Full text of Press Releases of the United States Department of the Treasury : Volume 382

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Treas.
HJ

10
.A13
P4

v.382

Department of the Treasury

PRESS RELEASES

The following numbers were not used:

706, 707, 710, 721,749, 769, 778

The following numbers are not available:

724, 725, 749, 783

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DEPARTlVIENT

'IREASURY

OF

THE

TREASURY

NEWS

omCE OF PUBliC AFFAIRS -1500 PENNSYLVANIA AVENUE, N.W. - WASHINGTON, D.C .• 20220 - (202) 622-2960

FOR IMMEDIATE RELEASE
Text as Prepared for Delivery
June 5, 2000

TREASURY ASSISTANT SECRETARY FOR FINANCIAL MARKETS
LEE A. SACHS REMARKS TO THE RESERVE MANAGEMENT
SEMINAR FOR SOVEREIGN INSTITUTIONS
ERMANTINGEN, SWITZERLAND

In 1824, Presidential candidate Andrew Jackson called our national debt a "national
curse". When he entered the White House in 1829 with a national debt of just over $58 million,
he embarked upon a crusade to eliminate it. In 1835, he succeeded, extinguishing our national
debt for the first and only time in our nation's history.
Today, over 160 years after our nation was last debt-free, President Clinton has presented
a plan that would lead to the elimination of the publicly held debt of$3.6 trillion by 2013.
Clearly, numerous factors can influence the timing and execution of such a plan. Already,
though, in the past seven years, the U S has made truly remarkable progress with its fiscal
policy. We have moved from incurring the largest budget deficit in our history to enjoying our
largest surplus. By the end of this fiscal year, we will have reduced the debt held by the public by
more than $350 billion - or almost 10 percent - in just 3 years.
President Jackson spoke of "the subl ime spectacle of a Republic ... free from debt and
with all ... [her] immense resources unfettered". Debt reduction holds the same sense of promise
today It has many benefits:
•

•

Leaving our "immense resources unfettered" puts our country in the best possible position to
meet our obligations to our seniors and ensure the future integrity of Social Security and
Medicare, especially as the pressures of the retirement of the baby boom generation puts
increasing demands on the system.
Today, interest payments on the national debt total approximately $220 billion per year - the
third largest individual item in our national budget. Freeing these significant resources for
other purposes will permit the U.S. government to operate more effectively and efliciently at
a lower cost to taxpayers, and, as President Clinton has commented, "lift the burden of
interest payments off our children and grandchildren".

LS-676

Far press releases, speeches, public schedules and official biographies, call our 24-hour fax line at (202) 622-2040
·u.s. Government Pnntlng Ofl,ce:

1998 - 619-559

•

•
•

Debt reduction means increased national savings will flow into financing capital investment
for businesses and homes for families - helping to create a more productive workforce, and
raising our overall standard ofliving.
Reduced pressure on credit markets will lower borrowing costs for American businesses and
consumers.
And, the results won't be felt only in the U.S. As the $3.6 trillion currently invested U.S.
government debt is freed for more productive uses, foreign businesses and nations also will
share in the benefits.

Paying down the debt and securing these advantages for the economy creates a new set of
challenges for Treasury's debt managers. Today, I \vould like to speak to you about the ways in
which we are meeting these challenges and some of the implications of the reduction of publicly
held US debt for financial markets more broadly.

Meeting Debt Management Challenges
While the challenges facing Treasury's debt managers are thankfully quite different from
those of a decade ago, our goals and principles remain the same. As we have stated in the past,
Treasury debt management has three main goals (1) to provide sound cash management in order
to ensure that adequate cash balances are available to meet our obligations at all times; (2) to
achieve the lowest cost financing for the taxpayers; and (3) to promote efficient capital markets.
In achieving these goals, we are guided by five interrelated principles
•
•
•
•
•

First, the maintenance of the "risk-free" status of Treasury securities to assure ready market
access and lowest cost financing.
Second, the maintenance of consistency and predictability in our financing program which
reduces uncertainty in the market and helps to minimize our overall cost of borrowing.
Third, the promotion of Treasury market liquidity, within the constraints of our borrowing
needs, both to promote efficient capital markets and to lower TreasuI)' borrowing costs
Fourth, financing across the yield curve to enable us to appeal to a broad range of investors
and to mitigate refunding risks.
Finally, unitary financing through which we aggregate the financing needs from all programs
of the Federal Government and borrow as one nation, ensuring that all programs benefit from
Treasury's low borrowing rate.

In furtherance of these principles in an era of increasing surpluses, we have taken a
number of steps. For the past three years, we have paid down the debt primarily by redeeming
outstanding securities as they matured and reducing the size and frequency of our auctions of
new securities. To promote our objectives, we have sought to concentrate new issuance in fewer,
larger benchmark issues. Thus, we have eliminated the 3- and 7-year notes, and reduced the size
and frequency of other issuances
As we have made such necessary changes, we have ai med to maintain the regularity and
predictability of our debt auctions by providing the markets with clear indications of our future
intentions For example, in February, we announced our intention to begin reducing issuance of

2

30-year bonds six months later - at our August refunding. This provides the market with ample
notice to adjust to such changes.
Our ability to effectively meet our debt management goals has been enhanced over the
past year by the addition of two important debt management too1s- debt buybacks and regular
reopenings. In November 1999 we announced a rule change that provided for more favorable tax
treatment associated with reopening issues with below market coupons. This new rule,
combined with the continuing fiscal improvements, enabled us to announce at our February
refunding a regular reopening policy which allows us to further concentrate our issuance and
thereby preserve liquidity in these benchmark issues.
Our other newly available debt management tool is the reintroduction of debt buybacks.
On March 9, we conducted our first buyback in over seventy years. Since that time, we have
conducted an additional tive buyback operations, repurchasing a total of $11 billion of par value
in outstanding publicly held debt with a weighted average maturity of 19.4 years. We have
announced our plans to buy back a total of up to $30 billion this year.
From a debt management perspective, debt buybacks have a number of important
advantages. With debt buybacks, we are better able to: maintain larger auction sizes in our
benchmark issues, enhancing liquidity~ prevent a potentially costly and unjustified increase in the
average maturity of our debt; and manage our cash flows by using cash to buy back debt in
periods in which revenues exceed our immediate spending needs
At our May quarterly refunding, we announced a regular schedule for our debt buyback
program for the current quarter. We expect to continue enhancing the regularity and
predictability of our buyback program in this manner by indicating our intentions at our
Quarterly Refunding announcements.

Changes Resulting f.'om Debt Redllction
While tools such as these enable us to better manage our rapid debt reduction, ultimately
a significantly declining supply of Treasury securities will lead to an adjustment by markets and
market participants.
Treasury securities currently playa number of roles in the global capital markets.
Among these functions are serving as a pricing benchmark, a hedging vehicle, and a low risk
investment for both domestic U.S. and international investors - including foreign central banks.
As the supply of Treasury securities continues to decline, other instruments will
increasingly serve the functions for capital markets that Treasuries currently serve. Such
substitutions will not take place overnight, but rather will result from a gradual transition.
Indeed, we have already entered the transition period Ultimately, only the markets can
determine which instruments or combinations of instruments \vill most effectively substitute for
Treasury securities with respect to these capital market functions We are confident that our
strong and dynamic markets will adjust successfully

In the meantime, the market for U.S. Treasury securities remains the deepest, most liquid
securities market in the world. For example, in 1999 the daily average volume of transactions in
the Treasury market was well over twice the daily average volumes for each of corporate debt,
agency debt, mortgage-related securities, and the New York Stock Exchange. I Only the volume
of interest rate swaps transactions even approached that of Treasury securities. 2
Already, however, we are beginning to see a change. This is perhaps best evidenced by
the growth trends in the issuance of longer-term securities For example, 1998 was the first year
in memory during which gross new issuance of Treasury coupon securities was exceeded by not
one, but three other domestic securities markets -- corporate, agency, and mortgage-backed
issuances each exceeded that of Treasury securities. These changing patterns of issuance suggest
that markets have already begun to adjust to a decrease in the relative supply of Treasury
securities. As the amount of our debt issuance continues to decline, it is likely that such changes
will continue.
I would like to take a moment to reflect upon a number of adjustments already taking
place, and some we may see in the future, with respect to certain capital market functions of
Treasury securities.
First, let me discuss the adjustment process that is already underway with regard to the
role of Treasury securities as a pricing benchmark
In the corporate bond market, high-grade corporations have been consolidating their
issuance into fewer, larger issues. While they are priced relative to Treasury securities, weight is
also given, as it has been for years, to the value of other high-grade corporate bonds and, more
recently, to interest rate swaps. These high-grade corporate issues, in turn, are becoming
benchmarks in their own right.
The corporate high yield bond market is traditionally less reliant on the Treasury market,
and thus, should be less affected. When high yield bonds are priced, they are already priced
relative to each other much more than they are to Treasury securities.
At the shorter end of the yield curve, the cOlllmercial paper market also relies on other
instruments in addition to Treasury bills for pricing value. As the Treasury bill supply has
decreased prime commercial paper, bankers' acceptances, and derivatives (particularly
Eurodollar futures) have also begun to take on benchmark roles. In fact, market participants
today already use Eurodollar futures quite actively to determine relative value in the short
maturity area
Finally, market participants have suggested that it is likely that other benchmarks,
including swaps, agency debt, and/or corporate indices may become more relevant pricing
benchmarks as the transition continues.

New York Federal Reser\'e Bank ;1I1d the NYSE.
Centm\ Bank Sliney of Forcign E\:changc and DCJ'l\'ati\'es Market Actl\ity

1l)l)X

Many of the same reasons that markets may find other instruments attractive as
alternative pricing benchmarks also may make them suitable hedging vehicles. Already, interest
rate swaps are widely used as a hedging vehicle because of their wide availability and liquidity.
Debt securities of other highly rated issuers are also used for hedging purposes, although to a
somewhat lesser extent at this time due to liquidity constraints. And, as I indicated earlier,
Eurodollar futures are already used as a primary hedging instrument in the short end of the yield
curve.
While these instruments have ditTerent risk characteristics than Treasury securities,
market participants have suggested that some of these characteristics, such as a higher correlation
to the securities being hedged, can serve to make them attractive as potential supplemental or
alternative hedging vehicles.
Finally, regarding the role of Treasury securities as a low risk investment, a further
decline in rates on Treasury securities relative to the rate on private instruments will increase the
incentive for other issuers and market partici pants to take advantage of the lower rates. Thus, if
the incentive becomes great enough, issuers will likely take steps to decrease the credit risk
associated with their debt. Similarly, capital markets professionals may seek to create new
instruments to fulfill this role. Already, for example, asset backed securities professionals are
issuing "super senior" tranches designed to provide an enhanced degree of safety in order to take
advantage of the premium the market is willing to pay for low risk assets.
It is likely that a variety of instruments will replace Treasury securities with respect to
their various private sector functions Market participants will determine which instruments or
combinations of instruments best meet their needs. Today the market for Treasury securities
remains the deepest, most liquid securities market in the world. As we continue on our path of
debt reduction, the market alone will determine what instruments will be most widely used in the
future

Conclusion

As Secretary Summers and Chairman Greenspan have said, our markets are among the
most innovative, competitive, and dynamic in the world. It is clear that they have the capacity to
adjust to a world with a reduced supply of Treasury debt, particularly when such a world will
bring with it the myriad benefits of debt reduction.
Thank you very much

-30-

D EPA R T lVl,'E N T

0 F

T 'II E

'T REA SUR Y

......................II..............~~J78~9~. .II..II......II....II......II....II..
OFFICE OF PUBUC AFFAIRS. 1500 PENNSYLVANIA AVENUE, N.W.• WASHINGTON. D.C .• 20220. (202) 622-2960

EMBARGOED UNTIL 12:30 P.M. EDT
Text as Prepared for Delivery
June 5, 2000

TREASURY DEPUTY SECRETARY STUART E. EIZENSTAT REMARKS TO THE
COMPUTER AND COMMUNICATIONS INDUSTRY ASSOCIATION (CCIA)
\\'ASHINGTON, DC

Thank you. I am pleased to be here with you today.
We come together at a time when America is experiencing enormous progress and
prosperity that few could have imagined at the beginning of this Administration We have had
our first back-to-back surpluses in 42 years. \Ve are in the midst of the longest economic
expansion in our nation's history And the benefits of this expansion are being felt all up and
down the economic ladder For the first time in a generation, the purchasing power of wages is
now rising even for the families in the bottom 20 percent of wage earners and unemployment is
at its lowest level in 30 years.
This prosperity is being fueled by the Information Revolution, of which all of your
companies are at the forefront Information technologies and the Internet have ushered in an
th
economic transformation as profound as that of the Industrial Revolution of the 19 century
In this economy_ information technology industries and firms constitute less than 10
percent of our employment, but have contributed almost a third of our nation's economic growth
over the past several years. Information technology has been the largest single factor in the
remarkable increase in productivity, which has given us a high rate of GOP growth with very
low unemployment and low inflation It has helped make the United States a high performance
economy, powered by technology, driv~n by ideas, rewarding the value of innovation, flexibility
and enterprise and attaining ever better livirig standar:ds for its people
As we consider the challenges and oppor1unities presented by this new economy, I would
like to talk to you today about what role the Federal Government is playing, and must continue to
play, to ensure that the U S. both continues its economic prosperity and maintains its leadership
in the crucial technologies that have brought about this prosperity Specifically, I would like to
touch on four criti cal areas of Government focus.

L8-677
For press releases, speeches, public schedules and official biographies, call our 24-hollr fax line at (202) 622-2040

•
•
•
•

Pursuing sound economic policies
Promoting policies that instill confidence in the Internet
Creating the legal and regulatory regimes that promote the growth of e-commerce
Ensuring. the inclusion and participation of all Americans in the new economy

Pursuing Sound Economic Policies
Let me begin with the first of these pursuing a sound economic policy.

A1ainlail1illg Fi.". cal Discipline
A key component of pursuing a sound economic policy is the maintenance of fiscal
discipline Our current economic prosperity has stemmed from the determination of President
Clinton and Vice President Gore to stop a generation of public borrowing and forge a new
national consensus around sound budget policy.
In this time of fiscal plenty, some might be tempted to dissipate the fruits of our efforts
over the last 7 years. Yet, if we as a country-fami! ies, businesses and government-are to take
maximum ad\'anta~e
.... of this moment, \\e cannot take our good f0I1une for granted. It would be
unwise to provide massive tax cuts that would deplete a large part of what is now only a
projected surplus It is our responsibility to use today's gains to ensure that we are able to meet
tomorro\v's needs
The cornerstone of such a policy is debt reduction Reducing publicly held debt delivers
substantial benefits to the pocket books of American families:
•
•

•

It means that less of the sa\ings of Americans will flow into government bonds and more
into financing capital ill\'estment for American businesses and homes for American families.
It means that we will be less reliant on borrowings from abroad to tinance American
investment
It means that there will be less pressure on interest rates than there would otherwise have
been, and therefore lower borrowing costs for businesses and lower interest payments for
American families

\Ve need to continue to exercise tiscal discipline, and retire debt, to keep the longest
economic e:'\pansion in our history going strong
rXjhllldlllg

A/urk('!.\'

Continuing to imprm·e our 0\\ n economic well-being also requires sustaining and
deepel~ing Ollr international engagement Your companies all conduct business in many, many
countnes across the globe You ha\"C seen that in the ne\v global economy, the economic wellbei ng of each nation is enormoLlsly atlected by the economic well-beino of the rest of the world
and this \\i11 become e\en more true mer time As a result, we must c~ntinue to push for open'
l1lar~ets and free trade

Our commitment to the open world trading system was reaffirmed a week and a half ago
by the House of Representatives when it took a significant step in support of opening markets by
passing a bill that would grant China permanent normal trade relations. Both sides in the debate
had honorable differences over the merits of the proposed legislation and, indeed, the legislative
process is not yet complete. Yet, if enacted, this legislation will allow the United States to
participate fully in the mutual gains from China's joining the WTO and opening its markets to
trade and investment. Further, by engaging the world's most populous country, we increase the
chances that it will become a more open, more democratic and more constructive member of the
global community in the 21 st century.

Promoting Policies that Instill Confidence

This Administration has stressed the need for the private sector to lead on Internet policy,
avoided unnecessary regulation, and drafted policies that recognize that the Internet has no
borders. Nevertheless, Government also needs to help instill confidence in the Internet by
ensuring that appropriate measures are taken to protect (I) consumers, (2) infrastructure, and (3)
our security interests
COIISlIme r

P,., nf(Y

First, if electronic commerce is to live up to its full potential, consumers must have
confidence in their ability to maintain their privacy Americans should not have to forgo
participating in our modern economy to preserve their privacy.
This Administration believes that we must keep our privacy protections as up to date as
our newest technolou,y President Clinton and Vice President Gore have stressed that
Government and private industry both have important responsibilities to create effective privacy
policies
~.

For the Government, this means exerting leadership in areas involving especially
sensitive information, such as medical information, information concerning our children, and our
financial data. We are in the midst of significant technological changes and consolidation within
the financial sector. As a result, financial institutions can both gather and analyze more
information about consumers than ever before, as well as target a wider range of products and
service to those individuals at less cost.
We must ensure that consumers can enjoy the substantial benefits of such market changes
with the same level of confidence in the ti nancial system that they had before The challenge is
to preserve the benetits of competition and innovation that information sharing and technology
have brought while protecting the ability of consumers to preserve their privacy
We took an important step to\vard meeting that challenge in the financial modernization
bill that the President signed last fall. For the first time, that law gave Americans the right to
know what their financial institutions do with their information, and the right to say "no" to those

: itutions sharing information with outsiders. As important as these changes were, the
esident announced in signing the bill that they did not go far enough
To achieve the President's mandate for greater protections, the Treasury, the White
House, and OMB developed a legislative proposal, which the President announced a month ago.
This proposal extends consumers' rights to choose whether their information may be shared
among affiliated companies; it gives consumers the right to access and correct information about
them held by financial institutions; and it provides special protections for especially sensitive
information about an individual's personal spending habits and medical information held by
affiliated financial firms.
In other areas, we believe that private industry has a responsibility to regulate itself to
ensure that individuals' privacy is protected In a recent address, the President put two simple
questions to business leaders:
•
•

Do you have privacy pol icies you can be proud of?
Do you have privacy policies that you would be glad to have reported in the media')

Working together, we can ensure that Americans access the Internet's full potential
without fear of sacrificing their pri\'acy
('I'If1cull,?fi·(/.\/rlfc/lfre Pro/t'CfJ()IIS

Second. if electronic commerce. and in pal1icular electronic finance, are to continue to
thri\t? in this ne\\ economy. then consllmers mllst feel that not only is their privacy protected, but
also that their financial information and delivery systems are secure.
The publ ic has gro\\ n more aware over the past year of the growing threat to our
economy posed by attacks on our computer and information systems as a result of highly
publicized virus attacks, such as the so-called "Love Bug" virus
This Administration has recognized and focused on the threat to our information systems
for some time In 1996, the President commissioned a blue ribbon Commission on Critical
Infrastructure Protection, which recoillmended a comprehensive program based on public-private
partnerships and information sharing to protect critical infrastructures against cyber threats.
The Commission's report was tile basis for a Presidential Decision Directive issued in
f\lay 1998 that sets forth a national goal of creating within five years the ability to protect our
nation's critical infrastructures from damaging attacks
Further. the Presidential Directi\e recognized that since the private sector owns and
operates the largest pal1 of the nation's information infrastructure, the private sector will have to
assume a major role in protecting that infrastructure The financial services industry's new
information sharing and analysis center is a prime example of how industry can take the
initiati\e ell\'isioned by the President Other sectors of our economy would do well to follow
suit

Security Interests: Encr}ptiol1Exporl COI11,.ols

Lastly, a further part of our responsibility to provide assurances for the appropriate use of
new information technologies is prudent oversig'ht of encryption and military technologies with
the minimum restrictions and burdens on businesses and individuals.

In keeping with this aim, the Administration removed most export controls for encryption
products last year. As a result of this simplified approach, exported encryption products now do
not need a license once they have been approved in a one-time review, except for encryption
products used by governments or with military applications. Also prohibited are the exports of
encryption products to countries that are state sponsors of terrorism
The Administration has also worked to liberalize export controls, while at the same time
ensuring against the diversion of military' technology to inappropriate uses Toward this goal, the
Administration three weeks ago announced that there wiIl be significant improvements in export
licensing regulations and procedures for defense-related technologies These improvements, in
some cases still being crafted, apply to export destinations in NATO and other allies. They
include bulk licensing for the export of satellites, data-sharing between U.S. and foreign defense
companies, and the use of U S. components in defense contracts with a foreign company

Promote Growth of E-Commerce

The next critical fUllction Go\'ernment mllst play is to create the legal and regulatory
regimes necessary to promote the gro\\ th of electronic commerce The Clinton-Gore
Administration has worked to create an environment in which the Internet has flourished, adding
efficiencies and dynamism to ollr economy.
To illustrate, I will discuss three key areas in which the Administration is ensuring our
laws and institutions keep pace with the rapid changes in e-commerce technology: (1) digital
signatures, (2) electronic payments, and (3) Internet taxation. I will then briefly describe some of
the initiatives the Treasury Department has .taken to lead by example in these areas.
Electronic .s'ignallires

First the Administration believes that passage of electronic signatures legislation is
crucial for the further growth of e-commerce, and we have been working for several months to
achieve this result. Approval ofa good electronic signatures bill will one of the most important
actions we can take to advance the digital economy and promote our future prosperity
We need to provide legal certainty for the use of electronic signatures and records to give
both businesses and consumers the confidence they need to bring electronic transactions into all
areas of the economy, from purchasing software to taking out a home mortgage. Throughout this
process, however, we have sought to ensure that important consumer protections enacted over
the last several decades are as strong in the electronic world as in the paper world

5

We are very pleased that House and Senate conferees reached an agreement last week,
and expect the report to be filed, adopted, and sent to the President soon
Payments

Second, the payments area represents one of the great opportunities of the Internet
Technology could ultimately provide us with the means to permit safe, secure on-line movement
of money.
Despite the expansion of the Internet into so many areas, there is no legitimate option at
this time for businesses to pay each other over the Internet. Most e-commerce shoppers use credit
cards, which involve a 2-6% expense to the seller and work on-line only for certain classes of
payments
One of the greatest attractions of the Internet is the way it makes possible person-toperson communication and commerce even where the people have no prior relationships and the
geographic distance between them is great Our current payment systems simply were not
designed to support this type of dynamic commerce.
To narrow this gap, payments need to be accompanied by transaction information that
allows one ~o purchase, collect and store data electronically We need an efficient, standardsbased mechanism for exchan<..!ill<..! inf<'Jrlllatiol1 across difTerent automated processes. Buyers,
sellers and financial institutiolls also Ileed to kno\v with certainty that their orders were received
and payments logged
ill/L'l'IlL'/ (UYU//(J1l

Third, regarding the \ery sensitive andvery contentious issue of taxation on the Internet,
\\c need to be sure that we do not discriminate against sales on the Internet and thereby impede
the gro\\lh of e-commerce \\'e need to ensure that governments finance themselves in a way
that does not impede the grO\vlh of the Internet. We must also ensure that the Internet does not
become a tax haven that depri\'es gm'ernments of the revenues necessary to fund essential civic
senices, such as education, police and firc protection And we must tind a way to meet the
challenge of achieving that in a manner that establishes a level playing field between the old
economy' and the new economy.
In furtherance of those goals, the Administration supports a permanent ban on taxes on
Internet access and an extension of the moratorium on discriminatory and multiple taxes that was
contained in the Internet Tax Freedom Act \Ve also support a permanent ban on customs duties
on international electronic transmissions
The current debate oyer ta\at ion of goods and services sold over the Internet stems from
a Supreme Court ruling that states cannot require out-of-state sellers to collect sales taxes unless
the sellers ha\'e a physical presence \\ ithin the state, such as a store As a result, under current
la\\. ta\('s on out-or-state purchascs. including those made on the Internet, go largely untaxed,

6

Although e-commerce is still a small percentage of total retail sales, the Commerce Department
expects it to grow dramatically in the coming years. State and local governments are concerned
that their revenue base will be undermined. At the same time, traditional retailers are concerned
that unequal tax treatment would put them at a competitive disadvantage vis-a-vis e-commerce.
Because the current debate is important to the national economy, the Administration has
been working actively as an honest broker to try to achieve consensus between industry and State
and local government officials on Internet tax issues. Over a year ago, Congress created an
Advisory Commission on Electronic Commerce to make recommendations on these issues. The
Commission succeeded in achieving consensus on the need for simplification of the widely
differing sales tax rates and definitions of taxable and non-taxable items employed by the over
6,000 taxing jurisdictions in this country A group of more than 40 Governors under the
leadership of Utah's Mike Leavitt has pledged to begin work on this effort.
The Commission did not, however, achieve a sufficient majority needed to make a
recommendation on the more pressing sales tax collection issues. In fact, one coalition of
Commissioners proposed further limits on the states' ability to collect sales taxes. The debate
now moves to the Congress. There are a number of proposals to extend the existing moratorium
and the Administration will work with Congress on them. However, until we see the results of
the States' simplification efforts, we should not change the existing rules regarding sales tax
collection which have allowed E-commerce to flourish. It is essential that we move with care and
consideration in changing those laws, because they go to the core of our system of government
as well as the continued vitality of the Internet.
F-C 'omll1erce Slfccesses (f/ '.heo.\ll1'1'

At the Treasury Department, we recognize that it is important to lead by example, and
thus we have invested much time and resources in thinking about how we can adjust the way the
government conducts its business to adapt to rapid advances in information technology I am
pleased to tell you that we have had significant success using new technologies. In some areas,
we are ahead of the private sector.
Treasury, through FMS, runs one of the largest payment collection systems in the world,
with more than $1.3 trillion or t\\'o out of every three dollars of U. S. government revenue now
collected electronically. Individuals can pay their taxes on line. More than three-quarters of all
government benefit payments are now made electronically. So are almost sixty percent of
payments to vendors.
We also are the world's largest issuer of smart cards This year we will issue close to a
quarter ofa million smart cards at U.S. military installations throughout the world. We also are
developing or testing a variety of new programs, including digital cash, secure Internet e-mail for
the delivery of digital checks to vendors, and ACH debit authorizations over the Internet
Sales of Treasury debt, both retail and institutional, also take advantage of new
technologies. Auctions of Treasury securities are now entirely electronic, as the last paper
bidders were recently moved to an Internet-based system. Consumers holding Treasury securities

7

through the Treasury Direct program can make purchases or reinvest on line or through an
automated phone system Even Savings Bonds can now be purchased over the Internet
\Ve h3ve learned a great deal through such pilot programs, and will continue to
implement and expand them. \Ve plan to share with industry the lessons we learn at a conference
or another forum that will allow stakeholders to address barriers to e-commerce on the Internet.

EnslI re Participation of All Americans
The last point I would like to discuss today is our responsibility to ensure that all
Americans are included in the prosperity and benefits afforded by this rapidly changing new
economy. In order to do this, we need both to invest in educating and training our workers and
to bridge the oft-discussed "digital divide"

\Ve need to continue il1\'e~tiJlg in our people to improve the productivity of the American
\vorkforce in the Information Age This :\dlllinistration has already invested substantially in
education and training. we ha\'e increased the Pell Grants; the work-study program, the
AllleriCorps program, and the HOPE scholarship, which is a $1,500 tax credit for the first two
years of college along \\ith further tax breaks for junior and senior year and for graduate school.
Through these programs, we ha\'e in etfect made two years of community college available to
e\'cr\' American We must continue to make this kind of meaningful investment to ensure that
e\'er\' American has access to high qualit\, education By properly educating and training a high
skilled \\orkflHce, we \\ill best CllSurc our continucd success in the new global economy
The first and primary policy for increasing the availability of high skilled workers must
be focLlsed on increasing the education and trail1in~ ofU S \\orkers However, at times U.S.
businesses need additional access to the international labor market to maintain and enhance our
global competitiveness, particularly in high-grm\11l new technology industries and particularly in
tight labor markets To this end. the President has proposed a balanced approach of a significant
increase in the number of H-I B ·visas
.. . At the same ti~~le, .it is critic~1 that we take this opportunity to correct long-standing
InJustices currently attectlllg many 1I111l1lgrants already in this cOlllltry. The President's proposal
UlLlS includes significant prm isiolls to protect and prepare the U S workforce, and measures of
fairness and equitv. for certain il1lmi!.!rants alreadv in the U S
"-'

~.

In addition, it is criticall~' important that we all \vork together to ensure that the benefits
of the ad\ances in technolog~; are extended to all.
~

8

Access to computers and the Internet, and the ability to use this technology effectively,
are becoming increasingly important to fully participate in our country's economic, political and
social life. Yet, there is strong evidence of a gap between those individuals and communities
that have access to the tools of the Information Age and those who do not. Unequal access to
this technology because of income, education level, race or geography could deepen divisions
within American society.
Let me briefly offer some specifics to better describe extent of the digital divide
•

•

•

Belter educated Americalls are more hkezv to he cOllnecled. Sixty-nine percent of households
with a bachelor's degree or higher have computers, compared to only 16 percent for
households that have not completed high school.
The divide betweell high- alld 1001'-incol17e Americans is .s·ign(ficant. Eighty percent of
households with an income of $75,000 or above have computers, compared to 16 perecnt of
households earning $10,000 to $15,000
Whiles are more likely 10 he COl1lleCleJ Iholl AIricall-Americans alld Hi.spallics. Forty-seven
percent of white households have computers, compared to 23 percent of African-American
and 26 percent of Hispanic households.

President Clinton has made it a major priority to bridge this digital divide, and this
Administration has a strong record of working to ensure that every child is technologically
literate. Our efforts have included
•
•
•

Increased educational technology funding by over 3,000 percent-from $23 million in FY94
to $766 million in FY2000
Establishing the $2 25 billion "E-rate" to connect schools and libraries to the Internet.
And worl,ing to e:-.:pand access to technology to people in under-served cOJllmunities and to
people with disabilities.

Despite these successes, there remains much to do in order to give all Americans the
skills they need. in this new economy and to achieve the President's goal of making Internet
connections as common as telephone connections today. As part of our continuing efforts to
achieve these goals, the Administration's budget proposal includes three tax incentives to
promote computer training for workers and to increase the number of computers in libraries and
technology education centers in low-income areas.
Many of your companies already contribute generously to addressing the critical issues of
our society, and for this we thank you Several information technology companies have been
leaders in this effort, establishing charitable foundations, donating computer equipment to
schools and inner-cities, and launching tcacher and worker training programs Yet, regardless of
how much you have done, I encourage YOLl to do more-not merely because it will benefit those
being left behind, but also because you will benefit as well. Ultimately, an Information
Revolution that fails to include large parts of the American people will fail everyone of us.

9

Conclusion

Although the challenges we face are considerable, they are dwarfed by the scope of the
opportunities before us. We are in for an exciting ride through cyberspace as the most basic
\vays in which we transact and interact, communicate and educate, are transformed by new
information technologies Working together-with the proper prudence, protections and
innovation-we can best ensure that the U S continues to enjoy prosperity in the new global
economy for years ahead.
-30-

10

PUBLIC DEBT NEWS
Department of the Treasury • Bureau of the Public Debt • Washington, DC 20239
TREASURY SECURITY AUCTION RESULTS
BUREAU OF THE PUBLIC DEBT - WASHINGTON DC
CONTACT:

FOR IMMEDIATE RELEASE
June OS, 2000

Office of Financing
202-691-3550

RESULTS OF TREASURY'S AUCTION OF 13-WEEK BILLS
91-Day Bill
June 08, 2000
September 07, 2000
912795EZO

Term :
Issue Date:
Maturity Date:
CUSIP Number:
High Rate:

5.800%

Investment Rate 1/:

5.968%

Price:

98.534

All noncompetitive and successful competitive bidders were awarded
securities at the high rate.
Tenders at the high discount rate were
allotted 52%. All tenders at lower rates were accepted in full.
AMOUNTS TENDERED AND ACCEPTED (in thousands)
Tendered

Tender Type
Competitive
Noncompetitive

$

19,847,830
1,257,216

$

102,054

102,054

21,207,100

8,505,100

4,721,605
17,946

4,721,605
17,946

Foreign Official Refunded
SUBTOTAL
Federal Reserve
Foreign Official Add-On
$

7,145,830
1,257,216

8,403,046 21

21,105,046

PUBLIC SUBTOTAL

TOTAL

Accepted

25,946,651

$

13,244,651

Median rate
5.780%: 50% of the amount of accepted competitive tenders
as tendered at or below that rate.
Low rate
5.740%:
5% of the amount
f accepted competitive tenders was tendered at or below that rate.
id-to-Cover Ratio

=

21,105,046 1 8,403,046

=

2.51

/ Equivalent coupon-issue yield.
I Awards to TREASURY DIRECT = $1,008,944,000

http://www.publicdebt.treas.gov

5-678

PUBLIC DEBT NEWS
Department of the Treasury • Bureau of the Public Debt • Washington, DC 20239

TREASURY SECURITY AUCTION RESULTS
BUREAU OF THE PUBLIC DEBT - WASHINGTON DC
FOR IMMEDIATE RELEASE
June 05, 2000

CONTACT:

Office of Financing
202-691-3550

RESULTS OF TREASURY'S AUCTION OF 26-WEEK BILLS
182-Day Bill
June 08, 2000
December 07, 2000
912795EJ6

Term:
Issue Date:
Maturity Date:
CUSIP Number:
High Rate:

6.040%

Investment Rate 1/:

Price:

6.318%

96.946

All noncompetitive and successful competitive bidders were awarded
securities at the high rate
Tenders at the high discount rate were
allotted 51%. All tenders at lower rates were accepted in full.
AMOUNTS TENDERED AND ACCEPTED (in thousands)
Tendered

Tender Type
Competitive
Noncompetitive

$

$

Foreign Official Refunded
SUBTOTAL
Federal Reserve
Foreign Official Add-On
$

4,431,305
1,090,546
5,521,851 2/

18,924,501

PUBLIC SUBTOTAL

TOTAL

17,833,955
1,090,546

Accepted

1,980,686

1,980,686

20,905,187

7,502,537

3,700,175
349,314

1,700,175
349,314

24,954,676

$

11,552,026

Median rate
6.020%: 50% of the amount of accepted competitive tenders
was tendered at or below that rate.
Low rate
5.980%:
5% of the amount
of accepted competitive tenders was tendered at or below that rate.
Bid-to-Cover Ratio

= 18,924,501 / 5,521,851 = 3.43

1/ Equivalent coupon-issue yield.
2/ Awards to TREASURY DIRECT = $796,967,000

http://www.publicdebt.treas.gov

LS-679

DEPARTMENT

OF

THE

TREASURY

NEWS
OFFlCE OF PUBUC AFFAIRS. 1500 PENNSYLVANIA AVENUE, N.W.• WASHINGTON, D.C.. 20220 • (202) 622-2960

FOR IMMEDIATE RELEASE
June 6, 2000

Secretary Summers to Visit Africa
Treasury Secretary Lawrence H. Summers will visit Nigeria, Tanzania, South Africa.
Mozambique and Egypt from June 10-19. While in the region, he will meet with government
officials and business leaders.
In Nigeria, Secretary Summers will visit Abuja (June 11-12) and Lagos ( June 13). In Tanzania.
he will visit Dar es Salaam (June 14). Following Tanzania, the Secretary will travel to Pretoria.
South Africa (June 15) and Maputo, Mozambique (June 16-17). Secretary Summers will visit
Cairo, Egypt on June 18.

-30LS-680

For press releases, '\'peeches, public schedules and official biographies. call ollr 24·hour fax line at (202; 62]·](H(J

DEPARTIVIENT

OF

'IRFASURY!

t

THE

TREASURY

NEWS

OFFICE OF PUBUC AFFAIRS • 1500 PENNSYLVANIA AVENUE, N.W.• WASHINGTON, D.C.. 20220. (202) 622-2960

EMBARGOED UNTIL 9:40 a.m., EDT
Text as Prepared for Delivery
June 6,2000

"Africa and the Global Development Challenge"
Remarks by Treasury Secretary Lawrence H. Summers
United Nations Conference on Women and Development
New York, NY
Good morning. We come together today to discuss an integral paIi of the global development
effort - the empowerment of women - at a time when that effort is in the spotlight in a way that
it has not been for a long time. The Beijing plus 5 initiative has made a crucial contribution to
this greater awareness. You are truly to be applauded for what you have all achieved.
I am going to sub-Saharan Africa next week to talk with officials and others in the region about
the development challenges that they face - because it is the region where the challenges are at
once the most profound and the most urgent. There may be issues with greater potential global
financial impact today than the successful economic development of Africa. But there is none
with greater potential human impact.

When G7 finance ministers meet in Japan next month in the lead-up to the Summit in Okinawa,
questions of development will be on the top of the agenda, with the continuation of the Heavily
Indebted Poor Countries (HIPC) debt relief initiative; with the much strengthened emphasis on
reducing global poverty that has been part of that initiative; and with the increasingly universal
belief that the dawn of the 21 51 century must be a time of more global hope and opportunity.
For all these reasons, let me focus my remarks today on sub-Saharan Africa: the enormous
obstacles that it faces; and the pressing need for a stronger and more effective international
development effort to help its countries begin to overcome them.
I.

Sub-Saharan Africa Today

For all the problems that still exist in most parts of the world the glohal dC\l~lopll1cnt eCrort has
had enormolls successes in the past Cev,' decades. Morc peoplc havc bl'cn lifted nut of pCl\crty.
LS-681

For press releases. sjJeeches, public schedules and official bfographies. cal!

Ollr

24-hollr fax li1lt' a.t (202) 622-2f}-10

especially in China and other parts of Asia, than at any time in world history. Average life
expectancy in the developing countries has risen by seven years since 1980, from 52 to 59. That
is considerably more than the increase we would see here in the US by eliminating all cancer.
And infant mortality has been reduced from 116 per 1,000 to 82, a decline of nearly 30 percent.
At the same time, while there are certainly exceptions, sub-Saharan Africa today stands out as a
region that still lags far behind.
•

On average, output per capita in sub-Saharan Africa was lower, in real terms last year than it
was in 1960. In some countries it has fallen by more than 50 percent. And the average
individual income in a region of 600 million people is now only 65 ccnts a day.

•

The region's share in global trade has fallen from 3 percent in the 1950s to less than 2
percent in the mid-1990s - a decline that is estimated to have reduced national incomes bv
nearly $70 billion each year, or just over 20 percent of regional GDP.
Across large parts of the continent, 200 of every 1,000 children die before the age of five,
and young girls have only a 1 in 4 chance of being enrolled in primary school. Indeed, in
many countries, children are more likely to die before reaching five than to learn to read.

•

Africa's problems have no single explanation and differ considerably trom country to country.
But most observers attribute the downwards divergence of the region in the past few decades to a
number of factors, including: poor national economic policies; the prevalence of kleptocratic and
corrupt governments; frequent civil and regional conflicts; and, not least, the challenges posed by
its natural environment, which leaves Africa particularly vulnerable to infectious disease, and
makes it more difficult to produce adequate food or trade with the global economy.
All of these problems are being exacerbated by the HIV / AIDS pandemic. The facts are known to
many of you here but they are worth repeating. And they certainly caught the attention of many
of the world' finance ministers when World Bank President Jim Wolfensohn so valuably
highlighted them at the Development Committee meeting in Washington this spring.
•

Of the 16 million deaths from AIDS to date, 14 million have been African. Last year, the
combined wars in Africa killed 200,000 people. AIDS killed ten times that number,
overtaking malaria to become the Continent's greatest single killer. Yet it is estimated that 90
percent of the illness and death that HIV / AIDS will bring to Africa are still to come.

•

As you know, women are increasingly bearing the brunt of HIV / AIDS, both as the primary
care providers and, among the young, as those who are often most vulnerable to the disease.
In many places, HIV / AIDS infection among young women is 3 to 5 times higher than among
boys. And in parts of South Africa, where I will be visiting next week, nearly one-third of
pregnant women are testing HIV positive, compared to just I percent in 1990. On a continent
where women perform an inordinate share of the physical labor and contribute in critical
ways to the household economy, the debilitation \vrought by AIDS is especially cruel.

CI

Today, 23 million Africans are infected, and I LOon (\!"(: ddded to the list e\ery day. In the
countries worst hit more than 1 in 4 urthe adult populatiol1 may now be HIV positi\·C' - and

more than 10 percent of the population are AIDS orphans. Y ct the total per capita health
budget in many countries is often less than $5 a year.
•

AIDS is wiping out several generations of improvement in life expectancy and mortality
rates. In southern Africa, life expectancy is expected to drop from a high of 59 in the early
1990s to 45 within the next 5-10 years, a level not seen since the 1950s. In the countries
where the virus is spreading fastest, it has been suggested that life expectancy could soon fall
back to the 35 years characteristic of biblical times.

Confronting these problems is a global moral imperative. But in a shrinking world, it also has
direct implications for the interests of people around the world: their interest in a strong global
economy; in avoiding conflicts into which they may be drawn and the threats posed rogue states;
and their interest in preventing the spread of diseases that are no respecters of national
boundaries.

II.

A Platform for Further Action

For all the problems, it is encouraging that both within sub-Saharan Africa and across the
international community there is a growing recognition of the seriousness of the situation and the
need to act. This is reflected in the activities that many of you here have been involved in since
Beijing to make the Platform for Action a reality. We also see it:
•

In the pockets of real progress in Africa: including Nigeria, where the first civilian elected
President in 20 years has put better governance at the top of his agenda; Uganda and
Tanzania and their successful efforts to support growth and poverty reduction in the 1990s;
and Mozambique, where democracy and rapid growth have replaced two decades of
devastating civil war. Mozambique has been one of the fastest growing economies in the
world in recent years. And even as it deals with major flooding and a looming malaria
epidemic, the government is working to keep its growth strategy on track.

•

In the recognition, at both the national and the global level, of the scale of the threat posed by
HIV / AIDS, including the crucial efforts of UNAIDS and other agencies and the VicePresident's pledge of much strengthened efforts to combat AIDS at the first-ever UN
Security Council meeting on a health issue last January.

•

And in the global community's embrace of the strengthened HIPC initiative in Cologne last
year, which focuses on ensuring that countries that are committed to reform can spend more
of their precious resources on their people - and less on paying off official debts.

These positive trends are a platform on which \ve must seek to build in the future as we work to
help African countries forge a more hopeful path.
II I.

The Agenda for the Future

Ir we are to move forward with this effort \ve have tll move beyond the debates of the past.

-.,
.)

•

There are people who argue that international assistance without conditions and without
governments that are committed to doing the right things is worse than useless. And they are
right.

•

There are people who argue that even with the best policies - and the best governments - in
the world, if you are one small country of many in 'a tropical, geographically isolated part of
the world and 20 percent of your population is affected by HIV I AIDS it is going to be
extraordinarily difficult to make good things happen. And they too are right.

Nations shape their own destiny. In recent years we have learned and re-Iearned the lesson that
the international community cannot want economic reform and development more than a
country's own government or its people do.
But at the same time, it is equally a mistake to overlook what might be called the tyranny of
geography: to suggest that the economic failures of isolated, tropical nations with poor soil, an
erratic climate and vulnerability to infectious disease can be traced simply to the failure of
governments to put in place the right enabling environment.
The challenges are colossal. The record of past economic reform and assistance efforts is worse
than mixed. And certainly, none of us has all the answers. But it is important to remember that
there are high return investments in growth and poverty reduction that are not being pursued in
Africa today - at tremendous human and economic cost - because of a lack of official resources.
There are four crucial lessons from the past few decades that must inform a more effective
international approach.

First, the needfor selectivity
Recent World Bank research has shown that targeted to the right policies and governments,
official assistance can be highly effective. In such environments, one percent of G DP in official
assistance translates roughly one-for-one into reduced poverty and lower rates of infant
mortality, and helps generate nearly twice that amount in inflows of new private investment. Yet
a large portion of global bilateral aid has flowed to countries with poor policies and approaches,
where assistance has been shown to do little good. While countries with good policies have
tended to face declining official support, just when their reform efforts are bearing fruit and
outside support can do most good.
Going forward, we must work to target scarce otlicial resources more effectively on countries
and programs with a proven capacity to deliver results.
•

That means that wc must 1110re often decline to provide assistance to corrupt or uncommitted
governments - in Africa or anywhere else - that lack the desire or the capacity to invest those
resources for the good of all of their people.

•

And it means that where countries are committed to effective policies. \\e must stiek with
them, and resist the common tendency to declare vietnr) too soon. V'/hat Africa needs must

4

today are success stories. When countries arc using official assistance well they should be
able to attract more of it.

Second. the importance of economic integration
Economic integration is the transforming global dynamic of our time. No developing country,
much less a small and under-developed tropical country, has achieved rapid economic growth in
the past fifty years without joining the global market and achieving rapid growth in exports.
Those that have deployed their comparative advantage effectively - most notably in East Asia have moved from subsistence to skyscrapers in barely a generation.

It is casy to be cynical about the capacity for information technology to speed the global
development effort at a time when half of the world's population has yet to use a telephone - and
40 percent of African adults cannot read. At the same time, we cannot ignore the possibility that
in Africa especially, the "death of distance" might open of a new range of opportunities for core
and periphery to compete on more equal terms, and so converge. This was brought home to me
on my last trip to Africa, three years ago, when I encountered an Internet provider from
Mozambique. His main concern was the advent of new competition.
•

That is one reason why HIPC, in Mozambique and elsewhere, is so important. It will help
free governments to realize the opportunities that global markets afford - by removing the
drag on growth and investor confidence that an unsustainable foreign debt creates.

•

And that is why the African Growth and Opportunity Act, which President Clinton signed
into law last month, is so important. This will open up important new opportunities for many
African economies by significantly expanding their access to the US market, especially in
apparels.

As part of this effort, the official donor community will perhaps also need to be more accepting
of the need for governments to chart their own course. Africa has learned the hard way that
selective protection of industry and national champions are not reliable strategies for growth. But
history also suggests that it is much more difficult to achieve change in a country when
governments lack a clear vision of what that change might achieve. In this context, I would hope
and expect that along with an increase in focus on human development indicators, future official
assistance programs will put more emphasis on manufacturing exports, which have played such a
crucial role in every major development success story of our time.

Third, the crllcial role of education
In a former capacity I undertook research that cOllvinced 111C that girls' education represented tht.'
single highest return investment that any developing country in the world could make, Nothing
that has occurred since then has led me to change my view.

•

The World Bank has recently estimated that if the Sub-Saharan Africa had seen just the East
Asian rate of improvement in the gender gap in education since 1970, GOP and living
standards would be 15-25 percent higher in those countries today.

•

And if the ratio of female-to-male years of schooling were near parity today, Africa's rate of
infant mortality would be 25 percent lower.

Education always pays otT What is especially attractive about educating girls is the additional
benefit that accrues to empowering the member of the household with the greatest capacity to
alter the life prospects of the generations to come.
Letting girls go to school, learn to read, and experience more of the world beyond their homes
makes them better off immediately and enriches their families. The result, in country after
country, is smaller, healthier families enjoying longer, happier lives. The cost of keeping girls in
school just one more year more than pay for themselves in the social and economic benefits in
the form of higher incomes, and smaller numbers of infant and maternal deaths.

It bears emphasis today that educating girls holds the further benefit of helping to prevent the
spread of HIV I AIDS. Studies in Zaire, Zimbabwe and elsewhere all suggest strongly that higher
rates of female secondary school enrollment have been associated with a much slower rate of
transmission ofHIV. And across the developing world, DHS data confirm that levels of
education are now highly correlated with the probability that women will practice safe sex.
•

That is why the new approach to official lending that is part of the HIPe initiative puts core
investments in female education, along with other core social investments, at center stage.
Uganda saved $45 million in debt service under the original HIPe. This relief has helped the
country to double enrollment in primary education in just two years. Under the enhanced
HIPe, Uganda is expected to receive an additional $650 million in debt relief in net present
value terms to invest in universal primary education and other basic human priorities.

•

And that is why we are asking the international community to consider concrete, multi-year
targets for substantial increases in World Bank lending for education - particularly for basic
education and to narrow the gap between girls and boys. And we are working to build
support for a major focus on basic education and health at the upcoming G7 meeting in
Okinawa next month.

Fourth, the importance of core investments in health
I believe strongly in the power of markets, economic gro'vvth and strong policies. But anyone
who studies the statistics on HIV I AIDS and other infectious diseases in sub-Saharan Africa
today has to conclude that without a more effective approach to these problems, no national
economic policy, however well devised and implemented, is going to yield significant positi\c~
results. They have also to conclude that !\f]-ican countries themselves will not be able to mount
such an approach on their own.

None of this is to absolve national governments for the waste of national resources that has taken
place in recent decades, and the failure of many to take the initiative in responding to the threat
of AIDS. But the rest of the world has to be doing more, not simply as a moral imperative but as
an economIC one.
•

We must ensure that IIIPC and other assistance to the poorest countries in the future deliver
concrete improvements in basic health - and more effective programs for preventing and
treating disease. Efforts to improve the efficiency of all health expenditures will be especially
crucial, when it is estimated that patients in public health facilities in Africa may receive
benefits worth only $12 for every $] 00 of public spending on drugs - and the poorest fifth of
the population on average receives only around 12 percent of subsidies in public health.

•

We must upgrade our national and international efforts to help countries address the
challenge of HIV I AIDS. USAID has been part of important success stories in this area notably in Uganda, where the prevalence of HIV among 15-24 year-olds in urban areas has
been cut by one third, and nationally by a third. The additional $100 million that the
President has requested for AIDS programs in next year's budget would signiticantly expand
our capacity to build on these examples in the future.

•

And we must work to mobilize global resources and expertise for the development and
dissemination of vaccines for the infectious diseases that afflict the developing world, as the
President has highlighted in his Millennial Vaccines Initiative:

IV.

•

By providing more resources for countries to purchase the vaccines that already exist.

•

By shifting existing international resources - notably multilateral development bank
lending - toward support for local infrastructure in the poorest countries to deli ver
vaccines and medicines and provide essential basic health services.

•

By intensifying the search for more effective ways of treating and preventing the major
killer diseases in the poorest countries, especially HIV I AIDS, malaria and tuberculosis:
for example, through greater public support for such research under the auspices of the
National Institute of Health.

•

And by strengthening private sector incentives to develop new vaccines for these
diseases. In the era of Viagra, it cannot be right that of the 1233 new medicines patented
between 1975 and 1997, only 13, or 1 percent, were for tropical diseases that afflict 90
percent of the world's popUlation - and that of those 13 new products, only 4 came from
research efforts that were aimed at curing humans. As a small step fonvard, the President
is proposing a new tax credit for sales of any infectious disease that causes over one
million deaths annually worldwide. We are calling on other governments to make similar
commitments, to help guarantee a future market for these urgently needed vaccines.
Concluding Remarks: the Need to Expand (;Iobal Assistance Capacity

7

By applying these four core lessons: the importance of selectivity, support for integration, and
substantial increased investments in education and in basic health, we can substantially improve
the quality of the resources that the international community brings to bear on the challenges that
sub-Saharan Africa faces today.
This is crucially important. With the lessons of experience now clearly understood, there can be
excuse in the future for letting aid fill the pockets of elites who put their palaces before their
people; or for letting optimism or geopolitical considerations triumph over a hardheaded
assessment of the facts. We have learned the hard way that money given to corrupt governments
harms no one as much as the people who live in those countries themselves.
And yet, we must also face up to the fact that when the average per capita health budget in subSaharan Africa will barely cover the cost of a tse tse fly trap, the very best governments in the
region today face problems that they will not come close to addressing without major outside
support. And we must face up to the fact that with the devastation that is coming from
HIV I AIDS, and the enormous progress being made in other parts of the world - the path the
world is now on is a path by which Africa will fall even further behind in the generation to come.
This is not something that any of us should be prepared to accept. It has been an important part
of your agenda for some time. And it must be an important part of the global financial agenda in
the years ahead. Thank you.

-30-

DEPARTMENT

IREASURY

OF

THE

TREASURY

fa) NEW S

OffiCE OF PUBUC AFFAIRS • 1500 PENNSYLVANIA AVENUE, N.W.• WASIDNGTON. D.C.. 20220. (202) 622-2960

u.s. International Reserve Position

June 6, 2000

The Treasury Depanment today released U.S. reserve assets data for the week ending June 2, 20Ce.
As indicated in this table, U.S. reserve assets totaled $67,224 million as of June 2, 2000, up from S67,039 million
as of May 26, 2000.
(in US millions)

Ma~

TOTAL
1. Foreign Currency Reserves
a. Securities

1

June 21 2000
67,224

26 1 2000
61,039

I. Official U.S. Reserve Assets

I

Euro
4,762

Yen
5,439

Of which, issuer headquartered in the U. S.

TOTAL

Euro

10,200

4,836

Yen

TOTAL

5.390

10.226
0

0

b. Total deposits with:
b.i. Other central banks and SIS

8,142

12,146

20,288

8,255

12.037

20,292

b.ii. Banks headquartered in the U.S.
bji. Of which, banks located abroad

0
0

0
0

b.iii. Banks headquartered outside the U.S.

0
0

0
0

15.265

15,358

3. Special Drawing Rights (SDRs) 2

10,237

10,300

4. Gold Stock 3

11,048

11,048

0

0

b.iii. Of which. banks located in the U.S.

2. IMF Reserve Position

5. Other Reserve Assets

2

11 Includes holdings of the Treasury's Exchange Stabilization Fund (ESF) and the Federal Reserve's System Open Market Account
(SOMA), valued at current market exchange rates. Foreign currency holdings listed as securities reflect marked-ta-market values, and
deposits reflect carrying values.
21 The items, "2. IMF Reserve Position" and "3. Special Drawing Rights (SDRs)." are based on data provided by the IMF and ;;Ire valued in
dollar terms at the official SDRJdoliar exchange rate for the reporting date. The IMF data for May 26 are final. The entries in the table above
for June 2 (shown in italics) reflect any necessary adjustments, including revaluation, by the U.S. Treasury to the prior week's IMF data.
31 Gold stock is valued monthly at $42.2222 per fine troy ounce. Values shown are as of April 30, 2000. The March 31, 2000 value was
$11,048 million.

18-682

u.s. International Reserve Position (cont'd)
II. Predetermined Short-Term Drains on Foreign Currency Assets
June 2,2000

May 26.2000
1. Foreign currency loans and securities
2. Aggregate short and long positions in forwards and
futures in foreign currencies vis-a-vis the U.S. dollar:
2.a. Short positions
2.b. Long positions

o

o

o
o

o
o
o

o

3. Other

III. Contingent Short-Term Net Drains on Foreign Currency Assets
June 2, 2000

May 26,2000
1. Contingent liabilities in foreign currency
1.a. Collateral guarantees on debt due within 1 year
1.b. Other contingent liabilities
2. Foreign currency securities with embedded options
3. Undrawn, unconditional credit lines
. 3.a. With other central banks

a

o

o
o

o
o

o

o

3.b. With banks and other financial institutions
headquartered in the U. S.
3.c. With banks and other financial institutions
headquartered outside the U. S.
4. Aggregate short and long positions of options in foreign

currencies vis-a-vis the U.S. dollar
4.a. Short positions
4.a.1. Bought puts
4.a.2. Written calls
4.b. Long positions
4.b.1. Bought calls
4.b.2. Written puts

PUBLIC DEBT NEWS
Department of the Treasury • Bureau of the Public Debt • Washington, DC 20239

FOR RELEASE AT 3:00 PM
June 6, 2000

Contact: Peter Hollenbach
(202) 691-3502

PUBLIC DEBT ANNOUNCES ACTIVITY FOR
SECURITIES IN THE STRIPS PROGRAM FOR MAY 2000

The Bureau of the Public Debt announced activity for the month of May 2000, of securities within
the Separate Trading of Registered Interest and Principal of Securities program (STRIPS).
Dollar Amounts in Thousands
Principal Outstanding
(Eligible Securities)

$1,976,734,120

Held in Unstripped Fonn

$1,780,292,898

Held in Stripped Fonn

$196,441,222

Reconstituted in May

$15,294,673

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 V of the Monthly Statement of the Public Debt, entitled "Holdings of Treasury
Securities in Stripped Fonn."
The Strips Table along with the new Monthly Statement of the Public Debt is available on Public
Debt's Internet homepage at: www.pubIicdebt.treas.gov.Awide range of infonnation about
Public Debt and Treasury Securities is also available on the homepage.
000

http://www.publicdebt.treas.gov

L5-683

TABLE V _HOLDINGS OF TREASURY SECURITIES IN STRIPPED FORM. MAY 31. 2000

Corpus
STRIP
CUSIP

Loan DesalptlO n

Treasury BonCis
CUSIP
912810DM7
008
OR5
OU9
ON5
OPO
OS4
OT2
OV7
DW5
DX3
DYl
OZ8
EA2
EBO
EC8
ED6
EE4
EFl
EG9
EH7
EJ3
EKJ
ElB
EMS
EN4
EP9
EO?
ES3
Ell
EV6
EW4
EX2
EYO
EZ7
FAl
FB9
FE3
FFO
FGB
FJ2
FM5

I
j

Tota.

Ponlon Held ,r

Outstand,n~

UnstrJpoed F om-

InlereSt Rate
11·5/8

912803 AS9

11115/04

8301.806

12

A05
AG8
AJ2
912800AA7
912803 AAl
AC7
AE3
AFO
AH6
AK9
Al7
AM5
AN3
AP8
A06
AR4
AS2
ATO
AU7
AV5
AW3

5115105

4.260.758

8115105

2/15119
8115119
2115120
5115120
8115120

9.269713
4,755916
6.005584
12.19B.799
6.407.916
6.383.859
6.912.354
18,823,551
16,854,448
17.506,669
13.430.258
8,318,439
B.064.470
lB.738.798
20.113,132
10,033.868
9.423,883
20,362.606

2/15121

10.775.873

5/15121
8/15121
11115121
8115122
11115122
2115123

11.501.788
11.453.482
32.628.394
10,338,790
10.079.626
18,040,261
22.694,044
11.099,662
11,550,170
12.327.007
12.904.916
10.893,818
11.493.177
10456.071
10,735,756
22.518,539
11,776.201
10,947.052
11.350,341
11.178.580
11,269,069

10-31<

9-31E
11-31~

11-114
10·518
9·718
9·114
7-114
7-112
8-314
8·718

9·118
9
8·718
8-118
8-112
8·3/4

8-314
7·71B
8·118
B-1I8
8
7-114
7-51B
7·118
6-114
7·112
7·518
6-7/6

6
6-314
6·112
6·518

6·318
6-118
5-112
5-114
5·114
6·118
6-114

AXl
AY9
AZ6
BAO
BB8
BC6
BD4
BE2
BF9
BG7
BH5

BJl
BKS
Bl6
BM4
BP7
BV4
BW2
CG6
CH4

2115106

11115114
2115/15

8115115
11115115
2115116
5115/16

11115116
5115117
8115117
5115118
11115/18

8/15123

1 '''5124
2115125
8115125
2115126
8115126
11115126
2115127

8115127
11/15127

8115128
11115128

2115129
8115129
5115130

526,179,444

Tolal Treasury Bonds ...
Treasury Inflat,on·lndexed NOles
CUSIP
Series Inlerest Rale
3·518
9"28273AB
J
3·318
A
2M3
3·518
3T7
A
3·718
4Y5
A
4·1/4
A
5WB

912820 BZ9
BVS
CL9
ON4
EK9

7115102
1/15107
1/15/08

1/15109
1/15110

Total Inflation-Indexed Notes ..
Treasury Inflat,on·lndexed Bonds
Inleresl Rate
CUSIP
912B10FDS
3·5/8
3·718
FH6
Totallnftallon·lndexed Bonds

912803 BN2
CF8

II

PnnClpal Amount OutstanCilng In TnousanOs
Matunty Date

4/15128
4/15129

3881006 '
1675.958
5431313
.: 714.828
2.025.584
7413 679
4878956
3787.059
6562,754 '
18645.951
17.542.128
11 072.909
11.014.256
3.124.639
3098.470
10.533.998
19,171.372
7.951.868
3.374,923
8429.646
9843,073
6991,708
9.860.522
13781.369
9.329.990
4.038,026
10,651.461
18.128,700
3596.702
3366,170
7.136.287
10.956.816
8549.818
7.555,577
6.100,871
9.284.556
16,929,739
11,583.401
10.479,852
1'.1S5.541
11,175.380
11.269,069
366 126.127

PortiOn HelG

1;-

Stnpoed For,.-

4420800
2584 800
3838400 ,
41088
3980000
4785120
1.528960

Reconst

~..Jte:

,",1-,0-,'"

C
C
14160C
C

3: ()()C
28880:
552 &4~
39J 40C

2.596 800
349600
177.600
1.312320
6433760
2415000
5193600
4.966.000
8.204 800
S41760
2.082000
6048.960
11,932960
932.800
4.510080
1.592960
18.847025
1,008.800
6.041.600
7,388.800
4,565.:344
7,502,960
8.184,000
5,190,720
1,948,100
2.344.000
3.937.600
4.355.200
1.451.200
5,588,800
192.800
467.200
164,600
3200
0

244800
80000
664.960
1520.950
256 800
334.400
585600
565.566
199.040
371 200
368320
516600
544000
316400
404 800
390 400
865.600
245.200
65.600
452.000
0
0

160.053.317

14.418.318

3632OC'

71.200
26 DOC

749922
331 200
g7,6OC
'~4OG

401.6OC
21664C
590 80C
416.800
561.280

17.961,945
17.013.093
17,800,069
16.586.51B
6.423,699

17.961.945
17.013.093
17.SOO069
16.586,518
6.423.699 .

0
0
0
0
0

0

75,765,324

75.785,324

0

0

17.776,478
15.317.803

17776,478
15,317,e03

0
0

0

33,094281

33094.261

0

0

0
0
0
0

0

TABLE V _HOLDINGS OF TREASURY SECURITlES IN STRIPPED FORM, MAY 31, 2000 -- Continued
I
loan DesclIpl,on

Treasury Noles
Series
CUSIP
AE
9128274J8
M
41.11
C
ZE5
AG
402
AH
4RO
AJ
4T6
D
ZN5
)(
3M2
AK
4W9
AL
4X7
U
422
A
ZX3
S
3VVfJ
V
5C2
W
5DO
X
SE8
A8S

!l

4E9
5Hl
SJ7
SL2
B92
5P3
501
5R9
025
2C5
2E1
5X6
6A5
6B3
6Cl
F49
6E7
G55
3J9
314
303
3S9
3V2
J78
3Z3
465
4Dl
4H2
4KS
lB3
4N9
4U3
N81
5A6
PB9
5F5
OBB
5MO
RS7
5S7
S86
TB5
6D9
U63
Va2
W81
X80
Y55
Z62
2JD
2U5
3EO
3X6
4F6
4Vl
5G3
5NB
521

T
Y
Z
AB
C
AC
AD
AE
0

Inleres! Ra!e
5·3/9
~318

8-3/4
~1I8

4-112
4
8-112
~3/4

4-5IS
4-518
4-112
7-3/4
~318

5
4-7/8
5
8
5-518
~1/4

5-314
5-1/2
7-7/8
~112

5-518
5-7/8
7-112

Q

~7/8

R
R

6-1/8
6-3/8
6-112
6-112
6-318
7-1/2
6-518
6-318

S
T
U
A

V
B
M
N
P
Q

C
A

0
E
F
G
H
B
J
K
A

E
B
F
C
G
D
H
A
B
E
C
D
A
8
C
D
8
C
D
B
C

~7tB
~314

5-3/4
5-518
~1J2

6-114
5-1/2
5-112
5-3/4
~112

5-3/8

5"314
~1/4

4-1/4
5·7/8
4-314
7-114
~1/4

7-114
6
7-718
~7tB

7-112
6-112
6·314
6·112
~718

~5I6

6-718
7
6-112
6-1/4
6-518
6-1/S
~112

~5I8

0

4-314

8
C
B

~112

Total Treasury Noles
Grand Total

I

6
6-112

Corpus
STRIP
CUSIP

912820 BOO'
DD6
AX5
OFI
DG9
OH7
AY3
CF2
Ol81
OM6
DP9
A20
CPO
DR5
DS3
DTI
BM
CX3
DW4

OX2
DYO
BB2
EB9
Ee7
ED5
BCO
EG8
EJ2
EL7
EN3
EPa
E06
B08

ES2
BE6
CC9
CE5
CH8
CKI
CNS
BF3
CS4
CU9
CW5
DA2
DC8
BGI
OE4
OJ3
1
BH9
D07
BJ5
DU6
BK2
DZ7
BLO
EE3
8M8
BN6
ER4
BPl
B09
BR7
8SS
8T3
BUO

B'N6
BX4
CAJ
COB
CYl
DKO
OV6
EA1
EMS

PrinCIpal Amounl Oul5land'ng ,n Thousanos
Recons~:!ute::

Malurrty Dale
TOla:
OufSland,nq

61'30100
71'31100
8115/00
8131100
9130100
10131100
11115100
11115100
11l'30l00
12131100
1131101
2115101
2/15101
2128101
3131101
4130101
5/15101
5/15101
5131101
6I30I01
7131101
8115101
8131/01
9I30I01
10131101
11115101
ll1JQ101
121'31101
1/31102
2126102
3131/02
4/30102
5/15102
5131102
8/15102
9130102
10131102
11130102
121'31102
1131103
2115103
2126103
3131103
4130/03
5131/03
6130103
8/15/03
8/15103
11115103
2/15/04
2/15104
5115/04
5115/04
8/15104
8115104
11115104
11/15104
2115105
5/15105
5/15105
8/15105
11/15105
2115106
5/15106
7/15106
10/15106
2/15107
5115107
8115107
2/15108
5115108
11115108
5115109
8/15109
2/15110

I

Pon/on Held In

Portier, Hef<J Ir.

Uns!npped Form

Siropped FO'r"

TnlS Mor:-

[

14.939.057
18.683.295
11.080.646
20028533
19,268.508
20524.986
11 519.682
16.036.088
20.157.568
19474,772
19.777,278
11.312.802
15,367,153
19,586.630
21.605,352
21,033.523
12.398.083
12.873.752
19.885.985
19001,309
20.541.318
12.339,185
20.116.595
16,797.82B
19.196.002
24.226.102
33.5046:27
31.166.321
19.381,251
16563,375
17.237,943
17.390.620
11.714.397
14.877.053
23.859.015
12.806,814
11737.284
12.120.580
12.052.433
13.100.640
23.562.691
13.670.354
14.172.892
12.573.248
13.132.243
13.126779
28011028
19.852.263
18.625}85
12.955.077
17.823.228
14.440.372
lB.925.383
13.346.467
lB.089.806
14373.760
32.658.145
13.834.754
14.739.504
15.425453
15002.580
15.209.920
15513.587
16015.475
22.740.446
22.459675
13.103.678
13.958 186
25.636.803
13.583.412
27.190,961
25.083.125
14.794)90
27.399.894
23.356.721

14671.657
18.680095
6,274,566
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DEPARTl\lENT

OF

THE

TREASURY

~~/~78~9~. . . . . . .

......

OmCE OF PUBUC AFFAIRS -1500 PENNSYLVANIA AVENUE, N.W. - WASHINGTON, D.C. - 20220 - (202) 622·2960

EMBARGOED UNTIL 10:00 A.M. (EDT)
Text as prepared for Delivery
June 7, 2000
TREASURY UNDER SECRETARY GARY GENSLER
HOUSE BANKING SUBCOMMITTEE ON CAPITAL MARKETS, SECURITIES, AND
GOVERNMENT SPONSORED ENTERPRISES

Mr. Chairman, Ranking Member Kanjorski, Members of the Subcommittee, thank you for the
opportunity to appear here today to discuss private equity investing and merchant banking, and their
role in the capital markets.
The enactment of financial modernization legislation was intended to stimulate greater
competition and innovation in the financial services industry. The Administration and Treasury
strongly supported the enactment Qffinancial modernization legislation and worked hard to produce
a balanced bill that serves the interests of consumers, companies, and the economy. As part of that
legislation, banks are allowed to engage in merchant banking activities, both as intermediaries and as
investors, to enable them to better compete with other institutions that are active in these markets.
At the same time, however, Congress intended to limit the mixing of banking and commerce and to
ensure that merchant banking activities are conducted in a safe and sound manner
The new merchant banking authority provided under the financial modernization legislation
significantly expands the ability of bank affiliates to invest in the private equity market. We and the
Federal Reserve Board are in the midst of a rule-writing process implementing the merchant banking
provisions of the financial modernization legislation. As part of this process, we are consulting
broadly to ensure that those rules fully carry out Congress's intent to grant financial holding
companies this important new authority and to preserve the safety and soundness of our financial
system, the strongest and most vibrant in the world.
I would like to discuss four areas in my remarks today:
•

First, the nature of merchant banking and private equity investments and their role in our
capital market~.

•

Second, the current role of financial institutions in merchant banking and the private equity
market.

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•

Third, the approach taken in last year's financial modernization legislation in authorizing
participation by financial holding companies in the private equity market

•

Finally, how the Federal Reserve and the Treasury Department have proposed to use their
rule-writing authority to implement this legislation.

Merchant Bankin2 and Private Equity Investment

The most important thing to understand about investments in the private equity market. or
as it is often called, merchant banking, is that these investments are generally higher risk, longer term,
illiquid investments. To help you better understand this market, let me begin by describing the history
and size of the private equity market, the nature of the investments and the risks they pose, and the
vehicle through which most of these investments take place, the private equity partnership
History and Size of Private Equity Investing
Private equity investing has· been a feature of the capital markets for centuries. Private equity
investments generally are understood to include transactions undertaken by professional investors in
unregistered shares of private or public companies. The organized private equity market represented
over $400 billion in assets under management as of year-end 1999. Until the 1950s, private equity
investing was largely the domain of wealthy individuals. Families like the Whitneys and Rockefellers
made significant venture capital investments in the post-war period Institutions started to become
involved in this type of investing in the 1960s and 70s, through direct investments, limited
partnerships, and Small Business Investment Companies ("SBles").
After a series of tax and pension law changes in the late 1970s, limited partnerships became
the predominant vehicle for collective investment in private equities, leading to dramatic growth in
this market. Although information on this market is .limited, the available data indicate that the
organized private equity market has grown from under $5 billion of private assets under management
in 1980 to over $400 billion in 1999, a more than 80-fold increase over twenty years. This growth
has paralleled a long period of strong growth in the public equity market. During this time, the public
equity market has grown from approximately $1.5 trillion in 1980 to over $17 trillion in 1999, an
approximately 12-fold increase
During the period from 1980 to 1999, the composition of the private equity market shifted
significantly. In 1980, approximately two-thirds of private equity investments were in the form of
venture capital, that is, investments in start-up or early stage companies. By 1999, venture capital
investments had falJen to one-third of the private equity market From 1980 to 1999, non-venture
capital investments grew almost ISO-fold and now constitute two-thirds of the private equity market
While leveraged buy-outs represent the bulk of non-venture capital investments, such investments
also include privately held, middle-market companies and companies in financial distress.

Nature of the Investments
Private equity generally is the most expensive fonn of finance available Equity investing, by
its nature, represents the highest-risk part of the capital structure, because it has the lowest priority
of claim on the cash flow of a company. Private equity investing adds further risk elements First.
these investments are illiquid, as they cannot be readily bought or sold the way registered shares of
a publicly held comp.any can be Second, the investments generally are made in higher risk
<;.:ompanies, such as start-ups, leveraged buy-outs, or -similar investments. Third, the investments are
typically held for the intermediate to longer term in the expectation of higher returns for higher risk
Private equity investors demand high rates of return to compensate for the risks associated
with these investments. For venture capital investments, there are significant risks that a product or
strategic plan of a start-up company may prove unworkable. For a leveraged buy-out of an existing
firm, there are significant risks associated with the high levels of debt a company takes on in
connection with such a buy-out.
Private equity investments generally are longer-term investments. They are generally held
from three to seven years, and may be held longer. These investments tend to be illiquid, in part
because the securities generally are not registered or the companies are not public The ownership
stakes held by private equity i!1vestors also tend to be quite large, further contributing to the illiquidity
of the investments. Investors often will have controlling or majority stakes in companies.
Private equity investments are made with a goal of eventual resale An investor's exit strate!:,')'
may consist of selling a stake in a company through a merger or acquisition or taking the company
public. The ability of investors to successfully exit an investment and realize any appreciation in value
depends in large part on how receptive markets are to such a sale. Thus, one of the most important
opportunities and risks of private equity investing relates to the performance ofthe equity and merger
markets.
We are currently in the midst of the longest economic expansion in our history. In addition,
the U.S. capital markets have had a long period of strong performance. Experience over the last
decade, therefore, can provide only partial guidance as to the riskiness of private equity investments
in the future. We should be careful not to let today's confidence lead to complacency as to the
general risks associated with these investments in the future.
Private Equity Partnerships
Let me briefly describe the vehicle by which most of these investments take place The best
estimates are that approximat~ly 80 percent of private equity is invested through limited partnerships
These partnerships generally have a professional asset manager acting as the general partner. The
general partners most frequently are independent private firms that are not affiliated with either
commercial or investment banking organizations. The investors are generally public or private
pension plans, endowments, foundations, corporations, and wealthy individuals.

For many of these investors, the funds placed with private equity partnerships represent a
portion of their funds that they dedicate to higher risk assets. Other high risk investments sometimes
include investments in real estate or hedge funds Indeed, the partnerships that invest in the private
equity market are set up in much the same way as hedge funds An important difference between
private equity partnerships and hedge funds, however, is that private equity partnerships generally do
not use leverage within the partnership. The portfolio companies themselves, however, often do have
leverage.
Role of Financial Institutions in the Private Equity Market

Let me now turn to the role of financial institutions in the private equity market While
private equity investment takes place largely outside of financial services firms, commercial and
investment banks playa number of roles in this market, as agents, intermediaries, and investors
As agents or underwriters, financial services firms provide services to investors, companies,
and asset managers. In particular, they raise funds for portfolio companies and partnerships and
advise on mergers and acquisitions. They also act as intermediaries, managing private equity
partnerships and investments for others. Investment banks, in particular, are active in each of these
areas. In these roles, financial services firms generally are more insulated from risk than they are
when acting as investors.
Conunercial and investment banks also are investors in the private equity market Investment
in private equity by commercial and investment banks has grown during the last ten years While
precise figures are not available, the best estimates are that these investments currently represent
roughly 20 percent of the organized private equity market Investment banks have invested in private
equities since the 1970s, generally as a complement to their management of private equity
partnerships Some of the earliest venture capital partnerships, such as the Sprout Group, were
formed by investment banks
Prior to enactment of the financial modernization legislation, commercial banks and their
affiliates had limited authority to invest in equities through Edge Act corporations, under the Bank
Holding Company Act, and through SBIes. These investments accounted for just under ten percent
of the total investments in the private equity market. This activity has been concentrated in a few
large banks, with the top ten commercial banks accounting for an estimated 90 percent of the total
private equity investments held by commercial banking organizations
Currently about $5.3 billion, or approximately 14 percent, of the private equity investments
held by commercial banks are invested through SBIes While this is only a small portion of
commercial bank investment in private equity overall, commercial banks represent 60 percent of the
t.otal private investment in SBIes .

4

Financial Modernization

In removing many of the restrictions of the Glass-Steagall Act to allow broader affiliations
of financial services finns, las.t year's financial moderniiation legislation sought to provide increased
competition and innovation in financial services. The legislation permits financial services firms to
participate more broadly in merchant banking activities. This will enable commercial and investment
banks to affiliate while allowing investment banks to retain their private equity investments We fully
support this "two-way street" approach. In addition.. the legislation allows financial services firms
to take advantage of the complementary nature of private equity investing with many of their existing
activities.
Nonetheless, the legislation does not allow for unrestricted merchant banking activities. \\'hen
the President laid out his four key principles for achieving an acceptable financial modernization bill,
one was to ensure that the legislation did not permit inappropriate mixing of banking and commerce.
We had learned important lessons from the experience of other countries, and we did not want to
repeat their experience in our countI)' In particular, we had seen the risk of permitting combinations
of companies that allocate capital with those that compete for capital. After much debate. Congress
concluded that we should be cautious about allowing banking and commerce to mix through the
affiliation of financial and commercial organizations.
The United States has the most efficient capital markets in the world. The allocation of capital
and risk in our markets is not burdened by corporate affiliations or relationships between financial and
commercial enterprises. Other countries. both in Europe and in Asia. allow their banks to have direct.
long-standing, ownership interests in commercial finns. None of these countries, however, has capital
markets as efficient and as well-developed as ours. None has a capital market that contributes so
successfully to its economy as ours does.
Accordingly, the financial modernization legislation included prudent steps to prevent the
mixing of banking and-commerce. As Representative Kanjorski stated, "[aJs a result, we will prevent
the development of the cozy relati'onships between financial firms and commercial companies that
helped lead to the disruption of the Japanese banking system earlier this decade."
Congress followed two key principles in authorizing financial holding companies to engage
in newly authorized merchant banking activities - first. to maintain an appropriate separation between
banking and commerce, and second, to ensure that merchant banking activities are conducted in a safe
and sound manner. To achieve these objectives, the Act permits financial services companies to
engage in the newly authorized activities only if the following conditions are met
•

To become a financial holding company, and thus conduct merchant banking activities, an
organization must be well-managed and well-capitalized

•

The financial services. holding company must have either a securities affiliate or an insurance
underwriter and a registered investment adviser that advises an insurance company to ensure
there is some level of capital markets expertise and controls within the organization

•

The activity must be part of a "bona fide" underwriting or merchant or investment banking
activity, including investments engaged in for the purpose of appreciation and ultimate resale

•

The investments must be held only for a period of time that enables their sale or disposition
on a reasonable basis consistent with the financial viability of the investment activities.

•

The company must not manage or operate HIe portfolio companies on a day-to-day basis
except as may be necessary or required to obtain a reasonable return on investment upon
resale.

In addition, th~ Act restricts cross-marketing between a depository institution and its holding
company's portfolio investments. ·It also provides that a portfolio company is presumed to be an
affiliate under section 23A of the Federal Reserve Act if a holding company holds 15 percent or more
of its capital.

Implementing Rules
Finally, Congress provided joint rule-writing authority to the Treasury and the Federal
Reserve Board to ensure that merchant banking activities would be conducted in a safe and sound
manner and would preserve an appropriate separation between banking and commerce. As Chainnan
Leach and Senator Sarbanes each said in separate statements during floor debate on the conference
report, "under the [rulemaking] authority, the Federal Reserve and the Treasury may define relevant
terms and impose such limitations as they deem appropriate to ensure that this new [merchant
banking] authority does not ." undermine the safety and soundness of depository institutions or the
Act's genera) prohibitions on the mixing of banking and commerce."
We are currently in the midst of the rule-making process. Two rules have been published for
comment. The first is an interim rule and request for comments published jointly by Treasury and the
Federal Reserve implementing the merchant banking provisions of the legislation The interim rule
addresses issues such as pennissible investments, risk management, holding periods and other issues
The second is a proposed rule published for comment by the Federal Reserve that would establish
capital requirements at the bank holding company level for equity investments.
The comment period on ~ach of the requests for comment recently closed. We are currently
reviewing and analyzing the comments received We plan to discllss the issues raised by commenters
both with the Federal Reserve and with the other bank regulatory agencies It is therefore premature
to make any predictions as to how we will resolve any of the issues addressed in the comments
In developing these rules, Treasury and the Federal Reserve not only relied on institutional
knowledge of the financial markets, but also conducted research and broad surveys of market
partICIpants. Interviews with some of the larger financial firms engaged in merchant banking
highlighted current industry practices, including holding periods, involvement in the management of
portfolio companies, and monitoring and risk management systems.
6

The finns we interviewed clearly recognized that private equity investments often are riskier,
less liquid and more volatile than other types of investments These investments also often involve
investment in leveraged companies Consequently, these investments require greater capital suppon
and careful monitoring and risk management This was consistent with what I had seen in my 18
years on Wall Street The interim rule is meant to be consistent with industry practices in making,
monitoring and managing the risks associated with merchant banking investments
Interim Rule
The interim rule includes six main provisions:
•

Holding periods for merchant banking investments. The rule generally permits a ten year
holding period- for direct investments and a fifteen year period for investments held through
private equity funds. A longer holding period may be approved by the Board on a case-bycase basis. The maximum holding periods permitted under the interim rule are longer than
current industry practice. Further, the longer periods permitted for investments held through
private equity funds are intended to recognize the added market discipline that such funds
bring to bear on merchant banking activities

•

Restricts routine management of portfolio companies. The interim rule implements the
provisions of the financial modernization legislation that generally prohibit a financial holding
company from operating a portfolio company on a day-to-day basis. The rule also describes
the circumstances under which routine management is permissible and includes certain safe
harbors. First, the interim rule allows a financial holding company to appoint directors
without limitation, including directors that are employees of the holding company. Holding
company employees .who are directors can exercise all powers as directors. Second, the
holding company may select the senior officers of the company. Third, through particular
covenants, the holding company may require the portfolio company to obtain the approval
of the holding company for certain actions outside of the ordinary course of business, such
as significant changes in the business plan, redemptions of stock, or sales of significant assets

•

Establishes recordkeeping and reporting requirements.
The interim rule includes
recordkeeping and reponirig requirements that are designed to ensure that both the financial
holding company and the Board can adequately monitor the exposure of the firm and its
compliance with applicable limitations

•

Restricts cross-marketing by an affiliated bank. The rule implements the restrictions of the
legislation on the ability of depository institutions to cross-market with a portfolio company
held by a financial holding company aftiliated with the depository institutions.

•

Presumption of control under section 23A The interim rule adopts the presumption of control
provided in the legislation for the purpose of applying the limits of section 23A of the Federal
Reserve Act to transactions between portfolio companies and an atIiliated depository
7

institution A financial holding company is presumed to control a portfolio company if it has
an interest of 15 percent or more of its equity capital.
•

Establishes transitional caps on investments As an interim measure, the rule establishes caps
on the amount of merchant banking investments that a financial holding company may make
under the new merchant banking authority Under the first cap, a financial holding company's
merchant banking investments may not exceed the lesser of30 percent of the company's Tier
1 capital or $b billion. The second cap, which applies only to investments that have not been
made through a private equity fund, limits merchant banking investments to the lesser of 20
percent of the holding company's Tier I capital or $4 billion. The caps may be exceeded \vith
the approval of the Board.
It is important to note that the interim rule applies only to activities conducted under the new

merchant banking authority and does not apply to investments made under previously existing
authority It does not apply to or in any way limit the ability of banking organizations to continue
to use other investment authority that predates the financial modernization legislation
Capital rule
In addition to the rule that Treasury and the Federal Reserve have jointly issued on the new
merchant banking activities, the Federal Reserve has proposed, with our participation and support,
a rule governing the regulatory capital treatment of equity investments in non-financial firms
The Board's capital proposal would place a 50 percent capital requirement at the holding
company level for such investments throughout a bank holding company. The capital requirement,
as proposed, would apply not only to newly authorized merchant banking investments, but also to
certain specified investments made under previously existing investment authorities, including equity
investments made by banking organizations through SBICs and Edge Act corporations. I would like
to note here that these" capital requirements would not apply to investments through SBICs made by
organizations that are not affiliated with a depository institution
qiven the risks of merchant banking investments, no one would suggest that it is appropriate
for an institution to borrow $24 of debt, add one dollar of equity, and invest $25 in a private equity
investment. This, however, is what is permitted by existing regulatory capital rules. The 50 percent
regulatory capital requirement proposed by the Federal Reserve would allow financial holding
companies to modestly leverage one dollar of equity with one dollar of borrowing to invest two
dollars in private equity investments The proposed requirement is half of the customary 100 percent
equity capital that is raised by private equity partnerships managed by non-financial services
institutions. The 50 percent requirement also is within the range of economic capital often held by
financial services firms to support private equity investment
We and the Federal Reserve have received significant comments with respect to the proposed
capital requirements. Commenters have raised concerns as to the appropriate level of the capital
requirement and the scope of its application with respect to investments under pre-existing authority.
8

While Governor Meyer will discuss these issues further, I know that both the Federal Reserve and
the Treasury will be considering all these comments carefully prior to publication of final rules

Conclusion
At the present time, we continue to review the comments received on the rules and will
carefully consider the important issues raised by the cgmrnenters. As we move forward, Treasury and
the Federal Reserve will work closely to ensure tharthe new merchant banking authority is used in
a way that preserves the safety and soundness of our financial institutions and the strength of our
capital markets
Thank you. I will be happy to answer your questions

--30--

9

DEPARTMENT

OF

THE

TREASURY

NEWS
OFFICE OF PUBUC AFFAIRS • 1500 PENNSYLVANIA AVENUE. N.W.• WASHINGTON. D.C. • 20220 • (202) 622-2960

Contact Steve Posner
(202) 622-2960

FOR IMMEDIATE RELEASE
June 7, :2000

TREASURY ANNOUNCES EFFECTIVE DATES
OF NEW TAX AGREEMENT WITH UKRAINE

The Treasury Department today announced that a new income tax treaty and protocol
with Ukraine entered into force on June 5, :2000 The treaty, to which the U S Senate gave
advice and consent to ratification in 1995, replaces the existing tax treaty between the United
States and Ukraine, which was signed in 1973 with the former Soviet Union and remains in force
for many of the former Soviet Republics.
On June 5, the United States and Ukraine exchanged instruments of ratification, the final
step required to bring the treaty into force. The treaty applies, with respect to taxes withheld at
source, in respect of amounts paid or credited on or after August 1, :2000 and, with regard to
other taxes, in respect of taxable years beginning on or after January I, 200 1

-30-

LS-685

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DEPARTMENT

OF

THE

IREASURY f~)

TREA·SURY

NEW S

OFFICE OF PUBllC AF}'AlRS • 1500 PENNSYLVANIA AVENUE, N:W .• WASHINGTON, D.C. • 20220 • (202) 622-2960

FOR IMMEDIATE RELEASE
June 7,2000

STATEMENT BY TREASURY DEPUTY SECRETAR\'
STUART E. EIZENSTAT

Treasury Deputy Secretary Stuart E. Eizenstat met with Ambassdor Winkler.
Ministry of foreign Affairs Legal Adviser and the head of the Austrian delegation at
the June 7 meetings, to discuss the Austria fund for slave and forced laborers. Deputy
Secretary Eizenstat stated that we made excellent progress today in our meeting with
the Austrian delegation and in a separate meeting with the plaintiffs' attorneys.
Ambassador Winkler described the legislative process for the draft law
establishing the Austria Fund and the recent revisions to the draft law.
"J am pleased to announce that the U.S. Government is satisfied that the

changes to the Austrian law creating the Austrian Reconciliation Fund take into account
our concerns," Deputy Secretary Eizenstat said. "It is important that the draft law
continue to be open to further amendments to ensure that it is also satisfactory to the
plaintiffs' attorneys."
Ambassador Winkler noted that the draft law has support from the four parties
in the Austrian parliament. The Constitutional Committee of parliament would mark up
the law on June 21, and the Government hopes that the l(lw would be adopted in July.
Deputy Secretary Eizenstat commended thl' profcssionalism of Dr. !'-.1aria
SchauJl1aycr, Austria's special envoy for forced and sla\·c lahor issues, and Amb~IS\adllr
\Vinklcr for their approach. They have been pdrtlclilariv sensitivc tu the legal CI()"~lrL'
ISSUC.

ThL' :\llstrian and U.S. (lclcgatlol1.'. Illl't \\ltl1 till' pl~lIl1llfl.'.' a\lllfl1'-'Y\. illLllld:llc'
legal rqnl'.'.ll11;ltl\L'\ of tile ('l~lllll.'. ('ollfl'I"ll,·,' :111,1 till' :\u.'.lri,lIl Jl'\\.I\h .."lllllllllllllt\ "
well ;1'.; \\ltl1 tIll' attoml'Y.'. for till' t\llstri;lIl l·(llllP,lllll'\

._-_. __ . . . . - - -

...

--.---.----

2

The participants addressed the overall capitalization of the Fund at six billion
schillings, which, in light of the discussion of the number of victims, the United States
considered a reasonable amount. The Austrian delegation provided data to reassure that
the planned six billion schilling ($400 million) capitalization of the Fund would be
adequate. The plaintiffs' attorneys are now considering this amount.
Executive Agreement and Statement of Interest
Given this progress on the Austria Fund legislation, and the bilateral discussion
on legal closure, Austria requested that we begin preparation of an Executive
Agreement and the Elements of a Statement of Interest to achieve legal peace for
Austrian companies. The United States agreed to seek authority to negotiate and
conclude an Executive Agreement.
Property
In Deputy Secretary Eizenstat's bilateral meeting with the Austrian delegation,
he stressed that we regard progress on property restitution as a matter of priority for the
United States. We welcome the recent appointment by the Austrian government of
Ambassador Sucharipa as special envoy for property restitution issues.
Ambassador Winkler reported that Ambassador Sucharipa has already begun
work property restitution issues, and Deputy Secretary Eizenstat noted that he plans to
meet with Sucharipa on June 19 in Washington. Ambassador Winkler indicated that
Sucharipa would also meet with the plaintiffs' attorneys on property restitution. He
added that we could expect an interim report by the Austrian Historians' Commission
by October.

-30-

l)

E ., (\ I~ TI\,l E N T

()...

1REASURY ( . .-..
~

1789

THE

T REA SUR \'

NEWS

omCE OF PUBUC AFFAIRS -1500 PENNSYLVANJAAVENUE, N.W.• WASHINGTON, D.C •• 20220. (202) 622-2960

FOR IMMEDIATE RELEASE
June 7, 2000

STATEMENT BY TREASURY DEPUTY SECRETARY STUART E. ElZENSTAT
The Administration has serious concerns with both the substance and process associated
with the European Commission's proposal regarding the application of value-added taxes (VAT)
to one form of electronic commerce.
The United States, the European Commission and the Ee member countries have all been
working with other governments, the business community, and other stakeholders within the
OECD on issues associated with electronlc commerce taxation, The OECD process is proceeding
well and is on target fOT completion next year. The global nature of electronic commerce makes
it critical that tax proposals are developed through a deliberative and inclusive process, such as
the OECD. Unilateral proposals, even though intended to be consistent with the OEeD
framework conditions, increase the risk of unintended consequences. They can undermine the
OEeD process and weaken the resolve of those who have been resisting unilateral measures
while awaiting the results of that process. We hope that does not happen.

It appears that the system proposed by the Ee has the potential to operate in a non-neutral
manner so that value-added taxes on electronicaJly delivered products may be higher than value
added taxes on their physically delivered functional equivalent. For example, it appears that, in
practice, the value added taxes applied to electronically delivered books and newspapers may be
higher than those applied to sales of the same physical books and newspapers.
The EC proposal addresses the taxation of products that are digitally delivered to
consumers, as well as certain radio and television broadcasting, which currently represent a very
small part of the electronic marketplace. Furthermore, technology in this area is changing
rapidly. Finally, the policy issues are extraordinarily complex and, in some cases, could have
effects outside the taxation area. Given the relatively small amounts involved, the unintended
implications of the EC proposal are not worth the short-term tax revenues that may result.
We appreciate that the EC indicates in its proposal that it intends to continue working
within the OECD regarding compliance issues T,lle EC's unilateral action, if implemented as
announced, could well hinder the: development of this new' global medium of commerce.
·30~

LS-687

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DEPARTMENT

OF

THE

TREASURY

NEWS
omCE OF PUBUCAFFAIRS -1500 PENNSYLVANIA AVENUE, N.W .• WASHINGTON. D.C.. 20220. (202) 622-2960

For Immediate Release
June 8, 2000

Contact: Public Affairs
202-622-2960

STATEMENT BY TREASURY SECRETARY LAWRENCE H. SUMMERS
I welcome today's bipartisan approval by the House Banking Committee of important
legislation to combat international money laundering. This is a significant step forward in our
fight to protect the U.S. financial system against international money laundering and to confront
those countries that serve as ready havens to hide and move dirty money around the world.
I congratulate Chairman Leach and Mr. Lafalce for their strong bipartisan leadership on
this issue. I look forward to continuing to work with the House and the Senate toward enacting
this important legislation to combat money laundering.
- 30-

LS-688

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DEPARTMENT

OF

THE

IREASURY (!.)

TREASURY

NEW S

1789

OmCE OF PUBUCAFFAIRS -1500 PENNSYLVANIA AVENUE, N.W. - WASHINGTON, D.C. - 20220 - (202) 622-2960

Erv1BARGOED UNTIL 1:00 PM EDT
Text as Prepared for Delivery
June 8,2000

"PREPARING FOR THE FUTURE BY INCREASING NATIONAL SAVINGS"
TREASURY SECRETARY LAWRENCE H. SUMl\1ERS REMARKS
TO THE NATIONAL TAX ASSOCIATION
\V ASHINGTON, DC

Good afternoon I am glad to be here
We come together at a moment of remarkable success for the American economy But it is at
moments such as this that we are most vulnerable to the dangers of complacency. Prosperity and
credibility are attributes that are rented, not owned. If we as a nation are to prolong and sustain
this period of economic strength, then we must take advantage of this opportunity to make the
right choices for our future
There are few choices that we can make as important to securing the future prosperity of our
country as that of increasing national savings This is the focus of my remarks today
I.

The Importance of Raising National Saving

Raising national savings is an especially important macroeconomic imperative today, for four
reasons
•

First, because with unemployment at its lowest level in a generation, now is not the time to
deliver additional fiscal stimulus to the economy, instead, the priority for policy must be to
increase the supply potential of the economy. Raising saving would "crowd in" private
investment and help to extend this investment-led expansion

•

Second, because higher national saving would help to reduce, rather than exacerbate, the US
trade and current account deticits. Without a higher rate of national saving, we are faced
with one of two outcomes either the current account deficit will remain high, running the
risk of fueling increased protectionist pressures; or we will fail to maximize our investment
in the domestic economy precisely when the return to such investment is high.

18-689
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•

Third, because we should be preparing for the aging of America Our countf\' faces an
unprecedented challenge with the retirement of the baby boom generation, b~ginning only
about a decade from now We should not jeopardize our ability to meet our obli~ations to the
next generation of retirees The best way to prepare the natiol~ for this develop~ent is by
increasing investment in productive assets With a larger productive capacity, the economy
will more easily be able to generate the government revenues required under current law

•

And fourth, because we should presef\'e our flexibility Higher saving has the central virtue
of providing us with options, not merely if our current economic strength continues as we
hope, but also if it does not Just as a prudent individual takes advantage of a period of
unexpected good fortune to make stronger provision for his or her future, so too does a
prudent nation.

Ifincreasing our national saving is the right objective. then how do we go about accomplishing
it') We can achieve this objective in t\-vo ways
•

First, we must increase the level of pub I ic saving, thereby sustaining and even accelerating
our current course of paying down the national debt.

•

Second, we must raise the level of personal saving, by encouraging American families and
individuals to save more

II.

The Imperative of Continuing to Pay Down Debt

The American economy is enjoying a record period of economic expansion This success is a
retlection of the entrepreneurial drive of Americans, the development and implementation of
new technology, and the dynamic and flexible character of the American economy.
But this expansion would not have been as impressive or as enduring if we had not chosen to
pursue a tough and prudent fiscal strategy since 1993. By moving from budget deficits to budget
surpluses, and seizing the opportunit~· to reduce the national debt, we have almost doubled our
net national saving rate to 7.3 percent last year.
In 1992, the Federal budget posted a record deficit of $290 billion - almost .5 percent of our gross
domestic product Since then we have achieved not only a unitied budget surplus - comprising
both the operating budget and the Social Security budget - but also last year, for the first tilne
since 1960, a small surplus in our on-budget account.
And this year, the on-budget surplus is on track to widen considerably. In other words, for the
first time since) 960, Social Security surpluses are being translated, one-for-one, into
government saving This is a major step forvvard in our ongoing preparation for the retirement of
the babyboom generation. If as the President has proposed, we use both the Social Security
surpluses and a share of the projected on-budget surpluses for debt reduction, we will be on track
to eliminate the net debt held by the public by at least 2013

Reducing national debt also brings direct benefits to American families, most notably bv putting
more disposable income into their pockets In that sense, debt reduction acts like a tax cut in two

ways
Firsl, hy l11ail1la/l1ill~ (l dOlI'l1I1'ord pressl/re

011

!Illae,\'! rates, dehl redllCIIOJ1 redllces lJ1ol'l~axe

co""'IS.

Everyone percentage point fall in long-term interest rates reduces the cost of mortgages for
American families by $250 billion over a decade. We estimate that, as a consequence of our ne\.\
path offiscal discipline, a typical American family with a mortgage of $100,000 would save
around $2,000 a year on mortgage payments .
•I.,'ecolld, dehl reduclioll redllces the/lIllIre

faX

h"rden

011

Americans

In the same way that a purchase must be paid for, whether you pay cash or buy it 011 a credit
card, government outlays must be paid for, whether through current taxes or future taxes
Therefore, when the government is running a deficit, the tax burden understates the true burden
of funding government services. The virtuous circle of rising budget surpluses and declining
levels of public debt has already lowered substantia\ly the tax burden that American families will
face in the future
Consider
•

In 1983, when the Federal government incurred a budget deficit of $208 billion, the
average American family was effectively saddled with future tax payments that were
equal to 35 percent of the taxes they were paying at the time

•

When the Clinton Administration took office in 1993, the deferred tax amounted to 22
percent of taxes paid.

•

In 2000, the $167 billion unified budget surplus we estimated in the February Budget
would represent a 9-percent redllctioll in the future tax burden on American families.
And with the brightening of the budgetary picture since February, that figure is all but
certain to improve from there.

In other words, as a result of the improved fiscal positions we have achieved, the total income
and payroll tax burden, including deferred taxes, on the typical American family has fallen by a
third since 1983: from 32 percent to 21 percent of income, or the lowest since 1974

III.

The

Critic~1 Import~nce

of Raising Personal Saving

The dramatic increase in the level of public saving since 1993 has not been matched by a similar
growth in private saving. Indeed, at just 06 percent in the first quarter of 2000, the personal
saving rate is lower than at any time since the Great Depression.

It is crucial to our economic health and to the securitv of individual Americans and farnihes that
we raise the level of personal saving

•

First, because raising personal saving will enable us to adjust to the fact that people are living
much longer than before. If both members of a couple in my age cohort reach 65, they wi II
face even odds that at least one of them will reach the age of 90 And as people are retiring
earlier and living longer, retirement spans for many individuals are approaching half or more
of their working lives

•

Second, because even in this era of budget surpluses, the national saving rate is still too lov.
It is not enough simply to continue to increase public saving; if we are to secure the future
prosperity of the American economy, we must also raise personal saving.

Crucial to addressing this problem will be encouraging more low- and middle-income Americans
to save. It is true that aggregate household wealth has risen to a record high in the United States
Yet, study after study concludes that a large proportion of Americans have inadequate savings
For example:
•

Half of American families on the brink of retirement had financial assets valued at less
than $40,000 in 1998. And for those not as close to retirement, financial assets were even
lower

•

Only half of American workers are currently participating in any kind of employerprovided pension plan, leaving more than 73 million American workers and their spouses
not covered by such a plan Indeed, more than 50 million Americans have no retirement
savings whatsoever

Encouraging more saving by low- and moderate-income Americans is not only about fairness but
also about effectiveness Policies that help those families to save are also likely to increase
national saving. In contrast, additional inducements to higher income people to save may result
primarily in a reshuffling of their saving from forms that are less-preferred under the tax system
to forms that are more-preferred, with little or no effect on their total saving
How can we most effectively help American families do what is so clearly in their interest and in
the national interesP There has recently been a sea change in thinking on this question
Economists have come to the recognition that saving behavior is affected by much more than
financial incentives Habit formation, the ease of saving, and a range of actions that influence
people's tastes, all have an enormous impact
Awareness of these behavioral influences has shaped our approach to this problem Let me
highlight three of the steps the Administration is taJ.:ing to raise personal saving
First, hy edllcalil1R AmericaJ1s ahoul Ihe

il17/)(w/aI/c('

(!lpers()llal s(t\'il1g

Earlier this year, I announced the launch of the National Partners for Financial Empowerment - a
broad-based coalition effort intended to help raise the level of financial awareness and improve

the practice of personal finance across America Our strate~\' is to build on the creative and
energetic efforts of the hundreds of private and non-profit groups already at work on this
Important problem.
By leveraging existing expertise, the new coalition has already brought greater focus and
visibil ity to this issue A number of encouraging efforts are underway
•

In Cleveland, the Consumer Federation of America is pilot-testing an innovative communitywide program called "Cleveland Saves," that will seek to otTer Clevelanders the guidance
and motivation they will need to meet an identified savings objective With the help of
prominent business, sports, government, religious, and community leaders, the effort aims to
spread financial literacy among all Clevelanders Eventually, CF A hopes to replicate this
effort in other cities

•

The Investment Company Institute Education Foundation and the National Urban League
recently announced that they are joining forces to sponsor "Investing for Success," a national
campaign in the African-American community to promote greater awareness about investing
The partnership will work with ICI member firms and NUL affiliates to develop pilot
"Investing for Success" programs in five cities, which will include investor education
seminars, educational materials and a website

•

In May, the American Express Foundation announced the first recipients of grants from the
American Express Economic Independence Fund, a new pilot grant program designed to
support the delivery of financial literacy education to underserved segments of society The
Fund will be jointly administered with the National Endowment for Financial Education -also an NPFE partner. The objective orthe Fund is to increase individuals' personal financial
knowledge and improve their skills and self-confidence with money

Seco"d, hy making ou/" eXlsllIlg S{{1'11lg.\ lI/cell/fI'eS more effeclil'e.

Studies show that individuals are 1llllch more likely to save when saving is made simple and
easy That is one reason why 40l(k) plans have become America's most popular savings vehicle
much like a Christmas Club, 401 (k) payroll deduction is convenient and regular, and the money
goes into savings before there is an opportunity to spend it
We are taking further steps to make it easier for employees to save·
•

We recently issued a ruling allowing automatic enrollment in 401 (k) plans for current
employees, building on an earlier ruling that allowed automatic enrollment for new hires.
The new ruling permits employers to enroll current employees in a 40 I (k) plan without
those employees having to take the initiative to do so themselves although, of course,
employees are provided with the choice of opting out

•

In our FY200 I budget we have proposed to allow automatic payroll contributions into IRAs.
That option would make contributing to an IRA as simple as regular payroll contributions to

a 401 (k)-type plan. and we know from research that automatic contributions through payroll
deduction are an effective way of helping people follow through 011 their savings plans
J/lirJ, hy /ar;.:e / 111[[ 1/('11' sm'lI1[[ IIlCentll'es at I()\\,- alld fJlIddll!-illCOll1e AlIl<!l'Ic([m.

At the moment the tax system offers the greatest incentives to those who need them the least
Two thirds of pension tax expenditures go to families in the top 20 percent of the income
distribution whi Ie just 12 percent goes to fami Iies in the bottom 60 percent Indeed, for many of
the poorest Americans. who pay no Federal income tax, 40 I(k) and IRA tax incentives are worth
nothing
Our proposed Retirement Savings Accounts, or RSAs, would ofTer a powerful new saving
incentive for people who receive little or no tax incentive under existing law. The President' s
proposal builds on the successful model ofIndividual Development Accounts, extending
generous credits to all low and moderate-income working families to encourage them to save and
build wealth.
Participants' contributions to retirement accounts sponsored bv employers or otTered by financial
institutions would qualify for a progressive tax credit To provide incentives where they are most
needed, the highest credit rates would apply to the lowest-income workers. RSAs would be
available to 55 million Americans who are 110t contributing to a 40 I (k) or IRA plan
The RSA proposal takes advantage of the existing payroll deduction mechanism of 40 1(k) plans.
and the positive peer effects that are associated with such plans. And the RSA proposal provides
a target level of savings for workers who now typically are not saving for retirement at all
Contributions to RSAs would accumulate tax-free If a familv consistently. took advantage of
RSAs, they could accumulate substantial assets to help maintain a healthy income in retirement
.

~

For example.
•

A 25-year-old worker eligiblefor the maximum RSA benefit every year could make
after-tax contributions of less than $1.000 every year and yet accumulate a quarter of a
million dollars by age 65 in retirement savings.

•

This accumulation could be enough to provide an annuity of$24,000 per year - an extra
$2,000 per month in retirement income

The _Qoai of increasin ::Jo retirement securitv_ for low and moderate-income Americans is surely• one
on which we can all agree. I urge Congress to enact RSAs
IV.

Conclusion

Let me conclude where I began. We are fortunate to be living in an era of record economic
grov.1h Common sense and economic logic both dictate that all of us --governments, businesses
and individuals-- should take advantage of periods of economic strength to lay the groundwork

for less fortunate moments in the future Increasing national saving is perhaps the most
important way to lay that groundwork - to increase supply rather than demand, to enhance the
prospect ofa healthy adjustment in our trade deficit, and to prepare for the challenge of the aging
of our population. By continuing on the course of debt reduction and by stimulating greater
personal saving through the tax code and other approaches, we can raise national saving and
confront these challenges directly Thank you
-30-

DEPARTMENT OF THE TREASURY
WASHINGTON, D.C.

June 8, 2000
SECRETARY OF THE TReAsuRY

The Honorable William Archer
Chainnan
Committee on Ways and .\1cans
US. House of Representatives
Washmgton, D.C. 20515
Dear Mr. Chairman:

It IS my understanding that the Committee on Ways and Means will hold a mark-up later todJY
on the "Debt Reduction Reconciliation Act of2000." We share the obJectlve ofpaymg dO\\[l the
debt held by the pUblic. However, we have grave concerns about the debt-limit provisions
contained in this legislation.

It has been this Administration's view that fiscal restraint is best exercised through the tools of
the budget process. Existing enforcement tools such as the pay-go rules and the discretionary
spending limits)n the Budget Enforcement Act have been key elements in maintaining fiscal
discipline during the last decade. Debt limits should not be used as an additional means of
imposing restraint. Debt is incurred solely to pay expenditures that have previously been
authorized by the Congress and for the investment of the Federal trust funds. By the time the
debt limit is reached, the Government is obligated to make payments and must have enough
money to do so.

If Treasury were prohibited from issuing any new debt to honor the Government's obligations,
there could be pennanent damage to our credit standing. The debt obligations of the United
States are recognized as having the least credit risk of any investment in the world. That credit
standing is a precious asset of the American people. Even the appearance of a risk that the
United States of America might not meet its obligations because of the absence of necessary deb'
authority would be likely to impose significant additional costs on American taxpayers.
The Administration is dedicated to eliminating the debt held by the public in the coming ye2.:s.

The Administration looks forward to working with the Congress to continue to keep the
on a path with responsible fiscal polley and fiscal discipline.
Sincerely,

Lawrence 11

SUlli:~i-':!<

cO"':ltr~.

D EPA R T 1\1 E N T

0 F

THE

TREASURY

T REA SUR Y

NEWS

Ot'FlCE OF PU8LIC A.t'}·AIRS e1500 PENNSYLVANIA AVENUE. N.W .• WASHINGTON. I).C.e 20220. (202) 622·296()

EMBARGOED UNTIL 2:30 P.M.
June 8, 2000

CONTACT:

Office of Financing
202/691-3550

TREASURY OFFERS 13-WEEK AND 26-WEEK BILLS
The Treasury will auction two series of Treasury bills totaling
approximately $16,000 million to refund $16,063 million of publicly held
securities maturing June 15, 2000, and to pay down about $63 million.
In addition to the public holdings, Federal Reserve Banks for their own
accounts hold $8,404 million of the maturing bills, which may be refunded at
the highest discount rate of accepted competitive tenders. Amounts issued
to these accounts will be in addition to the offering amount.
The maturing bills held by the public include $2,191 million held
by Federal Reserve Banks as agents for foreign and international monetary
authorities, which may be refunded within the offering amount at the highest
discount rate of accepted competitive tenders. Additional amounts may be
issued for such accounts if the aggregate amount of new bids exceeds the
aggregate amount of maturing bills.
Treasu~Direct

customers requested that we reinvest their maturing holdings of approximately $962 million into the 13-week bill and $724 million into
the 26-week bill.
This offering of Treasury securities is governed by the terms and conditions set forth in the Uniform Offering Circular for the Sale and Issue of
Marketable Book-Entry Treasury Bills, Notes, and Bonds (31 CFR Part 356, as
amended) •
Details about each of the new securities are given in the attached
offering highlights.
000

Attachment

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HIGHLIGHTS OF TREASURY OFFERINGS OF BILLS
TO BE ISSUED JUNE 15, 2000
June 8, 2000
Offering Amount •••••.••••••••••••••••••• $8,500 million

$7,500 million

Description of Offering:
Term and type of security •••••••••••••••
CUS:IP number •••••.••••••••••••.••••••••••
Auction date •••••.••••••••••••••••••••••
:Issue date ••••••••••••••••••••••••••••••
Maturity date •••••••••••••••••••••••••••
Original issue date •••••••••••••••••••••
Currently outstanding •••••••.•••••••••••
Minimum bid amount and multiples ••••••••

182-day bill
912795 FK 2
June 12, 2000
June 15, 2000
December 14, 2000
June 15, 2000

91-day bill
912795 EF 4
June 12, 2000·
June 15, 2000
September 14, 2000
September 16, 1999
$26,450 million
$1,000

$1,000

The following rules apply to all securities mentioned above:
Submission of Bids:
Noncompetitive bids

... . . . .. . Accepted

in full up to $1,000,000 at the highest discount rate of
accepted competitive bids.
Competitive bids •••••••••••• (1) Must be expressed as a discount rate with three decimals in
increments of .005%, e.g., 7.100%, 7.105%.
(2) Net long position for each bidder must be reported when the sum
of the total bid amount, at all discount rates, and the net long
position is $1 billion or greater.
(3) Net long position must be determined as of one half-hour prior
to the closing time for receipt of competitive tenders.

Maximum Recognized Bid
at a Single Rate .••••••••.•• 35% of public offering
Maximum Award ••••••••••••••••••• 35% of public offering
Receipt of Tenders:
Noncompetitive tenders •••••• Prior to 12:00 noon Eastern Daylight Saving time on auction day
Competitive tenders •••••.••• Prior to 1:00 p.m. Eastern Daylight Saving time on auction day
Payment Terms: By charge to a funds account at a Federal Reserve Bank on issue date, or payment
of full par amount with tender.
Treasu~Direct customers can use the Pay Direct feature which
authorizes a charge to their account of record at their financial institution on issue date.

DEPARTMENT

OF

THE

TREASURY

NEWS
OFFICE OF PUBUC AFFAIRS -1500 PENNSYLVANIA AVENUE, N.W. - WASHINGTON, D.C.. 20220. (202) 622-2960

FOR IMMEDIATE RELEASE
Text as Prepared for Del ivery
June 9, 2000

TREASURY DEPUTY ASSISTANT SECRETARY l\'IICHAEL S. BARR REMARKS TO
NATIONAL FEDERATION OF COMMUNITY DEVELOPMENT CREDIT UNIONS
DENVER~ COLORADO

Good morning. I appreciate the opportunity to speak with you today I'd like to thank Cliff
Rosenthal and tbe National Federation for Community Development Credit Unions as well as the
local credit unions, Zion United Credit Union, Denver Community Development Credit Union
and the Seguache County Credit Union that have helped organize this conference
I applaud all of you for your hard work and long-standing track record in helping communities
build economic self-reliance through a network of strong, sustainable, community-based
financial institutions Treasury Secretary Summers recently visited a COCU in San Francisco
that is helping a community get back on its feet The Northeast Community Development Credit
Union, which serves low-income individuals living in the Chinatown section of the city, opened
a branch in the Tenderloin nei~hborhood with the assistance of a CDFI Fund award of $720, 000
in I998 Until recently, the Tenderloin district. a community in steady decline, has been largely
devoid of mainstream financial institutions This ne\v branch 110t only helps local residents
obtain access to financial services such as lo\V-cost check cashing, but will also infuse Illuchneeded credit into this economically distressed area
~

This isjust one example of the great work that all of you do every day in your cities and towns
that helps communities and their residents become economically independent The Treasury
Department greatly values your work at the community !evel. as well as our strong working
relationship with the National Federation We were excited that you joined us in the launch of
the National Partners for Financial Empowerment (NPFE), which Secretary Summers launched
on April 4th NPFE is a coalition of private and public organizations dedicated to raising the
level of financial awareness and imprm'ing the practice of personal finance across America OUf
strategy is to build on the creative and energetic efTorts of the hundreds of private and non-profit
groups already at work on this important problem While NPFE is currently in the start-up phase
of development, we are working to put together a national campaign, including Public Service
Announcements and a website. \Ve hope to leverage existing expertise to bring greater focus and
visibility to this issue. As you are all keenly aware, education is the bedrock for helping families
and future generations achieve and retain financial independence CDeus have been long active
18-692
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in providing financial education to its consumers. giving them the skills to make better financial
decisions We \'v'ould welcome and encourage your participation and expertise to help make
~PFE a successful initiative
We are ualhered at a time of tremendous strength in the U.S economy We are in the midst of
the long~st peacetime expansion in history Inflation is low. The unemployment rate, at 4.1
percent. is nearly the lowest in a generation, and more Americans are workIng than ever before-135 million Even those who for too long were stranded on the bottom rungs of the economic
ladder have experienced increases in employment and real income. In fact, real income for
families in the lowest fifth of the income distribution rose faster than for any other group since
1993 But as you all know too well. there are still people deprived of the benefits of this
economy
Bringing Americans into the economic mainstream is a moral imperative. But it is also an
economic imperative. At a time when our economy is so strong, there are still millions of
Americans that are not benefiting from our nation's economic prosperity. Ifwe can bring these
individuals into the economy. it will help us to keep our economy growing strong. We can help
to reduce social costs and increase productivity. Thus, your efforts benefit not only individuals
you help, but all Americans. One of Treasury's core missions is to democratize access to capital
We have been \vorking with NFCDCll and other groups' organizations to promote increased
access to capital for underserved neighborhoods through a revitalized eRA and through
Treasury's CDFl Fund And just two weeks ago, President Clinton and the Speaker of the House,
Dennis Hastert. announced a bi-partisan agreement on our New Markets Initiative and Renewal
Communities All told, the President's New Markets initiative would unleash over $22 billion in
pri\'3te sector equity im'estment for business grovvth. This agreement, if passed into law, would
help stimulate tremendous new private sector investment in communities that our new economy
has vet to reach
These programs demonstrate what the public and private sectors can achieve when they work
together While access to capital is an impoT1ant part of tile Administration's efforts to bring all
Americans into the new econom~. I would like to focus my remarks today on one aspect in
\\'hich community de\elopment credit unions can playa key role helping provide universal
access to financial sen'ices for lower-income Americans
I \\Quld first like to describe some of the problems currently faced by those living outside the
financial mainstream. often called "the unbanked." but perhaps should be called the "un-creditunioned," and second. how v,orking together we can help bridge this financial divide by
prcnldlllg ne\\ opportunities for those \\ ho ha\'e been left on the wrong side of this divide.

