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Treas.

HJ
10
.A13
P4

v.390

Department of the Treasury

PRESS RELEASES

The following number was not used:
991

Numbers 892-894 and 897-899 are listed
on the Dec.,2001 list and 972 is listed on the Feb.,2002 list

DEPARTMENT

'IREASURY

THE

TREASURY

NEWS

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

FOR IMMEDIATE RELEASE
January 2, 2002

CONTACT: BETSY HOLAHAN
(202) 622-2960

Treasury Department Announces Availability of $8 Million for
"First Accounts" to Reduce Number of Unbanked Americans

WASHINGTON, DC - The Treasury Department has issued a Notice of Funds
Availability (NOF A) for the "First Accounts" program, which seeks to increase the number of
Americans who receive basic account services from insured financial institutions.
"Up to 40 million Americans do not use mainstream banking services" said Treasury
Assistant Secretary for Financial Institutions Sheila C. Bair. "We hope this program will
encourage the creation of innovative new products and services to significantly decrease the
number of unbanked Americans."
The NOPA, published in the Federal Register on December 27,2001, requests
applications from a wide variety of entities to compete for $8 million in grant funds.
Eligible applicants for the funds include employers, community development financial
institutions, depository institution holding companies, financial services electronic networks,
Indian Tribal governments, insured credit unions, insured depository institutions, labor
organizations, local governments, non-profit organizations and States.
The proposals for the grant funds will provide, either directly or through one or more
insured depository institutions or insured credit unions, low-cost electronic, checking or other
types of accounts to low- and moderate-income individuals who currently do not have an account
with an insured institution.

PO-891

For press releases, speeches, public schedules and official biographies, call our 24-hour fax line at (202) 622-2040
·U.S. Government Printing Office: 1998 - 619-559

The Treasury Department's NOFA puts particular emphasis on trying to reach unbanked
employees through their employers, as well as encouraging arrangements whereby employees
can obtain basic account services-building from services already provided by their employers'
financial institutions. While the NOF A encourages such employer arrangements, it also will
consider funding other types of applications that hold a reasonable likelihood of success. To
foster innovation, the NOF A provides wide flexibility to applicants in crafting their applications,
while giving priority to proposals that can be self-sustaining and replicable in other communities.
The deadline for applications is March 20, 2002. The application and additional
information is available on the First Accounts web site, www.treas.govl/irstaccoulltS.
-30-

DEPARTMENT

THE

TREASURY

NEWS

'IREASURY

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

CONTACT:

EMBARGOED UNTIL 2:30 P.M.
January 2, 2002

Office of Financing
202/691-3550

TREASURY OFFERS 10-YEAR INFLATION-INDEXED NOTES
The Treasury will auction $6,000 million of 10-year inflation-indexed
notes to raise cash.
Amounts bid by Federal Reserve Banks for their own accounts will be added
to the offering.
Up to $1,000 million in noncompetitive bids from Foreign and International
Monetary Authority (FIMA) accounts bidding through the Federal Reserve Bank of New
York will be included within the offering· amount of the auction. These
noncompetitive bids will have a limit of $100 million per account and will be
accepted in the order of smallest to largest, up to the aggregate award limit of
$1,000 million.
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 allocation percentage applied to bids awarded at the
highest yield will be rounded up to the next hundredth of a whole percentage
point, e.g., 17.13%.
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 security are given in the attached offering highlights.
000

Attachment

PO-895

For press releases,

speeches, public schedules and official biographies,
24-hour fax line at (202) 622-2040

call our

HIGHLIGHTS OF TREASURY OFFERING TO THE PUBLIC OF
10-YEAR INFLATION-INDEXED NOTES TO BE ISSUED JANUARY 15, 2002
January 2, 2002
Offering Amount . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $6,000 million
Public Offering . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $6,000 million
Description of Offering:
Term and type of security . . . . . . . . . . . . . . . . . . . . . . . . . . 10-year inflation-indexed notes
Series . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -. . . . . . . . . . . A-2012
CUSIP number . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 912827 7J 5
Auction date . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . January 9, 2002
Issue date . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . January 15, 2002
Dated date . • . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . • . January 15, 2002
Maturity date ......... '. . . . . . . . . . . . . . . . . . . . . . . . . . . . . January 15, 2012
Interest rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Determined based on the highest
accepted competitive bid
Real yield . . • . . . . . . . . . . . . . . . . . . . . . . . • . . . . . . . . . . . . . • Determined at auction
Interest payment dates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . July 15 and January 15
Minimum bid amount and multiples ........••......... $1,000
Accrued interest . . . . . . . . . . . . . . . . . . . . • . . . . . . . . . . . . . . None
Premium or discount . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Determined at auction
STRIPS Information:
Minimum amount required . . . . . . . . . . . . . . . . . . . . . . . . . • . . $1,000
Corpus CUSIP number ...............•.......•....•..• 912820 GT 8
Due date(s) and CUSIP number(s)
for additional TIIN(s) . . . . . . . . . . . . . . . . . . . . . . . . . . . July 15, 2011 - - 912833 YN 4
January 15, 2012 - - 912833 YP 9
Submission of Bids:
Noncompetitive bids:
Accepted in full up to $5 million at the highest accepted yield.
Foreign and International Monetary Authority (FlMA) bids: Noncompetitive bids
submitted through the Federal Reserve Banks as agents for FlMA accounts.
Accepted in order of size from smallest to largest with no more than $100
million awarded per account. The total noncompetitive amount awarded to Federal
Reserve Banks as agents for FlMA accounts will not exceed $1,000 million. A
single bid that would cause the limit to be exceeded will be partially accepted
in the amount that brings the aggregate award total to the $1,000 million limit.
However, if there are two or more bids of equal amounts that would cause the
limit to be exceeded, each will be prorated to avoid exceeding the limit.
Competitive bids:
(1) Must be expressed as a real yield with three decimals, e.g., 3.123%.
(2) Net long position for each bidder must be reported when the sum of the total bid
amount, at all yields, and the net long position is $2 billion or greater.
(3) Net long position must be determined as of one half-hour prior to the closing time fo
receipt of competitive tenders.
Maximum Recognized Bid at a Single Yield . . . . . . . . . . . . . . . 35% of public offering
Maximum Award . . . . . • . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35% of public offering
Receipt of Tenders:
Noncompetitive tenders: Prior to 12:00 noon eastern standard time on auction day.
Competitive tenders: Prior to 1:00 p.m. eastern standard 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.
Indexing Information:

CPI Base Reference Period ..... 1982-1984
Ref CPI 01/15/2002 . . . . . . . . . . . 177.56452
Index Ratio 01/15/2002 . . . . . . . . 1.00000

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
January 02, 2002

Office of Financing
202-691-3550

CONTACT:

RESULTS OF TREASURY'S AUCTION OF 4-WEEK BILLS
Term:
Issue Date:
Maturity Date:
CUSIP Number:

28-Day Bill
January 03, 2002
January 31, 2002
912795JE2
1.700%

High Rate:

Investment Rate 1/:

1.723%

Price:

99.868

All noncompetitive and successful competitive bidders were awarded
securities at the high rate. Tenders at the high discount rate were
allotted 41.40%. All tenders at lower rates were accepted in full.
AMOUNTS TENDERED AND ACCEPTED (in thousands)
Tender Type

Tendered

Competitive
Noncompetitive
FIMA (noncompetitive)

SUBTOTAL
Federal Reserve
TOTAL

Accepted

23,687,011
13,930

6,986,281
13,930

23,700,941

7,000,211

1,574,261

25,275,202

8,574,472

Median rate
1.670%: 50% of the amount of accepted competitive tenders
was tendered at or below that rate.
Low rate
1.650%:
5% of the amount
of accepted competitive tenders was tendered at or below that rate.
Bid-to-Cover Ratio

23,700,941 / 7,000,211

3.39

1/ Equivalent coupon-issue yield.

http://www.publicdebttreas.gov

PO-896

OFFICE OF PUBLIC AFFAIRS .1500 PENNSYLVANIA

AVE~UE,

N.W .• WASHINGTON, D.C.. 20220. (202) 622·2960

CONTACT:

EMBARGOED UNTIL 2:30 P.M.
January 3, 2002

Office of Financing
202/691-3550

TREASURY OFFERS 13-WEEK AND 26-WEEK BILLS
The Treasury will auction 13-week and 26-week Treasury bills totaling $26,000
million to refund an estimated $23,723 million of publicly held 13-week and 26-week
Treasury bills maturing January 10, 2002, and to raise new cash of approximately
$2,277 million. Also maturing is an estimated $15,000 million of publicly held 4-week
Treasury bills, the disposition of which will be announced January 7, 2002.
The Federal Reserve System holds $10,240 million of the Treasury bills maturing
on January 10, 2002, in the System Open Market Account (SOMA).
This amount may be
refunded at the highest discount rate of accepted competitive tenders either in these
auctions or the 4-week Treasury bill auction to be held January 8, 2002. Amounts
awarded to SOMA will be in addition to the offering amount.
Up to $1,000 million in noncompetitive bids from Foreign and International
Monetary Authority (FlMA) accounts bidding through the Federal Reserve Bank of New
York will be included within the offering amount of each auction.
These
noncompetitive bids will have a limit of $100 million per account and will be accepted
in the order of smallest to largest, up to the aggregate award limit of $1,000
million.
TreasuryDirect customers have requested that we reinvest their maturing holdings
of approximately $1,101 million into the 13-week bill and $731 million into the 26week bill.
The allocation percentage applied to bids awarded at the highest discount rate
will be rounded up to the next hundredth of a whole percentage point, e.g., 17.13%.
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

PO-900

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

HIGHLIGHTS OF TREASURY OFFERINGS OF BILLS
TO BE ISSUED JANUARY 10, 2002
January 3, 2002
Offering Amount ..... .
Public Offering ..... .
NLP Exclusion Amount.

· $12,000 mil110n
· $12,000 million
· $ 3,800 million

Description of Offering:
Term and type of security.
. . 91-day bill
CUSIP number.
. . 912795 JP 7
Auction date ..
· January 7, 2002
Issue date ....
. .... January 10, 2002
Maturity date.
. . . . . . . . . . . . . . . ...... . April 11, 2002
Original issue date . . . . . . . . . . . . . .
. .. October 11, 2001
... $15,282 million
Currently outstanding . . . . . . . . . . . .
Minimum bid amount and multiples.
. .. $1,000

$14,000 million
$14,000 million
None

182-day bill
912795 KR 1
January 7, 2002
January 10, 2002
July 11, 2002
January 10, 2002
$1,000

The following rules apply to all securities mentioned above:
Submission of Bids:
Noncompetitive bids:
Accepted in full up to $1 million at the highest discount rate of accepted competitive bids.
Foreign and International Monetary Authority (FIMA) bids:
Noncompetitive bids submitted through the Federal Reserve
Banks as agents for FIMA accounts.
Accepted in order of size from smallest to largest with no more than $100
million awarded per account.
The total noncompetitive amount awarded to Federal Reserve Banks as agents for FlMA
accounts will not exceed $1,000 million.
A single bid that would cause the limit to be exceeded will
be partially accepted in the amount that brings the aggregate award total to the $1,000 million limit.
However,
if there are two or more bids of equal amounts that would cause the limit to be exceeded, each will be prorated
to avoid exceeding the limit.
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 (NLP) 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
35% of public offering
. ...... .
Maximum Award.............
Receipt of Tenders:
Noncompetitive tenders ..... Prior to 12:00 noon eastern standard time on auction day
Competitive tenders . . . . . . . . Prior to 1:00 p.m. eastern standard 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.

DEPARTMENT

THE

TREASURY

NEWS

'IREASURY

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

Contact: Tara Bradshaw
(202) 622-2960

FOR IMMEDIATE RELEASE
January 4, 2002

TREASURY SECRETARY PAUL O'NEILL STATEMENT ON
CREATING JOBS AND GROWTH

Today's unemployment figures show that millions of dislocated workers are suffering
from our slow economy. We must take steps to speed our recovery and put Americans back to
work. I'm glad the Senate Majority Leader said today he agreed with the President that we
should work together to create jobs. I look forward to working with the Senate leader to secure
passage of legislation to help dislocated workers and to cut taxes so employers can create more
jobs. Creating jobs and getting the economy growing again is the surest path back to
Washington budget surpluses.

-30-

PO-901

For press releases, speeches, public schedules and official biographies, call our 24-hour fax line at (202) 622-2040
'U S Governmenl Pflnl,ng Ottlce 1998 - 619-559

DEPARTMENT

THE

TREASURY

NEWS

TREASURY

OFFICE OF PUBLIC AFFAIRS e1500 PENNSYLVANIA AVENUE, N.W. e WASHINGTON, D.C .• 20220 e (202) 622-2960

EMBARGOED UNTIL 11: 30 A.M.
January 7, 2002

Contact:

Office of Financing
202/691-3550

TREASURY OFFERS 4-WEEK BILLS
The Treasury will auction 4-week Treasury bills totaling $6,000 million to
refund an estimated $15,000 million of publicly held 4-week Treasury bills
maturing January 10, 2002, and to pay down approximately $9,000 million.
Tenders for 4-week Treasury bills to be held on the book-entry records of
TreasuryDirect will not be accepted.
The Federal Reserve System holds $10,240 million of the Treasury bills
maturing on January 10, 2002, in the System Open Market Account (SOMA).
This
amount may be refunded at the highest discount rate of accepted competitive
tenders in this auction up to the balance of the amount not awarded in today's
13-week and 26-week Treasury bill auctions. Amounts awarded to SOMA will be in
addition to the offering amount.
Up to $1,000 million in noncompetitive bids from Foreign and International
Monetary Authority (FIMA) accounts bidding through the Federal Reserve Bank of
New York will be included within the offering amount of the auction.
These
noncompetitive bids will have a limit of $100 million per account and will be
accepted in the order of smallest to largest, up to the aggregate award limit
of $1,000 million.
The allocation percentage applied to bids awarded at the highest discount
rate will be rounded up to the next hundredth of a whole percentage point,
e.g., 17.13%.
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

PO-902

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

HIGHLIGHTS OF TREASURY OFFERING
OF 4-WEEK BILLS TO BE ISSUED JANUARY 10, 2002
January 7, 2002
Offering Amount . . . . . . . . . . . . . . . . . . . . . $6,000 million
Public Offering . . . . . . . . . . . . . . . . . . . . . $6,000 million
NLP Exclusion Amount . . . . . . . . . . . . . . . . $10,500 million
Description of Offering:
Term and type of security ........... 28-day bill
CUSIP number . . . . . . . . . . . . . . . . . . . . . . . . 912795 JF 9
Auction date . . . . . . . . . . . . . . . . . . . . . . . . January 8,2002
Issue date . . . . . . . . . . . . . . . . . . . . . . . . . . January 10, 2002
Maturity date . . . . . . . . . . . . . . . . . . . . . . . February 7, 2002
Original issue date ................. August 9,2001
Currently outstanding ............... $40,659 million
Minimum bid amount and multiples .... $1,000
Submission of Bids:
Noncompetitive bids: Accepted in full up to $1 million at the highest
discount rate of accepted competitive bids.
Foreign and International Monetary Authority (FIMA) bids:
Noncompetitive bids submitted through the Federal Reserve Banks as agents for
FIMA accounts. Accepted in order of size from smallest to largest
with no more than $100 million awarded per account.
The total noncompetitive amount awarded to Federal Reserve Banks as agents for
FlMA accounts will not exceed $1,000 million. A single bid that
would cause the limit to be exceeded will be partially accepted in
the amount that brings the aggregate award total to the $1,000
million limit.
However, if there are two or more bids of equal
amounts that would cause the limit to be exceeded, each will be
prorated to avoid exceeding the limit.
Competitive bids:
(1) Must be expressed as a discount rate with three decimals in
increments of .005%, e.g., 4.215%.
(2) Net long position (NLP) 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 standard time on auction day
Competitive tenders:
Prior to 1:00 p.m. eastern standard time on auction day
Payment Terms:
By charge to a funds account at a Federal Reserve Bank
on issue date.

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

FOR RELEASE AT 3:00 PM
January 7,2002

Contact: Peter Hollenbach
(202) 691-3502

PUBLIC DEBT ANNOUNCES ACTIVITY FOR
SECURITIES IN THE STRIPS PROGRAM FOR DECEMBER 2001

The Bureau of the Public Debt announced activity for the month of December 2001, of securities within the
Separate Trading of Registered Interest and Principal of Securities program (STRIPS).
Dollar Amounts in Thousands
Principal Outstanding
(Eligible Securities)

$2,057,606,461

Held in Un stripped Form

$1,890,647,498
$166,958,964

Held in Stripped Form

$15,227,800

Reconstituted in December

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 "Holdin?'c; of Treasury Securities in Stripped Form."
The Stlips Table along with the new Monthly Statement of The Public Debt is available on Public Debt's
Internet site at: www.publicdebt.treas.gov.Awide range of information about the public debt and Treasury
securities is also available at the site.
000

PO-903
www.publicdebt.treas.gov

TABLE V HOLDINGS OF TREASURY SECURITIES IN STRIPPED FORM DECEMBER 31 2001

loan Description

Treasury Bonds:
CUSIP.
912810 DM7
008

ORB
DU9
JtJ5
DPO
DS4

DT?
DV7
DW5
DX3
DYI
DZ8
EA2
EBO
EC8
ED6
EE4
EFI
EG9
EH7
EJ3
EKO
EL8
EM6
EN4
EP9
E07
ES3
ET1
EV6
EW4
EX2
EYO
Ell
FAI
FB9
FE3
FFO
FG8
FJ2
FM5
FP8

Interest Rate:
11·518
12
10-3i4
9·318
11·311
11· 1/4
10-518
9·7/8
9·1/4
7·1/4
7·112
8·314
8·7/8
9·1/8
9
8·7/8
8·1/8
8·112
8·314
8·314
7·7/8
8·1/8
8·1/8
8
7·114
7·518
7·1/8
6·1/4
7·1/2
7·518
6·7/8
6
6·314
6·1/2
6·518
6·318
6·118
5-1/2
5-1/4
5-1/4
6·1/8
6·1/4
5-318

Amount Outstanding In Thousands

Corpus
STAIP
CUSIP

Maturity Date
Total
Outstanding

912803 AB9
AD5
AG8
AJ2
912800 AA7
912803AAI
AC7
flE3
fiFO
AH6
AI<9
AL7
AM5
AN3
AP8
A06
AR4
AS2
ATO
AU7
AV5
AW3
AXI
AY9
AZ6
BAD
BB8
BC6
BD4
BE2
BF9
BG7
BH5

BJl
BK8
Bl6
BM4
BP7
BV4
BW2
CG6
CH4
CK7

11115104
05115105
08/15105
02115106
11115114
02115115
08115115
11/15115
02115116
05115116
11/15116
05115117
08115117
05115118
11115118
02115119
08/15119
02115120
05115120
08115120
02115121
05115121
08/15121
11115121
08115122
11/15122
02115123
08/15123
11/15124
02115125
08115125
02115126
08115126
11115126
02115127
08115127
11115127
08/15128
11/15128
02115129
08/15129
05115130
02115131

Total Treasury Bonds ......... ........................ ...
Treasury Inflation-Indexed Notes:
Interest Rate:
Series:
CUSIP:
3-518
J
9128273118
3-318
A
2M3
3-518
A
3T7
3-718
A
4Y5
4-1/4
A
&N8
3-112
A
6R8

912820 BZ9
BVP.

DN4
EK9

GA9

07/15102
01/15/07
01/15108
01/15109
01/15110
01/15111

Totallnflalion-Indexed Notes ........ ..................
Treasury Inllatlon-Indexed Bonds:
Interest Rate:
CUSIP.
3-518
912810 FD5
3-718
FH6
3-318
F06
Totallnllation-Indexed Bonds .. ........................

912803 BN2
CF8
Cl5

04115128
04115129
04115132

8,301,806
4,260,758
9,269,713
4,755,916
5,015,284
10,783,299
4,023,916
5,584,859
5,501,754
W,823,551
18,824,448
15,619,169
11,208,358
6,797,439
7,174,470
13,320,498
18,940,932
9,656,268
7,707,183
17,259,306
10,195,573
10,191,788
9,926,382
30,632,194
10,227,790
7,423,626
16,152,061
22,659,044
9,704,162
10,019,170
11,267,207
12,837,916
9,000,418
10,870,177
9,601,971
9,358,756
22,021,339
11,776,201
10,947,052
11,350,341
11,178,580
17,043,162
16,427,648

Portion Held In
Unstripp€d Form

4,826,606
1,834,758
5,666,613
4,486,500
1,860,400
7,483,830
3,304,890
3,167,089

Portion Held in
Strippeo Form

Reconstituted
This Month

18,517,"1S6
17,407,708
8,487,664
7,899,085
2,919,839
3,572,347
7,882,816
18,164,105
7,761,420
2,946,743
7,374,906
9,088,373
5,260,725
7,151,090
15,665,625
9,091,491
3,465,431
9,959,661
19,385,468
3,638,442
3,805,969
7,286,325
11,763,116
6,709,600
5,216,527
6,430,766
7,130,756
11,626,639
11,072,701
10,362,052
11,010,445
10,485,980
16,677,050
16,299,648

3,475,200
2,426,000
3,603,100
269,416
3,154,884
3,299,469
719,026
2,417,770
254,713
305,795
1,416,740
·1,131,505
3,309,293
3,877,600
3,602,123
5,437,682
776,827
1,894,848
4,760,440
9,884,400
1,107,200
4,931,063
2,775,292
14,966,569
1,136,299
3,958,195
6,192,400
3,273,576
6,065,720
6,213,201
3,980,882
1,074,800
2,290,818
5,653,650
3,171,205
2,226,000
10,394,700
703,500
585,000
339,896
692,600
366,112
128,000

97,600
60,950
674,800
8,608
330,616
318,200
78,547
;:>31,600
210,400
129,938
135,638
909,360
290,000
27,200
399,800
658,500
465,120
212,400
60,000
352,540
225,600
293,642
75,200
3,190,725
134,400
166,400
504,000
258,560
142,960
489,600
261,360
520,400
864,982
372.250
289,600
307,400
370,100
299,000
194,400
30,904
0
100,000

503,639,485

359,395,976

144,243,509

14,743,300

18,661,715
17,675,874
18,493,7;,
17,232,633
11,958,446
11,233,268

18,66t,715

17,232,633
11,958,446
11,233,268

0
0
110,006
0
0
0

0
0
0
0
0
0

95,255,650

95,145,644

110,006

18,469,156
21,320,778
5,018,450

18,469,156
21,185,645
5,018,450

0
135,133
0

0
0
0

44,808,384

44,673,251

135,133

~,247,041

,-- "'7,"\('7,..

TABLE V' HOLDINGS OF TREASURY SECURITIES IN STRIPPED FORM, DECEMIER 11 JIIIlIt

Corpus
STRIP
ClJSIP

Loan Ooscript,on

Treasury Notes'
Series
CUSI;:>
C
912827 ?G6
R
5X6
0
2L5
[,AS
S
;>Po
E
&P,3
T
;>SO
r
U
rSl
f'49
A
,WI
G
V
6E7
2Y7
Ii
6F4
W
3C4
K
6HO
X
G55
B
l
3G5
6K3
Y
3J9
M
6Ll
Z
31..4
N
303
P
AC
6P2
Q
3S9
AO
600
3V2
C
6S6
L
J78
A
3Z3
0
6Ul
M
4B5
E
6V9
N
401
F
6W7
P
4H2
G
Q
6Y3
4K5
H
6Z0
R
7A4
S
L83
B
4N9
J
7CO
T
708
U
7E6
V
4U3
K
7Gl
W
7H9
X
N81
A
5A6
E
P89
B
fJ'<;

::x".v

R87
5S7
SS6
T85
609
U83
V82
6N7
W81
X80
6X5
Y55
Z62
7F3
2J0
2U5

D
H
A
B
E
C

Interest Rate'
6·1.'4
6·3/8
6·1/4
6·112
6·5'8
6·112
6·5'8
6·3'8
7·1/2
6·1/2

JEO
3X8
4F6
4Vl
5G3
5N8
521
6J6
6T4
7B2

F
A
B
E
C

0
F
B
C
D
B
C
D
B
C
B
C
B
C

To:al Treasury Notes
G'a'X1 Totai

Amount Outstanding In Thousands
Maturity Date
Total
Outstandina

Portion H~ld h
Unstriooed Form

Portio" Held in
Strlooed Form

Reconstituted
This Month

0
0
0
0
0
0
0
0
17,600
0
0
0
0
0
0
193,600
0
0
0
0
0
0
0
0
0
0
0
18,184
0
0
0
0
0
0
0
0
0
0
0
3,200
600
0
0
0
6,000
0
0
800
3,200
8,600
0
'Xl
0
800
0

13,453,346
19,381,251
13,799,902
16,563,375
14,301,310
17,237,943
14,474,673
17,390,900
11,714,397
13,503,890
14,871,823
13,058,694
14,320,609
12,231,057
15,057,900
23,859,015
12,731,742
15,072,214
12,806,814
15,144,335
26,593,892
12,120,580
15,058,526
12,052,433
14,822,027
13,100,640
15,452,604
23,562,691
13,670,354
14,685,095
14,172,892
14,674,853
12,573,248
13,338,528
13,132,243
13,331,937
13,126,779
14,671,070
16,003,270
28,011,028
19,852,263
18,665,038
22,675,482
25,147,970
18,625,785
26,170,536
29,667,709
12,955,077
17,823,228
14,440,372
18,925,383
13,348,487
18,089,806
14,373,760
32,658,145
13,834,754
14,739,504
28,562,370
15,002,580
15,209,920
28,062,797
15,513,587
16,015,475
27,797,852
22,740,446
22,459,675
18,801,283
13,103,678
13,958,186
25,638,803
13,583,412
27,190,961
25,083,125
14,794,790
27,399,894
23,355,709
22,437,594
23,438,329
26,635,316

13,398,338
19,376,451
13,799,902
16,521,775
14,278,910
17,197,143
14,474,673
17,384,500
7,091,997
13,503,890
14,849,423
13,058,694
14,312,209
12,231,057
15,056,300
19,285,226
12,731,742
15,072,214
12,734,814
15,144,335
26,505,092
11,760,580
14,990,688
11,650,193
14,822,027
13,100,640
15,427,004
22,341,599
13,626,354
14,685,095
14,172,092
14,674,853
12,558,848
13,338,528
13,103,843
13,331,937
13,099,579
14,671,070
16,003,270
25,730,788
19,680,863
18,665,038
22,675,482
25,147,970
17,376,085
26,170,536
29,667,709
12,284,077
17,803,228
13,628,972
18,925,383
11,492,167
18,089,806
14,388,960
32,658,145
13,252,674
14,739,104
28,562,370
15,002, 180
14,762,320
27,984,397
15,508,107
15,276,915
27,797,852
22,700,446
22,399,675
18,687,863
12,797,006
13,684,271
25,136,003
13,571,212
27,124,321
25,002, 125
14,723,090
27,286,394
23,301,709
22,334,594
23,430,569
26,635,316

55,008
4,800
0
41,600
22,400
40,800
0
6,400
4,622,400
0
22,400
0
8,400
0
1,600
4,573,789
0
0
72,000
0
88,800
380,000
67,840
402,240
0
0
25,600
1,221,092
44,000
0
800
0
14,400
0
28,400
0
27,200
0
0
2,280,240
171,400
0
0
0
1,249,700

..........

1,413,902,943

1,391,432,627

22,470,316

484,500

.....

2,057,606,461

1,890,647,498

166,958 964

15,227800

6·~'8

6·114
6·3.'8
6
6·1/4
6·3.'8
6·1/4
6·118
5-718
6
5-3.'4
5-3.'4
5-5'8
5-5'8
5-118
5-112
4·3.'4
6·1/4
5-112
4·5'8
5-112
4·1/4
5-3.'4
4
5-112
4·1/4
5-318
3-718
3-718
5-3.'4
5-1/4
3-5'8
2·3.'4
2·3.'4
4·1/4
3
3-1/4
5-718
4·3.'4
7·114
5-114

, ,'14

g~::I1::":~

6
7·718
5-718
7·112
6-1/2
6-3'4
6·112
5-718
5-3.'4
5-5'8
6-718
4-5'8
7
6-1/2
3-1/2
6-114
6-5'8
6-118
5-1/2
5-5'8
4·3/4
5-1/2
6
6·112
5-3/4
5

912820 FK8
EL7
Fl6
EN3
rM4
EP8
rN2
[Q6

Bue
FP7
[S2
F05
ETO
FR3
EU7
BE6
FSI
FU6
CC9
FV4
CE5
CH8
FY8
CKI
FZ5
CN5
GB7
BF3
CS4
G03
CU9
GEl
CW5
GF8
OA2
GH4
DC8
GJO
GK7
BGI
OE4
GM3
GNI
GP6
DJ3
GR2
GSO
BH9
007
BJ5
DU8
BK2
DZ7
BlO
EE3
BMB
BN6
ER4
BPI
B09
FXO
BR7
BS5
GG6
BT3
BUO
GQ4
BW6
BX4
CAS
C08
CYI
DKO
DV6
EAl
EM5
FT9
GC5
Gl5

01/31102
01/31102
02i28.'t)2
0228102
03131102
03'31/02
0-\,'30'02
04'30/02
0".'15102
05'31102
05131/02
06130102
06130102
07/31102
07131102
08/15102
08/31102
08/31102
09/30102
09/30102
10131102
11/30102
11/30102
12131102
12131102
01/31103
01/31103
02115103
02128103
02128103
03.'31103
03.'31103
04I30I03
04130103
05'31103
05'31103
06/30103
06f30I03
07/31103
08115103
08115103
08131103
09/30103
10131103
11115103
11/30103
12131103
02115'04
02115'04
05'15'04
05'15'04
08115'04
08115'04
11115'04
11/15'04
0211&'05
05'15105
05'15105
08115105
11/15105
11/15105
02115106
05'15106
05'15106
07/15106
10115106
11/15106
0211&'07
05'15107
0811&'07
02115'08
05'15'08
11115'08
05115'09
08'15'09
02115'10
08/15'10
02115'11
08/15'11

0
0
671,000
20,000
811,400
0
1,854,300

4,800
0
582,080
400
0
400
447,600
78,400
5,480
738,560
0
40,000
60,000
113,400
306,672
273,915
500,800
12,200
66,640
81,000
71,700
113,500
54,000
103,000
5,760
0

0
0
0
0
0
800
0
46,720
0

0
0

0
45,296
0
0
51,000

0
24,800
3,800
54,300
700
0
0
0

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
January 07, 2002

CONTACT:

Office of Financing
202-691-3550

RESULTS OF TREASURY'S AUCTION OF 26-WEEK BILLS
Term:
Issue Date:
Maturity Date:
CUSIP Number:
High Rate:

182-Day Bill
January 10, 2002
July 11, 2002
912795KR1
1.750%

Investment Rate 1/:

1.791%

Price:

99.115

All noncompetitive and successful competitive bidders were awarded
securities at the high rate.
Tenders at the high discount rate were
allotted 88.45%. All tenders at lower rates were accepted in full.
AMOUNTS TENDERED AND ACCEPTED (in thousands)
Tendered

Tender Type
Competitive
Noncompetitive
FIMA (noncompetitive)

4,887,350

Federal Reserve

32,112,87l

12,920,173
955,161
125,000
14,000,334 2/

27,225,521

SUBTOTAL

TOTAL

26,145,360
955,161
125,000

Accepted

18,887,684

Median rate
1.740%: 50% of the amount of accepted competitive tenders
was tendered at or below that rate.
Low rate
1.700%:
5% of the amount
of accepted competitive tenders was tendered at or below that rate.
Bid-to-Cover Ratio = 27,225,521 / 14,000,334 = 1.94
1/ Equivalent coupon-issue yield.
2/ Awards to TREASURY DIRECT = $780,483,000

htip://www.publicdebt.treas.gov

PO-904

CONTACT:

Office of Financing
202-691-3550

RESULTS OF TREASURY'S AUCTION OF 13-WEEK BILLS
Term:
Issue Date:
Maturity Date:
CUSIP Number:
High Rate:

91-Day Bill
January 10, 2002
April 11, 2002
912795JP7
1.655%

Investment Rate 1/:

1.684%

Price:

99.582

All noncompetitive and successful competitive bidders were awarded
securities at the high rate.
Tenders at the high discount rate were
allotted 14.60%. All tenders at lower rates were accepted in full.
AMOUNTS TENDERED AND ACCEPTED (in thousands)
Tender Type
Competitive
Noncompetitive
FIMA (noncompetitive)

29,566,175
1,477,436
278,000

SUBTOTAL

31,321,611

Federal Reserve

3,550,158

TOTAL

Accepted

Tendered

34,871,769

10,244,635
1,477,436
278,000
12,000,071 2/
3,550,158

15,550,229

Median rate
1.640%: 50% of the amount of accepted competitive tenders
was tendered at or below that rate.
Low rate
1.600%:
5% of the amount
of accepted competitive tenders was tendered at or below that rate.
Bid-to-Cover Ratio = 31,321,611 / 12,000,071 = 2.61
1/ Equivalent coupon-issue yield.
2/ Awards to TREASURY DIRECT = $1,220,586,000

http://www.publicdebt.treas.gov

PO-90S

DEPARTMENT

THE

TREASURY

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

REMARKS BY PETER R. FISHER
UNDER SECRETARY OF THE TREASURY FOR DOMESTIC FINANCE
BEFORE THE BOND MARKET ASSOCIATION LEGAL AND COMPLIANCE
CONFERENCE

It is a pleasure to be here with you and to be back in New York. Thank you for inviting me.

There are just two things I want to talk to you about today: number one: the primary market for
U.S. government securities and, number two, the secondary market for U.S. government securities.
I want to describe our efforts to improve the efficiency of the primary market by reducing the
time it takes us to release auction results. The Treasury, the Bureau of Public Debt and our colleagues at
the Federal Reserve Bank of New York are now on a mission to complete auction processing and release
results consistently within two minutes. Achieving this will take some time and some changes for all of
us. But our objective is clear and you can be judge of how we are doing.
I also want to touch on the importance of the efforts of your firms and your clients to ensure the
continued efficiency of the secondary market by your vigilant oversight of the competitive dynamics of
the financing market. The depth, liquidity and resilience of the secondary market for U.S. government
securities are critical to our debt management strategy. But they are much more a function of the things
that you do than they are of the things that we do.

Treasury auctions must be consistently brief: two minutes
The overarching objective for the management of the Treasury's marketable debt is to achieve
the lowest borrowing cost, over time, for the federal government's financing needs. Although I have
been at the Treasury for less than a year, I have been intimately involved in financing the government's
marketable debt for almost a decade. While there are many things we have done to try to achieve the
lowest borrowing cost for the taxpayer, for too long we have overlooked one of the simplest things we
can do: namely, to reduce the period of time it takes us to announce auction results.
Processing bids and disseminating results more quickly will be a win-win situation for both
investors and the Treasury. Shorter release times will reduce the period of time bidders are exposed to
uncertainty as to whether and at what price they purchased Treasury securities.
PO-906
Fw press releases, speeches, public schedules and official biographies, call our 24-hourfax line at (202) 622-2040
·U.S. Government Pflntlng Office: 1998 - 619-559

2
Reducing uncertainty will reduce risk for both investors and dealers. By reducing this risk, the
Treasury will no longer need to compensate bidders for the implicit option premium associated with the
extended period of uncertainty. This will lower the government's borrowing costs.
Considerable progress has been made in recent years. The Bureau of Public Debt, the New York
Fed and the dealers and other submitters have worked together to make these improvements possible. In
1995 the average release time was 45 minutes. By 2000 average release times had been reduced to 27
minutes. And, as many of you may know, over recent months we released several auction results in less
than 5 minutes by streamlining our treatment of questionable bids and by reducing the time the press has
to tum the auction results into headlines. But we can do better.
To achieve the lowest borrowing costs, we must make the period of time between the auction
close and the public release of results consistently brief We will not squeeze out the implicit option
premium we are now paying if we process most auctions in less than five minutes but still occasionally
take 20 or 30 minutes to get results out. So our objective is a two-minute release and the variance we
will tolerate is 30 seconds on either side ofthat objective. In the immediate future, our objective is to
release auction results within six minutes, plus or minus 60 seconds.
We can meet the two-minute objective using existing technology, but to meet the two-minute
mark consistently, we are all going to have to change our behavior to ensure that the process is driven
by the rules rather than the exceptions to the rules. There will be changes in the submission of bids, the
processing of bids and in how we get the results out.

Changes: your bid is your bid
For the bidding process, the most significant change - and the one that will require the most
attention by dealers and investors - is also the simplest to understand: your bid is your bid.
For many years, we have been very forgiving of the mistakes and errors of submitters and
bidders. We have been reviewing bids - eyeballing them for reasonableness - and giving submitters the
chance to correct glaring errors that we found. The historical origin of our bid review lies before the
dawn of computer systems when all auctions were manually processed. But to continue this review
process in an automated world has come at the expense of getting our results out more quickly.
Beginning with our next refunding auctions, we will take bids as submitted and reject bids that
fail to comply with our auction procedures. The onus will be entirely on submitters to ensure that their
bids are accurate for themselves and their customers. This includes names, bidder ID's, par amounts,
yields and net long positions.
Lest there be any confusion, let me state plainly: starting with the February refunding auctions,
staff at Public Debt and the New York Fed will no longer proactively contact submitters to question bids
or information submitted on tenders. Bids will be taken at face value and those that do not comply with
our procedures and system edits will not be included in the auction.
From a systems' perspective, there will no longer be bids with incorrect par amounts or yields.
All bids that satisfy the edits in the system will be accepted. Add an extra zero or mess up the big

3
figure, and if it hits - it's yours. We will not delay the auction processing or release times to ensure that
bids are "correct" and we will not accept any changes to bids that the system already accepted.

In addition, starting with the February refunding auctions, customer bids with an erroneous
bidder ID number will not be included in the auction. It will be the responsibility of the bid submitter to
work with the customer to ensure that this information is submitted properly.
You, in the compliance community, will need to continue to do your excellent work educating
traders and customers about the auction process. But we are now going to make your jobs a little easier
because there are going to be real consequences for bidding errors which should provide greater
incentives to submit accurate bids.
That said, the consequences of submitting an erroneous bid that is accepted are manageable.
Uniform price auctions ensure that all submitters will receive awards at a single, market price. The
depth of the secondary market provides an adequate means of redress for those who may have erred in
the par amount of their bid or had their bid rejected because of an unauthorized bidder ID or other
problem.

Changes: reducing reliance on back-up telephone bids
Because bids are submitted through the communications links between your systems and ours,
we also need to clarify how we will respond to emergency requests to submit bids via the telephone
because of system malfunctions or failures.

In the past, extended auction release times have been a consequence of a submitter discovering,
at the last minute, that their systems are not communicating with ours. Efforts have then been made to
fix system problems and, occasionally, when fixes are impossible, to allow bids to be submitted over the
telephone where adequate voice recognition exists. To shorten release times and, particularly, to reduce
the variance, we must eliminate the possibility that these problems delay our auction results.
Eventually, our systems will be reliable enough that we will be able to eliminate backup
telephone bids entirely. The next version of Treasury's automated auction system, TAAPSLink 2.0,
scheduled for release later this year, will help us move in this direction
In the interim, beginning in February, should submitters experience legitimate systems problems,
you will have to notify us at least ten minutes before an auction close and you will have to begin
submitting bids at least five minutes before the auction close. We will enter all the telephone bids we
can but only up to the close.
These are the immediate steps that we are taking to reduce release times. Three other areas
where we will be working will take a little more time.

Further steps we will take to speed up our release time

First, we will continue to improve our technology, both hardware and software. We want to
make s~bmitting tenders more "user friendly" and we want to improve the speed and reliability of our
processmg.
Second, we are going to go back to the drawing board to rethink the application ofthe Net Long
Position reporting requirement to see if we can find a way for compliance with this rule not to interfere
with faster auction processing.
We appreciate your efforts to ensure compliance with our Net Long Position regulation. But the
NLP rule, as currently applied, generates many tenders that are thrown into the questionable category by
our system, requiring time-consuming manual review. Most NLP reporting errors tend to be procedural
rather than substantive and almost all submitting firms would not be in violation of the 35 percent rule
even if they received 100 percent of what they bid for. We do not now have a specific proposal, but we
will be developing alternative approaches to enforcing the 35 percent rule that will not cost the taxpayers
money by slowing down auction release times. I hope that we will be putting something out for public
comment in the next few months.
The final area where we need to make changes to speed up our auction release times is in the
public dissemination of our results. A surprising amount of the total time between an auction close and
the release of results is currently taken up just with the process of getting the results out. We are going
to reengineer this process completely - working with Public Debt's website, our communications links
with submitters and the financial news services - to see what we can do to release results in as few
seconds as possible.
These are the things we are going to be doing to improve the efficiency of the primary market.
Some of these measures may seem "strict" in what I am asking of you and in what I am asking of
Treasury, but they are vital to our achieving the objective of a two-minute auction.
In anyone auction, accepting late bids, correcting bidder errors, or permitting backup telephone
bids might lower our cost of borrowing on that day. But this comes at a long-term cost - of extreme
variance in the duration of our release times - that we will no longer tolerate. We must look out for the
taxpayer's long run interests.

The secondary market: vou make it work
The efficiency of the secondary market for Treasury securities is something that we have less
ability to influence by our direct actions. You and your firms - dealers and investors, risk managers and
compliance officers - are the ones that can directly affect the depth and liquidity of the secondary
market. We can write rules, we can implore and exhort you but, ultimately, your firms and your clients
make this extraordinary marketplace function so well.
There is a tendency for us all to slip into the simplified habit of presuming that the liquidity of
our secondary market is principally a function of how much debt we issue. There is, of course, an
important and enduring truth to the idea that supply matters. But if that were all that mattered, there
would be a great secondary market for grains of sand.

5
The liquidity and - as I like to focus on - the resilience of our secondary market is principally a
function of the mechanisms that calibrate supply and demand. Most importantly, the smooth
functioning of the financing market in general, and the market for specific issues in particular, playa
vital role in the functioning of our secondary market.
As you will recall, last October we took the unprecedented step of holding an off-cycle
reopening of the 10-year note. We took this action only after we concluded that normal market
mechanisms were on the verge of failing.
Never is a long time, so it would be imprudent of me to say that the Treasury will never again
hold such an auction. But you should not count on it, you should not expect it and you certainly should
not hope that we need to do it again.
We want to rely on you to reconcile the forces of supply and demand.
And for this reason, I ask you to redouble your efforts to self-regulate the efficient functioning of
the repo market to ensure that there is a healthy competitive dynamic between the risks of holding long
and the risks of holding short positions, between the risks of withholding collateral and the risks of
failing to deliver.
Six years ago, when I was at the New York Fed, I sat down with Jerry Hawke, who was then the
Under Secretary for Domestic Finance, to discuss the market surveillance of the repo market conducted
by the New York Fed on behalf ofthe Treasury and the other regulators. Those discussions resulted in
two speeches that I gave in October 1996 and in January 1997 in order to clarify the expectations the
official sector had for behavior in the repo market following the 1991 Salomon Brothers' episode. (See
www.ny.frb.orglpihome/news/speeches/pf961008.html; and also see
www.ny.frb.org/pihome/news/speeches/pf970116.html)
Today, Jerry is the Comptroller of the Currency and I am the Under Secretary and I feel just as
strongly now as I did then about the importance of dealer firms self-policing the potential for extreme
trading practices and squeezes of individual issues.
I am not going to repeat now everything that I said in those speeches - you have already been
patient enough listening to me today.
I will suggest that anyone responsible for a government securities trading operation, whether as a
manager, or in compliance, or in legal work, or in risk management, should take the time to read those
two speeches. You should also read the remarks just given this past December by Dino Kos, my former
colleague and successor at the New York Fed, at the Bond Market Association's recent Repo and
Securities Lending Conference, which covers much of the same ground.
(www.ny.frb.org/pihome/news/speeches/2001lkosOl1206.html)
The reason I suggest the importance of reviewing this material is that I want this market to be
self-policing to the greatest extent possible. I am still an optimist because I still believe that our interest
in preserving the efficiency of the financing market is entirely consistent with good business practice on
your part.

In conclusion, let me thank you for listening to me this afternoon and thank you for all that you
do to make the U.S. government securities market the most efficient financial market in the world.

DEPARTMENT

THE

TREASURY

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

FOR IMMEDIATE RELEASE
January 8,2002

Contact: Tara Bradshaw
(202) 622-2014

TREASURY STATEMENT ON U.S.-PANAMA DISCUSSIONS OF A
TAX INFORMATION EXCHANGE AGREEMENT

The Treasury Department is pleased to confirm that representatives of the government of
the United States and the government of Panama have begun discussion of a tax information
exchange agreement. It is more important than ever to ensure that financial institutions are not
used to facilitate illegal activity of any kind.
Last summer, Treasury Secretary Paul O'Neill made a commitment to expand our tax
information exchange agreement network to help us to enforce U.S. tax laws. The United States
has tax information exchange relationships with over 70 countries through an extensive network
of agreements and tax treaties. The recently signed tax information exchange agreements with
the Cayman Islands and Antigua and Barbuda are valuable additions to that network. Our
information exchange relationships are important to the full and fair enforcement of the U.S. tax
laws by allowing for critical information to be obtained upon specific request in cases where
there is reason to believe that a taxpayer has not paid taxes that are due and owing.
-30-

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·u.s. Government Pflntlna Office:

1998· 619·559

DEPARTMENT

THE

'IREASURY

TREASURY

NEWS

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

FOR IMMEDIATE RELEASE
January 9, 2002

Contact: Public Affairs
(202) 622-2960

Treasurv SecretarY Paul O'Neill to Discuss Progress on the War Against
Terrorist Financing

What:

Secretary Paul O'Neill will update the press on the war against telTorist financing
and answer questions regarding all recent updates.

Where:

The Treasury Department
rd
The Diplomatic Room, 3 Floor
th
Please enter at the 15 Street Entrance

When:

Wednesday, January 9, 2002
1:30 PM

Contact:

The room will be available for pre-set up at 12:00 p.m. News media without
Treasury or White House press credentials planning to attend should contact
Public Affairs at (202) 622-2960 by 11 :30 a.m. with the following information:
name, social security number and date of birth. This information may also be
faxed to (202) 622-1999.

PO-90S

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'U S Government P',nllng Office 1998· 619-559

DEPARTMENT

THE

TREASURY

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

For Immediate Release

January 9,2002

FACT SHEET

The Continuing War on Terrorist Assets
"Today we are blocking the assets of two organizations and two individuals who have been
stealingfrom widows and orphans to fund al Qaeda terrorism. These bad actors will now be
pariahs in the civilized world. "
Treasury Secretary PaulO 'Neill
January 9, 2002

Today's Action

•

Today, the Treasury Department designated and blocked the assets of the Afghan Support
Committee (AS C), the Afghanistan and Pakistan offices of the Revival ofIslamic Heritage
Society (RIHS) and two individuals associated with those groups as financiers of terrorism,
under the authority of Executive Order 13224. Abu Bakr Al-Jaziri is the ASC finance chief.
Abd al-Muhsin Al-Libi is the Peshawar, Pakistan office director oftheRIHS and the ASC
manager in Peshawar.

•

While portraying themselves as legitimate charitable enterprises, the ASC and RIHS have
financed and facilitated terrorism. ASC and RIHS personnel, including Al-Jaziri and AlLibi, defrauded well-meaning contributors by diverting money donated for widows and
orphans to al-Qaida terrorists.

Afghan Support Committee (ASe)
•

The ASC is a non-governmental organization (NGO) established by Usama bin Laden. Abu
Bakr Al-J aziri, the finance chief of ASC also served as the head of organized fundraising for
Usama bin Laden. Al-Jaziri collected funds for al-Qaida in Jalalabad through the ASC. He
also collected money for al-Qaida from local Arab NGOs by claiming the funds were for
orphans and widows. Al-Jaziri then turned the funds over to al-Qaida operatives. In 2000,
he moved from Jalalabad to Pakistan where he continued to raise and transfer funds for alQaida.

PO-909
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Revival of Islamic Heritage Societ)' (RIHS)
•

The RIHS is a Kuwaiti-based non-governmental organization. In Pakistan and Afghanistan it
is affiliated with ASC. The Peshawar, Pakistan office director for RIHS is Abd al-Muhsin
AI-Libi, who also serves as the ASC manager in Peshawar. AI-Libi has provided Usama bin
Laden and his associates with facilities in Peshawar, and has carried money and messages on
behalf of Usama bin Laden.

•

The Pakistan office defrauded RIHS donors to fund terrorism. In order to obtain additional
funds from the Kuwait RIHS headquarters, the RIHS office in Pakistan padded the number of
orphans it claimed to care for by providing names of orphans that did not exist or who had
died. Funds then sent for the purpose of caring for the non-existent or dead orphans were
instead diverted to al-Qaida terrorists. There is no evidence at this point that this financing
was done with the knowledge of RIHS in Kuwait.

Summary
•

The President signed Executive Order 13224 on September 23, 200l. To date, the US
Government has named 168 organizations and individuals as financiers of terrorism, and has
blocked $34.2 million. Our coalition partners have blocked another $33.9 million. 196
nations have expressed support to disrupt terrorist financing and 144 nations have blocking
orders in force.
-30-

DEPARTMENT

TREASURY

THE

TREASURY

NEWS

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

FOR IMMEDIATE RELEASE
January 9,2002

Contact: Tasia Scolinos
(202)-622-2960

SECRETARY PAUL O'NEILL STATEMENT
REMARKS ON NEXT TERRORIST ASSET LIST
Good afternoon. Today we are blocking the assets of two organizations and two
individuals who have been stealing from widows and orphans to fund al Qaeda terrorism.
The Afghan Support Committee, branches of the Revival ofIslamic Heritage Society and
two of their employees defrauded well-intentioned donors and turned funds meant for
good into funds for evil. These bad actors will now be pariahs in the civilized world.
Let me take a moment to update you on our progress in shutting down these
terrorist financiers' access to not only the US financial system, but the world financial
system they rely on to transfer monies to finance the terrorists' evil acts.
As you all know, those who peddle weapons to the evildoers in the world don't
accept the currency Afghanis. Materials of destruction are sold on the world market in
hard currencies such as dollars, yen, euros or pounds.
And large quantities of hard currency can only be obtained in the money centers
of the world. Places like New York, London, Dubai, and Hong Kong. The world
financial system is a hub and spoke system, and money centers are the hubs through
which anyone in a remote part of the world must work to make purchases anywhere else
in the world.
Shutting down terrorists' access to money center nations is the key to preventing
them from purchasing the tools of their evil. These are the choke points in the system,
and they are the focus of our attention.
First, here at home we've begun implementing the PATRIOT act, prohibiting US
financial institutions from providing correspondent accounts to foreign shell banks, and
requiring that US financial institutions take reasonable steps to ensure that foreign banks
not use correspondent accounts to indirectly provide banking services to foreign shell
banks. In addition, we issued a proposed rule requiring securities brokers and dealers to
file suspicious activity reports. These steps make it harder for terrorists to access the US
financial system.
PO-910
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Second, we've worked with nations around the world to block terrorists' access to
the hard currencies they need to purchase the tools of terrorism. We have sent teams
from the US government to meet with their counterparts in the Middle East and Europe to
further cooperation.
We have sent technical assistance teams to help nations enhance their systems for
identifying and blocking accounts that finance terrorism. We also work systematically
through global institutions like the United Nations to engage the entire world in our
effort.
Money center nations have taken enormous steps so far in this effort. Canada and
Luxembourg have blocked all the names we have blocked and the UK has blocked all but
a small handful. The same would be true for the Hong Kong Monetary Authority ..
Switzerland has blocked 30 terrorist-related accounts containing 15 million dollars (24.9
million Swiss francs) since September 11. The UAE's action to block the al Barakaat
network effectively shut down the operation worldwide. And the list goes on. Hard
currency countries have been leading the charge in the international effort to destroy the
financial infrastructure of terrorism.
Because our allies in the money centers around the world are working with us,
terrorists who may have resources hidden somewhere remote can no longer change that
money into hard currency with ease. When the terrorists have no access to hard currency,
they have no means of purchasing the technology and equipment of terrorism. With each
new step in this effort, the civilized nations of the world add another brick to the wall that
cuts terrorists off from the financing they need to carry out their evil schemes.

-30-

CONTACT:

Office of Financing
202-691-3550

RESULTS OF TREASURY'S AUCTION OF 4-WEEK BILLS
Term:
Issue Date:
Maturity Date:
CUSIP Number:
High Rate:

28-Day Bill
January 10, 2002
February 07, 2002
912795JF9
1.660%

Investment Rate 1/:

Price:

1. 684%

99.871

All noncompetitive and successful competitive bidders were awarded
securities at the high rate. Tenders at the high discount rate were
allotted
0.26%. All tenders at lower rates were accepted in full.
AMOUNTS TENDERED AND ACCEPTED (in thousands)
Tendered

Tender Type
Competitive
Noncompetitive
FIMA (noncompetitive)

25,464,597
27,035

Federal Reserve

5,973,046
27,035

SUBTOTAL

TOTAL

Accepted

25,491,632

6,000,081

1,802,690

27,294,322

7,802,771

Median rate
1.640%: 50% of the amount of accepted competitive tenders
was tendered at or below that rate. Low rate
1.600%:
5% of the amount
of accepted competitive tenders was tendered at or below that rate.
Bid-to-Cover Ratio = 25,491,632 / 6,000,081 = 4.25
1/ Equivalent coupon-issue yield.

http://www.publicdebt.treas.gov

PO-911

CONTACT:

Office of Financing
202-691-3550

RESULTS OF TREASURY'S AUCTION OF 10-YEAR INFLATION-INDEXED NOTES
Interest Rate:
Series:
CUSIP No:
TIIN Conversion

3 3/8%
A-2012
9128277J5
Factor per $1,000
High Yield:

Issue Date:
Dated Date:
Maturity Date:
9.503587766 1/
3.480%

Price:

January 15, 2002
January 15, 2002
January 15, 2012

99.120

All noncompetitive and successful competitive bidders were awarded
securities at the high yield. Tenders at the high yield were
allotted 91.98%. All tenders at lower yields were accepted in full.
AMOUNTS TENDERED AND ACCEPTED (in thousands)
Tender Type

Tendered

Competitive
Noncompetitive
FIMA (noncompetitive)

Accepted

14,125,730
191,667

SUBTOTAL

14,317,397

6,000,004 2/

Federal Reserve
TOTAL

5,808,337
191,667

14,317,397

6,000,004

Median yield
3.449%:
50% of the amount of accepted competitive tenders
was tendered at or below that rate. Low yield
3.358%:
5% of the amount
of accepted competitive tenders was tendered at or below that rate.
Bid-to-Cover Ratio

14,317,397 / 6,000,004

2.39

1/ 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.
2/ Awards to TREASURY DIRECT = $61,324,000

http://www.publicdebt.treas.gov

PO-912

DEPARTMENT

THE

TREASURY

NEWS

'IREASURY

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

FOR IMMEDIATE RELEASE
January 10, 2002

CONTACT: BETSY HOLAHAN
202-622-2960

MEDIA ADVISORY
U.S. Treasurer Rosario Marin, Tennessee Governor Don Sundquist and
U.S. Mint Director Henrietta Holsman Fore To Unveil Tennessee Quarter

U.S. Treasurer Rosario Marin and U.S. Mint Director Henrietta Holsman Fore will join
Tennessee Governor Don Sundquist on Monday, January 14, 2002 to unveil the new official
Tennessee State Quarter.
The new coin features a trumpet, a fiddle, a guitar, and several musical notes,
symbolizing the state's many contributions to American music, with the inscription "Musical
Heritage." Similarly, Tennessee's state flag has three stars representing each region of the state.
The Tennessee quarter is the 16th quarter released under the U.S. Mint 50 State
Quarters(tm) Program, and the first quarter released in 2002. Launched in 1999, the 50 State
Quarters Program is a 10-year initiative honoring each ofthe nation's states in the order they
ratified the Constitution or joined the Union.
The unveiling will take place on January 14,2002 at the Country Music Hall of Fame's
Ford Motor Company Theatre in Nashville, TN. The event will be held at 10:30 a.m. Central
Time.
Media Contacts:
U.S. Mint - Michael White, 202-354-7222
Tennessee Governor's Office - Alexia Levison, 615-741-3763

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DEPARTMENT

'IREASURY

THE

TREASURY

NEWS

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

For Immediate Release
January 10, 2002

Contact Tony Fratto
at 202-622-2960.

Treasury Secretary Paul O'Neill Will Make Return Visit to Japan
Rebuilding Afghanistan, discussions with Japanese political
and economic leaders are on Tokyo agenda.
U.S. Treasury Secretary Paul O'Neill will travel to Tokyo January 20-24 to meet with
senior Japanese leaders and to represent the United States with Secretary of State Colin Powell
at an international conference on the economic future of Afghanistan. The visit will give
Secretary O'Neill the opportunity to complete a visit that was halted due to the September 11,
2001 terrorist attacks.
The aim of the International Conference on Reconstruction Assistance to Afghanistan, to
be held on January 21-22, is to refine assessments of Afghanistan's funding needs for
reconstruction and development, and to reinforce the political and financial support of the
international community. Secretary O'Neill and other U.S. officials will pursue President Bush's
commitment to assist in the reconstruction of Afghanistan's economy.
The conference is organized by a Steering Group of donor countries co-chaired by the
United States, Japan, the European Union and Saudi Arabia. The Treasury Department and the
State Department represent the United States on the Steering Group. The Tokyo conference
follows meetings held in Washington and Brussels in recent months.
Secretary O'Neill will remain in Tokyo for a series of meetings with senior Japanese
government officials. Secretary O'Neill will exchange views on international financial issues of
mutual interest and on the respective economic outlook and policies in the United States and
Japan.
Secretary O'Neill will also deliver a lunchtime address at the National Press Center in
Tokyo on Wednesday, January 23,2002. He will return to Washington on Thursday, January 24.
John Taylor, Treasury Under Secretary for International Affairs, will accompany
Secretary O'Neill in Tokyo.
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'U S Governmenl Pflnl,ng Ottlce 1998 - 619-559

D EPA R T 1\;1 E N T

0 F

THE

T REA SUR Y

NEWS

TREASURY

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

EMBARGOED UNTIL 2: 30 P.M.
January 10, 2002

CONTACT:

Office of Financing
202/691-3550

TREASURY OFFERS 13-WEEK AND 26-WEEK BILLS
The Treasury will auction 13-week and 26-week Treasury bills totaling $26,000
million to refund an estimated $25,821 million of publicly held 13-week and 26-week
Treasury bills maturing January 17, 2002, and to raise new cash of approximately $179
million. Also maturing is an estimated $12,000 million of publicly held 4-week
Treasury bills, the disposition of which will be announced January 14, 2002.
The Federal Reserve System holds $10,996 million of the Treasury bills maturing
on January 17, 2002, in the System Open Market Account (SOMA).
This amount may be
refunded at the highest discount rate of accepted competitive tenders either in these
auctions or the 4-week Treasury bill auction to be held January 15, 2002. Amounts
awarded to SOMA will be in addition to the offering amount.
Up to $1,000 million in noncompetitive bids from Foreign and International
Monetary Authority (FIMA) accounts bidding through the Federal Reserve Bank of New
York will be included within the offering amount of each auction.
These
noncompeti tive bids will have a liJ)l.i t of' $100 million per accour., and will be accepted
in the order of smallest to largest, up to the aggregate award l~mit of $1,000
million.

TreasuryDirect customers have requested that we reinvest their maturing holdings
of approximately $988 million into the 13-week bill and $947 million into the 26-week
bill.
The allocation percentage applied to bids awarded at the highest discount rate
will be rounded up to the next hundredth of a whole percentage point, e.g., 17.13%.
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 JANUARY 17, 2002
January 10, 2002
Offer"ing Amount .. " .. .
Public Offering ..... .
NLP Excluslon Amount.

. . $13,000 milll0n
· $13,000 million
.. $ 4,100 milll0n

Description of Offering:
Term and type of security.
· 91-day bill
CUSIP number.
· 912795 JQ 5
Auction date..
. January 14, 2002
Issue date....
. January 17, 2002
Maturity date.
.April 18, 2002
Original issue date.
. October 18, 2001
Currently outstanding..
$16,562 million
Minimum bid amount and multiples . . . . . . . . . . . $1,000

$13,000 million
$13,000 million
None

182-day bill
912795 KS 9
January 14, 2002
January 17, 2002
July 18, 2002
January 17, 2002
$1,000

The following rules apply to all securities mentioned above:
Submission of Bids:
Noncompetitive bids:
Accepted in full up to $1 million at the highest discount rate of accepted competitive bids.
Foreign and International Monetary Authority (FIMA) bids:
Noncompetitive bids submitted through the Federal Reserve
Banks as agents for FIMA accounts.
Accepted in order of size from smallest to largest with no more than $100
million awarded per account.
The total noncompetitive amount awarded to Federal Reserve Banks as agents for FIMA
accounts will not exceed $1,000 million.
A single bid that would cause the limit to be exceeded will
be partially accepted in the amount that brings the aggregate award total to the $1,000 million limit.
However,
if there are two or more bids of equal amounts that would cause the limit to be exceeded, each will be prorated
to avoid exceeding the limit.
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 (NLP) 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.
35% of public offering
Maximum Recognized Bid at a Single Rate.
35% of public offering
Maximum Award . . . . . . . . . . . . .
Receipt of Tenders:
Noncompetitive tenders ..... Prior to 12:00 noon eastern standard time on auction day
Competitive tenders . . . . . . . . Prior to 1:00 p.m. eastern standard 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.

DEPARTMENT

THE

TREASURY

NEWS

'IREASURY

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

U.S. In.ternational Reserve Position

1/11/02

The T reJ.sury Department tocby releJ.sed U.S. reserve assets data for the week ending JanU:1rv -+. 2C02. As mciioted
in this table, U.S. reserve assets totaled $68,978 million clS ofJanuary -+. 2CC2, compared to 568,621 million "15 of
December 28,2001.
(in US mil/ions)

l. Official U.S. Reserve Assets

December 28. 2001
68,621

TOTAL
1. Foreign Currency Reserves

a. Securities

Euro
5,426

January 4.2002
68,978

TOTAL

Yen
10.609

Of which. issuer headquartered in the US

Euro

16,035

5.506

Yen

TOTAL

10,631

16,137
0

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

9,143

3,775

b.ii. Banks headquartered in the U.S.

12.919

9,278

~,784

13,062
0

b.IL Of WhiCh, banks located abroad

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

17,849

17,919

10.774

10,816

11,045

b.iii. Of WhiCh, banks located in the U.S.

2. IMF Reserve Position

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

5. Other Reserve Assets

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 va lues
21 The Items, '2 II\;1F ReServe Position' and '3, SpeCial DraWing Rights iSDRsi,' are baseD on aata provided by the 11\J1F and are valued In
Dollar terms at the otfic:al SDR!dotiar -:;xehange rate ~or the reporting date. The entries In the table aDove for 'atest 'NeeK : snown In Italics i
reilecl any fleeessary adjusrments. Ineiuamg revaluation. by the US Treasurv to the prior 'Neek s IrvtF data The IMF jata ;or :he orror 'Neek
are final.
3/ GOla stoe:; ,sfaluea ,1lGlHillv 3t ':;.l;': "::'::2:2 Jer line trov ·JlIllC8

was S11,045 million

)-916

'/alues silown are

Ji ,\iO',eI11cer'::0 :':GC'

: 'k ,~clOcer

:':GG I falue

u.s. International Reserve Position (cont' d)
II. Predetermined Short-Term Drains on Foreign Currency Assets
December 28, 2001

1. Foreign currency loans and securities

January 4, 2002

o
o
o

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
3. Other

III. Contingent Short-Term Net Drains on Foreign Currency Assets
January 4, 2002

December 28, 2001

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
3.b. With banks and other financial institutions

o
o

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. Bou~ht calls
4.b.2. Written puts

DEPARTMENT

THE

TREASURY

NEWS

'IREASURY

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

Contact: Tara Bradshaw
(202) 622-2014

For Immediate Release
January 11, 2002

TASKFORCE STATEMENT ON REVIEW OF
RETIREMENT BENEFIT RULES AND PROTECTION

Today, Treasury Secretary Paul O'Neill, Labor Secretary Elaine Chao, and Commerce
Secretary Don Evans met to respond to the President's directive that they explore the rules,
regulations and laws that govern pension plans and investment programs, such as 401 (k)s, and
determine whether changes should be made to further protect employees' retirement savings.
They directed staff to immediately begin analyzing the effectiveness of retirement security
protections
"We will take the necessary steps to ensure appropriate protection for the retirement nest
eggs of millions of Americans," stated Treasury Secretary Paul O'Neill.
"We need to fully protect workers who depend on pensions and 401(k) plans for their
retirement," stated Labor Secretary Elaine Chao.
"Our number one priority is the security ofthe retirement savings of America's workers,"
stated Commerce Secretary Don Evans.
-30-

PO-917

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/

'U S Governmenl Pflnl,ng Ottlce 1998· 619·559

DEPARTMENT

THE

'IREASURY

TREASURY

NEWS

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

FOR IMMEDIATE RELEASE
JANUARY 1 L 2002

CONTACT: BETSY HOLAHAN
(202) 622-2960

JOINT PRESS STATEMENT OF THE US DEPARTMENT OF THE TREASURY,
OFFICE OF MANAGEMENT AND BUDGET, AND THE US GENERAL
ACCOUNTING OFFICE FEDERAL ACCOUNTING STANDARDS ADVISORY BOARD

On January 11, 2002, the Secretary of the Treasury, the Director of the Office of
Management and Budget, and the Comptroller General of the United States announced a
restructuring of the Federal Accounting Standards Advisory Board (F ASAB) to increase the
number of public members on the Board from three to six, decrease the number of federal
government members from six to three, and provide for terms of up to ten years. The F ASAB
promulgates generally accepted accounting principles (GAAP) for federal reporting entities.
Regarding the changes, Comptroller General David M. Walker, who currently chairs the
Joint Financial Management Improvement Program (JFMIP), stated:
Since its creation in 1990, the Board has made tremendous progress. We believe,
now more than ever, we must continue this progress in establishing sound financial
accounting and reporting. The changes are designed to enhance the independence of the
Board and increase public involvement in setting standards for federal financial
accounting and rep0l1ing. These changes will be effective June 30, 2002.
The Board's current public members David Mosso, formerly vice-chairman of the
Financial Accounting Standards Board: Jolm FarrelL retired partner from KPMG LLP: and
James Patton. professor with University ofPittsburgh's Katz School of Business will continue
and will be joined by three new members.
Secretary of the Treasury Paul H. O'Neill indicated that:
We believe that the restructuring further evidences our commitment to hiuh
quality standards developed with robust public participation. We anticipate recruiting
additional experienced knowledgeable members to join our present high caliber public
members and to continue the thoughtful deliberations of the Board.
~

Mitchell E. Daniels. Jr.. the Director of the Ot1ice of NIanagement and Budget. in
commenting on the reduction of federal membership said:

PO-91S
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This Administration is determined to improve the management of the federal
government. We want to move departments and agencies to the higher levels of
effectiveness and efficiency commonly seen in the private sector. It is only logical that
the standard setters themselves in an area like accounting bring a private sector
perspective and expertise to their work.
ABOUTFASAB
The mission of the FASAB is to promulgate federal accounting standards after
considering the financial and budgetary information needs of citizens, congressional oversight
groups, executive agencies, and the needs of other users of federal financial information.
Accounting and financial reporting standards are essential for public accountability and
for an efficient and effective functioning of our democratic system of government. Thus. federal
accounting standards and financial reporting playa major role in fulfilling the government's duty
to be publicly accountable and can be used to assess (1) the government's accountability and its
efficiency and effectiveness, and (2) the economic, political, and social consequences of the
allocation and various uses of federal resources.
For more information on FASAB, please visit our website: www.fasab.gov

-30-

DEPARTMENT

THE

TREASURY

NEWS

TREASURY

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

EMBARGOED UNTIL 11: 30 A.M.
January 14, 2002

Contact:

Office of Financing
202/691-3550

TREASURY OFFERS 4-WEEK BILLS
The Treasury will auction 4-week Treasury bills totaling $6,000 million to
refund an estimated $12,000 million of publicly held 4-week Treasury bills
maturing January 17, 2002, and to pay down approximately $6,000 million.
Tenders for 4-week Treasury bills to be held on the book-entry records of
TreasuryDirect will not be accepted.
The Federal Reserve System holds $10,996 million of the Treasury bills
maturing on January 17, 2002, in the System Open Market Account (SOMA).
This
amount may be refunded at the highest discount rate of accepted competitive
tenders in this auction up to the balance of the amount not awarded in today's
13-week and 26-week Treasury bill auctions. Amounts awarded to SOMA will be in
addition to the offering amount.
Up to $1,000 million in noncompetitive bids from Foreign and International
Monetary Authority (FIMA) accounts bidding through the Federal Reserve Bank of
New York will be included within the offering amount of the auction.
These
noncompetitive bids will have a limit of $100 million per account and will be
accepted in the order of smallest to largest, up to the aggregate award limit
of $1,000 million.
The allocation percentage applied to bids awarded at the highest discount
rate will be rounded up to the next hundredth of a whole percentage point,
e. g., 17.13%.
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

PO-9i9

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HIGHLIGHTS OF TREASURY OFFERING
OF 4-WEEK BILLS TO BE ISSUED JANUARY 17, 2002
January 14, 2002
Offering Amount . . . . . . . . . . . . . . . ·.··· .$6,000 million
Publ~c Offering. . . . . . . . . . . . . . . . . .. . $6,000 million
NLP Exclusion Amount . . . . . . . . . . . . . . . . $10,400 million
Description of Offering:
Term and type of security ........... 28-day bill
CUSIP number
. . . . . . . . . . . . . . . . . . . . . . 912795 JG 7
Auct~on date . . . . . . . . . . . . . . . . . . . . . . . . January 15,2002
Issue date . . . . . . . . . . . . . . . . . . . . . . . . . . January 17, 2002
Maturity date . . . . . . . . . . . . . . . . . . . . . . . February 14,2002
Original issue date . . . . . . . . . . . . . . . . . August 16,2001
Currently outstanding . . . . . . . . . . . . . . . $40,054 million
Minimum bid amount and multiples .... $1,000
Submission of Bids:
Noncompetitive bids: Accepted in full up to $1 million at the highest
discount rate of accepted competitive bids.
Foreign and International Monetary Authority (FIMA) bids:
Noncompetitive bids submitted through the Federal Reserve Banks as agents for
FIMA accounts. Accepted in order of size from smallest to largest
with no more than $100 million awarded per account.
The total noncompetitive amount awarded to Federal Reserve Banks as agents for
FIMA accounts will not exceed $1,000 million.
A single bid that
would cause the limit to be exceeded will be partially accepted in
the amount that brings the aggregate award total to the $1,000
million limit.
However, if there are two or more bids of equal
amounts that would cause the limit to be exceeded, each will be
prorated to avoid exceeding the limit.
Competitive bids:
(1) Must be expressed as a discount rate with three decimals in
increments of .005%, e.g., 4.215%.
(2) Net long position (NLP) 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 standard time on auction day
Competitive tenders:
Prior to 1:00 p.m. eastern standard time on auction day
Pavment
Terms:
.
By charge to a funds account at a Federal Reserve Bank
on issue date.