I.

Prohlems of "rnhanked"

Toda~', in this Internet age. as many as 10 percent of American households--and more than a fifth
of those \\ith lo\\-incoll1es--ha\e not broken through the banking barrier, 8.4 million households

Why is this number so high0 A 1998 Survey of Consumer Finances asked unbanked individuals
why they did not own a checking account. The reasons most often cited by respondents were not
writing enough checks to make an account wortll\vhile. minimum balances and/or service
charges being too high, not wanting to deal with banks, and not having enough money But we
know that low-income people, if given the chance, can save for their future Studies show that
given an institutional mechanism, such as an Individual Development Accounts (lDAs), lowincome people have demonstrated the capacity to save. In fact, very low-income households
save at a higher rate than other households
Community Development Credit Unions are on the front line for finding solutions to these
problems There are 190 primary credit union members in the NFCDCU with assets ranging
from under $1 million to up to $125 million Many of your institutions operate in some of the
poorest communities in the nation., You have a history of fostering savings among low-income
Americans and are vital players in providing access to bank accounts and other financial services
to low-income households I know of one credit union serving a large immigrant community in
the Washington Heights community in New York called Neighborhood Trust Federal Credit
Union. This credit union found that two-thirds of its members did not have a bank account prior
to joining the credit union. It is this \'Vork--your work. that will create greater financial
opportunities for low-income individuals and families.
Working toward bridging this tinancial divide has been a high priority of this Administration and
I would like to take a few minutes to describe our etforts to work with you to provide greater
access to financial services to all Americans Congress passed a law four years ago that included
a provision that the federal government convert most of its payments to electronic funds transfer
(EFT) by 1999. I stood with then-Secretary Rubin as he outlined the Treasury agenda for
financial empowerment as we approached the 21 ,I century In ticking through our objectives for
the next four years, he was the first to recognize the importance of this little-noticed provision to
our nation's communities He understood from the beginning that EFT'99 presents ,- .. a real
opportunity to have an effect on a very large number of people in the inner city .. [who] use
expensive check cashing services to get a hold of cash If we can figure out a way to get them
into the banking system for the tirst time, not only will it give them a more efficient way to cash
checks and access other financial services. but it rnav encourage people to save, to plan
financially, and therefore, to improve their economic life over time"
Last year, the initiative was expanded \vith the launch of Electronic Transfer Accounts (ET A)
that offered as many as 10 million recipients of Federal paY'ments, who lacked an account, the
option of setting up a low-cost electronic bank account at a mainstream financial institution. The
initiative has been growing rapidly and now includes the participation of more than 550 banks,
thrifts and credit unions across the Unityd States, including several community developmellt
credit unions such as Alternatives in Ithaca. NY, Bethex in the Bronx. NY; Central
Appalachian People's in Kentucky and New Horizons in Philadelphia We are making every
effort to expand it even further
This year, we.are continuing to build on the success of this initiative with further steps to extend
the benefits of low-cost bank accounts to the millions of Americans who do not receive Federal
payments. In January 2000 President Clinton announced a new initiative - l'Irsl A CC()II IJ/s - to

bf1n~

the "unbanked" into the financial mainstream The President's FY 200 I budget includes
S30 ~mill!on for the Treasury Department to pilot strategies to help 1m\,- and moderate-income
Americans benefit from basic financial sen'ices that most of us take for granted - such as basic
accounts and ATMs The initiative il1\'olves four components

•

First Accounts: The Treasurv Department will work with financial institutions to pilot low-cost,

electronic banking accounts -The effort builds on the Department's "EFT'99" initiative

•

ATl\ls: The Treasul)' Department will work with financial institutions to expand access to automatic
teller machines in safe, secure, and convenient locations, including U,S, Post Offices, in low-income
nei~hborhoods that often lack even these basic services, This program will build on a small pilot
rec~ntly begun with a financial institution placing ATMs in post offices in neighborhoods in
Baltimore, MD and Tallahassee, FL.

•

Financial Education: The Treasury Department \\'ill work with other organizations to educate 10\';income Americans about the benefits of having a bank account, managin~ household finances, and
building assets
'-

•

'-

'-

Research and Development: The initiative will also fund new research at the Treasury Department
on the financial services needs of 1m\,- and moderate-income individuals, as well as the development
of products that can help financial institutions meet those needs, This part of the initiative will build
on the extensive original research that Treasury conducted for EFT'99
I am happy to report that on Mav ) 8, ~OOO, the First Accounts initiative was introduced in the
House (HR 4490) by Representati\es Leach and LaFalce, and in the Senate by Senators Sarbanes
th
and Daschle (S 2592) On June 20 , Chairman Leach will be holding a hearing before the House
Committee on Banking and Financial Senices on the First Accounts initiative and the unbanked,

II.

Bringing all Americans into the Financial Mainstream

By bui Iding a stronger connection bet\\, een !O\\-incollle consumers and mainstream financial
institutions, \~.:e can pro\'ide indi\'iduals \\ ith the tools to invest in their own futures while
minimizing their vulnerability to exploitative financial practices Working together, we should
ensure that all low-income Anlericans h,n'e access to the t~'Pes of tinancial products that the rest
of us take for granted For example, all indi\'iduals should be able to cash their checks without
paving high fees and ha\'e access to mainstream sa\ings facilities
Of course, we recogn~ze th~t those \vith poor credit background or with a history of default
cannot get access to finanCIal sen'ices on preciselv the same terms as those with better
credit\\ol1hiness "SlJb-~ril:le" lending can prm'id-e a r'eal service to many low-income
AmerIcans Hem'e\er, \\Ithlll the domain of sub-prime lending, there is a growing class of
exploltatl\e len~ers \\ho prey on the lack of financial sophistication of borrowers who re-finance
mOrtgage~_ ?btalll short-term loans, and procure other types of credit at progressively expensive
rates Indl\lduals who borro\\ mOlle\ from sllch lenders are often left with a crushing debt
burden that can ultll1latel~ lead to tl'lreclosure

Let me focus on three areas that ',varrant special attention

Check Cm;/7e rs
Lacking a bank account can be expensive check cashers typically charge up to 3 perceflt per
check. A minimum-wage worker would pay between $15 and $30 month for this basic sen-ice
while the average Social Security recipient would pay $9-16 month to cash a risk-free
government check. Furthermore, those who need to rely on such services are also more directly
exposed to other high-cost and potentially high-risk financial services
As we move into a world of Direct Deposit, all financial institutions should be in a position to
offer low-income consumers a real opportunity to enter the financial mainstream. However.
many banks and thrifts do not have accessible locations and often times, check cashing facilities
can provide convenient services to their communities, including better hours, instant service, and
easy accessibility_
CDCUs offer their consumers, who are often low-income, a low-cost alternative to using check
cashers_ The impact of these services is measurable Let me give you an example. The
Community Trust Federal Credit Union in Florida estimates that it cashed nearly $50 million
worth of checks for more than 3,000 migrant farm workers and their families over a three-year
period throughout the state. In addition to providing low-cost check cashing services, this CDeLl
is also helping its consurners increase their savings.
Pmdar Lenders.
Even with a bank account, there are many Americans who still tind it difficult to get into the
financial mainstream. Many are prone to making bad financial decisions because they do not
know where to seek advice, because they lack knowledge of basic finance, or because they are
plagued by unfortunate circumstances People in these situations are vulnerable to payday
lending_ where they are charged high fees in e:\change for short-term loans These average about
$36 on a two-week $200 loan. Such loans are often "flipped", or subject to repeated re-financing,
so that the consumer gets further and further behind Again, CDCUs continue to provide a
cheaper and safer alternative to these institutions In fact. se\'eral credit unions have developed
new loan products to specifically compete with payday lenders as a source of emergency loans
for families without a sufficient safety net O\'er the longer term. we need to focus tirst on ways
to combat abusive practices Second, 011 \\.3VS to enhance competition And third, on ways to
improve household financial management and sa\'ings

iA!lJdlllg
Payday lending can keep a family' in a high-cost cycle of debt When abusive lending practices
serve to deplete the equity in a family" s home, however, the consequences of defaulL and
foreclosure are that much more devastaling Unfortunately, we are seeing growing evidence of
these predatory practices in a segment of the horne mortgage market Predatory lenders put
lower-income, elderly and minority borrowers at serious risk of losing their homes by repeatedly
refinancing their mortgage loans, levying exorbitant up-froTlt fees with each ne\V loan These
lenders will often ma),;e a 10a11 \\ithout allY regard for the borrower's ability to repay the loan
PredO/o/"\"

These features ma\' be accompanied h~ other abusive practices, such as high-pressure sales
tactics or outright deceptions CDCL:s ha\'e been a valuable instrument in the fight against
exploitati\e lenders by pro\'iding greater education to their consumers in the areas of predatory
lending and helping them recognize these tactics. Martin Eakes of Self-Help Credit Union has
been amon~ the leaders in combatin~ these practices
~

~

The federal gO\'ernment is also gettin!.! involved In response to this problem, Secretary
Summers and Secretary Andre\; Cuo;no are co-chairing a joint Treasury- HUD Task Force on
predatory lending We have spent the past several weeks focusing on this problem, and plan to
release a report this month Without pre-judging the findings of the report, I anticipate that it will
confront this issue on three broad fronts'

-

-

•

First ~-bv tightening....... enforcement of existin!.!....... laws that target abusive lending and looking....... at
how we can further strengthen these statutes. Senator Sarbanes and Representative LaFalce
have taken an important step by introducing legislation that would tighten enforcement and
increase penalties against such lenders \Vhile we consider what new legislation may be
required in this area, the Federal Reser\'e Board should use its existing authority under
HOEPA to bring more loans under HOEPA's protections and to combat abusive practices
occurring in this marketplace

•

Second, bv improving public education so that all Americans are in the position to consider
carefully all of their borro\\ ing options before they purchase a home And through the NPFE,
was launched last month. \\e aim to promote better financial literacy, including the provision
of counseling sef\ices to borrO\\ters on home purchases and loan re-financing.

•

Third, by expanding access for these borrowers to the prime market. Banks and thrifts, as
well as the secondar~' market. should continue to explore how to reach out to prime
borrowers in these markets. and ho\\ to graduate sub-prime borrowers into the prime
marketplace

III.

Conclusion

The last ten ~'ears ha\'c brought remarkable financial innovation to the United States But there
still exists a gaping financial di"ide The current strength orour economy provides us with an
enormous opportunity to make progress in providing greater access to financial services to lowincome consumers and communities The valuable work that CDCUs continue to do in their
communities coupled \\ith the Administration's strate!.!\, for universal access to fair financial
sen'ices. pro\ides us with an unprecedented opportun~y to make real pro~ress. We look forward
to \\orking \\ith ~'ou in bringing all Americans into the financial rnainstre;m Thank you
-]0-

DEPARTMENT

THE

ornCE OF PUBUC AFFAIRS • 1500

~

7

lREASURYf~)
1

_

OF

PENNSYLVANlAA~UE,

TREASURY

NEWS

_______

N.W.• WASlllNGTOK D.C. •

_

20220 • (202) 622·2960

Cl)J1taet: Franees .\nuers()11

FOR I;-vHdEDIA. TE RELE:\SE
June 9. ~OOO

(~()~) 6~~-~l)h( I

MEDIA ADVISORY
TREASURY DEPlTTY SECRETARY STl:ART E. EIZENSTAT PRESS C():"FERE'\Cr
ON GERMAl\ HOLOCAVST SETTLEl\IENT CLAI:\IS
Treasury Deputy Secretary Stuart E. Eizenstat \\-ill hold a press conference rt.'~~lrdll1~
German Holocaust Settlement Claims on Monday, June 12, at 3:00 p.m. at the Trcasur~
Department in the Diplomatic Reception Room (3311). 1500 Penl1s\-hania .-\\e :\\\.
\Vashington. DC.
Media \\-ithout Treasury or \\'hite HOLlse credentials must call (202) 622-2t)hO \\ itll d~lll'
of birth and social security number for clearance. This information 111a:-- ;]is() hL' fa"L'u [() (2()2)
622-1999. All calls and faxes must be in by I :OOp.I11 .. i\10nday. June 12_

LS-693

For press releases, speeches. public schedules and official biographies. call our 24-hour fax lin£' at (202) 622·2040

_

DEPARTMENT OF THE TREASURY
DEPARTMENT OF JUSTICE
For Immediate Release
June 12, 2000

Contact: Public Affairs
202-622-2960

TREASURY AND JUSTICE LAUNCH ANTI-MONEY LAUNDERING GRANTS
The Departments of Treasury and Justice today announced the Financial Crime-Free
Communities Support (C-FIC) Anti-Money Laundering Grant Program that will provide seed
capital for emerging state and local counter-money laundering enforcement efforts. Congress
appropriated approximately $2.55 million for the C-FIC grant program this fiscal year.
"Congress, particularly Senator Chuck Grassley and Congresswoman Nydia Velazquez,
recognized that state and local law enforcement authorities are on the front line of our continuing
fight against money laundering," said Deputy Secretary Eizenstat. "The C-FIC grants will
provide critical seed money for state and local programs that seek to address money laundering
systems within their jurisdictions, and to build innovative approaches to money laundering
control and enforcement."
The grants will be administered by the Bureau of Justice Assistance (BJA) and awarded
through a competitive peer review process to eligible state or local law enforcement agency or
prosecutor's office. Grants will also be awarded to eligible applicants who are located within the
High-Intensity Financial Crime Areas (HIFCA) -- New Yorlc/New Jersey, Los Angeles, San Juan
and Southwest Border -- that were designated in the National Money Laundering Strategy for
2000.
"The Bureau of Justice Assistance is vcry pleased to be working in partnership with
Treasury on this important state and local assistance program," said BJA Director Nancy Gist.
"This program will enhance state and local coordination with and strongly complement Justice
and Treasury's money laundering enforcement efforts at the FederalleveI."
For FY 2000, applicants may request funding of up to $300,000, which is expected to be
the maximum federal contribution available for each award. Applications are due July 24, 2000.
Starting today, C-FIC infoDllation and application materials are available on RIA's web
site at http://www.ojp.usdoj.gov/BJA. Copies can also be obtained by calling the BJA
Clearinghouse at 1-800-688-4252 or the U.S. Department of Justice Response Center at ]-800421-6770.
- 30 LS-694

DEPARTMENT OF THE TREASURY
WASHINGTON, D.C.
RETARY OF THE TREASURY

June 8, 2000

The Honorable Dennis Hastert
Speaker of the House
U.S. House of Representatives
Washington, DC 20515
Dear Mr. Speaker:
I am pleased to provide you with the Department of the Treasury's response to the Report
of the International Financial Institution Advisory Commission (the Commission). This
response is made pursuant to section 603(i)(l) of the Foreign Operations, Export
Financing, and Related Programs Appropriations Act, 1999.
As underscored in our response, we agree with a number of broad policy objectives that
underlie the Commission's Report. However, we believe that the core recommendations
in the majority report, if implemented, would weaken the International Monetary Fund
and the multilateral development banks to the point that they would no longer be able to
serve vital U. S. interests in responding effectively to financial crises or in promoting
market-oriented refonn and development in emerging market economies.
The Administration is committed to pursuing an ambitious and responsible program of
reform in these institutions. In consultation with Congress, we have already made
significant progress, and we look forward to working with Congress to advance crucial
further refonns.
Sincerely,

,,)

r.n tt!'\';~<'.k..-/
v

,-J}. __
-

Lawrence H. Summers
Enclosure
LS-695

dJMl~

DEPARTMENT OF THE TREASURY
WASHINGTON. D.C. 20220

Response to the Report of the
International Financial Institution Advisory
Commission
This response to the Report of the international Financial Institution Advisory Commission (the
Commission) has been prepared pursuant to section 603(i)(l) of the Foreign Operations, Export
Financing, and Related Programs Appropriations Act, 1999, found in Public Law 105-277.
Section 603(i)(1) provides that the Secretary of the Treasury shall, within three months of receipt
of the Commission report, "report to the appropriate committees on the desirability and
feasibility of implementing the recommendations contained in the report [of the Commission]".
The Commission was established under the legislation authorizing U.S. participation in the most
recent quota increase of the International Monetary Fund (IMF) and the establishment of the
New Arrangements to Borrow. Congress mandated the Commission to report on the future role
and responsibilities of international institutions including the IMF, World Bank, the African,
Asian and Inter-American Development Banks, the European Bank for Reconstruction and
Development, the Bank for International Settlements and the W orId Trade Organization. In
March 2000, the Commission released its report, including a set of recommendations supported
by the majority, and three dissenting statements.
The work of the Commission took place in the context of intense public discussion on the role of
the international financial institutions (lFIs). A number of reports with alternative programs for
reform have been published recently by the Council on Foreign Relations, the CATO Institute,
the Carnegie Endowment for International Peace, and the Overseas Development Council,
among others. The Commission's recommendations are appropriately considered against the
background of these reform proposals, the range of Congressional mandates for IFI reform, and
recent U.S. and multilateral efforts to reform the international financial architecture.

Table of Contents

June 8, 2000

Introduction
Principal Conclusions
U.S. Refonn Agenda in the IMF and the MOBs
Response to the Recommendations on Refonn of the IMF
Response to the Recommendations on Refonn of the MOBs
Debt Reduction for the Heavily Indebted Poor Countries
Response to the Recommendations on Refonn oftheBIS
Response to the Recommendations on Refonn of the WTO
Response to the Statement by Commissioner Levinson
Appendix

I

2-8
9-16
17-26

27-38
39-41

42
43
44-45
A.I-A.3

U.S. Department of the Treasury Response to the IF) Advisory Commission
Principal Conclusions - Page 2

Principal Conclusions
The IFls are among the most effective and cost-efficient means available to advance U.S. policy
priorities worldwide. Since their inception, they have been central to addressing the major
economic and development challenges of our time. They have promoted growth, stability, open
markets and democratic institutions, resulting in more exports and jobs in the United States,
while advancing our fundamental values throughout the world.
The Commission affirms the importance of the IFls in today's more integrated world. We share
this conviction and many of the underlying objectives of the Commission's report. We also
share with the Commission the belief that the IFls need to reform in important ways to confront
the new challenges oftoday's global economy. The Administration, working closely with the
Congress, has pressed for and achieved significant changes in the institutions. And more needs
to be done. The second part of our response details refonn achievements to date, and our agenda
for further change.
At the same time, and despite our shared objectives, it is fair to say that we disagree in
fundamental respects with the bulk of the Commission's reform prescriptions. After careful
consideration of each of the recommendations in the report, we believe that, taken together, the
recommendations of the majority, if implemented, would profoundly undermine the capacity of
the IMF and the multilateral development banks (MDBs) to perfonn their core functions of
responding effectively to financial crises and promoting durable growth and market-oriented
reforms in developing countries - and would thus weaken the IFIs' capacity to promote central
U.S. interests.

Shared Objectives
The Commission recognizes a continuing and essential role for the IFls.
The majority report concludes appropriately that the IMF should continue to have an important
role in crisis prevention, and that a strong capacity to respond to financial crises will be crucial to
the global economy going forward.
The majority report also concludes that the MDBs have a critically important mission in
promoting long-term development and refonn in the developing countries, and that more
resources need to be made available to support these efforts in the poorest countries.
These are welcome conclusions, which the Administration shares.

u.s. Department of the Treasury Response to the IFI Advisory Commission
Principal Conclusions - Page 3

The Commission also outlines a number of reform objectives that have commanded broad
bipartisan support in recent years - objectives that have formed the basis for achieving
substantial change in the nature and focus of these institutions. These objectives include:
•

A sea change in the transparency of these institutions' operations and that of member
countries.

u.s.

As a result of consistent
pressure, the IMF and the MDBs now systematically
disclose to the public a broad range of key documents on their lending operations
- including Letters of Intent and Press Information Notices. For example,
program documents for nearly 90 percent ofthe IMF arrangements discussed by
the lA-IF Executive Board since June 1999 have been publicly released. And the
creation and expansion of the Special Data Dissemination Standard (SDDS) have
set a new benchmarkfor IMF members to meet in providing accurate and timely
finanCial and economic information to markets and the public at large.
•

The development of new mechanisms for strengthening incentives for countries to reduce
their vulnerability to crises.

u.s.

The
has strongly promoted a more comprehensive international effort to
reduce the risk offinanCial crises, especially in the wake of recent crises in Asia
and elsewhere: this has borne fruit in the development of a common set of best
practices andfinancial standards; a systematically greater focus within the IFls
on national finanCial vulnerabilities, including excessive leverage or
unsustainable exchange rate regimes; and the development of the IMF's new
Contingent Credit Line (CCL) , conditioned on strong, ex-ante reforms in these
and other key areas.
•

A new focus within the IFls on the importance of strong, open financial systems, better debt
management policies, and appropriate exchange rate regimes.
Because national policy failures in these areas have played a significant role in
recent crises, the IMF and the World Bank have now adopted. or are in the
process of adopting, a number of new initiatives to help improve the quality ofthe
policy advice that they provide to governments. to help them design stronger
financial systems, debt structures that are less vulnerable to various risks, and
more resilient exchange rate regimes.

•

Fundamental refonn of the framework for the provision of IMF and World Bank lending to
the poorest countries, centered on greater selectivity and with a greater focus on poverty
reduction and growth.
Consistent pressure from the Administration and from Congress has helped to
achieve much greater selectivity in the allocation of MDB assistance - with
greater support for stronger performance and reduced supportfor repeated nonperformance. We have also helped to refocus the IFls' attention on key priorities
such as investment in basic education and health care and combating corruption.
The IMF's new Poverty Reduction and Growth Facility (PRGF) puts core social
investments and poverty reduction at the heart of the country's economic
program. And the World Bank has developed a range of tools to address

u.s. Department of the Treasury Response to the IFI Advisory Commission
Principal Conclusions - Page-l

corruption more effectively: for example. in the technical assistance it has
provided for civil service reform.
We have been working to build consensus in Congress and among other IFI shareholders on the
importance of other broad objectives that are also highlighted in the Commission Report. Most
notably:
•

A substantial increase in debt relief and concessional financial assistance targeted to the
poorest developing countries.
The new international debt initiative launched in 1999 will grant substantial debt
reduction to a number of highly indebted poor developing countries that commit
to a credible program of economic reform. Five countries have already qualified
for this enhanced relief, worth a total of$13-14 billion. but the United States must
play its part to ensure that the initiative is adequately funded. In addition to its
finanCing request for this initiative. the Administration has proposed targeted
increases in development assistance to combat infectious diseases, including
HIV/AIDS. and to promote primary education, poverty reduction and other
objectives. to complement existing bilateral and multilateral assistance programs.

•

A stronger role for the MDBs in international efforts to provide global public goods.
The World Bank, with our encouragement, is intensifYing its support/or
international efforts to promote environmental sustainability, reduce threats to
biodiversity, combat infectious diseases, and encourage the adoption of
development best practices. As part ofthis effort the President has calledfor the
MDBs to dedicate a further $400 million to $900 million of their lending to the
poorest countries each year for basic health care to immunize, prevent and treat
infectious diseases.

•

And the need for a clearer delineation of the respective roles of the multilateral development
banks and the IMF.
We are working to develop a more focussed role for the IMF, centered on crisis
prevention and response in the emerging economies and macroeconomic stability
in the poorest economies. and for the MDBs. which should address the longerterm challenges to development and reform in the developing and emerging
economies.

The reforms that have been implemented in the international financial institutions and the
important further steps that are underway will make a significant contribution to the IFls'
capacity to address the diverse and complex array of risks and challenges that the global
economy now presents. Many of these refonns have been initiated by the United States. and
they largely reflect the directions that the Congress outlined in the legislation establishing the
Commission. But America's ability to promote further change in the future will depend centrally
on our capacity to build broader support for our proposals among the shareholders of the
institutions.

U.S. Department of the Treasury Response to the IFI Advisory Commission
Principal Conclusions - Page 5

Commission Recommendations
Despite the broad objectives that we have in common, we find ourselves in fundamental
disagreement with the Report's core recommendations for further reform.
The critical test in evaluating the desirability of alternative reform proposals should be an
assessment of whether they would strengthen or weaken the capacity of the institutions to
address economic challenges that are critical to U.S. interests. In our view, the core
recommendations of the majority, taken together, would substantially harm the economic and
broader national strategic interests of the United States, by reducing dramatically the capacity of
the IMF and the MDBs to respond to financial crises, and by depriving them of effective
instruments to promote international financial stability and market-oriented economic reform and
development.
The reforms proposed by the majority do not offer a realistic prospect of preventing future
financial crises and, by effectively terminating the lending programs of the IMF and the MDBs
in a broad range of emerging market economies, could significantly undermine our capacity to
promote changes that would reduce the vulnerability of these economies, and as a consequence
the vulnerability of the U.S. economy, to future financial crises.
Specifically, if the Commission's majority reform proposals had been in place in 1997 and 1998,
neither the IMF nor the World Bank would have been able to respond to the acute financial crisis
that spread across emerging markets during that period. As a result, the crisis would have been
deeper and more protracted, with more devastating impact on the affected economies and
potentially much more severe consequences for U.S. farmers, workers, and businesses.
By essentially taking the World Bank out of the development finance business, the
Commission's reforms would eliminate the most cost-efficient and effective of the international
development institutions, and the one with the greatest concentration of development experience
and expertise. The result would be to impose a much greater burden on bilateral resources to
meet development objectives that are so important to the U.S. interest. This would also reduce
the effectiveness of development assistance provided by the United States and other nations.
The reform proposals of the majority, had they been in place at the start of the 1990s, also would
have precluded the MDBs from supporting economic restructuring and private sector
development in Eastern Europ~ and the former Soviet Union, and across Asia and Latin America
in a period of historic opportunities for positive reform. The MDBs would have been unable to
promote financial sector reform and capital market development in the emerging market
economies that now have the bulk of the world's population and a substantial share of world
output. And there would have been significantly reduced support for trade liberalization,
privatization, agricultural refonn, and other steps that have provided significant economic
benefits for many of the largest, most important emerging economies that have also been rapidly
growing trading partners of the United States.
In a world where the fortunes of U.S. workers and farmers, business and financial institutions are
increasingly tied to the overall strength of the world economy, we have a compelling interest in
working to build stronger, more effective global institutions that are able to address new

u.s. Department of the Treasury Response to the IFI Advisory Commission
Principal Conclusions - Page 6

challenges to growth and financial stability. In short, by weakening the institutions. we believe
that the recommendations of the Commission would leave the United States and many of our
closest allies and economic partners more vulnerable to the risks that a more integrated world
presents.

Commission Recommendations for the International Monetary Fund

The majority report outlines a set of recommendations for reform oj the IMF that
wouldJundamentally change the nature oj the institution. The main objective oj
the Commission's proposals is to limit IMF lending to very short-term, essentially
unconditional liquidity support Jar a limited number oj relatively strong emerging
market economies that would pre-qualifY Jor IMF assistance.
We do not believe this approach is either desirable or feasible.
•

By restricting the IMF's capacity to lend only to emerging market countries that pre-qualify
for assistance, the Commission's recommendations would preclude the IMF from being able
to respond to financial emergencies in a potentially large number of its member countries.
Even with a long phase-in period, many countries of potentially systemic importance to
global financial stability could be deemed ineligible for assistance, depriving us of the
capacity to help contain and resolve crises through the IMF. The majority acknowledges
in the executive swnmary of the report a possible need for an exception to the
prequalification requirements "where the crisis poses a threat to the global economy", but
this proposal is inconsistent with the overall thrust of the report and is not discussed or
developed in the report itself.
The Commission's limited criteria for prequalification, by focusing on the financial
sector, might not significantly reduce countries' vulnerability to financial crisis, even
where they have met all the relevant conditions. Experience suggests that these
conditions would not prevent governments from making a wide range of policy mistakes
that could contribute to a financial crisis, nor would they significantly insulate countries
from crises that arise outside the financial sector.

•

By precluding the IMF from applying policy conditions to its loans, outside of a very limited
set of prior conditions related to financial sector soundness, disclosure, and a general
requirement for fiscal soundness, the majority proposals would deprive the IMF of the
capacity to promote the policy reforms that are likely to be fundamental to restoring
confidence and economic recovery in such cases. The result would be to increase
substantially the risk that the financial assistance provided would be ineffective.

•

By limiting IMF assistance to very short-term loans (four to eight-month maturity) at very
high interest rates, the majority proposals would render IMF assistance ineffective in
promoting recovery even in those countries that prequalified. Experience suggests that these
terms would force repayment prematurely. Even in the most successful cases of recovery, it
has taken longer than eight months to restore substantial access to private finance. Premature
repayment and high interest rates that undennine the financial position of the government
would in turn undermine confidence among domestic and foreign investors, and could
thereby prolong and exacerbate the crisis itself.

u.s. Department of the Treasury Response to tbe IFI Advisory Commission
Principal Conclusions - Page 7

•

For all of these reasons we believe that implementing these proposals would substantially
reduce the IMF's capacity to restore lasting financial stability in crisis economies. However.
to the extent that such a system would commit the IMF to providing very large-scale
assistance, with very limited conditions, it would also risk a substantial increase in moral
hazard in the international financial system. Investors would be encouraged before a crisis to
lend excessively to prequalified countries in the expectation of being repaid from IMF
assistance. And governments would have an incentive to take risks in policy areas not
constrained by the eligibility criteria, in the expectation they would be insulated by the IMF
from the costs of failure. The result, in many ways, would be the worst of all worlds: overconfidence in a system that would prove ineffective for preventing and responding to crises.

•

By eliminating the IMF's concessionallending capacity in the poorest developing countries
the majority proposals would undermine the capacity of the IFIs to promote in these
countries the types of macroeconomic policy refonns that are critical to economic growth
and long-term development, and would thereby undercut the effectiveness of substantial
amounts of bilateral and multilateral development assistance.

While we have serious reservations about the wholesale adoption of prequalification for IMF
programs that the Commission proposes, we would note, once again, that we share the
Commission's desire to find new ways to encourage countries to reduce their vulnerability
before crisis strikes. In this context, we agree with the report that it is critical for countries to
strengthen the financial sector, improve the quality of disclosure, and reinforce the resilience of
the exchange rate regime. With the objective of trying to design more powerful incentives for
policy changes before crisis strikes, and with our active encouragement, the IMF has established
a new facility, the CCL, that would be available to countries that met a range of conditions. We
are now in the process of identifying modifications to this facility to try to make it more
effective. We believe this is a promising direction for refonn going forward as a complement to
the IMF's core lending instruments.

Commission Recommendations for the Multilateral Development Banks

The Commission proposes a comprehensive set of changes for the multilateral
development banks that would substantially modify the way they prOVide financial
assistance in support of development. The majority proposals would essentially
foreclose MDB lending to a broad range of emerging market economies, focus the
efforts of the MDBs on grants and "institutional reform loans "for the poorest
developing countries, transfor the World Bank's lending role to the regional
development banks, and close down the private sector financial operations of the
institutions.
We do not believe this approach is either desirable or feasible.

•

By eliminating MDB assistance for countries with a per capita income above $4,000 or an
investment grade credit rating, the majority proposals would eliminate the capacity of these
institutions to promote economic reform and development in countries that account for a
substantial share of the world's population and continue to face formidable development
challenges. Because access to private capital for many of these countries is fragile and
extremely limited, denying these countries access to multilateral lending would directly

u.s. Department of the Treasury Response to the IFI Advisory Commission
Principal Conclusions - Page 8

reduce their potential resources for meeting crucial development needs. Graduation policies
designed with a fixed and excessively low threshold risk worsening economic outcomes in
these countries, and increase the likelihood of future crises. This could undercut or prolong
the path to sustainable market access, and ultimately delay the time when these governments
will grow out of the need for official support.
•

By eliminating the private sector financial operations of the MDBs (including closing the
IFC and MIGA), the majority proposals would eliminate an important part of the MDBs'
capacity to promote private enterprise, privatization of state-owned finns, and the
d~velopment of domestic capital markets, all of which are critical to successful development
strategies.

•

By eliminating the World Bank's financial role in providing development assistance and by
transferring financial capacity to the Inter-American, Asian and, over time, the African
Development Banks, we believe the majority proposals would undermine the effectiveness of
the overall development effort. It would be counterproductive to limit to an advisory
capacity the institution that is the strongest, most experienced, and most competent in the
MDB system, and has the most advanced agenda for implementing reforms supported by the
U.S. Congress over the decades. Although the regional development banks have many
strengths and- in many cases playa useful complementary role to the World Bank, they do not
have the capacity to match the strengths of the World Bank in most areas of development
policy. Nor do we believe that they should seek to do so, at a time when there is broad
agreement on focusing the missions of such institutions where they have comparative
advantage.

•

By eliminating the capacity of the MDBs to provide emergency lending at times of financial
crisis, the majority proposals would make crisis response by the IMF less effective. In those
exceptional circumstances where crisis lending is appropriate, the emergency lending
capacity of the MDBs can be essential to support an appropriate level of fiscal expenditures
in such a crisis, to design and finance financial sector restructuring programs, and to further
targeted assistance for critical social programs, such as education and healthcare.

•

By transfonning the adjustment and project finance capacity of the institutions into a system
of grants largely channeled directly to service providers, bypassing governments, and with a
new financial instrument for institutional reforms, the majority recommendations embrace a
number of desirable objectives without identifying proposals that have a realistic prospect of
improving the overall effectiveness of development assistance. If implemented as proposed,
these measures would limit the overall availability of financial assistance to the poorest by
e1iminating the financial leverage provided by the MDBs' hard-loan operations and the
resources generated from reflows on concessional loans. Instead, the recommendations
emphasize a financing instrument that is unlikely to be effective or attractive to borrowers
compared to existing instruments for promoting critical improvements in the policy
framework and overall institutions of government,

As noted above, we share the Commission's view on the importance of focusing assistance on
the countries that need it most, and agree that substantial further reforms are necessary to
operationalize fully in the MDBs the lessons of recent experience with regard to the design and
financing of more effective development strategies. We will continue to explore a broad range
of proposals for how to best achieve these objectives. Our refonn agenda is discussed in more
detail in the next section. A detailed response to the Commission's recommendations follows.

U.S. Department of the Treasury Response to the IFI Advisory Commission

us. Reform Agenda in the IMF and the MDBs -

Page 9

u.s. Reform Agenda in the IMF and the Multilateral Development Banks
The Administration has worked to bring about substantial reforms in the international financial
institutions over the past several years. These efforts have been framed to a significant degree by
the objectives set out in U.S. legislation, including the 1998 legislation authorizing U.S.
participation in increasing the IMF's financial resources. The most recent Congressional efforts
to advance reform in the IMF and the MDBs focused on improving transparency and
accountability across the institutions; changing the terms of IMF assistance to reduce the risk of
moral hazard; refocusing the policy conditionality to promote market oriented reform,
environmental sustainability, and mitigating the social impact of economic change; and
encouraging greater selectivity in providing development finance. Some examples of recent
progress in these areas and others are detailed in the boxes that follow at the end of this part.
Although these changes are highly significant, we do not believe they sufficiently address our
concerns about the capacity of the institutions to confront effectively the new and complex
challenges of the world economy. Further refonn is needed - on many fronts over a period of
several years.
To this end, the Administration has outlined a broad framework for additional reforms that we
believe should guide the evolution of the institutions in the years ahead. Many of these changes
are founded on objectives similar to those that motivated the Commission's recommendations.
In general, however, we believe that we have identified a more promising set of reforms, that
match more closely our interests as a nation, have more practical value in addressing the
complexity of these problems, and are more likely to gain the broad international support
necessary to any successful program of change in international institutions.
The policy issues involved in designing more effective ways to promote financial stability and
successful economic development are many and complicated. The Congress and the
Administration share an interest in preserving the ability to adapt our approach to reflect past
experience and the evolution of informed opinion. And because of the high stakes involved in
making the right decisions about the appropriate direction of the institutions, we need to have a
substantial degree of confidence that the reforms we pursue will demonstrably imprqve and not
impair the effectiveness of the institutions. These considerations have shaped the approach for
reform outlined by the Administration.
Over the past several months we have begun to build consensus for these changes. We have
found considerable support for the broad direction of our proposals, and have already seen some
concrete changes in the institutions. This part of the report outlines the Administration's
proposals for reform, identifies specific measures that we believe would be most effective in
operationalizing these changes, and briefly reviews recent changes in the institutions resulting
from our initiatives.

U.S. Department of the Treasury Response to the IFI Advisory Commission

us. Reform Agenda in the IMF and the MDBs -

Page 10

Agenda for Further Reform of the International Monetary Fund
The central objective of reform in the IMF in this world of more integrated global capital
markets should be to reduce the incidence and severity of financial crises, particularly in
emerging market economies, and. more broadly, to foster growth in the context of a more stable
international financial system, including strong macroeconomic policies to spur growth in the
poorest countries. We believe the most promising proposals for advancing these objectives lie in
the following areas:
Greater focus on promoting the flow of information from governments to markets and investors
IMF surveillance should shift from a focus on collecting and sharing information within the club
of nations to promoting the collection and dissemination of information for investors and the
public, and assigning high priority not only to the quantity but also to the quality of information
disseminated.
•

To reinforce the Special Data Dissemination Standard as the international standard for
disclosure of national economic data, we support a new quarterly publication highlighting
country adherence and compliance with the SODS, and encouraging more countries to
subscribe and comply.

•

The SDDS should be further strengthened with better data on countries' external debt and. in
due course, financial sector indicators.

•

Publication ofIMF Reports on the Observance of Standards and Codes (ROSCs) on country
observance of the range of codes and standards to help strengthen financial systems should
be routine, with countries allowed to disclose their IMF Financial Sector Assessments if they
choose.

Greater attention to financial vulnerabilities and steps to reduce countries' vulnerability to crisis
This would entail, in particular, greater focus on the strength of national balance sheet and
liquidity indicators, with a more fully integrated assessment incorporated into regular IMF
surveillance. In this context, the IMF should highlight more clearly the risks of unsustainable
exchange rate regimes.
•

Indicators of financial vulnerability, liquidity and balance sheet risks should be developed
and systematically incorporated into the Fund surveillance process, both bilateral and
multilateral, and published regularly.

•

Debt management guidelines, based on the recent work by the IMF, the World Bank and the
Financial Stability Forum, should be developed by the IMF to guide countries to limit their
risks, make best use of today' s markets, and disclose their debt and reserve management
policies.

u.s. Department of the Treasury Response to the IFI Advisory Commission
u.s. Reform Agenda in the IMF and the MDBs - Page 11
A more strategic financing role focused on crisis prevention and emergencv situations in
emerging economies, and on supporting macroeconomic stability and growth in the poorest
countries
The IMF has already begun to streamline its financing instruments and a major review of its
facilities is underway, as called for by the United States and the G-7 countries earlier this year.
Going forward, we believe the IMF should focus primarily on forestalling contagion and
providing appropriately priced and conditioned financing for balance of payments emergencies
in emerging market economies, and on providing the macroeconomic framework for growth and
financial stability in the poorest, in the context of World Bank-led poverty reduction programs.
•

The IMF's eeL should be recast to make it a more effective crisis prevention tool, with
greater clarity about the conditions for its use and a more attractive pricing structure relative
to the IMF's other crisis financing instruments.

•

Terms of non-concessiohal IMF loans should be changed, with graduated charges to promote
early repayments, to limit excessive use of large-scale IMF financing and to reduce unduly
prolonged reliance on IMF financing. Use of the Fund's Extended Financing Facility (EFF)
to address longer-term structural balance of payments problems should be limited.

•

The new Poverty Reduction and Growth Facility should provide IMF advice and financing
for the poorest in support of strong macroeconomic policies to combat capital flight and
promote the financial stability and growth needed for effective poverty reduction.

Greater emphasis on catalyzing market-based solutions to crises
The IMF should continue to develop ways of catalyzing market-based approaches to resolving
crises, particularly where the private sector is involved, with carefully designed approaches to
achieve the right balance between maximizing prospects for an early recovery from the crises
and the need to lessen the risk of moral hazard.
•

IMF lending should catalyze private market financing on appropriate terms and promote a
return to normal market access.

•

In cases where debt restructuring is needed, the Fund should provide a medium-term
framework for the debt negotiation.

•

The Fund should be prepared to lend into arrears if a country is seeking to work
cooperatively and in good faith with its private creditors and is meeting other program
requirements.

u.s. Department of the Treasury Response to the IFI Advisory Commission
u.s. Reform Agenda in the IMF and the MDBs - Page l:l
Modernizing the IMF
As the IMF adapts to changes in the international financial system, it is important that it also
modernize as an institution, improving its evaluation system, enhancing dialogue with the private
sector, and updating its existing governance structure.
•

The IMF should quickly establish the recently agreed upon permanent independent
evaluation office, ensuring that the office's structure, terms of reference and operating
procedures allow it to be fully independent, transparent and open to external consultations.

•

The Fund should formally establish a liaison group consisting of private financial market
participants to deepen the Fund's understanding of global market trends.

•

Changes in the international monetary system, including countries' relative economic and
financial strength, should be more fully reflected in the IMF's governance structure.

Agenda for Further Reform of the Multilateral Development Banks
The overriding objective of reform ofthe multilateral development banks in a world where the
humanitarian and economic challenges facing developing and emerging economies are still
formidable should be to put into place more effective ways of promoting poverty reduction,
market-oriented economic reform, increased resources in support of programs with high
development returns, such as health care and basic education, the successful graduation of
emerging and transition economies to the point where they can rely on private finance, and
global public goods, such as environmental sustainability and programs to combat infectious
diseases. We believe the most promising proposals for advancing these objectives lie in the
following areas:
Improved performance and impact
The MDBs should rely on a smaller number of clear and measurable performance targets that are
set more realistically and are more vigorously adhered to.
•

Performance-based lending guidelines should apply to all soft loan windows and assistance
should be more focused on countries that are performing well, with less assistance to poor
performers -- and essentially withheld where governance is especially weak.

•

More effective mechanisms are needed within a number of the MDBs to evaluate when
targets and intermediate benchmarks have been met, along with a stronger commitment to
disburse in stages and to review more frequently.

u.s. Department of the Treasury Response to the IFI Advisory Commission
u.s. Reform Agenda in the IMF and the MDBs -

Page 13

Emphasis on economic growth and poverty reduction
The MDBs need to focus an even higher level of assistance in areas that have the highest
development returns, and particularly on investments in access to health care, clean water. and
basic education.
•

Ex-ante social and poverty assessments done by the World Bank should be prerequisites to
all Country Assistance Strategies (CASs) and adjustment operations, and such assessments
should be more explicitly linked to the sequencing and pace of reforms in IMF PRGF
programs.

•

Public Expenditure Reviews should be precursors to CASs to identify and remedy poor
composition and efficiency of spending.

•

Lending to social sectors and other poverty reduction priorities should be further increased.

Focused lending to emerging economies
We believe that the MDBs need to explore more innovative ways to catalyze private capital
flows to countries, within strict and clear guidelines that safeguard the financial position of the
institutions.
•

MDBs should establish a more selective lending framework that facilitates graduation.

•

MDB lending should decline in volume over time in countries that are expanding their
capacity to attract private finance.

•

Capital increases for the MDB hard windows are not anticipated and future donor
contributions should be directed exclusively to the soft windows. Along these lines, the
MDBs should re-examine their current hard window pricing policies with a view toward
stronger sustainability of the institutions' balance sheets and building a greater financial
capacity to contribute to overall development efforts.

Transparency
There needs to be a higher degree of transparency, with a stronger presumption for publication of
key loan documents, and transparency in the relevant operations at the national level, so that the
domestic population, outside investors and donors can more easily track results.
•

All CASs and Poverty Reduction Strategy Papers (PRSPs) should be released to the public.

•

All reports of MDB evaluation units should be public.

•

The quality and comprehensiveness of public participation in review of Bank policies,
projects, CASs and PRSPs should be strengthened.

u.s. Department of the Treasury Response to the IFf Advisory Commission
u.s.

Reform Agenda in the IMF and the MDBs - Page 1-1

Global public goods
As integration proceeds, the world is confronting a broad range of prob1ems that cross
international borders and defy solution by individual governments and markets. The World
Bank and other development institutions have an enormous contribution to make in helping
advance international efforts to provide global solutions in the fonn of public goods. especially
those which benefit developing countries.
•

There should be even greater focus on solutions to the problems of infectious diseases and
degradation of the global envirorunent.

•

Information technology can be used better to create and disseminate medical knowledge and
global environmental expertise.

Improved collaboration and selectivity
Institutional collaboration and definition of tasks need to be further improved, not only between
the IMF and the World Bank, but also between the World Bank and the regional development
banks.
•

MDBs should reduce MDB overlap and inconsistencies, speak more clearly on priorities. and
share lessons of experience.

•

Regional development banks should follow the example of the World Bank/African
Development Bank Memorandum of Understanding (MOU) to develop agreements between
each of the remaining regional banks and the World Bank.

•

MDBs should work to reduce the administrative burden on developing countries that stems
from negotiating multiple development and economic priorities with multiple donors and
international institutions.

u.s. Department of the Treasury Response to the IFI Advisory Commission
us. Reform Agenda In the IMF and the MDBs -

Page 15

International Monetary Fund: Selected Reforms Achieved to Date
Transparency
and Accountability

• Since June 1999, there has been a presumption of public release of program documents
detailing policy commitments countnes have agreed to as a condition for IMF support;
documents have been released in 50 of 58 cases since then.
• Release of "Public Infonnation Notices" (PINs) following Executive Board discussions of
Article IV consultations is becoming routine: 113 of 139 (81 %) were released in 1999. PINs
are also published on a broad range, of policy issues, e.g., private sector involvement.
safeguarding IMF resources, IMF work program.
• There is agreement to publish the IMF's Financial Transactions Plan quarterly with a onequarter lag beginning in August 2000. Information about the IMF's financial position is
available on the IMF's internet web site.

Crisis
Prevention
and
Resolution

• The SODS is now fully operational, providing potential investors with better information about
financial conditions in member countries; 24 countries now comply with SODS.
• The IMF is moving to address vulnerabilities, including national balance sheet and liquidity
risks, as part of surveillance. A growing number of Article IV staff reports make use of key
vulnerability indicators.
• The CCL offers incentives for countries to take early steps to reduce vulnerability to crisis.
The Supplementary Reserve Facility (SRF) charges premium interest rates to encourage an
early return to private markets, while providing exceptional financing to countries of systemic
importance.
• The IMF has begun to make use of guidelines developed by the G- 7 to catalyze private sector
involvement.

Strengthened
Financial
Systems

• The IMF helps to disseminate and encourage implementation of the Basle Core Principles.
• Under the Financial Sector Assessment Program (FSAP) launched in 1999, the IMF and World
Bank jointly conduct in-depth assessments of countries' financial systems; five countries have
undergone assessments with seven more to be completed by July 2000.
• As of September 30,1999, the IMF had completed assessments (ROSCs) of countries'
adherence to internationally-accepted standards for 13 countries, 10 of which agreed to
publication. Twenty-four countries are participating in a third phase to be completed in
September 2000. Infonnation on ROSCs is available on the IMF web site.

Exchange
Rate Regimes

• The United States and other G-7 nations have agreed that the IMF, in its surveillance, should
increase attention to exchange rate sustainability.
• The G-7 have agreed that the IMF should not provide significant official financing to a country
whose government is intervening heavily to support a particular exchange rate level, except
where that level is judged sustainable and certain conditions have been met, including
supporting institutional arrangements and maintaining consistent domestic policies.

Labor Issues

• Labor standards issues have been raised in recent important IMF programs (e.g., Korea,
Indonesia, Brazil and Mexico), as well as in Article IV consultations and program reviews
(e.g., Indonesia, Thailand and Korea).
• The ILO has been granted ongoing observer status in the IMF's International Monetary and
Financial Committee.
• The IMF, with the World Bank and the AFL-CIO, sponsored a seminar on Labor Standards and
the New International Economy during the 1999 Annual Meetings of the IMF and World Bank.

Trade
Liberalization

• In 1998, 24 IMF members moved to a more open trade regime, 17 in the context of Fundsupported programs.
• In 1999-2000, trade liberalization was an element in IMF programs in Indonesia, Nigeria,
Zambia, Guyana, South Korea, Jordan, Colombia and Uganda.

Good
Governance
and
Combating
Corruption

• A new safeguards framework to guard against misuse of IMF resources requires the publication
of annual audited central bank financial statements and new assessments of internal controls.
• The IMF now routinely encourages countries to maintain strong internal financial controls and
tighten supervision and regulation of domestic financial institutions, including measures to
deter money laundering.

u.s. Department of the Treasury Response to the IFI Advisory Commission
u.s.

Reform Agenda in the IMF and the MDBs - Page /6

Multilateral Development Banks - Selected Reforms Achieved to Date
Transparency
and Accountability

• The MOBs now have formal disclosure policies based on a presumption of disclosure
• MOB CASs increasingly address fiscal transparency and sound budget choices. including
military spending, and public expenditure reviews are conducted prior to many adjustment
loans and CASso
• Most MOBs have installed independent inspection panels to investigate public allegations of
non-compliance with MOB policies. Compliance advisers have been established in the (FC
and MIGA to address public complaints.
• Public participation in the design of MOB policies, projects and country strategies has
increased significantly. Public participation in the design of PRSPs is mandatory.

Poverty
Reduction

• Heavily Indebted Poor Country debt reduction is a major new component of the international
response to poverty reduction, under which PRSPs are being used to direct resources freed
from debt relief to social investments.
• Comprehensive poverty assessments done by the World Bank have started to feed into the
design of macroeconomic and structural reforms in lending programs for the poorest countries.
• World Bank lending is shifting from traditional infrastructure projects toward institutional and
policy reforms designed to build an enabling environment for human development and private
sector development

Eff~ctive,

Selective and
PerformanceBased
Lending

• Lending effectiveness and project quality are enhanced through: annual assessments by
evaluation units in each MOB; the introduction of mandatory project performance and
monitoring indicators; and the addition of outcome indicators in CASso
• Selectivity and comparative advantage have been encouraged through the adoption of an MOU
between the World Bank and AIDB, and the creation ofthe Evaluation Cooperation Groupcomposed of the heads of evaluation units of each of the MDBs - to establish a common
project rating methodology to facilitate identification of MOB comparative advantage.
• The World Bank and the AIDB have policies to link concessionallending levels to country
performance by evaluating public sector performance/governance, macro and structural
policies, and poverty reduction strategies. Good IDA perfonners now receive five times the
allocation of poor performers.

Governance
and Anticorruption

• Comprehensive governance strategies covering accountability, transparency, corruption.
participation and legal/judicial frameworks are in place or under preparation in every MDB.
• The World Bank now prepares governance assessments for all countries; in cases where
indicators suggest severe governance problems, lending is reduced or suspended.
• MOBs have upgraded attention to fiduciary policies, including anti-corruption measures and
improved procurement guidelines to safeguard the use of Bank resources.

Labor and
Environment

• An increasing number of MOB lending facilities include safeguards for core labor standards.

Additionally, MOB planning instruments and guidelines increasingly include references andlor
provisions for key labor issues and core labor practices.
• Publicly available Environmental Impact Assessments are required for all investment projects
and sector adjustment loans with potentially significant environmental consequences.
• There is now a much greater focus on environmental sustainability in MOB projects.

Structural
Change for
More
Resilient
Financia'l
Systems
Trade

• In response to the onset of crisis in East Asia, the World Bank established a unit of financial
experts to provide comprehensive, rapid-response, financial-sector advice to affected countries.
• Under the FSAP, the World Bank and IMF jointly carry out assessments of selected countries'
vulnerabilities
• The World Bank and IMF have been developing jointly debt management guidelines to inform
countries on how to limit risks associated with sovereign debt and make best use oftoday's
markets.
• MOBs have committed to better integrate trade into CASs in order to improve trade-related
infrastructure and institutions, and to foster trade liberalization and participation in the
international trading system.

u.s. Department of the Treasury Response to the IFf Advisory Commission
Response to the Recommendations on Reform of the IMF - Page J7

Response to the Recommendations on Reform of the
International Monetary Fund

Restrict IMF lending to countries that meet prequalification criteria
The Commission recommends that the IMF be restructured as a smaller
institution (a "quasi-lender of last resort ") that focuses on providing short-term
liquidity assistance to solvent emerging economies meeting a set of
prequalification eligibility criteria.
We share a number of the objectives that apparently underlie this recommendation - notably the
importance of creating strong, open financial systems; the role that greater transparency and
market forces can play in strengthening financial systems and reducing their vulnerability to
crisis; and the importance of sharpening incentives for countries to rely on private capital
markets and avoid undue recourse to IMF financing. However, we believe that this
recommendation would be neither desirable nor feasible.
To be eligible for IMF financing, a member country would have to meet three conditions
primarily: (1) permit freedom of entry and operation for foreign financial institutions; (2)
establish market-based disciplines in the domestic financial sector and ensure that commercial
banks are adequately capitalized (e.g., by a significant equity capital base or by the issuance of
uninsured subordinated debt to non-governmental and unaffiliated entities); and (3) publish
regularly the maturity structure of its outstanding sovereign and guaranteed debt and off-balancesheet liabilities in a timely manner. The Commission notes that this system would be phased in
over a period of several years and refers to the possibility of lending to countries that do not
prequalify in circumstances where a crisis poses a threat to the global economy. This exception
is not discussed in the report.
Our concern with the proposal centers on three points. First, implementing this recommendation
would preclude the IMF from being able to respond to financial emergencies and support
recovery in the vast majority of its members, possibly including all of the emerging market
countries affected by the financial crisis of 1997 and 1998. The exclusive focus on relatively
strong emerging economies would leave out most of the Fund's membership, notably all lower
income countries and many transition economies.
Second, the proposed eligibility criteria are too narrow. Even where they were met, they would
be unlikely to protect economies from the broad range of potential causes of crisis. The criteria
focus on the financial sector, and yet even problems that surface in the financial sector often
have their roots in deeper economic and structural weaknesses. One simply cannot predict with
confidence what the next generation of crisis will be and therefore we need to preserve the IMF's
ability to respond flexibly to changing circumstances.

u.s. Department of the Treasury Response to the IFI Advisory Commission
Response to the Recommendations on Reform of the IMF - Page 18

Third. the eligibility criteria as designed could increase moral hazard risks in the system. The
Commission's approach would provide an assurance of substantial financing. available
immediately and automatically without conditions, to countries that have met the eligibility
criteria but may still have fundamental macroeconomic weaknesses or structural problems in
areas other than the financial sector. In our view, this approach risks creating incentives for
countries to maintain inappropriate policies (other than those directly covered by the eligibility
criteria) in the expectation that unconditional funds would protect them from the adverse
consequences of their actions or inaction - as well as incentives for investors to lend to countries
with substantial underlying vulnerabilities in the expectation that the IMF will bail them out.
Despite our concerns with this proposal, we think it is important to strengthen incentives for
countries to take early steps to reduce their vulnerability to crisis. This should include steps to
strengthen macroeconomic frameworks; address macro-related structural weaknesses (including
though not limited to the financial sector), adhere to relevant international standards and codes.
and increase transparency. It was in large part with these objectives in mind that the IMF created
the Contingent Credit Line (eeL) in April 1999. The ceL offers the possibility of substantial
financing to countries fulfilling a number of eligibility criteria (implementing strong macro
policies; adhering to internationally accepted standards; maintaining constructive relations with
private creditors; ready to adjust their economic and financial programs as needed). The CeL.
therefore, incorporates a number of elements from the Commission's prequalification proposal.
However, the prequalification approach of the CeL, important as it is in setting a precautionary
line of defense against financial crisis and contagion, should be seen as a complement to (not a
replacement for) the IMF's other financing facilities.

Unconditional Lending
The Commission recommends that the IMF be precluded from conditioning its
financial support to member countries on the achievement of economic reforms.
other than reforms required to meet prequalification conditions.
We do not believe that this recommendation is desirable or feasible.

In making this recommendation, the Commission argues that IMF conditionality is generally
ineffective, that it allows the IMF to wield too much power over the economic policies of
borrowing countries, that it strengthens the executive branch of borrowing nations at the expense
of their legislatures, and that the IMF often fails to enforce its conditions. The only apparent
exception to the general prohibition on conditionality is that the IMF should establish "a proper
fiscal requirement to assure that IMF resources would not be used to sustain irresponsible budget
policies. "

U.S. Department of the Treasury Response to the IFI Advisory Commission
Response to the Recommendations on Reform afthe IMF - Page 19

In our view, the practice of providing phased financial support conditioned on progress in
implementing economic reforms is central to the effectiveness of financial assistance.
Conditionality is no guarantee of success - ultimately, sovereign governments are responsible for
the decisions that shape the performance of their economies - but it is central to several
fundamental objectives:

•

Encouraging countries to address the macroeconomic imbalances and structural
weaknesses, which gave rise to the need for external financing. This is critical to
stemming financial crisis, promoting recovery and growth, and reducing the risk of future
crisis. The Commission acknowledges the importance of a sound fiscal policy but makes no
accommodation for conditions on the monetary policy framework, the exchange rate regime.
the scope for exchange rate intervention, central bank support to financial institutions or
other actions that are likely to be critical to restoring confidence and promoting recovery.
Indeed, this has long been a core objective of Fund activity. And there is substantial
evidence that linking IMF financing to steps to, for example, improve a country's tax
collection system, strengthen the financial sector, reduce government subsidies, in fact
strengthens the hand of national authorities committed to refonn.

•

Helping to ensure, along with other measures, that IMF financing is used for the
purposes for which it is intended. Policy conditionality, in combination with safeguards in
the form of transparency, financial controls and auditing requirements, are important to
reduce the risk of misuse of IMF resources.

•

Helping to ensure that the borrowing country has the capacity to repay the IMF on
time. Without the capacity to apply conditions to its loans, the IMF would have virtually no
means to promote the economic changes necessary to improve the countries' ability to repay.

Of course the conditions on which the IMF provides financing need to be carefully designed to
fit the particular economic circumstances of the country involved.

u.s. Department of the Treasury Response to the IFI Advisory Commission
Response to the Recommendations on Reform of the IMF - Page 20

Maturity and Pricing of Loans
The Commission recommends that IMF loans should have a short maturity (e.g.,
a maximum of 120 days, with only one allowable rollover), and should be
provided at a penalty interest rate (i.e., a premium over the sovereign yield paid
by the member country one week prior to applying/or an IMF loan).
In our view, these recommendations are not desirable. The proposed 120-day lending window
(even' with one rollover) is an unrealistically short repayment period. Even in the successful
recent cases, countries needed substantially more than four months (120 days) to be in a position
to repay the loans extended by the official sector. Providing IMF assistance with such short
maturities could undennine, rather than support, prospects for repayment and recovery.
The Commission's recommendation of a penalty rate calculated on the basis of sovereign yields
one week before the member country applies for an IMF loan would also be counterproductive.
This would entail in most cases
Grapb 1: limeJine of the Receot Financial Crises, 1997-2000
interest rates so high (see Graph 1)
T,meline ofcountrycnses vx. JP Morgan Emerging Bond Marketlndr:x
that these loans would worsen the
(EBM] Brady Bond and EMBI Global spreads over U. S. Treasunes. in bpJ
underlying financial position of the
1800 - - - - - - - - - - - borrowing country.
Brazil

1600

~

..

While we find the Commission's
Russia
specific recommendations on
--1*- I
1400 maturity and pricing to be
Korea
undesirable, we do believe that it is
1200 important for the IMF to carefully
Indonesia
structure the terms of its financing in
1000 such a way that reduces moral
Thailand
hazard risks, discourages
800 -.
excessively frequent or prolonged
recourse to IMF resources, and
600 encourages an early return to the
private markets, especially in cases
- - EMBI Bradv Bonds
400 EMBI Globill
where exceptional amounts of IMF
---120 day repayment
120 day rollover
assistance are provided. With these
200 ~.-~--~-objectives in mind, the United States
0\
0\
0
0
0'
0'0
led an important innovation in this
--- 0 - ""
--0
r-area with the creation in December
Source: JPMorgan (Bloomberg). The EMB! Sovereign series IS
1997 of a new IMF facility: the
availabre from J 99 J onward: however. It covers the spreads of Brady
Bonds over u.s. Treasuries. The EMBJ Global series was created in
Supplemental Reserve Facility
1998 as a br~ader measure.
(SRF).· This marked a fundamental
change in the terms and conditions of IMF lending, emphasizing financing on shorter terms at
premium rates of interest. Since the creation of this new facility, a substantial portion of IMF
lending in large programs has been provided on so-called SRF terms - interest rates that are at
least three percentage points above short-term market rates, and maturities of two years or less.
Experience with this facility has been very positive, both in supporting economic recovery and
encouraging realistically early repayment.

I

-- --

u.s. Department of the Treasury Response to the IFI Advisory Commission
Response to the Recommendations on Reform of the IMF - Page 21

More recently, we have sought in the IMF to win support for our view that all non-concessional
Fund lending should in future be based on the principle that charges should escalate the longer
countries have Fund money outstanding and, above certain thresholds, the larger the scale of
financing. We are also seeking changes that would encourage more limited and effective use of
the Fund's vehicle for medium/longer term lending, the Extended Financing Facility (EFF). In
our view, the utility of this facility is in supporting those few, carefully targeted cases where bold
structural reforms are needed to secure stabilization and where the balance-of-payments benefits
of structural refonns may require a long time to appear and where countries have limited capital
market access.

Credit Limits
The Commission recommends that the IMF have the capacity to lend on a
substantial scale to countries that have met its pre qualification criteria, with
restrictions on the amounts available in order to reflect the borrowing
government's capacity to repay.

We share the view that the IMF should have the capacity to respond to crises in member
countries on a scale consistent with the scale of the crisis. However, we do not think that the
Commission offers a feasible approach to establishing appropriate credit limits.
The IMF currently has in place access limits that govern the amount of financing available to
member countries under its programs. These existing IMF limits allow countries to borrow
100% of their IMF quota per year, with a cumulative limit of 300% of quota under normal IMF
Stand-By or Extended arrangements. (The level of a country's quota is broadly determined by
its economic position relative to other members. Economic factors considered include members'
GDP, current account transactions, and official reserves.) In exceptional cases, the IMF may
approve arrangements exceeding these limits, but most programs are financed at a level well
below the access limits. There are also provisions in the IMF for exceptional access to resources
in cases of systemic crisis - through the Contingent Credit Line and the Supplemental Reserve
Facility_ Under the CCL, access is expected to be within a range of 300-500 percent of quota.
Under the Supplemental Reserve Facility, access is detennined based on considerations
including a member's financing need, its capacity to repay,-ti1e strength of its reform program,
and its record of cooperation with the Fund in the past.
We think that the Fund's current access limits provide the appropriate basis for guiding IMF
lending to member countries. Strict controls are needed on IMF lending to mitigate moral
hazard, preserve the Fund's catalytic role, and provide the incentives for countries to undertake
strong reform efforts, which are essential for ensuring that drawings from the IMF are repaid.
It is unrealistic and undesirable to hold out the prospect of IMF lending at a level equivalent, for
example, to one year of a member government's tax revenues. Such a credit limit would
dramatically increase the level of Fund financing to qualifying countries, resulting in very large
bailout packages that would surpass the financial capacity of the IMF and increase moral hazard.
For instance, Brazil's annual tax revenue is approximately $139 billion, many times the amount
of its quota in the IMF ($4.5 billion) as well as its most recent Fund program ($14.5 billion).

u.s. Department of the Treasury Response to the IFI Advisory Commission
Response to the Recommendations on Reform o/the lMF - Page 22

Elimination of IMF Concessional Lending
The Commission recommends that the IMF's concessionallending instrument, the
Poverty Reduction and Growth Facility (PRGF), be closed. Further, the
Commission suggests that long-term assistance to Joster development and
encourage sound economic policies should be the responsibility of the
reconstructed World Bank or the regional development banks.

In our view, this recommendation is neither desirable nor feasible. The recommendation rests on
the premise that the IMF is not well-suited to carry out a concessionallending role. has not done
so effectively. and that the multilateral development banks (MDBs), in particular the regional
development banks, would do a better job. This premise and the Commission's recommendation
are not well-grounded, on several counts.
First, one of the clearest lessons of development experience is that economic growth is critical to
poverty reduction, and that sound macroeconomic policies are critical to growth. Growth is the
necessary basis for generating resources for investment in primary education, health care, rural
infrastructure, and other areas critical to poverty reduction. A strong macroeconomic policy
environment - one that, for example, supports currency stability and keeps inflation in check - is
essential if a country is to avoid capital flight, make effective use of development assistance, and
lay a durable foundation for broad-based growth and poverty reduction. Helping countries set up
appropriate macroeconomic frameworks is the IMF's particular expertise and is not an area of
competence or experience for the MDBs. While the IMF is by no means infallible, there is
simply no other institution with the technical expertise to design the essential and highly
specialized policy conditions that the Fund provides in this area.
Second, the Commission's suggestion that the Fund could be effective in providing
macroeconomic advice through its Article IV consultations, but no financing to accompany such
advice is, in our view, wholly unrealistic. Development experience suggests that, while
financing is no guarantee of success, countries needing to take challenging, sometimes politically
difficult measures are unlikely to show the same degree of attention and receptivity if IMF policy
advice comes without any financial underpinnings.
Third, it is important to recognize that the IMF's concessionallending activities are financed by
bilateral contributions of member countries in addition to and separate from contributions in the
form of IMF quotas. Those activities are largely financed by other member countries, and they
will have a proportionately greater voice in deciding how these resources are used. Currently,
there is a strong consensus among the Fund's membership that concessionallending should
continue, partly for the reasons noted above, but also based on the view that IMF financing
should be avaiiable to all its members, and that the Fund's poorest members cannot afford
financing on non-concessional terms.
All of this said, we do believe that the IMF's role in this area needs to change significantly_ The
recently created PROF, the successor to the IMF's Enhanced Structural Adjustment Facility
(ESAF), represents an important shift in Fund operations in poor countries. Under this approach,
there is to be a clearer division oflabor between the World Bank and the IMF, with the Bank
taking the lead in providing advice on the design of growth-enhancing national poverty reduction

u.s. Department of the Treasury Response to the IFI Advisory Commission
Response to the Recommendations on Reform of the IMF - Page 23

strategies and structural reforms, while the Fund will focus on promoting sound macroeconomic
policy and structural reforms in related areas, such as tax policy and fiscal management. This
division of labor should be accompanied by a streamlining of conditionality to avoid overlap and
promote coherence. It is expected that both institutions will focus on a smaller number of clear
performance targets that are aimed at maximum poverty impact, are set realistically, and are then
more rigorously adhered.to.

No Future Quota Increases; Private Market Borrowing in a Crisis

The Commission recommends against further quota increasesfor the foreseeable
future, and that, in the event of a crisis, the Fund should borrow as needed either
from the private sector or from credit lines of member countries.
While it is difficult to predict the future with confidence, we agree that the IMF's liquidity
position is comfortable currently, and we do not see a need for a quota increase in the near
future. As of March 2000, the IMF had $289 billion in total resources, of which $138 billion
was usable. (The remaining $161 billion is currently in the form of existing loans and currency
holdings of countries with weak currencies.) In light of the Fund's comfortable liquidity
position, we consider the first part of this recommendation, counseling against a quota increase
for the foreseeable future, to be both desirable and feasible.
We agree that the Fund should be able to borrow from credit lines of member countries in
appropriate circumstances. This possibility is already provided for by the General Arrangements
to Borrow (GAB) and the New Arrangements to Borrow (NAB). The GAB and the NAB are
arrangements between the IMF and a number of member countries and institutions under which
supplementary resources can be provided to the IMF. Eleven industrial countries participate in
the GAB, which was created in 1962. Twenty-five countries and institutions participate in the
NAB, created in 1998. The total amount of resources available to the IMF under the NAB and
GAB combined is SDR 34 billion, about $46 billion.
While the Fund under its Articles of Agreement has the authority to borrow from private
markets, the IMF' s membership has not taken advantage of this authority for two principal
reasons. First, it is not clear that the IMF could raise substantial amounts of money from the
markets without compromising its members' financial claims on the institution. For the IMF to
borrow at AAA rates, its members may have to back such borrowings with their currency
subscriptions, similar to the way that callable capital of World Bank members backs up
borrowings by the Bank. This would involve a fundamental change in the IMF's financial
relationship with its members. (To the extent that borrowings need to be backed by currency
SUbscriptions, those subscriptions would be impaired.)
Second, we think that it is necessary and appropriate for members to exercise close oversight
over the financial resources and operations of the Fund. The quota increase mechanism provides
an effective means for such oversight.

u.s. Department of the Treasury Response to the IFI Advisory Commission
Response to the Recommendations on Reform of the IMF - Page].l

Article IV Consultations

The Commission recommends that GECD members be allowed to opt out of
Article IV consultations, though all other IMF members would be required to
participate. The Commissionfurther recommends that all Article IV reports be
published promptly.
We agree that Article IV reports should be published promptly and have actively advocated this
position in the Food as part of our broader efforts to increase transparency. Towards this end.
the United States led the effort to set up a pilot program for the publication of countries' Article
IV staff reports. Under this program, 29 coootries, including the United States, have now made
public the staff reports prepared as part of the Article IV surveillance process. Nearly 20
additional countries have agreed to release their staff reports in the future.
We do not think it is desirable, however, to allow OECD countries to opt out of the Article IV
process. Their participation underscores the reality that all IMF members playa part in the
international monetary system, and reinforces the universal nature of the Fund. The health of
industrialized COootry economies in particular is critical to the system. The United States sees
the Article IV process as an important vehicle for encouraging needed adjustment and reform in
industrialized coootries no less than in emerging market economies or developing countries. A
number ofOECD countries (e.g., Mexico, Korea and Turkey) are emerging market economies
whose health is important to regional/international stability, and are, in some cases, users of IMF
resources. Allowing them to opt out of the Article IV process would undermine the important
ongoing efforts to make the process a more effective vehicle for avoiding financial crises, and
would put the Fund in the imprudent position of providing financing to countries that are not part
of its surveillance activities.

Transparency in IMF Accounting

The Commission recommends a variety of steps to improve transparency in IMF
accounting - broadly that the IMF's accounting system be simplified and
reformed to mimic standard accounting procedures for representing assets and
liabilities and income and expenses. The Commission also suggests that the
IMF's SDR accounts be incorporated into the IMF's overall accounts so as to
obtain "an acctjrate view of net providers and users of subsidized funding. "
We believe that the recommendation to improve transparency in IMF accounting is desirable and
feasible. We agree that the IMF accounts should be as transparent and understandable as
possible and that there is scope for progress in this area, while bearing in mind that the accounts
reflect complexities in the nature of the Fund's financing and operations.

u.s. Department of the Treasury Response to the IFI Advisory Commission
Response to the Recommendations on Reform of the IMF - Page 25

Although there is more to be done in this area, a number of steps have been taken with the strong
backing of the United States to enhance infonnation available about the IMF's financial position.
•

Most recently, a decision was taken to publish quarterly details on the financing of the
Fund's operations by members - the "Financial Transactions Plan" (formerly known as the
operational budget). The Financial Transactions Plan will provide information about the
IMF's holdings of individual countries' currencies considered useful as a funding resource
(i.e., those members considered financially strong enough to support the extension of Fund
credits).

•

The Fund already posts a wide range of financial infonnation on its web site. This includes:
a weekly update of its financial activities, monthly infonnation on its liquidity position and
the resources available for lending, up-to-date information about Fund credit outstanding,
and extensive country-specific·data on transactions with its members, including loans, loan
disbursements and repayments. The aggregate amount of Fund lending is already clearly
labeled as financial assistance in the "IMF Financial Activities" report, which is updated
weekly. The list of individual loans outstanding indicates the date the arrangement was
approved and the date it expires. 1

•

Annual audited financial statements which have traditionally been included in IMF Annual
Reports are now also published on the Fund's website along with quarterly financial
statements. Financial statements are prepared in accordance with generally accepted
accounting principles and are accompanied by detailed explanatory footnotes. For the first
time this year, the Fund's financial statements for the latest financial year (May 1, 1999 to
April 30, 2000) will be prepared in accordance with internationally accepted accounting
standards; they will also be published (per established practice) in the IMF's annual report
and on the public web site.

Regarding the recommendation to incorporate the SDR accounts into the Fund's general
accounts, given the very different nature and purposes of the Fund's general resources (i.e.,
quota-based) and SDR resources, we think there is merit in having distinct accounts for the two,
and note that a change to this practice would require an amendment to the IMF Articles of
Agreement. We are prepared, though, to explore whether there is some presentational advantage
in showing a country's net use of SDRs.2 Indeed, it is our understanding that the new financial
statements noted above are expected to specifically identify net use and holdings of SDRs, as
well as credit outstanding, usable and non-usable currency assets, liquid claims on the Fund, and
a cash' flow statement.

I All Stand-by Arrangements must be repaid within 5 years of the date of expiration; Extended Arrangements must
be repaid within 10 years; and ESAF IPRGF arrangements must be repaid within 10 years.

2 The IMF publiCation International Financial Statistics includes a table providing data on each member country's
position (and the membership as a whole) with respect to use of IMF credit and SDRs. What is not provided is a
separate column showing a country's net use of SDRs, though this can easily be derived from the data provided by
subtracting a country's net cumulative allocation of SDRs from current holdings of SDRs.

U.S. Department of the Treasury Response to the IFI Advisory Commission
Response to the Recommendations on Reform of the IMF - Page 26

Repayment Obligations: IMF Priority; Negative Pledge;
Ineligibility in the Event of Default
The Commission recommends that the IMF be given priority over all other
creditors. that members exempt the IMF from application of negative pledge
clauses. and that member countries that default on IMF debts not be eligible for
financingfrom other multilateral agencies or member countries.
These recommendations are already largely reflected in the way that IMF financing is provided.
At present, the IMF, as a de facto preferred creditor, already enjoys priority status with regard to
other creditors. As for exempting the IMF from negative pledge clauses, the Commission itself
notes that the IMF is frequently exempted from the operation of such clauses and that other
approaches are available, even absent an explicit exemption, to permit the IMF to enforce its
repayment rights.
Regarding the proposal to suspend eligibility for other IFI financing if a country is in arrears to
the IMF, generally this is already the case. However, we recognize that there may be cases
requiring special.consideration, such as during workouts, humanitarian crises, or certain postconflict situations where lending would clearly advance our national interests.

u.s. Department of the Treasury Response to the IFI Advisory Commission
Response [0 the Recommendations on Reform a/the MDBs - Page 27

Response to the Recommendations on Reform of the
Multilateral Development Banks

Limits on MDB assistance
The Commission recommends phasing auf MDB lending to countries with annual
per capita incomes above $4,000 or an investment grade international bond
rating and sharply limiting assistance to countries with annual per capita
incomes above $2,500.
We do not support a rigid eligibility cutoff based solely on these criteria, as it is neither desirable
nor feasible.
The Commission's recommendation rests on the assumption that a country's potential access to
private markets at some level automatically translates into an availability of private finance at the
rates, maturities and volumes appropriate for the full range of purposes necessary to lay the basis
for sustained growth and poverty reduction. This is clearly not the case. Even relatively
productive emerging markets face severe limitations in the volume of private capital that is
reliably available for long-term development investments with the medium to longer-term
maturities that are necessary. Moreover, the private capital that is available comes with interest
rates that are prohibitive for development programs. These market limitations are of particular
importance with respect to the availability of support for development programs such as policybased sector reforms.
If the Commission's recommendations were applied as written, countries as diverse as BraziL
Indonesia, Turkey, and South Africa - where important, long-term U.S. strategic and economic
interests are clearly at stake -- would be denied access to MDB assistance. If these
recommendations were applied today, the World Bank and regional development banks would
be effectively precluded from lending of any kind, in any circumstances. These countries
currently absorb fully one-third of U.S. exports, a share that has risen markedly over the past
decade. Moreover, they are home to a substantial share of the worlds poor. For ex~ple, more
than 36 percent of the population of Latin America lives on less than $2 per day. Graduation
policies designed with a fixed and excessively low threshold risk worsening economic outcomes
in these countries and increasing the risk of future crises. This could undercut or prolong the
path to sustainable market access, and ultimately delay the time when these governments will
grow out of the need for official support.
We believe MDB support for emerging market economies needs to be more selective and
focused on areas where it can increase their overall capacity to access private capital resources
on a more durable basis. MDBs should emphasize lending to:

U.S. Department of the Treasury Response to the IFI Advisory Commission
Response to the Recommendations on Reform of the MDBs - Page 28

•

promote key public investments, particularly for the public goods that will not be adequately
supplied by private markets;

•

attract additional private capital flows, by among other things, reducing obstacles to private
investment; and

•

counteract temporary disruptions in access to private external capital.

Accordingly, we believe that the MDBs should:
•

have a strong presumption against lending where private finance is available on appropriate
terms;

•

reduce the share and volume of their lending to emerging economies over time. with
complete graduation as a clear objective; and

•

use their loan pricing flexibility more systematically to encourage graduation.

Severely Curtail Direct MDB Support for the Private Sector

The Commission recommends eliminating direct MDB loan and equity
investments in the private sector, closing the IFC, and limiting future support for
technical assistance and the dissemination of best practices standards. The
Commission would also eliminate the Multilateral Investment Guarantee Agency.
which provides political risk insurance to private investors.
We do not support eliminating the private-sector focussed operations of the MDBs or halting
MDB lending, guarantees, or insurance for private sector investors.
The Commission's recommendation is premised on a view that the public benefits (even in poor
countries) resulting from official credit for private-sector entities are not necessary, and that
official credits crowd out private investors. We believe this view ignores some important
realities:
•

capital markets are imperfect and the presence of private sector investment opportunities
does not mean, ipso facto, that they will be financed; .

•

private capital does not flow to risky countries in the volume and for the purposes necessary
to stimulate enduring and equitable growth;

•

direct MDB engagement with the private sector has been an instrument for wider private
sector development reforms; and

•

limited MDB lending to the private sector has catalyzed many times its amount in new and
additional private flows.

We believe that U.S. interests and the realities of developing country and emerging market
finance fully justify carefully focussed MOB support for private sector operations:
•

medium and long-term domestic finance is virtually unavailable for many sectors/projects in
most of the world's countries;

U.S. Department of the Treasury Response to the IFI Advisory Commission
Response to the Recommendations on Reform o/the MDBs - Page 29

•

private finance can be extremely susceptible to short-term disruption;

•

private sector finance for properly structured enclave investments in the poorest countries can
yield substantial social benefits;

•

modest amounts of MDB finance can privatize state-owned enterprises, providing both social
gains and new opportunities for subsequent private investment;

•

despite liberalization and reform during the 1990's, emerging market risk remains
unacceptably high, and project returns too low, for most private invest9fs and lenders: and

•

despite substantial progress in reforming the overall investment climate. uneven emerging
market accounting practices and investment regulation still present substantial challenges to
financial due diligence in these areas which further discourages long-term domestic lending.

Transactional finance from MDB private sector operations is an integral component of the
MDBs' broader sector restructuring and policy reform efforts in virtually every country in which
the MDBs are active. Given the real obstacles that still exist to long-term emerging market
lending and investment, MDB private sector operations are making important and clear
contributions to create new opportunities for investment, reduce risk and volatility, and increase
access to capital. In particular, the private sector windows play the following vital roles:
•

Investment Climate Development by promoting sound economic policies, divestiture of
state-owned enterprises, capital market development, investment rules and protection, and
free flow of capital;

•

Risk Mitigation through innovative co-financing and guarantee arrangements, application of
performance clauses to government partners, and early due diligence; and

•

Market Access Facilitation by restoring investor confidence in crisis times by investing in
those disrupted emerging markets with sound economic and investment climate
fundamentals.

The MDB private sector windows have been instrumental in catalyzing the additional private
funding, and the private sector development more broadly, which would not otherwise have
occurred given the realities of developing country finance. Given the risk of crowding out
private finance, direct MDB support for the private sector must be provided very selectively and
with great care. There would be no compelling case for involvement by the MDBs in the private
sector if all they brought to the table was cheaper finance.

Shift World Bank Operations to Regional Development Banks

The Commission recommends eliminating World Bank operations in Latin
America and Asia.
We do not support the Commission's recommendation to restrict lending in these regions to the
regional development banks.
The World Bank's global focus and unparalleled cross-regional experience represent an
enormously valuable asset to developing countries in all of the regions, and to the shareholder

u.s. Department of the Treasury Response to the IFI Advisory Commission
Response to the Recommendations on Reform of the MDBs - Page 30

community more broadly. In an increasingly integrated world economy, we believe that the
World Bank should be at the center of the global effort to develop and deliver core program
lending and targeted project finance aimed at building and supporting the institutions of
development and poverty reduction. The location, shareholding structure, and operational
experience of regional banks are also important assets, but in general they are not able to match
the technical resources of the World Bank. Indeed, knowledge transfer across regions is an
intrinsic asset of the World Bank. We believe that our multiple interests are best served by
working to ensure that the each MDB brings its particular expertise. including its unique regional
perspective, to bear whenever appropriate, while playing a clearly subsidiary role where others
are better positioned to bring maximum value.
We fully agree that increasing cooperation among the MDBs, sharpening their areas of
comparative advantage, and reducing operational overlaps would increase the system's overall
development effectiveness and should be pursued as a matter of priority. It makes little sense for
the regional development banks or, indeed, the World Bank, to build and maintain a capacity to
undertake every kind of activity relevant to development in every country in which they could
playa role. Responsibility for certain kinds of project lending should more often shift to the
regional development banks, where they have proven expertise. We have been working
aggressively to give these views concrete expression in the form of formal Memoranda of
Understanding between the World Bank and the regional banks that articulate a division of labor
reflecting comparative advantage and selectivity. In addition to these MOUs, the Country
Assistance Strategies (CASs) are continuing to address the appropriate division oflabor in
borrowing member countries. The World Bank and IFC produce joint CASs designed to
maximize Bank Group synergies in promoting private sector development.
As part of the process of improving institutional focus and specialization across the system, the
World Bank will need to deliver on its commitment to accept a more coordinating or supporting
role with respect to other agencies. For example, other agencies and bilateral donors that often
work closely with NGOs often have a clear comparative advantage in the area of humanitarian
assistance in post-conflict situations.

Transfer World Bank callable capita' to regional development banks
The Commission recommends transferring a portion of the World Bank's callable
capital to the regional development banks and reducing or reprogramming the
remainder in line with a declining portfolio balance.
The Commission recommends a significant reduction in World Bank non-concessional lending
in order to free up callable capital that could then be reprogrammed to support Bank assistance
for other purposes, or transferred to the regional development banks. We do not believe the
Commission's proposals in this respect are either desirable or feasible. Specifically, we do not
support the sharp reduction in World Bank lending capacity proposed by the Commission for the
short-run, nor do we believe its proposals are workable legally or attainable politically.
Shareholder capital in the MDBs has two components: paid-in and callable. Paid-in capital is
the amount of funding that countries actually transfer to the institutions to support their market-

U.S. Department of the Treasury Response to the IFI Advisory Commission
Response to the Recommendations on Reform o/the MDBs - Page 31

based lending operations. Callable capital is funding that shareholder countries have formally
agreed to make available on a contingency basis in the event that the bank is not able to meet its
liabilities. Callable capital therefore represents the contractual commitment of shareholders such
as the United States. Paid-in capital is typically a fraction of the total capital of a banle For
example, for the IDB's seventh capital increase in 1995, paid-in capital represented only 2.5% of
the total capital increase. The Banks issue bonds against their assets, including the paid-in
capital and the callable capital of investment grade shareholders (primarily the industrialized
countries) and use the proceeds to provide loans for development projects.
The Commission does not appear to have taken into account a number of major legal and
financial issues that would be direct obstacles to the callable capital transfers/reassignments it is
recommending. The World Bank is one of the global capital market's largest borrowers and is
widely viewed as one of its strongest. The Bank currently has about $116 billion of public1yheld bonds outstanding that have Deen issued against its callable capital. A transfer of this
underlying asset would be fundamentally inconsistent with the terms and conditions on which
these bonds were issued; there is a real risk that it could be potentially disruptive to the market,
and it would clearly raise a host of highly complex legal and contractual issues. Beyond this, the
World Bank's 181 member governments have specifically given callable capital commitments to
specific institutions, typically through a complex legal and legislative process. Any material
changes to these specific commitments would require most (perhaps all) of the shareholders to
return to their own legislatures for the necessary approvals and amendments.
Apart from the major technical obstac1es to a callable capital transfer of the kind recommended
by the Commission, any such transfer would need to gain a level of international support that is
highly unlikely. Specifically, it may require amendment of the Articles of Agreement of each of
the affected institutions, which would require at least a 75 percent majority vote of the
shareholders.

Eliminate MDB Role in Mitigating Financial Crisis
The Commission recommends that the MDBs should be precludedfromfinancial
crisis lending.
We do not support precluding the development banks from financial crisis lending.
While we agree that MDB financial crisis lending should be limited to exceptional cases, we also
believe that direct MDB support in crises can be critical to the success of recovery programs by
helping to minimize long-tenn damage, sustaining and restoring development momentum, and
contributing to intensified economic refonn and restructuring. We view the MDBs as
particularly well-positioned to provide significant value added in the effort to:
•

avoid unnecessary fiscal contractions in fiscal expenditures;

•

restructure banking and other financial institutions; and

•

minimize the adverse impact of the crisis on the poor by, for example, strengthening social
safety nets.

u.s. Department of the Treasury Response to the IFI Advisory Commission
Response to the Recommendations on Reform of the MDBs - Page 32

The upsurge in MDB "crisis" lending in the late 19905, most of which was provided on shorter
maturities and higher rates. was appropriate in the context of the acute and generalized reduction
of private capital flows to emerging economies. The risks were high. However. the economic
results that have emerged - in terms of helping to put in place fundamental reforms needed to
restore private sector confidence - have been broadly positive. A large measure of economic and
financial stability has been restored and economic growth prospects are now far better than
would otherwise have been expected.
MDB intervention was achieved without any additional budgetary costs for MDS member
governments. Moreover, it is our view that the existing capital base of the three largest MDB
hard loan windows (the IBRD, IDB, and ADS) is sufficient to maintain a cushion in lending
capacity that would enable these institutions to respond quickly with a substantial, but
temporary, expansion of lending if justified by a future adverse shift in global financial
conditions.
While MDB hard-loan lending rose sharply to help members deal with the recent financial crisis.
it has now returned to levels more consistent with, and in the case of the IBRD well below. the
pattern of pre-crisis lending.
The long-term pre-crisis trend shows that annual MDB hard-loan window lending has been
relatively steady in both the IDB and ADS, and actually declining in the IBRD despite the
addition of nineteen new member countries in Eastern European and the former Soviet Union.

Replace MDB Loans with Grants

The Commission recommends that MDB support for physical infrastructure and
social service projects in the poorest countries be provided through grants rather
than loans and guarantees.
If implemented as proposed, this recommendation would limit the overall availability of
financial assistance to the poorest. Moreover, we believe that moving to an all-grant system
would have negative .long-term financial implications for the institutions and their shareholders.
Over time, the effect would be to eliminate the reflows that derive from concessional loans
(mainly repayments of principal) and that currently fund a substantial portion of the institutions'
new concessionalloan commitments. Individual donors rely, almost invariably by law, on
annual legislative allocations of funding to support MDB operations in the poorest countries (i.e.,
concessionalloans for the most part). They cannot provide the long-term guarantee of future
resources that the Commission's grant-based approach would require.
The lending terms of all four MDB soft-loan windows are already highly concessional; e.g., IDA
credits have a grant element of about 70 percent at current interest rates. The World Bank also
provides selective grants for research and other global public goods, HIPe debt relief. and to
spur development in post-conflict countries. The IDB also provides some targeted grant funding.
The current approach of relying largely on highly concessional credits covers the administrative
costs of lending. It has two other advantages that would be lost under an all-grant approach.

u.s. Department of the Treasury Response to the IFI Advisory Commission
Response to the Recommendations on Reform of the MDBs - Page 33

•

Over time. repayments on past credits playa major role in funding new credits that would
have to be offset by donors to maintain the level of new commitments. For example. reflows
will finance over 38 percent of IDA-12 lending - the most recent replenishment of IDA
resources. This recycling of IDA repayments into new lending favors the poorest countries
in that the more advanced former and current recipients of IDA now account for roughly onehalf of current reflows.

•

The reality that credits must eventually be repaid helps to build financial discipline and debt
management skills in borrowing countries. It also provides an added incentive to ensure that
borrowed funds are used selectively and wisely.

We do believe there is scope for greater differentiation of soft-loan lending terms among the
poorest countries, providing the very poorest and least creditworthy borrowers with the highest
degree of concessionality. It is important to ensure that the stock of highly concessional debt is
accumulated and managed in a way that minimizes the prospect of future debt servicing
problems. We believe there is positive value in maintaining the lending approach of the MDBs
and consequently, we do not believe it is desirable to redesignate them as "Agencies".

Make Payments Directly to Service Suppliers
The Commission recommends that "poverty reduction grants" to eligible
countries (poor countries lacking capital market access) be paid directly to
service providers after there is independently verified delivery of service.
We fully share the Commission's underlying objective to improve the efficiency and
effectiveness of development assistance, to minimize the scope for corruption, and to link MDB
support systematically to solid performance by service providers. But while the specific
approach proposed by the Commission might be appropriate in some individual circumstances,
we do not believe it practical to institute this approach as standard practice.
Most social sector development operations have a much broader focus and scope than providing
a discrete and easily quantifiable service. In fact, many require a series of concerted actions over
a period of many years, and with sustained and extensive government involvement. For
example, a rural school or health clinic could well (and we would argue often should) be built by
an independent contractor. But the longer-tenn viability of the school, and therefore whether it
actually delivers the development benefits that are intended, requires regular government
involvement and support through the budget process.
We are also concerned that the proposal could:
•

undennine the basic objective of building local capacity to implement projects effectively,
including the need to improve the quality and performance of the government institutions
involved, and to build transparent procurement systems;

•

reduce private sector and civil society interest in bidding for selection as a service provider;
the built-in payment delays specified by the Commission's proposal would likely be a
disincentive to smaller private finns and NGOs, who would need to seek interim financing
that could well be in short supply; and

u.s. Department of the Treasury Response to the IFI Advisory Commission
Response to the Recommendations on Reform of the MDBs - Page 34

•

increase the cost of projects, because of additional risks associated with bridge financing
requirements, the additional costs of the independent verification process. and the potential
additional costs of outsourcing core services.

Establish Institutional Reform Loans to Support Policy Reform
The Commission endorses direct MDB loan support for institution building and
policy reform, and recommends a specific lending instrument whose terms and
conditions differ substantially from existing MDB instruments designed/or this
purpose.
While the Commission's proposal incorporates a number of basic principles and objectives with
which we are in fundamental agreement, the specific financing instrument the Commission
proposes is unlikely to be a particularly attractive device, compared to existing instruments, for
encouraging good performance.
For example, the proposed "Institutional Refonn" loan program would be based on full
amortization of principal and an interest subsidy of between 10-90%. Tenns of the loan could be
adjusted over the life of the loan to reflect good or poor project execution. It could be. however,
counterproductive to increase loan charges when a country is experiencing difficulty delivering
on its reform program. That may be the time when it needs the most help servicing its debt.
Notwithstanding these technical difficulties, we share the Commission's basic presumptions in
most significant respects. Specifically, we welcome the Commission's:
•

endorsement of direct MDB assistance to help build the core public institutions and promote
the basic policy reforms necessary for equitable economic growth and sustained
development;

•

strong agreement that objective and consistent assessments of borrower perfonnance should
directly guide MDB lending choices;

•

conviction that MDB instruments and operations need to incorporate, in a more effective
manner, clear and monitorable performance benchmarks and strong incentives for achieving
them; and

•

belief that monitoring of compliance with these conditions should be fully transparent.

These views have been the basis for much of our refonn advocacy in the MDBs during the past
five years, and they have directly shaped much of what has been achieved. All of the institutions
are focussing both lending and analytical work much more heavily on building institutional
capacity in borrowing countries, and on identifying and supporting the core policy reforms
necessary to create a favorable climate for market-driven growth and development. New loans
are building in more specific monitoring criteria, are being disbursed in tranches on the basis of
monitorable performance on agreed conditions, and are being directed intensively toward
countries that are moving demonstrably ahead with these refonns and using assistance
effectively. In particular, the World Bank, African Development Bank and the Inter-American
Development Bank have adopted detailed criteria for assessing performance and are allocating
all new concessionallending on that basis. We are presently working toward a similar system at

u.s. Department of the Treasury Response to the IFI Advisory Commission
Response to the Recommendations on Reform of the MDBs - Page 35

the Asian Development Bank. And finally, the aggressive transparency agenda we have pursued
with great success in all of the institutions has opened them up to a degree of independent public
scrutiny and quality control that can only improve their effectiveness.
In our view, these steps build in much of the additional clarity, accountability and perfonnance
incentives that the Commission rightly seeks. That said, there is still room for additional
progress, and we would welcome additional views on how this might be achieved most
effectively.

The World Bank Should Concentrate on the Production of Global Public Goods
The Commission recommends that the World Bank concentrate on the production
of global goods and serve as a centralized resource for regional banks.
We support the Commission's desire for increased focus by the World Bank on the production of
global public goods, including serving as a center for technical assistance to the regional
development banks. However, we view this as complementing, rather than replacing, the Bank's
other development priorities for addressing poverty reduction.
We believe that the World Bank and other development institutions have the potential to
significantly expand their efforts to promote global public goods and can make an enonnous
contribution in helping to push the frontier of international collaborative efforts in this area.
Regional MDBs should continue to emphasize regional projects that address cross-country
concerns. Examples such as the Consultative Group on International Agricultural Research
(CGIAR), the Green Revolution, and the onchocerciasis control program for river blindness in
Africa all demonstrate that innovative collaboration among the World Bank and other official
bodies delivers results. We believe that regional development banks also should continue to
increase their emphasis on developing regional approaches to regional development issues.
The World Bank and the regional development banks already provide significant support for
global public goods. For example, the World Bank has committed almost $1 billion to more than
81 HIV /AIDS-related projects in 51 countries and last year created a strategy to intensify its
actions in this area in collaboration with the Joint United Nations Program on HIV / AIDS, which
the Bank co-sponsored. The African Development Bank and the Inter-American Development
Bank are also lending for HIV /AIDS programs, but on a much smaller scale. The World Bank is
also boosting its support for expanded childhood immunization and looking into new incentives
to stimulate development of vaccines against key infectious killers in poor countries - AIDS,
malaria, and TB. In addition, the World Bank provides annual grants (currently $125 million)
out of its regular administrative budget for its Development Grant Facility (DGF). The DGF
works in partnership with other development organizations in supporting development research
(e.g., CGIAR) and other priority public goods, including seed money, for innovative, high risk,
high return activities for which lending is not appropriate.

u.s. Department of the Treasury Response to the IFI Advisory Commission
Response /0 the Recommendations on Reform of the MDBs - Page 36

Increased U.S. Support for Poverty Reduction Programs
The Commission proposes that the United States should significantly increase its
support of effective programs to reduce poverty.
We welcome the Commission's focus on the critical importance of reducing poverty and fully
support this recommendation of the Commission.
The United States provides substantially less official development assistance (aDA) as a share
of GNP than any other developed country. The 1998 U.S. aDA/GNP ratio of 0.10 percent was
less than one-half the 0.24 percent ratio recorded by all twenty-one members of the OECD·s
Development Assistance Committee. The United States ranked twentieth in the level of ODA
we provided by per capita ($32.65).
The level of U.S. development assistance appropriated annually has been consistently less than
the Administration's total request.
The Administration has substantially redirected the financial support we are providing to the
MDBs in favor of the soft-loan windows and the highly concessional assistance they provide for
the world's poorest countries. Funding for the soft-loan windows (including the Global
Environment Fund) account for over 88 percent of the Administration's FY 2001 Request for the
MDBs. We have also publicly stated that we do not believe it is realistic for the hard-loan
windows to expect any new capital increases.
We also continue to accord priority attention to the issue of how MDB resources are deployed by
working with MDB management and members to improve the MDBs' effectiveness in reducing
poverty. Our efforts center on such crucial issues as: greater lending selectivity, including
alJocations based on borrower performance; intensified support for social sector investments and
public goods; sharper focus on institutional and policy obstacles to equitable, market-based
growth; increased transparency and accountability within the institutions themselves; and
improved collaboration with other institutions and interested parties.
The Administration's request for almost $920 million in support of the HIPC Initiative between
FY 2000 and FY 2003 is another important demonstration of our commitment to work with our
development partners to enhance our assistance to the poorest countries that are committed to
sound policies in their efforts to reduce poverty. We are also seeking Congressional approval of
a substantial increase in our bilateral funding to help the poorest countries deal with HIV / AIDS
and other infectious diseases.

u.s. Department of the Treasury Response to the IFI Advisory Commission
Response to the Recommendations on Reform of the MDBs - Page

j:'

Box 1: Assessing the Commission's Negative Assessment ofMDB Successes
Overview of the Commission's critique of the World Bank OED Measurement ofSuccess

The World Bank's Operations and Evaluation Department (OED) is an independent unit of the
World Bank that reports directly to the Executive Board. It uses best practice standards and is
internationally respected for the quality of its work. The indicator used by the Commission is not an
accurate measure of the success or failure of Bank projects, and the Commission combines
categories to present an overly negative picture of the actual success rate.
The appropriate measure for the success of Bank projects is the OED outcome indicator. This
reports whether Bank projects are likely to achieve both their development objectives and at least a
10% rate of return. The outcome indicator takes into consideration all available information
regarding actual costs and benefits known at the time of evaluation as well as expected net benefits
over the remainder of the project's .intended life. By this measurement, 72% of projects completed,
and 81 % of the dollars lent, in FY98-99 had satisfactory outcomes. This shows a marked
improvement over the 65% of projects completed, and 73% of dollars lent between FY92-94, rated
satisfactory .
The Commission focuses on OED's sustainability rating. This identifies projects that require close
attention by borrowing governments and the Bank to manage risks that may affect the net benefits
expected after the time of evaluation. In this regard, it is not a measure of success or failure, but
rather a "red-flag" for projects requiring extra oversight and vigilance due to factors such as country
commitment to reform, country economic and financial policies, availability of funds for operations
and maintenance, institutional capacity, and political situation. The sustainability assessment rates
projects as likely, uncertain or unlikely to be resilient to future risk.
OED's 1999 Annual Review of Development Effectiveness (available on the Bank's web site)
showed that the share of projects with "unlikely sustainability" is declining. The share has
decreased from 19% for FY90-93 to 14% in FY98-99. Weighted according to disbursements, the
share has fallen from 14% to 6%. The Commission lumped into this category any project whose
sustainability was now unknown (e.g. a brand new project) to create a negative picture. A 14%
rating should not be too surprising, since much of the Bank's lending is for complex poverty
reduction sectors in low-income and low-capacity countries.
Similarly, it is not surprising that the likelihood of success and sustainability increases with the
income of the borrowing country. This reflects the greater institutional capacity, performance and
more advanced stage of development of higher income borrowers. For Africa, the rate is 61 %,
compared to 83% for Europe and Central Asia. Poorer countries have higher levels of risk since
they face the most formidable development challenges and have weak human and institutional
capacity.
Nevertheless, we believe that the success rate can be improved, and we have been a strong supporter
of Bank reforms that better incorporate OED evaluations into ongoing and prospective Bank lending
programs.

U.S. Department of the Treasury Response to the IFI Advisol1' Commission
Response 10 Ihe Recommendations on Reform of the MDBs - Page 38

Box 2: Financial Accounting and the MDBs
Cost of Participating in the MOBs
The Commission Report claims, using hypothetical models, that the annual cost to governments of
participating in the MOBs is $22 billion, of which it estimates the U.S. share at $5.5 billion. In the
real world of congressional budgets, U.S. scheduled commitments for the MOBs averaged $1.2
billion per year between 1995 and 1999, $700 million less than the level in 1996. The report fails to
note that the MDBs leverage our participation.a great deal. Every $1 we contributed between 1995
and 1999 generated $60 of development assistance.
The Report implies that the current US scoring methodology systematically underestimates the real
costs of participating in the MOBs because it does not explicitly include additional charges for
opportunity costs or forgone earnings on the paid-in capital, soft-window contributions and retained
earnings of the MOBs. In addition, the Report assigns as a "cost" the risk that the callable capital
pledged by governments may be called.
The Report's approach contradicts longstanding CBO and OMB practice on scoring US government
expenditures. When Congress appropriates funds for any purpose, for example to build a highway,
it would be unreasonable to assert that a future budget "cost" of this one year offunding is seven
percent (the rate used in the Report) year after year. Using this logic, a $100 million appropriation
in 1950 to build a road, would have a cumulative annual "cost" to the American taxpayer of $3 50
million in 2000 (7 percent of$100 million over 50 years). The real cost of the project is the amount
of funds actually provided by Congress in 1950, not an ever-increasing accumulation of opportunity
costs.
As the Report briefly acknowledges. there has never been a call on capital for any of the MOBs.
Further, equity available to the MOBs to cover "problem" loans is several multiples greater than
that held by commercial banks. Therefore, CBO and OMB practice for 50 years has been to not
assign a budget outlay for callable capital. We believe that the current accounting approach for the
cost of MOBs is accurate and appropriate.
Subsidy
The Report states that both market-based and concessionalloans confer a subsidy to borrowers. By
design, the concessionalloans are highly subsidized (i.e., the grant element of IDA loans is now
about 70%). This provides a substantial benefit to the poorest countries and is the reason the soft
windows of the MOBs were created.
Hard window loan rates are set typically well below the rate at which most countries can borrow in
the private markets. They also are set high enough. however, for the MOBs to cover their
administrative costs, provide adequate reserves and, in the case of the World Bank, for example,
contribute grant finance for global development priorities such as IDA, the Trust Fund for Gaza and
the West Bank, HIPC, etc.
This subsidy has no cost to donor governments beyond appropriated contributions to the hard and
soft windows. With respect to the hard loan windows, the preferred creditor status of the MOBs
enables them to raise funds at low rates in the capital markets and on-lend to borrowing members.
However, we believe that the pricing of the hard windows should be evaluated to reduce incentive
for emerging market countries to rely on official financing when it is available on appropriate terms.

u.s. Department of the Treasury Response to the IFI Advisory Commission
Debt Reduction/or the HIPCs - Page 39

Debt Reduction for the Heavily Indebted Poor Countries
The Commission recommends J 00 percent debt reduction by the IFIs and by
bilateral creditors for the heavily indebted poor countries (HIPCs).

100 Percent Debt Reduction by Bilateral Creditors
The Commission recommends that bilateral creditors, such as the U.S. Government, should
extend full debt write-offs to those HIPe countries that pursue effective economic development
strategies. We support this recommendation. In the context of the internationally agreed
enhanced HIPC initiative, we are forgiving 100% of the debt owed to the United States by
countries that qualify for HIPe debt reduction. This will result in the elimination of more than
$3.7 billion in debt owed by the world's poorest countries. We have encouraged other official
bilateral creditors to take similar actions.

100 Percent Debt Reduction by the IFIs
The Commission recommends that the International Monetary Fund, the World Bank, and the
regional development banks write off in their entirety all claims against those HIPe countries
that implement effective economic and social development strategies in conjunction with the
World Bank and the regional development banks. Although we share the Commission's goal of
substantial debt relief for HIPC countries committed to economic reform and poverty reduction,
we do not support a complete write-off of IFI debt.
Substantial debt reduction for the poorest countries is a priority of the Administration. In 1996
we led the development of the first comprehensive HIPe initiative. Last year we worked to
strengthen the initiative to provide deeper, broader, and faster debt relief for these countries. The
enhanced HIPC initiative also makes an explicit link between debt relief and poverty reduction
as the countries commit to using the resources freed by debt relief to address critical social needs
and promote broad-based growth.
The HIPC initiative was never intended as a panacea for the myriad development challenges of
HIPC countries or as a replacement for ongoing donor support. Rather. debt relief "'should be
seen as an integral part of the broader development agenda, and integrated into an overall
strategy of poverty reduction.,,1 Enhanced HIPe relief provides countries the opportunity to
concentrate on productive investments related to poverty reduction rather than on servicing old
debt.

1 The

HIPe Initiative: Delivering Debt Relief to Poor Countries, World Bank and IMF, February 1999.

u.s. Department of the Treasury Response to the IFI Advisory Commission
Debt Reductionfor the HIPCs - Page-lO

The Costs of 100 Percent Debt Reduction
The United States and other nations have worked extensively to reach agreement on a
comprehensive approach to addressing the debt problems of the HIPCs. Given that the HIPCs
will continue to need substantial amounts of external assistance to finance future development.
there has been a strong effort in designing the enhanced HIPC initiative to ensure that the
financial costs of debt relief to the IFIs do not undercut their capacity to provide new assistance.
As shown in the table below, under the enhanced HIPC initiative the total cost of debt relief to
the IFIs will be about $14 billion. Financing the initiative poses a substantial challenge for the
international community; even after the IFls maximize the use of their internal resources,
bilateral donor contributions of at least net present value (NPV) $3.6 billion will be required to
cover the full costs of IFI participation in the initiative. 2
In order to completely eliminate HIPC debt, costs for the IFIs would rise dramatically, to roughly
NPV$43 billion. It is not realistic to expect that the IFIs and bilateral creditors would be able to
finance these additional costs.

Box 3: Cost of Debt Reduction: 1000/0 Commission Plan vs. Current Plan
US$ billion NPV, at end-December 1998

Institution
World Bank Group
IDA
IBRD
IMF
AIDB
IDB
Other
Total
Source:
Note:

100% Reduction
20.3
(17.9)
(2.4)
6.2

6.9
2.8
7.1
43.4

Current Plan

Difference

6.3
(5.7)
(0.6)
2.3
2.2
1.1
2.2

14.0
(12.2)

14.1

0.8)
3.9
4.7
1.7
4.9
29.3

Based on HIPC Documents, credilor statementsfrom the MDBs or, In the absence oj such information.
the Debt Reporting System database of the WorldBank. The data are for the 40 HIPCs.
The totals may not sum up due to rounding.

2 This assumes that the IMF and the World Bank cover 100% of their costs (NPV $8.6 billion), and that all other
multilateral creditors together cover one-third of their total costs (NPV $1.8 billion).

U.S. Department of the Treasury Response to the IFI Advisory Commission
Debt Reduction/or the HIPCs - Page.//

Implications of 100 Percent Debt Write-off
A significant portion of new concessional assistance from the MOBs comes from resources that
are being paid back to the institutions by previous borrowers. For example. under the current
IDA-12 replenishment, about 38 percent of the resources for new lending will come from repaid
loans, or "reflows." The most striking impact of the Commission's recommendation that IFls
write off 100 percent of HIPe debt is that reflows to the concessional windows of the MDBs
would be cut by almost half, or about $31 billion (nominal) over the next twenty years. Reflows
to IDA would be cut by roughly 40%, reflows to the IDB's concessional window would be
reduced by about one-third, and reflows to the African Development Fund would be cut by over
80%. Not only would this result in substantially fewer funds for future lending to the HIPCs. it
would also leave fewer funds for non-HIPe countries that use concessionalloan facilities at the
MDBs. To the extent that complete debt forgiveness would also require reducing development
assistance for poor non-HIPC countries, it would in effect be ""the poor funding the poor."
Concessional finance available for Africa, the continent with the most HIPCs, would be hurt
most of all.
Moral hazard and inequity of treatment

In recommending that 100% of HIPe debt be cancelled, the Commission arbitrarily draws a line
between HIPCs and non-HIPCs in terms of debt sustainability. HIPes would have 100% of their
debt cancelled, while other poor and indebted non-HIPes would receive no debt reduction. The
purpose of the enhanced HIPe initiative is, in part, to reduce HIPC debt to a manageable level,
placing the HIPes on a more equal footing with other developing countries. Writing off 100%
of the debt for a specific group of impoverished countries poses a severe moral hazard for other
poor countries. In a sense, 100% debt cancellation rewards those poor countries with very high
debt levels in a manner that is likely to reduce future development assistance for other poor
countries.

U.S. Department of the Treasury Response to the IFI Advisory Commission
Response to the Recommendations on Reform of the BIS - Page.J2

Response to the Recommendations on Reform of the
Bank for International Settlements (BIS)
The Commission recommends that the BIS should promulgate new liquidity
standards to reduce the risk offinancial crises, while remaining afinancial
standard setter. It also recommends that the Basel Committee on Bank
Supervision align its risk measures more closely with credit and market risk. The
Commission calls for unspecified organizational reform and for expansion to be
gradual and deliberate so as to avoid disruption of the information exchange.
In general, we support the Commission's recommendations regarding the BIS, as they largely
reflect U.S. views and the current initiatives of the BIS.
The BIS contributes to the promotion of international financial stability by providing a forum for
international monetary and financial cooperation. The BIS hosts meetings of central bankers and
provides facilities for various groups. including the Financial Stability Forum secretariat and the
committees of the 0-10 governors.
The committees of the 0-10 governors (which include the Basel Committee, the Committee on
the Global Financial System. and the Committee on Payment and Settlement Systems), the
International Organization of Securities Commissions and the International Association of
Insurance Supervisors identify best practices and develop guidelines and standards. We believe
that the efforts of these standard-setting bodies play an important role in the strengthening of the
international financial system, thereby reducing the risk of future financial crises.
The United States has actively supported the updating and strengthening of capital adequacy
standards as promulgated by the Basel Committee. In June 1999, the Basel Committee released
a consultative paper on proposed changes to its 1998 Capital Accord. The proposed changes are
intended to more closely align capital with credit risk and to ensure that capital adequacy
standards remain responsive to innovations in risk management practices. The three pillars of
the Basel Committee's new capital adequacy framework are enhanced, risk-sensitive, minimum
capital requirements, an improved supervisory review process, and more effective use of market
discipline through disclosure. We support the further efforts of the Basel Committee that will
continue through 2000.
We agree with the Commission that expansion of membership in the BIS should be judicious and
deliberate. We believe that the recent additions to shareholder membership have been beneficial,
particularly as they have produced a more inclusive forum for central bankers to discuss the
prevention and resolution of financial crises. The BIS added to its membership nine new central
banks in 1996 and five more in 1999.

u.s. Department of the Treasury Response to the IFI Advisory Commission
Response /0 the Recommendations on Reform of the UTO - Page 43

Response to the Recommendations on Reform of the
World Trade Organization (WTO)
The Commission recommends that the WTO should not impinge on national
sovereignty, either directly or indirectly through WTO rulings or decisions. For
countries that do not comply with WTO dispute settlement panels, the Commission
recommends that Jines or trade liberalization should replace the ability of
countries to take compensatory action through import restraints.

The Commission's recommendations are based on a misunderstanding of the WTD. The United
States maintains its national sovereignty as a member of the WTD. No ruling or decision by the
WTO can extend the scope of U.S. commitments in the WIO without explicit legislative action
by the U.S. Congress. Neither the WIO nor its dispute settlement panels can force the United
States to change its laws~ only Congress can change U.S. law.
Retaliation by the prevailing party through import restrictions is clearly a less desirable outcome
to a WIO dispute than compliance by the losing party with a WIO ruling. Indeed, the WIO
agreement describes compliance as the preferred outcome. If the parties to a WTO dispute want
to resolve matters by agreeing on equivalent, compensating trade liberalization, they can do so
under the existing WTO rules. However, compensation depends upon the willingness of the
offending party to provide compensation, and the parties must agree that such compensation
would offset the harm done to the economy of the injured party.
Failing compliance or mutually acceptable compensation, however, it is in the interest of the
United States to have the suspension of benefits as an incentive for compliance. The injured
party must have recourse to the most effective means to reestablish the balance of rights and
obligations upset by violations ofWIO obligations. Io that end, a system of fines does not
seem to represent aneffective or practical response. It is not clear how the WTO could enforce
the payment of fines. Moreover, such fines could be perceived by member states as an
unacceptable infringement on national sovereignty.

Section 102 of the Uruguay Round Agreements Act, enacted by the U.S. Congress in 1994 to implement the
Uruguay Round, which established the WTO, provides explicitly that no provision of the WTO Agreement, nor the
application of any such provision to any person or circumstance, that is inconsistent with any U.S. law shall have
effect. Private parties legally cannot use the WTO Agreement as a basis for challenging any Federal, state or local
action in court.
I

u.s. Department of the Treasury Response to the IFI Advisory Commission
Response to the Statement b.-v Commissioner Levinson - Page 44

Response to the Statement by Commissioner Levinson
Commissioner Levinson recommends, inter alia, that continued u.s. support for
the Bretton Woods institutions should depend on the Us. voting against IFI
financing for countries that are egregious abusers of core worker rights. He also
recommends amendments to the WTO Agreement so it includes a core workers'
rights provision and a new chapter to prevent narrow interpretations of GA IT
Article XX "health and safety" and "endangered species" provisions. He also
recommends that the USED have a stated policy that requires private sector
creditors and investors to provide a substantial contribution to the finanCing of
Fund programs.

Labor Standards in the IFIs
The United States has pursued a variety of initiatives in support of core labor standards in the
programs and policies of the IMF and MDBs.2,3 The Treasury Department has put in place a
process by which core labor standards are routinely assessed in the context of its review of IFI
loans as well as of planning and surveillance instruments. This process provides for input from
the Departments of Labor and State, the International Labor Organization (ILO), and national
and intemationallabor union organizations and NGOs.

The U.S. Executive Directors have made clear, on numerous occasions, support for core labor
standards, including rights of association and collective bargaining, and frequently raise concerns
related to these rights, where relevant, in IMF and MDB programs in specific countries.
Through these interventions, the U.S. has played a key role in securing protection for core labor
standards in several important areas:
•

U.S. efforts resulted in protections against the use of child labor in projects in Bangladesh
and Indonesia and the establishment, within the World Bank, of a Child Labor Program
dedicated to supporting efforts to combat child labor and other child labor-related programs.

•

Several of the MDBs have adopted policy guidelines protecting labor rights and standards in
lending programs, including rights of association and collective bargaining, and assessing
core labor standards in their planning processes.

2 U.S. policy on labor issues at the IFIs is guided by Section 526 (e) of P.L. 103-306, the Foreign Operations, Export
Financing, and Related Programs Appropriations Act, 1995, and Section 610 (a) of the Foreign Operations, Export
Financing, and Related Programs Appropriations Act, 1999.

Pursuant to Section 526 (e) of P.L I 03-306, Treasury reports annually on the full range of its engagement on labor
issues at the IFIs in its Annual Report to Congress on Labor Issues and the International Financial Institutions. The
most recent report was submitted in December 1999.
3

u.s. Department of the Treasury Response to the IFI Advisory Commission
Response to the Statement by Commissioner Levinson - Page -15

•

The World Bank has established a Labor Markets Group that works closely with the ILO.
trade union and employer organizations. and other external partners. The Group supports
World Bank staff and borrowing countries through research and analysis. training. and
operational support, on the full range of labor standards and related labor issues.

Treasury's objectives are to help ensure that IFI policies and practices with respect to labor
issues are consistent with our support for core labor standards, and that project assistance be
extended, where relevant, in support of core labor standards. In this area of IFI refonn. we also
believe that there is important, further scope for changes. We will continue to press for more
attention to key labor issues in the work of the IMF and MDBs and greater cooperation with the
ILO. Our objectives require a multifaceted approach, which includes, and extends considerably
beyond. votes and statements before the respective Executive Boards.

Amendments to the WTO
With respect to the World Trade Organization, the Administration continues its efforts to
develop a consensus within the WTO on the relationship between trade and labor in response to
many of the same concerns and issues that were presented to the Commission and formed the
foundation of Commissioner Levinson's dissent from the Majority Report. The WTO Singapore
Ministerial Declaration renewed the commitment of WTO members to the observance of
internationally recognized core labor standards. WTO members also stated that the International
Labor Organization (ILO) is the competent body to set and deal with the standards and affirmed
their support in promoting them. We believe that the WTO and ILO would benefit from active
collaboration and that the WTO should have a key role in analyzing the fundamental
relationships between trade and labor. It is for this reason that the Administration has proposed a
WIO Working Group on Trade and Labor.
The Administration does not believe that it is necessary to create a new chapter in the WTO
Agreement to address the provisions of Article XX(b) and (g) on "health and safety" and
"endangered species." The WTO's Appellate Body has explicitly rejected the view that
exceptions such as GATT Article XX must be interpreted narrowly. It is simply not accurate to
say that u.S. invocations of exceptions under Article XX have been rejected in the three cases
mentioned.

Private Sector Involvement in Addressing Financial Crises
The u.s. Treasury supports appropriate contributions of private creditors to the financing of
Fund recovery programs. Where possible, the official sector, through its conditionality, should
support approaches - as in Korea and more recently in Brazil- that enable creditors to recognize
their collective interest in maintaining positions, despite their individual interest in withdrawing
funds. However, it would be counterproductive to make a fonnal contribution from private
creditors a requirement for all Fund lending. In some cases, the combination of catalytic official
financing and policy adjustment should allow the country to return quickly to private markets to
meet its financing needs and should depend on the specific circumstances of the crisis country.
Such flexibility is essential to the Fund's ability to promote effective adjustment and to catalyze
effective solutions to financial crises.

u.s. Department of the Treasury Response to the IFI Advisory Commission
Appendix - Page A. I

Appendix

Foreign Operations, Export Financing and Related Programs
Appropriations Act, 1999

Section 603. Advisory Commission
(a)

IN GENERAL.-The Secretary of the Treasury shall establish an International Financial
Institution Advisory Commission (in this section referred to as the "Commission").

(b)

MEMBERSHIP.(1)

(c)

IN GENERAL.-The Commission shall be composed of 11 members, as follows:
(A)

3 members appointed by the Speaker of the House of Representatives.

(B)

3 members appointed by the Majority Leader of the Senate.

(C)

5 members appointed jointly by the Minority Leader of the House of
Representatives and the Minority Leader of the Senate.

(2)

TIMING OF ApPOlNTMENTS.-All appointments to the Commission shall be made
not later than 45 days after the date of enactment of this Act.

(3)

CHAIRMAN.-The Majority Leader of the Senate, after consultation with the
Speaker of the House of Representatives and the Minority Leaders of the House
of Representatives and the Senate, shaH designate I of the members of the
Commission to serve as Chairman of the Commission.

QUALlFICATIONS.(I)

EXPERTISE.-Members of the Commission shall be appointed from among those
with knowledge and expertise in the workings of the international financial
institutions (as defined in section 1701 (c )(2) of the International Financial
Institutions Act), the World Trade Organization, and the Bank for International
Settl ements.

(2)

FORMER AFFILIA nON .-At least 4 members of the Commission shall be
individuals who were officers or employees of the Executive Branch before
January 20, 1992, and not more than half of such 4 members. shall have served
under Presidents from the same political party.

u.s. Department of the Treasury Response to the IFI Advisory Commission
Appendix - Page A.2

(d)

PERIOD OF ApPOINTMENT; V ACANCIEs.-Members shall be appointed for the life of the
Commission. Any vacancy in the Commission shall be filled in the same manner as the
original appointment was made.

(e)

DUTIES

(f)

(g)

OF THE COMMISSloN.-The Commission shall advise and report to the Congress
on the future role and responsibilities of the international financial institutions (as defined
in section 1701(c)(2) of the International Financial Institutions Act), the World Trade
Organization, and the Bank for International Settlements. In carrying out such duties. the
Commission shall meet with and advise the Secretary of the Treasury or the Deputy
Secretary of the Treasury, and shall examine(1)

the effect of globalization, increased trade, capital flows, and other relevant
factors on such institutions;

(2)

the adequacy, efficacy, and desirability of current policies and programs at such
institutions as well as their suitability for respective beneficiaries of such
instituti ons;

(3)

cooperation or duplication of functions and responsibilities of such institutions;
and

(4)

other matters the Commission deems necessary to make recommendations
pursuant to subsection (g).

POWERS AND PROCEDURES OF THE COMMISSION.(1)

HEARINGs.-The Commission or, at its direction, any panel or member of the
Commission may, for the purpose of carrying out the provisions of this section,
hold hearings, sit and act at times and places, take testimony, receive evidence.
and administer oaths to the extent that the Commission or any panel or member
considers advisable.

(2)

INFORMATIoN.-The Commission may secure directly infonnation that the
Commission considers necessary to enable the Commission to carry out its
responsibilities under this section.

(3)

MEETINGs.-The Commission shall meet at the call of the Chairman.

REpoRT.-On the tennination of the Commission, the Commission shall submit to the
Secretary of the Treasury and the appropriate committees a report that contains
recommendations regarding the following matters:
(1)

Changes to policy goals set forth in the Bretton Woods Agreements Act and the
International Financial Institutions Act.

(2)

Changes to the charters, organizational structures, policies and programs of the
international financial institutions (as defined in section 170 I (c )(2) of the
International Financial Institutions Act).

u.s. Department of the Treasury Response to the IFI Advisory Commission
Appendix - Page A.3

(3)

Additional monitoring tools, global standards. or regulations for, among other
things, global capital flows, bankruptcy standards, accounting standards, payment
systems, and safety and soundness principles for financial institutions.

(4)

Possible mergers or abolition of the international financial institutions (as defined
in section 1701(c)(2) of the International Financial Institutions Act), including
changes to the manner in which such institutions coordinate their policy and
program implementation and their roles and responsibilities.

(5)

Any additional changes necessary to stabilize currencies, promote continued trade
liberalization, and to avoid future financial crises.

(h)

TERMINA TION .-The Commission shall terminate 6 months after the first meeting of the
Commission, which shall be not later than 30 days after the appointment of all members
of the Commission.

0)

REpORTS BY THE EXECUTIVE BRANCH.(1)

Within three months after receiving the report of the Commission under
subsection (g), the President of the United States through the Secretary of the
Treasury shall report to the appropriate committees on the desirability and
feasibility of implementing the recommendations contained in the report.

(2)

Annually, for three years after the termination of the Commission, the President
of the United States through the Secretary of the Treasury shall submit to the
appropriate committees a report on the steps taken, if any, through relevant
international institutions and international fora to implement such
recommendations as are deemed feasible and desirable under paragraph (1).

DEPARTMENT

lREASURY

OF

THE

TREASURY

NEWS

~178~9~. . . . . . . . . . . . . ..

. . . . . . . . . . . . . . . .

OffiCE OF PUBUC AFFAIRS • 1500 PENNSYLVANIA AVENUE, N.W .• WASHINGTON, D.C .• 20220. (202) 622-2960

EMBARGOED UNTIL 9:30 A.M. (EDT)
Text as prepared for Delivery
June 13, 2000
TREASURY UNDER SECRETARY GARY GENSLER
JOINT SENATE BANKING SUBCOMMITTEES ON SECURITIES
AND FINANCIAL INSTITUTIONS
Chairmen Grams and Bennett, Ranking Members Dodd and Bryan, Members of the
Subcommittees, thank you for the opportunity to appear here today to discuss the regulation of
merchant banking activities under the financial services legislation.
The enactment of financial modernization legislation was intended to stimulate greater
competition and innovation in the financial services industry. The Administration and Treasury
strongly supported the enactment offinancial modernization legislation and worked hard to produce
a balanced bill that serves the interests of consumers, companies, and the economy. As part of that
legislation, banks are allowed' to engage in merchant banking activities, both as intermediaries and as
investors, to enable them to better compete with other institutions that are active in these markets.
At the same time, however, Congress intended to lirnit the mixing of banking and commerce and to
ensure that merchant banking activities are conducted in a safe and sound manner
The new mercJ1ant banking authority provided under the financial modernization legislation
significantly expands the ability ofbank atliliates to invest in the private equity market. \\' e and the
Federal Reserve Board are in the midst of a rule-writing process implementing the merchant banking
provisions of the financial modernization legislation As part of this process, we are consulting
broadly to ensure that those rules fully carry out Congress's intent to grant financial holding
companies this impol1ant new authority and to preserve the safety and soundness of Ollr financial
system, the strongest and most vibrant in the world

I would like to discllss four areas in my remarks today
•

First, the nature of merchant banking aile! private equity investments and their role

If1

our

capital markets
•

Second, the current role Df flllancial Institutillns in merchant banking. and the pri\ate equity
market

LS-696
For press releases, !Jpeeches, public schedules and official biographies, call our 24~our fax line at (202) 622-2040
'U 5 Government Pr,r:,ng (-<:e '0-38 - ,. ,...S::

•

Third, the approach ~aken in last year's financial modernization legislation in authorizing
participation by financial holding companies in the private equity market.

•

Finally, how the Federal Reserve and the Treasury Department have proposed to use their
rule-writing authority to implement this legisladon.

Merchant Banking and Private Equity Investment

The most important thing to understand about investments in the private equity market, or
as it is often called, merchant banking, is that these investments are generalIy higher risk, longer term,
illiquid investments. To help you better understand this market, let me begin by describing the history
and size of the private equity market, the nature of the investments and the risks they pose, and the
vehicle through which most of these investments take place, the private equity partnership
History and Size of Private Equity Investing
Private equity investing has been a feature of the capital markets for centuries. Private equity
investments generally are understood to include transactions undertaken by professional investors in
unregistered shares of private or public companies The organized private equity market represented
over $400 billion in assets uI1der management as of year-end 1999. Until the 1950s, private equity
investing was largely the domain of wealthy individuals. Families like the Whitneys and Rockefellers
made significant venture capital investments in the post-war period. Institutions started to become
involved in this type of investing in the 1960s and 70s, through direct investments, limited
partnerships, and Small Business Investment Companies ("SBIes").
After a series Gftax and pension law changes in the late 1970s, limited partnerships became
the predominant vehicle for collective investment in private equities, leading to dramatic growth in
this market. Although information on this market is limited, the available data indicate that the
organized private equity market has grown from under $5 billion of private assets under management
in 1980 to over $400 billion in 1999, a more than 80-fold increase over twenty years. This growth
has paralleled a long period of strong growth in the public equity market. During this time, the public
equity market has grown from approximately $1.5 trillion in 1980 to over $17 tri\1ion in 1999, an
approximately 12-fold increase.
During the period from 1980 to 1999, the composition of the private equity market shifted
significantly. In 1980, approximately two-thirds of private equity investments were in the form of
venture capital, that is, investments in start-up or early stage companies. By 1999, venture capital
investments had fallen to one-third of the private equity market From 1980 to 1999, non-venture
capital investments grew almost ISO-fold and now constitute two-thirds of the private equity market
While leveraged buy-outs represent the bulk of non-venture capital investments, sLlch ill\·estments
also include privately held, middle-market companies and companies in financial distress

Nature of the Investments
Private equity generally is the most expensive form of finance available. Equity investing, by
its nature, represents the highest-risk part of the capital structure, because it has the lowest priority
of claim on the cash flow of a company. Private equity investing adds further risk elements. First,
these investments are illiquid, as they cannot be readily bought or sold the way registered shares of
a publicly held company can be. Second, the investments generally are made in higher risk
companies, such as start-ups, leveraged buy-outs, or similar investments Third, the investments are
typically held for the intermediate to longer term in the expectation of higher returns for higher risk.
Private equity investors demand high rates of return to compensate for the risks associated
with these investments. For venture capital investments, there are significant risks that a product or
strategic plan of a start-up company may prove unworkable. For a leveraged buy-out of an existing
firm, there are significant risks associated with the high levels of debt a company takes on in
connection with such a buy-out.
Private equity investments generally are longer-term investments. They are generally held
from three to seven years, and may be held longer. These investments tend to be illiquid, in part
because the securities generally are not registered or the companies are not public. The ownership
stakes held by private equity investors also tend to be quite large, further contributing to the illiquidity
of the investments. Investors often will have controlling or majority stakes in companies.
Private equity investments are made with a goal of eventual resale. An investor's exit strategy
may consist of selling a stake in a company through a merger or acquisition or taking the company
public. The ability of investors to successfully exit an investment and realize any appreciation in value
depends in large part on how receptive markets are to such a sale. Thus, one of the most important
opportunities and risks of private equity investing relates to the performance of the equity and merger
markets.
We are currently in the midst of the longest economic expansion in our history. In addition,
the u.s. capital markets have had a long period of strong performance. Experience over the last
decade, therefore, can provide only partial guidance as to the riskiness of private equity investments
in the future. We should be careful not to let today's confidence lead to complacency as to the
general risks associated with these investments in the future.
Private Equity Partnerships
Let me briefly describe the vehicle by which most of these investments take place The best
estimates are that approximately 80 percent of private equity is invested through limited pal1nerships
These partnerships generally have a professional asset manager acting as the general partner The
general partners most frequently are independent private tirms that are not aHiliated with either
commercial or investment banking organizations The investors are generally public or pri\ate
pension plans, endowments, foundations, coq)orations, and wealthy individuals

')

.1

For many of these investors, the funds placed with private equity paI1nerships represent a
portion of their funds that they dedicate to higher risk assets. Other high risk investments sometimes
include investments in real estate or hedge funds. Indeed, the partnerships that invest in the private
equity market are set up in much the same way as hedge funds. An important difference between
private equity partnerships and hedge funds, however, is that private equity partnerships generally do
not use leverage within the partnership. The portfolio companies themselves, however, often do have
leverage.
Role of Financial Institutions in the Private Equity Market

Let me now turn to the role of financial institutions in the private equity market. While
private equity investment takes place largely outside of financial services firms, commercial and
investment banks play' a number of roles in this market, as agents, intermediaries, and investors
As agents or underwriters, financial services tlrms provide services to investors, companies,
and asset managers. In particular, they raise funds for portfolio companies and partnerships and
advise on mergers and acquisitions. They also act as intermediaries, managing private equity
partnerships and investments for others. Investment banks, in particular, are active in each of these
areas. In these roles, financial services firms generally are more insulated from risk than t hey are
when acting as investors
Conunercial and investment banks also are investors in the private equity market. Investment
in private equity by commercial and investment banks has grown during the last ten years \Vhile
precise figures are not available, the best estimates are that these investments currently represent
roughly 20 percent of the organized private equity mark~t. Investment banks have invested in pri\'ate
equities since the 1970s, generally as a complement to their management of private equity
partnerships. Some of the earliest venture capital partnerships, such as the Sprout Group, were
formed by investment banks.
Prior to enactment of the financial modernization legislation, commercial banks and their
affiliates had limited authority to invest in equities through Edge Act corporations, under the Bank
Holding Company Act: and through SBICs. These investments accounted for just under ten percent
of the total investments in the pri~ate equity market. This activity has been concentrated in a few
large banks, with the top ten commercial banks accounting for an estimated 90 percent of the total
private equity investments held by commercial banking organizations
Currently about $S 3 billion, or approximately 14 percent, of the private equity investments
held by commercial banks are invested through SBICs While this is only a small portion of
commercial bank investment in private equity overalL commercial banks represent 60 percent of the
total private investment in SBICs

4

Financial Modernization
In removing many of the restrictions of the Glass-Steagall Act to allow broader affiliations
offinancial services finns, last year's financial modernization legislation sought to provide increased
competition and innovation in financial services The legislation permits financial services firms to
participate more broadly in merchant banking activities.· This will enable commercial and investment
banks to affiliate while allowing investment banks to retain their private equity investments. We fully
support this "two-way street" approach. In addition, the legislation allows financial services firms
to take advantage of the complementary nature of private equity investing with many of their existing
activities.
Nonetheless, the legislation does not allow for unrestricted merchant banking activities When
the President laid out his four key principles for achieving an acceptable financial modernization bill,
one was to ensure that. the legislation did not permit inappropriate mixing of banking and commerce.
We had learned important lessons from the experience of other countries, and we did not want to
repeat their experience in our country. In particular, we had seen the risk of permitting combinations
of companies that allocate capital with those that compete for capital. After much debate, Congress
concluded that we should be cautious about allowing banking and commerce to mix through the
affiliation of financial and commercial organizations
The United States has the most efficient capital markets in the world. The allocation of capital
and risk in our markets is not burdened by corporate affiliations or relationsrups between financial and
commercial enterprises. Other countries, both in Europe and in Asia, allow their banks to have direct,
long-standing, ownership interests in commercial finns None of these countries, however, has capital
markets as efficient and as well-developed as ours. None has a capital market that contributes so
successfully to its economy as ours does.
Congress followed two key principles in authorizing financial holding companies to engage
in newly authorized merchant banking activities - first, to maintain an appropriate separation between
banking and commerce, and second, to ensure that merchant banking activities are conducted in a safe
and sound manner. To achieve these objectives, the Act permits financial services companies to
engage in the newly authorized activities only if the following conditions are met
•

To become a financial holding company, and thus conduct merchant banking acti\·ities, an
organization must be well-managed and well-capitalized.

•

The financial services holding company mLlst have either a securities aftiliate or an insurance
underwriter and a registered investment adviser that advises an insurance company to ensure
there is some level of capital markets experiise and controls within the organization

•

The activity 111ust be par1 of a "bona tide" undenvriting or merchant or investment banking
activity, including investments engaged in for the purpose of appreciation and ultimate resale.

•

The investments must be held only for a period oftimc that cnablcs their sale or disposition
on a reasonable basis consistent with the tinancial viability of the investment activities

•

The company must not manage or operate the portfolio companies on a day-to-day basis
except as may"be necessary or required to obtain a reasonable return on investment upon
resale

In addition, the Act restricts cross-marketing between a depository institution and its holding
company's portfolio investments. It also provides that a portfolio company is presumed to be an
aftiliate under section 23A of the Federal Reserve Act if a holding company holds 15 percent or more
of its capital.

Implementing Rules
Finally, Congress provided joint rule-writing authority to the Treasury and the Federal
Reserve Board to ensure that merchant banking activities would be conducted in a safe and sound
manner and would preserve an appropriate separation between banking and commerce. As Chainnan
Gramm stated, "[t]he conferees ... have specifically authorized the Federal Reserve and the Treasury
Department to jointly issue rules on merchant banking activities. If the regulators determine that any
such rulemaking making may be necessary and desirable going forward, the conferees encourage them
to act expeditiously." Commenting on the rulemaking authority in separate statements during floor
debate on the conference report, Conference Chainnan Leach and Senator Sarbanes each stated that
"under the [rulemaking] authority, the Federal Reserve and the Treasury may define relevant terms
and impose such limitations as th~y deem appropriate to ensure that this new [merchant banking]
authority does not ." undermine the safety and soundness of depository institutions or the Act's
general prohibitions on the mixing of banking and commerce."
We are currently in the midst of the rule-making process. Two rules have been published for
comment. The first is an interim rule and request for comments published jointly by Treasury and the
Feder~l Reserve implementing the merchant banking provisions of the legislation The interim rule
addresses issues such as pennissible investments, risk management, holding periods and other issues
The second is a proposed rule published for comment by the Federal Reserve that would establish
capital requirements at the bank holding company level for equity investments
The comment period on each of the requests for comment recently closed We are currently
reviewing and analyzing the comments received. We plan to discuss the issues raised by commenters
both with the Federal Reserve and with the other bank regulatOlY agencies It is therefore premature
to make any predictions as to how we will resolve any of the issues addressed in the comments
In developing these rules, Treasury and the Federal Reserve not only relied on institutional
knowledge of the financial markets, but also conducted research and broad surveys of market
participants Intervie.ws with some of the larger financial firms engaged in merchant banking
highlighted current industIY practices, includin'g holding periods, involvement in the management of
portfolio companies, and monitoring and risk management systems.

The finns we interviewed clearly recognized that private equity investments often are riskier,
less liquid and more volatile than other types of investments. These investments also often involve
investment in leveraged companies. Consequently, these investments require greater capital support
and careful monitoring and risk management. This was consistent with what I had seen in my 18
years on Wall Street. The interim rule is meant to be cbnsistent with industry practices in making,
monitoring and managing the risks associated with merchant banking investrnents
Interim Rule
The interim rule includes six main provisions
•

Holding periods for merchant banking investments. The rule generally permits a ten year
holding period for direct investments and a fifteen year period for investments held through
private equity funds. A longer holding period may be approved by the Board on a case-bycase basis. The maximum holding periods permitted under the interim rule are longer than
current industry practice Further, the longer periods permitted for investments held through
private equity funds are intended to recognize the added market discipline that such funds
bring to bear on merchant banking activities.

•

Restricts routine management of portfolio companies. The interim rule implements the
provisions of the financial modernization legislation that generally prohibit a financial holding
company from operating a portfolio company on a day-to-day basis. The rule also describes
the circumstances under which routine management is permissible and includes certain safe
harbors. First, the interim rule allows a financial holding company to appoint directors
without limitation, including directors that are employees of the holding company. Holding
company employees who are directors can exercise all powers as directors. Second, the
holding company may select the senior officers of the company. Third, through particular
covenants, the holding company may require the portfolio company to obtain the approval
of the holding company for certain actions outside of the ordinary course of business, such
as significant changes'in the business plan, redemptions of stock, or sales of significant assets

•

Establishes recordkeeping and reporting requirements.
The interim rule includes
record keeping and reporting requirements that are designed to ensure that both the financial
holding company and the Board can adequately monitor the exposure of the firm and its
compliance with applicable limitations.

•

Restricts cross-marketing by an atftliated bank The rule implements the restrictions of the
legislation on the ability of depository institutions to cross-market with a portfolio company
held by a financial holding company afTiliated with the depository institutions

•

Presumption of control under section 23A The interim rule adopts the presumption of control
provided in the legislation for the purpc)se of applying the limits of section 2JA of the Federal
Reserve Act to transactions between portfolio companies and an at1lliated deposito[\.
7

institution. A financiql holding company is presumed to control a portfolio company if it has
an interest of 15 percent or more of its equity capital.
•

Establishes transitional caps on investments. As an interim measure, the rule establishes caps
on the amount of merchant banking investments that a financial holding company may make
under the new merchant banking authority. Under the first cap, a financial holding company's
merchant banking investments may not exceed the lesser of 30 percent of the company's Tier
1 capital or $6 billion. The' second cap, which applies only to investments that have not been
made through a private equity fund, limits merchant banking investments to the lesser of20
percent of the holding company's Tier I capital or $4 billion. The caps may be exceeded with
the approval of the Board.

It is important to note that the interim rule applies only to activities conducted under the new
merchant banking authority and does not apply to investments made under previously existing
authority. It does not apply to or in any way limit the ability of banking organizations to continue
to use other investment authority that predates the financial modernization legislation
Capital rule

In addition to the rule that Treasury and the Federal Reserve have jointly issued on the new
merchant banking activities, the Federal Reserve has proposed, with our participation and support,
a rule governing the regulatory capital treatrnent of equity investments in non-financial firms
The Board's capital proposal would place a 50 percent capital requirement at the holding
company level for such investments throughout a bank holding company. The capital requirement,
as proposed, would apply not only to newly authorized merchant banking investments, but also to
certain specified investments made 'under previously existing investment authorities, including equity
investments made by banking organizations through SBICs and Edge Act corporations. I would like
to note here that these capital requirements would not apply to investments through SBICs made by
organizations that are not affiliated with a depository institution.
Given the risks of merchant banking investments, no one would suggest that it is appropriate
for an institution to borrow $24 of debt, add one dollar of equity, and invest $25 in a private equity
investment. This, however, is what is permitted by existing regulatory capital rules. The 50 percent
regulatory capital requirement proposed by the Federal Reserve would allow financial holding
companies to modestly leverage one dollar of equity with one dollar of borrowing to invest two
dollars in private equity investments The proposed requirement is halfofthe customary 100 percent
equity capital that is raised by private equity partnerships managed by non-tinancial services
institutions. The 50 percent requirement also is within the range of economic capital often held by
financial services tirms to support private equity investment
We and the Federal Reserve have received signitlcant comments with respect to the proposed
capital requirements. Comlllenters have raised concerns as to the appropriate level of the capital
requirement and the scope of its application with respect to investments under pre-existing authority

While Governor Meyer will discuss these issues further, I know that both the Federal Reserve and
the Treasury will be considering all these comments carefully prior to publication of final rules.

Conclusion
At the present time, ,we continue to review the comments received on the rules and will
carefully consider the impOliant issues raised by the commenters. As we move forward, Treasury and
the Federal Reserve will work closely to ensure that the new merchant banking authority is used in
a way that preserves the safety and soundness of our financial institutions and the strength of our
capital markets.
Thank you. I will be happy to answer your questions.

--30--

9

DEPARTMENT

OF

THE

TREASURY
,

NEWS

~~J78q~. . . . . . . . . . . . . . . . . . . .. .
,

....................

OmCE OF PUBUC AFFAIRS • 1500 PENNSYLVANIA AVENUE, N.W.• WASHINGTON, D.C. • 20220. (202) 622·2960

EMBARGOED UNTIL 10:00 A.M. (EDT)
Text as prepared for Delivery
June 14, 2000
TREASURY UNDER SECRETARY GARY GENSLER
HOUSE COMMITTEE ON BANKING AND FINANCIAL SERVICES
Mr. Chairman, Ranking Member LaFalce, and Members of the Committee, thank you
for inviting me here this morning to present the Administration's views on personal financial
privacy. I am pleased to have the opportunity to discuss these important issues, and to
comment on H.R. 4585, the Medical Financial Privacy Protection Act introduced by Chairman
Leach last week.
Protecting consumers privacy is of the utmost importance to the President and the
entire Administration. We want to work with Congress to provide Americans with the
comprehensive financial privacy protections they expect and deserve. Our financial system's
future growth rests in no small part on continued consumer confidence. Effective privacy
protections are an important foundation for that confidence. While we made some significant
progress toward this goal in the financial modernization bill signed by the President last year.
we believe more work can and should be done in this area.
To that end, the President announced an important new legislative proposal in April,
2000 to provide Americans with fully effective financial privacy protections. The plan
enhances consumer choice and control in several important ways. In particular, it provides
special protections for especially sensitive information, including the use of medical
information in financial settings.
My testimony is divided into four main parts:
•

First, I will discllss the importance of privacy protections and the changes
services industry that are making this <til ever-more important issue.

•

Second, I will review last year's efforts to improve personal privacy protections, inclucling
the provisions in the financial moderniLation bill.

•

Third, I will outline the President's comprehensive ConSllmer Financial Privacy Act

III

tile financial

initiative.
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•

Finally, I would like to cominent on medical pnvacy, and discuss the bill introduced last
week by Chairman Leach.

I. The Importance of Privacy in America's Chan~in~ Financial Markets

Personal privacy is a fundamental and highly prized American right. From our nation's
earliest days, citizens have been concerned about intrusions into their private lives, and have
fought to protect themselves from unwarranted invasions of their privacy. Over time, ideas
regarding what constitutes appropriate privacy protection have changed as our society and
economy have evolved.
Many Americans increasingly feel their privacy threatened by those with whom they do
business. These concerns 'are particularly acute when it comes to the privacy of financial
information, because financial data can be used to paint such a detailed portrait of an
individual's life. Financial institutions and other firms are able to consolidate and process
information about individuals' spending and investing habits in ways that were almost
inconceivable even a decade ago.
These capabilities are increasing public anxiety about just who has access to sensitIve
financial information, and what they will be able to do with it. A significant majority of
Americans are deeply concerned about the effects that changes in technology are having on
their ability to preserve, in the words of Justice Louis Brandeis, "the right to be let alone."
Americans want the ability to earn, invest, and spend their money without having to
worry about that information being obtained - and perhaps llsed to their disadvantage - by
firms unknown to them, or having that information open to inspection by the world at large.
Just as we do not expect letter carriers to read our mail, we do not expect financial institutions
to amass information about our transactions, consolidate and process it, and use it for purposes
that we never intended. We are in the midst of three sea-changes in the financial services
sector, however, that make such uses of information an increasing possibility: industry
consolidation, a technologi.cal revolution, and a ll10ve away from cash towards electronic
transactions.
Changes in Industry Structure. Integration and consolidation in the financial sector is
changing the outlook for data privacy. Banks have moved into insurance and securities
activities, insurance companies offer products that compete with bank products, and investment
banks are in the lending business. Thanks to the hard work of Chairman Leach, Ranking
Member LaFalce, Members of this Committee, and Illany others, last year tile President was
able to sign into law a financial modernization package that finally eliminated legal barriers to
this consolidation. These changes will bri ng considerable benefits to consumers in the form of
increased competition and greater innovation, The c1esi re of integrated financial services firms
to profit from their scale has createel a powerful incentive to treat consumer clata as a business
asset, however, which raises concerns about how that information will be used and controlled.

Technological Advances. Changes in technology have brought the ability to generate,
process, and use information in ways unimagined when most of our commercial and consumer
protection laws were written. These advances have been particularly important in the financial
sector, where firms are spending billions of dollars each year on computers and software to
reduce costs and improve service. These increasingly sophisticated tools and larger stores of
transaction and othe( financial information, however, have given consumers pause about the
potential uses of the data held by 'banks, insurers, and other financial firms.
The Move to Electr'onic Transactions. Finally, the explosion in the use of electronic
payments and receipts is also driving concerns about data handling and use. Americans'
increasing use of credit cards, debit cards and (more recently) electronic bill payment in lieu of
cash now allows financial services companies to collect a far greater amount of information on
each individual's transactions.
Taken together, these three trends - industry consolidation, technological advances, and
the movement from cash to electronic payments and receipt systems - provide financial
services firms with powerful incentives to mine consumer information for profit, and the tools
with which to do so. The challenge, therefore, is to protect the privacy of consumers while
preserving the benefits of competition and innovation.
II. Efforts to Enhance Financial Privacy P.'otections
This Administration took steps to address these challenges in May of 1999, when the
President announced. his plan for Financial Privacy and Consumer Protection in the 21 ,1
Century. That initiative recognized that while many firms collect information about LIS,
financial institutions have access to a unique window on the lives of most Americans. While a
grocery store may learn something about the food you buy, and a department store may know
what kind of clothes you prefer, banks, insurers, and brokerage firms collect a range of
information that is particularly comprehensive and personal. By processing all of your
transactions, a bank or credit card company can know much more about you than any
individual merchant. This information can also be particularly sensitive. A list of each
prescription drug you purchase or each stock you buy is more reveallng - and potentially more
open to misuse - than a list of the music CDs you buy.
With this in mind, the President recommended legislation to provide consumers with
notice and choice before their financial information is shared or sold -- the right to say "no" to
uses of information that indjviduals find invasive or ·inappropriate. Central to this policy is the
idea that a consumer's financial information belongs to the consumer, not the financial
institution that processes the transactions.
At the time this announcement was n1acie, in the Illi(ht of the financial modernization
debate, the President's agenda struck many as ambitious. Some suggested that the American
people did not feel particularly strongly about privacy issues, and that in any case Congress
was not prepared to act on legislation in this area. Clearly, the last twelve months have shown
otherwise.
..,
J

Although privacy was not initially part of the financial services debate, this
Administration felt strongly that if the rules for industry structure were being modernized,
critical protections for consumer data had to be updated as well. The final bill made progress
toward that goal. We believe that the new law's requirements for clearly stated privacy
policies, for effective notices to consumers, and for the right to Opt-Ollt of third-party
information sharing are important advances in privacy protection for all Americans.
This Administration believes, however, that much more can and should be done on
financial privacy. When the President signed the financial modernization act, he said, "I do
not believe that [its] privacy protections go far enough." He continued, "Without restraining
the economic potential of new b~lsiness arrangements, I want to make sure that every family
has meaningful choices about how their personal information will be shared within corporate
conglomerates. We can't allow new opportunities to erode old and fundamental rights."
III. The Consumer Financial Privacy Act
On April 30, 2000, the President announced a new initiative to provide Americans with the
additional protections he promised. That legislation is now before Congress as H. R. 4380, the
Consumer Financial Privacy Act. This bill takes a balanced, comprehensive approach to
financial privacy, providing important new rights and protections while addressing deficiencies
in last year's legislation. I would like to take a few minutes to describe the proposal.
Opt-In Protection for Especially Sensitive· Information. A central Administration
principle regarding privacy 'is that the greater the sensitivity of the data and the possible harm
from misuse, the greater should be the level of privacy protection. The Consumer Financial
Privacy Act therefore calls for the strongest protections in two highly sensitive areas: the
sharing of medical information by financial institutions, and the use of detailed personal
spending habits information about individual consumers. In these areas we have set the bar
high, requiring institutions to get affirmative ("opt-in") consent from consumers before
information sharing can occur.
•

Medical Information. A consumer seeking a loan or other financial products such as
investment advice or auto insurance should not have to worry that an institution is making
decisions based on personal medical records received from a life insurance affiliate. Life
insurance databases should not become the new source for marketing campaigns based on
medical information. The Consumer Financial Privacy Act would assure that companies do
not gain any special access to ll1edical records by being part of a financial holding compan~
Consumers would have to give affirmative consent before any financial firm could even
receive medical information from a life insurance affiliate or other compelny.

•

Personal Spending Information. America!1s do not expect a bank processing checks or
credit card payments to take their most sensitive financial information and share that
information with others. Under the Administration's proposal, a financial firm would not be

permitted to transfer individualized, personal spending habits - where people spend their
money, where they earn their money, and what they buy - unless a customer affirmatively
consents to such a lise of their information.

Opt-Out Protection for Other Financial Information. For other less sensItIve
categories of financial information, we believe that consumers should have meaningful choice the opportunity to opt-out -- before a financial services firm can share their financial data with
any other entity for marketing purposes. Last year's legislation granted important rights to opt
out of information sales to telemarketers and other unaffiliated firms. The Consumer Financial
Privacy Act would extend those protections to information shared within financial
conglomerates. In a world where affiliates can· engage in activities ranging from data
processing to travel agency, consumers deserve to have as much control over flows of
information to affiliates as they do over those to third parties.
The Administration proposal would also close the exception for "joint marketing" in
last year's bill. This provision would constitute an unnecessary loophole when there is opt-out
choice for affiliate sh;:tring.

Exceptions for Important Business Practices. The Consumer Financial Privacy Act
would preserve financial firms' ability to share information for important business practices by
providing exceptions from consumer choice for transaction processing, risk management, fraud
prevention, and to aid in law enforcement. In addition, the proposal will provide a new
exception to facilitate the development of innovative customer service tools such as
consolidated monthly statements and call-in centers that can access information from affiliated
firms at a customer's request.
These exceptions are crucial for the growth of our financial industries. They must be
subject, however, to appropriate reuse limitations. We include such limitations in order to
prevent abuses.
The Administration's proposal thus achieves the goal of matching the level of protection
to the sensitivity of the personal information involved and the potential abuses of such
information. For the 1110st sensitive data on health and comprehensive personal spending
habits, we call for opt-in consent. For other types of financial information, consumers should
have the right to opt-out of sharing for marketing and other purposes. Where important
business practices require infonnation sharing, we provide exceptions to consumer choice. but
make sure that consumers are protected by reuse restrictions.
Additional New Privacy Protections.
Beyond notice ane! conSLlmer choice
requirements, the Administration proposal provides additional protections in several key areas,
including:
•

The right for consumers to access and correct information held by financial institutions, to
ensure that firms are not deciding whether to offer them services based on mi staken
information about their financial status;

• Additional enforcement authority for the Federal Trade Commission and State Attorneys
General;

• Stricter limits on redisclosure and reuse of customer information; and

• Giving consumers the tools to comparison shop by requiring institutions to provide privacy
policy notices up front or upon request.
The Administration strongly favors a comprehensive approach to providing additional
privacy protections. We found that last year's bill, as important as it was, did not go far
enough, compelling us to call for additional legislation. We feel that our proposal covers the
necessary ground, filling the gaps in the financial modernization act, and including important
new protections. The American people want and deserve these privacy protections now, for
the full range of issues addressed in the President's proposal.
We are pleased that so many members of the House and Senate have supported this
approach, and have sponsored these proposals in Congress. Improving financial privacy
protections is a priority for so many members of this Committee. I would especially like to
thank Ranking Member LaFalce for being the lead sponsor of H. R. 4380 in the House. I also
thank the other Members of this COlllmittee who are among the many co-sponsors of this
comprehensive legislation.
IV. Medical Privacy and Financial Services

Let me turn now more specificall y to the issue of medical privacy in the financial
context. This Administration firmly believes that all Americans should be protected against the
misuse of their highly sensitive health and medical data. We feel that there is broad agreement
in the private sector and among the public that improving medical privacy is the right thing to
do.

We are deeply committed to providing consumer control and rigorous statutory
safeguards in the area of medical privacy. Congress and the Administration worked together
in 1996 to enact the Health Insurance Portability and Accountability Act (HIPAA). HIPAA
called for enactment of comprehensive privacy legislation by August 1999, and instructed the
Department of Health and. Human Services to iss'ue rules if that deadline were not met.
President Clinton announced the proposed rules last October. He has pledged that final
medical privacy regulations will be issued this year. By its terms, HIPAA applies only to
"covered entities" such as health providers, health plans (including health insurance
companies), and health clearinghollses.
Its protections clo not apply to most financial
institutions, including life, auto, workers' compensation, property and casualty, and Illany
disability insurance companies. The Consumer Financial Privacy Act and H. R. 4585 would
provide the first specific federal" protections for medical information in fInancial institutions
that are not covered by HIPAA.

As we have seen in past attempts to address medical privacy in the financial context, it
can be difficult to reach solutions that do not have unintended consequences. In last year's
financial modernization debate, proposals were offered that addressed some issues, but could
have seriously undermined other crucial medical priva'cy initiatives.
For instance, measures under consideration last year would have preempted the HIPAA
regulations that HHS is now in the process of making final. The provisions would have
exempted the health information they did cover from the re-use restrictions of the
modernization bill, providing a significant loophole for the inappropriate release of confidential
health information.
They also would have permitted, under the guise of "research,"
exceptions for the sharing of la~ge volumes of extremely sensitive medical information that
would be prohibited under the proposed HHS rules. Ulti mately, these provisions were not
included in the final bill so that the issues could be examined more thoroughly.
We have looked closely at these issues in the ensuing months, in consultation with HHS
and others. We believe that our new proposal provides appropriately strong protections for the
use of health information in the context of financial products and services. We believe it meets
the central challenges I just mentioned. The proposal:
•

Addresses the use of medical information in a broad context, covering the provision of all
financial products and services;

•

Avoids broad exceptions that could render the protections ineffective; and

•

Clarifies that nothing in the financial modernization laws would modify or supersede
HIPAA's privacy protections, preserving the effectiveness of these important rules.

H.R. 4585, The Medical Financial Privacy Protection Act
Mr. Chairman, by convening this hearing you are creating a much appreciated
opportunity to discuss the important issues surrounding financial privacy. Your legislation is
focused specifically on medical privacy. While we continue to believe that it is necessary to
seek legislation that provides comprehensive privacy protections, your bill offers a starting
point for consideration of several issues that we know will be an important part of a truly
effective privacy regime. Your bill, H.R. 4585, seeks to address the privacy of medical
information in four primary ways:
•

In the context of making decisions about a loan or other extension of credit, an institution
may not receive or use health information about a consumer from another company unless
it has provided notice and obtained affirmative consent.

• The bill bars financial iJ~stitLltions from disclosing medical information to affiliates or third
parties without providing notice and obtaining opt-in consent.

• An institution must obtain affirmative opt-in consent before it can transfer detailed personal
health spending information about a consllmer to an affiliate or third party.

• Institutions must provide consumers with access to, and the opportunity to correct,
individually identifiable health information. The bill also provides additional protections
for the reuse of health information, and for mental health information.
Mr. Chairman, we appreciate your personal involvement in this area. You have
introduced legislation that furthers the debate on these critically important issues. There is
common ground between your bill and the Administration's proposal regarding financial
medical privacy.
H.R. '4585 does differ in significant respects, however, from the
Administration's proposal. While there are a number of other issues, let me highlight oLlr two
most important concerns.
Scope of the Bill. We believe that financial privacy legislation should address the full range of
important consumer. protections. The Administration's Consumer Financial Privacy Act
addresses the full range of imp.ortant financial privacy issues that now face the American
people. It WOUld, among other measures, provide opt-in protection for consumer personal
spending habits; require customer choice before information is shared among corporate
affiliates; provide cllstomers with access to and the ability to correct their financial records;
aSSllre that privacy policies will be available for comparison shopping; and enhance
enforcement authorities where needed.

H.R. 4585, by contrast, is a narrower bill that addresses only the medical privacy
issues covered by the Consumer Financial Privacy Act. Some of the issues I just noted, such as
personal spending habits, access, and reLlse, are included in H.R. 4585, but solely as it relates
to personal health information. Medical privacy within the financial services industry is vitally
important, but is only one of the financial privacy issues that must be addressed. American
consumers want and deserve a broad set of protections.
Receipt and Use Provisions. The provisions in H.R. 4585 concerning "use or receipt" of
medical information apply only to "a loan or credit to a consumer." We feel that it is crucial
to apply the privacy protections beyond the "loan or credit" setting. A provision that applies to
disclosure and use of health information only with respect to "loans or credit" would permit
uses of health information in situations involving marketing and other financial settings. It i~
unclear why the use of sensitive medical information should be subject to restrictions in the
provision of a loan, but not in the provision of investment advice, auto insurance, travel
serVIces, or any of the many other non-credit products now permitted in financial holding
companies.

An additional proVISIon III the President's receipt and use proposals provides that a
financial services firm can only receive or lise medical information from an affiliate or third
party that it requires of al{ of its customers for a particular product or service. The language
in H.R. 4585 that seems to address this same topic is unclear, and may have unintended
con seq uen ces .

Conclusion
Mr. Chairman, thank you for providing this forum for the discusslon of these critically
important issues. This hearing provides a starting point for a thorough consideration of the
range of privacy issues raised by changes in technology and in our financial markets.
This is a historic opportunity to get financial privacy right - to put in place all of the
protections that American citizens want and need. In addition, we all recognize the special
sensitivity of personal medical information. The Administration supports having effective laws
in place that match the sensitivity of such data. There is common ground between Chairman
Leach's bill and the Administration approach. At the same time, we should also address the
other vital issues that are included in the Consumer Financial Privacy Act. To do otherwise is
to miss out on the chance to complete the work that was begun in last year's law.
We look forward to working with you, Congressman LaFalce, and other Members of
Congress to provide all Americans with comprehensive financial privacy protections.

--30--

DEPARTMENT

OF

THE

TREASURY

NEWS
OffiCE OF PUBliC AFFAIRS • 1500 PENNSYLVANIA AVENUE, N.W.• WASHINGTON, D.C .• 20220 • (202) 622-2960
;

EMBARGOED UNTIL 10:00 A.M. (EDT)
Text as prepared for Delivery
June 14, 2000
TREASURY ASSISTANT SECRETARY LEWIS A. SACHS
HOUSE AGRICULTURE SUBCOMMITTEE ON RISK MANAGEMENT,
RESEARCH AND SPECIALTY CROPS

Mr. Chairman, Ranking Member Condit. members of this Subcommittee, I appreciate the
opportunity to appear before you today to discuss H. R. 4541, the Commodity Futures
Modernization Act of 2000. The introduction of this legislation is an important step in the
modernization of the regulatory structure of the US derivatives markets. I would like to
commend you, Mr. Chairman, for the leadership and interest you have demonstrated in
addressing these complex but very important Issues.
They are fundamental to the
competitiveness and integrity of ollr markets.
After a brief discussion of the Over-the-Counter (OTC) derivatives markets, I would like
to focus my remarks on H.R. 4541 and its potential effect on the regulatory structure of the
derivatives and other financial markets.
Background

In previous testimony before this Subcommittee, I have highlighted the importance of the
OTC derivatives markets to our economy
•
By helping businesses and tinancial institutions to hedge their risks more efticiently,
derivatives enable them to pass on the benefits of lower costs to American consumers and
businesses.
•
By allowing for the transfer of unwanted risk, derivatives promote more efficient
allocation of capital across the economy, increasing productivity
•
By providing better pricing intl")rmation. derivatives can help promote greater liquidity
and efficiency in the underlying cash markets
•
Finally, by enabling more sophistic:ated management of assets, including m0l1gages.
consumer loans, and corporate debt, derivatives can help lower m0l1gage payments. Insurance
premiums, and other financing costs for American conSllmers and businesses
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To continue to reap such benefits, however, we must ensure that our regulatory and legal
framework keeps pace with rapid progress in the marketplace. While the current framework here
in the US. remains outdated, markets overseas are developing in a legal and regulatory
environment that allows greater efficiency, transparency and liquidity. This is not simply the
result of less regulation, but rather of more rational regulation and an environment of legal
certainty.
Unless our laws and regulations relating to derivatives are modernized, we run the risk
that innovation will be stifled by the absence of legal certainty, depriving the American economy
of the benefits that the derivatives markets can provide, and hampering the efforts of our OTe
and exchange-traded markets and businesses to compete globally
While it is important to update these laws, it is important to do so with the recognition
that the emergence of these markets has occurred during an era of unprecedented economic
growth and prosperity. It is to be expected that in times of distress some participants in these
markets, as in other financial markets, will be adversely affected. The recommendations we
have made, and the provisions in this bill will not prevent these situations from occurring, nor are
they intended to do so. What needs to be protected, however, is the financial system as a whole,
and not individual institutions. We believe that our recommendations with respect to clearing
and those designed to enhance transparency and legal certainty and to clarify the treatment of
derivatives in the case of bankruptcy or insolvency can contribute to enhancing the stability of
the system more broadly.
The challenge before this Subcommittee and the eongress is to establish a regulatory
regime that will strike a balance between allowing the economy to realize more fully the benefits
of derivatives and, at the same time, ensuring the integrity of the underlying markets, providing
appropriate protection for retail customers, and where possible, taking steps to mitigate systemic
risk.
When I last testified, before this Subcommittee, I outlined the primary objectives of the
Working Group with respect to legislation in this area They are:

•
To reduce systemic risk in the OTe derivatives market by removing legal i mpedi ments
to the development of clearing systems and ensuring that those systems are appropriately
regulated.
•
To promote innovation in the OTe derivatives market by providing legal certainty for
OTe derivatives and electronic trading systems. This would strengthen the overall legal
framework governing the OTe derivatives market that, in turn, would stirnulate even greater
competition, transparency, liquidity, and etliciency and deliver stronger benefits to U S
consumers and businesses
•
To protect I'etail customers by ensurjng that appropriate regulations are in place to deter
unfair practices in all markets in which they participate and by closing existing legal loopholes
that allow unregulated entities to pursue such unfair practices

2

•
To maintain U.S. competitiveness by providing a modernized framework that will lead
those engaged in the financial services industry to continue the operations of their businesses in
the United States, and thereby assuring the continued leadership of our capital markets.

Given the scope of this bill - providing legal certainty to OTC derivatives, reforming the
Shad-Johnson Accord, and providing regulatory relieffor futures exchanges - today I would add
a fifth important objective.
•
To protect the integrity of the ilia rkets underlying the derivatives
particular, the securities markets.

In

question -

In

A balanced bill should meet these important objectives
H.R. 4541: The Commodity Futures Modernization Act of 2000

Let me now turn to H R. 4:;41, the specific bill before this Subcommittee. Mr. Chairman,
while much of my testimony toqay will focus on specific concerns that we have with certain
provisions of this bill, we are supportive of your efforts to ensure that these important issues are
addressed in a timely manner We are committed to working closely with you, your staff, and
other members of Congress to facilitate the enactment of this important legislation It is in this
spirit of cooperation that the Treasury Department has identified a number of specific concerns
in the three main components of this bill that we believe must be addressed in order to ensure
that the final legislation maintains the integrity of our markets and satisfies the objectives set
forth by the President's Working Group.
OTe Derivatives

Let me first address OTC derivatives. This bill largely incorporates the recommendations
of the Working Group with respect to OTC derivatives which, if enacted, would create an
environment of greater leg.al ceI1ainty for these instruments
We do, however, have two
concerns in this area.
Clearinghouses: Our primary concern relates to the treatment of clearinghouses. The
Working Group's report recommended that Congress enact legislation to provide a clear basis
for the development of appropriately regulated clearing systems for aTC derivatives Welldesigned clearinghouses can help to reduce systemic risk first, hy diminishing the likelihood that
the failure of a single market participant can have a disproportionate effect on the market as a
whole; and second, by facilitating the offsetting and netting of contract obligations In addition
to these benefits, however, clearing tends to concentrate risks and certain responsibil ities for risk
management in a central counterpaI1y or clearinghouse Therefore, appropriate regulation of
clearing systems is essential to ensure that they indeed serve to mitigate systemic risk

Under the Working Group framework, regulator-y oversight could be provided by the
CFTC, SEC, a federal banking regulator, ·or by a recognized foreign regulatory authority.
depending on the structure of the clearinghouse and its activities Legislative action could have
the beneficial effects of reducing systemic risk by encouraging the development of such systems

through the clarification of their legal status and by subjecting them to appropriate supervision
The bill, as currently drafted, permits the development of clearinghouses, but does not ensure
that they will be appropriately regulated.
This bill allows but does not require entities that meet certain standards to register with
the CFTC as Derivative Clearing Organizations CDCOs") and grants the CFTC exclusive
jurisdiction with respect to such registered DCOs We have two concerns with this approach
first, regulatory oversight is optional on the pan of the clearinghouse; second, the exclusive
jurisdiction of the CFTC may preclude securities regulators from maintaining oversight of
organizations that clear securities- related transactions
Consistent with the Working Group's report, we believe H. R. 4541 should be amended to
make regulation of clearinghouses mandatory, and to permit the regulation to be carried out by
the appropriate functional regulator. This recommendation is consistent with current practice. in
which clearing systems for other markets operate under regulatory oversight.

Eligibility: Our second concern relates to part of the definition of eligible partIcIpant.
The bill, as drafted, maintains a lower threshold for the definition of eligible panicipant than that
recommended by the Working Group. We maintain -that participation in this market should be
limited to institutions, or individuals with substantial resources. The provision contained in the
bill does not meet this standard. Therefore we recommend that the Subcommittee adopt the
threshold contained in the Working Group's report
The Shad-J ohnson Accord

Let me now turn to the se<;:tion of the bill addressing reform of the Shad-Johnson Accord.
The members of the Working Group agreed that the current prohibition on single-stock futures
could be repealed if issues about the integrity of the underlying securities markets and regulatory
arbitrage are resolved Our view remains unchanged.
The provisions contained in this bill regarding futures on non-exempt seCUrItIes are a
good starting point, although a number of issues remain unresolved. The bill addresses some of
the customer protection and enforcement concerns identified by the CFTC, the SEC, and others
as necessary conditions for repealing the prohibition on single-stock futures. However, there are
a number of concerns that the regulatory agencies consider impOIiant, but that have not been
resolved in the legislation We hope that the SEC and CFTC can provide specific comments on
these issues in the near future so that they can be incorporated into this bill
In addition, certain issues related to the harmonization of margin requirements will need
to be clarified. While we do not see the need to establish margin requirements in statute. it will
be important to establish margin levels that do not encourage regulatory arbitrage or lead to a
substantial increase in leverage in our financial system
While we have no objection to the introduction of single-stock futures, it is vitall~
important that the integrity of the underlying markets be preserved, and that these instruments
not be used as a means to avoid fhe regulations of the cash markets Therefore. we continue to

4

be supportive of efforts by the SEC and CFTC to reach an agreement on a regulatory framework
for these products that preserves the integrity of the underlying securities markets. In addition,
we are supp0l1ive of actions taken by Congress to urge progress in these discussions. However,
if these issues cannot be resolved on a timely basis, we believe that it is important to move
forward with legislatiQn designed to clarify the legal certainty for OTC derivatives.
Regulatory Relief

The third component of this bill addresses regulatory relief for the futures exchanges.
The Treasury Department continues to support the view that it is appropriate to review, from
time to time, existing regulatory structures to determine whether they continue to serve valid
regulatory functions Like the OTC markets, exchange trading of derivatives should not be
subject to regulations that do not have a public policy justification Broadly, we are supportive
of the CFTC's efforts to provide appropriate regulatory relief to the futures exchanges, consistent
with the public interest. To this end, the CFTC has recently released its regulatory relief
proposal for public comment We will be submitting a formal comment letter on this proposal in
the near future
There may, however, be unforeseen consequences to lexislalfllX such regulatory relief
Once such provisions are written into law, the regulators will have no ability to review and
amend them should subsequent market developments warrant change or should other problems
arise. Again, we are supportive of appropriate regulatory relief for futures exchanges, but suggest
that certain aspects of that relief may be more appropriately provided through administrative
action.

In particular, we are concerned with the provIsions in H. R. 4541 regarding "exempt
boards of trade. " To encourage innovation, the Working Group recommended an exclusion from
the Commodity Exchange Act for electronic trading systems that satisfy certain criteria
Although the bill contains provisions to enact this exclusion, it also contains a statutory
exemption for certain electronic and physical trading faci Iities These "exempt boards of trade"
would remain subject to the CEA' s "exclusive jurisdiction" clause, thereby precluding regulatory
oversight by other agenci es
The potential impact of this provision on the government securities market is of particular
concern to the Treasury Department In 1986, Congress passed the Government Securities Act
to provide an appropriate regulatory framework for the government securities markets in direct
response to a number of problems in the unregulated pOl1ion of this market. In 1993, in response
to incidents of wrongdoing .in Treasury auctions, Congress strengthened these laws to provide
additional protection against market abuses
Under some interpretations, H.R 4)41 could allow futures on government securities to
escape most of the provisions of the CEA that currently apply to them. but would bloch:
regulation under the Government Securities Act In addition, securities market panicipants that
are currently regulated lIIlder- the GoverIll11ent Securities Act could potentially restructure
This has the
themselves as exempt boards of trade tu evade regulation under both statutes
potential to undermine the laws that Congress put in place in recent years that were designed to

uphold and strengthen the integrity of the government seCUritIes market. Any reduced
confidence in the integrity of the government securities market could lead to higher financing
costs for the Treasury and thus an increased burden on American taxpayers For these reasons,
we strongly recommend that those provisions of the bill related to exempt boards of trade be
removed, or amended to preclude the trading of securities-related products on those systems.
Again, we note that the CFTC's regulatory relief proposal - the basis for the regulatory
relief sections of this bill - has only recently been made available for public comment, and may
be modified before implementation. We look forward to commenting on the proposal and
working with the CFTC on these issues.

Bankruptcy
Mr. Chairman, although not part of this bill~ I would like to take this opportunity to
strongly urge Congress to adopt the President's Working Group recommendations regarding the
treatment of these instruments and certain other financial contracts in cases of bankruptcy or
insolvency. Rarely are there tangible steps the government can take that could have a
meaningful impact on the mitigation of systemic risk. Enacting the recommendations of the
Working Group designed to clarify the treati11ent of these instruments in bankruptcy is one of
those steps. By establishing a framework through which creditors and counterparties can work
out a swift resolution in cases of bankruptcy or insolvency, enactment of these recommendations
can serve to reduce the impact of the failure of anyone institution on the stability of the system
more broadly.

Conclusion
Mr. Chairman, you have gone to great lengths to build consensus among the members of
this Committee, the Working Group and market participants on a difficult set of issues. We
appreciate the leadership you have demonstrated and want to be constructive and helpful in
moving forward a bill that we can support It is in that spirit of cooperation that we have
suggested a number of changes to your bill. We hope that as you finalize this bill, we can
continue to work together to strike the appropriate balance to ensure that much-needed
legislative changes are made that will promote innovation, protect retail cLlstomers, reduce
systemic risk, maintain US 'competitiveness, and ensure the integrity of our markets
Thank you.

--30--

D EPA R T 1\1 E N T

0 F

THE

NEWS

1REASURY
OFFICE OF PUBLIC AFFAIRS

~

T REA SUR Y

1500 PENNSYLVANIA AVENUE, N.W .• WASHINGTON, D.C .• 20220. (202) 622-2960

FOR IMMEDIATE RELEASE
June 12, 2000

STATEMENT BY TREASURY DEPUTY SECRETARY STUART E. EIZENSTAT

Today, we are on the verge of a historic agreement.
Otto Graf
Lambsdorff and Dr. Manfred Gentz will recommend approval of the
agreement we have reached on the issue of legal peace for German
companies.
The creation and funding of the German Foundatjon, the
wide consensus of all the victims groups and plaintiffs' attorneys,
along with the Statement of Interest, Executive Agreement, Final Act
and the existing legal hurdles create a high probability that all
pending and future cases will be dismissed and enduring legal peace
will be achieved.
The legal closure agreement will remove a major hurdle to the
establishment of a German Foundation.
The German Government and
German industry have agreed to a 10 billion D-Mark capped fund for the
resolution of slave and forced labor claims and for all other wrongs
committed by German industry arising out of the Nazi era.
I want to
thank President Clinton and Chancellor Schroeder for their leadership.
We have also agreed upon the precise allocation of 10 billion D-Marks
to the various types of claims and for a Future Fund.
We have one more significant step before we meet again with all
the parties to sign a final act.
That next step is for the German
Parliament to pass the necessary legislation to establish the
Foundation, an action that Members felt they could not take without an
effective mechanism for legal peace.
The German Foundation, to be set in
U.S. commitment in an Executive Agreement
interest in support of dismissal, will be
effort to bring justice for Holocaust and
era.

German law and based on the
to file statements of
part of a half century U.s.
other victims of the Nazi

Our goal is for the German Foundation to be the exclusive remedy
and forum for the resolution of all claims against German companies
arising out of World War II.

LS - 69 9
J;'
press re Ieases, sPeeches, public schedules and oR;cial
biographies, call our 24~our fax line at (202) 622-2040
.ror
'JJ.

*

'U S Govemme<11 P[lnllng OHo:e 1998· 61 !'!-559

This exclusive role for the Foundation serves the foreign policy
interests of the united States. The alternative to thjs mechanism
would be years of litigation that lasts beyond the life-spans of the
large majority of survivors.
There will be many winners as a result of our agreement:
•

the victims, because more than one million people can soon
benefit from the Foundation promptly -- otherwise, only a few
thousand victims could hope to benefit from litigation in U.S.
courts that, even if successful, would take years to achieve;

•

the German companies, because they have taken a major step to
ensure that they will not have to pay twice for the same set of
facts; and,

•

German-American relations.
-30-

2

PUBLIC DEBT NEWS
Department of the Treasury • Bureau of the Public Debt· Washington, DC 20239

TREASURY SECURITY AUCTION RESULTS
BUREAU OF THE PUBLIC DEBT - WASHINGTON DC
Office of F~nancing
202-691-3550

CONT.i\CT;

R IMMEDIATE RELEASE
ne 12, 2000

RESULTS OF TREASURY'S AUCTION OF 1J-WEEK BILLS
91-Day Bill
June 1 5, 20
September 14, 20JO
9127952F4

Term:
Issue Date:
Maturity Date:
CUSIP Number:

°°

5.775%

High Rate:

Investment Rate 1/:

Price:

5.943%

98.540

All noncompetitive and successful competitive bidders were awarded
curities at the high rate.
Tenders at the high discount rate were
lotted 42%. All tenders at lower rates were accepted in full.
AMOUNTS TENDERED AND ACCEPTED (in thousands)
Accepted

Tendered

Tender Type
Competitive
Noncompetitive

$

21,586,530
1,317,969

284,529

284,529

23,189,028

8,501,628

4,650,037
60,471

4,650,037
60,471

Foreign Official Refunded
SUBTOTAL
Federal Reserve
Foreign Official Add-On
$

6,899,130
1,317,969
8,217,099 2/

22,904,499

PUBLIC SUBTOTAL

TOTAL

$

27,899,536

$

13,212,136

Median rate
5.765%: 50% of the amount of acceQted competitive tenders
tendered at or below that rate.
Low rate
5.730%;
5% of the amount
f accepted competitive tenders was tendered at or below that rate.

3.S

Ld-to-cover Ratio

I

=

22,904,499 / 8,217,099

=

2.79

Equivalent coupon-issue yield.
Awards to TREASURY DIRECT = $1,044,766,000

http://w\vw .pu blicdebt. treas. gov
~S-700

PUBLIC DEBT NEWS
Department of the Treasury • Bureau of the Public Debt • Washington, DC 20239

TREASURY SECURITY AUCTION RESULTS
BUREAU OF THE PUBLIC DEBT - WASHINGTON DC
R IMMEDIATE RELEASE
ne 12, 2000

CONTACT:

Office of Financing
202-691-3550

RESULTS OF TREASURY'S AUCTION OF 26-WEEK BILLS
182 -Day Bill
June 15, 2000
December 14, 2000
912795FK2

Term:
Issue Date:
Maturity Date:
CUSIP Number:
6.005%

High Rate:

Investment Rate 1/:

Price:

6.27n

96.964

All noncompetitive and successful competitlve bidders were awarded
ecurities at the high rate.
Tenders at the h~gh discount rate were
lotted 53%.
All tenders at lower rates were accepted in full.
AMOUNTS TENDERED AND ACCEPTED (in thousands)

Competitive
Noncompetitive

$

17,764,800
1,132,779

$

Foreign Official Refunded
SUBTOTAL
Federal Reserve
Foreign Official Add-On
$

4,263,050
1,132,779
5,395,829 2/

18,897,579

PUBLIC SUBTOTAL

TOTAL

Accepted

Tendered

Tender Type

2,106,471

2,106,471

21,004,050

7,502,300

3,754,273
448,529

3,754,273
448,529

25,206,852

$

11,705,102

Median rate
5.985%: 50% of the amount of accepted competitive tenders
as tendered at or below that rate.
Low rate
5.950%:
5% of the amount
t accepted competitive tenders was cendered at or below that rate.
Ld-to-Cover Ratio

= 18,897,579 / 5,395,829 = 3.50

Equivalent coupon-issue yield.
Awards to TREASURY DIRECT = $818,170,000

http://www. pu blicdebt. treas.go v

3-701

NEWS

lREASURY

1I1I1I1I1I1I1I1I1I1I1I1I1I1I1I1I1I1I1I1I1I1I"~/~78~9~~~1I~~~1I1I1I1I1I1I1I1I1I1I1I1I1I1I1I1I1II
OFFICE OF PUBUC AFFAIRS • 1500 PENNSYLVANIA AVENUE, N.W.• WASHINGTON, D.C.· 20220· (202) 622-2960

.

&

u.s. International Reserve Position

06/13/00

The Treasury Department today released U.S. reserve assets data for the week ending June 9, 2000.
As indicated in this table, U.S. reserve assets totaled $67,816 million as of June 9, 2000, up from $67,251 milliore.
as of June 2, 2000.
(in US millions)

TOTAL

r

1. Foreign Currency Reserves 1
a. Securities
Of which, issuer headquarlered in the U. S.

Euro
4,836

Yen
5,390

b.i. Other central banks and BIS
b.ii. Banks headquartered in the U.S.
b.ii. Of which, banks located abroad

b.iii. Banks headquartered outside the U.S.
b.iii. Of which, banks located in the U.S.

2

3, Special Drawing Rights (SDRs)
4. Gold Stock

2

3

5. Other Reserve Assets

TOTAL

Euro

10,226

4,877

TOTAL

Yen
5,459

8,255

12,037

20,292

8,343

12,191

0

15,375

15,5J3

10,310

10,:;;'5

11,048

11. :.48

0

0

0
Q

0

deposits reflect carrying values.
2/ The items, "2. IMF Reserve Position" and "3. Special Drawing Rights (SDRs)," are based on data provided by the IMF ant are valued In
dollar terms at the offiCial SDRJdollar exchange rate for the reporting date The IMF data for June 2 are fmal The entnes In the \2::lle a80ve

for June 9 (shown in italiCS) reflect any necessary adjustments, including revaluation, by the US Treasury to the Vlor week's IMF data

S11,048 million.

LS-702

20,534

0
0
0
0

11 Includes holdings of the Treasury's Exchange Stabilization Fund (ESF) and the Federal Reserve's System Open Market Account
(SOMA), valued at current market exchange rates. Foreign currency holdings listed as securities reflect marked-la-market values. and

3/ Gold stock is valued monthly at $42.2222 per fine troy ounce

10,325

J

0

b, Total deposits with:

2, IMF Reserve Position

9, 2000
67,816

June

2, 2000
67,251

June

I. Official U.S. Reserve Assets

Values shown are as of April 30, 2000. The March 3",. 2000

V2~e was

u.s. International Reserve Position (cont'd)
II. Predetermined Short-Term Drains on Foreign Currency Assets
June 2. 2000

June 9. 2000

o

1. Foreign currency loans and securities

2. Aggregate short and long positions in forwards and
futures in foreign currencies vis-a-vis the U.S. dollar:

o
o

2. a. Short positions
2.b. Long positions

o

3. Other

III. Contingent Short-Term Net Drains on Foreign Currency Assets
June 2, 2000
1. Contingent liabilities in foreign currency

June 9,2000

o

1.a. Collateral guarantees on debt due within 1 year
1.b. Other contingent liabilities

2. Foreign currency securities with embedded options

o

3. Undrawn, unconditional credit lines

o

3.a. With other central banks
3.b. With banks and other financial institutions
headquartered in the U.S.
3.c. With banks and other financial institutions
headquartered outside the U.S.

4. Aggregate short and long positions of options in foreign
currencies vis-a-vis the U.S. dollar
4.a. Short positions

4.a.1. Bought puts
4.a.2. Written calls
4.b. Long positions

4.b. 1. Bought calls
4.b.2. Written puts

o

SECRETARY OF THE TREASURY LAWRENCE SUMMERS
PRESS CONFERENCE
JUNE 12, 2000

SECRETARY OF THE TREASURY LAWRENCE SUMMERS IN A PRESS CONFERENCE HELD
IN ABUJA WITH JOURNALISTS ON JUNE 12, DiSCUSSED THE US POSITION ON DEBT
RELIEF FOR NIGERIA THE SECRETARY STATED 'THE US WILL SUPPORT A GENEROUS
PARIS CLUB DEBT RESCHEDULING FOR NIGERIA THIS YEAR BEYOND THIS YEAR,
PROVIDED NIGERIA MAKES SIGNIFICANT PROGRESS ON MEANINGFUL ECONOMIC AND
FINANCIAL REFORM, WE WOULD SUPPORT POSITIVELY, CONSIDERATION BY THE
INTERNATIONAL FINANCIAL COMMUNITY OF MULTILATERAL DEBT REDUCTION FOR
NIGERIA CONSISTENT WITH, AND ON THE BASIS OF, NIGERIA'S CONTINUED
PERFORMANCE UNDER APPROPRIATE ARRANGEMENTS WITH THE IMF AND THE
WORLD BANK.'
THE TEXT OF THE SECRETARY'S PRESS CONFERENCE FOLLOWS

THANK YOU ALL VERY MUCH FOR COMING I'M GLAD TO HAVE THIS OPPORTUNITY TO
SPEAK FOR A FEW MINUTES ABOUT THE MEETINGS THAT I HAD WITH
PARLIAMENTARIANS LAST NIGHT AND WITH THE PRESIDENT, VICE PRESIDENT,
FINANCE MINISTER AND CENTRAL BANK GOVERNOR THIS MORNING.
I CAME TO NIGERIA BECAUSE WE IN THE UNITED STATES BELIEVE THAT WHAT
HAPPENS IN NIGERIA IS VERY IMPORTANT FOR WHAT HAPPENS IN THE ENTIRE
ECONOMY OF SUB-SAHARAN AFRICA IN MUCH THE SAME WAY AS WHAT HAPPENS IN
THE UNITED STATES IS IMPORTANT FOR THE GLOBAL ECONOMY. I CAME TO NIGERIA
BECAUSE THIS IS A MOMENT OF BOTH GREAT CHALLENGE AND A MOMENT OF GREAT
OPPORTUNITY IN NIGERIA A MOMENT OF GREAT CHALLENGE BECAUSE OF THE
ECONOMIC DIFFICULTIES OF PAST POLICIES AND BECAUSE OF THE RISING HUMAN
DEVELOPMENT CHALLENGES IN NIGERIA; A MOMENT OF GREAT OPPORTUNITY
BECAUSE OF A DEMOCRATICALLY ELECTED GOVERNMENT AND BECAUSE OF A
GROWING INTERNATIONAL SENSE OF THE IMPORTANCE OF SUPPORTING ECONOMIC
DEVELOPMENT IN SUB SAHARAN AFRICA I ALSO CAME BECAUSE I THINK I'M THE FIRST
US. SECRETARY OF THE TREASURY TO HAVE COME TO NIGERIA AND I COME, WE
COME, BECAUSE THERE IS A SENSE THAT THE FINANCIAL CHOICES MADE BY NIGERIA
IN CONJUNCTION WITH THE INTERNATIONAL FINANCIAL INSTITUTIONS WILL HAVE
PROFOUND CONSEQUENCES IN THE YEARS AHEAD
THERE WERE THREE MAIN THEMES IN ALL OF OUR DISCUSSIONS FIRST, WE
DISCUSSED QUESTIONS OF ECONOMIC DEVELOPMENT STRATEGY FOR NIGERIA AND
THERE WAS, I THINK, A SHARED SENSE IN ALL OF OUR DISCUSSIONS ON THE
IMPORTANCE OF MACRO ECONOMIC STABILITY, ON THE IMPORTANCE OF MOVING
AHEAD WITH PRIVATIZATION, ON THE IMPORTANCE OF ESTABLISHING THE RULE OF
LAW, ON THE IMPORTANCE OF GREATER TRANSPARENCY IN BUDGETING
PROCEDURES AND THE PROVISION OF GREATER RESOURCES FOR THE SOCIAL
SECTORS IT WAS STRESSED THAT THESE WERE IMPORTANT NIGERIAN GOVERNMENT
OBJECTIVES BOTH THE PRESIDENT AND VICE PRESIDENT WERE VERY STRONG IN
SAYING THAT PRIVATIZATION. SCALING BACK SUBSIDIES, MORE SOCIAL INVESTMENTS
... THAT THESE WERE THEIR PRIORITIES, THEY DIDN'T COME FROM ANYWHERE ELSE
THE SECOND SUBJECT THAT WE DISCUSSED WAS THE FINANCIAL ENVIRONMENT AND
NIGERIA'S DEBT BURDENS THE PARLIAMENTARIANS LAST NIGHT VERY STRONGLY

LS-703

AND THE PRESIDENT AND OTHER OFFICIALS I MET WITH THIS MORNING, ALL
STRESSED RIGHTLY THAT NIGERIA CARRIED A VERY LARGE DEBT BURDEN AS A
CONSEQUENCE OF PAST BORROWING. PAST BORROWING IN LARGE PART HAD NOT
BEEN SUCCESSFUL IN GENERATING INVESTMENTS THAT CREATED THE WHEREWITHAL
TO PAY IT BACK AND THEY STRESSED THAT THE BURDEN OF DEBT SERVICE WOULD
POTENTIALLY ADVERSELY IMPACT KEY SOCIAL INVESTMENTS SUCH AS HEALTH AND
EDUCATION I STRESSED IN RESPONDING TO THIS ISSUE THE OVERWHELMING
IMPORTANCE OF ASSURING THAT RESOURCES WERE USED WELL IN THE CONTEXT OF
ANY TYPE OF SUPPORT FOR NIGERIA AND EMPHASIZED THE SIGNIFICANT BENEFIT
THAT NIGERIA WAS RECEIVING AS A CONSEQUENCE OF THE UPTAKE IN THE PRICE OF
OIL THAT HAD TAKEN PLACE THIS YEAR. BUT I WAS THEN ABLE TO REMIND THEM THAT
THE UNITED STATES WILL SUPPORT A GENEROUS PARIS CLUB DEBT RESCHEDULING
FOR NIGERIA THIS YEAR, AND THAT WE ARE WORKING TOWARDS THAT END IN THE
PARIS CLUB. BEYOND THIS YEAR, PROVIDED NIGERIA MAKES SIGNIFICANT PROGRESS
ON MEETING ECONOMIC AND FINANCIAL REFORMS, WE SUPPORT POSITIVE
CONSIDERATION BY THE INTERNATIONAL FINANCIAL COMMUNITY OF MULTI LATERAL
DEBT REDUCTION FOR NIGERIA CONSISTENT WITH AND ON THE BASIS OF NIGERIA'S
CONTINUED PERFORMANCE UNDER APPROPRIATE ARRANGEMENTS WITH THE IMF
AND THE WORLD BANK. I STRESSED THAT ANY SUPPORT FOR DEBT REDUCTION LAY
IN THE FUTURE AND WAS PREMISED ON SOUND NIGERIAN ECONOMIC POLICY TO USE
RESOURCES WELL BUT I DID INDICATE THAT IF SUCH POLICIES WERE FORTHCOMING,
THE UNITED STATES WOULD BE PREPARED TO SUPPORT DEBT REDUCTION IN THE
CONTEXT OF THE INTERNATIONAL CONSIDERATION OF THE ISSUES.
THE THIRD ISSUE THAT WE DISCUSSED WAS A MORE DETAILED DISCUSSION OF THE
LINKS BETWEEN HEALTH AND SOCIAL INVESTMENTS AND ECONOMIC PERFORMANCE
REMARKED ON THE EXPERIENCE IN THE U.S. AND MANY COUNTRIES THAT APART
FROM THE ENORMOUS HUMAN DIMENSIONS OF THE ISSUE, SUCCESSFUL AIDS
PREVENTION PROGRAMS PAID OFF IN THE SENSE OF IMPROVING ECONOMIC
PERFORMANCE AND REDUCING SUBSEQUENT BUDGETARY OUTLAYS I
CONGRATULATED PRESIDENT OBASANJO ON THE RECENT AFRICAN CONFERENCE
THAT HE HAD HOSTED ADDRESSING MALARIA ISSUES AND STRESSED THE
IMPORTANCE OF A CLEAR COMMITMENTS AROUND THE AIDS ISSUE SINCE NIGERIA IS
CLOSE TO AN INFLECTION POINT WITH RESPECT TO THAT PANDEMIC THE PRESIDENT
AND VICE PRESIDENT BOTH IN OUR CONVERSATIONS MADE CLEAR THEIR DESIRE TO
SEE A SUMMIT OF AFRICAN LEADERS TAKE PLACE TO ADDRESS THE AIDS ISSUE AND
THAT IS SOMETHING THAT PRESIDENT CLINTON HAS WANTED TO SEE FOR SOME TIME
SO I THINK WE CAN LOOK FORWARD WITH THIS COMMITMENT TO THAT TAKING PLACE
LET ME SAY FINALLY THAT I THINK THESE HAVE BEEN PRODUCTIVE AND USEFUL
DISCUSSIONS. NIGERIA'S ECONOMIC CHALLENGES ARE VERY, VERY GRAVE. THE
VARIOUS CHALLENGES WERE NOT CREATED IN A WEEK OR A MONTH OR A YEAR AND
THEY CERTAINLY WILL NOT BE ADDRESSED IN A WEEK OR A MONTH OR A YEAR, BUT I
BELIEVE THAT THE DEMOCRATIC OPPORTUNITY THAT NIGERIA NOW HAS PROVIDES
THE BEST WINDOW OF OPPORTUNITY THAT NIGERIA HAS ENJOYED IN MANY YEARS
AND IT IS AN OPPORTUNITY THAT THE UNITED STATES IS VERY MUCH COMMITTED TO
WORKING WITH NIGERIA TO TRY TO MAXIMIZE IT
I WILL STOP THERE AND AM HAPPY TO RESPOND TO ANY QUESTIONS
MR. SECRETARY, YOU MAY (INAUDIBLE) STRIKE OPTION CALLED BY THE ORGANIZED
LABOR OF NIGERIA IN YOUR OPINION DOES IT REFLECT A LIMIT (INAUDIBLE)? THE
CRISIS IN KADUNA WHICH LINGERED ON FOR A COUPLE OF WEEKS AND NOW WE HAVE
A SERIOUS CRISIS GOING ON?

SECRETARY SUMMERS. REGISTERING DISSENT IS AN IMPORTANT PART OF
DEMOCRACY, BUT I THINK THAT IT IS SOMETHING THAT ALWAYS HAS BE DONE IN A
RULE BASED WAY THAT DOES NOT INTERFERE WITH THE RIGHTS OF OTHERS FROM
CONVERSATIONS THAT I HAD I SENSED THAT THE NIGERIAN GOVERNMENT KNOWS
THAT THE DECISION IT MADE REGARDING OIL PRICES WAS A CONSEQUENTIAL
DECISION AND THAT IT WAS ONE THAT GOVERNMENT FELT WAS IMPORTANT TO TAKE
BOTH FOR BUDGET REASONS BECAUSE OF A DESIRE TO REALLOCATE FUNDS THAT
WERE GOING TO PETROLEUM SUBSIDIES TO OTHER PERHAPS HIGHER PRIORITY USES
AND BECAUSE OF ISSUES OF EFFICIENCY IN THE PETROLEUM SECTOR WHERE LARGE
AMOUNTS OF RESOURCES WERE BEING LOST OR STOLEN OR FLARED AS A
CONSEQUENCE OF THE PRICE CONTROLS THAT WERE IN PLACE I THINK THERE IS NO
QUESTION THAT ESTABLISHING A SENSE OF STABILITY.
GOVERNANCE, PERMANENCE, NOT OF THE POSITION OF ANY PARTICULAR INDIVIDUAL,
BUT OF THE BASIC RULE OF LAW IS VERY, VERY IMPORTANT TO NIGERIA'S ECONOMIC
FUTURE AND I THINK THAT IS A PROCESS THAT IS UNDERWAY PROSPECTS FOR
SUCCESS TO BE MAXIMIZED IS GREATEST IF DEMOCRACY IS ABLE TO SHOW
ECONOMIC RESULTS. THAT IS PART OF WHY OUR CONVERSATIONS FOCUSED ON
ISSUES OF INVESTMENT, HEALTH AND INVESTMENTS IN EDUCATION THAT IS WHY WE
TALKED ABOUT THE NEED IN THE NIGER DELTA AND OTHER PLACES TO FOCUS ON THE
DEVELOPMENT OF NON PETROLEUM EXPORTS
QUESTION: (INAUDIBLE) INTERESTED IN HELPING NIGERIA ON THE ISSUE OF DEBT
(INAUDIBLE) AS LONG AS NIGERIA WAS RELYING ON THE POLICIES OF THE IMF AND
THE WORLD BANK (INAUDIBLE) WE IN NIGERIA BELIEVE THAT MOST POLICIES OF THE
IMF AND THE WORLD BANK THAT ARE TRYING TO, FORCING (INAUDIBLE) TO APPLY TO
THEIR ECONOMIES ARE NOT IN THE INTEREST OF THE PUBLIC. FOR INSTANCE, THIS
ISSUE OF FUEL (INAUDIBLE) IS ONE CASE IN POINT THAT NIGERIANS SEE AS VERY
DETRIMENTAL. DO YOU THINK IT IS GOOD FOR THE CITIZENS OF THE COUNTRY FOR
THE GOVERNMENT OF THAT COUNTRY TO APPLY CERTAIN POLICIES THAT W~LL HAVE
ADVERSE EFFECTS OR TO THE DETRIMENT OF THE CITIZENS OF THE COUNTRY IN
ORDER TO SATISFY (INAUDIBLE).
SECRETARY SUMMER I BELIEVE THAT DEMOCRATICALLY ELECTED GOVERNMENTS
DO THEIR JOBS BEST, SERVE THEIR PEOPLE BEST, AND ARE OBLIGED TO PURSUE THE
ECONOMIC POLICIES THAT THEY BELIEVE WILL BEST SERVE THE INTERESTS OF THEIR
PEOPLE IN A COMPLEX GLOBAL ECONOMY AND REPRESENTATIVES IN THE NIGERIAN
GOVERNMENT WITH WHOM I SPOKE IN THE EXECUTIVE BRANCH, ALL ASSURED ME
THAT THE POLICIES BEING PURSUED REPRESENTED THEIR BEST JUDGMENT AS TO
HOW TO IMPROVE LIVING STANDARDS IN NIGERIA I DON'T THINK IT IS APPROPRIATE
FOR INTERNATIONAL ORGANIZATIONS TO IMPOSE PROGRAMS ON COUNTRIES BUT I
DO THINK IT IS APPROPRIATE FOR INTERNATIONAL ORGANIZATIONS, OR FOR NEUTRAL
COUNTRIES THAT ARE PROVIDING DEBT RELIEF, TO INSIST BEFORE THEY PROVIDE
RESOURCES THAT THERE BE A POLICY FRAMEWORK IN PLACE THAT WILL ASSURE
THAT THE RESOURCES ARE USED FOR EFFECTIVE HUMAN DEVELOPMENT RATHER
THAN FLOWING INTO SWISS BANK ACCOUNTS IT SEEMS TO ME THAT IT IS
APPROPRIATE FOR DEMOCRATIC GOVERNMENTS, AS MANY DEMOCRATIC
GOVERNMENTS AROUND THE WORLD DO, TO CERTAINLY ACCEPT THAT IDEA THAT A
FRAMEWORK THAT IS TECHNICALLY RIGHT AND WILL ASSURE THAT ASSISTANCE
RESOURCES ARE USED FOR THE INTENDED PURPOSES WILL BE IN PLACE THERE WAS
NO DISAGREEMENT OR FRICTION ON THIS QUESTION IN MY CONVERSATIONS WITH
NIGERIAN GOVERNMENT OFFICIALS

QUESTION FROM YOUR KNOWLEDGE OF NIGERIAN ECONOMY, DO YOU THINK THE
TIME IS RIGHT FOR THE NIGERIAN GOVERNMENT (INAUDIBLE)
SECRETARY SUMMERS. THE QUESTIONS OF PRECISE TIMING ARE NOT SOMETHING
THAT I FEEL KNOWLEDGEABLE ENOUGH TO HAVE A SPECIFIC JUDGEMENT ABOUT ONE
WAY OR THE OTHER, BUT I CERTAINLY FELT THAT THE ARGUMENTS THAT I WAS
EXPOSED TO THAT STRESSED THE IMPORTANCE'OF REALLOCATING THE BUDGET TO
THE HIGHEST PRIORITY USES AND STRESSED THE IMPORTANCE OF EFFICIENCY IN
THE PETROLEUM SECTOR AND STRESSED THE GENERAL DESIRABILITY OF REMOVING
PRICE CONTROLS AND DEVIATIONS OF PRICES FROM WORLD PRICES, THOSE
ARGUMENTS WERE ALL IN ACCORD WITH OTHER EXPERIENCES THAT I HAVE SEEN
AROUND THE WORLD.
QUESTION

(INAUDIBLE)

SECRETARY SUMMERS LET ME ANSWER THE QUESTION AND ASSISTANT SECRETARY
RICE MAY HAVE SOMETHING TO ADD IF I GET IT WRONG. THE PRESIDENT WANTS TO
VISIT NIGERIA AS HE HAS SAID ON MANY OCCASIONS BECAUSE HE VERY MUCH
SHARES THE SENSE OF EXCITEMENT THAT SURROUNDS NIGERIA'S TRANSITION TO
DEMOCRACY AND REGRETS THAT POLITICAL CONDITIONS PRECLUDE HIS VISIT TO
NIGERIA DURING HIS TRIP TO AFRICA TWO YEARS AGO. AT THIS TIME THERE IS NOT
YET A SCHEDULED DATE FOR THE VISIT, BUT THE PRESIDENT IS VERY EAGER TO
COME.
QUESTION: (INAUDIBLE) DEBT THAT NIGERIA HAS SHOULD BE CANCELLED DID YOU
DISCUSS THAT WITH MEMBERS OF THE GOVERNMENT? ARE THERE PLANS TO
UNILATERALLY OR NEGOTIATIONS TO REDUCE THEIR PRIVATE DEBT (INAUDIBLE)
SECRETARY SUMMERS: WE DID NOT HAVE A DETAILED DISCUSSION OF THAT IN
NIGERIA'S CASE AS IN OTHERS, IT IS IMPORTANT TO REMEMBER THAT DEBT IS A
CONTRACTUAL AND LEGAL OBLIGATION AND SO ANY KIND OF RESOLUTION THAT IS
NOT COOPERATIVE WITH CREDITORS IS ALWAYS VERY MUCH TO BE AVOIDED. IN THE
CONTEXT OF NIGERIA'S ONGOING DISCUSSIONS WITH THE PARIS CLUB WE WOULD
HOPE AND EXPECT THAT
THE PRINCIPLE OF COMPARABILITY WOULD BE
RESPECTED IN A BROAD WAY AS IT HAS BEEN IN OTHER COUNTRIES. AND NIGERIAN
OFFICIALS INDICATED TO US THAT THEY WERE GOING TO BE SEEKING ADVISORS WITH
RESPECT TO THE MANAGEMENT OF ALL THEIR DEBTS BOTH IN THE PUBLIC AND
PRIVATE SECTORS.
QUESTION

(INAUDIBLE)

SECRETARY SUMMER. WELL I THINK THAT THE DEMOCRATIC OPPORTUNITY, THE
COMMITMENT TO REDUCING CORRUPTION, AND THE MOVEMENTS TOWARD GREATER
TRANSPARENCY ARE ALL VERY CONSTRUCTIVE IN THIS REGARD, BUT ULTIMATELY IT
IS GOING TO BE CHOICES THAT THE NIGERIAN GOVERNMENT MAKES BOTH IN THE
DESIGN OF POLICY AND IT'S EXECUTION THAT ARE GOING TO DETERMINE WHAT
HAPPENS IN NIGERIA WHAT I THINK IS SURELY TRUE IS THAT CURRENT MOMENT
AFFORDS VERY IMPORTANT OPPORTUNITIES FOR SUBSTANTIAL INCREASES IN
CRUCIAL INVESTMENTS IN BOTH THE HEALTH AND EDUCATION OF THE NIGERIAN
PEOPLE
QUESTION

(INAUDIBLE)

SECRETARY SUMMERS I THINK THAT IS ALWAYS THE CASE IN CONTEXTS WHERE
DEBT ISSUES ARE BEING ADDRESSED WE WOULD RELY ON SATISFACTORY PROGRAMS
BEING IN PLACE WITH THE IMF AND THE WORLD BANK AND I WOULD EXPECT THAT
ESSENTIAL ELEMENTS OF THOSE PROGRAMS WOULD BE BUDGET ALLOCATIONS THAT
ASSURE THAT THE SAVINGS FROM DEBT RELIEF WOULD GO TO EDUCATION AND
HEALTH CARE, WOULD BE PROGRAMS THAT WOULD ASSURE THAT THE PROSPECTS
FOR ECONOMIC GROWTH WERE MAXIMIZED IN TERMS OF MACRO ECONOMIC
STABILITY AND IN TERMS OF THE FOCUS ON THE GOVERNMENT ACTUALLY CARRYING
THROUGH ON WHAT IT HAS SAID IT WANTS TO DO IN THE AREA OF PRIVATIZATION
BUT I WANT TO STRESS THAT THERE IS NO DESIRE TO IMPOSE A PROGRAM ON THE
NIGERIAN GOVERNMENT AND I WAS ENCOURAGED BY THE INDICATIONS THAT THE
PRESIDENT AND VICE PRESIDENT GAVE WITH RESPECT TO THEIR POLICY INTENTIONS
WHAT IS NOW GOING TO BE CRUCIAL IS THEIR EFFECTIVENESS IN CARRYING
THROUGH THOSE POLICY INTENTIONS.
THANK YOU VERY MUCH

pUBLIC DEBT NEWS
artment of the Treasury • Bureau of the Public Debt • Washington, DC 20239

FOR IMMEDIA TE RELEASE
June 14,2000

Contact: Office of Financing
(202) 691-3550

TREASURY'S. INFLATION-INDEXED SECURITIES
JULY REFERENCE CPI NUMBERS AND DAILY INDEX RATIOS
Public Debt announced today the reference Consumer Price Index (CPI) numbers and
daily index ratios for the month of July for the following Treasury inflation-indexed securities:
(1) the 3-3/8% 10-year notes due January 15,2007, (2) the 3-5/8% 5-year notes due July 15,
2002, (3) the 3-5/8% 10-year notes due January 15,2008, (4) the 3-5/8% 30-year bonds due
April 15, 2028, (5) the 3-7/8% 10-year notes due January 15,2009, (6) the 3-7/8% 30-year
bonds due April 15, 2029, and (7) the 4-114% 10-year notes due January 15,2010. This
infonnation is based on the non-seasonally adjusted U.S. City Average All Items Consumer
Price Index for All Urban Consumers (CPI-U) published by the Bureau of Labor Statistics of the
U.S. Department of Labor.
In addition to the publication of the reference CPI's (RefCPI) and index ratios, this
release provides the non-seasonally adjusted CPI-U for the prior three-month period.
This information is available through the Treasury's Office of Public Affairs automated
fax system by calling 202-622-2040 and requesting document number 704. The information is
also available on the Internet at Public Debt's website (http://www.publicdebt.treas.gov).
The information for August is expected to be released on July 18, 2000.
000

Attachment

LS-704

http://www.publicdebt.treas.gov

TREASURY INFLATION-INDEXED SECURITIES
Ref CPI and Index Ratios for

July 2000

Security:
Description:
CUSIP Number:
Dated Date:
Original Issue Dato:
Additional Issue Date:

3-3/B% 10-Year Notes
Series A-2007
9128272M3
January 15,1997
February 6,1997
April 15, 1997

3-5/B'Y. 5-Year Notes
Series J-2002
9128273A8
July 15, 1997
July 15, 1997
October 15, 1997

3-5/8% 10-Year Notes
Series A-200B
9128273T7
January 15, 1998
January 15, 1998
October 15, 1998

3-5/8% 3D-Year Bonds
Bonds of April 2028
912810FD5
April 15, 1998
April 15, 1998
July 15, 1998

Maturity Date:
Ref CPI on Dated Date:

January 15, 2007
158.43548

July 15, 2002
160.15484

January 15, 2008
161.55484

April 15, 2028
161.74000

Date
July
July
July
July
July
July
July
July
July
July
July
July
July
July
July
July
July
July
July
July
July
July
July
July
July
July
July
July
July
July
July

1
2
3
4

5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
29
30
31

2000
2000
2000
2000
2000
2000
2000
2000
2000
2000
2000
2000
2000
2000
2000
2000
2000
2000
2000
2000
2000
2000
2000
2000
2000
2000
2000
2000
2000
2000
2000

CPI-U (NSA) for:

RefCPI

Index Ratio

Index Ratio

Index Ratio

Index Ratio

171.20000
171.20323
171.20645
171.20968
171.21290
171.21613
171.21935
171.22258
171.22581
171.22903
171.23226
171.23548
171.23871
171.24194
171.24516
171.24839
171.25161
171.25484
171.25806
171.26129
171.26452
171.26774
171.27097
171.27419
171.27742
171.28065
171.28387
171.28710
171.29032
171.29355
171.29677

1.08057
1.08059
1.08061
1.08063
1.08065
1_08067
1.08069
1.08071
1.08073
1.08075
1.08077
1.08079
1.08081
1.08083
1.08085
1.08087
1.08089
1.08091
1.08093
1.08095
1.08097
1.08099
1.08101
1.08103
1.08105
1.08108
1.08110
1.08112
1.08114
1.08116
1.08118

1.06897
1.06899
1.06901
1.06903
1.06905
1.06907
1.06909
1.06911
1.06913
1.06915
1.06917
1.06919
1.06921
1.06923
1.06925
1.06927
1.06929
1.06931
1.06933
1.06935
1.06937
1.06939
1.06941
1.06943
1.06945
1.06947
1.06949
1.06951
1.06953
1.06955
1.06957

1.05970
1.05972
1.05974
1.05976
1.05978
1.05980
1.05982
1.05984
1.05986
1.05988
1.05990
1.05992
1.05994
1.05996
1.05998
1.06000
1.06002
1.06004
1.06006
1.06008
1.06010
1.06012
1.06014
1.06016
1.06018
1.06020
1.06022
1.06024
1.06026
1.06028
1.06030

1.05849
1.05851
1.05853
1.05855
1.05857
1.05859
1.05861
1.05863
1.05865
1.05867
1.05869
1.05871
1.05873
1.05875
1.05877
1.05879
1.05881
1.05883
1.05885
1.05887
1.05889
1.05891
1.05893
1.05895
1.05897
1.05899
1.05901
1.05903
1.05905
1.05907
1.05909

March 2000

111.1

April 2000

171.2

May 2000
-

I

I

171.3

TREASURY INFLATION-INDEXED SECURITIES

Ref CPI and Index Ratios for
July 2000
Security:
Description:
CUSIP Number:
Dated Date:
Original Issue Date:
AddltlonalllSue Date:

3-7/s04 10-Year Notes
Serlea A-200S
9128274Y5
January 15, 1999
January 15,1999
July 15, 1999

3-7/S% 3D-Year Bond.

4-114% 10-Year Note.

Bonda of April 2029
912810FH6
April 15, 1999
April 15, 1999
October 15, 1999

Serlea A-2010
9128275W8
January 15, 2000
January 18, 2000

Maturity Date:
Ref CPI on Dated Date:

January 15, 2009
164.00000·

April 15, 2029
164.39333

January 15,2010
168.24516

Date
July
July
July
July
July
July
July
July
July
July
July
July
July
July
July
July
July
July
July
July
July
July
July
July
July
July
July
July
July
July
July

1
2
3
4

5
6

7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
21
28
29
30
31

2000
2000
2000
2000
2000
2000
2000
2000
2000
2000
2000
2000
2000
2000
2000
2000
2000
2000
2000
2000
2000
2000
2000
2000
2000
2000
2000
2000
2000
2000
2000

CPI-U (NSA) for:

RefCPI

Index Ratio

Index Ratio

Index Ratio

171.20000
111.20323
171.20645
171.20968
171.21290
171.21&13
171.21935
171.22258
171.22581
171.22903
111.2322&
171.23548
171.23871
111.24194
111.2451&
111.24839
171.25181
111.25484
111.25806
171.2&129
111.28452
111.2&774
171.27097
111.27419
111.27142
111.28065
171.28381
111.28710
111.29032
111.29355
111.29677

1.04390
1.04392
1.04394
1.04396
1.04398
1.04400
1.04402
1.04404
1.04406
1.04408
1.04410
1.04412
1.04414
1.04416
1.04418
1.04420
1.04422
1.04424
1.04426
1.04428
1.04430
1.04432
1.04434
1.04435
1.04431
1.04439
1.04441
1.04443
1.04445
1.04447
1.04449

1.04140
1.04142
1.04144
1.04146
1.04148
1.04150
1.04152
1.04154
1.04156
1.04158
1.04160
1.Q.l1&2
1.04164
1.04166
1.04168
1.04170
1.04172
1.0417"
1.0417&
1.04178
1.04180
1.04182
1.04184
1.04186
1.04188
1.04190
1.04191
1.04193
1.04195
1.04197
1.04199

1.01756
1.01758
1.01760
1.01762
1.01764
1.017&6
1.01768
1.01770
1.01772
1.01774
1.01775
1.01777
1.01779
1.01781
1.01783
1.01785
1.01187
1.01789
1.01791
1.01793
1.01795
1.01797
1.01798
1.01800
1.01802
1.01804
1.01806
1.01808
1.01810
1.01812
1.01814

March 2000

171.1

April 2000

171.2

,

I

May 2000
-

171.3

D EPA R T 1\1 E N T

0 F

T BET REA SUR Y

NEWS
OFFICE OF PUBUC AFFAIRS -1500 PENN SYLVAN lA AVENUE, N.W.• WASHINGTON, D.C. - 20220· (202) 622-2960

FOR IMMEDIATE RELEASE
June 13, 2000

STATEMENT BY TREASURY SECRETARY LAWRENCE II. SUMMERS
I congratulate the efforts of W AMAT A (Wal io katika Mapambano na Al DS Tanzania) members
and volunteers in the fight against HIV / AIDS.
People are sometimes surprised to hear a Finance Minister like myself talk about Aids. But the
reason is very simple: AIDS is not only a health issue, but an issue with tremendous economic
implications that threatens the very foundation of development in Tanzania and throughout
Africa.
As a trailblazer in reducing the stigma of HIV / AIDS, W AMA T A and other non-governmental
organizations are absolutely crucial in the effort to stop AIDS from rolling back development
gains in Tanzania.
As we've seen from the success in Uganda and Senegal, national leadership is essential.
Likewise, we applaud Tanzanian President Mkapa who just this week took a bold step forward
by speaking directly to the people about the seriousness of AIDS. This leadership will be
essential in Tanzania where more than one in ten people are infected with HIV.
AIDS is an issue that effects us all. That is why President Clinton has set out a pro-active agenda
to tackle HIV / AIDS and other diseases that arc robbing millions of children of a hopeful future.
This effort increases funding and incentives for expanded research into new vaccines includin~
AIDS, malaria, and TB.
As part of this effort, I am pleased to announce today that the United States will make a S:25,(11)()
grant to WAMA T A to support their \Vork to speak out ahout I IIV; AIDS and I'[()vicie support ),lr
those affected by the disease. The grant is in addition to the $7.1 million the US currentl;
provides for the prevention and control ofHlV/AIDS ill Tanzania, where \\c are the largest
bilateral donor.
In April. Tanzania qualified for total debt reliefullder the I !cavil)' Indehted ]>\)()J' (ountn (I llP( I
Initiative which will translate into debt sen'icc'rclicf()ver timc orUS$:2 billiun (!\PVl. \\ith
roughly $100 million ill savings in FY2001 alonc. Thcsl' sa\ings amollnt tn l11()rc thanLIl1/;:::u,
entire health budget and should go a long way to help Talv<lllia light AiDS.

L8-705
Far press releases, st)eeches, public schedules and official biographies, call Olir 24·hollrfax line at (202) 622·2()-10

D EPA R T 1\-1 E N T

0 F

THE

T REA SUR Y
,

NEWS

TREASURY

OFFICE OF PUBLIC AFFAIRS .1500 PENNSYLVANIA AVENlJE, ~.W .• WASHlN(;TON. D.C .• 20220.(202) 622.2960

EMBARGOED UNTIL 2:30 P.M.
June 15, 2000

CONTACT:

Office of Financing
202/691-3550

TREASURY OFFERS 13-WEEK AND 26-WEEK BILLS
The Treasury will auction two series of Treasury bills totaling
approximately $16,000 million to refund $26,767 million of publicly held
securities maturing June 22, 2000, and to pay down about $10,767 million.
In addition to the public holdings, Federal Reserve Banks for their own
accounts hold $11,701 million of the maturing bills, which may be refunded at
the highest discount rate of accepted competitive tenders. Amounts issued to
these accounts will be in addition to the offering amount.
The maturing bills held by the public include $5,447 million held
by Federal Reserve Banks as agents for foreign and international monetary
authorities. Up to $3,000 million of these securities may be refunded within
the offering amount in each of the auctions of 13-week bills and 26-week
bills at the highest discount rate of accepted competitive tenders. Additional amounts may be issued in each auction for such accounts to the extent
that the amount of new bids exceeds $3,000 million.
TreasuryDirect customers requested that we reinvest their maturing holdings of approximately $962 million into the 13-week bill and $1,165 million
into the 26-week bill.

This offering of Treasury securities is governed by the terms and conditions set forth in the Uniform Offering Circular for the Sale and Issue of
Marketable Book-Entry Treasury Bills, Notes, and Bonds (31 CFR Part 356, as
amended) .
Details about each of the new securities are given in the attached
offering highlights.
L8-(08
000

Attaclunent

For press releases, speeches, public schedules alld official biographies, call our 24-hOllr fax line at (202) 622-2(/':1)

HIGHLIGHTS OF TREASURY OFFERINGS OF BILLS
TO BE ISSUED JUNE 22, 2000
June 15, 2000
Offering Amount . . . . . . . . . . . . . . . . . . . . . . . . . $8,500 million
Description of Offering:
Term and type of security . . . . . . . . . . . . . . .
CUSIP number..
. .....................
Auction date...
. ....................
I s sue da t e . . . . . . . . . . . . . . . . . . . . • . . . • . . . • .
Maturity date . . . . . . . . . . . . . . . . . . . . . . . . . . .
Original issue date . . . . . . . . . . . . . . . . . . . . •
Currently outstanding ............•.•••••
Minimum bid amount and multiples . . . . . . . .

91-day bill
912795 FA 4
June 19,2000
June 22, 2000
September 21, 2000
March 23, 2000
$11,114 million
$1,000

$7,500 million
182-day bill
912795 FL 0
June 19, 2000
June 22, 2000
December 21, 2000
June 22, 2000
$1,000

The following rules apply to all securities mentioned above:
Submission of Bids:
Noncompetitive bids

Accepted in full up to $1,000,000 at the highest discount rate of
accepted competitive bids.
Compet it i ve bids . . . . . . . . . . • • (1) Must be expressed as a discount rate with three decimals ~n
..
increments of .005%, e.g., 7.100%, 7.105%.
(2) Net long position for each bidder must be reported when the sum
of the total bid amount, at all discount rates, and the net long
position is $1 billion or greater.
(3) Net long position must be determined as of one half-hour prior
to the closing time for receipt of competitive tenders.

Maximum Recognized Bid
at a Single Rate . . . . . . . . . . . . 35% of public offering
Maximum Award . . . . . . . . . . . . . . . . . . . 35% of public offering
Receipt of Tenders:
Noncompetitive tenders . . . . . . Prior to 12:00 noon Eastern Daylight Saving time on auction day
Competitive tenders . . . . . . . . . Prior to 1:00 p.m. Eastern Daylight Saving time on auction day
Payment Terms:
By charge to a funds account at a Federal Reserve Bank on issue date, or payment
of fu11 par amount with tender.
Treasu~D~recc customers can use the Pay Direct feature which
authorizes

a

charge

to

their account

of record at

their financia1

i n s t i t u t i o n on

issue date.

DEPARTl\1ENT

OF

THE

TREASURY

NEWS
OFFICE OF PUBUC AFFAIRS • 1500 PENNSYLVANIA AVENUE, N.W.• WASHINGTON, D.C.. 20220. (202) 622-2960

FOR IMMEDIATE RELEASE
June 16, 2000

STATEMENT BY TREASURY DEPUTY SECRETARY STUART E. EIZENSTAT
I am delighted to learn that the World Jewish Restitution Organization and the Polish
Jewish Communities have concluded agreements for the establishment of a foundation to assist
in the restitution of communal property in Poland. To reach agreement, both parties had to
make some difficult compromises. I congratulate them for making these hard decisions in
order to speed the restitution of property righ tfull y belonging to the Polish Jewish com m uni ty.
I also want to thank my colleague, Ambassador Henry Clarke, for his role as the
mediator of these negotiations. Following my meeting with the parties in Warsaw,
Ambassador Clarke has worked hard for the past year to bring the parties together, to find
solutions to outstanding issues and to bring this process to a successful conclusion. He
deserves our congratulations.
With the agreement in place, I urge both parties now to complete the steps necessary to
get the foundation operating so that it can assist in the preparation of claims. Less than two
years remain to submit claims under the existing law. To complete the process prior to the
deadline will require a concerted effort by both parties. We stand ready to continue to be of
assistance to help launch this historic initiative to return communal property confiscated by the
Nazis, and then nationalized by the Communists. We commend the Polish government for
their willingness to facilitate the return of this communal property.
-30-

L8-709

Far press releases, speeches, public schedules and official biographies, call our 24-hour fax line at (202) 622-2040

DEPARTMENT

IREASURY

OF

THE

TREASURY

fU) N E W S

OFFICE OF PUBUC AFFAIRS • 1500 PENNSYLVANIA AVENUE, N.W .• WASHINGTON, D.C.. 20220. (202) 622-2960
q

FOR IM1V1EDIATE RELEASE
June 19, 2000

STATEMENT BY TREASURY SECRETARY LA\\'RENCE H. SUMMERS
REGARDING OECD'S TAX COMPETITION PROJECT

\Ve welcome the commitments announced by the OECD today of six jurisdictions to
move rapidly to eliminate their harmful tax practices These cOlllmitments represent an
important milestone in the etTon to ensure that the global mobility' of capital does not subven
national interests They also make a contribution to preventing tax evasion and avoidance
around the world. The jurisdictions have pledged changes to help ensure that their tinancial
sectors will meet international standards of fairness, transparency and disclosure, including the
exchange of information in the context of criminal and civil tax matters.
In today's global economy, it is vital that we put an end to international tax practices that
encourage tax evasion and improper tax a\'oidance and that distort capital flows We encourage
all jurisdictions that have not previously made commitments to eliminate harmful ta".: practices to
do so In addition, we \vould lil\e to reiterate our stll1l1g Sllppor1 fl")r the OECD's Tax
Competition Project more generall\" and look t(lmard to the publication of its repon ne.xt \\tek
-30-

LS-711

For press releases, speeches, public schedules and official biographies. call our 24-hour fax line at (202) 622-20-10

DEPARTl\lENT

OF

THE

TREASURY

NEWS
omCE OF PUBLIC AFFAIRS -1500 PENNSYLVANIA AVENUE, N.W. - WASlflNGTON, D.C. - 20220 - (202) 622-2960

EMBARGOED UNTIL 10 A.M. EDT
Text as Prepared for Delivery
June 20, 2000

ASSISTANT SECRETARY (FINANCIAL INSTITUTIONS)
GREGORY A. BAER
TESTIMONY BEFORE THE HOUSE COMMITTEE ON BANKING
AND FINANCIAL SERVICES

Mr. Chairman, Ranking Member LaFalce, and members of the Committee, thank you for
the opportunity to present the Treasury Department's views on H.R. 4419, the Internet Gambling
Funding Prohibition Act.
We are fortunate to be living in a period of rapid technological progress and solid
economic growth. Advances in information technology and the linkages provided by the Internet
are dramatically changing how we do business and even how we live. The resulting increases in
productivity have helped to fuel the New Economy.
One of the great benefits of the Internet is that it links individuals and businesses in realtime across borders and oceans. It creates a single market where merchants and consumers can
do business without having to incur the cost of meeting. It gives consumers greater access to
information and democratizes access to quality products. Through innovations like on-line
auctions, the Internet can make anyone a seller and anyone a buyer.
With the myriad benefits of this connectivity, however, come some costs. Because the
Internet knows no boundaries, it knows no states. Except for the need to convert currency in the
event of payment, the experience is no different on an American or Antiguan or Australian
website. Because the Internet is stateless, laws are more difficult to apply. Thus, over the past
year, we have seen profound effects on copyright, as Internet users share proprietary information
freely. As my colleague from the Department of Justice will elaborate, the Internet constitutes a
challenge to law enforcement.
Today's hearing concerns one area where these problems are being vividly demonstrated.
on-line gambling. As the Internet has revolutionized many industries, it also has affected the
gambling industry. A recent report found that as of January 2000, there were 650 Internet
gambling sites. In 1999, Internet gambling revenue was $1.2 billion, which was 80 percent
LS-712

FO?ess releases, speeches, public schedules and official biographies, call our 24~our fax line at (202) 622-2040
Q

higher than the previous year. Still the Internet gambling sector is small compared to the overall
gambling sector: in 1998, only 0.4 percent of adults in the United States gambled on the Internet,
whereas over 50 percent had purchased a lottery ticket and over one quarter had gambled in a
casino.

I.

Unique Challenges Posed by Internet Gambling

No one can doubt the damage that gambling can do. For compUlsive gamblers especially,
the damage to themselves and their families can be profound.
Thus, we must be concerned by the ability of the Internet to facilitate this sort of
compulsive gambling by allowing easy, around-the-clock access from the comfort of one's home
or workplace. Internet gambling can also facilitate underage gambling, as minors can log into
casinos and lie about their age in order to participate.
As Deputy Assistant Attorney General Di Gregory will describe, operating an on-line
casino is already illegal in the United States, but on-line casinos have proliferated overseas.
Internet casinos began in the Caribbean, and have spread to South America, Australia and other
countries, where they are legal under local law. Regardless of their physical headquarters, they
are quite easy to find on the Internet.
Preventing Americans from gambling at overseas Internet casinos is difficult for both
legal and practical reasons. Punishing the casino is difficult because its activities are legal in the
place it operates. Punishing the gambler would require identifying who is logging onto such
sites, a task that would face profound privacy and civil liberties concerns as well as technological
obstacles.
I would now like to turn to H.R. 4419, the Internet Gambling Funding Prohibition Act,
which provides an innovative, alternative approach to restrict Internet gambling. We look
forward to working with the Committee on this important issue.

IJ.

H.R. 4419

H.R. 4419 attempts to prevent Internet gambling by severing the link between the
gambler and the casino. The bill bans any person engaged in a gambling business from
knowingly accepting certain payments from other people participating in Internet gambling.
Prohibited payments include credit, electronic funds transfers or funds transmitted through the
use ofa credit card, check, draft or similar instrument. We are pleased to see that the bill does so
in a technology neutral way. It also prohibits·financial transactions involving payment through a
financial institution or intermediary acting on behalf of the person participating in Internet
gambling. Perhaps most significantly, it authorizes regulators to direct financial institutions not
to make payments to merchants identified as Internet casinos.

H.R. 4419 represents an innovative approach to the problem ofInternet gambling, and does not
contain the troubling loopholes that are found in some legislation. However, the bill also
presents technological challenges and policy concerns that need to be considered further,

2

including two enforcement provisions that the Treasury Department strongly opposes. We
believe, however, that these provisions are not central to the bill, and could be removed without
undermining its effectiveness. We also share in the concerns expressed by the Justice
Department.

A. Technology
H.R. 4419 is premised on the ability of actors in the payment system to identify and halt
payments to Internet casinos. Payment processors are granted a safe harbor for any transaction
where they do not know that the payee is involved in Internet gambling. The bill appears to
assume that payment processors will either know that a given payee is an Internet gambling
business or be informed by the government.
Currently, the majority of Internet gambling transactions are conducted with credit cards.
For purposes of tracking transactions, the major credit card companies really fall into two
groups. The first group consists of credit card associations owned by member banks, which are
responsible for issuing cards to customers and signing up, or "acquiring," merchants. The
second group includes firms that issue cards and acquire merchants directly.
Based on our discussions with the industry, we believe both types of company can
already identify and could probably refuse to authorize payments to Internet gambling
businesses. The two major credit card associations allow their members to acquire Internet
casinos as merchants ifthe business is legal in the place it is being conducted. As part of a
recent civil litigation settlement, however, one of the credit card associations agreed to assign a
merchant category code to Internet casinos. The other association can derive the same
information from a combination of codes and fields it assigns to merchants
Direct issuers should have no less ability to identify Internet gambling transactions. One
ofthe direct issuers represented that it no longer signs up any merchant engaged in Internet
gambling. However, a search of Internet gambling sites did reveal a few casinos claiming to
accept its cards.
A credit card is of course only one payment mechanism, but it is the most important for
on-line gambling. First, use of credit cards presents special concerns because gamblers are
indebting themselves in order to gamble. Second, credit cards are the most frequently used
payment mechanism: some sites even feature pictures of favored credit cards on their home
pages. Casinos appear to prefer them for the speed with which gamblers can be registered and
begin gambling; gamblers prefer them for that reason, but also because they can charge back in
the event of fraud, and can receive payment on winnings quickly and cheaply by having their
account credited.
The bill's restrictions would also apply to payments using off-line debit cards (better
known as check cards) and on-line debit cards (better known as ATM cards). Currently, almost
all off-line debit transactions are processed through two networks owned by the credit card
associations. Thus, merchant codes could also be used to block these transactions as well.