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
January 14, 2002

CONTACT:

Office of Financing
202-691-3550

RESULTS OF TREASURY'S AUCTION OF 13-WEEK BILLS
Term:
Issue Date:
Maturity Date:
CUSIP Number:
High Rate:

91-Day Bill
January 17, 2002
April 18, 2002
912795JQ5
1.530%

Investment Rate 1/:

Price:

1.558%

99.613

All noncompetitive and successful competitive bidders were awarded
securities at the high rate.
Tenders at the high discount rate were
allotted 99.16%.
All tenders at lower rates were accepted in full.
AMOUNTS TENDERED AND ACCEPTED (in thousands)

Competitive
Noncompetitive
FIMA (noncompetitive)

27,996,511
1,371,675
215,000

3,830,052

Federal Reserve
$

33,413,238

11,413,527
1,371,675
215,000
13,000,202 2/

29,583,186

SUBTOTAL

TOTAL

Accepted

Tendered

Tender Type

16,830,254

Median rate
1.520%: 50% of the amount of accepted competitive tenders
was tendered at or below that rate. Low rate
1.500%:
5% of the amount
of accepted competitive tenders was tendered at or below that rate.
Bid-to-Cover Ratio = 29,583,186 / 13,000,202 = 2.28
1/ Equivalent coupon-issue yield.
2/ Awards to TREASURY DIRECT = $1,096,380,000

http://www.publicdebt.treas.gov

PO-920

CONTACT:

Office of Financing
202-691-3550

RESULTS OF TREASURY'S AUCTION OF 26-WEEK BILLS
Term:
Issue Date:
Maturity Date:
CUSIP Number:
High Rate:

182-Day Bill
January 17, 2002
July 18, 2002
912795KS9
1.580%

Investment Rate 1/:

1.615%

Price:

99.201

All noncompetitive and successful competitive bidders were awarded
securities at the high rate.
Tenders at the high discount rate were
allotted 81.32%. All tenders at lower rates were accepted in full.
AMOUNTS TENDERED AND ACCEPTED (in thousands)

Competitive
Noncompetitive
FIMA (noncompetitive)

25,707,693
1,199,772
50,000

SUBTOTAL

26,957,465

Federal Reserve

4,639,252

TOTAL

Accepted

Tendered

Tender Type

31,596,717

11,750,403
.1,199,772
50,000
13,000,175 2/
4,639,252

17,639,427

Median rate
1.555%: 50% of the amount of accepted competitive tenders
was tendered at or below that rate.
Low rate
1.520%:
5% of the amount
of accepted competitive tenders was tendered at or below that rate.
Bid-to-Cover Ratio = 26,957,465 / 13,000,175 = 2.07
1/ Equivalent coupon-issue yield.
2/ Awards to TREASURY DIRECT = $998,799,000

http://www.publicdebt.treas.gov

PO-921

DEPARTMENT

'IREASURY

THE

TREASURY

NEWS

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

EMBARGOED UNTIL 9:30 A.M.
January 16, 2002

CONTACT: BETSY HOLAHAN
202-622-2960

REMARKS OF UNDERSECRETARY OF THE TREASURY
FOR DOMESTIC FINANCE PETER R. FISHER
TO THE AMERICAN COUNCIL OF LIFE INSURERS
BOCA RATON, FLORIDA

Over the last eight years, I have spent a fair amount of time working to promote
improvements in financial disclosure practices so that shareholders and creditors receive more
meaningful information about the extent and nature of the risks they incur. For all the time I
spent in central bank working groups on accounting and disclosure, we somehow never managed
to get much media attention for our recommendations. Accounting and disclosure rules just
don't seem to rise to the level of sufficient public or journalistic interest. That's unfortunate. It
is unfortunate because the thread which connects the events that do seem to get me in the news is
the failure of our financial accounting and disclosure practices to keep pace with the rapid
evolution of our capital markets and corporate finance.
Today, I am going to ask you to help improve the entire process by which we establish
norms of behavior for financial accounting and disclosure. If you in the life insurance industrywith the trillions of dollars of assets that you invest and the long investment horizon that is a
function of your liabilities - if you join this effort then we might finally make some real
progress. If you don't, and if we don't make real progress soon, then I fear that the financial
catastrophes of recent years will continue to haunt our financial markets and questions will
continue to be raised about our system of investor-based capitalism on which our economy
depends.
Last week, President Bush asked Secretary O'Neill to lead two efforts. First, the
President asked the Secretary to work with Labor Secretary Elaine Chao and Commerce
Secretary Don Evans to review all of the rules and laws that govern pension plans and retirement
investment programs to detern1ine whether changes need to be made to protect employees'
retirement savings; they, in tum, have directed the staffs of the Treasury, Labor and Commerce
departments to work together to analyze the effectiveness of all retirement security protections.
PO-922

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~

'U S Governmenl Pflnl,ng Ottlce 1998 - 619-559

Now as Secretary Evans made clear: "Our number one priority is the security of the
retirement savings of America's workers." And that's why the first effort President Bush
directed is focused on pension arrangements and 401 (k) plans.
President Bush also asked Secretary O'Neill to lead a working group, comprised of the
Treasury, the Federal Reserve, the S.E.C. and the C.F.T.C., to look at corporate disclosure rules
and regulations as they affect all investors and the workings of our capital markets. It is this
second effort that I want to talk about this morning, focusing on why you should help.
As a society, we face a tremendous challenge. Some how we are going to have to pay for
our collective retirements. Ifwe don't start saving more - a lot more - we will end up paying for
our retirements in the form of lower standards of living than we otherwise could achieve. For
you this is an opportunity.
I am an optimist. I think we are going to find a way to transform ourselves from a nation
of consumers to a nation of savers. I think we are going to find a way to put aside the trillions of
dollars that we still need to save to pay for my generation's extended life expectancy. This is
your opportunity - and your responsibility.
The American people are relying on you to manage our savings and our economy. In our
system of investor-based capitalism, you - your asset managers - are managing our economy
through the capital markets. Now, I'm a capital markets kind of guy. So I want to be clear that I
think it's great that you, and other financial intermediaries, are making most of the investment
decisions that drive our economy. I would not have it any other way.
But there is still a standard to which you need to be held and a responsibility that you
have to make sure that the system you manage - the system of institutional money management
- works on behalf of the shareholders, pensioners, retirees, employees and policyholders whose
savings are at risk.
For capitalism to work, the people who control capital have got to behave like capitalists.
This means that they need to compete vigorously with one another and they need to care
intensely about where and how the capital they control is invested. I want to focus on the second
part of this - about caring intensely where and how capital is invested - but let me first touch on
the issue of competition.
The objective that we, as a capitalist society, have for our financial services industry is
that you continuously improve the efficiency with which our savings are converted into
productive investment. The means through which we hope this happens is for each of you to
strive to increase your revenues and your profits. However, the end that we are expecting you to
achieve, through vigorous competition, is a continuous decline in your collective profits as a
share of our savings. It is fine if financial intermediaries' total profits grow in nominal terms but
- as a rough approximation for improving the productivity of the intermediation between savings
and investment - your profits should grow a little less rapidly than our national savings. This
will be the simplest indication that we are improving the productivity of capital itself.

3
I am sure that you can do even better at competing with your colleagues around the room
and with other financial institutions. But I am reasonably confident that you, the leadership of
your industry, have sufficient incentive to do so.
My greater concern is whether you are doing enough to make it possible for your
individual portfolio managers to behave like real capitalists - to care and care intensely about
where and how the capital they control is being invested - by improving the quality of the
information they rely upon.
Within your organizations, whose job is it to get up everyone morning and work to
improve the accounting and disclosure practices of all the companies in which you invest? Your
portfolio managers may think it is their job to scrutinize the disclosures of individual companies.
But I doubt they feel much responsibility for the state of accounting and disclosure practices, in
general. They are too busy trying to beat the benchmarks that you have set for their
performance. I suspect the same holds true for their managers and your risk managers as well.
Your accountants and auditors see their jobs as applying the existing rules, not
questioning them. Your chief investment officer may spend some time thinking about the
implications of accounting rules for performance and, perhaps, sitting on some industry
committee that is pondering accounting principles, and pondering and pondering. Your chief
financial officer may spend some time on accounting and disclosure practices. But I fear that the
prospect of applying new rules to your own balance sheets and income statements may dampen
your CFO's enthusiasm for any radical improvements in transparency to your shareholders.
In the division of labor within the institutionalization of asset management, too many
actors have the assignment of accepting the status quo accounting and disclosure regime; too few
see it as their job to work systematically to improve the quality of the information you have
about where and how the capital·you control is invested. So while developments in our capital
markets, corporate finance and risk management are racing along at 100 r.p.m., the evolution of
our accounting and disclosure regime crawls along at 10 r.p.m. and the gap between them is
forever widening.
If I sound a little frustrated, I am.
In 1994, I chaired a working group of G-l 0 central bankers who recommended that all
financial intermediaries - regulated and unregulated - move to disclosing more meaningful
information about the risks they incur and their risk management practices. We did this work in
the spring and summer of 1994, following the sell off in G-l 0 bond markets and the decline of
the dollar after the Fed's tightening of monetary policy - but before Orange County and long
before Long-Term Capital Management. While our work was directed at financial
intermediaries, I hope you will agree that, today, these words might apply equally to almost any
major corporation. So in light of recent events, humor me while I read you several paragraphs
from our 1994 report:

"For shareholders, creditors and counterparties in financial markets to allocate capital
efficiently, they need to be able to assess the risks to which fim1s are exposed and which, in their
view, should be reflected in share prices, funding costs and credit decisions.
"The use of derivative instruments has added diversity and complexity to firms' financial
assets, liabilities and off-balance sheet commitments. This has rendered the assessment of their
risk exposures more difficult. At the same time, derivative instruments have provided firms with
new opportunities to assess, price and manage increasingly refined elements of financial risk.
The development of methodologies for assessing the riskiness of portfolios or trading
positions has increased firms' ability to assess and understand their overall risk exposures.
"However, the evolution of trading and financial risk management practices in recent
years has moved well ahead of public disclosures of financial information made by most
financial firms. As a result, a gap exists between the precision with which a firm's management
can assess and adjust the firm's own risk exposures, and the information available to outsiders to
help them assess the riskiness of that firm's activities. Indeed, market participants are
increasingly aware of the contrast between their increased ability to assess and manage their own
financial risks and their relative inability to assess the riskiness of other market participants on
the same terms.
"The lack of transparency of financial intermediaries' trading and risk management
activities can cause a mis-allocation of capital among firms and can also amplify market
disturbances. When the riskiness of firms' activities are not apparent to outsiders, the market
allocation of capital to such firms is unlikely to reflect their actual risk-return prospects. During
episodes of market stress, a lack of information about a firm's market and credit risk exposures
can create an enviromnent in which rumors alone can cause a firm's creditors and counterparties
to reduce their dealings with the firm solely to avoid uncertainty. This may impair the firm's
market access and funding at the very time that these may be critical to the firm's survival."J
I could keep going, but I won't.
More recently, beginning in June 1999 I chaired another working group, this time
composed of representatives of the Basel Committee on Banking Supervision, the G-1 0 central
banks' Committee on the Global Financial System, the International Organisation of Securities
Commissions and the International Association ofInsurance Supervisors. Our report, published
last April, contained specific recommendations for improvement in disclosure practices based on
a pilot study in which forty-four private financial finns, including insurance companies, from
nine countries voluntarily provided confidential data from the second quarter of2000 on broad
2
range of financial risks.

1 "A Discussion Paper on Public Disclosure of Market and Credit Risk by Financial Intermediaries," published by
the Bank for International Settlements, September 1994, http://newrisk.ifci.ch/00011448.htm.
2 "Final Repoli of the Multidisciplinary Working Group on Enhanced Disclosure," published by the Bank for
International Settlements, April 2001, http://bis.org/publ/jointOl.htm .

5
Don't worry; I'm not going to read you anything from this report. I will note that it has
not been a best seller. Nor has the world rushed to adopt the recommendations ofthe report
known as "Fisher II". You may also understand why I am not very interested in spending the
rest of my career producing reports with statistical appendixes on accounting and disclosureFisher III, Fisher IV, etc. - and yet still periodically explaining to my children (and, I fear, my
grandchildren) why my name keeps appearing in the newspaper in stories about bankruptcy and
derivatives.
We've known for a long time, it's not about derivatives themselves. It is about disclosure
- more meaningful disclosure of risk to investors and creditors who are supposed to provide the
self-regulating mechanism of market discipline. What I have learned in the last few years is that
reports prepared by public servants are not going to make enough of a difference by themselves.
If we are going to improve accounting and disclosure practices, the private sector is going to
have to do some heavy lifting.
You need to engage in the effort to reinvigorate private-sector standard setting for
accounting that responds promptly and clearly to changes in business practices. You need to
take responsibility for the efforts to improve disclosure practices so that more useful and
meaningful information is provided to all investors so that they, and your portfolio managers, can
make investment decisions based on accurate risk-return profiles.
What specifically do I think you should do? For a start, put improving corporate
disclosure rules on your company's agenda and think of it as the best investment in risk
management for the long run. Meet with your CIO and your money managers and ask them
what are the five key pieces of information they would like to have to make more accurate
judgments about the equity and debt instruments they purchase. Perhaps the ACLI could come
up with your own set of recommendations for improving accounting and disclosure practices.
You also need to support Harvey Pitt, at the S.E.C., in his efforts to improve our
accounting and disclosure standard setting process. Harvey spelled out a terrific series of ideas
in a piece published by the Wall Street Journal on December 11 tho You should read it and then
do something about it. 3
I am particularly impressed with Harvey's idea that public companies and their auditors
could be required to identify and disclose the several, critical accounting principles on which
their financial results depend and which involve the most complex or subjective assessments.
Under such a rule, investors would be told, concisely and clearly, how the three, four or five key
principles are applied and given information about the possible impact of differing applications
of these principles to a company's financial results. This is a powerful idea. I can already hear
the ankle-biters and apologists for the status quo explaining why we could never do anything this
radical or that involved such subjective judgments.

Chairman Harvey L. Pitt, "How to Prevent Future Emons," The Wall Street Journal, December 11, 2001,
http://sec.gov/news/spchS 3 O.htm.
3

6
I hope that the working group that Secretary O'Neill is leading will consider as many of
Harvey's ideas as possible, as well as others, and layout a way forward so that we move beyond
investor protection to investor empowerment, in the sense that knowledge is power.
As Secretary O'Neill has explained, there are a number of investigations going on into
the events surrounding the bankruptcy of Enron, and if rules were broken, rule breakers should
be punished; if rules were bent, we should improve the means of enforcing those rules; and if
loopholes were used, new rules should be written.
My own experience over the last decade has taught me that if we are going to do anything
to reduce the risks of financial catastrophes and make real improvements in our financial system,
we are going to have to concentrate our efforts on the rules that govern accounting and disclosure
practices of all the companies in which the savings and wealth of the American people are
invested. Ifwe are going to have any chance for success, the institutional asset managers like
yourselves, who control trillions of dollars of investment, are going to have to care and care
intensely - and you are going to have to act.

-30-

DEPARTMENT

THE

TREASURY

NEWS

'IREASURY

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

FOR IMMEDIATE RELEASE
January 15, 2002

CONTACT: PETE HOLLENBACH
202-691-3502
BETSY HOLAHAN
202-622-1997

MEDIA ADVISORY
TREASURY SECRETARY PAUL O'NEILL TO ADDRESS
MEETING OF U.S. SAVINGS BONDS VOLUNTEER COMMITTEE
Treasury Secretary Paul H. O'Neill will address the U.S. Savings Bonds
Volunteer Committee and launch the 2002 savings bond campaign at noon on Thursday,
January 17,2002 at the St. Regis Hotel, 923 K Street N.W., Washington, DC. Joining
Secretary O'Neill will be Dr. Vance Coffman, Chairman and CEO, Lockheed Martin
Corporation, who will chair the committee in 2002, and Mr. Richard Carrion, President
and CEO of Banco Popular, who headed up the 2001 effort.
Dr. Coffman and Mr. Carrion will be available to the media at 1:45 p.m. after the
conclusion of the meeting.
The committee, comprised of 52 leaders from the public and private sectors,
including elected officials, senior executives from major corporations, and educators,
coordinates the efforts of volunteers nationwide to encourage savings and to educate
Americans about both Series EE and Series I U.S. Savings Bonds.
The meeting room will be available for set-up beginning at 11 :00 a.m. Television
cameras should be in place by 11 :45 a.m. Media should check in on the Lower Lobby Level
near the Chesapeake Room.
-30-

PO-923

For press releases, speeches, public schedules and official biographies, call our 24-hour fax line at (202) 622-2040
'U S Governmenl Pflnl,ng Ottlce 1998 - 619-559

DEPARTMENT

THE

TREASURY

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

EMBARGOED UNTIL 4:00 P.M.
January 15, 2002

CONTACT: MICHELE DAVIS
(202)-622-2920

REMARKS OF TREASURY SECRETARY PAUL O'NEILL
TO THE NATIONAL RETAIL FEDERATION
Good afternoon. It's wonderful to be with you today. I want to take a few moments to
make some remarks about what we're up to in Washington, and then I'd like to hear from all of
you. As retailers, you are the first to sense changes in consumer behavior, and therefore sense
the direction our economy is taking. Hearing from you about what you are seeing in your stores
is crucial in helping me do my job.
I saw the forecast you made and also the data released this morning on retail sales from
December. They fit into my overall view of where we are today - we see signs that the economy
is improving, but the signs don't give a clear indication that our rate of improvement will be as
strong as we'd like it to be. When I talk to executives in different industries, I hear different
outlooks. In some cases, I hear that inventories are at record low levels - a good sign for an
imminent recovery. Others tell me, however, they see no prospects for new orders. The signs
are mixed, and growth forecasts reflect that - suggesting that we'll have positive growth, but less
than the 3-plus percent rate that we'd like to return to quickly. That's not good enough. It's
especially not good enough for the people who've lost their j0bs since this recession started last
March.
We need to take action to strengthen our recovery and speed the process of putting
Americans back to work. Last month, we were very close to getting an economic security
package through the Congress, but we didn't get it done. The President has told the Congress
and the nation that we will continue to push for tax changes that will increase business
investment and job creation and put money in the hands of consumers.
Getting the economy growing again is good for working American families, good for
retailers like all of you, and also good for the federal government's budget. As you know, the
economic slowdown has virtually eliminated federal budget surpluses for the next two years.
The tax cut enacted last summer accounts for about 15% of the reduction in this year's surplus,
new spending in the wake of the September 11 attacks accounts for about 20%, and the rest two-thirds of the reduction - is the result of the slower economy. For example, the CBO reports
that when first quarter revenue is adjusted for the one time shift in timing that was legislated last
year, corporate tax receipts would have been down 40% quarter over quarter. The President's
tax relief package did not reduce corporate taxes at all in 2001 - the decline is entirely due to the
slowdown in the economy.
PO-924
For press releases, speeches, public schedules and official biographies, call our 24-hour fax line at (202) 622-2040
'U S Governmen, Pflnllng Ottlce 1998 - 619-559

The sooner we get the economy growing again, the sooner we will return to the era of
budget surpluses. Of course we should run a budget surplus when our economy is running well,
but we should not raise taxes to achieve an accountant's surplus when our economy is limping or
in the early stages of recovery.
Because it is so topical, I want to say a few words about the assignments the President
gave me last week to convene two groups to see what action should be taken, if any, to modify
laws, rules or regulations to better protect employees and investors from the circumstances of
Enron employees and investors.
We who believe in free markets know that government plays a crucial role in establishing
the rules of the game. Market economies work when the rules of the game provide investors
with the information they need to make sound decisions and also provide them with certainty
that the rules will be followed. The United States has the lowest cost of capital in the world
because we have the best rules. Individuals - whether they are asset managers at large
investment houses or simply managing their own personal savings -- are confident that they have
the information they need to make sound decisions and the ability to act on that information as
they see fit.
In the Enron case, something clearly went awry.
The Justice Department is pursuing a criminal investigation. If anyone at Enron broke
the rules, they will be punished.
At the same time, the President has asked us to look at the rules that apply to 401 (k)s,
pensions and other types of retirement plans to make certain the rules are adequate to ensure that
individuals do not lose control over the life savings they own. We also need to review whether
accurate information is available so that individuals can make wise saving and investment
decisions.
I met Friday with Labor Secretary Elaine Chao and Commerce Secretary Don Evans to
begin an examination of the rules that apply to 401(k) plans and private pensions. Working
Americans save through their 401(k)s to buy a home, to pay for their children's education, and to
retire in comfort. These savings belong to individual workers, and no one should take control
away from the individuals who own those nest eggs. We will look at a broad range of issues,
including the rules governing diversification, temporary lock out, and the availability of
information to employees. We must ensure that the rules enhance opportunities for individuals
to invest in our economy and ensure that their ownership oftheir life savings is protected. For
individuals to make the best possible decisions, they must know that the rules prevent anyone
from taking those decisions away from them.
Finally, the President has asked me to lead a group looking into disclosure rules, so that
all investors have the infonnation they need to make sound decisions. I will be working with
Chairman Greenspan, with Harvey Pitt at the SEC and Jim Newsome at the CFTC to ensure that
rules for disclosure keep pace with the increasing complexity of financial instruments used in our

economy. Our economy flourishes when each individual is able to make individual decisions
based on complete and accurate information. Individual investors making the most informed
decisions possible will allocate resources in our economy where they will have the greatest
return. It is the foundation of a successful market economy and a necessity for the peace of mind
of millions of employees whose life savings are the foundation for their dreams and aspirations.
-30-

09104101 0&: II PM

from: Department Of Treasury

2026\"2:7611

page 4. Of 7

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

FOR IMMEDIATE RELEASE
January 16, 2002

Contact: Office of Financing
202-691-3550

TREASURY'S INFLATION-INDEXED SECURITIES
FEBRUARY 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 February for the following Treasury inflation-indexed securities:

(1) 3-3/8% 1O-year notes due January 15, 2007
(2) 3-5/8% 5-year notes due July 15, 2002
(3) 3-5/8% lO-year notes due January 15,2008
(4) 3-5/8% 30-year bonds due Apri I 15, 2028
(5) 3-7/8% 10-year notes due January IS, 2009
(6) 3-7/8% 30-year bonds due April) 5,2029
(7) 4-114% lO-year notes due January 15,2010
(8) 3-112% IO-year notes due January 15,2011
(9) 3-3/8% 30-1I2-year bonds due April 15,2032
(l0) 3-3/8% 1O-year notes due January 15, 2012
This inforrnation 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 (RefCPl) 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 t:alling 202-622-2040 and requesting document number 925. The infonnation is also available
on the Internet at Public Debt's website (http;//www.publicdebt.treas_gov).
The infonnation for March is expected to be released on February 20,2002.
000

Attachment

http://www.publicdebt.treas.gov
PO-925

o
N

TREASURY INFLATION-INDEXED SECURITlES
Ref CPI and Index Rallo, 10,
February 2002

Security:
Desc:r1otlon'
CUSIP Number:
Daled [),at.:
Orfglnlll Issue Date:
AddlUcnallssuu 001111(5):

O.,te
Feb.
Feb.
Feb.
Feb.
Feb.
Feb.
Feb.
Feb.
Feb.
Feb.
Feb.
Feb.
Feb.
Feb.
Feb.
Feb.
Feb.
Feb.
Feb.
Feb.
feb.
Feb.
Feb.
Filb.
Feb.
Feb.
Feb.
Feb.

2
l
4
5
II
7
II
9
10
11
12
13
14
15
16
17
16
19
21)
Z1
U
Z3
24
25
2&
'Z1
U

Z002
ZOO2
2002
2002
2002
2002

2002
2002

2002
2002
2002
2002
2002
2002
ZOOZ

ZOOZ
21)02

2002
2002
2002
2001
2001
2002
2002

2002
2002
2002
2002

3·5I8'Y. IO-Vltil r Notes

~5Je%

S;e~!!sA·~

B~r!o:!~ -:'~

9128Z7ZM3
January IS. 19!17
February 6, 1997
April 15, 1997

3·518'Y. 5-Year Not..:s
..1. '20(12
!l128Z73A8
July Hi, 1997
July 15, 1997
Oc;tobitr 15, 1997

9118Z73T7
Janvary IS, 1998
Jllnvary 15, 1998
Oc;tober 15, 1998

912:1110FD5
A~HiI15, 19"
April 15,19"
July 15, 19911

Jilnllilry 15, ZOIJ7
158.43548

July 1 5, 2002
150.15484

Jaollary 15, 2008
161.55464

April IS, 2023
161.74000

3·3111% IO-Year Holes
!';"riA!, A.1{W}'T

Maturity Dale:
ReI CPI on Dated Date:

$ene~

JO.YltarBond5

.a..pr!1

202~

RIJICPI

IliduRa\lo

Index Rallo

InduRatio

IndaxRlltlo

177.40000
In.l7500
177.35000
1n.32500
177.31)000
177.VIS00
177.Z5DOO
177.USDO
177.2001)0
177.17500
177.15000
177.12S00
177.10000
177.07500
177.05000
177.0zs00
177.00000
1715.97500
176.95(100
176.ll2511O
'76.900ClO
176.81500
176.85000
176.8250(1
176.60000
116.77500
176.75000
176..71500

1.11970
1.111154
l.lll1ll
1.11923

1.11J768
1.10752
1.10737
1.10721
1.10705
1.10690
1.10674
1.10659
1.10643
1.10627
1.10611
1.10-596
1.105111}
';\(1565
1.1C1549
1.10534
1.1Q.51ft
1.105(12
1.1(1487
1.10471
1.111456
1.11J44(J
1.10424
1.10409
1.111393
1.10378
1.10:lti2
1.1034ti

1.09808
1.CI9792
1.09777
1.097fi1
1.09746
1.09731
1.011715
1.09700
1.09884
'.01l6G9
1.091;53
1.09638
1.09622
1.091;07
1.09591
1.09576
1.09580
1.09545
1.09529
1.09514
1.09498
'.09483
1.094S7
1.09452
1.09437
1.09421
1.09406
1.09390

1.09682
1.09"7
1.09661
1.119636
1.I\91i20
UJ9605
1.09589
UI9574
1.09569
'.09543
1.0952B
1,(19512
1.09497
1.09481
1.09466
1.119450
1.09435
1.09419
1.09404
1.119:Rl9
1.11937:1
1.(19358
1.119342
1.09327
1.09311
Ul92S6
1.092S(J
1.09265

1.11~7

1.1,agl
1.11175
1.1185'9

I.',a44
1.Wl21
1.11811

1.11196
1.1178'
1.11765
1.11749
1.11733
1.11717
1.117n2
1.116U
1.11670
1.11664
1.11639
1.11623
1.11607
1.H591
1.11575
1.11550
1.11544

I
I

~
~

.g
...,Col

....

~
o
......

"<:

~
~

~
~
~

CPl-lJ (NSA) for :

Oclobw 2001

177.7

NCMlmbu 2001

17704

Decemb8f' 200 I

176.7

..."

.....

TREASURV INFLA lION-INDEXED SEC IJRmeS
Rei CPI and Ind ... Ratios for
February 20e Z

s.ourlty:
Oescnption:
CU SIP Numbef:
Oated Oa\&:
Orfglnal luu8 Date:
Addllional Issue Date(s):

3.-718% 100YNTl\lo(es

s.m. A-2009

lU2.&274Y5
January 15, 1 999
January 15, 1999
July 15. !9!19

Maturity Dille:
Ref cPl on Dated Dale:

Date

Feb.
Feb.
Feb.
Feb.
Feb.
Feb.
Feb.
Fab.
Feb.
F.b.
Feb.
Feb.
Feb.
Feb.
Feb.
Feb.
Feb.
Feb.
Feb.
Feb.
Feb.
Feb.
Feb.
Feb.
Filb.
Feb.
Fab.
Feb.

I
2

:I
4

5
6

e
9
10
11
12

13
14
15
IS
17
18
19
20
21
22
23
24

2.002
2002
2002
2002
2002
2002
2002
20U
2D!1.2
2D!1.2
2002
2002
2002
2002
2002
2002

2002
2002
2002
2002
2002
2002
2002
2002
2002
2002
2002

2002

January 15, 2009
164.DOOOO

3.-718% 30-YaaJ Bends
Sands or A;Ni1 2029
91281C1FH6
April 15. 1999
April 15, 1 ggg
Oc:tober15. 1 ~9
OclDber 15, 2000
ApriI1!.21129
164.311333

912B27SWB
January 15, zeoo
January 18, 2000
July 15. 2000

J- t 12% 10-Year Holes
5&rtes A-2011
91211'l7OR8
January 15, 2001
January 16, l!O01
July 1 G, 200.

January 15, 2010
168.24S16

January 15, 2011
174.04515

4-114% 100VeaJ Hotes
Series A-101()

RerCPI

IndaxRaUo

Inde-R.tlo

Index Ratio

IndsKRatlo

177.4«1000
177.37500
177.3S000
1n.325DO
177.30CDD
177.275OD
177.a501l0
177.22500
177.20DOO
177.17500
177.150011
177.12500
177.10000
177.07500
177.05000
177.02500
177.DOOOO
176..!J7500
116.g5000
176.91500
176..90000
t 71i.1J75OO
17U5000
171i.82500
171UlOOOO
176.77500
171i.75000
176.72:5(1()

1.08171
1.oa155
1.oa140
U812.5
1.oal10
1.08095
1.H079
1.116064
1.0a&t9
1.&8&34

1.079'12
1.07897
1.07882
1.078ti6
1.07861
1.07136
1.07U1
!.0780S
1.07790
!.Om5
'.OTTtiO
1.07745
1.07729
1.07714
1.01699
1.07684
1.Cl76ti9
1.&765J
1.07638
U71i2J
1.&71iCJ8
1.CI7593
1.117S17
1.075GZ
1.07547
1.07531
1.07517
1.07501

1.A15441
U5427
1.05412
1.05397
1.o5aeZ
1.CI5367
1.o53t12
1.05337
1..05:122
1..o53(JB
1.05293
1.M278
1.GmJ
1.05:24S
1.052:3:3
1.0S218
1.05204
1.05189
1.05f74
L05159
1.05144
1.05129
1.115114
1.1151110
1.05lle5
1.05070

1.01928
1.o19t3
1.01899
1.01884
1.01870
1.01856
1.01841
1.01821
1.01813
1.01798
1.0'784
1.0'770
1.01755
1.0.741
1.0'726
1.0t712
1.0169l1
1.1116&3
1.1116&9
1.D165!;
1.01640
1.01626
1.01612
1.111597
1.01583
1.01568
1.01554
1.01540

!.CHIOU
1.08003
1.07gee
1.07973
1.(17957
1.07942
1.07927
1.07912
I.071!1911
I.am1
I.078S5
1.07851
1.01535
1.07820
I.07e05
1.07190
I.Om4
1.07759

1.05055
1.05040

..,

.."

.g
..,....
C>

o
...,..

..,- I
I
,

..,c:

I
CS)

CoD

~
~

g;!
~

CPI-U (N5A) (or:
~~

Ocl0b9r 200.

177.7

No\IUmber 2001

177.4

Dec:e.mber 2001

176.7

"tit

a'I

$
-.J

TREASURY INFLAl1OH-4NDEXED SECURITIES

Re' CPI and Index Ratios tor
February 2001

Security:
Description:
CUSIP Nu mba,:

October 1S, 2001
October 15, 2001

912I1Z77JS
Januar; 15, 2002
Januar; 15, 2002

h1alurity Dlte:
Ref CPI on Daled Date;

April 15, 2Ol2
177.50001)

January 15, 2012
177.56452

Feb.
Feb.
Feb.
Fet!.
Feb.
Feb.

Feb.
Feb.
Feb.
Fab.
Fab.
Feb.
Feb.
Feb.

reb.
Feb.
Feb.
Feb.
Feb.

F.b.
Feb.
Feb.
Feb.
Feb.
Feb.
Feb.
Feb.
Feb.

1
2
3

2002
2002
2002

2002
2002
2002
2002

5
6
7

1002

1002
2002
2002
2002
2002
2002
2002
2002
2002

10
11
12

13
14
15
1fi
17
111
19
20
21
12

2002
2002
2002
2002

2002

ZOO2

2002
2002
2002

26
27
211

2002

CPI-U {NSAI lor:

-i

'lJ
(S)

.£::>.

J.3t8% If-V.., Nobis

Sena. 4-20 12

ar April :ro32

DaWd Dale:
OrigInal Issue Dlibt:
Additlonallssus Dalels):

Oale

-i

J.3I&% 31).112·Ve.ar Sol1ds

Eiond&

91Z810FQ~

RefCf>I

IodexRaUo

1110.,. Rallo

'77.40000
177.371500
177.35000
177.3%5011
177.30000
177.%7500
177.25000
177.ZZ500
177.200lI0
177.'7500
177.'5000
177.12500
177.10000
177.075«10
177.05(101)
177.02500
177.00000
176.97500
176.95000
116.92500
176.9000D
176.8750D
116.85000
176.82500
176.80000
176.77500
176..75000
176.72!iDD

1I.99W
1).99939
OJl9itS

0.99907
0.9M93
1).99879
G.9t!N186
U.99a51
U.99837
1).99823

~be'2001

O.99lM)t
0..99l1lI7
0.9987'3
0.99859
0..&9&45
0.9983'
0..99&17

0..99103
1).99789
0.99775
0.99761
0.99746
O.99T.12
O.i971!
0.997o.t
0.99690
0.991i76
0.99662
0.99648
0.99634
0.519620
0.99606
0.99592
0.99577
0.951563

177.7

O.M(19

0..99795
0.99781
0.99767
0..99751
0.997311
0..99724
0.99711)
O..9!l696
0.996112
0.!l9&«i8
0..99664
0..9964tt
0.s96U
0.s9612.

O.9S&l8
0.99584
0..9%69
O.~

0.99541
0..9!l527

NovembeT2DIl1

177.4

Dllc;ambar 2001

176.7

DEPARTMENT

THE

TREASURY

NEWS
FOR IMMEDIATE RELEASE
January 16,2002

Contact: Tasia Scolinos
(202) 622-2960

TREASURY UNDER SECRETARY FOR ENFORCElVIENT JIMMY GURULE
"OPERATION WIRE CUTTER" REMARKS

For the past four months the United States's war on terrorism has dominated the national
media and the hearts and minds of both Americans and our friends abroad. Although we remain
dedicated and focused on our goal of wiping out al Qaida and their associates, we cannot forget
that there are other enemies who pose a very real threat to our country's security and well being.
These enemies are plotting ways to infiltrate our financial system with criminal proceeds while
enabling those who smuggle drugs into this- country to benefit financially from their illegal
actions.
Today we send a clear message to both the criminals who perpetrate illegal acts and the
white collar professionals that craft various schemes to hide the tainted money - if you think the
United States will look the other way, you are wrong. I testified during my confirmation hearing
that money laundering would be one of my top priorities while at the Treasury Department. I
meant that last May and I mean it today. I applaud Commissioner Bonner and the Custom
Service's commitment to this goal as well.' Operation Wirecutter is an example of how close
international partnership, tight interagency coordination, and a mutual commitment to shutting
down the financial infrastructure that makes these criminal acts profitable, can result in a
successful law enforcement action.
I also want to take the opportunity on behalf of Secretary O'Neill to thank our friends in
the Colombian government for their assistance and cooperation. This type of joint international
effort is truly remarkable. I believe that partnering with our law enforcement counterparts abroad
is a key tool in cracking down on those who seek to use the international banking system for
COffilpt purposes. It is my hope that otherjoint international law enforcement ventures will
follow today's model. Thank you for the dedication and diligence that you and your govemment
brought to Operation Wirecutter.

-30PO-926

For press releases, speeches, public schedules and official biographies, call our 24-hour fax line at (202) 622-2040
·U S Governmenl Pnnllng Ottlce 1998 - 619-559

DEPARTMENT

'IREASURY

THE

TREASURY

NEWS

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

EMBARGOED UNTIL 12:00 P.M.
January 16, 2002

Contact: Betsy Holahan
(202) 622-2960

REMARKS BY THE HONORABLE SHEILA C. BAIR
ASSISTANT SECRETARY FOR FINANCIAL INSTITUTIONS
U.S. DEPARTMENT OF THE TREASURY
BEFORE THE WOMEN HIGH TECH COALITION
RAYBURN OFFICE BUILDING

Introduction
I am delighted to have this opportunity to speak to you today about some of the policy
developments and challenges that face those of us working in and with the high tech industry.
The Women in High Tech Coalition, I can safely predict, will thrive because the challenges are
infinite and the need for collaboration among leaders limitless. I particularly want to thank
Jessica Wasserman for inviting me to share some of my recent experiences with you.
Background
As background, let me say that I have spent many years working in the financial sector, at
the New York Stock Exchange and as Commissioner for the Commodity Futures Trading
Commission, for example. In these positions I witnessed technological innovations in the office,
the trading room, back office operations, information management, and in other aspects of
communication and financial transactions. I also saw financial tumult in U.S. and foreign
markets during my career, and like the rest of you, lived through economic cycles of growth and
contraction.
All of this was useful experience for the new challenge I undertook last July when I
became Treasury Assistant Secretary for Financial Institutions. I also had the good fortune to
join an experienced Treasury team dedicated to the financial and economic prosperity of the
country, led by a Secretary, who by his own admission, is results oriented.
With the horrors of September 11 came a sudden reordering of priorities within the
Administration, and at Treasury. I would like to focus my remarks on one aspect of the work in
which I am involved that has taken on new urgency in recent months, namely, the protection of
the critical financial infrastructure ofthe nation.
PO-927
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'U S Governmenl Pflnl,ng Ottlce 1998 - 619-559

During the past few months I have spent a great deal of time thinking about and working
on ways to secure the technology and systems that comprise our national financial infrastructure.
This is not a job that industry can do alone, nor is it a purely govemmental function. It requires
collaboration, coordination, focus and planning.

Critical Infrastructure Protection
In 1997 a presidential commission studied the vulnerabilities of critical sectors of the
economy to non-traditional threats, principally cyber and tenorist threats. Based in pari on the
commission's findings, a 1998 Presidential Decision Directive (PDD 63) directed Treasury to
coordinate with the financial sector to mitigate the vulnerabilities facing the financial sector and
to develop plans for ensuring the continuity of operations and rapid recovery of critical financial
assets in the event of attack.
By 2001 the Treasurylindustry partnership had established a Banking and Finance Sector
Coordinating Committee, created the Financial Services Infom1ation Sharing and Analysis
Center (FS/ISAC), opened a Financial Services Security Laboratory to provide ex ante security
standards for new technologies, and prepared a national plan for critical infrastructure protection
in the sector.
The challenge grew exponentially following the unimaginable events of September 11.
Instantly, we leamed that the focus on cyber security was insufficient, and that govemment
needed to playa more active role.
On balance, the financial sector responded well, due in no small measure to the
preparatory work done for Y2K. For the most part, major financial institutions activated their
business continuity plans, and banking and payment systems remained open for business. Debt
and equity markets reopened the following week, thanks to the collaborative efforts of financial
regulators and market players.
Clearly, however, we needed greater coordination between industry and all levels of
govemment. There was no central, authoritative source of infom1ation on the system as a whole,
and no list of key contacts, for example. We also needed to bring front-line and local authorities
into closer coordination with key federal and industry officials. In addition, it appeared that
small- and medium-sized institutions and state regulators were less well prepared than major
financial institutions and federal authorities.
On October 16, President Bush issued Executive Order 13231, Critical Infrastructure
Protection in the Infom1ation Age. That order established the Critical Infrastructure Protection
Board to coordinate federal effOlis and programs that relate to protection of infom1ation. It also
established 10 standing committees. I chair the Financial and Banking Infom1ation
Infrastructure Committee, the FBIIC. All of the federal financial regulators serve on that
committee, that is, the federal bank, thrift, and credit union regulators, together with the
Securities and Exchange Commission and the Commodity Futures Trading Commission. In the
coming months we will develop a system for rapidly communicating and disseminating

information among Treasury and the federal financial regulators at times when minutes are
crucial.
We will also undertake regular, periodic, and comprehensive assessments of critical
infrastructure vulnerabilities in the financial services sector. Remember, the last major
vulnerability study for the sector was completed in 1997. A great deal ofteclmological
innovation has occurred since then, for example, through global accessibility to the ubiquitous
Internet and the exponential improvements in computer capabilities at ever decreasing costs.
Technology advances have also made financial firms more vulnerable in some important
ways. Transactional web sites are a doorway for hackers, as we know too well, and computer
and data centers have grown more concentrated and potentially more vulnerable as a result. We
have also experienced skill shortages in some areas, and must face the daunting fact that
redundant systems may require duplicative workforces to maintain and operate them.
Looking further ahead, we need to develop a comprehensive crisis management
capability. In addition to vulnerability assessment, we must consider scenario analysis,
contingency planning, gap analysis, and response and recovery procedures. Regulators, like the
institutions they regulate, need to review their continuity of operations plans in light of the
evolutionary developments of recent years and the specific lessons learned from the
September 11 attack.
We will need to reach out to our counterparts in foreign governments who are facing the
same challenges. Through bilateral and multilateral exchanges of information and working
relationships we will strengthen our global financial infrastructure and promote quick and certain
recovery of lost capabilities should the unthinkable happen.
Information Sharing
Technology, I find, is both a means to achieving security objectives and an end in itself,
for it is the sophisticated financial networks, systems, and components that we need to secure.
Security, we know, relies upon the timely and effective sharing of information.
Information sharing about vulnerabilities, threats, intrusions and anomalies is crucial to a
successful government-industry partnership for critical infrastructure protection. There are
legislative proposals from Senators Bennett and Kyl, for example, as well as a similar House bill,
aimed at mitigating industry's concerns about any potential adverse consequences of sharing
information with other companies and with the government. Businesses feel they could be
vulnerable to litigation for anti-trust or other anti-competitive practices, that sensitive corporate
information could be released publicly through the Freedom of Information Act, or that they may
face other liabilities. Treasury has some questions about the practical implications of such
legislation, but we have indicated our willingness to Congress, the Department of Justice, and
other interested parties in govenunent and industry on trying to encourage effective information
sharing.
Retirement Security

The ultimate objective of all of these efforts is to preserve and protect the physical and
technological security of our nation's critical assets. In the wake of the Enron debacle, another
type of security - Americans' retirement security - has assumed center stage among our nation's
leadership. The President has expressed his strong, personal concem that Enron employees lost
their life savings through no fault of their own. These events have wide-ranging repercussions
causing concem among the millions of Americans whose life savings are in their 401 (k) and
pension plans.
As you know, the Justice Department is pursuing a criminal investigation. The
Department of Labor and the Securities and Exchange Commission are also conducting separate
investigations for potential violations of their regulations.
If anyone at Enron broke the mles, they will be punished.
At the same time, we need to look at the policy issues presented by the Enron case. We
need to detennine whether the mles that apply to 401 (k)s, pensions, and other types ofretirement
plans are adequate to ensure that individuals do not lose control over the life savings they own.
We also need to review whether accurate infonnation is available so that individuals can make
wise saving and investment decisions. Women, given their longer li fe spans and the fact that
they are more likely to take time off from the paid workforce to tend to family responsibilities,
have a particular interest in assuring that retirement mles are adequate.
Last Thursday the President directed the Secretaries of Treasury, Commerce, and Labor
to convene a working group to analyze pension mles and to develop recommendations to
strengthen retirement security. That working group has already begun its work. We will look at
a broad range of issues, including the mles goveming diversification, temporary lock out, and the
availability of infonnation to employees.
We must ensure that the mles enhance opportunities for individuals to invest in our
econ0my and ensure that their ownership of their life savings is protected. For individuals to
make the best possible decisions, they must know that the mles prevent anyone from taking those
decisions away fi-om them.
Conclusion

Whether in govemment or the private sector, we operate in a dynamic business world. It
is a global environment, influenced by events, often beyond our control, an infom1ation tidal
wave that challenges and expands our intellectual capacity, and a domestic economic and
political setting that is in a constant state of adaptation.
Whatever role you play in this high tech arcna, whatever your background, you will find
it is people working together who will have the greatest success. YOLI have demonstrated your
understanding of this in establishing the Women in High Tech Coalition. I wish you \vell and
thank you for this opportunity to meet with you.

DEPARTMENT

THE

TREASURY

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

For Immediate Release
January 16, 2002

Contact: Tara Bradshaw
(202) 622-2014

PRESERVING TAX RELIEF PROTECTS
AMERICAN FAMILIES AND WORKERS
Congress approved, and the law now provides for significant future tax relieffor
individuals and small businesses. Any repeal of a scheduled reduction in taxes is, by
definition, a tax increase. The following is a breakdown of who loses from the repeal of
any scheduled tax relief
REPEALING THE PRESIDENT'S TAX CUTS WOULD HURT TWO-INCOME FAMILIES WITH
CHILDREN BY:

• Reinstating the marriage penalty
• Raises taxes on married couples and families by $50 billion
• Reducing the child credit
• Today, the credit is $600, it is scheduled to rise to $1000 per child
• Freezing at today's level, as opposed to the fully phased in tax relief,.
would cost a family with 2 children $800 in tax relief each year
• Raising income tax rates on millions of working families
• 36 million taxpayers will pay higher taxes if the scheduled rate
reduction to 25% is repealed
• Two-thirds of those taxpayers have incomes under $100,000
• Reducing the value of the personal exemptions and itemized deductions
REPEALING THE PRESIDENT'S TAX CUTS WOULD HURT SMALL BUSINESSES -- THE
ENGINES OF JOB CREATION IN OUR ECONOMY:

.10 million small business owners would pay higher taxes if the scheduled rate
reduction to 25% is repealed
.80% of the benefit ofreducing the top two income tax rates goes to business
owners who file individual returns
PO-9Z8
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1998· 619·559

• Reinstating the death tax threatens the survival of small businesses and the jobs
they provide when the businesses pass from one generation to the next
REPEALING THE PRESIDENT'S TA.X CUTS WOULD UNDERMINE FINANCIAL SECURITY:

• Eliminating the scheduled increases in the annual contribution limit for lRAs
and 401(k)s makes it harder to save for retirement
• Today the limit for IRAs is $3,000, it is scheduled to rise to $5,000
• Today the limit for 401(k)s is $11,000, it is scheduled to rise to
$15,000
• Repealing the scheduled reduction in the death tax would limit parents ability to
pass their life's earnings on to their children

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DEPARTMENT

THE

TREASURY

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

For immediate release:
January 16, 2002

Contact: Michele Davis
(202) 622-2920

Statement of Secretary Paul O'Neill on Senator Kennedy's Proposed Tax Increases:

"Virtually the entire Congress agrees with President Bush's economic security proposal
to create jobs by reducing taxes on business investment. This proposal goes in the opposite
direction. It would cost our economy jobs. The burden ofthe proposed tax increases falls
squarely on small businesses - the job creators in our economy. Eighty percent of the higher
income taxes he proposed would be paid by business owners who file individual returns. And
reinstating the death tax would make it harder to keep family businesses - and their employeesintact from one generation to the next.
"Raising taxes onjob creators is always a bad idea, and its an especially bad idea during
an economic slowdown. We should be nourishing our nascent recovery, not smothering it with
new taxes on job creators.
"Senator Kennedy championed bipartisan cooperation to improve our children's
education. I wish we could foster that same bipartisan cooperation to create jobs."
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DEPARTMENT

'IREASURY

THE

TREASURY

NEWS

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

For Immediate Release
January 16, 2002

Contact: Tara Bradshaw
(202) 622-2014

O'NEILL STATEMENT ON THE NATIONAL RESEARCH PROGRAM
Today the Intemal Revenue Service announced they are developing a new
program, the National Research Program, which will help ensure that taxpayers are
paying their fair share of taxes, while providing the IRS with the necessary tools to
measure compliance.
"The US tax system is predicated on faimess -- that individuals are taxed fairly
and that everyone pays their fair share. This sense of faimess is the foundation for
confidence in our tax system -- while no one likes paying taxes, they want to know that
tax dollars are fairly collected. The result has been traditionally high voluntary
compliance with the law in the U.S. Ifwe can't make sure that everyone pays their fair
share, then honest taxpayers get stuck making up the difference. So, tracking taxpayer
compliance is a comerstone of a fair tax system," stated Treasury Secretary Paul O'Neill.
"The problem is that currently, there are no up-to-date data on who is and is not
paying their fair share, and why. While we have a general sense of the tax gap, and we
know that compliance is uneven, we don't have the necessary information to kriow how
big the problem is or how to fix it.
"As a result, right now, when the IRS chooses which taxpayers to audit, too many
law-abiding taxpayers are subjected to audits for the wrong reasons, when they've done
absolutely nothing wrong. The IRS is simply auditing too many of the law-abiders and
not enough of the people who avoid paying taxes because they lack the basic information
to make informed audit decisions. That only hurts the honest taxpayers and helps the
cheats, and that's backwards. The NRP will help put us back on the right track," O'Neill
stated.
For the last 15 years the IRS has not been co llecting taxpayer comp liance
information because there were major problems with the original data collection program
(TCMP) and methods, especially audits, being overly burdensome and intrusive on
taxpayers.

PO-930

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·u.s. Government Printing Olhce:

1998 - 619-559

The problems with the old TeMP program have been addressed, and IRS has now
come up with a vastly improved way to get the necessary information on tax fairness,
called the National Research Project. This new approach will allow the IRS to gather the
necessary tax fairness data without excessively burdening taxpayers.
"The NRP may eliminate up to 15,000 unnecessary audits of honest taxpayers
every year, and instead focus tax enforcement on those who are not paying their fair
share. The NRP project will occur within the existing level of audit activity and will not
itself involve additional audits or examinations of taxpayers," O'Neill concluded.

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DEPARTMENT

'IREASURY

THE

TREASURY

NEWS

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

FOR IMMEDIATE RELEASE
January 17, 2002

Contact: Betsy Holahan
(202) 622-2960

TREASURY SECRETARY PAUL O'NEILL REMARKS TO THE
U.S. SAVINGS BONDS VOLUNTEER COMMITTEE

Thank you Richard, and thank you for hosting this year's luncheon and meeting
of the U.S. Savings Bonds Volunteer Committee. Before I make the formal presentations
we have for you, I'd like to thank you, your 2001 committee and Banco Popular for
helping make last year a tremendous year for the savings bond program.
Richard, as private sector CEOs you and I always looked at the bottom line to let
the numbers tell the story. So, let's take a quick look at the numbers you and your
committee posted. Bond sales in fiscal year 2001, totaled $6.6 billion -- up an impressive
30 percent from a year earlier. Your efforts to encourage Americans to take a look at the
value of our newest savings bond, the inflation-indexed I Bond also made their mark.
For the first time, I Bonds accounted for more than half of all bond sales.
I know that this success was the result of your personal commitment, not only as
chair, but also as a member of the committee over several years to encourage Americans
to plan for and save for their future. Your efforts to reach out to the Hispanic community
with this important message are particularly gratifying. This dovetails with your efforts
to reach out to the under-served and un-banked to bring them into the financial
mainstream.
So, it is with great pleasure that I present you with Treasury's Gold Medal of
Merit as a token of our appreciation. I'd also like to present this special Citation that
commemorates our thanks for your service.
As I ask Vance Coffman to join me at the podium, I'd like to remind you that his
and Lockheed-Martin's support over the years are hard to beat. Vance is no stranger to
the committee having headed up the savings bond effort among his colleagues in the
Aerospace industry. And in doing so he demonstrated his and his company's leadership
by consistently earning the program's highest honors for participation. So as I present
you with this certificate appointing you Chair of the 2002 U.S. Savings Bonds Volunteer
Committee, I want to thank you in advance for the energy and leadership you and your
team will bring to our effort this year.
PO-931
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·U.S. Government Pflntlnq Office. 1998· 619·559

What you, the Savings Bond Volunteers, do is a crucial part of educating
Americans of every age and background on the importance of retirement savings. In the
broader context of saving, I'd like to make a few comments on the security of the
nation's retirement system. The pension system has evolved in recent years into one that
increasingly emphasizes two of the country's quintessential values, personal
responsibility and freedom of choice. This evolution provides workers much greater
opportunity than ever before to build wealth and save for their own retirement but also
imposes a greater degree of individual responsibility in doing so.
Defined contribution plans, commonly known as 401 (k) plans, give individual
workers their own account in which they can build wealth and save for retirement.
Participants are allowed, within limits set in the tax code, to choose the level of their plan
contributions. The tax relief plan signed into law last summer increased the amount
individuals can put into IRAs and 401(k)s, because the President is very committed to
expanding every American's ownership and control of their retirement nest eggs.
Your 401 (k) is a nest egg you own, and you decide how to invest your
contributions, choosing among a set of investment options offered by their employer. In
many plans, participants are also free to invest their employer's matching contributions as
they see fit. This freedom to choose among investments allows employees to choose the
tradeoff between risk and return with which they are most comfortable.
Working Americans value that sense of ownership and control ~ especially the
knowledge that no one can take your nest egg away from you. That peace of mind
depends on public confidence that retirement plans operate fairly and openly. The rapid
collapse of the Emon Corporation and the effect of the decline in its stock price on its
employees' retirement funds may have diminished that confidence. When the company's
stock became virtually worthless, employee's life savings dissolved.
The experience of Enron employees is unsettling to the millions of Americans
whose life savings are in their 401(k) plans. Working Americans save to buy a home, to
pay for their children's education, and to retire in comfort. The President is very
concerned that people lost much of their retirement savings through no fault of their own.
The Justice Department is pursuing a criminal investigation. The Department of
Labor and the Securities and Exchange Commission are also conducting separate
investigations for potential violations of their regulations.
If anyone at Enron broke the rules, they will be punished. At the same time, we
need to look at the policy issues presented by the Enron case. We need to detcnnine
whether the rules that apply to 401(k) plans, pensions, and other types of retirement plans
are adequate to ensure that individuals do not lose control over the life savings they own.
We also need to review whether accurate infonnation is available so that individuals can
make wise saving and investment decisions.

Last week the President directed me, Secretary Chao of the Labor Department and
Secretary Evans of the Commerce Department to convene a working group to analyze
pension rules and to develop recommendations to strengthen retirement security. This
review will focus on the issues of fair play in the market and the balance between
consumer choice and finns' interests in offering defined contribution plans.
A working group of senior staff has already met twice and Secretaries Chao and
Evans and I will hold our second meeting later today. The working group is looking at a
broad range of issues, including the rules governing diversification, temporary lock out,
and the availability of infornlation to employees. We must ensure that the rules enhance
opportunities for individuals to invest in our economy and ensure that their ownership of
their life savings is protected. We want to enhance, not limit, choices individuals can
make in planning for their retirement security. At the same time, we want to preserve and
enhance employers' incentives to offer retirement options that will help their employees
build an economically successful future. For individuals to make the best possible
decisions, they must know that the rules prevent anyone from taking those decisions
away from them. We are committed to delivering to the President recommendations that
promote the retirement security of working Americans.
Weare also pursuing new methods of making the full range of Treasury securi ties
more widely available, because Treasury securities are a valuable tool for every
American seeking financial security. We offer the safest, most liquid, securities in the
world to fill investor needs across the whole spectrum of portfolios, from the individual
investor who has $50 to invest, to the largest asset managers and other finns who invest
billions of dollars in managing their portfolios.
The Internet now gives us the technological wherewithal to create the broadest
possible primary market for Treasury securities that imagination and effort will allow.
The Bureau of Public Debt already has some of this in place. Their website offers
illvestors the opportunity to get infonnation on and buy both savings bonds and
marketable bills and notes directly from the Treasury. Creating and continually enhancing
this direct link to Treasury products will let our customers move seamlessly along the
whole continuum of the securities we offer as their investment needs evolve.
Enhancing and protecting retirement security for all Americans is one of President
Bush's priorities, and one of my top agenda items for this year. I'm eager to expand the
availability of savings tools to all Americans, and to ensure that working American's
ownership of their retirement nest eggs is protected.
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DEPARTMENT

THE

TREASURY

NEWS

'IREASURY

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

FOR IMMEDIATE RELEASE
January 17, 2001

Contact: Public Affairs
(202) 622-2960

MEDIA ADVISORY:
MEETING OF THE WORKING GROUP ON
RETIREMENT SECURITY PROTECTION
Treasury Secretary Paul H. O'Neill, Labor Secretary Elaine Chao and Commerce
Secretary Don Evans will make brief remarks at their meeting of the Working Group on
Retirement Security Protection at 3:30 p.m. EST on Thursday, January 17, 2002 in the
Treasury Department's Large Conference Room (Room 3327), 1500 Pennsylvania
Avenue, NW.
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 faxes to (202) 622-1999.

-30-

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·u.s. Government Printing QHice:

1998 - 619-559

DEPARTMENT

THE

TREASURY

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

For Immediate Release
January 17,2002

Contact: Tara Bradshaw
(202) 622-2014

TREASURY, IRS ISSUE GUIDANCE ON CAPITALIZATION
Today the Treasury Department and the Internal Revenue Service sent an advance notice
of proposed rulemaking (ANPRM) regarding capitalization to the Federal Register for
publication. The ANPRM describes rules and standards the Treasury Department and the IRS
expect to propose in 2002 to provide a framework for addressing capitalization issues with
respect to expenditures incurred in acquiring, creating, or enhancing intangible assets.
"Currently, the IRS spends a substantial and disproportionate amount of its examination
resources resolving capitalization issues. Recently, much of the uncertainty and controversy in
the capitalization area has related to expenditures that create or enhance intangible assets. We
believe the rules and principles described in this advance notice with respect to intangible assets
are a first step to providing clear and administrable rules that will significantly reduce
uncertainty and controversy in this area thereby freeing up both IRS and taxpayer resources,"
said Mark Weinberger, Treasury Assistant Secretary (Tax Policy). "We also hope to issue
additional guidance addressing other areas of capitalization, such as costs to repair or improve
tangible assets."
The ANPRM indicates that forthcoming proposed regulations will describe the specific
categories of expenditures incurred in acquiring, creating, or enhancing intangible assets or
benefits that taxpayers are required to capitalize. In addition, the forthcoming proposed
regulations will recognize that many expenditures that create or enhance intangible assets or
benefits do not create the type of future benefits for which capitalization under section 263(a) is
appropriate, particularly when the administrative and record keeping costs associated with
capitalization are weighed against the potential distortion of income.
In addition, the ANPRM indicates that forthcoming proposed regulations are expected to
provide safe harbors and simplifying assumptions to reduce the administrative and compliance
costs associated with section 263( a). Specifically, the forthcoming proposed regulations are
expected to include a "one-year rule," under which costs relating to intangible assets with
relatively short useful lives will not be capitalized, and "de minimis rules," under which certain
types of costs less than a specified dollar amount will not be capitalized.
PO-933

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~U.S

Government Pnnt!ng OfflC2 1998 - '3"19-555

The ANPRM also indicates that the Treasury Department and the IRS are considering
whether additional administrative relief should be provided. Finally, the ANPRM invites
comments from the public regarding these standards.
The text of the ANPRM
-30-

[4830-0 1-p]
DEPARTMENT OF THE TREASURY
Internal Revenue Service
26 CFR Part 1
[REG-125638-01]
RIN 1545-BAOO
Guidance Regarding Deduction and Capitalization of Expenditures
AGENCY: Internal Revenue Service (IRS), Treasury.
ACTION: Advance notice of proposed rulemaking.
SUMMARY: This document describes and explains rules and standards that the IRS and
Treasury Department expect to propose in 2002 in a notice of proposed rulemaking that will
clarify the application of section 263( a) of the Internal Revenue Code to expenditures incurred in
acquiring, creating, or enhancing certain intangible assets or benefits. This document also invites
comments from the public regarding these standards. All materials submitted will be available
for public inspection and copying.
DATES: Written and electronic comments must be submitted by [INSERT DATE THAT IS 60

DAYS AFTER DATE OF PUBLICATION OF THIS DOCUMENT IN THE FEDERAL
REGISTER].
ADDRESSES: Send submissions to: CC:ITA:RU (REG-125638-01), room 5226, Internal
Revenue Service, POB 7604, Ben Franklin Station, Washington, DC 20044. Submissions may be
hand delivered Monday through Friday between the hours of 8 a.m. and 5 p.m. to: CC:IT A:RU
(REG-125638-01), Courier's Desk, Internal Revenue Service, 1111 Constitution Avenue N.W.,
Washington, DC. Alternatively, taxpayers may send submissions electronically via the Internet
by selecting the "Tax Regs" option on the IRS Home Page, or directly to the IRS Internet site at
http://www. irs. ustreas.gov/taxJegs/regslist.html.

FOR FURTHER INFORMA nON CONTACT: Conceming submissions, Guy Traynor (202)
622-7180; conceming the proposals, Andrew 1. Keyso (202) 927-9397 (not toll-free numbers).
SUPPLEMENTARY INFORMATION:
The IRS and Treasury Department are reviewing the application of section 263( a) of the
Intemal Revenue Code to expenditures that result in taxpayers acquiring, creating, or enhancing
intangible assets or benefits. This document describes and explains rules and standards that the
IRS and Treasury Department expect to propose in 2002 in a notice of proposed rulemaking.
A fundamental purpose of section 263( a) is to prevent the distOliion of taxable income
through current deduction of expenditures relating to the production of income in future taxable
years. See Commissioner v. Idaho Power Co., 418 U.S. 1,16 (1974). Thus, the Supreme Court
has held that expenditures that create or enhance separate and distinct assets or produce certain
other future benefits of a significant nature must be capitalized under section 263( a). See
INDOPCO, Inc. v. Commissioner, 503 U.S. 79 (1992); Commissioner v. Lincoln Savings &
Loan Ass 'n, 403 U.S. 345 (1971).
The difficulty of translating general capitalization principles into clear, consistent, and
administrable standards has been recognized for decades. See Welch v. Helvering, 290 U.S. Ill,
114-15 (1933). Because cOUlis focus on particular facts before them, the results reached by the
courts are often difficult to reconcile and, particularly in recent years, have contributed to
substantial uncertainty and controversy. The IRS and Treasury Department are concemed that
the current level of uncertainty and controversy is neither fair to taxpayers nor consistent with
sound and efficient tax administration.
Recently, much of the uncertainty and controversy in the capitalization area has related to
expenditures that create or enhance intangible assets or benefits. To clarify the application of
section 263(a), the forthcoming notice of proposed rulemaking will describe the specific
categories of expenditures incurred in acquiring, creating, or enhancing intangible assets or
benefits that taxpayers are required to capitalize. In addition, the forthcoming notice of proposed
rulemaking will recognize that many expenditures that create or enhance intangible assets or

benefits do not create the type of future benefits for which capitalization under section 263(a) is
appropriate, particularly when the administrative and record keeping costs associated with
capitalization are weighed against the potential distOliion of income.
To reduce the administrative and compliance costs associated with section 263(a), the
forthcoming notice of proposed rulemaking is expected to provide safe harbors and simplifying
assumptions including a "one-year rule," under which expenditures relating to intangible assets
or benefits whose lives are of a relatively short duration are not required to be capitalized, and
"de minimis rules," under which certain types of expenditures less than a specified dollar amount
are not required to be capitalized. The IRS and Treasury Department are also considering
additional administrative relief, for example, by providing a "regular and recurring rule," under
which transaction costs incurred in transactions that occur on a regular and recurring basis in the
routine operation of a taxpayer's trade or business are not required to be capitalized.
The proposed standards and rules described in this document will not alter the manner in
which provisions of the law other than section 263(a) (e.g., sections 195, 263(g), 263(h), or
263A) apply to detemline the correct tax treatment of an item. Moreover, these standards and
rules will not address the treatment of costs other than those to acquire, create, or enhance
intangible assets or benefits, such as costs to repair or improve tangible property. The IRS and
Treasury Department are considering separate guidance to address these other costs.
The following discussion describes the specific expenditures to acquire, create, or
enhance intangible assets or benefits for which the IRS and Treasury Department expect to
require capitalization in the forthcoming notice of proposed rulemaking. The IRS and Treasury
Department anticipate that other expenditures to acquire, create, or enhance intangible assets or
benefits generaIIy will not be subject to capitalization under section 263(a).
A. Amounts Paid to Acquire Intangible Property

1. Amounts paid to acquire financial interests.
Under the expected regulations, capitalization will be required for an amount paid to
purchase, originate, or otherwise acquire a security, option, any other financial interest described

in section 197(e)(I), or any evidence of indebtedness. For a discussion of related transaction
costs see section C of this document.
For example, a financial institution that acquires portfolios of loans from another person
or originates loans to borrowers would be required to capitalize the amounts paid for the
portfolios or the amounts loaned to borrowers.
2. Amounts paid to acquire intangible property from another person.
Under the expected regulations, capitalization will be required for an amount paid to
another person to purchase or otherwise acquire intangible property from that person. For a
discussion of related transaction costs see section C of this document.
For example, an amount paid to another person to acquire an amortizable section 197
intangible from that person would be capitalized. Thus, a taxpayer that acquires a customer base
from another person would be required to capitalize the amount paid to that person in exchange
for the customer base. On the other hand, a taxpayer that incurs costs to create its own customer
base through advertising or other expenditures that create customer goodwill would not be
required to capitalize such costs under this rule.
B. Amounts Paid to Create or Enhance Certain Intangible Rights or Benefits
1. l2-month rule.
The IRS and Treasury Department expect to propose a 12-month rule applicable to
expenditures paid to create or enhance certain intangible rights or benefits. Under the rule,
capitalization under section 263(a) would not be required for an expenditure described in the
following paragraphs 2 through 8 unless that expenditure created or enhanced intangible rights or
benefits for the taxpayer that extend beyond the earlier of (i) 12 months after the first date on
which the taxpayer realizes the rights or benefits attributable to the expenditure, or (ii) the end of
the taxable year following the taxable year in which the expenditure is incurred.
The IRS and Treasury Department request comments on how the 12-month rule might
apply to expenditures paid to create or enhance rights of indefinite duration and contracts subject
to tem1ination provisions. For example, comments are requested on whether costs to create

contract rights that are terminable at will without substantial penalties would not be subject to
capitalization as a result of the 12-month rule.
2. Prepaid items.
SUbject to the 12-month rule, the IRS and Treasury Department expect to propose a rule
that requires capitalization of an amount prepaid for goods, services, or other benefits (such as
insurance) to be received in the future.
For example, a taxpayer that prepays the premium for a 3-year insurance policy would be
required to capitalize such amount under the rule.
Similarly, a calendar year taxpayer that pays its insurance premium on December 1,
2002, for a 12-month policy beginning the following February would be required to capitalize
the amount of the expenditure. The 12-month rule would not apply because the benefit
attributable to the expenditure would extend beyond the end of the taxable year following the
taxable year in which the expenditure was incurred. On the other hand, if the insurance contract
had a term beginning on December 15, 2002, the taxpayer could deduct the premium expenditure
under the 12-month rule because the benefit neither extends more than 12 months beyond
December 15, 2002 (the first date the benefit is realized by the taxpayer) nor beyond the taxable
year following the year the expenditure was incurred.
3. Certain market entry payments.
Subject to the 12-month rule, the IRS and Treasury Department expect to propose a rule
that requires capitalization of an amount paid to an organization to obtain or renew a
membership or privilege from that organization.
For example, subject to the 12-month rule, the rule would require capitalization of costs
to obtain a stock trading privilege, admission to practice medicine at a hospital, and access to the
multiple listing service. The rule does not contemplate requiring capitalization for costs to
obtain ISO 9000 certification or similar costs.
4. Amounts paid to obtain certain rights from a govemmental agencv.

SUbject to the 12-month rule, the IRS and Treasury Department expect to propose a rule
that requires capitalization of an amount paid to a governmental agency for a trade name,
trademark, copyright, license, permit, or other right granted by that governmental agency.
For example, under the rule, a restaurant would be required to capitalize the amount paid
to a state to obtain a license to serve alcoholic beverages that is valid indefinitely.
5. Amounts paid to obtain or modify contract rights.
Subject to the 12-month rule, the IRS and Treasury Department expect to propose a rule
that requires capitalization of amounts in excess of a specified dollar amount (e.g., $5,000) paid
to another person to induce that person to enter into, renew, or renegotiate an agreement that
produces contract rights enforceable by the taxpayer, including payments for leases, covenants
not to compete, licenses to use intangible property, customer contracts and supplier contracts.
The IRS and Treasury Department request comments on whether there are standards other than
the standard described above that would be more appropriate for determining whether
expenditures related to the creation or enhancement of contractual rights should be capitalized.
Subject to the 12-month rule, this rule would require a lessee to capitalize an amount paid
to a lessor in exchange for the lessor's agreement to enter into a lease. This rule also would·
require a lessee to capitalize an amount paid to a lessor in exchange for the lessor's agreement to
terminate a lease and enter into a new lease. See, e.g., U.S. Bancorp v. Commissioner, 111

T.c.

231 (1998). However, this rule would not require a lessee to capitalize an amount paid to a
lessor to terminate a lease where the parties do not enter into a new or renegotiated agreement.
This rule also would not require a taxpayer to capitalize a payment that does not create
enforceable contract rights but, for example, merely creates an expectation that a customer or
supplier will maintain its business relationship with the taxpayer. See, e.g., Van Iderstine Co. v.
Commissioner, 261 F.2d 211 (2

Cir. 1958).

6. Amounts paid to tem1inate certain contracts.
Subject to the l2-month rule, the IRS and Treasury Department expect to propose a rule
that requires capitalization of an amount paid by a lessor to a lessee to induce the lessee to

tenninate a lease of real or tangible personal property or by a taxpayer to temlinate a contract
that grants another person the exclusive right to conduct business in a defined geographic area.
For example, under the rule, a lessor that pays a lessee to tenninate a lease of real
property with a remaining tenn of 24 months would be required to capitalize such payment. See,
e.g., Peerless Weighing and Vending Machine Corp. v. Commissioner, 52 T.e. 850 (1969). On
the other hand, if the lease had a remaining tenn of 6 months, the 12-month rule would apply,
and the taxpayer would not be required to capitalize the tennination payment under the rule.
As a further example, where a taxpayer grants another person the exclusive right to
develop the taxpayer's motel chain in four states, and the taxpayer later pays that other person to
tenninate such right at a time when the remaining useful life of the right is 5 years, the taxpayer
would be required to capitalize the tennination payment under the rule. See Rodeway Inns of
America v. Commissioner, 63 T.e. 414 (1974).
7. Amounts paid in connection with tangible property owned by another.
SUbject to the 12-month rule, the IRS and Treasury Department expect to propose a rule
that requires capitalization of amounts in excess of a specified dollar amount paid to facilitate the
acqu.isition, production, or installation of tangible property that is owned by a person other than
the taxpayer where the acquisition, production, or installation of the tangible property results in
the type of intangible future benefit to the taxpayer for which capitalization is appropriate. This
rule would apply even though there is no contractual relationship between the taxpayer and the
other person. This rule is intended to require capitalization of expenditures that produce
intangible future benefits similar to those that were in issue in Kauai Tenninal Ltd. v.
Commissioner, 36 B.T.A. 893 (1937) (expenditure incurred to construct a publicly owned
breakwater for the purpose of increasing taxpayer's freight lighterage operation). The IRS and
Treasury Department request comments on standards that can be established to ensure that the
expenditures described in this rule result in the type of future benefits that are similar to those in
Kauai Temlinal and therefore should be capitalized. The IRS and Treasury Department also

request comments on whether safe harbors or dollar thresholds should be used to deternline
whether capitalization of such expenditures is appropriate under section 263(a).
8. Defense or perfection of title to intangible property.
Subject to the 12-month rule, the IRS and Treasury Department expect to propose a rule
that requires capitalization of amounts paid to defend or perfect title to intangible property.
For example, under the rule, if a taxpayer and another person both claim title to a
particular trademark, the taxpayer must capitalize any amount paid to the other person for
relinquishment of such claim. See, e.g., J.J. Case Company v. United States, 32 F.Supp. 754 (Ct.
Cl. 1940).
C. Transaction Costs

The IRS and Treasury Department expect to propose a rule that requires a taxpayer to
capitalize certain transaction costs that facilitate the taxpayer's acquisition, creation, or
enhancement of intangible assets or benefits described above (regardless of whether a payment
described in sections A or B of this document is made). In addition, this rule would require a
taxpayer to capitalize transaction costs that facilitate the taxpayer's acquisition, creation,
restructuring, or reorganization of a business entity, an applicable asset acquisition within the
meaning of section 1060( c), or a transaction involving the acquisition of capital, including a
stock issuance, borrowing, or recapitalization. However, this rule would not require
capitalization of employee compensation (except for bonuses and commissions that are paid with
respect to the transaction), fixed overhead (e.g., rent, utilities and depreciation), or costs that do
not exceed a specified dollar amount, such as $5,000. The IRS and Treasury Department request
comments on how expenditures should be aggregated for purposes of applying the de minimis
exception, whether the de minimis exception should allow a deduction for the threshold amount
where the aggregate transaction costs exceed the threshold amount, and whether there are certain
expenditures for which the de minimis exception should not apply (e.g., commissions).
The IRS and Treasury Depm1ment are considering alternative approaches to minimize
uncertainty and to ease the administrative burden of accounting for transaction costs. For

example, the rules could allow a deduction for all employee compensation (including bonuses
and commissions that are paid with respect to the transaction), be based on whether the
transaction is regular or recurring, or follow the financial or regulatory accounting treatment of
the transaction. The IRS and Treasury Department request comments on whether the recurring
or nonrecurring nature of a transaction is an appropriate consideration in determining whether an
expenditure to facilitate the transaction must be capitalized under section 263( a) and, if so, what
criteria should be applied in distinguishing between recurring and nonrecurring transactions. In
addition, the IRS and Treasury Department request comments on whether a taxpayer's treatment
of transaction costs for financial or regulatory accounting purposes should be taken into account
when developing simplifying assumptions.
For example, under the rule described above, a taxpayer would be required to capitalize
legal fees in excess of the threshold dollar amount paid to its outside attorneys for services
rendered in drafting a 3-year covenant not to compete because such costs would not have been
incurred but for the creation of the covenant not to compete. Similarly, the rule would require a
taxpayer to capitalize legal fees in excess of the threshold dollar amount paid to its outside
attorneys for services rendered in defending a trademark owned by the taxpayer.
Conversely, a taxpayer that originates a loan to a borrower in the course of its lending
business would not be required to capitalize amounts paid to secure a credit history and property
appraisal to facilitate the loan where the total amount paid with respect to that loan does not
exceed the threshold dollar amount. The taxpayer also would not be required to capitalize the
amount of salaries paid to employees or overhead costs of the taxpayer's loan origination
department.
In addition, the rule would require a corporate taxpayer to capitalize legal fees in excess
of the threshold dollar amount paid to its outside counsel to facilitate an acquisition of all of the
taxpayer's outstanding stock by an acquirer. See, e.g., INDOPCO, Inc. v. Commissioner, 503
U.S. 79 (1992). However, the rule would not require capitalization of the portion of officers'

salaries that is allocable to time spent by the officers negotiating the acquisition. Cf. Wells Fargo

& Co. v. Commissioner, 224 F.3d 874 (8 th Cir. 2000).
The ntle also would not require capitalization of post-acquisition integration costs or
severance payments made to employees as a result of an acquisition transaction because such
costs do not facilitate the acquisition.
D. Other Items on Which Public Comment is Requested
1. Other costs of creating, acquiring or enhancing intangible assets or benefits that require

capitalization.
The IRS and Treasury Department are considering what general principles of
capitalization should be used to identify the costs of acquiring, creating, or enhancing intangible
assets or benefits that should be capitalized under section 263(a) but are not described above.
The IRS and Treasury Department anticipate that these general
principles will apply in rare and unusual circumstances to require capitalization of costs that are
similar to those described above. Comments are requested on capitalization principles (for
example, a separate and distinct asset test or a significant future benefit test) that can be used to
identify other costs that should be capitalized under section 263( a) and the administrability of
such principles. The IRS and Treasury Department also request comments on other categories of
costs associated with intangible assets or benefits that should be capitalized under section 263( a),
but are not described above.
2. Book-Tax conformity.
The IRS and Treasury Department request comments on whether there are types of
expenditures other than those discussed above for which the taxpayer's treatment for financial or
regulatory accounting purposes should be taken into account in determining the treatment for
federal income tax purposes or to simplify tax reporting.
3. Amortization periods.
Certain intangibles have readily ascertainable useful lives that can be detem1ined with
reasonable accuracy, while others do not. The IRS and Treasury Department expect to provide

safe harbor recovery periods and methods for certain capitalized expenditures that do not have
readily ascertainable useful lives. Comments are requested regarding whether guidance should
provide one uniform period or multiple recovery periods and what the recovery periods and
methods should be.
4. De minimis rules.
The IRS and Treasury Department request comments on whether there are types of
expenditures other than those discussed above for which it would be appropriate to prescribe de
minimis rules that would not require capitalization under section 263(a). If there are such
categories or thresholds, comments are requested on how expenditures would be aggregated in
applying these de minimis rules.
5. Costs of Software.
The IRS and Treasury Department request comments on what rules and principles should
be used to distinguish acquired software from developed software and the administrability of
those rules and principles. See Rev. Proc. 2000-50, 2000-2 C.B. 601.

Heather C. Maloy
Associate Chief Counsel (Income Tax & Accounting)

DEPARTMENT

THE

TREASURY

IIIL:~

TREASURY

NEWS

OFFICE OF PUBLIC AFFAIRS -1500 PENNSYLVANIA AVENUE, "I. W.• WASHINGTON, D.C .• :30220 - (20Z) 62:3-2960

EMBARGOED UNTIL 2:30 P.M.
January 17, 2002

CONTACT:

Office of Financing
202/691-3550

TREASURY OFFERS 13-WEEK AND 26-WEEK BILLS
The Treasury will auction 13-week and 26-week Treasury bills totaling $27,000
million to refund an estimated $27,791 million of publicly held 13-week and 26-week
Treasury bills maturing January 24, 2002, and to pay'down approximately $791 million.
Also maturing is an estimated $10,000 million of publicly held 4-week Treasury bills,
the disposition of which will be announced January 22, 2002.
The Federal Reserve System holds $12,031 million of the Treasury bills maturing
on January 24, 2002, in the System Open Market Account (SOMA).
This amount may be
refunded at the highest discount rate of accepted competitive tenders either in these
auctions or the 4-week Treasury bill auction to be held January 23, 2002. Amounts
awarded to SOMA will be in addition to the offering amount.
Up to $1,000 million in noncompetitive bids from Foreign and International
Monetary Authority (FIMA) accounts bidding through the Federal Reserve Bank of New
York will be included within the offering amount of each auction.
These
noncompetitive bids will have a limit of $100 million per account and will be accepted
in the order of smallest to largest, up to the aggregate award limit of $1,000
nillion.

TreasuryDirect customers have requested that we reinvest their maturing holdings
)f approximately $1,058 million into the 13-week bill and $690 million into the 26'leek bill.
The allocation percentage applied to bids awarded at the highest discount rate
Till be rounded up to the next hundredth of a whole percentage point, e.g., 17.13%.
This offering of Treasury securities is governed by the terms and conditions set
'orth in the Uniform Offering Circular for the Sale and Issue of Marketable Book-Entry
'reasury Bills, Notes, and Bonds (31 CFR Part 356, as amended).
Details about each of the new securities are given in the attached offering
ighlights.
000

ttachment

·934

press releases. speecJzes, public schedules and ojjicial biographies. call our ].J-Iwur ilLY line

ill

urn) 622-]O.Jlj

..... '-311JJ.L'-3fl";J

UI>

"t<~l1.;:'Ut<l:

U~~-~Kl.IHj::;

TO BE ISSUED JANUARY 24,

Ur'

jjlLLS

2002
January 17,

(} ~ ~ ":~.! II:!. !,.1Il~~111 ~
!' I~ j, l! ':: () ~ E': ~ ! ~1?1
111.1'

I!:xc;ll1tJioll
AmounL
------- -

!Jt,,~(: ~ !l'~!':'~':_.5:'!_~! teL~:
'J' eo: 1. 111 a Il d L Y l' e 0 f " eel n- i t y

$14,000 million
$14,000 million
$ 4,500 million

91-day bill
912795 JR 3
AilCLiull daLe.
January 22, 2002
j:..;tJlle ddLe . . .
January 24, 2002
l.fd Lur i Ly dd Le
April 25, 2002
()Lj~illdl is"lIe datto . . . . . . . . . . . . . . . . . . . . . . . . October 25, 2001
CurrenLly outstanding . . . . . . . . . . .
$17,754 million
MilliIBuIB Did amount and mUltiples . . . . . . . . . . . $1,000
C lJ !j 1 P

1ll1llliJ e L

2002

$13,000 million
$13,000 million
None

182-day bill
912795 KT 7
January 22, 2002
January 24, 2002
July 25, 2002
January 24, 2002
$1,000

'!'he tollowing rules apply to all securities mentioned above:
Submission of Bids:
Noncompetitive bids:
Accepted in full up to $1 million at the highest discount rate of accepted competitive bids.
l<'oreigll and International Monetary Authority (FIMA) bids:
Noncompetitive bids submitted through the Federal Reserve
Banks as agents for FIMA accounts.
Accepted in order of size from smallest to largest with no more than $100
million awarded per account.
The total noncompetitive amount awarded to Federal Reserve Banks as agents for FlMA
accounts will not exceed $1,000 million.
A single bid that would cause the limit to be exceeded will
be partially accepted in the amount that brings the aggregate award total to the $1,000 million limit.
However,
if there are two or more bids of equal amounts that would cause the limit to be exceeded, each will be prorated
to avoid exceeding the limit.
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 (NLP) 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 standard time on auction day
Competitive tenders . . . . . . . . Prior to 1:00 p.m. eastern standard time on auction day
Pa~nent 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.

DEPARTMENT

THE

TREASURY

NEWS

TREASURY

OFFICE OF PUBLIC AFFAIRS '1500 PENNSYLVANIA AVENUE, N.W.' WASHINGTON, D.C.' 20220' (202l 622.2960

EMBARGOED UNTIL 2:30 P.M.
January 16, 2002

CONTACT:

Office of Financing
202/691-3550

TREASURY OFFERS 2-YEAR NOTES
The Treasury will auction $25,000 million of 2-year notes to refund $27,068
million of publicly held notes maturing January 31, 2002, and to pay down about
$2,068 million.
In addition to the public holdings, Federal Reserve Banks hold $5,766 million
of the maturing notes for their own accounts, which may be refunded by issuing
an additional amount of the new security.
Up to $1,000 million in noncompetitive bids from Foreign and International
Monetary Authority (FIMA) accounts bidding through the Federal Reserve Bank of New
York will be included within the offering amount of the auction. These
noncompetitive bids will have a limit of $100 million per account and will be
accepted in the order of smallest to largest, up to the aggregate award limit of
$1,000 million.
TreasuryDirect customers requested that we reinvest their maturing holdings
of approximately $621 million into the 2-year note.
The auction will be conducted
tive and noncompetitive awards will
tenders . . The allocation percentage
be rounded up to the next hundredth

in the single-price auction format. All competibe at the highest yield of accepted competitive
applied to bids awarded at the highest yield will
of a whole percentage point, e.g., 17.13%.

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 BookEntry 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

PO-935

For press releases, speeches. public schedules alld official biographies. call our 2-1-I/Ourfax line at (202) 622-20-10

HIGHLIGHTS OF TREASURY OFFERING TO THE PUBLIC OF
2-YEAR NOTES TO BE ISSUED JANUARY 31, 2002

January 16, 2002
Offering Amount . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $25,000 million
Public Offering . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $25,000 million
Description of Offering:
Term and type of security . . . . . . . . . . . . . . . . . . . . .
Series . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
CUSIP number . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Auction date .................................................................
Issue date . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Dated date . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Maturity date . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interest rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

2 -year notes
J-2004
912827 7K 2
January 23, 2002
January 31, 2002
January 31, 2002
January 31, 2004
Determined based on the highest
accepted competitive bid
Yield . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Determined at auction
Interest payment dates . . . . . . . . . . . . . . . . . . . . . . . . July 31 and January 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 . . . . . . . . . . . . . . . . . . . . . . . $1,000
Corpus CUSIP number . . . . . . . . . . . . . . . . . . . . . . . . . . 912820 GU 5
Due date(s) and CUSIP number(s)
for additional TINT(s) . . . . . . . . . . . . . . . . . . . . . . January 31, 2004 - - 912833 YQ 7
Submission of Bids:
Noncompetitive bids:
Accepted in full up to $5 million at the highest accepted yield.
Foreign and International Monetary Authority (FIMA) bids: Noncompetitive bids
submitted through the Federal Reserve Banks as agents for FIMA accounts.
Accepted in order of size from smallest to largest with no more than $100
million awarded per account., The total noncompetitive amount awarded to Federal
Reserve Banks as agents for FlMA accounts will not exceed $1,000 million. A
single bid that would cause the limit to be exceeded will be partially accepted
in the amount that brings the aggregate award total to the $1,000 million limit.
Ho·~ever, if there are two or more bids of equal amounts that would cause the
limit to be exceeded, each will be prorated to avoid exceeding the limit.
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 total
bid amount, at all yields, and the net long position is $2 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 Yield . . . . . . . . . . . 35% of public offering
Maximum Award . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35% of public offering
Receipt of Tenders:
Noncompetitive tenders:
Prior to 12:00 noon eastern standard time on auction day.
Competitive tenders:
Prior to 1:00 p.m. eastern standard 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 featu=e which authorizes a charge to their account of record at their
financial institution on issue date.

DEPARTMENT

THE

TREASURY

NEWS

'IREASURY

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

u.s. International Reserve Position

01/18/02

The Treasury Department today released U.S. reserve assets data for the week ending January 11, 2002. As
indicated in this table, U.S. reserve assets totaled $68,677 million as of January 4,2002, compared to $68,866
million as of December 28,2001.
(in US millions)

TOTAL
I. Foreign Currency Reserves
a. Securities

January 11, 2002
68,731

January 4, 2002
68,936

I. Official U.S. Reserve Assets

Euro
5,506

Yen
10,631

TOTAL

Euro

16,137

5,490

Yen

TOTAL

9,707

Of which, issuer headquartered in the U. S.

15,197

b. Total deposits with:
b.i. Other central banks and BIS
b.ii. Banks headquartered in the U.S.
b.iL Of which, banks located abroad
b.iii. Banks headquartered outside the U.S.
b.iiL Of which, banks located in the U.S.

IMF Reserve Position

Special Drawing Rights (SDRs)
Gold Stock

Other Resenre Assets

9,278

3,784

13,062
0
0

9,241

4,583

0
0

17,919

17,871

10,774

10,794

11,045

I Includes holdings of the Treasury's Exchange Stabilization Fund (ESF) and the Federal Reserve's System Open Market Account
30MA), valued at current market exchange rates. Foreign currency holdings listed as securities reflect marked-to-market values, and
eposits reflect carrying values.
, The items, "2. IMF Reserve Position" and "3. Special Drawing Rights (SDRs)," are based on data provided by the'IMF and are valued in
}Jlar terms at the official SDR/doJlar exchange rate for the reporting date. The entries in the table above for latest week (shown in italics)
flect any necessary adjustments, including revaluation, by the U:S. Treasury to the prior week's IMF data. The IMF data for the prior week

e final.
Gold stock is valued monthly at $42.2222 per fine troy ounce. Values shown are as of November 30, 2001. The October 31,2001 value
1S

$11,045 million.

-936

13,824
0
0

u.s. International Reserve Position (cont'd)
II. Predetermined Short-Term Drains on Foreign Currency Assets
January 4, 2002

1. Foreign currency loans and securities

January 11, 2002

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.a. Short positions
2.b. Long positions
3. Other

III. Contingent Short-Term Net Drains on Foreign Currency Assets
January 11, 2002

January 4, 2002

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
l. 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.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
o

Ottical Reserve Assets Worksheet
(actual US dollar amounts)

Enter Dates Here

Last Week
04-Jan-02

This Week
11-Jan-02

Foreign Currency

04-Jan-02

11-Jan-02

Euro Securities
Yen Securities

$5,505,546,083.99
$10,631,457,800.34

$5,489,993,088.28
$9,706,771,665.28

-924.686,135

and Qaste data into last week
and put new data from fax

Sec. Total
Euro Deposits
Yen Deposits

$16, 137,003,884.33

$15,196,764,753.56

-940.239.131

into right column

$9,278,011,534.29
$3,783,556,253.00

$9,241,467,956.93
$4,582,915,301.49

-36,543.577

Deposit Total

$13,061,567,787.29
$29,198,571,671.61
$0.8946
Y 131.02

$13,824,383,258.42

762,815,4 71

$29,021,148,011.98
$0.8905
Y132.17

-177,423.660

Change

Total
Euro Rate
Yen Rate

IMF

04-Jan-02

Source: NY Fed (fax)
-15.552,996

799,359.048

11-Jan-02

Source: IMF (email)

(prelim, with adjust.)
Reserve Tranche
GAB
NAB
Total
SDR

cOQ~

Qut actual figures in for last week

17,848,807,778.42
0.00

17,871,251,067.71
0.00

0.00
17,918,735,076.00

0.00
17,871,251,067.71

-47,484,008.29

10,773,777,496.52

10,794,025,977.29

20,248,480.77

04-Jan-02

11-Jan-02

11,044,773,461.54

22.443,289.29
0.00
0.00

0.00

as of 10/31 /0 1

Gold

Source: FMS website
0.00

http://www.fms.treas.gov/gold

04-Jan-0~1

11-Jan-0~1

IOther Res.Assets

1TOTAL

68,935,857,705.67

68,731,198,518. 52 1

-204,659,187.15

Adjustments to IMF and SDR data, translated at current exchange rates
:Pr~i~~-iriiF-[)ata-------------IN-S-DR~---------------------------------------------------sD-R-iat~for------------------------1

:I Calculation Section
Reserve Tranche
GAB
NAB
SDRs

04-Jan -02
14,206,304,255
0
0
8.580,44 1.100

Adiustments
14,206,304,255
0
0
14,206,304,255
8,580,441,100

11-Jan-02
In USD
:
0.794925
$17,871,251,067.71
$0.00
$0.00
Total $17,871,251,067.71
SDRs $10,794,025,977.29

Source:
http://www.imf.org/external/map.htm. then go to "Exchange Rates in Terms of SDRs Daily"

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

EMBARGOED UNTIL 11: 30 A.M.
January 22, 2002

Contact:

Office of Financing
202/691-3550

TREASURY OFFERS 4-WEEK BILLS
The Treasury will auction 4-week Treasury bills totaling $6,000 million to refund
an estimated $10,000 million of publicly held 4-week Treasury bills maturing January
24, 2002, and to pay down approximately $4,000 million.
Tenders for 4-week Treasury bills to be held on the book-entry records of
TreasuryDirect will not be accepted.
The Federal Reserve System holds $12,031 million of the Treasury bills maturing
on January 24, 2002, in the System Open Market Account (SOMA).
This amount may be
refunded at the highest discount rate of accepted competitive tenders in this auction
up to the balance of the amount not awarded in today's 13-week and 26-week Treasury
bill auctions. Amounts awarded to SOMA will be in addition to the offering amount.
Up to $1,000 million in noncompetitive bids from Foreign and International
Monetary Authority (FIMA) accounts bidding through the Federal Reserve Bank of New York
will be included within the offering amount of the auction.
These noncompetitive bids
will have a limit of $100 million per account and will be accepted in the order of
smallest to largest, up to the aggregate award limit of $1,000 million.
Note:
The closing times for receipt of noncompetitive and competitive tenders
will be at 11:00 a.m. and 11:30 a.m. eastern standard time, respectively.
The allocation percentage applied to bids awarded at the highest discount rate
will be rounded up to the next hundredth of a whole percentage point, e.g., 17.13%.
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 BookEntry 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

PO-937

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

HIGHLIGHTS OF TREASURY OFFERING
OF 4-WEEK BILLS TO BE ISSUED JANUARY 24, 2002
January 22, 2002
Offering Amount ..................... $6,000 million
Public Offering ..................... $6,000 million
NLP Exclusion Amount ................ $10,400 million
Description of Offering:
Term and type of security ........... 28-day bill
CUSIP number ........................ 912795 JH 5
Auction date ........................ January 23, 2002
Issue date .......................... January 24, 2002
Maturity date ....................... February 21,2002
Original issue date ................. August 23,2001
Currently outstanding ............... $40,087 million
Minimum bid amount and multiples .... $1,000
Submission of Bids:
Noncompetitive bids: Accepted in full up to $1 million at the highest
discount rate of accepted competitive bids.
Foreign and International Monetary Authority (FIMA) bids:
Noncompetitive bids submitted through the Federal Reserve Banks as agents for
FIMA accounts. Accepted in order of size from smallest to largest
with no more than $100 million awarded per account.
The total noncompetitive amount awarded to Federal Reserve Banks as agents for
FIMA accounts will not exceed $1,000 million. A single bid that
would cause the limit to be exceeded will be partially accepted in
the amount that brings the aggregate award total to the $1,000
million limit. However, if there are two or more bids of equal
amounts that would cause the limit to be exceeded, each will be
prorated to avoid exceeding the limit.
Competitive bids:
(1) Must be expressed as a discount rate with three decimals in
increments of .005%, e.g., 4.215%.
(2) Net long position (NLP) 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 11:00 a.m. eastern standard time on auction day
Competitive tenders:
Prior to 11:30 a.m. eastern standard time on auction day
Payment Terms:
By charge to a funds account at a Federal Reserve Bank
on issue date.

CONTACT:

Office of Financing
202-691-3550

RESULTS OF TREASURY'S AUCTION OF 13-WEEK BILLS
Term:
Issue Date:
Maturity Date:
CUSIP Number:
High Rate:

91-Day Bill
January 24, 2002
April 25, 2002
912795JR3
1.670%

Investment Rate 1/:

1.700%

Price:

99.578

All noncompetitive and successful competitive bidders were awarded
securities at the high rate. Tenders at the high discount rate were
allotted 20.84%. All tenders at lower rates were accepted in full.
AMOUNTS TENDERED AND ACCEPTED (in thousands)
Tender Type
Competitive
Noncompetitive
FIMA (noncompetitive)

25,703,655
1,421,102
269,000

SUBTOTAL

27,393,757

Federal Reserve

4,820,165

TOTAL

Accepted

Tendered

32,213,922

12,310,035
1,421,102
269,000
14,000,137 2/
4,820,165

18,820,302

Median rate
1.645%: 50% of the amount of accepted competitive tenders
was tendered at or below that rate.
Low rate
1.620%:
5% of the amount
of accepted competitive tenders was tendered at or below that rate.
iBid-to-Cover Ratio = 27,393,757 / 14,000,137 = 1.96
1/ Equivalent coupon-issue yield.
2/ Awards to TREASURY DIRECT = $1,161,972,000

http://www.publicdebt.treas.gov

PO-938

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
January 22, 2002

CONTACT:

Office of Financing
202-691-3550

RESULTS OF TREASURY'S AUCTION OF 26-WEEK BILLS
Term:
Issue Date:
Maturity Date:
CUSIP Number:
High Rate:

182-Day Bill
January 24, 2002
July 25, 2002
912795KT7
1.735%

Investment Rate 1/:

1.774%

Price:

99.123

All noncompetitive and successful competitive bidders were awarded
securities at the high rate. Tenders at the high discount rate were
allotted 25.08%. All tenders at lower rates were accepted in full.
AMOUNTS TENDERED AND ACCEPTED (in thousands)

Competitive
Noncompetitive
FIMA (noncompetitive)

Accepted

Tendered

Tender Type
$

21,358,695
928,381

12,071,635
928,381

SUBTOTAL

22,287,076

Federal Reserve

4,673,096

TOTAL

26,960,172

13,000,0162/
4,673,096
$

17,673,112

Median rate
1.700%: 50% of the amount of accepted competitive tenders
was tendered at or below that rate.
Low rate
1.660%:
5% of the amount
of accepted competitive tenders was tendered at or below that rate.
Bid-to-Cover Ratio = 22,287,076 / 13,000,016 = 1.71
1/ Equivalent coupon-issue yield.
2/ Awards to TREASURY DIRECT = $738,991,000

http://www.publicdebt.treas.gov

0-939

DEPARTMENT

THE

TREASURY

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

FOR IMMEDIATE RELEASE
January 23,2002

Contact: Public Affairs
(202) 622-2960

UNLOCKING THE JAPANESE REAL ECONOMY
U.S. SECRETARY OF THE TREASURY PAUL O'NEILL
NATIONAL PRESS CENTER
TOKYO JAPAN

It is a pleasure to be here today. As many of you may know, I was in Japan when the
tragic events of September 11 th occurred and forced me to postpone my meetings with Japanese
government officials and members of the private sector. I am gratified that I now have the
opportunity to pick up on that agenda and to renew some of the relationships I established with
Japanese officials and private individuals when I was a corporate executive. From my private
sector experience, I have developed the highest respect for the ability of Japanese industry to rise
to the challenge of world competition, and to challenge all of us to rise to our best.

On this occasion, I came to Japan to attend the Conference on Afghan Reconstruction.
The conference demonstrated that Japanese and U.S. cooperation could be a tremendous force
for global progress - in this case, giving Afghanistan a real opportunity to rebuild its economy
and foster democratic institutions. What is true in political and strategic affairs holds with even
greater force in economics. As the two largest economies in the world, along with Europe, we
have a shared responsibility for global economic outcomes. The pace of our economies is of
great importance to the prospects and potential of the economies of the rest of the world.
Since mid-year 2000, the U.S. economy has slowed, with negative effects on the world at
large. We in the United States know that the world needs a vibrant US. economy. We also
know that the world needs vibrant economies in Japan and Europe. We are working hard to
improve U.S. competitiveness and we are using our macro policy tools to restore strong US.
growth. The Federal reserve has cut interest rates to the lowest levels since the early 1960s. The
President's tax cuts, and fiscal measures enacted immediately after the attacks will support US.
recovery, and I am confident that the US. economy will deliver accelerating growth as we move
through the year.
PO-940

For press releases, speeches, public schedules and official biographies, call our 24-hour fax line at (202) 622-2WO
·u.s. Government Printing Office:

1998 - 619-559

Japan has perfonned far below its potential over the past decade. The resulting cost has
been high - for the Japanese people and for the world economy. When the world's secondlargest economy struggles, we all are affected. Some commentators have given up hope that
Japan can again be an engine for world growth and prosperity. In fact, I am struck by the change
in tone and prescription from the outside commentators. They have gone from offering a
bewildering - and often contradictory - spectrum of policy advice to counseling other nations to
protect themselves from a continuation of Japan's economic malaise, or worse.
But I believe that the critics who are now ready to write the Japanese economy off are
wrong. Japan has tremendous resources in the diligence of its workforce and the
competitiveness of the best of its fim1s. Imagine what Japan would look like if its whole
economy perfonned like Toyota or Sony, or any number of other Japanese companies. The pathbreaking manufacturing techniques and systems ideas developed by top-flight Japanese
companies have also benefited U.S. consumers through cheaper, higher-quality products, and
made U.S. industry more productive and efficient. Japan's economic leadership inspired people
around the world to rise to new challenges, innovate and improve.
Every country, no matter how competitive, goes through periods where decisive economic
adjustments and changes in policy are required.
•

•

In the United States, I remember the painful period at the end of the 1970s and early in the
1980s, when many critics were willing to write us off. Our public and private institutions
responded to the challenges and created an historic economic boom.
In the United Kingdom, Margaret Thatcher led a fundamental reshaping of the British
economy during her tenure as Prime Minister. Her labor market refonns, deregulation,
privatization, and overhaul of the tax system improved incentives and injected a healthy dose
of fresh competition into the U.K. economy.

Decisive policy actions reinvigorated these nations and made them examples to people
around the world who were shrugging off the yoke of communism. By invoking a vision,
leaders change expectations about the future and create public confidence to see their nations
through the pain of the initial adjustments.
Japan has its own historical examples of decisive action. In the 1970s when the world was
confronted with a series of energy shocks, Japan acted quickly to adjust. In the industry I know
the best - aluminum - Japan took concelied action to stop producing primary aluminum as it
recognized its competitive disadvantage in this energy-intensive business. To be sure, this action
caused dislocations for the Japanese employees and companies, but it demonstrated that when
Japan decides to act it can do so quickly and effectively.
Such quick and effective action is needed now.
This is why President Bush has expressed strong support for Prime Minister Koizumi and
his refonn program. Prime Minister Koizumi has a vision of Japan - prosperous people
providing leadership [or a vibrant Asian economy that sets a model for the world.

The Prime Minister has embraced a strong reform agenda that can return Japan to its
place of global prominence and recognition. Let me say that nowhere have I seen any indication
from the Prime Minister's remarks that he believes that tampering with foreign exchange rates is
a realistic element of a reform agenda. I agree with him. During this trip, and on many other
occasions over the past year, I have been asked about the U.S.-Japanese exchange rate. Implicit
in the questions is the suggestion that exchange rate manipulation can return Japan to sustained
economic growth. The straight fact is this: exchange rates cannot improve productivity or fix
non-performing loans. The weight of historical evidence shows that those who have tried to fix
underlying economic problems with protectionist measures - artificially depreciating the
currency is one of those - actually weaken their own economy.
From the rest of the world's point of view, the objective and the measure of success is a
Japan growing its gross domestic product again. It is clear that the policy prescriptions of the
past - export led growth and endless public works projects - cannot work. But I am convinced,
if the Japanese people resolve that they will grow again, they will devise the means to do it. If
you establish a goal you will achieve it.
In order to accomplish the goal it will be necessary to formulate specific policies and to
assign to each policy its expected contribution to the goal - along with the expected timetable to
fully achieve the policy. It is clear in both public and private activities that goals without
policies and timetables are destined to be not goals but unfulfilled yearnings.

Let me tum briefly to three areas that I believe may help to unlock the full potential of
Japan's economy. The first is the banking sector. I applaud the central role the Prime Minister
Koizumi's reforms have given to addressing the banking sector problems. The President in two
U.S.-Japan summits - as well as my G7 finance ministry and central bank colleagues - have
welcomed Japan's particular emphasis on this issue, and for good reason. A financial sector that
is healthy and efficiently allocates capital to its most productive uses is critical for an economy to
reach its full potential. A healthy banking system is also willing to take on risk, but does so
consciously, and continually appraises its loan portfolio at its true market value.
We in the U.S. know from our own experience that a banking system that is struggling to
rid itself of bad and risky loans can expect a tremendous drag on the real economy. If one can
learn as much from mistakes as from successes, there are many lessons to be drawn from our
own savings and loan crisis - which grew significantly over time before it was effectively
addressed.
There were two things that I think were critical in turning the comer. The first was a
decision to deal with the problem in its full extent, rather than through a series of partial
measures designed in each case to minimize the immediate cost of dealing with the problem.
The second was the decision to speed the return of distressed assets to private hands through
sales of loan claims and their underlying collateral in the market.
What we learned, in the S&L crisis and in the banking problems we had in the 1990s,
was the imp0l1ance of addressing the problems of the borrowers. In some cases liquidation and
sale of assets was the only available option.

But in many cases there was a core business that was viable within a company that was
heavily indebted. Extracting that viable business was not simply a matter of reducing debt;
restructuring of operations and management was almost always necessary. But if a company
could be successfully restructured, its value was much higher than in liquidation, the loss of
employment considerably lessened, and the chances of creating a secure future much higher.
A supportive macroeconomic environment is especially important in the context of
banking reform, as firms and their employees adjust to changes in the financial system. The first
element of such an environment is price stability. We have all learned the corrosive effect that
inflation has on economies, but deflation is at least as bad. Deflation multiplies the burdens
faced by debtors, as well as discouraging both consumption and business investment. Like
inflation, persistent deflation is a monetary phenomenon, and will respond to monetary policy.
But as long as deflation persists other reforms remain much more difficult to achieve.
The other leg of macroeconomic policy is fiscal policy. As the Koizumi Administration
has emphasized, nonproductive public investment does not produce sustained growth.
I would also like to discuss the introduction of true price competition throughout
Japanese industry. While Japan's best firms face price competition on a daily basis - both at
home and abroad - in significant parts of the Japanese economy there are firms that owe their
survival less to the creation of real economic value than to barriers and regulation. Increased
price competition through deregulation and structural reform can lead to adjustments and some
dislocation. However, it also creates economic opportunities and activity that will lead to a new
entry by both domestic and foreign firms, increased employment, renewed growth, and a secure
future.
Actions by individual companies indicate what is possible for the Japanese economy as a
whole. Nissan is a company that appeared on the verge of closing two years ago. New investors
and a determined effort at restructuring, in which both management and workers participated,
returned this company to profitability well before most thought possible. Nissan rewarded its
workers by meeting the union's last wage and bonus demands in full
The telecommunications industry is a clear example of the benefits that opening up new
markets to competition can bring. Freeing up entry and price competition in mobile telephone
services led to a rush of investment in base station and antenna facilities, and to a skyrocketing
number of cellular telephone subscribers. And, as a result of the opportunities created and the
new competition introduced, NTT DoCoMo is now a world leader in mobile communications
innovation.
Big Bang financial services deregulation has led to a burst of new competition on
products and pricing, just as it did in the United States and the United Kingdom. Japanese
companies that once had to go to New York or London to obtain the financial service products
they needed can now find many of them domestically. After deregulation in the United States,
the financial services industry grew at a far faster rate than the economy as a whole, and I expect
the same to occur in Japan.

The introduction of price competition throughout the Japanese economy entails thousands
of smaller, detailed yet highly important decisions in trade, regulatory, and fiscal policies. It is
not my place or the place of the U.S. govemment to lecture the Japanese govemment on how to
proceed - these are decisions for the Japanese people. I do want to offer my support to Prime
Minister Koizumi as he has clearly stated that structural refom1 "with no sacred cows" is
necessary for economic recovery and strong, sustained growth. The Prime Minister has already
outlined steps to cut back inefficient public works expenditures and to abolish or privatize
Japan's public corporations. I wish him full success as he takes these initiatives forward.
Much is riding on these efforts - for Japan and for the world. In the U.S.-Japan
Partnership for Economic Growth our two countries have recognized the decisive influence that
our two economies have on global economic growth and wellbeing. We have a shared
responsibility to do all that we can do to assure that we reach our full economic potential.
I am a strong optimist on the United States. I am also a strong optimist on Japan, and
view this period as a time of great opportunity for policy to bring about a change for the better.
Decisive actions are necessary to solve difficult problems, and the United States supports Prime
Minister Koizumi' s commitment to take decisive actions. Markets are clearly waiting for
implementation of such actions and will respond strongly and positively to policies that will help
Japan to achieve its full potential. Building confidence will reduce the short-tenn pain of the
adjustments and speed the retum of Japan to a path of strong growth. But I finnly believe that
the Japanese miracle is not finished, is not in the past. Retuming Japan to robust and durable
growth is of the utmost importance to Japan, to the United States, and to the world.

-30-

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
January 23, 2002

Office of Financing
202-691-3550

RESULTS OF TREASURY'S AUCTION OF 4-WEEK BILLS
28-Day Bill
January 24, 2002
February 21, 2002
912795JH5

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

1.655%

Investment Rate 1/:

Price:

1.684%

99.871

All noncompetitive and successful competitive bidders were awarded
securities at the high rate.
Tenders at the high discount rate were
allotted 23.81%. All tenders at lower rates were accepted in full.
AMOUNTS TENDERED AND ACCEPTED (in thousands)

Competitive
Noncompetitive
FIMA (noncompetitive)

Accepted

Tendered

Tender Type
$

24,314,800 •
16,176

5,983,850
16,176

SUBTOTAL

24,330,976

6,000,026

Federal Reserve

2,537,803

TOTAL

26,868,779

8,537,829

Median rate
1.630%: 50% of the amount of accepted competitive tenders
was tende~ed at or below that rate. Low rate
1.600%:
5% of the amount
of accepted competitive tenders was tendered at or below that rate.
Bid-to-Cover Ratio = 24,330,976 / 6,000,026 = 4.06
1/ Equivalent coupon-issue yield.

http://www.publicdebt.treas.gov

)0-941

CONTACT:

Office of Financing
202-691-3550

RESULTS OF TREASURY'S AUCTION OF 2-YEAR NOTES
Interest Rate:
Series:
CUSIP No:

3%
J-2004
9128277K2
High Yield:

Issue Date:
Dated Date:
Maturity Date:
3.039%

Price:

January 31, 2002
January 31, 2002
January 31, 2004

99.925

All noncompetitive and successful competitive bidders were awarded
securities at the high yield. Tenders at the high yield were
allotted 58.90%. All tenders at lower yields were accepted in full.
AMOUNTS TENDERED AND ACCEPTED (in thousands)
Accepted

Tendered

Tender Type
Competitive
Noncompetitive
FIMA (noncompetitive)

37,307,340
1,071,788
100,000

SUBTOTAL

38,479,128

Federal Reserve

5,766,370
$

TOTAL

44,245,498

23,828,265
1,071,788
100,000
25,000,053 1/
5,766,370

30,766,423

Median yield
2.980%:
50% of the amount of accepted competitive tenders
was tendered at or below that rate. Low yield
2.920%:
5% of the amount
of accepted competitive tenders was tendered at or below that rate.
Bid-to-Cover Ratio

38,479,128 / 25,000,053

1.54

1/ Awards to TREASURY DIRECT = $853,360,000

http://www.publicdebt.treas.gov

)-942

DEPARTMENT

THE

TREASURY

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

FOR IMMEDIATE RELEASE
January 24, 2002

Contact: Tasia Scolinos
(202) 622-2960

TREASURY SIGNS LICENSE UNBLOCKING FROZEN AFGHAN ASSETS

Late yesterday the Treasury Department signed a license authorizing the Federal
Reserve to unblock Afghan government assets frozen in 1999 under Executive Order
13129. The license, signed by Richard Newcomb, Director of Treasury's Office of
Foreign Assets Control, gives control of the assets to the new Afghan Interim
Authority (AlA). The license will unblock approximately $193 million in gold and
$24 million in other assets of the Afghan Central Bank held at the Federal Reserve
Bank of New York.
The assets had been blocked under the 1999 Executive Order that froze all assets
associated with the Taliban regime. The Taliban, who seized control of Kabul in
1996, were not recognized as the legitimate government of Afghanistan by the United
States or the United Nations. The Secretary of State has certified that the AIA is the
recognized legitimate authority to operate the account. This follows action by the
Afghan Sanctions Committee of the United Nations Security Council, which on
January 18 th removed the Afghan Central bank from its list of sanctioned parties.
"This is how the blocking system was designed to work," said Treasury Secretary
Paul O'Neill. "The blocked assets are held until a recognized regime is in place and
the funds can be directed back to the legitimate holders. These funds will now be
available to_help stabilize the Afghan economy,_strengthen the operations of the
central bank, and shape a better future for the people of Afghanistan."

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DEPARTMENT

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_

/789

TREASURY

NEWS

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

CONTACT: BETSY HOLAHAN
202-622-2960

FOR IMMEDIATE RELEASE
January 24,2002

Statement of Treasury Under Secretary Peter R. Fisher
on Sallie Mae's Privatization Announcement
WASHINGTON, DC -- In response to the Student Loan Marketing Association's (Sallie
Mae) announcement today that it planned to accelerate its wind-down as a governmentsponsored enterprise, Treasury Under Secretary for Domestic Finance Peter R. Fisher made the
following statement:
"I am pleased that Sallie Mae has approved a wind-down plan that will result in its
complete privatization by September 30, 2006 -- two years earlier than required by Congress.
The plan is a prudent one and should provide the basis for a constructive dialogue between
Treasury and Sallie Mae over the coming four years."
Sallie Mae was created by Congress to facilitate a nationwide secondary market in
guaranteed student loans. In 1996, Congress passed the Student Loan Marketing Association
Reorganization Act (Privatization Act), which requires the full dissolution and privatization of
Sallie Mae by September 30, 2008. The Treasury Department exercises oversight responsibilities
over Sallie Mae, including monitoring its wind-down process, through Treasury's Office of
Sallie Mae Oversight.
-30-

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DEPARTMENT

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TREASURY ,~)
_

1789

TREASURY

NEW S

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

Contact: Public Affairs
(202) 622-2960

FOR IMMEDIATE RELEASE
January 24,2002

MEDIA ADVISORY:
UNITED STATES AND BAHAMAS WILL SIGN TAX INFORMATION
EXCHANGE AGREEMENT ON FRIDAY
Treasury Secretary Paul H. O'Neill will hold the United States-Bahamas tax
infonnation exchange agreement signing ceremony at 11 :00 a.m. EST on Friday, January
25, 2002 in the Treasury Department's Diplomatic Reception Room (Room 3311), 1500
Pennsylvania Avenue, NW. Treasury Secretary O'Neill and Bahamian Finance Minister
William Allen will be signing the tax infonnation exchange agreement.
The Room will be available for pre-set at 10:00 a.m.
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
infonnation: name, social security number and date of birth. This infonnation may also
be faxes to (202) 622-1999.