3

Currently, on-line debit transactions generally do not take place on the Internet, due to the
problems of encrypting the PIN.
Still, there could be ways to avoid these payment restrictions on debit transactions. First,
through electronic bill payment, individuals currently authorize payments to merchants.
Presumably, such payments could be made to Internet casinos, which we gather would not
currently need to he identified as such. Second, some Internet aggregators now accept deposits
from consumers - which can come through credit card payments - and allow the consumer to
spend that money on-line. Third, there are numerous attempts underway to develop electronic or
digital cash - stores of value that can be spent on-line in anonymous peer-to-peer transactions
(that is, without involving a bank or other use of the traditional payment system). On-line gift
certificates and rewards programs allow consumers to purchase or earn the ability to spend online currency at participating merchants. Although casinos do not appear to be among those
merchants, systems could be created with that purpose in mind. Thus, while new, anonymous
payment mechanisms will be a boon to Internet commerce and even Internet privacy, they will
present serious challenges to those attempting to restrict Internet gambling and other illegal
conduct.
Finally, all of the credit card issuers have stressed to us that merchants can take other
measures to conceal the nature of their businesses. A merchant could submit transactions under
different names, or misidentify the nature of its business. And of course nothing would prevent a
gambler from simply sending a check to a casino overnight mail.
B. Public Policy Concerns
While most ofH.R. 4419 is directed at stopping payments to on-line casinos, it also
contains sanctions designed to dissuade other nations from hosting such casinos. The Treasury
Department strongly opposes these provisions.
Section 4(b) of the bill would require the Secretary of the Treasury to instruct the U.S.
Executive Directors of each international financial institution (lFI) to oppose any "non-basic
human need" loan for any country that the Secretary determines (1) permits a high level of
participation in, and the use of the financial payment and transfer systems to facilitate Internet
gambling by U.S. citizens and residents; and (2) is not effectively implementing measures to
limit such participation and financial system use by U.S. citizens.
This provision undermines the Administration's policy of supporting the institutions'
focus on their core missions: poverty reduction, economic growth, and the stabilization of global
financial markets. It also would be difficult for Treasury to determine which countries have a
"high" level of participation in Internet gambling or are not "effectively" implementing measures
to limit U.S. citizens' gambling activities. Under this provision, Treasury would be forced to
evaluate countries based on the actions of their private citizens and companies, not on the actions
of their governments.

4

Section 4(c) would require the Secretary of the Treasury and the Federal Reserve to take
such action as they determine to be appropriate to limit or preclude access to the U.S. payment
system by financial institutions that are chartered by, organized under the la~s of, or have their
principal places· of business in a country that permits a high level of participation in Internet
gambling by U.S. citizens. This provision may raise questions with our trading partners
concerning its consistency with U.S. obligations under international trade agreements.

Ill. Conclusion
Mr. Chairman, thank you for the opportunity to appear before the Committee today. We
look forward to working with you to resolve the concerns that we and the Justice Department
have raised today. I also look forward to answering any questions the Committee may have.

-30-

5

PUBLIC DEBT NEWS
Department of the Treasury • Bureau of the Public Debt • \Vashington, DC 20239

TREASURY SECURITY AUCTION RESULTS
BUREAU OF THE PUBLIC DEBT - WASHINGTON DC
CONTACT:

R IMMEDIATE RELEASE
2000

ne 19,

Office of Financing
202-691-3550

RESULTS OF TREASURY'S AUCTION OF 13-WEEK BILLS
91-Day Bill
June 22, 2000
September 21, 2000
912795FA4

Term:
Issue Date:
Maturity Date:
CUSIP Number:
5.690%

High Rate:

Investment Rate 1/:

Price:

5.852%

98.562

All noncompetitive and successful competitive bidders were awarded
curities at the high rate.
Tenders at the high discount rate were
lotted 93%. All tenders at lower rates were accepted in full.
AMOUNTS TENDERED AND ACCEPTED (in thousands)

Competitive
Noncompetitive

$

21,172,000
1,292,614

$

1,420,000

1,420,000

23,884,614

8,513,118

5,553,692

5,553,692

Foreign Official Refunded
SUBTOTAL
Federal Reserve
Foreign Official Add-On

o

°
$

5,800,504
1,292,614
7,093,118 2/

22,464,614

PUBLIC SUBTOTAL

TOTAL

Accepted

Tendered

Tender Type

29,438,306

$

14,066,810

Median rate
5.680%: 50% of the amount of accepted competitive tenders
as tendered at or below that rate.
Low rate
5.650%:
5% of the amount
accepted competitive tenders was tendered at or below that rate.
d-to-Cover Ratio = 22,464,614 / 7,093,118 = 3.17
Equivalent coupon-issue yield.
Awards to TREASURY DIRECT = $1,042,814,000

S-713

http://www .pu blicdebt. treas.gov

PUBLIC DEBT NEWS
.1>epartment of the Treasury • Bureau of the Public Debt • Washington, DC 20239

TREASURY SECURITY AUCTION RESULTS
BUREAU OF THE PUBLIC DEBT - WASHINGTON DC
CONTACT:

IMMEDIATE RELEASE
2 00

°

Ie 19,

Office of Financing
202-691-3550

RESULTS OF TREASURY'S AUCTION OF 26-WEEK BILLS
182 -Day Bill
June 22, 2000
December 21, 2000
912795FLO

Term:
Issue Date:
Maturity Date:
CUSIP Number:
5.920%

High Rate:

Investment Rate 1/:

Price:

6.188%

97.007

All noncompetitive and successful competitive bidders were awarded
:urities at the high rate.
Tenders at the high discount rate were
lotted 82%. All tenders at lower rates were accepted in full.
AMOUNTS TENDERED AND ACCEPTED (in thousands)
Accepted

Tendered

Tender Type
Competitive
Noncompetitive

$

18,169,323
1,581,583

3,000,000

3,000,000

22,750,906

7,508,266

4,038,461
45,000

4,038,461
45,000

Foreign Official Refunded
SUBTOTAL
Federal Reserve
Foreign Official Add-On
$

2,926,683
1,581,583
4,508,266 2/

19,750,906

PUBLIC SUBTOTAL

TOTAL

$

26,834,367

$

11,591,727

Median rate
5.920%: 50% of the amount of accepted competitive tenders
tendered at or below that rate.
Low rate
5.850%:
5% of the amount
accepted competitive tenders was tendered at or below that rate.
d-to-Cover Ratio

=

19,750,906 / 4,508,266

= 4.38

Equivalent coupon-issue yield.
Awards to TREASURY DIRECT = $1,255,546,000

L8-714

http://www .pu blicdebt. treas. gov

DEPARTMENT

OF

THE

TREASURY

NEWS
OFFICE OF PUBliC AFFAIRS • 1500 PENNSYLVANIA AVENUE, N.W.• WASHINGTON, D.C. • 20220 • (202) 622·2960

For Immediate Release
June 20, 2000

Contact: Public Affairs
202-622-2960

TREASURY SECRETARY MEETS WITH MEXICAN FINANCE MINISTER
Treasury Secretary Lawrence H. Summers and Mexico's Secretariat of Finance and
Public Credit Angel Gurria today signed a new Customs Mutual Assistance Agreement (CMAA)
providing for enhanced cooperation on a wide range of law enforcement issues between the U. s.
and Mexican customs administrations.
The U.S. and Mexico had signed a Customs Mutual Assistance Agreement in 1976, but
the rapid expansion of trade under the North American Free Trade Agreement (NAFTA) and
changes in the legal frameworks in both countries caused the two governments to seek an
expanded cooperation agreement.
The new CMAA will assist in the gathering of evidence for criminal and civil cases
involving trade fraud, money laundering, export control violations, and drug smuggling, and \\·ill
do so in a manner that respects the legal frameworks of both countries. The agreement includes
new rules for disclosure of information, and addresses the exchange of information in an
electronic format.
- 30 -

LS-71S

For press releases, speeches, public schedules and official biographies, call

Ollr

24-hour fax line at (202) 622-2040

DEPARTMENT

OF

THE

TREASURY

NEWS

~~/78~q~. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ..

....

OFFICE OF PUBUC AFFAIRS • 1500 PENNSYLVANIA AVENUE, N.W .• WASHINGTON, D.C .• 20220. (202) 622-2960

For Immediate Release
June 19, 2000

Contact: Public Affairs
202-622-2960

ST ATEMENT BY TREASURY DEPUTY SECRETARY STUART EIZENST AT

I welcome the House passage of H.Res. 495, expressing support for the Financial Action
Task Force and for its ongoing efforts to identify those countries and territories that are noncooperative with global efforts to combat money laundering. I appreciate the leadership of
Representatives Roukema, Bereuter, Bliley, Borski, McInnis, Goss, Pickett and McCollum, as
well as the Banking Committee Chairman Leach and Ranking Member LaFalce.
Money laundering is a growing, global problem that requires a global response. The U.S.
delegation is in Paris this week to complete this unprecedented initiative to identify nations that
are non-compliant with global efforts to combat money laundering. This is the first-ever
multilateral publication of a list that will shine the spotlight on these non-cooperative countries.
Along with the overwhelming bipartisan vote earlier this month by the House Banking
Committee to pass the International Counter-Money Laundering Act of 2000, this action by the
House sends a strong signal that the both the legislative and executive branches of the U.S.
government are united on the need to crack down on foreign countries that provide no-questions
asked financial services to international drug cartels, criminal and terrorist organizations.
- 30 LS-716

For press releases, speeches, public schedules and official biographies, call Ollr 24-hour fax lille at (202) 622-2040

NEWS
OffiCE OF PUBLIC AFFAIRS -1500 PENNSYLVANIA AVENUE, N.W. - WASIDNGTON, D.C. - 20220 - (202) 622·2960

EMBARGOED UNTIL 2:00 P.M. EDT
Text as Prepared for Delivery
June 20, 2000

TREASURY TAX LEGISLATIVE COUNSEL JOSEPH MIKRUT TESTIMONY
BEFORE THE HOUSE COMMITTEE ON WAYS AND MEANS
SUBCOMMITTEE ON OVERSIGHT

Mr. Chairman, Mr. Coyne, and distinguished Members of the Subcommittee:

I appreciate the opportunity to discuss with you today the issue of disclosure of political
activities of tax-exempt organizations At the outset, ] would like to emphasize that the
Administration strongly supports efforts to require greater disclosure of political campaign
contributions and expenditures as part of its on-going efforts to achieve comprehensive campaign
finance reform. Some of the disclosure proposals raise issues outside the tax code - such as
Federal election laws issues - which are generally beyond the expertise of the Treasury
Department. However, recent developments involving so-called "section 527" organizations
show the interplay between the Federal election laws and tax code rules. I will focus my remarks
today on issues that arise under the Internal Revenue Code.

Internal Revenue Code Rules

In general
Twenty-seven different types of tax-exempt organizations are described in section SOl(e)
of the Internal Revenue Code. I These organizations - which cover a wide range of nonprofit
entities, including charities, social welfare organizations, labor unions, business leagues, and
social clubs - general Iyare exem pt from Federal income tax (other than with respect to certain
unrelated business income). In addition, section 527 provides a limited tax-exempt status to
certain "political organizations," meaning parties, committees, funds, and other organizations
that are organized and operated primari Iy for the purpose of accepting contributions or making
expenditures to influence the selection of an individual to public office. Section 527 entities are
exempt from tax on political contributions they receive (and certain other political fundraising
receipts), but are subject to tax on their investment income

LS-7I 7
Unless othem isc indicated. all section rcfcrcnccs are 10 rhc Inlcmal

RCYCllllC

Codc of 1<)X6. as amcnded.

FO:}ress releases, speeches, public schedules and official biographies, call our 24-hour fax line at (202) 622·2040
~

The different tax-exempt organizations are subject to different rules under the Internal
Revenue Code with respect to their "political" (in the broad sense of the term) activities In
particular, the tax code differentiates "lobbying" with respect to legislation from "political
campaign intervention" (sometimes referred to as "electioneering"), even though both types of
advocacy activities are commonly thought of as being "political." In discussing the rules
governing participation by tax-exempt entities in political activities and disclosure of such
activities, it is necessary to keep in mind the different types of tax-exempt entities and to
distinguish lobbying from political campaign intervention.
Charities
Exempt Status
Organizations described in section SOl(c)(3) are commonly referred to as ';charities."c
Compared to other tax-exempt organizations, charities are eligible for the most preferred taxexempt status under the Code. That is, not only are charities generally exempt from tax at the
entity level, they also have access to tax-exempt financing and are eligible to receive
contributions that are deductible for Federal income, estate, and gift tax purposes J At the same
time, charities are subject to the most stringent rules with respect to their advocacy activities.
Section 50I(c)(3) expressly provides that charities are prohibited from intervening in any
political campaign on behalf of (or in opposition to) any candidate for public office; and charities
may not engage in more than "insubstantial" lobbying in an attempt to influence legislation.
Political intervention by charities

Although charities are absolutely barred from intervening in a political campaign on a
partisan basis, charities may engage in some election-related activities - such as voter
registration efforts or sponsoring a debate - provided that the activities are not biased towards a
particular candidate-1 Section 50 I (c)(3) is violated when a charity intervenes in a political
campaign "on behalf of (or in opposition to) any candidate." However, in cases where the
charity does not directly provide financial support to a candidate, or explicitly endorse or oppose
a candidate, the determination of whether prohibited ·political campaign intervention .has
implicitly occurred is made by the IRS on the basis of all facts and circumstances. In this regard,
the IRS does not use the Federal election law "express advocacy" standard (which is discussed
below). 5
Because a tax-exempt charity may not engage in political campaign intervention
consistent with its section 501 (c)(3) status, there generally is no disclosure regime provided by
the Internal Revenue Code for prohibited political campaign activities of charities. If a charity
"Charities'· includepubJic charities (sllch as churches. schools. hospit;lls. and organi!.illions that receive their
support fron) a broad range of public sources) and pri\"ale foundations (\\hich generally arc closely controlled and,
thus. are subject to special rules under the Code)
3 Howe\'er. conlributions 10 a charit\ arc not deductible if earmarked for lobbying (lc[i\illes Sec Treas. Reg. Sec.
1.l70A-l(j)(G). In addition. 110 ded;,clion is allO\led for OUI-of-pocket e.\penditllTes made 011 behalf of a charil~
(other tllCllI a Church) if the e.'pendllurc IS madc for lobbying purposes. See section 170(l)(6)
~ See. e.g .. Re\". Ru1. 80-282. 1~S(J-2 CB 17X SpeCial nIles apply to private fOlindations under section -i9A5(f).
- Sec. e.g .. Re,·. Rul. 71-:-2-18. IlJ7R-1 C 8. 15-1
:c

improperly engages in political campaign intervention, the charity's tax-exempt status under
section 501(c)(3) may be revoked, in which case the IRS will notify the public that contributions
to the entity no longer are tax-deductible. Moreover, penalty excise taxes may be imposed by the
IRS under section 4955 in addition (or as an alternative) to revocation of tax-exempt status.
When penalty excise taxes are imposed under section 4955 as a result of improper political
campaign intervention, disclosure of this fact is required on the charity's annual information
return, which is filed with the IRS and which must be made available to the public upon request 6
Lobbying by charities
As a general rule, section 501(c)(3) provides that no more than an insubstantial amount of
the activities of a charity may be attempting to influence legislation. More specifically, the Code
and regulations contain three sets of overlapping rules governing such "lobbying" efforts by
charities. One set of rules applies to public charities that elect to be governed by a specific,
numeric test (based on dollar amounts of expenditures by the charity) to determine whether their
lobbying activities are substantial. - Another set of rules applies to charities that choose to be
subject to a facts-and-circumstances test of whether their lobbying activities are substantial
relative to their other activities. ~ A third set of rules applies to private foundations, which
generally are subject to penalty excise taxes on their lobbying expenditures ~ven if the
foundation's lobbying activities are not so substantial as to jeopardize its tax-exempt status 9
The definition of "lobbying" for purposes of section 501 (c)(3) is essentially the same
under the three sets of rules governing charities. In short, "lobbying" includes directly
contacting members ofa legislative body (or their staffs) to support or oppose legislation (socalled "direct lobbying"), as well as urging the public to contact legislative bodies, or otherwise
attempting to influence public opinion, with respect to specific legislation (so-called "grassroots
lobbying"). All facts and circumstances surrounding a communication generally are taken into
account in determining whether "lobbying" has occurred, although discussions of broad social or
policy issues (even issues likely to be addressed by a legislature) generally do not constitute
"lobbying" for purposes of section 501(c)(3) if the discussion does not advocate for or against a
specific legislative proposal
For communications that fall within the section 50 I (c)(3) general definition of
"lobbying," exceptions are provided when an organization makes available certain nonpartisan
analysis, study, or research, or provides technical advice to a governmental body in response to a
written request III In addition, for purposes of section 50 I(c)( 3), "lobbying" does not incl ude
~ See section 61O-l(d) and Treas. Reg. Sec. 301.61O~(a)-3(a).
See sections SO/(h) and ..J91 I. which prm'idc that an "clccting" charity's total lobbying c\pcnditurcs in any year
may not exceed 20% of the first $,00.000 of the organi7'<ltion·s excmpt purpose cxpcnditures. \\illl dccreasing
percentages for additional exempt purpose cxpcnditures (subjcct to a $1 million cap for total lobbying cxpcnditurcs).
A separate limit equal 10 25% of the oyerall permissible lobbyi ng amount applies to grass roots lobbying.
8 See. e.g. Treas. Reg. Scc. 1503(c)(3)-I(c)(~)(li): Haswell \" United Statcs. SOO F.2d I Ln (Ct. CI. 1974)
9 See section 49..J5(d)( I) and (c)
10 TIle '"nonpanisan allal~sis" except ion may apply. c\en if the COlllllHI111catioll ;ld\ocatcs a paniclIlar pOSH ion.
provided that therc is a sufficicntly fuJI ;Jnd fan c\positioll of thc facts to enable the rccipient 10 fOfIll an independcnt
opinion and the cOlllmunication does not '"directly encourage" the recipiclltto take aclion. Sec Trcas. Reg Scc
56A911-2(c)( l)(ii) and ("i)

certain communications between a public charity and its members, nor does the term include
direct lobbying by a charity with respect to legislation which might affect the existence, powers
and duties, tax-exempt status, or deduction of contributions to the organization (so-called "selfdefense lobbying").11
Under current law, charities disclose their lobbying activities to the IRS and the general
public by reporting on their annual information return (Form 990) the amount oftheif lobbying
expenditures for the taxable year. In addition, charities which elect to be subject to the section
501(h) numeric test of "substantiality" must allocate their expenditures between "direct" and
"grass roots" lobbying. Non-electing charities must disclose their general methods of lobbying,
such as the use of media advertisements or direct contacts with legislators, and the amounts
expended using each method. In addition, to the extent that a charity engages in non-partisan
analysis of legislation as part of its major program services, such activities are described on the
Form 990.
Ifa charity improperly engages in "substantial" lobbying, the charity's tax-exempt status
under section 501(c)(3) may be revoked, and such a sanction would be disclosed to the general
public. Moreover, penalty excise taxes may be imposed by the IRS under sections 4911 or 4912
in cases of excess lobbying expenditures, and imposition of these penalties would be reported on
the charity's Form 990.
Disclosure of contributors to charities
The annual information return (Form 990) required to be filed by a charity with the IRS
and made publicly available contains a variety of information about the charity's operations for
the taxable year, including a description of its major programs, gross income and expenses,
assets and liabilities, and total contributions received 1: When filing this return with the IRS,
charities also attach a list that identities the names and addresses of all substantial contributors
(generally meaning persons who contribute $5,000 or more to the charity during the year).
However, section 6104( d)(3) expressly provides that, in the case of a public charity, public
disclosure is not required of its contributor list. The Form 990 is required to be filed within four
and one-half months following the end of the organization's taxable yearIJ An organization that
fails to file a complete and accurate Form 990 is subject to a penalty of $20 for each day the
failure continues, up to a maximum penalty per return of$10,000 or (ifless) five percent of the
organization's gross receipts for the year. 11 Similar penalties also may be imposed if an
organization fails to make its Form 990 (or its exemption application) publicly available. 1)

See sections -I-911(d) and -I-9-1-5(c).
The annual information-reporting rcquircmcnt does not apply to churches and small chari tics which nonnally
have annual gross rcceipts below $25.000. See scction ()011(a)(2)~ Re,·. Proc X1-23. 1<)83-1 e.B. 6X7.
13 An organiz.1tion may rcqucst up to t\\O 90-da~ extensions of timc to file its Form 990 (for a masimum estension
of up to six mont hs)
14 Section 6652(c)( I HA). Higher penalties (I.e .. $1 ()() per day. up to a masilllum of $SO.OO() apply to orgal1lzatiol1s
having
annual gross receipts O\'er $1 million
1, .
. Section 6652(c)( 1)(e) and (D).
II

Ie

4

Non-charities
Exempt Status
Nonprofit organizations that are described in section 501 (c) but which are not charities
include section 501(c)(4) social welfare organizations, section 501(c)(5) labor and agricultural
organizations, section 50 I (c)( 6) business leagues, and section 50 I (c)(7) social clubs. These noncharities generally are exempt from tax on dues and contributions, related-function income, and
investment income, but are subject to tax on certain unrelated business income. 16 Contributions
to non-charities generally are not deductible to the donor for Federal income, estate, or gift tax
purposes 17 However, in some instances, contributions or dues may be deductible by the payor as
a trade or business expense, provided that the payment is not allocable to political campaign or
lobbying activities conducted by th~ recipient organization. 18
Political campaign intervention
Non-charities generally are not restricted by the Internal Revenue Code from engaging in
political campaign activities However, political campaign activities cannot be the primary
activities of an entity described in section 50l(c), such as a section 501(c)(4) social welfare
organization. 19 If the primary activities of an organization are conducting or funding political
campaign activities, such an organization may be eligible for the limited tax-exempt status under
section 527 (see below).
T a the extent that a non-charity engages in 'any political campaign activities, the
organization (or a separate segregated fund through which it funds such activities) is subject to
tax on the lesser amount of its investment income or the amount expended on political campaign
activities.:" The objective of this rule is to prevent organizations from using tax-free investment
income to fund political campaign intervention For this purpose, the test for determining
whether political campaign activities have been funded or conducted by the organization is
generally the same as for purposes of section 50 I (c )(3) - that is, the question is whether, based

16 Certain organizations - such as social clubs described ill section 50 1(c)(7) - arc e~cmpt from tax on dues and
certain other amounts paid by membcrs. but arc Sllbjcct to t;J.' 011 their illvcstmcllt illCOIIIC and any incomc received
from non-membcrs.
I' There are Iimitcd cxccptions to this gener,lI mle for cCl1ain contributions madc to \\ilf yctCf(lI1S groups. domestic
[ratema] societies. and cerlain nonprofit ccmctcry cOlllpallles. Sec sections 170(c)(l). (C)(4). and (c)(5). The IRS
position is that. in the abscncc of a spccific stallllo~ c.,ccpt iOIl. gi fts 10 1I01l-chan tiC-5 arc subjcct to thc Fcdcral gift
tax. Sce Rcy. Rul R2-216 C.B 1982-1 C.B no.
18 Sec section 162( e)(}). Corporations and busincsses gcncrally arc prohibited by scction IG2( c)( I ) from deducting
political campaign and lobbying expenditures: and section 162(e)(3) ensures that section 162(e)(I) IS not
circumvented by a business simply making dues p,iymcnts to a mcmbcrship organization ,\·hich. in tum. conducts
political campaign or lobbying acti,'itics 011 bchalf of its membcrs. Ho\\c\·cr. a \Ion-charity such as a busincss
league may elect to pay a "proxy" ta., on its polilical campaign or lobbying expcnditures. in which case dues paid by
its members could be deducted as a busincss c'pcnse without regard to the political campaign or lobbyl11g
expenditures
madc by• thc org[lI1izlltion See section 6033(e)
19
See Rc\. RuI. 81-95. 19XI-1 CB. ~32.
~~ Sec seclion 527(f).
~

on all the surrounding facts and circumstances, there has been an attempt to influence an election
for public office by supporting or opposing one or more candidates: 1
Non-charities must indicate on their Form 990 the amount of expenditures for political
campaign intervention and indicate whether they filed a Form] 120-POL, which is required if
their net investment income and political campaign expenditures both exceed $100 Form 1120POL is a one-page form indicating the amount of investment income, expenses attributable that
income, and the amount of tax due. There is no listing on the Form 1120-POL of contributors to
the organization or recipients of disbursements. In contrast to the Form 990, which is an
information return, the Form 1120-POL is a tax return that is not publicly available. Form 1120POL is required to be filed within two and one-half months after the end of the organization's
taxable year ~2
Lobbying activities
Non-charities described in section 501(c) are not subject to any specific Internal Revenue
Code provision that restricts their lobbying activities Indeed, lobbying may be the primary
activity for some tax-exempt organizations, such as a social welfare organization or a business
league. In general", the only theoretical limit is that the lobbying activities must somehow further
the entity's nonprofit purposes.
Non-charities with members who may be deducting their dues payments as business
expenses are required to indicate on their Form 990 the amount of their lobbying expenditures,
which would be non-deductible if directly incurred by the member. Other non-charities
generally do not specifically report lobbying expenditures on the Form 990, but may describe
their lobbying activities ifpart ofa major program of the organization
Disclosure of contributors
As with charitable organizations, non-charities described in section 501 (c) generally must
report on their Form 990 the total amount of dues and contributions received by the organization
during the taxable year. In addition, non-charities provide a list of their major contributors
(generally meaning persons who make gifts of $5,000 or more during the year) to the IRS, but
this list is not publicly available.
Section 527 political organizations
Section 527 governs the tax treatment of "political organizations," meaning a party,
committee, association, fund, or other organization (whether or not incorporated) organized and
operated primarily for the purpose of directly or indirectly accepting contributions or making
expenditures (or both) for an "exempt function" Section 527 uses the term "exempt function"
rather than "political campaign intervention," although there is significant overlap in the tax code
meaning of these terms. Section 527(f)(2) defines the term "exempt function" as-

21

"See Re\". Rul XJ-<JS. supra.
-- An organi7~lion lila! reqllcsl a S/\-Illonlh C\tcnslOll of IlfIlC 10 Ii Ie

Form J 12()-POL

"the function of influencing or attempting to influence the selection, nomination, election,
or appointment of any individual to any Federal, State, or local public office or office in a
political organization, or the election of Presidential or Vice-Presidential electors,
whether or not such individual or electors are selected, nominated, elected, or appointed"
Section 527 clarifies the tax treatment of "political organizations" by providing that
contributions (and certain political fundraising receipts) received by the entity (or fund) are not
subject to an entity-level tax, yet the entity's (or fund's) investment income and any income from
events that are not political in nature is subject to tax, generally at the highest corporate income
tax rate.:: 3 Moreover, another section of the Code - section 2501(a)(5) - specifically provides that
contributions to section 527 political organizations are exempted from the Federal gift tax.:4
In determining whether a particular activity constitutes "exempt function" activity for
purposes of section 527, the IRS examines all facts and circumstances to determine if there is a
sufficient nexus between the activity and the election of an individual to a public office~5 The
IRS generally applies the same standard used to test whether particular activities amount to
"political campaign intervention" for a section 50 I (c) organization when determining whether
"exempt function" activities are conducted for purposes of section 527.:6 In both the section
SOl(c) and section 527 context, the scope of campaign-related activities is broader than the
definition of "express advocacy" under the Federal Election Campaign Act (FECAr- (see
discussion below). Thus, the section 527 definition of "political organizations" covers not only
traditional political parties and candidate committees subject to regulation under the.fECA, but
also covers other organizations (and unincorporated funds) which are organized and operated
primarily to conduct activities in an attempt to influence an election - at the Federal, State, or
local level - even though these organizations may not engage in "express advocacy" in the
FECA sense. In other words, section 527 covers "political organizations" that are commonly
referred to as "issue advocacy" organizations for Federal election law purposes, ~~ because such
organizations conduct (or fund) biased voter education efforts, targeted voter-registration efforts,
or grassroots lobbying intended to influence an election, although the organization does not
expressly advocate the election (or defeat) of a particular candidate. The IRS has ruled that,
because such biased campaign-related activities constitute "political campaign intervention"
~3 A special rule proyides th,lI princip(li cmnpaign committecs of candid(ltcs for Congress arc su~iect to ta" (It
graduated corporatc rates. Section 527(11).
~~ If. howcycr. a contribution is made of apprcciatcd propert~· to a section 527 cntlty. then the contributor is treated
as if he sold the propcrt~ i1t itsf,lir market \'ahle and contributed the proceeds to the section 527 cntit)' Section 8-1-.
!~1 this w(ly. built-in (unta\ed) gallls cannol be uscd to fund political campaign acti,·ities.
-, See Hill. Fr(lnces R "Problllg the Limits of SectIon 527 to Dcsign a Nc\\ Campaigll Finallcc Vehicle." Tax NOles.
at387--W2 (January 17. 2()OO)
~G Sec. c.g .. PLR 9~;OXm7 (No, 21. 19n)("Jt follO\\s that am aCli'Jtics constituting prohibited political
intervelltion by a section 50J(c)(3) orgalli/.Mlon (lrC acti"ilics that Illtlst be less Ihan the primm:" acti,'iIJCS oCa
Section 501(c)(~) organization. "hich ;lrc. 111 turn. acti\itlcs that arc exempt fUllctions for a section 527
organization .. ): PLR 19992S05 I (March 21). J999)("si milar analysis" applies under sect ions 50 I( C)(3). 50 I (c)( -t).
and section 527 to delenninc if "yoter guides cross O\'er the line from simply eduC(l\ing \'oters to attempting to
influence their \·otes").
~' 2 USC 431 er seq
-~ There is no Sl<l/ulor\ or rC~tll(Jtof\ defillltioll of "issue adyocacy" for FEC A purposes. The term' issue advocacy"
is used in the FECA c~l1tc"tlo des~ribe all political actiyities thai f(lll outside the scope of "cxpress ad\ocClcy.·· Sec;
Hill. supm. al 3<)5

under long-standing interpretations of section SOl(c)(3), an entity or fund organized and operated
primarily to conduct such activities is treated as a section 527 entity.~Y
To ensure that tax-exempt organizations which conduct some political campaign
activities but not as their primary activity - e.g., a social welfare organization - cannot use taxfree investment income to fund such activities, section 527(f) imposes a tax on the organization's
investment income, up to the amount of its "exempt function" expenditures within the meaning
of section 527. This tax imposed under section 527(t) operates so that section 527 organizations
and section 501 (c) entities receive consistent treatment with respect to their campaign-related
activities 30
Political organizations described in section 527, as well as section 501(c) organizations,
are required to file a Form 1120-POL with the IRS for any taxable year in which the organization
has both investment income and "exempt function" expenditures (within the meanmg of section
527) exceeding $100 As mentioned previously, Form 1120-POL is a one-page form which does
not list contributors to the organization, nor does it identify the recipients of disbursements made
by the organization. The Form I 120-POL is not disclosable to the general public. In contrast to
charities and non-charities described in section 50 I (c), political organizations do not file an
annual information return (Form 990)
Federal Election Law Rules

The Federal Election Campaign Act (FECA) requires public disclosure of Federal
campaign finances, limits campaign contributions by individuals, political parties, and other
special interests, and regulates spending in campaigns for Federal office in order to inform the
electorate and prevent corruption of the political process J1

Contribution limits
The FECA prohibits certain individuals and entities (such as corporations, labor
organizations, Federal government contractors, and foreign nationats) from making contributions
or expenditures to influence Federal elections. In addition, the FECA generally limits the
amounts that may be contributed by individuals and groups to candidates (and their authorized

:9 In recent years. J Ilumber of cnlilies have soogln recognition from the IRS of theIr section 527 st(lIl1S by describing

their intended election-related actiYities and ackllO\dedging that their primary objecti\'e was to influence elections.
although tl1c organiz(llions \\ere specifically prohIbited by their organizational docume11\s (or a resolution passed by
the governing board) frol11 expresslY ad,·ocatlllg the election or defeat of any candidate Based on slIch
representations from the organiz<lliOlls. the IRS concluded that they \I ere ··political organizaliolls·· under section
527. See. c.g .. PLR 9725036 (March 24. I 997)(althollgh factual and educational. thc contcnt. timing. and targeting
of tile material was in1cndcd to II1flucncc the elecioral process): PLR I 1)')l)2505 I (March 21). 11J1)'J)(matcrials
distributed and iechniqlles used rescmble public edllcation and issue ad\·ocacy materials nnd techniques often used
by section 501 (c)(3) and 50 I (c)( 4) organi7.ations: hon-cycr. because materials and techniques \\"ere admittedly
deSigned to influence elections and \\erc biased in their presentation. they constituted scction 527 ··exempt function"
actirities).
3f1 For purposes oUhe section 527({) t'lX. certain sepClrate segregated funds. such as a PAC. established by a section
501(c) organization arc treated as separate organi7.<11ions (sec 527(f)(3».
31 s
.
cc Bucklc, \ . Valeo. 42.+ U.S I (1976).

committees), political party committees, and other political committees.': However, the FECA
dollar-amount contribution limits do not apply to so-called '"independent expenditures," which
are expenditures for communications (such as newspaper, TV, or direct mail advertisements)
which expressly advocate the election or defeat of a clearly identified candidate, but which are
made independently from the candidate's campaign (i.e., the expenditure is not made with the
cooperation or consent of, or at the request or suggestion of, the candidate or the campa~gn). 3."
Although there is no limit on the amount of such "independent expenditures," the law requires all
persons making such independent expenditures to report them to the Federal Election
Commission (FEC) and to disclose the sources of the funds they used. 3-1 In contrast with
independent expenditures, expenditures which are coordinated with the candidate's campaign
are, for FECA purposes, treated as in-kind contributions subject to the general contribution
limits 3 :'
Reporting and disclosure
The FECA requires political committees (including political party committees, campaign
committees, and political action committees (PACs» to register and file periodic reports with the
FEe disclosing the funds they raise and spend. 36 Each political committee is required to file a
statement of organization with the FEC, generally within 10 days after establishment. The
statement must include the name and address of the committee, the names and addresses of its
Treasure~- and the custodian of its books and accounts. Thereafter, each political committee
must file periodic reports of its receipts and disbursements. During an election year, a political
committee generally has the option offiling quarterly or monthly reports, and must also file
special pre- and post-election reports During a non-election year, quarterly filers automatically
switch to a semi-annual reporting schedule .""
Each report must disclose the amount of cash on hand at the beginning of the reporting
period, the committee's total receipts (for the reporting period and the calendar year to date),
including the total contributions received from political committees and other sources, and an
itemized list of contributors, including each person (other than a political committee) whose
aggregate contributions during the calendar year exceed $200 ~'J Each report must also disclose
the committee"s total disbursements (for the reporting period and the calendar year to date);
including all contributions to candidates and other political committees, and all independent
expenditures. The report must identify each person who receives aggregate disbursements of
$200 or more during the calendar year, and report the date, amount, and purpose of each
3'

- 2 USC Hla.

~-Hb, ~~lc, ~~le.

Indi\'iduals and cntitics (such as corporations) that arc prohibitcd from making contributions to influcncc Fcderal
elections arc Iikc\\ise prohibltcd from making "indepcndent c:'\pcnditllfcs
3~ 2 USC ~3-J.(b) and (e) Sec also Colorado RCPIIOliclIl Federal CampaIgn Committce \. FEe SJ~ U S ()()~ (J996).
3) 2 USC ~.t la(a)(7)(B)(i)
36 2 USC .t31( 17). ~33. -I-3·t
r FECA rcquires each political cOlllmittee to deSIgnate a Treasurcr. \\ ho must autilonz.c all e:'\pendilurcs (Iud kccp
detailed rccords of all contributions recci\cd and disbursements Jll<1de 011 bchalf of the cOJllmittce 2 USC ~32
3~ 2 USC .t3~(a)(~). The reporting schedule for authonzcd cOlllll1JlleeS of <I candidate IS described in 2 USC
·B~(a)(2) and n)
39 For cadi contribution. the committce mllst rcport the full name and address of the contributor. the contributor's
occupation and cmploycr. thc date of receipt and the amount of each contribution. and the aggregatc contributions
received from the same contributor during the calendar year. 2 USC -1-3 1(13) and ~3-1-(b)(3).
33

9

disbursement.~" The FEC makes all statements of organization and periodic reports available to
the public within 48 hours after receipt ·11

In addition to required disclosure by political committees, the FECA requires any person
who makes independent expenditures in an aggregate amount of more than $250 during a
calendar year to report to the FEe detailed information regarding the identities of contributors,
and the amount and purpose of such independent expenditures 4 : In addition, any person who
finances communications expressly advocating the election or defeat of a clearly identified
candidate, or solicits any contribution through public advertisements or direct mail must indicate
who paid for the communication and whether it is authorized by the candidate or authorized
committee. 43
Since 1998, the FEe has permitted filers to submit reports electronically by modem or
via the Internet The FEe scans all reports filed with the FEC to make digital images of the
documents, and makes the digital images available in the FEe's Public Records Office and on
the Commission's Internet web site~4 Also available on the FEe's web site is a searchable
database of campaign finance information . .J' Visitors may search this database for information
regarding contributions by individuals and political committees to House, Senate, and
Presidential campaigns, political parties, and PACs in the 1997-98 and 1999-2000 election
cycles By querying this database, visitors can search for contributions made by a specific
individual, contributions received or made by a specific political committee, and contributions
received by a specific campaign. Results of these queries are linked to the imaging system so
visitors can view the actual financial reports filed by the campaigns or committees.
Express advocacy standard
Although some uncertainty remains, the current prevailing view of the courts appears to
be that, in the absence of coordination with a candidate's campaign, only communications that
contain express words advocating the election or defeat of a candidate-such as "vote for,"
"support," "defeat," and certain other "magic words'"-are subject to the requirements ofFECA
including the restrictions on contributors eligible to fund such communications, the contribution
limits, and public disclosure requirements for funds raised and spent on such communications.~6
4U In t11e ease of independcnt cxpendlillres. the report III11st also state whether the independent expenditure is 1I1
support of or JJ1 opposition to. a candid{lte. as "cll as the nalllC and office sought b~ the candidate. and a
certification. under penalty of pe~juf\. \\"hetller the e"penditure is made in cooperation. consultation. or concert with
any political committcc. or at the requcst or suggestion of am candidate or ;l\lthorizcd cOlllmittee. 2 USC

~3~(b)(6)(B).

Federal Election Commissioll. Tn enl\ Year Report al ~ () ()!)5)
2 USC .l3.l(c)
43 rusc .l.lld.
~~ The FEes Public Records Office continues to make m·ailable microfillll and paper copies of these reports See
Federal Election Commission. Annual Report 19n. al 7-9.
4'
. The Intcmet address is: \\\n\.fed.go\/finance reports.hlllli
4" See Maine Right to Life COl1ll11illeC Y. FEC. <)g F.~d I (1" CIL I <)<)(})~ FEC Y. Chrislian Action Network. n F. 3d
1178 H UI Cif. (997)~ FEC, Christian CoaJillolL 52 F SlIPP 2d.l5 (DOc. )<)99) But see FEC, Furgalch.807
F.2d 857 (9 'l, Cir 19R7W·npress ad,oeacy·· subJect (0 regul;lIion under FECA necd not include ,lilY of the ,,·ords
listed in Buckle, but "must. "hen read as a "hole. and ,,·ith limited reference to e"temal e,·ents. be susceptible of
no other reasomble interpretation but as ,111 e\:horiation to yotc for or against CI speCIfic candidate"·). Sec also
41

4c

10

Accordingly, individuals, entities. and groups - including section 527 political organizations
that attempt to influence Federal elections, but that refrain from "'express advocacy," may be able
to avoid the FECA reporting and disclosure requirements~-

Lobbying Disclosure Act
The Lobbying Disclosure Act10 requires certain individuals and organizations that lobby
the Federal government (either on behal f of clients or on the organization's own behalf) to
register with the Clerk of the House of Representatives and the Secretary of the Senate, and to
file semi-annual reports detailing their lobbying activities, The stated purpose of the Act is to
promote public awareness of efforts by paid lobbyists to' influence the public decisionmaking
process of the legislative and executive branches of the Federal government. ~0
In general, an organization that engages in lobbying activities on its own behalf is subject
to the registration and reporting requirements of the Act if it ( 1) has at least one employee who
spends 20 percent of his or her time on lobbying activities and (2) expends (or expects to
expend) more than $20,500'" for lobbying activities in any six month period 'I Among the
information required to be reported semi-annually are the general areas (e,g, communications,
education, health issues) and specific issues (e,g, specific bills before Congress or specific
executive branch actions) on which the organization lobbied, the Houses of Congress or Federal
agencies contacted, and a good faith estimate of the total expenses incurred in carrying out the
lobbying activities, The registration forms (Form LD-I) and semi-annual reports (Form LD-2)
are publicly available ':
Lobbying is broadly defined under the Act to include any oral or written communication
with certain Federal executive or legislative branch officials'; regarding (1) the formulation,

Buckle\' \" Valeo. 424 U,S, at 44, n,52 (limiting the application of certall1 pro\'isions of the FECA to
"communications contcllning express \\ords of ad\ocacy of election or dcfcat. such as '\ole for.' ·clcct.· . support.
'~ast your ballot for.' 'Smith for Congrcss.· '\ote against.' ·defcat.· ·rcject... ·)
~ To a\'oid thc FECA reporting rcquircmcnts.;1 scction 527 organi7~1\1on must also ;I\'oid making contributions
directly to candidatc commlttces or making coordiniltcd expcnditurcs, 2 USC .f.fiaW)(R) and .f4Ia(a)(7)(B) It is
unclear \\"hether a scctlon 527 org;lI1i/~ltion th;lt cngagcs III both "cxprcss ad\oc;lC\" and "issuc ad,'ocac\'" would be
treated as a "politlcal cOlllmittcc" undcr thc FEC A and. tilus. Sll~lcct to disclosurc niles \\ith rcspcct to "soft money"
contributions it rccci\'cs. c\'cn though no 11illilS as to sourcc or alllollnt apply to such contributIOns Sec Hill. supra
at 395. 40()-O I,
48 2 USC 16(H ef .'cr}
~91n gcncral. the Act is a disclosure st;Jtutc and docs not rcstrict lobbying acti\'ity Howcvcr. thc Act pro\'idcs that
section 50 I (c)( ~) organizations that cngage 111 lobbying acti\'itlcs arc not c1iglble to rccei\c Fcdcral award. grant. or
loan funds 2 USC 161 I
~" ThiS amount is indexed for inflation 2 USC 1603,
51 Registration is gCllcr;llh rcqlJlrcd \\ithlll -l5 days aftcr an organization first makes a lobbying cOlllll1unication.
Each rcgistrant mllst disclosc Its name. addrcss. and a dcscription of its busincss. thc gcncral arcas in which it
expects to cngagc in lobbying. and thc Idcntlty of cCrtalll organiz,ations that contributc to and control its lobbying
acti\'itics. and ccrtain othcr information, 2 USC I ('()3
~:,1 2 USC 16().+. 1605.
'. To constitutc lobb\'inl! undcr the Act. thc cOlllmllnicill ion IIltlst bc directcd 10 Mcmbers of Congrcss,
CongreSSional staff ;;nd ~ccrtain othcr Icglslatl\'e branch cmployces. thc Presldcnt. tile Vicc President. employccs of
the Executi\c Officc of t hc Prcsidcnt. and certain e'ccut i\'c branch officials and cll1plo~ ccs. polItICal appointecs. and
certain high-ranking meillbers of t hc IIl1i forlllcd seT\'iccs, 2 USC 1(i()2(3) alld (4)

I1

modification, or adoption of Federal legislation, (2) the formulation, modification or adoption of
a federal rule, regulation, executive order, or any other program, policy or position of the Federal
government, (3) the administration or execution of a Federal program or policy, and (4) the
nomination or confirmation of a person to a position that is subject to Senate confirmation " The
Act excepts from the definition of lobbying certain categories of communications, including
communications by churches, and various communications of a public nature (such as testimony
before a Congressional committee, communications made on the public record in a public
proceeding, and mass media communications).':'
To reduce the recordkeeping burden on organizations (such as for-profit entities, certain
tax-exempt membership organizations, and certain public charities) that are already required
under the Internal Revenue Code to track expenditures for lobbying,~h the Act generally permits
such organizations to use the Internal Revenue Code definition for purposes of reporting the
amount of their lobbying expenditures during the semi-annual reporting period." However, such
organizations must use the Act's definition of lobbying for purposes of providing a narrative
description of their lobbying activities before the legislative branch "

Proposals for increased disclosure bv section 527 entities
1h

Several bi lis have been introduced in the I06 Congress to expand the reporting and
disclosure requirements governing section 527 political organizations The bills, however,
generally would not apply to section 527 organizations that attempt to influence State and local,
but not Federal, elections Some of these proposals would amend the Internal Revenue Code to
require section 527 organizations to file periodic disclosure reports with the IRS and make such
reports publicly avai lable '9 The information to be disclosed would parallel the contents of
disclosure reports currently filed under FEe A with respect to "'express advocacy" - that is, the
name, address, occupation, and name of employer of each person who contributed more than
$200 to the organization during the reporting period, and the name and address of each person to
The definition of lobbying under the Act is both more IIlclusiye ,md less inclusi\e th(ln the lntennl Re\enue Code
definition. For e,ample. although the Act does not apply to "gr.lssroots" lobb~1I1g or lobbying at the Stale or local
level. it applies to efforts to influence not onl\ legislation, but (1150 a broad range of policy-re\;!ted matters at the
Fcderalle\cl.
5; 2 USC 1602(X). Unlike section-l911(d) orthe Jntcm,Ji Re\cnlle Code. the Act cont,lins no specific e.'\ception for
"self-defcnsc" 10bb~lI1g HO\\e\er. dependln)! 011 the fOflll of thc com nll II lIC,lt ion. a sclf-dcfense COllllllllllleatlon may
fall \rithin one of the other c.'\ecptions under the Act
'" For e.'\Cllllple. for-profit entities III II st keep track of lobbying and polllical c'IKndllurcs, \\ hich arc not deductible
under section 162(e) of the Code Ta,-c.,clllpl Illelllbership organl/;llions Ih;11 recelye deductible dues must keep
track of the ponion of membcrship contribulions allriblll,lble to lobbying and poltllcal aCII\ ilics. and p,lY a pro.'\~ ta.'\
or inforll1lllcmbers "hat ponion of their dues is nondeductible under section 1()2(e) Sec section 6011(e) Public
charitics that ha\e made (]II elect Ion under section :'ill I (h) of t he Code Illust track e.'\penditures for "attempts to
\~uence legislation'· as defined under section -I<JII(dl
, 2 USC 16IO Although "non-electing" public charities must also trac).; c.'\pcndilurcs for lobbying as defined under
section SOI(c)(3). the Act does not pronde a SlInibr e,ceptioll for them. The special nile allo,,·ing cenain
organizations to report openditures using thc Internal ReYClllle Code definitions docs not apply to lobbyists paid by
outside clients.
;~ Non-electing public ch:lrities ;lIId pri\ate foulldallolls ;Irc rcqlllred to use the Act's dcfinition for all purposes.
Because the lObbying acti\lties co\cred bY (hc Act arc differcnt from thc "attcmpts to IIln"cncc lcgisl;ltion" which
arc prohibited under scctlon -I<J-I:'i(e) of the Code. IJrJ\·ate foundalions 1Il;l\. bc rcqlllfed to rcglster under the Act.
. See HR -II 6R (Doggett) and S l:'iX, (LlcberJn<ln)
.'-1

~

12

whom disbursements were made of more than $200 during such period 61' These proposals
generally follow the reponing periods and multiple filing deadlines under the current-law FECA
disclosure regime (which vary based on whether a Federal election or primary is held during the
year). At least one bill would require the IRS to develop procedures for submission in electronic
61
form of disclosure reports
Some proposals would allow political organizations the option of
filing disclosure reports with the FEe as an alternative to filing such repons with the IRS Other
introduced bills take a different overall approach. These proposals would not amend the Internal
Revenue Code, but instead would modify the Federal election laws to require periodic disclosure
to the FEC of contributors to, and expenditures made by, section 527 political organizations 62
To prevent avoidance of the disclosure objectives, one proposal provides that the new
disclosure requirements to be incorporated into the Internal Revenue Code would apply to all
organizations that satisfy the section 527 definition of a political organization "without regard to
whether such organization claims a tax exemption under section 527"6' This would prevent a
political organization from evading the new disclosure requirements, while claiming essentially
the same tax treatment under general principles of the Code outside of section 527 (as discussed
below). Thus, the new disclosure requirements would apply to all organizations (and funds) that
are organized and operated primarily to influence Federal elections. However, other than H.R
4621, which directly amends the FECA (as well as the Federal Communications Ad'~), the
introduced bills referred to above generally would not apply to entities, tax-exempt or taxable,
that engage in some campaign-related activities but not as their primary activity6~
The sanction for non-disclosure would vary under the introduced bills Under HR. 4168,
the penalty for non-disclosure would be the same as that imposed under current-law on large
organizations that fail to file an accurate Form 990 (", In addition, under H.R 4168, the gift tax
See H.R -I-16f( which "ould also rcquire rcports to bc filed shortl~ artcr a political organiLation is cstablished.
lIlcluding identifying all persons "ho arc in ;1 pOSition to ··c:\ercisc substantial direct or IIldircct influcncc" O\cr thc
organiZ:1tlon Si1l1ilarl~. S. 25X:; "ould rcquire notification to bc filed "ith the IRS shortly aftcr thc organization IS
established. identifying officcrs. kcy employecs. and related el1lillcs. S 25ln would rcqUlrc disclosure of thc
identity ofpcrsons \\ho recci\c disbllrscments from the organi/.<ltioll only if they receiyc $50() or more dUring thc
calendar Year.
61 See H:R. ~ 16X.
6: See H.R ~621 (Castle) Anothcr bill. H.R :;6XR (1\loore). "ould amcnd scction 527 of thc Intcmal Rcycnue
Code to reqlJlre Ihilt political org,lIliz(ltions which :lltcmptlO influence Fcderal elections must ccrti(\ to thc IRS that
they are in compliance \llth FECA dlsclosurc rcquircments. and the bill also \Iould amcnd FECA to impose spccific
statutory disclosurc requiremcnts for ;11l~ entity that clal111s scctlon 527 status for lntcrnal Re\clluc Code purposes.
See also S. 25R2 (Licbcrman). \\hich \\ottld 110t add an~ specific dlsclosurc rules to the Internal Rcyenuc Codc but
would simpl\ amcnd section 527 to pro\lde (IS a gcncral ntle that a politiccll organl!~\lion which allc1llpts to
influence Fcdcral clections IS describcd in seCl10n 527 0111\ If It IS a ··politlcal COnl1l1ltlCc·· for purposcs ofFECA.
6.1 H.R.-l16R
.
M The amendmcnts madc b\ HR -1-621 10 Ihc Comlllunications Act \\ould rcquirc dlsclosurc as pan of certain
broadcast polit iCC11 ;ld,cr! is~mcnts of the name of thc person(s) rcsponsible for such ad,ertisclllcnts. ilnd "ould also
makc publicly mailable infonnillion rcgarding donors to cntitics \\hich place such ad,·crtiscmcnts.
6.' Another rcccntly introduccd bill. S. 27-l2 (SIllIth). would impose on scction 527 entitics disclosure rcquircmcnts
similar to H.R ~ 16X. and the bill also \\ ould imposc on scction 50 I (c)( 5} labor (bul not agricultural) organizations
and section 501(c)(6} busincss lcagucs simil,u disclosurc rcqulfClllcnts ifthc organization spends more than $25.000
during thc cillcndar ,·car for COIllIllIlJl\cations to the general public \\"hich mcntion all clcctiol1 for Fcdcral office. a
candidatc for Fcdcr;iI officc. ,Ill indl\idl1:l1 holdlllg Federal office. or a political par1~. or \\hich contain thc likcncss
of such candidate or indl\iduaL
M See footnote 1-1- supra.
6"

13

exclusion under current-law section 2501 (a) for contributions made to political organizations
would not apply to contributions made to organizations that are not in substantial compliance
with the bil1's disclosure requirements Under S. 2583, the penalty for inadequate disclosure
would be that all the political organization's contributions (and other political fundraising
receipts), minus the costs directly connected with the production of such income, would be
subject to tax Under other biBs, the consequences of nondisclosure are unclear, because these
bills would simply deny section 527 status to entities that are not subject to the FEC reporting,
which would not necessarily result in any adverse tax consequences (see below)6-

Issues Presented by Current

L~w

Tax Treatment
Section 501(c) nonprofits and 527 organizations generally receive the proper tax
treatment under current law with respect to their advocacy activities. The current-law tax rules
provide appropriate and consistent treatment of political organizations and other organizations
that engage in electioneering activities by generally ensuring that only after-tax dollars are used
to fund such coBective activities Contributions to section 527 organizations are not deductible
for Federal income tax purposes, and even in cases where contributions to a section 501(c)
organization may be deductible as a business expense, no deduction is allowed (or a proxy tax is
imposed) for the portion allocable to political activities
The limited tax-exempt status provided by section 527 for the political entity itself does
not represent a significant tax subsidy Arguably, section 527 merely codifies the same tax
treatment that would result under general tax principles - i.e, contributions to political
organizations would be excludable as "gifts" under section 102 or under a common-law
"conduit" theory('X If, instead of pooling their funds, political supporters collectively decided to
underwrite advocacy activities but each supporter separately wrote a check to pay for an
advertising campaign, no additional level of tax would be imposed on that collective activity.
However, individuals who used their investment income to pay for political advertising would
pay tax on that income. Section 527 produces the same result by taxing all investment income of
poJi'tical organizations, as well as taxing other nonprofit organizations on their investment
income to the extent they incur political campaign expenses In effect, the tax consequences.
. under current-law rules generally are the same regardless of whether electioneering activities are

6-

Sec H.R. Y)88 and S 25X2.
Sec H.Rpt No 1502. <)3',1 Cong .. 2 rrd Scss. at to..! ( I <J7..l )(\cglslatl\C histo~ to scction 527 indicatllIg that conduct
and financing of political actl\'ity generally is nol a tradc or busincss): Rc\·. Proc 6X-I <). I%X-I Cs. X\O(trcating
receipts ofp6litical organi:l. ations as ··gifts··): Rc\ Rul. 7..l-21. 197..!-1 CB. l..l (modified and clarificd in Rcy. Rul
7~-~75. 197..l-2 CB. 22)(political organizations should bc ta'\cd on thcir inycstmcnt incomc) Howc\cr. some of the
··excmpt function·· income rccciycd by section 527 entitics from political fundraising activities whcrc thcrc is a quid
2I,o guo transaclion (such as with ineomc from bingo gamcs and sales of political matcnal) would. in thc absence of
tlle specific statuto~ prmlsion. not be C:\Clllpl from ta.\ at the entity !c\'el as ··gifts·· or under a ··conduit" theo~.
Under general t;):-; principles. the question \\itll a political org;mi7.alloll would be \I hat c:-;penscs could be claimed
against such income as off-scttin'g dcductlons
68

14

conducted collectively through a nonprofit entity or by a group of individuals without the use of
a separate legal entity or segregated fund
("1

If there is any significant tax subsidy granted to section 527 political organizations, it is
because contributions (if greater than the general $10,000 gift-tax exclusion amount) are
provided a special exemption from the Federal gift tax under section 2501(a)(I)(5) Absent
section 2501(a)( 1)(5), contributions to such organizations would technically be subject to the gift
tax, although it is not clear under common law whether all political contributions would be
viewed as gratuitous gifts subject to the gift tax regime. Nonetheless, the presence of a gift tax
subsidy may provide the basis for regulation of constitutionally protected advocacy activities
conducted by nonprofit organizations.- I
7

"

Definitional issues
Under the Internal Revenue Code, difficult line-drawing sometimes is required under
current law to determine whether particular advocacy activities, taking into account all facts and
circumstances, constitute implied political campaign intervention. The tax code consistently
uses such a facts-and-circumstances test for al\ nonprofits to determine whether political
campaign intervention has occurred The IRS recognizes that material may_"re}lect a dual
character" in that it may contain elements of grass roots lobbying with respect to legislation and,
at the same time, be biased in favor of a candidate. -: This presents subtle line-drawing problems
in particular cases, similar to the issues that arise with charities, as well as with taxable
businesses, when trying to distinguish "lobbying" with respect to legislation from discussions of
broad social issues-'
There may have been the implicit assumption in 1974, when section 527 was enacted,
that political organizations generally would be subject to the FECA regime, which had been
enacted just three years earlier and also referred to contributions and expenditures for "the
purpose of influencing any election " - I However, in the aftermath of the Supreme Court's 1976
decision in Buckley v. Valeo, the scope of the FECA has been shrinking As Federal courts
6Y The Code prO\·ides similar trealment for collccti, e rccrcatioIlal actiyitles conducted through section .'iO I (c)(7)
social clubs. \dlich Iike\\ise recei\c non-deductible contribllt Ions. do nol p(l~ Iil." on mcmbcr dues. but do pay ta\: on
their investment income
~n With respect to political contributions made prior to the enactmelll of scctIons 527 and 2501 (a)(5). two Federal
courts held that such contributions \\cre not subject to the Federal gift ta". under the rationale that the political
organization receiYing the contributiOfl may be ,'Ic\\·cd as the mcans to the end of the contributor. who wishcs to
express shared political yie\\·s. Sec Carson, UnIted States. 6-l1 U. S. X04 ( 1(\111 Cir 1<)X I): Stem, United States.
436 F.2d 1327 (Sill CiT. 1971)
~I See Regclll y Ta\:Cltion With Representat iOIl. 40 I U.S 540 ( I')X:>)( upholding constitutionality of lobbying
restrictions 011 charities): Call1nlClrano Y United States.l.'iR U S 4<)X (!()S4)(dcni;11 ofbusillCss-c\:pellse deductions
f?r lobbving is constitutional)
- See. e.g.. PLR 972503<i (March 2-l, 1<)<)7): PLR I <)<)<J25()51 (March 2<)_ 1<)<)<)
;3 WiUl respect to taxable busincsscs_ scctlon I ()2(ej( I )(e) disallows a deduction for amounts paid in conncction
with attempts to influence the general public \\iI11 respcct to elections or Icglslati\e mailers. Sec Treas Reg. Sec.
1.l62-20(e)(4). At the S(lllle timc. e."\pellditnrcs lIlcurred for ad,·crtising ,,·hich prescnts views on economic,
financial. social. or olher subjects of a general naturc may be deductible as a tradc or business c\:pcnsc_ provided that
the advertiSing keeps tile la:"\payer' s nallle beforc Ihc public and is related 10 the patronage the ta\:pa~'er might
~;asonably e."pcct in the future. See Trcas Rcg Sees 1.102-20(a)(2) and 1.1()2-20(c)(5).
See 2 USC -l:> I(R)( A) and -B I (<))( A)

15

during the mid- and late-1990' s adopted a narrow interpretation of communications covered by
the FECA, it became easier for entities to admit before IRS that they had an agenda to influence
elections (and thereby obtain certainty in their tax law treatment) yet still claim that they were
immune from FEC regulation because they did not engage in "express advocacy"
The narrow, "express advocacy" standard used by some courts in applying the FECA
regime avoids the difficult and sometimes subtle determinations that are required under a factsand-circumstances approach. In the FECA context - which does not involve a tax subsidy issue
- it remains an open question whether the "express advocacy" standard is constitutionally
mandated. -~ However, the "express advocacy" standard is inherently under-inclusive~ and if used
in the tax code, effectively would allow tax-free funds to subsidize political campaign
intervention. Therefore, the "'express advocacy" test is not the appropriate standard for tax code
purposes. At the same time, the tax code's broader facts-and-circumstances approach results in a
broad class of entities being eligible for section 527 status as "political organizations," when
only a subset of such organizations currently are subject to FECA disclosure rules.
Disclosure
The information required to be furnished to the IRS by section 527 organizations under
current-law rules generally is adequate for tax administration purposes, given the nondeductibility of contributions to these organizations and the fact that their net investment income
is subject to tax As with other tax-exempt entities that receive simi lar tax treatment, it may be
appropriate to require section 527 organizations, at a minimum, to file with the IRS (and make
publicly available) an annual information return.;~
Under FECA, however, timely periodic disclosure throughout an election cycle and
disclosure of contributor identities is essential to effectuating the goals of that statutory scheme.
The purpose of the FECA regime is to educate the public and to prevent corruption of the
electoral process. The objectives of the FEe A disclosure regime are not being accomplished in
the case of section 527 organizations which carry out activities that are admittedly intended to
influence the electoral process, yet stop short of the "express advocacy" line
-, See foolnOle -Ie) supra. If thc "C\:press ad,·oCilC'" standard is constltlltion:llly mandated "hen no tax subsidy is
inyoh·ed. then the presence of such a stlbsidy potentially may prmide a constitutional baSIS for moving beyond the
"express advocacy" stan<ilrd and to require disclosure \\·ith respect to ceI1(Jin "issue advocacy" However. under
such a ··subsidy" rationale. It appears that groups lIlust hCl\·e the opportunity 10 engage in conduct that is not eligible
for the subsidy - that is. engaging in "issue advocacy" but 110t disclosing contributors - without incurring a penalty
or being unduly restricted. beyond the loss of the gmemment ta\ sllbsid~ See Regan v. Tax(Jtiol1 With
Rcpresentation. -IG I U.S at 55:1-5-1 (Blacklllun. L conclirring)(denial of section 50 I(c)(]) status for charities that
lobby is constitutionally permissible. because chantlcs may cOllduct lobbying dCtl\ JIles through a controlled section
5OT(c)(-I) entity): FCC \. Leaguc of Women Voters. -I()X US :1()-I (I')X-I): American Socletv of Association
Executives \' United States. 1')5 F.:1d -17 (DC Cn 11)')'))(org;l1l1/~ltlon can ;l\old burden on its First Amendment
rights by splitting itsclf into t\\O la\-e\elllpt elltltles. one lhal refrallls from lobbying and reccives dcduclible dues.
while the other conducts lobbYIng bul docs 110t rcccl\·c deductible dues) See also NAACP Y. Alabama. 357 U.s
:U9 (l95X)(compelled disclosure has potelltlal to Infnnge on Firsl Amendment rights of speech and association).
(, In its recent Sludy of dlscloSllre by t;1\-eXelllpt organizalions. Ihe staff of the Joinl COlllllllllee on Taxation
reCOlllmended that section 527 polilical organizallons be reqlllfed to file an anllual return (regardless of whether they
hare any ta\ablc income) disclosing informatIon regarding their actiyilies and sources of funds received See JCS1-00. Vol. II. at Sl-l-% (Jan 2X. 200())

16

Conclusion
The Administration supports enhanced disclosure by political organizations as part of its
efforts to expeditiously achieve comprehensive campaign finance reform. Just as the current tax
code rules do not distinguish between "express advocacy" and "issue advocacy" in the electoral
context, so too should the disclosure requirements governing political organizations - under
either the Internal Revenue Code or the Federal election laws - not depend on formalistic
distinctions between communications that are obviously designed to influence the electoral
process.
In recent years, a significant issue has developed, whereby some section 527 political
organizations satisfy public disclosl;lre requirements, while other section 527 entities with the
admitted primary purpose of influencing elections can side-step disclosure requirements by
simply avoiding the use of certain "magic words" in their election advertisements This is an
untenable situation. The important public interest to be served by disclosure is equally
applicable to all section 527 entities, regardless of whether they attempt to influence Federal
elections through "express advocacy" or "issue advocacy." As several recently introduced bills
demonstrate, there are alternative approaches for achieving consistency in the disclosure
obligations of section 527 political organizations The Administration appreciates efforts made
by Members of both parties and looks forward to working with Congress to craft legislation that
will provide for enhanced disclosure of political campaign activities
-30~

17

D EPA R T :\1 E N T

() F

THE

T REA SUR Y

~~/78~q~. . . . . . . . . . . . . . . . . . . . . . . . . .. . .

..........................

OmCE OF PUBUC AFFAIRS • 1500 PENNSYLVANIA AVENUE. N.W .• WASillNGTON, D.C .• 20220. (202) 622·2960

u.s. International Reserve Position
The Treasury Department today released

06/20/00

u.s. reserve assets data for the week ending June 16, :2000.

As indicated in this table, u.S. reserve assets totaled $68,i63 million as of June 16,2000, up from $67,821
million as of June 9, 2000.
(in US millions)

June 9, 2000
67,821

I. Official U.S. Reserve Assets

TOTAL
I, Foreign Currency Reserves
a, Securities

I

1

Euro
4,877

Yen
5,459

June 16, 2000
68,163

TOTAL

Euro

10,335

4,956

Yen

TOTAL

6,052

o

Of which, issuer headquartered in the U. S.

11,008

o

b, Total deposits with:
b.i~

Other central banks and SIS

8,343

b.ii. Banks headquartered in the U.S.

12,191

20,534
0

8.456

11,692

20.148
0

bjL Of which, banks located abroad

0

0

b,iii. Banks headquartered outside the U.S.
b.iii. Of which, banks located in the U.S.

0
0

0

15,508

15,542

10,395

10.417

11,048

11,048

0

0

!. IMF Reserve Position

2

I, Special Drawing Rights (SDRs)

" Gold Stock 3
I, Other Reserve Assets

2

11 Includes holdings of the Treasury's Exchange Stabilization Fund (ESF) and the Federal Reserve's System Open Market Account
(SOMA), valued at current market exchange rates. Foreign currency holdings listed as securities reflect marked.to-market values, and
deposits reflect carrying values.

2J The items, "2, IMF Reserve Position" and "3, SpeCial Drawing Rights (SDRs): are based on data provided by the IMF and are valued In
dollar terms at the offiCial SDRIdoliar exchange rate for the reporting date. The IMF data for June 9 are final. The entries in the table above
for June 16 (shown In italics) reflect any necessary adjustments, including revaluation, by the U.S. Treasury to the pnor week's IMF data.
31 Gold stock IS valued monthly at $42.2222 per fine troy ounce. Values shown are as of April 30, 2000. The March 31, 2000 value was
$11,048 million.

LS-718

0

u.s. International Reserve Position (cont'd)
II. Predetermined Short-Term Drains on Foreign Currency Assets
June 9,2000
1. Foreign currency loans and securities

June 16, 2000

o

o

o
o
o

o
o
o

2. Aggregate short and long pOSitions in forwards and
futures in foreign currencies vis-a-vis the U.S. dollar:
2.B. Short positions
2.b. Long positions

3. Other

III. Contingent Short-Term Net Drains on Foreign Currency Assets
June 16, 2000

June 9. 2000

1. Contingent liabilities in foreign currency

o

o

o
o

o
o

o

o

1.a. Collateral guarantees on debt due within 1 year
Lb. Other contingent liabilities
2. Foreign currency securities with embedded options

3. Undrawn, unconditional credit lines
3.B. With other central banks
3.b. With banks and other financial institutions
headquartered in the U.S.
3.c. With banks and other financial institutions
headquartered outside the U. S.

t Aggregate short and long positions of options in foreign
currencies vis-a-vis the U.S. dollar
4.a. Short positions

4.a.1. Bought puts

4.a.2. Written calls
4.b. Long positions

4.b.l. Bought calls
4.b.2. Written puts

EMBARGOED UNTIL 2:30 PM EDT
June 20, 2000

Contact: HUD - 202-708-0685
Treasury - 202-622-2960

BUD, TREASURY RELEASE JOINT REPORT RECOMMENDING
ACTIONS TO CURB PREDATORY LENDING
Treasury Secretary Lawrence H. Summers and Housing and Urban Development
Secretary Andrew Cuomo today released a joint HUD- Treasury report detailing recommendations
on legislative, regulatory, and other steps to curb the increasing occurrence of predatory
mortgage lending.
"These critical recommendations will help protect American families from the abusive
practices of some unscrupulous lenders," said Secretary Summers. "Predatory lending practices
should have no place in the subprime market, or any other market"
Secretary Cuomo said: "Predatory lenders are greedily devouring families' life savings and
destroying good neighborhoods all across the country. We heard horror stories at our forums
around the country about the suffering these lenders have caused, and Members of Congress have
heard the same stories. We ask Congress to join us and move swiftly to give American
homebuyers the protection they need from predatory lenders."
Based on information gathered at five field forums by the joint HUD-Treasury Task Force
on Predatory Lending, the report, "Curbing Predatory Home Mortgage Lending. " proposes a
four-point plan to address predatory lending practices:

•

•

Improve Consumer Literacy and Disclosures. Creditors should be required to recommend
that high-cost loan applicants avail themselves of home mortgage counseling, disclose credit
scores to all borrowers upon request and give borrowers more timely and more accurate
information as to loan costs and terms

Prohibit Harmful Sales Practices in the Mortgage Market. Practices such as' loan
"flipping" and lending to borrowers without regard to their ability to repay the loan should be
banned. New requirements should be imposed on mortgage brokers to document the
appropriateness of a loan for high-cost loan applicants. and lenders who report to credit
bureaus should be required to provide "full-file" payment history for their mortgage
customers.
LS-719
-more-

•

Restrict Abusive Terms and Conditions on High-Cost Loans. We recommend that
Congress increase the number of borrowers in the subprime market covered by legislative
protections; further restrict balloon payments on high-cost loans; restrict prepayment penalties
and the financing of points and fees; prohibit mandatory arbitration agreements on high-cost
loans; and ban lump-sum credit life insurance and similar products.

•

Improve Market Structure. Award Community Reinvestment Act (CRA) credit to banks
and thrifts that promote borrowers from the subprime to prime mortgage market, and to deny
CRA credit to banks and thrifts for the origination or purchase of loans that violate applicable
lending laws.

Senator Paul Sarbanes of Maryland, Senator Charles Schumer of New York and
Congressman John Lafalce of New York have all introduced important legislation to combat
predatory lending.
"I want to commend Secretary Cuomo, Secretary Summers and the members of the
Predatory Lending Task Force for their thorough and excellent work," said Senator Paul
Sarbanes. "This report incorporates the key principles contained in the LaFalce-Sarbanes
legislation and lays out a roadmap for action by the Congress and the regulators that will help put
an end to these abusive practices."
Representative John Lafalce said: "The Task Force has made strong recommendations
that -- if they are fully implemented -- can make a real difference in curbing abusive predatory
lending practices. I am particularly pleased that the Task Force's report embraces the principal
elements of the LaFalce-Sarbanes predatory lending bill introduced earlier this year."
Senator Charles Schumer, who recently released a report on predatory lending in New
York, added: "It is clear that we need to focus a spotlight on predatory lenders whose sole
purpose is to hijack the American dream from unsuspecting borrowers. We should leave no stone
unturned to find and crack down on predatory lenders and Congress must pass the strongest
legislation possible to end this pernicious practice."
While expanded access to credit from both prime and subprimelenders has contributed to
the highest homeownership rates in the nation's history, there is growing evidence that some
lenders are engaging in predatory lending practices - excessive front-end fees, single premium
credit life insurance, and exorbitant prepayment penalties - that make homeownership much more
costly for families that can least afford it.
Copies of the report can be found on the HUD homepage at ~.h!,l.MQ.yi!1~\:Y..~J}~mJ or
at the Treasury homepage at www.treas.gov.

-30-

2

DEPARTlVIENT

OF

THE

lREASURY {.)

TREASURY

NEW S

178<)

omCE OF PUBUC AFFAIRS. 1500 PENNSYLVANIA AVENUE, N.W.· WASHINGTON, D.C.. 20220. (202) 622·2960

For Immediate Release
June21,2000

Contact: Public Affairs
202-622-2960

TREASURY SECRETARY TO RELEASE FIREARMS TRAFFICKING DATA
Treasury Secretary Lawrence H. Summers will release a report with new data on the
illegal firearms market based on investigations by the Bureau of Alcohol, Tobacco and Fiream1s
(ATF). The report, Following the Gun: Enforcillg Federal Lm1!s Against Firearms Traffickers
will be released on Wednesday, June 21 at 9:15 a.m. in Treasury's Diplomatic Reception
Room 3311 at 1500 Pennsylvania Avenue, N.W.
Media without Treasury or White House press credentials planning to attend should
contact Treasury's Office of Public Affairs at (202) 622-2960, with the following information:
name, social security number and date of birth. This information may also be faxed to (202)
622-1999.
- 30 LS-720

_For press releases, speeches, public schedllies and official biographies, call our 24J!our fax line at (202) 622~2().10

DEPARTl\;lENT

OF

THE

TREASURY

~/78~q~. . . . . . . . . . . . . . . . . . . . . ..

........................

OmCE OF PUBUC AFFAIRS • 1500 PENNSYLVANIA AVENUE, N.W .• WASHINGTON, D.C.. 20220. (202) 622.2960

EMBARGOED UNTIL 10:00 A.M. (EDT)
Text as Prepared for Delivery
June 21, 2000

TREASURY SECRETARY LAWRENCE H. SUMMERS
TESTIMONY BEFORE THE JOINT SENATE COMMITTEES ON AGRICULTURE,
NUTRITION, AND FORESTRY AND
BANKING, HOUSING AND URBAN AFFAIRS

Chairman Lugar, Chairman Gramm, Senator Harkin, Senator Sarbanes, Members of these
Committees, thank you for giving me the opportunity to discuss the Commodity Futures
Modernization Act with you today. This legislation represents an important step in the
modernization of the regulatory structure for the U. S. derivatives market. Let me also take this
opportunity to commend both Chairmen Gramm and Lugar for the leadership and interest you
have shown in this area.
The over-the-counter derivatives market is an important component of the American
capital markets and a powerful symbol of the kind of innovation and technology that has made
the American financial system as strong as it is today. Operating within a proper and appropriate
framework of legal certainty, we believe that the benefits to the U.S. economy of OTC
derivatives would continue to grow. For example:

•

By helping businesses and financial institutions to hedge their risks more efficiently,
derivatives enable them to pass on the benefits of lower costs to American consumers and
businesses.

•

By allowing for the transfer of unwanted risk, derivatives can promote more efficient
allocation of capital across the economy, increasing productivity.

•

By providing better pricing information, derivatives can help promote greater liquidity and
efficiency in the underlying cash markets.

• Finally, by enabling more sophisticated management of assets, including mortgages,
consumer loans, and corporate debt, derivatives can help lower mortgage payments,
insurance premiums, and other financing costs for American consumers and businesses.
LS-722

For press releases, speeches, public schedules and official biographies, call our 24-hour fax line at (202) 622-2(}:10
·U S Governmen!

Prln!lr'l~ OttIC€'

19-je· 619-559

Clearly, it is vital that we work together to provide a regulatory framework that will
ensure the continuation of a healthy and well-functioning OTC derivatives market. While the
current framework here in the US. remains outdated, markets overseCl.S are developing in a legal
and regulatory environment that allows greater efficiency and transpar~ncy.
Unless our laws and regulations relating to derivatives are mcdernized, we run the risk
that innovation will be stifled by the absence of legal certainty, depriving the American economy
of the benefits that the derivatives markets can provide, and hampering the efforts of our OTC
and exchange-traded markets and businesses to compete globally.
Let me divide my remarks into two parts:
•

First, I will begin by reviewing the findings of the President's Working Group on Financial
Markets and our guiding principles for modernization of the U.S. legal and regulatory
framework for OTC derivatives.

•

Second, I Will discuss in detail S. 2697, the Commodity Futures Modernization Act, and our
position with respect to the bill's treatment of OTC derivatives, regulatory relief for the
futures exchanges, and the repeal of the Shad-Johnson restrictions on the trading. of single
stock futures.

I.

Modernization of our Legal and Regulatory Framework for Derivatives.

As a result of concerns about the regulatory structure of US. derivatives markets,
Congress requested that the President's Working Group study the OTC derivatives market and
recommend what changes were required. The Working Group worked on the assumption that
legislative action would be required within a timeframe appropriate to the growing importance of
the OTC derivatives market - and taking into account this market's potential contribution to the
efficient functioning of the American financial sector and to that of the economy as a whole.
The Working Group had four primary objectives for legislation in this area:

•

To reduce systemic risk in the OTC derivatives market by removing legal impediments to
the development of clearing systems and ensuring that those systems are appropriately
regulated.

• To promote innovation in the OTC derivatives market by providing legal certainty for OTe
derivatives and electronic trading systems.
This would strengthen the overall legal
framework governing the OTC derivatives market that, in tum, would stimulate even greater
competition, transparency, and efficiency and deliver stronger benefits to US. consumers
and businesses.

•

To protect retail customers by ensuring that appropriate regulations are in place to deter
unfair practices in all markets in which they participate and by closing existing legal
loopholes that allow unregulated entities to pursue such unfair practices.

2

•

To maintain U.S. competitiveness by providing a modernized framework that will lead
those engaged in the financial services industry to continue the operations of their businesses
in the United States, and thereby help to assure the continued leadership of our capital
markets.

In addition, because the scope of the legislation being considered extends ·beyond the
areas considered in detail by the Working Group, we would add a fifth important objective:
•

To protect the integrity of the markets underlying the derivatives in question -particular, the markets for securities.

In

The Working Group made a series of unanimous recommendations with respect to
furthering these objectives.
The challenge before these Committees and the Congress is to establish a regulatory
regime that will strike a balance between allowing the economy to realize more fully the benefits
of derivatives and, at the same time, ensuring the integrity of the underlying markets, providing
appropriate protection for retail customers, and where possible, taking steps to mitigate systemic
risk.
At the same time, we need to recall that the emergence of these markets has occurred
during an era of unprecedented economic growth and prosperity. It is to be expected that in
times of distress some participants in these markets, as in other financial markets, will be
adversely affected. What needs to be protected, however, is the financial system as a whole, and
not individual institutions.
We believe that the Working Group's recommendations with respect to clearing and
those designed to enhance transparency and legal certainty and to clarify the treatment of
derivatives in the case of bankruptcy or insolvency can contribute to enhancing the stability of
the system more broadly.
II.

The Commodity Futures Modernization Act.

Mr. Chairman, in light of the Working Group's recommendations, we generally support
this bill and are committed to working with these Committees and the Congress to facilitate the
enactment of this important legislation.

Moreover, we believe it is important to move forward with appropriate legislation as soon
as possible. In the absence of an updated legal and regulatory environment, needless systemic
risk might jeopardize the broader vitality of the American capital markets. We also risk an
erosion of competitiveness of American financial markets, with an increasing amount of business
moving offshore to jurisdictions where the framework has kept up with the pace of change.
In that regard, we believe that this bill incorporates the recommendations of the Working
Group with respect to aTC derivatives which, if enacted, would promote greater legal certainty

3

for these instruments and help to advance all of the Working Group's objectives with respect to
these instruments.
I would like to address the three major areas of the bill:

•

First, the bill's approach to OTC derivatives;

•

Second, the regulatory relief provisions of the bilI; and

•

Finally, the provisions of the bill providing for the repeal of the Shad-Johnson restrictions on
the trading of single stock futures.

o TC derivatives
Let me first address the bill's approach to OTC derivatives. This bill largely incorporates
the recommendations of the Working Group with respect to OTC derivatives. We strongly
support such provisions. We do, however, have one important concern in this area.
The bill provides a broad exclusion from the securities laws for swaps, including, in
particular, swaps based on securities. We are very much supportive of the objective of removing
any unnecessary regulation. Let me caution, however, that there is an important distinction
between the securities laws and the commodities laws in that the securities laws do not impede
legal certainty. Thus, this is not a legal certainty issue.
As a general matter, we do not believe that swaps should be regulated as securities.
However, it is important to preserve prohibitions against insider trading, fraud, and manipulation
and also to preserve other measures which are demonstrably necessary to protect retail
customers.
We are concerned that the provisions, as currently drafted, could have the unintended
consequence of interfering with these vital protections that are now in place for the securities
markets. I would also note that it will be important to clarify the definition of "swap
agreements" so that it does not extend to certain transactions that are not customarily considered
swaps and thereby raise regulatory issues that swaps do not.
Because the provisions, as currently drafted, have the potential to impact the underlying
securities markets, we believe that it is imperative that they be amended to address these
concerns.

Regulatory Relief
Let me n~xt tum to the regulatory relief proposals contained in the bill. The Treasury
D~p~rtment contmues to support the view that it is appropriate to review, from time to time,
eXlstl.ng regu~atory structures to determine whether they continue to serve valid regulatory
functlO~s. LIke the OTC markets. exchange trading of derivatives should not be subject to
regulatIOns that do not have a public policy justification.

4

In that regard, the CFTC has recently released its regulatory relief proposal for public
comment. We will be submitting a formal comment letter on this proposal in the near future.
Broadly, however, we are supportive of the CFTC's efforts to provide appropriate regulatory
relief to the futures exchanges, consistent with the public interest.
With regard to the specific regulatory relief provisions of the bill as currently drafted, we
have a concern with certain provisions that permit "exempt boards of trade". To encourage
innovation and competition, the Working Group recommended an exclusion from the
Commodity Exchange Act for electronic trading systems that satisfy certain criteria. Although
the bill contains provi::;ions to enact this exclusion, it also contains a statutory exemption for
certain electronic and physical trading facilities. These "exempt boards of trade" would remain
subject to the CEA's "exclusive jurisdiction" clause, thereby precluding regulatory oversight by
other agencies.
To be clear: there are provisions in the bill as currently drafted which could have the
perverse consequence of creating the situation where protections that are present with respect to
off-exchange trades would not be present with respect to transactions that took place on an
exchange. These matters have particular importance with respect to the integrity of the
government securities markets. Any reduced confidence in such integrity could lead to higher
financing costs for the Treasury and thus an increased burden on American taxpayers.

•

The potential impact of this provision on the integrity of the government securities market is
of particular concern to the Treasury Department. In 1986, Congress passed the Government
Securities Act to provide an appropriate regulatory framework for the government securities
markets in direct response to a number of specific problems in the unregulated portion of this
market. In 1993, in response to incidents of wrongdoing in Treasury auctions, Congress
strengthened these laws to provide additional protection against market abuses.

•

This has the potential to undermine the laws that Congress put in place in recent years that
were designed to uphold and strengthen the integrity of the government securities market.

For these reasons, we strongly recommend that those provisions of the bill related to
exempt boards of trade be removed or amended to preclude the trading of securities-related
products on those systems.

The Shad-Johnson Accord.
Let me now tum to the question of restrictions on trading of individual stocks under the
Shad-Johnson accord. The members of the Working Group agreed that the current prohibition on
single-stock futures could be repealed if issues about the integrity of the underlying securities
markets and regulatory arbitrage are resolved. Our view remains unchanged.
The provisions contained in this bill regarding futures on non-exempt secuntles
(corporate stocks and bonds) are a good starting point, although a number of issues remain
unresolved. The bill addresses some of the customer protection and enforcement concerns

5

identified by the CFTC, the SEC, and others as necessary conditions for repealing the prohibition
on single-stock futures.
However, there are a number of concerns that the regulatory agencies consider important,
but that have not been resolved in the legislation. We hope that the SEC and CFTC can provide
specific comments on these issues in the near future so that they can be incorporated into this
bill.
In addition, certain issues related to the harmonization of margin requirements will need
to be clarified. While we do not see the need to establish margin requirements in statute, it will
be important to establish margin levels that do not encourage regulatory arbitrage or lead to a
substantial increase in leverage in our financial system.
While we have no objection to the introduction of single-stock futures, it is vitally
important that the integrity of the underlying markets be preserved, and that these instruments
not be used as a means to avoid the regulations of the cash markets. Therefore, we continue to
be supportive of efforts by the SEC and CFTC to reach an agreement on a regulatory framework
for these products that preserves the integrity of the underlying securities markets.
However, if these issues cannot be resolved on a timely basis, we believe that it is
important to move forward with legislation designed to clarify the legal certainty for aTC
derivatives.
The Importance of Clarifying the Treatment of Financial Contracts in Bankruptcy.

Before closing, although it is not part of this bill, I would like to take this opportunity to
strongly urge Congress to adopt the President's Working Group recommendations regarding the
treatment of certain financial contracts, including OTC derivatives, in cases of bal'lkruptcy or
insolvency.
Rarely are there tangible steps the government can take that could have a meaningful
impact on the mitigation of systemic risk. Enacting the recommendations of the Working Group
designed to clarify the treatment of these instruments in cases of bankruptcy or insolvency is one
of those steps.
By establishing a framework through which creditors and counterparties can work out a
swift resolution in cases of bankruptcy or insolvency, enactment of these recommendations can
serve to reduce the impact of the failure of any one institution on the stability of the system more
broadly.

v.

Conclusion

In conclusion, we have an opportunity to advance legislation that will create a modern
legal and regulatory fram.ework for OTC derivatives. S. 2697 is certainly a significant step in the
right direction. We look forward to working with members of these Committees, and with other
members of Congress to address our remaining concerns with the bill and to pass legislation that

6

will help to reduce systemic risk, promote innovation, protect retail customers, maintain U.S.
competitiveness, and protect the integrity of our securities markets

7

DEPARTl\1ENT

OF

THE

TREASURY

omCE OF PUBUC AFFAIRS. 1500 PENNSYLVANIA AVENUE, N.W .• WASHINGTON, D.C.. 20220. (202) 622·2960

EMBARGOED UNTIL 9:15 A.M. EDT
June 21,2000

Contact: Public Affairs
(202) 622-2960

TREASURY, ATF RELEASE GUN TRAFFICKING INVESTIGATIONS REPORT
Treasury Secretary Lawrence H. Summers today released the most comprehensive report
ever about the illegal fireanns market based on the work of the Bureau of Alcohol, Tobacco and
Fireanns (ATF). The report, Following the Gun: Enforcing Federal Laws Against Firearms
Traffickers documents more than 1,500 fireanns trafficking investigations that led to the
conviction, prosecution and sentencing of corrupt licensed dealers, straw purchasers, unlicensed
dealers, and traffickers of stolen guns.
The investigations were initiated by A TF between July 1996 and December 1998 and
conducted in partnership with U.S. Attorneys and state and local authorities.
"We are cracking down on gun traffickers and making it harder and harder for criminals
to obtain guns illegally," said Secretary Summers. "But, this report also shows that we must do
more to close every trafficking channel, starting with closing the gun show loophole, and
stiffening criminal penalties for fireanns dealers and large-scale traffickers."
The report found that:
o

Approximately 1,500 trafficking investigations led to over 1,700 defendants being
prosecuted. Of the almost 60 percent of these defendants adjudicated at the time of the
survey, 812 fireanns traffickers were convicted and sentenced in federal court to a
cumulative total of 7,420 years in prison with an average sentence of about nine years.

o A quarter of the traffickers identified in the investigations were convicted felons. About 45
percent of the investigations involved convicted felons who illegally bought, sold, possessed,
received, or stole fireanns.
::J

Nearly half of the trafficked firearms, 40,000, were associated with investigations of corrupt
FFLs. Corrupt federal fireanns licensees (FFLs) - retail dealers, pawnshops, and residential
FFLs - were associated with about 9 percent of investigations and, with the largest average
number of firearms per investigation, 350.

LS-723
For press releases. speeches, public schedules and official biographies, call our 24-hour fax line at (202) 622-2040

o

Almost 26,000 trafficked firearms were associated with investigations involving gun shows.
Gun shows were associated with the second highest number of trafficked firearms per
investigation, 130 guns, and about 14 percent of the investigations.

o

More than 22,500 trafficked firearms were associated with investigations of unlicensed
sellers. Unlicensed sellers were the Tocus of about a fifth of the investigations and were
associated with an average of 75 guns per investigation.

o

Almost 26,000 trafficked firearms were associated with investigations in which there was a
straw purchaser. Straw purchasers, who buy firearms on behalf of others from licensed and
unlicensed sellers,-and transfer them either to prohibited persons or to unlicensed sellers,
were the most common subject of trafficking investigations. Almost half of all the
trafficking investigations involved straw purchasers, with an average of 37 firearms
trafficked per investigation.

o

About 11,000 trafficked firearms were associated with investigations involving theft.
Firearms stolen from residences, federally licensed retail firearms dealers, and common
carriers were involved in over a quarter of the ATF trafficking investigations. Of the three
targets of theft, common carriers were associated with the most number of guns per
investigation, over 66.

o

Firearms tracing was used as an investigative tool in 60 percent of the investigations, and
analysis of crime gun tracing information and multiple sales reports created the leads to start
30 percent of the investigations.

ATF Director Bradley Buckles stated, "A TF is confident that crime gun tracing solidifies the
law enforcement partnerships needed to keep the streets of this nation safer and more secure."
In a transmittal letter to the President, Secretary Summers outlined several legislative and
enforcement steps to reduce illegal firearms trafficking including stiffer criminal penalties,
increasing sentencing for major traffickers and expanding the level of firearms tracing to identify
all sources of crime guns.
Following the Gun: Enforcing Federal Laws Against Firearms Traffickers is available on
ATF's website: www.atf.trcas.gov
- 30 -

PUBLIC DEBT NEWS
Department of the Treasury • Bureau of the Public Debt • Washington, DC 20239

FOR IMMEDIATE RELEASE
June 21, 2000

Contact: Peter HoHenbach
(202) 691-3502

BUREAU OF THE PUBLIC DEBT AIDS SAVINGS BONDS OWNERS
AFFECTED BY WILDFIRES IN COLORADO
The Bureau of Public Debt took action to assist victims of wildfires in Colorado by expediting the
replacement or payment of United States Savings Bonds for owners in the affected areas. The
emergency procedures are effective immediately for paying agents and owners in Park, Jefferson
and Larimer counties. These procedures will remain in effect through end of July 2000.
Public Debt's action waives the normal six-month minimum holding period for Series EE and
Series I savings bonds presented to authorized paying agents for redemption by residents of the
affected area. Most financial institutions serve as paying agents for savings bonds.
Public Debt will also expedite the replacement of bonds lost or destroyed. Bond owners should
complete form PD-I048, available at most financial institutions or by writing the Kansas City
Federal Reserve Bank's Savings Bond Customer Service Department, 925 Grand Boulevard,
Kansas City, Missouri 64198; phone (816) 881-2000. This form can also be downloaded from
Public Debt's website at: www .publicdebt.treas. gov . Bond owners should include as much
information as possible about the lost bonds on the form. This information should include how
the bonds were inscribed, social security number, and approximate dates of issue. bond
denominations and serial numbers if available. A notary public or an officer of a financial
institution must certify the completed form. Completed forms should be forwarded to Public
Debt's Savings Bond Operations Office located at 200 Third St., Parkersburg. West Virginia
26106-1328. Bond owners should write the word "DISASTER" on the front of their envelopes,
to help expedite the processing of claims.

000

18-126
http://www.publicdebt.treas.gov

D1JlI,WJOJ/!D tm'rn. 9=00 A.X.
~ 21, 2000

WBLle COJr'l'AC"r: Office of Pin~cing
203-691-3550
IIBDXA c:ozrrAC'l': »111 lIuelt
202-622-1997

1...

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~~••RZ'l' r ••• roPeS ~e right to aecept
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to the 2lezt $100,000. As. Z"a1N1t: of ~i. 1:O'IIA4i».51, the Tnasury may buy
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Detail. About the operat1on aDQ each of the eligible i8sue. aze
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18-121

-

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20, 2000
19, 2000

DEPARTMENT

OF

THE

TREASURY

OFFlCE OF PUBUCAFFAIRS -1500 PENNSYLVANIA AVENUE, N.W. - WASIDNGTON, D.C. - 20220 - (202) 622·2960

F or Immediate Release
June 22, 2000

Contact: Public Affairs
(202) 622-2960

STATEMENT BY TREASURY SECRETARY LAWRENCE H. SUMMERS
REGARDING FATF ANNOUNCEMENT OF NON-COOPERATIVE COUNTRIES
Today in Paris, the Financial Action Task Force (FATF) named 15 jurisdictions that have
failed to take adequate measures to combat international money laundering. The United States,
an active participant in the FATF, welcomes this landmark step to limit the capacity of drug
dealers, terrorists, organized criminals and corrupt foreign officials to launder their ill-gotten
gains through safe havens.
FATF's Report on Non-Cooperative Countries and Territories provides important
information that financial institutions in this country and around the world should make use of in
conducting their own internal anti-money laundering efforts. The United States will promptly
examine what additional guidance ought to be provided to our own financial institutions.
The Report also underscores the importance of Congress acting on the bi-partisan antimoney laundering legislation introduced by Congressmen Leach and LaFalce. The legislation,
which passed overwhelmingly by the House Banking Committee, would substantially enhance
the capacity ofthe United States to employ targeted counter-measures against money laundering
havens.
This Report fulfills a commitment made by FATF in February and by the United States in
March in our National Money Laundering Strategy to identify countries whose counter-money
laundering regimes fail to meet international standards. It is major step in the right direction.
Taken together with recent actions by the Financial Stability Forum - categorizing
offshore financial centers according to their perceived quality of supervision and degree of
regulatory cooperation - and the OECD - cracking down on harmful tax competition - FATF's
action reflects a new international commitment to curb financial abuse around the world. These
measures are crucial steps in the effort to ensure that global mobility of capital remains a strong
positive force for economic growth and prosperity worldwide.
- 30LS-728

For press releases, speeches, public schedules and official biographies, call our 24-hour fax line at (202) 622-2040

D EPA R T 1\1 E N T

lREASURY

0 F

THE

T REA SUR Y

fa) NEW S
1789

OffiCE OF PUBUCAFFAIRS -1500 PENNSYLVANIA AVENUE, N.W. - WASHINGTON, D.C. - 20220 - (202) 622·2960

FOR IMMEDIATE RELEASE
Text as Prepared for Delivery
June 21, 2000

UNDERSECRETARY .OF THE TREASURY (DOMESTIC FINANCE)
GARY GENSLER
REMARKS TO THE WOMEN IN HOUSING AND FINANCE
Good evening and thank you for inviting me to speak to you tonight. I would panicularly like to
thank your president, Diane Casey. and to congratulate Women in Housing and Finance on its 20
year anniversary. You have built a remarkable organization, and I am pleased to say that many
Treasury officials and staff are among your members.
I would like to use this opportunity to focus on the dramatic change that technology is bringing
to the financial world. We have already responded to some of these changes with two landmark
pieces of legislation that I would like to briefly discuss later on.
But my main focus this evening will be on the future. None of us are clairvoyants and it would
be futile for us to attempt precise forecasts about where this exciting technological journey wi])
take us. We can at least make reasonable guesses, however, as to some of the likely paths along
the way and discuss the potential implications of traveling them.
When this Administration took office in January 1993, there were fewer than 1,000 websites on
the Internet. Many people had not heard of the World Wide Web, let alone come to terms with email, URLs, or online shopping. Now, of course, these tenns are part of our everyday language.
Almost 30 percent of Americans are now "on-line" and e-commerce has become a reality. The
Internet, once a curiosity used solely by government engineers and scientists, is now an integral
pan of everyday life.
While it is impossible to predict the exact nature of the cbanges that e-commerce will bring to
the world of finance over the next few years, I will venture to say that the changes will be
profound. We can be sure that Americans will increasingly be in a position to conduct their
finances online. It will become normal for Americans to use the Internet to pay their bills,
manage their bank accounts, secure mortgages or life insurance, and organize their personal
savings. Why? Because it is cheaper, easier. and more convenient for them to do so on-line, and
because the Internet provides them with greater choice. For the first time, Americans in small
LS - 729

Far press releases, speeches, public schedules and official biographies, call our 24-hour fax line at (202) 622-2040

towns and big cities alike will have access, at the click of a mouse, to a wide variety of financial
institutions and a much broader array of products and services.
Rapid developments in electronic financial services pose an important challenge for those of us
in the various branches of government. The Administration has worked hard to facilitate the
growth of these services. We have already taken two very important steps to put in place a
framework for the future that lies ahead for the financial industry.
The one step that has received significant attention is the landmark financial modernization act
signed by the President 'Iast fall. By breaking down outdated barriers between banks and other
financial service companies, that Act opened the door to greater innovation and competition. We
have equipped the financial industry to take advantage of the rapid technological changes that are
taking place, while providing consumers with greater choice and lower costs. At the same time,
we worked hard to ensure that the legislation took the important first steps toward the privacy
protections necessary in an increasingly electronic financial world.
Last week, we took a second, but less talked about step, as Congress passed the Electronic
Signatures in Global and National Commerce Act. The "E-Sign" or "Digital Signature" Act, as it
has been called, removes legal impediments to conducting transactions on-line. This legislation
is a major milestone in the development of electronic finance. It provides the legal certainty for
electronic transactions that business needs by preempting laws that require paper contracts,
notices, and records. We worked very hard to ensure that this Act provided a viable framework
for the future, by ensuring that consumers will continue to benefit from the protections they
currently enjoy omine.
Both the financial modernization legislation and the digital signature bill represent critical and, I
believe, historic steps forward for the American financial industry. They lay the groundwork for
the rapid development of online financial services. While we are only in the early stages of
what will clearly be a dynamic process, we can at least guess at some of the likely issues with
which Congress and regulators may have to grapple in the years ahead.
•

First, the accelerating and dramatic pace of change in how financial services are delivered
underscores the priority of ensuring that both cOnsumer protection and consumer confidence
are as strong on-line as off-line.

•

Second, in a world of disappearing geographic boundaries, it is likely that we may have to
adapt our legal and regulatory framework.

•

And third, rapid changes in the nature of products and market structures are likely to create
challenges for our legal and regulatory framework as boundaries between products continue
to break down.

I.

Encouraging Growth by Building Consumer Confidence.

2

Of all the goods and services traded in our economy, financial services are among the best suited
for electronic delivery. When we buy a financial product. we don't need to kick the tires or try it
on for size. For the financial services industry to realize the full potential of electronic
commerce, however, consumers must have confidence that they will not suffer by moving their
financial activities on-line.
As the President said recently: "Just as at the dawn of the Industrial Age a hundred years ago,
new rules were required to make sure that the Industrial Revolution worked for all our
people ... so we also need new rules for the Information Age to protect those old values."
As Congress moved forward on electronic signatures legislation, the Administration worked hard
to ensure that the bill would give Americans the same consumer protections on-line that they
have today ina paper world. Among other things, the legislation states that consumers must
consent electronically to receive electronic notices and reasonably demonstrate that they have the
ability to do so. Critical exceptions were added for certain types of notices, such as cancellation
of insurance, foreclosure on a residence, product recalls, and court orders. The Administration
believes that these protections are essential to preserve the vitality of consumer protection
statutes and the continued development of electronic commerce.
Just as consumers need to know that existing protections will not be diminished on-line, they
also need to know electronic finance will not create new problems? Americans also need to have
confidence in how their financial institutions are using the information amassed from their
electronic transactions. Americans should not have to forgo participating in our modem
economy out of fear oflosing their right to privacy.
The President has announced new legislation to protect the financial privacy of consumers. The
proposal builds on the progress made in last year's financial modernization legislation, but would
extend those protections to data shared within large financial organizations, and would add
strong protections for the most sensitive data. At the same time, the legislation is structured in a
balanced way so as to preserve the benefits that flow from the growing integration of the
financial services industry.
We believe that our proposed privacy legislation, like the electronic signatures bill that just
passed, will enhance consumer confidence in the financial services industry. That confidence
will be crucial to providing a sound basis for the continued growth of electronic financial
services. And it also lays the basis for what will surely be more groundbreaking legislation in
the years to come as financial e-commerce becomes more widespread.
II.

Adapting to a World without Borders.

The Internet knows no geographic borders. None of us are visionaries. But it is surely not
impossible to imagine a world in the not-too-distant future where it is typical for an Internet
customer to buy her mortgage in one continent, her insurance in another, and manage her
finances in a third without even.being aware of it.

3

We saw one example of the negative side to these dramatic changes, however, at yesterday's
House Banking hearing on Internet gambling. While operating an on-line casino is illegal in the
United States, on-line casinos have proliferated overseas. This kind of cross-border activity
raises many challenges for our legal system in a very short period of time. Would any of you
have imagined two years ago that Congress, let alone the House Banking Committee, would so
soon be holding hearings on Internet gambling?
How will we effectively regulate activities in a world where geographic borders offer less
constraint than ever? We are rapidly approaching a world in which it is as easy to trade shares
listed in Tokyo or Frankfurt as in New York. Regulators will increasingly be challenged by the
geographic limitations of their jurisdictions. Even within the United States, the availability of
on-line financial services raises significant questions for products, such as insurance, that are
regulated on a state-by-state basis. Beyond the world of finance, these questions already have
raised many issues for taxation.
Let me suggest a few likely developments:
•

First, national regulators will have to cooperate to a greater degree to prevent a "race to the
bottom" in standards of supervision and oversight. New technology is likely to spur a
gradual internationalization of standards and the cross-border consolidation of stock and
derivatives exchanges as globalization intensifies.

•

Second, we will need to develop common - or at least consistent - standards of accounting
and auditing. We have already made progress in this area, but the process is likely to go
further to ensure that the same high standards of financial accounting and auditing apply
wherever a stock is listed.

•

Third, for some products, Congress and the States will most likely revisit issues concerning
the appropriate mix of federal and state regulation. Indeed, we have recently seen Congress
address issues related to insurance products as part of both the Digital Signatures and
Financial Modernization Acts. Doubtless Congress and the States will have to confront
similar challenges as technological change gathers pace.

III.

Adapting to a World of Rapidly Changing Conceptual Boundaries.

Technology does not just challenge the existence of national boundaries. It also breaks down
barriers between once distinct market structures and the products that trade within them. As
technology facilitates the development of new products and new ways of delivering existing
products, the distinction between different types of products and markets will increasingly blur
These developments will change the way we think about product and market regulation.
We have already seen these challenges in the OTC derivatives markets, where the development
of new products and electronic trading mechanisms has raised questions about the appropriate
regulatory approaches for some time. Our position has been to adapt the regulatory environment
to suit changing circumstances by calling for legal certainty forthe OTC derivatives market. We
4

are confident that Congress will enact these measures. Electronic trading systems are profoundly
altering the structure of the securities markets, as well. Regulators and the exchanges are
grabbling with these issues already. I expect that the pressures for change will increase as time
goes on.
This convergence of products will continue to present challenges to Congress and the regulators.
I expect that banking, insurance, and securities products will become tess and less
distinguishable over time. New products will present increasing challenges to our regulatory
structure and to the concept of functional regulation. Looking further ahead~ it is possible that old
definitions will not be as relevant as they were and that Congress might find it appropriate from
time to time to review the scope of reguI ato-ry boundaries.
IV. Conclusion.
These issues will only become more challenging, not Jess, as technology develops. If we are to
preserve the competitiveness of our institutions and markets, it is essential that we find rational
solutions that will both preserve market integrity and encourage innovation. We will have to
continually examine our laws and regulatory structures to ensure that they are keeping up with
our finance in th.is ever-changing environment.
Thank you very much.
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5

D EPA R T

~1

E N T

0 F

THE

T REA SUR Y

1789

OrnCE OFPUBUCAFFAIRS -1500 PENNSYLVANIA AVENUE, N.W. - WASHINGTON, D.C. - 20220 - (202)622·2960

PURLIC CONTACT: Ofrice of Financing
202-691-3550
MEDIA CONTACT:
Bill Buck
20Z-6ZZ- 1997

FOR IMMEDIATE RELEASE
June ZZ, ZOOO

TREASURY DEBT BUYBACK OPERATION RESill>TS

Today, Treasury completed a debt buyback (redemption) operation for $Z.O billion
par of its outstandi ng issues. A total of 12 issues maturi ng between February ZOl5 and
August ZOl9 were eligible for this operation. The settlement date ror this operation will
be June Z6, ZOOO. Summary results of this operation are presented below.
(amounts in mi 11 ions)

Ofrers Received (Par Amount):
Ofrers Accepted (Par Amount):

$7,339
Z,OOO

Total Price Paid f'or Issues

(Less Accrued Interest):
Number of' Issues Eligible:
For Operation:
For Which Off'ers were Accepted:
Weighted Average Yield
of all Accepted Orfers (%):
Wei ghted Average Maturi ty
for all Accepted Securities (in years):

Z,678

12
11

6.313

16.<1

Details for each issue accompany this release.

LS-730

For press re/eases, ,lpeec/Il'S, puhlic schedllies anli of/kial bioRfaphie." call ollr 2-1-!rollr{ax lillc at (202) 622-20-10

June ZZ,

TREASURY DEBT

BUYBACK

2000

OPERATION RESULTS

(amounts in millions, prices in decimals)

Table I

Coupon
. tl'
Ila~'-l

11. 2S0
10.62S
9.87S
9.2S0
7.2S0
7. SOO
8.7S0
8.87S
9. 12S
9.000
8.87S
8. 12S

ldaturi ty
Dat e
02l1S/lS
08/1S/IS

11/1S/IS
02l1S/16
OS/lS/16
11/1S/16
OS/lS/17
OS/lS/17
OS/lS/18
11/1S/18
02l1S/19
08/1S/19

Par
Amount
Offered

Par
Amount
Accepted

Highest
Accepted

Weighted
Average
Accepted

~

fi:.i.g

721
1,277
603
370
ISS
20S
667
S38
44S
690
940
726

1]5
662
Z28
4S
0
10
242
6S
SS
20S
137
176

146.S7S
141. 6ZS
134.7S1
12S.984

146.S44
141.S64
134.72S
12S.967

N/A

N/A

112.1S6
12S.Z03
lZ6.6S7
129.921
129.062
127.937
120.093

112.1S6
lZS.IS9
126.6SS
129.904
129.024
127.91S
120.081

Lowest
Accepted
Yield

Weighted
Average
Accepted
Yield

Par Amount
Privatel): Held'

6.323
6.313
6.308
6.306

6.326
6.318
6.313
6.308

Table II

Coupon
Rate (%)
11. 2S0
10.62S
9.87S
9.2S0
7.2S0
7.S00
8.7S0
8.875
9. 125
9.000
8.875
8. 12S

ldaturi ty
Date

CUSIP
Number

02l1S/IS

912S10DPO
912S10DS4
912S10DT2
912810DV7
912S10DWS
912810DX3
912S10DYl
912810DZ8
912810EA2
912S10EBO
912810EC8
912810E06

08/1S/lS
11/1S/lS
02l1S/16
OS/lS/16
1111S/16
OS/lS/17

OS/lS/17
05/1S/18
11/1S/18
02l1S/19
08/1S/19

Total Pal' Amount Offered:
Due to roundi ng,

N/A
6.299
6.306
6.307
6.310
6.309
6.306
6.303

7,339
2,000

Total Par Amount Accepted:
Notl':

N/A
6.299
6.303
6.304
6.309
6.306
6.305
6.302

detai I s may not add to total s .•

'Amount outstandi ng after operati on.

Cal cuI ated usi ng amounts reported on announcement.

10,17S
4,S79
S, 149
S,830
17,726
17,426
14, S10
11,336
7,033
7,271
16,829
18,08S

NEWS

TREASURY

OFFICE OF PUBLIC AFFAIHS -1500 PENNSYLVANI;\ AVENUE, N.W .• WASIII1'<CTON,

20220 - (202) (,22·2<;(,0

Office of Financing
202/691--J5SU

CONTACT:

EMBARGOED UNTIL 2:30 P.M.
June 22, 2000

Il.c..

TREASURY OFFERS 13-HEEK AND 26-WEEK BILLS
The 'rreasury will auction two series of Treasury bills totaling
approximately $16,000 million to refund $16,517 million of publicly held
securities maturing June 29, 2000, and to pay down about $517 million.
In addition to the public holdings, Federal Reserve Banks for their ovm
accounts hold $11,004 million of the maturing bills, which may be refunded at.
the highest discount rate of accepted competitive tendors.
Amounts issued to
these accounts will be in addition to the offering amount.
The maturing bills held by the public include $3,242 million held
by Federal Reserve Banks as agents for foreign and international monetary
authorities.
Up to $3,000 million of these securities may be refunded within
the offering amount in each of the auctions of 13-weok bills and 26-week
bills at the highest discount rate of accepted competitive tenders.
Additional amounts may be issued in each auction for such accounts to the extent
that the amount of new bids exceeds $3,000 million.
TreasuryDirect customers requested that ,,,,e reinvest their maturing holoings of approximately $898 million into the 13-weok bill and $724 million in~o
the 26-week bill.

This offering of Treasury securities is governed by the terms and conditions set forth in the Uniform Offering Circular for the Sale and Issue of
Marketable Book-Entry Treasu~~ Bills, Notes, and Bonds (31 CFR Part 356, as
amended) .
Details about each of the new securities ara given
offering highlights.

~n

the attached

LS-i31
000

Attachment

For press releases, speeches, pilblic schedules and official biographies, call

Ollr

24-hollr fax line at (2D2) 622-2()-i:

HIGHLIGHTS OF TREASURY OFFERINGS OF BILLS
TO BE ISSUED JUNE 29, 2000
June 22, 2000
Offering Amount . . . . . . . . . . . . . . . . . . . . . . . . . $8,500 million
Description of Offering:
Term and type of security ...............
CUSIP number . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Auction date . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Issue date . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Maturity date . . . . . . . . . . . . . . . . . . . . . . . . . . .
Original issue date .....................
Currently outstanding ...................
Minimum hid amount and multiples ........

91-day bill
912795 FB 2
June 26, 2000
June 29, 2000
September 28, 2000
March 30, 2000
$14,861 million
$1,000

$7,500 million
182-day bill
912795 FM 8
June 26, 2000
June 29, 2000
December 28, 2000
June 29, 2000
$1,000

The following rules apply to all securities mentioned above:
Submission of Bids:
Noncompetitive bids ......... Accepted in full up to $1,000,000 at the highest discount rate of
accepted competitive bids.
Competitive bids ............ (1) Must be expressed as a discount rate with three 4ecimals in
increments of .005%, e.g., 7.100%, 7.105%.
(2) Net long position for each bidder must be reported when the sum
of the total bid amount, at all discount rates, and the net long
position is $1 billion or greater.
(3) Net long position must be determined as of one half-hour prior
to the closing time for receipt of competitive tenders.
Maximum Recognized Bid
at a Single Rate ............ 35% of public offering
Maximum Award . . . . . . . . . . . . . . . . . . . 35% of public offering
Receipt of Tenders:
Noncompetitive tenders ...... Prior to 12:00 noon Eastern Daylight Saving time on auction day
Competitive tenders ......... Prior to 1:00 p.m. Eastern Daylight Saving time on auction day
Payment Terms: By charge to a funds account at a Federal Reserve Bank on issue date, or payment
of full par amount with tender.
Treasu~Direct customers can use the Pay Direct feature which
authorizes a charge to their account of record at their financial institution on issue date.

D E P .\ R T 'I E :\ T

() F

TilE

'IREASURY fI)

T REA SUR Y

NEW S

178'l

OffiCE OF PUBUC AFFAIRS • 1500 PENNSYLVANIA AVENUE. N.W.• WASHINGTON, D.C. • 20220. (202) 622-2960

EMBARGOED UNTIL 10 A.M. EDT
Text as Prepared for Delivery
June23,2000

TREASURY SPECIAL ADVISOR TO THE SECRETARY AND DEPUTY SECRETARY
WILLIAM F. WECHSLER TESTIMONY BEFORE THE HOUSE COMMITTEE ON
GOVERNMENT REFORM, SUBCOMMITTEE ON CRIMINAL .ruSTICE. DRUG
POLICY AND HUMAN RESOURCES
Mr. Chainnan and Ranking Member Mink and Members ofthis Comminee:
I want to thank you for this opportunity to speak to you today about international money
laundering. Treasury Secretary Lawrence Summers and Deputy Secretary Stuart Eizenstat
applaud your continued focus on this important issue. International money laundering is a
growing. global problem that requires a global solution. Former IMF Managing Director
Camdessus has estimated the volume of cross-border money laundering at between two and five
per cent of the world's gross domestic product. Ifhe's right, that means that between $600
billion and $1.5 trillion each year is laundered around the world.
To some, money laundering may look like a clever game played by accountants and other
white collar professionals. But we know that there is often a bloody reality at its core.
International drug cartels, criminal organizations and 'terrorist groups must launder their dirty
money in order to receive the ultimate benefit of their crimes. and to finance their ongoing
criminal operations. There would be no incentive for the cartels to push drugs on the streets of
the United States if they could not launder the profits back into their home countries' financial
systems, making their money appear to be legitimate and themselves very wealthy.
By cracking down on international money laundering we can accomplish three things.
First. we can disrupt international criminal networks by anacking their financial foundations.
Second, we can raise the cost of laundering money and thereby help deter criminals from abusing
legitimate financial systems. And third. we can follow the trail of dirty money to the underlying
crimes or to the criminals themselves. We all remember that it took an accountant to put Al
Capone behind bars.

LS-732

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I.

The National Money Laundering Strateg)·

Secretary Summers and Deputy Secretary Eizenstat are fully committed to combating
money laundering. both at home and abroad. Under their leadership. we at the Treasury have
worked with the Department of Justice, the law enforcement and regulatory agencies and the rest
of the executive branch to develop a senes of new initiatives to combat money laundering. In
March, we unveiled the National Money Laundering Strategy for 2000. the most comprehensive
plan ever put forth on the subject. It includes literally scores of specific action items to combat
money laundering. For each item, goals for this year are laid out, and specific government
officials are listed who .is personally responsible for meeting those goals.
The National Money Laundering Strategy for 2000 identifies four critical fronts for our
efforts to combat money laundering: federal law enforcement, fmancial services regulation and
supervision, partnership with state and local efforts, and international initiatives. I will quickly
describe some highlights of our approach toward the first three fronts before focusing my
remarks on the fourth. the specific subject under examination today, how we have improved
international cooperation to combat money laundering. As I do so. I cannot stress strongly
enough our conviction that in order for us to have success in combating money laundering. all
four of these fronts must be part of a comprehensive. integrated strategy. If we only focus on
one without paying attention to another, money launderers will easily be able to elude our grasp.
•

Strengthening Domestic Law Enforcement. In March, the Departments of Justice and the
Treasury designated the first-ever High Risk Money Laundering and Financial Crime Areas
(HIFCAs). Three geographic areas were chosen, New YorkINew Jersey. Los Angeles and
San Juan, and one systemic focus, bulk cash smuggling across the border between Mexico
and Texas and Arizona. For each of these HIFCAs, an action team composed of all relevant
law enforcement authorities, prosecutors and financial regulators is being established to
spearhead-a coordinated, concentrated. strategically focused law enforcement attack on
money laundering. Many other specific law enforcement initiatives are underway and can be
better described by the representatives of the law enforcement agencies you have here today.

•

Enhancing Regulatorv and Cooperative Public-Private Efforts. Among our initiatives on this
front is our ongoing program to eliminate outstanding loopholes in our anti-money
laundering regime by bringing in all significant providers of financial services. In March,
FinCEN issued a final rule requiring suspicious activity reporting by money services
businesses that will become effective at the end of 200 1. Later this year FinCEN will issue a
final rule for casinos. and by the end of the year FinCEN. working with the SEC. will issue a
proposed rule for brokers and dealers in securities. This will help to better deter money
launderers from abusing these financial services.

•

Strengthening Partnerships with State and Local Governments. A critical initiative on this
front is our new grant program to provide seed capital for emerging state and local countermoney laundering enforcement efforts. The Financial Crime Free Communities Support
Program (C-FIC) will provide approximately $2.5 million this year in technical assistance
and training to state and local law enforcement. Last week the Departments of Justice and
the Treasury formally began the application process.

2

•

II.

International Initiatives. We have a wide range of initiatives on this fourth from. which will
be the focus of my remarks today.

International Trends

Let me begin with some context. The last decade has seen two fundamental trends in
international money laundering. First. the good news. In the last decade or so most of the
world's major developed financial centers have worked together to establish global anti -money
laundering standards. This effort is critical because it is a statistical certainty that much of the
world's dirty money flows through these financial centers:
The U.S. and its partners took.a great step forward in combating international money
laundering in 1989 with the creation of the Financial Action Task Force (F ATF) by the G-7. In
1990 and again in 1996, the FA TF issued its set of comprehensive recommendations on what
countries need to do - in tenns of laws, regulations and enforcement - to combat money
laundering effectively. In joining FATF. every member nation makes a political commitment to
adopt the recommendations and allows itself to be evaluated by the other member nations on
whether it has fulfilled that commitment. Today FA TF has grown to 26 members and three more
are on their way toward full membership: Brazil, Argentina and Mexico. This top-down.
cooperative approach has been greatly successful in encouraging FA TF member nations to
improve their money laundering regimes.
That is the positive trend that we have witnessed in the last decade. It is because of this
trend that we now routinely read of significant money laundering cases being brought by Swiss
authorities involving Russian crime, Latin American drug cartels and African official corruption
something that only a few years ago was unimaginable. Just last week, FATF achieved another
major triumph when Austria. yieJding to FA TF's demands, finally agreed to abolish its system of
anonymous passbook saving accounts.
Now for the bad news. While we have been working to improve anti-money laundering
regimes in major, developed financial centers. there has been a second trend that has served to
undermine our accomplishments. As a result of globalization and advances in banking and
communications technologies, money can move farther and faster than ever before. That is a
great boon to business, but can also provide new opportunities for money laundering. As
Secretary Summers said in a speech last March, "In a world where capital can silently traverse
the globe with the push of a button, proceeds of crime can move just as quickly and just as
quietly." Only a decade ago, many nations in the world were too physically remote to be
significantly involved in international banking. The quality of their anti-money laundering
regimes did not significantly affect the U.S. or other countries. But now they are only a click of
the mouse away. And now they can just as quickly become money laundering havens.
Becoming a money laundering haven is easy to do. It costs no money. Simply pass a
few laws that provide, for example. excessive bank secrecy. anonymous company formation. and
unregulated offshore financial services. and wait for the money flow in. Better yet. pass a law
banning information sharing with foreign law enforcement on financial matters. It has not taken

3

long for a number of countries to choose this path. Indeed. there has been a proliferation of these
money laundering havens in the last few years. Many openly announce that they are passing
such laws as a formal part of their economic development programs. Some even blatantly
advertise on the internet that by putting money in their banks you will be protected by their laws
from investigations by U.S. law enforcement. Of course. it will be extremely difficult for these
countries to ever know whether the money in their banks is dirty or clean.
To give just one example: In the South Pacific there is a small island nation called
Nauru. It once had one of the highest per capita incomes in the world due to phosphate mining.
But the phosphate ran out, so it turned to offshore financial services. Nauru quickly became very
popular - so popular that late last year the Russian Central Bank announced that out of a total
$74 billion that flowed from Russia to offshore centers in 1998. $70 billion moved through
accounts in Nauru. Now, we may never know how much of that money was capital flight and
how much was criminal proceeds, but the point is from Nauru's point of view they had knO\\'
way of knowing either.

III.

Identification of Non-Cooperative Countries and Territories

The United Btates and the rest of the responsible international community has acted
quickly to staunch this new, dangerous proliferation of money laundering havens. Last year. the
United States and the United Kingdom issued advisories to our domestic financial institutions
urging th~m to enhance their scrutiny of transactions coming in or going out of Antigua because
of our serious concerns about glaring weaknesses in Antigua' s anti -money laundering regime.
This public rebuke had a profound affect on Antigua. which has since worked with the U.S. to
change its laws to move toward international standards. But even as we were taking this action.
we knew that a more systematic approach was needed.
So in February of this year. the 26 nations of the Financial Action Task Force reached
agreement on a list of 2S criteria - objective measures that we could use to determine whether
countries fell significantly short of international anti-money laundering standards. These
countries could be both money laundering havens and large sources of dirty money. The FATF
arso agreed on a list of countries that would be the first to be judged against those criteria. The
FA TF then produced comprehensive analyses of each of those countries legislative. regulatory
and enforcement anti-money laundering efforts. Finally, the FATF offered all of the countries
under review ample opportunity to respond to F ATF's analyses. both in writing and in face-toface meetings.
Yesterday FATF released its first report to identify non-cooperative countries and
territories. Included on that list were: the Bahamas. the Cayman Islands. the Cook Islands. the
Marshall Islands, Israel, Lebanon. Liechtenstein. Nauru. Niue. Panama. the Philippines, Russia.
St. Kitts and Nevis. St. Vincent and the Grenadines. This is a major accomplishment. to my
knowledge the first-ever multilateral designation otnmy subject listing countries that fail to
comply with well-established international standards. These conclusions are not just the
conclusions of the United States. but are firmly backed by 26 nations. This public "naming and
shaming" should have a profound affect. Indeed. it already has. Countries such as Liechtenstein
which for years had never had a successful prosecution of a money laundering case. are now

4

taking commendable steps when confronted with F ATF action. In recent months. the Austrian
who Liechtenstein recently appointed to be their first-ever independent prosecutor on money
laundering has arrested a number of prominent officials on money laundering charges including
the brother of the deputy head of government and a sitting member of parliament. Just last week.
he raided the bank that belongs to the family of the Prince. All because the international
community has taken strong measures.

IV.

Next Steps

In the coming months, the FA TF will undertake similar analyses of additional countries.
I expect that some more countries will be added to the list over time. I also expect that some
countries named yesterday by FATF will react constructively and will bring their anti-money
laundering regimes up to international standards. If so, they will be dropped from the list. As
appropriate we will offer technical assistance to help them on their way, and encourage our allies
in FATF to do the same.
It is possible, however, that some nations will instead continue to ignore international
standards and thereby remain money laundering havens. We will then have to explore with our
allies what appropriate countenneasures could be taken. Unfortunately, the United States at
present does not posses all the tools we need to crack down on international money laundering
havens and other foreign money laundering threats. That is why we worked with Chainnan
Leach and Ranking Member Lafalce in the House Banking Committee to develop a bipartisan
bill that would give us these tools.

We were very pleased that the House Banking Committee, by an overwhelming
bipartisan vote of31 to 1, on June 8 reported out H.R. 3886, the International Counter-Money
Laundering and Foreign Anti-Corruption Act of2000. This bill would authorize the Secretary of
the Treasury ill designate a foreign jurisdiction. a foreign institution or a class of international
transactions as being a .... primary money laundering concern." Then, in consultation with the
Chairman of the Federal Reserve and other appropriate officials, he could impose one or more
targeted actions, including provisions for additional record-keeping and reporting, the
identification of beneficial owners and those using correspondent or payable-through accounts,
and for restricting correspondent relationships with money laundering havens and rogue foreign
banks.
In this way, we could focus our efforts on dirty money while allowing legitimate
commerce to continue unimpeded. We could thereby help prevent laundered money from
slipping undetected into the tJ.S. financial system and crack down on foreign money laundering
havens in ways that we cannot today. I cannot stress strongly enough how important passage of
this bipartisan legislation will be to our comprehensive efforts to combat international money
laundering.
Again, thank you for this opportunity to speak about this important subject.
-30-

5

DEPARTl\1ENT

OF

THE

TREASURY

OFFICE OF PUBUCAFFAIRS • 1500 PENNSYLVANIA AVENUE, N.W.• WASIllNGTON, D.C.• 20220. (202) 622·2960

FOR IMMEDIATE RELEASE
June 22, 2000

STATEMENT BY TREASURY SECRETARY LAWRENCE H. SUMMERS

I am very encouraged by the U.S. Senate's adoption today ofa bipartisan resolution urging the
Congress to "fully fund bilateral and multilateral debt relief." The global HIPC (Heavily
Indebted Poor Countries) Initiative is in urgent need of U.S. funds to continue the work of
relieving the debt burden of millions of the world's poorest people in countries committed to
economic reform and poverty alleviation. I appreciate the leadership of Senators Chafee,
Sarbanes, Mack and Biden in today's action, and look forward to working with the Congress in
the weeks ahead to obtain the funding requested by the Administration for this vital international
program.
-30-

LS - 733

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D EPA R T 1\1 E N T

lREASURY

0 F

THE

T REA SUR Y

$'~~ NEW S

OffiCE OF PUBUCAFFAIRS -1500 PENNSYLVANIA AVENUE, N.W. - WASHINGTON, D.C. - 20220 - (202) 622-2960

FOR IMMEDIATE RELEASE
Text as Prepared for Delivery
June 23, 2000

DEPUTY TREASURY STUART E. EIZENSTAT
REMARKS TO THE INTERNATIONAL RELATIONS INSTITUTE
ALGIERS, ALGERIA
I am very happy to be here in Algiers. It was most gracious of former Prime
Minister Hamdani to host this gathering, and invite leaders of your economy and your
government, as well as representatives of American companies active in Algeria.
The United States and Algeria have many ties, but one is especially symbolic. Just
a few days from now, on the Fourth of July, we shall be celebrating the anniversary of
our independence. The next day you will be celebrating yours. In 1962, three months
after the independence of Algeria was achieved, President Kennedy spoke of your "proud
history as a people, which goes back for thousands of years, and the great place Algeria
can play in North Africa and throughout the world." In that spirit, we welcome the
progress you are making toward domestic peace, stability and national reconciliation. We
look forward, as you do, to continued strengthening of your relationships with other
nations and with international institutions. And we especially commend President
Bouteflika for the role he played, as chairman of the Organization of African Unity, in
achieving a truce agreement between Ethiopia and Eritrea.
The developed nations of the world, such as the United States, share with you a
commitment to economic progress. It is no longer a matter of big power politics, as it was
during the Cold War. It is a simple case of demographics. The labor force in the U.S. and
Western Europe is aging. In the next twenty-five years, almost all of the world's
population growth as well as a great deal of the growth in productivity is going to take
place in countries such as yours. This is where the expanding markets and the manpower
are going to be. Huge amounts of private capital are coursing around the world today,
looking for attractive areas for investment.
The developing countries have a reciprocal desire for this capital to look with
favor upon them. Even those which are blessed with essential natural resources want to
diversify their economies. They want to train their population for productive work in a
globalized economy. They do not want the benefits and opportunities of the information

LS-734
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'U S Government Printing Otfl.:~ 1998· 619-559

2

age to pass them by. Those nations, from Central Europe to Asia, which have
successfully made the transition from central planning to a market economy over the last
twenty years have enjoyed impressive increases in their standard of living. Those that
join them will be in position to maximize the benefits that come from globalization and
minimize the risks.
Experience shows that investment capital flows to those countries that offer a
conducive investment climate--a predictable and transparent regulatory system, a vibrant
and independent private sector, an established infrastructure to support new business
ve'ntures, an educated workforce, and physical proximity to other buoyant markets. A
business-friendly environment is created by forward looking governments that plan and
then enact the necessary reforms-sometimes painful and politically unpopular ones-to
lay the groundwork for sustained growth. This involves reforming and reducing the role
of the state in the economy, liberalizing the trade regime by lowering tariff and other
barriers, and investing in the country's human capital through increased spending on
education and health care. Only then will private business activities take hold and
prosper, and create much-needed jobs.
Experience throughout the world shows that market-based economic systems
provide the best environment for creating jobs, generating economic activity, and raising
living standards, both in our own country and around the world. But we also believe that
markets by themselves do not necessarily create the conditions needed for them to
function well. When it comes to investment generating factors such as developing a
skilled work force, maintaining sound macroeconomic policies, managing national debt,
providing full and accurate information for private investment decisions, and protecting
intellectual property rights, government action is needed for markets to produce the best
results.
The Algerian economy has been making the transition from central planning,
which characterized it for so many years, to a market economy. American investors have
been steadily increasing their stake. U.S. investment in Algeria is increasing at the rate of
$500 million a year. We are the third largest customer for your foreign trade. Our
companies have signed contracts, over the past year, to supply hundreds of millions of
dollars of products and services in areas from air traffic control to agriculture. One of our
largest financial institutions, Citibank, has begun operations here. We are participating in
your International Trade Fair for the first time since 1993. The U.S.Government
encourages American investment in Algeria and we hope, over time, there will be
increased access for products from Algeria and other members of the U.S.-North Africa
Economic Partnership to US. markets
Private capital, as well as international financial institutions, is taking a fresh look
at the benefits of investment here as conditions are becoming more peaceful. They will be
watching how the government implements its announced policies. At the same time,
increased revenue from the petrochemical sector offers the wherewithal for public
investments, in both infrastructure and human capital, that will enhance your

2

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attractiveness to private investment. Successful diversification, by the same token, will
reduce the economy's vulnerability to future swings in world oil prices.
You have taken impressive measures recently to restore macroeconomic stability
and move towards a more market-based economy. You have successfully brought
inflation under control and have pursued remarkably responsible fiscal policies, leading
to reductions in both the government deficit and external debt. You have overhauled your
housing policy, in the face of pressing needs, and made a start in opening the banking
sector to new domestic and foreign entrants. You have enacted an investment code and
trade legislation designed to make Algeria more attractive to foreign investors. And you
have the beginnings of a securities market, which, as it grows, will make it easier for
venture capital to seek opportunities.
The Algerian government understands that a comprehensive and determined
program of reforms is still necessary to put the economy on a path to sustained growth.
Private investors in Algeria and abroad will watch implementation of announced
intentions closely. The banking system not only needs to be restructured to a sounder
financial footing, but also needs to achieve greater efficiency, with stronger management
and supervision. The privatization of state-owned industrial companies needs to be
accelerated and broadened. The telecommunications infrastructure needs to be updated
and expanded so it can operate with the efficiency that global business firms require. In
addition, an improved institutional and legal framework is needed to protect property
rights. The opening of the economy needs to continue and even accelerate. Allowing a
foreign role in energy, transportation, utilities and telecommunications would be a good
start. Algeria can also send a positive and valuable signal by accelerating its work to
become a member of the World Trade Organization.
There is another role in the restructuring process that your government
understands and has stated its intention to perform. The deep-seated reforms required of
developing countries sometimes cause changes that result, in the short term, in less rapid
economic growth and temporary increases in unemployment, even as their long-term
benefits will be higher sustained growth and lower unemployment. If the people of a
country are to be expected to accept these, they must have some confidence that a social
safety net is in place to help them weather the transition and manage the risks of a market
economy. Social programs should be aimed at developing human capital, so that people
have the skills to change occupations and make other adjustments, and at alleviating
substandard living condi~ions. Economic reform cannot just show up in statistics. People
must be able to see the change in their job opportunities and the conditions of daily life.
With the institution of mortgage guarantees and a secondary market, Algeria has taken an
important new initiative in dealing with your prolonged and severe shortage of housing.
But you need better medical facilities, more classrooms and more teachers, as well as
expanded housing. These are needs that can and should be addressed by better targeting
government resources and taking advantage of the recent lessening of economic pressures
due to the rise in oil prices.
I would now like to discuss the U.S.-North Africa Economic Partnership, and the
role it can play in integrating this area of the world with the global economy. The

3

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purpose of the Partnership is to foster trade and investment, both between the Maghreb
region and the United States and within the region, in the interests of more rapid
economic growth and long term stability. The Partnership pursues these goals by
encouraging the private sector to take greater advantage of both the trade and investment
opportunities that exist in the region as a whole.
I first proposed this initiative, almost two years ago, because I was struck by the
desire of business people and government officials in this region to broaden their range of
economic relations and forge closer commercial links with the United States. They
wanted our know-how, and where possible our capital. We felt U.S. companies would be
most interested in trade and investment if they could operate on a regional basis By
investing in one country and then exporting to the entire region, they could reach a
market of70 or 80 million people.
The U.S. Government is very serious about this initiative, and I am proud to have
my name associated with it. We have taken some important initial steps. There have
been two Ministerial-level meetings with Tunisia, Morocco and Algeria. We have formed
a Steering Committee consisting of the Ambassadors of the three nations resfdent in
Washington to work with senior officials of our government to monitor progress toward
economic reform in North Africa, and on the range of investment promotion, technical
assistance and educational programs that are planned. A number of senior government
officials have visited the region and engaged in high level policy dialogue aimed at
promoting economic reform and liberalization. Last April, 90 American businessmen
heard ministers from the Maghreb speak in Washington about economic developments
and opportunities for investment in their countries.
Currently, with funding support from our Congress, our Treasury Department is
providing technical assistance on debt management and financial reform. Our
Department of Commerce providing advice on commercial law and privatization and will
set up a training program for Algerian commercial attaches .
. We are now ready to bring the critical parties together. I am happy to be able to
announce today that the U.S Government will sponsor the first ever official Investment
Conference to be held for the Maghreb region. It will be held this fall in the United
States. It will be funded by our Trade and Development Agency. It will be specifically
designed to bring US. businessmen together with prospective partners and clients in
seeking out trade opportunities, establishing joint ventures and making investments.
The US. government can be helpful in these and other ways. But if the Maghreb
countries expect to reap the benefits of being treated as an economic unit, they need to
reduce internal barriers to trade and investment. Tariffs are high, ranging from an average
of24 per cent in Algeria to 34 per cent elsewhere in the region. Poor transportation, visa
requirements and a closed border also create barriers to trade. All of these make it more
difficult to invest in one country and export to the others.

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In conclusion, with continued progress toward domestic peace and a revived
world economy, Algeria has a significant opportunity to speed up its desired transition to
a market economy. I hope we can see an intensified commitment here and in other
Maghreb capitals to economic liberalization and to intra-regional integration. A brighter
economic future awaits those countries whose leaders have the foresight, the
determination and the diplomatic skills to proceed in that direction. Thank you.
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5

NEWS

TREASURY

OFFICE OF PUBUC AFFAIRS • 1500 PENNSYLVANIA AVENUE, N.W .• WASHINGTON, D.C .• 20220. (202) 622-2960

FOR IMMEDIATE RELEASE
June 26, 2000

Contact: Public Affairs
(202) 622-2960

TREASURY WELCOMES OECD REPORT ON HARMFUL TAX COMPETITION
Treasury Secretary Lawrence H. Summers today welcomed the OECD's report on the
global effort to protect the integrity of national tax systems from harmful tax competition The
report details the OECD's work in this area and identifies 35 jurisdictions as tax havens and 47
tax regimes in OECD member countries as potentially harmful.
"The identification of tax havens and potentially harmful tax regimes is a crucial step in
preventing distortions that could undermine the benefits of enhanced capital mobility of today's
economy," said Secretary Summers. "It is our hope that the listed tax haven jurisdictions will
take this opportunity to work with the OECD to reform their harmful tax practices."
Last week, the OECD announced that six jurisdictions made commitments to eliminate
their harmful tax practices and would not be included in the tax haven list, even if they otherwise
would have met the tax haven criteria. OECD member countries committed to eliminate their
harmful tax practices in 1998 Those countries will be meeting with many non-member
countries this week at a symposium in Paris to further discuss ways to address the global
problem of harmful tax competition
"We encourage all countries to follow the example set by the OECD member countries
and six non-member jurisdictions that have committed to eliminate harmful tax practices,"
Secretary Summers said.
The OECD's Forum on Harmful Tax Practices, which the United States co-chairs, was
established in April 1998 to address the growing problem of unfair tax competition. The Forum
will continue its efforts by working with cooperative tax havens, developing more detailed
guidance to help countries determine whether their tax regimes are actually harmful, and
developing and coordinating defensive sanctions.
The full OECD report, entitled "Progress on Identifying and Eliminating Harmful Tax
Practices," is available on the GECD website at bttjJ://wwwoccdorg
. -30-

18-135

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DEPARTMENT

1REASURY

OF

THE

TREASURY

rl) NEW S

OFFICE OF PUBUC AFFAIRS • 1500 PENNSYLVANIA AVENUE, N.W .• WASHINGTON, D.C .• 20220. (202) 622.2960

EMBARGOED UNTIL 10:00 A.M. (EDT)
Text as Prepared for Delivery
June 27, 2000

TREASURY UNDER SECRETARY (DOMESTIC FINANCE)
GARY GENSLER
TESTIMONY BEFORE THE HOUSE COMMITTEE ON BANKING AND
FINANCIAL INSTITUTIONS

Chairman Leach, Ranking Member LaFalce, and Members of the Committee, I
appreciate this opportunity to be here today to discuss basic banking and H.R. 4490, the First
Accounts Act of 2000. I would particularly like to thank Chairman Leach and Mr. LaFalce for
cosponsoring the First Accounts Act on its introduction.
Despite the strong national economy, 10 million American families are not participating
in our financial system at even the most basic level. These 10 million families - nearly 85
percent of who make less than $25,000 annually - lack a bank account. Bringing these
families into the financial services mainstream will mean lower costs and more opportunities
for them to plan financially and to save for the future. That is good for these families, and
good for our national economy.
For some time, Treasury has been working to help families gain access to the financial
services mainstream. Building on these efforts, the First Accounts Act will help us take small,
but important steps to expand the reach of the financial system to many families who lack this
basic passport to the broader economy.
My testimony today will focus on four points:
First, low-income families face practical challenges to full participation in the mainstream
financial services sector.
Second, universal access to financial services is critical to our nation's families and to our
economy as a whole.
LS-736

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Third, the Administration has already taken steps to bridge the financial services divide.
Fourth, the First Accounts initiative will continue to build on our efforts to bring the
unbanked into the financial services mainstream.

Bridging the Banking Divide
The Federal Reserve's 1998 Survey of Consumer Finances indicates that there were
nearly 10 million families in the United States in 1998 without either a checking or savings
account, representing 9.5 percent of US families. Over 8.4 million of these families have
incomes below $25,000, or less than 65 percent of US family median income. Nearly one in
four lower-income families is unbanked. The problem also occurs disproportionately among
minority families, nearly one-quarter of who are unbanked, even regardless of income.
Evidence further indicates that the unbanked are often concentrated in lower-income urban
areas.
For most of us, entering the financial services mainstream is simple. We can walk into
a local bank branch, make an opening deposit, and walk out with a checkbook and a checking
account. We have our paychecks directly deposited to our account, and can access those funds
in any number of ways - at convenient ATMs, at point-of-sale terminals at local merchants, or
by writing checks. And we are typically able to keep a cushion of funds that allows us to
handle financial contingencies, avoid overdrafts and maintain a minimum balance in the
account.
For the unbanked, gaining a foothold in the financial services mainstream is unlikely to
be as simple. Let me highlight five reasons why Treasury believes many low-income
Americans do not have bank accounts: a lack of low-cost account products tailored to their
needs; prior problems with bank accounts; insufficient convenient access; a lack of consumer
education; and industry perception that these customers may not be profitable.
First, financial institutions may not offer account products that meet the needs of the
unbanked population:
Many accounts impose significant fees for monthly service charges; failure to maintain
specified minimum balances, and for bounced checks and other types of account
mismanagement. For customers who by definition must maintain low balances, this pricing
system can present more risks than rewards. Financial institutions may also charge high
fees for products such as money orders that are not used by their typical customers.
The Federal Reserve reports that when asked why they do not have an account, the
unbanked cite reasons including not writing enough checks to make an account worthwhile,
minimum balances and/or service charges being too high, not wanting to deal with banks,
2

and not having enough money. Some of these concerns can be addressed by developing
and marketing new products tailored to the needs of this popUlation.
Second, the unbanked may have greater difficulty qualifying for conventional account
products. This may reflect past problems that the un banked have encountered in the banking
system:
For example, eighty percent of u.S. depository institutions look up account applicants on
an online network that tracks checking and savings accounts closed "for cause" - because
the accountholder wrote bad checks or failed to pay overdraft fees, for example. Records
of such activity remain on the network for five years, during which time the individual may
be unable to obtain a conventional bank account at most financial institutions. While the
system may weed out applicants who pose an undue risk to financial institutions, the system
may also freeze out for five years those individuals who wrote a small number of bad
checks by mistake.
Surveys indicate that at least half of unbanked households had an account at some point in
the past. Many of these individuals may have left the financial services mainstream
because they had problems managing or affording a bank account.
A third reason may be the lower availability of mainstream financial services in the
areas where the unbanked live and work:
Mainstream financial institutions are less present in many inner-city neighborhoods. In
New York City, for example, only 2.5 percent of all bank branches are located in lowincome areas that contain more than 6 percent of the city's total households.
Electronic banking services may also be less available in these neighborhoods. For
example, research indicates that lower-income zip codes in New York and Los Angeles
have only half as many ATMs per capita as middle-income zip codes. In combination with
other factors, a relative absence of branches and ATMs may make account ownership less
attractive and more difficult for families in these neighborhoods.
Fourth, many unbanked Americans lack knowledge about the benefits of a bank account
and how to effectively manage household finances. This may negatively affect their attitudes
and perceptions about financial institutions and account products.
Fifth, many financial institutions feel that serving this customer segment involves
greater risks and fewer rewards than serving other segments. In particular, the costs of
developing new products and new distribution networks to reach the unbanked, combined with
the costs of marketing and providing consumer education to this population, may result in an
extended period of time for a bank to recover its start-up costs for serving the unbanked.

3

Financial institutions may also be concerned about the long-term profitability of serving this
sector.
We need to overcome these practical barriers if we are to help bring the unbanked into
the financial services mainstream.

The Importance of Universal Access
Like money itself, the benefits that a bank account provides are easy to take for
granted, until you do not have one. Providing greater access to the financial services system
has the potential to generate tangible economic benefits, both for families and for our nation's
economy.
Lower Costs to Consumers - Being unbanked can impose a large financial burden on
families and individuals.
Many families pay a premium for conducting financial
transactions outside of the banking system. A recent survey found that nearly half of a
sample of Earned Income Tax Credit recipients in inner-city Chicago used a check cashing
service to cash their tax refund, yet prices for financial services at these outlets often far
exceed the cost of using a low-cost bank account. Recent Treasury research indicates that a
minimum wage worker can pay an average of $18 per month for cashing paychecks at a
check casher.
Gateway to Economic Mobility - It is difficult for families to accumulate savings when
they don't have a bank account. In addition, paying high costs for financial services can
significantly reduce the amount low-income families are able to save. Studies show that the
principal gateway to saving and to responsible management of household finances is
participation in mainstream financial services. Research by Bill Gale at the Brookings
Institution showed that even after controlling for income and other factors, low-income
families with bank accounts were 43 percent more likely to have positive net financial
assets than families without bank accounts.
With even a modest amount of savings, lower-income families may be able to handle
unforeseen financial needs, needs that drive those without savings toward high-cost credit
options like payday lending. The high costs of payday loans, which average about $36 on
a two-week $200 loan, can erode what little financial stability these families may have.
Access to Credit and the New Economy - Account ownership is critical to participating in
the mainstream economy, as well as to bridging the digital divide. First, without an
account it is more difficult and expensive for a person to establish credit, obtain a credit
card, qualify for a loan to buy a car or a house, or obtain financing for a small business.
Increasing account ownership can thus help low-income individuals who are attempting to
better their financial condition. A 1999 Federal Reserve study found that lower-income
families who held a transaction account were seven times more likely to have a credit card,
4

and two and a half times as likely to have a first mortgage, as lower-income families
without an account.
Second, without a bank account or credit card, it is next to impossible to conduct financial
transactions. online. It is even difficult to gain access to the Internet. Thus, if we are going
to bridge the "Digital Divide," we need to bridge the banking divide.
Increased Economic Efficiency - Lastly, banking the unbanked increases the efficiency of
the economy at large. For example, it costs just 2 cents for the Federal Government to pay
an employee by electronic transfer whereas it costs 42 cents to process a paycheck. Private
sector employers face similar costs. Financial institutions can also gain by banking the
unbanked. Surveys of the unbanked indicate that about half of households without bank
accounts regularly cash their checks at banks, thrifts or credit unions, and often at no fee.
By moving customers who already are in the bank lobby into an account relationship, banks
can reduce costs and generate revenue. Over time, these customers can build credit
histories, increasingly the likelihood that they will access other financial products at the
bank.

Increasing Access to Financial Services
For these reasons, it has been a high priority of this Administration, and the Treasury
Department in particular, to help Americans overcome barriers to the banking system. Between
1992 and 1998, the percentage of families without a bank account decreased from 13 percent to
under 10 percent. Let me highlight a few of the ways in which this Administration's efforts
have contributed to this favorable trend:
First, the strong economy has helped to increase the incomes of even the lowest-paid
American families. Real income for families in the lowest fifth of the income distribution rose
faster than for any other group since 1993. Strong growth in family income has helped to
reduce the ranks of the unbanked.
Second, a strong Community Reinvestment Act. Under the revised CRA regulations
adopted in 1995, banks and thrifts are examined for their performance not only on lending and
investment, but also on the provision of services. CRA is helping to encourage financial
institutions to be more attentive to the financial services needs of low- and moderate-income
persons. The Federal Financial Institutions Examination Council (FFIEC) has made clear that
banks and thrifts can receive positive CRA consideration for the provision of consumer
education, innovative accounts, Individual Development Accounts, and Electronic Transfer
Accounts, discussed more fully below.
Third, EFT '99. In 1996, Congress enacted the Debt Collection Improvement Act,
which required Treasury by 1999 to make most Federal payments by electronic funds transfer.

5

To meet this requirement, Treasury launched the EFT'99 initiative, and put in place a two-part
strategy to meet its statutory obligations under the Act.
First, Treasury launched a nationwide public education campaign to reach the millions of
people who receive federal benefits by paper check, including those without bank accounts.
As part of the EFT'99 initiative, Treasury's Office of Public Education developed a wide
variety of promotional materials, conducted broad-based public relations activities, and
partnered with a national network of community organizations to educate consumers about
EFT. At the end of 1999, Treasury estimated that it had reached 1. 1 million people faceto-face through its community outreach program alone.
Second, Treasury created the Electronic Transfer Account (ETA). The Department
worked with consumer groups, industry and other government agencies to develop the
ETA. The ETA is a low-cost, no-frills basic bank account available at federally insured
financial institutions into which recipients can have their Federal payments deposited
electronically. It is an entirely voluntary account - any individual receiving a Federal
payment is eligible to open an ETA, and any Federally insured financial institution may
become an ETA provider.
The EFT'99 initiative was designed to address, specifically for federal benefit
recipients, many of the challenges of increasing account ownership among the unbanked:
The ETA was designed to be accessible and affordable for lower-income, unbanked federal
check recipients, including those who may have had problems managing a bank account in
the past. Its primarily electronic design protects accountholders and banks from incurring
the costs of checking overdrafts, and makes the account easier to manage for consumers
who may have had problems doing so in the past. Treasury's EFT'99 research indicated
that a substantial portion of unbanked federal check recipients were interested in opening a
low-cost account like the ETA with features tailored to their needs.
The EFT'99 public education campaign has reached millions of check recipients, informing
them of the safety and security of direct deposit, along with how to obtain an ETA.
Treasury conducted extensive research on the product preferences of the unbanked federal
benefit recipient population, and on the costs to large and small banks of offering
transaction accounts to this population. In the ETA, Treasury sought to balance the cost to
financial institutions of supplying various account features with consumers' product
preferences.
Treasury compensates each ETA provider $12.60 for each new ETA customer. This
compensation offsets the incremental set-up costs to financial institutions for establishing a
new ETA, while the accountholder pays a small monthly fee to cover the recurring costs of

6

maintaining the account. The availability of this compensation has increased the number of
institutions volunteering to offer the ETA.
Since unveiling the ETA last June, we have conducted extensive marketing of the ETA
to financial institutions. As of June 22, we have 586 financial institutions certified to offer the
ETA in 6,132 branch locations nationwide.
Fourth, as I noted previously, many lower-income commumtIes lack sufficient
convenient access to mainstream financial services. That is why Treasury has been working to
provide easy access to banking services within previously under-served communities. Working
with the US Postal Service, Treasury has established a small pilot program to place ATMs in
local post offices to give families easy and secure access to funds at a low cost.
Fifth, Treasury's Community Development Financial Institutions Fund has also played

an important role in promoting access to financial services in lower-income communities.
Through its CDFI and Bank Enterprise Award programs, the Fund provides financial
incentives to banks, thrifts, credit unions and CDFIs for providing increased retail banking
services to underserved communities. The Fund currently provides per-account incentives to
financial institutions that increase their provision of ETAs to consumers in lower-income
communities.
Lastly, the Administration has supported basic savings initiatives that bring low-income
families into the banking mainstream. Under the Assets for Independence Act, the Department
of Health and Human Services is working with states and local organizations to help lowincome people establish Individual Development Accounts (IDAs). Families' deposits into
these savings accounts are matched with federal and private dollars to help accountholders
meet savings goals, such as a down payment on a home or school expenses. Under another
demonstration, IDA programs are operating in 13 sites across the country, with more than
2,000 savers. The President's proposal for Retirement Savings Accounts in his FY 2001
budget builds on the successful model of IDAs, and would help more low-income families to
start savings relationships with mainstream financial institutions.

H.R. 4490 - The First Accounts Act of 2000
The Pre'sident's FY 2001 budget includes $30 million for the Treasury Department to
build on this Administration's work by piloting strategies to help more low- and moderateincome Americans to access basic financial services in the banking mainstream. Treasury
estimates that at least half of the 10 million families without bank accounts do not receive
federal benefits and are thus not eligible for the ETA.
The First Accounts Act of 2000, introduced last month by Chairman Leach and
Ranking Member LaFalce, would authorize Treasury to extend the benefits of low-cost basic
7

bank accounts to the millions of unbanked Americans who do not receive Federal payments.
Companion legislation has also been introduced in the Senate. The First Accounts bill IS
currently cosponsored by 25 Members, including many of the Members of this committee.
The initiative involves four elements:
First Accounts - Treasury will work with financial institutions to pilot low-cost, electronic
banking accounts for unbanked, non-federal benefit recipients. The program will provide
financial institutions with flexibility and incentives to design products that work for
consumers who may have difficulty qualifying for a conventional checking or savings
account, and that are profitable for financial institutions. The design of these accounts will
build on our experience designing the basic banking product for federal benefit recipients,
the ETA.
ATMs and other access points - Treasury will work with financial institutions and
electronic networks to increase the number of electronic access points in low-income
neighborhoods that often lack these basic services. This may include providing incentives
for the installation of automatic teller machines in safe, secure, and convenient locations,
including U.S. Post Offices, expanding the number of point-of-sale terminals at merchant
locations in these neighborhoods, or providing innovative internet-based solutions in these
communities.
Financial Education - Treasury will work with other organizations to educate low-income
Americans about the benefits of having a bank account, managing household finances, and
building assets. First Accounts will support partnerships between financial institutions and
community-based organizations with expertise in delivering consumer financial literacy.
This consumer education effort will build upon the EFT '99 public education campaign and
our work on the National Partners for Financial Empowerment.
Research and Development - The initiative will also fund new research at Treasury on the
financial services needs of low- and moderate-income individuals who do not receive
federal benefits, as well as the development of products that can help financial institutions
meet those needs. This part of the initiative will build on the extensive original research
that Treasury conducted for EFT'99.
This fall, Treasury's CDFI Fund will expand the scope of its BEA and CDFI programs
to provide incentives for banks, thrifts, credit unions and CDFls to offer First Accounts-type
products to customers who do not receive Federal payments.
Awards, subject to the
availability of funds, will depend on the actual increase in services provided. The results of
these programs will help to inform the structure and incentives for the First Accounts pilot.
EFT'99 will also continue to provide valuable input into the structure of the First
Accounts initiative. As Treasury continues its consumer education efforts, it will further
8

develop best practices to apply to the First Accounts initiative. As the ETA continues to roll
out over the coming months, Treasury will gauge the demand for low-cost electronic account
products among consumers and industry experience in offering such products. Treasury will
also gather evidence from our Postal-ATM pilot in six neighborhoods, showing ATM usage in
safe, secure locations in underserved, low-income neighborhoods. We will pair our findings
from the pilot with further research to identify gaps in electronic access to banking services.
After assessing these outcomes, Treasury will determine how best to allocate the pilot's
elements - research, education, access points and accounts - and to draw on the strengths of
our offices and bureaus that have been instrumental in the implementation of EFT'99.
Conclusion

Despite the unprecedented growth in our nation's economy over the last several years,
10 percent of American families are not participating in our banking system at even the most
basic level. This Administration has done much to help lower-income families move into the
financial services mainstream, but much more remains to be done. Helping the 10 million US
families without bank accounts to access the financial services mainstream can lower costs for
these families and encourage them to save, while benefiting our economy as a whole. The
First Accounts Act of 2000 represents a small but significant step toward helping more of these
families to enjoy the benefits of full participation in that system. We look forward to working
with this Committee to enact this important legislation. I would like to thank Chairman Leach
and Ranking Member LaFalce for focusing attention on the issue of the unbanked with this
hearing. I will be happy to answer any questions you might have.

-30-

9

NEWS
ornCEOFPUBUCAFFAIRS -1500 PENNSYLVANIA AVENUE, N.W. - WASHINGTON, D.C.- 20220. (202) 622-2960

EMBARGOED UNTIL 1:30 P.M. EDT

Text as Prepared for Delivery
June 28, 2000

TREASURY DEPUTY ASSISTANT SECRETARY WILLIAM SCHUERCH
TESTIMONY BEFORE THE SUBCOMMITTEE ON THE WESTERN HEMSIPHERE
HOUSE COMMITTEE ON INTERNATIONAL RELATIONS

Chairman Gallegly, Ranking Member Ackerman, and other Members of the Committee, I
appreciate the opportunity to meet with you today to discuss the important role that the World
Bank and the Inter-American Development Bank (IDB) play in promoting economic growth and
poverty reduction in Latin America and the Caribbean. While most Latin American countries
rely far more heavily on private financing and the multilateral institutions now provide only a
small fraction of total resources flows. these institutions are central to the region's efforts to
address its economic and development challenges. They promote growth, stability, open
markets, and democratic institutions while advancing fundamental U.S. values throughout the
region. At the same time, U.S. support for the World Bank and IDB operations in Latin
America entails only modest budgetary costs.
Unprecedented globalization, supported by advances in technology and communications,
has opened new opportunities for the world economy. Major political and economic changes are
accelerating in many areas of the world. This is an era of great challenges. In our integrating
world, the United States has a growing stake in the economic and political stability and success
of other countries -we are now more likely to benefit from their success, and more likely to be
damaged by their failures. And as you well know, Latin America is particularly important in this
regard to the United States given our strong cultural, economic, and strategic interests in the
region. For example, Latin America accounts for twenty percent of both U.S. exports and u.s.
foreign direct investment.
The World Bank and the IDB are among the most effective and cost-efficient means we
have to help the countries of Latin America and the Caribbean address their long-term economic
and development challenges. Ultimately, it is a country's own commitment to sound policies
that is the most critical factor in its ability to improve the economic welfare of its people. But
when such a commitment is genuine and policies are sound, the World Bank and the lOB -- as
well as USAID and other bilateral donors -- can provide valuable supporting roles in promoting
sustainable economic growth, open markets, poverty reduction, environmental protection, and
good governance.
LS-737
Far press releases, speeches, public schedules and official biographies, call our 24-11our fax line at (202) 622-2040
·U S Governmenl Pnn!'n1 Qtke 19<'0· 619·559

I would like to discuss two broad areas today: (l) the current economic and social
situation in Latin America, including the key development challenges the region faces, and, (2)
the roles played by the World Bank and the IDB, as well as our development agenda for
increasing the effectiveness of these institutions.
Economic and Social Situation

Latin America and the Caribbean have made important strides in implementing sound
macro-economic policies, adopting more outward-oriented and private sector friendly
environments, and improving public sector management. Despite individual country setbacks,
there has also been major movement in the direction of democratic and more accountable
government.
The region recorded real annual growth of3.6 percent (1.1 percent per capita) over the
1991-98 period. This represented a significant improvement over the 2.6 percent annual increase
(0.4 percent per capita) recorded over the previous 15 years. As a result of the adverse impact of
the Asian crisis on the global economic environment through falling export prices and volumes,
and reduced capital flows to developing countries, growth in Latin America slowed to 2.1
percent in 1998 and was virtually flat in 1999. GroMh has subsequently rebounded to a
projected rate of roughly 4 percent this year.
Although the pace of growth over the last decade is less than one-half of that recorded in
Asia, it is still an important step in the right direction and was achieved against a background of
financial crises, natural disasters, and fluctuations in commodity prices.
Latin America's economic growth has also translated into important social progress, e.g.,
• infant mortality rate has dropped from 61 per 1,000 live births in 1980 to 31 in 1998.
• Life expectancy at birth has increased from 65 years in 1980 to 70 years in 1998.
• Primary school enrollment has increased from 86 (male) and 85 (female) percent in 1980 to
95 (male) and 93 (female) percent in 1997. Latin Americans over 25 in the 1960s had only
3.2 years of education. This average reached 5 years in the 1990s.
• The percent of the population with access to sanitation (sewerage) has increased from 46
percent in 1982 to 68 percent in 1995.
At the same time, much remains to be done. Economic and social progress has been
uneven both within and among countries, and Latin America's record in translating economic
growth into poverty reduction has been very disappointing, e.g"
• Latin American countries have the greatest income disparities of any region. The poorest 20
percent of the population receive less than 5 percent of total income while the richest 20
percent recei ve 53 percent.
2

•

more than 15 percent of the population are living on less than $1 per day; more than 36
percent are living on less than $2 per day. (Brazil accounts for almost 40 percent of the
population below $2 per day.) Unlike the East Asia and Pacific region where the incidence
of poverty has been declining, these figures for Latin America remained roughly constant,
with perhaps only a very slight decline, over the 1990s. The region is clearly not on track to
meet the International Development Goal of reducing the incidence of income poverty by
halfby 2015.

While sound macro-economic policies are essential for the economic growth that is the
most important determinant of countries' ability to raise incomes and reduce poverty and
inequality, this must be accompanied by the right social sector policies to effectively achieve
poverty reduction. Efforts to promote economic growth, poverty reduction, and economic
inclusion should be mutually reinforcing. This is one of Latin America's most crucial
development challenges as we enter the new millennium.
In addressing this challenge, we know some things about what contributes to equitable
growth. For example, there is now a broad consensus on the need to focus more explicitly on
attacking poverty, by concentrating resources and attention more effectively on the interventions
that most affect poverty. Thus while it is crucial for the countries of the region to maintain
sound economic management, they also need to prioritize investments in human development,
particularly the provision of stronger and more efficient basic education and health services, and
rural development, that expand opportunities for the poor.
The Role of the World Bank and IDB

Because Latin America's per capita income is relatively high compared to that of other
developing regions, only a small portion of World Bank and IDB assistance is provided on
concessional terms and this assistance is restricted to the region's poorest countries, currently
Bolivia, Guyana, Haiti, Honduras and Nicaragua. During the last five years, total concessional
lending by the World Bank's International Development Association (IDA) and the IDB's Fund
for Special Operations averaged about $875 million annually ($365 million IDA + $510 million
FSO). Bolivia and Honduras were the largest two recipients of both IDA and FSO resources,
together accounting for just over one-half of the total.
The level of "hard loan" (based on the institutions' cost of borrowing) World Bank
(IBRD) and IDB lending to Latin America varies annually. The long-term pre-financial crisis
trend shows lending to the region relatively steady in the IDB (roughly $5.5 to $6.0 billion
annually) and actually declining in the mRD (averaging about $4.5 billion). In rough terms, the
combined level of new hard loan lending commitments from the World Bank and IDB is
normally around $10 billion annually.
• New IBRD commitments to Latin America declined from an annual average of$5.5 billion
in FY 1992-93 to an annual average of $4.2 billion in FY 1996-97. During the recent
financial cri'sis, lending reached $5.7 billion in FY 1998 and $7.2 billion in FY 1999. It is
expected to drop sharply this year.

3

• New commitments ofIDB ordinary capital lending exceeded $5 billion for the first time in
1992. Lending averaged $6.4 billion in 1995-96; falling to $5.7 billion in 1997. Lending
reached $9.3 biJlion in 1998 and $9.1 billion in 1999 due largely to a substantial increase in
assistance to help cushion the financial and development impact of the crisis on Argentina
and Brazil and other economies in the region. Lending has now returned to more normal
levels with lending for 2000 currently projected at about $6 biIlion.
In terms of net transfers, it is not unusual in the Latin American region as a whole for the
aggregate repayments on hard loans plus interest and charges to exceed the level of new
disbursements to hard loan borrowers. In the ffiRD, the negative net transfer in FY 1997 and FY
1998 averaged $1.3 billion, although there was a positive transfer of$640 million in FY 1999
reflecting increased disbursements from crisis lending. In the IDB, the net transfer to Latin
America was negative from 1990 to 1996, but has been positive since 1997 by an average of $2.1
billion annually as a result of increased disbursements from crisis lending.
Because of Latin America's increased ability to access private market financing, World
Bank and IDB financing has declined in relative terms and now represents only a small share of
total capital flows to the region. (Over the last decade, the share of total loan disbursements to
Latin America attributable to the MDBs has declined from over 30 percent to about 10 percent;
while the share of private lending has increased from less than 50 percent to around 85 percent.)
Yet given their leverage with their borrowing members, the Multilateral Development Banks
(MOBs) are well positioned to address the major economic weaknesses that both constrain
countries' ability to attract private financing and undermine the sustainability of their long-term
growth. There has also been a long-term shift in the focus of both institutions away from
traditional·infrastructure and energy projects and toward the social and financial sectors.
The effectiveness ofMDB lending to Latin America varies by country. Overall, we
believe the World Bank and the IDB have played a highly positive role in encouraging and
supporting countries of the region to build economic frameworks necessary to make markets
work more effe9tively and allowing private enterprise to grow. While countries themselves
should take the ultimate responsibility and credit for their sound economic management, the
MDBs have been indispensable helpful partners in promoting reforms in a broad range of areas
which we now take for granted. These reforms include: allowing the market (not governments)
to set industrial, energy, and agricultural prices; liberalizing trade and investment; prioritizing
public expenditure on cost-effective programs; professionalizing and shrinking the civil service;
reducing or eliminating public subsidies to public enterprises; privatizing and allowing private
firms to operate in all sectors; reforming the banking sector through sound banking and credit
policies; and advancing good governance by addressing corruption and promoting greater
transparency, accountability, rule of law, and participation.
Argentina is a good example. Since 1991, when it began a dramatic turnaround in the
management and performance of its economy, it has been the second largest Latin American
borrower from both the ffiRD (Mexico is the first by a small margin) and the IDB (after Brazil).
Over this period, and in sharp contrast with past stagnation, economic growth averaged 5 percent
per year. Total GNP doubled in real terms, and the economy was put on a sounder footing to

4

address outstanding problems, particularly the stubbornly high level of unemployment and the
need to improve certain social indicators - such as income equity and poverty - which have
been deteriorating. Despite Argentina's relatively high per capita income ($8,970).
approximately 3S percent ofthe population lack access to safe water with 2S percent lacking
access to sewerage.
The World Bank's independent and highly respected Operations Evaluation Department
(OED) recently evaluated the Bank's assistance strategy in Argentina. While the scale of the
World Bank's assistance (and that of the IDB) in a large and sophisticated economy such as
Argentina is relatively small, the OED evaluation was highly positive in terms of the total impact
of the Bank's supportive financial and advisory role to a highly committed government. Over
time the Bank's program - which totaled $12.6 billion over the nine years -- evolved from
support for public sector reform and privatization to support for financial sector reform, and then
provincial reform. focussed at first on provincial finances and increasingly on social sector
issues. During the 1998-99 Asian financial crisis. Bank assistan~ by helping to minimize the
contraction in public expenditures. contributed to protect social expenditures, as well as to
mitigate the crisis's impact on the poor. This overall strategy was judged largely successful,
with high rates of achievement of project objectives and low levels of portfolio problems. The
institutional impact of the Bank's program was also evaluated as substantial and. with the
reforms it supported now fully imbedded in the Argentina's institutional setting, likely
sustainable.
.
Bolivia, the largest Latin American recipient of IDA and FSO concessional funds over
the last decade, has also experienced a dramatic economic transformation. Emerging from a
period of severe economic and social chaos. Bolivia has compiled an impressive twelve-year
track record on stabilization and reform despite major economic constraints including weak
institutional capacity. major infrastructure weaknesses, adverse terms of trade. and vulnerability
to climatic/geological shocks. (Although Bolivia's land area equals the combined area of
California and Texas. there are only 2,400 kilometers of paved roads. Exports are heavily
commodity-based and relatively undiversified, with manufactured goods accounting for less than
10 percent of exports.) As is the case in Argentina, in Bolivia it is the strong commitment of
successive democratically elected governments that has been decisive, although the IDA and the
lOB, as well as other donors, have provided crucial support.
• Annual growth averaged 4.3 percent (about 2 percent per capita) in the 19905; after being at
negative levels during the 1980s.
• Inflation has been reduced from 24,000 percent in the mid-I 980s to about 5 percent today.
• Privatization has reduced state-controlled enterprises from 25 percent of the economy in the
early 1990s to less than 2 percent.
Unfortunately. the resulting impact of economic growth and reform on poverty has been
modest. While some social indicators show improvement, for example, infant mortality has been
reduced from 100 deaths per 1.000 to 65 per 1,000 in three years, some 70 percent of the
population remain poor. The government is strongly committed to addressing this problem and.
5

is currently in the process of developing, with civil society participation and in concert with a
parallel dialogue organized by the Catholic Church, a Poverty Reduction Strategy Paper (PRSP)
based on "growth with equity". PRSPs set out clear strategies for addressing the key constraints
individual countries confront in their efforts to reduce poverty. Preparation of a participatory
PRSP presents a complex and difficult challenge, but if successful would constitute a major
achievement and establish a firm basis for a more credible long-term attack on poverty. The
PRSP process has the strong support of IDA and the IDB, as well as the International Monetary
Fund, USAID and other donors, for whom it would constitute the basis for all future lending.
The World Bank and the IDB plan to continue to support economic reform in Latin
America, recognizing that many countries are now in the most difficult phase of the reform
process (e.g., major public sector, pension, budgetary, institutional and judicial reform,
frequently at both the federal and local levels) where implementation is complex and difficult
and the efforts needed to build the necessary domestic public and political consensus are time
consuming and vulnerable to protracted delays. The region also remains vulnerable to external
shocks. There is also major public concern about income inequality and the difficulty in
securing sustainable progress in unemployment and poverty reduction. As a result there is
danger that these could undermine economic and social support for the ongoing reform process.
In response, the future programs of both the World Bank and the IDB will focus heavily on
reducing countries' vulnerability to adverse developments in the international economy and
financial markets, while also concentrating even more assistance on the social sectors (e.g.,
health, education, and safety nets). As a recent World Bank study ("Securing Our Future in a
Global Economy") concluded, much more needs to be done by governments to protect the
sustainability of social service programs during times of economic and financial crises. The fact
that Latin America has a relatively young population also provides a window of opportunity to
strengthen social security and pension reform.
The World Bank and the IDB have also played active roles in responding quickly to
facilitate recovery and reconstruction from natural disasters, such as Hurricane Mitch in
Honduras and Nicaragua, the January 1999 earthquake in Colombia, and the adverse economic
disruptions throughout the region resulting from EI Nino. Both institutions also have leadership
roles in aid-coordination where they collaborate closely with USAID and other bilateral donors.
Heavily Indebted Poor Country (HIPe) Initiative

The United States has played the leading role in helping to design and implement the
ffiPC Initiative. The enhanced HIPC Initiative seeks to improve prospects for long-term growth
and poverty reduction by reducing debt for the poorest countries that have demonstrated good
economic performance, in order to provide a cushion against future debt problems and free up
significant new resources for productive investments to reduce poverty. Bolivia was determined
eligible for enhanced HIPC relief in January and Honduras is expected to become eligible in
early July. Two other Latin American countries _. Guyana and Nicaragua -- are also potentially
eligible. IDPC is not a cure for the poverty of these countries, but one of a number of programs - including the provision of concessional IDA and FSO resources - focused on deepening a longterm sustainable effort at poverty reduction.
6

The link between RIPC debt relief and poverty reduction has been strengthened by the
introduction of Poverty Reduction Strategy Papers, which are prepared by national authorities
with broad popular participation, are now an integral part of the HIPC framework. We have
been working hard to ensure the HIPCIPRSP process emphasizes sound economic management,
health, education and other programs critical to poverty reduction, monitorable poverty reduction
targets, good governance and transparency, and civil society participation.
Overall the I-ITPC program is expected to benefit up to 33 poor countries, most of them in
Africa. The cost to the United States of participating in RIPC is $920 million over three years.
This includes the $320 million cost of bilateral debt reduction and $600 million that will be
added to funds provided by other donors to the RIPC Trust Fund to help offset the cost of debt
relief for regional multilateral institutions such as the IDB that lack adequate internal resources
for full funding.

An Administration request to help finance RIPC is pending before the Congress. Passage
is crucial for the Initiative as a whole, but particularly for eligible countries in Latin America
where an agreement negotiated last week among the IDB and its member countries to finance the
IDB's full RIPC costs is contingent on US financial participation. The agreement symbolizes
strong regional and non-regional cooperation in the IDB. While some technical details must still
be worked out, it is a significant step toward the implementation and financing of the enhanced
HIPC program in Latin America. The IDB will contribute at least $850 million of internal
resources to help support its total HIPC costs of $1.1 billion. The agreed framework will also
provide at least $250 million to support the participation of sub-regional institutions in RIPe.
Without a substantial U.S. contribution, debt relief for near-term candidates will not move
forward. The Administration strongly supports debt relief for the world's poorest, most heavily
indebted countries. However, the U.S. delay in funding is having significant consequences.
Bolivia, a good reformer and strategic U.S. ally in coca eradication, has met the requirements to
receive debt relief under the Enhanced RIPC Initiative. However, debt relief for Bolivia will not
occur until the United States contributes to the RIPC Trust Fund. In addition, if we do not
contribute, debt relief for the other Latin American HIPCs will not move forward. As Honduras
is expected to soon become eligible, the need for a sizeable U.S. contribution to the H1PC Trust
Fund is urgent.
It should be noted that the US. budgetary costs, in terms of annual funding

appropriations, for financing World Bank and IDB operations in Latin America are very modest.
•

We no longer request funding for either institution's hard loan windows because we believe
their existing capital bases are adequate to sustain lending indefinitely.

• The United States is participating with more than thirty other donors in funding IDA, but the
U.S. costs attributable to IDA operations in Latin America - in rough proportion to the
region's share ($604 million) ofIDA commitments last year - are about $70 million
annually.
•

We last provided funding for the World Bank's International Financial Corporation in FY
1997. The IFC makes direct equity investments to promote private sector development,
7

foreign investment, privatization, and efficient markets in developing countries. Latin
America, with a total committed portfolio of$8.2 billion, is the largest regional recipient of
IFC operations.
• This year's Administration request includes $16 million for the World Bank's Multilateral
Investment Guarantee Agency. MIGA was established in 1988 to provide investment
insurance (guarantees) against non*commercial risks in developing countries at market rates
to private direct investors. Latin America has the largest regional concentration ofMlGA's
coverage.
•

The latest replenishment for the IDB's FSO concessional window entails no new U.S.
funding.

• This year's Administration request for appropriations also includes funding for two members
of the IDB Group, the Inter-American Investment Corporation ($34 million) and the
Multilateral Investment Fund ($25.9 million). The lIe provides long-term loans and equity
investments· in small- and medium-sized enterprises primarily in the smaller and poorer
countries; the MIF focuses on catalyzing investment reforms through grants for technical
cooperation, human resource development, and small (primarily micro) enterprise
development as well as for micro-finance institutions.
Increasing the Effectiveness of the World Bank and the IDB

We are counting on the World Bank and IDB to continue playing a vital role in
promoting economic growth and poverty reduction in Latin America. However, like all
institutions, they can be improved and their capacity to respond quickly and creatively to the
evolving requirements of their membership strengthened. Both institutions must be alert to the
opportunities for strengthening their development effectiveness. And, as the situation in Latin
America demonstrates, efforts that more effectively promote growth need to be combined with a
strong governmental and institutional commitment to poverty reduction.
The Administration has worked hard with the members of the World Bank and the IDB,
and with their managements, to promote reforms that improve their development effectiveness.
We have been successful in achieving significant changes in many areas, for example,
•
•
•
•
•

More transparency and accountability in the institutions and their operations;
Increased attention to poverty reduction;
Greater attention to lending effectiveness and project quality;
More focus on governance and anti-corruption; and
Increased attention to environmental sustainability and core labor standards.

The issue of institutional reforms has been highlighted by the recent report of the
International Financial Institution Advisory Commission and the Department of the Treasury's
June 8, official response to the recommendations of the Report. As you know, Treasury
disagrees in fundamental respects with the bulk of the Commission's reform prescriptions. I
would like to briefly touch on three of these recommendations that are particularly relevant for
8

Latin America: the recommendations to phase out lending to countries with annual per capita
incomes above $4,000 or an investment grade international bond rating, to preclude the MOBs
from financial crisis lending, and to shift World Bank operations to the regional development
banks. In sum, we believe that these recommendations would eliminate the capacity of the
World Bank and IDB to continue promoting economic reform and development in many Latin
American countries that continue to face formidable development challenges.
•

Because access to private capital for many of these countries is vulnerable to market
disruptions and often unavailable in the volumes and terms appropriate for long-term
development investments, graduation policies with a fixed and excessively low threshold risk
worsening economic outcomes and increase the likelihood of future crises. This could
undercut or prolong the path to sustainable market access, and ultimately delay the time
when these governments will grow out of the need for official support.

• In those exceptional circumstances where crisis lending is appropriate, the emergency
capacity of the MDBs can be essential to support an appropriate level of fiscal expenditures,
to design and finance financial sector restructuring programs, and to further target assistance
for critical social programs, such as education and healthcare.
• Eliminating the World Bank's financial role in providing development assistance would
undermine the effectiveness of the overall development effort. Although the IDB has many
strengths and plays a complementary role to the World Bank, it does not have the broad
strengths of.the World Bank across the development policy spectrum.
The Administration's Reform Agenda

Latin American and the Caribbean still confront formidable development challenges in
achieving sustainable growth and poverty reduction. The overriding objective of on-going
reform in the World Bank and the IDB is to put in place more effective ways for these
institutions to help members address these challenges. We believe the most promising
approaches for advancing this goal lie in the following proposals:
•

Improved performance and impact: with the MOBs relying on a smaller number of
measurable performance targets, with a stronger link between disbursements and
performance progress, and lending concentrated on countries that are performing well;

• Emphasis on economic growth and poverty reduction: with the MDBs focusing higher levels
of assistance in areas that have the highest development returns, particularly health care,
basic education, rural roads, and water supply and sewerage;
• Focused hard-loan lending to emerging economies: with the MDBs exploring innovative
ways to cat~lyze private capital and establishing more selective lending frameworks to
facilitate graduation;

9

•

Transparency: with a stronger presumption in the institutions to publish key loan documents
and to establish increased transparency in their lending operations at the local level so that
programs can be more easily monitored;

•

Global public goods: with a stronger focus on solutions to the problems of infectious diseases
and environmental degradation, and the use of information technology to create and
disseminate knowledge; and

• Improved collaboration and selectivity: with further efforts to reduce operational overlap
among institutions, speak more clearly on priorities, and share the lessons of experience.
Conclusion

In concluding Mr. Chairman, I would to emphasize the importance that the Treasury
Department places on working to help assure that our neighbors in Latin American and the
Caribbean are successful in their efforts to achieve sustainable growth and poverty reduction.
This is very much in our own national interests.
The Treasury Department remains committed to working hard with the management and
members of both the World Bank and the IDB to ensure these institutions are able to work
effectively in supporting those borrowing governments committed to sound economic
management and reform. The challenge of reenergizing efforts to combat poverty in Latin
America is multi-dimensional. It is also difficult and complex. In a good policy environment,
economic assistance - multilateral and bilateral- can and does make an important difference
both in spurring growth and in reducing poverty. We will work closely with the Congress to
maintain a selective and well-targeted effort in this area. Thank you.
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10

D EPA R T i\1 E N T

0 F

THE

T REA SUR Y

•

NEWS

1REASURY

omCE OF PUBUC AFFAIRS -1500 PENNSYLVANIA AVENUE, N.W. - WASHINGTON, D.C. - 20220 - (202) 622-2960

June 28, 2000

U.S. International Reserve Position

The Treasury Department today released U.S. reserve assets data for the week ending June 23, 2000.
As indicated in this table, U.S. reserve .1SSets tot.lled $67,967 million as of June 2), 1000, down from S68,119
million as of June 16, 2000.

("In us ml'/I"on5)
I
TOTAL
1. Foreign Currency

Reserves 1

I

Euro
4.956

a. Securities

June 23 1 2000
67,967

June 161 2000
68,119

I. Official U.S. Reserve Assets

Yen
6.052

Euro

TOTAL
11.008

4.796

Yen

TOTAL

5.572

Of which, issuer headquartered in the U.S.

10.367

0

0

b, Total deposits with:
b.i. Other central banks and SIS
b.ii. Banks headquartered in the U,S.

8,456

11,692

20,148

8.208

12.447

0

20.656

0

b.ii. Of which. banks located abroad

0

0

b.iii. Banks headquartered outside the U,S.

0

0

0

0

15,515

15.504

3. Special Drawing Rights (SDRs) 2

10.400

10.393

4. Gold Stock

11,048

11.048

0

0

b.iii. Of which. banks located in the U.S.

2.

IMF Reserve Position

3

5. Other Reserve Assets

2

11 Includes holdings of the Treasury's Exchange Stabilization Fund (ESF) and the Federal Reserve's System Open Market Account
(SOMA), valued at current market exchange rates Foreign currency holdings listed as securities reflect marked-to-market values. and
deposits reflect carrying values.
21 The items, "2. IMF Reserve Position" and "3 Special Drawing Rights (SDRs)." are based on data provided by the IMF and are valued rn
dollar terms at the official SDR/doliar exchange rate for the reportIOg date. The IMF data for June 16 are final The entries In the table above
for June 23 (shown," Italics) reflect any necessary adjustments. Including revaluation. by the US Treasury to the prior weeks IMF data

31 Gold stock is valued monthly at $42.2222 per fine 1roy ounce Values shown are as of May 31. 2000 The April 30. 2000 value was
S11.048 million.

:'S-738

U.S. International Reserve Position (cont'd)
II. Predetermined Short-Term Drains on Foreign Currency Assets
June 23. 2000

June 16. 2000

1. Foreign currency loans and securities
12. Aggregate short and long positions in forwards and
futures in foreign currencies vis-a-vis the U.S. dollar:
2.a. Short positions
2.b. Long positions
3. Other

o

o

o
o

o
o
o

O·

III. Contingent Short-Term Net Drains on Foreign Currency Assets
June 23. 2000

June 16. 2000

1. Contingent liabilities in foreign currency
1.a. Collateral guarantees on debt due within 1 year
1.b. Other contingent liabilities
~. Foreign currency securities with embedded options
~. Undrawn. unconditional credit lines
3.a. With other central banks
J.b. With banks and other financial institutions
headquartered in the U. S.
J.c. With banks and other financial institutions
headquartered outside the U. S.
4. Aggregate short and long positions of options in foreign
currencies vis-a-vis the U.S. dollar
4.8. Short positions
4.a.1. Bought puts
4.8.2. Written calls
4.b. Long positions
4.b.1. Bought calls
4.b.2. Written puts

o

o

o
o

o
o

o

o

PUBLIC DEBT NEW'S
Department of the Treasury - Bul"uu of the Public Debt • Washington, DC 20239

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n:C79SRla2

High Rat;c:

5.6BO~

Investment Rate l/:

Price:

5.844%

!is.564

~~l noncompetitive ~nd s~cce~stul ~ompetit1ve bidders werp. award~d
se~uriLi~s at. t:he high rate.
"r~ndel'S at ~hC! high discount. rate were
allot.t~d
35i. Ali tendars at lower rate& were accepted in full_

Al-IOONTS TElNOER.l3!D AloID ACC£PTED (in

Competitive
Nuncompetitive
SUE IOTAL

SOBTOTAL
FeQ;;;:t;"al l'.e=e;t:Ve
~oreisn

Accepted

Tend.e;n~d

Tender Type

~UBL1 C

thOU:5ilnda)

21.892,175
1,;30i,07J

6.515,385
l,2Q7,073

23,099.218

7,722 .... 58

781.'00

781,iOO

23,880,94 9

!j,504,158

4.8815,692

4,9A6.692

a

o

Official Add-On

TOTAL

$

28,767,640

s

13,3510.6S0

Medj~n race
5.670%: sot of tne amounL of acc~pted comper.itiv~ ~enders
was LClldel."ed .:It nr below that ~ate, Low J,·ate
5.600!r:
:a of Lhe amount
of accepted compl!ticivp. tenders was tendered ~t o:c belo.... Chat rat.e.
Bi~-t~-Cove~

RatIo •

2J,O~9,~4S

/

1.i22,~58

= 2.99

11 8qu;" valent: coupon-issue yield.
2/ Aw~rds CO TREASURY

ornECT

= $971,748,000

bttp:lfwww.publicdcbt.treas.go ....

1S-739

21

PUBLIC DEBT NEWS
Department

()f

the Treasury • Bureau of the Public Debt· Washington, DC 2U239

TREASURY SECURIT't AUCTION RESur,TS
BURP-AU

FOR

IMMEDIA~E

OF THE PUOL!C DEBT - WASHINGTON DC
Office of financing

CONTACT:

RELEASE

202-691-3%0

June 26. 2000

fl,ESULTS OF

TR~SORY 1£

hUC'nON OF 26 -WEEK BILLS

Term:

182 Day Bill

T.55US! D!!.te:

June 29, 2000
December ~8, 2000
912795FMB

MOl'curity Date:
CUS IP Numb~r:
High Rate:

5.955%

.ll1vest.ment Rs.te 1/:

Pr-ice;

96.989

All noncompetit"Lve \lnd !5UCClassful COllIpetlt:lve bidden:: ..... er@ aW<lxded
securities at the high rate. Tenders at the high uiscotlnt rate were
aHoned

72';.

11.11

t:eDd.~.ra

at lower rOl.tes were

acc~.9ted

il1. full.

AMOUNTS TENDERED AND ACCEPTE~ (in ~housands)

Tender Type

Ac:c:~pted

Tendered

Competit.i.ve
Noncompetitive

$

IB.6!:i6,800

$

1. 040,408

2,523,'100

FOrfli.gn Official Refund.ed

5UBTOTAL
Pederal Rescrvl!!!
coreign Official hdd-On

22,220,608

7,501.608

4,ll39,461

1,039,461

o

o

s

'fOTAl"

4,S81,20S 2/

19,697.208

I?UBLIC SLJBTOT1H .

3,910,800
l,040,408

25,253,059

$

11.543,069

rat~
~.940%; 50~ of the Qmoun~ or accepted competitive tenders
tendered at or belo.... 'l':hat ra.te.
Low rate
5.890~:
5~ of the amount
of i'lccepted compe!titive tend.::rtl was c:endered at: or below that r~Le.

Median

~Ja8

Eid-to-Cover RaLio

=

19.697,~08

! 4,981,208 ; 3.95

V Eqt!\valent r.oupon-i5<;1,l';: yield.
2/ Awards to TREASURY DIRECT = $803,796.000

L3-740

http;/lwww.publlcdebLtreas.gnv

D E P :\ R T :\1 E :\ T

0 F

THE

T REA SUR Y

ornCE OF PUBUC AFFAIRS -1500 PENNSYLVANlAAVENUE. N.W. - WASHINGTON, D.C. - 20220. (202) 622-2960

FOR IMMEDIATE RELEASE
As Prepared for Delivery
June 27,2000

"ISRAEL'S ECONOMY IN THE INFORMATION AGE"
TREASURY DEPUTY SECRETARY STUART E. EIZENSTAT
ADDRESS AT UNIVERSITY OF HAIFA JEWISH-ARAB CENTER
HAlF A, ISRAEL

President Hayouth; Rector of the University Gad Gilbar; Rector-elect Aaron BenZe'ev; Eliezar Rafaeli, Chairman of the Board of the Jewish Arab Center; my dear friend
Amatzia Baram, whose invitation brought me here; deans, faculty, students, and
distinguished guests. I would also like to recognize my Haifa relatives who are here
today-the Frankels, Hochwalds and Hods.
Thank you. I appreciate the opportunity to address you today here at this great
university in one ofIsrael's most vibrant and diverse cities. As the only liberal arts
university in northern Israel, Haifa University is an academic leader within Israel's
world-class higher education system. As a university whose student body is close to 20
percent Arab, it also serves as a symbol of diversity and cooperation to the rest of the
country-a mission the University takes seriously by pioneering such institutions as its
Jewish-Arab Center. I would like to acknowledge and thank Mr. Rafaeli and Dr. Baram,
Director of the Center, for all their hard work on behalf of this special institution.
Like the university it houses, Haifa, too, is a picturesque and diverse city. At the
tum of the century, Haifa was dubbed the "city of the future"- the main Mediterranean
station for the Hijaz Railway was inaugurated here; a modem pier opened here; large
cargoes began to be unloaded here; and warehouses and large shops were built here.
Nearly a hundred years later, Haifa remains a "city of the future." For just as Haifa led
Israel's industrial revolution, so too is it today leading its Information Revolution, as
home to a growing high-tech industry.
Throughout my career, I have been involved in my government's economic
policies toward Israel, working to promote the peace process and regional economic
cooperation and spearheading the recent and ongoing negotiations for Holocaust
reparations. My attachment to Israel is deeply personal as well as professional: my wife

LS - 741

-

For press releases, speeches, public schedules and official biographies, call our 24-hour fax line at (202) 622-2040
·U S Government Pnntlnl'"] Otllce n98 - 619·559

and sons lived here and I have many relatives and friends here. I always enjoy returning
to Israel, and it gives me great pleasure to return here again today to discuss Israel' 5
promising future as a leader in the new global economy.
Israel today is a strong. independent, secure and self-reliant state. It is a modem
and industrialized country well-positioned to participate fully in the new global economy.
No other country which gained its independence after World War II has come so far and
made more dramatic economic strides as Israel. In the short space of five decades it has
grown from a developing and agrarian economy to a developed, high-tech society.
Israel's thriving high tech industry is a testament to your country's capacity to seize new
opportunities. As Israel takes its place as a leader in the Information Revolution, I would
like to talk today about the opportunities and concomitant responsibilities that Israel will
face going forward. In 50 years, Israel has gone from planting trees to wiring the world.
Physical labor is being replaced by prowess in cyberspace. Only a half century after its
birth, Israel is ready to join the group of fully developed industrial democracies.
Israel's Role in the New Global Economy

Today, Israel is at the cutting edge of the Information Revolution of the 21st
Century, which will transfonn the world in the same profound way as the Industrial
Revolution of the 19th Century. You are remarkably well-positioned to be among the
world's top leaders in the high tech field which will dominate the first part of the new
Millenium. Israel is already a recognized worldwide leader in telecommunications and
data networking: software and the lnternet; semiconductors, electronics and digital
printing; phannaceuticals, biotechnology and medical equipment. In the 19905. while
exporting from your traditional industries remained constant, they increased four fold
($2.8 billion to $12 billion from 1990-1999) in your high tech industries.
Israel has all the building blocks for continued leadership and success in the high tech,
global economy tomorrow:
•

You have a highly educ~ted workforce, with more engineers per employee than
any country in the world-almost twice as many by this measure as the US and more
than that of Japan-and the third highest percentage of academic degree holders in
math, science and engineering-the skills required to navigate in the Information
Revolution.

'. This is significantly the result of the massive immigration from the Former Soviet
Union. Of the one million immigrants who came to Israel in the last decade, nearly a
quarter were engineers and more than half were highly skilled.
•

You have the highest proportion of scientists and engineers engaged in research
and development in the world.

•

Israel is the only country with Free Trade Agreements with the U.S., Canada. the
European Union and EFTA, giving you unequalled access to these markets and in the
2

case of the US, tariff-free imports of US-made components.

•

You have a well-developed venture capital market willing to invest in cutting edge
technology. Last year, fifty Israeli venture capital funds invested over $400 million
in almost 500 deals involving Israeli high tech companies.

•

Your large public investments in your military have had important economic
benefits. The Israeli military and its associated companies have served as incubators
for high tech businesses by fostering technologies with significant commercial
applications. I

Roughly a quarter of your popUlation is on the Internet. You have more cell phones
per person than the United States and more than twice as many per person as the
European Union. Today, Israel's "Silicon Wadi" is one of the most prolific incubators of
technology in the world.
Check Point, a company in only its fourth year on the market, already has a market
cap larger than Bezeq and Bank Hapoalim combined. Internet gurus like Yossi Vardi and
Gil Shwed are being lionized in the media in terms formerly reserved for war heroes and
Zionist pioneers.
The implications of the new global economy for Israeli society are profound. Fora
country founded on the principles of self-sufficiency and self-defense, Israel's economic
well-being is becoming increasingly intertwined with global developments. Almost a
hundred Israeli companies are traded on Wall Street making Israel the second largest
foreign presence, after Canada, in NASDAQ. When the U.S. stock market rises or falls.
the Tel Aviv Stock Exchange (T ASE) often follows right along.
The link between the high tech economies of the United States and Israel has grown
particularly strong in the last few years. More and more Israeli firms are opening U.S.
offices. while at the same time more and more U.S. firms are investing in Israeli
companies. Last year, more than $1 billion in U.S. venture capital was invested in
Israel-more than the U.S. currently provides Israel each year in economic assistance.
Earlier this month, Lucent Technologies bought Chromatis Networks for $4.5 billion-.
more than 10 times what AOL paid just two years ago for Mirabilis in a highlypublicized deal that confirmed Israel's place as a key player in the new global economy.
The relationship between our two countries is shifting from assistance in development to
partnership in globalization. The U.S. is helping incubate Israeli high tech firms through
the Joint U.S.-Israel Binational Research and Development Foundation (BIRD). The
BIRD, through an endowment equally financed by our two governments. funds high tech
joint venture research and development in Israel.
As a result, Israel's economic prospects look increasingly bright. Following three
years of slow growth, the IMF forecasts that Israel is now on the threshold of a marked

I

See Lehman Brothers Report on Israeli High Tech (May 2000)
3

improvement and could grow between three and a half and four percent for the next two
years, and some in Israel believe even that estimate is too conservative. Israel today is
close to joining the select group of developed nations. Israel today has a GDP per capita
of approximately $16.500, more than that of Spain and three-quarters that of the
European Union average. Inflation dropped sharply in 1999, ending at 1.3 percent. the
lowest level in thirty years.

Steps to Ensure Further Prosperity
To ensure that this transition continues and Israel reaches its full potentiaL Israel
must recognize the responsibilities and challenges that accompany your new economic
status. The U.S. government has a strong interest and desire to see your economy
succeed. With that in mind, I would like to touch upon what we in the U.S. believe to be
the greatest challenges facing Israel as you leave behind your days as a developing
country. This will require a combination of fiscal discipline. real structural reforms and
special efforts to avoid a "digital divide" in Israel and with your neighbors. This will not
be easy. It will involve difficult choices and require discipline and restraint but will pay
many dividends for your people. Now.that Israel is finally enjoying an economic
rebound, you have a narrow window of opportunity to lock into place reforms that will
ensure continued high growth and jobs for young people and new immigrants.
The United States makes formal recommendations on Israeli economic policy
through the Joint Economic Development Group (JED G), which I chaired when I was at
the State Department. In its last communique. the Group encouraged Israel to continue
reducing the size of government expenditures relative to GOP while increasing public
investment in education and infrastructure, thereby making more resources available to
stimulate growth through the private sector. It also called for deeper capital markets.
more competition and transparency, budgetary restraint and broadening of the tax base.

Fiscal Discipline
A key ingredient is fiscal discipline. In the U.S., we have learned that fiscal
discipline pays off. Our current economic prosperity has stemmed from the
determination of President Clinton and Vice President Gore to stop a generation of public
borrowing, reverse fiscal deficits and forge a new national consensus around sound
budget policy. It makes possible a "virtuous cycle" where interest rates can be reduced,
which spurs private investment. which in tum produces further economic growth, which
increases available tax revenues, reducing what the government has to borrow, which in
tum can lower interest rates and start the cycle all over again.
Israel needs to pursue a policy of fiscal discipline anchored in debt reduction,
given your large public debt. Today, Israel continues to maintain a large public debt,
more than 100 percent (112%) ofGDP at the end oflast year. Israel's budget deficit
reached 2.75% of GDP last year. This year seems to be bringing a slight improvement, as
evidence suggests that even the estimated budget deficit of 2.5% of GOP may be reduced.
Already in the first quarter tax revenues rose sharply over the same period last year.
4

The Government of Israel is to be praised for maintaining fiscal discipline in the
current budget. We hope that as additional or unanticipated revenues may become
available, the government will continue its responsible fiscal policies so that the Israeli
economy is placed on a long-term glide path to lower deficits.
We recognize that Israel has unique needs. Even with progress in the peace
process, Israel has ongoing defense requirements to maintain its security in a difficult
region. Moreover, Israel continues to have a special mission to absorb tens of thousands
of immigrants each year-{)ne million in the last decade alone. At the same time,
however, Israel's budget is 44 percent of its GOP. That compares with total U.S.
government spending, which is approximately 30 percent of GOP, and with the average
government spending of all OECO countries, which is approximately 38 percent of GOP.
This high level of government spending places a huge burden on your economy. Israel
should gradually decrease the size of its budget relative to its economy, while shifting its
priorities to greater infrastructure investments, both physical and sociaL in order to
stimulate higher growth.

Structural Reforms
Fiscal discipline alone, however, is not enough. Regardless of how well fiscal
policy is managed, in order to retain the high-tech businesses and talent that will propel
Israel's economy forward, Israel will also need to implement genuine structural reforms.
A recent report from the Israel Democracy Institute found that 90 percent of
Israeli-rooted companies are registered abroad at least in part because of high taxes.
onerous regulations and bureaucratic red-tape. Many American investors require Israeli
companies to open headquarters in the U.S. and have relocated many Israeli workers to
the U.S. It is estimated that there are 10,000 Israelis working in Silicon Valley today.
many for companies that originated in Israel.
In order to retain capital and talent, and thereby reach the next stage of your
development, Israel must pursue reforms such as deregulation, market liberalization and
privatization in the energy, telecommunications and transportation sectors. The benefits
of such measures were demonstrated when Israel opened the international
telecommunications market to competition in 1997. As a result, prices dropped by
roughly 80 percent across the board, overnight. But because Israel's domestic telecom
market has not been liberalized, a call to Eilat from Tel Aviv could cost more than a call
to New York City.
Other reforms Israel should implement include continued capital market
liberalization and increased competition in the banking sector. We also hope the
government will act quickly to layout measures to broaden the tax base and reduce
inequities in the overall tax structure. These initiatives hold promise but they must be
implemented rapidly to keep pace with changes in the new global economy; those
economies that are the most innovative and open will reap the most benefits from
5

investment and growlh.
The development of high technology must also be accompanied by intellectual
property laws and effective enforcement mechanisms to protect the rights of the inventors
of new technology. Israel has shown a welcome commitment to improving the
enforcement of its intellectual property laws with specially-formed enforcement units at
Ben-Gurion Airport, in Tel Aviv and here in Haifa. Still, further steps should still be
taken to reduce the high rate of software, music and video piracy. There is no substitute
for tougher enforcement. We look to the Government ofIsrael to commit the kinds of
resources necessary to bring its intellectual property laws and enforcement standards up
to the same high levels as its high tech industries.
Money Laundering

One specific legal reform that is critically important to allow Israel's unfettered
participation in the new global economy concerns money laundering. Although Israel
has an effective bank regulatory regime and excellent domestic law enforcement
agencies, Israel today has no law that makes money laundering a crime. This places
Israel nearly alone among developed nations and in direct conflict with well-established
international anti-money laundering standards. Just a few days ago, the world's leading
anti-money laundering authority, the 26-nation Financial Action Task Force (F ATF),
named Israel as among the nations that are non-cooperative with international efforts to
combat money laundering.
Money laundering-the act of making the proceeds of crimes appear to be
legitimate funds-allows criminals the full benefit of their illegal acts. and facilitates
their financing of new crimes, operations and terrorist acts. The United States has for
years encouraged Israel to pass a law criminalizing money laundering. We are pleased to
note that with strong government support a bill is finally in front of the Knesset. If it is
FATF -compliant, passed and successfully implemented, the U.S. would strongly
advocate for FA TF to remove Israel from its list of non-compliant countries.
Passing this law will do more for Israel than merely generate international
approbation and crack down on international criminals; it will also remove an important
obstacle to Israel's economic grow1h and development. Cracking down on money
laundering both requires more transparency in financial systems and helps provide for a
more inviting environment for foreign investment. We are pleased that the Barak
Government recognizes this important fact, and is committed to joining the international
consensus to combat money laundering.
Ensuring No One is Left Behind

In order to provide for Israel's continued economic growth. it will become
increasingly important to make sure that all groups in society benefit. Ultimately. an
Information Revolution that fails to include large parts of the Israeli population will fail
all Israelis.
6

Access to computers and the Internet. and the ability to use this technology
effectively, are becoming increasingly important to fully participate in the Information
Revolution. All developed countries face a digital divide that increase economic gaps in
our societies-a divide between those who are computer literate and those who are not.
between those with access to the Internet and those without, between those who have the
skills to make it in the Information Age and those who do not.
In the United States. even while we are enjoying the longest economic expansion
in our nation's history, there is strong evidence of a gap between those individuals and
communities that have access to the tools of the Information Age and those who do not.
In the U.S., we are growing more and more concerned about our own digital divide and
developing programs to address it:
•

Better educated Americans are more likely to be connected. Sixty-nine percent of
households with a bachelor's degree or higher have computers. compared to only 16
percent for households that have not completed high school.

•

The divide between high- and low-income Americans is significant. Eighty percent
of households with an income of$75,000 or above have computers, compared to 16
percent of households earning $10,000 to $15,000.

•

Whites are more likely to be connected than African-Americans and Hispanics.
Forty-seven percent of white households have computers, compared to 23 percent of
African-American and 26 percent of Hispanic households.

In Israel, the gap may grow between those at the top and bottom of the economic
ladder, and the rapid growth in Israel's high tech sector threatens to widen this gap in the
coming years. Eighteen percent of the country's population now lives in poverty.
Despite the boom in its high tech sector, Israel's unemployment rate remains high-it
was 9% in April. The specific challenge to Israel of a "digital divide" is that it could
deepen the existing divisions in your society and with your neighbors. You face three
particular digital divides: with Israeli Arabs. with lower income Israeli Jews, and with
your regional neighbors.
One of the most critical chasms in Israeli society is between its Jewish and Arab
citizens-a chasm this University is working to close. Arab Israelis have long
complained of their situation. Today, Arab Israelis account for 20 percent of the Israeli
population, yet comprise almost half of Israel's poor. The socioeconomic divisions
within Israeli society are not limited to Arabs and Jews. Even among Israeli Jews, there
exist significant income and inequality, especially among those living in developing
towns. This has also led to a growing geographic disparity: while northern and central
metropolitan areas like Tel Aviv, Haifa and Jerusalem have benefited from Israel's
blossoming high tech sector, southern development towns lag behind economically. Just
one indicator is that per capita income in Beersheba is only about 70 percent of the
national average.
7

Israel stands on the brink of a critical policy decision for a country founded on an
egalitarian vision by the pioneers of the Yishuv. The '"digital divide" can exacerbate
existing divisions and contribute to minorities' feelings of alienation and exclusion. or the
Information Revolution can be used to uplift everyone and unite a nation in growth and
economic prosperity. Israel's swift immersion into the new global economy cannot be
stopped-nor should it. The question will be whether all groups in Israeli society will be
part of this new economy, or whether the Israel of the future will comprise, in effect. two
economies-the new high tech economy for the educ~ted, multilingual elite and the older
low tech economy for those without the skills to keep up. Israel's future identity, values
and vision will be defined by how Israel responds to this epochal challenge.
As you consider ways to deal with the "digital divide" within Israel. you might
look to some of the proposals that the Clinton Administration has put forth to address our
own "digital divide". In the U.S .• the Clinton Administration has responded with
numerous initiatives to ensure that every child is technologically literate. These include:
increased educational technology funding, incentives for employer-based computer
training, connecting schools and libraries to the Internet, and working to expand
technology access to people in under-served communities and to people with disabilities.

Promoting Regional Economic Growth
The United States. as a global power, is concerned not just with its own ""digital
divide," but also with the increasing technological gap between developed and
developing nations. As Israel takes up its place as a leader in the new global economy,
there is a concern with your neighbors in the region. This global Digital Divide can be
seen clearly here in the Middle East as a result ofIsrael's rapid technological progress in
recent years. Today, Israel has a GOP per capita roughly 12 times that of Jordan. Egypt
or the West Bank and Gaza. As the most technologically advanced nation in the Middle
East, Israel has a special interest in doing what it can to spread prosperity to its neighbors,
just as the U.S. and other devel<?ped countries must do for the developing world as a
whole.
Taking steps to promote regional economic growth will benefit you as well as
your Arab neighbors. For just as your security cannot be divorced from the Middle East
as whole, neither can your economic prosperity. Your economic and political well-being
will pe enhanced as the economies of your neighbors grow. Increased economic
prosperity is one of the primary ways to bolster public support for the peace process
throughout the region. And progress in the peace process would further improve the
regional economy by allowing governments to divert precious resources away from
defense expenditures and into productive civilian investments. Further, by reducing the
amount of risk, it would generate significant new foreign investment in Israel. as well as
other countries in the Middle East. Ultimately, economic interdependency will foster
peace as every nation becomes more and more dependent on the productive economies of
its neighbors.
8

Yet neither Jordan nor the Palestinians have realized a full economic di vidend
from the peace process. Although the West Bank/Gaza has had three years of rising
economic growth and unemployment has declined, real per capita income is still 10%
below what it was in 1993, before the Oslo Accords.
This task will not be easy. Today regional trade is relatively low: less than 10
percent of all trade in the Middle East is between countries in the region. Although the
level of non-oil regional trade is higher, it is still below the intra-regional levels of 20
percent in the Americas, 30 percent in Asia and 60 percent in Europe. There remain
significant obstacles to expanding economic activity between you and your Arab
neighbors. Key among them is your security concerns, making the flow of goods and
people across regional borders more onerous, costly and time-consuming. When I was
Under Secretary of State, I maintained a dialogue with the Israeli government on such
issues. For example, I proposed the creation of an expanded list of business people who
posed no security risk, for whom travel between the West Bank/Gaza and Israel should
be made easier; and another list of workers with good security records who would have
the privilege of working even in times of closure. The opening of a safe passage route
between the West Bank and Gaza was an important advancement in this regard. Clearly.
Israel has an obligation to protect its citizens from terrorist attacks. The challenge is to
balance this near-term security need with your long-term security interests in reducing
poverty in the West Bank/Gaza and Jordan.
But continued donor assistance, more Palestinian workers in Israel and greater
trade with Israel, while important, cannot sustain high-level, self-sustaining growth. For
this private sector investment is critical. And this will only come in large amounts when
the Palestinian Authority fully implements Chairman Arafat's January Decree to
consolidate all tax revenues under the Finance Ministry, creates a Palestinian Investment
Fund to develop a privatization strategy, and coordinates economic development. When
there is greater transparency in the publication of financial data; when a modern legal
framework for investment is passed; and when corruption is rooted out, investment will
flow in and your Palestinian neighbors will feel the economic benefits of peace.
Despite the difficulty in addressing such critical concerns, we have begun to make
progress thanks 'to the active participation and cooperation of all countries in the region
and the international donor community and international financial institutions like the
IMF and the World Bank.
The United States government for its part, has actively pursued a range of
cooperative projects between Israel and your Arab neighbors to promote greater
economic growth and cooperation. Some of these projects have been very successful.
Let me briefly touch on three:

•

First, as part of the Wye Accords. we are providing assistance to the Palestinians
for a variety of projects designed to improve regional trade and economic
cooperation, such as industrial zones in the West Bank and Gaza, and truck/cargo
9

scanners to facilitate quick movement of goods between the West Bank and Gaza and
Israel, Jordan and Egypt. These scanners, for example, should enable Palestinians
trucks to carry out door-to-door trucking and thereby resolve a significant
impediment to increased Jordanian-Palestinian trade. The Gaza Industrial Estate,
which we promoted, is now off and running, with some 30 companies locating there.
•

Second, my government is also cooperating with yours and Jordan' s to promote
the rapidly expanding Qualifying Industrial Zone (QIZ) program. Existing industrial
zones have fostered new joint ventures and huge employment increases, dramatically
expanding Jordanian exports to the U.S., and new zones are being constructed
rapidly. Since lit was designated a QIZ, over 5,000 jobs have been created for
Jordanians in Irbid, which I visited just yesterday. By March, we expect the QIZs to
support as many as 15,000 jobs in Jordan.

•

Third, we are continuing to nurture discussions between Israel and Jordan on the
Aqaba-Eilat Airport project, just one of the regional ideas to arise out of the U.S.Israel-Jordan trilateral process.

In addition to such cooperative projects, there are important steps that individual
countries can take to lay the groundwork for increased trade and economic gro\V'th.
Many of your neighbors have worked to get their fiscal houses in order and have begun
implementing structural reforms, increasing fiscal transparency, privatizing. and
deregulating. The Palestinian Authority agreed as of April to consolidate their finances
and build transparency into their economic system, for example by directly transferring
all funds collected by Israel to the Finance Ministry. The U.S. and Jordan have agreed to
open their markets to each other. We are enthusiastic about a U.S.-Jordan Free Trade
Agreement and this week we will be beginning preliminary discussions with Jordan. The
Israeli~Jordanian pilot project on door-to-door trucking is a prime example of the kind of
cooperation that can help improve prospects for greater regional trade. I hope both Israel
and Jordan will work hard to expand this program and make it a successful example of
the great economic potential in the region.
As your neighbors try to catch up to the fast pace of the Information Age. Israel
can help through technology transfers and by opening your market in those areas where
they have a competitive advantage. I also understand that Israel and Jordan recently
signed the Eilat-Aqaba Protocol to allow limited Jordanian workers into Israel for day
jobs. I am confident this project will help create and sustain employment for Jordanians
while filling a labor shortage in Israel. I urge the Israeli government to look at ways to
expand such projects to help the regional atmosphere and improve prospects for peaceful
coexistence. As we in the U.S. know from our trade agreements with our neighbors,
Mexico and Canada, free and fair trade involves opening your markets to countries with
all different levels of development. This allows all economies to take advantage of the
resulting synergies. For example, the Palestinian and Jordanian economy can find in
Israel a high-income market for its agricultural goods, textiles and other labor-intensive
products. The resulting economic growth will increase the demand for technology in the
10

West Bank/Gaza and Jordan-providing Israel with a new and easily-accessible local
market for expanding its technology services. At the same time. growing middle classes
will serve as an anchor of stability.
All countries in the region ultimately benefit from expanded trade and
cooperation. The common quest for economic prosperity can serve as a powerful
impetus for old enemies to set aside their internecine differences and work together in the
new global economy.
Conclusion

Israel truly stands at a pivotal juncture in its history. For a country characterized
by intense and continuous change, the Information Revolution is poised to fundamentally
alter Israeli society at a speed you have not experienced before. Your economic
independence will be tried; your commitment to egalitarianism and pluralism will be
challenged; your ingenuity and resourcefulness will be tested.
By making the right choices. Israel can be a leader in technological innovation;
bring all its citizens-Arabs and Jews-into the economic mainstream; bolster support
for the peace process; and contribute to new levels of prosperity in the region by opening
up its market and know-how to its neighbors.
The task will not be easy, but we know there are few things Israel cannot
accomplish. Emerging from the ashes of a decimated European Jewry, surviving
repeated conflicts with much larger neighboring armies, Israel has proven its mettle time
and again. So often, Theodore Herzl's vision- im tirtzu ein zo agada, if you will it, it is
no dream-has been realized. I am confident, as I am sure you are too, that Israel can
meet the challenges posed by, and responsibilities concomitant with, its rapid integration
into the new global economy.

-30-

II

OYl'IC£ OF PUBLIC AFFAIRS -1500 PENNSYLVANIA AVENUE, N.W. _ WASHINGTON, D.C.' 20220' (202) 622·2960

PUBLIC CONTACT: Office of Financing
202-691-3550
MEDIA CONTACT: Bill Buck
202-622-B97

DtBARGOED UN"l'I:L g: 0 0 A. 14.
June 28, 2000

TREASURY ANNOUNCES DEBT BUYBACK OPERATION
On ~e 29, 2000, the Treasury will buy ~ck up to $2,000 ndllioD par
of its outstzmc1ing issues that m.a.ture between February 2019 and AUgust 2023.
Treasury reserves the right eo accept les8 than the announced amount.
This debt buyback (redemption) operation will be conducted by Treasuryrs
Fiscal Agent, the Federal Reserve Bank of New York, using its Open Market
operations system. Only institutions that the Federal Reserve Bank of New
York b4s approved to conduct Open Market transactions may s~t offers on
behalf of themselves ~d their customers. Offers at the highe8t accepted
price for a particular issue may be accepted on a prorated basis, rounded up
to the next $100,000. As a result of this rounding, the Treasury may buy
bdck ~ ~~t sli~htly l~rger than the one announced above.
This debt buyback operation is governed
fonh in 31

en

'rhe debt

by
Part 375 and this announcement.

Duy~c:k

the terms and conditions set

operation regulations are available on the El"U"eau of

the Public Debt·s website 4t www.publicdabt.treas.gov.
Details about the operation and each of tha eligible issues are given
in the attached highlights.
000

Attachmeut
LS-742

For press releas:er. rpeeches, puhlic schedules and ofFICial biographies, call Dur 24-hour flU line at (202) 622-'Ju.:u

HIGHLIGHTS OF TREASURY DEBT BUYBACK OPERATION
June 28, 2000

Par amount to be bought back •.. Up to $2,000 million

Operation date ......•.••••••... June 29, 2000
time ••••••••••• 11:00 A.M. Eastern Daylight Savin~ time
Settlement data .. _. _ .••.•••.... July 3, 2000

Operation close

Minimum par offer amount ••••.•. $100,O"bO
Multiples of par ..••.••••••.••. $100,000
Format for offers .•••• Expressed in ter.ms of price per $100 of par with
three decimals. The first two decimals represant
fractional 32~ of a dollar. The third decimal
represents eighths of a 32~ of a dollar, and ~st
be a 0, 2, 4, or 6.
Delivery instructions •...•••••••.•...• ABA BUmber 021001208 YRB NYC/COST

TreaSUry issues eligible for debt buyback operation (in millionsL:

Coupon
~ate (%)

8.875
8.125
8.500

Katurity
Date
02/15/2019
08/15/2019
02/15/2020

7.875

05/15/2020
08/15/2020
02/15/2021

8.125

05/15/2021

8.125

OB/15/2021
11/15{2021

8.'50
8.750

S.OOO

7.125

08/15/2022
11/15/2022
02/15/2023

6.250

09/15/2023

7.250
7.625

CUSIP
NUmber
912810 EC e
912810 ED 6
912810 EE 4
912810 EF 1
912810 EG 9
912810 EH 7
912810 EJ 3

Pa.r Amount Par A1IIOWlt
Held as
Priv""tely
HeldOutstandingS'l'RIPS**
16,829
18,602
7,906
18,086
19,937
l,05A
8,G08
10,034
1,839
7,9Z2
5,724
9,'24
18,786
lO,227
20 1 363
10,776
9,875
1,013
11,502
10,012
4,409

par Amount

912810 EK 0
912810 EL 6
91nlO EM 6

11,453
32,628
10,339

29,766

912810 EN 4

10,080

8,479

912810 EP 9
912B10 1'2 7

18,040

15,463

7,245

22,694
205,872

21,207
184,321

',519
70,347

Total

•
**

9,795

9,493

1,163
18,341
970
5,939

Par amounts are as of JUoe 27, 2000
Par amounts are as of June 26, 2000

The difference betw8Bn the par amount outstanding and the par alWUllt
privately held is the par amount of those issues held by the Federal
Rese:n-e System.

NEWS

TREASURY

OffiCE OF PUBUC AFFAIRS -1500 PENNSYLVANIA AVENUE, N.W. - WASIDNGTON, D.C. - 20220 - (202) 622-2960
1

FOR IMMEDIATE RELEASE
June 28, 2000

STATEMENT BY TREASURY SECRETARY LAWRENCE H. SUMMERS AND
COUNCIL OF ECONOMIC ADVISERS CHAIRMAN MARTIN N. BAILY

The Administration respects the independence of the Federal Reserve in making decisions about
our nation's monetary policy. We share the Federal Reserve's goals of maintaining healthy
economic growth while preserving low inflation.
Supported by sound economic policies, including budget discipline, the economy continues to
grow, with strong investment and higher productivity, creating good jobs and improved living
standards for all Americans. We are committed to 'sustaining this economic success into the
future.
-30-

LS-743

_For press releases, speeches, public schedules and official biographies, call our 24-hour fax line at (202) 622-2040

PUBLIC DEBT NEWS
Department of the Treasury • Bureau of the Public Debt • Washington, DC 20239

TREASURY SECURITY AUCTION RESULTS
BUREAU OF THE PUBLIC DEBT - WASHINGTON DC
CONTACT:

FOR IMMEDIATE RELEASE
June 28, 2 0

°°

Office of Financing
202-691-3550

RESULTS OF TREASURY'S AUCTION OF 2-YEAR NOTES
Interest Rate:
Series:
CUSIP No:
STRIPS Minimum:

Issue Date:
Dated Date:
Matu:::ity Date:

6 3/8%
W-2002
9128276F4
$1. 600, 000
High Yield:

Price:

6.483%

June 30, 2000
June 30, 2000
June 30, 2002

99.800

All noncompetitive and successful competitive bidders were awarded
securities at the high yield.
Tenders at the high yield were
allotted 67%.
All tenders at lower yields were accepted in full.
AMOUNTS TENDERED AND ACCEPTED (in thousands)
Accepted

Tendered

Tender Type
$

competitive
Noncompetitive

25,401.709
1,615,777

$

10,001,897 1/

27,017,486

PUBLIC SUBTOTAL

3,108,900
1, 200,000

3,108,900
1,200,000

Federal Reserve
Foreign Official Inst.

$

TOTAL

31,326,386

8,386,120
1,615,777

$

14,310,797

Median yield
6.470%:
50% of the amount of accepted competitive tenders
was tendered at or below that rate.
Low yield
6.400%:
5% of the amount
of accepted competitive tenders was tendered at or below that rate.
Bid-to-Cover Ratio = 27,017,486 / 10,001,897
1/ Awards to TREASURY DIRECT

=

2.70

$1,093,126,000

http://www .pu blicdehttreas. go v

LS-744

PUBLIC CONTACT: Office of Financing

FOR IMMEDIA1t RELEASE

202-691-3550

June 29, 2000
MEDIA CONTACT:

Bill Buck

zoz- 6Z2- 1997
TREASURY DEBT BUYBACK OPERATION RESULTS

Today, Treasury completed a debt buyback (redemption) operation for S2.0 billion
par of its outstanding issues. A total of 13 issues maturing between February 2019 and
August 2023 were eligible for this operation. The settlement date for this operation will
be July 3, ZOOO. Summary results of this operation are presented below.
(amounts in millions)

Offers Received (Par Amount);

$7,023

Offers Accepted (Par Amount):

2,000

Total Price Paid for Issues
(Less Accrued Interest):

2,478

Number of Issues lligible:
For Operation:

13

For Vtbich Offers were Accepted:

11

Weighted Average Yield
of all Accepted Offers (%):

6.257

Weighted Average Maturi ty
for all Accepted Securities (in years):

20.4

Details for each issue accompany this release.

LS-745

For press releases, speeches, public schedules and official biographies, call ollr 24-hollf fax line at (202) 622-20010

Junt 29,

11lEA'ilJRY DEBT BlfYBACK OPERATION RFSULTS

\amounts in millions. prIces in declmdls)
Table 1
Weighted
Par
Amount

~

o.taturi ty
Datp

Par
Amellmt
Offered

8.875

02115/19

958

8.125
11.500
8.750
8.750
7.875
8. 125
6. 12S
8.000
7.250
7.625
7.125
6.250

08/15/19

430

OZl1S120
05/15/20

355
605

08/15120
02/15/21

l,lO5

280

11

05/IS/21

638

GO

08/15/21

427
1,199
100
435
281
210

210
15Z

Coupon

-

11115/21
08/15/22
11/15122

02115123
08/15123

Accepted
4t.1
GO
25
180
494

Highest

AHrag.

Accepted
Price

Accepted
Price

123.375
120.515
124.984
128.031
123.234
118.593
121. 640
121.812
120.531

128. 354
120.506
124.984
128.002
128.179
118.593
121. 631
121. 789
120.518

0

N/A

N/A

270
115

116.687
lID. 828

116. ti67
110.795

0

NII\

N/A

Table 11

Weighted
LoM!st

Average

Coupon
Rate ("l

o.taturi ty
Date

CUSIP
Number

Accepted
Yield

Accepted
Yield

Privatel), Held'

8,875
8. 125
11.500
8,750
8.750
7.875
8.125
8.125

02115/19
08/ lSI 19
02115120

912810EC8
912810£00
912810EE4
912810EFI
912810EC9
912810EH7
91 2810IJ3
912810EKO
912810E18
91281OB16
912810EN4
912810EP9
912810EQ7

6.270
6,268
6.268
6.263
6.262
6.257
6.2S3
6.2aO
6,246

6.271
6.269
6. 268
6.265
6. 266
6. 257
6. 254
6. 252
6.241

16 407
18026
8 583
7,742
18 292
9,864
9,952
9585
29,614

8.000

7.250
7.625
7.125
6.250

OS/15/2O

08/15120
02/15121

05/15/21
08/15121
11/15121
03/15/22

1lI1S/22
02115/23
03/15/23

Total Par Amount OffHPd:
Total Par Amount Acreptpd:

Par AmolOlt

N/A

N/"

9 493

6.211

8,209

6.226

6.233
6. 228

S/A

N/A

7.021
2.000

SotP: Dup to rounding. dptails lIIa.y not add to totals.
',-\mount outstanding after operation. Calculated using amounts reported on announcement.

15,348
Zl,

207

2000

D EPA R T :M E N T

0.'

T

TREASURY

-

OHJC~

Hr·:

T I(

&<;

A S 11 U Y

NEWS

OF fUlSLIC hfFAIR:; .1SOO rENNSYLVANIA AVENUE, N.W •• WASHINGTON. D.C.e 20220. (202)

EMBARGOED UNTIL :2: 30 P. M •
JUne 29, 2000

CONTACT:

622·2~6()

Office of Financing

202/691-3550

TREASURY OFFERS lJ-WEEK AND 26-W,EEK BlLLS
The Treasury will &uction ~wo series of Treasury bills totaling
approximately $l~,OOO million to .efund $15,232 million of publicly held
securities maturing JUly 6, 2000, and to raise about $768 million of new cash.
Xn addition to the public holdings, Federal Reserve Banks for their own
accounts hold $8,~29 mlllion of the maturing billa, which may be refunded at
the highest discount rate of accepted competitive tenders. Amounts issued
to these accounts will be in addition to the offering amount.
The maturing bills held by the public include $2,869 million held
by Federal Reaerve B4nks as agentB for foreign and international monetary

authorities, which may be refunded within the offering amount at the highest
discount rate of accepted competitive tenders. Additional amounts may be
issued for such ~CCQuntB if the ~gg~egAte AmO~t of ~ew bids exceeds the
aggregate amount of maturing bills.
Tr6asur.yD~rect

cuatomerd requested thAt we reinvest their maturing hold-

ings of approximately $854
the 26-week bill.

~illion

into the 13-week bill and $817 million into

Due to an early market closing on Monday, July 3, 2000, the closing
times for both auctions will be 11;00 a.m. EDST for noncompetitive tenders
and 11:30 a.m.EDST for competitive tenders.
Thi~ offering of Trc~~ury ~o~uri~ic~ i~ goyerned by the tc~ ~ couditions set forth in the Uniform Offering Circular for the Sale &nd Issue of
M&rketAble Book-Entry Treasury Bills, Notes, and Bonds (31 CFR ~art 356, as
amended) •

Details about each of the new securities are given in the attached
offering highlights.
000

Attachment

LS-746
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HIGHL~GHT9

TO

OF TREASURY OFFERING9 OF BILLS
B~ ISSUED JULY 6, 2000

JUne 29,
Offering Amount . . . . . . . . • • • . . . . . . • • . . . . . . $8,500 million
Description of Offering:
Term and t~e of security • . . . • . . • • . • . . . .
CUSIP number . . . . . . . . . . . . . . . . . . . . . • . . . . . .
Auction date . . . . . . . . . . . . . . • • . . . . . . . . . . . .
Issue date . . . . . . . . . . . . . . " . . . . . . . . . . . • . .
Maturity date, . . . . . . . . . . . . . . . . . . . • . . . . . .
Original issue date . . . . • • • . . . . . . . . . . . . . •
CUrrently outstanding . . . • . . . . . . . . . . . . . . .
Minimum bid amount and multiples .•••....

91-day bill
912795 FC 0
July 3, 2000
July 6, 2000
October 5, 2000
April 6, 2000
$11,777 million
$l,OOO

2000

$7,500 million
182-day bill
912795 ES 6
July 3, 2000

July 6,
Janua.,ry
Janua.ry
$14,942

2000
4, 2001
6,

2000

million

$1,000

The £ollowing rules apply to all securities mentioned above:
Submission of Bidsl
Noncompetitive bids .•....••• Accepted in full up to $1,000,000 at the highest discount rate of
accepted competitive hids.
C~etitive bids . . . . • . . . . . . • (1) Must be expressed as a discount rate with three decimals in
incramenta of .005%, e.g., 7.100%, 7.105%.
(2) Net long position for each bidder must be reported when the sum
of the total bid amount, ac all discount rates, and the net long
position is $~ billion or greater.
(3) Net long position must be determined AS of one hal£-hour prLor
to the closing time for receipt of competitive tenders.

Maximum Recognized Bid
at a Single Rate . . . . • . . . . . . • 35% of public offering
Maximum A'\'1ard .••••••.•.••.•..

35% of public offering

Receipt of Tenders:
Noncompetitive tenders . . . . . • Prior to 11:00 a.m. Eastern Daylight S~ving time on auction day
competitive tenders . . . . . . . • • Prior to 11:30 a.m. Eastern Daylight Baving time on auction day
Payment TermBs
By charge to a funds account at a Federa1 Reserve Bank on issue date, or payment
of full par amount with tender.
TreasuryDlrect customers can use the Pay Direct feature which
authori%oo ~ charge to their account of record at their financial institution on issue date.