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DEPARTMENT

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TREASURY ~fS+'~\

\~'" ~ r::/
~~~;
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .~~1789

TREASURY

NEW S

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

FOR IMMEDIATE RELEASE
January 24,2002

CONTACT: BETSY HOLAHAN
202-622-2960

MEDIA ADVISORY:
NEW PROCEDURES FOR TREASURY'S QUARTERLY REFUNDING
ANNOUNCEMENT
The Treasury Department will announce the government's quarterly refunding needs on
Wednesday, January 30,2002. The procedure for releasing this information has been modified to
improve the timeliness and transparency of the announcement.
At 9:00 a.m. EST, the Treasury Office of Public Affairs will post the relevant documents
on the Treasury web site (www.treasury.gov) The information will be delivered to credentialed
members of the media in the Treasury Pressroom at 8:45 a.m. with lock-down embargo rules
enforced until 9:00 a.m. A member of Treasury's Office of Public Affairs will instruct media in
attendance of the embargo rules and procedures upon delivery of the documents to the Treasury
Pressroom. The traditional practice of making the quarterly refunding announcement at a news
conference has been discontinued.
The relevant documents are:
1. The Treasury Department's policy statement
2. The Treasury Borrowing Advisory Committee's (BAC) Report to the Secretary
3. Minutes of the BAC's January 29,2002 meeting
4. The Bureau of Public Debt's auction announcements covering securities to be issued
February 15,2002
Following the posting of the relevant documents on the Treasury web site, a senior Treasury
official will be available to take questions from credentialed media at 9:30 a.m. in Room 3327 at
the Treasury Department, 1500 Pennsylvania Ave., N.W., Washington, D.C. No broadcast
equipment will be permitted at the briefing.
On Tuesday, January 29,2002, the economic briefing and presentation on Treasury's
financing needs will occur as usual at 9:00 a.m. The briefing will be held in Room 3327 at the
Treasury Department.
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·U S Government Printing Ofhce t99A - 6t9-SS9

Members of the media without Treasury or White House press credentials should contact
Frances Anderson in Treasury's Office of Public Affairs at 202-622-2960 by 8:30 a.m. EST on
Tuesday, January 29,2002 with the following information: full name, media organization,
contact phone number, social security number and date of birth. This information may also be
faxed to 202-622-1999. On Wednesday, January 30,2002, media credentials must be shown to
gain entry to the briefing room.

-30-

DEPARTMENT

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NEWS

'IREASURY

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

For immediate release
January 24, 2002

Contact: Public Affairs
(202) 622-2960

STATEMENT BY SECRETARY PAUL O'NEILL ON BONUS DEPRECIATION
AMENDMENT BEFORE THE SENATE

The economic stimulus bill under consideration in the Senate includes a 30% bonus
depreciation provision which expires in one year. Senator Gordon Smith has introduced an
amendment for consideration on the Senate floor that would make the same bonus depreciation
available for 3 years. Treasury Secretary PaulO 'Neill made the following comment:

The short period of eligibility for new investment under the base proposal would result in
no stimulus to the kind of job creating major projects that are fundamental to our growing
economy. Under the base proposal, a project begun tomorrow must be completed by December
31 of this year to get any benefit. Senator Gordon Smith is right to propose an amendment
extending the 30% bonus depreciation provisions to 3 years, so that more investment takes place
and more jobs are created. Senator Smith's amendment greatly enhances the job creation that
will be generated by the bonus depreciation provisions under consideration in the Senate.
--30--

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·u.s.

Government Printing Office 1998· 619-559

DEPARTMENT

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NEWS

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

EMBARGOED UNTIL 9:00 PM EASTERN
January 24, 2002

Contact:

Rob Nichols
202-622-2910

"Thoughts on the Global Economy"
Remarks by Kenneth W. Dam
Deputy U.S. Treasury Secretary
Delivered to
The World Affairs Council of Washington, D.C.
January 24, 2002
A.

Introduction & Thanks

Argentina & Emerging Market Policies -- The Struggle for a New Paradigm
This administration came to office having advocated a new approach
to international financial crises. We sought to reduce the likelihood of crises
arising in the first place. We sought to increase investment flows from the
developed to the developing world at more affordable interest rates. And we
sought to promote a more prudent approach to the use of IMF resources. I
would like to focus my comments on this last effort.
Beginning with Mexico in the mid-90s, and especially with the Asian
financial crisis later in the 90s, the size of major IMF programs grew
enormously in a number of crisis countries. And worries arose that large
financing packages might be leading some creditors to act on the assumption
that-their investments might be protected whenever an emerging market
country got into financial trouble.
To want to change a policy is one thing, but in this instance changing
it was something else again. Three problems stood in the way. First, large
borrowers from the IMF increasingly began to fall behind in carrying
through on IMF programs. Second, the threat of contagion to other emerging
market countries had to be faced. And third, sovereign debt workouts -- the
practical alternative to the policy of extending large scale access to IMF
resources when borrowers failed to take the necessary steps to return to
payments balance -- might prove hard to achieve.
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The first step was the decision to be sure that the IMF itself was taken
seriously. The fact is that markets had increasingly begun to look through
the IMF to the U.S. Treasury as the decisive decision maker, despite the fact
that the U.S. had only one seat on the IMF Executive Board. \Ve believe that
the Fund's success is essential to stability in the international economy, and
we wanted to make sure that we did not undermine its credibility. That's
harder than it sounds when the media repeatedly seeks a U.S. view on each
new financial event and when a judicious silence is interpreted as a lack of
engagement. So although we talked at one level or another with Fund
officials nearly every day, we wanted the Fund to be outfront and successful.
We took the second step when Turkey, having received a large
augmentation of its IMF program in December 2000, faced another crisis last
Spring. The problem was that Turkey needed to take decisive action on a
number of fronts, which was politically difficult for the governing coalition.
The solution we found, jointly with the Fund and its other shareholders, was
to require Turkey to adopt a number of difficult measures, including nine
key prior actions to be precise, before the IMF would agree to a new
program, rather than, as too often in the past, merely requiring the borrower
to promise to take action in the future under the principle of conditionality.
This principle of prior action was not entirely new -- nothing is in
international affairs -- but the emphasis was new.
Argentina provided a new challenge to the emerging policy. 'We
decided, again jointly with the Fund and its other shareholders, to go the last
mile with Argentina last August. We went along with a new program, but
with the twist that some of the Fund money could be used to support a
voluntary, market-based debt operation.
But here again a ruling coalition found it difficult to take the
necessary measures and within a few months Argentina was in deep trouble.
The decision was taken within the Fund process that Argentina's economic
situation had become unsustainable. This recognition that the international
community should not entertain ever larger scale financing for a country
thatcannot resolve problems- rooted inJ.ts-policies and structures came to be
accepted by markets as well as by governments.
Still, as the President has said, "the United States is prepared to help
Argentina weather this storm. Once Argentina has committed to a sound
and sustainable economic plan, [we] will support assistance for Argentina
through international financial institutions."
The Argentine case shows that with sufficient preparation the
international community does not have to be faced with contagion whenever
a large borrower runs into trouble. Steps were taken by the Fund, through

its existing program with Brazil, to give confidence that Argentina's closest
neighbor would not fall victim to contagion. And the markets came to see
that a workout was inevitable. The result is that today there is little evidence
of contagion in the Argentine crisis, particularly not worldwide contagion.
We are thus well along the way to a new paradigm. The international
community recognizes that the Fund cannot succeed if borrowers are unable
or unwilling to take the domestic steps necessary to live within their means.
The world is thus beginning to move back toward the original concept of the
Fund as a lender to help countries withstand temporarv payments
imbalances. Contagion seems far less a necessary consequence than in the
recent past. And in the case of Turkey, while it cannot be said to have
overcome all of its economic challenges, recent economic indicators suggest
that the markets at least have regained considerable confidence and Turkey
appears to be making progress on some of the difficult measures that it
needed to implement to restore its economy to health.
Of course, the new paradigm is not yet fully in place. Until the world
economy recovers, emerging market economies face a difficult head-wind.
Fortunately, the world economy, like the US economy, appears to be doing
better than a few months ago.
And a second challenge lies in creating the structure for successful
sovereign workouts. The world has no system such as found where national
bankruptcy systems provide a stable environment for a debtor and its
creditors to negotiate free from the fear that opportunistic minority creditors
may, especially through litigation, make agreement difficult. Under our
corporate reorganization law, Chapter 11, the bargaining occurs in the
shadow of the court, thereby assuring that the interests of creditors as a
group are safeguarded and that a sensible restructuring can be arrived at.
No such international bankruptcy system exists. Anne Krueger, the
second-ranking official at the IMF, has made some tentative suggestions. The
U.S. Treasury has similarly expressed interest. Various possibilities, some
lMF-centered and others based more on contract, are under wide discussion
in and out of official circles. We believt4hat if those discussions can reach a
sensible, market-friendly conclusion, both creditors and debtors will be
better off. And another step away from the bail-out paradigm will have been
taken.
C.

Financial War on Terrorism
1.

The world economv is bottoming -- but terrorism is a "wild card. "
\Ve are now seeing many signs that the world economy is bottoming
and perhaps reviving. Here in the U.S., consumer confidence has improved.

Leading indicators are up - for the third week in a row. And, most
importantly, there are signs that the economy can sustain the high rates of
productivity growth that it achieved during the last half of the 1990s.
But, as Chairman Greenspan has observed, we saw some of these
encouraging signs in August and early September. The attacks on the \Vorld
Trade Center certainly dealt our economy a short-term blow and ended an
earlier recovery.
Terrorism remains an economic wild-card. No one can predict
whether or when another attack may take place, or how bad the next attack
might be. The recent incident of the shoe bomber demonstrates that the
threat is not yet behind us. Our job, as stewards of our citizens and our
economy, is to try to make sure that another attack does not occur or at least
does not succeed.
2.

Treasurv's role in the overall war effort.
As you know, U.S. foreign policy is coordinated by the National
Security Council. At the beginning of his Presidency, President Bush made
Treasury a full member in the NSC - on all issues, not just so-called
economic issues.
Today problems do not come labeled "security only" or "economic only."
In addition, President Bush tapped Treasury as the lead agency on the
financial front ofthe war on terrorism. We draw upon our experience in
money laundering and other financial crimes, our relations with finance
ministries around the world, and our contacts with the financial services
industry. \Ve use the expertise of financial investigators in our Treasury
bureaus, particularly the IRS and the Customs Service. We use the credit
card and identity theft expertise of the Secret Service. We rely on the Office
of Foreign Assets Control (or "0 FAC") to help unveil terrorist financing
networks and implement asset blocking orders against them.
But we can't go it alone. \Ve work closely with other agencies especially the Department of -Justice aIHl the FBI, the State Department, and
the intelligence agencies. There has been an unprecedented level of
cooperation as these agencies have worked together and mostly set aside
their historical rivalries.
In this vein, I was pleased to announce yesterday that the President
will ask Congress to increase the budget for the Financial Crimes
Enforcement Network or "'FinCEN" - one of Treasury's bureaus that
provides law enforcement agencies across government with a common
platform from which to conduct financial crimes investigations.

Importance of international cooperation.
International cooperation is crucial to winning the financial war.
After all, we can't bomb foreign bank accounts. We need the help ofthe
foreign government to freeze them.
So far, we have received much international cooperation. We froze
some $34 million of terrorist assets in the U.S. since September 11 - foreign
governments froze at least another $46 million -- $10 million of which I
announced on Tuesday. 147 countries and jurisdictions have blocking orders
in place. Luxembourg and Canada have blocked all of the names we have
blocked, and the UK has blocked all but a handful. Switzerland, the country
that used to advertise its protection of "bank secrecy," has blocked 30
terrorist-related accounts. Even the United Arab Emirates has issued
blocking orders on the assets of several terrorists on the U.S. list and
published an additional list of 30 companies with suspected terrorist links.

The UN and our able Ambassador John Negroponte have played an
important role as well. UN Resolution 1373 calls on member countries to
criminalize terrorist financing and to develop the legal infrastructure to
designate and sanction terrorists and those who support them. Believe it or
not, many countries - including Canada - did not have laws on their books
making it a crime to wittingly provide money to terrorist organizations.
Increasingly, they now do. Also, the UN has maintained and expanded a list
of designated terrorist individuals and organizations. The G-7, G-20, and the
31-member Financial Action Task Force have also made important
contributions.
We are particularly pleased with the EU's recent decision not only to
cooperate, but to playa leadership role. At the end of December, the EU
designated several terrorist entities and organizations, including some Irish
and Spanish extremist organizations that the U.S. had not previously
designated. We were pleased to follow the EU's lead and designate those
entities, too.
Needless to say, some of the international cooperation - particularly
from countries in the Gulf region - is behind the scenes. But regional
governments are quietly providing leads, taking the initiative to shut down
front charities, and cooperating with the coalition's overall investigations.
4.

New tools in the war on financing.

Also important, we have some new tools to fight on the financial front.
For example, the USA Patriot Act requires banks to know the true owner of
correspondent bank accounts and to terminate suspect correspondent

accounts. We will be extending suspicious activity reporting requirements to
brokers and security dealers. As of January 1, we have required money
service businesses - including hawalas - to register with FinCEN, report
suspicious activity, and collect and retain customer identification information
- over 8,500 have already done so. And we recently concluded agreements
with Interpol and Europol that deepen our ability to exchange information
with foreign law enforcement agencies.
D.

Other International Issues -- Creating a Clean Environment
Another important component of the financial front of the war on
terrorism is our effort to create a cleaner international financial system more
generally. We continue to support the highly-successful '"name and shame"
approach of the Financial Action Task Force. And this approach is being
extended to terrorism. Increasingly, foreign jurisdictions previously known
for their "'no questions asked" approach to financial services are finding it
worthwhile to start asking a few questions. In addition, we have concluded
landmark Tax Information Exchange Agreements based on an OECD model,
with the Cayman Islands and Antigua & Barbuda. We are about to
announce a third, major agreement. Around the world, financial centers are
cleaning up their act. This has a further, if less direct, deterrent effect on
terrorist finances.

Are We Making a Difference'? Short Answer Is Yes.
Without question, there is a lot of activity on the financial front. But
are we making a difference'? Earlier, I cited some quantitative measures of
our success -- $80 million in frozen assets; 147 countries with blocking
orders, etc. But do all of the statistics mean that we are helping to prevent
terrorist attacks? That is the ultimate question, the ultimate measure of
success. We may ultimately never know the answer - it is hard to prove a
negative, hard to measure prevention and deterrence. But, I think, the short
answer is yes.
Our intelligence channels indicate Al Qaeda was "feeling the pinch"
in Afghanistan. We believe that terrol-:ists-groups are finding it harder to
move money around the globe. Wealthy donors who are accustomed to
paying protection money are becoming more cautious about whom they
support. Shutting down the global al-Barakaat hawala was a particular blow
because Osama bin Laden and Somali extremist groups derived large sums
of money from its operations. As a result of these pressures, we have
crippled bin Laden's global reach. His loose collection of allied extremist
groups was premised on his providing them with financial means. Bin
Laden's operations must now find additional sources to support themselves.

Another place where we see some signs of success is in the special area
of Islamic charities. While they are important sources of support for
hospitals, orphanages and the like, the managers of some charities sometimes
also run a clandestine business supporting terrorist groups. Their directors
and donors are waking up and cleaning up some of the charities' operations.
And governments in which these charities are found are rethinking their
"blind eye" approach.
As I mentioned earlier, regional cooperation is picking up.
F.

Next Challenges
So the short answer is "yes, we are making a difference" but we need
to do more. Let me mention four tasks.
First, we must encourage independent identification of terrorist
groups by other countries. The EU designation at the end of December is a
step in the right direction, but we need more countries to initiate more
designations.
Second, we have to ensure that more countries issue blocking orders
for more of the entities identified, by the United States, other countries, and
the international community, as being part of terrorist financial networks.
We must also do a better job of following up with the countries to make sure
that their orders, once issued, are fully implemented and obeyed.
Third, we must do a better job of exploiting the "industrial quantity"
of documents captured in Afghanistan and increasingly elsewhere. Hard
drives and e-mailsmustbeexploitedaswell. This is a massive challenge. To
meet it, we must bring documents together from all over the world, translate
them, cross-reference them, and thereby build a complete picture. No one
document can tell us that much.
Fourth, we must redouble efforts by U.S. and allied intelligence
services against such financial intermediaries as hawalas and other informal
systems.
Some may be tempted to say that the financial war on terrorism is an
impossible task. After all, money is fungible and illegal money tends to flow
to the most hospitable country. But that the task is difficult does not mean
that it is impossible. This is an unconventional war where there are no
boundaries, where civilians are the targets, where people (or so-called
"martyrs") are the weapons, and where electronic money transfers and
messaging are the fuel and the logistics train. Identifying the flow of money
helps us find the footprint of sleeper cells, disable them, and perhaps prevent
the next attack.

Thank you.

DEPARTMENT

THE

TREASURY

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

For Immediate Release
January 25,2002

Contact: Tara Bradshaw
(202) 622-2014

TREASURY SECRETARY O'NEILL'S SIGNING CEREMONY STATEMENT
UNITED STATES AND THE BAHAMAS SIGN AGREEMENT
TO EXCHANGE TAX INFORMATION

Today Treasury Secretary Paul O'Neill signed a new agreement with the Commonwealth
of The Bahamas that will allow for exchange of information on tax matters between the United
States and The Bahamas. The agreement was signed by Treasury Secretary Paul O'Neill and
Bahamian Finance Minister William Allen.
At the signing ceremony, Treasury Secretary Paul O'Neill delivered the following remarks:
"I would like to thank you all for being here today and welcome our friends from The
Bahamas, especially Finance Minister William Allen and the other members of his delegation
who participated in the negotiation of this important agreement.
"The United States has long had a close relationship with The Bahamas, which is one of
our nearest neighbors and a recognized leader in the Caribbean. I am happy to say that our
relationship has grown significantly closer recently. In particular, I would like to extend my
sincere gratitude to The Bahamas for the extraordinary cooperation it has provided in our efforts
to disrupt the financing of terrorist organizations. After the September 11 th attacks in New York
and Washington, The Bahamas moved quickly to identify and freeze suspect accounts and has
closely cooperated with U.S. law enforcement authorities investigating the financing of terrorist
organizations.
"The tax information exchange agreement we are signing today marks another important
step forward in our relationship. By signing this agreement, The Bahamas leaves no doubt that it
should be counted among the financial centers of the world that are committed to upholding
international standards and simply will not tolerate the abuse of their financial institutions for
illicit purposes.
"I have spoken many times about our obligation to enforce our tax laws, because failing
to do so undermines the confidence of honest taxpayers in the fairness of our tax system. I have
pledged that we would do our utmost to ensure adequate enforcement of our laws, and I made a
commitment to quicken the pace for obtaining new tax information exchange agreements.
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Today's signing is a significant step forward in our continuingjoumey, and I hope that the
cooperative spirit of The Bahamas will serve as an example for other countries in the Caribbean
and around the world."
The text of the Agreement follows:

AGREEMENT BETWEEN
THE GOVERNMENT OF THE UNITED STATES OF AMERICA AND
THE GOVERNMENT OF THE COMMONWEALTH OF THE BAHAMAS
FOR THE PROVISION OF INFORMATION WITH RESPECT TO
T AXES AND FOR OTHER MATTERS

WHEREAS The Bahamas has taken significant steps in the international fight
against money laundering and other financial crimes, and the United States recognizes The
Bahamas as a cooperating country with respect to all relevant international efforts to counter
money laundering activities;
WHEREAS the United States has recognized the efforts on the part of The
Bahamas to ensure that the same financial standards apply in The Bahamas as apply in other
recognized international financial centers;
WHEREAS, the Government of The Bahamas and the Government of the United
States (the "Contracting Parties"), wish to enter into an agreement (the "Agreement") to establish
the terms and conditions governing the provision of information by the Government of The
Bahamas to the Government of the United States with respect to certain taxes; and
WHEREAS the Contracting Parties wish to enter into a form of agreement that
allows United States taxpayers to deduct expenses allocable to a convention, seminar or similar
meeting held in The Bahamas in the same manner and to the same degree that such a deduction
would be permitted if such meeting were held in the United States,
NOW, THEREFORE, the Contracting Parties agree as follows:

ARTICLE 1 - DEFINITIONS
1.

In this Agreement, unless otherwise defined:
a)
"civil matter" means an examination, investigation or proceeding relating
to United States federal tax administration and enforcement with respect to
conduct that does not constitute a criminal tax offense under the laws of the
United States;
b)

"Competent Authority" means:
(i)
in the case of the United States, the Secretary of the Treasury or his
delegate; and
(ii)
in the case of The Bahamas, the Minister of Finance or his
delegate;

c)
"criminal matter" means an examination, investigation or proceeding
concerning conduct that constitutes a criminal tax offense under the laws of the
United States;
d)
"information" means any fact or statement, in any fornl, that is foreseeably
relevant or material to United States federal tax administration and enforcement,
including, but not limited to,
(i)
(ii)

testimony of an individual, and
documents or records;

"pending matter" means an examination, investigation or proceeding
e)
under the federal tax laws of the United States that is pending at the time the
request under Article 2 is made, and
(i)
in the case of a criminal matter, relates to a taxable period
commencing on or after January 1, 2004; or
(ii)
in the case of a civil matter, relates to a taxable period
commencing on or after January 1,2006;
f)
"person" includes an individual and a partnership, corporation, trust,
estate, association or other legal entity;
g)

"privileged communication" means a communication that
(i)
is a confidential communication, whether oral or written, passing
between(a)
a counsel and attorney in his or her professional capacity
and another counsel and attorney in such capacity; or
(b)
a counsel and attorney in his or her professional capacity
and his or her client, whether made directly or indirectly through
an agent of either;
(ii)
is communicated or given to a counsel and attorney by, or by a
representative of, a client of his or hers in connection with the giving by
the counsel and attorney of legal advice to the client;
(iii)
is made or brought into existence for the purpose of obtaining or
giving legal advice or assistance;-ttncl
(iv)
is not made or brought into existence for the purpose of
committing or furthering the commission of some illegal or wrongful act.

"resident" means:
(i)
a citizen of the United States or any person, other than a company,
resident in the United States for the purpose of United States tax; but in
the case of a pminership, estate or trust, only to the extent that the income
derived by such partnership, estate or trust is subject to United States tax
as the income of a resident, either in its hands or in the hands of its
pminers or beneficiaries; and:

(ii)
a company created under the laws of the United States, any state or
the District of Columbia.
i)

"tax" means all federal taxes in the United States;

j)
for purposes of determining the geographical area within which
jurisdiction to compel production of information may be exercised,
(i)
"United States" means the United States of America, including
Puerto Rico, the Virgin Islands, Guam and any other United States
possession or territory;
(ii)
"The Bahamas" means The Commonwealth of The Bahamas.

ARTICLE 2 - PROVISION OF INFORMATION WITH RESPECT TO
'UNITED STATES TAXES
1.
The Competent Authority of the United States shall only make a request for
information pursuant to this Article when the Competent Authority of the United States is unable
to obtain the requested information by other means, having made all reasonable efforts to do so.

2.
Upon receipt of a request made in conformity with the provisions of this Article,
the Competent Authority of The Bahamas shall, subject to the provisions of paragraph 7 of this
Article, make all reasonable efforts to provide to the Competent Authority ofthe United States
information with respect to United States federal taxes.
3.
Any request for information made by the Competent Authority of the United
States pursuant to this Article shall be made in connection with a pending matter of a United
States taxpayer and shall be framed with the greatest degree of specificity possible. In all cases,
such request shall specify in writing the following:
a) the legal name of the person about whom the request is made;
b) the type of information requested;
c) the period of time with respect to which the information is requested;
d) the likely location of the information:
e) the matter under United States federal tax law with respect to which the
information is sought and whether that matter is criminal or civil in nature;
and
f)

the reasons for believing that the information requested is foreseeably relevant
or material to United States federal tax administration and enforcement with
respect to the person identified in subparagraph a) ofthis paragraph.

This Article shall not apply to the extent that the requested information:

a) relates to a matter under United States federal tax law that is barred by the
applicable statute of limitations; or
b) constitutes or would reveal a privileged communication.
5.
Where the Competent Authority ofthe United States requests information with
respect to a matter which (i) relates to a person not resident in the United States or (ii) does not
constitute a criminal matter, a senior official designated by the Secretary of the Treasury of the
United States shall certify that such request is foreseeably relevant or material to the
determination of the federal tax liability of a taxpayer of the United States or the criminal
liability of a person under the federal tax laws of the United States. If information is requested
relating to persons not resident in the United States, it shall also be established to the satisfaction
of the Competent Authority of The Bahamas that such information is foreseeably relevant or
material to the administration and enforcement of the federal tax laws of the United States.
6.
If specifically requested by the Competent Authority of the United States, the
Competent Authority of The Bahamas shall provide information pursuant to this Article in
specified forms to be admissible in judicial or administrative proceedings in the United States to
the same extent that such specified forms can be obtained under the laws and administrative
practices of The Bahamas. The specified forms shall include depositions of witnesses and
authenticated copies of original documents, including books, papers, statements, records,
accounts, and writings.
7.
Nothing in this Agreement shall be construed so as to impose on the Government
of The Bahamas the obligation to:
a) carry out administrative measures at variance with the laws and administrative
practices of The Bahamas;
b) supply particular items of information which are not obtainable under the laws
or in the normal course ofthe administration of The Bahamas;
c) supply information which would disclose any trade, business, industrial,
commercial or professional secret or trade process; or
d) supply information the disclosure of which would, in the judgment of the
Government of The Bahamas, be con1l:ary to national security or public policy
in The Bahamas.
8.
Notwithstanding paragraph 7, the Competent Authority of The Bahamas shall
have the authority to obtain and provide information held by financial institutions, nominees or
persons acting in an agency or a fiduciary capacity or information respecting ownership interests
III a person.
9.

In connection with a request for information under this Article:
a) a claim of privilege under the laws of the United States shall be determined
exclusively by the courts of the United States; and

b) a claim of privilege under the laws of The Bahamas shall be determined
exclusively by the courts of The Bahamas.
ARTICLE 3 - PROTECTION OF INFORMATION WITH RESPECT TO UNITED
STATES FEDERAL TAXES
1.
Information provided to the Competent Authority of the United States pursuant to
this Agreement shall be disclosed only to departments, agencies and judicial and administrative
bodies of the Government of the United States, and to employees and agents thereof, involved in
the
a) determination, assessment, and collection of; and
b) administration of, the recovery and collection of claims derived from, the
enforcement or prosecution in respect of, or the determination of appeals in
respect of;
those United States federal taxes with respect to which the relevant request was made pursuant to
this Agreement, or the oversight of the above. Such departments, agencies and judicial and
administrative bodies, and the employees and agents thereof, shall use such information only for
the purposes listed in this paragraph. Such departments, agencies and judicial and administrative
bodies, and the employees and agents thereof, may disclose such information in connection with
court proceedings related to those federal taxes with respect to which the relevant request was
made pursuant to this Agreement.
2.
The Competent Authority of The Bahamas shall treat any request for information
received from the United States pursuant to this Agreement as confidential and shall only
disclose such information as necessary to carry out its obligations under this Agreement. Such
requests may be disclosed in connection with court proceedings related to the performance of the
obligations of The Bahamas under this Agreement.
3.
Nothing in this Agreement shall be construed to permit the Government ofthe
United States to share information received pursuant to this Agreement with an agency or
employee of any other government.
4.
Information that is provided to the Government of the United States pursuant to
this Agreement befGre January 1, 2006 concerning a Grim-inal matter shall notQe used in
connection with any other matter without prior written consent of the Competent Authority of
The Bahamas. With respect to information that is provided to the Government of the United
States pursuant to this Agreement on or after January 1, 2006, the Competent Authority of the
United States shall provide prior written notice to the Competent Authority of The Bahamas
before using such information for a type of United States federal tax matter other than the one for
which it was requested.
ARTICLE 4 - QUALIFIED INTERMEDIARIES
For the purposes of considering an application by a person in The Bahamas to enter into a
Qualified Intermediary Withholding Agreement (within the meaning of Revenue Procedure

2000-12) with the Internal Revenue Service of the United States, The Government ofthe United
States shall certify that The Commonwealth of The Bahamas has taken significant steps towards
achieving effective rules and/or procedures for providing tax information to the United States of
America for both civil tax administration and criminal tax enforcement purposes, and the Internal
Revenue Service of the United States of America has determined The Bahamas' "know your
customer" rules to be acceptable within the meaning of Section 3 of Revenue Procedure 200012.
ARTICLE 5 - CONVENTION TAX TREATMENT
A United States taxpayer may deduct from income costs incurred with respect to
attendance at a conference or convention held in The Bahamas in the same manner and to the
same extent that such taxpayer is permitted to deduct such costs with respect to attendance at a
conference or convention held in the United States.
ARTICLE 6 - ADMINISTRATIVE PROVISIONS
1.
The Competent Authorities of the Contracting Parties shall enter into an
agreement (the "Competent Authority Agreement") regarding implementation of this Agreement.
2.
The Competent Authorities ofthe Contracting Parties shall endeavor to resolve by
mutual agreement any disputes arising as to the interpretation or application of this Agreement.
3.
The Competent Authorities ofthe Contracting Parties may communicate directly
for the purposes of reaching an agreement under this Article.
4.
The Government of the United States shall reimburse the Government of The
Bahamas for all direct costs incurred in providing information pursuant to this Agreement as
provided in the Competent Authority Agreement. The Competent Authorities of the Contracting
Parties shall consult from time to time with a view to minimizing such costs.
ARTICLE 7 - ENTRY INTO FORCE, EFFECTIVE DATE, MODIFICATION AND
TERMINATION
1.
This Agreement shall enter into force upon an exchange of notes by the duly
authorized representatives of the Contracting Parties, confirming their agreement that both sides
have met the constitutional and statutory requirements necessary to effectuate this Agreement.
2.

The provisions of Articles 2 and 3 shall take effect
a) on January 1, 2004 with respect to requests for information made in
connection with a criminal matter; and
b) on January 1,2006 with respect to requests for information made in
connection with a civil matter.

The provisions of Article 5 shall take effect on January 1,2006.

4.
The provisions of this Agreement, with the exception of those identified in
paragraphs 2 and 3 of this Article, shall take effect upon the entry into force of this Agreement.
5.
The effective date provisions set forth in paragraph 2 of this Article are
established in the expectation that the United States will enter into arrangements with certain
other off-shore financial centers for the provision of infornlation with respect to taxes. If the
United States has not entered into such arrangements by January 1,2004, or if the United States,
at any time, enters into such arrangements that differ in material respect from the provisions of
this Agreement, the Government of The Bahamas and the Government of the United States shall
hold consultations concerning appropriate modifications to this Agreement.
6.
If, at any time after the entry into force of this Agreement, the Organization for
Economic Cooperation and Development or other international organization develops a model
agreement on tax infonnation exchange, a Contracting Party may propose modifications to this
Agreement for the purpose of bringing this Agreement into confonnity with the model
agreement. Upon receipt of such a proposal, the other Contracting Party shall enter into good
faith negotiations concerning the proposal.
7.
This Agreement shall remain in force until tenninated by one of the Contracting
Parties. Either Contracting Paliy may tenninate this Agreement at any time upon three months
prior written notice transmitted through diplomatic channels.

IN WITNESS WHEREOF, the undersigned, being duly authorized by their respective
governments, have signed this Agreement.

DONE at Washington, in duplicate, this twenty-fifth day of January, 2002.

FOR THE GOVERNMENT
OF THE UNITED STATES
OF AMERICA:

FOR THE GOVERNMENT
OF THE COMMONWEALTH
OF THE BAHAMAS:

DEPARTMENT

THE

TREASURY

NEWS
OFFICE 01' PUBLIC AFFAIRS -1500 PENNSYLVANIA AVENUE, N.W. - WASHINGTON, D.C.- 20220 - (202) 622-2960

EMBARGOED UNTIL 2:30 P.M.
January 24, 2002

CONTACT:

Office of Financing
202/691-3550

TREASURY OFFERS 13-WEEK AND 26-WEEK BILLS
The Treasury will auction 13-week and 26-week Treasury bills totaling $29,000
million to refund an estimated $28,846 million of publicly held 13-week and 26-week
Treasury bills maturing January 31, 2002, and to raise new cash of approximately $154
million. Also maturing is an estimated $7,000 million of publicly held 4-week
Treasury bills, the disposition of which will be announced January 28, 2002.
The Federal Reserve System holds $11,809 million of the Treasury bills maturing
on January 31, 2002, in the System Open Market Account (SOMA).
This amount may be
refunded at the highest discount rate of accepted competitive tenders either in these
auctions or the 4-week Treasury bill auction to be held January 29, 2002.
Amounts
awarded to SOMA will be in addition to the offering amount.
Up to $1,000 million in noncompetitive bids from Foreign and International
Monetary Authority (FIMA) accounts bidding through the Federal Reserve Bank of New
York will be included within the offering amount of each auction. These
noncompetitive bids will have a limit of $100 million per account and will be accepted
in the order of smallest to largest, up to the aggregate award limit of $1,000
million.

TreasuryDirect customers have requested that we reinvest their maturing holdings
of approximately $1,211 million into the 13-week bill and $1,044 million into the 26week bill.
The allocation percentage applied to bids awarded at the highest discount rate
will be rounded up to the next hundredth of a whole percentage point, e.g., 17.13%.
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
highlights.

ar~_given

in the attached offering

000

Attachment

'0-950

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

HIGHLIGHTS OF TREASURY OFFERINGS OF BILLS
TO BE ISSUED JANUARY 31, 2002
January 24, 2002
Offering Amount . . . . . . . . . . . . . . . . . . . . . . . . . . . . $15,000 million
Public Offering . . . . . . . . . . . . . . . . . . . . . . . . . . . . $15,000 million
NLP Exclusion Amount . . . . . . . . . . . . . . . . . . . . . . . $ 4,700 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 JS 1
January 28, 2002
January 31, 2002
May 2, 2002
November I, 2001
$18,897 million
$1,000

$14,000 million
$14,000 million
None

182-day bill
912795 KU 4
January 28, 2002
January 31, 2002
August I, 2002
January 31, 2002
$1,000

The following rules apply to all securities mentioned above:
Submission of Bids:
Noncompetitive bids: Accepted in full up to $1 million at the highest discount rate of accepted competitive bids.
Foreign and International Monetary Authority (FIMA) bids: Noncompetitive bids submitted through the Federal Reserve
Banks as agents for FIMA accounts.
Accepted in order of size from smallest to largest with no more than $100
million awarded per account.
The total noncompetitive amount awarded to Federal Reserve Banks as agents for FIMA
accounts will not exceed $1,000 million.
A single bid that would cause the limit to be exceeded will
be partially accepted in the amount that brings the aggregate award total to the $1,000 million limit. However,
if there are two or more bids of equal amounts that would cause the limit to be exceeded, each will be prorated
to avoid exceeding the limit.
Competitive bids:
(1) Must be expressed asl a discount rate with three decimals in increments of .005%, e.g., 7.100%, 7.105%.
(2) Net long position (NLP) 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
~aximum Award . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35% of public offering
Receipt of Tenders:
Noncompetitive tenders ..... Prior to 12:00 noon eastern standard time on auction day
Competitive tenders . . . . . . . . Prior to 1:00 p.m. eastern standard 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.

federal financing
WASHINGTON, D.C. 20220

bankNEWS

FEDERAL FINANCING BANK December 31, 2001
Kerry Lanham, Secretary, Federal Financing Bank (FFB) ,
announced the following activity for the month of November 2001.
FFB holdings of obligations issued, sold or guaranteed by
other Federal agencies totaled $40.5 billion on November 30,
2001, posting a decrease of $89.3 million from the level on
October 31, 2001. This net change was the result of decreases in
holdings of agency debt of $60.1 million and in holdings of
agency assets of $75.0 million, and an increase in holdings of
government-guaranteed loans of $45.8 million. The FFB made 92
disbursements, received 7 prepayments, and processed 5
refinancings during the month of November.
Attached to this release are tables presenting FFB November
loan activity and FFB holdings as of November 30, 2001.

PO-951

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Page 2
FEDERAL FINANCING BANK
NOVEMBER 2001 ACTIVITY
Borrower

Date

Amount
of Advance

Final
Maturity

Interest
Rate

3ENCY 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.

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

11/01
11/01
11/02
11/02
11/05
11/05
11/06
11/06
11/07
11/08
11/09
11/09
11/13
11/13
11/14
11/14
11/15
11/15
11/16
11/16
11/19
11/19
11/20
11/21
11/23
11/23
11/26
11/26
11/27
11/27
11/28
11/28
11/29
11/29
11/30
11/30

$850,000,000.00
$331,100,000.00
$1,375,000,000.00
$441,200,000.00
$550,000,000.00
$283,500,000.00
$250,000,000.00
$183,000,000.00
$210,000,000.00
$39,200,000.00
$800,000,000.00
$245,700,000.00
$1,050,000,000.00
$293,000,000.00
$700,000,000.00
$342,800,000.00
$435,000,000.00
$518,900,000.00
$460,000,000.00
$306,900,000.00
$325,000,000.00
$233,400,000.00
$238,900,000.00
$126,000,000.00
$675,000,000.00
$389,600,000.00
$1,125,000,000.00
$275,900,000.00
$980,000,000.00
$95,000,000.00
$800,000,000.00
$123,800,000.00
$500,000,000.00
$220,900,000.00
$1,140,000,000.00
$271,400,000.00

11/02/01
11/02/01
11/05/01
11/05/01
11/06/01
11/06/01
11/07/01
11/07/01
11/08/01
11/09/01
11/13/01
11/13/01
11/14/01
11/14/01
11/15/01
11/15/01
11/16/01
11/16/01
11/19/01
11/19/01
11/20/01
11/20/01
11/21/01
11/23/01
11/26/01
11/26/01
11/27/01
11/27/01
11/28/01
11/28/01
11/29/01
11/29/01
11/30/01
11/30/01
12/03/01
12/03/01

2.173%
2.183%
2.173%
2.132%
2.183%
2.132%
2.132%
1.979%
1.928%
1.968%
1.928%
1.958%
1.968%
1.969%
1.958%
1.999%
1.969%
2.040%
1.999%
2.071%
2.040%
2.061%
2.071%
2.081%
2.071%
2.071%
2.081%
2.102%
2.071%
2.040%
2.102%
1.999%
2.040%
1.928%
1.999%
1.907%

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
S/A
S/A
S/A
S/A
S/A
S/A
S/A
S/A
S/A
S/A

$27,528.94
$56,866.64
$379,615.30
$14,671.04

1/30/02
8/01/05
8/01/05
1/30/02

2.173%
3.434%
3.434%
1.979%

S/A
S/A
S/A
S/A

GOVERNMENT-GUARANTEED LOANS
GENERAL SERVICES ADMINISTRATION
Atlanta CDC Lab
san Francisco OB
san Francisco OB
Atlanta CDC Lab

11/01
11/05
11/05
11/07

Page 2
FEDERAL FINANCING BANK
NOVEMBER 2001 ACTIVITY
Borrower

Date

Amount
of Advance

Final
Maturity

Interest
Rate

3ENCY 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.

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
S/A
S/A
S/A
S/A
S/A
S/A
S/A
S/A
S/A
S/A

$27,528.94
$56,866.64
$379,615.30
$14,671.04

1/30/02
8/01/05
8/01/05
1/30/02

2.173%
3.434%
3.434%
1.979%

S/A
S/A
S/A
S/A

GOVERNMENT-GUARANTEED LOANS
GENERAL SERVICES ADMINISTRATION
Atlanta CDC Lab
san Francisco OB
san Francisco OB
Atlanta CDC Lab

11/01
11/05
11/05
11/07

Page 4
FEDERAL FINANCING BANK
NOVEMBER 2001 ACTIVITY
Borrower
3rady Electric #746
~am Wal Elec. #514
~ogan County Coop. #749
3rayson Rural Elec. #619
~orain-Medina Electric #760
)glethorpe Power #445
)glethorpe Power #445
)glethorpe Power #445
)ineland Telephone #403
)ineland Telephone #747
~ural Elec. Conven. #613
;outheastern Indiana #496
~raverse Electric #768
S/A is a Semiannual rate.
Qtr. is a Quarterly rate.
306C refinancing

Date

Amount
of Advance

Final
Maturity

Interest
Rate

11/27
11/29
11/29
11/30
11/30
11/30
11/30
11/30
11/30
11/30
11/30
11/30
11/30

$3,250,000.00
$411,000.00
$275,000.00
$1,300,000.00
$900,000.00
$21,902,169.41
$6,224,046.58
$27,197,208.87
$899,000.00
$213,000.00
$200,000.00
$3,500,000.00
$401,000.00

12/31/02
1/02/29
12/31/35
4/01/02
12/31/35
12/31/20
12/31/20
12/31/20
1/02/24
12/31/19
1/03/34
1/03/33
12/31/35

2.507%
5.352%
5.346%
1.798%
5.204%
5.166%
5.166%
5.166%
5.232%
4.903%
5.200%
5.230%
5.204%

Qtr.
Qtr.
Qtr.
Qtr.
Qtr.
Qtr.
Qtr.
Qtr.
Qtr.
Qtr.
Qtr.
Qtr.
Qtr.

Page 5
FEDERAL FINANCING BANK HOLDINGS
(in millions of dollars)

Program

November 30, 2001

Agency Debt:
U.S. Postal Service

October 31, 2001

Monthly
Net Change
11/1/01-11/30/01

Fiscal Year
Net Change
10/1/01-11/30/01

Subtotal*

$8 , 961. 4
$8,961.4

$9,021.5
$9,021.5

-$60.1
-$60.1

-$2,351.6
-$2,351.6

Agency Assets:
FmHA-RDIF
FmHA-RHIF
Rural Utilities Service-CBO
Subtotal *

$2,310.0
$4,375.0
$4,270.2
$10,955.2

$2,385.0
$4,375.0
$4,270.2
$11,030.2

-$75.0
$0.0
$0.0
-$75.0

-$125.0
$0.0
$0.0
-$125.0

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 -Sect ion 511
Subtotal*

$2,141.0
$41. 9
$7.1
$1,207.3
$2,264.6
$13 .1
$941.1
$13,822.2
$126.3
$3.4
$20,568.2

$2,154.0
$31. 9
$7.1
$1,278.7
$2,266.3
$13.1
$941.1
$13,698.2
$128.6
$3.4
$20,522.4

-$12.9
$10.0
$0.0
-$71. 4
-$1. 7
$0.0
$0.0
$124.1
-$2.3
$0.0
$45.8

-$15.6
$10.5
-$0.7
-$71. 4
-$3.4
$0.0
$0.0
$223.0
-$5.7
$0.0
$136.8

==========

-------------------

=======--=

==========

$40,484.8

$40,574.1

-$89.3

-$2,339.8

Grand total*
* figures may not total due to rounding
+ does not include capitalized interest

federal financing
WASHINGTON. D.C. 20220

bonkNEWS

FEDERAL FINANCING BANK

November 30, 2001

Kerry Lanham, Secretary, Federal Financing Bank (FFB) ,
announced the following activity for the month of October 2001.
FFB holdings of obligations issued, sold or guaranteed by
other Federal agencies totaled $40.6 billion on Octo.ber 3.1, 2001,
posting a decrease of $2,250.5 million from the level on
September 30, 2001. This net change was the result of decreases
in holdings of agency debt of $2,291.5 million and in holdings of
agency assets of $50.0 million, and an increase in holdings of
government-guaranteed loans of $91.0 million. The FFB made 98
disbursements and received 21 prepayments during the month of
October. In addition, the FFB extended the maturities of 107
loans guaranteed by the Rural Utilities Service.
Attached to this release are tables presenting FFB October
loan activity and FFB holdings as of October 31, 2001.

PO-952

Page 2
FEDERAL FINANCING BANK
OCTOBER 2001 ACTIVITY
Date

Borrower
~GENCY

Amount
of Advance

Final
Maturity

Interest
Rate

10/02/01
10/02/01
10/03/01
10/03/01
10/04/01
10/04/01
10/05/01
10/0S/01
10/09/01
10/09/01
10/10/01
10/10/01
10/11/01
10/11/01
10/12/01
10/12/01
10/15/01
10/15/01
10/16/01
10/16/01
10/17/01
10/17/01
10/18/01
10/18/01
10/19/01
10/19/01
10/22/01
10/22/01

3.629%
2.491%
2.521%
2.389%
2.491%
2.358%
2.389%
2.337%
2.358%
2.316%
2.337%
2.348%
2.316%
2.348%
2.348%
2.399%
2.348%
2.378%
2.399%
2.378%
2.378%
2.348%
2.378%
2.348%
2.348%
2.317%
2.348%
2.316%
2.317%
2.348%
2.316%
2.327%
2.348%
2.296%
2.327%
2.265%
2.296%
2.265%
2.265%
2.214%
2.265%
2.173%
2.214%
2.173%

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.
J.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
Postal

10/01
10/01
10/02
10/02
10/03
10/03
10/04
10/04
10/05
10/05
10/09
10/09
10/10
10/10
10/11
10/11
10/12
10/12
10/15
10/15
10/16
10/16
10/17
10/17
10/18
10/18
10/19
10/19
10/22
10/22
10/23
10/23
10/24
10/24
10/25
10/25
10/26
10/26
10/29
10/29
10/30
10/30
10/31
10/31

$2,300,000,000.00
$225,400,000.00
$2,200,000,000.00
$98,100,000.00
$1~975,000,000.00

$26,400,000.00
$1,530,000,000.00
$213,000,000.00
$2,000,000,000.00
$381,900,000.00
$1,040,000,000.00
$348,400,000.00
$885,000,000.00
$181,300,000.00
$650,000,000.00
$272,500,000.00
$1,525,000,000.00
$327,400,000.00
$1,925,000,000.00
$282,800,000.00
$1,665,000,000.00
$299,200,000.00
$1,500,000,000.00
$325,200,000.00
$1,350,000,000.00
$285,100,000.00
$1,200,000,000.00
$282,600,000.00
$1,000,000,000.00
$308,800,000.00
$700,000,000.00
$361,700,000.00
$570,000,000.00
$286,400,000.00
$500,000,000.00
$158,300,000.00
$1,400,000,000.00
$184,700,000.00
$1,650,000,000.00
$229,200,000.00
$1,500,000,000.00
$145,000,000.00
$1,200,000,000.00
$271,500,000.00

10/2~/01

10/23/01
10/24/01
10/24/01
10/25/01
10/25/01
10/26/01
10/26/01
10/29/01
10/29/01
10/30/01
10/30/01
10/31/01
10/31/01
11/01/01
11/01/01

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
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

Page 3
FEDERAL FINANCING BANK
OCTOBER 2001 ACTIVITY
Borrower

Date

Amount
of Advance

Final
Maturity

Interest
Rate

VERNMENT-GUARANTEED LOANS
ENERAL SERVICES ADMINISTRATION
an Francisco OB
tlanta CDC Lab
an Francisco OB

10/05
10/16
10/16

$311,566.62
$88,226.96
$575,429.64

8/01/05
1/30/02
8/01/05

3.606% S/A
2.370% S/A
3.662% S/A

10/09
10/12
10/12
10/25
10/25
10/30
10/30

$992,280.24
$116,083.08
$84,415.20
$175,925.25
$370,154.49
$69,480.70
$84,447.38

7/01/31
3/01/30
3/01/30
9/04/29
9/04/29
3/01/30
3/01/30

5.151%
5.274%
5.274%
5.134%
5.134%
5.091%
5.091%

10/01
10/01
10/01
10/01
10/01
10/01
10/01
10/01
10/01
10/01
10/01
10/01
10/01
10/01
10/01
10/01
10/01
10/01
10/01
10/01
10/01
10/01
10/01
10/01
10/01
10/01
10/01
10/01
10/01

$1,000,000.00
$4,000,000.00
$2,000,000.00
$3,169,545.41
$1,407,778.38
$351,208.98
$810,084.91
$1,057,719.89
$704,374.90
$404,977.69
$757,138.66
$914,322.63
$294,840.53
$213,983.65
$367,402.91
$215,328.94
$154,277.17
$134,405.97
$73,637.32
$111,272.80
$35,814.28
$1,184,496.27
$236,515.07
$894,105.60
$2,678,214.20
$1,603,909.88
$961,222.59
$580,362.81
$901,201.80

2.395%
2.395%
2.395%
2.395%
2.395%
2.395%
2.395%
2.395%
2.395%
2.395%
2.395%
2.395%
2.395%
2.395%
2.395%
2.395%
2.395%
2.395%
2.395%
2.395%
2.395%
2.395%
2.395%
2.395%
2.395%
2.395%
2.395%
2.395%
2.395%

EPARTMENT OF EDUCATION
ennett College
arber-Scotia College
arber-Scotia College
ougaloo College
ougaloo College
arber-Scotia College
arber-Scotia College

S/A
S/A
S/A
S/A
S/A

S/A
S/A

URAL UTILITIES SERVICE
ig Sand Elec. #540
lue Grass Energy #674
lue Grass Energy #674
razos Electric #917
razos Electric #917
razos Electric #917
razos Electric #917
razos Electric #917
razos Electric #917
razos Electric #917
razos Electric #917
razos Electric #917
razos Electric #917
razos Electric #917
razos Electric #917
razos Electric #917
razos Electric #917
razos Electric #917
razos Electric #917
razos Electric #917
razos Electric #917
:azos Electric #917
~azos Electric #917
::-azos Electric #917
~azos Electric #917
::-azos Electric #917
::-azos Electric #917
::-azos Electric #917
:-azos Electric #917

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Page 4
FEDERAL FINANCING BANK
OC'1'OBER 2001 ACTIVITY
Borrower
~razos Electric #917
3razos Electric #917
3razos Electric #917
~razos Electric #917
3razos Electric #917
3razos Electric #917
~razos Electric #917
lrazos Electric #917
~razos Electric #917
~razos Electric #917
~razos Electric #917
~razos Electric #917
~razos Electric #917
~razos Electric #917
~razos Electric #917
Irazos Electric #917
Irazos Electric #437
Irazos Electric #437
Irazos Electric #437
Irazos Electric #437
Irazos Electric #437
trazos Electric #437
Irazos Electric #561
Irazos Electric #561
irazos Electric #561
;razos Electric #561
,rown County Elec. #687
'lark Energy Coop. #611
'umberland Valley #668
oop. Power Assoc. #130
oop. Power Assoc. #130
oop. Power Assoc. #240
arien Telephone Co. #719
ouglas Electric #725
ouglas Electric #725
leming-Mason Energy #644
leming-Mason Energy #644
leming-Mason Energy #644
leming-Mason Energy #644
leming-Mason Energy #644
armers Telephone #399
rays on Rural Elec. #619
rays on Rural Elec. #619
rays on Rural Elec. #619
~rrison County #532
~rrison County #532
lter-County Energy #592
lter-County Energy #592
1ter-County Energy #592
1ter-County Energy #592

Date

Amount'
of Advance

Final
Maturity

Interest
Rate

10/01
10/01
10/01
10/01
10/01
10/01
10/01
10/01
10/01
10/01
10/01
10/01
10/01
10/01
10/01
10/01
10/01
10/01
10/01
10/01
10/01
10/01
10/01
10/01
10/01
10/01
10/01
10/01
10/01
10/01
10/01
10/01
10/01
10/01
10/01
10/01
10/01
10/01
10/01
10/01
10/01
10/01
10/01
10/01
10/01
10/01
10/01
10/01
10/01
10/01

$489,606.03
$1,412,724.44
$1,702,152.10
$1,997,680.78
$817,259.23
$625,234.69
$411,761.59
$1,104,760.99
$1,435,446.90
$2,359,947.46
$2,526,065.03
$495,310.82
$16,026.70
$845,014.55
$2,768,383.44
$2,170,144.69
$4,080,348.61
$1,378,886.84
$312,770.41
$2,996,027.77
$1,157,054.49
$486,009.52
$10,887,599.61
$5,479,980.99
$10,692,952.64
$8,414,474.21
$250,000.00
$3,000,000.00
$4,200,000.00
$7,847,627.68
$2,468,583.84
$4,512,336.23
$1,927,403.00
$175,000.00
$150,000.00
$2,600,000.00
$1,400,000.00
$1,500,000.00
$2,200,000.00
$1,400,000.00
$2,301,162.00
$1,200,000.00
$600,000.00
$1,000,000.00
$995,933.31
$896,339.98.
$1,493,899.96
$1,991,866.62
$2,596,398.13
$221,000.00

12/31/01
12/31/01
12/31/01
12/31/01
12/31/01
12/31/01
12/31/01
12/31/01
12/31/01
12/31/01
12/31/01
12/31/01
12/31/01
12/31/01
12/31/01
12/31/01
12/31/01
12/31/01
12/31/01
12/31/01
12/31/01
12/31/01
12/31/01
12/31/01
12/31/01
12/31/01
12/31/01
12/31/01
12/31/01
9/30/11
9/3.0/11
9/30/11
12/31/01
12/31/35
12/31/35
12/31/01
12/31/01
12/31/01
12/31/01
12/31/01
9/30/05
12/31/01
12/31/01
12/31/01
12/31/01
12/31/01
12/31/01
12/31/01
12/31/01
12/31/01

2.395%
2.395%
2.395%
2.395%
2.395%
2.395%
2.395%
2.395%
2.395%
2.395%
2.395%
2.395%
2.395%
2.395%
2.395%
2.520%
2.520%
2.520%
2.520%
2.520%
2.520%
2.520%
2.395%
2.395%
2.395%
2.395%
2.395%
2 ;395%
2.395%
4.274%
4.274%
4.274%
2.395%
5.268%
5.268%
2.395%
2.395%
2.395%
2.395%
2.395%
3.659%
2.395%
2.395%
2.395%
2.395%
2.395%
2.395%
2.395%
2.395%
2.395%

Otr.
Qtr.
Qtr.
Qtr.
Otr.
Otr.
Qtr.
Otr.
Qtr.
Otr.
Otr.
Qtr.
Otr.
Otr.
Otr.
Otr.
Qtr.
Otr.
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Qtr.
Qtr.
Qtr.
Otr.
Qtr.
Otr.
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Qtr.
Qtr.
Qtr.
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Qtr.
Qtr.
Otr.
Qtr.
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Qtr.
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Otr.
Qtr.
Otr.
Qtr.
Qtr.
Qtr.
Qtr.
Qtr.
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Page 5
FEDBRAL FINANCING BANK
OCTOBER 2001 ACTIVITY
Borrower
Jicking Valley Elec. #522
~gnolia Electric #560
leade County Elec. #662
leade County Elec. #662
Jorthern Neck Blec. #556
lewberry Electric #704
lolin Rural Elec. #528
lolin Rural Elec. #577
rolin Rural Elec. #577
rorthwest Iowa Power #907
I & A Electric Coop. #379
glethorpe Power #445
glethorpe Power #445
glethorpe Power #445
wen Blectric #525
'anhandle Tele. #400
emiscot-Dunklin Elec. #727
an Miguel Electric #919
an Miguel Electric #919
urry-Yadkin Elec. #534
urry-Yadkin Elec. #534
urry-Yadkin Elec. #534
urry-Yadkin Elec. #534
urry-Yadkin ~lec. #534
nited Power Assoc. #432
nited Power Assoc. #432
nited Power Assoc. #433
nited Power Assoc. #433
psala Coop. Tele. #429
9sala Coop. Tele. #429
~n Horne Coop. Tele. #409
~n Horne Coop. Tele. #409
!taula Electric #585
!st Kentucky Power #491
reat" River Energy #738
~eat River Energy #738
~eat River Energy #738
~eat River Energy #738
~eat River Energy #738
~eat River Energy #738
:-eat River Energy #738
!fferson Energy #692
)lk County #637
!eker Cooperative #699
Ltional Power #788
ltional Power #788
.tional Power #789
.tional Power #789
K.M. Electric #770
.rry-Yadkin Elec. #534

Date

Amount
of Advance

Final
Maturity

Interest
Rate

10/01
10/01
10/01
10/01
10/01
10/01
10/01
10/01
10/01
10/01
10/01
10/01
10/01
10/01
10/01
10/01
10101
10/01
10/01
10101
10101
10/01
10/01
10/01
10/01
10/01
10/01
10/01
10/01
10/01
10/01
10/01
10/02
10/03
10/03
10/03
10/03
10/03
10/03
10/03
10/03
10/04
10/05
10/09
10/09
10/09
10/09
10/09
10/09
10/09

$2,737,820.66
$4,981,675.83
$1,300,000.00
$2,000,000.00
$748,102.95
$4,164,000.00
$1,885,301.75
$2,572,495.73
$2,572,495.73
$5,783,750.74
$842,670.44
$14,833,506.52
$15,346,013.31
$14,563,767.21
$1,990,178.44
$961,536.20
$2,061,000.00
$8,280,550.23
$8,694,674.64
$990,497.38
$990,497.38
$495,248.68
$990,497.38
$990,497.38
$1,925,950.60
$8,416,765.44
$1,131,234.56
$385,950.60
$12,158.67
$320,331.96
$394,285.71
$162,916.66
$400,000.00
$11,000,000.00
$4,644,000.00
$4,652,000.00
$4,652,000.00
$4,652,000.00
$4,652,000.00
$4,652,000.00
$319,000.00
$3,547,000.00
$244,000.00
$990,000.00
$1,509,000.00
$48,187,000.00
$19,800,000.00
$36,700,000.00
$500,000.00
$1,000,000.00

12/31/01
12/31/01
12/31/01
12/31/01
1/03/34
12/31/01
12/31/01
12/31/01
12/31/01
12/31/12
9/30/02
4/01/02
4/01/02
12/31/19
9/30/02
12/31/13
12/31/30
12/31/01
12/31/01
12/31/01
12/31/01
12/31/01
12/31/01
12/31/01
9/30/11
9/30/11
9/30/11
9/30/11
12/31/01
12/31/01
12/31/12
12/31/12
1/03/12
12/31/24
12/31/03
1/03/06
12/31/07
12/31/09
1/03/12
12/31/13
12/31/15
1/02/35
1/02/35
1/02/35
12/31/30
12/31/30
12/31/30
12/31/30
12/31/35
12/31/02

2.395%
2.520%
2.395%
2.395%
5.245%
2.395%
2.395%
2.395%
2.395%
4.258%
2.611%
2.478%
2.478%
4.779%
2.487%
4.405%
5.205%
2.395%
2.395%
2.395%
2.395%
2.395%
2.395%
2.395%
4.451%
4.451%
4.274%
4.274%
2.520%
2.520%
5.988%
5.879%
4.503%
5.104%
2.845%
3.575%
4.110%
4.303%
4.431%
4.578%
4.723%
5.157%
5.141%
5.147%
4.972%
4.972%
4.972%
4.972%
5.160%
2.407%

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.
Qtr.
Qtr.
Qtr.
Qtr.
Qtr.
Qtr.
Qtr.
Qtr.
Qtr .
Qtr.
Qtr .

Page 6
FEDERAL FINANCING BANK
OCTOBER 2001 ACTIVITY
Borrower
Blue Grass Energy #674
Harrison County #532
Scenic Rivers Energy #677
Rutherford Electric #779
W. Farmers Elec. #701
Cornbelt Power #565
Ellerby Telephone #635
Tri-County Elec. TN #647
Scenic Rivers Energy #677
Seminole Electric #678
Coop. Power Assoc. #720
James Valley Elec. #516
Laurens Elec. #553
Aiken Elec. #549
Escambia River Elec. #498
North Georgia Elec. #781
Citizens Tel (VA) #680
Decatur County #575
Coast Elec. Power #787
San Patricio Elec. #676
Shelby Energy Coop. #758
Kootenai Elec. #752

Date

Amount
of Advance

Final
Maturity

Interest
Rate

10/10
10/10
10/10
10/12
10/12
10/15
10/15
10/16
10/17
10/17
10/18
10/18
10/18
10/19
10/19
10/19
10/23
10/23
10/24
10/25
10/29
10/30

$5,000,000.00
$1,625,000.00
$710,000.00
$12,500,000.00
$2,803,000.00
$6,353,000.00
$170,000.00
$1,278,000.00
$710,000.00
$8,205,000.00
$7,498,000.00
$2,548,000.00
$4,650,000.00
$6,000,000.00
$1,137,000.00
$2,011,000.00
$113,000.00
$1,233,000.00
$6,000,000.00
$782,000.00
$1,000,000.00
$800,000.00

3/31/04
7/01/02
3/31/11
12/31/35
12/31/25
12/31/14
1/03/12
1/03/33
1/02/35
12/31/19
12/31/35
1/03/33
1/03/34
1/03/34
1/03/33
12/31/35
12/31/15
1/03/34
12/31/02
1/02/35
4/01/02
12/31/31

2.921%
2.239%
4.506%
5.275%
5.118%
4.859%
4.520%
5.202%
5.192%
4.738%
5.064%
5.275%
5.161%
5.156%
5.270%
5.178%
4.510%
5.195%
2.449%
5.169%
2.103%
5.057%

S/A is a Semiannual rate.
Otr. is a Quarterly rate.
maturity extension or interest rate reset

Otr.

Qtr,
Otr,

Otr,
Otr,

Otr.
Qtr.
Qtr.
Qtr.

Qtr.
Qtr.

Otr.
Qtr.
Qtr.
Qtr.

Qtr.
Qtr.
Qtr.
Qtr.

Otr.
Qtr.

Otr.

Page 7
FEDERAL FINANCING BANK HOLDINGS
(in millions of dollars>

Program
Agency Debt:
U.S. Postal Service

October 31, 2001

September 30. 2001

Monthly
Net Change

Fiscal Year
Net Change

10/1/01·10/31/01

10/1/01-10/31/01

Subtotal *

$9.021.5
$9.021.5

$11.313.0
$11,313.0

-$2.291.5
-$2.291.5

-12.291.5
-$2.291.5

Agency Assets:
FmHA·RDIF
FmHA-RHIF
Rural Utilities Service-CBO
Subtotal *

$2,385.0
$4.375.0
$4.270.2
S11.030.2

$2,435.0
$4.375.0
'4.270.2
$11,080.2

·$50.0
$0.0
SO.O
-$50.0

-$50.0
$0.0
·$50.0

Government-Guaranteed Lending:
DOD-Foreign Military Sales
OoEd-HBCU+
OHUD-Community Dev. Block Grant
DHUD-Public Housing Notes
General Services Administration+
DOl-Virgin Islands
DON-Ship Lease F1nancing
Rural Utilities Service
SBA-State/Local Development Cos.
DOT-Section 511
Subtotal *

$2.154.0
$31.9
$7.1
$1.278.7
$2.266.3
$13.1
$941.1
$13.698.2
$128.6
$3.4
$20,522.4

$2.156.7
$31.3
$7.8
$1.278.7
$2.268.0
$13.1
$941.1
$13,599.2
$132.0
$3.4
$20.431.4

-$2.7
$0.6
-$0.7
$0.0
·$1.7
$0.0
$0.0
$98.9
-$3.4
$0.0
$91.0

-$2.7
$0.6
-$0.7
$0.0
.$1. 7
$0.0
JO.O
$98.9
-$3.4
$0.0
$91.0

Grand total*

$40.574.1

10.0

;;g;

* f1gures may not total due to rounding
+ does not include capitalized interest

$42.824.6

-$2.250.5

DEPARTMENT

THE

TREASURY

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

EMBARGOED UNTIL 9:00AM
January 30, 2002

CONTACT: Betsy Holahan
(202) 622-2960

Assistant Secretary for Financial Markets
Brian C. Roseboro
February 2002 Quarterly Refunding Statement
The Department of the Treasury announced its quarterly refunding needs and
related financing changes today. The recently announced budget projections indicate a
need for relatively small increases in financing in the fiscal years 2002 and 2003. We
anticipate financing these deficits with existing securities and within the existing auction
schedules. The specific terms of the refunding follow.
We are offering $29 billion of notes to refund approximately $4.1 billion of
privately held bonds maturing or called on February 15, raising approximately $24.9
billion. The securities are:
1. Are-opening of the 5-year note, first issued in November 2001, in the amount of

$16 billion, maturing November 15, 2006.
2. A new 10-year note in the amount of$13 billion, maturing February 15,2012.
These securities will be auctioned on a yield basis at 1:00 p.m. Eastern time on
Tuesday, February 5, and Wednesday, February 6, respectively. The balance of our
financing requirements will be met through 2-year note and bill offerings.

Short-term Financing Needs
The introduction of the 4-week bill last August has reduced our reliance on cash
management bills for bridging short-tenn cash shortfalls. The April swing in cash
balances, however, will be too large to be accommodated by changes in regular weekly
bill issuances. As a result, we expect to issue at least one off-cycle cash management bill
in April.

PO-953

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

Buyback Operations
At the last refunding, we listed three conditions that would detennine whether any
buyback operations would be conducted. As we stated then, our decisions on whether to
conduct buyback operations, and on the amount and timing of any purchases, will he
made at the time of our regular quarterly refunding announcements and will be based
upon three factors: projections of the federal government's annual, unified surplus or
deficit position; projections of that three-month period's cash position; and analysis of
how best to minimize borrowing costs over time.
Given current circumstances, we will conduct three buyback operations before the
next refunding, on April 18, April 23, and Apri125, in order to lower high seasonal cash
balances that we expect at that time. In these three operations, we expect to repurchase a
total of $3 billion to $5 billion in long-dated securities.

Policy Issues Under Discussion
We are reviewing the application of the 35 percent rule, the reopening policy for
5-year and lO-yearnotes, and ways to enhance development of the market for lO-year
Treasury Inflation-Indexed Securities. We are interested in suggestions from the public.

The 35 percent rule: We are examining ways in which the Net Long Position
(NLP) rule (as it applies to the calculation of the 35 percent auction award limit) could
better achieve its underlying objective and simultaneously facilitate faster, more efficient
auctions. Changes under consideration include:
• Whether the "designated reporting time" should be moved closer to the
competitive auction closing time to better meet the rule's objective. It is now
30 minutes prior to the closmg time for receipt of competitive bids. (31 CFR §
356. 13(b), see the Unifonn Offering Circular,
http://VtIWW.publicdebt.treas.gov/gsr/gsruocam.htm#auction);
• Whether the entry ofNLP data, and the deadline for its receipt at Treasury,
should be split from bid submission to facilitate faster auctions. NLP data
could be submitted at some time shortly after the auction.
We welcome suggestions on alternatives that would meet the twin goals of
making auctions"more operationally efficient and safeguarding the objective of the NLP
rule.

Re-opening policy: In response to actual and projected surpluses, Treasury
announced a regular re-opening policy for 5-year and lO-year notes at the February 2000
quarterly refunding. Treasury is now considering a return to regular quarterly issuance
of new 5-year and IO-year notes without any pre-announced reopenings. Treasury will
base its decision on the following factors:
• Treasury's borrowing needs;
• Liquidity needs in the marketplace;
• Future cash management considerations.

OFFICE OF PUBLIC AFFAIRS .150() PENNSYLVANIA AVENUE, N.W .• WASHINGTON, D.C .• 20220. (202) 622.2960

EMBARGOED UNTIL 11:30 A.M.
January 28, 2002

Contact:

Office of Financing
202/691-3550

TREASURY OFFERS 4-WEEK BILLS
Xhe Treasury will auction 4-week Treasury bills totaling $10,000 million to
refund an estimated $7,000 million of publicly held 4-week Treasury bills maturing
January 31, 2002, and to raise new cash of approximately $3,000 million.
Xenders for 4-week Treasury bills to be held on the book-entry records of
will ~ be accepted.

Treasu~Direat

The Federal Reserve System holds $11,809 million of the Treasury bills maturing
on January 31, 2002, in the System Open Market Acoount (SOMA). This amount may be
refunded at the highest discount rate of accepted competitive tenders in this auction
up to the balanoe of the amount not awarded in today's 13-week and 26-week Treasury
bill auctions. Amounts awarded to SOMA will be in addition to the offering amount.
Up to $1,000 million in noncompetitive bids from Foreign and International
MOnetary Authority (FIMA) accounts bidding through the Federal Reserve Bank of New York
will be included within the offering amount of the auction. These noncompetitive bids
will have a limit of $100 million per account and will be accepted in the order of
smallest to largest, up to the aggregate award limit of $1,000 million.
The allocation percentage applied to bids awarded at the highest discount rate
will be rounded up to the next hundredth of a whole percentage point, e.g., 17.13%.
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 BookEntry 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

PO-954

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

HIGHLIGHTS OF TREASURY OFFERING
OF 4-WEEK BILLS TO BE ISSUED JANUARY 31, 2002
January 28, 2002
Offering Amount . . . . . . . . . . . . . . . . . . . . . $10,000 million
Public Offering . . . . . . . . . . . . . . . . . . . . . $10,000 million
NLP Exclusion Amount . . . . . . . . . . . . . . . . $13,600 million
Description of Offering:
Term and type of security . . . . . . . . . . . 28-day bill
CUSIP number . . . . . . . . . . . . . . . . . . . . . . . . 912795 HJ 3
Auction date . . . . . . . . . . . . . . . . . . . . . . . . January 29, 2002
Issue date . . . . . . . . . . . . . . . . . . . . . . . . . . January 31,2002
Maturity date . . . . . . . . . . . . . . . . . . . . . . . February 28, 2002
Original issue date . . . . . . . . . . . . . . . . . March 1,2001
Currently outstanding . . . . . . . . . . . . . . . $53,636 million
Minimum bid amount and multiples .... $1,000
Submission of Bids:
Noncompetitive bids: Accepted in full up to $1 million at the highest
discount rate of accepted competitive bids.
Foreign and International Monetary Authority (FIMA) bids:
Noncompetitive bids submitted through the Federal Reserve Banks as agents for
FIMA accounts. Accepted in order of size from smallest to largest
with no more than $100 million awarded per account. The total noncompetitive amount awarded to Federal Reserve Banks as agents for
FIMA accounts will not exceed $1,000 million.
A single bid that
would cause the limit to be exceeded will be partially accepted in
the amount that brings the aggregate award total to the $1,000
million limit. However, if there are two or more bids of equal
amounts that would cause the limit to be exceeded, each will be
prorated to avoid exceeding the limit.
Competitive bids:
(1) Must be expressed as a discount rate with three decimals in
increments of .005%, e.g., 4.215%.
(2) Net long position (NLP) 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 o£~ompetitive 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 standard time on auction day
Competitive tenders:
Prior to 1:00 p.m. eastern standard time on auction day
Payment Terms:
By charge to a funds account at a Federal Reserve Bank
on issue date.

DEPARTMENT

THE

TREASURY

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

EMBARGOED UNTIL 3:00 P.M.
January 28, 2002

CONTACT: Betsy Holahan
(202) 622-2960

TREASURY ANNOUNCES MARKET FINANCING ESTIMATES
The Treasury Department announced today that it expects to borrow
$60 billion in marketable debt during the January - March 2002 quarter and
to target a cash balance of $20 billion on March 31. In the quarterly
announcement on October 29, 2001, Treasury announced that it expected to
borrow $59 billion in marketable debt and to target an end-of-quarter cash
balance of $30 billion. While there is little net change in borrowing this
quarter, the change in the cash balance is expected to cover lower receipts
and higher expenditures.
Treasury also announced that it expects to pay down $89 billion in
marketable debt during the April - June 2002 quarter and to target a cash
balance of $60 billion on June 30.
During the October - December 200 1 quarter, Treasury borrowed $52
billion in marketable debt and ended with a cash balance of $52 billion on
December 31. This included borrowing of $61 billion in marketable
Treasury securities and buybacks of $812 billion in outstanding marketable
Treasury securities. On October 29, Treasury announced that it expected to
borrow $31 billion in marketable debt and Jo Jarget an end-of-quarter cash
balance of $35 billion. The increase in borrowing was primarily related to
timing in tax receipts.
Additional financing details relating to Treasury's Quarterly
Refunding will be released at 9:00 A.M. on Wednesday, January 30, 2002.
PO-955
-30-

·U.S. Government Printing Ollie". 1958 - 619-559

PUBLIC DEBT NEWS
Department of tbe Treasury • Bureau of the Public Debt • Washington, DC 20239
TREASURY SECURITY AUCTION RESULTS
BUREAU OF THE PUBLIC DEBT - WASHINGTON DC
FOR IMMEDIATE RELEASE
January 28, 2002

CONTACT:

Office of Financing
202-691-3550

RESULTS OF TREASURY'S AUCTION OF 26-WEEK BILLS
Term:
Issue Date:
Maturity Date:
CUSIP Number:

182-Day Bill
January 31, 2002
August 01, 2002
912795Kt14

High Rate:

1.830%

Investment Rate 1/:

1.872%

Price:

99.075

All noncompetitive and successful competitive bidders were awarded
securities at the high rate. Tenders at the high discount rate were
allotted 25.46%. All tenders at lower rates were accepted in full.
AMOUNTS TENDERED AND ACCEPTED (in thousands)
Tender Type

Tendered

Competitive
Noncompetitive
PIMA (noncompetitive)

SUBTOTAL

27,673,220
1,311,055
472,000

29,456,275

TOTAL

34,588,206

19,131,976

1.795%: 50% of the amount of accepted competitive tenders
Low rate
1.720%:
5% of the amount
tendered at or below that rate.

Ratio = 29,456,275 / 14,000,045 = 2.10

L/ Equivalent coupon-issue yield.
~/

Awards to TREASURY DIRECT

= $1,097,703,000

http://www.publicdebt.treas.gov

PO-956

14,000,045 2/
5,131,931

~as tendered at or below that rate.
~f accepted competitive tenders was

~id-to-Cover

12,216,990
1,311,055
472,000

5,131,931

Pederal Reserve

Median rate

Accepted

PUBLIC DEBT NEWS
Departmeat of t.e Trea.ury • Bareau of t"e Public Debt • W....la..oa, DC 2023'
TREASURY SECURITY AUCTION RESULTS

BUREAU OF THE PUBLIC DEBT - WASHINGTON DC

Office of Financing
202-691-3550

CONTACT:

FOR IMMEDIATE RELEASE

January 28, 2002

RESULTS OF TREASURY I S AUCTION OF 13 -WEEK BILLS

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

91-Day Bill
January 31, 2002
May 02, 2002
912795JS1
1.715%

Investment Rate 1/:

1.748'

Price:

99.566

All noncompetitive and successful c~etitive bidders were awarded
securities at the high rate. Tenders at the high discount rate were
allotted 21.12t. All teDders at lower rates were accepted in full.
AMOtD1'1'S TBNDBRED

ANI)

ACCBPTBD (in thousands)

Tender Type

Accepted

Tendered

CoInpetitive
Noncompetitive
FIMA (noncompetitive)

28,726,815
1,569,353
167,000

167,000

15,000,176 2/

30,463,168

SUBTOTAL

5,010,212

Federal Reserve
TO'l'AL

35,473,380

13,263,823
1,569,353

20,010,388

Median rate
1.690t: sot of the amount of accepted competitive tenders
was tenciered at or below that rate. Low rate
1. 660t:
5t of the amount
of accepted competitive tenders was tendered at or below that rate.
Bid-to-Cover Ratio

= 30,463,168

I 15,000,176

= 2.03

1/ Equivalent coupon-issue yield.
2/ Awards to TREASURY DIRECT - $1,310,880,000

http:I,,"",.pabUcdebt.treas.gov

'-957

E P \ R T \1 (. :\ T

0 F

'( H E

T R E \ S l R '\

NEWS
omCE OF PUBUCAFlAJRS -1500 PENNSYLVANIA AVENUE, N.W•• WASHINGTON, D.C. - 20220. (201) 622-2960

EMBARGOED UNTIL DELIVERY
January 29, 2002

CONTACT: BETSY HOLAHAN
202-622-2960

ACTING DIRECTOR OF THE OFFICE OF MACROECONOMIC ANALYSIS
KAREN HENDERSHOT
REMARKS TO THE TREASURY BORROWING ADVISORY COMMITTEE
OF THE BOND MARKET ASSOCIATION

A great deal has happened in the three months since we last met. In late November, the
National Bureau of Economic Research (NBER) officially confirmed that the economy was in
recession. More recently, however, we have begun to get increasingly strong signals of a likely
bottoming out. A sense of incipient recovery is emerging in surveys of both consumers and
businesses.
The improved tone to recent economic data is a welcome development after the initial
post-September 11 readings. More than 800,000 jobs were lost in October and November, the
steepest two-month drop since the early 1980s both in volume and percentage terms. New orders
for nondefense capital goods excluding aircraft, a leading indicator of business investment
spending, plunged by 10 percent in September. That was the sharpest fall since 1989 and a
further blow to the already-fragile investment sector. The impact of the attacks appeared likely
to t1:>.row the economy seriously off course.
Instead, the economy regained its footing rather smoothly and appears poised to resume
growth in the current quarter. Fourth-quarter real GDP estimates will be released by the
Commerce Department tomorrow. The latest consensus forecast predicts that real GDP wi11 have
contracted by an annual rate in the neighborhood of 1- W percent. Should this prediction come
to pass and .growth resumes in the first quarter as expected, the entire GDP Joss during the latest
recession will have been a mere 0.6 percent. This would be much less than the average decline
of 2.2 percent associated with the previous nine post-World War II recessions and would be
matched only by the contraction of 1970 as the mildest on record.
The source of this relatively modest decline can be found in the behavior of households.
Benefiting from tax cuts, low mortgage and auto finance rates, the lift to real incomes from
falling energy prices, and a competitive pricing environment generally, both personal
consumption and residential investment have outperformed typical recession patterns.

PO-958

•

·u.s. Gow!mnIerA Printing Office: 1998 - 619-559

•

Real personal consumption expenditures seem quite likely to have gone throughout the
entire recession without turning negative on a quarterly basis and in the fourth quarter are
expected to have increased by a rapid 4 to 5 percent annual rate. That consumption does
not decline in a recession is not typical but also not unprecedented. It also occurred in
1970. Still, this strength is surprising after the spending boom of the late 1990s led to the
widespread assessment that consumption had little room for further growth.

•

Also atypical for a recession has been continued growth in residential investment, which
in the past has always fallen early in a downturn. While a decline is likely in the fourth
quarter, the overall strength has been another important pillar supporting real GOP.

The burst in consumption in the fourth quarter, along with a possible increase in
investment in equipment for the first time in more than a year, could propel real final sales
forward at a fairly healthy pace in tomorrow's GOP report. More than offsetting that growth,
however, is an expected record rate of inventory liquidation - a vital pre-requisite for a revival in
production. Thus, even a negative headline GDP number would obscure a healthy composition
of developments - strong demand and lean inventories - that set the stage for recovery. While it
is too soon to declare the recession over, positive signs are becoming more abundant.
•

Initial claims for unemployment insurance benefits have fallen by about 20 percent on a
four-week average basis from a peak in late October to the lowest point since the
beginning of September. In 1991, the economy was 3-112 months into recovery before
such a drop was achieved.

•

Conswner attitudes have risen back to levels of last JatlUary.

•

The average factory workweek jumped four-tenths of an hour in December and overtime
hours rose two-tenths, likely signaling an imminent need for additional workers.

•

New orders for nondefense capital goods have risen in each of the latest two months and
high-tech categories, such as computers, are beginning to grow.

•

-The Conference-Board's composite index ofleading-indicators, which includes the
statistics cited above, has now risen three months in a row - including a gain in
December which was the strongest in nearly 6 years.

•

And fmally, a survey by the National Association for Business Economics (NABE) noted
that demand revived at businesses of most of its members in the fourth quarter. Surveys
of purchasing managers are similarly upbeat.

Despite reasonably compelling evidence that an economic rebound is near, less certainty
can be attached to its likely profile and strength. Most current forecasts place real growth for the
year following the GDP trough in the 2·112 to 3·percent range. While this is substantially less
than the 5-112 percent averaged in the first year of growth following other post-war downturns, a
conservative estimate may be warranted.

•

A portion of consumption and residential investment was surely pulled forward by the
recent favorable interest rates and auto incentives, perhaps limiting scope for further large
gaIns.

•

In addition, business willingness to expand both payrolls and investment is likely to hinge
heavily on the restoration of corporate profits. In the current environment oflittle pricing
power, that may prove a difficult challenge.
That is the summary of recent economic developments and the near-term outlook.

D E P ,\

T 1\1 E N T

0 F

THE

T REA S 1I R Y

NEWS
ornCE OF PUBUCAFFAIRS -1500 PENNSYLVANIAAVENUE, N.W. - WASHINGTON, D.C. - 20220 - (202) 622-2960

EMBARGOED UNTIL DELIVERY
January 29, 2002

CONTACT:

Rob Nichols
(202) 622-2910

TESTIMONY OF KENNETH W. DAM
DEPUTY SECRETARY
DEPARTMENT OF THE TREASURY
BEFORE THE
SENATE BANKING COMMITTEE
JANUARY 29, 2002,10:00 A.M.
THE UNITED STATES SENATE

Chairman Sarbanes and distinguished members of the Senate Banking Committee, thank
you for inviting me to testify about the Treasury Department's efforts to disrupt terrorist
financing and, in particular, the steps we are taking to implement the provisions of the
International Money Laundering Abatement and Anti-Terrorist Financing Act of 2001. I have
asked Under Secretary for Enforcement Jimmy Gurule to join me today.
On September 24, 2001, President Bush stated, "we will direct every resource at our
command to win the war against terrorists, every means of diplomacy, every tool of intelligence,
every instrument of law enforcement, every financial influence. We will starve the terrorists of
funding." The Treasury Department is determined to· help make good on this promise. ram here
today to tell you about the progress we have made and some of the complexities we still face.
Much of our progress is directly attributable to the Congress and this Committee. The
swift passage of the USA PATRIOT Act and, in particular, Title III of that Act - the
International Money Laundering Abatement and Anti-Terrorist Financing Act of200l, have
given us important new tools in the financial front of the war on terrorism. To highlight just two
aspects of the Act:
• The Act requires financial institutions to terminate correspondent account~ maintained for
foreign shell banks and to take reasonable steps to ensure that they do not indirectly provide
banking services to foreign shell banks. Treasury provided immediate, interim guidance to
financial institutions, suggesting that they {)btain certification from all for€ign banks with
correspondent accounts that they were not shells and that the foreign banks did not
themselves maintain correspondent accounts for shell banks.
• The Act requires all financial institutions to have an anti-money laundering program in place
by April. Although many broker-dealers already had anti-money laundering programs in
place, the Act ensures that all will.
This Committee played an important role in securing the passage ofthese and other provisions.
On behalf of the Treasury Department - including our 25,000 law enforcement officers - I thank
you.
PO-959

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I also wish to thank the many federal agencies that have worked with Treasury. This is a
team effort. We have worked closely with the State Department, the Defense Department, the
Department of Justice, the Federal Bureau of Investigation, the intelligence community, and
many other parts of the federal government. We coordinate daily at all levels and, I think, have
done a good job of setting aside some of our historical rivalries. To cite just one of many
examples of this coordination, the Administration recently created a new-high level strategies
and priorities committee that I chair. This committee brings together senior officials from across
the government to chart our strategy for pursuing terrorist finances over the coming months and
years.

Summary of Developments in Financial Aspects of U.S. Anti-Terrorism Initiatives
Our priority is to help prevent terrorist attacks by disrupting terrorist finances. As the
President has said, we seek to "starve the terrorists of funding." Our goal is to deprive terrorists
of one of the raw ingredients in terrorism: money for anns, explosives, plane tickets, and even
the day-to-day sustenance of operatives. I will tell you candidly that where there is a conflict
between preventing terrorist attacks and the prosecution of criminal cases against terrorists,
preventing terrorist attacks comes first.
The strategy for the fmancial front of the war on terrorism closely tracks our strategy in
the rest of the war. We remain focused on finishing off Al Qaeda. We are targeting not only Al
Qaeda operatives, but their financial intennediaries and others that support them. Increasingly,
we are also focussing on other terrorist groups of global reach. In addition, we are striving to
ensure that fight on the financial front is not a unilateral effort or even a U.S.-led effort, but, like
the rest of the war, a multilateral effort led by nations around the world.
We use several tactics on the financial front of the war on terrorism. Some of our tactics
are public -like the public designation of terrorist organizations and the civil blocking of
terrorist assets. Other tactics are private - for example, we work with foreign governments to
enable them to designate and block terrorist assets on their own behalf. I would be pleased to tell
you more about our private efforts in a closed session.
One thing that is different about the financial front from the rest of the war is that it is
perhaps harder to measure success in the financial effort. To address this, we measure success
in many ways. For example, we track the total amount of terrorist assets blocked. Since
September 11 th, the United States and other countries have frozen more than $80 million in
terrorist-related assets. We expect the amount of blocked assets to continue to grow - although
we also expect to release some of the money. For example, assets once controlled by the Taliban
regime of Afghanistan will be returned to the legitimate government of Afghanistan.
·The amount.of assets blocked undersc0res the importance of another measure - the
amount ofintemational cooperation in the financial front of the war. I cannot emphasize enough
how vitally important international cooperation is. After all, we cannot bomb foreign bank
accounts. We need the cooperation of foreign governments to investigate and block them. So
far, we have received a remarkable degree of cooperation. Foreign governments have blocked
more than $46 million - over half of the total of$80 million. 147 countries and jurisdictions
arOlUld the world have blocking orders in place. We work with these countries daily to get more
information about their efforts and to ensure that the cooperation is as deep as it is broad. For
example, we are providing technical assistance to a number of countries to help them develop the
legal and enforcement infrastructure they need to find and freeze terrorist assets.

We have also had success pursuing international cooperation through multilateral fora
including the U.N., the G7, the G20, the Financial Action Task Force (FATF), and the
international financial institutions to combat terrorist financing on a global scale. A good
example of Treasury leadership on this issue is in the role of the United States in the FATF on
Money Laundering, a 31-member organization. In late October 2001, the United States hosted
an Extraordinary F ATF Plenary session, at which F ATF members established eight Special
Recommendations on Terrorist Financing. These recommendations quickly became the
international standard on steps that countries can take to protect their financial systems from
abuse by terrorist financiers. Our delegation is at a meeting in Hong Kong as I speak
establishing a process by which all countries will engage in a self-assessment of compliance with
these recommendations.
Still a third measure is the flow of funds disrupted. For example, when we shut down the
AI-Barakaat hawala network, we seized $1.9 million in assets. But we disrupted the flow of
much more. Our analysts believe that AI-Barakaat's worldwide network channeled as much as
$15 to $20 million to Al Qaeda a year. It is important, therefore, to keep an eye on the flow of
funds - how much money moved through a pipeline that we froze - as well has how much
money happened to be in the pipeline when we froze it.
Finally, we do not ignore non-quantified measures of success. I would be willing to
elaborate upon these measures in a closed session. I can tell you in open session, however, that
we believe from our intelligence channels that Al Qaeda and other terrorist organizations are
suffering financially as a result of our actions. We also believe that potential donors are being
more cautious about giving money to organizations where they fear that the money might wind
up in the hands of terrorists.
Having discussed some of our successes, I wish to spend a moment on some of the
complexities we face. This Committee is intimately familiar with the challenges facing our antimoney laundering efforts. Stopping terrorist financing is perhaps more nuanced than money
laundering because terrorist financing could be described as "reverse money laundering." In
money laundering, the proceeds of crime are laundered for legitimate use or for use in
perpetrating more crimes. If you find evidence of the original crime, you are likely to be placed
on the trail of some money-laundering. In terrorist finance, it is often the other way around.
Proceeds of legitimate economic activity are used for illicit purposes. The money can come from