NEWS

TREASURY

OFF1CE OF PUBUCAFFAIRS -1500 PENNSYLVANIA AVENUE, N.W. - WASHII\GTON, D.C. - 20220 - (202) 622-2960

FOR IMMEDIATE RELEASE
June 29, 2000

STATEMENT BY TREASURY SECRETARY LAWRENCE H. SUMMERS

This April, President Clinton proposed a plan that would provide comprehensive consumer
financial privacy protection for all Americans.
Today, a bipartisan House Banking Committee passed a bi II based largely on the medical privacy
provisions of the President's legislation. We believe, however, that Congress should extend
protections to other consumer financial information, including consumers' personal spending
habits.
We hope that Congress will complete the job the Banking Committee began today by passing
this year the privacy protecti.ons American's expect and deserve.
-30-

LS-747

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DEPARTMENT

OF

THE

TREASURY ~t.ir~
\:",,1

~ ~/

TREASURY

NEW S

~~~
. . . . . . . .~178~9~. . . . . . . . . . . . . . . ..

..

OmCE OF PUBUC AFFAIRS -1500 PENNSYLVANIA AVENUE, N.W. - WASHINGTON, D.C. - 20220 - (202) 622-2960

FOR IMMEDIATE RELEASE

June 30, 2000

STATEMENT BY TREASURY SECRETARY LAWRENCE H. SUMMERS

I welcome the decision by the Mrican Development Bank (AIDB) deputies to approve a
financial framework for AIDB's participation in the enhanced HIPC debt relief initiative. This
takes the international community another step closer to making debt relief a reality for over 25
of world's poorest countries.
This agreement and the June 20 approval by the Inter-American Development Bank
(IDB) Board of Governor's Working Group on IDPC of a financial framework for IDB' s
participation in the enhanced HIPC initiative, both symbolize strong regional and non-regional
cooperation in financing debt relief.
A significant funding gap remains. A substantial contribution by the US. is urgently
needed to finance these agreements for Africa and Latin America. We urge the Congress to
provide the funding for the Administration's HIPC budget request.
-30-

LS-748

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TREASURY

NEWS

ornCE OF PUBUC AFFAIRS -1500 PENNSYLVANIA AVENUE, N.W. - WASHINGTON, D.C. - 20220 - (202) 622-2960

EMBARGOED UNTIL 10 AM (EDT)
Text as Prepared for Delivery
July 5,2000

"DEVELOPMENT AND INTEGRATION: TOWARD A NEW GLOBAL CONSENSUS"
TREASURY SECRETARY LAWRENCE H. SUMMERS
REMARKS TO THE UNITED NATIONS ECONOMIC AND SOCIAL COUNCIL
NEWYORK,NY

I am glad to be here at the United Nations to address the issue of global development,
because there is no greater challenge than global development and because the success or failure
of the UN system that will be critical to ensuring that that challenge is met. This will be a central
focus at the upcoming meetings in Japan of both the G7 Finance Ministers and the G8 headsand must be the crucial long-term question for all of the world's governments in the years ahead.
•

It must be the central moral question of our time, when 1.2 billion people on this planet live
on less than a dollar a day.

•

It must be a central global security question, when some of the greatest conflicts in the world
have had their roots in economic failure and despair.

•

And it must be a central global economic question, when the world is more integrated than
ever before, and when the aging of the major industrial countries gives them an even greater
stake in growing markets and opportunities overseas.

The "post-Cold War era" has been an era that is defined by what it follows, not what it is.
But in the absence of major geopolitical conflicts, the successful integration of the poorest
economies must surely be the defining challenge of the era to come.
•

We saw this in the debates inside, and outside, the conference halls at the WTO meetings last
year in Seattle and more recently regarding China's entry to the WTO.

•

We see it in ongoing debates about develppment assistance and the reform of the World
Bank, International Monetary Fund and other international tlnancial institutions.

LS - 750
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•

And we see it in the unprecedented global support for the Heavily Indebted Poor Countries
initiative to reduce the debts of the poorest countries in this millennial year.

These debates are not over. In many ways, they have hardly begun. But in the fire of
argument we can also glean the beginnings of a new global consensus: growing areas of
agreement on how to build a truly global economy, ami how to make it work for alI its members.
Today I want to reflect on some of the framing realities for this new consensus, and some of its
core elements.
I.

The FI'aming Realities of a New Global Economy

This new global consensus starts from some basic realities about the world of the early
21 st century:
•

First, there can be no successful economic development without economic growth. This has
lately been portrayed as a question for debate. But the truth is that no serious observer doubts
the centrality of growth. Experience and academic evidence point up the same conclusion
time and again. In every time in history and every region, the incomes of the poorest cannot
grow in a lasting way when the broader economy does not. The debate, rather, is about how
best to achieve rapid and poverty-reducing growth.

•

Second, the "new economy" holds out enormous potential for accelerating global
convergence - when information technology could help isolated and far-flung nations
overcome the barriers of time and space, and advances in biotechnology offer fresh promise
for overcorriing the scourge of infectious disease. But when half of the world's population
has yet to use a telephone, and 40 percent of African adults cannot read, there is perhaps an
equal chance that technology will speed further divergence. We will not see that more
inclusive outcome without concerted public action.

•

Third, the crucial factor in achieving successful global development in the years ahead will
be national policies in the developing countries themselves. In this new global economy,
countries will shape their own destinies. And the international community cannot want
growth and reform in any country more than a nation's own government and its people do.

Achieving successful global development in this context is an immensely difficult and
complex challenge, and none of us has all the answers today But I believe that we need to form
a new global consensus embracing the major elements that are essential to success.
III.

Ten Elements of a NeVI! Global Consensus

Five of the core elements relate to what countries do - and five to the actions and policies
of the international community.
1. Market-oriented policies

2

It cannot be an accident that Soviet-style communism, planning ministries in the
developing world and large US corporations run by command and control all ran into a brick
wall in the same decade and had to be restructured. In this new global economy, the power of
open markets and market-based incentives are larger and clearer than ever before. And the
failings of more centralized means of coordinating economic activity have become that much
more apparent.

Globally the message has been repeated again and again: successful national economic
development depends above all on the promotion of markets, and the institutions and policies
that are needed for markets to function well - especially the creation of a supportive macroeconomic environment. This does not mean that there is no room for variation. It does mean that
innovation in public policy will achieve most by working to support the market - not supplant it.
2. Effective illstitlllions and the rule ~f law

If there has been a major progression in global thinking on development in the past ten
years it has been on the centrality of institutions. Whether it be the transparency ofa nation's
budget or the independence of its judges, the integrity of its public servants or the health of its
civil society - strong institutions, good governance and a functioning rule of law can make all
the difference to whether a country moves forward in a global economy, or ever further behind.
The importance of these things comes through in all of the major economic success
stories, and failures, of our time: in the contrasting experience of the East Asian economies and
that of sub-Saharan Africa, where it is estimated that Africans receive only $12 worth of benefits
for every $100 allocated to public health; and the contrast between the transition economies of
Central and Eastern Europe and those of the Former Soviet Union, where organized crime
structures have too often substituted for an effective rule oflaw. The point is starkest, perhaps, in
Amartya Sen's observation that no democratic nation has ever had a major famine.
3. Integration with the rest of the world

As growth is central to development and poverty reduction, so integration is central to
growth. That is the lesson of recent US experience. It is equally the lesson of the global
development experience since World War II. In the developing world, only one country,
Botswana, has achieved rapid economic growth in this period without rapid growth in
manufacturing exports. This has important implications for developing countries today
In the post-war period, multilateral trade liberalization through the GATT and other
mechanisms has brought enormous global benefits. But while the rhetoric would suggest
otherwise, the most valuable part of the process for any country has not been the concessions
they receive from others, but the concessions that they grant themselves: the opening of their
own economies to the competition, goods and ideas that integration affords While other factors
have certainly played a role, domestic protectionism and discouragement of exports bear a large
share of the blame for the decline in sub-Saharan Africa's global trade share since 1970 - a
decline that has represented an annual loss of income of more than 20 percent of regional GDP.
3

4. Core investments in education

Experience in Asia and elsewhere has taught us that investments in people are central to
rapid, poverty-reducing growth. Worldwide, no country has enjoyed sustained economic
progress without literacy rates well over 50 percent. And there is no higher return investment that
a developing country can make than investment in the-education of young girls. Letting girls go
to school and experience more of the world beyond their homes makes them better off
immediately and enriches their families. The result is not just more productive workers, but
smaller and healthier families.
The World Bank has recently estimated that if countries in sub-Saharan Africa had seen
the East Asian rate of improvement in the gender gap in education since 1970, their GDP and
living standards would be 15-25 percent higher than they are today. As it is, in large parts of
Africa today, young girls are more likely to die before reaching the age offive than they are to
learn to read. To put it bluntly, until we see substantial improvement in these figures, the dream
of putting the world's poorest citizens on a fast track to technology and growth will remain just
that: a dream.
5. Investments in basic health

The other crucial investment in growth and development is in basic health. This must be
an even higher priority in the poorest countries when AIDS killed ten times more Africans last
year than all of the region's military conflicts combined, and when it is estimated that 90 percent
of the illness and death that HIV/AlDS will bring to Mrica are still to come.

In southern Africa, life expectancy is now expected to drop from a high of 59 in the early
19905 to less than 45 within the next 5-10 years, a level not seen since the 1950s. In the countries
worst hit, more than 1 in 4 of the adult population may now be HIV positi ve - and more than 10
percent of the population are AIDS orphans. Yet the total per capita health budget in many
countries is often less than $5 a year.
In all of these ways, national policies will be crucial to creating a strong and truly global
new economy. But the frameworks and policies that we develop internationally will also playa
central role. These comprise the other five core elements of the new consensus.
6. A rule-based global ecoJlomic system

We learned the importance of common rules and institutions here in the US more than a
century ago, as inter-state commerce took off and the national economy began to come together
Over time, politicians in both major parties came to recognize that greater interconnectedness
between states also called for common institutions and understandings at the nationalle\'eL to
offset the downward pressure on local rules and standards that competition could create
Increasingly the same imperative needs to be recognized at a global level. As the
President has said: "a legal framework of mutual responsibility and social safety is not
destructive to the market; it is essential to its success." In that sense, the actions of the Financial
4

Action Task Force and other groups to name and shame jurisdictions that encourage the dark
side of capital mobility - money laundering, tax evasion and so forth - are examples of
something we should see much more of in the future,
7. A strong and stable global jinaJlcial.\ystem

At a time when the cost of a large American mall or office building exceeds the private
capital flow to many developing countries, a strong and stable flow of capital from the industrial
world to the developing world will be essential to a successfully integrated global economy. It
bears emphasis in this context that the lesson of the Asian crisis is not that poor countries should
accept less capital - it is that capital flows need to be deepened and better utilized to ensure their
stability.
This is the central objective of the international community's approach to the ongoing
reform of the international financial architecture, which has emphasized transparency, the
improvement of domestic financial infrastructures, and the monitoring and reduction of financial
vulnerabilities that are associated with leveraged national balance sheets. It will be essential to
assure that the IMF continues to have a strong capacity to respond aggressively to financial
crises, while at the same time becoming increasingly selective and short term in its provision of
funds. And the World Bank and the other multilateral development banks will need increasingly
to focus their work on countries and sectors where private capital cannot be expected to go
In the public as in the private sector, questions of pricing in finance will be central in the
years ahead: central to assuring that finance is properly used, and central to mobilizing the kind
of resources that will be necessary if truly concessional needs are to be met. That is why the
pricing policies of the international financial institutions will be under discussion in Fukuoka this
weekend, and also at the fall meetings in Prague,
8. A realistic approach to debt

The reality that not all loans will be repaid, and provision must be made for writing off
bad ones, is central to any properly functioning financial system. That is why countries have
bankruptcy laws, and why private sector involvement has been an important part of discussions
of crisis management. It is also why the enhanced HIPe initiative that has been agreed among
the G7 in the past year is so appropriate,
Beyond good financial practice, writing otT bad loans is morally right. The power of
compound interest should not ever be the power to stop children from going to school or from
getting necessary health care We are committed to ensuring that unsustainable debt burdens do
not stop poor countries from realizing their economic potential. But equally, we are committed to
not repeating the mistakes of the past, and to ensuring that assistance provided through debt
relief helps the intended beneficiaries - as part ofa new framework for providing support that
puts poverty reduction and popular participation at center stage,
9. Enhanced provision of global pllhlic good\'
5

I referred earlier to the profound opportunity and challenge represented by the dramatic
developments in information technology and the life sciences There would be no Internet, no
sequenced human genome, and no eradication of any major disease, without public sector action.
Nor can any of these issues begin to be addressed in a purely national context - even in the US,
let alone in countries that are far smaller and poorer. That is why global public goods need a
much more prominent place on our development agenda than they have had to date.
We have had enough successes, with the Consultative Group on International
Agricultural Research (CGIAR) and the Green Revolution, the campaign to defeat river
blindness in Africa, and the eradication of small pox, to show that global public goods can be
provided. But if the potential of modern science is to be realized, there is no alternative to global
public institutions and actions of a kind very different from the standard country-by-country
programs to which we have all become accustomed.
This is the animating idea behind President Clinton's Millennial Vaccines Initiative, with
its emphasis on creating market incentives for the development of vaccines against the small
number of diseases that account for more than a million fatalities each year, and on expanding
the capacity to disseminate vaccines that already exist, notably through the Global Alliance for
Vaccines and Immunization (GA VI). But vaccines are only one area - agricultural, educational
and environmental research are just some of the others.
As always, in the provision of public goods, financing is the crucial challenge. Everyone
- governments, foundations and international institutions - wants to lever the efforts of others,
and no one wants to be levered. I do not have any answers to provide here. But the development
banks could take small but significant steps as they review their pricing and use of net income
policies going forward. And there is certainly scope for closer cooperation between the public
and the private sectors at a time when the US Forbes 400 commands more than $1 trillion.
10. More and more effective official external assistance

Too often, in recent years, the debate about international development assistance has been
paralyzed by a stand off between two extreme views:
•

The first is the view that all that stands between the poorest countries and rapid economic
growth is inadequate international financial support.

•

The second is the view that the countries' problems stem only from a lack of commitment in
the countries themselves - a failing that no amount of external support will fix.
It is time that we recognized that both views are right - and both views are wrong.

On the one hand, no country will succeed without the right policies in place. Tempting as
it is to believe that just providing support to governments and letting them use it as they see fit is
enough, the overwhelming lesson of history is that it isn't so. Indeed, the economic history of
Nigeria, Venezuela, Zambia and others with abundant natural resources offer concrete examples
of the dangers of external finance without good policies All too often, natural resource windfalls
6

have flowed into palaces, corruption, and Swiss bank accounts, producing little or no tangible
benefit for a nation's people. The lesson is that support needs to be targeted to countries and
policies with a proven capacity to deliver results, and that conditions are appropriate when
assistance is provided.
At the same time, those who preach self-reliartce need to recognize that the most
committed governments in the poorest countries today face problems that they will not come
close to addressing without major outside support, And we all must face up to the fact that there
are high return investments in growth and poverty reduction that are not being pursued in the
poorest countries today, at tremendous human and economic cost, because of a lack of official
resources,
Increasing the quantity, as well as the quality, of global development assistance must be a
global humanitarian imperative at a time when the average per capita health budget in subSaharan Africa will barely cover the cost of a tse-tse fly trap, yet net official transfers per capita
to Africa are now more than one third lower, in real terms, than they were in 1990
We recognize that this is a challenge that the world's richest country has a particular
responsibility to confront. The US continues to be one of the largest contributors to the global
development effort and the largest market for developing country goods, But Americans should
not be satisfied with what we are now doing. Our defense budget last year was more than a $100
billion lower in real terms than it was in 1989 - but rather than reinvest a portion of this dividend
in forward defense of US interests through foreign assistance, we spent 20 percent less, in real
terms, on our foreign operations in 1999 than we did on average during the 1980s
The global stake in successful economic development has never been greater, There have
never been greater technological opportunities to promote convergence than there are today, And
for all the arguments that rage, there is probably more agreement on the right way forward, both
nationally and internationally, than ever before, The question really is whether internationally we
will have the will to do what can be done, That is why I am so honored to have had the
opportunity to participate in this forum of the UN today, Thank you.
-30-

7

NEWS

CLIPS

Compiled in the Office of Public Affairs

EMBARGOED UNTIL NOON
July 5, 2000

STATEMENT BY TREASURY UNDER SECRETARY GARY GENSLER

The Federal Reserve today announced changes to the management of the System Open Market
Account (SOMA)
The Federal Reserve consulted closely with the Treasury Department concerning these changes
We believe that they will allow the Federal Reserve to adjust the quantity and composition of the
SOMA portfolio in a manner consistent with the Federal Reserve's portfolio needs and
consistent with Treasury's broad debt management objectives.
This announcement provides important information to market paliicipants as this Administration
continues its commitment to reduce the public debt.
-30-

LS-751

1500 PENNSYLVANIA AVENUE, N.W.• WASHINGTON, D.C.· 20220· (202) 622·2960

PUBLIC DEBT NEWS
Department of the Treasury • Bureau of the Public Debt • Washington, DC 20239

..

TREASURY SECURITY AUCTION RESULTS
BUREAU OF THE PUBLIC DEBT - WASHINGTON DC
CONTACT:

FOR IMMEDIATE RELEASE
July 03, 2000

Office of Financing
202-691-3550

RESULTS OF TREASURY'S AUCTION OF 13-WEEK BILLS
91-Day Bill
July 06, 2000
October OS, 2000

Term:
Issue Date:
Maturity Date:
CUSIP Number:
High Rate:

912795FCO
5.830%

Investment Rate 1/:

Price:

6.00H

9B.526

All noncompetitive and successful competitive bidders were awarded
securities at the high rate. Tenders at the high discount rate were
allotted 79%. All tenders at lower rates were accepted in full.
AMOUNTS TENDERED AND ACCEPTED (in thousands)
Accepted

Tendered

Tender Type
Competitive
Noncompetitive

$

$

Foreign Official Refunded
SUBTOTAL
Federal Reserve
Foreign Official Add-On
$

7,241,907
1,169,936
8,421,843 2/

22,647,001

PUBLIC SUBTOTAL

TOTAL

21,477,065
1,169,936

102,442

102,442

22,749,443

8,514,285

4,402,511
2,558

4,402,511
2,558

27,154,512

$

12,919,354

Median rate
5.800%: 50% of the amount of accepted competitive tenders
was tendered at or below that rate. Low rate
5.750%:
5% of the amount
of accepted competitive tenders was tendered at or below that rnte.
Bid-to-Cover Ratio

= 22,647,001 /

8,411,843

= 2.69

1/ Equivalent coupon-issue yield.
2/ Awards to TREASURY DIRECT = $925,987,000

http://www.publicdcbttrcas.go\'

LS-752

PUBLIC DEBT NEWS
Department of the Treasury • Bureau of the Public Debt • Washington, DC 20239

TREASURY SECURITY AUCTION RESULTS
BUREAU OF THE PUBLIC DEBT - WASHINGTON DC
FOR IMMEDIATE RELEASE
July 03, 2000

Office of Financing
202-691-3550

CONTACT:

RESULTS OF TREASURY'S AUCTION OF 26-WEEK BILLS
182-Day Bill
July 06, 2000
January 04, 2001
912795ES6

Term:
Issue Date:
Maturity Date:
CUSIP Number:
5.975%

High Rate:

Investment Rate 1/:

Price:

6.247%

96.979

All noncompetitive and successful competitive bidders were awarded
securities at the high rate.
Tenders at the high discount rate were
allotted 35%.
All tenders at lower rates were accepted in full.
AMOUNTS TENDERED AND ACCEPTED (in thousands)
Tender Type

Tendered

Competitive
Noncompetitive

$

PUBLIC SUBTOTAL

$

SUBTOTAL
Federal Reserve
Foreign Official Add-On
$

3,494,460
249,890

1,

19,299,210

Foreign Official Refunded

TOTAL

18,049,320
1,249,890

Accepted

4,744,350 2/

2,759,058

2,759,058

22,058,268

7,503,408

3,726,862
70,942

3,726,862
70,942

25,856,072

$

11,301,212

Median rate
5.960%: 50% of the amount of accepted competitive tenders
was tendered at or below that rate.
Low rate
5.900%:
5% of the amount
of accepted competitive tenders was tendered at or below that rate.
Bid-to-cover Ratio

= 19,299,210

/ 4,744,350

= 4.07

1/ Equivalent coupon-issue yield.
2/ Awards to TREASURY DIRECT = $917,099,000

http://www.publicdebttreas.gov

LS-753

D EPA R T 1\1 E N T

0 F

THE

T REA SUR Y

OffiCE OF PUBUC AFFAIRS • 1500 PENNSYLVANIA AVENUE, N.W. • WASHINGTON, D.C. • 20220 • (202) 622·2960

u.s. International Reserve Position
The Treasury Department today released
As indicated in this table,

07/05/00

u.s. reserve assets data for the week ending June 30, 2000.

u.s. reserve assets totaled $67,959 million as of June 30, 2000, up from S67,819

million as of June 23, 2000.
(in US millions)

I. Official U.S. Reserve Assets
TOTAL

I

1. Foreign Currency Reserves 1
a. Securities

Euro
4.796

Of which, issuer headquartered in the

June 23, 2000

June 30, 2000

67,819

67,959

Yen
5.572

U. S.

TOTAL

Euro

10.367

4.901

Yen

TOTAL

5.490

10.391
0

0

b. Total deposits with:
b.i. Other central banks and BIS

8,208

b.ii. Banks headquartered in the U.S.

12,447

20.656

8.379

12.266

0

20,644
0

bji. Of which, banks located abroad

0

0

b.iii. Banks headquartered outside the U.S.

0

0

0

0

15.356

15,432

10,393

10,444

11,048

11.048

0

0

b.iii. Of which, banks located in the U.S.

2. IMF Reserve Position

2

3. Special Drawing Rights (SDRs)
4. Gold Stock

3

5. Other Reserve Assets

2

11 Includes holdings of the Treasury's Exchange Stabilization Fund (ESF) and the Federal Reserve's Syslem Open Market Account
(SOMA). valued at current market exchange rates. Foreign currency holdings listed as securities reflect marked-to-market values. and
deposits reflect carrying values.
21 The Items, "2. IMF Reserve Position" and "3. Special Drawing Rights (SDRs)," are based on data provided by the IMF and are valued in
dollar terms at the official SDRIdoliar exchange rate for the reporting date. The IMF data for June 23 are final The entries in the ta.ble above
for June 30 (shown in italics) reflect any necessary adjustments, Including revaluation, by the U.S. Treasury to the prior week's IMF data.

31 Gold stock is valued monthly at $42.2222 per fine troy ounce. Values shown are as of May 31, 2000. The April 30. 2000 value was
$11,048 million.

LS-754

u.s. International Reserve Position (cont'd)
II. Predetermined Short-Term Drains on Foreign Currency Assets
June 30. 2000

June 23. 2000
1. Foreign currency loans and securities
~. Aggregate short and long positions in forwards and
futures in foreign currencies vis-a-vis the U.S. dollar:
2.8. Short positions
2.b. Long positions
3. Other

o

o

o
o
o

o
o

o

III. Contingent Short-Term Net Drains on Foreign Currency Assets
June 30, 2000

June 23. 2000

1. Contingent liabilities in foreign currency
1.a. Collateral guarantees on debt due within 1 year
l.b. Other contingent liabilities
2. Foreign currency securities with embedded options
3. Undrawn, unconditional credit lines
3.a. With other central banks
3.b. With banks and other financial institutions
headquartered in the U. S.
3.c. With banks and other financial institutions
headquartered outside the U. S.
~. Aggregate short and long pOSitions of options in foreign
currencies vis-a-vis the U.S. dollar
4.2. Short pOSitions
4.a.1. Bought puts
4.a.2. Written calls
4.b. Long positions
4.b.1. Bought calls
4.b.2. Written puts

o

o

o
o

o
o

o

o

DEPARTMENT

OF

THE

TREASURY

TREASl.71{Y

NEWS

OUICE or 'VILle AFFAIRS. 2500 P'iNNSYL"ANfA AVENUE, N.w•• WASHINCTON, I).C •• a03Z0. (10%) Ul.~~60

~:

"WIBU.CJOZD mI'l'IL 2: 30 P.M.
I1Uly 5, 2000

office of FinanciAg
202/691-3550

"1'IlEAStJKY TQ AUCTIOB $5,. 000 IIILLIOB OF

9-1/2-YEAR 4-1/4_ tRFLATIOR-%SbZ1ED MOTES
~e Treaaury wi11 auetioa $5,000 ail1ioa. of 9-1/2-yea: '-1/4"
Wlat:.ioD-i».d.exed l&at •• to s-ai •• c:ash.

Amounts ~i4 by Federal Reserve BaDka for Ch.ir own accOUDta and as
agents for forei~ ancI iDten&&tioDal II/:)Det.aJ:y authori tie. will be added to
the offeriD§.

The auction will be

coD4uc~ea

iD the aiug1e-pric. auction

fo~t.

ana

DOACCZIIPetitive .warda rill be at the !Ugheat yield of
accepted e~etiti. . ~..aera.

All c:ompetitive

Thi. offering of Treasury securities is g0V8rDed by the t.~ aDd
conditions set fo~ iD the uDiform Offerins Circular for ~. Sale aDd
I.au. of MArke~l. Book-2Dt~ ~•• ~ Bill., Hotes, ana Bond. (31 cr.R
Part 356, as aIDCmClecl).
For origiDal i • .ue 4iac:OUDC (o~), IRS ~egulati~ permit ~egp~iDgs
ofiDflation-iaaeae4 aecuritie. without regard toOrD rules, provided that
the reopenings occur DOt iDore thaD one year after the original ••c:uri tie.
ware first issued to the PQl:>lic. Therefor., the OlD limit does Dot apply
to thi. auceion.
Details about
highlights.

~. ..~!~

are given in the attaChed

offer~g

000

:-755

-

'or P~SI rel'lUes. SPUChIS, pllblic IchtdU'~1 olld ofJU~1 biog'lJphi~$1 ctdl our 24-holl, /IIZ lJ", IJr (20l) 6227~040
.

JaGBLIC2rS OP '1'ItUStJ1lY orPDDIG '1'0 '1'BB PUBLIC OF
9-1/2-YEAa %RFLATIO.-~t·kO ROTES TO BE ZSSUSD JULy 17, 2000

July S, 2000
OfferiD~

Amount •••••••••••••••••••••••••••••••• $5,000 million

Descriptioa of Offering:
~er.a aDd t.r.Pe of .eea%ity •••••••••••••••••••••• 9-1/2·y.ar inflationiDdexed notes (reopening)
S.ri ••••••••••••••••••••••••••••••••••••••••••• A-2010
eoalP DD"b«r ••••••••••••••••••••••••••••••••••• 912821 5W 8
Auc~i.OD d.&~•••••••••••••••• : ••••••••••••••••••• wuly 12, 2000
I • .ue 4at •••••••••••••••••••••••••••••••••••••• wuly 17, 2000
Datea date ••••••••••••••••••••••••••••••••••••• Jau\1&Z'Y 15, 2000

Maturity 4at ••••••••••••••••••••••••••••••••••• January lS, 2010
~ter••t ~at ••••••••••••••••••••••••••••••••••• 4-1/4%
AmouDt originally i ••u.a .•••••••.•••.••.••••••• $6,318 million
Adju8ted ~t cuxr~tly out.taudiDg •••••••••• $6,'30 million
Real yi.ld ••••••••••••••••••••••••••••••••••••• DetermiD.a at auction
XDter•• t payment dat ••••••••••••••••••••••••••• 3anU&r,y 15 aDd ~ly 15
H;n;zmna bid ~~ and multip~e ••••••••••••••.• $l,OOO
AccrQed ~t.re.t ••••••••••••••••••••••••••••••• $O.23098 per $1,000 (from
July 15 to JUly 17, 2000)
IAju.ted accrue! interest payable b7 tDve.tor •• $0.23S11 per $1,000
Premium or di.COUDt •••••••••••••••••••••••••••• Dater.min.d at auction
STRIPS IDfo:mation:

Hip;mgm amouDt

r.qai~e4 ••.••••.••.•••.••••••••. $1,OOO

cor.pua CUSXP nvmber •••••••••••••••••••••••••••• 912820 EX 9
TIXH conver.i~ £ac~or per $~,OOO •••••••••••••• 12.630378193
sUbmi •• i~ of Bias:
NODCompetiti~

bids:

Will be accepted iD full
highest accepted yield.

up

to $5,000,000 at tbe

Competitive bida:
(1) lllua~ be

expres.ed ... a real yield with three c1ecimala, e.g., 3.123%.
(2) Ret long poa:i.ticm for each hidder mu8t be reported wUn the sua o£ the
eotal bid amoune, at ~l yiel4a, aDd ~. n.t loag poaitiou i . $2 billion

or greater.
(3) Net lcmg position muat be cletezm.1Ded &a of one half-heuzo prior to th.
clo.ing time for rec.ipt of competitive tendera.
KaK~

~~

1ecognlzed Bic! at a Single Yi.ld •••••••••• 35% of ~lic off~~g
Award ••••••••••••••••••••••••••••••••••••• 35% of public offeriDg

aec.ipt of TeD4.~.:
Bozac=c;;apetiti'nll tenders: n-ior to 12: 00 noon Ea.teZ'Zl Daylight Saving time
on auction day.
Cgmpetltlva tenders: P~ior to 1:00 p.m. Ba.tern Daylight Saving t~. au
auC!tiOl1 clay.
PaYlD8Z1t !farms: By charge to a fund. account at • Feaeral a.s.Z"V'e Ilau on i.au.
da.te, or JNI,YID8l1t of fu1l par IUDO'Wlt with tend.r. ~a.w:yP.i.Z".ct evstomara Cc:LD
ua. the Pay Direct feature which authorizes a charge to their account of
record at ch.ir fiD&Dcial ~titutioD ou issua da~e.
Indexing IDfo%m&tion:

~r Bas. ae£erenca Pe1"iea., _
Ref CPX 01/15/2000 •••••••••
Ref CPI 07/17/2000 •••••••••
XDdez Ratio 07/17/2000 •••••

1'82-1984

168.24516
171.25161
1.01787

D EPA R T

~I

E N T

0 F

THE

TREASURY

T REA SUR Y

NEWS

orntE or PUBLIC AffAIRS. 1500 PENNSYLVANIA AVENtJE, N.W•• WASHINGTON, 'D.C.- 20220 - (202) 622.2"0

DJD,RGOEl) Ull'rn.

2: 30 P. II.

CONTACT:

JUly 5, 2000

Office of PinanciDg
202/691-3550

Tbe ~reasu%y will auction two series of Treasur,y bills to~aling
approxilDat.ly $16,000 million to refund $15,,022 million of publicly held
securities maturing JUly 13, 2000, and to raise about $978 millioa of Dew

cash.
XD addition to the public hol~gs, Pederal Reserve Banka for their cwn
accounts bold $7,708 million of the'aaturing ~ills. which may ~e refunded at
the highest discount rate of accepted campetitive teDders. Amounts issued
to these accounts will be in a44ition to the offering amount.
The maturing bills held by the publie include $2,621 million held

Federal Reserve Ballks as agents for foreign and international IDOneta.ry
authorities, Which may be refunded within the offering amount at the highest
4iscO\mt zoate of accepted competitive tenders. Additional amounts may ]:)e
issued for such accounts if the aggregate amount of new bids exceeds the
aggregate amount of maturing bills.

by

~reasur,yD1rect

customers requested that we ~einvest their maturing holdings of &l>proxUaately $929 million into the 13-week bil~ and $920 mi11ion into
the 26-week bill.

offering of Treasury securities is g~rned by the terms and CODditions set forth in the-uniform Offering Circular for the Sale and Issue of
Karketable Book-~tr.Y Treasury Bills, Notes, and Bonds (31 CY.R Part 356,_ as
~s

~ed).

Details about each of the
offering highlights.

DeW

securities are given in the attached
000

Attadnnent

LS-756

-

For press releases, speeches. public schedules and official biographies, call our Z4·hoflr ja% lint at (202) 622·2040

HXGBLXGHTS or TREA8~Y OFFBR~S OF BILLS
TO BE XBBUED JULY 13_ 2000
July 6, 2000
Ottering Amount ••••••••••••••••..••••••• $8,500 million
Description of Ofe.rinqs
Term and type of s.curity ••.•....••••••.
CUSIP nun\ber •••••••••••••••••••••••••••.
Auction date •.•••••••••••••••••• ~ •••••••
XBsue date ••••••••••••••••••••••••••••••
Maturity date ••••••••••••••••••••••••••.
Orig~nal ~BBue dat ••••••••••••••••••••••
Cu~rently outstandlnv •••••••••••••••••••
Minimum bid amount ana mult~ple8 ••.•••••
The

fol1ow~ng

91-day bill
912795 EO 2
.;July 10. 2000
July 13, 2000
OctOb.r 12, 2000
OctOb.r 14, 1999
$29,276 .il~ion
$1,000

rules apply to all securities

ment~onea

$7,500 million
182-day bill
912795 JI'N 6
July 10. 2000
July 13, 2000
January 11, 2001
o1Uly 13. 2000

$1.000

abovel

Submis8ion or Bids,
Noncompetitive bIds ••••••••• ,Acc.pted in full up to $1.000,000 at the highest discount rat. of
accepted competitive bids.
Competitive bids •••••••••••• (1) MUst be expressed as a discount rate with thr.e decimals in
increments oe .005%, e.g •• 7.100%, 7.105%.
(2) Net long position for each bidder muat be r.ported when the Bum
of the total bid amount. at all discount rate., an4 the net Long
position Is $1 billion or greater.
(3) met long position must be determined as of one haLf-hour prior
to the cloBing time for rec.ipt of competitive tenders.
Maximum Recognized Bid
at a Single Rate •••••••••••• 35% of public offering
MAximum Award ••••••••••••••••••• 35% of public offering
Receipt of ~ender81
Noncampetitive tenders •••••• Prior to 12100 noon Eastern Daylight Savlng time on auction day
Coapetitive tenders ••••••••• Prior to 1100 p._. Eastern Daylight Saving time on auction 4~
Payment ~.rm8' By charge to a funds account at a Federal Reserve Bank on iS8ue date. o~ pay.ment
of full par amount with tender.
Tre•• u~1rect customer. can use the Pay Direct feature whicb
authorize. a charge to their account of record at their financial institution on issue date.

PUBLIC DEBT NEWS
Department of the Treasury • Bureau of the Public Debt • Washington, DC 20239

FOR RELEASE AT 3 :00 PM
July 7, 2000

Contact: Peter Hollenbach
(202) 691-3502

PUBLIC DEBT ANNOUNCES ACTIVITY FOR
SECURITIES IN THE STRIPS PROGRAM FOR JUNE 2000

The Bureau of the Public Debt announced activity for the month of June 2000, of securities within
the Separate Trading of Registered Interest and Principal of Securities program (STRIPS).
Dollar Amounts in Thousands
Principal Outstanding
(Eligible Securities)

$1,974,208,217

Held in UnstrippedForm

$1,781,103,827
$193,104,390

Held in Stripped Form
Reconstituted in June

$20,460,604

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 V of the Monthly Statement of the Public Debt, entitled "Holdings of Treasury
Securities in Stripped Form."·
The Strips Table along with the new Monthly Statement of the Public Debt is available on Public
Debt's Internet homepage at: www.publicdebt.treas.gov.Awide range of information about
Public Debtand Treasury Securities is also available on the homepage.
000

LS-757

http://www.publicdebt.treas.gov

TABLE V • HOLDINGS OF TREASURY SECURITIES IN STRIPPED FORM, JUNE 30. 2000

Corpus
STRIP
CUSIP

Loan Oesaiplion

Treasury Bonds:
CUSIP:
91281001.17

DOS
DRS
DUS
DNS
OPO
DS4
OT2
DV7
OWS
DX3

Interest Rate:
11-518
12

10-314
~

11-314

11·1/4
1~

So718
Sotl4
7·114
7·112

DYI

~4

oze

8-718
SoI18
9
8-718
8-118
8-112

EA2
EBO
EC8
EOS
EE4
EFI
EG9
EH7
EJ3
EKO
ElB
EM6
EN4

EP9
E07
ES3
Ell
EV6

EW4
EX2

EYO
EZ7
FAt
FB9
FE3
FFO
FG8
FJ2
FM5

912803AB9
.t.05

AGS
AJ2
912800M7
912803Ml
AC7

AE3

Principal Amount OuIstalding In Thousands
Maturity Date

11115104
5115105
8115105
2115106

2115116

~4

ATe

8-314
7-718
8-118
8-118
8
7-1/4
7-518
·7·118
6-1/4
7-112
7·518
6-718
6
6-314
6-112
6-518
6-318
6-118
$.112
$.114
$.114
6-118
6-1/4

AU7
AV5

AWJ
AXI
AY9
AZ6

BAO
BBB
BCS
BD4
BE2
BF9
BG7
BHS
BJI
BKe
Bl6

BM4
BP7
BV4

BW2
eG6
CH.c

8115119
2115120
5115120
8115120
2115121
5115121
8115121
11/15121

8115122
11/15122
2115123
8/15/23
11115/24
2115125
8115125
2115126
8115126
11115126
2115127

8/15127
11115/27
8115128
11115128
2115129
8115129
5115130

ToUll Treasury Bonds...........................
Treasury !nnation-Indexed Notes:
CUSIP:
Series: Interest Rate:
9128273A8
J
3-518
2M3
A
3-318
3T7
A
3-518
4Y5
A
3-718
5'NB
A
4-114

S12820BZ9
BVB
CL9

DN4
EK9

7J1S102
1/15107
1/15108
1/15109
HI5110

Total Inflation-Indexed Notes................
Treasury Innation-Indexed BondS:
CUSIP:
Interest Rate
912810 FDS
3-518
FH6
3-718
Total Inflation-Indexed Bonds...............

912803BN2
CFB

4115128
4115129

Portion Held in
Stripped Form

TtIlS Montn

18,823,551
18.844.448
17,264,669
13,364.858
8,263,439
7,859,470
18,601,793
19.937,432
10,033,868
9.... 23,883
20,362.606
10,nS,873
11,501,788
11,453,482
32,628,394
10.338.790
10,079,626
18,040,261
22.694.044
11,099.662
11,550,170
12,327.007
12,904,916
10.893.818
11,493.177
10,"'58.071
10,735.756
22,518.539
11,776.201
10.947,052
11,350.341
11,178,580
11.269.069

3,188,239
2,742,070
11,310,593
18,62"',472
8,162,668
3,774.123
10,273,646
9.955.073
7,092,188
10,328,682
15,01",019
9,398,790
".212,"26
10.801,861
18.169.212
3,780,142
3,48&,170
7,045,727
11,006,416
8.281.818
7.456.317
6,232,071
9,434,956
17.182.539
11,597,401
10,446,252
11.182,341
11,175,380
11.269,069

524,179,344

369,596,889

154,582,455

19,226,100

17,916,745
17.027.276
17,814.863
16,600,194
6,429.006

17.976,145
17.027.276
17.81",863
16,600,194
6.429,006

0
0
0
0
0

0
0
0

75.848.084

75.848,084

0

0

17.791.270
15,330,463

17,791,270
15,330.463

0
0

0
0

33,121.733

33,121,733

0

0

6,005,584
12,023,799

5115116
11115116
5115117
8115117
5115118
11115118
2115119

Portoan Held in
Unstripped Form

.... 515.200
2.613.300
3.939.200
147,6.48
4,089,600
5.222.560
1,387.200
2.428.800
492.800
388,800
1.306.160
5,912.000
2.268,800
5,075,200
5,117,400
7,291,200
1,312,960
I,S71 ,200
5.649.760
10,088,960
820,800
4,409.600
1,124,800
17,614,375
940,000
5.867,200
7,238,400
.... 524,832
7.319,520
8064,000
5281,280
1,898,500
2,612,000
4,036,800
"',224,000
1,300,800
5.336.000
178,800
SOD,800
168.000
3,200
0

2115115
8115115
11115115

MO

AS2

8.301.806
4.260.758
9.269.713
4.755.916

11115114

AH6
AKS
Al7
AM5
AN3

APB
AQ6
AR...

Reeon$l~uled

Total
OWtanding

5,7~,916

6.155.859
6,1167,~

3.786.606
1,647.458
5.330.513
4.608,268
1,915,984
6.801,239
4,358,116
3,727.059
6,374,554
18,434,751
t7,S38,288
11,352,669

11,096,058

.

72,000
0
240.800
1.600
164,800
148.480
458.880
560.000
105.000
368,800
114.480
951.040
364.800
206.400
258,600
1,795,200
184,320
838.400
1,217.920
2,588.000
248,000
375.040
1,233,2BO
2.735,600
201,600
515.200
350."00
186.oeO
338,480
233.600
27,200
217,100
414.400
336,000
270,400
251.200
414.400
50,000
161,600
24.000
0
0

0
0

TABL.E V· HOLDINGS OF TREASURY SECURmES IN STRIPPED FORM, JUNE 3D, 2000 - ConUnued

Loan OesaiptiDn

Corpus
STRIP
CUSIP

Principal Amount Outslanding " Thousands

Treasury Notes:
Series: Interest Rate:
CUSIP:
912820006
AF
>318
9128274Ml
8-314
AX5
ZE5
C
OFI
AG
5-118
4Q2
4-112
OG9
4RO
AH
DH7
4
H6
AJ
AV3
8-112
ZN5
0
5-314
CF2
3M2
X
AK
4-518
OLe
4VV9
OMS
4-518
4X7
Al
4-112
OP9
4Z2
U
A
7·3/4
PZO
ZX3
S-3I8
CPO
3WO
S
5
DRS
5C2
V
4-718
OS3
500
W
DTt
5EB
5
X
BA4
8
AS5
B
5-518
CX3
4E9
T
5-114
DW4
5Hl
Y
5J7
5-314
OX2
Z
5-112
OYO
5L2
AS
7·718
B92
BB2
C
5P3
AC
5-112
EB9
5-518
EC7
sal
AD
E05
5-718
5R9
AE
D25
7·112
BCO
D
5-718
2CS
EG8
a
6-118
EJ2
2El
R
6-3/8
5X6
R
El7
6-112
GA5
EN3
S
6-112
EPB
6B3
T
SCI
6-318
EOS
U
F49
B08
A
7·112
6E7
6-518
ES2
V
SF4
6-318
ETO
W
6-3/8
BE6
G55
B
3J9
5-718
M
CC9
3L4
5-314
N
CE5
5-314
CHB
303
P
3S9
&-518
CKI
a
3V2
5-112
CN5
C
J78
6-114
BF3
A
3Z3
5-112
CS4
D
4B5
5-112
CU9
E
4Dl
F
5-314
CW5
4H2
5-112
DA2
G
4K5
H
&-31B
DC8
L83
B
5-314
BGI
4N9
5-1/4
DE4
J
4U3
4-114
OJ3
K
N81
A
5-718
BH9
5A6
4-314
E
007
P89
B
7·114
BJ5
5F5
F
5-114
Dua
OS8
7·114
C
BK2
5Ma
G
6
DZ7
RB7
D
7·718
Bla
5S7
H
5-7/8
EE3
S86
A
7·112
BM1!
T85
6-112
BN6
B
609
6-314
ER4
E
U83
6-112
BPI
C
V82
$0718
0
B09
'MIl
A
5-518
BR7
X80
6-7/8
B
BS5
Y55
7
BT3
C
Z62
6-112
D
BUD
2JO
B
6-114
8W6
2U5
6-518
C
BX4
3EO
6-118
D
CA3
3XB
B
5-112
coa
4F6
C
5-518
CVl
4Vl
4-3/4
0
DKO
5G3
B
5-112
OV6
5N8
6
EAl
C
521
6-112
EMS
B

Total Treasury Notes.

.... ,

7131100
8115100
8131100

9IJOJOO
10131100
11115/00
11/15100
11130/00
12131100
1131101
2115101
2115101
2128101
3131101
4I30I01
5115101
5115101
5IJ1101
6I'30I01
7131101
8115101
8131101
9I30I01
10131101
11/15101
111300'01
12131101
1131102
2128102
3131102
4130102
5115102
5131102
6I'30I02
8115102
9130102
10131102
11I30I02
12131102
1131103
2115103
2128103
3131103
4I30I03
5131103
6IJOJ03
BI15103
B/15103
11115103
2115104
2115104
511 Sl'04
5115104
8115104
BI15104
11115104
11115104
2115105
5115105
5115JOS
8115105
11115105
2115106
5115106
7115106
10115106
2115107
5115107
8115107
2I151OB
5115108
11115108
5115109
8115109
2115110

.....................

Grand Total .. .......... ..........................................

ReconslRuted
thiS Month

Maturity Date

.......... ......................

Total

Portion Held in

PortIOn Held in

Outslanding

Unstripped Form

Stripped FOfm

18.683.295
11.080.646
20.028.533
19,268.508
20,524,986
11.519,682
16,036.088
20.157.568
19.474.772
19.m.278
1'.312.B02
15.367,153
19.566',630
21.605.352
21.033,523
12.398.083
12.873.752
19.885.985
19.001.309
20.541.318
12.339.185
20.118.595
18.797.B28
19.196.002
24.226.102
33.504.627
31,166,321
19.381,251
16.563,375
17.237.943
17,390,820
11.714.397
14.B71.673
14.329.281
23.859.015
12,806.814
11.737.284
12.120.580
12.052,433
13.100.640
23.562,691
13,670.354
14,172,692
12,573.248,
13.132,243
13.126,719
2B.011 ,028
19,852.263
18,625.785
12,955,077
17.B23,228
14.440.372
18,925,383
13,346,467
lB,089,806
14,373.760
32.658,145
13,834.754
14,739,504
15,425.608
15,002.580
15.209.920
15,513,587
16.015,475
22,740.446
22,459,675
13,103,678
13.958.186 .
25.636,803
13,583,412
27,190,961
25,083.125
14,794,790
27.39'3,894
23,355,709

18.662.495
6.189,606
20.023,733
19,245,308
20,496,986
5,799.2J!2
16,036.oBB
20,157.568
19,468.372
19,m.27B
6.962.402
15.367.153
19,586.630
21.582.952
21.033.523
8.186.408
12.873.752
19.785.985
18.999.709
20.291.318
8.190,385
20.118,595
lB.776,068
19.196,002
20.174,902
33,504,627
31,116,721
19.381.251
16,542.575
17,236.343
17,390.B20
8.49B.237
14.B71.S73
14.329.2Bl
21,134.215
12.770.014
11,678.084
11.843,780
11,919.633
13,100.640
22.785,859
13,626,354
14,172,092
12.573,248
13.132,243
13,125,179
27,314,228
19,B52,263
18,571,385
12,756,671
17,B23.228
14.291.572
18,925.383
12,193,667
lB,089.B06
14.370.560
32,65B,145
13,554.994
14.734,304
15.425,608
15,002,580
15.096.320
15,513.267
15.789.875
22.740,446
22,459.675
12,9'35.390
13,782,186
25.555,203
13.551,812
27.190,961
25,034,325
14,792,390
27.399,794
23,355,709

20.800
4,891.040
4.800
23,200

28.000
5.720,400
0
0
6,400
0
4.350,400
0
0
22.400
0
4,211,675
0
100.000
1.600
250,000
4.148.800
0
21.760
0
4.051,200
()

49,600
0
20,BOO
1,600
0
3.216.160
0
0
2.724.800
36,800
59.200
276,800
132.800
0
776,832
44.000
800
0
0
1.600
696,800
0
54,400
198,400
0
148,800
0
1.152,800
0
3.200
0
279,760
5.200
0
0
113.600
320
225.600

0
0
108.288
176.000
Bl.Soo
31.600
0
48,BOO
2,400
100
0

0
272.320
0
0
0
B6,800
0
0
0
0
20,000
0
0
0
0
25.000
0
0
0
0
345,600
0
0
0
99.120
0
0
0
0
0
0
68,4BO
0
o X
20.800
0
2,400
50,400
0
0
50,784
0
0
0
0
0
71.200
0
B,ooo
16.000
0
0
'0
55.200
0
0
3.200
7.200
0
0
0
28.BOO
0
0
0
0
800
0
0
0
0
0
2,400
0
0

1,341.059.057

1.302.537. I 22

'38.521,935

1.234,504

1.974,208,217

1.781,103,827

193,104,390

20,460.604

DEPARTMENT

OF

TREASURY

THE

TREASURY

NEWS

~~/78~9~. . . . . . . . . .1I........................

................................

OFFICE OF PUBUC AFFAIRS • 1500 PENNSYLVANlAAVENUE, N.W.• WASHINGTON, D.C.. 20220. (202) 622-2960

FOR IMMEDIATE RELEASE
July 8, 2000

STATEMENT BY TREASURY SECRETARY LAWRENCE SUMMERS
AT THE G-7 PRESS CONFERENCE

I want to begin by sharing my perspective on today's meetings, and then I will be happy
to answer questions. In addition to our traditional review of developments in the world
economy, we focused on four broad issues as part of the preparations for the Summit meeting of
Leaders on July 21-23 - actions against abuse of the global financial system, international
financial architecture, poverty reduction and economic development and information technology.
First, there was considerable optimism among us about the prospects for global economic
growth - even in comparison to our discussions in April. This is striking compared to the
concern about slow global demand and weak job growth at the time of the last Summit in Japan
in 1993. At the same time, we all recognize that achieving and sustaining strong growth over the
medium term requires continued pursuit of sound macroeconomic and structural policies - in our
own countries and throughout other regions of the world.
We also met with our Russian colleagues and heard about their new program to deepen
macro-economic stabilization and advance structural reform. We urged them to come to an
agreement with the IMF on a strong economic program focused on structural reforms.
Second, actions against abuse of the global financial system. Clearly, the world economy
benefits enormously from the free flow of capital. But there is also a dark side to international
capital mobility, in that it can create new openings for the corrupting influence of money
laundering. The G-7 has recognized this reality and we have made it our priority to strengthen
our cooperation to tackle abuses of the international financial system.
In the past two months, we have taken three concrete steps toward this end. The FSF
published a list of offshore financial centers that follow lax regulatory and supervisory practices.
The OEeD listed jurisdictions that promote harmful tax competition. And the FATF just named
15 non-cooperating countries and territories that have failed to take adequate measures to combat
international money laundering.
LS-758

For press releases, speeches, public schedules and official biographies, call our 24-hour fax line at (202) 622-2040

Today, following on the heels of the FATF report, the U.S. joined our G-7 partners in
announcing the issuance of coordinated bank advisories to our domestic financial institutions and
called on these institutions to apply enhanced scrutiny to transactions involving the 15
jurisdictions that have not been cooperative in the international fight against money laundering.
Taken together, these actions demonstrate multilateral resolve to ensure that the global
mobility of capital remains a strong positive force for economic growth and prosperity around
the world. In addition, Ministers discussed the role of the international financial institutions in
the effort against money laundering and urged them to incorporate anti-money laundering
initiatives and assessments into their programs and to assist with members where money
laundering has been identified as a particular vulnerability. We also agreed to consider, in due
course, additional countermeasures with regard to jurisdictions that fail to join fully the
international fight against money laundering - including the possibility of conditioning or
restricting financial transactions with those jurisdictions and the support they receive from the
international financial institutions.
Third, international financial architecture. In the aftennath of the Asia crisis, we made it
a priority at the Cologne Summit to intensify our efforts to strengthen the international financial
architecture. Significant progress has been made - with countries moving away from "soft pegs"
to more resilient exchange rate policies, reducing short-term external debt burdens, building up
reserves and strengthening financial systems, in part by adopting internationally relevant
standards and codes.
Today, we agreed on a range of proposals that will build further on work already begun at
the IMF this spring. Most important, the G-7 agreed to a restructuring of IMF facilities to
provide for a more focused and selective financing role for the institution. Interest rates for nonconcessionallending would rise with the length of time loans are outstanding and with the
amount of resources made available above a certain threshold. The IMF's Contingent Credit
Line facility should be made far more attractive by reducing its interest rate and making access to
it in times of need more readily available. Medium-tenn lending through the Extended Facility
would be confined to well-defined cases in which medium-tenn structural reform is of central
importance. The Fund would also strengthen its post -program monitoring and encourage
countries to repay quickly once they are back on a sustainable path.
We also intensified our discussions ofMDB priorities and agreed on a framework for
concrete change going forward. Most important, poverty reduction must be the core role of the
MDBs. The focus of these institutions, particularly in the poorest countries, must be on highreturn investments - such as education, health and sanitation projects. The pricing of the MDBs'
hard lending windows needs review for reasons of incentives, reserve adequacy and concessional
resource mobilization. And the MDBs, particularly the World Bank, must step forward with
increased resources targeted to the battle against HIV /AIDs and other infectious diseases, as well
as in the provision of other global public goods. We believe the Bank should increase its income
and devote a larger share to this important priority. We also discussed President Clinton's AIDS
and Millennium vaccines initiative, with the other ministers expressing considerable interest in
our tax credit proposal to spur vaccine development.

2

Fourth, on the related issue of poverty reduction and economic development. Reducing
poverty and advancing global development is the greatest challenge we face. Experience has
shown that growth is the key ingredient for poverty reduction and in tum requires the pursuit of
sound policies. Debt relief can also playa key reinforcing role as part of the process of
establishing a virtuous circle of poverty reduction and development. We reaffirmed our
commitment to implementing the enhanced HIPe initr-ative. We want countries to benefit from
timely and deep debt relief. But it is also crucial to strike the right balance in providing debt
relief and ensuring that high-quality programs of poverty reduction and reform are fully
implemented. We have prepared an update for our Heads on the status of the debt initiative.
Fifth, information technology. We all agreed that IT holds great promise - among other
things for productivity growth, increased demand, and employment. The key issue we face is the
extent to which we are able to narrow the existing gaps among us in our ability to take advantage
of these technological changes and see them translated into higher potential growth rates, as they
have been in the United States. In this context, what is really important are regulatory incentives
the facilitate innovation, labor market flexibility and human capital investment that facilitates the
adoption of new technology, and financial markets that effectively mobilize finance for
innovation. The broader opportunities and challenges posed by information technology will also
be a key focus of our Leaders' discussions in two weeks.

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Fact Sheet On Money Laundering Advisories
July 8, 2000

Today, the U.S. joined our G-7 partners in announcing the issuance of Advisories to our
domestic financial institutions. As detailed in each Advisory, these Advisories call upon
financial institutions to apply enhanced scrutiny to transactions involving 15 nations whose
counter-money laundering systems we have found to be deficient. These same 15 nations were
identified last month by the Financial Action Task Force as being non-cooperative in the
international fight against money laundering. This coordinated, multilateral response to
international money laundering is a landmark step that reflects a new international commitment
to curb financial abuse around the world.
The Advisories that we are issuing are intended to notify our domestic financial institutions of
money laundering risks that they face in the identified jurisdictions, and to protect our financial
systems from the corrupting influence of money laundering. The jurisdictions that are the subject
of Advisories are as follows:
Bahamas
Dominica
Liechtenstein
Niue
Russia

Cayman Islands
Israel
Marshall Islands
Panama
St. Kitts and Nevis

Cook Islands
Lebanon
Nauru
Philippines
St. Vincent and the Grenadines

Each Advisory issued by the United States is based on an independent review the U.S. undertook
of each identified country's domestic counter-money laundering regime, and each Advisory is
tailored to the individual country -- both regarding the description of the problem and the actions
that financial institutions arc called upon to undertake.
Each Advisory will remain in effect until the identified country takes concrete steps to bring its
counter-money laundering regime into compliance with international standards. At that time, we
will revise or rescind the Advisory, as appropriate. With regard to those jurisdictions that
continue to refuse to join the international fight against money laundering, we will begin to
consider taking multilateral countermeasures in coordination with our G-7 allies - including the
possibility of conditioning or restricting financial transactions with those jurisdictions as well as
the support they receive from the international financial institutions.

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These Advisories are not sanctions, and it is not our intent to curtail legitimate business with any
of the identified jurisdictions. It is, however, our goal to curtail the access to our financial
systems that international money launderers have gained through inadequate counter-money
laundering regimes in other countries. We hope that our actions will encourage all the
jurisdictions concerned to take appropriate and urgent steps to improve their anti-money
laundering regimes. Along with others in the G-7, we ~ttach importance to maintaining an
ongoing dialogue with identified countries and territories and, where appropriate, providing
technical assistance to help them bring their anti-money laundering regimes into compliance with
international standards.
Taken together with recent actions by the Financial Stability Forum (categorizing offshore
financial centers according to their perceived quality of supervision and degree of regulatory
cooperation) and the OEeD (cracking down on harmful tax competition) FATF's action reflects
a new international commitment to curb financial abuse around the world. These measures are
crucial steps in the effort to ensure that global mobility of capital remains a strong positive force
for economic growth and prosperity worldwide.
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OffiCE OF PUBUC AFFAIRS -1500 PENNSYLVANLo\. AVENUE, N.W. - WASHINGTON, D.C .• 20220 • (202) 622-2960

Strengthening the International Financial Architecture
July 8, 2000
Progress to Date
Reduced vulnerability to crisis. Crisis prevention starts at the national level. With this in mind,
the international community has engaged in an intensive global effort to help emerging markets
reduce their vulnerability to crisis. Results are already evident in a wide range of emerging
market economies, where there are:
•
•
•

Stronger financial sectors, facilitated by concrete progress toward the adoption and
implementation of global codes of best practice.
More resilient exchange rate policies, as countries have moved away from the "soft peg"
approach that was at the heard of recent crises.
Substantial improvements in national balance sheet management, including reduced shorttenn external debt burdens and substantial increases in reserve cushions.

Increased transparency. Disclosure is the foundation of any well-functioning financial system.
The international community has made enhanced disclosure a major priority - resulting in
dramatic improvements in the quality of infonnation available to markets.
•

•

Major emerging market countries now make available a much broader array of infonnation
about their perfonnance and prospects, including reserves and related liabilities, external debt
burdens and overall policy programs.
International financial institutions both encourage and contribute to the increased flow of
information - releasing more details of their own operations, advice to governments, and
assessments of compliance with international standards and codes.

More effective crisis response. The institutions at the core of the international financial system
are now equipped with instruments to respond quickly and effectively to impending crises in a
manner that reduces moral hazard and helps restore the flow of private capital. The IMF and
World Bank can now provide large-scale resources, under exceptional circumstances and at a
higher rate of interest and shorter maturity, to help crisis-hit countries restore confidence and
begin recovery.
Appropriate private sector involvement. Rapid restoration of private capital flows is a crucial
ingredient of successful crisis response in today's global economy. The G-7 articulated in
Cologne a broad framework to guide official efforts to accomplish this goal. Consistent with the

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G-7 framework, the international community has applied a series of new approaches - from
Korea to Pakistan - for facilitating constructive involvement of private creditors in the resolution
of financial crises. Operational guidelines articulated in April will guide efforts going forward.
Reduced systemic risk. New cooperative approaches at the intemationallevel are now helping

raise standards, reduce systemic risk and create the conditions for stable capital flows. Initiatives
are underv,ray to revise the Basle Capital Accord to make it more sensitive to risk and to improve
risk management and disclosure in major financial institutions and highly leveraged institutions,
as recommended by the Financial Stability Forum.
Enhanced dialogue and consensus building. Emerging market economies are gaining an

increasing voice in the international system. The Group of20 provides new opportunities to
participate at the formative stage in the discussion of key economic and financial policy issues.
Agenda going forward
Equipping the IMF for the future. In Fukuoka, G-7 Finance Ministers laid out specific proposals

for change to advance the process of reform underway in the IMF.
•

A new structure for IMF lending to provide for a more focused and selective financing role
for the institution.
Interest rates for non-concessionallending would rise with the length of time loans are
outstanding and with the amount of resources made available above a certain threshold.
The interest rate for the Contingent Credit Line would be reduced below that for largescale, emergency lending, encouraging countries to take early action to prevent crises.
Countries that continue to meet ex ante conditions would be able to draw resources under
the Contingent Credit Line should contagion threaten their stability.
Medium-term lending through the Extended Facility would be confined to well-defined
cases in which medium-term structural reform is of central importance.
Greater emphasis on prior actions, limitations on access and strengthened post-program
monitoring would discourage undue and repeated reliance on Fund resources.
Once countries are back on a sustainable economic and financial path, they would be
encouraged to repay the Fund as quickly as possible.

•

A much stronger focus on preventing crises.
Regular publication of indicators of national liquidity and balance sheet risks, which are
already being incorporated as a systemic part of the IMF surveillance process.
A much more active role for the IMF in encouraging countries to adopt sustainable
exchange rate policies, with the presumption that the international community should not
provide large-scale official financing for a country intervening heavily to support an
unsustainable exchange rate level.

2

•

Strengthened safeguards on the use ofIMF resources.
Vigorous implementation of the new framework for safeguard assessments, strengthened
measures to discourage misreporting and the requirement that all countries making use of
Fund resources publish annual financial statements independently audited by external
auditors in accordance with internationally accepted standards.

•

Greater openness and enhanced accountability of the IMF itself.
Quarterly publication of the IMF's financial transactions plan and further steps to make
its financial operations and statements more understandable to the pUblic.
Expeditious establishment of a permanent independent evaluation office in the IMF.

Re·framing the priorities of the Multilateral Development Banks. Ministers also put fOlWard a
framework for concrete change in the MOBs. These proposals are based on their shared view
that:
•
•
•
•
•

Economic growth is indispensable for poverty reduction.
Effective lending depends on clear conditions.
The MDBs should playa lead role in providing global public goods.
MDB lending must not supplant private resources.
The MDBs must stand ready to respond quickly to temporary disruption of access to private
capital, in order to accelerate the return to markets and graduation from MDB assistance.

Consistent with this consensus, Ministers agreed to work to operationalize the following key
reforms.
•

Articulation of multiyear frameworks with clear commitments to increase support for core
social investment such as basic health and education, clean water and sanitation.
• Incorporation of clear and measurable performance benchmarks in lending and greater focus
on lending to borrowers that demonstrate strong performance.
• A comprehensive review of pricing under the hard-lending windows, including the merits of
differentiating pricing based on the type of operation financed.
• Dedication of greater MDB resources to global public goods, such as to fight infectious
diseases, support agricultural resources and tackle cross·border environmental problems.
• Increased emphasis on good governance, including systematic support for legal, institutional
and regulatory reforms, capacity-building and improved government accountability and the
rule oflaw.
• Greater transparency, public participation and accountability, particularly including release
of all country strategies and evaluation reports and increased effectiveness and accessibility
of independent inspection panels in all institutions.

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EMBARGOED UNTIL II :00 AM EDT
Text as Prepared for Delivery
July 10,2000
"TAX ADMINISTRATION IN A GLOBAL ERA"
TREASURY SECRETARY LAWRENCE H. SUMMERS REMARKS
TO THE 34TI1 GENERAL ASSEMBLY OF THE INTER-AMERICAN
CENTER OF TAX ADMINISTRATORS
WASHINGTON, DC
Thank you and welcome to the annual CIAT General Assembly. The USA is proud to be
your host in 2000. The theme for this year's event is "Tax Administration for the New
Millennium" This is a very relevant topic in light of globalization and rapid developments in
technology.
Tax administration has always been a national challenge. As Oliver Wendell Holmes
th
once said: "Taxes are what we pay for a civilized society." In the 19 Century when inter-state
commerce was taking off, we in the United States came to recognize that a greater degree of
interconnectedness between states also called for common institutions and understandings at a
national level.
The same is true today, to a celtain extent, at a global level. New technology and
globalization presents us all with the challenge of adapting our national institutions to meet the
needs of a changing world. ]n a world economy where capital is mobile but labor is relatively
immobile, we needed to develop common standards in order to prevent a damaging "race to the
bottom".
Today, I would like to discliss ho",,· we can act both to maximize the benefits of new
technology in terms of tax administration while at the same time minimizing the potentially
negative effects of both technology globalization by cooperating on an international leveL
Let me divide my remarks into three parts.
•

First, what we have accomplished in our etT0I1s to modernize the IRS with new technology.

•

Second, the importance of adapting our lax systems to an increasingly electronic world.

•

And third, the goal of ensuring that we maximize the benefits of globalization.

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I.

Modernizing the IRS

In the past decade and a half, an unprecedented number of countries in the Americas and
round the world have changed their governments towards the model of government by the
people. The next step is to ensure effective governmenrfor the people. Building an efficient and
responsive tax administration is an integral pan orthat challenge.
In the United States we have faced similar challenges in recent years. In 1996, we
realized that public confidence in the Internal Revenue Service was low and that there was much
room for improvement in the level of customer service. We have turned the situation around to a
large extent by taking advantage of new technology to provide better and more responsive
customer service.
In its new mission statement, the IRS pledged to fOCLlS 011 two core priorities "Providing
America's taxpayers top quality service by helping them understand and meet their tax
responsibilities, and applying the tax law with integrity and fairness to all"
As a result of the modernization and re-organization of the IRS, we have been able to
take advantage of new technology to provide a genuinely user-friendly and efficient service For
example:
•

In FY2000 electronic tax filing hit a new record with more than 35 million taxpayers filing
electronically - a 20 percent increase over last year. Over the same period, the number of
taxpayers filing self-prepared tax returns from their home computers grew by 44 percent to
7.6 million

•

The number of recorded hits on the IRS website rose by 15 percent to over 791 million in the
tax year that ended in May. This makes the IRS website one of the most frequently visited
sites on the Internet.

Clearly, we have much more to accomplish [ believe, that under the leadership of
Commissioner Charles Rossotti, the IRS will continue to build effective reforms around the
needs and interests of ordinary and law-abiding taxpayers partly through the use of new
technology It is also encouraging to hear that some of our pal1ners in the region are taking
advantage of new technology to improve customer service. For example, I believe that taxpayers
in Chile can now access their returns over the Internet
II.

Meeting the Clu,IIcllgc of E-ColllIII l'rcl'

The Internet provides new ways for ta\ administrations, slich as the IRS, to improve the
ease and transparency of tax collection. But ne"'.: technology also raises certain problems In a
world where cyber-transactions are growing at a rapid pace, tax administrations face the
challenge of adapting existing tax systems to all economy that increasingly ignores physical
borders.

2

In such a world, it will be easier for companies to avoid tax collectors by operating
worldwide through web-sites based in jurisdictions that are unwilling to share taxpayer
information.
Similarly, it will be increasingly easy for companies to avoid taxes by taking advantage
of different tax rules and tax systems that do not operate well together. We have seen that, for
example, in retail sales on the Internet, where companies have taken advantage of the fact that
sales taxes may not apply when sales are made from some jurisdictions but not others
Additional problems could arise from the increasing sophistication oflnternet encryption
codes that are established for valid reasons of commercial secrecy but can also be used to
conceal relevant tax details from tax administrations.
How can tax administrations best respond to these challenges?
Some have argued that we should respond to the challenge of e-commerce by suspending
taxes on Internet transactions. Others have suggested that we create new forms of tax that
specially target certain aspects of tile vil1ual economy. We reject both views The position of the
Clinton Administration is that tax administrations can and should provide an environment in
which e-commerce can flourish, while at the same time ensuring that the Internet does not
become a tax haven that undermines the revenues that allow public services to function
normally.
In 1996, the US and its main industrialized partners, agreed that there should be
intensified international cooperation through the OECD to ensure that we adapt our tax
administrations as smoothly as possible to a world increasingly driven bye-commerce. This
Administration's main objective in this regard is to work with both OECD and nOIl-OECD
partners to build an international consensus on the framework underlying any taxation of ecommerce. We are conducting an on-going dialogue to this end, with two principles in mind:
•

First, tax rules and tax administration should be neutral and non-discriminatory between ecommerce and non-Internet transactions. In our view, tax administrators and policy makers
can apply existing tax prinCiples to e-commerce, based upon international consensus on the
application of those principles. This ensures that any taxation of e-commerce will be guided
by the same principles of neutrality, etliciency; certainty, simplicity; effectiveness, fairness
and flexibility that govern other forms of commerce.

•

Second, international cooperatiDn should aim to prevent the eillergence of double taxation or
unintentional non-taxation of e-commerce. while maintaining the fIscal sovereignty of
participating countries. A key element of this clYort mllst be to minimize oPPol1unities for tax
arbitrage across borders.

Cooperation between national tax administrations is absolutely critical if we arc to adapt
to the new world of e-commerce At the same time it is il11p0l1ant that we listen to other groups
within and across national borders to make the transition slIccessful. We believe it is important to

..,
J

ensure, wherever possible, that revenue authority initiatives are integrated into overall
government policy and with private sector initiatives.
Under the leadership of Vice President Gore, this Administration has made enormous
progress in coordinating the views of both the private sector and various U.S government
agencies to ensure that the U.S government continues fb playa constructive role in shaping a
practical and realistic response to e-commerce tax issues.
III.

Promoting Cooperation to Maximize the Benefits of Globalization

It is a priority of the Clinton Administration to ensure that the otherwise positive forces
of global capital mobility do not undermine our national interests by facilitating increased tax
evasion or abusive tax avoidance. In a world where capital can silently traverse the globe at the
touch of a button, tax evasion and tax avoidance schemes can be undertaken just as easily and
just as quietly.

In the same way that it is critical that we build consensus to ensure that e-commerce does
not give rise to distortions in our national tax administrations, it is also important that we foster a
climate of cooperation among nations to combat tax evasion.
Let me highlight two areas where we have taken recent steps to further these important
goals:
•

First, at the multilateral level, the OEeD last month published a report of its work on harmful
tax competition. While the two lists included in the report have drawn widespread attention,
the real story from the DEeD's work is the commitment ofOECD members and six nonOECD members to cooperate with each other and eliminate their harmful tax practices. This
cooperation ultimately will provide new tools that will allow tax administrators to discover
and fully evaluate transactions that may be abusive. We encourage all countries that have not
yet made a commitment to eliminate their harmful tax practices to do so.

•

Second, at the national level, we arc Sllpp0l1ing a legislative proposal that would require the
reporting of payments to "identified tax havens," determined under criteria similar to that
developed by the OECD. Another measure would restrict certain tax benefits for income
flowing through such havens, In addition, banks based in tax havens that wish to be Qualified
Intermediaries under U.S regulations will have to comply with more rigorous requirements
than banks based elsewhere so that we can establish the identity of the beneficial owners of
interest income.

The OECD's work to date and oLlr unilateral initiatives are first steps in ensuring that Ollr
policy objectives can be realized without fear of eroding our tax base and creating distortions
that could undermine the substantial benefits that arise 1"0111 global capital mobility. Other
countries similarly will benefit from the ~EeD's work and arc in various stages of considering
and implementing their own rules to prevent the erosion of their respective tax bases.

4

For example, 29 non-members of the OECD met with OECD members in Paris last
month, and I am pleased to repolt that a strOllg consensus emerged lI·om that meeting regarding
the need to address globally the problem of harmful tax competition. It has been our experience
in the United States that many troubling transactions and tax shelters have been designed with
the aim of avoiding taxes in nOIl-OECD member countres rather than in the U.S.
In today's global environment, a country cannot develop its tax policy or administer its
tax Jaws without giving consideration to the actions of other jurisdictions. Further, our national
efforts to encourage and mandate disclosure are efTective only up to a certain point. In order to
uncover and properly evaluate transactions, we need to cooperate and work closely with the tax
administrators of all countries.

IV.

Conclusion

In conclusion, let me take this opportunity to congratulate CIA T on its impressive work.
The Department of Treasury strongly supports IRS's membership ofCIAT and we encourage
you in your continued efforts to build more effective tax administration systems and to share
information and experiences with one another
We all benefit from the development of more transparent and ctTective tax systems .And
we should make every effort to assist one another in ensuring that best practices are as widely
available as possible. It is also in all of ollr interests to ensure that we continue to work together
at the international level so that we can derive maximum benefits tr·om globalization.
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omCE OF PUBUC AFFAIRS • 1500 PENNSYLVANIA AVENUE, N.W.• WASHINGTON, D.C•• 20220. (202) 622-2960

Text as Prepared for Delivery
July 10,2000

REMARKS BY TREASURY DEPUTY SECRETARY STUART E. EIZENSTAT
COMMERCE DEPARTMENT BUREAU OF EXPORT ADMINISTRATION
UPDATE 2000

I am very happy to be here today. I have a deep and continuing interest in the
Export Control program, which was in my area of responsibility when I was at
Commerce. This program is an important part of the overall foreign and national security
policy of the United States. To administer it successfully, at a time of rapid changes in
technology and shifts in international trade patterns, is a difficult job. We are very
fortWlate that people with the skills and experience of Bill Reinsch, Scott Bunton, Roger
Majak and the members of their team are in charge ofthis program. And they rely on all
of you, not only to ensure compliance, but to give them practical input and constructive
suggestions from the viewpoint of our exporting finns.
The tenn sanctions is sometimes applied to different kinds of measures. There are
the broad embargoes on nations such as Iran, Iraq, Cuba, Libya, Sudan and Serbia that
deny those countries access to our markets, to the right to purchase our goods and
services, and to the economic benefits ofV.S. investment. There are also the narrowly
targeted prohibitions against new investment or the transfer of defined products or
technologies to some nations, to encourage them to take certain actions, such as abiding
by a human rights standard or nonproliferation rules, or because of the threat of a transfer
of sensitive military technology to nations of concern. Some observers would even
include in the definition of sanctions the withholding of U.S. support in loan or grant
decisions by International Financial Institutions, or on conditions we put on our own aid
programs when they are imposed to advance our foreign policy objections.
At the outset, I want to make it clear that while sanctions, by their nature, act to
restrict trade and investment, they do not represent the fundamental thrust of the
international economic policy of the United States. We seek to open markets, not close
them, encourage investment, not restrict -it. Last year, our exports of goods amounted to
almost $700 billion, of which less than 3 per cent went to controlled destinations.
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We are working actively to spread the benefits of globalization and technology, in
terms of higher living standards and greater economic opportunity, to peoples throughout
the world. Yet it is precisely because the world is growing smaller, with people, goods
and ideas moving ever more freely across borders, that those governments that flout
international norms, abet or practice terrorism, or traffic in weapons of mass destruction
pose a growing danger to international peace and economic progress. All nations need to
be alert, and act appropriately to counter these threats.
This Administration's position on the role of sanctions as a tool of foreign policy
has been clearly stated. Properly designed, implemented and applied as a part of a
coherent strategy, they are a valuable tool for enforcing international norms of behavior
and protecting our national interests. At the same time, sanctions are often blunt
instruments with unintended adverse consequences on innocent parties, as nations of
concern choose guns over butter. As a policy, economic sanctions are not a panacea nor
are they cost free. The decision to use sanctions must weigh these costs against their
anticipated benefits and, if possible, adjust the sanctions to reduce the potential adverse
impact on the civilian population. Indeed, used inappropriately, sanctions can impede the
attainment of our objectives and come at a significant cost to other U.S. policy goals.
The U.S. uses economic measures to pursue a broad variety of policy goals. National
security, non-proliferation, human rights, environmental protection, and combating
narcotics and terrorism are perhaps the most important. None of these is simple and their
costs and gains cannot be measured in dollars and cents on a spreadsheet. Nevertheless,
Americans expect that when their government does use economic sanctions, the measures
can be effectively implemented and enforced, will have a significant impact on those at
whom they are targeted, will not have a greater adverse impact on the U.S. itselfthan the
wrong they are trying to remedy, and that due consideration is given to the potential
adverse impact on American agriculture and business, as well as other U.S. interests,
including ties with our allies.
There are certain common sense principles this Administration is using in making
decisions on sanctions. First, we believe unilateral sanctions should generally not be the
initial, but among the last, measures taken when a foreign government or group acts in a
way that negatively affects our interests. We should first aggressively pursue other
diplomatic options. Depending on the situation, they can range from symbolic measures
at one end of the spectrum, such as withdrawing an Ambassador or denying visas to
target figures, to stronger responses at the other, such as entering into security
arrangements with neighboring countries. Generally, we should turn to sanctions only
after other, less conflictive options have failed, or are judged to be inadequate or
inappropriate.
The Thompson bill, S2645, currently being considered in the Senate, departs from
this approach. It is yet another example of an ill-conceived unilateral sanctions bill. In an
effort to impose mandatory sanctions on China for weapons proliferation, with a low
threshold of proof, it would diminish our ability to work with China on missile
proliferation; would punish China as a whole for the actions of private U.S. and Chinese
persons; and would threaten permanent nomlal trade relationships with that nation. It

2

would hurt our interests more than China's, by undermining confidence in U.S. financial
markets, threatening Chinese retaliation against U.S. financial services firms, and simply
lead to China doing business with our international competitors in dual-use products.
Second, we believe sanctions are most effective when they deprive the target country or
group of one or more of its critical needs, from armaments to key commodities, or of its
prestige and place in the international community."That, in tum, requires that they have
broad multilateral support, especially, though not exclusively, through the United
Nations. Last week's decision by the Security Council to ban international sales of
diamonds originating with the rebel forces in Sierra Leone is the most recent example of
this type of effort. The history of our own use of unilateral sanctions shows that by
themselves, in the majority of cases, they fail to change the conduct of the country
targeted, or, at best, are a contributory. but probably not decisive, factor in securing the
changes we seek. Multilateral sanctions, if applied broadly and consistently, maximize
international pressure on the offending state. It was multilateral sanctions that helped end
apartheid in South Africa, isolated Saddam Hussein in Iraq and limited his ability to
acquire weapons of mass destruction, brought Serbia to the bargaining table in Dayton,
and encouraged Libya to surrender the Lockerbie suspects for trial. In the global
economy of today, there are few products or services in which the United States is the
sole supplier. Our ability to unilaterally deny key economic benefits to a particular
country is therefore limited.
Third, sanctions should be narrowly targeted and we must carefully consider their
impact on companies from third countries. Sanctions that are both unilateral and
extraterritorial may often complicate our efforts to build the multilateral support that is so
important if we are to be truly effective in influencing the policies and behavior of target
states.
Nonetheless, where we do not succeed in building a coalition of like-minded
countries, and important national interests or core values are at issue, the U.S. feels it
must be prepared to act unilaterally, as we have done with respect to Cuba and Iran. We
understand that some countries that share our values and our views, for example, about
the dangers posed by states of concern may be reluctant to join in our initiative. But to
maintain our leadership role, the U.S. must sometimes act even though other nations do
not feel compelled to do so. Indeed, unilateral U.S. action may spur others to act as well,
or may parallel independent action by others. An example is the EU's sanctions program
against Burma, a nation on which the U.S. imposes its own sanctions because of its antidemocratic measures and human rights violations.
Fourth, Presidents should be given broad flexibility in any sanctions legislation
passed by the Congress. This is so the President can use sanctions flexibly to respond to
constantly changing and evolving situations and to balance competing national interests,
which only the President can do in his role as the Constitutional implementer of U.S.
foreign policy. The President should have the necessary authority from Congress,
including waivers, to tailor specific U.S. actions to meet our nation's foreign policy
objectives He must be able to trade off sanctions measures to get international consensus

3

for actions that may have a greater impact upon the sanctioned country, or even directly
negotiate with the sanctioned country to modify its behavior.
I was in charge of the negotiations with the European Union and Russia over
investments in Iran under the Iran and Libya Sanctions Act. Sanctions, if imposed, could
have badly impaired diplomatic and economic relations. But by using the project-byproject waiver authority, which Congress wisely built into the Iran and Libya Sanctions
Act, we were able to gain agreement from the EU to strengthen export controls on hi-tech
exports to Iran and aggressively fight terrorism. The Russians agreed to adopt, for the
first time, a catchall export control system. These actions directly furthered the basic goal
of1LSA. Without Presidential waiver authority, this would have been impossible.
Waiver authority was also key in my two extended negotiations with the ED over
Cuba sanctions. The Helms-Burton Act requires certain measures with respect to firms
that invest in property confiscated by the Cuban government. The first negotiation, in
1997, resulted in the EU taking a Common Position on Cuba which explicitly tied closer
relations to an improvement in human rights and democracy in that regime and cleared
the way for a series of Presidential waivers of sanctions under Title III of the HelmsBurton Act, which have thus far been exercised every six months by President Clinton, as
the EU has renewed and implemented its Common Position. In the second negotiation,
in 1998, the EU acknowledged for the first time that Cuba had confiscated U.S. property
in contravention of intemationallaw. The EU committed to restrict official government
support for investments by companies in illegally expropriated property and to refrain
from giving export and investment subsidies to any oftheir companies which are
investing in such property. This could have a much greater impact on restraining
investment in illegally expropriated property in Cuba than the Title IV visa sanctions.
However, implementation of this agreement is contingent on our obtaining waiver
authority from the Congress under Title IV of Helms-Burton.
Last month, the Supreme Court unanimously decided to strike down a
Massachusetts state law restricting state entities from buying goods or services from
companies doing business with Burma. The Court determined that the state law was
preempted by the Federal law which imposed sanctions on Burma thus violated the
Supremacy Clause of the Constitution. In that decision, the Court emphasized the
importance of waiver authority in a sanctions regime. It spoke of the "significance" of
"the express investiture of the President with statutory authority to act for the United
States in imposing sanctions ... augmented by the flexibility to respond to change by
suspending sanctions in the interest of national security."
In light of the general principles I have described, this Administration has worked
with Congress, both this year and last, on general sanctions refoml legislation. We
believe that, as part of such legislation, the President should be authorized to refrain from
imposing any unilateral sanction, and be able to suspend or terminate the application of
such a sanction on national interest grounds. So that Congress can play its Constitutional
role with respect to this decision, it would be notified of the President's decision to
exercise such a waiver and be able to disapprove of it, using expedited procedures. It is

4

important that the President have flexibility to avoid complicating our government's
efforts to deal with the situation which led to the sanctions. As Secretary Albright
succinctly put it, there can be no "cookie-cutter" or "one size fits all" approach to
sanctions policy.
Unfortunately, it now appears that comprehensive"Sanctions reform legislation will not be
enacted in this Congress. However, the Administration is closely watching deliberations
on the Senate and House bills to eliminate sanctions on agricultural and medical products,
even to terrorist-list states, and to subject new agricultural and medical sanctions to
requirements of prior notice and approval by both Houses of Congress. The legislative
outcome is uncertain because of efforts to exclude certain states such as Cuba and Iran
from the scope of the legislation or alternatively to tie the hands ofthe President in
administering sanctions policy.
The President believes that food and medicine should not be a tool of foreign
policy except under extraordinary circumstances. The measures now being debated in
Congress share in some respects the basic intent of actions already taken by the
Administration to open up fann exports when the President detennines that this is in the
national interest. Unfortunately, we have several concerns with the bill pending in the
House of Representatives. The prior notice and Congressional approval requirements
would severely restrict the President's flexibility to impose or retain agricultural and
medical sanctions, which might be justified in certain situations. There is no provision
for a Presidential waiver. The proposed definition of agricultural commodity is far
broader than the standard used by the Administration and could include products that
states of concern could sell to earn foreign exchange for weapons programs. The
licensing provisions for sales to terrorist state governments do not appear to give the
President flexibility with regard to exports to non-governmental entities in these
countries.
A fifth factor that guides our sanctions policy is that, in balancing the
considerations of which I have spoken, we try to be guided by the principle that our
purpose in applying sanctions is to influence the behavior of regimes, not to deny people
their basic human needs. Some regimes, such as that of Saddam Hussein, may choose to
buy guns instead of butter regardless of sanctions. In such cases, we seek to evaluate
approaches that may ameliorate the effect on the civilian population without jeopardizing
the purposes for which the sanctions were applied in the first place. The United Nations's
Oil for Food Program in Iraq, which we helped shape, exemplifies this concern.
While discussing general sanctions reform legislation with the Congress, the
Administration has recently taken steps under existing authority to maximize the
effectiveness of sanctions, while minimizing their harmful impact on innocent
individuals. Last year, for example, President Clinton announced we would generally
exclude agricultural products and commodities, medicines and medical equipment from
future unilateral sanctions, and from existing sanctions, where we have discretion to do
so. As a result, we have liberalized regulations on food and medicine exports to Iran,
Sudan and Libya.

5

As part of our policy to promote people-to-people ties with Cubans, we increased
the amount of remittances individuals can send to independent Cuban households and
allowed licensing of food sales to certain non-government stores and other entities.
Last September, after receiving assurances that North Korea will refrain from flight tests
of long-range missiles while efforts to improve relations continue, the Administration
began a process that resulted last month in the easing of some sanctions against that
country. The new rules concern consumer and non-sensitive exports. They will also allow
importation of most goods of North Korean origin, as well as personal remittances and
transport restrictions. The new regulations were published on June 19, but North Korea
will remain designated a terrorist state under our law and non-proliferation controls, so
relaxation of sanctions will not affect controls prohibiting exports of military and
sensitive dual-use items, some financial activities, and most U.S. government aid.
Last March, as a result of the growth of the reform movement in Iran, Secretary
Albright announced we would no longer bar imports into the United States of certain
foodstuffs and carpets from Iran. However, further changes in relations between Iran and
the U.S. are likely to evolve slowly and additional U.S. steps must be taken as part of a
reciprocal, balanced exchange between the two sides. The Secretary made it clear that
Iran's continued support of terrorism remains high on the list of our grievances and
reaffirmed that our Iranian sanctions are due, in part, to the fact that the authorities
currently exercising control in Tehran have financed and supported terrorist groups,
including those violently opposed to the Middle East Peace Process. "Until these policies
change," she said, "fully normal ties between our governments will not be possible and
our principal sanctions will remain."
These are some of the factors and national policy considerations that underlie
sanctions, including export controls. As you can see, they have been effective and
flexible policy tools. If they are to continue to be so, all parts of our government, as well
as private interests and non-governmental organizations must work together to see that
our use of sanctions is appropriate, coherent and designed to attract international support.
In that effort, as well as the implementation of our policies, we need and appreciate the
active participation of yourselves and your companies. Thank you.
- 30 -

6

PUBLIC DEBT NEWS
Department of the Treasury • Bureau of the Public Debt • Washington, DC 20239

TREASURY SECURITY AUCTION RESULTS
BUREAU OF THE PUBLIC DEBT - WASHINGTON DC
Office of Financing
202-691-3550

CONTACT:

FOR IMMEDIATE RELEASE
July 10, 2000

RESULTS OF TREASURY'S AUCTION OF 13-WEEK BILLS
91-Day Bill
July 13, 2000
October 12, 2000
912795EG2

Term:
Issue Date:
Maturity Date:
CUSIP Number:
5.900%

High Rate:

Price:

6.071%

Investment Rate 1/:

98.509

All noncompetitive and successful competitive bidders were awarded
securities at the high rate. Tenders at the high discount rate were
allotted 44%. All tenders at lower rates were accepted in full.
AMOUNTS TENDERED AND ACCEPTED (in thousands)

Compet i t i ve
Noncompetitive

$

24,271,751
1,248,406

$

42,880

42,880

25,563,037

8,504,398

3,973,927
7,120

3,973,927
7,120

Foreign Official Refunded
SUBTOTAL
Federal Reserve
Foreign Official Add-On
$

7,213,112
1,248,406
8,461,518 2/

25,520,157

PUBLIC SUBTOTAL

TOTAL

Accepted

Tendered

Tender Type

29,544,084

$

12,485,445

Median rate
5.885%: 50% of the amount of accepted competitive tenders
was tendered at or below that rate. Low rate
5.850%:
5% of tte amount
of accepted competitive tenders was tendered at or below that rate.
Bid-to-Cover Ratio = 25,520,157 / 8,461,518

= 3.02

1/ Equivalent coupon-issue yield.
2/ Awards to TREASURY DIRECT = $1,000,295,000

http://www.publicdebttreas.gov

LS-761

PUBLIC DEBT NEWS
Department of the Treasury • Bureau of the Public Debt • Washington, DC 20239

TREASURY SECURITY AUCTION RESULTS
BUREAU OF THE PUBLIC DEBT - WASHINGTON DC
Office of Financing
202-691-3550

CONTACT:

FOR IMMEDIATE RELEASE
July 10, 2000

RESULTS OF TREASURY'S AUCTION OF 26-WEEK BILLS
182-Day Bill
July 13, 2000
January 11, 2001
912795FN6

Term:
Issue Date:
Maturity Date:
CUSIP Number:
5.945%

High Rate:

Investment Rate 1/:

Price:

6.215%

96

.994

All noncompetitive and successful competitive bidders were awarded
securities at the high rate. Tenders at the high discount rate were
allotted 100%. All tenders at lower rates were accepted in full.
AMOUNTS TENDERED AND ACCEPTED (in thousands)
Accepted

Tendered

Tender Type
Competitive
Noncompetitive

$

19,360,760

$

2,571,765

2,571,765

23.282,791

7,502,791

3,734,247
428,235

3,734,247
428,235

Foreign Official Refunded
SUBTOTAL
Federal Reserve
Foreign Official Add-On
$

TOTAL

4,931,026 2/

20,711,026

PUBLIC SUBTOTAL

3,580,760

1,350,266

1,350,266

27,445,273

$

11,665,273

Median rate
5.935%: 50% of the amount of accepted competitive tenders
was tendered at or below that rate. Low rate
5.900%:
5% of the amount
of accepted competitive tenders was tendered at or below that rate.
Bid-to-Cover Ratio

= 20,711,026 /

4,931,026

= 4.20

1/ Equivalent coupon-issue yield.
2/ Awards to TREASURY DIRECT = $1.016,038,000

http://www .pu blicdebt. treas.gov

L5-762

DEPARTMENT

NEWS

OF

THE

TREASURY

CLIPS

.

~~~q~. . . . . . . . . . . . . . . . . . . . . . . . . .11

..........................

Compiled ill the OffICe of Public Affairs

FOR IMMEDIATE RELEASE
July 10,2000

STATEMENT BY TREASURY SECRETARY LA WRENCE H. SUMMERS
ON MEXICO

We welcome Mexico's announcement that henceforth it will treat its IMF standby
arrangement as precautionary, and that it is exploring with the IMF the possible early
repayment of all outstanding loans. Mexico's decision reflects its favorable prospects for
continued growth and stability due in large part to the sound policies of President Zedillo
and the Mexican economic team, including Hacienda Secretary Gurria and Central Bank
Governor Ortiz.
The change in Mexico's relationship with the IMP is consistent with our view that IMF
lending to countries that normally have access to international capital markets should be
only on a short-term basis. This represents a significant evolution of international
financial policy.
The U.S. Treasury and the Federal Reserve havc renewed the North American
Framework Agreement swap lines with Mexico and Canada for another year, through
December 2001.
-30-

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lS0() PENNSYLVANIA AVEr'WE, ~.W.· WASHIl\CTO\, D.C.· 20220· (202) 622-2960

D EPA R T 1\1 E N T

0 F

THE

T REA SUR Y

!.?8 9

omcr Of PUBUC AFFAlRS -1500 PENNSYLVANIA AVENUE. N.W. - WASIDNGTON. D.C.· 20220. (202) 622·2960

U.s. International Reserve Position

7/11/00

The Treasury Department today released U.S. reserve assets data for the week endingJuly 7, 2000.
As indicated in this table, U.S. reserve assets totaled $67,421 million as ofJuly 7,2000, down from $67,955 million as
of June 30, 2000.
(in US millions)

I. Official U.S. Reserve Assets

I

1. Foreign Currency Reserves 1
I. Securities

Euro
4,901

Yen
5,490

Ofwhich, issuer headquartered in the U.S.
b. Total deposits with:
bJ. Other centlilt banks and SIS
bii. Banks headquartered in the U.S.
b.iL Ofwhich, banks located abroad
biii. Banks headquartered outside the U.S.
b.iii. Of which, banks located in the U.S.
2, IMF Reserve Position

2

3. Spacial Drawing Rights (SDRs)
., Gold Stock 3

5. Other Reserve Assets

Jul~ 71

301 2000
67,955

2000
67,421

June

TOTAL

2

8.379

12,266

TOTAL

Euro

10,391
0

4,869

20,644
0
0

8,332

Ven

TOTAL

5,404

0

12.076

20,407
(

0

C
0
0

15,428

15,320

10,444

10,372

11,048

11,048

a

0

11 Indudes holdings of the Treasury's Exchange Stabilization Fund (ESF) and the Federal Reserve's System Open Market Account
(SOMA), valued at current market exchange rates. Foreign currency holdings listed as securities reflect marked-to-market values, and
deposits reflect carrying values.
2J The items, "2. IMF Reserve Position" and M3. Special Drawing Rights (SDRs)," are based on data provided by the IMF and are valued in
dollar terms at the offiCial SDRJdoliar exchange rate for the reporting date. The IMF data for June 30 are final. The entries in the table above
for July 7 (shown in italiCS) reflect any necessary adjustments. induding revaluation, by the U.S. Treasury to the prior week's IMF data.
3J Gold stock is valued monthly at $42.2222 per fine troy ounce. Values shown are as of May 31, 2000. The April 3D, 2000 value was
$11,048 million.

-764

10.273

(

ll.S. International Reserve Position (cont'd)
II. Predetermined Short-Term Drains on Foreign Currency Assets
June 30. 2000

July 7.2000
0

1 Foreign currency loans and secunties
12 Aggregate short and long pOSitions in forwards and
futures in foreign currencies vis-a-vis the U.S. dollar:

C

0
0
0

2.a Short positIons
2.b Long positions

3. Other

C

0

a

III. Contingent Short-Term Net Drains on Foreign Currency Assets
June 30. 2000
1. Contingent liabilities in foreign currency
1.a. Collateral guarantees on debt due within 1 year
1.b Other contingent liabilities
2. Foreign currency securities with embedded options
3. Undrawn. unconditional credit lines

July 7.2000

o

c

o

o

o

3.a With other central banks
3 b With banks and other financial institutions
headquartered in the U. S.
3 c. With banks and other financial institutions
headquartered outside the U. S.
~. Aggregate short and long positions of options in foreign
currencies vis-a-vis the U.S. dollar
4.a. Short positions

4.a.1. Bought puts
4.a.2. Written calls
4.b. Long positions

4.b.1. Bought calls
4.b.2. Wntten puts

o

NEWS

CLIPS

Compiled in the Office of Public Affairs

EMBARGOED UNTIL I OOo. A.M. (EDT)
Text as prepared for Delivery
July 12, 20.00

TREASURY ASSISTANT SECRETARY LEWIS A. SACHS
HOUSE COMMERCE SUBCOMMITTEE ON FINANCE AND HAZARDOUS
MATERIALS
Chairman Oxley, Ranking Member Towns, members of this Subcommittee, I
appreciate the opportunity to appear before you today to discuss RR 4541, the
Commodity Futures Modernization Act of2000
In November 1999, the President's WDrking Group on Financial Markets
presented its report CJve!'-lhe-('olllller DerivCltives Marke(s lIlId (he ('otl/mouity r;;xchal/ge
Act to the Congress. In this report, the Working Group, which is chaired by Secretary
Summers and includes the Chairmen of the Federal Reserve, the Commodity Futures
Trading Commission and the Securities and Exchange Commission. set forth a series of
unanimous recommendations designed to reform the legal and regulatory framework
affecting the OTe derivatives market The legislation before you today would enact
many of those important recommendations.
I would like to begin by providing some background on OTC derivatives and the
recommendations of the President's Working Group on Financial Markets I will then
turn to RR 4541 more specifically. including the bill's treatment of OTe derivatives,
regulatory relief for the futures exchanges, and the refclrlll of the Shad-Johnson
restrictions on the trading of single stock and narrow-based stock index futures
I.

OTe Derivatives and the President's \Vorking Group's Recommendations

Mr. Chairman. our financial sectl)r is the central nervous system of the American
economy As our economy and our rinancial markets have evolved over the past two
decades , so too have the needs of the tinancial
sector Most'
notably. ill an era of
.
globalization. volatility of interest rates. increased securitization and the grow1h of the
bond markets relative to the traditional loan markets, businesses and tinancial institutions
have required a more diverse and effective set of tools for managing risk.

LS-765

LSt500 PENNSYLVANIA AVENUE, N.W.· WASHINGTON, D.C.' 20220' (202) 622-2960

In that sense, the over-the-counter derivatives market has grown directly in
response to the needs of the private sector. An' OTe derivative is an instrument that
allows a party seeking to reduce its risk exposure to transfer that exposure to a
counterparty that wants and may be in a better position to assume the risk. This is an
important development that has significantly enhanced the ability of businesses to
manage their risk profiles, to compete more effect'ively in the global marketplace, and to
deliver more efliciently and at lower cost a wide range of services and products to the
American consumer.
Because of these rising demands, the notional value of global OTC derivatives
has risen more than five-told over the past decade, to more than $80 trillion according to
estimates produced by the Bank for International Settlements.
The benefits to the American economy of OTe derivatives would continue to
grow within a proper and appropriate framework of legal certainty For example

•

By helping businesses and financial institutions to hedge their risks more
efficiently, OTC derivatives enable them to pass 011 the benetits of lower product
costs to American consumers and businesses.

•

By allowing for t,he transfer of unwanted fisk, OTe derivatives promote the more

efficient allocation of capital across the economy, further increasing American
productivity.

•

By providing better

pricing information, OTC derivatives can help promote

greater efficiency and liquidity of the underlying cash markets that feed into a
stronger economy for all Americans.
•

And, by enabling more sophisticated management of assets, including mortgages,
consumer loans and corporate debt, OTr derivatives can help lower mortgage
payments, insurance premiums, and other linancing costs for American
consumers and businesses

Thus, OTC derivatives have the potential to bring imp0l1ant benefits to our
economy. It ,vas with the importance of OTe derivatives in mind that, last yeClr. the
Congress requested that the Working Group conduct a study of the OTe derivatives
market and recommend changes required to ensure that we continue tl) reap such benctils
In response, the Worbng Group developed its set

nfUIl<lllttllUlI';

recommenci(lTion:-;

designed to achieve fOllr objectives
•

First, to reduce systemk ris!;. in the (He deri\'(ltivl'S nwt-ket by remuving legitl
impediments to the development llr clearitlt! systems alld ensurlllg that those
systems are appropriately regulated

•

Stcond, to promote innovation in the Ole derivatives market by providing
legal certainty fix OTe derivatives and electronic trading systems. This would
strengthen the overall legal framework governing the Ole: derivatives market
and, in turn, wauld stimulate greater competition, transparency, liquidity, and
efliciency and deliver stronger benefits to US consumers and businesses.

•

Third, to p."oteet retail cllstomers by ensuring that appropriate regulations are in
place to deter unfair practices in all markets in which they participate and by
closing existing legal loopholes that allow unregulated entities to pursue such
unfair practices throug.h foreign currency transactions

•

And fourth, to maintain liS competitiveness by providing a modernized
framework that will lead those engaged in the financial services industry to
continue the operations of their businesses in the United States, and thereby
promote the continued leadership of American capita! markets.

Given the scope of the bill before you today - providing legal certainty to OTC
derivatives, reforming the Shad·Johnson Accord, and providing regulatory relief for
futures exchanges - today I would add a fifth important objective:
•

To protect the integrity of the markets underlying the derivatives in question in particular, the securities markets.

While seeking to accomplish these objectives, we need to recall that the
emergence of the OTC derivatives market has come during an era of unprecedented
economic strength and prosperity
It is to be expected that in times of distress some participants in these markets, as
in other financial'markets, will be adversely affected. The recommendations we have
made, and the provisions in this bill, will not prevent these situations from occurring, nor
are they intended to do so What needs to be protected, however, is the financial system
as a whole, and not individual institutions

We believe that our recommendations with respect to clearing and those designed
to enhance transparency and legal cenainry and to clarify the treatment of derivatives in
the case of bankruptcy or insolvency can contribute to enhancing the stability ()f the
system more broadly
II.

The Commodity Futun.-s l\1()(h-l'IIiz:ltiulI Act of 20110

Let me now turn to tilt: legislation before ~'Oll tlllL!,·. fiR '-1)-+ I ~flr Chairm:tn.
we believe that this bit,! incurporates many Llf ·the reculllnlclloatiun::; of the \\'llrkll1g
Group with respect to OTe derivatives ,,;lIicl1, if enacted. w()uld pl~1ll1Ote greater legal
certainty for these instruillellts and help In acil:ance the \N()lkill~ Grollp'~ other objecti,ts
In particular, with respect to legat certainty, we believe that this bill, with minor changes.
would strike the appropriate balance between allowing the economy to realize more fully

the benefits of derivatives and. at the same time, !!llsuring the integrity of the underlying
markets. providing appropriate protection for retail customers. and where possible. taking
steps to mitigate systemic risk.
Moreover. we believe that It IS IInportllnt to move forward with appropriate
legislation as soon as possible. A failure to act"in this area would risk a situation in
which the existing legal framework for our financial markets would lag significantly
behind the development of the markets themselves.

In the absence of an updated legal and regulatory environment. needless systemic
risk might jeopardize the broader vitality of the American capital 1l1arkets~ innovation
might be stifled by the absence of legal certainty; and American consumers might be
deprived of the benefits that a more appropriate legal framework would promote. We also
risk an erosion of the competitiveness of American financial markets, with an increasing
amount of business moving otTshore to jurisdictions in which the regulatory framework
has kept up with the pace of change.
With this in mind. l would like to address the three major areas of the bill:
•

First. the bill's approach to OTe derivatives;

•

Second. the provisions of the bill designed to provide regulatory relief for futures
exchanges; and

•

Finally, the provisions of the bill providing for the repeal of the Shad-Johnson
restrictions on the trading of single stock and narrow-based stock index futures.

OTC Derivatives
Let me first discuss the bill's provisions regarding OTe derivatives. H.R. 4541
would take significant steps toward achieving the Working Group's goals by enacting
most of our recommendations regarding OTe derivatives. While there are a few changes
which we would like to see enacted. slIch as amendments to the definition of eligible
contract participants and of excluded GOll1modity. we believe that the legislation takes an
appropriate approach to OTC derivatives and encourage the Congress to adopt these
provisions. Let me (ollch upon a few of the specific objt:ctivcs that this bill helps to
accomplish.
Fir.\·" H. R. 454 J would J1rtH'iC/(' /eKul n~rt((;II(I" The Working Group m~mbt:rs
spent several ml1nths studying and developing ,.eCl>lllnll!ndalion~ regarding the
appropriate status of OTe: derivatives under the Commodity Exchange ;\CI \\'t: !,xlIst:d
upon areas in which the need fi''))" change had been del11l1nstrilled in our markets

With regard to swap agreements, the Working Group soughl to remove the cloud
of legal uncertainty resulting ii'om questions about lhe entorceabilit\ of c.:ertair~ :i\\'ap
contracts in US" COUI1S. This uncertainlY resliited Ii'om a lack llf darily rl:~arding

4

whether the CEA applie~ to certain OTe derivative transactions. The CEA was designed
primarily to address issues of fraud. manipulation, and price discovery. Thus, the
Working Group unanimously recommended that the legal status of such contracts be
clarified by creating a statutory exclusion from the CEA for certain OTe derivative
transactions which do not require regulation for these public policy reasons, The
exclusion is limited to transactions involving qualified participants who do not require the
additional protections of the CEA. and the instruments subject to the exclusion generally
are not susceptible to manipulation, nor do they serve a primary price discovery function
at this time.
H.R. 4541 would establish such an exclusion for certain swap agreements and
thereby ensure that the U.S. OTC derivatives market can develop within the kind of
innovative and legally stable environment on which the continued competitiveness of our
financial markets depend,
Seconci, H.B. 4541 woultl pr(J1lit1e for tile tiel'efopment of ltppropriatefyregulated clearing/lOuse.... The Working Group's repon recommended that Congress

enact legislation to provide a clear basis for the development of appropriately-regulated
clearing systems for OTe derivatives. Well-designed clearinghouses can help to reduce
systemic risk: first, by diminishing the likelihoad that the failure of a single market
participant can have a disproportionate effect on the market as a whole; and second, by
facilitating the offsetting and netting of contract obligations. In addition to these benefits,
however, clearing .tends to concentrate risks and certain responsibilities for risk
management in a central counterparty or clearinghouse. Therefore. appropriate regulation
of clearing systems is essential to ensure that they indeed serve to mitigate systemic risk.
Under the 'Working G~oup framework. regulatory oversight could be provided by
the CFTC, SEC, a federal banking regulator, or by a recognized foreign regulatory
authority. depending on the structure of the clearinghouse and its activities.
H.R. 454! provides for the development of clearinghouses. and requires that they
be regulated. It thereby can provide the beneficial effects of reducing systemic risk by
encouraging the development of slich systems through the clarification of their legal
status and by subjecting them to appropriate Slipervision.

However. we believe that H R 4541 could be improv~d by clarifying the scope of
the SEC's authority to regulate c1earingllDlIses that clear securities and that also wish tn
clear OTe derivatives
Filwl(l', H. R. 4J41 !ukt',\' ;/IIf1or'ttllf .'ilep.'i IOWaI'd pro/cdill;: refail ('u.\'fol1lcrs.

The Working Group recoll1mendt:d thaI the CFTC be granted explicit authority to
regulate toreign currcncybucket shops and to prosecute such entities when they
attempt to defraud retail customers H.R 4541 provides such authority to the CFTC, thus
strengthening protection for small investors. Again, this is all area in which problems
have arisen, and the need for appropriate oversight clearly has been demonstrated We
are pleased to see 'these provisions incorporated in the bill

The Sbad-Johnson Accpl'd

Let me now turn to the section of the bill addressing reform of the Shad-johnson
Accord. The members of the Working Group agreed that the current prohibition on
single-stock and narrow-based stock index futur~s could be repealed if issues about the
integrity of the underlying securities markets and"regulatory arbitrage are resolved. Our
view remains unchanged
The provisions contained in this bill regarding futures on nOll-exempt securities
are a good starting point. although a number of issues remain unresolved. The bill
addresses some of the customer protection and enforcement concerns identified by the
CFTC, the SEC, and others as necessary conditions for repealing the prohibition on
single-stock futures. However. there are a number of concerns that the regulatory
agencies consider important, but that have not been resolved in the legislation. We hope
that the SEC and CFTC can provide specific comments on these issues in the near future
so that they can be incorporated into this bill.

In particular, certain issues related to the harmonization of margin requirements
will need to be clarified. While we do not see the need to establish margin requirements
in statute, it will be important for regulatOl)' authorities to establish margin levels that do
not encourage regulatory arbitrage or lead to a substantial increase in leverage in our
financial system.
While we have no objection to the introduction of single-stock or narrow-based
stock index futures, it is vitally important that the integrity of the underlying markets be
preserved, and that these instruments not be used as a means to avoid the regulations of
the cash markets .. Therefore, ';He continue to encourage efforts by the SEC and CFTC to
reach an agreement on a regulatory framework for these products that preserves the
integrity of the underlying securities markets. However, if these issues cannOl be resolved
on a timely basis, we believe that it is important to move forward with legislation
designed to clarify the legal certainty for OTe derivatives and to implement the other
recommendations of the Working Group.
Regulatory Relief
The third component of this bill addresses regulatory relief for the tllturl!S
exchanges The Treasury Department continues to support the view that it is appropriate
to review, from time to time, existllH! regulatory. strllctures ILl deh:rmine whetber thl!\·.
continue to serve v(did public policy functions. Like the OT(, markds. exchange trading
of derivatives should not be subject to regulatiolls that do i1llt ha'·c a public policy
justification. Broadly, we are supportive of the (FTC's e!Torts to provide appropriate
regulatory reI ief to the tlltureS exchanges, consistent with the publ ie interest Tot hi send.
the CFTC has recently released its regulatory reliefproposall"t)r public comment We \\ill
be submitting a formal comment letter on this proposal in the near future
~

~

6

There may, however, be unforeseen consequences to Ic!Kls/afiIiK such regulatory
relief. Once such provisions are written into law, the regulators will have no ability to
review and amend them should subsequent market developments \"'arran1 change or
should other problems arise. Again, we are supportive of appropriate regulatory relief for
futures exchanges, but suggest that certain aspects of that relief may be more
appropriately provided through administrative action.
III.

The Importance of Clarifying the Treatment of Financial Contracts in
Bankruptcy

Mr. Chairman. although not part of this bill. I would like to take this opportunity
to strongly urge Congress to adopt the President's Working Group recommendations
regarding the treatment of OTC derivatives and certain other financial contracts in cases
of bankruptcy or insolvency. Rarely are there tangible steps the government can take that
could have a meaningful impact on the mitigation of systemic risk. Enactll1g the
recommendations of the Working Group designed to clarify the treatment of these
instruments in bankruptcy is one of those steps: By establishing a framework through
which creditors and counterparties can work out a swift resolution in cases of bankruptcy
or insolvency, enactment of these recommendations can serve to reduce the impact of the
failure of any one institution on the stability of the system more broadly

IV.

Conclusion

In conclusion. Mr. Ch4lirman, we have an opportunity to advance legislation that
will create a modem legal and regulatory framework for OTe derivatives designed to
promote innovation. protect retail customers, reduce systemic risk. maintain U.S
competitiveness, and ensure the integrity of our markets. We look forward to working
with the members of this Committee, other members of Congress. and our colleagues on
the President's Working Group in an effort to further advance these important objectives
Thank you.
-30-

2826222611

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Page 23 of 30

NATIONAL CHURCH ARSON TASK FORCE

1'. O. Sor. 61798
Wa.>lIing'(ln, D.C. 205JO

CR

FOR IMMEDIATE RELEASE
TUESDAY, JULY 11,2000

(202) 514-2001
roD (202) 5]4-1888

WWW.USDOJ.GOV

INDIANA MAN PLEADS GUILTY TO SETTING 26 CHURCHES ABLAZE
WASHINGTON, D.C_ -- A Yorktown. Indiana man pleaded guilty today to setting 26

churches on fIre in eight states between 1994 and 1999, the Justice Department announced.
Jay Scott Ballinger, 38, pleaded guilty in U.S. District Court in Indianapolis to 29
criminal coun.ts contained in ten separate indictments and informations that were unsealed today.
Specifically, Ballinger pleaded guilty to one count of conspiring to bum a church, six counts of
burning a bui lding in interstate commerce, 20 counts of damaging a religious property and two
counts of using fire to commit a federal felony.

fA list of the charges is attached.]

Today's plea follows a nationwide investigation conducted by the Federal Bureau of
Investigation and the Bureau of Alcohol, Tobacco and Firearms. investigators from the Indiana
State Fire Marshal's Office, numerous state and local fire investigators around the United States,

and the Nationa1 Church Arson Task Force (NCATF).
"The rampage that resulted from the destructive acts of this one individual has ended,"

said Bill Lann Lee, Acting Assistant Attorney General for Civil Rights, and Co~Chair of the
NCATF. "These crimes \.Iiill not be tolerated, and the federal government remains steadfast in
our cooperative efforts to prosecute each and every one of these incidents to the fulJest extent of

the law."
"Today's plea represents the laTgest number of fires charged to any single defendant since

LS - 766

President Clinton fOimed the NCATF," said James E. Johnson, Treasury Under Secretary for
Enforcement, and Co-Chair of tile NCI\.TF. "This case demonstrates the impact of our
collaborative effOlts. With more than 900 church fires investigated since 1996, the NCATF
success rate is more than double the national solve rate for all arsons. The investigators,
prosecutors, and state and local authorities should be commended for their efforts."

"The dots were connected in this case due to timely communication between state and
federal agencies. And the picture came into focus thanks to the cooperation of law enforcement
agencies at aU levels across the country," said Timothy M. Morrison, United States Attorney in
Indianapolis.
With the exception ofthe church arsons occurring in the Southern District ofIndiana, all
of the other cases were previously filed in their respective districts. The cases were then

transferred to the Southern Distl'ict ofIndjana based on an agreement that Ballinger would plead
guilty to all charges at a hearing scheduled in the Southern District ofIndiana.
According to the plea agreement unsealed today, the Justice Department will recommend
that Ballinger be sentenced 10 more than 42 years in prison.
Ballinger still faces federal charges in the Northern and Middle Districts of Georgia for
setting five church fires in Georgia in December 1998 and January 1999, including one in which
a firefighter was killed while on duty. Ballinger will be transported to Georgia to face the
charges there following his sentencing in Indiana. Taday's gUilty plea in Indianapolis covers all
other federal charges currently pending against Ballinger.
According to the plea agreement, Ballinger grew up in the Yorktown, Indiana area and
traveled extensively throughout the COlUltzy during his adult life, studying and practicing his

religious beliefs as a Luciferian. He frequently expressed his hostility toward organized

Christianity. signed individuals he met to contracts with the devil, and tenned himself a

missionary of Lllcifer. In late 1993, Ballinger began traveling with an 18-year-old woman
named Angela Wood. 'NOile living in motels with Ballinger, Wood obtained short tenn
employment as a nightclub dancer at "arious locations to pay their living expenses. Wood also
assisted Ballinger in selting many of the church flres, primarily acting a<; a lookout so that
Ballinger would not be spotted setting the fires.
According to the papers, most of the fires Ballinger set were started late at night or early
in the mornin.g at isolated rural churches. On most occasions, Ballinger broke a window at the

side or back of the church, poured a flammable rnix1Ure (usually gasoline) into the church, set the
flammable mixture on fire with a lighter, then left the area.
The first church atson committed by Ballinger and Wood was at the Concord Church of
Cluist, Lebanon, Indiana on January 10, 1994. The church was an approximately 100 year old
white frame chuTch which was depicted in the opening scene of the movie "Hoosiers."
Angela Wood pleaded guilty in November] 999 to one COllllt of conspiracy to commit
arson and church arson, one count of arson of a building ill interstate commerce, four counts of
church arson and one count of use of fire to commit a federal felony. Wood is cooperating with
the government in the cases against Ballinger and will be sentenced by Judge Barker following
the completion of Ballinger's cases in the Southern District ofIndjana.
In a related case, Donald Puckett of Lebanon, Indiillla, pled guilty and was sentenced in
September 1999 to an arson charge for assisting Ballinger and Wood in setting the Concord
Church of Christ Fire in January 1999. Puckett is currently serving a 27 month sentence of
imprisonment for his conviction, and is cooperating with the government.
BalUnger is currently detained in the Marion County Jail in Indianapolis pending

2826222611

from: Department OF Treasury

08/23/00 05:30 PM

PaCJe Z3 of 30

sentencing in these cases. United States District Court Judge Sarah Evans Barker will set a
sentencing dale within 70 days.
The National ChUTCh Arson Task Force was established by President Clinton in June
1996 and continues to investigate arsons at houses of worship. The NCATF represents a
coordinated effort of local, state and federal agencies, led by the Departments of Justice and
Treasury, to investigate and prosecute arson attacks on houses ofworsbip, as well as assist
communities in the wake offires. The other federal agencies include HUD, the FBI, the ATF,
the Federal Emergency Management Agency (FEMA), and the Community Relations Service.

As reported in the Third Year Report of the NCATF, released in January, the Task Force
had opened iJ)vestlgations into 827 arsons, bombings and attempted bombings that occurred at

houses of worship between January 1, 1995 and October 5, 1999. federal, state and local
authorities have arrested 364 suspects in connection with 294 incidents. The NCATf's 35.6%

arrest rate is more than double the rate of arson arrests nationwide.