almost anywhere.
A particular fonn of this problem is presented by the case of illicit charities. Illicit
charities are organizations that exploit their charitable status to funnel money to terrorists. Such
organizations are, in my view, particularly deplorable. But at the same time, it cannot be
doubted that some of them do· perfonn some charitable aGts-and that many donors believe that
their donations are paying for charitable works. To solve this problem, we are developing a
comprehensive, coordinated, inter-agency strategy to clean up illicit charities while still
providing vehicles for legitimate charitable works.
I would like to highlight a few additional steps that we have taken. First, we got the
Foreign Terrorist Asset Tracking Center (FTAT) up and running under the direction of the Office
of Foreign Assets Control (OFAC). FTAT was funded by Congress in the FY 2001
Appropriations Bill and was being organized and staffed when the attacks occurred. When fully
operational, FTAT will serve as an analytical and strategic center for attacking the problem of
terrorist financing.

Since September, FTAT has served not only to provide analysis of particular targets and
networks, but also as an information hub where intelligence and law enforcement agencies can
share and analyze information for a common purpose. Thus far, the Department of Defense, the
Department of Justice, and the intelligence community have made vital contributions to this
inter-agency effort to hunt down the sources of terrorist financing. Though FTAT is still in its
infancy, it is making a significant impact on this cooperative and concentrated interagency
venture.
Second, on October 25,2001, Treasury created Operation Green Quest ("Green Quest"),
a new multi-agency financial enforcement initiative intended "to augment existing counterterrorist efforts by bringing the full scope of the government's financial expertise to bear against
systems, individuals, and organizations that serve as sources of terrorist funding." Green Quest
is made up of investigators and analysts from the U.S. Customs Service, the IRS-Criminal
Investigation Division, the Financial Crimes Enforcement Network (FinCEN), OFAC, the Secret
Service, and the FBI, with support from the Department of Justice. These agencies have brought
their world-renowned financial expertise to bear on terrorist financing and have seen remarkable
results in the three months FT AT has been in existence.
Green Quest has complemented the work ofFTAT in identifying terrorist networks at
home and abroad, and it has served as an investigative arm in aid of blocking actions. Green
Quest's work, in cooperation with the Department of Justice, has led to 11 arrests,3 indictments,
the seizure of nearly $4 million, and bulk cash seizures of over $8.5 million. Green Quest
agents, along with the FBI and other government agencies, have traveled abroad to follow leads,
exploit documents recovered, and to provide assistance to foreign governments. The work of
these financial experts is just starting but they have already opened well over two hundred
terrorist financing investigations and are following new leads on a daily basis.
Third, we have worked closely with the FBI-led investigation into the September 11 th
attacks. Immediately after the attacks, Treasury deployed personnel to the FBI's Financial
Review Group, bringing additional financial investigative capabilities, contacts in the financial
sector, and expertise to the FBI's group. Treasury has also deployed people to serve on various
Joint Terrorism Task Forces (JTTFs) headed by the FBI. Since then, those committed to this
mission have made significant contributions, in the Group and in the field, to tracking the
perpetrators of those heinous acts.
The November 7,2001, designation of al-Barakaat as a terrorist-related financial entity is
an example of how Treasury efforts, along with the fine work of our inter-agency partners, can
lead to results in this war on terrorist financing. Al-Barakaat is a Somali-based hawaladar 1
operation, with locations in the United States and in 40 countries, that was used to finance and
support terrorists around the world? FTAT analysis idemified AI-Barakaat as a major financial
operation that supported terrorist organizations and was providing material, financial, and
logistical support to Usama bin Laden, Al Qaeda, and other terrorist groups.
Treasury coordinated efforts to block assets and to assist other law enforcement agencies
to take actions against AI-Barakaat. On November 7, 2001, federal agents executed search
warrants in three cities across the country (Boston, Columbus, and Alexandria) and shut down
eight AI-Barakaat offices across the U.S., including locations in the following cities:
1 Hawala is a type of alternative remittance system that is common in many parts of the world, including the
Middle East and Far East. A hawaladar is an entity that engages in hawala transactions.
2 Some individuals may have used AI-Barakaat as a legitimate means to transfer value between individuals in
different countries without passing through the formal international banking system.

•
•
•
•
•

Boston, Massachusetts;
Columbus, Ohio;
Alexandria, Virginia;
Seattle, Washington; and
Minneapolis, Minnesota.

As part of that action, OFAC was able to freeze $1,900,000 domestically in Al-Barakaatrelated funds on November 7, 2001. Treasury also wo~ked closely with key officials in the
Middle East to facilitate blocking of Al-Barakaat's assets at its financial center of operations.
Disruptions to AI-Barakaat's worldwide cash flows could be as high as $300 to $400 million per
year, according to our analysts. Of that, our experts and experts in other agencies estimate that
$15 to $20 million per year would have gone to terrorist organizations. The AI-Barakaat
investigation exemplifies the importance of the flow of funds disruption measure that we are
attempting to use more broadly. In addition, the combined work ofFTAT and law enforcement
led to additional leads in the AI-Barakaat investigation.
This is an example of what our combined efforts can do when we join our resources and
our expertise to fight the scourge of terrorist financing.
Although we have made much progress, we still have much work to do. First, we must
encourage more independent identification of terrorist groups by other countries. The EU
designation at the end of December is a step in the right direction, but we need more countries to
initiate more designations.
Second, we have to ensure that more countries issue blocking orders for more of the
entities identified, by the United States, other countries, and the international community, as
being part of terrorist financial networks. We must also do a better job of following up with the
countries to make sure that their orders, once issued, are fully implemented and obeyed.
Third, we must do a better job of exploiting the "industrial quantity" of documents
captured in Mghanistan and increasingly elsewhere. Hard drives and e-mails must be exploited
as well. This is a massive task. To do it, we must bring documents together from allover the
world, translate them, cross-reference them, and thereby build a complete picture. No one
document can tell us that much.
Fourth, we must redouble efforts by U.S. and allied intelligence services against such
financial intermediaries as hawala dealers and other informal systems.
To conclude this portion of my testimony, I believe that we have had several important
successes on the financial front of the war on terrorism. We have marshaled the considerable
expertise of our Treasury law enforcement personnel to execute the President's mission to detect,
disrupt~ and dismantle the financial infrastrucfure of te:rt6'rist financing. We have worked closely
with other agencies of the federal government and, I believe, obtained an unprecedented level of
cooperation and coordination. We have worked extensively with foreign governments to ensure
that terrorist money has nowhere to hide.
Some have said that the financial war on terrorism is an impossible task. After all,
money is fungible and illegal money tends to flow to the most hospitable country. I disagree.
That the task is difficult does not mean that it. is impossible. This is an unconventional war
where there are no boundaries, where civilians are the targets, where people (or so-called
"martyrs") are the weapons, and where electronic money transfers and messaging are the fuel
and the logistics train. Among other things, identifying the flow of money helps us find the
footprint of sleeper cells, disable them, and perhaps prevent the next attack.

Implementation of the International Money Laundering Abatement and Anti-Terrorist
Financing Act of 2001
The Treasury Department is committed to the aggressive and thorough implementation of
the International Money Laundering Abatement and Anti-Terrorist Financing Act of2001. In
the aftermath of September 11, efforts to enhance the Federal Government's ability to combat
international money laundering, which had already begun before September 11 were given a
whole new level of priority by Congress and the Administration. The government and the
financial community were forced to rethink assumptions, to reevaluate risks of money laundering
and abuse in connection with terrorist financing, and, ultimately, to take the steps necessary to
protect the country's financial system. The results of this reassessment were dramatic. Through
the Act, which is also known as Title III ofthe USA PATRIOT Act, Congress took up the
challenge of eliminating vulnerabilities within our anti-money laundering regime. Now, we at
Treasury will continue this initiative through implementing regulations.
The Act is ambitious not only in scope, but also in its aggressive implementation
schedule. The inclusion of numerous key provisions demonstrates remarkable resolve by
Congress following the September attacks. Perhaps the most striking aspect of the Act is that in
one legislative package, Congress addressed many deficiencies identified in our counter-money
laundering regime. Treasury must address a wide array of challenging issues and promulgate
regulations with far-reaching consequences-all on an accelerated schedule.
Treasury's Implementation Plan
Our plan for implementation relies heavily on tapping the existing resources and
expertise found in the government to deVelop creative solutions to complex issues. Once the Act
became law, we formed interagency working groups to handle each of the statutory provisions
requiring implementation or reports. After identifying the appropriate Treasury personnel to
chair these working groups, we solicited interagency participation. This system offers two
distinct advantages: (1) it brings the collective knowledge and expertise of the various
governmental agencies and departments together; and (2) it facilitates the consultation
requirements found in many provisions ofthe Act. I am pleased to say that the results thus far
have been remarkable. Other agencies and departments stepped forward immediately,
committing personnel and resources. For example, less than one month after the Act was signed
by the President, Treasury issued interim guidance on two key provisions that were set to take
effect on December 26, 200 1. When Treasury requested consultation, the other agencies and
departments responded quickly, assisting with our analysis of the issues and the completion of
the guidance in time for the affected financialinstitutioJ1.S.. to- use it. And the cooperation
continues. Working groups and subgroups meet almost daily. Drafts are being circulated and
comments are received when requested. We are grateful for the assistance.
Another encouraging result of this process has been the response of the private sector and
industry groups. With respect to several key provisions, we have received not only positive
comments about the legislation, but also helpful insight into implementation issues. Others have
contributed by simply taking the time to educate us on their particular industry and existing
practices and procedures. Regulations cannot be conceived and drafted in a vacuum. Creative
and constructive suggestions from those who will be affected by the regulations allow us to
identify issues early and then find solutions early.

As I noted, our implementation plan has met with some early success. Since October of
last year, we have issued interim guidance and regulations covering four statutory provisions.
The two provisions that took effect in December were the prohibition against certain U.S.
financial institutions maintaining correspondent accounts for foreign shell banks or indirectly
providing services to them (Section 313) and the requirement that U.S. financial institutions
obtain ownership and registered agent infonnation from foreign banks for which they maintain
correspondent accounts (Section 319(b)). On November 20, less than one month after the
passage of the Act, Treasury issued interim guidance that explained the provisions, identified
their scope, and provided financial institutions with a certification that could be utilized to
comply with the provisions. Treasury subsequently issued a fonnal proposed rule in December
that codified the Interim Guidance as a regulatory standard. On a separate front, four months
ahead of the statutory deadline, Treasury issued in December a regulation implementing Section
365 of the Act, which effectively gives FinCEN access to reports filed by non~financia1 trades or
businesses when they receive $10,000 or more in coins or currency. Finally, as required by
Section 356 of the Act, Treasury issued in December a proposed rule that would require
securities brokers and dealers to file suspicious activity reports. In support ofFinCEN's
increased responsibilities under the Act, the President's FY 2003 budget calls for a $3.3 million
dollar increase in FinCEN's budget to help FinCEN expand suspicious activity reporting to a
number of new industries and maintain the Suspicious Activity Reporting Hotline, begun this
fall, to expedite the investigation of suspicious financial activities.
We have many additional regulations to promulgate and reports to file with Congress.
We are detennined to promulgate these regulations and prepare the reports expeditiously. We
are always cognizant of the urgency of our task. At the same time, we are also working closely
with other agencies, the private sector, and, of course, the Congress to ensure that we do our job
not just fast, but well.
Treasury's Implementation Principles
As we implement the Act, we are guided not only by the express statutory language, but
also by certain core principles that reflect our vision of what this legislation should accomplish
and the manner in which it should be implemented. This legislation addresses broad issues and
relies heavily on implementing regulations to define the scope of the provisions. Through the
regulatory process, we will take the general and make it specific, exercising our discretion where
appropriate. In this role, it is essential that we remain true to our core principles, which are as
follows:
1.
Prevent regulatory arbitrage.
The Act takes aim at those areas of our financial and regulatory system that present
opportunities for exploitation.- Treasury embraces this ~; and, through the regulatory process,
will adhere to the principle that people should not be able to shift from one type of financial
institution to another in order to avoid a regulatory scheme or anti-money laundering controls.
The test is a functional one, namely, can a similar financial transaction be accomplished through
another financial institution with less regulation. The justification for this principle is two-fold:
first, our financial system is only as secure as its most vulnerable point; and second, a regulatory
scheme must not create a competitive advantage for one type of financial institution over another
when they perfonn the same or similar functions.
Our proposed regulation for Section 319(b) illustrates the point. Section 319(b) provides
the Secretary of the Treasury and the Attorney General with administrative subpoena authority to
compel the production of documents from foreign banks with correspondent accounts in the U.S.

The section also requires "covered" U.S. financial institutions that maintain a correspondent
account on behalf of a foreign bank to maintain records identifying the owners of the foreign
bank as well as its registered agent. But, Section 319(b) does not define "financial institution"
for purposes of the section. Based on the notion that similar activity ought to be regulated
similarly, instead oflimiting the application to depository institutions-such as banks, thrifts,
credit unions-Treasury proposed to extend the rule to securities brokers and dealers who also
maintain correspondent accounts for foreign banks. In this way, the rule does not create the
opportunity to shift from a bank to a securities broker or dealer in order to avoid regulation.
The provision of the Act requiring Treasury to issue a rule requiring securities brokers
and dealers to file suspicious activity reports embodies this same principle. Banks and other
depository institutions must file suspicious activity reports because such reports are important to
the fight against money laundering. Because the potential for money laundering exists in the
securities industry, a similar rule will soon apply. Section 356 of the Act also directs us to
recommend whether and how to bring investment companies under the Bank Secrecy Act. For
this as well we will analyze the functional activities of such entities, compare them with the
activities of regulated entities, and identify the money laundering risks presented. With this
information, Treasury will be able to proffer methods for applying the BSA to such entities.
2.

Honor a central purpose of the Act: to enhance coordination and information
flow.

An overarching goal of this legislation, and an important lesson we are learning as we

continue our work to disrupt the financial underpinnings of terrorism, is that appropriate
information must be made available to enable law enforcement, the intelligence community, and
the regulators to protect our financial system. The financial institutions themselves have a
critical role in sharing and reporting information. The Act facilitates information sharing on a
number of levels: (1) among law enforcement and financial institutions; (2) among regulators,
law enforcement, and the intelligence community; and (3) among financial institutions
themselves. We will fulfill this goal of enhancing the ability to use and share information to
combat terrorism and money laundering.
Treasury, through FinCEN, is well positioned to continue to expand its role as the
lynchpin for infonnation sharing and coordination between the government and the financial
sector. Indeed, Section 361 of the Act, among other things, requires FinCEN to establish a highspeed network for access to its extensive BSA data and infonnation. Similarly, Section 362
requires Treasury to establish a highly secure network through which financial institutions can
make Bank: Secrecy Act filings and receive alerts regardffig:-suspicious activities or persons
requiring immediate attention. Treasury is charged with establishing a highly secure network
through which financial institutions can make Bank Secrecy Act filings and receive alerts
regarding suspicious activities or persons requiring immediate attention. I am pleased to report
that FinCEN is on schedule to have a working prototype for initial testing by mid-April.
Additionally, Section 314 of the Act contemplates an expanded role for Treasury in the
sharing of information regarding terrorism and money laundering not only among law
enforcement and financial institutions, but also among financial institutions themselves.

Treasury is completing-work on a regulation that will be issued by the February deadline
that, in part, first sets up the procedures by which financial institutions may share information
among themselves regarding suspected terrorist financing, including money laundering, after
providing notice to Treasury.
3.
Respect important privacy rights.
The significant anti-money laundering provisions of the Act also serve to highlight the
tension between the need to share infonnation and the legitimate need for fmancial privacy. We
acknowledge, as we must, that now more than ever law enforcement and the intelligence
community must have the ability to obtain and share financial infonnation. However, that need
must always be balanced against our fundamental notions of privacy. Striking that balance is the
challenge for Treasury as we implement this legislation.
4.

Require only the degree of reporting that results in action by the government.

The potential new reporting obligations created by the Act mean that we must be even
more vigilant in ensuring that the information reported is useful and in fact will be used
effectively by the government. One consequence of an aggressive regulatory scheme is
increased reporting obligations. But additional reporting requirements in and of themselves
cannot serve as proxies for an effective anti-money laundering regime. If the information is not
going to be used, it should not be requested. This principle guided our approach to implementing
Section 365. That Section requires that non-financial trades or business file a report when they
receive over $10,000 in coins or currency-a requirement that is virtually identical to the
requirement placed on the very same businesses to file a report with the IRS under section 6050I
of the Internal Revenue Code. Although the purpose of Section 365 was unquestionably to
provide law enforcement and regulatory authorities with access to the same information currently
received by the IRS-information that could not be easily shared because of the IRS
confidentiality statute-as written, Section 365 seemed to impose a new reporting requirement.
Thus, we crafted a rule that permits businesses to file a single cash reporting form that will go to
both FinCEN and the IRS, thus satisfying both reporting requirements with a single report.
5.
Protect our financial system.
The Bank Secrecy Act exists to protect our financial system. The Act provides Treasury
with additional authority to systematically eliminate known risks to the financial system as well
as to act in response to a specific threat that may arise. Proven high~risk accounts, such as
correspondent accounts maintained on behalf of foreign.shell banks, will no 10nger be pennitted
access to our system. In Section 311, you have also given us a powerful weapon with which we
can apply graduated, proportionate measures when specific money laundering risks involving
foreign jurisdictions and individuals arise. This new authority makes it clear that the Secretary,
in consultation with other agencies, can impose an array of special measures that are tailored to
the particular risk presented. Treasury is conducting active training and outreach to educate law
enforcement agencies about this new tool.
Treasury's Implementation Priorities
Within the framework of the principles I have outlined above, the first priority for
Treasury is to take all reasonable steps to meet the deadlines imposed by the Act.

We have devoted considerable resources to this task, redirecting our policy objectives to
accommodate this effort. I will not sit here today and assure this Committee that, without fail,
we will meet each deadline. The issues presented are complex and, as we proceed, new ones
continue to arise. I can assure you, however, that we are working and will continue to work
diligently on implementation, while taking the time that may be necessary to resolve difficult
legal and policy questions.
Beyond the deadlines imposed in the Act, we have identified various provisions which,
for a variety of reasons, we seek to pursue at the outset. These are provisions that, in our view,
ought to be addressed on an expedited basis if possible. Finally, certain provisions with no
immediate deadlines will inevitably have to be implemented after the more immediate priorities.
1.
The First Tranche -- To be Implemented by April.
Over the next three months, we are striving to implement statutory provisions addressing:
(1) information sharing among financial institutions, law enforcement and regulatory authorities
(Section 314); (2) enhanced due diligence provisions applicable to financial institutions that
maintain either private bank accounts or correspondent accounts for non-U.S. persons (Section
312); (3) methods for identifying and confirming the identity of foreign nationals (Section 326);
(4) the minimum requirements for anti-money laundering compliance programs for financial
institutions; (5) the role of the IRS in the administration of the Bank Secrecy Act (Section 357);
and (6) methods for improving compliance with the obligation to report foreign bank accounts
(Section 361). Additionally, we will be issuing final regulations covering the foreign shell bank
correspondent account prohibition (Section 313), the record-keeping provision under Section
319(b), and the cash reporting requirements (Section 365).
2.
The Second Tranche - To Be Implemented as Expeditiously as Possible.
Treasury is moving forward now to implement the following provisions addressing: (1)
the authority of the Secretary, in consultation with other agencies, to designate primary money
laundering concerns and impose special measures against them (Section 311); (2) concentration
accounts (Section 325); (3) account opening procedures (Section 326); (4) suspicious activity
reporting for futures commission merchants, commodity trading advisors, and commodity pool
operators (Section 356); and (5) the efficient use of exemptions for currency transaction reports
(Section 366). We intend to issue regulations further defining terms contained in Section 311 at
the same time we issue regulations implementing the due diligence provisions of Section 312.
Also, Treasury and the regulators are aggressively moving forward to draft regulations setting
forth customer identification procedures for financial institutions.
IMMEDIATE RESULTS

.Although we have much to do to fully.implement.the provisions ofthe Act, I wish to
emphasize that the Act has helped us generate immediate results in the financial front of the war
on terrorism. I alluded to two of those re'sults at the beginning of my testimony.
INFORMATION SHARING

The amendments to the Bank Secrecy Act clarify the authority ofthe Secretary to share
BSA information with the Intelligence Community for intelligence or counterintelligence
activities related to domestic or international terrorism, regardless of whether the BSA
information is related to law enforcement.

The amendments to the Right to Financial Privacy Act ("RFPA") further enhance the
ability of government to obtain and share relevant financial records with another agency or
department, such as FinCEN and OFAC, involved in intelligence or counterintelligence activities
related to international terrorism without notifying the targets. The amendment to the Fair Credit
Reporting Act facilitates government access to information contained in suspected terrorists'
credit reports when the inquiry relates to international terrorism. This amendment allows those
investigating suspected terrorists prompt access to credit histories that may reveal key
information about the terrorists' plan or source of funding - without notifying the targets.
The Act also allows for greater information sharing with the private sector and selfregulatory organizations. Under the Act, for example, financial institutions that submit voluntary
disclosures of infonnation relating to terrorism and money laundering are immunized from
liability, and Bank Secrecy Act reports can now be made available to securities and commodities
self-regulatory organizations.
IEEPA AMENDMENTS THAT HAVE HELPED IN OUR FREEZING EFFORTS

This Committee was also largely responsible for amendments to the International
Emergency Economic Powers Act ("JEEPA") that clarified the authority of the President and the
Treasury Department to target and block terrorist assets successfully and efficiently. On
December 14, 2001, OFAC utilized this authority to block suspect assets and records during the
pendency of an investigation in the case of Global Relief Foundation and Benevolence
International Foundation, two charities with locations in the United States.
In addition, it has become easier to share and use intelligence information for freezing
assets since the PATRIOT Act authorized courts to consider classified information under the Act
without such information being disclosed to those challenging the blocking. The JEEPA
amendment also grants the President the power to confiscate and vest in the United States
Government property of countries or persons involved in hostilities or attacks against the United
States. Though this authority has not been used, it is a powerful new tool available to the
Executive and a deterrent effect to those who would support terror.
NEW TOOLS TO FOLLOW THE MONEY AND TO DETER MONEY LAUNDERING

The Act also strengthens existing money laundering provisions and enhances the
Treasury Department's ability to deal with this problem - which, in many respects, is related to
the i~sue of terrorist fmancing. For example, the Act now requires that trades or businesses
receiving more than $10,000 in coins or currency file reports with FinCEN. In addition, as of
January 1,2002, certain money service businesses are required to register with FinCEN and are
now required to file suspicious activity reports (SARs) for money orders, travelers checks, and
all transactions by money transmitters. While Congress gave Treasury the authority to impose
some of these requirements before the Act was enacted,Jhe.-Act extended the requirement to
underground money transmitters. We have acted promptly to take full advantage of this new
extension of authority. To date, it appears that registration is on track, and we will be able to
begin the process of finding those underground money remitters who fail to register and charge
them criminally if they have not registered in accordance with the law. In addition, the Act has
given sharper teeth to these provisions by increasing civil and criminal penalties for Bank
Secrecy Act violations.
In all, the Act enables us to fulfill our mission of thwarting the criminal use of the
fmancial system in a way that was unavailable or impossible before October 25, 2001.

Conclusion

Mr. Chairman, we are engaged in a long-term battle against illegal abuse of the financial
system. Whether it is terrorist financing or classic narcotics money laundering, we need to take
every measure possible to combat the evil deeds that soil our financial system and pose a real
threat to our security.
Treasury will continue to use the powers and assets at its disposal to ferret out terrorist
financiers and networks and choke the funding source for terrorists here at home and abroad.
We will continue to work in close coordination with our sister departments and agencies and
with our international partners to make our campaign against terrorist financing as effective as
possible. Furthermore, we will continue to fight the battle against money laundering and the
criminal misuse of the financial system. An essential part ofthis mission is the complete and
efficient implementation of the provisions of the Act. We are ready for this sustained effort, and
we appreciate your support.
Mr. Chairman, this concludes my formal testimony. I would be pleased to answer any
questions that you, or members Qfthe Committee, may have regarding the Administration's
goals and policies regarding terrorist financing and the Act.
Thank you.

-30-

D F P \ R 1 \1 k \

() I,

HI,

L \ S l R \

NEWS
omer. OF PUBUC AFFAIRS -1500 PENNSYLVANlAA'VENUE, N.W. - WASHINGTON, D.C. - 2OUO. (102) 622-2960
Contact:

For Immediate Release
January 29,2002

Rob Nichols
202-622-2910

DEPUTY TREASURY SECRETARY KENNETH DAM TO PAKISTAN AND INDIA

Deputy U.S. Treasury Secretary Kenneth Dam will travel to Pakistan and India February
4-11.

During his visit, Deputy Secretary Dam will discuss our common efforts to combat
terrorist financing; he will address trade, investment and a range of steps supportive of strong
economic growth; and he will reinforce President Bush's message that these two nations resolve
their differences peacefully.

Deputy Secretary Dam will meet with a wide array of senior government officials and
private sector political, financial and economic experts.
-30-

PO-960

•

·U.s, GOVIIMIInI Printing Office: 1998· 6111-559

federal financing
WASHINGTON, D.C. 20220

bankNEWS

FEDERAL FINANCING BANIC January 31, 2002

Kerry Lanham, Secretary, Federal Financing Bank (FFB),
announced the following activity for the month of December 2001.
FrB holdings of obligations issued, sold or guaranteed by
other Federal agencies totaled $39.1 billion on December 31 ,
2001, posting a aecrease of $1,388.9 million from the level on
November 3D, 2001. This net change was the result of decreases
in holdings of agency debt of $1,385.6 million and in holdings of
goverpment-guaranteed loans of $3.3 million. The FFB made 80
disbursements, received 16 prepayments, and extended the
maturities of 110 loans guaranteed by the Rural Utilities Service
during the month of December .
.. Attached to this release are tables presenting FrB December
loan activity and FFB holdings as of December 31, 2001.

P0-961

Page 2
FEDERAL FINANCING BANK
DECEMBER 2001 ACTIVITY
Date

Borrower

Amount
of Advance

Final
Maturity

Interest
Rate

12/04/01
12/04/01
12/05/01
12/10/01
12/10/01
12/11/01
12/11/01
12/12/01
12/12/01
12/13/01
12/14/01
12/26/01
12/27/01
12/28/01
12/31/01
12/31/01
1/02/02
1/02/02

1.928%
1.907%
1.866%
1.897%
1.815%
1.876%
1. 836%
1. 815%
1.784%
1.795%
1.815%
1. 845%
1.877%
1. 866%
1.877%
1. 845%
1. 866%
1.866%

1. 897% S/A

;ENCY DEBT
r,S, POSTAL SERVICE
f,S. Postal Service
" S. Postal Service
i, S. Postal Service
:,5. Postal Service
'.5. Postal Service
'.5. Postal Service
'.S. Postal Service
'.S. Postal Service
',S. Postal Service
.S. Postal Service
.5. Postal Service
. S. Postal Service
.5. Postal Service
.5. Postal Service
.S. Postal Service
.8. Postal Service
.8. Postal Service
.8. Postal Service

12/03
$100 1 000 1 000.00
12/03
$306,200,000.00
12/04
$56,400,000.00
12/07
$200,000,000.00
12/07
$227,900,000.00
12/10
$480 1 000,000.00
12/10
$244 1 300,000.00
12/11
$190,000,000.00
12/11
$253 1 000,000.00
12/12
$266,800,000.00
12/13
$60,400,000.00
12/24
$263,500,000.00
$54,900,000.00
12/26
12/27
$187,500,000.00
12/28 $1,600,000,000.00
12/28
$313,700,000.00
12/31
$780,000,000.00
12/31
$245,800,000.00

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

VERNMENT-GUARANTEED LOANS
ENERAL SERVICES ADMINISTRATION
tlanta CDC Lab
~ley Services Contract
rramblee Office Building
tlanta CDC Lab
tlanta CDC Lab
~PARTMENT

12/06
12/11
12/14
12/14
12/26

$76,273.38
$32,677.99
$12,319.33
$14,824.22
$97,870.63

1/30/02
7/31/25
10/01/26
1/30/02
1/30/02

12/03
12/03
12/03
12/03
12/03
12/11
12/14

$112,624.07
$30,108.35
$66,594.15
$1,319,765.27
$6,168.75
$201,402.48
$62,717.76

12/03
12/03
12/03
12/03

$7,000,000.00
$498,000.00
$97,000.00
$1,100,000.00

5.667%
5.648%
1.815%
1.845%

S/A
S/A
S/A
S/A

3/01/30
3/01/30
1/02/15
1/02/15
7/01/31
9/04/29
7/01/31

5.282%
5.282%
4.592%
4.592%
5.267%
5.585%
5.557%

S/A
S/A
S/A
S/A
S/A
S/A
S/A

4/01/02
12/31/30
12/31/15
12/31/30

1.776%
5.216%
4.635%
5.221%

Qtr.
Qtr .
Qtr.
Qtr.

OF EDUCATION

3.rber-Scotia College
3.rber-Scotia College
tncoln University
lncoln University
lvingstone College
mgaloo College
:nnett College
mAL UTILITIES SERVICE
licalola Electric #664
larles Mix Elec. #630
.tizens Tel (VA) #680
anters Electric #763

Page 3
FEDERAL FINANCING BANK
DECEMBER 2001 ACTIVITY
Borrower

Date

Amount
of Advance

Final
Maturity

Interest
Rate

~utherford

12/03
12/03
12/03
12/04
12/06
12/06
12/07
12/07
12/07
12/10
12/10
12/10
12/11
12/11
12/12
12/13
12/13
12/13
12/14
12/14
12/17
12/17
12/17
12/18
12/18
12/19
12/20
12/20
12/20
12/21
12/21
12/21
12/21
12/21
12/21
12/27
12/27
12/27
12/28
12/28
12/28
12/28
12/31
12/31
12/31
12/31
12/31
12/31
12/31
12/31

$3,500,000.00
$11 , .5 9 9 , 800 . 0 0
$119,400.00
$325,000.00
$20,658,000.00
$85,000.00
$3,500,000.00
$4,000,000.00
$2,000,000.00
$7,970,000.00
$1,375,000.00
$5,000,000.00
$930,000.00
$393,000.00
$10,540,000.00
$550,000.00
$1,500,000.00
$1,400,000.00
$321,000.00
$3,700,000.00
$3,762,000.00
$1,700,000.00
$1,000,000.00
$100,000.00
$2,331,000.00
$4,459,000.00
$440,000.00
$4,005,000.00
$1,750,000.00
$4,624,000.00
$373,000.00
$860,000.00
$14,049,000.00
$4,584,000.00
$8,000,000.00
$200,000.00
$500,000.00
$4,802,000.00
$6,358,000.00
$20,254,649.00
$2,965,918.00
$500,000.00
$5,000,000.00
$793,422.08
$595,066.54
$994,822.06
$2,300,000.00
$4,000,000.00
$2,000,000.00
$3,122,674.95

12/31/35
12/31/20
12/31/20
1/02/35
12/31/25
1/03/34
12/31/35
1/02/35
4/01/02
12/31/24
1/02/35
1/03/23
12/31/02
4/01/02
1/03/34
12/31/35
12/31/35
4/01/02
12/31/24
12/31/35
1/02/35
1/03/34
4/01/02
12/31/15
12/31/30
3/31/06
1/02/35
12/31/35
7/01/02
12/31/35
1/02/35
12/31/35
12/31/25
12/31/25
1/03/05
12/31/30
1/03/12
4/01/02
1/02/07
12/31/25
12/31/19
12/31/03
12/31/03
4/01/02
4/01/02
4./01/02
7/01/02
1/03/12
1/03/12
4./01/02

5.226%
4.972%
4.972%
5.201%
5.265%
5.219%
5.431%
5.428%
1.779%
5.644%
5.574%
5.658%
2.217%
1.847%
5.517%
5.429%
5.429%
1.670%
5.449%
5.490%
5.575%
5.576%
1.739%
5.0"95%
5.504%
4.173%
5.426%
5.427%
1.816%
5.417%
5.419%
5.417%
5.522%
5.397%
3.664%
5.541%
5.153%
1.748%
4.413%
5.455%
5.120%
3.177%
3.147%
1.721%
1.721%
1.721%
1.834%
5.077%
5.077%
1.721%

Electric #779
Jnited Power Assoc. #433
mited Power Assoc. #433
rashington Electric #655
•labama Electric #695
Ineida-Madison Elec. #582
~ookson Hills Elec. #797
:ast Central Energy #660
leade County Elec. #662
:ast Kentucky Power #489
~rlboro Elec. #642
·nion Electric #783
~laware County Elec. #682
ast River Power #453
oweta-Fayette Elec. #620
astern Maine Coop. #795
organ County Elec. #759
tearns Cooperative #733
lock Island Power #652
rcas Power and Light #775
ake Region Elec. #712
. Indiana Rural Elec. #54B
umter Elec. #735
itizens Tel (VA) #680
RECl Electric #650
est River Elec. #751
dams Rural Electric #706
itizens Elec. #742
arrison County #532
~rth Georgia Elec. #781
orth Plains Elec. #785
rince George Elec. #796
ri-State #475
ri-State #757
lite River Valley Elec. #776
~ke Region Elec. #737
ille Lacs Electric #769
iTCommunications #798
lck River E.M.C. #656
~orgia Trans. Corp. #559
lterstate Tele #661
mches River Elec. #634
nicalola Electric #664
.9 Sand Elec. #540
.9 Sand Elec. #540
.9 Sand Elec. #540
.9 Sand Elec. #540
.ue Grass Energy #674
.ue Grass Energy #674
:azos Electric #917

Qtr.
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Qtr.
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Qtr.
Qtr.
Qtr.
Qtr.

Qtr.
Qtr.
Qtr.
Qtr.
Qtr.

Qtr.
Qtr.
Qtr.
Qtr.

Qtr.
Qtr.

Qtr.
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Page 4
FEDERAL FINANCING BANK
DECEMBER 2001 ACTIVITY
Date

Borrower
Brazos
Brazos
Brazos
Brazos
Brazos
Brazos
BrazoS
Brazos
Brazos
Brazos
Brazos
Brazos
Brazos
Brazos
Brazos
Brazos
Brazos
Brazos
BrazOS
Brazos
Brazos
Brazos
Brazos
Brazos
BrazoS
Brazos
Brazos
Brazos
Brazos
Brazos
Brazos
Brazos
Brazos
Brazos
Brazos
Brazos
Brazos
Brazos
Brazos
Brazos
Brazos
Brazos
Brazos
Brazos
Brazos
Brazos
Brazos
Brazos
Brazos
Brazos

Electric
Electric
Electric
Electric
Electric
Electric
Electric
Electric
Electric
Electric
Electric
Electric
Electric
Electric
Electric
Electric
Electric
Electric
Electric
Electric
Electric
El.ectric
Electric
Electric
Electric
Electric
Electric
Electric
Electric
Electric
Electric
Electric
Electric
Electric
Electric
Electric
Electric
Electric
Electric
Electric
Electric
Electric
Electric
Electric
Electric
Electric
Electric
Electric
Electric
Electric

#917
#917
#917
#917
#917
#917
#917
#917
#917
#917
#917
#917
#917
#917
#917
#917
#917
#917
#917
#917
#917
#917
#917
#917
#917
#917
#917
#917
#917
#917
#917
#917
#917
#917
#917
#917
#917
#917
#917
#917
#917
#437
#437
#437
#437
#437
#437
#561
#561
#561

12/31
12/31
12/31
12/31
12/31
12/31
12/31
12/31
12/31
12/31
12/31
12/31
12/31
12/31
12/31
12/31
12/31
12/31
12/31
12/31
12/31
12/31
12/31
12/31
12/31
12/31
12/31
12/31
12/31
12/31
12/31
12/31
12/31
12/31
12/31
12/31
12/31
12/31
12/31
12/31
12/31
12/31
12/31
12/31
12/31
12/31
12/31
12/31
12/31
12/31

Amount
of Advance
$1,386,960.50
$346,416'.45
$799,030.64
$1,043,286.45
$694,763.13
$399,451. 44
$746,806.89
$902,760.25
$291,112.02
$211,277.65
$363,081.08
$212,795.98
$152,462.37
$132,824.93
$72,771.11
$109,963.88
$35,392.99
$1,171,492.25
$233,732.89
$884,289.64
$2 ,648,811. 37
$1,586,301.32
$950,669.79
$573,991.28,
$891,940.53
$484,574.55
$1,398,206.47
$1,684,659.80
$1,978,412.89
$809,376.66
$619,204.22
$407,241.06
$1,092,6,32.35
$1,419,687.82
$2,334,038.73
$2,498,332.58
$489,873.04
$15,850.75
$835,737.54
$2,737,990.68
$2,146,602.24
$4,049,638.24
$1,368,508.78
$310,416.38
$2,973,478.44
$1,148,346.02
$482,351.61
$10,799,598.38
$5,435,687.93
$10,606,524.69

Final
Maturity
4/01/02
4/01/02
4/01/02
4/01/02
4/01/02
4/01/02
4/01/02
4/01/02
4/01/02
4/01/02
4/01/02
4/01/02
4/01/02
4/01/02
4/01/02
4/01/02
4/01/02
4/01/02
4/01/02
4/01/02
4/01/02
4/01/02
4/01/02
4/01/02
4/01/02
4/01/02
4/01/02
4/01/02
4/01/02
4/01/02
4/01/02
4/01/02
4/01/02
4/01/02
4/01/02
4/01/02
4/01/02
4/01/02
4/01/02
4/01/02
4/01/02
4/01/02
4/01/02
4/01/02
4/01/02
4/01/02
4/01/02
4/01/02
4/01/02
4/01/02

Interest
Rate
1.721%
1.721%
1.721%
1.721%
1.721%
1.721%
1.721%
1.721%
1.721%
1.721%
1.721%
1.721%
1. 721%
1.721%
1.721%
1.721%
1.721%
1~721%

1.721%
1.721%
1.721%
1.721%
1.721%
1.721%
1.721%
1.721%
1.721%
1. 721%
1.721%
1. 721%
1.721%
1.721%
1.721%
1.721%
1.721%
1. 721%
1. 721%
1.721%
1.721%
1.721%
1.846%
1.846%
1.846%
1.846%
1.846%
1.846%
1.846%
1.721%
1.721%
1.721%

Qtr.·
Qtr ..
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Page 5
FEDERAL FINANCING BANK
DECEMBER 2001 ACTIVITY
Borrower
3razos Electric #561
3rown County Elec. #687
~odington-Clark Elec. #551
~entral Georgia Elec. #731
~entral Elec. Power #624
~entral Elec. Power #504
:itizens Elec. #742
:lark Energy Coop. #611
~mberland Valley #668
)arien Telephone Co. #719
)arien Telephone Co. #719
)arien Telephone Co. #719
)elaware County Elec. #682
~ederal Rural Elec. #728
'leming-Mason Energy #644
'leming-Mason Energy #644
'leming-Mason Energy #644
'leming-Mason Energy #644
'leming-Mason Energy #644
'reeborn - Mower Coop. #736
'reeborn-Mower Coop. #736
'reeborn-:Mower Coop. #736
'armers Telephone #399
'armers Telephone #399
:rayson Rural Elec. #619
~rayson Rural Elec. #619
·rayson Rural Elec. #619
~rrison County #532
:arrison County #532
nter-County Energy #592
nter-County Energy #592
nter-County Energy #592
nter-County Energy #592
ohnson County Elec. #482
icking Valley Elec. #522
agnolia Electric #560
eade County Elec. #662
eade County Elec. #662
ewberry Electric #704
~lin Rural Elec. #528
~lin Rural Elec. #577
~lin Rural Elec. #577
~en Electric #525
:e Dee Elec. #547
iedmont Tel. #566
~n Miguel Electric #919
~n Miguel Electric #919
:enic Rivers Energy #677
~litrock Telecom Coop. #506
:earns Cooperative #733

Date

Amount
of Advance

Final
Maturity

Interest
Rate

$8,346,462.52
$250,000.00
$495,559.32
$1,780,000.00
$5,593,000.00
$2,923,000.00
$2,694,000.00
$2,984,466.17
$4,200,000.00
$1,927,403.00
$444,000.00
$214,000.00
$364,000.00
$500,000.00
$2,586,537.34
$1,392,750.87
$1,492,233.08
$2,188,608.52
$1,392,750.87
$750,000.00
$500,000.00
$300,000.00
$1,791,728.21
$1,984,607.69
$1,193,786.47
$596,893.24
$994,822.06
$990,776.42
$891,698.78
$1,486,164.63
$1,981,552.85
$2,582,954.12
$219,855.67
$1,594,631.44
$2,723,644.38
$4,956,448.67
$1,300,000.00
$2,000,000.00
$4,164,000.00
$1,875,539.76
$2,559,175.49
$2,559,175.49
$1,980,312.06
$5,330,664.67
$160,006.00
$8,167,555.41
$8,576,028.76
$1,38'0,000.00
$1,680,731.68
$2,400,000.00

4/01/02
4/01/02
12/31/08
4/01/02
12/31/02
1/03/33
4/01/02
4/01/02
4/01/02
4/01/02
4/01/02
4/01/02
4/01/02
7/01/02
4/01/02
4/01/02
4/01/02
4/01/02
4/01/02
7/01/02
1/02/35
1/02/35
1/03/06
1/03/06
4/01/02
4/01/02
4/01/02
4/01/02
4/01/02
4/01/02
4/01/02
4/01/02
4/01/02
4/01/02
4/01/02
4/01/02
4/01/02
4/01/02
4/01/02
4/01/02
4/01/02
4/01/02
4/01/02
12/31/29
7/01/02
4/01/02
4/01/02
12/31/03
1/02/18
4/01/02

1.721%
1.721%
4.857%
1.721%
2.262%
5.643%
1.721%
1.721%
1.721%
1.721%
1.721%
1.721%
1.721%
1.834%
1.721%
1.721%
1.721%
1.721%
1.721%
1.834%
5.517%
5.517%
4.185%
4.185%
1.721%
1.721%
1.721%
1.721%
1.721%
1.721%
1.721%
1.721%
1.721%
1.846%
1.721%
1.846%
1.721%
1.721%
1.721%
1.721%
1.721%
1.721%
1.721%
5.522%
1.834%
1.721%
1.721%
3.149%
5.243%
1.721%

Qtr.,
Qtr.,
Qtr.,
Qtr.,
Qtr.,
Qtr.,
Qtr.
Qtr.
Qtr.
Qtr.
Qtr.
Qtr.
Qtr.
Qtr.
Qtr.
Qtr.
Qtr.
Qtr.
Qtr.
Qtr.
Qtr.
Qtr.
Otr.
Qtr.
Qtr.
Qtr.
Qtr.
Qtr.
Qtr.
Qtr.
Qtr.
Qtr.
Qtr.
Qtr.
Qtr.
Qtr.
Qtr.
Qtr.
Qtr.
Qtr.
Qtr.
Qtr.
Qtr.
Qtr.
Qtr.
Otr.
Qtr.
Qtr.
Qtr.
Qtr.

Page 6
FEDERAL FINANCING BANK
DECEMBER 2001 ACTIVITY
Borrower
surry-Yadkin
Surry-Yadkin
surry-Yadkin
surry-Yadkin
surry-Yadkin
Upsala Coop.

Date
Elec.
Elec.
Elec.
Elec.
Elec.
Tele.

#534
#534
#534
#534
#534
#429

12/31
12/31
12/31
12/31
12/31
12/31

Amount
of Advance
$984,324.21
$984,324.21
$492,162.10
$984,324.21
$984,324.21
$316,323.51

S/A is a Semiannual rate.
Qtr. is a Quarterly rate.
maturity extension or interest rate reset

Final
Maturity
4/01/02
4/01/02
4/01/02
4/01/02
4/01/02
4/01/02

Interest
Rate
1.721%
1.721%
1.721%
1.721%
1.721%
1.846%

Qtr.
Qtr.
Qtr.
Qtr.
Qtr.
Qtr.

Page 7
FEDERAL FINANCING BANK HOLDINGS
(in millions of dollars)

Program
Agency Debt:
U.S. Postal Service

December 31. 2001

November 30. 2001

Monthly
Net Change
12/1/01-12/31/01

Fiscal Year
Net Change
10/1/01-12/31/01

Subtotal *

$7.575.8
$7.575.8

$8.961.4
$8,961.4

·$1.385.6
·$1,385.6

·$3.737.2
-$3,737.2

Agency Assets:
FmHA-RDIF
FmHA·RHIF
Rural Utilities Service-CBO
Subtotal *

$2,310.0
$4.375.0
$4.270.2
$10,955.2

$2.310.0
$4.375.0
$4.270.2
$10,955.2

$0.0
$0.0
$0.0
$0.0

·$125.0
$0.0
-$125.0

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 *

$2.103.1
$43.7
$7.0
$1.207.3
$2.246.8
$13.1
$941.1
$13,875.8
$123.5
$3.4
$20.564.9

$2.141.0
$41.9
$7.1
$1.207.3
$2.264.6
$13.1
$941.1
$13,822.2
$126.3

--==--=-=

-$37.9
$1.8
·$0.1
$0.0
·$17.8
$0.0
$0.0
$53.6
-$2.8
$0.0
-$3.3

-$53.5
$12.3
-$0.9
·$71.4
-$21.2
SO.O
$0.0
$276.6
-.$8.4
$0.0
$133.5

=====---_===-:1

====-=====

$40.484.8

-$1.388.9

·$3.728.7

Grand total*

* figures may not total due to rounding
does not include capitalized interest

- ====-

$39.095.9

$3.4

$20.568.2

SO.O

p0962

Page 1 of6

TREASURY NEWS

FROM THE OFFICE OF PUBLIC AFFAIRS
FOR IMMEDIATE RELEASE
January 30, 2002
PO-962
REPORT TO THE SECRETARY OF THE TREASURY
FROM THE
TREASURY ADVISORY COMMITTEE
OF THE
BOND MARKET ASSOCIATION
January 30, 2002

Dear Mr. Secretary:
Over the past three months, data on the economy's perfonnance and forecasts for the next year have
become mixed. Indeed, signs of weakness persist. The unemployment rate rose from 5.4% in October to
5.8% in December. Payroll employment fell by almost I million jobs in that period, and most
economists believe GDP fell in both the third and fourth quarters. The National Bureau of Economic
Research declared that a recession began in March of 2001. On the other hand, other infonnation,
especially recent data, suggest that the recession may be drawing to a close. Weekly data on new claims
for unemployment benefits have declined by over 100,000 over the past few months. Household
spending has proven to be much more resilient than anticipated and consumer confidence has been
rising. Orders for durable goods have increased and recent reports by the Institute for Supply
Management have shown marked increases. Most economists expect a swing in business inventories to
lead to positive GDP growth in the first and the second quarters of 2002. At issue among forecasts is
whether household and. business final demand wi-ll be strong enough to ignite a self-sustaining recovery
and, if so, how strong that recovery will be.
Interest rates on most Treasury maturities have risen since our last meeting on October 30. Yields on 2year notes have risen by about 40 basis points, on 5-year notes by 65 basis points, and on 10-year notes
by about 60 basis points. At the November refunding announcement, the Treasury stated its intention to
discontinue issuing 3D-year bonds. This caused an almost immediate decline in the yield on 3D-year
bonds of almost 40 basis points, but the move was subsequently reversed. The yield on outstanding 30year bonds are now about 25 basis points higher than at the time of our October 30 meeting. Yields on
short-tenn Treasury bills have declined by 40 basis points for 3-mcnth bills and 20 basis points for 6month bills, in sympathy with the 75 basis point drop in the federal funds rate that took place in two
installments in early November and early December. Spreads to Treasuries on corporate bonds,
mortgage-backed securities, and swaps have all declined since October 30 but generally not enough to

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01/3012002

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p0962

offset the rise in Treasury yields. Overall, fixed income markets appear to anticipate an end to Fed
easing, an economic recovery, and at some point a rise in the federal funds rate from its current level of
1.75%.
The equity market has risen since October 30, with the Dow Jones Industrial Index up about 5%, the
S&P 500 Index up about 4%, and the NASDAQ Composite up over 13%. However, the averages peaked
in early January and are off about 7%, 6%, and 8%, respectively, from highs achieved on January 4.
Company reports have become less pessimistic since our October 30 meeting. Data collected by First
Call show that while the 129 negative pre-announcements or earnings warnings for the first quarter of
2002 are 12% above those recorded at the same point in the first quarter of 2001, they are 31 % below
those at comparable points in the second, third, and fourth quarters of 2001. In addition, positive preannouncements have accelerated.
As noted in our October 30 report, the budget outlook is significantly different from what it was earlier
in 2001. The Congressional Budget Office estimates a current policy deficit for the current fiscal year of
$21 billion, compared to a surplus of $313 billion proj ected last year at this time and a surplus of about
$150 billion projected as ofmid-2001 after the tax cut was enacted. The CBO also now projects a deficit
of $14 billion for 2003 and a surplus of $54 billion in 2004. However, these projections assume current
policies are left unchanged. The President's budget is reported to contain proposals that would increase
the deficit for the current fiscal year to over $100 billion and the deficit for 2003 to $80 billion.
However, the President's proposal would still have the budget returning to surplus in 2004.
Against this economic and financial background, the Committee began consideration of debt
management questions posed by the Treasury and the composition of financing to refund $4.1 billion of
privately held Treasury debt maturing on February 15.
The first question posed by the Treasury asked what adjustments to financing plans should be made this
year and next because of changes in the budget outlook. In particular, the Treasury asked what changes,
if any, should be made in tenus of the following:
o Issue size

o Reopening policies
o Frequencies
o Types of securities and maturities
o Buybacks
To begin with, the Committee report of October 30 had considered the effect on financing plans of the
change in the budget outlook, under the assumption of a deficit/surplus projection that was roughly
similar to the latest CBO current policy projection. At that time, the Committee concluded that "the
Treasury does not appear to have to make dramatic changes in its current coupon offering frequencies or
sizes in fiscal year 2002 or even in 2003." The Committee believed at that time and continues to believe
that the extra money raised in 2-year notes, now being issued at $25 billion per month, as well as some
extra issuance in Treasury bills, will accomplish the bulk of the additional financing required in 2002
and 2003 as long as deficits fall within the ranges encompassed by the CBO current policy projections
and would probably, with minor adjustments, cover the budget profile of the President's budget.

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01130/2002

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Page30f6

The CBO estimated that between 1981 and 2001 the average absolute divergence beween their forecast
for the budget deficit in the current year and the actual outcome because of economic and technical
factors alone was the equivalent of about $60 billion, expressed in terms of the deficit for 2002. Current
financing schedules are geared toward small to moderate deficits, with a return to surplus within the next
few years. Ifbudget outcomes are more favorable than now anticipated, with smaller deficits and a more
rapid return to surplus, the current financing schedules can be modified at the margin, similar to what
had been the trend prior to fiscal year 2002. On the other hand, it is conceivable that the combination of
enactment of policy proposals equivalent in size to those in the President's budget and unforeseen
economic and technical factors could result in significantly larger financing needs that would require
changes to current financing schedules. If this were to occur, the Treasury could, in short, begin to
unwind some of the fmancing changes made over the past several years. More specifically, the
following represent a general list of alternatives and possible changes if unfavorable deficit outcomes
develop.
o Issue size: The Treasury has increased the issue size of the 2-year note from $17 billion in
September to $25 billion in January. Most members believe that the market is having some
difficulty absorbing the increase, with two of the last three auctions having cover ratios of
1.5 to 1, the lowest for a 2-year note since 1988. One member disagreed, suggesting that
auction procedures, such as single price auctions, were the problem. However, the majority
believe that if the Treasury needs to raise more cash, it should next move to the 5-year note,
where members believe the market could absorb increased issue sizes. Members expressed
some ambiguity about making significant increases to la-year note issuance. Some
expressed skepticism about increasing 10-year note sizes if the budget is still going to return
to surplus in a few years after a short period of higher deficits. If unfavorable budget
outcomes appear to be pushing the date of the return to surplus back several years, all
members agreed that 10 year-issuance could be increased.
a Reopening policies: The Treasury policy of reopening 5-year and la-year issues in
alternate quarters was formulated as a means of providing large liquid issues in a period of
sharply rising budget surpluses. If an unfavorable deficit outcome results in a significant
rise in issue sizes, it is not clear that the reopening policy would be needed and could even
create cash management problems for the Treasury at maturity.
o Frequencies: Members are of the belief that it would take a very sharp deterioration of the
deficit outlook for the current financing schedule, with larger issue sizes, to be insufficient
to meet financing needs. If that outcome were to occur, clearly the Treasury could revert to
more frequent 5-year and la-year auctions.
a Types of securities: Finally, the Treasury could, in theory, re-institute discontinued new
issue maturities, in the event that other changes did not satisfy financing requirements.
o Buybacks: A somewhat different quesbon arises in the case of buybacks. The Committee
recommended and the Treasury implemented debt buybacks in a period when surpluses
were developing, and there were projections that the public debt would be paid down within
the next decade. Buybacks were a useful way of maintaining market liquidity by making it
possible to issue larger sizes of current coupons than would o~herwise have been. the case. A
side benefit was interest cost savings to the Treasury. In a penod of budget defiCIts,
buybacks are not necessarily needed to enhance liquidity in ~urrent co~pons. However, even
in a period of overall deficit, the Treasury continues to have lsolated wmdows when they
have significant amounts of excess cash or surplus and buybacks are an opportune use of
that excess cash. Some members believed that buybacks should be continued throughout the

01/30/2002

Page 4of6

po962

year even if at a lower level as long as the Treasury continues to believe the budget will
eventually return to surplus. However, the majority believed that for the time being the
Treasury might want to engage in buybacks primarily during months or quarters when they
run surpluses. A continuation of the program under such circumstances would be less likely
to be interpreted as an attempt to manipulate the yield curve but as a reasonable component
in a program to manage cash positions that is also consistent with the belief that the budget
will return to surplus at some point.
In response to Treasury's request for ways to enhance the development of the lO-year inflation indexed
securities market, the Committee recognized that for a number of reasons including supply/demand
imbalances and the current low-inflation environment, the lIs market remains an expensive debt
management tool. Some member believe that the program has not been in existence long enough to fully
ascertain whether it will ultimately require higher interest payments than on nominal securities, citing
past experience with the introduction of the 30-year bond. Regardless, most felt that a number of
program adjustments might help broaden demand for the product and eventually lead to more favorable
financing tenns for Treasury.

First, Treasury should reiterate their long-tenn commitment to the program. Despite broader acceptance
among investors in recent years, many still are skeptical as to whether the Treasury will continue the
program in any meaningful way.
Additionally, Treasury should upgrade its marketing program for lIs by highlighting, for instance, the
deflation protection imbedded in new issue lIs as well as the non-correlated nature of the product as a
portfolio management tool. This could help create more interest in the product among non-traditional IIs
players.
Smoothing the new issue process by spreading issuance more unifonnly throughout the year and moving
auctions to more effective dates might create more interest in the auction process and alleviate some of
the previously mentioned supply/demand imbalances. To accomplish this, Treasury should move from 2
to 4 auctions per year including 2 new issues and 2 reopenings. Additionally, Treasury should consider
aligning the lIs new issues with the quarterly refundings when interest in Treasuries is at a peak. This
change could increase crossover participation from traditional Treasury participants and generally
increase focus on the product.
The next question from the Treasury had to do with the calculation of the net long position (NLP) as part
of the auction process and efforts by the Treasury to reduce the time between submission of auction bids
and amtouncement of results. Currently, net long positions for Treasury auctions are calculated as of
~2:30 p.m~ for a 1:00 p.m. auction close, and repQrtable net long positions are sul>mitted along with bids
for calculation of the .35 percent award limit. Would it be feasible to have the net long position
calculation computed at 1:00 p.m., but reported after the close of an auction? Effectively, bidding
entities would be responsible for net long calculations relative to amounts bid, and auction awards would
would be based solely on amounts bid. Net long positions for purposes of the 35 percent rule would be
detennined after awards are made. If this approach were taken, the Treasury asked what sanctions the
Committee would recommend if an entity were found to be in violation of the 35 percent rule.
Most Connnittee members felt that separating NLP reporting from actual auction bidding and moving
the reporting point from 12:30 to 1:00 p.m., while somewhat more burdensome to the bidder, was
manageable practically. It might create some unintended consequences including smaller bid to cover
rates and generally ~eaker auction results. In recent years the dealer community has improved its ability
to calculate NLP. qwckly and accurately and because of this most Committee members felt that moving
the NLP calculatIon from 12:30 to 1:00 could be accomplished easily. The self policing aspect of the 35
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01130/2002

p0962

Page 5 of6

percent rule, however, was more troubling as it shifted the burden of staying within the 35 percent limit
squarely from Treasury to the bidder. In the past, a bidder could submit mUltiple bids in excess of the
35% rule knowing Treasury would reduce the award to be conforming. Under the self policing method,
however, the bidder would be in violation once the threshold bid was awarded in auction. To avoid this
situation bidders would almost certainly place fewer auction bids leading to smaller bid/cover ratios and
possibly to weaker auction results. The Committee felt strongly that any benefits to Treasury afforded by
quicker turnaround time in these situations should be weighed against the potential for weaker auction
results.
In response to the question of recommended sanctions if an entity were found to be in violation of the 35
percent rule, the strong majority of Committee members felt that current sanctions were appropriate if
not onerous. Also, it was unclear whether the change in NLP reporting would lead to fewer or more
violations of the 35 percent rule. Treasury could adjust sanctions in the future if material violations of
the 35 percent rule increased.
Finally, the Committee felt that improving the electronic capabilities of the auction platfonn could both
improve Treasury auction turnaround and increase investor participation in the auction. For instance, if a
bidder were able to check all auction inputs electronically prior to submission, errors would be kept to a
minimum while customer participation remained high and auction turnaround quick.
The Treasury asked for the Committee's recommendation on the composition of financing in 5- and 10year notes to refund $4.1 billion of privately held bonds maturing on February 15, the composition of
marketable financing for the remainder of the January-March quarter, and the composition of the
marketable financing for the April-June quarter.
The Committee recommends a $15 billion reopening of the outstanding 5-year note due November 15,
2006 and a new $13 billion 10-year note due February 15, 2012. For the remainder of the quarter the
Committee recommends a $25 billion 2-vear note to be auctioned on February 27. The Committee does
not recommend any cash management bills, projecting that the funding that would normally take place
in cash management bills will be accomplished by increasing the size of 4-week bills to a high of $23
billion in mid-March as shown in the attached table.
For the April-June quarter, the Committee's recommended financing is contained in the attached table.
However, three salient features of the recommendation are worthy of note.
First, the Committee suggests an $18 billion new issue of 5-year notes, to be auctioned on May 7. This
larger initial size for the 5-year is consistent with the Committee's October 30 recommendation that the
initial issue size for 5-year notes should be larger relativeJ-o the reopening so that more securities are
available for hedging purposes during the initial three months when the issue's usefulness as a hedge is
at its best.
Next, the financing plan for April-June includes a $3 billion reopening of the January inflation indexed
lO-year. Committee members believe that making the indexed security part of the refunding would call
attention to the issue and would enhance somewhat the development of the indexed market. Some
members believed $3 billion was too small an issue size, even for a reopening. However, the majority
believed the amount was a good starting point if the Treasury decides to include indexed securities in all
four refundings.
Finally, the Committee recommendation for the April-June period includes a $12 billion (approxirr:ately
$9 billion par amount) purchase of outstanding long-tenn bonds by the Treasury, concentrated m the

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p0962

Page 60f6

period of maximum Treasury cash balances, approximately April 17 to May 15, consistent with the
earlier discussion of buybacks in this report. Some members believed $12 billion was too large an
amount for repurchases in a one-month period, but the majority believed the market could accommodate
the repurchase. Also, a few members advocated that repurchases be spread throughout the year.
However, the majority felt the market would be skeptical of the Treasury's motivation for such a policy
while the government is running deficits and, as a result, advocated concentrating the purchase during
periods of large, excess cash balances.
Respectfully submitted,

James R. Capra, Chairman

Timothy W. Jay, Vice Chainnan

Ql table

Q2table

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01/3012002

u.s. TREASURY FINANCING SCHEDULE FOR 1ST QUARTER 2002
BILLIONS OF DOLLARS

ISSUE
4 WEEK AND
3&6 MONTH BILLS

ANNOUNCEMENT AUCTION
DATE
DATE

12127
01103
01110
01/17
01/24
01/31
02107
02114
02121
02126
03/07
03114
03121

12131
01107
01114
01/21
01/28
02104
02111
02118
02125
03104
03111
03118
03125

SETTLEMENT
DATE

01/03
01/10
01/17
01/24
01/31
02107
02114
02121
02128
03/07
03114
03/21
03/28

4-WK
7.00 A
6.00 A
6.00 A
6.00 A
10.00 A
10.00
12.00
15.00
15.00
19.00
23.00
23.00
23.00

OFFERED
AMOUNT
3-MO
14.70 A
12.00 A
13.00 A
14.00 A
15.00 A
15.00
15.00
15.00
15.00
15.00
15.00
14.00
13.00
541.35

MATURING
AMOUNT

NEW
FED NON
MONEY ROLLOVEf:

6-MO
17.65 A
14.00 A
13.00 A
13.00 A
14.00 A
14.00
14.00
14.00
14.00
14.00
14.00
13.00
12.00

-4.38·
43.7
38.7
-6.72
37.8
-5.82
37.8
-4.79
35.S
3.15
36.0
3.00
36.0
5.00
36.0
8.00
39.0
5.00
39.0
9.00
38.0
14.00
41.0
9.00
41.0
7.00
499.92
41.44
• Note: There was an error at the December 31 auctions that resulted in more 3 and 6 month bills beina issued than the originally announced $13 and $15 billion

0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
2.76
0.00
0.00
0.00
0.00
2.76

I-YEAR BILLS

02128

10.0

-10.00

-2.76

0.0

6.00

0.00

27.1

-2.07

0.00

4.1

23.70

0.00

25.00

23.6

1.37

0.00

84.00

54.99

29.01

0.00

COUPONS

10-Year TIPS

01/02

01/09

01115

6.00 A

CHANGE
~
+1.00

2-YearNote

01/23

01130

01/31

25.00 A

+2.00

5-Year Note (R)
10-Year Note

01131
01/31

02105
02106

02115
02115

15.00
13.00

-1.00

2-YearNote

02120

02127

02128

R=Reopening
A = Announced

Treasury announced a
Ql borrowing need of
S60 billion on 1128/02.

28.00

NET CASH RAISED THIS QUARTER:
NET FED ROLLOVER:
MARKETABLE BORROWING:
BUYBACKS:
TOTAL NE,. BORROWING:

60.44
0.00
60.44
0.00
60.44

U.S. TREASURY FINANCING SCHEDULE FOR 2ND QUARTER 2002
BILLIONS OF DOLLARS

ANNOUNCEMENT AUCTION

SETILEMENT

OFFERED

QAT.E

.I:!.m.

4 WEEK AND
3&8 MONTH BILLS

03128
04104
04111
04118
04125
05102
05/09
05116
05123
05128

04101
04108
04115
04122
04129
05106
05113
05120
05127
06/03

04104
04111
04/18
04/25
05102
05109
05116
05123
05130

06106

06110

06113
06120

06/17
06/24

~
3-MO
13.00
13.00
13.00
13.00
13.00
13.00
13.00
13.00
13.00
14.00
14.00
14.00
14.00
173.00

CASH MANAGEMENT BILLS
IS-Day Bill
03128
04102
Matures 4118
BUYBACKS
Apnl 15 to May 11 Total

06106
06113
06/20
06127

4-WK
15.00
12.00
6.00
6.00
6.00
6.00
9.00
15.00
18.00
6.00
6.00
6.00
7.00

04/03

MATURING
AMOUNT
6-MO
12.00
12.00
12.00
12.00
12.00
12.00
12.00
12.00
12.00
12.00
13.00
13.00
13.00

30.00

NEW
FEONON
MONEY ROLLOVER

44.7
46.0
4B.O
50.0
44.0
42.0
37.0
37.0
37.0
37.0
40.0
44.0
46.0
552.70

3.00
6.00
-5.08
-7.00
-11.00
-12.00
-102.70

30.00

0.00

-4.70
400
-17.00
-19.00
-13.00
-11.00

-3.00

0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00

-12.00

COUPONS
CHANGE
IN SIZE
2-Year Note

03120

03127

04/01

25.00

24.0

0.98

0.00

2-Year Note

04117

04124

04130

25.00

25.5

·0.53

0.00

5·Year Note
10-Yeer Nata (R)
100Year (R)

05101
05/01
05101

OSl07

05115

05/0B

9.4

22.58

0.00

05109

05115
05115

2·Year Note

05122

05129

05131

25.110

22.2

2.79

0.00

107.00

81.19

25.81

0.00

R=Reopenlng
A = Announced

Treasury
announced a Q2
borrowing need of
$89 billion on
1/28/02.

29.00

18.00
11.00
3.00

+3.00
-2.00
-3.00

NET CASH RAISED THIS QUARTER:
NET FED ROLLOVER:
MARKETABLE BORROWING:
BUYBACKS:
TOTAL NET BORROWING:

-78.89
0.00
....-76.89
·12.00

-88.89

Page 1 of4

p0963

FROM THE OFFICE OF PUBLIC AFFAIRS

FOR IMMEDIATE RELEASE
January 29, 2002
PO-963
MINUTES OF THE MEETING OF THE
TREASURY BORROWING ADVISORY COMMITTEE
OF THE BOND MARKET ASSOCIATION
January 29, 2002

The Committee convened at 9:00 a.m. at the Treasury Department for the portion ofthe meeting that
was open to the public. All members were present except for Messrs. Anderson, Druckenmiller and
Lyski. The Federal Register announcement of the meeting and a list of Committee members are
attached.
The Committee was welcomed by Timothy Bitsberger, Deputy Assistant Secretary for Federal Finance.
Karen Hendershot, Acting Director of the Office of Macroeconomic Analysis, summarized the current
state of the U.S. economy (statement attached). Fred Pietrangeli, a senior economist in the Office of
Market Finance, presented a series of charts updating Treasury borrowing estimates, and debt and
interest rate statistics.
The public meeting ended at 9:20 a.m.
The Committee reconvened in closed session at the Madison Hotel at 10:35 a.m. All members were
present except for Messrs. Anderson, Druckenmiller and Lyski. The charge, also attached, was
distributed to the Committee.
After reading the charge, the Committee began by review~its fmancing advice from the previous
Committee meeting in October. In October, it observed that central budget forecasts can be met with
existing securities and existing schedules. The Committee then discussed any financing changes needed
if financing requirements exceed current central projections and sought to provide advice that would
acknowledge any potential downside risks.
Committee members generally agreed that there was little room for additional increases in 2-year notes,
at least in the short-term. One member argued that there is additional capacity at the short-end of the
curve.
For some Committee members, the need for leveling off issuance of 2-year notes, combined with more
pessimistic budget forecasts, indicates that Treasury may be approaching a time when it will need to
increase issuance of 5-year notes. Members generally spoke positively about Treasury's ability to issue

01/30/2002

p0963

Page 20f4

5-year notes. The high level of fails in the financing market experienced recently can be taken as an
indication that the market can readily absorb more supply. The Committee also discussed whether
increased auction sizes would allow for a suspension of reopenings and the market impact of returning
to single-issue 5-year notes. Members generally favored suspending the regular reopening policy, if
auction sizes become large enough, and some noted that more frequent maturities would help investors
managing duration risk.
Committee members discussed the appropriateness of buybacks in a period of fiscal deficits. Most
members viewed the buyback program as a valuable tool that should be kept viable until surpluses
return. Members acknowledged the need for a transparent justification for buyback operations in the
absence of surpluses and that financing gains, by themselves, were an insufficient justification for the
program. Suggestions for maintaining the program until surpluses return included only conducting
buyback operations in surplus quarters and using the buyback program as a cash management tool. One
member suggested that participation could be increased by conducting more frequent operations with
fewer securities.
The Committee next considered the question of how Treasury could enhance development of the
Treasury inflation-indexed securities (lIS) market. Committee members noted that the lIS program has
been an expensive way to raise debt to date, but may not be in the future. Some members noted that IIS
have a unique position in portfolios because of their lack of correlation with other assets. One member
argued that there is insufficient demand for a security linked to the consumer price index and that
Treasury could shift the index to something that the market needs. Other members disagreed with this
assessment and argued, instead, that relatively high cost ofIIS to date is a result of supply outstripping
demand.
Committee members identified several actions the Treasury could take to enhance the TIPS market.
Most important, Treasury needs to make an explicit statement about its commitment to the program.
Treasury could also work to increase awareness of the program to various investor classes (the deflation
protection feature was cited as attractive). Auction cycle could be moved, possibly tying lIS issuance to
the quarterly refunding, or moving to four auctions a year. Another suggestion is that tax treatment
should be simplified.
The Committee next considered ways in which the net long position (NLP) reporting requirement could
be modified to help reduce auction turnaround times. While compliance by dealers was characterized as
more complex. Committee members acknowledged that separation of NLP reporting from the auction
process was feasible. While noting that a change to a reporting time as of auction time would require a
higher level of self-policy by auction participants, existing sanctions were generally viewed as
~ufficient. Treasury should state what the costs ofnon-comgliaRce are.
For the quarterly refunding, the Committee recommended a $15 billion reopening of the 5-year note, a
$13 billion initial offering of the 1O-year note, and no buybacks for this calendar quarter. For the next
quarter, the Committee made a tentative recommendation of$18 billion for a new 5-year note, $11
billion reopening of the 10-year note and a par amount 0[59 billion in buybacks (which seemed large to
some members). The Committee also suggested that Treasury consider revising the IIS schedule to
coincide with the quarterly refunding process and move to more frequent issuance to increase market
focus (perhaps with a $4 billion initial offering and a $2 billion reopening).
The Committee also had a brief discussion of a proposed schedule change that would move the
Committee meeting two weeks forward. This change is attractive from Treasury's perspective because it
allows additional time for deliberation on Committee advice. Some Committee members, however,
voiced concern about additional focus on the committee Report to the Secretary which could lead to two
http'/Iwww ",ea.R."ov/nreRR/relea.~es/no963.btm

01/30/2002

po963

Page 3 of4

weeks of greater market uncertainty.
The Committee adjourned at 12:35 p.m.

The Committee reconvened at the Madison Hotel at 5:50 p.m. All members were present except for
Messrs. Anderson, Axelrod, Druckenmiller and Lyski. The Chairman presented the Committee report to
the Under Secretary for Domestic Finance Peter Fisher, Assistant Secretary for Financial Markets, Briar
Roseboro and Deputy Assistant Secretary for Federal Finance, Tim Bitsberger. A brief discussion
followed the Chairman's presentation, but did not raise significant questions regarding the report's
content.

The meeting adjourned at 6:10 p.m.

Paul F. Malvey
Director
Office of Market Finance
January 29, 2002

Certified by:

James R. Capra, Chairman

http://www.t:re8S.llOv/l>I.e$S/releasesh>o962.htm

01/30/2002

U.S. TREASURY FINANCING SCHEDULE FOR 1ST QUARTER 2002
BILLIONS OF DOLLARS

ISSUE
4 WEEK AND
3&6 MONTH BILLS

ANNOUNCEMENT AUCTION
DATE
M[S
12127
01/03
01/10
01/17
01/24
01131
02107
02114
02121
02126
03107

12131
01107
01114
01121
01128
02/04
02111
02118
02125
03/04
03111
03118
03125

SETTLEMENT

.Q8IS
01/03
01/10
01117
01/24
01/31
02107
02114
02121
02128
03/07
03114
03/21
03128

4-WK
7.00 A
6.00 A
6.00 A
6.00 A
10.00 A
10.00
12.00
15.00
15.00
19.00
23.00
23.00
23.00

OFFERED
AMOUNT
3-MO
14.70 A
12.00 A
13.00 A
14.00 A
15.00 A

MATURING
AMOUNT

NEW
FED NON
MONEY ROLLOVER

6-MO
17.65 A
14.00 A
13.00 A
13.00 A
14.00 A
14.00
14.00
14.00
14.00
14.00
14.00
13.00
12.00

43.7
4.38'
38.7
-6.72
37.B
-5.82
37.B
4.79
35.B
3.15
36.0
15.00
3.00
15.00
36.0
5.00
15.00
36.0
8.00
15.00
39.0
5.00
39.0
15.00
9.00
36.0
14.00
15.00
41.0
03/14
14.00
9.00
7.00
03121
41.0
13.00
499.92
41.44
541.35
• Note: There was an error at the December 31 auctions that resulted in more 3 and 6 month bills bein~ issued than the originally announced $13 and $15 billion

0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
2.76
0.00
0.00
0.00
0.00
2.76

1-YEAR BILLS

02128

10.0

-10.00

-2.76

0.0

6.00

0.00

27.1

-2.07

0.00

4.1

23.70

0.00

25.00

23.6

1.37

0.00

84.00

54.99

29.01

0.00

COUPONS

10-YearTIPS

01102

01109

01/15

6.00 A

CHANGE
IN SIZE
+1.00

2-YearNote

01123

01130

01/31

25.00 A

+2.00

5-Year Note (R)
1(}-Year Note

01/31
01/31

02105

02115
02115

15.00
13.00

-1.00

02106

2-YearNote

02120

02127

02128

R=Reopening
A = Announced

Treasury announced a
Q1 borrowing need of
$60 billion on 1126102.

28.00

NET CASH RAISED THIS QUARTER:
NET FED ROLLOVER:
MARKETABLE BORROWING:
BUYBACKS:
TOTAL NET BORROWING:

60.44
0.00
60.44
0.00
60.44

U.S. TREASURY FINANCING SCHEDULE FOR 2ND QUARTER 2002
BILLIONS OF DOllARS

ANNOUNCEMENT

AUCT~N

SElTLEMENT

OFFERED
~
3·MO

J§§YS

Q.ill

4 WEEK AND

03128

3&6 MONTH BILLS

04/04

04/01
04108
04/15
04/22
04129
05106
05113
05120
05127
06/03
06/10
06117
06124

04/04
04/11
04/18
04125
05102
05109
05116
05123
05130
06/06

4-WK

04/11
04/18

04125
05102
05109
05116
05123
05128
06106
06113
06120

CASH MANAGEMENT BILLS
IS-Day Bill
03128
04102
Matures 411 B
BUYBACKS
April 1510 May 17 Total

06113
06120
06127

15.00
12.00
6.00
6.00
6.00
6.00
9.00
15.00
18.00
6.00
6.00
9.00
7.00

04103

13.00
13.00
13.00
13.00
13.00
13.00
13.00
13.00
13.00
14.00
14.00
14.00
14.00
173.00

MATURING
AMQUNT

NEW

FED NON

~ ROLLOVER

6-MO

3.00
6.00
·5.08

0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00

40.0

·7.00

0.00

44.0
46.0
552.70

·11.00
-12.00
·102.70

0.00
0.00
0.00

30.00

0.00

12.00
12.00
12.00
12.00
12.00
12.00
12.00
12.00
12.00
12.00

50.0
44.0
42.0
37.0
37.0
37.0
37.0

13.00

13.00
13.00

30.00

44.7
46.0
48.0

-4.10
-9.00
·17.00
·19.00
·13.00
·11.00

-3.00

-12.00

COUPONS
CHANGE
IN SIZE

2-Year Note

03/20

03127

04101

25.00

24.0

0.98

0.00

2·Year Note

04117

04124

04130

25.00

25.5

-0.53

0.00

S-Vear Note
to-Year Note (R)
to-Year (R)

05101
05101
05101

05107
05108
05109

05115
05115
05115

9.4

22.58

0.00

2-Year Note

05122

05/29

05131

25,"0

22.2

2.79

0.00

107.00

81.19

25.81

0.00

R=Reopening
A = Announced

29.00

lB.OO
11.00
3.00

"'3.00
-2.00

·3.00

Treasury

NET CASH RAISED THIS QUARTER:

announced a Q2
borrowing need of -

NET FED ROLLOVER:
MARKETABLE BORROWING:

$89 biliiOll on
1128/02.

BUYBACKS:
TOTAL NET BORROWING:

-76.89
0.00
=-=-76.89
·12.00

=-==
-88.89

po963

Page 4 of4

Treasury Borrowing Advisory Committee
Of the Bond Market Association
January 29, 2002
Qltable

Q2table

January 29,2002
COMMITTEE CHARGE

The Treasury Department would like the Committee's advice on the following:
• The composition of fmancing in 5- and 10-year notes to refund $4.1 billion of privately held
bonds maturing on February 15.
• The composition of Treasury marketable financing for the remainder of the January-March
quarter, including cash management bills if necessary.
• The composition of Treasury marketable financing for the April-June quarter.
• The Administration announced last week that the budget deficit is expected to be $106 billion in
FY2002 and $80 billion in FY2003. It is still forecasted that in the out years the budget balance
will return to significant surpluses. Given the significant change in the projected outlook, Treasury
needs to make additional adjustments to its financing plans this year and next. What would you
recommend as adjustments to Treasury's financing? In tenns of issue sizes, buybacks, reopenings,
frequencies, securities?
• What recommendation do you have for the issuance calendar of Treasury's 10-year inflationindexed security? What suggestions do you have for enhancing the development of the 10-year lIS
market?
.
• Currently, net long positions for Treasury auctions are calculated as of 12:30 p.m. for a 1:00 p.m.
auction close, and reportable net long positions are submitted along with bids for calculation of
the 35 percent award limit. Would it be feasible to have the net long position calculation
computed at 1:00 p.m., but reported after the close of an auction? Effectively, bidding entities
would be responsible for net long calculations relative to amounts bid, and auction awards would
be based solely on amounts bid. Net long positions for purposes of the 35 percent rule would be
determined after awards are made. Also, what sanctions do you recommend if an entity were
found to be in violation of the 35 percent rule. What else do you recommend to improve the
turnaround in Treasury auctions?
• Any other topics related to Treasury's debt management program.

Search I Email I Treasury Home Page I Sitemap
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01130/2002

D E P _\ R T

E N T

lREASURY

0 F

THE

T REA S V R Y

NEWS

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

For Immediate Release
January 30, 2002

Contact: Tara Bradshaw
(202) 622-2014

TREASURY, IRS ANNOUNCE NEW EFFORTS TO EXPAND E-FILING

Today the Treasury Department and the Internal Revenue Service announced new efforts
to reduce taxpayer burden through expanded electronic filing opportunities.
E-filing is an immediate and important way to reduce the burden for both taxpayers and
the government. Taxpayers who file returns electronically, and opt for Direct Deposit, get their
refunds in half the time. Electronic returns are far less error-prone, which cuts down on
unnecessary notices and penalties. Electronic returns are also far cheaper to process, which saves
money for Uncle Sam.
"I believe that the current tax code is an abomination that cries out for vast simplification
and reform. Until that vision can be accomplished, we need to reduce the burden on taxpayers in
the short term by rapidly expanding opportunities such as e-filing, and making it free to those
who choose it. No one should be forced to pay extra just to file his or her tax return. To
accomplish this goal, this Administration is committed to taking a new approach. I've asked
Commissioner Rossotti to reach out and work in a new partnership with the private sector. I
don't intend for the IRS to get into the software business, but rather to open a constructive
dialogue with those who already have established expertise in this field. In the end, this effort
should come up with a better way to save time and money for both taxpayers and the
government," stated Treasury Secretary Paul O'Neill.
The President's budget will contain two proposals aimed at increasing the number of
taxpayers who choose to e-file. First, legislation is to be proposed extending the April filing date
for electronic returns by at least ten days. This will give taxpayers a little extra time to get their
affairs"in order around tax day as an added inducement to e-=file. Second the Administration
proposes to encourage further growth in "electronic filing by providing taxpayers the option to file
their tax return on-line without charge. Treasury believes the best way to accomplish this is by
forging a new partnership with existing private sector expertise in the field.
Currently, e-filing is the product of a public-private arrangement where taxpayers use efiling vendors which must be approved by the IRS. Today, over 40 million taxpayers take
advantage ofthis process. However, that leaves the more than 90 million taxpayers who don't.
Research shows there are many factors that influence this decision.

PO-964

One is cost: while it only costs 34 cents to mail a paper return, e-filing is sometimes
offered for free, but can sometimes cost up to $10-$12. Another is privacy: some taxpayers don't
want to send their personal tax infonnation to the IRS via a third party.
"This Administration has worked hard to lower the tax burden on working Americans.
There's more to be done. We should do everything we can to reduce the burdens the tax system
places on taxpayers. By encouraging more people to file their returns electronically, the
proposals in the President's budget will produce real benefits for taxpayers." stated Treasury
Secretary Paul O'Neill.

-30-

DEPARTMENT

THE

TREAS;~1FY''"

NEWS

TREASURY

OFFICE OFPUBUC AFFAIRS -1500 PENNSYLVANIA AVENUE, N.W. - WASIllNGTON, D.C. at 20220 - (202) 622·2960

Contact: Tasia Scolinos
(202) 622-2960

FOR IMMEDIATE RELEASE
January 30, 2002

Treasury Strengthens Transparency on Global Standards
On June 2S t \ 2001, Treasury Secretary Paul O'Neill launched a web site aimed at
increasing the transparency of U.S. actions with respect to ongoing international efforts to
improve the stability of financial systems around the globe and to keep criminals from
abusing the international financial system. Today, the Treasury Department has taken
another important step on the transparency front by posting the United States' recently
completed self-evaluation with respect to the Financial Action Task Force (F ATF)
Special Recommendations on Terrorist Financing. Also posted on the site is the Federal
Reserve's self-evaluation of compliance with core principles that serve as universal
guidelines for the design and operation of safe and efficient payment systems worldwide.
These guidelines and other internal evaluations can be found at:
http://www.treas.gov/standards/.

-30-

PO-965

•

·U.s. GCIVImIIIInI Printing Office: 1998· 619-559

DEPARTMENT

THE

TREASURY {~J

TREASURY

NEW S

OFFlCE 01<' PUBLIC AF}o'i\IRS -1500 PENNSYLVANIA AVENUE, N.W. - WASHINGTON, D.C.- 20220 - (202) 622-2960

EMBARGOED UNTIL 9:00 A.M.
January 30, 2002

CONTACT:

Office of Financing
202/691-3550

TREASURY FEBRUARY QUARTERLY FINANCING
The Treasury will auction $16,000 million of 4-3/4-year 3-1/2% notes and $13,000
million of IO-year notes to refund $4,146 million of publicly held securities maturing
February lS, 2002, and to raise about $24,854 million of new cash.
In addition to the public holdings, Federal Reserve Banks, for their own
accounts, and Government accounts hold $1,847 million of the maturing securities,
which may be refunded by issuing additional amounts of the new securities.
Up to $1,000 million in noncompetitive bids from Foreign and International
Monetary Authority (FIMA) accounts bidding through the Federal Reserve Bank of New
York will be included within the offering amount of each auction. These
noncompetitive bids will have a limit of $100 million per account and will be accepted
in the order of smallest to largest, up to the aggregate award limit of $1,000
million.

TreasuryDirect customers requested that we reinvest their maturing holdings of
approximately $12 million into the 4-3/4-year note and $3 million into the lO-year
note.
The auctions being announced today will be conducted in the single-price auction
for.mat. All competitive and noncompetitive awards will be at the highest yield of
accepted competitive tenders. The allocation percentage applied to bids awarded at
the highest yield will be rounded up to the next hundredth of a whole percentage
point, e.g., 17.13%.
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 notes are given in the attached offering highlights.
The 7-5/8% Bonds of 2002-07 that were called ~or redemption on october 15, 2001,
are also being redeemed on February 15, 2002. T:tfi"s "bond., of which $2,668 million is
publicly held, will be repaid from available funds.
000

attachment

)-966

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

NEWS

TREASURY

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

MEDIA ADVISORY
Treasury To Block the Assets of Additional Drug Cartel Fronts Under the
Kingpin Act

What:

Treasury Under Secretary for Enforcement Jimmy Gurule and DEA
Administrator Asa Hutchinson will hold a press conference to discuss action
taken by the Treasury Department's Office of Foreign Assets Control to block the
assets of individuals and entities operating as fronts for the drug cartels.

Where:

The Treasury Department
rd
The Diplomatic Room, 3 Floor
Please enter at the 15 th Street Entrance

When:

Thursday, January 31,2002
11:00 AM

Contact:

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.

-30PO-967

D EPA R T 1\1 E N T

0 F

THE

T REA SUR Y

NEWS
ornCE OF PUBliC AFFAIRS • 1500 PENNSYLVANIA AVENUE, N.W. • WASlDNGTON, U.c.

20220. (202) 622-2960

Contact: Tasia Scolinos
(202) 622-2960

FOR Th1MEDIATE RELEASE
January 31,2002

STATEMENT OF TREASURY UNDER SECRETARY FOR ENFORCEMENT JIMMY
GURULE KINGPIN TIER TWO DESIGNATIONS

Thank you all for coming today. I am particularly pleased to be joined here today by the
Director ofOFAC Rick Newcomb, DEA Administrator Asa Hutchinson and Customs Deputy
Commissioner Chuck Winwood. As many of you know, since September 11 th, the Treasury
Department has been at the forefront of the war against terrorism. We have moved aggressively
on many fronts to cut off the money used to fund these terrible acts that threaten the security and
well being of our nation. We are detemlined and committed to this cause. At the same time, we
know that there are other enemies that threaten the stability of our society and the safety of our
children. We continue to battle every day the scourge of illegal narcotics that infects our society.
Today we send a very clear message to those who support the drug traffickers financially
by devising schemes to legitimize their dirty money by operating front companies that allow
drug proceeds to infiltrate legitimate looking businesses. The United States is committed to
routing out both the drug dealers and the financiers who make their illegal actions profitable. To
those who think otherwise - who think the United States is too preoccupied with the war on
terrorism to pay attention - I am here today to tell you that you are wrong. We have been, and
remain, committed to this objective.
Let me now tum to the specific actions taken today by Treasury's Office of Foreign
Assets Control. Rick Newcomb and his team have worked tirelessly to make today's actions
possible. Their long hours and dedication to this project has resulted in credible infomlation
linking the individuals and entities named here beside me to major narcotics traffickers. Tv,:elve
foreign businesses and fifteen individuals in the Caribbean-and Mexico have been named "Tier
II" designations, pursuant to the Foreign Narcotics Kingpin Designation Act. Under authority of
the Kingpin Act, OF AC has detemlined that these 27 entities arc acting as fronts or agents for
foreign drug kingpins previously named by the President.
Today's action prohibits Americans fi'om doing business with these 27 designees and
blocks their assets found in the United States. The newly designated businesses and individuals,
located in the Caribbean and Mexico, include a drugstore chain and pharmaceutical distributor,
air courier services, a hotel and resort complex. as well as real estate. electronic security and
consulting firms. Treasury has deteffilined that drug kingpins previously named by the PreSident
under the Kingpin Act exert ultimate control over these Tier II designees.
PO-968

·U.s. GOYIImIIIII Printing 0Ifice: 1998· &19-559

'DEPARTMENT

T'HE

TREASURY

NEWS
omCE OF PUBUC AFFAIRS -1500 PENNSYLVANIA AVENUE, N.W.• WASHINGTON, D.C•• 20220. (202) 622.2960

Contact: Tara Bradshaw
(202) 622-2014

F or Immediate Release
January 31, 2002

TREASURY ANNOUNCES NEW HEALTH TAX CREDIT TO HELP PROVIDE

AFFORDABLE HEALTH INSURANCE
Today the Treasury Department announced the new Health Insurance Tax Credit
(HITC) that will be included in President Bush's budget for 2003. This HITC would
provide a pennanent tax credit to make insurance more affordable.
"We need to make sure that all Americans have access to affordable health
insurance. The Administration's innovative Health Insurance Tax Credit will help
uninsured Americans obtain health insurance coverage to provide greater health security
for themselves and their families," stated Treasury Secretary Paul O'Neill
This HITC would create a refundable income tax credit for the cost of health
insurance purchased by individuals under age 65. The credit would provide a subsidy for
a percentage of the health insurance premium, up to a maximum credit 0[$1,000 per
adult and $500 per child, up to two children. A two-parent family with two children
would be eligible for a maximum credit of$3,000; The maximum subsidy percentage
would be 90 percent for low-income taxpayers and would phase down with income.
Individuals pm1icipating in public or employer-provided health plans would not be
eligible for the tax credit. The credit could also be used in state sponsored private
purchasing pools. In addition, individuals would not be allowed to claim the credit and
make a contribution to an MSA for the same taxable year.
This is an improved HITC proposal, compared to the health insurance tax credit
proposal in last.year's FY 2002 budget. Elements oulle current proposal are phased in
one-year faster, and it provides additional subsidies for married couples with children.

-30-

PO-969

•

·u.s. GOVIIMIant Printing 0Ifica: 1998 • 61&-559

D EPA R T

E NT

0 f'

THE

T REA S LT R Y

NEWS
omCE OF PUBIJC AFFAIRS -1500 PENNSYLVANIA AVENUE, N.W. - WASIDNGTON, D.C. - 20220 - (202) 622.2960

For Immediate Release
January 31, 2002

Contact: Tara Bradshaw
(202) 622-2014

TREASURY TO ISSUE GUIDANCE ON LOSS DISALLOWANCE RULES

Today the Treasury Department announced that it intends to issue interim regulations
shortly that will replace the loss disallowance rule in the consolidated return regulations.
These rules determine the amount ofloss allowable on a sale or disposition of subsidiary
stock by a consolidated group.
Notice 2002-11 is being issued as a result of the Solicitor General's decision not to file an
appeal with the Supreme Court in Rite Aid Corp. v. United States. In Rite Aid, the Federal
Circuit Court of Appeals held invalid the duplicated loss factor in section 1.1502-20 of
the consolidated return regulations. Section 1.1502-20, commonly known as the loss
disallowance rule, disallows certain losses on sales of stock of a member of a
conso lidated group.
"The Treasury Department and IRS were advised that the Supreme Court was unlikely to
grant a petition for certiorari without a split in the circuit courts of appeal regarding the
validity of the loss disallowance rule. Without prompt resolution of the issue, continuing
to defend the validity of the duplicated loss component of sxtion 1.1502-20 is not in the
interests of sound tax administration. New rules governing the treatment of loss on sales
vf stock of a member of a consolidated group must be implemented, because the
duplicated loss factor is inextricably linked with the other factors in the loss disallowance
rule," stated Mark Weinberger, Treasury Assistant Secretary for Tax Policy.
Interim temporary regulations will require consolidated groups to determine the
allowable loss on a sale or disposition of subsidiary,stock under a regime that does not
include a duplicated loss rule. The temporary regulations will apply prospectively. For
transactions entered into, or for which there is a binding contract, before the date of
issuance of temporary regulations, groups will be allowed certain choices with respect to
a disposition of subsidiary stock, including the new interim rule. The Treasury
Department and the IRS are undertaking a broader study of the affected regulatory
provisions of the consolidated return regulations. Treasury and the IRS intend to request
comments in co~unction with the issuance of the interim regulations.
Treasury and the IRS emphasized that the decision in Rite Aid implicates no other
provisions of the consolidated return regulations.
PO-970

•

·U.s. GOVIIMIInI Printing 0IIice: 1998· 619-559

The text o/Notice 2002-11 follows:
Part m-Administrative, Procedural, and Miscellaneous

IRS Announces New Position WHh Regard To Consolidated Retum Loss
Disallowance Rule
Notice 2002-11
This Notice sets forth the Internal Revenue Service's position with respect to the
opinion of the U.S. Court of Appeals for the Federal Circuit in Rite Aid Com. v. United
States, 2SS F3d 1357 (Fed. Cir. 2001), and the loss disallowance rules that apply to sales
of stock of a member of a consolidated group.
In Bite Aid. the Federal Circuit held that the duplicated loss component of
§ 1.1502-20 of the Income Tax Regulations, which disallows certain losses on sales of
stock of a member of a consolidated group, was an invalid exercise of regulatory
authority. The Internal Revenue Service believes that the court's analysis and holding

were incorrect.
Nevertheless, the Service has decided that the interests of sound tax
administration will not be served by continuing to litigate the validity of the loss
duplication factor of§ 1.1502-20. Moreover, because of the interrelationship in the
operation of all of the loss disallowance factors, the Service has decided that new rules
governing loss disallowance on sales of stock of a member of a consolidated group
should be implemented
Accordingly, the Service intends to promulgate interim regulations that,
prospectively frOm the date of their issuance, will require consolidated groups to
determine the allowable loss on a sale or disposition of subsidiary stock under an
amended § 1.337(d)-2 instead ofunder § 1.1502-20. For transactions (including those fur
which a return. has been filed) completed before the date of issuance of interim
regulations, or for which there is a binding contract before that date, groups will be
allowed. certain choices with respect to a disposition of subsidiary stock, including a
choice to apply § 1.337(d)~2 as amended. The Service and Treasury are undertaking a '
broader study of the regulatory provisions-necessary-to implement § 337(d) of the
Intema1. Revenue Code in the context, of affiliated groups filing consolidated returns and
will request comments in conjunction with the issuance of the interim regulations.
It is the Servicets position that the Rite Aid opinion implicates only the loss
duplication aspect of the loss disallowance regulation and that the authority to prescribe
consolidated return regulations conferred on the Secretary is limited only by the
requiremen~ that the Secretary, in his discretion, has determined such rules necessary
clearly to reflect consolidated tax liability.

DEPARTMENT

THE

TREASURY

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

u.s. International Reserve Position

1/31/02

The Treasury Department today released u.s. reserve assets data for the week ending January 25, 2002. As

ndicated in this table, u.s. reserve assets totaled $67,712 million on that date, compared to $68,509 million at the
!nd of the prior week.
US millions)

)fficial U.S. Reserve Assets

January 18.2002

TOTAL
=oreign Currency Reserves

Securities

Euro
5,457

Yen
9,673

TOTAL

Euro

15,129

5,330

Yen

TOTAL

10,136

Of which, issuer headquartered in the US.

January 25. 2002
67,712

68,509

15,467

Total deposits with:

b.i. Other central banks and BIS

9,184

bJi. Banks headquartered in the US.

4,567

13,750

8,993

3,910

12,903

b.iL Of Which, banks located abroad

bJii. Banks headquartered outside the U.S.

b.iii. Of which, banks located

1F Reserve Position

lecial Drawing Rights (SORs)
lId Stock

her Reserve Assets

the U.S.

17,828

17,649

10,757

10,649

11,045

Includes holdings of the Treasury's Exchange Stabilization Fund (ESF) and the Federal Reserve's System Open Market Account (SOMA),

=d at current market exchange rates. Foreign currency holdings listed as securities reflect marked-to-market values, and deposits reflect
ling values.
he items, "2. IMF Reserve Position" and "3. Special Drawing Rights (SDRs)," are P_9S~ on data provided by the IMF and are valued in
['terms at the offiCial SDR/doliar' exchange rate for the reporting daie. The entrie~in the table above for latest week (shown in iialics)
:t any necessary adjustments, including revaluation, by the U.S Treasury to the prior week's IMF data. The IMF data for the prior week
naL
lid stock is valued monihiy at $422222 per fine troy ounce Values shown are as of December 30, 2001
;11.045 mlliion.

The November 30. 200-, value

u.s. International Reserve Position (cont'd)
. Predetermined Short-Term Drains on Foreign Currency Assets
January 18, 2002
Foreign currency loans and securities

January 25, 2002

o
o

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
Other

,Contingent Short-Term Net Drains on Foreign Currency Assets
January 18. 2002
:ontingent liabilities in foreign currency
a. Collateral guarantees on debt due within 1 year
b. Other contingent liabilities
=oreign currency securities with embedded options
Jndrawn, unconditional credit lines
l.a. With other central banks
I.b. With banks and other financial institutions
headquartered in the U. S.
:.C. With banks and other financial institutions
headquartered outside the U. S .
.ggregate short and long positions of options in foreign
urrencies vis-a-vis the U.S. dollar
.a. Short positions
4.a.1. Bought puts
4.a.2. Written calls
b. Long positions
4.b.1. Bought calls
4.b.2. Written puts

January 25. 2002

o
o

Ottica. Reserve Assets Worksheet
(actual US dollar amounts)
Last Week
Enter Dates Here

This Week

18-Jan-02

25-Jan-02
Change

Foreign Currency

~-Jan-04

25-Jan-02

$5,456,744,951- 17
$9,672,703,068.46

$5,330,479,490.09
$10.136.039.332.19

Sec. Totsl
Euro Deposits
Yen Deposits

$15.129.448.019.63
$9,183.682.976.52

Deposit Total
Total
Euro Rate
Yen Rate

Euro Securities
Yen Securities

Source: NY Fed (fax)
-126.265.461
463.336.264

co/2}! and /2aste data into last week
and put new data from fax

S15,466,518.822.28

337.070.803

into right column

$4.566.676.081.99

$8.993.447,564.52
$3,909.658,672.70

-190.235.412
-657.017.409

$13.750,359.058.00

S12.903.106.237.22

-847.252.821

$28.879.807.078.15
SO. 8844
Y 132.64

$28.369.625.059.49
SO. 8655
Y 134.47

-510.182.019

18-Jan-02

25-Jan-02

IMF

Source: IMF (email)

(prelim, with sdjust.)
Reserve Tranche
GAB

17,827,819.785.0<

NAB
Total
SDR

put actual figures in for last week

0.00

17.649.070.986.49
0.00

·178.748.798.55
0.00

0.00
17.827.819,785.04

0.00
17,649,070.986.49

-178.748.798.55

10.756.557,150.99

10,648,707,638.50

-107.849.51249

0.00

Source: FMS website
0.00

http://wwwJms.treas.gov/gold

-796.780.329.69

___________________________________________________________{

~~£~~~~~~~_~~~!:!'~~_~~!!~~~~_~~~~~~!i!_~~~_I!~~~~~~_I!~!_~!~~

lPrelim.IMF Data

IN SDRs

SDR rate for

lCalculation
Section
I
Reserve Tranche
GAB
NAB
SDRs

18-Jan-02
1-1. ' 21.1-1·Ur76
0

Adlustments

2S-Jan-02
14.221.144,876

II.NIlS--:

:U :-:0..\-11.11111

14.221.144,876
8.580.441.100

TotalSDRs

In USD
l
$17.649.070.986.49
50.00
SO.OO
S17.649,070.986.49
510.648.707.638:50

Source:
http:/twww.imf.org/externallmap.htm. then go to "Exchange Rates in Terms of SDRs Daily"

DEPARTMENT

THE

TREASURY

NEWS

'IREASURY

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

Contact: Public Affairs
(202) 622-2960

For Immediate Release
February 1, 2002

MEDIA ADVISORY:
DEPARTMENT OF THE TREASURY "BLUE BOOK" TECHNICAL TAX BRIEFING
Monday, February lh, 3:00 p.m.
WHO:

Assistant Secretary for Tax Policy Mark Weinberger and other Treasury Tax
Policy Staff

WHAT:

The "Blue Book" technical background briefing on the President's tax proposals.
This session will provide a synopsis of the tax proposals and will also allow for a
Question and Answer session with Tax Policy staff. No cameras will be admitted- this is a "pen and pad" only briefing.
The "Blue Book" will be posted on the Internet Monday, February 4th at 8:00 a.m.
at http://www.treas.gov/taxpolicy/librarylbluebk02.pdf

WHEN:

Monday, February 4th, 3:00 p.m.

WHERE:

Large conference Room (3 rd floor, Room 3327)
U.S. Department of Treasury
th
1500 Pennsylvania Ave., NW (Please use Visitor's Entrance on 15 Street)

Media without Treasury or White House press credentials planning to attend should contact
Treasury's Office of Public Affairs at (202) 622-2960 withihe following information: full name,
organization, social security number and date of birth. This information may also be faxed to
(202) 622-1999

PO-972

•

·U.s. GOYIIMIInI Printing 0Ifice: 1998· 619-559

TREASURY

NEWS

OFFICE OF PUBLIC AnA-IRS '1500 PENNSYLVANIA AVE~1,JE. N.W.• WASHINGTON, D.C.- 20220. (202) 621.2960

CllBARGOED UN'l'IL :ii I 3 0 P. M..
January 31, 2002

CONTACT;

TllEAStnlY OPPER.S 13 -WEEIt

ANI)

Office of rinancing
202/691-3550

:.i6 -WED: B:ILLS

The '1'z:'eaauzy will auction lJ-week and 26-waak Treasury bills totaling $30,000
dllion to refund an estimated $2',922 million of publicly held 13-~eek and 26-waak
Teasu~ b~lls maturing Yebr~ary 7, 2002, and to raise new cash of approx~mately $78
~llion.
Also maturing is an eseimated $6,000 million of public~y hald 4-waek
rea8ury bille, the disposition of which ~ill be announoed 'ebruary 4, 2002,

Tha 'ederal Reserve Systsm holds $12,540 million of the Treasury bills maturing
n February 7, 2002, in the System Open Ha.rket Adcount (SOHA). 'l:'hiEl aD101lnt may be
s£unded aC the highest diacoune rate bf ~ccepted competitive tenders either in ~he8e
~ctions

~arded

or the 4-weax Treasury bill auc~ion ~o be held Fe~ruary 5. 2002.
to SOMA will be in addition to the o~fe~1ng amount.

Amounts

to $1.000 million in nonco~etitivo bids from Foreign and International
Authority (¥rMA) accounts bidding through the Federal Reserve Bank of New
)rk will b~ included Yithin the offering amount of each auction. These
)Dcompetitive bids will have a limit of $100 million pe~ account and will be aeeepted
, the order of ~=alle8t to larga~e, up to the aggregate award l~it of $1,000
~

)neta~

Lllton.

Treasury.Direce eUBtomers have requested that we reinvest their maturing holdings
$1,151 million into the 13·weax bill and $705 million into the Z6-

approxima~ely

lek bill.

The allocation percentage applied to bids awarded at the highest diBcount rate
11 be rounded up to the next hundredth of a whole percentage point, e.g., 17.13%.
This offering of Treasury 8ecurieies is governed by the te~s and conditione set
rth in the Uniform Offering Circular for the Sale and Zssue of Marketable Book-Entry
easury Bills, Notes. and aonds (31 CrR Pare 355, as amended).
Data!la about each of the new securitieg .re given in the attachad offering
;hlights.
000
~achment

173

'pfeal ,eleasest speeches, public schedules and official blutraphies, call ou, 24-hQJl' fax line at (202) 622-2040

January 3l, 2002

Offer;ing Amount ••.•.•••••.•..••.•..•.•••..•• $1.6, 000
Pl.lhlic Of£ering .•...•.•.• ; •....•.•..••••••... $16, (}OO
HLP Bxclusion Amount •.•.....•••..•.••••.•.•. $ 5,000
DescriptioD of

mi~1ion
mil~ion
mi1l~on

$l4,000 mil-lion
$14,000 million
None

Off.r~ng:

T&rm and type of security .••....••••..••.••• 91-day bill
CUSIP number ..•....••.•....••......•...•.... 912795 J'r 9
Auct.ion date .•••....••.••...•.•..•.••.•.•.•. February 4, 2002
Issue da te •...• _ ..•..............•.......... Februa-r:y 7 I 2002
Haturity dat.e ..•.•..•.•.•••••••.••.•.•••.... May 9,2002

Original issue date .•••.••••...•••••••....•• NoYember 8. 2001
currently o~tstanding •... ,,_ .....•........•. $20,370 mill-ion
Kin~um bid ~unt and ~ltiples ••.......... $1,000

182-day bill
912795 ltV 2

J!.'ebruary 4, 2002
February', 2002
August 8, 2002
February 7, 2C102
$1,000

The following rules apply to all securities mentioned &bove~
Submission of Bids:
Noncampet.it~ve bidst
Accepted in full up to $1 mil~~oD at the highest discount rate of Accepted competitive bids.
~oreign and ~nternational Monetary Authority (PIMA) bids:
Noncompetitive bid, submitted through the Federal Reserva
Banks aa agents for FIMA accounts. Accepted in order of size from smallest to largest with DO more ~an $LOO
million awarded per account. The total noncompeti~ive ~unt awarded to Federal Reserve &anks a8 ageDta for vnu
accounts will not exceed $L,OOO million. A eing~e bid that would cause the ~~t to be exceeded w~~l
be partially accepted in the amount that bri~9B tne aggregate award total to the $1,000 ~llion l~t. However,
if there are two or more bias of equal amounts that would cause the limit to be exceeded, each will be prorated
to avoid exceeding the l~t_
Competitive bids:
_
(1) Must be expressed as a discount rate with three decimals in increments of .005%. e.g., 7.~OO', 7.105\.
(2) Net long posicion (HLP) £or each bidder must be reported when the Bum of the total bid amount, at al~
discount rates, and the net long position is $1 billion or greater.
C3) Net 10ng pos~tion must be determ1ned as of one half-hour prior to the closing t~e fOT receipt of
competitive tenders.
Kax~mum ReCOgnized Bid at a SingLe aate.~ .....• 35~ of pUbL~~ offering
MAximum Award .....••.....•....• _ •..•••........ ,35% of pub~ic offering
Receipt of Tenders:
Noncompetitive tende~& ..•.• Prior to 12;00 noon eastarn s~andard tLma on auction day
Competitive tenGers •..•.•.• Pr;io% to ~:oo p.m. eastern standard time on auction day
Payment Te~: By charge to A funds account at a Federal Reserve Bank on issue date, or payment of fu11 par .mount
with tender. TreasuryDirect customers can use the Pay Direct feature which authorizes a charge to their account of
record at their finaneial iDstitutioD on issue date.

d
--l
f2
-0
IS)

DEPARTMENT

TREASURY

THE

TREASURY

NEWS

--.:z~_.
OmCE OF PUBUC AFFAIRS

III

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

FOR IMMEDIATE RELEASE
February I, 2002

Contact: Public Affairs
(202) 622-2960

Treasury Secretary Paul O'Neill's Remarks at the
World Economic Forum
New York; New York

I want to talk today about a vision. A vision of a world that works
better. By working better, I mean a world where people everywhere are
enjoying a higher and rising standard of living -- rising incomes that come
from good jobs for everyone who wants one.
Let me begin by telling you the perspective I bring to this vision.
From
1977 to 2001 I worked in the private sector after working 1S years in the
Federal Government.
During those private sector years I worked in two large
multi national companies.
From 1987 to 2001 I was the Chairman and CEO of
Alcoa.
When I joined Alcoa in 1987 we employed 55,000 people in 13
counties.
When I left at the end of the year 2000; 140,000 people worked
for Alcoa at 350 locations in 36 counties. This is to establish the basis
for an assertion that I know something about job creation and about the ways
of life and work in many places around the globe.
As I traveled the world over the last quarter century I was struck by two
things.
First/ and most important, the demonstrated fact that human beings
everywhere/ with the proper education, training, and a stable social
environment, can and do perform value adding work at world competitive
levels.
That means they can be paid compensation that gives them the capacity for
independence and their self-determined pursuit of the good life for
themselves and their families.
I draw from Uris - observation that human
beings everywhere have in them the latert capacity to create a high standard
of living.
The second general observation is this: In spite of the first observation,
the disparity of living standards among the world's people is so large as to
be practically incomprehensible.
The obvious question is: Why? Why is it, if people have the capacity to
create a good life that so many billions of people exist today with little
hope of the good life we know is possible.
Some of you will think this is a
dead end question - - a question too big to ask - - one of life's
imponderables - - let's move or. to something else.

PO-974
F'or press releases, speeches, public schedules and official biographies, call our 24-hour fax line at (202) 622-2040
·U.S. Government Printing Oftice. 1998· 619·559

I do not agree.

I believe this is the question for us and our time.

If you examine the economic history of the last 300 years it is easy to
conclude that there is no absolute limit on world economic product.
That is to say, economic prosperity is not rooted in some people getting
more by taking someone else's share. In fact, it appears that the world
economic pie is limited only by our imagination -- when we back up our
imagination with the necessary social institutions and structures and human
beings and resources are organized to create value.
I realize this is a lofty perspective and I intend to bring it down to the
ground. But, as an analytic habit of mind, I find it useful to remind
myself of the purpose and potential of what we do lest we get caught up in
the alphabet soup of development agencies and NGO's and government
organizations as though their existence were the only objective.
Let me bring these general ideas down to the ground and talk more
specifically about economic development and the role of the international
financial institutions.
I want to affirm that I believe the 1F1's have been, and are now important
and they need to be even more important in the future. By important in the
future I mean identified with eVer greater success in contributing to a
rising standard of living for people everywhere.
To illustrate the thought process I believe we should employ in reaching for
this objective, I want to discuss five interrelated subjects. The first is
sovereign debt interest rates.
As the world has become evermore one capital market, sovereign interest
rates have become a measure or proxy that allows us to compare conditions
and prospects across geographic and political boundaries.
For as long as I
can remember, we seem to have accepted the proposition that low-income
nations are destined to have high interest rates as compared to developed
countries. Implicit in this notion is the idea that low-income nations are
inherently less creditworthy than developed nations. OUr expectations are
fulfilled when nations borrow amounts that raise the risk of default. As
the risk of default increases, the rates go up. But this proposition is not
ordained, it is just a practice we have fallen into. In fact, low-income
nations could have investment grade debt if they diSCiplined their debt
issues to amounts they can service on a reliable basis.
We haven't paid much attention to this iesue because we tend to forget the
connection between governments and their people.
To put the issue squarely, governments get their revenue from their people
and, when governments take on debt that results in interest rates of 20% or
more they are, in effect, causing their people to pay those interest rates,
sapping the ability of the people to tend to their individual needs. I saw
this issue starkly in reviewing an analysis of a developing country economic
plan where the target interest rate associated with economic success was
judged to be 18%. Think about the consequences of an 18% interest rate for
a country and its development prospects as compared to say a 10i rate or a
6% rate. Obviously. there is an interaction between interest rates and
total amounts of capital borrowed but it isn't possible to make a case for
sovereign rates that exceed a rate that can be returned by investments.

Out of this, I conclude that an objective of the international financial
institutions should be to work with developing nations to achieve investment
grade ratings for their debt issues. This will not be easy but it should be
our objective because as developing nations move toward investment grade
status they will reduce the danger of economic collapse; in effect, creating
a cushion against unanticipated adverse events.
The second issue is related to the first. It is the issue of the
appropriate balance between loans and grants in providing assistance to
developing nations. Let me ask you a question. Do you think it makes sense
to make a loan, even a highly concessional loan (that means long term and
low interest rates) to a nation that is already up to its eyeballs in debt
with scant prospects of being able to service its already outstanding
commercial debt? I don't think so, but there are staunch advocates for
preserving the practices of the past fifty years and continuing to encourage
developing nations to take on loans from the development agencies. I think
the advocates do not understand the first principles of capital markets and
they certainly have not learned a lesson from the current experience of
having to write off loans for the heavily indebted nations. President Bush
has proposed that we shift assistance so that in the future 50% of the money
provided by development banks be in the form of grants, moving from the
current practice of 98% loans and 2% grants.
The opposition's main argument against this proposition seems to be that
the virtue of loans is that it teaches developing nations important lessons
about how to conduct their affairs. The RIPe loan forgiveness process makes
a mockery of this notion.
Rather than add to the financial woes of developing nations by adding to a
debt burden they cannot service we should openly admit that some countries
need grants. Let me hasten to add, that does not mean gifts for the
profligate. By grant I mean, a sum of money given for a specific purpose
with measurable results that are pro growth and a higher standard of living
for the people. Some of the critics of shifting the balance between loans
and grants see such a shift
a nefarious plot to reduce the total amount
of aid provided. On the contrary, I believe the world's taxpayers, who are
after all the ultimate source of all develbpment assistance, will respond
with more assistance, if and when those of us in leadership positions can
demonstrate that we know what we are doing by producing results measured by
rising standards of living in developing nations.

The third issue is related to the first two; it is the importance of
creating the conditions in developing ·countri~ tnat will result in the
establishment and growth of a vibrant private sector economy. If a country
is seen to be fiscally well managed, patient private sector investments will
be made instead of the flighty deposits seeking short-term high risks and
returns. Patient private sector investors create a multiplier effect that
leads to more jobs, and more stable jobs.
Prudent sovereign fiscal management is a key but it needs to be buttressed
by a stable social environment as demonstrated by the clear rule of law,
enforceable contracts, and protection from extortionists and other forms of
capital thieves. For a truly vibrant economy these conditions are not
discretionary. They must be the center of attention for sovereign
governments and for serious development agencies and efforts.

When these things are said in development circles, everyone shakes their
heads in agreement but the real world circumstances do not bear a close
relationship to this prescription. I believe until the fundamentals are in
place and working, the effectiveness of development assistance is a small
fraction of what it should be.
The fourth issue is what I will call the process of deliberate learning.
Over the last 50 years, hundreds of billions of dollars have been spent in
the name of economic development. With so many of the countries that have
been aided still not showing strong evidence of positive change, I believe
we need to sift and sort the facts and experience to understand where our
efforts have produced great results and, as importantly, where there are no
results or retrogression. This is an important task for the analytic
community. At the last meeting of the G-20, I asked Jim Wolfensohn of the
World Bank to prepare a report to begin this process. I emphasized the
importance of learning and saying in a forthright way what hasn't worked and
why so that we can agree to stop making such interventions.
The fifth and final issue is examining and refining the systems and tools
we have, or ought to have, to help countries that fall into troubled times. As
an illustration, let me use Argentina as a reference case. When we began
early last year to examine the financial facts in Argentina we found that
they had national debts totaling about $130 billion and a revenue stream
capable of supporting perhaps $100 billion. As we looked at things they
might do we examined their debt instruments and found that the country had
given away their rights to restructure.
We should learn from that experience and seek to convince developing
countries not to give away important fiscal flexibility for a few basis
points of advantage when they issue debt.
A related learning is the need to create a process for controlled
restructuring when a country falls on hard times. A serious discussion has
been started by the recent call for the creation of a bankruptcy process.
Many questions must be answered before a workable system can be put in
place. I believe we should press ahead on this issue as quickly as possible
but I hope you can tell from what I have said that I believe if we do a
better job of economic development we will not often have to use such a
tool.

DEPARTMENT

THE

TREASURY

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

For hnmediate Release
February 1, 2002

Contact: Tara Bradshaw
(202) 622-2014

TREASURY SECRETARY PAUL O'NEILL'S STATEMENT ON
PROTECTING RETIREMENT SAVINGS

Today the President announced four steps recommended by his Task Force on Retirement
Security to enhance the safeguards protecting workers' retirement savings. The Treasury looks
forward to working with Congress to enact these important refonns.
Large companies often make contributions to their employees' 401(k) accounts in the
fonn of employer stock. Employers should continue to be encouraged to make generous
contributions to these plans. When these contributions are made in the fonn of employer stock,
workers should have the freedom to diversify those contributions into other investment options
after they have participated in the 401 (k) plan for three years.
"Blackout periods" occur when employees cannot change their investments due to
administrative changes being made to their plans. These periods must be fair, responsible, and
transparent. Thus, corporate executives should not be able to buy or sell company stock while
the company's workers are prohibited from trading emp~oyer stock in their 401(k) plans due to a
blackout. By requiring 30 days advance notice before a blackout period begins, workers will
have appropriate time to plan around these changes.
Current law inhibits employers from hiring investment advisors to give investment advice
at the workplace that could assist workers in making retirement planning decisions. Enactment
of the House-passed Retirement Security Advice Act would remove the existing barriers.
Workers deserve timely infonnation on their 401(k) accounts, including the value of
those accounts, their right to diversify their investments, and the importance of asset
diversification.
The Task Force's recommendations will provide hardworking Americans greater freedom
to choose, better information to make decisions, and a level playing field during blackout
periods, thereby enhancing their retirement security.
-30-

•

·u.s. aa.rvntnI PrintIng 0IIIca: 1_. atHIII

OFFICE OF PUBLIC !\FFAIRS. 1500 PENNSYLVANIA AVENUE, N.W .• WASHINGTON, D.C.e 20220. (202) 622-2960

EMBARGOED UNTIL 11: 30 A.M.
February 41 2002

Contact:

Office of Financing
202/691-3550

TREASURY OFFERS 4-WEEK BILLS
The Treasury will auction 4-week Treasury bills totaling $14,000 million to
refund an estimated $6,000 million of publicly held 4-week Treasury bills maturing
February 71 2002 1 and to raise new cash of approximately $8 / 000 million.
Tenders for 4-week Treasury bills to be held on the book-entry records of
TreasuryDirect will ~ be accepted.
The Federal Reserve System holds $12,540 million of the Treasury bills maturing
on February 7, 2002, in the System Open Market Account (SOMA). This amount may be
refunded at the highest discount rate of accepted competitive tenders in this auction
up to the balance of the amount not awarded in today's 13-week and 26-week Treasury
bill auctions. Amounts awarded to SOMA will be in addition to the offering amount.
Up to $1,000 million in noncompetitive bids from Foreign and International
Monetary Authority (FIMA) accounts bidding through the Federal Reserve Bank of New York
will be included within the offering amount of the auction.
These noncompetitive bids
will have a limit of $100 million per account and will be accepted in the order of
smallest to largest, up to the aggregate award limit of $1,000 million.

~ill

Note:
The closing times for receipt of noncompetitive and competitive tenders
be at 11:00 a.m. and 11:30 a.m. eastern standard time, respectively.

~ill

The allocation percentage applied to bids awarded at the highest discount rate
be rounded up to the next hundredth of a whole percentage point, e.g., 17.13%.

This offering of Treasury securities is governed by the terms and conditions
let forth in the Uniform Offering Circular for the Sale and Issue of Marketable Book:ntry Treasury Bills, Notes, and Bonds (31 CFR Part 356, as amended).
Details about the new security are given in the attached offering highlights.

000

ttachment

)-976

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

DEPARTMEl\T

THE

TREASURY

NEWS

TREASURY

OFFICE OF PUBLIC AFFAIRS -1500 PENNSYLVANIA AVENUE, N.W.• WASHINGTON, D.C •• 20220 _ (202) 622.2960

EMBARGOED UNTIL 11:30 A.M.
February 4, 2002

Contact:

Office of Financing
202/691-3550

TREASURY OFFERS 4 -WEEK BILLS
The Treasury will auction 4-week Treasury bills totaling $14,000 million to
refund an estimated $6,000 million of publicly held 4-week Treasury bills maturing
February 7, 2002, and to raise new cash of approximately $8,000 million.
Tenders for 4-week Treasury bills to be held on the book-entry records of
TreasuryDirect will ~ be accepted.
The Federal Reserve System holds $12,540 million of the Treasury bills maturing
on February 7, 2002, in the System Open Market Account (SOMA). This amount may be
refunded at the highest discount rate of accepted competitive tenders in this auction
up to the balance of the amount not awarded in today's 13-week and 26-week Treasury
bill auctions. Amounts awarded to SOMA will be in addition to the offering amount.
Up to $1,000 million in noncompetitive bids from Foreign and International
Monetary Authority (FIMA) accounts bidding through the Federal Reserve Bank of New York
will be included within the offering amount of the auction. These noncompetitive bids
will have a limit of $100 million per account and will be accepted in the order of
smallest to largest, up to the aggregate award limit of $1,000 million.
Note: The closing times for receipt of noncompetitive and competitive tenders
will be at 11:00 a.m. and 11:30 a.m. eastern standard time, respectively.
~ill

The allocation percentage applied to bids awarded at the highest discount rate
be rounded up to the next hundredth of a whole percentage pOint, e.g., 17.13%.

This offering of Treasury securities is governed by the terms and conditions
forth in the Uniform Offering Circular for the Sale and Issue of Marketable Book:ntry Treasury Bills, Notes, and Bonds (31 CFR Part 356, as amended).
~et

Details about the new security are given in the attached offering highlights.

000

.ttachment

)-976

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

HIGHLIGHTS OF TREASURY OFFERING
OF 4-WEEK BILLS TO BE ISSUED FEBRUARY 7, 2002
February 4, 2002
Offering Amount . . . . . . . . . . . . . . . . . . . . . $14,000 million
Public Offering . . . . . . . . . . . . . . . . . . . . . $14,000 million
NLP Exclusion Amount . . . . . . . . . . . . . . . . $10,100 million
Description of Offering:
Term and type of security ........... 28-day bill
CUSIP number . . . . . . . . . . . . . . . . . . . . . . . . 912795 JJ 1
Auction date . . . . . . . . . . . . . . . . . . . . . . . . February 5,2002
Issue date . . . . . . . . . . . . . . . . . . . . . . . . . . February 7,2002
Maturity date . . . . . . . . . . . . . . . '" ..... March 7,2002
Original issue date . . . . . . . . . . . . . . . . . September 6,2001
Currently outstanding ......... '" ... $38,760 million
Minimum bid amount and multiples .... $1,000
Submission of Bids:
Noncompetitive bids: Accepted in full up to $1 million at the highest
discount rate of accepted competitive bids.
Foreign and International MOnetary Authority (FlMA) bids: Noncompetitive bids submitted through the Federal Reserve Banks as agents for
FlMA accounts. Accepted in order of size from smallest to largest
with no more than $100 million awarded per account.
The total noncompetitive amount awarded to Federal Reserve Banks as agents for
FlMA accounts will not exceed $1,000 million. A single bid that
would cause the limit to be exceeded will be partially accepted in
the amount that brings the aggregate award total to the $1,000
million limit.
However, if there are two or more bids of equal
amounts that would cause the limit to be exceeded, each will be
prorated to avoid exceeding the limit.
Competitive bids:
(1) Must be expressed as a discount rate with three decimals in
increments of .005%, e.g.
4.215%.
(2) Net long position (NLP) 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.
I

Maximum ReCOgnized Bid at a Single Rate ... 35% of public offering
Maximum Award . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35% of public offering
Receipt of Tenders:
Noncompetitive tenders:
Prior to 11:00 a.m. eastern standard time on auction day
Competitive tenders:
Prior to 11:30 a.m. eastern standard time on auction day
Payment Terms:
By charge to a funds account at a Federal Reserve Bank
on issue date.

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
OR IMMEDIATE RELEASE
February 04, 2002

CONTACT:

Office of Financing
202-691-3550

RESULTS OF TREASURY'S AUCTION OF 13-WEEK BILLS
91-Day Bill
February 07, 2002
May 09, 2002
912795JT9

Term:
Issue Date:
Maturity Date:
CUSIP Number:
1. 735%

High Rat :

Investment Rate 1/:

Price:

1. 769%

99.561

All noncompetitive and successful competitive bidders were awarded
curities at the high rate. Tenders at the high discount rate were
lotted 62.01%. All tenders at lower rates were accepted in full.
AMOUNTS TENDERED AND ACCEPTED (in thousands)
Accepted

Tendered

Tender Type
Competitive
Noncompetitive
FlMA (noncompetitive)

29,144,949
1,658,951
95,000

14,246,179
1,658,951
95,000

SUBTOTAL

30,898,900

16,000,130

Federal Reserve

4,964,492

4,964.,492

TOTAL

35,863,392

20,964,622

Median rate
1.710%: 50% of the amount of accepted competitive tenders
tendered at or below that rate. Low rate
1.680%:
5% of the amount
accepted competitive tenders was tendered at or below that rate.
-to-Cover Ratio

30,898,900 1 16,000,130

1.93

Equivalent coupon-issue yield.
Awards to TREASURY DIRECT = $1,369,532,000

77
http://www.publicdebt.treas.gov

HIGHLIGHTS OF TREASURY OFFERING
OF 4-WEEK BILLS TO BE ISSUED FEBRUARY 7, 2002
February 4, 2002
Offering Amount ..... . . . . . . . . . . . . . . . . $14,000 million
Public Offering ..... . . . . . . . . . . . . . . . . $14,000 million
NLP Exclusion Amount . . . . . . . . . . . . . . . . $10,100 million
Description of Offering:
Term and type of security . . . . . . . . . . . 28-day bill
CUSIP number
. . . . . . . . . . . . . . . . . . . . . . 912795 JJ 1
Auction date . . . . . . . . . . . . . . . . . . . . . . . . February 5, 2002
Issue date . . . . . . . . . . . . . . . . . . . . . . . . . . February 7, 2002
Maturity date . . . . . . . . . . . . . . . . . . . . . . . March 7, 2002
Original issue date . . . . . . . . . . . . . . . . . September 6, 2001
Currently outstanding . . . . . . . . . . . . . . . $38,760 million
Minimum bid amount and multiples .... $1,000
Submission of Bids:
Noncompetitive bids:
Accepted in full up to $1 million at the highest
discount rate of accepted competitive bids.
Foreign and International Monetary Authority (FlMA) bids:
Noncompetitive bids submitted through the Federal Reserve Banks as agents for
FIMA accounts.
Accepted in order of size from smallest to largest
with no more than $100 million awarded per account.
The total noncompetitive amount awarded to Federal Reserve Banks as agents for
FIMA accounts will not exceed $1,000 million.
A single bid that
would cause the limit to be exceeded will be partially accepted in
the amount that brings the aggregate award total to the $1,000
million limit.
However, if there are two or more bids of equal
amounts that would cause the limit to be exceeded, each will be
prorated to avoid exceeding the limit.
Competitive bids:
(1) Must be expressed as a discount rate with three decimals in
increments of .005%, e.g., 4.215%.
(2) Net long position (NLP) 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
Recei;Et of Tenders:
Noncompetitive tenders:
Prior to 11: 00 a.m. eastern standard time on auction day
Competitive tenders:
Pr~or to 11: 30 a.m.
eastern standard time on auction day
Payment Terms:
By charge to a funds account at a Federal Reserve Bank
on issue date.

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
lR IMMEDIATE RELEASE
~bruary 04, 2002

CONTACT:

Office of Financing
202-691-3550

RESULTS OF TREASURY'S AUCTION OF 13-WEEK BILLS
Term:
Issue Date:
Maturity Date:
CUSIP Number:

9l-Day Bill
February 07, 2002
May 09, 2002
912795JT9

High Rate:

1. 735%

Investment Rate 1/:

1.769%

Price:

99.561

All noncompetitive and successful competitive bidders were awarded
curities at the high rate.
Tenders at the high discount rate were
lotted 62.01%. All tenders at lower rates were accepted in full.
AMOUNTS TENDERED AND ACCEPTED (in thousands)

Competitive
Noncompetitive
FlMA (noncompetitive)

29,144,949
1,658,951
95,000

TOTAL

4,964,492

Federal Reserve

35,863,392

14,246,179
1,658,951
95,000
16,000,130 2/

30,898,900

SUBTOTAL

Accepted

Tendered

Tender Type

20,964,622

i-to-Cover Ratio

30,898,900 / 16,000,130

1.93

Equivalent coupon-issue yield.
Awards to TREASURY DIRECT = $1,369,532,000

177
http://www.publicdebt.treas.gov

PUBLIC DEBT NEWS
Department of tbe Treasury • Bureau of the Public Debt • Washington, DC 20139

TREASURY SECURITY AUCTION RESULTS
BUREAU OF THE PUBLIC DEBT - WASHINGTON DC
'OR IMMEDIATE RELEASE
'ebruary 04, 2002

CONTACT:

Office of Financing
202-691-3550

RESULTS OF TREASURY'S AUCTION OF 26-WEEK BILLS
Term:
Issue Date:
Maturity Date:
CUSIP Number:
High Rate:

182-Day Bill
February 07, 2002
August 08, 2002
912795KV2
1.830%

Investment Rate 1/:

1.812%

Price:

99.075

All noncompetitive and successful competitive bidders were awarded
at the high rate. Tenders at the high discount rate were
.lotted 12.97%. All tenders at lower rates were accepted in full.

~curities

AMOUNTS TENDERED AND ACCEPTED (in thousands)
Tender Type

Tendered

Competitive
Noncompetitive
FlMA {noncompetitive}

SUBTOTAL

26,504,721
1,065,672
100,000

Accepted
$

14,000,406 2/

27,670,393

Federal Reserve

TOTAL

5,052,260

32,722,653

12,834,734
1,065,672
100,000

19,052,666

Median rate
1.800%: 50% of the amount of accepted competitive tenders
tendered at or below that rate. Low rate
1.750%:
5% of the amount
accepted competitive tenders was tendered at or below that rate.

l-to~Cover

Ratio

= 27,670,393 I

14,000,406 = 1.98

Equivalent coupon-issue yield.
Awards to ,TREASURY DIRECT = $B40,124,000

http://www.publitdebt.treas.gov

DEPARTMENT OF THE TREASURY
OFFICE OF PUBLIC AFFAIRS
202-622-2960
FOR IMMEDIATE RELEASE
February 4, 2002

Contact: Tony Fratto
(202) 622-2960

Treasury Secretary PaulO 'Neill made the following statement today on Argentina:

Argentina is an important friend and ally ofthe United States.
We have been very concerned about the difficult circumstances now facing the people of
Argentina.
Weare encouraged that the Argentine Government is taking substantive steps to address
its economic problems, and hope that it will now accelerate its work with the IMF to
fonnulate a sustainable economic program, including an appropriate budget.
The United States also welcomes recently announced initiatives of the World Bank and
Inter-American Development Bank to implement programs to address social safety net
issues in Argentina.
We remain prepared to support, through the international financial institutions, a
sustainable plan for economic recovery in Argentina.

--30-PO-979

D EPA R T l\1 E N T

0 F
,

THE

T REA S IT R V

NEWS
omCE OF PUBLIC AFFAIRS -1500 PENNSYLVANIAAVENUE, N.W. - WASHINGTON, D.C. - 20220 _ (202) 622-2960

EMBARGOED UNTIL 9:30 A.M.
February 5, 2002

CONTACT: BETSY HOLAHAN
202-622-2960

PAUL H. O'NEILL SECRETARY
U.S. DEPARTMENT OF THE TREASURY
BEFORE THE
SENATE COMMITTEE ON BANKING, HOUSING, AND URBAN AFFAIRS
FINANCIAL EDUCATION

Introduction

Chairman Sarbanes, Senator Gramm, distinguished members of the Committee. Thank
you for the opportunity to appear before you this morning to talk about the vital importance of
financial education. I am especially pleased to do so in the company of Chairman Greenspan
and Chairman Pitt. Mr. Chairman, I commend you for focusing a national spotlight on this
critical topic, which is so closely linked to our economic future. It is one, I might add, in which I
have a deep and longstanding personal interest.

In his inaugural address, the President stated "[tJ!le.ambitions of some Americans are
limited by failing schools and hidden prejudice and the circumstances of their birth. We do not
accept this, and we will not allow it." Ownershir, independence, and access to wealth should not
be the privilege of a few. They should be the hope of every American. Financial literacy is an
essential tool to make that hope a reality.

PO-980

Need for Improved Financial Education

The U.S. financial system commands the respect and admiration of the world in large part
because of the widespread availability oflow-cost, high quality fmancial services. Technology
and innovation have made possible a rich diversity of financial products to meet the individual
needs of millions of American households and businesses.

Today's expansive menu of financial product offerings, however, has added complexity
to the decisions Americans must make in choosing the financial products that best serve their
needs. I recall a time not so long ago when, for a large number of Americans, mortgage rates
were fixed, savings went into a bank passbook account, consumer goods were bought on a cashonly basis, and pensions all had defined benefits for retirement. Today, mortgage financing
comes in a variety of packages, credit card use is universal, and savings investment vehicles
range from CDs to mutual funds to individual stocks to annuities. Moreover, the importance of
knowing how to invest savings wisely has risen exponentially with the decline in popUlarity of
defined benefit retirement plans.

To be sure, the evolution of our nation's financial system has created wonderful new
opportunities for Americans to meet their needs as consumers, while at the same time) building
wealth and security for their and their families' economic futures. However, Americans need to
be fully prepared and financially educated to take advantage of these opportunities. Ifwe do not
understand the most important concepts of personal finance, such as how to budget, save, invest
and use credit wisely, then we are missing our full potential as individuals, as well as our
potential as a country.

We have significant room for improvement in the area of financial education. Recent
studies illuminate this fact. In one test of financial basics given to high school students, the
average score was a disappointing 51 percent, with only one-tenth of students scoring above 70
percent on the exam. Remarkably, only fifty percent of high school students understood the
concept of compound interest. Results were similarly disappointing when adults were tested:
their average score was only 57 percent.

There is a tragic human and personal cost that our society pays for this lack of financial
knowledge. All of us know family or friends who have had money problems at some stage in
their life. We all know the terrible price in suffering, stress, and hwniliation that is faced by
those in financial trouble. Four in ten Americans admit they are living beyond their means,
primarily because of the misuse and misunderstanding of credit. Between 1990 and 2000,
personal bankruptcies rose by 69%, again stemming primarily from credit misuse.

A lack of financial knowledge is especially problematic for the most vulnerable members
of our society. The poor, the elderly, and minority groups can be victims of fraud and deception,
predatory lending, and other such abuses. Financial education is a crucial weapon in our arsenal
to protect our citizens from these types of attack. Understanding personal finance is a
consumer's first line of defense against financial rip-offs and scams. Those most vulnerable to
these attacks are precisely the people who have the most to gain by a concerted nationwide effort
to raise Americans' level of financial knowledge.

Current Efforts to Address the Problem

Considerable efforts are being made in the private and public sector to promote financial
education. Our staff has completed a list of financial educational resources offered by the
various Federal departments and agencies that is attached to my testimony for inclusion in the
record.

As the attached document shows, no fewer than 10 f~deral departments ~d agencies,
including the Treasury Department, offer a wide variety of financial education programs and
resources. In addition, many states, Wisconsin, Maryland, and California, to name a few, have
taken initiatives to raise the level of their residents' financial knowledge. Similarly, financial
service providers have made extensive efforts in the banking, securities, and insurance industries
to teach the public how to properly use their products.

Faith-based organizations and community groups have also promoted financial education.
As we all know, talking about money, and especially about the state of one's own finances, can
be difficult. Faith-based and community organizations tend to foster the trust necessary for their
members to discuss these personal matters with them. Such groups can encourage people who
have never saved before to begin saving; to think twice about making an impulse purchase; or to
consider more deeply the need to focus not only on short-tenn conswnption, but also on Iongterm investment.

A Focus on the Schools
These current efforts are important, yet much more needs to be done if we are to
significantly raise the ability of Americans to more effectively master their financial lives. To be
sure, our national strategy must address the financial educational needs of Americans in all walks
of Hfe. This moming, however, I would like to focus in particular on the need for more financial
education in our nation's schools.
No better venue exists for us to reach such a large segment of the population than through
our schools. No better mechanism exists for providing our nation's youth with the educational
building blocks they will need to become competent consumers and managers of household
wealth. By beginning the financial education process early, we can equip our youth with a

foundation for making sound financial decisions throughout their lives. Indeed, in those states

that have begun requiring personal financial education in high school, research shows that high
school graduates have higher savings rates and higher levels of net-worth.

Of course, financial education must begin with basic literacy. A child with insufficient

reading skills will never be able to comprehend a credit card application or a Truth in Lencting
disclosure. A child lacking basic math skills will never be able to balance a checkbook or
compare credit card interest rates. Financial education programs will be successful only for
those children who have mastered basic academic skills. This is one of the reasons why it was so
important for the Congress to pass the President's education bill- the No Child Left Behind Act
of200l- signed into law on January 8.

Faith-based organizations and community groups have also promoted financial education.
As we all know, talking about money, and especially about the state of one's own finances, can
be difficult. Faith-based and community organizations tend to foster the trust necessary for their
members to discuss these personal matters with them. Such groups can encourage people who
have never saved before to begin saving; to think: twice about making an impUlse purchase; or to
consider more deeply the need to focus not only on short-tenn consumption, but also on longtenn investment.

A Focus on the Schools

These current efforts are important, yet much more needs to be done if we are to
significantly raise the ability of Americans to more effectively master their financial lives. To be
sure, our national strategy must address the financial educational needs of Americans in all walks
of Hfe. This morning, however, I would like to focus in particular on the need for more financial
education in our nation's schools.

No better venue exists for us to reach such a large segment ofllie popUlation than through
our schools. No better mechanism exists for providing our nation's youth with the educational
building blocks they will need to become competent consumers and managers of household
wealth. By beginning the financial education process early, we can equip our youth with a
foundation for making sound financial decisions throughout their lives. Indeed, in those states
that have begun requiring personal financial education in high school, research shows that high
school graduates have higher savings rates and higher levels of net-worth.

Of course, financial education must begin with basic literacy. A child with insufficient
reading skills will never be able to comprehend a credit card application or a Truth in Lending
disclosure. A child lacking basic math skills will never be able to balance a checkbook or
compare credit card interest rates. Financial education programs will be successful only for
those children who have mastered basic academic skills. This is one of the reasons why it was so
important for the Congress to pass the President's education bill- the No Child Left Behind Act
of2001- signed into law on January 8.

This landmark legislation provides the most sweeping reforms of the Elementary and
Secondary Education Act since it first became law in 1965. Included among the bill's provisions
are requirements that states set high standards for achievement in reading and math and that they
test every child in grades 3 through 8 to ensure that students are making progress in achieving
those standards. The bill also includes specific language recognizing the importance of financial
education efforts by local schools.
State and local educators are now undertaking the process of developing standards in
math and reading, and the educational curricula that will help their students achieve those
standards. In collaboration with Secretary Paige, I would like to take the opportunity of this
hearing to call upon schools to integrate financial education into those standards and curricula not as a separate discipline, but as means of exposing children to basic financial and economic
principles at the same time they acquire core reading and mathematical skills.
Teaching a child how to balance a checkbook reinforces basic addition and subtraction.
Learning how to calculate compound interest provides an excellent way to exercise knowledge
of percentages. Reading lessons can include stories about children saving money to buy
something special, or getting their first after-school job. For older children, assignments in
English literature can easily be structured to include novels that not only build reading
comprehension, but also help students explore and analyze principles of economic behavior.
Successfully interweaving financial education into math and reading standards required
by the President's education program would be a giant leap
JOlWard in helping. prepare our
.- .
nation's youth to become financially Iite~ate adults. In the short nul, building financial education
into courses that are already required by all schools may be the most expeditious and least
expensive way to make our educational system more responsive to students' fmancial
educational needs.

At the same time, such efforts would complement initiatives already underway in several

states to incorporate personal finance courses into school curriculums. Mississippi, Illinois,
Idaho and New York have been leaders in assuring that personal finance is at least offered to all
students before they graduate from high school. I would also note that legislation or resolutions
have now been passed in Tennessee, Delaware, Louisiana, Michigan and Wisconsin to provide
personal finance education courses. And Delaware and Wisconsin have established task forces
to review the issue and make recommendations.
A FinanciallEducational A1Uance

In 1996, I had the privilege of co-chairing the Pennsylvania Advisory Commission on
Academic Standards. This was a 17-member panel of non-educators, charged by then Governor
Tom Ridge with the job of reviewing education standards being developed for Pennsylvania.
Our goal was two-fold: to ensure that the concerns of students, parents, and local businesses
were considered in developing the standards; and to serve as a reality check, if you will, so that
the standards reflected the real-world needs of students once they graduated and entered the
workforce. The effort was highly successful and today Pennsylvania is recognized as having one
of the highest quality education standards for its children.
Just as Governor Ridge called upon non-educators in Pennsylvania to partner with
educators in the successful development of "real world" education standards, I believe the
financial services sector can just as effectively partner with state and local educators in the
development of financial education standards. For instance state banking superintendents,
insurance commissioners, and securities administrators all possess a wealth of expertise and
experience to contribute to the development offinanciaIeducation guidelines." Private financial
institutions also have much to offer in terms of expertise, as well as providing a source of
additional resources to support teacher training and the establishment of financial education
curricula and programs.

At the national level, the Treasury Department is focusing much of its existing financial
education programs on youth. Just last year, we launched the Money Math program, a personal
finance education kit for young people in grades 7 through 9. More than 110,000 middle school
math teachers in 16,000 school districts nationwide received the kits free of charge.

In terms of new initiatives, I am pleased to announce that our Treasurer, Rosario Marin,
has agreed to organize an effort to recruit the support of state treasurers in pressing for more
financial education in the schools.
In addition, we are working to find a suitable way in which we can recognize, in conjunction
with the U.S. Department of Education, local schools that have exhibited high distinction in the
area of financial education. By providing a national spotlight for innovative educators who have
developed successful programs for teaching personal finance, we hope to motivate their
colleagues in other schools to follow suit.

In partnership with the Department of Education, I am willing to do whatever I can to
promote financial education in the schools. As all of us know, education forms one of the most
important bases of our free and prosperous society, and financial education skills figure
prominently in the success with which we exercise our economic freedoms. As a grandfather of
twelve wonderful grandchildren, I lrnow well that children are America's future, and I would like
to see an educational system that provides all American children with these vital life skills.

Other Areas of Focus

Youth education will not, of course, help the legions of adult Americans whose financial
education skills fall short. Let me mention some ofthe policy issues where we have identified
financial education as key to protecting and promoting the financial health of the adult
popUlation.

We should extend our efforts on financial education to retirement security. As you know, the
President requested that I, along with Labor Secretary Chao and Commerce Secretary Evans
eXamine retirement savings laws to determine whether any reforms are necessary to promote the
ability of all Americans to plan for a secure retirement. Last week, the President announced our

recommendations, which include proposals to increase the freedom of American workers to
choose how they wish to invest their 40 1(k) assets, as well as to prevent corporate officers from

selling company stock during a so-called "blackout" when workers are prohibited from trading in
their 401(k) plans. A key feature of our recommendations is to expand workers' access to

financial educational resources and professional investment advice, so that they can have the
tools they need to make informed investment decisions.
Moreover, investors cannot learn what companies do not disclose. Recognizing that the
Nation's corporate disclosure system is not worlcing as well as it should, the President has asked
his Worldng Group on Financial Markets to take a hard look at what we can do to fix it

Chairman Greenspan, Chairman Pitt, CFTC Chairman James Newsome and I are looking for

ways to realign our corporate disclosure and accounting system with its basic purpose - to
provide investors with the information ~ey need to make infonned decisions about public
cOIpOrations' Dnancial positions and prospects. Clear, accurate, and comprehensive disclosures

are essential to all Americans' ability to invest and save. The key is accountability and
responsibility for corporate officers and directo'rs, accountants and auditors. We are committed

to tha President's call to hold corporate America to "the bighest standards of conduct." I am
confident that the Working Group's recommendations to the President will point the way to
strengthening our disclosure regime.
Financial education is also a centerpiece of First AccoUnts, a program in which Senator
Sarbanes has a major interest First Accounts is a grant program administered by the Treasury
Department and designed to move a maximum number of ''unbanked" low- and moderateincome individuals to "banked" status with insured depository institutions. Without basic
financial services, low- and moderate-income individuals may have a reduced ability to manage
their finances and may be limited in planning and saving for the future.

We issued a Notice of Funding Availability on December 27,2001, and are providing
applicants until March 20, 2002 to respond. In addition, we sent hundreds of copies oftms
Notice to community groups, faith-based organizations, labor unions in all fifty states, and
dozens of financial institutions and their trade associations. We expect to use the First Accounts
program to fund replicable model projects that develop financial products and services for these
individuals without the need for ongoing public subsidies. In seeking applications, we have
recognized that financial education can be a key component in persuading more Americans to
open bank accounts. We will also undertake research to evaluate the success of the funded
projects and to understand what products, services, educational initiatives, marketing techniques,
or incentives are needed.
Finally, I think it is important to make this observation: unwise financial decisions do not
always stem from a lack of financial education. All too often, bad choices stem from economic
despair. No amount of financial education will help individuals build their retirement nest eggs

if their incomes barely cover their families' living expenses. No amount of fmancial education
will help individuals escape the high fees charged on short-teon, unsecured loans if their families
are in need of food or medicine, and there is no other place to go for the funds. With more
money in their pockets, people will be better positioned to make sound economic choices and
provide for their and their families' economic futures. As we aggressively promote fmancial
education, we must not lose sight of the larger goal to promote economic prosperity through the
President's economic program.
Conclusion

The importance ofhigh quality education to the future of our society and to our nation's
economy can never be underestimated. I am reminded of a saying from the gentleman who
graces the one hundred dollar bill - Benjamin Franklin, "If a man empties his purse into his head,
no man can take it away from him." Those words written at the dawn of this great nation's
history are as true today.

Financial education can be compared to a road map to the American Dream. I believe
that we need to teach all Americans the necessary tools to read that map, so that they can reach
the Dream.
-30-

DEPARTMENT

'IREASURY
1789

THE

TREASURY

NEWS

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

Contact: Tara Bradshaw
(202) 622-2960

Embargoed Until: 2:30 P.M.
February 5,2002

TESTIMONY OF TREASURY SECRETARY PAUL O'NEILL
BEFORE THE
SENATE FINANCE COMMITTEE

Good morning Chairman Baucus, Senator Grass1ey and members of the committee.
Thank you for inviting me to testify today. Now that we've had a year to work together, you
should know that I am an optimist about the US economy. I believe we always have untapped
potential that can be unleashed to spread prosperity throughout the nation. Never has that been
more true than right now. Even after a difficult year, my optimism about the fundamentals of the
US economy has not changed. I believe we were on the verge of recovery before the September
11 terrorist attacks, and that our resilience and determination have brought us back to the early
stages of recovery today. We see more and more signs every day indicating that the seeds for a
recovery are there, and only need nourishing to speed the process of putting Americans back to
work. I believe we will return to prosperous economic growth rates of3 to 3.5 percent, as soon
as the fourth quarter ofthis year, especially if we are able to pass still-needed economic security
legislation to hasten and strengthen our recovery.
Strengthening our economy must be our primary goaL It is the focus of the President's
budget. That must be our goal, because a return to our normal growth rates means jobs for the
1.4 million Americans who have lost jobs during this recession. Just as a strengthening economy
means greater prosperity for our nation's people, it also means greater strength for our
government. It means greater revenues going into the Treasury, without raising taxes, giving us
resources to address the nation's needs, and the retirement of even more federal debt - leading to
long-term economic security for our children. Even with all that must be done to enhance our
security, we expect that a return to economic growth will bring us back to government surplus in
2005.
The economy's slowdown began in mid-2000, when GDP and job-growth slowed
sharply. Business capital spending began to plummet in late 2000, and accelerated its decline in
2001, dragging down the economy. In August we were beginning to see the evidence of an
economic rebound. I firmly believe that had it not been for the terrorist attacks of September
11 th, that we would have seen an end to the economic downturn and would perhaps have avoided
a recession.
PO-981

•

·U.s. GOVImIIIInI Printing Office: 1998· 619-559

In sum, the scorecard for the economy in 2001 reflected a combination of adverse events:
•
•
•
•

The private sector lost more than 1.5 million jobs.
The unemployment rate rose 1.8 percentage points.
Industrial production was off nearly 6 percent during the year.
Industry was using less than 75 percent of its capacity.

As bad as these numbers are, they could have been worse. Our well-timed bipartisan tax
relief package put $36 billion directly into consumers' hands in the late summer and early fall,
providing much needed support as the economy sagged. It was the right thing to do, at just the
right time.
It's not surprising then that both the Congressional Budget Office and the Office of
Management and Budget project deficits for this year and next as a result of the economic
slowdown and the response to the September 11 attacks. Last April's budget forecast a fiscal
2002 surplus of $283 billion. The Mid-Session review figures, released in August, took account
of the impact of the President's tax relief package and projected a $195 billion surplus in fiscal
2002. The new budget forecasts a fiscal 2002 deficit of $9 billion, assuming no policy action to
stimulate the economy. The reduced surplus estimates are the result of the economic downturn
and the response to the September 11 attacks. CBO's projections confirm that tax relief played a
minor role in the surplus decline in the next few years - accounting for less than 12 percent of
the decline in 2002 and less than 28 percent in 2003.

April 2002 budget baseline:
Changes from:
weaker economy/technical changes
enacted spending
tax relief
February 2003 budget baseline:

FY02 surplus (in billions)
$283
-19·7-54
-40
-9

The CBO budget projects a 10-year surplus of $1.6 trillion. Last August, after factoring
in the tax relief package, the CBO projected a $3.4 trillion surplus for the next 10 years. The
recession and the war on terrorism depleted the 10-year projections by $1.8 trillion. The lesson
from these numbers is simple - 1O-year projections are a useful discipline but they do not predict
the future.

None oflast year's 10-year estimates foresaw the events of September 11 or a negative
$660 billion worth of "technical changes" that are now included in the new 10-year estimates by
agreement among the technical experts. We do know about the here and now, and we should
deal with the here and now, reigniting growth to restore long-term surpluses.
The Administration's growth projections are similar to the consensus of private forecasts.
Over 90 percent of the Blue Chip Economic Indicators panel members say the recession will end
before April ofthis year. We share that assessment. Personally, I am optimistic that the
economy will do even better than our budget assumptions suggest. For the near tenn, we expect
the economy to grow 2.7 percent during the four quarters of 2002. That projection includes the
foreseeable effects on the economy of the President's economic security package.
The lesson is clear. A strong economy is crucial to restoring budget surpluses. Some
would suggest that we need surpluses to improve our economy. They have the logic backwards.
Growth creates surpluses, not the other way around.
The federal budget was in deficit every year from 1970 through 1998. From 1970
through the early 19908, government spending growth exceeded government revenue growth by
% of a percentage point a year, on average. Fiscal discipline was imposed by the historic
Omnibus Budget Reconciliation Act, signed in 1990 by President Bush. With fiscal restraint
made an integral part of the budget process, once the economy took off in the 19908, revenue
growth was double the pace of spending growth. It was the rapid economic growth of the 1990s
that generated the burgeoning budget surpluses, which appeared even as federal outlays grew
about 3.5 percent a year from 1993 through 2000.
Today the economy is recovering. The tax cut oflast May helped to keep the economic
downturn shallow and it will continue to help. Energy prices have retreated. The Federal Reserve
has reduced short-tenn interest rates 11 times since the beginning of2001. Measures of
consumer confidence are bouncing back. The index of leading indicators increased sharply in
December for the third straight gain. Motor vehicle sales have remained strong. And initial
filings for unemployment benefits are in decline. But we all know that unemployment itself is a
lagging indicator. Although the current trend is positive, too many people will remain out of
work. And given the choice, they'd rather have a regular paycheck than an unemployment
check.
The President has presented a budget to speed our recovery. First, the budget includes
tax relief to stimulate job creation as a crucial tool to speed our recovery and put Americans back
to work. The Presidenf s proposals - accelerated depreciation, speeding up the reduction in the
27 percent income tax rate, adjustments to the corporate AMT so it doesn't cancel out tax relief,
and checks to those who didn't benefit from last summer's tax rebates - enjoy bipartisan support
in both houses of Congress. I'm eager to work with all of you to complete work on a package to
create jobs and assist dislocated workers with extended unemployment benefits and temporary
assistance with health care.
Second, the President's budget proposes strict fiscal discipline - increasing spending for
national security and homeland defense, and holding the line on other spending.

His management agenda calls for performance measures to be used to determine where
budget increases are ~ocated - so that our resources go into the projects and programs that
make the biggest difference in people's lives. As the experience of the 1990s shows, this
discipline in C111Cial to ensuring we do not return to systemic deficits of the past. But fiscal
discipline alone will not guarantee budget surpluses. We must return to 3 to 3.5 percent annual
growth to ensure surpluses for years to come.
The focus must be on restoring growth. Surpluses will then follow naturally. Raising
taxes would stifle the process of getting Americans back to work. This is a bad idea, as our
recovery is struggling to take hold. According to 1999 data, the most recent available, 17 million
small business owners and enuepreneurs pay taxes under the individual income tax rates. They
have made business plans that assume that the tax relief enacted last summer will take place as
scheduled. Eighty percent of the benefit of cutting the top two rates goes to small business
owners and entrepreneurs. These are the engines ofjob creation in our economy.

Tax relief should be accelerated, as the President bas proposed to boost job creation.
Such relief will have minimal, or DO, effect on long-term interest rates. According to a recent
analysis by the CEA, an expected $1 trillion change in the public debt over 10 years would tend
to raise the long-term interest rate by 14 basis points. Since the tax cut last year, the IO-year
nominal rate has averaged 4.93 percent, which is substantially below the 6.16 percent averaged
from 1993 through 2000.
Restoring growth is the key to America's future. Restoring growth is the key to ensuring
we have the resources in Washington to fight the war on terrorism, provide for homeland defense
and provide the services the American people demand. The President's budget will help to
ensure that both peace and prosperity are restored to the American people as soon as possible.
-30-

DEPARTMENT

THE

TREASURY

NEWS

'IREASURY

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

Embargoed Until: 10 A.M.
February 5, 2002

Contact: Tara Bradshaw
(202) 622-2960

TESTIMONY OF TREASURY SECRETARY PAL"L O'NEILL
BEFORE THE
HOUSE WAYS AND MEANS COMMITTEE

Good morning Chainnan Thomas, Congressman Rangel and members of the committee.
Thank you for inviting me to testify today. Now that we've had a year to work together, you
should know that I am an optimist about the US economy. I believe we always have untapped
potential that can be unleashed to spread prosperity throughout the nation. Never has that been
more true than right now. Even after a difficult year, my optimism about the fundamentals of the
US economy has not changed. I believe we were on the verge of recovery before the September
11 terrorist attacks, and that our resilience and determination have brought us back to the early
stages of recovery today. We see more and more signs every day indicating that the seeds for a
recovery are there, and only need nourishing to speed the process of putting Americans back to
work. I believe we will return to prosperous economic growth rates of3 to 3.5 percent, as soon
as the fourth quarter of this year, especially if we are able to pass still-needed economic security
legislation to hasten and strengthen our recovery.
Strengthening our economy must be our primary goal. It is the focus of the President's
budget. That must be our goal, because a return to our normal growth rates means jobs for the
1.4 million Americans who have lost jobs during this recession. Just as a strengthening economy
means greater prosperity for our nation's people, it also means greater strength for our
government. It means greater revenues going into the Treasury, without raising taxes, giving us
resources to address the nation's needs, and the retirement of even more federal debt -leading to
long-term economic security for our children. Even with all that must be done to enhance our
security, we expect that a return to economic growth will bring us back to government surplus in
2005.
The economy's slowdown began in mid-2000, when GDP and job-growth slowed
sharply. Business capital spending began to plummet in late 2000, and accelerated its decline in
2001, dragging down the economy. In August we were beginning to see the evidence of an
economic rebound. I firmly believe that had it not been for the terrorist attacks of September
11 th, that we would have seen an end to the economic downturn and would perhaps have avoided
a recession.
PO-982

•

·U.s. Govammllll Prilting 0Ifice: 1998· &19-5511

The September 11 attacks created shockwaves that rippled throughout all sectors of the
economy. Financial markets were shut down for almost a week. Air transportation came to a
standstill. As a result, GDP felll.3 percent at an annual rate in the third quarter.
By late November, the National Bureau of Economic Research declared that the US was
in a recession. They designated the end of the previous expansion to be March 2001, but they
observed that the slowdown might not have met their qualitative standards for recession without
the sharp declines in activity that followed the terrorist attacks.
In sum, the scorecard for the economy in 2001 reflected a combination of adverse events:
•
The private sector lost more than 1.5 millionjobs.
•
The unemployment rate rose 1.8 percentage points.
•
Industrial production was off nearly 6 percent during the year.
•
Industry was using less than 75 percent of its capacity.
As bad as these numbers are, they could have been worse. Our well-timed bipartisan tax:
relief package put $36 billion directly into consumers' hands in the late summer and early fall,
providing much needed support as the economy sagged. It was the right thing to do, at just the
right time.
It's not surprising then that both the Congressional Budget Office and the Office of
Management and Budget project deficits for this year and next as a result of the economic
slowdown and the response to the September 11 attacks. Last April's budget forecast a fiscal
2002 surplus of $283 billion. The Mid-Session review figures, released in August, took account
of the impact of the President's tax relief package and projected a $195 billion surplus in fiscal
2002. The new budget forecasts a fiscal 2002 deficit of $9 billion, assuming no policy action 10
stimulate the economy. The reduced surplus estimates are the result of the economic downturn
and the response to the September 11 attacks. CBO's projections confirm that tax relief played a
minor role in the surplus decline in the next few years - accounting for less than 12 percent of
the decline in 2002 and less than 28 percent in 2003.

April 2002 budget baseline:
Changes from:
weaker economy/technical changes
enacted spending
tax relief
February 2003 budget baseline:

FY02 surplus (in billions)
$283
-19·1-54
-40
-9

The CBO budget projects a 10-year surplus of$1.6 trillion. Last August, after factoring
in the tax relief package, the CBO projected a $3.4 trillion surplus for the next 10 years. The
recession and the war on terrorism depleted the lO-year projections by $i.8 trillion. The lesson
from these numbers is simple - 10-year projections are a useful discipline but they do not predict
the future.

None of last year's 10-year estimates foresaw the events of September 11 or a negative
$660 billion worth of "technical changes" that are now included in the new 10-year estimates by
agreement among the technical experts. We do know about the here and now, and we should
deal with the here and now, reigniting growth to restore long-tenn surpluses.
The Administration's growth projections are similar to the consensus of private forecasts.
Over 90 percent of the Blue Chip Economic Indicators panel members say the recession will end
before April of this year. We share that assessment. Personally, I am optimistic that the
economy will do even better than our budget assumptions suggest. For the near tenn, we expect
the economy to grow 2.7 percent during the four quarters of 2002. That projection includes the
foreseeable effects on the economy of the President's economic security package.
The lesson is clear. A strong economy is crucial to restoring budget surpluses. Some
would suggest that we need surpluses to improve our economy. They have the logic backwards.
Growth creates surpluses, not the other way around.
The federal budget was in deficit every year from 1970 through 1998. From 1970
through the early 1990s, government spending growth exceeded government revenue growth by
% of a percentage point a year, on average. Fiscal discipline was imposed by the historic
Omnibus Budget Reconciliation Act, signed in 1990 by President Bush. With fiscal restraint
made an integral part of the budget process, once the economy took off in the 1990s, revenue
growth was double the pace of spending growth. It was the rapid economic growth of the 1990s
that generated the burgeoning budget surpluses, which appeared even as federal outlays grew
about 3.5 percent a year from 1993 through 2000.
Today the economy is recovering. The tax cut of last May helped to keep the economic
downturn shallow and it will continue to help. Energy prices have retreated. The Federal Reserve
has reduced short-term interest rates 11 times since the beginningof2001. Measures of
consumer confidence are bouncing back. The index of leading indicators increased sharply in
December for the third straight gain. Motor vehicle sales have remained strong. J\nd initial
filings for unemployment benefits are in decline. But we all know that unemployment itself is a
lagging indicator. Although the current trend is positive, too many people will remain out of
work. And given the choice, they'd rather have a regular paycheck than an unemployment
check.
The President has presented a budget to speed om: recovery. First, the-budget includes
tax reliefto stimulate job creation as a crucial tool to speed our recovery and put Americans back
to work. The President's proposals - accelerated depreciation, speeding up the reduction in the
27 percent income tax rate, adjustments to the corporate AMT so it doesn't cancel out tax relief,
and checks to those who didn't benefit from last summer's tax rebates -enjoy bipartisan support
in both houses of Congress. I'm eager to work with all of you to complete work on a package to
create jobs and assist dislocated workers with extended unemployment benefits and temporary
assistance with health care.
Second, the President's budget proposes strict fiscal discipline - increasing spending for
national security and homeland defense, and holding the line on other spending.

His management agenda calls for perfonnance measures to be used to determine where
budget increases are allocated - so that our resources go into the projects and programs that
make the biggest difference in people's lives. As the experience of the 1990s shows, this
discipline in crucial to ensuring we do not return to systemic deficits of the past. But fiscal
discipline alone will not guarantee budget surpluses. We must return to 3 to 3.5 percent annual
growth to ensure surpluses for years to come.
The focus must be on restoring growth. Surpluses will then follow naturally. Raising
taxes would stifle the process of getting Americans back to work. This is a bad idea, as our
recovery is struggling to take hold. According to 1999 data, the most recent available, 17 million
small business owners and entrepreneurs pay taxes under the individual income tax rates. They
have made business plans that assume that the tax relief enacted last summer will take place as
scheduled. Eighty percent of the benefit of cutting the top two rates goes to small business
owners and entrepreneurs. These are the engines of job creation in our economy.
Tax relief should be accelerated, as the President has proposed to boost job creation.
Such relief will have minimal, or no, effect on long-term interest rates. According to a recent
analysis by the CEA, an expected $1 trillion change in the public debt over 10 years would tend
to raise the long-term interest rate by 14 basis points. Since the tax cut last year, the lO-year
nominal rate has averaged 4.93 percent, which is substantially below the 6.16 percent averaged
from 1993 through 2000.
Restoring growth is the key to America's future. Restoring growth is the key to ensuring
we have the resources in Washington to fight the war on terrorism, provide for homeland defense
and provide the services the American people demand. The President's budget will help to
ensure that both peace and prosperity are restored to the American people as soon as possible.

-30-

DEPARTMENT

THE

TREASURY

NEWS

'IREASURY

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

U.. S. International Reserve Position

February 5, 2002

.e Treasury Department today released U.s. reserve assets data for the week ending February 1,2002. As
licated in this table, U.s. reserve assets totaled $67,756 million on that date, compared to $67,999 million at the
i of the prior week.
; millions)

Ja.nuary 25. ~.002
67,999

'icial U.S. Reserve Assets

TOTAL
"eign Currency Reserves

)ecurities

Euro
5,330

Yen
10,136

February 1. 2002
67,756

TOTAL

E:Jro

15,467

5,358

Yen

TOTAL

10,270

15,628

If whic!7. issuer '7eadquanered in tile U. S.

-otal deposits with:
i. Other central banks and BIS
ii. Banks headquartered in the U.S.
b.ii. Of which. banks located abroad

·ii. Banks headquartered outside the U.S.

8,993

3,910

12,903

9,030

3,962

0
0

12,992

17.828

17.-+58

cial Drawing Rights (SDRs) 2

10,757

10.633

::I Stock 3

11,045

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

Reserve Position

Reserve Assets

eludes holdings of the Treasury's Exchange Stabilization Fund (ESF) and the Federal Reserve's System Open Market Account ~SOMA),
at current market exchange rates. Foreign currency holdings listed as securiti65" reflect marked-to-market values, and deposits reflect
,g values.
items ... ~. IMF ReServe Position' and "3. SpeCial Drawing Rights ISDRs).·' are !lased on data provided by the IMF and are valued in
erms at the official SOR!doliar e;{change rate fer the reporting date. The entries in the tabie above for latest 'Neek {shown in italics I
any necessary adjustments. including revaluation. by the U.S. Treasury to the prior week's IMF data. The IMF data for the prior weeK

31.
:! 5lCC:\ :s ·.:a~L:eC rr:cnthl:.t .:n .~...t.: .

: . :~.l.: ;milion.

..2:::: p~r tll~c tro:J uunc~.

'/alues Si10\rvn are ::is Jf Decerncer .3 ~ ~CO:

The NC'Iember 2G :I~C i 'iaa.. c

Offical Reserve Assets Worksheet
(actual US dollar amounts)
Last Week
Enter Dates Here

This Week

25-Jan-02

1-Feb-02
Change

Foreign Currency

!£9.:..J.an-o.~

l:.E~b-Q;f

$5,330,479,490.09

$5,358,002,508.58

27,523,018

$10,136,039,332.19

$10,270,465,744.86

134,426,413

co~~ and ~aste data into last week
and put new data from fax

$15,466,518,822.28

$15,628,468,253.44

161,949,431

into right column

$8,993.447,564.52
$3,909,658,672.70

$9,030,304,106.05
$3,961,508,560.78

36,856.542
51,849,888

Deposit Total

$12,903,106,237.22

$12,991,812,666.82

88,706,430

Total

$28,369,625,059.49

$28,620,280,920.26

250,655,861

Euro Securities
Yen SeCUrities

Sec. Total
Euro Deposits
Yen Deposits

Euro Rate

$0.8655

$0.8685

Yen Rate

Y 134.47

Y 132.71

25-Jan-02

1-Feb-02

IMF

(prelim.

Reserve Tranche

SDR

put actual figures in for last week

17.458.253.47573

000

0.00

1] 827JH9.785.0~

000
17.458,253,475.73

0,00
-369,566,309.31

10.756.557,150.99

10,633,136.13060

-123,421,020.39
0,00

as of 10/31/0 1
Gold

Source: IMF (email)

adjust,

I :.X~"7.X I 'I. ·:-;5 II.,

GAB
NAB
Total

IV/til

Source: NY Fed (fax)

25-Jan-Q.4

1-Feb·O~

11.044.675,236.85

11,044.675,236 85

-369,566,309.31
0.00

Source: FMS website
0.00

http://www.fms.treas.gov/gold

~~-Jan-O~I

1-F~Q-0~1

lather Res.Assets
67,998,677,232.37

IrOTAL

67,756,345,763.441

-242,331,468.93

Adjustments to IMF and SDR data, translated at current exchange rates

---------------------------------------------------------------------------._-------------------------------------------------.
IN SCRs
SDR rate for
,:
:Calculation Section
25-..Jan-02
Adjustments
1-Feb-02
In
USC
:
.- _. --- _.....
,:Prelim. IMF Cata

Reserve Tranche

1·I,IIS':','I'1I1,1I1 ~

14,087.990.017

GAB
NAB

SDRs

S.~~II.

/11.11111

'I .'io(,"~;

$17.458.253.475.73
50.00
50.00

14.087,990,017

Total

8.580.441.100

SDR,,"

517.458.253.475./3
510.633.136.130.60

Source:
http://www.imf.org/externallmap.htm. then go to "Exchange Rates in Terms of SDRs Daily"

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:

IMMEDIATE RELEASE
Feruary 05, 2002

Office of Financing
202 - 6 91- 3 55

RESULTS OF TREASURY'S AUCTION OF 4-WEEK BILLS
28-Day Bill
February 07, 2002
March 07, 2002
912795JJl

Term:
Issue Date:
Maturity Date:
CUSIP Number:
1.700%

High Rate:

Investment Rate 1/:

Price:

1. 723%

99.868

All noncompetitive and successful competitive bidders were awarded
at the high rate.
Tenders at the high discount rate were
)tted 83.54%. All tenders at lower rates were accepted in full.

~rities

AMOUNTS TENDERED AND ACCEPTED (in thousands)
Accepted

Tendered

Tender Type
Competitive
Noncompetitive
FIMA (noncompetitive)

SUBTOTAL
Federal Reserve
$

TOTAL

37,547,200
25,516

13,974,820
25,516

37,572,716

14,000,336

2,523,437

2,523/437

40,096,153

16,523,773

Median rate
1.690%: 50% of the amount of accepted competitive tenders
tendered at or below that rate.
Low rate
1.650%:
5% of the amount
:cepted competitive tende~s was tendered at or below that rate.
:o-Cover Ratio
~ivalent

37,572,716 / 14,000,336 = 2.68

coupon-issue yield.

http://www.publicdebt.treas.gov

PUBLIC DEBT NEWS
Department of the Treasury • Bareau of the Public Debt • Washington, DC 10139

TREASURY SECURITY AUCTION RESULTS
BUREAU OF THE PUBLIC DEBT - WASHINGTON DC
IMMEDIATE RELEASE

CONTACT:

Office of Financing

!bruary 05, 2002

202-691-3550

RESULTS OF TREASURY'S AUCTION OF 4-3/4-YEAR NOTES
This issue is a reopening of a note originally issued November 15, 2001.