###

00-391

2026222611

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08/23/00

05:30 PM

Page ZJ of 30

NATIONAL CHURCH ARSON TASK FORCE

P. o. Bo.I 65798
WaShlllglOn, D. C. 205JO

SEPARATE INDICTMENTS AND INFORMATIONS RELATED TO
JA. Y SCOTT BALLINGER GUILTY PLEAS ON JULY 11.2000

Soulh1ml District of Indiana

1 count conspiracy to commit arson / church arson
3 counts arson of a building in interstate commerce
8 counts church arson
2 counts use offlIe to commit a federal felony

Eastern District of Termessee

1 count church arson

Central District of California

1 count arson of" building in interstate conunerce

Western District of Kentucky

4 counts church arson

Eastcm District of Yrissouri

I count church arson

District of South Carolina

1 count church arson

Northem District ofIndiana

1 count arson of a building in interstate commerce
2 counts church arson

Southern DisLrict of Ohio

1 count arson of a building in interstate commerce
1 count church arson

Northem District of Alabama

1 count church arson

NorJlem District of Ohio

1 count churd} arson

2926222611

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05:30 PM

Page 23 of 30

NATIONAL CHURCH ARSON TASK FORCE

CHURCH ARSONS TO WHICH JAY SCOTT BALLINGER PLEADED GUlL TV
JULY 11,2000:

January 10,

19~14

March 1, 1994

Concord Church of Christ
Lebanon,lN

November 20, 1998

Bethel Mis~jonary Baptist
Church, Fillmore, IN

Liberty Baptist Church

November 27, 1998

Christian l.iberty Church
Sheridan, IN

Church of God at Angola
Angola, IN

December 20, 1998

Mt. Eden Christian

Maranatha Baptist Cburch

Dece.mber21,1998

Bolton Schoolhouse
Missionary Baptist
Church. Bonnieville, KY

First Eminence B<lptist
Church, Eminence, IN

December 22,1998

South Shore American
Baptist Church
Dana Point, CA

Little Hurricane Primitive
Baptist Church
Manchester, TN

January 17,1999

Cedar Grove Baptist
Church, Franklin, KY

Sunlight Baptist Church
Eastaboga, AL

January 18,1999

Pleasant Hill Methodist
Church, Elkton, KY

Arm Oak Baptist Church
Hardeeville, SC

Jaouary 18,'1999

New Harmony Baptist
Church, MorgantolNTl, KY

Sumach United Methodist
Church, Wardel~ MO

January 23,1999

Otterbein United Brethren
Church, Rockford., OH

January 25, ] 999

Stidham United Methodist
Church. Lafayclte, TN

January 30, 1999

Wabash Primitive Baptist

Kemplon, IN
July 1, 1994

July 8, 1994

Church. Little York, IN

Versailles, OH
July 11, 1994

September 25, 1995

October 27, 1996

December 22, 1996

July 28, 1997

November 13, 1997

April 21, 1998

Milledgeville United
Methodist Church
Milledgeville, IN
Hawcreek Missionary
Baptist Church
Hope, TN

Church, HW1[ington, IN
February 6, 1999

June

ro,

1993

Grace Baptist Church

Coatesville, IN
July 25, 1998

New Liberty
Congregational Chrishan

Church, Lynn, rN
September 10, 1998

Eb~C:Ltr Presbyteriun
Church, Lewisville, IN

Community United
Methodis[ Church
Brookville, OB

D EPA R T ~I E N T

0 F

THE

T REA SUR Y

NEWS

lREASURY

omCE OF PUBUC AFFAIRS • 1500 PENNSYLVANIA AVENUE, N.W.• WASHINGTON, D.C .• 20220 • (202) 622-2960

FOR IMMEDIATE RELEASE
July 12, 2000

Contact:

John Longbrake
(202) 622-2960

IMF CONCLUDES ARTICLE IV CONSULTATION WITH THE UNITED STATES

The Treasury Department today published the concluding statement by the staff of the International
Monetary Fund for this year's Article IV Consultation with the United States.
In the statement, the IMF staff highly commends the U.S. Administration and Federal Reserve for their
accomplishments, noting that: "Sound monetary and fiscal policies have contributed to making the current U.S.
economic expansion the longest on record." The IMP staffalso underscores that the federal fiscal balance has
improved steadily since 1992 and that consecutive fiscal surpluses were recorded in 1998-99, the first time in
more than 40 years. In this regard, the staff state: "The favorable fiscal outlook, rising national saving, and low
inflation have laid the foundation for strong investment spending which, in turn, has facilitated high rates of
growth in both productivity and real income."
The IMF staff also notes the importance of the U.S. expansion to the global economy. "The strength of
the U.S. economic expansion played a critical role in supporting world economic growth during the period of
turbulence in 1997-98, and it has also provided significant support to the global recovery that now appears to be
well underway." However, the IMF also takes the view that the growth in U.S. domestic demand in excess of
supply and the perceived attractiveness of the investment environment have been reflected in a large and
growing external current account deficit. In the view of the UviF staff, appropriate policies in our major trading
partners to promote sustained expansion of their economies as well as U.S. policies aimed at sustaining
noninflationary growth are necessary to produce a smooth rebalancing of global demand.
Release of this statement is consistent with a broad effort by the United States to enhance the
transparency of the 1Mf'. In recent years, approximately 80 percent of the IMP's members have begun
publishing Public Information Notices for Article IV consultations. The United States is also part of a pilot
project established by the IMF's Executive Board to allow countries to release the staff reports on their Article
IV reviews. Nearly fifty countries and regions, including the United States, have already published staff reports
on their Article IV reviews and many more plan to do so. The United States expects to release this year's staff
report in late July after it has been reviewed by the Executive Board.
-30-

LS -767

For press releases, speeches, public schedules and official biographies, call our 24-hollr fax line at (202) 622-2040

INTERNATIONAL MONETARY FUND
2000 Article IV Consultation with the United States of America
Statement of the Fund Mission

July 2000
I.
Sound monetary and fiscal policies have contributed to making the current U.S.
economic expansion the longest on record. The federal fiscal balance has improved steadily
since 1992, and budget surpluses were recorded in 1998 and 1999, the first time in more than
40 years that there were consecutive surpluses. Government debt held by the public has
declined sharply as a share of GOP, and a continuation of current policies holds the prospect
of eliminating the public debt early in the next decade. Monetary policy has helped the U.S.
expansion to maintain its footing through a number of shocks, while inflation remains low
and unemployment has fallen to levels not seen in 30 years. The favorable fiscal outlook,
rising national saving, and low inflation have laid the foundation for strong investment
spending which, in tum, has facilitated high rates of growth in both productivity and real
income. The u.s. authorities are to be highly commended for these accomplishments.
2.
The strength of the U.S. economic expansion played a critical role in supporting
world economic growth during the period ofturbulence in 1997-98, and it has also provided
significant support to the global recovery that now appears to be well underway. This growth
in U.S. domestic demand in excess of supply has been reflected in a large and growing
external current account deficit. At the same time, large external surpluses in Japan and, to a
lesser extent, in the euro area have emerged. The sustainability of the large U.S. current
account deficit hinges on the ability of the United States to continue to attract sizable capital
inflows. Up to now these inflows in large part have reflected the perceived attractiveness of
the U.S. investment environment, but such perceptions are subject to continuous reappraisal.
If the uneven pattern of world growth which has prevailed in recent years were to persist
much longer, it would raise concerns that external imbalances among the major economies
would widen further, increasing the risk of an abrupt reversal with potentially adverse
consequences worldwide. Signs of stronger growth in the euro area are encouraging. but
prospects for a significant pickup in demand in Japan are still unclear, and appropriate
policies in these countries will be needed to promote the sustained expansion of their
economies. In the United States, the policies that will best serve the key U.S. domestic
objective of sustaining noninflationary growth will also contribute to a smooth rebalancing of
global demand.
3.
The strength of U.S. aggregate demand has been supported by rising real incomes,
enhanced profitability, and rapidly growing household wealth-all of which are closely
related to the surge in productivity experienced in the United States in the second half of the
1990s. This productivity surge also has been a primary factor underlying the attractive
investment environment in the United States, drawing in substantial flows of capital, pushing
up the value of the dollar, and contributing to a sharp widening of the current account deficit

-2-

The sustainability of current high stock market valuations will depend to a considerable
extent on how prolonged will be the factors underlying the surge in productivity growth, and
thus the outlook for corporate earnings. Capital deepening and the diffusion of information
technologies appear to underlie much of the increase. At this juncture. there is no way of
knowing how long this process might continue to support these high levels of productivity
growth. with their associated favorable effects on real incomes. profits, and wealth.
Nevertheless. it is clear that continued domestic demand growth at a pace well in excess of
the productivity-driven increases in potential output is not sustainable. Ifnot reined in, such
rapid demand growth threatens to undermine the prospects for sustained noninflationary
growth.
4.
In these circumstances. the IMF statfbelieves that the principal policy priority for the
United States in the near term is to ensure that the pace of aggregate demand growth is
brought back in line with the economy's potential growth in supply in order to keep inflation
in check. The prospect that those factors which have helped to contain inflationary pressures
over the past few years-such as restrained growth in employee benefits and weak import
and non-oil commodity prices-may begin to reverse adds to the need for decisive policy
action to slow demand growth. The Federal Reserve has acted appropriately. raising shortterm interest rates by a further 50 basis points at the May FOMe meeting. Although it did not
raise the federal funds rate further in June. the FOMe indicated its concern that the risks
going forward continued to be mainly weighted toward conditions that might generate
heightened inflationary pressures. The IMF staff believes a further tightening of monetary
policy will be required to ensure that inflation remains under control. How much more
interest rates will need to be increased will depend on how the economy responds to past and
subsequent steps to tighten policy, and whether there are additional indications of emerging
wage and price pressures in the period ahead. Although tighter U.S. monetary policy wiJI
inevitably have spillover effects on the rest of the world, including for the cost of financing
in the emerging market countries, the impact would be even more detrimental for these
countries if the U.S. authorities were to delay a policy response and subsequently needed to
tighten monetary policy more sharply once inflationary pressures had strengthened.
S.
Fiscal policy also has an important role to play in restraining domestic demand
growth in the near term. Preserving the fiscal surpluses in prospect entails the withdrawal of
a significant stimulus to demand, whereas measures to substantially cut taxes or raise
spending would add to demand at an inappropriate time and thereby jeopardize the continued
noninflationary expansion of the economy. Indeed. a tightening of the fiscal stance would
alleviate the burden on monetary policy, and reduce some of the upward pressure on U.S.
interest rates that could increase the dollar's value and exacerbate global current account
imbalances. By helping to raise the level of national saving, maintaining a tight fiscal
position would also help to ensure an orderly correction in the current account imbalance and
in the real value of the dollar over the medium term. Moreover, although the underlying
fiscal position appears to be very solid, the simple fact that changing economic conditions
could significantly alter medium-term budgetary prospects argues strongly for caution in
introducing new expansionary fiscal measures; it would be better to use stronger-thanexpected fiscal surpluses to pay down the public debt more rapidly.

-3-

6.
To ensure that budget discipline is maintained, the Administration in its FY 200 I
budget proposes to extend through FY 2010 the discretionary spending caps and the PAY GO
financing requirement. These budget enforcement mechanisms have played an important role
in the improvement in the fiscal position since 1992. Under the Administration's proposal,
the discretionary spending caps would be raised in FY 2001 to reflect currently enacted
levels of spending and to ensure that adequate levels of basic government services are
maintained. Thereafter, the caps would rise roughly in line with inflation~ PAYGO would be
extended without modification. The IMF staff agrees that adjustments are necessary to make
the discretionary spending caps more realistic; however, once this has been done and these
budget enforcement mechanisms have been extended, the discipline imposed by the caps and
PAYGO should be re-established.
7.
In the FY 2001 Budget, the Administration continues its practice of proposing small
targeted tax ,cuts to promote specific economic and social objectives. Repeated resort to such
tax expenditures adds to the complexity of the tax code, undermining transparency and
increasing compliance costs. The IMF staff continues to take the view that the authorities
should limit recourse to the use of targeted tax cuts. The underlying objectives of most of the
measures proposed might better be addressed through spending programs
8.
The Administration's intention to preserve a substantial portion of the budget
surpluses in prospect under current services over the longer term is laudable, and the IMF
staff welcomes the view recently expressed by the Secretary of the Treasury that there is a
compelling argument for establishing as a medium-term fiscal policy objective the
elimination of the net government debt held by the pUblic. Elimination of the public debt
would be an important step in preparing the federal government for the coming long wave of
unfunded liabilities associated with the aging of the population, as the first of the baby-boom
generation starts to retire around 2010. Indeed, to meet these obligations fully, the overall
fiscal position may need to remain in surplus for a while even after the public debt has been
retired. In this context, the IMF staff believes that a reasonable medium-term fiscal policy
objective could be to adopt measures to eliminate the actuarial imbalances facing Social
Security and Medicare Hospital Insurance (HI), and then attempt to keep the remainder of the
budget roughly in balance on average over the business cycle. This might be facilitated if
revenues and expenditures of Social Security and Medicare HI were more formally separated
from the rest of the federal budget, in order to help mitigate pressures to divert surpluses in
these programs to other uses.
9.
The Administration's plan for strengthening the long-term financial outlook of Social
Security and Medicare shores up their future economic viability by reducing the public debt
and by transferring on-budget resources to the programs. Such resource transfers could risk
softening budget constraints that have helped over the years to restrain spending, although
this risk might be reduced by the Administration's proposal to link these transfers to part of
the interest saving from retiring the public debt. However, once the precedent was set, it
could be easier to justify transfers to finance extensions of benefits. In the view of the IMF
staff, relatively small adjustments in the parameters of both the Social Security and Medicare
systems (such as a combination of small payroll tax increases and benefit cuts), if put in

-4-

place soon, would be sufficient to meet the future liabil ities of the programs based on current
estimates of these liabilities. Particularly in the case of Medicare, however, it has to be
recognized that, because of the uncertainties associated with projecting future health care
costs, additional periodic adjustments to the program's parameters are likely to be required,
and a mechanism for routinely making such adjustments will need to be established. The
IMF staff also takes the view that it would be better for the Administration to ensure that the
current long-term financial shonfall is fully addressed before adopting new Medicare
benefits.
Although at present the authorities do not see major vulnerabilities in the banking
sector that might contribute to triggering a downturn in economic activity, they have been
prudently cautious in their supervision of banks, and the IMF staff is impressed by their
determination not to be complacent. Any downturn in the economy will inevitably produce
some financial distress as falling incomes and profits create debt-servicing difficulties for
some households and businesses. In this context, the IMF staff strongly supports the
authorities' efforts to be pre-emptive and to limit the scope of such potential future financial
distress by appropriately cautioning bank lending officers against loosening lending
standards and making loans on the basis of the tenuous assumption that current favorable
economic conditions will continue uninterrupted.
to.

11.
The 'Gramm-Leach-Bliley Act represents a much needed overhaul of the badly
outdated laws regulating the financial sector in the United States. The expanded opportunities
for new financial holding companies to engage in banking, securities, and insurance activities
and the new regulatory supervisory structure provided for under the law pose significant new
challenges. In particular, although the Act provides broad guidelines, it does not specifically
layout how the supervisory responsibilities of the Federal Reserve, the other federal banking
agencies, and the nonbank functional supervisors (including the Securities and Exchange
Commission, the Commodity Futures Trading Commission, and the state-level insurance
commissioners) are to be implemented in practice. To address concerns raised by some
market participants about this division of responsibilities, the Federal Reserve is working to
adapt its supervisory approach to ensure it is fully effective; to work more closely with other
supervisory agencies; and to avoid an extension of the banking safety net The authorities
have rightly emphasized that the central supervisory challenge will be to ensure that the
large, more complex financial institutions that are emerging have sufficiently robust riskmanagement systems. They have also indicated their interest in making more use of market
information and discipline in supervising financial institutions In this context, one possible
approach that is being considered by the authorities is to require the regular issuance by large
banks of a uniform subordinated debt instrument
12.
The strength of the US. economy has generally helped to contain protectiomst
pressures, even in the face of a strong dollar and the weakness of economic activity abroad
Nonetheless, US. antidumping (AD) and countervailing duty (CVD) actions increased In
1998 and 1999 It is in the interest orboth the United States and the international community
that protectionist pressures be strongly resisted. As a general rule, the Administration has
stressed the importance of, and has taken measures aimed at, enhancing market competition

- 5-

throughout the economy. Consistent with this policy approach, the IMF statfbelieves that the
implementation of AD/CVD trade remedies should not be used as a means of inhibiting
market-based competition from imports. To this end, a change in procedures is called for,
such that import protection would be provided only in those cases where foreign producers
were found to be engaged in anticompetitive behavior.
13.
The United States should continue to be a major force for the further liberalization of
world trade through efforts to initiate a new round of multilateral negotiations and in the
sectoral negotiations currently scheduled in the areas ofagriculture and services. The United
States has also worked constructively with authorities in other countries to reach a pragmatic
solution to improve the functioning of the dispute-settlement mechanism, which is an
essential element in the WTO's rules-based approach to international trade. The
improvements in market access provided in the African Growth and Opportunity Act and in
the Caribbean Basin Initiative are useful steps to enhance growth prospects for the countries
of these regions, and the IMF staff encourages the authorities to broaden further duty-free
access to the U.S. market for the least-developed countries.
14.
Official development assistance (ODA) rose slightly in 1999 to 0.1 percent of GNP,
but remains near its recent historical low level. Under the FY 200 1 Budget, 00 A would
remain at this low level over the five-year budget horizon. The IMF staff urges the authorities
to make further efforts to raise foreign assistance.

D EPA R T :\1 E ~ T

'IREASURY

0 F

THE

T

J{

E A S LJ R Y

NEWS

ornCE OF PUBUC AFFAIRS .1500 PENNSnVANIA AVENUE, N.W
. •• WASHINGTON, D.C•• 20220. (202) 622-2960

FOR IMMEDIATE RELEASE
July 12, 2000

STATEMENT BY TREASURY SECRETARY LAWRENCE H. SUMMERS
ON ENHANCED III PC DEBT RELIEF

Let me thank Congresswoman Pelosi for arranging this press conference at such a critical
moment. I would also like to recognize the remarkable efforts of the religious community to raise
awareness about this important issue.
Today, even as we speak, scientists and health workers frolll around the world are
meeting in South Africa to confront the urgent task of tackling the AIDS pandemic that has
affected so many countries, particularly in Africa, where the disease has left 12 million children
orphaned and is already rolling back hard won economic gains.
Both the AIDS conference in Durban and the approaching G8 summit in Okinawa
highlight the overriding need for Congress to act quickly to fulfill the commitments the United
States has made to provide clear illternationalleadership in granting debt relief to the poorest
countries. In that respect, we also need to move forward with the President's Millennium
Vaccines Initiative, including the vaccine tax credits that will help us develop cures for some of
the diseases killing millions of the world's poor every year.
Owing to the delay in providing funding tor the enhanced HIPe initiative, debt relieffor
Latin America is already- stalled. Unless the U.S. tlillds its share of the initiative, this vital Qlobal
undertaking will also stall in Afi·ica. We should have no doubt that sllch an outcome would have
serious implications tor US global leadership.
~

There is no justification for such a delay. Countries that qualify tor relief have
demonstrated a clear track record of economic retorm and cOlllmitment to poverty reduction.
Under the initiative, the eight cOllntries that have qualified so far are designated to receive more
than $15 billion in debt reduction. On average, this means $95 million per year that can be spelll
on productive investments designed to reduce IxwCl1y and stimulate economic growth
Debt reduction for the poorest. most heavily indebted countries is both a moral
imperative and an economic imperativl' Ii)!' the Unitl~d States Debt reduction also has (til impact
on our national security. As the President has onen said, today the US has as much LO fear from
states that are too weak as states that are too strong.

L8-768
For press releases, speeches, public schedules and official biographies, call our 24-hour fax line at (202) 622-2040
.

By freeing up billions of dollars to invest in educating and vaccinating children, protect
the environment, fight the scourge of Aids, and fund other poverty reduction efforts in the
poorest countries around the world, the President's HIPe initiative will help stabilize countries
that are at risk on many fronts. The case for providing debt reliefis therefore overwhelmingly in
our national interest. And yet, the U.S. contribution to the initiative represents only about 3
percent of the total. The Administration has requested"$435 million this year for debt relief.
For the poorest and most indebted countries in Latin America, the delay in U.S. funding
is already having significant consequences where a U.S. contribution to the HIPC Trust Fund is
essential to enable the Inter-American Development Bank to participate in debt reduction.
Bolivia and Honduras have qualified to receive debt relief under the enhanced HIPe initiative.
However, significant debt relief will not move forward until the U.S. contributes to the I-IIPC
Trust Fund.
Bolivia - a model economic reformer and strategic U.S ally in coca eradicationhowever will not receive the roughly $850 million in debt relief that it qualified for because of
the delay in U.S. contribution to the HIPe Trust Fund. Over two-thirds of the population live in
poverty, yet without HIPC debt relief Bolivia would continue to spend $35 a year per person on
debt servicing - more than its per capita spending 011 health or educatioll.
Honduras is one of the poorest countries in our Hemisphere; over halfofits people live in
poverty and nearly half of the rural population suffers from malnutrition. Yet for every dollar
the government spends on health care, its sends $4.00 to its creditors to paying off old debts.
Earlier this month, the international creditors agreed that Honduras met the qualifications for
$556 million in debt relief Yet Honduras will not be able to put all of these resources to bear on
attacking poverty until Congress acts.
Due to some initial contributions from the European Union and other creditors, there is
funding for the early African countries to qualify for debt relief However, because these donors
have based additional contributions to the HIPC Trust Fund on an American contribution, many
of the more than 25 African countries in the HlPC program will have to await a contribution
from the U.S.
Many of the countries that qualify t()r the President's enhanced initiative have identified
prevention of HIV/ AIDS as the top priority tor re-invcsting savings that result from debt relief. I
had the privilege of visiting Afi'ica recently In Tanzania, I saw first-hand the country's
commitment to tighting diseasc. Tanzania will save about $100 million per year in debt service
and will use HIPC debt relief ill part to conduct a nCltionwidc campaign to light the spread of
HIV/AIDS and to immunize children against infectiolls diseases
I also visited Mozambique v"here I \\"itnessed commitlllellt oCthe government to lighting
poverty and disease. Mozambique is the 10lh poorest cOllntry in the world, \vith an annllal per
capita GOP of barely $200, has an illiteracy rate of60 percent and recent Iloods have caused
hundreds of millions of dollars in damage Despite these obstacles, the Government of
Mozambique has designed an impressive poverty reduction strategy that depends on funds freed
from debt relief tor its financing. Mozambique'S planned spending increase on health and
education is funded by the over $100 million in annual debt savings that it has received from
HIPe.

2

This is a remarkable moment for the United States We are richer than ever before and we
are growing faster than ever before. Yet the Achilles Heel for the US is our reluctance to engage
adequately in the world The bill before Congress provides grossly inadequate tlmds to help the
poorest countries in the world to tight poverty and disease. As a result, the President's advisers
will recommend that the President vetoes the bill in its current fOIl11
-30-

D EPA R T 1\1 E N T

TREASURY

0 F

THE

T REA SUR Y

NEWS

FOR lMMEDIA TE RELEASE
July 12, 2000
SEC Chairman Levitt and Treasury Secretary Summers To Conduct
Investors Town Meeting In Cleveland
Free Program Will Offer Area Residents Practical Tips for Saving and Investing
Cleveland area residents who want to learn more about saving and investing wisely will get
their chance when U.S Securities and Exchange Commission Chairman Arthur Levitt and u.s
Department of Treasury Secreta!)1 Lawrence H Summers conduct an Investors Town Meeting at the
Cleveland Convention Center on Tuesday, July 25, 2000.
Chairman Levitt and Secretary Summers will ofter practical financial tips and answer audience
questions during a ninety-minute general session that will begin at 600 pm. The free program will
also feature a series of educational seminars on stocks, bonds, mutual funds, and other financial topics
at 4:30 p.m. and 7:45 p.m
"Our financial markets have created unprecedented opportunities for American families, but
investing in the stock market will always entail risk," Levitt said. "The more you know about setting
financial goals and choosing investments that match your objectives and tolerance fbr risk, the more
likely you will achieve financial security"
"Too many Americans lack the basic tlnancial knowledge necessary to prepare them for
the future," said Secretary Summers. "By planning for your n.lture and using the power of compound
interest, even small investments can generate substantial wealth for your retirement"
In addition to the SEC and the DepaJ1ment ofTreasUIY, the town meeting wil! be sponsored by
the Cleveland Plain Dealer, Cleveland Saves, and the National Paltners for Financial Empowemlent
(NPFE). Launched in April by Secretary Summers, NPFE is a national partnership of government
agencies and private sector organizations that works to promote personal finance education among
individuals, and in schools, workplaces, and other institutions
Cleveland Saves is a coalition of nearly 100 Greater Cleveland-area employers, unions,
nonprofits, and financial institutions that has been working with the nonprofit Consumer Federation of
America to encourage Clevelanders to save and build wealth
LS-770

For press releases, speeches, public schedules and official biographies, call our 24-hour fax linc at (202) 622·2040

'Th~

"isit tl'OIll Chairman Le\'itt and Secretary Summers will highlight the opportunities fi)!'
Cleveland area citizens to save and do so wiselv,"
. said (Ret) U.S. Senator Howard I I. Metzenbaulll '
Chairman of the Consumer Federation of America.

Admission is lJ·ee. but reservations are recommended because seating is limited. To reselve a
seat, call l-g77-J9CJ-4064, or send an e-mail to rsvp@sec.gov. Anyone who needs auxiliary aids to
attend the town meeting, such as a sign language interpreter, should request them at the time of
resel\.'atioll

The town meeting will be the 38th ofa national series launched by the SEC in 1994 to promote
public understanding of the securities markets and awareness of the risks and rewards of investing.

# #

#

Press Contacts'
SEC
John J. Nester
(202)942-7083

Treasury
Bill Buck
(202)622-2960

n.~~1~d@~~.~,gQY

bHI.,~!!~J;@~Q:JI~i.\~$Q'y

Cleveland Saves
George Barany
(216)881-9650
g~Qf.g~@~~.~<:.Qfim~t,Qrg

CFA
Stephen Brobeck
(202) 387-6121
~_bm~~£k@~~~.~mi~LQrg

PUBLIC DEBT NEWS
Department of the Treasury • Bureau of the Public Debt • Washington, DC 20239

TREASURY SECURITY AUCTION RESULTS
BUREAU OF THE PUBLIC DEBT - WASHINGTON DC
FOR IMMEDIATE RELEASE
Jul Y 12, 2 00 0

CONTACT:

Office of Financing
202-691-3550

RESULTS OF TREASURY'S AUCTION OF 9-YR 6-MO INFLATION-INDEXED NOTES
This issue is a reopening of an inflation-indexed note originally issued
January 18, 2000.
rnterest Rate:
Series:
:USIP No:
STRIPS Minimum:

4 1/4%
A-2010
9128275W8
$1,000

Issue Date:
July 17, 2000
Dated Date:
July 15, 2000
Maturity Date:
January 15, 2010
TIIN Conversion Factor per $1,000
12.630378193 1/

High Yield:

4.030%

Adjusted Price: 103.539

All noncompetitive and successful competitive bidders were awarded
securities at the high yield. Tenders at the high yield were
allotted 52%. All teriders at lower yields were accepted in full.
Adjusted accrued interest of $ 0.23511 per $1,000 must be paid for
She period from July 15, 2000 to July 17, 2000.
AMOUNTS TENDERED AND ACCEPTED (in thousands)
Tender Type

Tendered

Accepted

Competitive
Noncompetitive

$

11,693,381
47,639

$

4,953,981
47,639

TOTAL

$

11,741,020

$

5,001,620 2/

Both the unadjusted price of $101.721 and the unadjusted accrued interest
0.23098 were adjusted by an index ratio of
1.01787, for the period
rom January 15, 2000, through July 17, 2000.

,f $

Median yield
3.997%: 50% of the amount of accepted competitive tenders
'as tendered at or below that rate. Low yield
3.880%:
5% of the amount
f accepted competitive tenders was tendered at or below that rate.
id-to-cover Ratio = 11,741,020 / 5,001,620 = 2.35

I This factor is used to calculate the Adjusted Values for any TIIN face
amount and will be maintained to 2-decimals on Book-entry systems.

I Awards to TREASURY DIRECT = $23,256,000

http://www.publicdebt.treas.gov

5-771

DEPARTMENT

OF

THE

~""~~

TREASURY { .
OmCE OF PLTBUC AFFAIRS -1500

TREASURY

NEW S

1780q~~"""""""""""""""""
S.W.• WASHISGTO!'l:, D.C.. 20220.1202) 622·2960

PEN~SYLVANlAAVENUE,

EMBARGOED UNTIL 3·30 PM
July 13,2000

REMARKS TO THE BOND MARKET ASSOCIATION
BY UNDER SECRETARY FOR DOMESTIC FINANCE GARY GENSLER
I am pleased to be with you to talk about some of the debt management challenges Treasury faces
as we continue to pay down publicly held debt. The Treasury Borrowing Advisory Committee of
the Bond Market Association has provided valuable assistance in this process While the history
of this Committee goes back to the Truman Administration, debt paydown presents a far different
challenge than anything the Committee has addressed in the past. Their insights will continue to
be very valuable to us as we go forward. I particularly want to thank Ken deRegt for his
leadership of this group. I also want to thank Micah Green for inviting me here today
By the end of this fiscal year, we will have achieved three straight years of unified budget
surpl.uses -- a feat unimaginable just a few years ago. The unified surpluses for the three years are
estimated to total just over $400 billion. These surpluses cap the longest series of improvements
in budget results in the history of the United States.
This progress has had a significant effect on Treasury financing. As we announced at the May
Quarterly Refunding, we expect to have paid down an estimated $355 billion injust under three
years
As a result Treasury debt is becoming ever smaller relative to the size of the economy and the
capital markets. Since 1994, the ratio of Treasury debt held by the public has fallen from 50
percent ofGDP to an estimated 35 percent at the end of June. We expect this to continue to
decline, falling to less than 20 percent by 2005. In the U.S. capital markets, Treasury's share of
debt outstanding has fallen from more than 33 percent six years ago to 23 percent today. The
drop is even more dramatic in terms of gross new issuance. Treasury's share of new issuance has
dropped nearly in half over that period.

Treasury's Debt Management Principles
Reducing Treasury debt held by the public brings many benefits to the economy and all
Americans. It also brings new challenges for Treasury debt managers. While the challenges are
new, our primary goals remain the same: (1) to provide effective cash management; (2) to achieve
the lowest cost financing for the taxpayers; and (3) to promote efficient capital markets.
LS-772

For press releases, speeches, public schedules and official biographies, call our 24-hour fax line at (202) 622-2040

In pursuing these goals, we have consistently followed five interrelated principles
_

First. the maintenance of the "risk-free" status of Treasury securities to assure ready
market access and lowest cost financing.

_

Second, the maintenance of co~sistency and predictability in our financing program to
reduce uncertainty in the market and help to minimize our overall cost of borrowing.

_ Third, the promotion of Treasury market liquidity, within the constraints of our borrowing
needs, both to promote efficient capital markets and to lower Treasury borrowing costs.
_ Fourth, financing across the yield curve to enable us to appeal to a broad range of
investors and to mitigate refunding risks.
_ Finally, unitary tinancing through which we aggregate the financing needs of all programs
of the Federal Government and borrow as one nation, ensuring that all programs benefit
from Treasury's low borrowing rate

Meeting Debt Management CJ1allenges
Thus far, Treasury has managed the decline in publicly held debt primarily by paying off debt as it
has matured (refunding the maturing debt with smaller amounts of new debt) In any year, there
is a significant amount of previously issued Treasury bill and coupon debt maturing. The amount
of this maturing debt in any year is still far greater than the surplus. The surplus is currently equal
to approximately half of the amount of maturing coupon debt. Thus, we increasingly have been
able to reduce issuance of new debt, reducing both the size and the frequency of offerings. Taken
together, we have decreased the size of bill issuance by 28 percent and of coupon debt by over 50
percent since 1996.
Until earlier this year, we had maintained the frequency of bill auctions, while reducing auction.
sizes. The average size of bill auctions has fallen from close to $26 billion in 1996 to just under
$16 billion this year This February, we announced the first reduction in the frequency of bill
auctions as we moved from monthly to quarterly one-year bill auctions. Because bills mature
quickly, changes in issuance affect the stock of outstanding bills very rapidly. Overall, the
privately held bill market has shrunk from $586 billion at the end of 1996 to $437 billion at the
end 6fJune, a reduction of 25 percent.
As has been customary, we will continue to use bill issuance as a mechanism to respond to
seasonal fluctuations in cash positions and needs. We also continue to look at eliminating the one
year bill. As we discussed in May, there are a limit~d number of statutory provisions that
reference the one-year bill for the purpose of setting interest rates. We are pleased with the
progress to date of our discussions with Congress to designate appropriate alternative reference
rates for student loans rates and other statutorily set rates that currently reference the one-year
bill.

2

There have been significant changes in coupon issuance, as well Auctions for regular coupon
offerings have been reduced by more than one-third, from 39 to 25 a year. Moreover. six of those
15 remaining auctions are now regularly scheduled reopenings for 5- and la-year notes and 30year bonds. Thus, we have effectively reduced coupon issuance to nineteen specific issues,
cutting the number of issues effectively in half If at some point in the future we adopt the
recommendation of the Borrowing Advisory Committee to move from monthly to quarterly
auctions of two-year notes, we could further reduce coupon issuance to eleven specific issues
The actions taken to date have allowed Treasury to significantly reduce overall coupon issuance,
while maintaining large, liquid issues. Based on current auction sizes, the volume of Treasury's
coupon issuance has dropped from $582 billion in FY 1996 to approximately $250 billion, well
over 50 percent With the policy of reopenings, however, the reduction in the average issue size
has declined only 16 percent, from $14 8 billion in 1996 to $124 billion currently
While the reductions in coupon issuance have been significant, they have had a much less
significant effect in percentage terms on the size of the outstanding stock of coupon debt. The
coupon market by definition is longer maturity debt. As a result, the size of the privately held
outstanding privately held coupon debt has decreased from $245 trillion to $2.11 trillion from the
end of FY 1996 to the end of June, a reduction of only fourteen percent. Outstanding privately
held debt with a maturity offive years or more, however, has increased during this period from
$740 billion to $828 billion, an increase of eleven percent
Over our nation's financial history, we also have paid down debt by buying debt back before it
matures. From time to time, during periods of sustained budget surpluses, Treasury has entered
the market to repurchase its debt. Debt repurchases were first proposed by Secretary of the
Treasury Alexander Hamilton in a plan he submitted to Congress in 1795 to extinguish the debt
within thirty years. Albert Gallatin, the fourth Secretary of the Treasury, later conducted the first
debt repurchases during the period from 1807 to 1812. The last time Treasury paid down debt in
this manner was seventy years ago under Secretary Andrew Mellon. In this new period of
sustained surpluses, it is important to renew this tradition.
Buybacks have the potential to bring more balance to the paydown of the debt Prior to the
buyback program, all of the paydown was on the short end of the maturity spectrum. Even this
fiscal year, of the $216 billion that we estimated in May would be paid down, almost 90 percent
will go to paying down debt as it matures. Only approximately II percent of total paydown for
the fiscal year will be used to pay down debt prior to maturity.
We have been very pleased with the results of the initial buybacks. We have completed half of the
$30 billion of buyback operations that we plan to conduct this year. In May, we announced a
regular schedule for the buyback program. We anticipate that in the future we will announce the
aggregate size of the operations on a quarterly basis at the Quarterly Refunding Announcement.
3

We continue to analyze the buyback results to determine how we can best use this debt
management tool.
Future Challenges

Debt held by the public is expected to shrink further. The Administration's Mid-Session Review
of the budget forecasts that publicly held debt will be reduced by $1.2 trillion over the next five
years and by $2.9 trillion over ten years. Continued fiscal discipline will present additional
challenges in debt management.
First, the effect of eight years of fiscal discipline is already showing up in Treasury's maturing
debt. There will be a great deal less maturing debt to be redeemed in the very near future. At its
peak in FY 1998, we had $510 billion in maturing coupon debt. By 2002. maturing coupon debt
will fall below $400 billion. Depending on issuance patterns, maturing coupon debt is likely to
have declined by 2004 to below $300 billion. At some point, it is likely that maturing coupon
debt will decline to an amount that is less than the unified surplus.
Second. the challenge of how to continue to issue sufficient longer-term debt while best reducing
outstanding debt recognizing the maturity structure of the currently outstanding debt. Paying
down debt only by redeeming maturing debt, by its nature, is asymmetrical. with the paydown in
the shorter end of the maturity spectrum. As of June, however. over $460 billion of privately held
Treasury debt had a remaining maturity of more than ten years. Based on current issuance and
buyback schedules, this outstanding longer~term debt will decline by only three percent on a net
basis this calendar year. In cpntrast, debt with a remaining maturity of less than 10 years will
decline three times faster, by approximately 9 percent.
Role of Treasury Securities in the Markets

Treasury securities currently play an important role in the global capital markets. They are
actively used for hedging purposes. They provide a pricing benchmark across the yield curve.
The Federal Reserve uses transactions in Treasury securities to affect the supply of reserves in the
banking system.
The Federal Reserve currently holds a little over $500 billion of Treasury securities in the System
Open Market Account, or "SOMA". The Federal Reserve System last week announced changes
in how it will manage the SOMA portfolio. setting limits as to the percentages of each
outstanding issue that it will hold. with percentages declining by maturity. The effect of this
change will be that the Federal Reserve will no longer consistently roll over 100 % of their
maturing securities into new issues.
4

While many things may change over the next 24 months, based on the Federal Reserve's current
holdings and Treasury's current auction sizes, the new procedure could lead to net redemptions
approaching $30 billion in coupon securities. In addition, this year there have been net bill
redemptions by the Federal Reserve, primarily due to the reduction in Treasury's 52-week bill
issuance. These net redemptions were just over $7 billion in the last quarter and are likely to be
somewhat higher this quarter The Federal Reserve would meet its additional portfolio needs
primarily with purchases in the secondary market, subject to the same limits by maturity as for
purchases at auction.
The Federal Reserve consulted closely with Treasury concerning these changes. We believe that
they will allow the Federal Reserve to adjust the quantity and composition of the SOMA portfolio
in a manner consistent with the Federal Reserve's portfolio needs and consistent with Treasury's
broad debt management objectives These changes also may allow Treasury greater scope in the
future to maintain the size of coupon issuance
.
With the significant reduction in the supply of Treasury securities that has taken place over thl;;
last five years, other market participants have already begun to adjust. as well. In the corporate
bond markets, high-grade corporate issuers are positioning themselves as pricing benchmarks by
consolidating their issuance into fewer, larger issues. At the shorter end of the yield curve, prime
commercial paper, and other instruments have begun taking on a benchmark role. Eurodollar
futures already are actively used for this purpose. Interest rate swaps and other debt instruments
may become more relevant pricing benchmarks as the transition continues.
Derivatives and other debt instruments may also be seen as suitable hedging vehicles While they
have different risk characteristics than Treasury securities, some may have a higher correlation to
the securities being hedged than Treasury securities currently have. Some of these characteristics
may make derivatives and other debt instruments attractive as potential supplemental or
alternative hedging vehicles.
In all likelihood, financial markets will adjust to the shrinking stock of Treasury securities in
variety of ways. Market participants will determine which instruments or combinations of
instruments best meet their needs As we continue on the path of debt reduction, the market alone
will determine what instruments will be most widely used in the future. In the meantime, the
market for U.S. Treasury securities remains the deepest, most liquid securities market in the
world.

Conclusion
In conclusion, reducing Treasury debt held by the public brings many benefits to the economy and

5

all Americans. While the debt pay down presents new challenges, the goals and principles
Treasury follows remain the same. Consistent with these goals and principles, Treasury has made
significant changes in its debt management program, including reducing issuance size and
frequency, instituting permanent reopenings, and re-instituting debt buybacks after seventy years
These changes have set the stage for other changes that may be necessary in the future and for a
smooth transition by the Treasury markets and market participants
Thank you.

6

2826222611

from: DeDBrtment OF Treasury

08/23/00 05:30 PM

PaCJe 23 of 30

OFFICE OF PUBLIC AFFAIRS '1500 PENNSYLVANIA AVENUE, N.W.' WASHINGTON, I).C.' 20220' (202) 622·2960

CONTACT:

EMBARGOED UNTIL 2:30 P.M.
July 13, 2000

Office of Financing
202/691-3550

TREASURY OFFERS 13-WEEK AND 26-WEEK BILLS
The Treasury will auction two series of Treasury bills totaling
approximately $16,000 million to refund $25,455 million of publicly held
securities maturing July 20, 2000, and to pay down about $9,455 million.
In addition to the public holdings, Federal Reserve Banks for their own
accounts hold $12,778 million of the maturing bills, which may be refunded at
the highest discount rate of accepted competitive tenders. Amounts issued to
these accounts will be in addition to the offering amount.
The maturing bills held by the public include $6,634 million held
by Federal Reserve Banks as agents for foreign and international monetary
authorities. Up to $3,000 million of these securities may be refunded within
the offering amount in each of the auctions of 13-week bills and 26-week
bills at the highest discount rate of accepted competitive tenders. Additional amounts may be issued in each auction for such accpunts to the extent
that the amount of new bids exceeds $3,000 million.

TreasuryDirect customers requested that we reinvest their maturing holdings of approximately $815 million into the 13-week bill and $1,253 million
into the 26-week bill.
This offering of Treasury securities is governed by the terms and conditions set forth in the Uniform Offering Circular for the Sale and Issue of
Marketable Book-Entry Treasury Bills, Notes, and Bonds (31 CFR Part 356, as
amended) .
Details about each of the new securities are given in the attached
offering highlights.

LS-773

000

Attachment

For press releases, speeches, public schedules and official biographies, call our 24·hour fax line at (202) 612·2(140

HIGHLIGHTS OF TREASURY OFFERINGS OF BILLS
TO BE ISSUED JULY 20, 2000
July 13, 2000
Offering Amount . . . . . . . . . . . . . . • . . . . . . . . . . $8,500 million
Description of Offering:
Term and type of security . . . . . . . . . . . . . . .
CUSIP number . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Auction date . . . . . . . . . . . . . . . . . • . . • . . . • • . •
Issue date . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Maturity date . . . . . . . . . . • . . . . . . . . . . . . . . • .
Original issue date . • . . . . . . . . . . . . . . . . . . .
Currently outstanding . • . . . . . . . . . . . • . • • • .
Minimum bid amount and multiples ..•.••.•

91-day bill
912795 FD 8
July 17, 2000
July 20,2000
October 19, 2000
April 20, 2000
$11,962 million
$1,000

$7,500 million
182-day bill
912795 FP 1
July 17, 2000
July 20, 2000
January 18, 2001
July 20, 2000
$1,000

The following rules apply to all securities mentioned above:
Submission of Bids:
Noncompetitive bids . . . . . . . . . Accepted in full up to $1,000,000 at the highest discount rate of
accepted competitive bids.
Competitive bids . . . • . . . . . . . . (1) Must be expressed as a discount rate with three decimals in
increments of .005%, e.g., 7.100%, 7.105%.
(2) Net long position for each bidder must be reported when the sum
of the total bid amount, at all discount rates, and the net long
position is $1 billion or greater.
(3) Net long position must be determined as of one half-hour prior
to the closing time for receipt of competitive tenders.
Maximum Recognized Bid
at a Single Rate • . • • • . . . • • • 35% of public offering
Maximum Award . . . . . . . . . . . . . . . . . . 35% of public offering
Receipt of Tenders:
Noncompetitive tenders ...•.• Prior to 12:00 noon Eastern Daylight Saving time on auction day
Competitive tenders ...••.•.• Prior to 1:00 p.m. Eastern Daylight Saving time on auction day
Payment Terms:
By charge to a funds account at a Federal Reserve Bank on issue date, or payment
of full par amount with tender.
TreasuryDirect customers can use the Pay Direct feature which
authorizes a charge to their account of record at their financial institution on issue date.

2826222611

from: Department OF Treasury

f)

E I' . \ I< T l\I E N T

0 F

08/23/00 05:30 PM

THE

T I{ E A S

(I

Pa~e

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I{ Y

NEWS
omCE OF PUBUC AFFAIRS • 1500 PENNSYl.V~ AVENUE, N.W.• WASlDNGTON, D.C•• 20220 • (202) 622.2960

FOR IM:MEDIA TE RELEASE
Text as Prepared for Delivery
July 17, 2000

DEPUTY SECRETARY OF THE TREASURY STUART E. EIZENSTAT
REMARKS AT THE 12~b AND CONCLUDING PLENARY ON THE
GERMAN FOUNDATION
BERLIN, GERMANY
"'Historic" is a much-abused word, used so often it has become debased.
But today's agreement is genuinely historic, marking the culmination of what is
likely to be the last major multilateral negotiation with Germany for the wrongs
perpetrated during Nazi Germany's ruinous period of power from 1933 to 1945.
German companies t along with Germany's Government, have courageously
come to terms with injuries largely ignored for 55 years, which for decades they
insisted were the responsibility of the German Goyernment, if anyone, to address.
In so doing, they are providing some justice, however belated and for only a small
fraction of the victims, but justice nevertheless to the elderly survivors never before
compensated for these historically gnve wrongs -- slave and forced laborers of
whom some one million of more than 10 million survive; those whose property were
confiscated through Aryanization; others who were sUbject to medical experiments
and other wrongs; those whose insurance policies were never paid, and an those
who suffered at the hands of German companies.
All of the countries and organizations involved represent people grievously
injured by German companies and the Nazi regime. Yet in allocating funds t we
largely avoided arguments over degrees of suffering. We recognized that all of
those eligible deserved to be recognized and compensated. Jewish-non-Jewish ties
were thereby strengthened. In point of fact, most of the funds for slave and forced
laborers will go to deserving non-Jews too long forgotten.
Permit me to provide a context for what has taken us 18 months to conclude.
I refer to the five Central and Eastern European governments -- Belarus, the Czech
Republic, Poland, Russia, and Ukraine, the State of Israel, the German
Government, representatives of the Bundestaq, lawyers for the victims.
LS-774
_Fur Jm!:ss releases, spuMes, public schedules and official biographies, caU ortr 24-htlUrfax line at (202) 622·2040
·U.S. G"""rnmenl Printing Oltice: 199B· 619-559

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representatives of German companies, and the Conference on Jewish Material
Claims Against Germany.
THE HOLOCAUST
One must begin with the Holocaust, probably the gravest crime against
humanity in recorded history and history's greatest robbery -~ robbery of personal
effects. an, property, insurance, the right to compensation for labor, and,
ultimately. dignity. Slave Laborers, Jewish and non-Jewish, who lived in
concentration camps while they were forced to work, will receive the highest per
capitA allocation, because they were being worked to death. The Nazis had three
methods of extermination: gassing. shooting and slave labor, known in German as
"Vernichtung durch Arbeit," literally "extermination through labor. n
The Nazi regime, in addition to attempting to conquer Europe and subject
nations to a racist ideology, also undertook a war within a war, one to exterminate
the Jewish people. They often sacriflced resources for the broader war effort for
this wax against an entire people. As one historian described it, lithe Nazi Holocaust
transcends the bounds of modern historical experience... . Never before in modem
history had one people made the killing of a.nother the fulfillment of an ideology ... "
The Gennan legislation passed by the Bundestag last week acknowledged these
historical facts and accepted the responsibility for them. The preamble to the law
states:
"that the National Socialist State inflicted severe injustice on slave laborers
and forced laborers, through deportation, internment, exploitation which in
some cases extended to extermination through labor.,.,"
"that German emerprises which participated in the National Socialist
injustice bear a historic responsibility and must accept it,... "
"that the German Bundestag acknowledges political and moral responsibility
for the victims of National Socialism ...
The Conference on Jewish Material Claims Against Germany played a
critical role in our success. The Conference was led by Israel Miller, Israel Singer,
Gideon Taylor, and Karen Heilig, together with a team of attorneys, Stan Chelsey
and Jeanne Geoppinger. The State of Israel, represented by Minister Rabbi
Melchoir, Binjamin Shalev, Lenny Ben-David~ Bobby Brown, and also with
Holocaust sUlVivors Ben Meed; Roman Kent, Noach F1ug~ Karl Brozik, Saul
Kagan, an,d Ben Helfgott also played a key role. They all constantly reminded us of
the moral dimension of our effort and kept all of us pointed toward the ultimate goal
of justice for those who suffered, Jew and non-] ew alike. The Claims Conference is
a worthy partner organization to handle the claims of Jewish slave and forced
laborers.

2

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This agreement does not end moral responsibility for the Holocaust.
Nothing can erase the memory of those who died, of the culture and potential
achievements lost, of the suffering of those who survived, of the lessons the
Holocaust must teach us about the importance of tolerance and the rule of law, of
the need for good people not to remain silent in the face of evil, of the need for
prompt international response to human rights violations. All of this should remain
in our hearts and minds as long as people occupy this planeL But at the same time,
this historic agreement does help to close a chapter for those who have waired so
long for some measure of justice, and it does help to heal wounds left open during
the lifetime of many of the survivors.
CENTRAL AND EAST EUROPEANS
One of the most important achievements of our negotiations is to provide
belated recognition and payments to the double victims of the 20th Century's worst
evils -- Nazism and Cornrnunism 1 some one million citizens of Central and Eastern
Europe who were forced laborers and in some cases slave laborers of Nazi industry
and agriculture. They were forced to keep the German economy running while
Germans went to war. They received little or no compensation and lived in harsh
conditions, guarded camps and, in some cases, concentration-like camps. As if this
was not enough, they then lived for over four decades after World Wax IT under the
iron rule of Communist governments, denied compensation from Germany, until the
programs of the 1990s. At last their suffering is being recognized.
The German Foundation has a responsibility to ensure that they are treated
fairly and equitably, and that all people Similarly situated are treated the same. We
will do all we can to help achieve that result.
I want to applaud the representatives of the govemments of Belarus, the
Czech Republic. Poland, Russia, and Ukraine, led respectively by Belarus Deputy
Foreign Minister Vladimir Gerasimovich, liri Sitler of the Czech Republic, Polish
Deputy Foreign Minister Jerzy Kranz, Russian Ambassador Valentin Kopteltsev.
and Ukraine Deputy Foreign Minister Olexander Maidannyk; as well as the leaders
of their Reconciliation Foundations. which will handle claims in their countries. All
of you made important contributions and were excellenr representatives for your
people. You have each written an important page in your country's histories.
GERMANY

We must never forget that half of the 10 billion DM amount to reach a
dignified payment level for victims came from the Federal Republic of Germany,
through its government and parliament, and thus from all of the German people.
Despite the efforts of postwar German governments to address the consequences of
Na2i horrors, we found ourselves struggling with this moral issue again, 55 years
after the end of Hitler's Germany. Many countries and leaders are reluctant to face
the past. Here Germany's leaders were willing to recognize an important gap in
past compensation and restitution programs. It is to Germany's eternal credit that
3

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your leader, Chancellor Schroeder. chose to face the wrongs perpetrated by
Germany's companies during the War and the German state's own employment of
forced and slave laborers and to reach out to surviving victims. The leadership and
courage of Chancellor Schroeder, and his willingness and that of his government
and the Bundestag and Bundesrat to contribute 5 billion DM to the German
Foundation at a difficult budgetary and economic time, has been inspirational.

This adds a new dimension to Germany's collective and continuing
acceptance of responsibility for Nazi wrongs, shouldering an obligation never
matched by any other nation in history. Since its founding, the Federal Republic of
Germany has made compensation and reconciliation for wrongs committed during
the Nazi era an important part of its political agenda. The agreement we sign today
is a significant new chapter in that continuing and ongoing responsibility. You have
set an example for the 21 ~~ Century other nations would do well to follow.
No one has set a better moral tone for our work than German President Ra.u,
whose statement in December iIi which he "begged forgiveness" on behalf of
German enterprises and the German people for the wrongs committed, remains the
signature moral position in this long affair.
Yet from its inception, this has been at its heart a German company
initiative. It was this generation of enlightened German industrialists and fmancial
leaders who w~re willing to meet the moral responsibility for the actions of their
corporate predecessors. For sure, there were practical and legal dimensions to their
actions, given the pendency of class actions against them in the United States, one of
their largest markets. But it would be unfair and misleading to suggest that this was
their sole motivation for the actions they have taken. They have contended from the
start that they bore no legal responsibility today. Indeed, there are a variety of legal
hurdles to any recovery in U.S. courts.
But German companies sued in U.S. courts have clearly assumed a moral
responsibility, thereby setting a standard for good corporate citizenship. This is
evidenced by their willingness to create a Foundation which will pay I)1any more
victims than those surviving laborers their companies employed or wronged -perhaps many as a million more, those who worked for defunct German .
companies, those not subject to the jurisdiction of U.S. courts, S5 companies, and
public employees, and to permit the Reconciliation Foundation to pay agricultural
workers. This moral dimension is further demonstrated by the contributions of
literally hundreds of German companies who have absolutely no legal risk in U.S.
courts or elsewhere. Moreover, German companies insisted on an adequately
fmanced Future Fund within the capped 10 biUion DM-plus interest fund, for the
benefit of heirs and for education projects and programs to promote tolerance and
human rights. We are certain that German enterprises will rise to the challenge of
promptly raising their 5 billion DM contribution.

as

There are many German company leaders who deserve credit, .including
Deutsche Bank Chairman Breuer, and members of the German Foundation Initiative
11

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Legal Working Group. headed by Dr. Klaus Kohler. But the leader of [he German
company effort from the start has been Manfred Gentz, the Chief Financial Officer
of DaimlerChrysler. Dr. Gentz, with tremendous business responsibilities,
undertook the time~consuming task of leading the corporate effort. He has been a
rough but fair negotiaror, a diligent defender of German corporate interests, and one
who never lost sight of his dual goals of a measure of justice for victims and legal
peace for German companies. Both goals are now within sight. We would not be
here today without him. The legal team of German companies is ably represented
by the firm of Wilmer. Cutler, and Pickering, which includes Lloyd Cutler, Roger
Witten, Robert Kimmitt, Lou Cohen, and John Trenor.
U.S. LAWYERS
We must be frank. It was the American lawyers, though the lawsuits they
brought in U,S. courts, who placed the long~forgotten wrongs by German
companies during the Nazi era on the international agenda, It was their research
and their work which highlighted these old injustices and forced us [0 confront
them. Without question, we would not be here without them_ The settlement we
reached of 10 billion DM will help hundreds of thousands of victims, beyond those
whom the lawyers represent, live out their declining years in more comfort. For
this dedication and commitment to the victims, we should always be grateful to these
lawyers.

But they have also worked diligently to find solutions to seemingly intractable
problems and to cooperate in fInding ways to achieve legal peace for German
companies.
The legal fees they will receive are far less than would normally be received
for such a large settlement and represent only about one percent of the total
Foundation sum. This is eminently reasonable given their contribution. Their
receiving from the Foundation what is negotiated with German companies and the
German Government is indispensable to the implementation of this agreement, and I
have pledged, together with Count Lambsdorff and Dr. Gentz, to ensure that this is
achieved.
Special recognition is due Mel Weiss, Professor Burt Neubome, Deborah
Sturman, Michael Hausfeld, Martin Mendelsohn, Robert Swift. Ed Fagan, Michael
Witti, Steve Whinston, Mel Urbach, Lawrence Kill, Dennis Faucher, Barry Fisher,
Carey D' Avino, Linda Gerstel, Irwin Levin, Edward Millstein, Morris Ratner, and
Richard Shevitz.

MESSAGE TO VICTIMS AND SURVIVORS
One of the great disappointments is that this agreement comes so many years
after the WaJ and that so many who would have been eligible have died. Through
this Foundation Initiative we will honor the memories of those who died during and
5

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after the Nazi. period. To those who still survive, we know that no amount of
money can adequately compensate you for the wrongs perpetrated against you. But
we hope the dignified sums you will receive will serve as a recognition of your
suffering and will enable you to live with less difficulty than would be the case
without these payments.
We also hope the Future Fund, which will endure long into the future, will
support projects which will remind generations still unborn of your sacrifice.
UNITED STATES ROLE

Why has the U.S. Government bken such a direct role in the settlement of
private lawsuits and in helping to shape the German Foundation, "'Remembrance,
Responsibility, and the Future"? It is because we were asked by the German
Government to work as partners with them in facilitating this historic initiative, and
all parties to the litigation agreed to our participation. It is because of President
Clinton's determination to expeditiously help in their lifetimes those who were

victims of German companies and German government injustices, many of whom
are American citizens. It is because of our national interest in addressing any
tensions in our relationship with Germany, one of our most important in the world.
arising out of prolonged litigation and threats of sanctions.
But it is also because the United States for 55 years has supported Germany's
efforts to provide justice to victims of the Holocaust and Nazi era to Jews and nonJews alike, wherever they lived. This effort has been a continuation of these
governmental efforts. U.S. occupation forces passed the first compensation and
restitution law to address the wrongs done to victims of Nazi persecution in the
early postWar period. This law was later largely incorporated into German domestic
legislation, which was encouraged by the United States, and reached millions of
Nazi victims in the West (4.4 million claimants under the German Indemnification
Law alone), Payments from the German Foundation will add another 5 billion
dollars to the 100 billion (in current dollar terms) in compensation, restitution, and
pensions that have been paid and will continue to be paid by Germany for acts
arising out of the National Socialist period. This new Foundation will make
payments to more than one million survivors of the Nazi era, and represents a
fulflliment of the task of the past half·century of bringing a measure of justice to the
victims.
7

Our role has been to work cooperatively with Germany as a catalyst and
partner to help achieve some justice for far more people and far more rapidly than
could ever be achieved in our courts, and to create a mechanism to help German
enterprises achieve legal peace in the United States. courts. The unique agreement
we sign today recognizes our responsibilities, which we will meet to help achieve
that result.

The importance the U.S. Government has attached to these negotiations is
demonstrated by the direct involvement of President Clinton at critical times, along
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with his Chief of Staff John Podesta, his National Security Advisor Sandy Berger
and his Counsel Beth Nolan, as well as Secretary of State Madeleine Albright and
Secretary of the Treasury Lawrence Summers.
But I must single out the remarkable U.S. team who showed brilliance,
imagination, determination, sound advice and counsel, and, yes, moral support to
me ~d to the entire enterprise. Each member ofthe team, without complaint,
added these negotiations to an already overburdened schedule. They never found an
obstacle they could not help all of us to overcome. Ambassador 1.0. Bindenage1,
Ron Bettauer, Eric Rosand, Basil Scarlis, Jody Manning, Richard Smith, John
Becker of the State Department; Solicitor General Seth Waxman, David Ogden,
David Anderson, David Buchholz, of the Department of Justice; Holly Toye Moore,
my Senior Advisor at the Treasury Department, have all served their country and
this great cause with unswerving dedication and deserve our praise. The U.S.
Ambassador [0 Germany, John Kornblum, deserves special recognition as one of the
fathers of this initiative and the provider of sage advice and extraordinary effort
from start to finish, along with his Embassy team, in particular, Mark Scheland.
OTIO COUNT LAMBSDORFF

I have saved the best for last. Count Lambsdorff, my co--chair and long-time
friend, has been the one indispensable person to our success. He has spent a
lifetime of faithful service to the Federal Republic of Germany, devoting himself to
strengthening the German-U.S. relationship. Count, your remarkable work here has
added another chapter· to a distinguished career. He has been the person most
responsible for finding and brokering compromises, for motivating us at difficult
moments to never forget the victims we were trying to help. He has been ever
faithful, friendly even at the most difficult and tension~fllled times. creative and
indefatigable.
Count Lambsdorff is a great German patriot who has done yet another great deed
for his country. The work of your team of Michael Geier, Otto Loeffler, Gerd
Westciickenberg, Stephan Keller, and many others is appreciated.
REMAINING TASKS
To achieve our basic goal of assisting the victims in their lifetimes. we still
have work to do. Count La.mbsdorff and I have exchanged letters with the
plaintiffs' lawyers and representatives of Central and East European governments,
and with the Claims Conference, addressing a number of outstanding issues which
required clarification following passage of the German legislation, in areas such a
insurance, "other wrongs," and payment of attorneys fees. We are determined to
see that the commitments in these letters are honored.
I would also like to stress some additional poin ts:

7

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It is critically important that all German insurance companies cooperate with
the process established by the International Commission on Holocaust Era Insurance
Claims, or ICHEIC. This includes publishing lists of unpaid insurance policies and
subjecting themselves to audit. Unless German insurance companies make these
lists available through ICHEIC, potential claimants cannot know their eligibility,
and the insurance companies will have failed to assume their moral responsibility.

It is also critical that German companies open their archives for research on
the Nazi period and World War and for the i,dentification of any art works they
may have in their possession, which might have been looted during the Nazi eta.

n

This is a German enterprise initiative in which they have pledged to provide
5 billion DM. We all expect this money to be provided as soon as possible in an
interest-bearing account so that any delay in settlement and dismissal of cases will
not further disadvantage aging victims.

The plaintiffs' attorneys are working together with defense attorneys to
consolidate and dismiss pending court cases against German firms for wrongs
arising out of the Nazi era.
The new Foundation should convene the board of trustees and initiate public

notification so that potential recipients may begin to receive payments by the end of
this year.
We all now bear a heavy responsibility to implement this historic agreement.
The victims have waited S5 years for this day. We cannot let them wait longer.
Thank you all for your roles in this historic endeavor.
-30-

8

DEPARTMENT

OF

THE

TREASURY

NEWS

TREASURY

Contact Steven Posner
(202) 622-2960

FOR IMMEDIATE RELEASF
July 17, :WOO

u.s., FRANCE TO NEGOTIATE REVISION OF PENSION

PROVISIONS

OF INCOME TAX TREATY

The United States and France are discllssing the possible revision of the pension
provisions of the income lax treaty CLIITently in force between the two countries. Negotiations are
expected to take place this summer
The Treasury Department invites written comments from the public regarding the
proposed revision of the pension provisions of the treaty. Comments should be sent no later than
August 11, 2000, to Philip R. West, International Tax Counsel, Room 1000 Main Treasury,
Washington, DC 20220. Comments may also be sent by fax to (202) 622-0646, or bye-mail to
Phi1.West@do.treasgov.
-30-

LS-775

Far press releases, speeches, public schedules and official biographies, call our 24-hollrfax line at (202) 622-2040
'U S Governrrenl Punting (jlliee 1998· 619-5S9

PUBLIC DEBT NEWS
Department of the Treasury· Bureau of the Public Debt· Washington, DC 20239

TREASURY SECURITY AU2TION RESULTS
BUREAU OF THE PUBLIC DEBT - WASHINGTON DC
Office cf Financing
202-691-3550

CONTACT:

FOR IMMEDIATE RELEASE
July 17, 2000

RESULTS OF TREASURY'S AUCTION OF 13-WEEK BILLS
9l-Day Bill
July 20, 2000
October 19, 2000
912795FDB

Term:
Issue Date:
Maturity Date:
CUSIP Number:
5.960%

High Rate:

Investment Rate 1/:

price:

6.137%

9B.493

All noncompetitive and successful competitive bidders were awarded
securities at the high rate. Tenders at the high discount rate were
allotted 72%. All tenders at lower rates were accepted in full.
AMOUNTS TENDERED AND ACCEPTED (in thousands)

Corr.petiti ve
Noncompetitive

$

20,141,771
1,191,305

$

1,350,000

1,350,000

22,683,076

8,507,456

5,222,498

5,222,498

Foreign Official Refunded
SUBTOTAL

5,966,151
1,191,305
7,157,456 2/

21.333,076

P'JBLIC SUBTOTAL

Federal Reserve
Foreign Official Add-On
TOTAL

Accepted

Tendered

Tender Type

°

°
$

27,905,574

$

13,729,954

Median rate
5.945%: 50% of tte amount of accepted competitive tenders
was tendered at or below that rate. Low rate
5.900%:
5% of the amount
of accepted competitive tenders was tendered at or below that rate.
Bid-to-Cover Ratio = 21,333,076 / 7,157,456

=

2.98

1/ Equivalent coupon-issue yield.
2/ Awards to TREASURY DIRECT = $908,483,00C

LS-776

http://www.publicdebt.treas.go v

PUBLIC DEBT NEWS
Department of the Treasury • Bureau of the Public Debt • Washington, DC 20239

TREASURY SECURITY AUCTION RESULTS
BUREAU OF THE PUBLIC DEBT - WASHINGTON DC
Office of Financing
202-691-3550

CONTACT;

FOR IMMEDIATE RELEASE
July 17, 2000

RESULTS OF TREASURY'S AUCTION

BULS

182-Day Bill
July 20, 2000
January 1B, 2001

Term:
Issue Date:
Maturity Date:
CUSIP Number:

912795FPl

6.015%

High Rate:

OF 26-WEEK

Investment Rate 1/:

6.290%

price:

96.959

All noncompetitive and successful competitive bidders were awarded
securities at the high rate. Tenders at the high discount rate were
allotted 95%. All tenders at lower rates were accepted in full.
AMOUNTS TENDERED AND ACCEPTED (in thousands)

competitive
Noncompetitive

$

PUBLIC SUBTOTAL

15,921,133
1,758,604

$

SUBTOTAL
Federal Reserve
Foreign Official Add-On
$

2,743,850
1,758,604
4,502,454 2(

17,679,737

Foreign Official Refunded

TOTAL

Accepted

Tendered

Tender Type

3,000,000

3,000,000

20,679,737

7,502,454

4,038,462
885,000

4,038,462
885,000

25,603,199

$

12,425,916

Median rate
6.010%: 50% of the amount of accepted competitive tenders
was tendered at or below that rate. Low rate
5.950%:
5% of the amount
of accepted competitive tenders was tendered at or below that rate.
Bid-to-Cover Ratio = 17,679,737 / 4,502,454 = 3.93
1/ Equivalent coupon-issue yield.
2/ Awards to TREASURY DIRECT = $1,357,441,000

http://www.publicdebt.treas.gov
LS-777

federal financing
WASHINGTON, D.C. 20220

bankNEWS

FEDERAL FINANCING BANK

February 29,2000

Kerry Lanham, Secretary, Federal Financing Bank (FFB),
announced the following activity for the month of January 2000.
FFB holdings of obligations issued, sold or guaranteed by
other Federal agencies totaled $40.8 billion on January 31, 2000,
posting a decrease of $1.4 billion from the level on December 31,
1999. This net change was the result of a decrease in holdings
of agency debt of $1.04 billion, in holdings of agency assets of
$100.0 million, and in holdings of agency guaranteed loans of
$261.3 million. FFB made 55 disbursements during the month of
January. FFB also received 17 prepayments in January.
Attached to this release are tables presenting FFB January
loan activity and FFB holdings as of January 31, 2000.

L5-779

Page 2

FEDERAL FINANCING BANK
JANUARY 2000 ACTIVITY

Date

Borrower

Amount
of Advance

Final
Maturity

AGENCY DEBT

Interes:Rate

-

U.S. POSTAL SERV:::CE
U.S. Postal Service

u.s. Postal Service
U.S.
U.S.
U.S.
U.S.
U.S.
U.S.
U.S.
U.S.
U. S.
U.S.
U.S.
U.S.
U.S.
U.S.
U.S.
U.S.
U.S.
U.S.
U.S.
U.S.
U.S.
U.S.
U.S.
U.S.
U.S.
U.S.
U.S.
U.S.
U.S.
U.S.
U.S.
U.S.
U.S.
U.S.
U.S.
U.S.
U.S.
U.S.
U.S.
U.S.

Postal
Postal
Postal
Postal
Postal
Postal
Postal
Postal
Postal
Postal
Postal
Postal
Postal
Postal
Postal
Postal
Postal
Postal
Postal
Postal
Postal
Postal
Postal
Postal
Postal
Postal
Postal
Postal
Postal
Postal
Postal
Postal
Postal
Postal
Postal
Postal
Postal
Postal
Postal
Postal

Service
Service
Service
Service
Service
Service
Service
Service
Service
Service
Service
Service
Service
Service
Service
Service
Service
Service
Service
Service
Service
Service
Service
Service
Service
Service
Service
Service
Service
Service
Service
Service
Service
Service
Service
Service
Service
Service
Service
Service

1/03
1/03
1/03
1/04
1/04
1/04
1/05
1/05
1/06
1/06
1/07
1/07
1/10
1/10
1/11
1/11
1/12
1/12
1/13
1/13
1/14
1/14
1/18
1/18
1/19
1/19
1/20
1/20
1/21
1/21
1/24
1/24
1/25
1/25
1/26
1/26
1/27
1/27
1/28
1/28
1/31
1/31

$300,000,000.00
$1,100,000,000.00
$132,000,000.00
$200,000,000.00
$650,000,000.00
$201,000,000.00
$200,000,000.00
$411,000,000.00
$150,000,000.00
$246,500,000.00
$1,000,000,000.00
$346,100,000.00
$1,350,000,000.00
$419,300,000.00
$1,200,000,000.00
$378,200,000.00
$1,120,000,000.00
$365,600,000.00
$950,000,000.00
$405,600,000.00
$870,000,000.00
$390,600,000.00
$800,000,000.00
$323,400,000.00
$520,000,000.00
$304,200,000.00
$325,000,000.00
$251,700,000.00
$1,450,000,000.00
$298,300,000.00
$1,730,000,000.00
$381,300,000.00
$1,575,000,000.00
$281,900,000.00
$1,475,000,000.00
$241,300,000.00
$1,245,000,000.00
$399,800,000.00
$1,350,000,000.00
$426,500,000.00
$975,000,000.00
$408,500,000.00

3/30/00
1/04/00
1/04/00
3/30/00
1/05/00
1/05/00
1/06/00
1/06/00
1/07/00
1/07/00
1/10/00
1/10/00
1/11/00
1/11/00
1/12/00
1/12/00
1/13/00
1/13/00
1/14/00
1/14/00
1/18/00
1/18/00
1/19/00
1/19/00
1/20/00
1/20/00
1/21/00
1/21/00
1/24/00
1/24/00
1/25/00
1/25/00
1/26/00
1/26/00
1/27/00
1/27/00
1/28/00
1/28/00
1/31/00
1/31/00
2/01/00
2/01/00

5.354%
5.357%
5.607%
5.249%
5.346%
5.555%
5.607%
5.566%
5.555%
5.533%
5.566%
5.500%
5.533%
5.545%
5.500%
5.555%
5.545%
5.576%
5.555%
5.533%
5.576%
5.530%
5.533%
5.681%
5.530%
5.639%
5.681%
5.607%
5.639%
5.594%
5.607%
5.670%
5.594%'
5.691%
5.670%
5.701%
5.691%
5.711%
5.701%
5.771%
5.711%
5.890%

Page 3
FEDERAL FINANCING BANK
JANUARY 2000 ACTIVITY
Date

Borrower

Amount
of Advance

Final
Maturity

Interest
Rate

GOVERNMENT-GUARANTEED LOANS
GENERAL SERVICES ADMINISTRATION
Atlanta
Atlanta
Atlanta
Atlanta
Atlanta

CDC
CDC
CDC
CDC
CDC

Lab
Lab
Lab
Lab
Lab

1/07
1/07
1/07
1/21
1/21

$6,160.00
$3,158.77
$59,735.81
$9,935.20
$3,209.80

1/30/02
1/30/02
1/30/02
1/30/02
1/30/02

6.490%
6.490%
6.490%
6.634%
6.634%

S/A
S/A
S/A
S/A
S/A

9/30/33
6/30/00
6/30/00
6/30/00
6/30/00
6/30/00
3/31/00
3/31/00
3/31/00
6/30/00
6/30/00
6/30/00
6/30/00
6/30/00
3/31/00
3/31/00
3/31/00
3/31/00
3/31/00
3/31/00
3/31/00
3/31/00
3/31/00
3/31/00
3/31/00
3/31/00
3/31/00
3/31/00
3/31/00
3/31/00
3/31/00
3/31/00
3/31/00
3/31/00
3/31/00
3/31/00
3/31/00
3/31/00
3/31/00

6.481%
5.760%
5.760%
5.760%
5.760%
5.760%
5.227%
5.227%
5.227%
5.759%
5.759%
5.759%
5.759%
5.759%
5.227%
5.227%
5.227%
5.227%
5.227%
5.227%
5.227%
5.227%
5.227%
5.227%
5.227%
5.227%
5.227%
5.227%
5.227%
5.227%
5.227%
5.227%
5.227%
5.227%
5.227%
5.227%
5.227%
5.227%
5.227%

Qtr.
Qtr.
Qtr.
Qtr.
Qtr.
Qtr.
Qtr.
Qtr.
Qtr.
Qtr.
Qtr.
Qtr.
Qtr.
Qtr.
Qtr.
Qtr.
Qtr.
Qtr.
Qtr.
Qtr.
Qtr.
Qtr.
Qtr.
Qtr.
Qtr.
Qtr.
Qtr.
Qtr.
Qtr.
Qtr.
Qtr.
Qtr.
Qtr.
Qtr.
Qtr.
Qtr.
Qtr.
Qtr.
Qtr.

RURAL UTILITIES SERVICE
Agralite Elec. #543
*Allegheny Electric #255
*Allegheny Electric #255
*Allegheny Electric #255
*Allegheny Electric #255
*Allegheny Electric #255
*Allegheny Electric #908
*Allegheny Electric #908
*Allegheny Electric #908
*Allegheny Electric #908
*Allegheny Electric #908
*Allegheny Electric #908
*Allegheny Electric #908
*Allegheny Electric #908
*Brazos Electric #917
*Brazos Electric #917
*Brazos Electric #917
*Brazos Electric #917
*Brazos Electric #917
*Brazos Electric #917
*Brazos Electric #917
*Brazos Electric #917
*Brazos Electric #917
*Brazos Electric #917
*Brazos Electric #917
*Brazos Electric #917
*Brazos Electric #917
*Brazos Electric #917
*Brazos Electric #917
*Brazos Electric #917
*Brazos Electric #917
*Brazos Electric #917
*Brazos Electric #917
*Brazos Electric #917
*Brazos Electric #917
*Brazos Electric #917
*Brazos Electric #917
*Brazos Electric #917
*Brazos Electric #917

1/03
1/03
1/03
1/03
1/03
1/03
1/03
1/03
1/03
1/03
1/03
1/03
1/03
1/03
1/03
1/03
1/03
1/03
1/03
1/03
1/03
1/03
1/03
1/03
1/03
1/03
1/03
1/03
1/03
1/03
1/03
1/03
1/03
1/03
1/03
1/03
1/03
1/03
1/03

$370,000.00
$3,280,258.38
$1,194,316.63
$956,002.72
$4,891,664.05
$1,685,364.87
$863,045.76
$2,640,855.37
$3,869,588.25
$1,258,922.66
$1,547,118.45
$4,277,978.22
$4,115,808.58
$5,190,476.06
$3,421,241.10
$1,519,571. 01
$376,530.17
$868,489.75
$1,133,978.52
$755,158.36
$434,175.43
$811,726.23
$974,420.07
$314,220.08
$228,048.56
$389,499.02
$228,279.12
$163,555.63
$142,489.34
$78,065.96
$117,964.91
$37,968.20
$1,249,886.53
$245,731.07
$250,739.40
$943,464.80
$2,826,065.33
$1,692,453.90
$1,014,287.01

Page 4

FEDERAL FINANCING BANK
ACTIVITY

JANUARY 2000

Borrower
*Brazos Electric #917
*Brazos Electric #917
*Brazos Electric #917
*Brazos Electric #917
*Brazos Electric #917
*Brazos Electric #917
*Brazos Electric #917
*Brazos Electric #917
*Brazos Electric #917
*Brazos Electric #917
*Brazos Electric #437
*Brazos Electric #437
*Citizens Elec. #529
*Harrison County #532
*Licking Valley Elec. #522
Moreau-Grand #569
*New Horizon Elec. #473
*New Horizon Elec. #473
*New Horizon Elec. #473
*New Horizon Elec. #473
*New Horizon Elec. #473
*New Horizon Elec. #473
*New Horizon Elec. #473
*Nolin Rural Elec. #528
*0 & A Electric Coop. #379
*Oglethorpe Power #445
*Owen Electric #525
*Saluda River Elec. #472
*San Miguel Electric #919
*San Miguel Electric #919
*Steele-Waseca Coop. #550
*Surry-Yadkin Elec. #534
*United Power Assoc. #911
*United Power Assoc. #911
*United Power Assoc. #911
*United Power Assoc. #911
*United Power Assoc. #911
*United Power Assoc. #911
*United Power Assoc. #911
*United Power Assoc. #911
*United Power Assoc. #911
*United Power Assoc. #911
*United Power Assoc. #911
*United Power Assoc. #911
*United Power Assoc. #911
*United Power Assoc. #911
*United Power Assoc. #911
*United Power Assoc. #911
*United Power Assoc. #911
*United Power Assoc. #911

Date

Amount
of Advance

Final
Maturity

Interest
Rate

1/03
1/03
1/03
1/03
1/03
1/03
1/03
1/03
1/03
1/03
1/03
1/03
1/03
1/03
1/03
1/03
1/03
1/03
1/03
1/03
1/03
1/03
1/03
1/03
1/03
1/03
1/03
1/03
1/03
1/03
1/03
1/03
1/03
1/03
1/03
1/03
1/03
1/03
1/03
1/03
1/03
1/03
1/03
1/03
1/03
1/03
1/03
1/03
1/03
1/03

$612,401.80
$946,999.68
$514,487.14
$1,484,517.24
$1,788,653.20
$434,492.93
$1,165,749.46
$1,514,690.92
$2,490,228.65
$2,665,516.74
$1,425,910.75
$323,436.77
$1,961,000.00
$1,000,000.00
$1,633,000.00
$1,207,000.00
$5,245,495.96
$1,404,724.40
$2/272/416.51
$6,734,955.41
$3,430,018.93
$6,990,560.46
$1/764,777.80
$1/893,000.00
$866,609.74
$15,313/852.90
$2,700/000.00
$1,302,216.15
$8,877,554.60
$9,321,536.18
$3,695/000.00
$1,000/000.00
$814/389.66
$588,485.61
$9/772,675.09
$3,159,767.24
$2,662,481. 54
$3,160,736.56
$3/364,928.36
$3,729,642.96
$1,421,471.73
$3,511,145.37
$1,045,855.99
$795,960.30
$601/107.43
$1,032,041.51
$1,006,847.94
$59,236.59
$455,883.05
$703,612.17

3/31/00
3/31/00
3/31/00
3/31/00
3/31/00
3/31/00
3/31/00
3/31/00
3/31/00
3/31/00
3/31/00
3/31/00
3/31/00
3/31/00
1/03/34
1/03/34
3/31/00
3/31/00
3/31/00
3/31/00
3/31/00
3/31/00
3/31/00
3/31/00
3/31/00
3/31/00
3/31/00
3/31/00
3/31/00
3/31/00
3/31/00
3/31/00
3/31/00
3/31/00
3/31/00
3/31/00
3/31/00
3/31/00
3/31/00
3/31/00
3/31/00
3/31/00
3/31/00
3/31/00
3/31/00
3/31/00
3/31/00
3/31/00
3/31/00
3/31/00

5. 227
5.227% 0
5.227%0
5.227% C
5.227% Q
5.227% Q
5.227% 0
5.227% Q
5.227% Q
5.227% Q
5.352%0
5.352% Q
5.352% Q'
5.352% QI
6.603% QI
6.862% QI
5.352% QI
5.352% QI
5.352% 01
5.352% 01
5.352% QI
5.352% QI
5.352% Qt
5.352% Qt
5.352% 01
5.227%QI
5.352% Qt
5.352% Ot
5.227%Ot
5.227% Qt
5.227% Ot
5.227% Ot
5.227% Ot
5.227% Ot
5.227% Ot
5.227%Ot
5.227% Ot
5.227%Ot
5.227% Ot
5.227% Qt
5.227% ot
5.227% Qt
5.227% Ot
5.227%Ot
5.227% Ot
5.227% ot
5.227% Qt
5.227% Ot
5.227% Ot
5. 227% Q~

n

Page 5
FEDERAL FINANCING BANK
JANUARY 2000 ACTIVITY
Borrower
*Unlted Power Assoc. #911
*United Power Assoc. #911
tBrazos Electric #917
tBrazos Electric #917
tBrazos Electric #917
umatilla Electric #586
Tri-County EMC #557
Carroll Elec. #488
N. Pittsburgh Tele. #449
McLeod Coop. Power #554
Marshalls Energy Co. #458

Date
1/03
1/03
1/04
1/04
1/04
1/07
1/10
1/11
1/18
1/19
1/31

Amount
of Advance
$478,541.01
$1,003,600.82
$2,091,667.94
$855,709.75
$654,650.82
$5,000,000.00
$1,200,000.00
$301,000.00
$2,323,000.00
$750,000.00
$143,000.00

S/A is a Semiannual rate.
Qtr. is a Quarterly rate.
* maturity extension or interest rate reset
+ 306C refinancing

Final
Maturity

Interest
Rate

3/31/00
3/31/00
3/31/00
3/31/00
3/31/00
1/02/29
1/03/34
12/31/08
12/31/12
4/01/30
1/02/18

5.227%
5.227%
5.227%
5.227%
5.227%
6.659%
6.574%
6.646%
6.727%
6.775%
7.251%

Qtr.
Qtr.
Qtr.
Qtr.
Qtr.
Qtr.
Qtr.
Qtr.
Qtr.
Qtr.
Qtr.

FEDERAL FINANCING BANK HOLDINGS
(in millions of dollars)

Program

January 31, 2000

December 31, 1999

Monthly
Net Change

Fiscal Year
Net Change

1/1/00 - 1/31/00

10/1/99- 1/31/00

Agency Debt:
U.S. Postal Service
National Credit Union Adm.-ClF
Subtotal*

$4,633.5
$40.0
$4,673.5

$4,671. 0
$1. 041. 0
$5,712.0

-$37.5
-$1,001.0
-$1.038.5

-$1. 645.6
$40.0
-$1. 605.6

Agency Assets:
FmHA-RDIF
FmHA-RHIF
DHHS-HMO
DHHS-Medical Facilities
Rural Utilities Service-CBO
Subtotal *

$3,410.0
$6,565.0
$1. 7
$3.2
$4,598.9
$14,578.8

$3,410.0
$6,665.0
$1. 7
$3.2
$4,598.9
$14,678.8

$0.0
-$100.0
$0.0
$0.0
$0.0
-$100.0

$0.0
-$560.0
$0.0
$0.0
$0.0
-$560.0

Government-Guaranteed Lending:
DOD-Foreign Military Sales
DoEd-HBCU+
DHUD-Community Dev. Block Grant
DHUD-Public Housing Notes
General Services Administration+
DOl-Virgin Islands
DON-Ship Lease Financing
Rural Utilities Service
SBA-State/local Development Cos.
DOT-Section 511
Subtotal*

$2,552.0
$20.8
$12.7
$1. 348. 5
$2,361.3
$15.1
$1.047.5
$13,958.1
$180.7
$3.7
$21,500.2

$2,582.5
$20.8
$12.8
$1. 348.5
$2,370.0
$16.1
$1.138.7
$14,084.8
$183.7
$3.7
$21,761. 6

-$30.5
$0.0
-$0.2
$0.0
-$8.7
-$1.0
-$91.2
-$126.7
-$3.0
$0.0
-$261. 3

-$58.9
$9.8
-$1.0
-$71. 4
-$43.6
-$1. 0
-$91. 2
$73.1
-$13.2
$0.0
-$197.5

Grand total*

$40,752.6

$42,152.4

-$1.399.8

-$2.363.1

* figures may not total due to rounding
+ does not include capitalized interest

federal financing
WASHINGTON.O.C. 20220

bankNEWS

FEDERAL FINANCING BANK

March 31 t 2000

Kerry Lanham, Secretary, Federal Financing Bank (FFB) ,
announced the following activity for the month of February 2000.
FFB holdings of obligations issued, sold or guaranteed by
other Federal agencies totaled $40.2 billion on February 29, .
2000, posting a decrease of $570.8 million from the level on
January 31, 2000. This net change was the result of a decrease
in holdings of agency debt of $543.3 million and in holdings of
agency assets of $50.0 million, and an increase in holdings of
agency guaranteed loans of $22.5 million. FFB made 73
disbursements during the month of February. FFB also received 17
prepayments and processed 4 buydowns on behalf of RUS-guaranteed
borrowers in February.
Attached to this release are tables presenting FFB February
loan activity and FFB holdings as of February 29, 2000.

LS-780

Page 2
FEDERAL FINANCING BANK
FEBRUARY 2000 ACTIVITY
Date

Borrower

Amount
of Advance

Final
Maturity

IntereSt
Rate

2/02/00
2/02/00
2/03/00
2/03/00
2/04/00
2/04/00
2/07/00
2/07/00
2/08/00
2/08/00
2/09/00
2/09/00
2/10/00
2/10/00
2/11/00
2/11/00
2/14/00
2/14/00
2/15/00
2/15/00
2/16/00
2/16/00
2/17/00
2/17/00
2/18/00
2/18/00
2/22/00
2/22/00
2/23/00
2/23/00
2/24/00
2/24/00
2/25/00
2/25/00
2/28/00
2/28/00
2/29/00
2/29/00
3/01/00
3/01/00

5.771% Sf A
5.837% S/A
5.890%- S/A
5.785% Sf A
5.837% S/A
5.753%- S/A
5.785%- S/A
5.792% S/A
5.753% S/A
5.848%- S/A
5. 792% S/A
5.816% S/A
5.848%S/A
5.785% S/A
5.816% S/A
5.795% S/A
5.785% S/A
5.782% S/A
5.795% S/A
5.806%S/A
5.782% S/A
5.879% S/A
5.806% S/A
5.858% S/A
5.879% S/A
5.868% S/A
5.858% B/A
5.875% S/A
5.868% S/A
5.942% S/A
5.875% S/A
5.942% S/A
5.942% S/A
5.931% S/A
5.942% S/A
5.917% S/A
5.931% S/A
5.926% S/A
5.917% S/A
5.905% S/A

AGENCY DEBT
U.S. POSTAL SERVICE
U.S.
U.S.
U.S.
U.S.
U.S.
U.S.
U.S.
U.S.
U.S.
U.S.
U.S.
U.S.
U.S.
U.S.
U.S.
U.S.
U.S.
U.S.
U.S.
U.S.
U.S.
U.S.
U.S.
U.S.
U.S.
U.S.
U.S.
U.S.
U.S.
U.S.
U.S.
U.S.
U.S.
U.S.
U.S.
U.S.
U.S.
U.S.
U.S.
U.S.

Postal
Postal
Postal
Postal
Postal
Postal
Postal
Postal
Postal
Postal
Postal
Postal
Postal
Postal
Postal
Postal
Postal
Postal
Postal
Postal
Postal
Postal
Postal
Postal
Postal
Postal
Postal
Postal
Postal
Postal
Postal
Postal
Postal
Postal
Postal
Postal
Postal
Postal
Postal
Postal

Service
Service
Service
Service
Service
Service
Service
Service
Service
Service
Service
Service
Service
Service
Service
Service
Service
Service
Service
Service
Service
Service
Service
Service
Service
Service
Service
Service
Service
Service
Service
Service
Service
Service
Service
Service
Service
Service
Service
Service

2/01
2/01
2/02
2/02
2/03
2/03
2/04
2/04
2/07
2/07
2/08
2/08
2/09
2/09
2/10
2/10
2/11
2/11
2/14
2/14
2/15
2/15
2/16
2/16
2/17
2/17
2/18
2/18
2/22
2/22
2/23
2/23
2/24
2/24
2/25
2/25
2/28
2/28
2/29
2/29

$700,000,000.00
$336,700,000.00
$600,000,000.00
$238,300,000.00
$360,000,000.00
$262,200,000.00
$1,190,000,000.00
$338,000,000.00
$1,500,000,000.00
$280,700,000.00
$1,350,000,000.00
$178,000,000.00
$1,175,000,000.00
$231,000,000.00
$950,000,000.00
$318,000,000.00
$850,000,000.00
$406,000,000.00
$700,000,000.00
$384,100,000.00
$525,000,000.00
$334,800,000.00
$325,000,000.00
$381,200,000.00
$160,000,000.00
$380,100,000.00
$1,075,000,000.00
$381,900,000.00
$1,675,000,000.00
$111,000,000.00
$1,505,000,000.00
$62,500,000.00
$1,125,000,000.00
$286,000,000.00
$1,725,000,000.00
$190,100,000.00
$850,000,000.00
$266,700,000.00
$475,000,000.00
$365,200,000.00

Page 3
FEDERAL FINANCING BANK
FEBRUARY 2000 ACTIVITY
Borrower

Date

Amount
of Advance

Final
Maturity

Interest
Rate

GOVERNMENT-GUARANTEED LOANS
GENERAL SERVICES ADMINISTRATION
Atlanta CDC Lab
Memphis IRS Service Cent.
ICTC Building
ICTC Building
ICTC Building
Atlanta CDC Lab
Atlanta CDC Lab
Atlanta CDC Lab

2/07
2/15
2/25
2/25
2/25
2/28
2/28
2/28

$7,018.59
$930.58
$96,898.00
$75,234.00
$9,969.00
$451,697.01
$10,208.40
$9,79l.87

1/30/02
1/02/25
11/02/26
11/02/26
11/02/26
1/30/02
1/30/02
1/30/02

6.774%
6.658%
6.502%
6.502%
6.502%
6.577%
6.577%
6.577%

S/A
S/A
S/A
S/A
S/A
S/A
S/A
S/A

2/01
2/01
2/04
2/04
2/09
2/09
2/09
2/11
2/11
2/14
2/15
2/15
2/15
2/15
2/15
2/15
2/15
2/18
2/18
2/18
2/18
2/22
2/22
2/22
2/22
2/23
2/24
2/24
2/29

$7,000,000.00
$2,500,000.00
$1,500,000.00
$265,000.00
$2,077,000.00
$5,000,000.00
$7,876,000.00
$1,036,000.00
$1,000,000.00
$1,500,000.00
$2,000,000.00
$3,000,000.00
$625,000.00
$1,668,665.71
$394,117.88
$1,555,356.24
$2,126,443.38
$400,000.00
$1,500,000.00
$1,290,000.00
$917,000.00
$999,880.00
$6,489,000.00
$700,000.00
$6,303,000.00
$536,000.00
$24,564.00
$3,000,000.00
$2,700,000.00

1/03/34
4/02/01
1/03/34
1/03/34
4/02/01
1/03/34
4/02/01
1/03/34
4/02/01
6/30/00
4/02/01
3/31/03
12/31/29
1/03/17
1/02/18
1/02/18
1/03/22
1/03/34
4/02/01
12/31/29
1/03/34
1/03/34
12/31/29
1/03/33
4/02/01
1/03/34
4/01/02
4/01/30
1/03/34

6.532%
6.455%
6.271%
6.271%
6.360%
6.428%
6.361%
6.448%
6.223%
5.828%
6.323%
6.632%
6.391%
6.654%
6.650%
6.650%
6.636%
6.507%
6.291%
6.398%
6.330%
6.260%
6.326%
6.396%
6.391%
6.175%
6.674%
6.419%
6.243%

Qtr.
Qtr.
Qtr.
Qtr.
Qtr.
Qtr.
Qtr.
Qtr.
Qtr.
Qtr.
Qtr.
Qtr.
Qtr.
Qtr.
Qtr.
Qtr.
Qtr.
Qtr.
Qtr.
Qtr.
Qtr.
Qtr.
Qtr.
Qtr.
Qtr.
Qtr.
Qtr.
Qtr.
Qtr.

Rmuili UTILITIES SERVICE
Aiken Elec. #549
Jackson Energy #527
Little River Elec. #587
Pataula Electric #585
Coop. Power Assoc. #450
#560
United Power Assoc. #433
BARC Electric #581
Cental Virginia Elec. #593
Inter-County Energy #592
Central Texas Elec. #520
Glades Elec. Coop. #604
Lake Region Elec. #591
N.E. Missouri Elec. #217
N.E. Missouri Elec. #217
N.E. Missouri Elec. #217
N.E. Missouri Elec. #217
Belfalls Elec. #542
Karnes Elec. #568
Pee Dee Elec. #547
Traverse Electric #602
Butler Rural Elec. #578
Erath County Elec. #599
Tri-State E.M.C. #503
United Power Assoc. #432
Western Indiana #594
Farmer's Telephone #459
Kootenai Elec. #531
Tri-County EMC #557
S/A is a Semiannual rate.
Qtr. is a Quarterly rate.
interest rate buydown

Page 4
FEDERAL FINANCING BANK HOLDINGS
(in millions of dollars)

Program

February 29. 2000

January 31. 2000

Monthly
Net Change

Fiscal Year
Net Change

2/1/00 - 2/29/00

10/1/99- 2129/00

Agency Debt:
U.S. Postal Service
National Credit Union Adm.-ClF
Subtotal*

$4.090.2
$40.0
$4.130.2

$4.633.5
$40.0
$4.673.5

-$543.3
$0.0
-$543.3

-$2.188.9
$40.0
-$2.148.9

Agency Assets:
FmHA-RDIF
FmHA-RHIF
DHHS-HMO
DHHS-Medical Facilities
Rural Utilities Service-CBO
Subtotal*

$3.410.0
$6.515.0
$1. 7
$3.2
$4.598.9
$14.528.8

$3.410.0
$6.565.0
$1. 7
$3.2
$4.598.9
$14.578.8

$0.0
-$50.0
$0.0
$0.0
$0.0
-$50.0

$0.0
-$610.0
$0.0
$0.0
$0.0
-$610.0

Government-Guaranteed lending:
DOD·Foreign Military Sales
UoEd-HBCU+
DHUD-Community Dev. Block Grant
DHUD-Public Housing Notes
General Services Administration+
DOl-Virgin Islands
DON-Ship Lease Financing
Rural Utilities Service
SBA-State/Local Development Cos.
DOT-Section 511
Subtotal*

$2.518.4
$20.8
$12.7
$1.348.5
$2.362.0
$15.1
$1.047.5
$14.016.1
$178.2
$3.7
$21, 522.8

$2.552.0
$20.8
$12.7
$1.348.5
$2.361.3
$15.1
$1,047.5
$13,958.1
$180.7
$3.7
$21,500.2

-$33.7
$0.0
$0.0
$0.0
$0.7
$0.0
$0.0
$58.0
-$2.4
$0.0
$22.5

-$92.6
$9.8
-$1. 0
-$71.4
-$43.0
-$1. 0
-$91. 2
$131.1
-$15.6
$0.0
-$175. 0

Grand total*

$40.181.8

$40,752.5

-$570.8

-$2.933.9

* figures may not total due to rounding
+

does not include capitalized interest

federal financing
WASHINGTON. D.C

20220

bonkNEWS

FEDERAL FINANCING BANK

April 30. 2000

Kerry Lanham, Secretary, Federal Financing Bank (FFB),
announced the following activity for the month of March 2000.
FFB holdings of obligations issued, sold or guaranteed by
other Federal agencies totaled $39.3 billion on March 31, 2000,
posting a decrease of $875.8 million from the level on February
29, 2000. This net change was the result of an increase in
holdings of agency debt of $177.4 million, and a decrease in
holdings of agency assets of $165.0 million and in holdings of
agency guaranteed loans of $888.2 million. FFB made 75
disbursements during the month of March. The FFB also received
46 prepayments in March, and extended the maturity of 92 loans
guaranteed by the Rural Utility Service.
Attached to this release are tables presenting FFB March
loan activity and FFB holdings as of March 31, 2000.

LS-781

Page 2
FEDERAL FINANCING BANK
MARCH 2000 ACTIVITY
Date

Borrower

Amount
of Advance

Final
Maturity

Interest
Rate

AGENCY DEBT
U.S. POSTAL SERVICE
U.S.
U.S.
U.S.
U.S.
U.S.
U.S.
U.S.
U.S.
U.S.
U.S.
U.S.
U.S.
U.S.
U.S.
U.S.
U.S.
U.S.
U.S.
U.S.
U.S.
U.S.
U.S.
U.S.
U.S.
U.S.
U.S.
U.S.
U.S.
U.S.
U.S.
U.S.
U.S.
U.S.
U.S.
U.S.
U.S.
U.S.
U.S.
U.S.
U.S.
U.S.
U.S.
U.S.

Postal
Postal
Postal
Postal
Postal
Postal
Postal
Postal
Postal
Postal
Postal
Postal
Postal
Postal
Postal
Postal
Postal
Postal
Postal
Postal
Postal
Postal
Postal
Postal
Postal
Postal
Postal
Postal
Postal
Postal
Postal
Postal
Postal
Postal
Postal
Postal
Postal
Postal
Postal
Postal
Postal
Postal
Postal

Service
Service
Service
Service
Service
Service
Service
Service
Service
Service
Service
Service
Service
Service
Service
Service
Service
Service
Service
Service
Service
Service
Service
Service
Service
Service
Service
Service
Service
Service
Service
Service
Service
Service
Service
Service
Service
Service
Service
Service
Service
Service
Service

$350,000,000.00
3/01
$203,000,000.00
3/01
$150,000,000.00
3/02
$190,200,000.00
3/02
$890,000,000.00
3/03
$324,900,000.00
3/03
3/06 $1,190,000,000.00
$347,500,000.00
3/06
$975,000,000.00
3/07
$264,400,000.00
3/07
$885,000,000.00
3/08
$221,900,000.00
3/08
$725,000,000.00
3/09
$239,600,000.00
3/09
$560,000,000.00
3/10
3/10
$272,200,000.00
$390,000,000.00
3/13
$296,900,000.00
3/13
3/14
$100,000,000.00
3/14
$340,800,000.00
3/15
$300,300,000.00
3/16
$123,000,000.00
3/17
$700,000,000.00
3/17
$326,700,000.00
3/20 $1,000,000,000.00
3/20
$346,700,000.00
3/21
$850,000,000.00
3/21
$295,900,000.00
3/22
$750,000,000.00
3/22
$253,800,000.00
3/23
$610,000,000.00
3/23
$304,000,000.00
3/24
$520,000,000.00
3/24
$338,900,000.00
3/27
$415,000,000.00
3/27
$261,200,000.00
3/28
$175,000,000.00
3/28
$293,200,000.00
3/29
$305,700,000.00
3/30
$960,000,000.00
3/30
$167,500,000.00
3/31 $1,750,000,000.00
3/31
$307,600,000.00

3/02/00
3/02/00
3/03/00
3/03/00
3/06/00
3/06/00
3/07/00
3/07/00
3/08/00
3/08/00
3/09/00
3/09/00
3/10/00
3/10/00
3/13/00
3/13/00
3/14/00
3/14/00
3/15/00
3/15/00
3/16/00
3/17/00
3/20/00
3/20/00
3/21/00
3/21/00
3/22/00
3/22/00
3/23/00
3/23/00
3/24/00
3/24/00
3/27/00
3/27/00
3/28/00
3/28/00
3/29/00
3/29/00
3/30/00
3/31/00
3/31/00
4/03/00
4/03/00

5.926%
5.884%
5.905%
5.883%
5.884%
5.912%
5.883%
5.978%
5.912%
5.957%
5.978%
5.957%
5.957%
5.946%
5.957%
5.985%
5.946%
6.020%
5.985%
5.999%
5.978%
5.988%
5.978%
6.006%
5.988%
6.072%
6.006%
6.030%
6.072%
6.030%
6.030%
6.019%
6.030%
6.027%
6.019%
6.010%
6.027%
6.010%
6.020%
6.010%
5.998%
6.020%
6.006%

SIA
SIA
SIA
SIA
SIA
SIA
SIA
S/A
SIA
SIA
S/A
S/A
S/A
S/A
S/A

Sf A

S/A
S/A
SIA
SIA
S/A
S/A
S/A
S/A
S/A
SfA
S/A
S/A
S/A
S/A
SIA
sfA
S/A
S/A
SIA
SIA
SIA
SIA
SIA
SIA
sfA
sfA
sfA

Page 3
FEDERAL FINANCING BANK
MARCH 2000 ACTIVITY
Date

Borrower
OVERNMENT~GUARANTEED

Amount
of Advance

Final
Maturity

Interest
Rate

LOANS

GENERAL SERVICES ADMINISTRATION
Atlanta CDC Lab
Foley Square Office Bldg.
Atlanta CDC Lab
Atlanta CDC Lab
Memphis IRS Service Cent.
R~

3/15
3/23
3/29
3/29
3/29

$4,833.44
$30,201.00
$583,007.71
$12,060.31
$1,689.57

1/30/02
7/31/25
1/30/02
1/30/02
1/02/25

6.613%
6.359%
6.713%
6.713%
6.413%

S/A
S/A
S/A
S/A
S/A

3/01
3/06
3/06
3/07
3/09
3/09
3/09
3/10
3/13
3/13
3/14
3/15
3/15
3/16
3/17
3/20
3/20
3/20
3/21
3/21
3/22
3/22
3/22
3/28
3/28
3/30
3/31
3/31
3/31
3/31
3/31
3/31
3/31
3/31
3/31
3/31
3/31
3/31
3/31

$3,132,000.00
$5,530,000.00
$350,000.00
$400,000.00
$1,600,000.00
$6,204,000.00
$1,000,000.00
$950,000.00
$2,102,000.00
$203,000.00
$2,889,000.00
$242,000.00
$1,000,000.00
$5,000,000.00
$1,000,000.00
$1,900,000.00
$1,269,214.00
$516,000.00
$2,378,901. 00
$1,000,000.00
$1,000,000.00
$1,900,000.00
$1,000,000.00
$24,697,000.00
$4,130,000.00
$2,000,000.00
$3,318,295.78
$4,741,014.19
$853,059.76
$2,610,298.94
$3,832,025.59
$2,412,218.44
$1,982,000.00
$800,000.00
$3,385,053.63
$1,503,498.06
$372,875.14
$860,059.20
$1,122,970.83

4/02/01
4/02/01
4/02/29
1/03/34
1/02/01
1/03/34
4/01/30
4/02/01
6/30/00
1/03/34
12/31/25
1/03/33
7/01/30
1/03/34
3/31/10
12/31/29
1/02/18
1/03/34
10/02/00
6/30/00
12/31/31
4/01/30
1/03/34
1/03/28
1/03/28
7/01/30
10/02/00
10/02/00
6/30/00
6/30/00
6/30/00
6/30/00
10/02/00
6/30/00
6/30/00
6/30/00
6/30/00
6/30/00
6/30/00

6.299%
6.133%
6.283%
6.244%
6.216%
6.257%
7.966%
6.128%
6.021%
6.298%
6.515%
6.333%
6.372%
6.166%
6.345%
6.278%
6.988%
6.096%
6.249%
5.930%
6.083%
7.657%
6.057%
6.339%
6.216%
6.276%
6.222%
6.222%
5.877%
5.877%
5.877%
6.002%
6.099%
6.002%
5.877%
5.877%
5.877%
5.877%
5.877%

Qtr.
Qtr.
Qtr.
Qtr.
Qtr.
Qtr.
Qtr.
Qtr.
Qtr.
Qtr.
Qtr.
Qtr.
Qtr.
Qtr.
Qtr.
Qtr.
Qtr.
Qtr.
Qtr.
Qtr.
Qtr.
Qtr.
Qtr.
Qtr.
Qtr.
Qtr.
Qtr.
Qtr.
Qtr.
Qtr.
Qtr.
Qtr.
Qtr.
Qtr.
Qtr.
Qtr.
Qtr.
Qtr.
Qtr.

UTILITIES SERVICE

united Power Assoc. #432
Pee Dee Elec. #547
Rosebud Elec. #555
Goodhue County #595
Johnson County Elec. #482
Midwest Electric #610
Southside Electric #606
Gate City Elec. #580
Citizens Elec. #529
Oneida~Madison Elec. #582
Tri-State #475
Hawkeye Tri~County Elec. #509
United Elec. #519
Laurens Elec. #553
Holmew-Wayne Elec. #455
Central Iowa Power #442
Marshalls Energy Co. #458
Midwest Electric #610
Farmers Telephone #399
Shelby Energy Coop. #607
Excelsior Elec. #468
Southside Electric #606
S. Central Arkansas #605
Dairyland Power #588
Dairyland Power #589
Kootenai Elec. #531
Allegheny Electric #255
Allegheny Electric #255
Allegheny Electric #908
Allegheny Electric #908
Allegheny Electric #908
Allegheny Electric #908
A & N Electric #584
Big Sand Elec. #540
Brazos Electric #917
Brazos Electric #917
Brazos Electric #917
Brazos Electric #917
Brazos Electric #917

Page 4
FEDERAL FINANCING BANK
MARCH 2000 ACTIVITY
Borrower
*Brazos Electric #917
*Brazos Electric #917
*Brazos Electric #917
*Brazos Electric #917
*Brazos Electric #917
*Brazos Electric #917
*Brazos Electric #917
*Brazos Electric #917
*Brazos Electric #917
*Brazos Electric #917
*Brazos Electric #917
*Brazos Electric #917
*Brazos Electric #917
*Brazos Electric #917
*Brazos Electric #917
*Brazos Electric #917
*Brazos Electric #917
*Brazos Electric #917
*Brazos Electric #917
*Brazos Electric #917
*Brazos Electric #917
*Brazos Electric #917
*Brazos Electric #917
*Brazos Electric #917
*Brazos Electric #917
*Brazos Electric #917
*Brazos Electric #917
*Brazos Electric #917
*Brazos Electric #917
*Brazos Electric #917
*Brazos Electric #917
*Brazos Electric #917
*Brazos Electric #917
*Brazos Electric #437
*Brazos Electric #437
*Brazos Electric #437
*Brazos Electric #561
*Brazos Electric #561
*Citizens Elec. #529
*Georgia Trans. Corp. #446
*Harrison County #532
*New Horizon Elec. #473
*New Horizon Elec. #473
*New Horizon Elec. #473
*New Horizon Elec. #473
*New Horizon Elec. #473
*New Horizon Elec. #473
*New Horizon Elec. #473
*Nolin Rural Elec. #528
*0 & A Electric Coop. #379

Date

Amount
of Advance

Final
Maturity

Interest
Rate

3/31
3/31
3/31
3/31
3/31
3/31
3/31
3/31
3/31
3/31
3/31
3/31
3/31
3/31
3/31
3/31
3/31
3/31
3/31
3/31
3/31
3/31
3/31
3/31
3/31
3/31
3/31
3/31
3/31
3/31
3/31
3/31
3/31
3/31
3/31
3/31
3/31
3/31
3/31
3/31
3/31
3/31
3/31
3/31
3/31
3/31
3/31
3/31
3/31
3/31

$747,827.93
$429,960.82
$803,846.68
$965,709.26
$311,411.12
$226,009.92
$386,282.50
$226,393.97
$162,204.97
$141,312.65
$77,421.29
$116,990.74
$37,654.65
$1,240,325.00
$197,747.53
$248,668.78
$936,247.38
$2,804,446.16
$1,679,506.77
$1,006,527.79
$607,716.97
$940,271.73
$510,831.97
$1,473,970.49
$1,775,945.73
$2,077,542.16
$849,930.83
$650,229.73
$431,169.10
$1,156,831.57
$1,503,103.66
$2,471,178.60
$2,645,125.75
$1,418,798.87
$321,823.60
$1,190,545.56
$11,134,000.00
$5,604,000.00
$1,961,000.00
$11,806,421.57
$1,000,000.00
$5,195,086.78
$1,391,225.01
$2,250,578.60
$6,670,232.54
$3,397,056.48
$6,923,381. 23
$1,747,818.30
$1,893,000.00
$862,551.37

6/30/00
6/30/00
6/30/00
6/30/00
6/30/00
6/30/00
6/30/00
6/30/00
6/30/00
6/30/00
6/30/00
6/30/00
6/30/00
6/30/00
6/30/00
6/30/00
6/30/00
6/30/00
6/30/00
6/30/00
6/30/00
6/30/00
6/30/00
6/30/00
6/30/00
6/30/00
6/30/00
6/30/00
6/30/00
6/30/00
6/30/00
6/30/00
6/30/00
6/30/00
6/30/00
6/30/00
6/30/00
6/30/00
6/30/00
6/30/00
6/30/00
6/30/00
6/30/00
6/30/00
6/30/00
6/30/00
6/30/00
6/30/00
6/30/00
10/02/00

5.877% Qtr
5.877% Otr
5.877% Otr
5.877% Otr
5.877% Otr
5.877% Otr
5.877% Otr
5.877% Otr
5.877% Otr
5.877% Qtr
5.877% Otr
5.877% Otr
5.877% Otr
5.877% Otr
5.877% Otr
5.877% Otr
5.877% Otr
5.877% Otr
5.877% Otr
5.877% Qtr
5.877% Otr
5.877% Otr
5.877% Ot!
5.877% Qtr
5.877% Otr
5.877% Otr,
5.877% Otr,
5.877% OtT.
5.877% Otr,
5.877% Qtr,
5.877% Qtr,
5.877% Qtr.
5.877% Qtr.
6.002% Qtr
6.002% Qtr
6.002% Qtr
5.877% Qtr,
5.877% Qtr.
6.002%Qtr.
5.877% Qtr,
6.002% Qtr,
6.002% Qtr,
6.002% Qtr.
6.002% Qtr,
6.002% Qtr,
6.002% Qtr,
6.002% Qtr.
6.002% Qtr.
6.002% Qtr.
6.223% Qtr.

Page 5
FEDERAL FINANCING BANK
MARCH 2000 ACTIVITY
Borrower
-Oglethorpe Power #445
•OWen Electric #525
-Saluda River Elec. #472
•San Miguel Electric #919
-San Miguel Electric #919
.Steele-Waseca Coop. #550
tSurry-Yadkin Elec. #534
*Surry-Yadkin Elec. #534
tUnited Power Assoc. #911
tUnited Power Assoc. #911
*United Power Assoc. #911
*United Power Assoc. #911
*United Power Assoc. #911
*United Power Assoc. #911
*United Power Assoc. #911
*United Power Assoc. #911
*United Power Assoc. #911
*United Power Assoc. #911
*United Power Assoc. #911
*United Power Assoc. #911
*United Power Assoc. #911
*United Power Assoc. #911
*United Power Assoc. #911
*United Power Assoc. #911
*United Power Assoc. #911
*United Power Assoc. #911
*United Power Assoc. #911
*United Power Assoc. #911
*United Power Assoc. #432
*United Power Assoc. #433

Date

Amount
of Advance

Final
Maturity

Interest
Rate

3/31
3/31
3/31
3/31
3/31
3/31
3/31
3/31
3/31
3/31
3/31
3/31
3/31
3/31
3/31
3/31
3/31
3/31
3/31
3/31
3/31
3/31
3/31
3/31
3/31
3/31
3/31
3/31
3/31
3/31

$15,196,703.18
$2,700,000.00
$1,291,582.63
$8,791,378.89
$9,231,050.68
$3,695,000.00
$1,000,000.00
$1,000,000.00
$806,484.26
$582,773.09
$9,677,810.31
$3,129,094.92
$2,636,636.45
$3,130,054.83
$3,332,264.51
$3,693,438.78
$1,407,673.30
$3,477,062.17
$1,035,703.71
$788,233.80
$596,836.87
$1,024,709.38
$997,074.32
$58,815.74
$452,644.23
$696,782.10
$472,457.06
$994,629.15
$1,555,045.05
$2,566,865.65

6/30/00
10/02/00
6/30/00
6/30/00
.6/30/00
6/30/00
6/30/00
6/30/00
6/30/00
6/30/00
6/30/00
6/30/00
6/30/00
6/30/00
6/30/00
6/30/00
6/30/00
6/30/00
6/30/00
6/30/00
6/30/00
6/30/00
6/30/00
6/30/00
6/30/00
6/30/00
6/30/00
6/30/00
6/30/00
6/30/00

5.877%
6.223%
6.002%
5.877%
5.877%
5.877%
5.877%
5.877%
5.877%
5.877%
5.877%
5.877%
5.877%
5.B77%
5.877%
5.877%
5.877%
5.877%
5.877%
5.877%
5.877%
5.877%
5.877%
5.877%
5.877%
5.877%
5.877%
5.877%
6.002%
6.002%

S/A is a Semiannual rate.
Qtr. is a Quarterly rate.
* maturity extension or interest rate reset

Qtr .
Qtr.
Qtr .
Qtr.
Qtr.
Qtr.
Qtr.
Qtr.
Qtr.
Qtr.
Qtr.
Qtr.
Qtr.
Qtr.
Qtr.
Qtr.
Qtr.
Qtr.
Qtr.
Qtr.
Qtr.
Qtr.
Qtr.
Qtr.
Qtr.
Qtr.
Qtr.
Qtr.
Qtr.
Qtr.

Page 6
FEDERAL FINANCING BANK HOLDINGS
(in millions of dollars)

Program

March 31. 2000

February 29. 2000

Monthly
Net Change

Fiscal Year
Net Change

3/1/00 - 3/31100

10/1/99· 3/31/0C

Agency Debt:
u.s. Postal Service
National Credit Union Adm.-ClF
Subtotal*

$4.307.6
$0.0
$4.307.6

$4.090.2
$40.0
$4.130.2

$217.4
-$40.0
$177.4

-$1.971.5
$0.0
-$1. 971. 5

Agency Assets:
FmHA-RDIF
FmHA-RHIF
DHHS-HMO
DHHS-Medical Facilities
~ural Utilities Service-CBO
Subtotal *

$3.410.0
$6.350.0
$1. 7
$3.2
$4,598.9
$14,363.8

$3.410.0
$6,515.0
$1. 7
$3.2
$4,598.9
$14.528.8

$0.0
-$165.0
$0.0
$0.0
$0.0
-$165.0

$0.0
·$775.0
$0.0
$0.0
$0.0
-$775.0

Government·Guaranteed Lending:
DOD-Foreign Military Sales
DoEd-HBCU+
DHUD-Community Dev. Block Grant
DHUD-Public Housing Notes
General Services Administration+
DOl-Virgin Islands
DON-Ship Lease Financing
Rural Utilities Service
SBA-State/Local Development Cos.
DOT-Section 511
Subtotal *

$2.500.7
$20.8
$12.3
$1,348.5
$2,358.1
$15.1
$1,047.5
$13,151. 9
$176.1
$3.6
$20,634.6

$2.518.4
$20.8
$12.7
$1.348.5
$2,362.0
$15.1
$1.047.5
$14.016.1
$178.2
$3.7
$21. 522.8

-$17.7
$0.0
-$0.3
$0.0
-$3.9
$0.0
$0.0
·$864.2
-$2.1
$0.0
-$888.2

-$110.2
$9.8
-$1.3
-$71.4
-$46.8
-$1. 0
-$91. 2
-$733.1
-$0.1
-$1. 063.2

Grand total*

$39,306.0

$40.181.8

-$875.8

-$3.809.7

* figures may not total due to rounding
+

does not include capitalized interest

-$17.7

federal financing
WASHINGTON, D.C

20220

bankNEWS

FEDERAL FINANCING BANK

MAY 31, 2000

Kerry Lanham, Secretary, Federal Financing Bank (FFB),
announced Lhe following activity for the month of April 2000.
FFB holdings of obligations issued, sold or guaranteed by
other Federal agencies totaled $38.7 billion on April 3D, 2000,
posting a decrease of $606.1 million from the level on March 31,
2000 .. This net change was the result of an increase in holdings
of agency-guaranteed loans of $9.6 million, and a decrease in
holdings of agency debt of $505.7 million and in holdings of
agency assets of $110.0 million. FFB made 58 disbursements
during the month of April. The FFB also received 13 prepayments
in April.
Attached to this release are tables presenting FFB April
loan activity and FFB holdings as of April 30, 2000.

LS-782

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Page 2
FEDERAL FINANCING BANK
APRIL 2000 ACTIVITY
Date

Borrower

Amount
of Advance

Final
Maturity

Interest
Rate

-

AGENCY DEBT
U.S. POSTAL SERVICE
U.S.
U.S.
U.S.
U.S.
U.S.
U.S.
U.S.
U.S.
U.S.
U.S.
U.S.
U.S.
U.S.
U.S.
U.S.
U.S.
U.S.
U.S.
U.S.
U.S.
U.S.
U.S.
U.S.
U.S.
U.S.
U.S.
U.S.
U.S.
U.S.
U.S.
U.S.
U.S.
U.S.
U.S.
U.S.
U.S.
U.S.
U.S.
U.S.
U.S.