.terest Rate:
ries:
SIP No:

Issue Date:
Dated Date:
Maturity Date:

3 1/2%
F-2006
9128277F3

High Yield:

Price:

4.254'

February 15, 2002
November 15, 2001
November 15, 2006

96.780

All noncompetitive and successful competitive bidders were awarded
at the high yield. Tenders at the high yield were
lotted 11.31%. All tenders at lower yields were accepted in full.
~urities

Accrued interest of $ 8.89503 per $1,000 must be paid for the period
November 15, 2001 to February 15, 2002.
AMOUNTS

TENDERED

ACCEPTED (in thousands)

AND

Accepted

Tendered

Tender Type
Competitive
Noncompetitive
FIMA (noncompetitive)

22,840,000
616,519

16,000,002 1/

23,456,519

SUBTOTAL

TOTAL

944,332

Federal Reserve

24,400,851

15,383,483
616,519

16,944,334

Median yield
4.210%: 50% of the amount of accepted competitive tenders
tendered at or below that rate. Low yield
4.160%:
5' of the amount
~cepted competitive tenders was tendered at or be~9w-that rate.
to-Cover Ratio
~ards

23,456,519 / 16,000,002

1.47

to TREASURY DIRECT = $486,188,000

http://www.publicdebt.treas.gov
-985

E P \ R T l\l E N T

0 F

T II E

T REA S

R \'

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

Contact: Tony Fratto
(202) 622-2960

EMBARGOED UNTIL 10:00 A.M. EST
February 6,2002

STATEMENT OF JOHN B. TAYLOR
UNDER SECRETARY OF THE TREASURY FOR INTERNATIONAL AFFAIRS
BEFORE THE
SUBCOMMITTEE ON INTERNATIONAL MONETARY POLICY AND TRADE
OF THE HOUSE FINANCIAL SERVICES COMMITTEE

Thank you Chairman Bereuter, Ranking Member Sanders and members of the
Subcommittee for inviting me to participate in this hearing on the current economic situation in
Argentina.
The people of Argentina are facing extremely trying times. Throughout this difficult
period, President Bush has made it clear that Argentina is an important friend and ally ofthe
United States of America. We want our allies to be strong leaders of free democracies and free
markets. Argentina should be an engine of economic growth in our hemisphere. It is important
that Argentina succeeds.

In order to understand the current situation in Argentina, I think it is helpful to begin by
reviewing some of the key economic developments in Argentina during the last decade.
The Economy 0/ Argentina in the 1990s

In the early 1990s, the government of Argentina undertook a series of important refonns

in economic policy, including monetary policy, fiscal policy, structural policy, and international
trade policy. Perhaps most dramatic and immediately n.Qticeable was the change in monetary
policy. A highly inflationary monetary policy was replaced by a new "convertibility law," which
pegged the peso one-to-one with the dollar and largely prevented the central bank from fmancing
the government's budget deficit by printing money. Fiscal policy was also brought into better
control with a decline in deficits. On the structural side, a comprehensive privatization program
was implemented through which a nwnber of inefficient state-owned enterprises were privatized.
Moreover, barriers to international trade and investment were reduced and Argentina's financial
sector was opened to foreign investors.
PO-986

•

·U.s. GOVIIMIInI Printing Office: 1998· 619-5511

These market-oriented reforms produced very impressive results. Hyperinflation-which
had risen to over 3000 percent-was brought to a quick end by the convertibility law. Economic
growth turned around sharply: after falling during the 19808, real GDP began growing at over 4
percent per year. Investment and exports grew particularly rapidly. The sharp increase in
economic growth was even more remarkable given the very rapid disinflation that was occurring
at the same time.
However, starting in the late 19908 there were a number of policy setbacks and external
shocks which sharply reduced economic growth in Argentina and ultimately led to the financial
crises in 2000-2001 and the current halt to economic activity.
First, government budget deficits began to increase, an indication that fiscal discipline
had begun to wane. Government spending at the federal and provincial level increased faster
than tax revenues. These deficits could not be financed by money creation because of the
convertibility law. Instead, they were financed by borrowing in both the domestic and the
international capital markets; however, as the government's debt began to rise and raise
questions about sustainability of the debt, risk premia rose and increased interest rates.
Eventually the higher interest rates put additional pressure on the budget deficit and held back
economic growth.
Second, the low inflation of the early-to-mid 1990s turned into persistent deflation which
also had negative effects on economic growth. In addition, the currencies of Argentina's major
trading partners in Europe and Brazil depreciated relative to the dollar, and therefore relative to
the Argentine peso. This effective appreciation of the peso led to a deterioration in Argentina's
competitiveness which, along with the higher interest rates, further held back economic growth.
Third, persistent expectations of depreciation of the peso caused interest rates on peso
loans to be higher than dollar interest rates. Whenever policy actions were taken that raised
questions about central bank. independence or about the convertibility law, market expectations
of depreciation increased causing domestic interest rates to rise further.
As low economic growth persisted into 2000, concerns began to grow that a vicious cycle
of low tax revenues and continued government spending increases would lead to rising interest
rates, which would further slow the economy. Following the political tunnoil in October 2000
when Vice President Alvarez resigned, Argentina's borrowing costs soared and rolling over
government debt became more and more difficult. Renewed plans to reduce the budget deficit
brought interest rates down temporarily, but by February 2001 it was clear that further actions
needed to take place. The Argentine government introduced a number of policy changes and
finally decided to create a rule - the zero deficit law - in the summer of 200 1 to try to provide
confidence about the government's seriousness in getting its fiscal house in order.
Eventually, however, it became clear that these changes to the budget were not working.
Many market participants considered the govemm,ent's economic plan to be unsustainable, and
interest rates on government debt began to increase sharply. By November, it was apparent that
the government's debt would have to be restructured and, indeed, President de la Rua took the
step of announcing that such a restructuring would take place.

As the restructuring effort was underway, the uncertainty about its impact on the banking
system led to increasingly large deposit withdrawals from banks and international reserves began
to fall. In order to stop the withdrawals and the decline in reserves, the government imposed
severe restrictions on such withdrawals in December. Soon after the restrictions were imposed,
social and political protests turned violent, leading to the resignation of President de la Rua and
his Ministers.
Economic circumstances in Argentina deteriorated after the imposition of the restrictions
on deposit withdrawals. The lack of a functioning payments system led to a virtual halt of much
economic activity. The shortage of liquidity is hindering economic growth and underlies much
of the social frustration. The Duhalde government, which took over in January, is in the process
of gradually removing these restrictions and at the same time moving to a flexible exchange rate
system.
It is of course up to the government of Argentina to work out the details of a set of

economic policies that will increase economic growth in a sustainable way. Indeed, it has begun
to layout the broad outlines of such a policy strategy in the last few days, and, as Secretary
O'Neill said on Monday, we are encouraged that the Argentine Government is taking substantive
steps to address its economic problems. In terms of economic policy, the government must still
develop a growth-oriented tax system and a lasting budget arrangement with the provinces that is
based on realistic assumptions about available sources of non-inflationary financing. The
central bank must establish a transparent, rules-based monetary regime that will keep inflation
from rising as the convertibility law did in the 1990s. The govenunent must begin discussions to
restructure its debt. And banks must be recapitalized so that lending to the private sector can
resume, which in turn will strengthen growth, investment, and job creation.
Summary of IMF Programs

During the period of time discussed above, the government of Argentina had several
programs with the International Monetary Fund (IMP). In March 2000, Argentina obtained a
$7.4 billion IM:F program. The Argentine government treated the program as "precautionary,"
meaning that the government did not intend to draw upon it. However, starting in the summer of
2000, the growing concern in financial markets was that the persistent Argentine recession was
setting up the potential for a financial crisis.

In December 2000, Argentina drew on $2 billion from its IMF program, and the next
month the IM:F approved an additional $6.3 billion for Argentina's program, bringing the total
program size to $13.7 billion. As a condition for the January package, the Argentine government
agreed to a series of structural measures in the area of fiscal, pension and health care reforms to
help develop a sustainable fiscal position in the medium-term and to build investor confidence.
In August 2001, the IMF provided Argentina with a further augmentation of$8 billion.
Of this amount, $5 billion was to bolster reserves in the central bank to counter a substantial fall
in deposits during the summer.

The remaining $3 billion could be used to support a voluntary, market-based debt
operation and thereby begin to address Argentina's debt sustainability problem. However, when
tax revenues continued to fall short and the government failed to reach an agreement on transfers
to the provinces, it became increasingly clear that the government was not going to be able to
meet its fiscal targets and had no other sources of financing. This fueled concerns about the
government's ability to service its debt, particularly to domestic banks, and eventually prompted
an accelerated nul on the banking system.
In December, IMP staff determined that Argentina was not going to make its fiscal
targets for the fourth quarter that were agreed upon in August and that its program was no longer
sustainable. Thus, the IMP could not complete its review and consequently did not disburse a
loan tranche in December 2001.

u.s. Policy
Since the Bush Administration took office, we have remained in close engagement with
the IMP, the G~7, and other leaders in the region about the financial and political problems that
Argentina faces. Moreover, we have and will remain fully engaged with Argentina -- our
neighbor, friend, and strong ally. As President Bush has stated and Secretary O'Neill has
reiterated, once Argentina has designed a sustainable economic program, we are prepared to
support it through the international financial institutions.
Our engagement with the International Monetary Fund and the government of Argentina
during the last year should be viewed in the context of our overall approach to emerging markets.
During the last four years the flows of capital to the emerging markets have declined sharply,
and it has been the intent of the Bush Administration to reverse this trend by reducing the
frequency of financial crises of the kind that we have seen in Argentina.
Of course the ideal would be to prevent crises such as the one in Argentina from
occurring. This requires not only early detection of policies or of external shocks that could
cause crises, but also the resolve to take actions to reverse such policies or counter such shocks.
The Bush Administration has encouraged the IMF to strengthen its capacity to detect potential
troubles on the horizon, and to be willing to warn countries that are heading down a dangerous
path to take appropriate action. Effective communication with markets is also key. And the llvlF
can be more effective and credible in undertaking these tasks if it focuses on issues that are
central to its expertise - notably strengthening monetaryy.fiscal, exchange rate, financial sector,
and debt management policies. In the last decade, the IMF became too involved in matters
outside of these core areas.
I hope the emerging market asset class grows much more in the future as the rates of
economic growth in developing and emerging market countries rise. But we have to recognize
that official sector resources caIUlot possibly grow at such a high rate that we can continue with
very large official finance packages to deal with emerging market debt crises as in recent years.
There will inevitably be limitations on the use of official sector resources.

Moreover, in order to reduce bailouts of private investors it is necessary to limit the use
of official resources, especially in cases where debt sustainability is in question. We must
therefore gradually move in the direction of less reliance on large official finance packages.
An important change has been occurring in emerging markets and we have encouraged
this change as part of our approach to emerging markets. Investors are increasingly
differentiating between countries and markets based on fundamental economic assessments -judgments that are facilitated by better infomation. This differentiation is reducing contagion
from one country to another, as exemplified most recently by the relative stability in other
emerging markets over the past few months despite the crisis in Argentina. Emphasis on the risk
of contagion by the official sector in the past led to the expectation on the part of investors and
emerging market governments that the official sector would bail them out. That encouraged
excessive risk-taking and gave rise to the very conditions that made financial crises more likely.
Changing this mindset has been an important priority, and, I think, an area where we have made
some progress.

One important challenge that remains is to explore options to promote more orderly
sovereign debt restructurings. The official sector should not encourage countries to default on
their debts, but we recognize that restructuring can and will happen in certain cases. At the
moment, there is a great deal of uncertainty about the process involved in such restructurings. It
is important to find a way such that when a sovereign debt restructuring oecm'S, it does so in a
more orderly manner that treats debtors and creditors fairly and reduces the scope for arbitrary,
unpredictable official action.

Thank: you again for this opportunity to speak with you. I look forward to hearing your
views and answering your questions.

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

Embargoed Until: 10 A.M. EST
February 6,2002

Contact: Public Affairs
(202) 622-2960

TESTIMONY OF TREASURY SECRETARY PAUL O'NEILL
BEFORE THE
HOUSE BUDGET COMMITTEE

Good morning Chairman Chairman Nussle, Congressman Spratt and members of the
committee. Thank you for inviting me to testify today. Now that we've had a year to work
together, you should know that I am an optimist about the US economy. I believe we always
have untapped potential that can be unleashed to spread prosperity throughout the nation. Never
has that been more true than right now. Even after a difficult year, my optimism about the
fundamentals of the US economy has not changed. I believe we were on the verge of recovery
before the September 11 terrorist attacks, and that our resilience and determination have brought
us back to the early stages of recovery today. We see more and more signs every day indicating
that the seeds for a recovery are there, and only need nourishing to speed the process of putting
Americans back to work. I believe we will return to prosperous economic growth rates of 3 to
3.5 percent, as soon as the fourth quarter of this year, especially if we are able to pass sti11needed economic security legislation to hasten and strengthen our recovery.
Strengthening our economy must be our primary goal. It is the focus of the President's
budget. That must be our goal, because a return to our normal growth rates means jobs for the
1.4 million Americans who have lost jobs during this recession. Just as a strengthening economy
means greater prosperity for our nation's people, it also means greater strength for our
government. It means greater revenues going into the Treasury, without raising taxes, giving us
resources to address the nation's needs, and the retirement ~f even more federal debt - leading to
long-term economic security for our children. Even witli all that must be dorie to enhance our
security, we expect that a return to economic growth will bring us back to government surplus in
2005.
The economy's slowdown began in mid-2000, when GDP and job-growth slowed
sharply. Business capital spending began to plummet in late 2000, and accelerated its decline in
2001, dragging down the economy. In August we were beginning to see the evidence of an
economic rebound. I firmly believe that had it not been for the terrorist attacks of September
11 th, that we would have seen an end to the economic downturn and would perhaps have avoided
a recession.

PO-987
Fw press releases, speeches, public schedules and official biographies, call our 24-hour fax line at (202) 622-2040
•
·U.S. Government Printing Office 1998·619·559

In sum, the scorecard for the economy in 2001 reflected a combination of adverse events:
•
•
•
•

As bad as these numbers are, they could have been worse. Our well-timed bipartisan tax
relief package put $36 billion directly into consumers' hands in the late summer and early fall,
providing much needed support as the economy sagged. It was the right thing to do, at just the
right time.
It's not surprising then that both the Congressional Budget Office and the Office of
Management and Budget project deficits for this year and next as a result of the economic
slowdown and the response to the September 11 attacks. Last April's budget forecast a fiscal
2002 surplus of $283 billion. The Mid-Session review figures, released in August, took account
of the impact of the President's tax relief package and projected a $195 billion surplus in fiscal
2002. The new budget forecasts a fiscal 2002 deficit of$9 billion, assuming no policy action to
stimulate the economy. The reduced surplus estimates are the result of the economic downturn
and the response to the September 11 attacks. CBO's projections confirm that tax relief played a
minor role in the surplus decline in the next few years - accounting for less than 12 percent of
the decline in 2002 and less than 28 percent in 2003.

April 2002 budget baseline:
Changes from:
weaker economy/technical changes
enacted spending
tax relief
February 2003 budget baseline:

FY02 surplus (in billions)
$283
-197
-54
-40
-9

The CBO budget projects a 10-year surplus of $1.6 trillion. Last August, after factoring
in the tax relief package, the CBO projected a $3.4 trillion surplus for the next 10 years. The
recession and the war on terrorism depleted the 1O-year projections by $1.8 trillion. The lesson
from these numbers is simple - 10-year projections are a useful discipline but they do not predict
the future.

None oflast year's 10-year estimates foresaw the events of September 11 or a negative
$660 billion worth of "technical changes" that are now included in the new 10-year estimates by
agreement among the technical experts. We do know about the here and now, and we should
deal with the here and now, reigniting growth to restore long-term surpluses.
The Administration's growth projections are similar to the consensus of private forecasts.
Over 90 percent of the Blue Chip Economic Indicators panel members say the recession will end
before April of this year. We share that assessment. Personally, I am optimistic that the
economy will do even better than our budget assumptions suggest. For the near term, we expect
the economy to grow 2.7 percent during the four quarters of2002. That projection includes the
foreseeable effects on the economy of the President's economic security package.
The lesson is clear. A strong economy is crucial to restoring budget surpluses. Some
would suggest that we need surpluses to improve our economy. They have the logic backwards.
Growth creates surpluses, not the other way around.
The federal budget was in deficit every year from 1970 through 1998. From 1970
through the early 1990s, government spending growth exceeded government revenue growth by
% of a percentage point a year, on average. Fiscal discipline was imposed by the historic
Omnibus Budget Reconciliation Act, signed in 1990 by President Bush. With fiscal restraint
made an integral part of the budget process, once the economy took off in the 1990s, revenue
growth was double the pace of spending growth. It was the rapid economic growth ofthe 1990s
that generated the burgeoning budget sUlpluses, which appeared even as federal outlays grew
about 3.5 percent a year from 1993 through 2000.
Today the economy is recovering. The tax cut oflast May helped to keep the economic
downturn shallow and it will continue to help. Energy prices have retreated. The Federal Reserve
has reducedfshort-tenn interest rates 11 times since the beginning of2001. Measures of
consumer confidence are bouncing back. The index ofleading indicators increased sharply in
December for the third straight gain. Motor vehicle sales have remained strong. And initial
filings for unemployment benefits are in decline. But we all know that unemployment itself is a
lagging indicator. Although the current trend is positive, too many people will remain out of
work. And given the choice, they'd rather have a regular paycheck than an unemployment
check.
The President has presented a budget to speed oUf recovery. First, the- budget includes
tax relief to stimulate job creation as a crucial tool to speed our recovery and put Americans back
to work. The President's proposals - accelerated depreciation, speeding up the reduction in the
27 percent income tax rate, reducing the corporate AMT, and checks to those who didn't benefit
from last summer's tax rebates - enjoy bipartisan support in both houses of Congress. I'm eager
to work with all of you to complete work on a package to create jobs and assist dislocated
workers with extended unemployment benefits and temporary assistance with health care.
Second, the President's budget proposes strict fiscal discipline - increasing spending for
national security and homeland defense, and holding the line on other spending.

His management agenda calls for perfonnance measures to be used to detennine where
budget increases are allocated - so that our resources go into the projects and programs that
make the biggest difference in people's lives. As the experience ofthe 1990s shows, this
discipline in crucial to ensuring we do not return to systemic deficits of the past. But fiscal
discipline alone will not guarantee budget surpluses. We must return to 3 to 3.5 percent annual
growth to ensure surpluses for years to come.
The focus must be on restoring growth. Surpluses will then follow naturally. Raising
taxes would stifle the process of getting Americans back to work. This is a bad idea, as our
recovery is struggling to take hold. According to 1999 data, the most recent available, 33 million
small business owners and entrepreneurs pay taxes under the individual income tax rates. They
have made business plans that assume that the tax relief enacted last summer will take place as
scheduled. Eighty percent of the benefit of cutting the top two rates goes to small business
owners and entrepreneurs. These are the engines of job creation in our economy.
Tax relief should be accelerated, as the President has proposed to boost job creation.
Such relief will have minimal, or no, effect on long-term interest rates. According to a recent
analysis by the CEA, an expected $1 trillion change in the public debt over 10 years would tend
to raise the long-term interest rate by 14 basis points. Since the tax cut last year, the 10-year
nominal rate has averaged 4.93 percent, which is substantially below the 6.16 percent averaged
from 1993 through 2000.
Restoring growth is the key to America's future. Restoring growth is the key to ensuring
we have the resources in Washington to fight the war on terrorism, provide for homeland defense
and provide the services the American people demand. The President's budget will help to
ensure that both peace and prosperity are restored to the American people as soon as possible.

-30-

D EPA R T l\I E N T

1REASURY

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

FOR IMMEDIATE RELEASE
February 6,2002

Contact: Public Affairs
(202) 622-2960

MEDIA ADVISORY
Treasury Secretary Paul H. O'Neill Press Conference to Discuss G-7
Finance Ministers Meeting Agenda
Treasury Secretary Paul H. O'Neill will hold a press conference in advance
of his trip to Ottawa, Canada to attend a meeting of Group of Seven (G-7)
Finance Ministers this weekend. The press conference will take place on
Thursday, February 7,2002 in the Treasury Department's Cash Room at
2:00PM. Secretary O'Neill will brief reporters on the agenda items to be
discussed in Ottawa and will take questions.
The Room will be available for pre-set at 1:00 p.m.
Media without Treasury br White House press credential 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.

PO-988

FfJI' press releases, speeches, public schedules and official biographies, call our 24-hGUT fax line at (202) 622-2040
·u.s. Government Printing Office:

1998 - 619-559

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

EMBARGOED UNTIL 9:15 A.M. EST
February 7,2002

CONTACT: BETSY HOLAHAN
202-622-2960

THE HONORABLE SHEILA C. BAIR
ASSISTANT SECRETARY FOR FINANCIAL INSTITUTIONS
U.S. DEPARTMENT OF THE TREASURY
SEVENTH ANNUAL INSTITUTE ON
THE EMERGING LAW OF CYBERBANKING AND ELECTRONIC COMMERCE
WASHINGTON, DC
"FOLLOWING THE MONEY & SEIZING THE ASSETS"

"I fear we have awakened a sleeping giant, and filled him with a terrible resolve. " Admiral
Isoroku Yamamoto after the attack on Pearl Harbor

Note of Thanks
I would first of all like to thank Thomas Vartanian, Roland Brandel, John Douglas, and John
Muller for their invitation to speak before you today. As I examine the many interesting
discussions that will be held during the next two days, and the many distinguished speakers, I
know that you will all find this to be a valuable opportunity. I note that your conference will
focus on such interesting issues as cybercrime. insurance against risks of the new economy,
privacy issues, and many others. I know that you will find this conference not only
professionally valuable, but also intellectually interesting. In addition, I hope that all of you will
take the opportunity to informally share information and expertise as you work to help your
financial institution clients with the many complex issues raised by money laundering and
terrorist related asset seizures.
Introduction

On October 26,2001, President Bush signed into law the Patriot Act. On that date, the President
noted that this legislation ''will help counter a threat like no other our nation has ever faced.
We've seen the enemy, and the murder of thousands of innocent, unsuspecting people.
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They recognize no barrier of morality. They have no conscience. The terrorists cannot
be reasoned with."
This legislation is markedly different from previous anti-money laundering legislation. It
requires that all of us, whether in the government or in the private sector, work together and
cooperate, and it specifically charges us in the government to be more responsive to financial
institutions and to work harder to communicate with you. As we face such an unprecedented
threat, we in the government must be even more willing to share knowledge and insights with the
public, just as we require that financial institutions share their knowledge of potentially
suspicious activities with us.
I recognize that such measures require much from all of us, from government, from
financial institutions, and from the public. However, let me describe what we are doing and how
it will benefit our common goal- to make the laundering of funds and the financing of terrorist
activity as difficult as possible.
Terrorist Financing
Let me start with the premise that tools to combat terrorist financing, money laundering
and related illicit activities are present as building blocks in the federal structure. The Federal
government has dedicated criminal investigators, hard-working prosecutors, the ability to seize
assets and block the movement of funds to known terrorist groups, and the ability to interdict
goods entering or leaving the country.
September 11 th has had us focus even more on how to best organize the basic elements of
anti-money laundering and anti-terrorist efforts. These building blocks are being put together in
ways that demonstrate to the world our national resolve to combat terrorist financing. The basic
elements of asset forfeiture, sanctions lists issued by the Office of Foreign Assets Control, the
use of highly skilled criminal investigators, and a close working relationship with the financial
services sector have all been in place. What the Treasury has done is to assemble these
constituent elements in innovative ways that signal our intention to address terrorist financing in
the most rigorous ways possible under the law. With the use of these tools, senior decisionmakers at the Treasury and elsewhere in the Administration are able to see links and connections
about which no one was previously aware.
The overriding purpose is the creation of a picture, through the use of all our legal
powers, that provides the Treasury with the ability to pinpoint vulnerabilities and weaknesses of
those who may be working to finance terrorist operationS'and launder criminal proceeds.
Suspicious Activity Reporting
Suspicious activity reporting is one of the most effective tools that we have to create that
picture for prosecutors and law enforcement officials. At the heart of suspicious activity
reporting are the efforts of fmancial institutions, examining information, in order to provide the
Nation with information on potential illegal activities.

Banks have been required now to file suspicious activity reports for more than five years,
and Congress has mandated that we extend this obligation to other industries. Moreover, prior to
the Patriot Act, the Treasury had specifically endorsed the application of suspicious activity
reporting to additional financial service providers.
I wish to touch upon the proposed regulation to require securities brokerage finns to
report suspicious activities to the Treasury. Published on December 31, 2001, we will accept
comments on it until March 1,2002. The purpose of this regulation - to prevent the criminal
abuse of the securities brokerage industry - is one that I have heard many in the financial
services industry support, and for many years.
This regulation would impose an affinnative obligation on all securities brokers and
dealers to report suspicious activities. As you know, final regulations are required to be issued
by July 2, 2002. There are certain exceptions in the proposed rule, for reporting stolen or
counterfeit securities, for example, or for reporting certain securities violations by finn
employees. However, what is significant is that the proposed regulation creates a "level playing
field" with those financial services industries already required to report suspicious activities.
The concept of suspicious activity reporting by securities brokerages is not new, and has
been endorsed by the International Organization of Securities Commissioners and by the
Financial Action Task Force - the leading international body with a focus on money laundering
and terrorist financing. Many larger securities finns already come under such requirements,
either because oflaws in other nations, or because of an affiliation with a bank. Moreover, the
Treasury has endorsed the concept of suspicious activity reporting for many years, and we
believe that, given the significant levels of funds moving through securities finns, such a
measure is warranted.
Many securities finns already have anti-money laundering programs in place, and many
have stated publicly that they volWltarily file suspicious activity reports when they suspect
money laundering may be occurring. The securities industry has taken a leadership role, even in
the absence of any formal regulatory requirement, to aggressively analyze and report suspicious
activity to the authorities. Many securities brokerage finns have systems and controls in place
that rival those of other industries for which such controls already exist as required by law.
The current regulatory proposal is just that - a proposal - and we welcome and hope that
comments will be made by all of you on ways to improve or refine this regulatory proposal
before it becomes final. We are anxious to understand what potential concerns may exist,
including special issues applicable to smaller securities bwkers, specialist finns, and the relative
obligations of clearing and introducing brokers. The goal of our efforts is to get this right. We
need the expertise of the financial services industry in fonnulating a regulation that accomplishes
both the public goal of thwarting money laWldering and terrorist financing, and the goal of doing
this in a way that yields the best possible result with the least unnecessary use of resources.
Prohibition on Correspondent Accounts with Shell Banks

Another regulatory proposal we have issued, requires the termination of correspondent
account activities by securities brokerage finDs with foreign shell banks. Banks have been under
a statutory obligation to tenninate correspondent banking activities with foreign shell banks since
December 25,2001. The proposed rule was published on December 28,2001, and the comment
period for this proposal closes on February 11, 2002. A shell bank is a bank, licensed under the
authority of any government that has no physical presence, including employees, in the
jurisdiction in which it is licensed as a bank. The proposal would require securities brokers to
terminate any correspondent accounts with such foreign shell banks. For purposes of this
proposed regulation, the term "correspondent account" includes many types of transaction,
clearing, and settlement accounts.
This regulation would assist banks and securities brokers in determining whether a
foreign bank client is, in fact, a foreign shell bank, and provide guidance on ways to make such a
detennination and thereby be compliant with the statute.
The statute also makes it unlawful to offer correspondent account services indirectly to a
foreign shell bank. As such, banks and securities brokerages are provided in this proposed rule
with an optional method to detennine whether their foreign bank clients, in turn, offer services to
foreign shell banks. The proposed rule does not require the adoption of this method, but rather
offers it as an option. The questionnaire, which would be sent by the bank or securities firm to
its foreign bank clients, asks such clients whether they service foreign shell banks, using the
correspondent accounts of the U.S. bank or securities broker. Treasury is aware that in many
cases it may be difficult for a bank or securities broker to independently determine what types of
client relationships a foreign bank may have. This questionnaire is intended to be a way for U.S.
banks and securities firms to satisfy their obligation to have some level of knowledge as to
whether the U.S. finn is indirectly affiliated with foreign shell banks.
Foreign shell banks have often been noted as being tied to money laundering and other
illegal activities, and this rule seeks to hinder that process. I know that you have long supported
measures to prohibit criminal activity, and we look forward to your comments and suggestions
on this proposal as well.
Minimum Customer Identification Standards
Other efforts underway at the Treasury involving the Patriot Act include a discussion of
the types of identifying customer information needed when opening an account, and what types
of information are most helpful in preventing future acts of money laundering or terrorist
financing, and in prosecuting criminals who do engage msuch illegal acts.
Section 326 authorizes and requires the Treasury to issue, jointly with other Federal
regulators, minimal client identification requirements by October 26, 2002. Such requirements
are extremely important to identifying accurately the clients of a securities brokerage firm. Such
minimal requirements should be consistent among various financial services industries, so that a
client of one type of financial services firm cannot direct funds or marketable assets among other
types of financial services firm, without having had minimal client identification standards
applied.

Challenging issues to be confronted will include: how to identify clients who may only
engage in Internet transactions for which no physical face-to-face meeting is ever necessary; how
to ensure that the needs of smaller financial institutions are appropriately considered; and
whether there are any "level playing field" issues (i.e. whether specific industries will be
required to raise their standards to meet those of other regulated financial institutions). In
addition, the current identification requirements among various types of financial services
providers, such as banks, securities brokers, mutual funds, futures finns, and insurance firms all
vary somewhat, and we need to understand what those requirements are and what differences
exist. Treasury Domestic Finance is taking a leading role, along with Treasury Enforcement, in
chairing this intra-governmental effort in order to ensure that the best possible results are
achieved, on a timely basis, and with due consideration of the many issues involved.
We all need to better understand what steps firms are currently taking to deter criminal
abuse by those seeking to hide or disguise their identity when using securities brokerage houses.
Such knowledge can inform the process of determining whether and how to cure any potential
weaknesses that could be exploited by criminals.
Anti-Money Laundering Programs
Another effort involves an examination of anti-money laundering programs within
securities brokerage firms, as required by Section 352 of the Patriot Act. By April 24, 2002,
banks, securities brokerage firms, investment companies, and many other types of financial
institutions will be required to have in place anti-money laundering programs. Of course, some
financial institutions, including banks and credit unions are already required to have such
programs in place. The statute states that such programs must have: appropriate policies,
procedures and controls; a compliance officer to assume responsibility for the program; training
of employees regarding their duties pursuant to the program; and an independent audit to test the
operation of the program. The statute further authorizes Treasury to refine or augment these
minimal requirements by regulation.
The types of such anti-money laundering programs will no doubt vary with the type of
financial institution, its size and characteristics, and the market it serves. Financial institutions
that markets heavily to overseas customers may need to have a more robust internal program
than a small community financial institution.
We also need to examine issues between different types of financial institutions. Just as
banks and credit unions are required to have anti-money laundering programs that are quite
similar, so too, one might expect that certain securities brokers would have anti-money
laundering programs very similar to those of a futures commission merchant. Consistency when
appropriate can be a unifying factor bringing together disparate activities. Yet I am reminded
that we must create workable rules that can adapt to the rapidly changing nature of the financial
marketplace. Mark Twain asked, "Who is the really consistent man? The man who changes."
Financial institutions have seen enormous change during the last few decades, and we must
ensure that rules that we create are able to operate in an environment of change.

In the area of promulgating regulations that clarify the obligation to have anti-money
laundering programs, Treasury Domestic Finance shares the lead with Treasury Enforcement.
We are examining what regulations, if any, should be promulgated to clarify or augment the
existing statutory responsibilities. This includes an examination of the application of this
requirement to the insurance industry and mutual funds.
Cooperation will be important for everyone. Banks and other financial service providers
that are experienced with federal money laundering requirements can provide useful expertise to
industry sectors that will be grappling with these requirements for the first time. I am
encouraged because I have heard repeatedly that while individual financial institutions of all
types earnestly and strenuously compete for market share and profitability in general, in their
anti-money laundering efforts, these same finns work just as hard to cooperate with one another
and to share insights, tips, and advice on how to stay at the head of the pack, and cheer each
other on.
We all have much to learn from each other in the area of anti-money laundering and the
deterrence of terrorist financing, including which types of measures are most effective, and
which balance benefits with resources available most effectively. At the Treasury, our ability to
promulgate useful and effective regulations in these areas benefits greatly from the experience of
the financial services industry, and their regulators.
Next Steps and Conclusion
We will all continue to heed the President's call regarding terrorism, that "[o]urs will be a
broad campaign, fought on many fronts." One ofthose fronts that President Bush has described
is the financing of terrorist activities and the money laundering that accompanies it. To all of
you that have and are serving in that campaign, and to those of you serving on the financial
fronts, you deserve and have our thanks. While you may never receive a medal for your efforts,
your contributions have been and continue to be valuable, and are recognized.
Prior to, September 11 th, many Americans thought of international enforcement efforts to
stop money laundering and terrorist financing as applying to crimes committed in remote,
foreign locations and therefore irrelevant to our daily lives. The tragedy of September 11 made
us all aware of how important such efforts are to protect the homeland. We have done a great
deal since September 11 th, and we will all undoubtedly be called upon to do more. We must
continue to build upon a framework of cooperation, trust, and shared responsibility in order to
stop the financing of terror and the laundering of funds that support terror.
Finally, it is my hope that as we all proceed with our many tasks, we pause to thank one
another for the hard work and Herculean efforts that have characterized our post-September 11
resolve to stamp out money laundering and terrorist financing. Many in the financial services
sector lost offices, friends, or colleagues on September 11 th. Our mutual goal is to ensure that
this does not happen again. I thank you all.
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For Immediate Release
February 6,2002

TREASURY SECRETARY PAUL O'NEILL STATEMENT ON
SENATE ACTION ON STIMULUS PACKAGE TODAY

I'm disappointed the Senate Democratic leadership couldn't produce a bill to help create
jobs and put Americans back to work. Passing an extension of unemployment benefits is the least
they can do. It's just as important that we create new jobs. By failing to produce a bill to
stimulate the economy, the Senate Democratic leadership has failed to help Americans get back
to work as quickly as possible.

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February 7, 2002
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UNLEASHING INDIA'S VAST GROWTH POTENTIAL
REMARKS BY KENNETH W. DAM
DEPUTY U.S. TREASURY SECRETARY
DELIVERED TO THE
CONFEDERATION OF INDIAN INDUSTRY (ell)
NEW DELHI, INDIA

I would like to thank Sanjiv Goenka for those kind introductory remarks, and elI for inviting me
to speak: to you today. I am pleased to be with so many prominent Indian businessmen and
businesswomen under one roof.
Also, special thanks to myoId friend, Bob Blackwill, for his kind words of introduction. I
understand the Ambassador spoke to a similarly distinguished audience -- in this very room -just over a week ago. I understand the subject of his address was, among other things: "chapatis,"
rabbits, turtles, and rocks.
All kidding aside, I have carefully read the text of Bob's outstanding precis on US-India
economic relations, and I concur with his conclusions as 'rell as his prescriptions for enabling us
to maximize our bilateral economic relationship.
Indeed, the importance of the U.S.-India bilateral relationship cannot be overstated. We are the
two largest democracies in the world. Both of us boast of a proud intellectual heritage. Both of us
have a strong-willed and determined citizenry.
Ladies and gentleman, I have wanted to travel to India for some time to witness firsthand the
extraordinary changes taking place here and to understand India's enormous economic potential.
Last year, when President Bush appointed me to serve as Deputy Secretary of the United States

Treasury, I decided that my first international trip would be to India.
On the morning of September 11, I arrived at the office with all of my bags packed, ready to
depart for New Delhi. Unfortunately, no planes left the United States that day.

Less than five months have passed since that' terrible morning. Nevertheless, we are witnessing
an international landscape transformed. New alliances have developed to fight the international
scourge of terrorism. An unyielding coalition has toppled one of the world's most repressive
regimes in Afghanistan. One hundred and forty-nine nations and jurisdictions are working
together to halt underground networks of terrorist financing.
I am happy to say that India has been a constructive ally in this effort. Since September 11, the
United States, working closely with many countries, including India, has blocked some $34
million in terrorist assets and our allies have blocked nearly $70 million. Your government is no
stranger to the fight against terrorism and has stood tall with us since September. Your blocking
efforts are active, meaningful and comprehensive.
Just as important as grappling with the new challenges posed by terrorism, is that we work hard
to promote and stimulate economic growth and prosperity. Just as we take steps to block the
terrorists of today, we must strive to address the economic conditions that contribute to the
terrorists of tomorrow. Economic progress remains one of the strongest weapons we have against
the despair and hopelessness on which terrorism feeds, and I believe it is incumbent upon
governments to move ahead with their economic reforms. Therefore, I would like to focus some
of my remarks today on the challenge and the opportunity of economic reform, and in partiCUlar,
freer trade.
Why is freer trade so important? In a sentence, because trade is a sine qua non of economic
growth and poverty reduction, necessary but not sufficient.
For those of you who are exporters and importers, the benefits of freer and more expanded trade
are clear. Freer trade means open markets. Open markets mean greater sales. Greater sales mean
higher profits.
For farmers, small-scale local manufacturers or service providers, more open trade brings
broader markets in which to sell a greater variety of goods and services. For the average
housewife, open markets provide a wider range of products with more choices and of better
quality. In sum, trade increases access to goods and services, and it boosts the overall standard of
living.
But the benefits of trade are more than just more bountiful markets. Freer trade also accelerates
the exchange of technology, more productive capital inputs, and the transfer of best practices.
Firms in protected economies often find themselves mired in old technologies, using out-of-date
machinery. Increased trade and investment provides new access to the world's best management
practices, the world's best production processes, the world's best financial management.
This is not mere theory. Look at the way Korean textile production processes have spread across
East Asia. It all began with Korean textile firms investing in production facilities in Thailand,
Malaysia, and Indonesia. These finns brought local managers and selected workers to Korea for
months at a time to learn the highly successful methods of Korean textile production.

In Korea, local managers used the best machinery, saw how various parts of the production
process fit together, and learned advanced management techniques. After several months, local
Thai, Malay and Indonesian managers returned home and put these best practices to use in local
factories. Over time, these local managers started their own firms and Korean production
processes were permanently transferred to locally owned textile firms.
Freer trade also allows domestic firms to specialize their production processes to a much greater
extent than they can under import substitution. Local firms can join global production and
distribution systems and can use their comparative advantage to specialize in one part of the
operation. As workers and managers become more productive and learn new skills, they can
move up the value-added chain of manufacturing.
Consider, also, Malaysia in the early 1970s. Malaysia built a powerful electronics sector by
specializing in the assembly of parts. Over time, Malaysian finns "graduated" to producing
packaging material and simple components, then later to more sophisticated electronic parts, and
later still to testing and design. At each step, Malaysian finns carefully concentrated on being the
best at a specialized stage of the process, and connected with other firms to make truly worIdclass products.
The effect of free trade on services is even more impressive. Services already contribute to more
than 40 percent of India's GOP, with commercial services accounting for about 27 percent of
India's trade. Services exports generate large numbers ofjobs for workers at a variety of skill
levels. With the Indian economy presently supplying the world with only about one percent of its
overall trade in services, India has the potential to convert its immense human resource skills and
capabilities into vast services exports.
Don't just take my word for it. Study after study has shown a positive correlation between trade
liberalization and economic growth. The Uruguay Round alone - according to studies by the
WTO - increased world income by $109 billion; more generous estimates put the figure at over
$500 billion. That helps explain why the United States is so intent on beginning another round of
multilateral trade negotiations. It will be an arduous, multi-year undertaking, but the pay-offwill
be great.
Economic gains accrue to the countries that are more open to trade, while more closed
economies lag behind. Economist] effrey Sachs and Andrew Warner found that over the last
thirty years, the most open economies grew by more than two percentage points faster per year
than closed economies. This translates into 60 percent higher per capita income over 25 years an astonishing difference.
India's own experience over the past decade also shows iliat trade liberalization inexorably leads
to economic growth. The Indian reform program initiated in 1991 -- which included substantial
unilateral reductions in trade barriers -- breathed life into the Indian economy after 44 years of
being closed off to the outside world. Injust four short years, India's total trade increased from
16 percent to 23 percent of GOP. And India's nominal GDP doubled in the same period. Since
the Uruguay round, India's total trade has grown by 44 percent, an average increase of 7.5
percent annually.
With India's opening to external markets, a whole lexicon has been tossed out the window:

special import licenses, "export quality," import quotas, and the Inspector Raj, to name a few.
We hope that more will follow: "octroi," the special additional duty, and the negative list for
imports.
Freer trade has also helped increase India's access to the U.S. market dramatically, almost
doubling India's exports from $5.3 billion in 1995 to more than $10 billion in 2000. The United
States now absorbs 23 percent of India's goods exports and has accounted for more than 35
percent of India's export growth over the last five years.
More dramatic has been the expansion of India's exports to the United States in what is generally
viewed as our most restrictive market - textiles and apparel. India now supplies more than $2.7
billion worth oftextiles and apparel to the United States - an 84 percent increase as a result of the
reduction in U.S. barriers through the Uruguay Round.
Nowhere is the confluence of globalization, trade liberalization, and Indian ingenuity more
obvious than in information technology. India's domestic reforms during the 1990s combined
with international trade liberalization, under the 1997 Information Technology Agreement, to
give impetus to India's nascent IT sector. India's IT sector has grown at an average annual rate of
50 percent, from almost nothing in 1991 to sales of$8.3 billion in 2000 and employment of
400,000. India's IT sector generates 15 percent of Indian exports and accounts for about 2
percent ofGDP. Bangalore - India's "Silicon Valley" - is setting an example of how private
enterprise, if left alone, can flourish in India.
However, in no way am I suggesting that trade liberalization, whether unilateral or as part of
multilateral trade negotiations, is an easy process. Or that trade liberalization is a process in
which every individual firm and every worker will benefit. Firms that enjoy the greatest
protections often find it difficult to compete in an opening trading system. At the same time,
many firms that cannot even exist in a closed economy come to life under open trade to provide
more jobs at better wages, while providing consumers with much better choices and prices.
As a lifelong advocate for freer trade, I am sympathetic to the hurdles policymakers must
confront in trying to lower domestic trade barriers. Like India, the United States historically has
had its own highly protectionist trade regimes. In the United States, we spent almost 70 years
trying to claw back from the economic disruption caused by the high tariffs of our own SmootHawley Tariff Act of 1930. It is hard to believe that in 1934, the average U.S. tariff on
manufactured goods was 44 percent. Today it stands at just 3 percent.
I would also like to stress again that freer trade alone will not unleash India's vast growth
potential. More open trade must be part of a broader economic development strategy. Economic
experiences from around the world point to four key policy ingredients to maintaining economic
growth:
First, governments must maintain macroeconomic stability. Large budget deficits and
undisciplined monetary policy lead to high levels of debt and inflation, they restrict the private
sector's access to capital, and they undermine incentives for new investment.
Second, governments must invest heavily in health and education. A healthier, better-educated
population is essential to a productive workforce.

Third,.govemments must establish strong institutions for governance, with minimal corruption,
enforceable contracts, and a lean and competent civil service.
And fourth, governments must establish conditions under which private enterprise can flourish:
strong infrastructure, minimal red tape, and very little government intervention.
As you know, India's economic reforms in the early 1990s took significant steps in this direction.

The results of the first phase ofthis program were striking -- a substantial expansion of trade and
acceleration of economic growth to 6-7 percent in real terms. These reforms provided a glimpse
ofthe kind ofgrowth India could reclaim if its growth potential were truly unleashed.
Yet, in recent years, India's reform program has, frankly, stalled on many fronts. Progress on
privatization has slowed. Many bureaucratic hurdles to private enterprise remain.
Macroeconomic balance has proven elusive. Large fiscal deficits have re-emerged. And
unfortunately, lingering investment disputes have cast a dark cloud over foreign investor
attitudes towards India.
I have noticed that some of the media debate in India about the Dabhol power company has
focused on only one of its U.S. shareholders, when there are three. This preoccupation misses the
point. U.S. policy is that we want to see Dabhol and similar difficulties faced by U.S. companies
in the Indian power sector resolved in a manner that is fair to all parties. A fair and equitable
resolution to the Dabhol project will have the effect of assuring American investors that India
honors the sanctity of contract and the rights of investors. The sooner these difficulties are
resolved, the better it will be for both our countries.
Also, I truly hope that India will redouble its efforts to accomplish important second-generation
reforms, and vigorously work towards achieving macroeconomic balance. Progress on these
fronts, together with steps to further open the trade regime, will lock in and build upon the gains
achieved by the first generation of reforms. India, a country of over I billion people, owes it to
its people - not to the United States or anyone else - to finish the job of creating an environment
that will allow India achieve its enormous economic potential.
Moreover, by accelerating the process of trade and broader economic reform, I believe India has
a golden opportunity to continue to increase its influence and stature in the world. In this regard,
I am reminded of what one of the fathers of modern day India, lawaharlal Nehru once said: "The
policy of being too cautious is the greatest risk of all. "

In conclusion, let me go back to one of my opening thOUghts. We stand at a critical, though not
entirely new moment in history, forced, as we are, to consider both the possibilities of expanded
trade and expanded global conflict. Writing at a similar jUtlction in history, noted Western
economist Adam Smith drew a direct connection between trade and conflict in his classic work
"The Wealth of Nations," penned in 1776.
According to Smith, "the inhabitants of all the different quarters of the world may arrive at that
equality of courage and force, which ... can alone overawe the injustice of independent nations
into some sort of respect for the rights of one another. But nothing seems more likely to establish
this equality of force than the mutual communication of knowledge and all sorts of
improvements which an extensive commerce carries along with it."

It is my hope that India and the United States can cooperate more closely in the years to comet

not just to defeat terrorism, but to continue to lead the world as friends, partners, and allies.
Thank you for your attention and for inviting me here today.
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February 7, 2002

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TESTIMONY OF TREASURY SECRETARY PAUL O'NEILL
BEFORE THE
SENATE BUDGET COMMITTEE

Good morning Chairman Chairman Conrad, Senator Domenici and members of the
committee. Thank you for inviting me to testify today. Now that we've had a year to work
together, you should know that I am an optimist about the US economy. I believe we always
have untapped potential that can be unleashed to spread prosperity throughout the nation. Never
has that been more true than right now. Even after a difficult year, my optimism about the
fundamentals of the US economy has not changed. I believe we were on the verge of recovery
before the September 11 terrorist attacks, and that our resilience and determination have brought
us back to the early stages of recovery today. We see more and more signs every day indicating
that the seeds for a recovery are there, and only need nourishing to speed the process of putting
Americans back to work. I believe we will return to prosperous economic growth rates of 3 to
3.5 percent, as soon as the fourth quarter of this year. I'm disappointed the Senate was not able
to vote out a bill to speed job creation to more quickly return Americans to work.
Strengthening our economy must be our primary goal. It is the focus of the President's
budget. That must be our goal, because a return to our normal growth rates means jobs for the
1.4 million Americans who have lost jobs during this recession. Just as a strengthening economy
means greater prosperity for our nation's people, it also means greater strength for our
government. It means greater revenues going into the Treasury, without raising taxes, giving us
resources to address the nation's needs, and the retirement of even more federal debt -leading to
long-term economic security for our children. Even with all that must be done to enhance our
security, we expect that a return to economic growth will bring us back to government surplus in
2005.
The economy's slowdown began in mid-2000, when GDP and job-growth slowed
sharply. Business capital spending began to plummet in late 2000, and accelerated its decline in
2001, dragging down the economy. In August we were beginning to see the evidence of an
economic rebound. I firmly believe that had it not been for the terrorist attacks of September
11 th, that we would have seen an end to the economic downturn and would perhaps have avoided
a recession. The September 11 attacks created shockwaves that rippled throughout all sectors of
the economy. Financial markets were shut down for almost a week. Air transportation came to a
standstill. As a result, GDP fell 1.3 percent at an annual rate in the third quarter.
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By late November, the National Bureau of Economic Research declared that the US was
in a recession. They designated the end of the previous expansion to be March 2001, but they
observed that the slowdown might not have met their qualitative standards for recession without
the sharp declines in activity that followed the terrorist attacks.

In sum, the scorecard for the economy in 2001 reflected a combination of adverse events:
•
The private sector lost more than 1.5 million jobs.
•
The unemployment rate rose 1.8 percentage points.
•
Industrial production was off nearly 6 percent during the year.
•
Industry was using less than 75 percent of its capacity.
As bad as these numbers are, they could have been worse. Our well-timed bipartisan tax
relief package put $36 billion directly into consumers' hands in the late summer and early fall,
providing much needed support as the economy sagged. It was the right thing to do, at just the
right time.
It's not surprising then that both the Congressional Budget Office and the Office of
Management and Budget project deficits for this year and next as a result of the economic
slowdown and the response to the September 11 attacks. Last April's budget forecast a fiscal
2002 surplus of $283 billion. The Mid-Session review figures, released in August, took account
of the impact of the President's tax relief package and projected a $195 billion surplus in fiscal
2002. The new budget forecasts a fiscal 2002 deficit of$9 billion, assuming no policy action to
stimulate the economy. The reduced surplus estimates are the result of the economic downturn
and the response to the September 11 attacks. CBO's projections confirm that tax relief played a
minor role in the surplus decline in the next few years - accounting for less than 12 percent of
the decline in 2002 and less than 28 percent in 2003.

April 2002 budget baseline:
Changes from:
weaker economy/technical changes
enacted spending
tax relief
February 2003 budget baseline:

FY02 surplus (in billions)
$283
-197
-54
-40
-9

The CBO budget projects a 10-year surplus of$I.6 trillion. Last August, after factoring
in the tax relief package, the CBO projected a $3.4 trillion surplus for the next 10 years. The
recession and the war on terrorism depleted the 10-year projections by $1.8 trillion. The lesson
from these numbers is simple - 10-year projections are a useful discipline but they do not predict
the future. None oflast year's 10-year estimates foresaw the events of September 11 or a
negative $660 billion worth of ''technical changes" that are now included in the new 10-year
estimates by agreement among the technical experts. We do know about the here and now, and
we should deal with the here and now, reigniting growth to restore long-term surpluses.

The Administration's growth projections are similar to the consensus of private forecasts.
Over 90 percent of the Blue Chip Economic Indicators panel members say the recession will end
before April of this year. We share that assessment. Personally, I am optimistic that the
economy will do even better than our budget assumptions suggest. For the near term, we expect
the economy to grow 2.7 percent during the four quarters of 2002. That projection includes the
foreseeable effects on the economy of the President's economic security package.
The lesson is clear. A strong economy is crucial to restoring budget surpluses. Some
would suggest that we need surpluses to improve our economy. They have the logic backwards.
Growth creates surpluses, not the other way around.
The federal budget was in deficit every year from 1970 through 1998. From 1970
through the early 1990s, government spending growth exceeded government revenue growth by
¥.t of a percentage point a year, on average. Fiscal discipline was imposed by the historic
Omnibus Budget Reconciliation Act, signed in 1990 by President Bush. With fiscal restraint
made an integral part of the budget process, once the economy took off in the 1990s, revenue
growth was double the pace of spending growth. It was the rapid economic growth of the 1990s
that generated the burgeoning budget surpluses, which appeared even as federal outlays grew
about 3.5 percent a year from 1993 through 2000.
Today the economy is recovering. The tax cut of last May helped to keep the economic
downturn shallow and it will continue to help. Energy prices have retreated. The Federal Reserve
has reduced short-term interest rates 11 times since the beginning of2001. Measures of
consumer confidence are bouncing back. The index of leading indicators increased sharply in
December for the third straight gain. Motor vehicle sales have remained strong. And initial
filings for unemployment benefits are in decline. But we all know that unemployment itself is a
lagging indicator. Although the current trend is positive, too many people will remain out of
work. And given the choice, they'd rather have a regular paycheck than an unemployment
check.
The President has presented a budget to speed our recovery. First, the budget includes
tax relief to stimulate job creation as a crucial tool to speed our recovery and put Americans back
to work. The President's proposals - accelerated depreciation, speeding up the reduction in the
27 percent income tax rate, reducing the corporate AMT, and checks to those who didn't benefit
from last summer's tax rebates - enjoy bipartisan support in both houses of Congress. I'm eager
to work with all of you to complete work on a package to create jobs and assist dislocated
workers with extended unemployment benefits and temporary assistance with health care.

Second, the President's budget proposes strict fiscal discipline - increasing spending for
national security and homeland defense, and holding the line on other spending. His
management agenda calls for performance measures to be used to determine where budget
increases are allocated - so that our resources go into the projects and programs that make the
biggest difference in people's lives. As the experience ofthe 1990s shows, this discipline in
crucial to ensuring we do not return to systemic deficits of the past. But fiscal discipline alone
will not guarantee budget surpluses. We must return to 3 to 3.5 percent annual growth to ensure
surpluses for years to come.

The focus must be on restoring growth. Surpluses will then follow naturally. Raising
taxes would stifle the process of getting Americans back to work. This is a bad idea, as our
recovery is struggling to take hold. According to 1999 data, the most recent available, 33 million
small business owners and entrepreneurs pay taxes under the individual income tax rates. They
have made business plans that assume that the tax relief enacted last summer will take place as
scheduled. Eighty percent of the benefit of cutting the top two rates goes to small business
owners and entrepreneurs. These are the engines of job creation in our economy.
Tax relief should be accelerated, as the President has proposed to boost job creation.
Such relief will have minimal, or no, effect on long-term interest rates. According to a recent
analysis by the CEA, an expected $1 trillion change in the public debt over 10 years would tend
to raise the long-term interest rate by t4 basis points. Since the tax cut last year, the to-year
nominal rate has averaged 4.93 percent, which is substantially below the 6.16 percent averaged
from 1993 through 2000.
Restoring growth is the key to America's future. Restoring growth is the key to ensuring
we have the resources in Washington to fight the war on terrorism, provide for homeland defense
and provide the services the American people demand. The President's budget will help to
ensure that both peace and prosperity are restored to the American people as soon as possible.

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EMBARGOED UNTIL DELIVERY
FEBRUARY 7, 2002

CONTACT: PUBLIC AFFAIRS
(202) 622-2960

TREASURY SECRETARY PAUL O'NEILL
PRE-OTTAWA PRESS CONFERENCE
Good afternoon. Tomorrow I will be travelling to Ottawa to attend a meeting of G-7
Finance Ministers. I will emphasize two points in particular to my colleagues. First, we must
continue our efforts to ensure that our financial systems are not used for terrorists' benefit.
Second, we must continue to work together to bolster economic growth in our economies.
With our G-7 partners we have made a lot of progress in combating the financing of
terrorism. I want to thank them for their support. To date, 149 countries and jurisdictions,
including the G-7, have issued orders to freeze terrorist assets, and we have blocked over $104
million since September 11. But we can do more. My goal is for the United States to work with
the G-7 and our allies to develop a mechanism to block the assets of terrorists simultaneously in
all our countries. This will require even closer cooperation and commitment. We will also
develop key principles regarding information to be shared, the procedures for sharing it, and the
protection of sensitive information. We should spare no effort in ridding the world's financial
system of terrorist fundraising activities.
I want to hear from my G-7 colleagues about their efforts to implement the rigorous G-7
Action Plan that we agreed upon back in October. I will also discuss with the heads of the IMF
and World Bank their institutions' efforts to assess all countries' compliance with international
standards on terrorist financing.
Improving living standards around the world is also paramount, and the G-7 countries all
need to contribute to strong and vibrant growth in order to help make this possible. The
resumption of strong growth in our economies will benefit both emerging economies and the
poorest countries.
I expect to discuss the steps that each G-7 country is taking to reinvigorate global
economic growth. For our part, the United States has put the worst part of the economic
slowdown behind us. We see more signs every day indicating that the seeds for a recovery are
there, and they only need nourishing to speed the process of putting Americans back to work. I
believe we will return to prosperous real economic growth rates of3 to 3.5 percent, as soon as
the fourth quarter of this year.
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Two other priorities for our discussions tomorrow are to discuss the important challenges
the world faces in aiding the poorest nations and the efforts underway to involve the private
sector in resolving financial crises. On development issues, I plan to emphasize the importance
of the President's grants proposal and the need to improve the effectiveness of development
assistance. Rather than adding to the debt burden many developing countries cannot service, we
should openly admit that some countries need grants, and that grants are more appropriate than
loans for education, sanitation projects, and other projects that offer great societal return but do
not necessarily create a direct financial return that can finance the repayment of a loan.
On crisis resolution, a serious discussion has been started by the recent call for the
creation of a bankruptcy process. I will stress my commitment to work on a sovereign debt
restructuring mechanism that is market~based, gives responsibility and ownership to debtors and
creditors, and minimizes any potential conflict of interest. We should press ahead on this topic
and address the many questions that need answering so that we can put a workable process in
place.

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For Immediate Release
February 7, 2002

Contact: Tara Bradshaw
(202) 622-2014

ADMINISTRATION ANNOUNCES BIPARTISAN AGREEMENT ON
CHAJUTABLEGnnNGTAXINCENTWES

Today, President Bush, Treasury Secretary Paul O'Neill and Senators Liebennan
and Santorum announced a compromise bill, "The Charity Aid, Relief, and
Empowerment Act of 2002" ("CARE") that includes many of the charitable giving tax
incentives sought by the Administration, as well as elements of the Administration's
faith-based initiative that provide direct support to groups aiding the poor and the needy.
"In the aftennath of September 11 th, many Americans have eagerly reached out to
support their favorite charities and non-profits. At the same time, the recent decline in the
economy has pinched many hardworking Americans' pocketbooks---making it more
difficult to contribute those precious dollars that charities rely on to continue their good
works," said Secretary Paul O'Neill. "As the economy begins to rebound, we must seize
this window of opportunity to provide incentives to encourage all Americans to support
charities. "

Currently, approximately two-thirds of tax filers who make charitable
contributions do not get the benefit of a charitable contribution deduction because they
don't itemize. This bipartisan CARE Act will allow taxpayers that don't itemize to deduct
charitable contributions in addition to claiming the standard deduction.
"The CARE Act makes it easier for those who already give, to continue giving,
and it will encourage people who don't currently make charitable contributions, to start,"
O'Neill continued.
The CARE Act will allow tax-free withdrawals from IRAs for charitable
contributions for individuals over the age of 67. Rath~r than the individual making the
withdrawal, including it as taxable income, and then claiming the charitable deduction,
the individual can just make the tax-free withdrawal contribution directly to the charity.
"This vastly simplifies the complexity these donors face today," said Secretary
O'Neill.
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Many charities also rely on the support of corporate charitable contributions. To
encourage corporations to increase their amount of support, the CARE Act increases the
limit for corporate charitable contributions from 10% to 13% in 2002 and 15% in 2003.
"I want to thank: Senators Santorum and Liebennan for their work and I look
forward to working with Congress to get this CARE Act passed into law to help
Americans give---and to help charities grow," O'Neill concluded.

mGHLIGHTS OF THE CHARITY AID, RELIEF, AND
EMPOWERMENT ACT OF 2002 ("CARE")

Many of the provisions in the CARE Act are in effect for two years--the changes
aren't pennanent, but they are a step in the right direction and will provide relief to
charities at a time when the need for their services is great.
1. Charitable contribution deduction for nonitemizers. The CARE bill would allow
nonitemizers to deduct their charitable contributions up to $400 for single taxpayers
($800 for married taxpayers filing joint returns) during 2002 and 2003.
Allowing nonitemizers to deduct charitable contributions would provide an incentive for
all taxpayers to give to charity (compared to current law, which only rewards giving by
itemizers). Currently, only one-third of taxpayers can deduct their charitable
contributions.
2. Tax-free distributions from IRAs for charitable pwposes. The CARE bill would provide
tax-free treatment of distributions made from IRAs for charitable purposes after the
beneficiary reaches age 67. Tax-free treatment would apply to distributions made (in
2002 and 2003) directly to charitable organizations or "indirectly" through charitable
remainder trusts, pooled income funds, or the purchase of charitable gift annuities.
This proposal would encourage donations of otherwise taxable IRA assets to charity, by
eliminating the need for taxpayers first to include the taxable amounts in income, and
then claim an offsetting charitable contribution deduction. Because not all taxpayers can
deduct the full amount of their charitable contributions, current law effectively
discourages some taxpayers from donating IRA assets to charity.
3. An increase in the percentage limit for cOIporate charitable contributions. The CARE
bill would raise the deduction limit (currently 10% of taxable income) to 13% for 2002
and 15% for 2003.
Raising the limit on corporate charitable contributions would provide an incentive for
corporations to increase their support for charitable organizations.

An expanded and increased enhanced deduction for donations of food inventory. For
2002-2003, the CARE bill would allow all businesses (not just C corporations) to claim
an enhanced deduction for donated food equal to the lesser ofFMV or two times basis.
(Certain cash method taxpayers could assume a basis in the donated food equal to 25
percent ofFMV.) Special rules are provided for valuing surplus food for which there is
no ready market. This provision would assist charities in combatting hunger.
4. Individual Development Accounts. After 2002 and before 2008, the CARE bill would
allow up to 900,000 eligible lower income Americans to create individual development
accounts (IDAs). For each account, the fmancial institutions sponsoring the IDA
program would match up to $500 per year in account-holder contributions. Neither the
matching amounts nor earnings on those amounts would be subject to income tax.
Withdrawals of these matching amounts and earnings would have to be for higher
education expenses, first-time home purchase expenses, and business capitalization
expenses. A withdrawal from the main account for other purposes may result in a forfeit
of some or all of the matching account. The program would be funded through 2009 by
allowing the sponsors both an income tax credit for the matching amounts and an annual
$50 per account credit to cover the costs of administration and participant education.

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FOR IMMEDIATE RELEASE
February 7, 2002

Contact: Tony Fratto
(202) 622-2960

IMPROVING THE BRETTON WOODS FINANCIAL INSTITUTIONS
BY
JOHN B. TAYLOR
UNDER SECRETARY OF TREASURY FOR INTERNATIONAL AFFAIRS
ANNUAL MIDWINTER STRATEGIC ISSUES CONFERENCE
BANKERS ASSOCIATION FOR FINANCE AND TRADE
WASHINGTON, DC

One of my responsibilities as the Under Secretary of Treasury for International Affairs is
to oversee our relationships with the Bretton Woods Financial Institutions-the World Bank and
the International Monetary Fund. These institutions, along with regional development banks, are
essential instruments in achieving two of the most important international economic policy goals
of the United States-raising economic growth and improving economic stability in the world
economy.
Many people think these institutions could be doing a better job than they have been in
recent years. I agree with that view. And from the start of the Bush Administration, a high
priority has been to improve the performance of these institutions. Last year President Bush, in a
speech at the World Bank, and Secretary O'Neill, in a speech at the Detroit Economic Club,
called for reforms in these institutions. In my remarks here today, I would like to describe some
of the details of our reform strategy and explain the rationale that underlies our specific reform
proposals.

The Past as Prologue: From Post World War II to Post September 11

Let me begin with a little history. More than 50 years ago, as World War n was drawing
to a close, our predecessors in the United States Treasury began thinking about what the world
economy would look like after the war. They showed great knowledge and leadership in doing
so.

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They knew that world depression and financial collapse had led to economic nationalism
in the 1930s and ultimately to the war itself. They knew that it was in the interest of the United
States to establish conditions in the world economy that would prevent a recurrence of such
calamities. They saw the need for two new international financial institutions to help carry out
this task: (1) a multilateral fund to keep the world financial system running smoothly by
preventing crises in payments flows and exchange rates; and (2) a multilateral development bank
to help reconstruct the countries devastated by the war. They worked with our allies to actually
create two new institutions-the International Monetary Fund and the World Bank-with many
of the key discussions taking place in Bretton Woods, New Hampshire. They then convinced the
U.S. Congress to authorize and fund the institutions. In later years, the World Bank took on the
task of economic development more broadly and was joined by regional development banks. By
any measure these institutions were successful in their original task; the post-World War II
reconstruction, development, and economic integration was an amazing success.
Simply put, the job of the World Bank today is to help poor countries become less poorthat is, to increase the well-being of people in poor countries. The Bank's mission, I believe, is
particularly important after September 11 because poverty can be a breeding ground for
terrorism. Improving the lives of people around the world is a priority in and of itself. Our fight
against terror makes these investments to improve the lives of the world's poor all the more
imperative.
I think it is helpful to think of the current situation this way: We at Treasury should view
the post-September 11 period much as our predecessors at Treasury viewed the post-World War
IT period. They thought it was imperative to create new international financial institutions in part
to help prevent another war. We should think it is imperative to refonn these same international
financial institutions in part to help prevent future acts of terror.

Productivity and Measurable Results

How are we trying to improve the World Bank? To start, we have suggested two broad
themes. One theme is to call for a greater focus by the World Bank on increasing productivity
growth. Productivity is the amount of goods or services that a worker can produce in a set period
of time, such as a day or a year. The simple truth is that countries are poor because productivity
is low in those countries. And countries are rich because productivity is high in those countries.
The best way to understand this is to look at a color-coded map of the countries that are poor and
the countries are rich. Countries that are poor have low levels of productivity. So if we can
improve productivity growth in the poor countries, we will reduce poverty in those countries.
An advantage of the focus on productivity is that we already know a lot about the basic
causes of productivity. Low education, low productivity. Low business investment, low
productivity. Lack of proper health care, low productivity. So by looking at productivity, you
can focus your attention on those areas that really make a difference to people's standard of
living.

The second broad theme we are emphasizing is measurable results - that is, looking at the
activities that are undertaken by the institution and seeing exactly where it makes a difference.
And how much of a difference? And compared to what other activity? We have to measure
results - higher productivity, more children in school, fewer people with HIV/AIDS - rather than
just hope that the results are delivered.

The President's Grants Proposal
We have made three specific reforms proposals that are meant to deliver on these broader
themes. The first is our grants initiative. Last year, in his speech at the World Bank President
Bush announced his proposal to take 50 percent of the funds that the World Bank currently
provides to the poorest countries in the form of loans and convert them into grants. This is a
major initiative; let me try to explain why.
The World Bank, as part of its efforts in poor countries, has a branch called the
International Development Association (IDA). What IDA does is make loans to very poor
countries. And the terms on these loans are quite remarkable: the loans have a 40-year maturity,
the interest rate is 0.75 percent, and there is a lO-year grace period. Now, if you think about it,
that's not a loan -- that's a grant. In many respects, it is dishonest to call it anything but a grant.
At the least it's misleading.
Moreover, what has happened in recent years is that we have developed a process
effectively to write off these loans. It is called the Highly Indebted Poor Country (RIPe)
initiative. "HIP-ick" is the way that it is pronounced. And under the HIPC initiative, these IDA
loans are being forgiven. In fact there is a major movement around the world - the U2 rock
singer Bono is a major proponent of it - to "drop the debt."
You see, at the same time we are effectively writing off old loans to poor countries countries that have unsustainable amounts of debt already - the IDA program is out there
writing new loans. Sure, the terms are very favorable. But the truth is that we know that many
of these countries cannot really afford even one dollar more of additional debt.
The idea behind the grant proposal is to say, "Look, let's be honest about it. Let's
recognize that these countries' loans are probably not going to be paid back anyway. So let's
just give them grants. Start educating your children. Improve your health delivery systems. Put
in place the basic building blocks of productivity."
Now, to be sure, under the President's proposal grants are not "free." In fact, an
important advantage of grants is that they can easily be tied to measurable performance or
results. For example, if it is a grant for education, then the grant doesn't continue unless
enrollment goes up or unless test scores go up, or however else you want to measure the
performance. If it's a grant to deliver a better vaccine or deal with HIV/AIDS, then the grant
continues as long as the health service is being delivered.

Grants can be tied more effectively to performance in a way that longer-term loans
simply cannot. You have to keep delivering the service or you don't get the grant.

Results-Based Replenishment
There is another novel proposal we have suggested to the World Bank - to have
shareholders' contributions tied to measurable results. Let me explain a little bit how this
proposal works. Every three years, the United States and other shareholders in the World Bank
contribute a certain amount to this IDA program. The United States has reduced its contributions
to IDA in the 1990s. We intend to reverse this trend. We want to increase our contributions to
IDA, but we think it is essential to do so in a way that gears the contribution to results.
In the budget President Bush released this week, he is proposing that the United States'
IDA contribution be stepped up from $850 million the first year, to $950 million in the second
year, and then to $1.05 billion in the third year. But these increments will only occur if concrete
performance benchmarks are met. The stepped-up, results-based replenishment is a new idea.
We are very much hoping it will make a difference by providing an incentive for achieving better
development results - again, emphasizing the goal of increasing productivity and reducing
poverty through whatever means work.

Private Sector Development
A third major initiative is to encourage more emphasis at the World Bank and the other
multilateral development banks on private sector loans, especially to small businesses. The
activity of the European Bank for Reconstruction and Development (EBRD) has been very
effective in Russia and other formerly centrally planned economies. But the mandate of the
EBRD is limited to the regions of Eastern Europe and the former Soviet Union. We are working
on a new proposal for this type of activity to be undertaken in all developing countries.

Toward More Capital Flows and Greater Stability in Emerging Markets
I'd also like to talk about reforms related to the International Monetary Fund and
emerging markets. To have greater economic stability in the world, you certainly have to have
greater economic stability in emerging markets. Unfortunately, emerging markets have not been
very stable in recent years. There have been many crisesi Moreover, the flow of investments
going through these markets has declined sharply during the last four years. If you want more
countries to experience higher economic growth, you want more funds going through these
emerging markets, not less - and ultimately at lower interest rates for countries that are having to
pay the interest rates.
So what do you do about this? What possible methods are there? Let me go down the
list of things that we are proposing and that I hope will ultimately be effective.

The Components of an IMFlEmerging Markets Reform Strategy

First is to focus more on crisis prevention. That means asking the IMF to look more
closely at countries that have the telltale signs of a future crisis - or close to a situation where
economic trends are not sustainable. This also entails giving more ownership of the problems to
the countries so that they can make the decisions before the crises get out of hand.
Second, we need to narrow the focus of the IMF. The IMF, in giving loans to countries
over the years, has insisted on conditions that go well beyond the expertise and the purview of
the IMF -- areas that have more to do with social policy or interfere in the politics of
governments. This reduces a country's sense of ownership in a way that is counterproductive.
And by narrowing the focus to things like fiscal policy, monetary and exchange rate policy, and
financial sector policies, the hope is that the IMF will be able to focus more on preventing crises.
We also want the IMF to make efforts to avoid giving advice that might discourage
economic growth. Tax policy is an area that deserves special care. Economic growth can be