Postal
Postal
Postal
Postal
Postal
Postal
Postal
Postal
Postal
Postal
Postal
Postal
Postal
Postal
Postal
Postal
Postal
Postal
Postal
Postal
Postal
Postal
Postal
Postal
Postal
Postal
Postal
Postal
Postal
Postal
Postal
Postal
Postal
Postal
Postal
Postal
Postal
Postal
Postal
Postal

Service
Service
Service
Service
Service
Service
Service
Service
Service
Service
Service
Service
Service
Service
Service
Service
Service
Service
Service
Service
Service
Service
Service
Service
Service
Service
Service
Service
Service
Service
Service
Service
Service
Service
Service
Service
Service
Service
Service
Service

4/03
4/03
4/04
4/04
4/05
4/05
4/06
4/06
4/07
4/07
4/10
4/10
4/11
4/11
4/12
4/12
4/13
4/13
4/14
4/14
4/17
4/17
4/18
4/18
4/19
4/19
4/20
4/20
4/21
4/21
4/24
4/24
4/25
4/25
4/26
4/26
4/27
4/27
4/28
4/28

$1,900,000,000.00
$351,700,000.00
$1,700,000,000.00
$239,700,000.00
$1,520,000,000.00
$216,500,000.00
$1,330,000,000.00
$205,700,000.00
$1,175,000,000.00
$195,800,000.00
$980,000,000.00
$245,700,000.00
$670,000,000.00
$276,300,000.00
$500,000,000.00
$245,100,000.00
$340,000,000.00
$258,400,000.00
$1,200,000,000.00
$322,300,000.00
$1,600,000,000.00
$268,000,000.00
$1,350,000,000.00
$246,100,000.00
$1,190,000,000.00
$248,600,000.00
$1,050,000,000.00
$230,700,000.00
$1,550,000,000.00
$325,000,000.00
$780,000,000.00
$321,700,000.00
$625,000,000.00
$287,000,000.00
$470,000,000.00
$296,800,000.00
$330,000,000.00
$300,600,000.00
$1,150,000,000.00
$401,900,000.00

4/04/00
4/04/00
4/05/00
4/05/00
4/06/00
4/06/00
4/07/00
4/07/00
4/10/00
4/10/00
4/11/00
4/11/00
4/12/00
4/12/00
4/13/00
4/13/00
4/14/00
4/14/00
4/17/00
4/17/00
4/18/00
4/18/00
4/19/00
4/19/00
4/20/00
4/20/00
4/21/00
4/21/00
4/24/00
4/24/00
4/25/00
4/25/00
4/26/00
4/26/00
4/27/00
4/27/00
4/28/00
4/28/00
5/01/00
5/01/00

5.998%
5.999%
6.006%
5.957%
5.999%
5.989%
5.957%
6.009%
5.989%
6.019%
6.009%
5.978%
6.019%
5.957%
5.978%
5.957%
5.957%
5.936%
5.957%
5.933%
5.936%
5.947%
5.933%
5.936%
5.947%
5.936%
5.936%
5.912%
5.936%
5.912%
5.912%
5.926%
5.912%
5.916%
5.926%
5.874%
5.916%

S/A
S/A
S/A
S/A
S/A
S/A
S/A
S/A
S/A
S/A
S/A
S/A
S/A
S/A
S/A
S/A
S/A
S/A
S/A
S/A
S/A
S/A
S/A
S/A
S/A
S/A

sf A

S/A
sf A

S/A
S/A
S/A
S/A
sf A
S/A
S/A
S/A

5.873% SIA

5.874% S/A
5.943% SIA

Page 3
FEDERAL FINANCING BANK
APRIL 2000 ACTIVITY
Borrower

Date

Amount
of Advance

Final
Maturity

Interest
Rate

GOVERNMENT-GUARANTEED LOANS
GENERAL SERVICES ADMINISTRATION
Foley Services Contract
Atlanta CDC Lab
Atlanta CDC Lab
Atlanta CDC Lab
Atlanta CDC Lab

4/18
4/21
4/21
4/21
4/21

$184,103.65
$150,852.00
$14,766.94
$30,383.43
$5,157.76

7/31/25
1/30/02
1/30/02
1/30/02
1/30/02

6.303%
6.502%
6.502%
6.502%
6.502%

S/A
S/A
S/A
S/A
S/A

4/03
4/03
4/11
4/11
4/13
4/13
4/14
4/14
4/18
4/18
4/24
4/24
4/27

$590,000.00
$1,110,000.00
$2,000,000.00
$472,000.00
$1,300,000.00
$803,000.00
$456,000.00
$700,000.00
$1,500,000.00
$3,749,000.00
$1,084,000.00
$64,184.00
$1,000,000.00

1/03/34
1/03/34
6/30/10
1/03/34
1/02/01
1/03/34
1/03/34
10/02/28
4/02/01
12/31/12
1/03/34
10/02/00
7/01/30

5.951%
5.951%
5.777%
5.788%
6.071%
5.940%
5.911%
6.141%
6.024%
6.217%
5.926%
5.937%
6.099%

Qtr.
Qtr.
Qtr.
Qtr.
Qtr.
Qtr.
Qtr.
Qtr.
Qtr.
Qtr.
Qtr.
Qtr.
Qtr.

RURAL UTILITIES SERVICE
Decatur County #575
Morgan County Elec. #539
Farmers' Elec. #598
Rural Elec. Conven. #613
Shelby Energy Coop. #607
wild Rice Elec. #617
Carroll Elec. #618
Orange County Elec. #466
Harrison County rural #609
N. Pittsburgh Tele. #449
Cimarron Electric #567
Piedmont Tel. #566
Cental Virginia Elec. #593
S/A is a Semiannual rate.
Qtr. is a Quarterly rate.

Page 4
FEDERAL FINANCING BANK HOLDINGS
(in millions of dollars)

Program

Monthly
Net Change

Fiscal Year
Net Change

411/00- 4130/00

10/1/99· 4/30/00

April 3D, 2000

March 31, 2000

Agency Debt:
U.S. Postal Service
National Credit Union Adm.-ClF
Subtotal*

$3,801. 9
$0.0
$3,801. 9

$4,307.6
$0.0
$4,307.6

-$505.7
$0.0
-$505.7

·$2,477.2
$0.0
·$2,477.2

Agency Assets:
FmHA-RDIF
FmHA-RHIF
DHHS-HMO
DHHS-Medical Facilities
Rural Utilities Service-CBO
Subtotal *

$3,410.0
$6,240.0
$1. 7
$3.2
$4,598.9
$14,253.8

$3,410.0
$6,350.0
$1. 7
$3.2
$4,598.9
$14,363.8

$0.0
-$110.0
$0.0
$0.0
$0.0
-$110.0

$0.0
-$885.0
$0.0
$0.0
$0.0
·$885.0

Government·Guaranteed lending:
DOD-Foreign Military Sales
DoEd·HBCU+
DHUD·Community Dev. Block Grant
DHUD-Public Housing Notes
General Services Administration+
DOl-Virgin Islands
DON·Ship lease Financing
Rural Utilities Service
SBA·State/local Development Cos.
DOT-Section 511
Subtotal *

$2,498.0
$20.8
$12.3
$1 ,348.5
$2,358.5
$15.1
$1,047.5
$13,166.5
$173.4
$3.6
$20,644.2

$2,500.7
$20.8
$12.3
$1, 348. 5
$2,358.1
$15.1
$1, 047.5
$13,151. 9
$176.1
$3.6
$20,634.6

-$2.7
$0.0
$0.0
$0.0
$0.4
$0.0
$0.0
$14.6
-$2.7
$0.0
$9.6

·$112.9
$9.8
·$1.3
-$71.4
·$46,4
. $1. 0
-$91. 2
. $718, 5
·$20.4
·$0,1
-$1.053.6

Grand total*

$38,699.9

-$606.1

·$4,415.8

=

* figures may not total due to rounding
+

does not include capitalized interest

$39,306.0

federal financing
WASHINGTON. D.C

20220

bankNEWS

FEDERAL FINANCING BANK

June 30, 2000

Kerry Lanham, Secretary, Federal Financing Bank (FFB) ,
announced the following activity for the month of May 2000.
FFB holdings of obligations issued, sold or guaranteed by
other Federal agencies totaled $39.1 billion on May 31, 2000,
posting an increase of $402.7 million from the level on April 30,
2000. This net change was the result of an increase in holdings
of agency debt of $476.8 million and in holdings of governmentguaranteed loans of $25.9 million, and a decrease in holdings of
agency assets of $100.0 million. FFB made 62 disbursements
during the month of May. The FFB also received 15 prepayments in
May.
Attached to this release are tables presenting FFB May loan
activity and FFB holdings as of May 31, 2000.

L5-783

Page 2
FEDERAL FINANCING BANK
MAY 2000 ACTIVITY
Final
Maturity

Interest
Rate

$40,000,000.00

8/14/00

6.375%S/A

5/01 $1,475,000,000.00
$371,600,000.00
5/01
5/02 $1,245,000,000.00
$360,100,000.00
5/02
$500,000,000.00
5/03
$560,000,000.00
5/03
$350,500,000.00
5/03
5/04
$350,000,000.00
5/04
$357,300,000.00
$280,000,000.00
5/05
5/05
$234,000,000.00
5/08
$130,000,000.00
5/08
$199,200,000.00
5/09
$59,000,000.00
5/12
$390,000,000.00
5/12
$345,300,000.00
5/15
$770,000,000.00
5/15
$395,600,000.00
5/16
$625,000,000.00
5/16
$345,800,000.00
5/17
$610,000,000.00
5/17
$233,200,000.00
5/18
$470,000,000.00
5/18
$288,100 / 000.00
5/19
$960,000,000.00
5/19
$395,900,000.00
5/22
$250,000 / 000.00
5/22
$353,000,000.00
5/23
$115,000,000.00
5/23
$251,900,000.00
5/24
$247,700 1 000.00
5/25
$500,000 1 000.00
5/25
$250,000,000.00
5/26
$263 / 800,000.00
5/30
$135 / 000 1 000.00
5/30
$475 / 100,000.00
5/31
$215,000 1 000.00
5/31
$523 / 700,000.00

5/02/00
5/02/00
5/03/00
5/03/00
7/27/00
5/04/00
5/04/00
5/05/00
5/05/00
5/08/00
5/08/00
5/09/00
5/09/00
5/10/00
5/15/00
5/15/00
5/16/00
5/16/00
5/17/00
5/17/00
5/18/00
5/18/00
5/19/00
5/19/00
5/22/00
5/22/00
5/23/00
5/23/00
5/24/00
5/24/00
5/25/00
3/01/01
5/15/30
5/30/00
5/31/00
5/31/00
6/01/00
6/01/00

5.873% S/A
6.124% S/A
5.943% Sf A
6.041% S/A
5.926% Sf A
6.124% S/A
6.030% S/A
6.041% S/A
6.019% S/A
6.030% S/A
6.079% S/A
6.019% S/A
6.312%S/A
6.260% S/A
6.260%S/A
6.256% S/A
6.259% S/A
6.375% S/A
6.256% S/A
6.323%S/A
6.375%S/A
6.177% S/A
6.323% sf A
6.040% S/A
6.17790 S/A
5.995% S/A
6.040% sf A
6.135% sf A
5.995% S/A
6.135% sf A
6.041% sf A

Date

Borrower

Amount
of Advance

AGENCY DEBT
NATIONAL CREDIT UNION ADMIN.
National Credit Union

-

CLF
5/16

U.S. POSTAL SERVICE
U.S.
U.S.
U.S.
U.S.
U.S.
U.S.
U.S.
U.S.
U.S.
U.S.
U.S.
U.S.
U.S.
U.S.
U.S.
U.S.
U.S.
U.S.
U.S.
U.S.
U.S.
U.S.
U.S.
U.S.
U.S.
U.S.
U.S.
U.S.
U.S.
U.S.
U.S.
U.S.
U.S.
U.S.
U.S.
U.S.
U.S.
U.S.

Postal
Postal
Postal
Postal
Postal
Postal
Postal
Postal
Postal
Postal
Postal
Postal
Postal
Postal
Postal
Postal
Postal
Postal
Postal
Postal
Postal
Postal
Postal
Postal
Postal
Postal
Postal
Postal
Postal
Postal
Postal
Postal
Postal
Postal
Postal
Postal
Postal
Postal

Service
Service
Service
Service
Service
Service
Service
Service
Service
Service
Service
Service
Service
Service
Service
Service
Service
Service
Service
Service
Service
Service
Service
Service
Service
Service
Service
Service
Service
Service
Service
Service
Service
Service
Service
Service
Service
Service

6.333%S/A
6.299% S/A
5.932% S/A
5.967% S/A
5.999% S/A
5.932% S/l-,
5.759% SiP.,

Page 3
FEDERAL FINANCING BANK
MAY 2000 ACTIVITY
Borrower

Date

Amount
of Advance

Final
Maturity

Interest
Rate

OVERNMENT-GUARANTEED LOANS
GENERAL SERVICES ADMINISTRATION
Atlanta CDC Lab
Atlanta CDC Lab

5/18
5/19

$187,670.12
$52,060.85

1/30/02
1/30/02

5/01
5/01
5/02
5/03
5/04
5/05
5/08
5/08
5/08
5/08
5/11
5/12
5/15
5/19
5/19
5/23
5/25
5/25
5/30
5/30
5/31

$11,000,000.00
$1,960,000.00
$15,798,983.00
$919,000.00
$2,400,000.00
$1,171,000.00
$360,000.00
$2,297,000.00
$825,000.00
$914,000.00
$600,000.00
$872,575.00
$2,800,000.00
$429,000.00
$250,000.00
$2,000,000.00
$2,000,000.00
$2,800,000.00
$381,000.00
$1,407,794.00
$2,900,000.00

1/03/34
1/03/34
12/31/25
1/03/34
1/03/33
1/03/33
1/03/34
1/03/34
7/01/30
10/02/00
1/02/29
1/03/34
12/31/31
1/03/34
1/03/34
7/01/30
1/03/33
12/31/30
12/31/29
1/03/12
1/03/33

6.983% S/A
7.013% S/A

Rmvlli UTILITIES SERVICE
Horry Electric Coop. #536
Three Notch Elec. #596
Georgia Trans. Corp. #559
Western Indiana #594
Blue Ridge Elec. #512
Socorro Elec. #541
Agralite Elec. #543
Empire Electric #627
Menard Elec. #518
Steele-Waseca Coop. #550
Whetstone Valley #571
Butler Rural Elec. #578
Sho-Me Power #480
Goodhue County #595
Logan County Coop. #603
Cental Virginia Elec. #593
Southeastern Indiana #496
Southwest Mississippi #628
Erath County Elec. #599
Kalona Co-operative #625
Jemez Mountains Elec. #499
S/A is a Semiannual rate.
Qtr. is a Quarterly rate.

6.081%
6.871%
6.249%
6.147%
6.369%
6.327%
6.331%
6.331%
6.522%
6.206%
6.395%
6.281%
6.496%
6.378%
6.379%
6.366%
6.532%
6.381%
6.257%
6.415%
6.417%

Qtr.
Qtr.
Qtr.
Qtr.
Qtr.
Qtr.
Qtr.
Qtr.
Qtr.
Qtr.
Qtr.
Qtr.
Qtr.
Qtr.
Qtr.
Qtr.
Qtr.
Qtr.
Qtr.
Qtr.
Qtr.

Page 4
FEDERAL FINANCING BANK HOLDINGS
(in millions of dollars)

Program

May 31. 2000

April 30, 2000

Monthly
Net Change

Fiscal Year
Net Change

5/1100 - 5/31100

10/1/99- 5/31/00

Agency Debt:
U.S. Postal Service
National Credit Union Adm.-ClF
Subtotal *

$4.238.7
$40.0
$4.278.7

$3.801. 9
$0.0
$3,801. 9

$436.8
$40.0
$476.8

-$2.040.4
$40.0
-$2.000.4

Agency Assets:
FmHA-RDIF
FmHA-RHIF
DHHS-HMO
DHHS-Medical Facilities
Rural Utilities Service-CBO
Subtotal *

$3,410.0
$6.140.0
$1. 7
S3.2
$4.598.9
$14.153.8

$3,410.0
$6.240.0
$1. 7
$3.2
$4.598.9
$14.253.8

$0.0
-$100.0
SO.O
SO.O
$0.0
-$100.0

$0.0
-$985.0
$0.0
SO.O
$0.0
-$985.0

Government-Guaranteed lending:
DOD-Foreign Military Sales
DoEd-HBCU+
DHUD-Community Oev. Block Grant
DHUD-Public Housing Notes
General Services Administration+
DOl-Virgin Islands
DON-Ship·lease Financing
Rural Utilities Service
SBA-State/local Development Cos.
DOT-Section 511
Subtotal *

$2.485.1
$20.8
$12.3
$1.348.5
$2.346.0
$15.1
$1,047.5
$13.220.8
$170.6
$3.6
$20.670.1

$2.498.0
$20.8
$12.3
$1.348.5
$2.358.5
$15.1
$1.047.5
$13.166.5
$173.4
$3.6
$20.644.2

-$12.9
$0.0
-SO.1
$0.0
-$12.5
$0.0
$0.0
$54.3
-$2.9
$0.0
$25.9

-$125.9
$9.8
-$1.4
-$71.4
-$58.9
-$1.0
-$91. 2
-$664.2
-$23.3
-$0.1
-$1.027.6

Grand total*

$39.102.6

$38.699.9

$402.7

*

figures may not total due to rounding

+ does not ;nclude cap;tal;zed ;nterest

--

-$4.013.0

DEPARTMENT

OF

THE

TREASURY ~(ti~l~
~~,~~/~

TREASURY

NEW S

_------~17~q:.-------OmCE OF PCBUC AFFAIRS • 1500
AVENLE, N.W .• WASHINGTON, D.C.. 20220. 1202) 622·2960
PENNSYLVA1\L~

FOR INfMEDIATE RELEASE
July 17, 2000

STATEMENT BY TREASURY SECRETARY LAWRENCE H. SUMMERS

Today's survey confirms that the Community Reinvestment Act is profitable for America's
communities and financial institutions
eRA lending has dramatically increased in recent years and has played an important role in our
national economic prosperity. eRA is also opening new markets for profitable lending by
America's financial institutions
This report is further evidence that eRA creates and strengthens important relationships between
financial institutions and the communities they serve.
-30-

LS-784

For press releases, speeches, public schedules and official biographies, call our 24-hour fax line at (202) 622-2040

DEPARTMENT

OF

THE

TREASURY {l!;fl
X~~i

TREASURY

NEW S

~/78~g. . ._ _ _ _ _ __

_ - - - - -. . . . .

OFFICE OF PUBUC AFFAIRS -1500 PENNSYLVANIA AVENUE, N.W .• WASHINGTON, D.C .• 20220. (202) 622·2960

Embargoed until 11:00 a.m.
Remarks as Prepared for Delivery
July 18, 2000

REMARKS OF TREASURY SECRETARY LAWRENCE H. SUMMERS AT THE
DEPARTMENT OF LABOR RETIREMENT SAVINGS EDUCATION CAMPAIGN
FIFTH ANNIVERSARY EVENT

We come together at a special time a celebration of five years of the Retirement Savings
Education Campaign. I would like to join Secretary Herman in saluting the accomplishments of
the RSEC and in recognizing the many organizations that have joined with us in the effort.
By almost any measure we are enjoying a record period of economic expansion. But now is not a
time for complacency. There are few choices we can make today that are as important to
securing the future prosperity of our country as increasing saving.
Increasing saving is both a macroeconomic and a microeconomic imperative: it is crucial to our
overall economic health and to the financial security of individual Americans and their families.
Let me divide my remarks on this topic into three parts:
•

First, the importance of staying on the path of fiscal discipline.

•

Second, the steps the Administration is taking to raise personal saving within existing law.

•

And third, the need to target new savings incentives at middle and lower-income workers,
who are largely left behind under our current system.

I.

Maintaining Fiscal Discipline.

Raising national saving is an especially important macroeconomic imperative today for four
main reasons because now is not the time to deliver additional fiscal stimulus to the economy;
because higher national saving would help reduce the US current account deficit; because we
should be preparing for the aging of America; and because we should preserve our fiscal
flexibility

LS-785

t

~or press releases, speeches, public schedules and official biogr:aphies, call our 24-hour fax line at (202) 622-2040

If increasing national saving is the right objective, how do we accomplish it')
•

First, we must increase the level of public saving by paying down the national debt as
proposed in the Mid-Session Review of the budget.

•

Second, we must raise the level of personal saving, by encouraging individual Americans
to save more.

The current expansion would not have been as impressive or as enduring if we had not chosen to
pursue a tough and prudent fiscal strategy since 1993. By moving from budget deficits to budget
surpluses, we have nearly doubled our net national saving rate, to more than 7 percent last year.
If, as the President has proposed, we use the Social Security and Medicare surpluses and a share
of the projected on-budget surpluses for debt reduction, we will be on track to eliminating the net
debt held by the public by 2012.
But improving the level of public saving will not alone be sufficient to enable us to meet the
challenges that lie ahead. It is critical that we raise personal saving both for our nation's
economic security and for the financial security for families and individuals in retirement. Ifboth
members of a couple in my age cohort reach 65, they will face even odds that at least one of
them will reach the age of90. And as people are retiring earlier and living longer, retirement
spans for many individuals are approaching half or more of their working lives.
II.

Using Behavioral Influences to Promote Personal Saving.

Saving enough to achieve a more secure retirement is within the reach of almost every American
family. An individual who saved $15 a week - today's price of two movie tickets - for the past
ten years would have accumulated $22,000 by investing in the stock market. This amount rises to
$120,000 if he or she had started 20 years ago and almost $400,000 if he or she had started 30
years ago.
To be sure, the recent decades have been an extraordinary period in our financial history.
Individuals who believe that such returns will necessarily persist in the future may save too little.
Still, this example points to the enormous potential of saving and the power of compounding.
How can we most effectively help American families do what is so clearly in their interest and in
the national interest') There has recently been a sea change in thinking on this question.
Economists have come to recognize that behavioral influences are at least as important in
determining saving as financial incentives Habit formation, social institutions, and the whole
range of influences on people's tastes, all are capable of having an enormous impact.
Saving can become something that is as habitual as wearing a seatbelt or locking your door when
you go out at night. But it only becomes a habit when it is taught when it is facilitated, and when
it is something that people want to emulate. For example, one recent study found that 40 percent
of employees who received educational savings material at work were inspired either to start
saving for the first time or to resume saving. Similar results were achieved among people who
took personal finance courses in high school.

2

We are bringing this research to bear in our efforts to promote personal saving.
First, we are helping to educate Americans ahoul the importance (if persollal saving.

Recent surveys suggest that more than half of all Americans have little or no idea how much they
need to save for retirement. We must ensure that all Americans understand the importance of
financial planning and can take advantage of the savings incentives that are available.
In 1995 the Department of Labor, Treasury, and 65 other public and private organizations
launched the RSEC, and pledged to raise awareness about the importance of saving for
retirement. On April 4th of this year we announced the launch of the National Partners for
Financial Empowerment: a broad-based public-private coalition intended to further raise
financial awareness and improve personal financial competency. The NPFE is already
sponsoring a number of efforts to elevate the visibility of this topic:
•

Next week I will be joining SEC Chairman Levitt in Cleveland in another of the Chairman's
series ofInvestor Town Meetings. This Town Meeting in Cleveland will be to highlight a
pilot project called Cleve/and S'aves, which is sponsored by the Consumer Federation of
America to raise financial literacy in that city

•

The NPFE will soon be launching a public service announcement campaign. The first round
of announcements will be distributed to more than 1,000 TV stations across the country

•

And I am pleased to announce that today we are launching the NPFE website that will serve
as a gateway for financial planning and saving resources for individuals, employers, and
communities.

Second, we are improvlJJ~ exislill~ sa"inx.\" illcentives hy mClkill).; if easier fo fake advullfa;.;e (if
them.

Studies show that individuals are much more likely to save when saving is made simple and
easy. That is one reason why401(k) plans have become America's most popular savings vehicle:
much like a Christmas Club, 40 l(k) payroll deduction is convenient and regular, and the money
goes into savings before there is an opportunity to spend it
Traditionally, an employee must opt in to a 40 I (k). Under a more novel approach known as
automatic enrollment, an employee is presumed to participate unless the employee explicitly opts
out. Not surprisingly, given the importance of the way choices are framed, 401 (k) plans with
automatic enrollment have significantly higher employee participation rates than plans without
automatic enrollment.
We have issued two important rulings during the last two years that promote expanded adoption
of automatic enrollment - the first making clear that automatic enrollment in 40 I (k) plans can be

3

applied to new hires, and the second making clear that it can be applied to employees already on
the payrolls.
In light of the favorable early experience with these rulings and strong interest from the pension
community, we are now taking several additional steos to broaden the applicability of the
concept of automatic enrollment
•

First, today I am pleased to announce that the IRS is issuing two new rulings extending the
concept of automatic enrollment to 403(b) retirement plans, which serve millions of
employees of public schools and other educational and charitable organizations, and to 50called 457 plans, which serve millions of State and local government employees.

•

Second, the IRS yesterday announced that it will allow automatic enrollment to be offered as
an option in its standardized 40 I (k) plans. These "off-the-shelf' plans are most commonly
used by small businesses, and small business is where we have the greatest challenge and the
greatest opportunity to increase retirement savings. Like the 40 I (k) rulings, this guidance
allows interested employers to create a "positive presumption" in favor of saving.

•

Third, Treasury and IRS yesterday issued another ruling clarifying that employers may
automatically roll over a departing employee's balance to an IRA set up for that employee,
unless the employee explicitly directs otherwise. This ruling is designed to reduce the
leakage from retirement plans that would inevitably be associated with a highly mobile
workforce.

So that there can be no mistaking our positions on these critical issues, Secretary Herman and I
are releasing a joint statement today making clear that automatic enrollment in retirement saving
plans and automatic rollover of accumulated balances are fully consistent with the policy of both
our Departments We urge all employers to carefully consider adopting automatic enrollment.
Ill.

Targeting New Savings Incentives at Those Who Need Them Most.

We should all be able to agree on the need to raise personal savings through methods such as
those I have just described. But inevitably, disagreements will arise about the broad direction of
tax policy. Let me just record two issues in tax policy that have a direct bearing on national
saving.
First, it is critically important that we continue to pay down the debt held by the public. Debt
reduction is the most effective form of tax cut because it cuts the burden of future interest and
principal payments and also because it makes a direct contribution to the pool offunds available
for private investment, and thereby helps hold down interest rates. Every one percentage point
fall in long-term interest rates reduces the cost of mortgages for American families by $250
billion over a decade.

4

In this regard, it is particularly important that we pay attention to the near and long-term
consequences of tax cuts. Highly back-loaded tax cuts offer prospects of substantial benefits at
little apparent cost. But they are more dangerous to the economy than large tax cuts phased-in
quickly. They are more dangerous because their cost is not fully apparent and because their cost
will be borne as the baby boom generation starts to retire in an economic environment about
which we cannot be absolutely certain because it is so far into the future.
Second, as we approach the question of tax incentives for saving, there is a strong argument for
much greater focus on the needs of the 75 million American who do not participate in a
retirement pension plan and have little or no other retirement savings. Targeting incentives at
low and middle-income employees is right both because it is fair and because it is effective.
Common sense dictates that savings incentives will be most effective in raising overall personal
saving if the target population has no saving and thus no ability to reduce the flow of saving to
non-preferred vehicles.
In particular, as we work to strengthen the pension system, we have serious reservations about
provisions that would weaken protections for low and middle income employees by undermining
"top-heavy" and anti-discrimination safeguards or otherwise leading to benefit reductions. It is
my hope that as savings policy is addressed this year, these issues will be considered in a serious
way.
Two-thirds of existing pension tax expenditures go to families in the top 20 percent of the
income distribution while only 12 percent goes to families in the bottom 60 percent. Indeed, for
the tens of millions of Americans who pay no Federal income tax, 40 I (k) and IRA tax incentives
are worth nothing
Our proposed Retirement Savings Accounts, or RSAs, would extend credits to all low and
moderate-income working families to encourage them to save and build wealth. Participants'
contributions to employer plans and IRAs would qualify for a progressive tax credit and
accumulate tax free. To provide incentives where they are most needed, the highest credit rates
would apply to the lowest-income workers
The RSA approach takes advantage of the existing payroll deduction mechanism of 40 I(k) plans,
and the positive peer effects that are associated with such plans And RSAs would provide a
target level of savings for workers who now typically are not saving for retirement at all.
V.

Conclusion.

We are a fortunate country and this is as fortunate a time as any in our history to be an American.
But this is not a time to rest on our laurels. New prosperity must be built on old virtues. Ifwe are
to lay the groundwork for our nation's future growth and improve the financial security of all of
our families, then we must redouble our efforts to raise personal saving, the goal with which we
began our partnership five years ago. Thank you
-30-

5

u.s. Treasury Department
u.s. Labor Department
FOR IMMEDIATE RELEASE
July 18, 2000
JOINT STATEMENT 01 TREASU.RY SECRE"fARY LAWRENCE R. SUMMERS AND
LABOR SECRETARY ALEXIS M. HERMAN

We must encourage individuals to increase their retirement savings. Our national economic
health and the financial security of our nation's workers during retirement depend on it.
Indiyiduals are much more likely [0 save when saving is made easy. That is one reason why
employer-sponsored retirement savings plans have become America's most popular savings
vehicles. Unfortunately, despite the popularity of [hese plans. participation in them is still far
lower than it should be. We need to find ways to broaden participation.

Private sector experience and academic studies have shown that automatic enrollment is one way
to achieve broader participation ill savings plans. When employers automaticalJy enro]) workers
in retirement savings plans participation improves dramatically, especially among low-and
moderate-income workers.
Treasury announced today thal the IRS is taking several steps related to automatic enrollment, all
of which should promote broader participation in employer.sponsored retirement plans.
We see automatic enrollment as a promising method of encouraging participation by those who
have disproportionately been missing the benefits of a regular, disciplined approach to retirement
saving. Automatic enrollment is fully consistent with Labor and Treasury policies, and we
encourage empJoyers to con~ider adopting automatic enrollment.

By encouraging saving we can fairly and effectively raise lhe personal savings rate and increase
the retirement security of all Americans.
-30LS-785

D EPA R T l\1 E l\' T

0 F

THE

.

T REA SUR Y

.'

NEWS
ornCE OF PUBUC AFFAIRS -1500 PENNSYLVANIA AVENUE, N.W. - WASIDNGTON. D.C. _ 20220 - (202) 622.2960

u.s. International Reserve Position

7/18/00

The Treasury Department today released U.S. reserve assets data for the week endingJuly 14, 2000.
As indicated in this table, U.S. reserve assets
of July 7, 2000.

tota~ed

567,044 million as of July 14,2000, down from $67,5,5 million as

(in US millions)

I. Official U.S. Res.erve Assets

Julll 7, 2000
67,535

TOTAL
1. Foreign Currency Reserves 1
a. Securities
Of which. issuer headquat1emcl in the U.S.

t

Euro
4,869

Yen
5,404

JulX 14, 2000
67,044
TOTAL

Euro

10,273
0

4,810

20.407

6.241

Yen
5,956

TOTAl
10,766

0

b. Total deposits with:
b.i. Other central banks and sis
b.ii. Banks headquartered in the U.S.
boiL Of which, banks located abroad
b.iii. Banks headquartered outside the U.S.
b.iii. Of which, banks located in the U.S.

8,332

12.076

11,514

19.755

0

0

0

~

0
0

0
C

2. IMF Reserve Position 2

15,363

rS.1c=

3, Special Drawing Rights (SDRs) Z

10,444

~, 3~C

4, Gold Stock 3

11,048

:1

5. Other Reserve Assets

0

11 InclUdes holdings of the Treasury's Exchange StC\bihzatlon Fund (ESF) and the Federal Reserve's System Open Market Account
(SOMA), valued at current market exchange rates. Foreign currency holdings listed as securities reflect marked·lo·market values. ar.d
deposits reflect.carrying values.

21 The items, '2. IMF Reserve Posillon" and "3. Special Orawang Rights (SDRsl," are based on data provided by the IMF and are ... a~uec In
dollar terms at the official SDR/dollar exchange rate for the reporting date The IMF dala for July 7 are final The entnes In the ta~'e a:i?ve
for July 14 (shown in italics) renect any necessary adlustments, aneluding revaluahon, by the U S 1 reasu'Y to Ihe prior week's IMi' :,:a

31 Gold Slock is valued monthly at $42.2222 per fine troy ounce Values shown are as of May 31, 2000 The April 30, 2000 valu:: ,', as
S1',048 million.

LS-787

e-=.:

--

U.S. International Reserve Position (cont'd)
11. Predetermined Short-Term Drains on Foreign Currency Assets
July 7. 2000

1. Foreign currency loans and securities
2. Aggregate short and long positions in forwards and
futures in foreign currencies vis-a-vis the U.S. doUar.
2.8. Short positions

2.b. Long positions
3. Other

July 14. 2000

0

0

0
0
0

a
0
0

111. Contingent Short-Term Net Drains on Foreign Currency Assets
July 7.2000

1. Contingent liabilities in foreign currency
1.a. Collateral guarantees on debt due within 1 year
l.b. Other contingent liabilities
2. Foreign currency securities with embedded options
3. Undrawn. unconditional credit lines
3.8. With other central banks
3.b. With banks and other financial institutions

July 14, 2000

a

a

o

o

G
C

o

o

u.

headquarlered in the S.
3.e. With banks and other financial institutions
headquartered outside the U.S.
4. Aggregate short and long positions of options in foreign
currencies vis-a-vis the U.S. dollar
4.a. Short positions
4.8.1. Bought puts
4.8.2. Written calls
4.b. Long positions
4.b.1. Bought calls
4.b.2. Written puts

ottical Reserve Assets Worksheet
(actual US dollar amounts)

Enter Dates Here

Last Week
7-Jul-00

Foreign Currency

7-Jul-OO

14-Jul-OO

$4,868,871,948.98

$4,810,023,166.04

·58,848.782.94

~5,404,464,558.02

~5,955,724,471.64

551,259.913.62

$10,273,336,507.00
$8,331,520,720.33

$10,765,747,637.68

492,411,130.68

$20,407,309,941.08

$8,241,300,47B.85
i1',513,604,505.63
$19,754,904,98448

-562.184,71512
·652,404,956.60

$30,680,646.448.0B
$0.9545
Y 106.14

$30,520,652,622.16
$0.9374
Y 107.88

Euro Securities
Yen Securities
Sec. Total

Euro Deposits
Yen DepOSits
Deposit Total
Total
Euro Rate
Yen Rate

~12,07.5,7B9,220.75

7-Jul·OO

IMF

This Week

14-Jul-00
Source: NY Fed

·90,220,241.48

·159,993,625.92

Source IMF (fax)

14-Jul-OO
(preJim, with adjusO

Reserve Tranche
GAB
NAB
Total
SDR

15,362,560,631.74
0.00

15,165,322,199.18
000

0.00
15,362,560,631.74

0.00
15,165,322,199.18

·197,238.432.56

10,444,353,747.79

10,310.259,698.64

.134,094,049.15

7-Jul-DO

14-Jul·OO

11,047,619,661.80

11,047,619,661.80

7.JUI.O~1

14-JUI'0~1

·197,238.432.56
000
000

000

as of 5/31/00
Gold

Source: FMS (monthly statement)
0

!Other Res.Assets
jTOTAL

Source (?)
-491.326.30763

67,535,180,489.41

67,043,854,181. 78 1

Adjustments to IMF and SDR data, translated at current exchange rates

Wre1in;-.-iMF:oat-;-------- ----iNs-oR;------------------------------------------------- --SDR- ~~i~ i~; --------. ----------- --!
:Calculation Section
7..Ju(·OO
Adjustments
14·Jul·QO
In USD
!
!ReserveTranche

11,487,923,127

:G~

a

\NAB
,

0

,

:

11,487,923,127

075751263

0
Q
11,487,923.127

$15.165.322,19918:

,

SOC-::1:
SO.C':]:
Total'"

'

$15,165.322.199.18:

!~~~~ _________________________ ?~~~9~~~~~~?~_____________________ . _________'C,~_~~,_1_~~~9_~~ ______~ ~~~ _=. _ $ 10,310.259 ,698E4:

DEPARTMENT

OF

THE

TREASURY

OffiCE OF PUBUC AFFAIRS -1500 PENNSYLVANIA AVENUE, N.W. - WASHINGTON, D.C.' 20220 - (202) 622·2960

EMBARGOED UNTIL 10:00 AM. (EDT)
Text as prepared for Delivery
July 19, 2000

TREASURY ASSISTANT SECRETARY LEWIS A. SACHS
HOUSE COMMITTEE ON BANKING AND FINANCIAL SERVICES

Chairman Leach, Ranking Member LaFalce, members of this Committee, I
appreciate the opportunity to appear before you today on behalf of the Treasury
Department to discuss H R 4541, the Commodity Futures Modernization Act of 2000. I
would like to commend you, Mr. Chairman, Ranking Member LaFalce, and the other
members of this Committee for the leadership you have demonstrated on the important
matters under discussion today.
In November 1999, the President's Working Group on Financial Markets
presented its report entitled ()l'cr-Ihe-Collllfer Derivatives Markets and the Commodity
Exchange Act to the Congress. In this report. the Working Group, which is chaired by
Secretary Summers and includes the Chairmen of the Federal Reserve, the Commodity
Futures Trading Commission and the Securities and Exchange Commission. set forth a
series of unanimous recommendations designed to reform the legal and regulatory
framework affecting the OTe derivatives market. The legislation before you today
would enact many of those important recommendations
Let me begin by providing some background on OTe derivatives and the
recommendations of the President's Working Group on Financial Markets. I will then
turn to H.R. 4541 more specifically, including the bill's treatment of OTC derivatives.
regulatory relief for the futures exchanges, and the reform of the Shad-Johnson
restrictions on the trading of single stock and narrow-based stock index futures
I.

OTe Derivatives and the President's Working Group's Recommendations
Mr Chairman, our tinancial sector is the central nervous system of the American

economy As our economy and our financial markets have evolved over the past two
decades, so too have the needs of the financial sector Most notably, in an era of
globalization, volatility of interest rates, increased securitization and the growth of the
bond markets relative to the traditional loan markets. businesses and financial institutions
have required a more diverse and effective set of tools for managing risk

LS 788

For press releases, speeches, public schedules and official biographies, call ollr 24.nour fax line at (202) 622·2rHO

In that sense. the over-the-counter derivatives market has grown directly in
response to the needs of the private sector An OTe derivative is an instrument that
allows a party seeking to reduce its risk expoflure to transfer that exposure to a
counterparty that wants and may be in a better position to assume the risk. This is an
important development that has significantly enhanced the ability of businesses to
manage their risk profiles. to compete more effectively in the global marketplace. and to
deliver more efficiently and at lower cost a wide range of services and products to the
American consumer.
Because of these rising demands. the notional value of global OTe derivatives
has risen more than five-fold over the past decade, to more than $80 trillion according to
estimates produced by the Bank for International Settlements.
.
The benefits to the American economy of OTe derivatives would continue to
grow within a proper and appropriate framework of legal certainty. For example:
•

By helping businesses and financial institutions to hedge their risks more
efficiently, OTe derivatives enable them to pass on the benefits of lower product
costs to American consumers and businesses.

•

By allowing for the transfer of unwanted risk. OTe derivatives promote the more
efficient allocation of capital across the economy, further increasing American
productivity.

•

By providing better pricing information. OTe derivatives can help promote
greater efficiency and liquidity of the underlying cash markets that feed into a
stronger economy for all Americans.

•

And, by enabling more sophisticated management of assets, including mortgages,
consumer loans and corporate debt. OTe derivatives can help lower mortgage
payments. insurance premiums, and other financing costs for American
consumers and businesses.

Thus, OTe derivatives have the potential to bring important benefits to our
economy. It was with the importance of OTe derivatives in mind that. last year, the
Congress requested that the Working Group conduct a study of the OTe derivatives
market and recommend changes required to ensure that we continue to reap such benefits.
In response. the Working Group developed its set of unanimous recommendations
designed to achieve four objectives:

2

•

First, to reduce systemic risk in the OTe derivatives market by removing legal
impediments to the development of clearing systems and ensuring that those
systems are appropriately regulated.

•

Second, to promote innovation in the OTe derivatives market by providing
legal certainty for OTe derivatives and electronic trading systems. This would
strengthen the overall legal framework governing the OTe derivatives market
and, in turn, would stimulate greater competition, transparency, liquidity, and
efficiency and deliver stronger benefits to US consumers and businesses.

•

Third, to protect retail customers by ensuring that appropriate regulations are in
place to deter unfair practices in all markets in which they participate and by
closing existing legal loopholes that allow unregulated entities to pursue such
unfair practices through foreign currency transactions.

•

And fourth, to maintain US competitiveness by providing a modernized
framework that will lead those engaged in the financial services industry to
continue the operations of their businesses in the United States, and thereby
promote the continued leadership of American capital markets.

Given the scope of the bill before you today - providing legal certainty to OTe
derivatives, reforming the Shad-Johnson Accord, and providing regulatory relief for
futures exchanges - I would like to also emphasize a fifth important objective:
•. To protect the integrity of the markets underlying the derivatives in question in particular, the securities markets.
While seeking to accomplish these objectives, we need to recall that the
emergence of the OTe derivatives market has come during an era of unprecedented
economic strength and prosperity.
It is to be expected that in times of distress some participants in these markets, as

in other financial markets, will be adversely affected. The recommendations we have
made, and the provisions in this bill, will not prevent these situations from occurring, nor
are they intended to do so. What needs to be protected, however, is the financial system
as a whole, and not individual institutions
We believe that our recommendations with respect to clearing and those designed
to enhance transparency and legal certainty and to clarify the treatment of derivatives in
the case of bankruptcy or insolvency can contribute to enhancing the stability of the
system more broadlv
II.

The Commodity Futures Modernization Act of 2000

Let me now turn to HR. 4541, the legislation before you today. This bill
incorporates many of the recommendations of the Working Group with respect to OTe

derivatives which. if enacted. would promote greater legal certainty for these instruments
and help to advance the Working Group's other objectives In panicular, with respect to
legal certainty, we believe that this bill, with minor changes, would strike the appropriate
balance between allowing the economy to realize more fully the benefits of derivatives
and, at the same time. ensuring the integrity of the underlying markets, providing
appropriate protection for retail customers, and wh~re possible, taking steps to mitigate
systemic risk.
Moreover, we believe that it is imponant to move forward with appropriate
legislation as soon as possible A failure to act in this area would risk a situation in
which the existing legal framework for our flnancial markets would lag significantly
behind the development of the markets themselves
In the absence of an updated legal and regulatory environment, needless systemic
risk might jeopardize the broader vitality of the American capital markets; innovation
might be stifled by the absence of legal certainty; and American consumers might be
deprived of the benefits that a more appropriate legal framework would promote. We also
risk an erosion of the competitiveness of American financial markets, with an increasing
amount of business moving offshore to jurisdictions in which the regulatory framework
has kept up with the pace of change.
With this in mind, I would like to address the three major areas of the bill
•

First, the bill's approach to OTe derivatives;

•

Second, the provisions of the bill designed to provide regulatory relief for futures
exchanges; and

•

Finally, the provisions of the bill providing for the repeal of the Shad-Johnson
restrictions on the trading of single stock and narrow-based stock index futures

OTe Derivatives

Let me first discuss the bill's provisIons regarding OTC derivatives. HR. 4541
would take significant steps toward achieving the Working Group's goals by enacting
most of our recommendations regarding OTC derivatives While there are a few changes
which we would like to see enacted, such as amendments to the definition of eligible
contract participants and of excluded commodity, we believe that the legislation takes an
appropriate approach to OTe derivatives and encourage the Congress to adopt these
prOVISions. Let me touch upon a few of the specific objectives that this bill helps to
accomplish
Fint, H.R. 4541 would prol'ifie legal certain~l' for OTe derivatives. The
Working Group members spent severa) months studyi ng and developing
recommendations regarding the appropriate status of OTe derivatives under the

4

Commodity Exchange Act We focused upon areas in which the need for change had
been demonstrated in our markets
With regard to swap agreements, the Working Group sought to remove the cloud
of legal uncertainty resulting from questions about the enforceability of certain swap
contracts in u.s courts. This uncertainty resulted from a lack of clarity regarding
whether the CEA applies to certain OTC derivative transactions The CEA was designed
primarily to address issues of fraud, manipulation, and price discovery Thus, the
Working Group unanimously recommended that the legal status of such contracts be
clarified by creating a statutory exclusion from the CEA for ce!1ain OTC derivative
transactions which do not require regulation for these public policy reasons. The
exclusion is limited to transactions involving qualified participants who do not require the
additional protections of the CEA, and the instruments subject to the exclusion generally
are not readily susceptible to manipulation, nor do they serve a primary price discovery
function at this time.
HR. 4541 would establish such an exclusion for certain swap agreements and
thereby ensure that the U.s. OTC derivatives market can develop within the kind of
innovative and legally stable environment on which the continued competitiveness of our
financial markets depend.
Second, HR. 4541 woultl prOl'itie for the development of appropriatelyregulated clearinghouses. The Working Group's report recommended that Congress
enact legislation to provide a clear basis for the development of appropriately-regulated
clearing systems for OTC derivatives. Well-designed clearinghouses can help to reduce
systemic risk first, by diminishing the likelihood that the failure of a single market
participant can have a disproportionate effect on the market as a whole; and second, by
facilitating the offsetting and netting of contract obligations. In addition to these benefits,
however, clearing tends to concentrate risks and certain responsibilities for risk
management in a central counterparty or clearinghouse Therefore, appropriate regulation
of clearing systems is essential to ensure that they indeed serve to mitigate systemic risk

Under the Working Group framework, regulatory oversight could be provided by
a federal banking regulator, the SEC, the eFTc, or by a recognized foreign regulatory
authority, depending on the structure of the clearinghouse and its activities
Mr Chairman, Congressman LaFalce, you and this Committee have demonstrated

true leadership in this very impo!1ant area The legislation before you today and the bill
you introduced earlier this year each address the vast majority of issues raised by the
Working Group in this area. If Congress decides to pursue the approach outlined in your
legislation, there are a few changes that we would recommend in order to assure
efficiency and fair competition among the various types of clearing organizations We
would be pleased to provide technical assistance in this regard, and we look forward to
working with you on these matters

Finally,

H.R.

4541 takes important steps toward protecting retail customers.

The Working Group recommended that the CFTC be granted explicit authority to
regulate foreign currency "bucket shops" and to prosecute such entities when they
attempt to defraud retail customers. H.R. 4541 provides such authority to the CFTC, thus
strengthening protection for small investors. Again, this is an area in which problems
have arisen. and the need for appropriate oversigh,t clearly has been demonstrated. We
are pleased to see these provisions incorporated in the bill.

The Shad-Johnson Accord

Let me now turn to the section of the bill addressing reform of the Shad-Johnson
Accord. The members of the Working Group agreed that the current prohibition on
single-stock and narrow-based stock index futures could be repealed if issues about the
integrity of the underlying securities markets and regulatory arbitrage are resolved. Our
view remains unchanged.
The provisions contained in this bill regarding futures on non-exempt securities
are a good starting point. although a number of issues remain unresolved. The bill
addresses some of the customer protection and enforcement concerns identified by the
CFTC, the SEC, and others as necessary conditions for repealing the prohibition on
single-stock futures. However, there are a number of concerns that the regulatory
agencies consider important, but that have not been resolved in the legislation. We· hope
that the SEC and CFTC can provide specific comments on these issues in the near future
so that they can be incorporated into this bill.
In particular, certain issues related to the harmonization of margin requirements
will need to be clarified. While we do not see the need to establish margin requirements
in statute. it will be imponant for regulatory authorities to establish margin levels that do
not encourage regulatory arbitrage or lead to a substantial increase in leverage in our
financial system.
While we have no objection to the introduction of single-stock or narrow-based
stock index futures, it is vitally important that the integrity of the underlying markets be
preserved, and that these instruments not be used as a means to avoid the regulations of
the cash markets. Therefore, we continue to encourage efforts by the SEC and CFTC to
reach an agreement on a regulatory framework for these products that preserves the
integrity of the underlying securities markets. However, if these issues cannot be resolved
on a timely basis, we believe that it is important to move forward with legislation
designed to clarify the legal certainty for OTC derivatives and to implement the other
recommendations of the Working Group
Regulatory Relief

The third component of this bill addresses regulatory relief for the futures
exchanges. The Treasury Department continues to support the view that it is appropriate

6

to review, from time to time, existing regulatory structures to determine whether they
continue to serve valid public policy functions. Like the OTe markets, exchange trading
of derivatives should not be subject to regulations that do not have a public policy
justification. Broadly, we are supportive of the CFTC's efforts to provide appropriate
regulatory relief to the futures exchanges, consistent with the public interest. To this end.
the CFTC has recently released its regulatory relief proposal for public comment. We will
be submitting a formal comment letter on this proposal in the near future.
There may, however, be unforeseen consequences to legislating such regulatory
relief Once such provisions are written into law, the regulators will have no ability to
review and amend them should subsequent market developments warrant change or
should other problems arise. Again. we are supportive of appropriate regulatory relief for
futures exchanges, but suggest that certain .aspects of that relief may be more
appropriately provided through administrative action.
HI.

The Importance of Clarifying the Treatment of Financial Contracts in
Bankruptcy

Although if is not part of this bill, I would like to take this opportunity to address
another issue that is of concern to this 'Committee and on which the Committee has
shown tremendous leadership. Earlier this year, Chairman Leach and Congressman
Lafalce introduced legislation that would enact the President's Working Group
recommendations regarding the treatment of OTe derivatives and certain other financial
contracts in cases of bankruptcy or insolvency. We would like to urge the Congress to
adopt these provisions. By establishing a framework through which creditors and
counterparties can work out a swift resolution in cases of bankruptcy or insolvency,
enactment of these recommendations can serve to reduce the impact of the failure of any
individual institution on the stability of the system more broadly.
While these provisions are not a pan of H.R. 4541. the Congress may wish to
consider adding them to this legislation. The Working Group's recommendations
regarding the treatment of these instruments in bankruptcy and insolvency are an integral
part of our broader approach to orc derivatives and the mitigation of systemic risk and
thus may fit naturally and appropriately into this bill.
Rarely are there tangible steps the government can take that could have a
meaningful impact on the mitigation of systemic risk. Enacting the recommendations of
the Working Group designed to clarify the treatment of these instruments in bankruptcy
is one of those steps.
IV.

Conclusion

In conclusion, Mr. Chairman, we have an opportunity to advance legislation that
will create a modern legal and regulatory framework for aTe derivatives designed to
promote innovation. protect retail customers. reduce systemic risk. maintain U.S.
competitiveness, and ensure the integrity of our markets. We look forward to working

7

with the members of this Committee, other members of Congress, and our colleagues on
the President's Working Group in an effort to further advance these important objectives.
Thank you.
-30-

8

OFFICE OF PUBLIC AFFAIRS el500 PENNSYLVANIA AVENUE, I\.W .• WASHINGTO:-l, I).C.' 20220' (202) 622·2960

CONTACT:

EMBARGOED UNTIL 2:30 P.M.
July 19. 2000

Office of Financing
202/691-3550

TREASURY TO AUCTION $10,000 MILLION OF 2-YEAR NOTES
The Treasury will auction $10,000 million of 2-year notes to refund
$27,322 million of publicly held securities maturing July 31, 2000, and to
pay down about $17,322 million.
In addition to the public holdings, Federal Reserve Banks hold $3,700
million of the maturing securities for their own accounts, which may be
refunded by issuing an additional amount of the new security.
The maturing securities held by the public include $6,073 million held
by Federal Reserve Banks as agents for foreign and international monetary
authorities. Amounts bid for these accounts by Federal Reserve Banks will
be added to the offering.

TreasuryDirect customers requested that we reinvest their maturing
holdings of approximately $823 million into the 2-year note.
The auction will be conducted in the single-price auction format.
All competitive and noncompetitive awards will be at the highest yield of
accepted competitive tenders.
The notes being offered today are eligible for the STRIPS program.
This offering of Treasury securities is governed by the terms and
conditions set forth in the Uniform Offering Circular for the Sale and Issue
of Marketable Book-Entry Treasury Bills, Notes, and Bonds (31 CFR Part 356,
as amended).
Details about the new security are given in the attached offering
highlights.
000

Attachment

LS-789

For press releases, speeches, public schedules

alld

official biographies, c{lll ollr 2.f·/1our fax

{eliC al

(]02; 62 ;.!()-

HIGHLIGHTS OF TREASURY OFFERING TO THE PUBLIC OF
2-YEAR NOTES TO DE ISSUED JULy 31, 2000

July 19, 2000

...

Offering Amount .....•......................... $10,000 million
Description of Offering:
Term and type of security ..................... 2-year notes
Series ..•.......•........... , ............ '" .. X-2002
CUSIP number .................................. 912827 6H 0
Auction date .................................. July 26, 2000
Issue date ..........•......................... July 31, 2000
Dated date .................................... July 31, 2000
Maturi ty date ................................. July 31, 2002
Interest rate ...•...............•........•.... Determined based on the highest
accepted competitive bid
Yield •..........••.••........................ Determined at auction
Interest payment dates ........•........••.... January 31 and July 31
Minimum bid amount and multiples •............. $1,000
Accrued interest payable by investor .......... None
Premium or discount ...••.•............•....... Determined at auction
STRIPS Information:
Minimum amount required ....................... Determined at auction
Corpus CUSIP number .......................... 912820 EU 7
Due date(s) and CUSIP number(s)
for additional TINT (5) . . . . . . . . . . . . . . . . . . . . . . Not applicable
Submission of Bids:
Noncompetitive bids:
Accepted in full up to $5,000,000 at the highest accepted yield.
Competitive bids:
(1) Must be expressed as a yield with three decimals, e.g., 7.123%.
(2) Net long position for each bidder must be reported when the sum of the tot~l
bid amount, at all yields, and the net long position is $2 billion or greater.
(3) Net long position must be deter.mined as of one half-hour prior to the
closing time for receipt of competitive tenders.
Maximum Recognized Bid at a Single yield ........... 35% of public offering
Maximum Award ...................................... 35% of public offering
Receipt of Tenders:
Nonco~petitive tenders:
Prior to 12;00 noon Eastern Daylight Saving time
on auction day.
Competitive tenders: Prior to 1:00 p.m. Eastern Daylight Saving time on
auction day.
Payment Terms:

By charge to a fur-ds account at a Federal Reserve Ban/. on iss"..:'"
Treasury-Direct customers c=..:-~ '':£~
the Pay Direct feature whic~ authorizes a charge to their account of record a:
their financial institution on issue date.
date, or payment of full pa:- a..rnount ·,..,i th tender.

OFJt'ICE 01' PUBLIC AFFAIRS. 1500 PI<:NNSYLVANIA AVENUE, N. W. _ WASHINGTON, D.C.- 20220 _ (202) 622-2960

EMBARGOED ~lIL 9:00 A.M.
July 19, 2000

PUBLIC CONTACT: Office of Financing
202-691-3550

MEDIA CONTACT:

Bill Buck
202-622-1997

TREASURY ANNOUNCES DEBT BUYBACK OPERATION
On JUly 20, 2000, the Treasury will buy back up to $1,500 million par
of its outstanding issues that mature between February 2021 and August 2023.
Treasury reserves the right to accept less than the announced amount.
This debt buyback (redemption) operation will be conducted by Treasury's
Fiscal Agent, the Federal Reserve Bank of New York, using its Open Market
operations system. Only institutions that the Federal Reserve Bank of New
York has approved to conduct Open Market transactions may submit offers on
behalf of themselves and their customers. Offers at the highest accepted
price for a particular issue may be accepted on a prorated basis, rounded up
to the next $100,000. As a result of this rounding, the Treasury may buy
back an amount slightly larger than the one announced above.
This debt buyback operation is governed by the ter.ms and conditions set
forth in 31 CFR Part 375 and this announcement.
The debt buyback operation regulations are available on the Bureau of
the Public Debt's website at www.publicdebt.treas.gov.
Details about the operation and each of the eligible issues are given
in the attached highlights.
000

Attachment
L5-790

For press releases, speeches, public schedules and official biographies, call ollr 24·lwllr fax line at (202) 621-20./0

HIGHLIGHTS OF TREASURY DEBT BUYBACK OPERATION
July 19, 2000
Par amount to be bought back •• Up to $1,500 million
Operation date ..•••.••••...••• July 20, 2000
Operation close time .••..••••• 11:00 a.m. Eastern Daylight Saving time
Settlement date •.•...•••.•..•• July 24~ 2000
Minimum par offer amount
$100,000
Multiples of par ...........•. $100,000
Format for offers ....• Expressed in terms of price per $100 of par with
three decimals. The first two decimals represent
fractional 32 nds of a dollar. The third decimal
represents eighths of a 32 nd of a dollar, and must
be a 0, 2, 4, or 6.
Delivery instructions . . . . . . . . . ABA Number 021001208 FRB NYC/CUST
Treasury issues eligible for debt buyback operation (in millions):

Coupon
Rate (%)
7.875
8.125
8.125
8.000
7.250
7.625
7.125
6.250

Maturity
Date
02/15/2021
05/15/2021
08/15/2021
11/15/2021
08/15/2022
11/15/2022
02/15/2023
08/15/2023

CUSIP
Number
912810 EH 7
912810 EJ 3
912810 EK 0
912810 EL 8
912810 EM 6
912810 EN 4
912810 EP 9
912810 EQ 7
Total

Par Amount
Outstanding*
10,765
11,442
11,243
32,476
10,339
9,810
17,925
22,694
126,694

Par Amount
Privately
Held*
9,844
9,952
9,585
29,599
9,493
8,209
15,338
21,207
113,227

Par Amount
Held as
STRIPS**
805
4,489
1,119
18,759

1,019
5,829
7,259
4,737
44,016

* Par amounts are as of July 18, 2000
** Par amounts are as of July 17, 2000
The difference between the par amount outstanding and the par amount
privately held is the par amount of those issues held by the Federal
Reserve System.

PUBLIC DEBT NEWS
Department of the Treasury • Bureau of the Public Debt • Washington, DC 20239

Contact: Office of Financing
202-691-3550

FOR IMMEDlATE RELEASE
July 18, 2000

TREASURY'S INFLATION-INDEXED SECURITIES
AUGUST REFERENCE CPI NUMBERS AND DAILY INDEX R.\TIOS

Public Debt announced today the reference Consumer Price Index (CPI) numbers and daily
index ratios for the month of August for the following Treasury inflation-indexed securities:
(1)
(2)
(3)
(4)
(5)
(6)
(7)

the 3-3/8% 1O-year notes due January 15, 2007
the 3-5/8% S-year notes due July 15, 2002
the 3-S/8% IO-year notes due January 15,2008
the 3-5/8% 30-year bonds due April 15, 2028
the 3-7/8% lO-year notes due January 15,2009
the 3-7/8% 30-year bonds due April 15,2029
the 4-114% IO-year notes due January 15,2010

This infonnation is based on the non-seasonally adjusted U.S. City Average All Items Consumer Price
Index for All Urban Consumers (CPI-U) published by the Bureau of Labor Statistics of the U.S.
Department of Labor.
In addition to the publication of the reference CPI's (Ref CPI) and index ratios, this release
provides the non-seasonally adjusted CPI-U for the prior three-month period.
This infonnation is available through the Treasury's Office of Public Affairs automated fax
system by calling 202-622-2040 and requesting document number 778. The information is also
available on the Internet at Public Debt's website (http://www.publicdebttreas.gov).
The infonnation for September is expected to be released on August 16, 2000.
000

Attachment

LS-791
http://www.publicdebt.trcas.gov

TREASURY INFLATION-INDEXED SECURITIES
Ref CPI and Index Ratios for
August 2000

Security:
Description:
CUSIP Number:
Dated Date:
Original Issue Date:
Additional Issue Date:

3·3/8% I O·Year Notes
Series A-2007
9128272M3
January 15, 1997
February 6, 1997
April 15, 1997

3_5/8°), 5-Year Notes
Series J-2002
9128273A6
July 15, 1997
July 15, 1997
October 15,1997

Maturity Date:
Ret CPI on Dated Date:

January 15, 2007
158.43548

July 15,2002
160.15484

Date
Aug.
Aug

Aug.
Aug.
Aug.
Aug.
Aug.
Aug.
Aug.
Aug.
AuO·
Aug.
Aug
Aug.
Aug.
Aug.
Aug
Aug.
Aug.
Aug.
Aug.
Aug.
Aug.
Aug.
Aug.
Aug.
Aug.
Aug.
Aug.
Aug.
Aug.

I
2
3
4
5
6
7
8
9
10
11
12

13
14
15
16
17
18
19
20
21
21
23
24
25
26
27

26
29
30
31

Ret CPI
2000
2000
2000
2000
2000
2000
2000
2000
2000
2000
2000
2000
2000
2000
ZOOO
2000
2000
2000
2000
2000
2000
2000
2000
2000
2000
2000
2000
2000
2000
2000
2000

CPI·U (NSA) lor

Inde~

171.30000
171.33226
171.36452
171.39677

1.08120
1.08140
1.08160
1.08181
1.08201
1.08222
1.08242
1.08262
1.08283
1.08303
1.08323
1.08344
1.08364
1.08384
1.08405
1.08425
1.08445
1.08466
1.08486
1.08507
1.08527
1.08547
1.08568
1.06586
1.06608
1.08629
1.08649
1.08669
1.08690
1.08710
1.08731

171.42903
171.46129
171.49355
171.52581
171.55806
171.59032
171.62258
171.65484
171.68710
171.71935
171.75151
171.78387
171.81613
171.84839
171.88065
171.91290
171.94516
171.97742
172.00968
172.04194
172.07419
172.10645
172.13871
172.17097
172.20323
172.23548
172.26774

April 2000

Ratio

171.2

3·S/8% 10·Year Notes
Series A-2008
January 15, 1998
January 15, 1998
October 15, 1998

3·5/8% 3D-Year Bonds
Bonds of April 2028
912810FDS
April 15, 1998
April 15, 1998
July 15, 1998

January 15, 2008
161.55484

April 15, 2028
161.74000

912B273T7

Index Ratio

Index Ratio

Index Ratio

1.06959
1,06979
1.06999
1.07019
1.07040
1.07060
1.07080
1.07100
1.07120
1.07140
1.07160
1.07181
1.07201
1.07221
1.07241
1.07261
1.07281
1.07301
1.07322
1.07342
1.07362
1.07382
1.07402
1.07422
1.07442
1.07463
1.07483
1.07503
1.07523
1.07543
1.07563

1.06032
1.06052
1 06072
1.06092
1.06112
1.06132
1.06152
1.06172
1.06192
1.06212
1.06232
1.06252
1.06272
1.06292
1.06312
1.06332
1.06352
1.06372
1.06392
1.06411
1.06431
1.06451
106471
1.06491
1.06511
1.06531
1.06551
1.06571
1.06591
1.06611
1.06631

105911
1.05931
1.05951
1.05971
1.05990
1.06010
1.06030
1.06050
1.06070
1.06090
1.06110
1.06130
1.061501.06170
1.06190
1.06210
1.06230
1.06250
1.06270
1.06290
1.06310
106330
1.06349
1.06369
1.06369
1.06409
106429
1.06449
1.06469
1.06489
1.06509

May 2000

171.3

June 2000

1723
I

TREASURY INFLATION-INDEXED SECURITIES
Raf CPI and Index Ratios for
August 2000

.

.

Security:
Description:
CUSIP Number;
Dated Date:
Original Issue Date:
Addition,,1 Issue Date:

3·7/8% 10·Year Notes
Serle 5 A-2009
9128274Y5
January 15, 1999
January 15. 1999
July 15, 1999

3·7/8% 30-Year Bonds
Bonds of April 2029
912810FH6
April 15, 1999
April 15. 1999
October 15, 1999

4-1/4% 10· Year NOIIIS
Series A-2010
9128275W8
January 15, 2000
January 18. 2000
July 15, 2000

Maturity Date:

January 15, 2009
164.00000

April 15, 2029
164.39333

January 15, 2010
168.24516

Ref CPJ on Dated Oat.:

l
I

Date
Aug.
Aug.
Aug,
Aug.
Aug.
Aug.
Aug,
Aug,
Aug,
Aug,
Aug,
Aug.
Aug,
Aug,
Aug,
Aug,
Aug.
Aug,
Aug.
Aug,
Aug,
Aug,
Aug.
Aug.
Aug.
Aug,
Aug,
Aug,
Aug,
Aug
Aug,

1
2

3
4

5
0

7
8
9

10
11
12

13
14
15

16
17
18
19
20
21
22
23
24
25
:26

27

28

29

JO
31

2000
2000
2000
2000
2000
2000
2000
2000
2000
2000
2000
2000
2000
2000
2000
2000
2000
2000
2000
2000
2000
2000
2000
2000
2000
2000
2000
2000
2000
2000
2000

CPI·U (NSA) for:

Ref CPI

Index Ratio

Index Ratio

Index Ratio

171.30000
171.33226
171,36452
171.39677
171.42903
171.46129
171.49355
171.52581
171.55806
171,59032
17162258
171,65484
171,68710
171.71935
171.75161

1.04451
1.04471
1,04491
1.04510
1.04530
1.04550
1.04569
1.04589
1.04609
, ,04628
1,04648
1.046fj8
1,04687
1.04707
1.04727
1,04746
1.04766
1.04786
1.04805
1,04825
1.04845
1.04664
1,04864
1.04904
1.04923
1,04943
1.04963
1.04982
1.05002
1,0502.
1,05041

1.04201
1,04221
1.04241
1.04260
1.04280
1,04299
1.04319
1.04339
1,0435&
1.04378
1.04398
1,04417
1.04437
1.04456
1.04476
1.04496
1,04515
1,04535
1,04555
1.04574
1.04594
1.04613
1.04633
1,04653
1.04672
1.04692
1.04711
1.04731
1.04751
1.04770
1.04790

1.01816
1,01835
1.01854
1.01873
1.01892
1.01912
1,01931
1,01950
1,01969
1.01988
1,0:2007
1.02027
1.02046
1.02065
1,02084
1,02103
1.02122
1.02142
1.02161
1.02180
1.02199
1.02218
1,02238
1,02257
1,02276
1.02295
1,02314
1.02333
1,02353
1.02372
1,02391

171,71>367

171,81613
171,84839
171,88065
171.91290
171.94516
171.97742
172.00968
172,04194
172,07419
172,10645
172.13671
172.17097
172,20323
172,23548
172.26774

April 2000
.---.

May 2000

171.2

--

--

171.3

-----

I
I

June 2000

172.3

I

I

DEl-~AR.TMENT

OF

TIlE

TREASURY

TREASURy l,~,7~\1t N' E W S
1I1I1I1'1I'1I1I'1I1I'II'IIIIIIIIIIII'II'II'IIIIII\iI~~"~'~j~~~C'~~~~'~lfl;IIIIIIIIIIIIIIIII'1I1I1I1I1I1I1I1I1I1I1I1I1II
...

'

.

1·'I~I"'"

&

PUBLIC CONTACT: Office of Finllncing
202-691-3550
MEDIA CONTACT: Bill Buck
202-622-1997

FOR IMMEDIATE RELEASE
July 20, 2000

TREASURY DEBT BUYBACK OPERATION RBSULTS

Today, Treasury completed a debt buyback (redemption) operation for $1.5 billion
jar of its outstanding issues. A total of 8 issues maturing between February 2021 and
August 2023 were eligible for this operation. The settlement date for this operation will
be July 24, 2000. Summary results of this operation are presented below.
(amounts in millions)

Offers Received (Par Amount) :
Offers Accepted (Par Amount) :

$4,440

1,500

o
rotal Price Paid for Issues
(Less Accrued Interest) :
Number of Issues Eligible:
For Operation:
For Which Offers were Accepted:
Neighted Average Yield
of all Accepted Offers (%):
Neighted Average Maturity
for all Accepted securities (in years) :

1,803

8

7

6.186

21.3

Details for each issue accompany this release.

S-792

or press releases, speeches, public schedules and official biographies, call our 24-hour fax line at (202) 622-2040

July 20, 2000
TREASURY DEBT BUYBACK OPBRATION RBSULTS

(amounts in millions, prices in decimals)
Table I
Weighted
Average

coupon

Maturity

Amount

Amount

Highest
Accepted

El!.t2 '~l

Ilgll

Off ere d

Acceoted

~

~

119.375

Par

Par

Accepted

7.875

02/15/21

655

240

119.421

8.125

05/15/21
08/15/21

351

122.468

122.434

11/15/21
08/15/22
11/15/22
02/15/23

844
570
927
185
569
360

320
209
25
2 BO

122.656
121.375
112.890
117.531

122.620
121.253
112.890
117.478

330

111. 625
N/A

111.617

08/15/23

75
0

Lowest
Accepted

Weighted
Average
Accepted

.I.!.§.lg

llil.!!
6.195
6.191
6.188
6;190
6.172
6.171
6.165
N/A

8.125

B.OOO
7.250
7.625
7.125
6.250

NLA

Table I I

Coupon
Rate (III)

Maturity
~

CUSIP
Number

7.875

02/15/21
05/15/21
08/15/21
11/15/21
08/15/22
11/15/22
02/15/23

912810BH7
912810RJ3
912810RKO
912810RL8
912810BM6
912810RN4
912810RP9

6.192
6.189
6.186
6.181
6.172
6.167
6.164

08/15/23

912810B07

N/A

8.125
8.125
8.000
7.250
7.625
7.125
6.250

Total Par Amount Offered:
Total Par Amount Accepted:

Par Amount
PrivatelY Held·

4,440
1,500

Note: Due to rounding, details may not add to totals.
·Amount outstanding after operation. Calculated using amounts reported on announcement.

9,604
9,601
9,265
29,390
9,468
7,-929
15,263
21,207

DEPARTIUENT

OF

l'HE

TREASURY

TREASURY

NEWS

OFEICE OF PUBLI<: AFFAIRS - 1500 PENNSYLVANIA AV£NUEI..N.W•• WASHINGTON, D.C.-

amARGOZD tnr.rXL 2: 30 P.K.
il\11y 20, 2000

CONTACT:

:zono. (ZOl)

6Z1.1960

Office of Financing
202/691-3550

TREASURY OFFERS 13-WEEK AND 26-WEEK BILLS

Treasury will auction two series of Treasury bills total~g
$16,000 million to refund $15,019 million of publicly held
securities maturing Jul~ 27, 2000, and to raise about $981 million of new
~e

approx~te1y

cash.
In addition to the publie holdings, Federal Reserve Banks for their own
accounts hold $10,004 million of the maturing bills, whieh may be refund&d at
the highest discount rate of.accepted competitive tenders. Amounts issued to
these accounts will be in addition to the offering amount.
The maturing bills held by the public include $4,735 =illion held
by Federal Reserve ~s as agants for foreign and international monetary
au~horitie8.
Up to $3,000 million of these securities may be refunded within

the offering amount in each of the auc~ions of 13-week bills and 26-week
bills at the highest discount ~ate of accepted competitive tenders. Additional amounts may be issued in each auction for such accounts to the extent
that the amount of new bids exceeds $3.000 million.
xre4~irect customers requested that we re~nv9st their maturing holdings of approximately $900 million into the l3-week bill and $844 million into
the 26-week bill.

'l'his offering of Treasury securities is governed by the tez:ltl.S and conditions set forth in the ~for.m Offe.ing Circular for the Sale aDd Issue of
Marketable Book-Entry Treasury Bills, Notes, and Bonds (31 CYR Part 356, as
amended) •

Details about each of the new securities are given in the attached
offering highlights.

000

LS-793
Attachment

For press releases, Jpeeches, public schedules and official biographies, call our 24-hour fQJ; line at (202) 622·2040

HIGHLIGHTS OF TRZASURY OFFERINGS OF BILLS
~O

BE ISSUED JULY 27, 2000
July 20, 2000

Offering Amount: . . . . . . . . . . . • . . . . . . . . . • . . . $8,500 million
Dascription of Offering I
and type of security ......•.•..•••.
cusrp number . . . . . . . . . . . . • . . . . . . . . . . . • . . .
Auction date ......•.........••••.•.••...
ISDue date ..................••••..••••.•
Maturity d~te .•....•••.••......•.•••••.•
Original issue date ..•...........•..••••
CUrrently outstanding ........•.•..••••.•
lofinimum bl<1 amount and multiples ..••••.•
Term

91-day b~ll
912795 FE 6
July 2', 2000
J'U1y 27 I 2000
October 26,2000
April 27, 2000
$14,293 million
$1, 000

$7,500 mil.l.ion
182-day bill
912795 PO 9
JUly 24, 2000
JUly 27, 2000
January 25, 2001
JUly 21, 2000
$1,000

The following rules apply to all securities mentioned above I
Submission of Bids!
~oncompetitivo bids . . . . . . . . • Accepted in full up to $1,000,000 at the highest discount rate of
acce~ted c~etitive bids.
Competitive bids . . . . . . . . . . . • (l) MUst be expressed a8 a. discount rate with three decLmals in
increments ot .005%, e.g., 7.100%, 7.105%.
(2) Net 10ng position for each bidder must be reported when the sum
of the total hid amount, at all discount rates, and the nat long
position is $1 bill.ion or greater.
(3) Net 10ng posicion must be deter,mined as of one half-hour prior
to the c10sing time for receipt of competitive tenders.
l-Iaximum Recognized Eid
at a Single R~te . . . . . • • . . . . .

35% of public offering

MaKjmum Award • . • . . . . . . . . . • • . . . . . 35% of public offering

of Tenders:
Noncompetitive tenders •.••.• Prior to 12:00 noon Eastern Daylight Saving time on auction day
Competitive tenders ...•..••• Prior to 1100 p.m. Eaatern Dayligbt Saving tLrne on auction day

Recei~t

Paym9nt TeDm91
By charge to a runds account at a Federal Reserve Bank on issue data, or payment
of full par amount with tender.
TreasuryDirect customers can use the Pay Direct feature which
au~hoci~eB a charge to their account of record at their financ~a1 ~nstitution on issue date.

DEPARTMENT OF THE TREASURY
WASHINGTON. 0 C

CIlETAR'I OF TH£ TREASURY

July 20, 2000
The Honorable Tom Daschle
Democratic Leader
United States Senate
Washington, D.C. 20510

Dear Senator Daschle:
The Administration S\lpports marriage penalty relief, and has proposed a targeted and fiscally
responsible plan in the budget to provide it. However, the Administration strongly opposes the
marriage penalty relief bill that passed the House this afternoon. If this bill is sent to the
President in its current fonn, his senior advisers will recommend that he veto it. This bill would
cost more than $280 billion and be more expensive than either the House or the Senate bill over
ten years. Together with the other tax legislation passed by the Congress this year, it would
threaten our fiscal discipline and jeopardize our ability to strengthen Social Security and
Medicare, pay down the national debt, enact well-targeted tax cuts, provide a long-overdue
voluntary Medicare prescription drug benefit, and meet other pressing national priorities.
OUf current strong

fiscal position reflects both difficult choices and an honest approach to
budgeting. The package of bills working their way through Congress would subvert the fiscal
diScipline that has helped to fuel the economic growth of the past eight years. The tax bills
passed in the Congress are now approaching the size of the large tax bill that the President
vetoed last year, and threaten our ability to pay down the debt and strengthen Medicare and
Social Security. Furthermore, focusing on five-year estimates masks the true size of the tax cuts.
which would drain the surplus just as the baby boom generation moves into retirement.
Fiscal discipline has been critical to the prosperity we enjoy today, and to the prospect ofbudget
surpluses that we now project for years to come. But projections are inherently uncertain. This
is not the time to abandon our path of fiscal discipline. Congress should pro\'idc a thorough
accounting of how much it intends to spend this year.
Moreover, the House bills would primarily help those AmerIcans who haw already benefited
most from our strong economic expansion, rather than focusing 011 working families. The tot:::
tax savings tbat would accrue to the 1 percent of Americans with tile highest incomes \'·;ould
exceed those provided to the bottom 80 percent. This amounts to an average la:-. cut of ab\)ut
$16,000 for each family in the top 1 percent and less than S200 for each family 111 the bl):.tC'i11
percent.

Unfortunately, the conference marriage penalty bill is poorly targctetl. Less th:m half of [lie cr <
of the bill would go to those who actually have l11atTiagc penalties. Moreover. although th;: C(~~
L8-794

;lPP,-\lIS relall\el:; moderate because it includes a provision to sunset it aller li\e years,
\\Ilolly uml\llistlc [0 imagine Congress allowing marriage penalty relief to expire. ;\s noted,
[he tcn-\ear cust (lfthlS bill alone would be more than S280 billion.

Ilt' [11L' hill
It IS

In eOl1tr~lSI. the President's tax cutting proposals would maintain our fiscal discipline while
providing meaningful tax rehefto a broad spectrum of low- and moderate-income families. Our
budget proposals would prOVide significant marriage penalty relief targeted at those families who
actually suffer penalties, and tax incentives for retirement savings targeted at the 75 million
:\mericans who lack pension coverage. We have also proposed tax credits to assist families with
[heir long-term care and child care needs, as well as tax incentives to repair and build schools
and improve the environment. Two-thirds of the benefits of the major tax proposals in our
budget would accrue to the middle 60 percent of the income distribution. We also support
targeted estate tax relief that addresses inequities created under the current system_
Notwithstanding our concerns with this and other tax bills that together total over $700 billion,
the President has offered to sign marriage penalty relief costing about $250 billion over 10 years
if the Congress passes a plan that preserves the Medicare surplus to pay down the debt and
passes a plan that gives real, voluntary Medicare prescription drug coverage that is available and
affordable for all seniors. This balanced approach would ensure that we are taking prudent steps
to allocate the surplus toward meeting the real needs we face, while maintaining fiscal discipline.
The Administration would like to work with Congress in the remaining days of this session to
enact meaningful legislation that addresses the priorities of the American people. Our focus
should be on strengthening Social Security and Medicare, enacting well-targeted tax cuts that
maintain fiscal discipline, paying down the debt, and addressing other national priorities.
Sincerely,

~\\-/~
Lawrence H. Summers

NEWS

1RFASURY

OFFICE OF PUBUC AFFAIRS. 1500 PENNSYLVANIA AVENUE, N.W.• WASHINGTON, D.C .• 20220. (202) 622·2960

.

EMBARGOED UNTIL 9:30 A.M. EDT
Text as Prepared for Delivery
July 25. 2000

TREASURY DIRECTOR OF MULTILATERAL DEVELOPMENT BANKS
JOSEPH EICHENBERGER
TESTIMONY BEFORE THE SUBCOMMITTEE ON THE WESTERN HEMISPHERE,
PEACE CORPS, NARCOTICS, AND TERRORISM

Mr. Chairman, Ranking Member Dodd, and distinguished Members of the
Subcommittee, thank you for the opportunity to discuss the important role of the multilateral
development banks (MDBs) in addressing environmental degradation in Latin America. The
Inter-American Development Bank, the World Bank, and the Global Environment Facility are
playing a key role, both directly and indirectly, in the region to address such issues as: air and
water pollution, biodiversity conservation, forestry preservation, ozone depletion, and land
degradation. Directly, the institutions are major lenders for environmental purposes, together
financing over $1.6 billion in Latin American in FY 1999. Indirectly, all are involved in
promoting the policy and institutional reforms. The World Bank has rightly said, " ... lasting
poverty reduction is only possible if the environment is able to provide the services people
depend on and if natural resource use does not undermine long-term development." We can all
agree on that common sense principle.
The Treasury Department is actively engaged in MDB policy and project decisions
related to environment and we have been successful in promoting a stronger environmental
agenda within the banks. We have benefited greatly in these efforts from the keen on-going
interest of Congress and civil society groups. I also want to acknowledge USAID's expertise on
environmental issues and the very helpful co)\aboration it has had with us and the MDBs on a
wide range of issues. But that said, there is clearly still a great deal of work to be done, and
continued strong U.S. leadership wil\ be essential. Today, I will focus my remarks on three main
topics:
I.

The key environmental challenges in Latin America;

II.

MDB efforts to address these challenges; and

III.
U.S. priorities for the MDBs going forward.
LS - 795

For press releases, speeches, public schedules and official biographies, call ollr 24--hour fax line at (202) 622·2040

.

I.

Key Environmental Challenges In Latin America

In Latin America, as elsewhere, natural resources have traditionally been viewed as a
basis for revenue generation and economic growth, with important sustainability issues typically
relegated to secondary status. Over time, this has led to over exploitation of the natural resource
base upon which many of these economies depend. Fortunately, the view in the region is
changing, as de~ocracy has taken stronger hold, and as the basic economic logic of conservation
and sustainable development has become better understood.
Meeting an increasing demand for energy is one of the biggest environmental issues
faced by Latin American today -- be it through the use of forests as a fuel source or emissions
from power generators, rural and urban areas suffer the associated environmental impacts of
energy production and usage. Urban air pollution remains a key human health and environment
issue, as does water pollution in densely populated areas. Much of the region's biodiversity
resources are under threat fj-om forest loss, soil depletion, water pollution, fisheries exploitation,
land degradation from poor agricultural practices, unsustainable forestry practices, and
overgrazing. The use of persistent organic pollutants (e.g., DDT), with their insidious impacts, is
also another major challenge for the region.
The reasons for these problems are multiple and complex. Lack of institutional capacity
has long been a constraint to implementing environmental policies and programs, and to
managing the environmental implications of growth and development. In many cases,
government policies in areas such as land use and energy pricing have directly encouraged
activities that are contrary to sound, long-term resource management. Latin America's welcome
efforts to build market-based economies have in some important respects outpaced its efforts to
build capacity to regulate and monitor natural resource use and enforce environmental laws_
Poverty itself can be directly responsib Ie for unsustainable resources use, leading to a vicious
cycle of need and overexploitation
II.

MDB Efforts To Address Environmental Challenges.

We believe the MOBs need to playa significant and multifaceted role in helping Latin
America deal effecti vely with these urgent environmental challenges Over the past decade, we
have worked hard to ensure that the MDBs take fully into consideration the direct impact of their
projects on the environment We have also given considerable emphasis to the important role of
the MDBs in helping strengthen institutions across the region responsible for implementing and
developing sound environmental policies for sustainable development and poverty alleviation.
With substantial leadership iI-om the U.S., the Inter-American Development Bank, the
World Bank, and the Global Environment Facility have dedicated significant amounts of
resources to environmental protection. Globally, in 1999, these MDBs have provided close to $4
billion for environmental etT0I1s. For the region, the figures are also impressive Despite the
appropriate priority given to managing the financial crisis, in 1999 the IDB approved $894
million in loans for environment and natural resources, or 9 percent of the Bank's overall lending
total. FY 1999 World Bank lending in the region for environment totaled approximately $458
million.

2

Both institutions have used loans, grants. and technical assistance to build diverse
environmental portfolios in the Latin American and Caribbean region, with some very innovative
projects. Most of the IDB and World Bank environmental loans in the region have been geared
to address urban environment problems, improve the drinking water supply, and pollution
control. They also provide technical cooperation to cOuntries, in such areas as pollution control,
institutional strengthening, coastal resources management, watershed management, and natural
resources conservation.
To highlight several projects in particular:
• The IDB's Multilateral Investment Fund (MIF) and the Nature Conse!V'ancy co-sponsored
the EcoEmpresas Fund to invest risk capital in NGOs. microenterprises, and smaIl businesses
that work to preserve the environment while making a profit. The IDB received a special
recognition award from the Nature Conservancy for its work on this project.
•

The IDB's Inter-American Investment Corporation (lIC) and a u.S.-owned environmental
service provider have formed a strategic partnership to handle industrial waste and harness
the recovered energy resources from waste material.

•

The IDB is also supporting the Coastal Resources Management program in Ecuador with the
assistance of the University of Rhode Island Coastal Resources Center.

•

A World Bank Clear Air Initiative in Latin America will bring together city managers,
development agencies, leaders from public sectors, and NGOs to address air quality problems
in large metropolitan areas. This three-year program covers issues of environment, urban,
transport. health, energy, industrial pollution, and global emissions, as they relate to the
quality of the air in the cities of the most urbanized region of the developing world.

•

The Meso-American Biological Corridor is a multidonor initiative which includes the World
Bank and GEF investments in Belize, Costa Rica, EI Salvador. Honduras, Mexico.
Nicaragua, and Panama. This initiative is helping to protect the countries' terrestrial and
marine ecos'ystems through a variety of projects, including by training indigenous peoples in
natural resource management.

•

In Mexico. the World Bank supported a project to test whether small and medium-sized
enterprises can successfully adopt environmental management systems. The project enlisted
the private sector. local academic institutions, and the Mexican Government.

These projects. and many similar projects reflect the MDBs' etforts to find innovative
approaches to environmental challenges. including by forming public-private sector partnerships
We have encouraged such work by the MOBs as a concrete application of their particular assets
and capabilities.

3

Global Environment Facility

The Global Environment Facility (GEF) has emerged as the principal international
funding mechanism to address global environmental challenges (e.g., international waters,
biodiversity, ozone depletion, and climate change) facing developing countries and nations
transitioning to market economies. Since its creation in 1991. the GEF has provided close to
5570 million directly in grants for operations in Latin America. which has leveraged 51.3 billion
in co-financing.
The GEF financed $270 million. including co-financing, for Latin American projects in
FY 1999. In 1999, every dollar provided by the U.S. has leveraged approximately $10 from
recipient governments. other bilateral donors, the private sector, and other multilateral
institutions.
Examples of GEF Projects in Latin America include:
• Renewable fuel technology is being developed in Brazil. The GEF has worked with the
Brazilian Government. General Electric, and private Brazilian companies to develop and
demonstrate generating technology that uses wood chips from plantation forests for fuel.
• OEF is working with Colombia, Costa Rica, Panama, and Nicaragua to reduce pesticide
runoff to the Caribbean Sea by developing and implementing management practices and
national regulatory systems to control the use of pesticides and promote the use of alternative
pest control systems.
• In Argentina, GEF is financing work with fisherman and tour guides off the Patagonian
Coast to develop a plan enabling profitable fishing while protecting endangered whales,
elephant seals. and penguins.
The GEF seeks to maximize its efficiency and impact by collaborating closely with other
institutions, including the World Bank. In FYOO, for example, joint World Bank-GEF projects
equal to $264 million were approved. In response to a new GEF policy supported by the United
States, the regional development banks are preparing to impJe,ment GEF projects. The IDB has
already proposed its involvement in two projects. a coastal zone management program in
Jamaica and a technical assistance project in the Gulf of Honduras.
However. the GEF's ability to achieve its mission is being severely limited by financial
constraints arising largely from the U.S. inability to deliver on our financial commitments. u.s.
arrears to the GEF now total $204.2 million, and will expand further if the low funding levels
contained in the current Foreign Operations Appropriations bills for FYO 1 are maintained. The
impact of U.S. arrears is further magnified by the fact that other countries are holding back their
contributions until the U.S. makes a substantial contribution. The bottom line is that the GEF
may find itselfunable to make any new operational commitments beyond the fourth quarter of
this year in the absence of some significant new U.S. funding.

Tropical Forest Conservation Act

Though not a part of the MDB efforts on environment, the Tropical Forest Conservation
Act (TFCA) bears mentioning. It is another priority in our environmental agenda. The TFCA,
enacted in 1998, provides eligible countries the opportunity to reduce concessional debts owed to
the United Stat~s, and at the same time generate funds to conserve or restore their tropical
forests. While the debt reduction component of the legislation is modest, the amounts generated
for tropical forest conservation programs are meaningful. For example, the roughly $6 million
that we have already set aside for Bangladesh's participation will leverage even more resources
to conserve or restore its 1.5 million hectares of tropical forests. roughly half of which are in the
southwestern Sunderbans region and home to the world's sole genetically viable population of
400 Bengal tigers.
Oftne 10 countries that have requested participation in the TFCA, six are from Latin
America (i.e .. Peru, Belize, EI Salvador, Paraguay, Ecuador, and Costa Rica). Of these, Peru and
Belize, have already been certified as eligible and are now entitled to discuss innovative debt
swap mechanisms that could generate additional funds for tropical forest conservation programs.

In.

The U.S. Environmental Agenda In Latin American And How We Are Working To
Ensure MOB Operations Reflect This.

The U.S. has focused its efforts on MDB reforms in several areas to promote the
overriding principle of environmentally sustainable development: (1) greater "mainstreaming"
or integration of environmental concerns into regular operations of the MDBs; (2) more
environmentally beneficial projects; (3) ongoing implementation of existing MDB operational
policies on environment; (4) improvements in MDB policies regarding civil society
participation; and (5) further enhanced transparency of the Bank's operations. We pushed for
progress on these fronts in our negotiations to provide financial replenishment and have been
pleased with progress in some areas.
At the lOB. many of the positive developments stem from U.S. leadership in the
negotiations for the eighth replenishment of the IDB in 1994 to press the Bank to provide greater
protection for the environment The accomplishments are wide-ranging:
•

Development of new policies related to the environment, such as water resource
management, coastal management, forestry, energy and sustainable agriculture development,
including a commitment to not finance commercial logging in moist tropical forests;

•

Lending for environmentally beneficial projects. Lending for environmentally beneficial
projects has remained relatively constant since the General Capital Increase (Gel) at around
9 percent of the Bank's portfolio. However, this figure may actually understate the
environmental work of the Bank since many projects have positive environmental aspects
even though the primary objective of the project is not environmental;

•

Greater emphasis on energy efticiency. The Sustainable Energy Markets (SMSE) program,
initiated in 1996, focuses on industrial energy efficiency, renewal and efficiency in urban

5

transport. The program has mobilized around $S million in external donor funds to prepare
efficiency projects for implementation. In addition, lIe and MIF, both members of the IDB
Group, are financing pilot projects under this program;
•

Consultation with affected people and inclusion of resettlement plans as part of
environmental impact assessments; and

•

Development by Management of an information disclosure policy and creation of an
independent inspection mechanism that will investigate charges by local people that the Bank
has failed to follow its own operational policies.

As a res~lt of the negotiations for a capital increase of the Inter-American Investment
Corporation (lIC) in 1999, the IIC adopted a new policy regarding environmental and labor
review of projects. The lIe has also adopted the IDB inspection panel function and, in January
1999, a policy regarding information disclosure was approved for the first time.
The IDB has created environmental units within each regional operations department to
integrate environmental considerations into project preparation and implementation. It has
adopted procedures to deal with any resettlement that might be entailed by projects. The Bank
has adopted a Strategy for Integrated Water Resources Management and an implementation
action plan that focuses on internal dissemination and mainstreaming of environment into Bank
operations. The IDB has improved its capacity to integrate environmental considerations into its
projects and programs. We were pleased with the involvement of civil society in the IDB's
development of an energy strategy. Going forward, we want to see the IDB put greater emphasis
on lending for renewable energy and energy efficiency projects. The IDB needs to reinforce its
program of consultation with civil society to ensure this is an integrated element in all its
operations. In this regard, we are working closely with the Bank as it prepares a formal
framework for consultation and public participation.
During the 1998 negotiations for the twelfth repleni shment for the International
Development Association (IDA-I2) -- the soft loan window of the World Bank, the U.S. pushed
for a deeper set'ofreforms than those achieved in prior replenishments to better mainstream
environmental considerations into both IDA projects and its policy dialogue with borrowing
countries. In particular:
•

Adequacy of country environmental policies and regulations as a performance criteria for
allocating IDA resources;

•

Integration of environmental issues into all Country Assistance Strategies (CASs);

•

Using National Environmental Action Plans as a key element when designing Bank
operations; and

•

Greater IDA collaboration with the Global Environment Facility.

6

It should also be noted that other World Bank atliliated institutions are showing progress
on the environment. The Multilateral Investment Guarantee Agency (MIGA) adopted new
environmental disclosure policies in 1999, which are being implemented. The International
Finance Corporation (IFC) is also moving forward to better incorporate environmental concerns
into its lending operations.

The World Bank has made noteworthy progress in mainstreaming environmental issues
into the Bank's operations. Serious gaps remain, however. We do not consider the Bank to have
lived up to the expectation that it would make strong efforts to mainstream environment
throughout its regular operations. as required by the GEF's second replenishment agreement. A
progress report on the mainstreaming efforts outlined in IDA-12 is due in December 2000, which
we will be carefully analyzing to see what areas are lacking. In addition, the Bank's
Environment Strategy, currently under preparation, provides a mechanism for securing a better
commitment from the Bank to integrate environmental issues into all operations. As a result of
strong U.S. advocacy, an independent Inspection Panel was created in 1994 to examine alleged
violations of Bank policies in the preparation and implementation of projects. In the policy area,
we are following closely the ongoing conversion of advisory directives into more formal
operational policies. especially in the area of resettlement and indigenous peoples.
Enhancing the transparency of these institutions and increasing public participation in
countries' development programs are central policy goals of the U.S., particularly in terms of the
environment. We have been at the forefront in calling upon these institutions to increase their
disclosure of information in a timely manner. Over the last five years there have been notable
successes (e.g., disclosure of country assistance strategies by the World Bank. and public release
of environment impact assessments by both the lOB and World Bank for projects with a
significant impact on the environment before project appraisal/analysis missions leave for the
borrowing country).
We believe there is much more room for improvement in both the IDB and the World
Bank policies and practices related to environment. The Banks' record on consistent
implementation of safeguard policies and enforcement of their own procedures is a key concern
to the U.S. The Banks, to their credit, are also aware that they need to do much more to ensure
that staff and management make this a priority. Though we have made progress in improving
the quality oftoan documents related to environment and resettlement and making them publicly
available in a timely manner, in part due to the requirements of the Pelosi Amendment, we still
find projects which do not meet the Amendment's standards. We subsequently oppose any
otTending projects, sending a clear message to Bank leadership. We will continue to use our
voice and vote to urge the Banks to meet higher environmental standards in accordance with the
provisions of the Pelosi Amendment.
In a broader context, we are calling for a reform agenda for the MDBs to enhance their
focus on the provision of global public goods, including the global environment, as a more
forward-thinking approach to poverty reduction and the links between it and our environment
and natural resources. We believe the MOBs must move away from financing sectors/projects
that the private sector can easily do on its own and focus more on social programs and
international public goods that the private sector will not or cannot finance, such as the

7

lJEPARTMENT

OF

THE

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TREASURY { .

TREASURY

NEW S

178q~~""""""""""""""""",

ornCE OF PlfBUC AffAIRS • 1500 PENNSYLVANIA AVENCE. N.W.• WASHINGTON. D.C.. 20220. (202) 622.2960

EMBARGOED C:\fTIL 10 A.M. EDT
Text as Prepared for Delivery
July 25.2000
TREASURY DEPUTY ASSISTANT SECRETARY FOR TAX POLICY
JONATHAN TALISMAN TESTIMONY BEFORE THE SUBCOMMITTEE ON
TAXATION AND IRS OVERSIGHT COMMITTEE ON FINANCE
:vIr. Chainnan. Senator Baucus. and distinguished Members of the Subcommittee:

I appreciate the opportunity to discuss with you today the Federal income tax issues
relating to proposals to encourage the creation of public open spaces in urban areas and the
preservation of farn1 and other rural lands for conservation purposes as well as Federal income
tax issues relating to proposals to lower U.S. dependency on foreign oil used in transportation
fuels (including tax incentives to promote the use of alternative fuel vehicles and to increase
domestic oil production). The first part of my testimony will focus on the Administration's
proposed tax incentives to help build livable communities. I will then discuss the
Administration's proposals for lowering U.S. dependency on foreign oil. I would like to begin
by thanking the Chainnan and Senator Baucus for their leadership on these issues.
Earlier this year. in the Administration's budget for FY 2001, the President proposed
initiatives to help build livable communities for the 21 5t century. These initiatives aim to provide
communities with tools, infonnation, and resources they can use to enhance the quality ofhfe of
their residents. enhance their economic competitiveness, and build a stronger sense of
community. For example, the Administration proposed a new financing tool -- Better America
Bonds -- to help preserve green space. improve water quality, and revitalize communities for
future generations. The Administration proposal would make available a total of $1 0.75 billion
in bond authority over 5 years for investments by State, local, and tribal governments to preserve
green space. create or restore urban parks, protect water quality, and clean up abandoned
industrial sites. The revenue cost of the Better America Bonds proposal is estimated to be $690
million over 5 years. The Administration also proposed to make pennanent the tax incentive to
clean up brown fields in low-income communities and other targeted areas, which is scheduled to
expire on December 31, 2000. The revenue cost of the brown fields proposal is estimated to be
$600 million over five years.
The Administration's budget also included a $4 billion package of tax incentives over 5
years to encourage energy efficiency, reduce greenhouse gas emissions, and develop renewable
energy sources. The tax incentives are part of a larger package of complementary initiatives.
LS-796

~or press releases, speeches. public schedules and official biographies, call our 24-hour fax line at (202) 622·2040

In addition to the tax incentives. the Administration's budget includes a 5337 million increase in
funding for research and development in energy-efficient technology and renewable energy. a
new S8; million Clean Air Partnership Fund to boost State and local efforts to reduce air
pollution and greenhouse gases, almost $500 million to accelerate efforts to develop clean energy
sources both here and abroad, and 51.7 billion in funding for global climate change research.
The President's package of research and development funding and tax incentives to address the
challenge of climate change totals over S4.1 billion for fiscal year 2001.
In addition to calling for steps to decrease our demand for oil through increased
efficiency and increased development of renewable energy resources, the Administration is
proposing new steps to support domestic exploration and production, and to lower the business
costs of producers when oil prices are low. The Administration's proposals include favorable tax
treatment for geological and geophysical costs and delay rental payments. The revenue cost of
these tax proposals is estimated to be $750 million over 5 years.

My comments today will focus on an explanation of the Administration's tax initiatives
for improving the environment and reducing our dependence on foreign oil.

Encouraging Prosperity, Improving the Environment
Better America Bonds
Americans are concerned that the quality of the environment surrounding their
communities is threatened by sprawl. that scenic vistas are being lost, that watersheds arc
eroding and contaminated. and that public access to outdoor recreation is diminishing.
To address these concerns, the Administration proposed the creation of a new financial
tool -- referred to as "Better America Bonds" -- for use by State, local, and tribal governments,
often in partnership with nonprofit organizations. to make their communities more livable.
Better America Bonds are a tax-credit bond program, similar to the current-law provision for
Qualified Zone Academy Bonds. Through the provision of tax credits, the Federal government
would. in effect, pay all the interest on Better America Bonds for fifteen years, thereby
significantly lowering the cost of financing below that attainable by State. local, and tribal
governments issuing traditional tax-exempt bonds. S. 1558. introduced by the Chairman and
ranking member of this subcommittee. contains many significant aspects of the Better America
Bonds proposal. In fact, the bonds proposed by S. 1558 would be very similar to Better America
Bonds. except that under S. 1558 the authority to issue bonds would be allocated by a newly
created board. whereas the authority to issue Better America Bonds would be allocated by the
Environmental Protection Agency (EPA), as described below. In addition. Mr. Matsui and
others have introduced a proposal for Better America Bonds in H.R. 2446. The Administration
looks forward to working with Congress to resolve the differences between these bills and the
Administration's proposal.

2

Interest would effecti\'ely be paid to holders of Better America Bonds in the fonn of a
credit that could be claimed by the bondholder against Federal income taxes otherwise due. The
credit rale would be set by the Treasury Department on a daily basis based on Aa corporate
yields of comparable maturity. The credit rate set for the day on which the bonds \. . ere sold
would apply for the life of the bonds. (This method of setting credit rates was established by
Treasury regulations for Qualified Zone Academy Bonds sold on or after July 1. 1999.) Issuers
of Better America Bonds would pay no interest for the IS-year tenn of the bonds; their only
obligation would be for repayment of principal after 15 years.
The Administration's proposal is designed to enhance the marketability of Better
America Bonds by allowing buyers of the bonds to strip the "coupons," in the fonn of the tax
credits. from the obligation to repay principal and sell the two pieces separately. much the same
way that Treasury obligations are stripped. This would pennit non-taxable entities. such as
pension funds and endowments. to benefit from the difference between the current value of the
stripped principal and the repayment of principal at par upon redemption. while a taxable
investor claims the tax credit.
The proceeds of Better America Bonds could be used for the following purposes:
I.

Acquisitior of land by State, local. or tribal governments for open space.
\vetlands. parks. or greenways. Acquired land would be owned by a government
or a tax-exempt entity whose exempt purposes include environmental protection .

..,

Construction of public access facilities such as campgrounds and hiking or
biking trails on publicly owned land or land owned by a tax-exempt entity whose
exempt purposes include environmental protection.

}.

Improvement of water quality by planting trees or other vegetation.
creating settling ponds to control runoff, or remediating conditions caused by the
prior disposal of toxic or other waste.

4,

Acquisition of permanent easements on privately owned open land that
prevent commercial development and any substantial change in the character or
use of the land. Such easements could be held by governments or tax-exempt
entities.

5.

Environmental assessment and remediation of brown fields owned by State
or local governments under certain circumstances.

6,

Environmental assessment and remediation of property damaged by
anthracite coal mining and owned by a State. local, or tribal government or
qualifying tax-exempt entity under certain circumstances.

3

For ~\ample. the City of L~wistown. Montana could use Better America Bonds to
acquire land for parks. open space. and trail systems. Other Montana municipalities could Issue
Better America Bonds to acqUIre land along rivers. such as the Missouri and the Yellowstone. In
order to preser.e the natu'ral structure. reduce erosion, and protect the water quality. In Utah,
Better AmencJ Bonds could be used to preserve the Bonneville Shoreline Trail in the \\'asatch
Mountains. In addition, Salt Lake City could use Better America Bonds in Its Park Blocks
development. In furtherance of its plan to create green space, pathways and park facilities to
support significant economic development.
In general. property acquired with the proceeds of Better America Bonds would be
available only for public use and use by tax-exempt entities, but not private use. The one
exception is with respect to remediated brownfields and certain property damaged by coal
mining, \\'hich could be sold to a private entity for private development, with the sale proceeds
made a\'ailable to repay principal.
Owners of property financed with Better America Bond proceeds generally would be
required to cO\'enant not to convert the property to a nonqualifying use without first offering the
property for sale to tax-exempt entities at a price that does not exceed the original value of the
property. A tax-exempt purchaser would be required to hold the property in its qualifying use in
perpetuity.
The Administration proposes $2.15 billion of authority to issue Better America Bonds
each year for 5 years beginning in 2001 (i.e .. a total of$10.75 billion of bond authority). Of the
total authorization. S50 million per year would be available with respect to property damaged by
anthracite cQal mining under special allocation rules. The EPA would administer an annual.
open competition among State, local. and tribal governments for authority to issue these bonds,
subject to published EPA guidelines.
Projects qualifying for Better America Bonds, with the exception ofremediated
brownfields and damaged coal property converted to private use, could be financed by taxexempt bonds under current Federal tax law. Indeed, States and localities occasionally use taxexempt bonds for these purposes. But more needs to be done. Benefits from environmental
projects are often so diffused over time and distance that taxpayers within particular local
jurisdictions are reluctant to finance such projects with conventional tax-exempt bonds. Better
America Bonds would provide a deeper subsidy than tax-exempt bonds in order to induce State
and local governments to undertake beneficial environmental infrastructure projects. The
reYenue cost of the proposal is estimated to be $690 million for FY 2001 - 2005.
Compared to traditional tax-exempt bonds, Better America Bonds would significantly
reduce the financing costs to local taxpayers of environmental projects. For example, annual
payments of principal and interest on a traditional 30-year, 6-percent, $10 million tax-exempt
bond Issue would be about $726,000. In comparison, the annual payments into a sinking fund
earning 6.5 percent that would repay after IS years the $10 million principal of an issue 0 f Better
America Bonds would be about $414,000. A State or local government issuing the bonds would
thus sa\'e about 5312.000 per year over the initial 15 years, and $726,000 per year over the
4

remaining 15 years at a 3D-year issue's term. Better America Bonds \J,'ould cost state and local
govemments only about halfofwhat a tax-exempt bond would (in present value tenns). This is
a powerful tool for financing investments to make our communities better.
Better America Bonds nor only would provide a deeper subsidv to State and local
governments than tax-exempt bonds, they also would be more efficie~t. With Better America
Bonds. the Federal government would pay the issuer's interest costs in the fonn of a tax credit to
the bondholders. The issuer would receive the full benefit of the Federal subsidy.
By contrast, the revenue loss to the Federal government from tax-exempt bonds exceeds
the amount of the subsidy to State and local governments. The subsidy from a tax-exempt bond
depends on market factors, and is equal to the debt service savings a State or local government
realizes by borrowing at a tax-exempt, rather than a taxable, interest rate. The large volume of
outstanding tax-exempt bonds has increased tax-exempt interest rates generally, which has
reduced the subsidy provided by tax-exempt bonds to amounts significantly below the cost to the
Federal go\·emment.
Brownfields Remediation Costs
Brownfields are abandoned or underutilized properties where redevelopment is
complicated by known or suspected contamination. Because lenders, investors, and developers
fear the high and uncertain costs of cleanup, they avoid developing contaminated sites. Blighted
areas of brown fields hinder the redevelopment of affected communities and create safety and
health risks for residents. The obstacles in cleaning these sites, such as regulatory barriers, lack
of private investment. and contamination and remediation issues. are being addressed through a
wide range 0 f Federal programs that includes the tax incentive for brownfields remediation.
To encourage the cleanup of contaminated sites, the Administration proposed, and the
Congress enacted in the Taxpayer Relief Act of 1997, a brownfields tax incentive that permits
the current deduction of certain environmental remediation costs. Environmental remediation
expenditures qualify for current deduction if the expenditures would othernrise be capitalized and
are paid or incurred in connection with the abatement or control of hazardous substances at a
qualified contaminated site. A qualified contaminated site must be located within a targeted
area. i.e .. census tracts with at least 20-percent poverty rates (and certain contiguous industrial or
commercial tracts). designated Empowerment Zones and Enterprise Communities, and the 76
EPA brownfields pilot projects designated before February 1997. In order to claim a current
deduction. the taxpayer must obtain a statement from a designated State environmental agency
that the qualified contaminated site satisfies the statutory geographic and contamination criteria
of a brownfield. The provision applies to qualified environmental remediation expenditures paid
or incurred in taxable years ending after August 5,1997, and before January 1,2002.
Many taxpayers are unable or unwilling to undertake long-term remediation projects
based on the current-law, temporary incentive because environmental remediation often extends
over a number of years. For that reason, the Administration's budget proposed a permanent

5

extension of the bro\\ nfields tax incentive. That proposal was introduced by Mr. Coyne and
several cosponsors JS H.R. 1630
Reclaiming brownfields would encourage the redevelopment of targeted communitIes by
making unused or underutilized land productive again. Extending the special current-law rule on
a pern1anent basis \\ould eliminate uncertamty regarding the future availability of the incentive
and encourage long-range investment in the targeted areas. The revenue cost of the proposal is
estimated to be approximately S536 million for FY 2001 - 2005. Treasury estimates that the tax
incenti\e would induce an additional S7 billion in private investment to return 18,000
brownfields to productive use over the next ten years.

Energy Security
Oil is an internationally traded commodity with its domestic price set by world supply
and demand. Domestic exploration and production activity is affected by the world price of
crude oil. Historically, world oil pnces have fluctuated substantially. From 1970 to the early
1980s. there was a fi\efold increase in real oil prices. World oil prices were relatively more
stable from 1986 through 1997. During that period, average annual refiner acquisition cost
(composite) ranged from S14.83 to S23. 74 per barrel in real 1992 dollars. In 1998, however. oil
prices dec lined to about S11.15 per barrel at the refiner in real 1992 dollars, their lowest level in
25 years in real tern1S. Since 1998, the dec line has reversed with refiner acquisition costs (in
nominal dollars) rising to about S17.50 per barrel in 1999 and to over $28 per barrelm March
2000. Although \1arch is the latest month for which composite figures are available, the price of
West Texas intennediate crude on the spot market was nearly $31 per barrel on July 20,2000.
Domestic oil production has been on the decline since the mid-1980s. From the late
1970s to the mid 1980s, oil consumption in the United States also declined, but in the last decade
oil consumption has risen by nearly 12 percent. The decline in oil production and increase in
consumption have led to an increase in oil imports. Net petroleum imports have risen from
approximately 42 percent of petroleum products supplied in 1989 to 51 percent in 1999. The
volatility' of crude oil prices over the past year has focused attention on the economic condition
of the oil and gas industry, the increasing U.S. dependence on foreign oil supplies, and the
prospects for reducing reliance on oil imports.
The strong perfonnance of our economy over the past year, despite oil price rises,
underscores the dramatic improvements in energy efficiency we have achieved over the past
quarter century. While past oil shortages have taken a significant to 11 on the U.S. economy, the
recent increases in oil prices have yet to have a major impact on the economy. Increased energy
efficiency in cars. homes, and manufacturing has helped insulate the economy from these shorttem market fluctuations. In 1974, we consumed 15 barrels of oil for every $10,000 of gross
domestic product. Today, we consume only 8 barrels of oil for the same amount of economic
output.
\Ve can, however, do more to minimize the effect of future energy price increases and
reduce our dependence on foreign oil. One essential element of national energy security is a
6

comprehensive and balanced program of tax incentives. These must include both support for
domestic oil producers to reduce our reliance on oil imports and incentives for energy efficiency
and rene\\'able and alternative energy sources. While current law provides substantial tax
incentives for domestic oil and gas production and some incentives for energy efficiency and
renewable and alternative energy, the Administration proposes to do more in both areas.

Energy Efficiency and Alternative Energy Sources
Individuals and businesses do not invest enough in energy-saving technologies that
produce benefits to society in excess of their private returns. If a new technology reduces
pollution or emissions of greenhouse gases, those "external benefits" should be included in the
decision about whether to undertake the investment. But potential investors have an incentive to
consider only the private benefits in making decisions. Thus, they avoid technologies that are
not profitable even though their benefits to society exceed their costs. Tax incentives can offset
the failure of market prices to signal the desirable level of investment in energy-saving
technologies because they increase the private return from the investment by reducing its aftertax cost. The increase in private return encourages additional investment in energy-saving
technologies.

Current law tax incentives for energy efficiency and alternative energy sources
Tax incentives currently provide a limited amount of support for energy-efficiency
improvements and increased use of renewable and alternative fuels. Current incentives in the
form of1ax expenditures are estimated to total $5.8 billion for fiscal years 2001 through 2005.
They include a tax credit for electric vehicles and expensing for clean-fuel vehicles and cleanfuel refueling property ($460 million), a tax credit for the production of electricity produced
from wind or biomass and a tax credit for certain solar energy property ($625 million), an
exclusion from gross income for certain energy conservation subsidies provided by public
utilities to their customers ($560 million), and an income tax credit or partial excise tax
exemption for ethanol and renewable source methanol used as automobile fuel ($4.2 billion). I

Electric and clean-fuel vehicles and clean-fuel vehicle refueling property
A I O-percent tax credit is provided for the cost of a qualified electric vehicle, up to a
maximum credit of $4,000. A qualified electric vehicle is a motor vehicle that is powered
primarily by an electric motor drawing current from rechargeable batteries, fuel cells, or other
I A/I([~)"tical Perspectives, Budget of the United States Government, Fiscal Year 2001, U.S.
Govemment Printing Office, Washington, DC, 2000, p. 120. These estimates are measured on
an outlay-equivalent basis. They show the amount of outlay that would be required to provide
the taxpayer the same after-tax income as would be received through the tax preference. This
outlay-equivalent measure allows a comparison of the cost of the tax expenditure with that of a
direct Federal outlay.

7

portable sources of electric current, the original use of which commences with the taxpayer. and
that is acquired for use by the taxpayer and not for resale. The full amount of the credit is
available for purchases prior to 2002. The credit begins to phase down in 2002 and does not
apply to \"ehicles placed in service after 2004.
Certain costs of qualified clean-fuel vehicles and clean-fuel vehicle refueling property
may be deducted when such property is placed in service. Q':lalified electric vehicles do not
qualify for the clean-fuel vehicle deduction. The deduction begins to phase down in 2002 and
does not apply to property placed in service after 2004.
Energy from wind or biomass
A 1.5-cent-per-kilowatt-hour tax credit is provided for electricity produced from wind,
"closed-loop" biomass (organic material from a plant that is planted exclusively for purposes of
being used at a qualified facility to produce electricity), and poultry waste. The electricity must
be sold to an unrelated third party and the credit is limited to the first 10 years of production.
The credit applies only to facilities placed in service before January 1, 2002. The credit amount
is indexed for inflation after 1992.
Solar energv
A 10-percent investment tax credit is provided to businesses for qualifying equipment
that uses solar energy to generate electricity, to heat or cool or provide hot water for use in a
structure, or to provide solar process heat.
Energv conservation subsidies
Subsidies provided by public utilities to their customers for the purchase or installation of
energy conservation measures are excluded from the customers' gross income. An energy
conservation measure is any installation or modification primarily designed to reduce
consumption of electricity or natural gas or to improve the management of energy demand with
respect to a dwelling unit.
Ethanol
Ethanol and renewable source methanol used as a highway fuel may qualify for either an
income tax credit or a partial exemption from the excise tax on highway fuel. The income t~x
credit is generally 54 cents per gallon for ethanol and 60 cents per gallon for renewable source
methanol. As an alternative to the income tax credit, gasohol blenders may claim a gasoline tax
exemption of 54 cents for each gallon of ethanol and 60 cents for each gallon of renewable
source methanol that is blended into qualifying gasohol. Slightly lower credits and exemptions
apply in years after 2000 and both the credit and the exemption are scheduled to expire in 2005.
The favorable tax treatment of ethanol increases national energy security by reducing the
demand for imported oil and U.S. dependence on foreign oil sourc