encouraged by lower tax rates; and the lower rates may encourage more collection and make tax
administration easier. A remarkable example, I think, is how Russia instituted a l3 percent flat
tax and actually raised more tax revenue. It is worth noting that they did this after their IMF
program ended. When Russian authorities were unable to borrow from the IMF (or any other
source) and had to make decisions helpful for raising revenues on their own, they chose a
remarkably effective reform.
The third part of our strategy is to work to reduce contagion. Contagion refers to the
phenomenon that when there is a crisis in one country it spreads to other countries. Many people
thought contagion was an important characteristic of the Asian crises in the late 1990s. When
we started in the Bush Administration, we looked carefully at this contagion issue and tried to
see whether it was changing. And it was pretty clear to us that contagion was declining for a
number of reasons. One is that people in the markets were paying more attention to the
fundamentals. Another was that countries were starting to be more transparent in their policies.
And there was more discerning analysis at investment banks, trading firms, and mutual funds on
developments in the emerging market countries.
We tried to comment on this change in contagion because we believed that if people were
not so concerned about contagion, then they wouldn't be so willing to bailout bondholders. So,
early on in the Administration, we said that we did not think contagion is automatic. We said
that if it is there, it is more likely to be based on fundamentals. In fact, we were criticized quite
heavily for saying this early on. But I think it has been effective because irrational fears of
contagion have come down dramatically over the course of the last year. This is illustrated by
the terrible economic situation in Argentina. Despite the tragic situation for the world's largest
emerging market debtor, yield spreads have gone down in virtually every other country. People
in the markets call this de-coupling. I think it has fundamentally changed the nature of emerging
markets and what the official sector response to these crises should be. And, in fact, this also
creates the opportunity for countries to have more ownership and responsibility for their
problems.

The fourth part of our strategy is to limit official sector support to countries when they
reach unsustainable debt situations. Too much official sector assistance reduces incentives for
countries to come to the right decisions and it also ends up bailing out bondholders, as I think
we've seen in a number of cases. It's only by limiting official sector support that you can
prevent both of those things. I think it is clear to people who observe these markets thatalthough it took us a while to get there - the official sector support is being limited to a
significant degree. The reality is that if we want emerging markets to grow much more rapidly
in the future, it will be necessary to limit official sector support: the size of the markets will
outpace what is politically feasible for the official sector to do.
The fifth part of our strategy regarding emerging markets and IMP reform has to do with
creating an alternative to IMP bailouts that countries can use when they get in bad situations.
This alternative is to create a more systematic approach to the restructuring of sovereign debt trying to make restructuring more predictable. When countries get close to the situation where
debt is unsustainable, it frequently becomes very cloudy as to what happens next. And in my
experience in this job so far I can attest that when a country gets close to a position where things
might be unsustainable, too many decision-makers simply must guess what might happen next.
There is too much uncertainty.
What is needed here is a more formal workout strategy for countries that reach an
unsustainable debt position. Secretary O'Neill called for us all in the international community to
work on such a strategy last year. And the First Deputy Managing Director of the Th1F Anne
Krueger responded, showing great courage in laying out some specific suggestions in detail. In
Anne Krueger's proposal, the IMF-at some point when it was clear that a country's debt was
unsustainable-would step in and call a standstill-a time out-when the country would stop
servicing its debt and at the same time there would be a stay on the legal activities that might
occur.
There are alternatives to this proposal. Several alternatives would facilitate the workout
of sovereign debt problems by debtors and creditors themselves without a strong Th1F role. In
my view these alternatives are promising; and they may be easier to implement and more
predictable. For example, one could introduce new bond provisions so that when a country gets
to a situation where it needs a restructuring, there is a more orderly process for a workout with
the bondholders. One could require such provisions as a condition for the use of IMF resources.
Of course, introducing new provisions is something one can only do for new bonds. That might
not effectively deal with the situation we are in now, so there also may need to be some way to
deal with the existing bond provisions. Even with existing bond provisions, there may be ways
to create a more predictable workout process that emphasizes private sector decision-making and
does not require the IMP to play such a central role. Irrespective of how this discussion turns
out, it is essential to get a greater degree of predictability to the workout process, and I think that
will make these markets work better in the future.
If you look at what has happened over the course of the year, I think: you can point to
some progress in our efforts. Contagion in emerging markets has gone down significantly. I
hope that continues.

I hope it is a fundamental change. And then finally you have seen-<iespite the
increased uncertainty after September 11 and the situation in Argentina-a decline in spreads for
almost all these markets; this is promising. We also have to continue to expand free trade
because developing countries will grow more quickly when they are able to trade freely.
It's clear that we still have a long way to go with many of our reforms. Not everyone
agrees with our reforms. But no one should doubt our commitment to pursuing them. But I think
the progress we have made this year is significant and we intend to be persistent in achieving
these goals.

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omCE OF PUBUC AFFAIRS -1500 PENNSYLVANIA AVENUE, N.W. - WASIDNGTON, D.C.• 20220. (202) 622.2960

For Immediate Release
February 7, 2001

Contact: Tara Bradshaw
(202) 622-2014

RICHARD H. CLARIDA SWORN IN AS ASSISTANT SECRETARY
OF THE U.S. TREASURY FOR ECONOMIC POLICY

Today at 4:30 p.m. Treasury Secretary Paul O'Neill will swear-in Richard H. Clarida as
Assistant Secretary for Economic Policy. The u.S. Senate confirmed Clarida on January 25,
2002. President George W. Bush nominated Richard Clarida on October 31, 2001.
As Assistant Secretary for Economic Policy, Clarida is the senior advisor to the Treasury
Secretary and the Deputy Secretary on all aspects of economic policy. His office is responsible
for reporting on current and prospective economic developments and assisting in the
determination of appropriate economic policies. His office is also responsible for the review and
analysis of both domestic and international economic issues and developments in the financial
markets.
Prior to joining the Treasury Department, Clarida was Chairman of the Department of
Economics at Columbia University, and has been a Professor at Columbia since 1988. From
1983 to 1988 he served as an assistant professor of economics at Yale University. In 1987, 1988
and 1989, we was a consultant to President Reagan's Council of Economic Advisors, and was a
Senior Staff Economist at the CEA from 1986 to 1987. Clarida was a visiting scholar at the
International Monetary Fund in 1992 and 1993, and then again from1995 to 1997. He was a
visiting scholar at the Federal Reserve Board in 1992, 1994 and 1997.
Clarida earned his Master's and Ph. D in Economics from Harvard in 1983. He earned a B.S. in
Economics with Highest Honors from the University of Illinois in 1979.
He is married, has two children and resides in Southport, CT.
PO-997
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For Immediate Release
February 7,2001

Contact: Tara Bradshaw
(202) 622-2014
B. JOHN WILLIAMS, JR.
SWORN IN AS CHIEF COUNSEL
OF THE INTERNAL REVENUE SERVICE

Today at 4:30 p.m. Treasury Secretary Paul O'Neill will swear-in B. John Williams, Jr.
as Chief Counsel of the Internal Revenue Service and an Assistant General Counsel in the
Department of the Treasury. The U.S. Senate confirmed Williams on January 25,2002. President
George W. Bush nominated Williams on July 3, 2001.
As the IRS Chief Counsel, Williams will oversee the administration of the Federal tax

laws. His office is responsible for providing guidance on the correct legal interpretation of the
tax laws, representing the IRS in litigation, and providing all other legal support the IRS needs to
carry out its mission of serving American taxpayers. His office also drafts regulations, rulings,
and other published legal guidance; handles tens of thousands of cases per year in the U.S. Tax
Court and bankruptcy courts and works closely with the Department of Justice on other tax
litigation in other Federal courts; and provides specific legal advice and determinations to
taxpayers and to various IRS offices both before and after taxes are filed.
Most recently, Mr. Williams was a partner at Shearman & Sterling and was responsible
for the firm's tax litigation practice. Prior to joining Sheannan & Sterling, he was Chaitman of
the Tax Section at Morgan, Lewis & Bockius, where he lead the tax litigation practice for 10
years. He was appointed to the United States Tax Court in 1985 by President Reagan and served
until 1990.
From 1984 to 1985 Mr. Williams was a partner at Morgan, Lewis & Bockius, where he
practiced administrative law, specializing in Treasury and IRS matters. He has also served as
Deputy Assistant Attorney General, US Department of Justice, Tax Division, from 1983 to 1984.
He was initially responsible for appellate litigation before being assigned to supervise the
Division's trial litigation. Mr. Williams was also instrumJntal with respect to settlement
recommendations and legislative policy.
He served as Special Assistant to Chief Counsel, Internal Revenue Service, from 1981 to
1983. During his tenure at the IRS Mr. Williams was also responsible for policy and technical
review of rulings and regulations.
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While an Associate at Ballard, Spahr, Andrews & Ingersoll from 1976 to 1981, his
principal areas of concentration included corporate tax planning and tax litigation. He also served
as an Attorney-Advisor, United States Tax Court from 1974 to 1976, where he researched and
drafted opinions and conference memoranda for the Hon. Bruce M. Forrester.
Mr. Williams earned a J.D., with distinction, from George Washington University Law School in
1974 and a B.A., with distinction, from George Washington University in 1971.

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Contact: Tara Bradshaw
(202) 622-2014

For Immediate Release
February 7,2001

EDWARD R. KINGMAN JR.
SWORN IN AS ASSISTANT SECRETARY
OF THE U.S. TREASURY FOR MANAGEMENT

Today at 4:30 p.m. Treasury Secretary Paul O'Neill will swear-in Edward R. Kingman,
Jr. as Assistant Secretary for Management and Chief Financial Officer in the Department of
Treasury.
The U.S. Senate confinned Kingman on January 25, 2002. President George W. Bush nominated
Kingman on September 19, 2001.
As the Assistant Secretary for Management and Chief Financial Officer, Kingman is the
senior advisor to the Treasury Secretary and the Deputy Secretary on all matters involving the
internal management of the Department and its Bureaus. He serves as the Chief Operating
Officer of the Department and he represents the Department to the President's Management
Council. His office is responsible for strategic management (planning and budgeting), budget
execution and development, financial management, information technology, human resources,
procurement, asset management and security. The ASMlCFO oversees all administrative and
support services for the Department Headquarters offices. The Treasurer of the United States,
U.S. Mint and the Bureau of Engraving and Printing report to the ASM/CFO.
Most recently, Kingman served as President and Chief Executive Officer of EuroTel
Praha in Prague from 1998 to 2000, where he developed and led strategic initiatives that more
than quadrupled the customer base, grew the private market value by more than $2B USD, and
made it the second most profitable company in the Czech Republic. He also launched the first
mobile/web portal in Central Europe, the first pre-paid roaming in the world and the first GPRS
and high speed 43.2 kB/s data in Central Europe.
While in Prague, Kingman was awarded the Demf)cracy & Free Enterprise Award, as
well as numerous community service awards for supporting humanitarian efforts by providing
wireless telecommunications at the Tirana, Albanian refugee camp during the Kosovo conflict.
From 1994 to 1997, as Senior Vice President and Chief Financial Officer ofGrupo
IusaCell in Mexico City, he took the company public on the New York Stock Exchange. Also
with Grupo IusaCell, he served as the Executive Vice President and Chief Operating Officer,
from 1997 to 1998.
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•

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From 1992 to 1994, Kingman was Vice President of Finance-Network, for Verizon
Communications (formerly Bell Atlantic). He served with the Chesapeake and Potomac
Telephone Companies, from 1969 to 1991, in several positions of increasing responsibility
including Controller, Executive Director of External Affairs, as well as Treasurer.
Mr. Kingman earned a B.A., from American University in 1970, and an MBA in Finance
from American University in 1979. In 1997 he attended the Harvard Business School's
Advanced Management Program.
Mr. Kingman currently resides in Maryland with his wife and two children.
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OFFICE OF PUBLIC AFFAIRS e1500 PENNSYLVANIA AVENUE, N.W. e WASHINGTON, D.C.e 20220 e (202) 622-2960

EMBARGOED UNTIL 2:30 P.M.
February 7, 2002

CONTACT:

Office of Financing
202/691-3550

TREASURY OFFERS 13-WEEK AND 26-WEEK BILLS
The Treasury will auction 13-week and 26-week Treasury bills totaling $30,000
nillion to refund an estimated $29,804 million of publicly held 13-week and 26-week
rreasury bills maturing February 14, 2002, and to raise new cash of approximately $196
nillion. Also maturing is an estimated $6,000 million of publicly held 4-week
rreasury bills, the disposition of which will be announced February II, 2002.
The Federal Reserve System holds $12,777 million of the Treasury bills maturing
February 14, 2002, in the System Open Market Account (SOMA). This amount may be
refunded at the highest discount rate of accepted competitive tenders either in these
luctions or the 4-week Treasury bill auction to be held February 12, 2002. Amounts
lwarded to SOMA will be in addition to the offering amount.

Up to $1,000 million in noncompetitive bids from Foreign and International
Authority (FIMA) accounts bidding through the Federal Reserve Bank of New
rork will be included within the offering amount of each auction. These
loncompetitive bids will have a limit of $100 million per account and will be accepted
~n the order of smallest to largest, up to the aggregate award limit of $1,000
lillion.
~netary

TreasuryDirect customers have requested that we reinvest their maturing holdings
)f approximately $1,140 million into the 13-week bill and $985 million into the 26reek bill.
The allocation percentage applied to bids awarded at the highest discount rate
rill be rounded up to the next hundredth of a whole percentage point, e.g., 17.13%.
This offering of Treasury securities is governed by the terms and conditions set
:orth in the Uniform Offering Circular for the Sale and Issue of Marketable Book-Entry
'reasury Bills, Notes, and Bonds (31 CFR Part 356, as amended).
Details about each of the new securities are given in the attached offering
.ighlights.
000

.ttachment

'0-1000

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

TO BE ISSUED FEBRUARY 14, 2002
February 7, 2002
Offering Amount . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $16,000 million
Public Offering . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $16,000 million
NLP Exclusion Amount . . . . . . . . . . . . . . . . . . . . . . . . $ 5,400 million
Description of Offering:
Term and type of security . . . . . . . . . . . . . . . . . . . 91-day bill
CUSIP number . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 912795 JU 6
Auction date . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . February 11, 2002
Issue date . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . February 14, 2002
Maturi ty date . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . May 16, 2002
Original issue date . . . . . . . . . . . . . . . . . . . . . . . . . November 15, 2001
Currently outstanding . . . . . . . . . . . . . . . . . . . . . . . $21,433 million
Minimum bid amount and multiples . . . . . . . . . . . . $1,000

$14,000 million
$14,000 million
None

182-day bill
912795 KW 0
February 11, 2002
February 14, 2002
August 15, 2002
February 14, 2002
$1,000

The following rules apply to all securities mentioned above:
Submission of Bids:
Noncompetitive bids:
Accepted in full up to $1 million at the highest discount rate of accepted competitive bids.
Foreign and International Monetary Authority (FIMA) bids: Noncompetitive bids submitted through the Federal Reserve
Banks as agents for FlMA accounts.
Accepted in order of size from smallest to largest with no more than $100
million awarded per account.
The total noncompetitive amount awarded to Federal Reserve Banks as agents for FIMA
accounts will not exceed $1,000 million. A single bid that would cause the limit to be exceeded will
be partially accepted in the amount that brings the aggregate award total to the $1,000 million limit.
However,
if there are two or more bids of equal amounts that would cause the limit to be exceeded, each will be prorated
to avoid exceeding the limit.
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 (NLP) 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 standard time on auction day
Competitive tenders . . . . . . . . Prior to 1:00 p.m. eastern standard 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 t~nder.
TreasuryDirect customers can use the Pay Direct feature which authorizes a charge to their account of
record at their financial institution on issue date.

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omCE OF PUBUC AFFAIRS -1500 PENNSYLVANIA AVENUE, N.W. - WASHINGTON, D.C. - 20220 - (202) 622.2960

FOR IM:MEDIATE RELEASE
February 8,2002

Contact: Tara Bradshaw
(202) 622-2960

STATEMENT BY DEPUTY TREASURY SECRETARY KENNETH W. DAM ON
EUROPEAN UNION E-COMMERCE TAX PROPOSAL
The Administration has serious concerns about a European Union proposal to
apply value-added taxes (VAT) to imports of certain e-commerce goods and services.
According to European Union statements, U.S. sellers of goods or services
digitally-delivered to EU consumers may soon be required to register in the EU and
charge EU VAT, at the V AT rate that applies in the consumer's country of residence.
Conversely, EU companies that sell digitally-delivered products to EU consumers would
continue to charge V AT at the rate applicable in the companies' country of establishment,
regardless of where in the EU the consumer is resident. Moreover, such EU companies
would not be subject to any additional administrative requirements.
Thus, under the proposal, U.S. sellers may be required to charge VAT on sales to
an EU consumer at a rate higher than their EU competitors would charge on sales of the
same product to the same consumer. In addition, U.S. sellers may be subject to more
onerous administrative and compliance requirements than are placed on their EU
competitors.
Furthermore, EU V AT on digitally-delivered products may be imposed at a rate
higher than on physically-delivered equivalents. For example, in many EU countries, the
VAT rate applied to sales of digitally-delivered books, newspapers and magazines may
be higher than that applied to sales of the same books, newspapers and magazines sold in
physical form.
The United States and each country of the' EU have been working within the
Organization for Economic Cooperation and Development with other governments and
with the business community on tax issues associated with electronic commerce taxation,
and have pledged that any taxation of e-commerce be neutral and equitable between
conventional and electronic forms of commerce. In addition, each has obligated itself in
international treaties not to impose measures that discriminate against nationals of the
other signatories. The EU proposal may be contrary to those agreements.

PO-100l
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The proposal may potentially be inconsistent with international trade obligations
in the World Trade Organization, in particular the commitment to accord national
treatment to foreign goods and services.
Unilateral proposals such as the EU's may encourage others to take unilateral
measures, rather than waiting for the global consensus that can be developed through a
deliberative and inclusive process, such as the DECO's. Further efforts to achieve a more
global consensus that reflects a consideration of all the issues raised must be made before
unilateral action can be justified. We hope we can continue to work with the EU and with
other stakeholders regarding the difficult substantive and administrative issues raised by
the taxation of e-commerce, in order to achieve the required consensus.

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T II E

T R E ;\ S 11 R Y

NEWS
ornCE OF PUBUCAFFAIRS -1500 PENNSYLVANIA AVENUE, N.W. - WASIDNGTON, D.C. - 20220 - (202) 622-2960

Contact: Tara Bradshaw
(202) 622-2960

FOR IMMEDIATE RELEASE
February 8, 2002

STATEMENT BY DEPUTY TREASURY SECRETARY KENNETH W. DAM ON
EUROPEAN UNION E-COMMERCE TAX PROPOSAL
The Administration has serious concerns about a European Union proposal to
apply value-added taxes (VAT) to imports of certain e-commerce goods and services.
According to European Union statements, U.S. sellers of goods or services
digitally-delivered to EU consumers may soon be required to register in the EU and
charge EU VAT, at the VAT rate that applies in the consumer's country of residence.
Conversely, EU companies that sell digitally-delivered products to EU consumers would
continue to charge VAT at the rate applicable in the companies' country of establishment,
regardless of where in the EU the consumer is resident. Moreover, such EU companies
would not be subject to any additional administrative requirements.
Thus, under the proposal, U.S. sellers may be required to charge VAT on sales to
an EU consumer at a rate higher than their EU competitors would charge on sales of the
same product to the same consumer. In addition, U.S. sellers may be subject to more
onerous administrative and compliance requirements than are placed on their EU
competitors.
Furthermore, EU VAT on digitally-delivered products may be imposed at a rate
higher than on physically-delivered equivalents. For example, in many EU countries, the
VAT rate applied to sales of digitally-delivered books, newspapers and magazines may
be higher than that applied to sales of the same books, newspapers and magazines sold in
physical form.
The United States and each country of the 'EU have been working within the
Organization for Economic Cooperation and Development with other governments and
with the business community on tax issues associated with electronic commerce taxation,
and have pledged that any taxation of e-commerce be neutral and equitable between
conventional and electronic forms of commerce. In addition, each has obligated itself in
international treaties not to impose measures that discriminate against nationals of the
other signatories. The EU proposal may be contrary to those agreements.

PO-IOOI
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·U.S. Govemment Printing Office: 1998· 819-559

The proposal may potentially be inconsistent with international trade obligations
in the World Trade Organization, in particular the commitment to accord national
treatment to foreign goods and seIVices.
Unilateral proposals such as the EU's may encourage others to take unilateral
measures, rather than waiting for the global consensus that can be developed through a
deliberative and inclusive process, such as the ~EeD's. Further efforts to achieve a more
global consensus that reflects a consideration of all the issues raised must be made before
unilateral action can be justified. We hope we can continue to work with the EU and with
other stakeholders regarding the difficult substantive and administrative issues raised by
the taxation of e-commerce, in order to achieve the required consensus.

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

FOR IMMEDIATE RELEASE

Contact: Tasia Scolinos

February 8, 2002

(202 622-2960

TREASURY SIGNS LICENSE UNBLOCKING ADDITIONAL FROZEN AFGHAN
ASSETS
Today the Treasury Department authorized the unblocking of another $25.5 million in
Afghan government-owned commercial bank assets. These assets were frozen by the
Department of Treasury under a 1999 Presidential Executive Order issued to prevent their use by
the Taliban authorities. The authorization, signed today by Treasury's Office of Foreign Assets
Control, will allow the new Afghan Interim Authority (AlA) to access assets of Afghan Export
Promotion Bank, Bank Millie, and subsidiaries of Bank Millie, Afghan House and Afghan
Trading.
Today's authorization follows action taken by the Sanctions Committee of the United
Nations Security Council on January 24th which removed these four banks from its list of
blocked entities. These actions follow the issuance of a January 24th license by the Office of
Foreign Assets Control which unblocked approximately $193 million in gold and $25 million in
other assets of the Afghan Central Bank held at the Federal Reserve of New York.
"We are committed to helping the Afghan people during this critical period of
rebuilding," said Treasury Secretary Paul O'Neill. "We are optimistic that the funds unblocked
today will play an integral role in this new chapter of Afghan history. "

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FOR IMMEDIATE RELEASE:
February 9, 2002

Contact: Michele Davis
(202) 622-2920

STATEMENT OF SECRETARY PAUL O'NEILL FOLLOWING THE G-7 FINANCE
MINISTERS MEETING IN OTTAWA
Good afternoon. It was a pleasure to meet again with my G-7 colleagues for a frank and
useful discussion of the world economy and each of our own economies. We agreed that we
must continue to bolster economic growth in our economies, for the good of our own citizens
and the people of the world. For our part, the United States has put the worst part of the
economic slowdown behind us. We see more signs every day indicating that a recovery is
underway and I believe we will return to prosperous real economic growth rates of3 to 3.5
percent, as soon as the fourth quarter of this year.
Working together, the G-7 nations have made progress in combating the financing of
terrorism. I took the opportunity to once again thank my colleagues for their support. To date,
149 countries and jurisdictions, including the G-7, have issued orders to freeze terrorist assets,
and we have blocked over $104 million since September 11.
At today's meeting, we agreed to do more. In our Action Plan we committed to develop
a mechanism to block the assets of terrorists simultaneously in all our countries. This will require
even closer cooperation, both to share intelligence and protect sensitive information. We should
spare no effort in making the world's financial system off limits to terrorist fundraising activities.
In bilateral meetings and in a group session I raised the President's grants proposal and
the need to improve the effectiveness of development assistance. I urged my colleagues to
expand the portion of aid provided as grants, especially to the lowest income nations where an
additional debt burden cannot be serviced. I am confident that the outstanding issues on the 13th
replenishment of the International Development Association will be resolved in a timely manner.
On crisis resolution, I am pleased that my colleagues are eager to playa leading role in
improving the framework to prevent and resolve financial crises. A market-based predictable
process for sovereign debt restructuring would be a helpful contribution to the orderly
functioning of the world financial markets.

I want to thank Paul Martin for hosting these meetings. In my discussions with Minister
Martin, we reaffirmed our joint commitment to finding innovative means to improve both the
security and efficiency of border crossings so vital to the free flow of trade between Canada and
the United States. We will continue to work toward greater information exchange to create a
seamless border process.

Fur press releases, speeches, public schedules mul ojJici4l biographies, call our 24hour fax line at (202) 622-2040
·u.s. Government Printing Office: 1998 • 619-559

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NEWS

OFFICE OF PUBLIC AFFAIRS .1580 PENNSYLVANIA AVENUE, N. W. e WASHINGTON, D.C.e 20220. (101) 622.2968

EMBARGOED UNTIL 11:30 A.M.
February 11, 2002

Contact:

Office of Financing
202/691-3550

'l'REASURY OFFERS 4-WEEK BILLS

The Treasury will auction 4-week Treasury bills totaling $18,000 million to
refund an estimated $6,000 million of publicly held 4-week Treasury bills maturing
February 14, 2002, and to raise new cash of approximately $12,000 million.
Tenders for 4-week Treasury bills to be held on the book-entry records of
will ~ be accepted.

Treas~Direct

The Federal Reserve System holds $12,777 million of the Treasury bills maturing
on February 14, 2002, in the System Open Market Account (SOMA). This amount may be
refunded at the highest discount rate of accepted competitive tenders in this auction
up to the balance of the amount not awarded in today's 13-week and 26-week Treasury
bill auctions. Amounts awarded to SOMA will be in addition to the offering amount.

up to $1,000 million in noncompetitive bids from Foreign and International
Monetary Authority (FIMA) accounts bidding through the Federal Reserve Bank of New York
will be included within the offering amount of the auction. These noncompetitive bids
will have a limit of $100 million per account and will be accepted in the order of
smallest to largest, up to the aggregate award limit of $1,000 million.
The allocation percentage applied to bids awarded at the highest discount rate
will be rounded up to the next hundredth of a whole percentage point, e.g., 17.13%.
This offering of Treasury securities is governed by the terms and conditions
let forth in the Uniform Offering Circular for the Sale and Issue of Marketable Book~ntry Treasury Bills, Notes, and Bonds (31 CFR Part 356, as amended).
Details about the new security are given in the attached offering highlights.

000

.ttachment

)-1004

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HIGHLIGHTS OF TREASURY OFFE~NG
OF 4-WEElt BILLS TO BE ISSUED FEBRUARY 14, 2002
February 11, 2002
Offering Amount . . . . . . . . . . . . . . . . . . . . . $18,000 million
Public Offering . . . . . . . . . . . . . . . . . . . . . $18,000 million
NLP Exclusion Amount . . . . . . . . . . . . . . . . $ 9,000 million
Description of Offer~g:
Term and type of security ........... 28-day bill
CUSIP number . . . . . . . . . . . . . . . . . . . . . . . . 912795 JK 8
Auction date . . . . . . . . . . . . . . . . . . . . . . . . February 12, 2002
Issue date ..... , . . . . . . . . . . . . . . . . , ... February 14, 2002
Maturity date . . . . . . . . . . . . . . . . . . . . . . . March 14,2002
Original issue date . . . . . . . . . . . . . . . . . September 13, 2001
Currently outstanding ............... $34,904 million
~nimum bid amount and multiples .... $1,000
Submission of Bids:
Noncompetitive bids: Accepted in full up to $1 million at the highest
discount rate of accepted competitive bids.
Foreign and International Monetary Authority (FlMA) bids: Noncompetitive bids submitted through the Federal Reserve Banks as agents for
FIMA accounts. Accepted in order of size from smallest to largest
with no more than $100 million awarded per account.
The total noncompetitive amount awarded to Federal Reserve Banks as agents for
FIMA accounts will not exceed $1,000 million. A single bid that
would cause the limit to be exceeded will be partially accepted in
the amount that brings the aggregate award total to the $1,000
million limit. However, if there are two or more bids of equal
amounts that would cause the limit to be exceeded, each will be
prorated to avoid exceeding the limit.
Competitive bids:
(1) Must be expressed as a discount rate with three decimals in
increments of .005%, e.g., 4.215%.
(2) Net long position (NLP) 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 standard time on auction day
Competitive tenders:
Prior to 1:00 p.m. eastern standard time on auction day
Payment Terms: By charge to a funds account at a Federal Reserve Bank
on issue date.

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
February 11, 2002

Office of Financing
202-691-3550

RESULTS OF TREASURY'S AUCTION OF 26-WEEK BILLS
Term:
Issue Date:
Maturity Date:
CUSIP Number:

182-Day Bill
February 14, 2002
August 15, 2002
912795KWO
1.810%

High Rate:

Investment Rate 1/:

1.852%

Price:

99.085

All noncompetitive and successful competitive bidders were awarded
securities at the high rate. Tenders at the high discount rate were
allotted 34.49%. All tenders at lower rates were accepted in full.
AMOUNTS TENDERED AND ACCEP.TED (in thousands)
Tender Type
Competitive
Noncompetitive
FlMA (noncompetitive)

37,381,181
1,352,879
125,000

Federal Reserve

5,109,999

5,109,999
$

43,969,059

12,522,206
1,352,879
125,000
14,000,085 2/

38,859,060

SUBTOTAL

TOTAL

Accepted

Tendered

19,110,084

Median rate
1.800%: 50% of the amount of accepted competitive tenders
was tendered at or below that rate. Low rate
1.750%:
5% of the amount
of accepted competitive tenders was tendered at or below that rate.
Ilid-to-Cover Ratio

= 38,859,060 / 14,000,085 = 2.78

/ Equivalent coupon-issue yield.
/ Awards to TREASURY DIRECT = $1,056,379,000

http://www.publicdebt.treas.gov

1-1005

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
February 11, 2002

CONTACT:

Office of Financing
202-691-3550

RESULTS OF TREASURY'S AUCTION OF 13-WEEK BILLS
91-Day Bill
February 14, 2002
May 16, 2002
912795JU6

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

1.715%

Investment Rate 1/:

1. 748%

Price:

99.566

All noncompetitive and successful competitive bidders were awarded
securities at the high rate. Tenders at the high discount rate were
illotted 60.62%. All tenders at lower rates were accepted in full.
AMOUNTS TENDERED AND ACCEPTED (in thousands)
Tender Type
Competitive
Noncompetitive
FIMA (noncompetitive)

34,232,340
1,534,388
200,000

SUBTOTAL

35,966,728

Federal Reserve

5,446,225

TOTAL

Accepted

Tendered

41,412,953

14,265,670
1,534,388
200,000
16,000,058 2/
5,446,225

21,446,283

Median rate
1.700%: 50% of the amount of accepted competitive tenders
tendered at or below that rate. Low rate
1.660%:
5% of the amount
: accepted competitive tenders was tendered at or below that rate .

.d-to-Cover Ratio = 35,966,728 / 16,000,058 = 2.25
Equivalent coupon-issue yield.
Awards to TREASURY DIRECT = $1,276,455,000

http://www.publicdebltreas.gov

1006

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FOR IMMEDIATE RELEASE

Contact: Tony Fratto

February 12, 2002

(202) 622-2960

MEDIA ADVISORY
Under Secretary for International Affairs, John Taylor will testify at a hearing hosted by
the Joint Economic Committee of the Congress regarding "Reform of the IMF and World
Bank". The hearing will take place on Thursday, February 14, 2002, 10:00 AM at the 2318
Rayburn House Office Building, Washington, DC.

-30PO-1007

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

Government Prtnllng Office 1998· 619·559

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IREASURY

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- 20220 -

(202)622.2960

FOR IMMEDIATE RELEASE

Contact: Tony Fratto

February 12,2002

(202) 622-2960

MEDIA ADVISORY
Under Secretary for International Affairs, John Taylor will testify at a hearing hosted by
the Joint Economic Committee of the Congress regarding "Reform of the IMF and World
Bank". The hearing will take place on Thursday, February 14,2002, 10:00 AM at the 2318
Rayburn House Office Building, Washington, DC.

-30PO-I 007

For press releases, speeches, public schedules and official biographies, call our 24-hour fax line at (202) 622·2040
'U S Government Pflnllng Office 1998· 619·559

Restrictions on Travel to Cuba:
Administration and Enforcement
Prepared Statement of
R. Richard Newcomb
Director, Office of Foreign Assets Control
United States Department of the Treasury
before the Subcommittee on
Treasury and General Government Appropriations
Committee on Appropriations
United States Senate
Washington, D.C.
February 11, 2002

Introduction

Chairman Dorgan, Members of the Subcommittee,

Thank you for the opportunity today to address issues
concerning the administration and enforcement of restrictions on
travel-related transactions involving Cuba.

As you know, the

Treasury Department's Office of Foreign Assets Control ("OFAC")
is currently responsible for administering and enforcing 24
economic sanctions programs, most recently the President's
September 23 Executive Order targeting persons who commit,
threaten to commit, or support terrorism.

With respect to the

embargo on Cuba, the President, as recently as January 17, has
reasserted his commitment to the use of the embargo and travel

restrictions to encourage a transition to democracy in Cuba.
(Tab 1)
When I speak about travel during the course of this
testimony, I refer specifically to restrictions on "transactions
related to travel," rather than simply to "restrictions on
travel."

OFAC's jurisdiction under the Trading With the Enemy

Act ("TWEA") is to prohibit or regulate commercial or financial
transactions, not travel per se.

The licensing criteria set

forth in the Cuban Assets Control Regulations, 31 CFR Part 515
(the "Regulations"), implemented under the authority of this
statute, address transactions incident to travel and other
transactions that are directly incident to those activities
deemed consistent with

u.s. foreign policy.

We enforce against transactions engaged in by persons
subject to

u.s. jurisdiction when those transactions are entered

into without authorization.

In contrast, travel to Cuba that is

fully hosted by Cuban or third-country nationals,

where nothing

of value is provided in return, is not covered by the
Regulations.

OFAC's jurisdiction under TWEA to regulate these

classes of transactions has withstood ~udicial review and been
confirmed by the United States Supreme Court. 1

The Supreme Court upheld restrictions on travel-related transactions with Cuba in Regan
v. Wald, 468 U.S. 111 (1984). The Court held that TWEA provides an adequate statutory basis
for the 1982 amendment to the Regulations restricting the scope of permissible travel-related
transactions with Cuba and Cuban nationals. The Court rejected the argument that such a
2

II.

Licensing

A. Historical Context

The licensing regime applicable to transactions involving
Cuba travel took its present form toward the end of the last
administration, with an emphasis on people-to-people contact and
family reunification.

This is only the most recent development

in administration policy on the subject, however, and the
current status of Cuba travel is very much a legacy of both
political parties.

I have appended a chronology demonstrating

how often the policy has shifted with respect to Cuba travel.
(Tab 2)
In 1977, for example, President Carter lifted restrictions
on travel to Cuba in their entirety, such that all travelrelated transactions involving Cuba were authorized under a
general license.

General licenses in OFAC parlance constitute

regulation violates the right to travel guaranteed by the D~e Process Clause of the Fifth
Amendment to the Constitution. It held that, in light of tlle traditional deference given to
executive judgment in the realm of foreign policy, the Fifth Amendment right to travel did not
overcome the foreign policy justifications supporting the President's decision to curtail the flow
of currency to Cuba by restricting financial transactions relating to travel to Cuba. The Court
rejected the respondents' argument that a restriction on travel was inappropriate because, in their
view, there was no "emergency" at the time with respect to Cuba and that the relations between
Cuba and the United States were then subject to "only the 'normal' tensions inherent in
contemporary international affairs." 468 U.S. at 242. The Court declined to second-guess the

blanket authorization for those transactions set forth in the
general license in OFAC's regulations, and are self-selecting
and self-executing.

No further case-specific permission is

required to engage in transactions covered by that general
license.

Then, in 1982, the pendulum swung in the other

direction, and President Reagan reimposed a prohibition on all
travel-related transactions.

The pre-existing general license

was limited to official U.S. or foreign government travel,
visits to close relatives, and travel related to journalism,
professional research of an academic nature and certain
professional meetings.
From 1982 to early 1994, the general license authorization
remained unchanged.

Travel transactions for humanitarian

reasons, public performances, exhibitions, and similar
activities were specifically licensed on a case-by-case basis.
In 1993, under President Clinton, specific licenses were made
available for travel transactions related to educational,
religious, and human rights activities and the export or import
of informational materials.
In the summer of 1994, responding in part to Cuban policies
that resulted in thousands of Cuban rafters crossing the Florida
Straits, President Clinton tightened OFAC's licensing regime to

Executive branch on this foreign policy issue. Id. See also: Freedom to Travel Campaign v.
Newcomb, 82 F 3d 1431 (9th Cir. 1996).
4

require specific licenses
journalists.

for all but diplomats and full-time

U.S. persons seeking to visit close relatives in

Cuba instantly became by far the largest source of specific
license applications.

The following year, the general license

was reinstated for professional research, professional meetings
and the first family visit in circumstances of "extreme
humanitarian need" during any 12-month period.
Subsequent to the Pope's visit to Cuba in 1998, President
Clinton announced a new policy in 1999 to promote increased
people-to-people contacts in support of the Cuban people.

The

result of this policy shift is reflected in the current twelve
regulatory categories of activities for which travel-related and
other transactions are authorized, either by general or specific
license.

General licenses continue to apply to diplomats, full-

time journalists, professional researchers, certain professional
meetings and the first family visit per 12-month period.

The

requirement that the family visit take place under circumstances
of "extreme" humanitarian need, however, was eliminated.
Existing categories were expanded, most requiring case-bycase authorization by specific license, including educational
exchanges, religious activities, athletic competition and public
performances and exhibitions.

In addition, consistent with an

overall policy development applicable to most countries subject
to economic sanctions programs that liberalized the export of

food and medicine, travel and other transactions directly
incident to the marketing, sales negotiation, accompanied
delivery or servicing of agricultural exports to Cuba became
eligible for authorization by specific license, provided that
the exports are of the kind licensed by the Department of
Commerce.
Over the years, Congress has been actively involved in the
formulation of policy with regard to Cuba generally, and Cuba
travel in particular.

In 1992, the Cuban Democracy Act (the

"CDA") added civil penalty authority and required the creation
of an administrative hearing process for civil penalty cases and
the establishment of an OFAC satellite office in Miami to assist
in administering and enforcing the Cuba program.

The Cuban

Liberty and Democratic Solidarity (Libertad) Act of 1996 (the
"Libertad Act") required that the underlying prohibitions as set
forth in the Regulations are to remain in place until there is a
transition to a democratically-elected government in Cuba. 2
Finally, in 2000, Congress passed the Trade Sanctions
Reform and Export Enhancement Act (the "TSRA"), restricting the
President's discretionary authority to~authorize certain travel-

In a December 1998 report, the General Accounting Office
concluded that this provision of the Libertad Act did not
eliminate the President's authority to make modifying amendments
to the Regulations, short of lifting the underlying
prohibitions. See: Cuban embargo: Selected Issues Relating to
Travel, Exports, and Telecommunications, GAO/NSIAD-99-10.
2

related transactions to, from, or within Cuba.

Under section

910 of the TSRA, that authority is restricted to travel-related
transactions related to activities " . . . expressly authorized
in paragraphs (1) through (12) of section 515.560 of title 31,
Code of Federal Regulations, or in any section referred to in
any of such paragraphs (1) through (12)
in effect on June I, 2000)."

(as such sections were

Any activity falling outside of

these twelve categories is defined in this section of the TSRA
as "tourism" and may not be the basis for issuing a license.
Section 910 of the TSRA also expressly provides for caseby-case review of license applications for travel in support of
agricultural exports -- an activity referred to in paragraph
(12) of section 515.560 of the Regulations -- but in so doing
restricted the President's discretion to authorize such trips by
general license.

I have appended a synopsis of these twelve

categories of activities for which travel-related transactions
may be authorized to this testimony for ease of reference. (Tab
3)

I have also appended our brochure on Cuba entitled: "What

You Need to Know About the U.S. Embargo," which covers all
facets of this economic sanctions program.

(Tab 4)

B. Licensing

Administrative process: OFAC processes a large number

of license applications relating to the Cuba embargo, the
majority of which concern travel.

License applications relating

to subsequent family visits, free-lance journalism, educational
activities by accredited U.S. academic institutions, religious
activities, informational materials and agricultural and medical
exports are processed by OFAC's Miami office.

During calendar

year 2001, the Miami office handled 19,045 license applications
for travel, particularly family visits, and at least as many
attendant telephone calls.
Another of the office's primary responsibilities is to
regulate certain activities of 182 entities nationwide, which
are currently licensed to: (1) provide travel and carrier
services to authorized travelers; and (2) remit funds to Cuban
households on behalf of individuals who are subject to U.S.
jurisdiction in the amounts and frequency

authorized under the

Regulations (the "Service Provider Program").

Almost two-thirds

of these licensed entities are headqua~tered in Miami.

Integral

to this regulatory program is the licensing and compliance
oversight of the direct charter flights to Cuba currently
authorized from Miami, Los Angeles and New York to carry
authorized travelers.

I have appended a copy of OFAC's Circular

2001, setting forth guidelines applicable to the Service
Provider Program.

(Tab 5)

The Miami office also investigates

alleged violations of the Regulations and processes enforcement
referrals from the U.S. Customs Service and the U.S. Coast
Guard.
The remaining travel-related license applications are
processed at OFAC's main office in Washington, DC, along with
all non-travel license applications involving Cuba, relating to
everything from blocked estates to international corporate
acquisitions.

The travel-related applications include those

involving professional research and attendance at professional
meetings not covered by the general license, educational
exchanges not involving academic study pursuant to a degree
program, participation in a public performance, clinic,
workshop, athletic or other competition, or exhibition in Cuba,
support for the Cuban people as provided in the CDA,
humanitarian projects, activities of private foundations or
research or educational institutes, and exports of medicine or
medical supplies and certain telecommunications equipment or
reexports of U.S.-origin agricultural bommodities from a third
country to Cuba.

During calendar year 2001, OFAC's Washington,

DC staff handled 1,283 license applications for travel in these
various categories, with support from Treasury's Office of the
General Counsel.

We endeavor to process license applications within two
weeks absent the need for interagency review, and most travelrelated applications fall within this category.

There are many

instances, however, where a given application fails to meet the
applicable licensing criteria.

Depending upon the

circumstances, the licensing officer may contact the applicant
to request additional information or clarification or prepare a
letter of denial.

Certain applications may have been delayed by

the anthrax threat, which caused the main Treasury Department
mailroom to shut down for several weeks.

Mail continues to be

delayed for up to two months because of the decontamination
process that has since been put into place.

2. Licensing Criteria: Recent events have unfortunately

given rise to misperceptions on the part of the U.S. public
regarding travel to Cuba.

While travel for purposes of tourism

or most business transactions remains strictly prohibited,
travel guides to Cuba are readily available in any bookstore or
on the internet portraying Cuba as just another Caribbean
tourist destination.

The Pope's visit~to Cuba in 1998,

President Clinton's 1999 people-to-people initiative, the recent
surge in popularity of Cuban music and culture and the Elian
Gonzales case have all served to focus the American public's
interest and attention on this country.

It appears that a great deal of the current frustration
regarding the denial of license applications involves a
disconnect on what constitutes an "educational exchange" or
"people-to-people contact./I

These terms are often used in

license applications but are not accompanied by material
sufficient to demonstrate eligibility according to the
applicable licensing criteria.

We will continue to streamline

these licensing criteria and, at the same time, promote greater
transparency and understanding by the public.
Educational exchanges not involving academic study pursuant
to a degree program must take place under the auspices of an
organization that sponsors and organizes such programs to
promote people-to-people contact.

We have published explanatory

guidelines on our Internet website. (Tab 6)

These guidelines

provide, in part, that people-to-people contact normally entails
direct interaction between U.S. and Cuban individuals not
affiliated with the Cuban government, and normally does not
involve meetings with Cuban government officials.

OFAC

evaluates, among other things, whether the U.S. program is
structured to result in direct and individual dialogue with the
Cuban people and whether the proposed activities with the Cuban
people are educational in nature, such as participation in joint
activities that may include seminars, lectures and workshops.
OFAC also evaluates whether each traveler will be fully

participating in all of the proposed people-to-people
activities.
Educational exchange involving people-to-people contact
does not include travel for purposes of, for example: railroad
hobbyists' desire to see aging locomotives in Cuba; a U.S.
city's desire to establish a sister city relationship with
government officials of a Cuban city or provence, or a group of
architects getting together to take a walking tour of Havana.
Such proposed itineraries are not made more acceptable by a
traveler's commitment to distribute a small amount of over-thecounter medicines or visit Cuban clergy or dissidents during the
trip, when such contacts are minimal and clearly not the primary
focus of the trip.
Two-year licenses for such exchanges issued at the advent
of the people-to-people initiative in 1999 are now coming up for
renewal.

As we review activities undertaken pursuant to those

licenses during the past two years, it appears that not all of
the activities that took place pursuant to those licenses
entirely conformed to the intent of the licenses as issued.

For

example, some license holders allowed bther groups to travel to
Cuba under the authority of their licensees when that particular
use of the license was not contemplated in the original
submission to OFAC.

Accordingly, we are exercising a heightened

degree of scrutiny in our review of these requests for renewals,

and are incorporating reporting requirements into the renewed
licenses to ensure better compliance.
Finally, there has also been some confusion with respect to
our licensing criteria with respect to applications to permit
persons to travel to Cuba in conjunction with the exportation of
agricultural commodities authorized by the Department of
Commerce.

Consistent with the TSRA, the Regulations provide

that travel and other transactions that are directly incident to
the

~marketing,

sales negotiation, accompanied delivery, or

servicing of exports that appear consistent with the export
licensing policy of the Department of Commerce" may be
authorized by specific license. 3
This licensing criterion does not include trade missions to
discuss transactions that are not currently authorized, such as
direct U.S. financing, with a view toward the eventual end of
the embargo.

It also does not permit individuals with no

apparent nexus to this criterion to join the trip, simply out of
General transportation services relating to these exports are
authorized by general license. Consistent with the CDA, vessels
are authorized by another OFAC general license to carry goods to
Cuba that are authorized for export by· the Department of
Commerce provided that: (1) they have not engaged in trade or
purchased or provided services in Cuba within 180 days or; (2)
the vessels are not otherwise carrying goods or passengers in
which Cuba or a Cuban national has an interest. Vessels not
qualifying for this general authorization may be specifically
licensed. Financing of these exports is restricted by the TSRA
to payment of cash in advance or to financing by third country
financial institutions, except that such financing may be
3

personal interest or a familial relationship to another
traveler.

While there is no limitation on numbers of

participants in any given group, this nexus must exist between
each traveler and the activity in which he or she seeks to
engage.

Large numbers are sometimes an indication that no such

nexus exists.

We have just issued explanatory guidelines on our

website to provide additional guidance to persons applying for
these licenses.

(Tab 7)

III. Enforcement

Historical Context

Prior to 1992, OFAC lacked civil penalty authority to
enforce the Cuban embargo.

Criminal prosecution of travel-

related violations was extremely rare.

In my experience,

u.s.

Attorneys often do not accept travel violations for criminal
prosecution absent other illegal commercial or financial
transactions by the traveler involving Cuba or Cuban nationals.
The lack of criminal prosecutions is wtdely reported in the
media and in almost any travel publication that discusses Cuba.
With the passage of the CDA in 1992, the Trading With the
Enemy Act ("TWEA") was amended to provide that civil fines of up
confirmed or advised by a United States financial institution.
14

to $50,000 (now adjusted for inflation to $55,000) could be
levied for violations of the Regulations.

The CDA also required

that the Secretary of the Treasury impose such penalties "only
on the record after opportunity for an agency hearing . . . with
the right to pre-hearing discovery."

In 1996, the LIBERTAD Act

increased the number of categories of violations for which civil
penalties may be sought to include all travel-related
violations.

In February 1997, OFAC promulgated proposed

regulations to govern the hearings, and in March 1998 published
final regulations.

Judicial review by Article III courts is

available once the Administrative Law Judge's civil penalty
determination is made final.
No administrative review process is currently in place,
despite efforts over the years to establish such a process.

am pleased to note, however, that Secretary O'Neill has approved
a proposal for Treasury Department funding of two Administrative
Law Judges with the necessary support staff.

B. Investigation

The majority of OFAC's enforcement actions with respect to
the Cuba embargo concern individuals who engage in unauthorized
travel transactions related to Cuba tourism.

For many reasons,

including those previously articulated, increasingly larger

numbers of Americans disregard the law and travel to Cuba purely
for tourism.

Interest in Cuba on the part of otherwise law-

abiding Americans has also been exploited by foreign travel
agencies that falsely advertise trips to Cuba claiming that such
travel is legal.

OFAC has endeavored to correct these agencies'

misrepresentations by contacting them directly and placing
advisories for all to see on our website.

(Tab 8)

Beyond tourism, certain organizations and individuals view
travel to Cuba as an act of civil disobedience.

Organized

challenges to the embargo have taken the form of protests
involving unlicensed travel transactions and the unlicensed
export of goods.

There are passionate constituencies on both

sides of this issue, those who believe that we do not do enough
to stem the flow of U.S. tourist travel to Cuba and those who
believe that any regulation of travel is an infringement of
their constitutional rights.
OFAC has worked hard to develop procedures with the Customs
Service to identify unlicensed travelers returning to the United
States from Cuba.

We have endeavored to enforce these

restrictions in an evenhanded manner that is consistent with our
responsibilities under the law.

Returning Cuba travelers are

identified by Customs agents and inspectors at ports of entry in
the United States or at U.S. Customs Preclearance Facilities in
Canada or the Bahamas.

Those travelers who do not claim a

general or specific license from OFAC to engage in Cuba travelrelated transactions are routinely referred to OFAC for
investigation and civil penalty action.

This workload is an

extremely heavy drain on finite enforcement and legal resources.

Civil Penalties

When an enforcement case is referred for civil penalty
consideration, the administrative record either contains
evidence of transactions involving Cuba or the prepenalty notice
is premised upon a rebuttable presumption that an individual
traveling to Cuba necessarily engaged in transactions involving
Cuba.

This presumption appears in OFAC's Regulations and may be

rebutted by documentation establishing that the traveler was
fully hosted by a Cuban or third-country national.

If the

presumption is not rebutted, a prepenalty notice with statement
of rights and procedures attached is then issued alleging
violations of the embargo.

(Tab 9)

In many instances,

individuals request an informal settlement before OFAC issues a
prepenalty notice.
Typical penalty assessments for unauthorized travel range
from $5,000 to $7,500, but the majority of cases are settled in
amounts ranging from roughly $2,000 to $5,000, depending upon
the circumstances.

A number of prepenalty notice recipients,

however, request administrative hearings, often with the
assistance of public interest legal organizations.

previously mentioned, these cases are awaiting the funding and
selection of Administrative Law Judges.
I have appended a chart that depicts our Cuba travel
enforcement case openings and referrals for civil penalty
review, as well as the number of Cuba travel Prepenalty Notices
issued, for the period of January 1996 through June 2001.
10)

(Tab

As shown, 4,535 travel cases were opened for investigation;

1,690 cases were referred for civil penalty review; and
Prepenalty Notices were issued in 947 cases.

Again, many

individuals request informal settlements with OFAC without the
issuance of prepenalty notices.

III. Conclusion

At this time, OFAC devotes approximately 5% of its budget
and 7 full-time equivalent positions to the administration and
enforcement of restrictions involving travel to Cuba.

addition, Treasury's Office of the Gen~ral Counsel devotes
significant resources in support of these efforts.

OFAC remains

committed to carrying out the President's mandate that
enforcement of the Cuba embargo be enhanced under current law.
OFAC will continue to administer and enforce the restrictions on

travel-related transactions involving Cuba in a manner that is
timely, fair, and consistent with that law.

Thank you.

D E P \ H. T \1 E 1\ T

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FOR IMMEDIATE RELEASE
February 12,2002

Contact: Tasia Scolinos
(202)622-2960
Testimony of Juan C. Zarate
Deputy Assistant Secretary
Terrorism and Violent Crime

u.S. Department of the Treasury
House Financial Subcommittee
Oversight and Investigations
2:00 p.rn. February 12,2002
The United States House of Representatives
2167 Rayburn House Office Building

Chainnan Kelly and distinguished members of the House Financial Services
Subcommittee, pennit me to begin by thanking you for inviting me to testify today about the
measures the Treasury Department has taken to disrupt terrorist financing, the lessons we have
learned to date about patterns of financing and fundraising, and how the provisions of the
recently enacted USA PATRIOT Act (pATRIOT Act) are helping us in our mission. With me
today are three individuals who are assisting the Treasury Department in connection with the
U.S. government's efforts to investigate the financing of terrorism: John Varrone, Assistant
Commissioner, Office of Investigations, U.S. Customs Service; R. Richard Newcomb, Director
of the Office of Foreign Assets Control (OFAC); and James F. Sloan, Director of the Financial
Crimes Network (FinCEN). Thank you for having us here today to address you.
As you are aware, on September 24,2001, President Bush stated, "We will direct every
resource at our command to win the war against terrorists, every means of diplomacy, every tool
of intelligence, every instrument of law enforcement, every financial influence. We will starve
the terrorists of funding. n The President directed Secretary O'Neill to lead the nation's war
against the financing of global terrorism, and we have devoted our extensive resources and
expertise to fulfill this mandate. In our actions and in our words, the Treasury Department has
shown quite clearly that in this war, financial intennediaries and facilitators who infuse terrorist
organizations with money, materiel, and support must be held accountable along with those who
perpetrate terrorist acts.
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The Treasury Department owes this Committee, and Congress in general, a debt of
gratitude in helping us with the resources and authority to identify, disrupt, and dismantle
terrorist financial networks. Immediately after the horrific attacks of September 11 th, Congress
worked closely with the Department of the Treasury, along with the Department of Justice and
other agencies and departments, to make significant improvements in the law that allows us to
tackle the issue of terrorist financing in a more unified, aggressive manner. Of particular
importance to our counter-terrorist efforts, the PATRIOT Act clarifies the law enforcement and
intelligence communities authority to share financial information regarding terrorist
investigations. These provisions are already being utilized and are bearing fruit in disrupting
financing networks.
Before I address the specific issues raised in your invitation letter, allow me to share with
you the efforts the Treasury Department has taken to date, along with our sister departments and
agencies, to combat terrorist financing.
THE BAtTLE AGAINST TERRORIST FINANCING:

Treasury, in close partnership with the State Department, the Defense Department, the
Department of Justice, the Federal Bureau of Investigation, the intelligence community, and
many other parts of the federal government, has been dealing with terrorist financing on multiple
levels. We have concentrated much of our enforcement efforts and resources on identifying,
tracing, and blocking terrorist-related assets. In this endeavor, we have collected the financial
expertise, information, and authorities that are unique to the Treasury Department to attack
terrorist financing on all fronts. We have also engaged the world, in bilateral and multilateral
fora, to ensure international cooperation in our anti-terrorist campaign. Allow me to highlight
briefly the efforts the Treasury Department has taken to date to tackle the global problem of
terrorist financing.
TREASURY ENFORCEMENT ACTIONS

First, the Treasury Department chairs the inter-agency working group that has been
targeting and listing individuals and entities pursuant to the President's September 23,2001
Executive Order. In this inter-agency process, we have assembled experts and policymakers
from the Treasury Department, including the Office of Foreign Assets Control (OFAC), the
Department of Justice, the Department of State, the Federal Bureau of Investigation (FBI), the
intelligence community, and the White House. Through this process, the U.S. Government has
designated 168 individuals and entities as terrorist-related entities pursuant to the Executive
Order. Since September 11th, the United States and othel countries have frozen more than $104
million in terrorist-related assets. Since the attacks, the United States alone has blocked over $34
million. A portion of that amount has since been unblocked for the new Afghan Interim
Authority.
In this process, we have identified, among other entities, front companies, charities,
banks, and a hawala conglomerate that served as the financial support networks for al-Qaida and
other global terrorist groups. We have shut down the operations of these entities in the United
States and abroad.

Second, as part of the anti-terrorist financing strategy, we utilized the inter-agency
Foreign Terrorist Asset Tracking Center (FTAT), led by Treasury's OFAC, immediately after the
September 11 th attacks to serve as an analytical center for attacking the problem of terrorist
financing. Treasury's OFAC and its FTAT division have served not only to provide essential
analysis on particular targets and networks, but the center is a place where intelligence and law
enforcement agencies can share and analyze information for a common purpose. This interagency concentration on hunting the sources of terrorist financing complements the work being
done by the FBI's Financial Review Group, the Department of Defense and the intelligence
community to uncover terrorists. Though FTAT is still in its infancy, it continues to make a
significant impact on this cooperative and concentrated venture.
The process of identifying and investigating targets is ongoing, and we are currently
investigating other financial entities, businesses, groups, and persons for potential listing. We
are focusing on uncovering high-impact financial intermediaries that act as financial conduits
and facilitators for terrorist groups. Our ultimate goal is to use all the tools at our disposal to
disrupt vigorously terrorist financing in an effort to prevent the perpetration of further terrorist
attacks.
Third, on October 25,2001, Treasury created Operation Green Quest ("Green Quest''), a
new multi-agency financial enforcement initiative intended ''to augment existing counterterrorist efforts by bringing the full scope of the government's financial expertise to bear against
systems, individuals, and organizations that serve as sources of terrorist funding." Green Quest
is aimed at identifying, freezing and seizing the accounts and assets of terrorist organizations that
pose a threat to the United States and to all nations of the world. This task force is led by the
Customs Service, and includes the Internal Revenue Service, the Secret Service, the Bureau of
Alcohol Tobacco and Firearms (ATF), Treasury's Office of Foreign Asset Control (OFAC),
FinCEN, the Postal Inspection Service, the Federal Bureau of Investigation (FBI), the
Department of Justice, and the Naval Criminal Investigative Service (NCIS). Green Quest
brings together the extensive financial expertise of the Treasury Bureaus along with the
exceptional experience of our partner agencies and departments to focus on terrorist financing.
Green Quest has complemented the work ofOFAC and FTAT in identifying terrorist
networks at home and abroad, and it has served as an investigative ann in aid of blocking
actions. Green Quest's work has led to 11 arrests,3 indictments, the seizure of nearly $4
million, and bulk cash seizures-cash smuggling-of over $9 million. Green Quest, along with
the FBI and other government agencies, has also traveled abroad to follow leads, exploit
documents recovered, and to provide assistance to foreign: governments. In this effort, Green
Quest has made full use of its overseas Customs Attaches to investigate suspect networks and to
gather information for its own use and the use ofFTAT. The work of these financial experts is
just starting as they have opened numerous terrorist financing investigations and are following
leads on a daily basis. Green Quest's work, in combination with the work ofOFAC and FTAT,
serves as a seminal part of our enforcement efforts.
Finally, we have also been committed fully since the terrorist attacks to the FBI-led
investigation into the September 11 th mass murders. Immediately after the attacks, Treasury

assets were deployed to engage in the FBI efforts to bring the perpetrators and their financiers to
justice. Treasury agents and analysts from the Customs Service, IRS-Criminal Investigation
Division, U.S. Secret Service, the Bureau of Alcohol, Tobacco, and Firearms, and FinCEN
combined efforts with the FBI's Financial Review Group, bringing with them their unique
financial investigative capabilities, contacts in the financial sector, and expertise.
For example, the U.S. Secret Service was able to bring its experience in credit card and
identity fraud as well as its electronic crimes expertise to bear immediately on the investigation,
working with the Department of Justice in the following ways:
• Assisting in developing complete financial profiles of all suspects (living and deceased) in
the investigation;
• Identifying other suspects through current and historical financial investigations;
• Contributing to an intelligence assessment regarding possible future acts through analysis of
money movement, expenditures, and other financial data;
• Developing an analysis of current credit card usage by the suspects in the investigation; and
• Investigating more than 17,000 leads in support of the Department of Justice investigation.
As you can see, the U.S. Secret Service, along with the other Treasury Bureaus, has made
significant contributions in close coordination with the FBI to tracking the perpetrators and
facilitators of the September 11 th attacks.
INTERNATIONAL COOPERATION

Our efforts cannot be successful if prosecuted unilaterally and are ultimately doomed to
failure if we cannot obtain the cooperation of other nations. To date, all but a handful of
countries have expressed their support for the international fight against terrorist financing.
Currently, 149 countries and jurisdictions around the world can block terrorist assets. The U.S.
government is working with a number of countries with respect to technical assistance to
strengthen their capacity to freeze terrorist funds. Daily, we are in contact with foreign financial
officials and are engaged in bilateral and multilateral discussions regarding international
cooperation and action against terrorist activities and financing.
Treasury has engaged in numerous international fora, including the G7, 08, G20, the
Financial Action Task Force (FATF), the global network of Financial Intelligence Units (FIUs)
of which FinCEN is a key member, and the international financial institutions to combat terrorist
financing in a global, systematic way. Treasury has also worked with regional organizations
such as APEC and the Manila Framework Group to furth6r coordinate international efforts to
stop the financing of terrorism. In March, we, along with the State Department, will be
participating in an ASEAN Regional Forum and Pacific Island Forum regarding counterterrorism and financing issues.
A good example of the work of Treasury, State and Justice on this issue is in the role of
the United States in the FATF on Money Laundering, a thirty-one member organization. We
have directed the international effort to use the successful FATF to address the issue of terrorist
financing. The United States hosted an Extraordinary FATF Plenary session in October of 2001 ,

at which FATF members established 8 Special Recommendations on Terrorist Financing that
have quickly become the international standard on how countries can ensure that their financial
regimes are not being abused by terrorist financiers. Our delegation just returned from a Plenary
Session in Hong Kong in which, among other things, FATF is engaging all countries, including
non-members, in a self assessment process concerning measures against terrorist financing in
their respective financial regimes. This FATF effort, along with our continued engagement at a
bilateral and multilateral level, will ensure that we are marginalizing terrorist financiers by
securing the global financial system.
Also, on November 17, the G20 finance ministers and central bank governors met in
Ottawa, Canada and agreed that they would block terrorist assets in their respective countries,
and report publicly on precisely which terrorist groups each country has blocked and the amount
of actual monies blocked, if any. Meeting the next day, the governing body of the IMF
announced that the IMF will take similar steps.
This past weekend, the G7 group of industrial countries met in Ottawa and agreed to an
ambitious new work program. In partiCUlar, the G7 agreed to develop a mechanism to identify
jointly terrorists whose assets would be subject to freezing. This will require even closer
cooperation and commitment. We will also develop key principles regarding infonnation to be
shared, the procedures for sharing it, and the protection of sensitive infonnation.
Treasury also supports FinCEN's active involvement in the growing network of financial
intelligence networks or FIUs. The specialized agencies created by governments to fight money
laundering first met in 1995 at the Egmont-Arenberg Palace in Belgium to share experiences.
Now known as the Egmont Group, these FIUs meet annually to find ways to cooperate,
especially in the areas of infonnation exchange, training, and the sharing of expertise.
This global network of infonnation exchange and cooperation has been a valuable and
responsive avenue of terrorist-related information. FinCEN hosted a special meeting of the
Egmont Group on terrorist financing in October 2001 to support the unprecedented law
enforcement investigation in the wake of the events of September 11. During the special
meeting, the Egmont Group agreed to: (1) review existing national legislation to identify and
eliminate existing impediments to exchanging infonnation between FlUs, especially when such
infonnation concerns terrorist activity; (2) encourage national govenunents to make terrorist
financing a predicate offense to money laundering and to consider terrorist financing one fonn of
suspicious activity for which financial institutions should be on the look out; (3) pass requests for
information involving FIUs exclusively between FIUs rather than other government agencies; (4)
have FIUs playa greater role screening requests for information; and (5) to pool Egmont Group
resources, where appropriate, to conduct joint strategic studies of money laundering
vulnerabilities, including Hawala.
THE WORLDWIDE AL-BARAKAAT INVESTIGATION AND FREEZING OF ASSETS

The November 7, 2001 designation of Al-Barakaat as a terrorist-related financial entity is
a good example of how Treasury efforts both domestically and abroad, along with the fine work
of our inter-agency partners, can lead to results in this war on terrorist financing. Al-Barakaat is

a Somali-based hawaladar 1 operation, with locations in the United States and in 40 countries, that
was used to finance and support terrorists around the world. 2 OFAC, FinCEN, and intelligence
analysis, along with investigative work by the U.S. Customs Service, IRS-Criminal Investigation
Division, and the FBI, identified Al-Barakaat as a major financial operation that supported
terrorist organizations and was providing materiel, financial, and logistical support to Usatna bin
Laden and other terrorist groups.
Treasury and the FBI took decisive action to block assets and to take law enforcement
actions against Al-Barakaat. On November 7,2001, federal agents executed search warrants in
three cities across the country (Boston, Columbus, and Alexandria) and shut down eight AlBarakaat offices across the U.S., including locations in the following cities:
•
•
•
•
•

Boston, Massachusetts;
Columbus, Ohio;
Alexandria, Virginia;
Seattle, Washington; and
Minneapolis, Minnesota.

At the same time, OFAC was able to freeze approximately $1,100,00 domestically in AIBarakaat-related funds. As part of the Department's international outreach efforts, Treasury also
worked closely with the United Arab Emirates to enable the UAE to block Al-Barakaat's assets
at its financial center of operations in Dubai. Disruptions to Al-Barakaat's cash flows, resulting
from OFAC's designation actions and international cooperation, are estimated to be in excess of
$65 million from the United States alone. In addition, the combined work of OFAC, Operation
Green Quest, and law enforcement had led to additional leads in the Al-Barakaat investigation.
This is an example of what our combined efforts can accomplish when we join our
resources and our expertise to fight the common scourge of terrorist financing.
In sum, Treasury is tapping the full spectrum of our financial forensic expertise as well as
the experience and resources of other agencies and foreign governments to execute the
President's mission to detect, disrupt, and dismantle the financial infrastructure of terrorist
financing.
TERRORIST FINANCING TRENDS

Based on our combined efforts and our experience in this war against terrorist financing,
we are beginning to see more clearly the mosaic of terroriSt financing and the movement of
suspected terrorist funds. Terrorist groups differ from other criminal organizations or networks
because of the motive behind the crime. Unlike drug traffickers and organized crime groups that
primarily seek monetary gain, terrorist groups usually have non-financial goals: pUblicity; the

I Hawala is a type of alternative remittance system that is common in many parts of the world, including the
Middle East and Far East. A hawaladar is an entity that engages in hawala transactions.
2 Some individuals may have used AI-Barakaat as a legitimate means to transfer value between individuals in
different countries without passing through the formal international banking system.

dissemination of an ideology; the destruction of a society or regime; and simply sowing terror
and intimidation.
Terrorist financing, therefore, is different than classic money laundering. In cases of
money laundering, the proceeds of illicit activity are laundered or layered in ways to make the
proceeds appear legitimate, and the ultimate goal is usually the attainment of more money. With
terrorist financing, the source of funding or financing is often legitimate - as in the case of
charitable donations or profits from store·front businesses - and the ultimate goal is not
necessarily the attainment of more funds. The ultimate goal of terrorist financing is destruction.
Uncovering the sources and methods of terrorist financing is a complex endeavor. The
complexity stems in part from the sophistication of the individuals attempting to hide their
activities. It is also difficult to attribute certain types of activities or movement of money
directly to terrorism.
Nevertheless, there are similarities in the way international criminal enterprises and
terrorist organizations of global reach, like al-Qaida, move money or attempt to hide their
financial tracks. International terrorist groups need money to attract, support, and retain
adherents throughout the world as well as to secure the loyalty of other groups that share the
same goals. Thus, there is a need to devise schemes to raise, collect, and distribute money to
operatives preparing for attacks. This need to move money makes the terrorist funds vulnerable
to detection if we have the right safeguards in place.
SOURCES OF TERRORIST FUNDING

There are a plethora of terrorist funding sources, and the means used by particular
terrorist organizations varies from group to group. Some terrorist groups, such as those in
Europe, East Asia, and Latin America, rely on common criminal activities including extortion,
kidnapping, narcotics trafficking, counterfeiting, and fraud to support their heinous acts. Other
groups, such as those in the Middle East, rely on commercial enterprises, donations, and funds
skimmed from charitable organizations to not only fund their activities but also to move materiel
and personnel. Still other groups rely on state sponsors for funding.
The following is a basic summary of the sources of funding and the means used to move
money that we believe terrorist organizations and their supporters use to plan attacks and to
support their networks.

DONAnONS TO CHARITIES

Investigation and analysis by enforcement agencies have yielded infonnation indicating
that terrorist organizations sometimes utilize charities to facilitate funding and to funnel money.
Charitable donations to non-governmental organizations (NGOs) are commingled and then often
diverted or siphoned to groups or organizations that support terrorism. Fundraising may involve
community solicitation in the United States, Canada, Europe, and the Middle East or solicitations
directly to wealthy donors. Though these charities may be offering humanitarian services here or
abroad, funds raised by these various charities are sometimes diverted to terrorist causes. This

scheme is particularly troubling because of the perverse use of funds donated in good will to fuel
terrorist acts.
We have seen clear examples of this type of scheme in our efforts to identify and freeze
terrorist-related assets. In one instance, Hamas, a foreign terrorist organization, used the largest
U.S. Islamic charity, the Holy Land for Relief and Development (Holy Land), as a fundraising
source for its terrorist activities. Based on preliminary work of the FBI, we acted to designate
Holy Land on December 4,2001, pursuant to E.O. 12334 and to freeze the assets of Holy Land
because it was being used as a charitable front to raise and funnel money to Ramas. In another
example, on January 9,2002, the Treasury Department blocked the assets of two foreign
charities that were funneling funds to al-Qaida: the Afghan Support Committee and the Pakistan
and Afghanistan offices of the Revival of Islamic Heritage Society (RIHS).
The Treasury Department continues to scrutinize the activities of suspect charitable
organizations, both in North America and abroad that may have ties to terrorist organizations. In
addition, we will continue to work closely with our international partners to ensure that there are
monitoring and regulatory mechanisms in place for any such NGOs in their jurisdiction. As we
have said before, charities advertising to help refugees, widows and orphans should be doing just
that-not being used, wittingly or otherwise, to funnel money to terrorist organizations or to
indoctrinate impoverished populations with political-religious extremism and with it a potential
breeding ground for future terrorism.

COMPANIES AND BUSINESSES

Terrorist groups create front businesses and corporations, transfer funds between them,
and "layer" the financial transactions to avoid detection. We have designated several companies,
such as the Al-Barakaat companies, as fronts for terrorist organizations pursuant to the
President's Executive Order.
Seemingly legitimate businesses have been used by terrorists and their supporters as
"fronts" to disguise a variety of criminal activities. These businesses often can be convenience
stores, restaurants, or fast food stores. The businesses are usually acquired using funds furnished
by a single individual. This investor, in exchange for providing financing, receives a portion of
the profits from legitimate business operations until the investment is repaid. In some cases, it is
alleged that the "seed" money to acquire the businesses is provided by terrorist groups.
Small retail businesses that deal extensively in cash are ideal for laundering the proceeds
from a variety of criminal activities and provide retail outlets for stolen merchandise. They are
also ideal locations from which infonnal money remittors, like hawaldars, can transact business.
Regular fraud schemes frequently result in illegal profits and resulting criminal
investigations that ultimately uncover terrorist financing. One clear example of this occurred last
year, when an inter-agency task force, involving the FBI, the Bureau of Alcohol, Tobacco, and
Fireanns, the Immigration and Naturalization Service, and other law enforcement uncovered a
contraband cigarette trafficking and fraud scheme involving approximately a dozen Lebanese
individuals. In the course of investigating this scheme, the task force uncovered that some of the

participants were involved in a military procurement program designed to obtain and send dual
use items to Hizbollah operations in Lebannon.
We continue to monitor, analyze, and investigate the links between businesses, in the
United States and elsewhere, and terrorist groups. Using Bank Secrecy Act data and analysis
provided by FinCEN and other relevant data from various Treasury databases, we are able to
target suspicious business activities and anomalous transactions. This type of methodical
investigative and analytical work will continue to uncover networks of businesses used to
generate and funnel money to terrorist groups.

TRADE MISPRICING

International trade may be utilized by terrorist organizations to disguise funding sources.
Terrorist front companies might overvalue or undervalue merchandise, or they might use double
invoicing or might fabricate shipments altogether. The Treasury Department is looking into this
method of raising funds, but there has as yet been no direct link established to terrorist financing.
There are various Customs commercial databases that are capable of identifying trends
and anomalies in a particular company or industry. Specifically, the U.s. Customs Service has
developed a program known as the Numerically Integrated Profiling Systems (NIPS). NIPS
allows for the manipulation of trade data, BSA data, commerce data and I-94 passenger data.
Green Quest has applied NIPS in targeting commodities and companies that may be funneling
funds in support of terrorism. NIPS is a component of the Green Quest strategy to target tradebased money laundering or terrorist financing systems.
An example of this type of activity involved an analysis conducted by the U.S. Customs
Service Offices of Strategic Trade and Intelligence. This analysis involved the exportation of
honey to Middle Eastern countries. On October 12,2001, the Treasury Department named two
honey companies as fronts for terrorist funding to al-Qaida. The Customs Service analysis
identified anomalies in the packing weight, shipping weight and the reported value of the
shipped honey, which may be indicative of trade-based money laundering or terrorist financing.
4.

USE OF CREDIT CARDS

While I cannot comment on ongoing investigations into credit card usage, in connection
with several regulatory provisions of the USA PATRIOT Act, we are exploring whether whether
and what type of further regulatory action is warranted.

NARCOTIcsTRAFRCKmG

From our experience with terrorist groups, we know that some use narco-trafficking to
support and fuel their militant activities. We also know that the portion of Afghanistan that the
Taliban previously controlled produced at least three-quarters of poppy in the world and that alQaida members may have been involved in the heroin trade.

Green Quest and the Customs Service will continue to pursue narcotics investigations for any
terrorist related links to further disrupt the funding of any future acts of terrorism against the
United States.
METHODS OF MOVING MONEY

Terrorist groups, including al-Qaida, use different means of moving money to support
their respective organizations. This money movement around the world, which largely still relies
on traditional wire transfers, provides the footprints to where sleeper cells lie and allows us to
attempt to disrupt those fund flows. Like other criminal organizations, terrorist groups use
various means to move money. The following is a brief summary of ways in which money may
be moved to terrorist organizations.

USE OF CORRESPONDENT ACCOUNTS AND OFFSHORE SHELL BANKS

There is some evidence to indicate that those who support terrorist groups use shell banks
and companies and perhaps correspondent accounts to collect and move money. On November
7,2001, the Treasury Department listed Bank al-Taqwa, a Bahamian-based shell bank, as a
terrorist financing source. In 1997, it was reported that the $60 million collected annually for
Hamas was moved to accounts with Bank AI Taqwa. As of October 2000, Bank AI Taqwa
appeared to be providing a clandestine line of credit to a close associate of bin Laden and as of
late September 2001, bin Laden and his al-Qaida organization received financial assistance from
the chairman of that bank.
The Treasury Department continues to monitor the use of shell bank, shell companies,
and correspondent accounts to move illicit funds or funds directed for terrorist financing
purposes. Though Bank Secrecy Act (BSA) data, including Suspicious Activity Reports (SARs)
and Currency Transaction Reports (CTRs), reflects documented use of correspondent accounts
and shell entities for money laundering purposes, it is difficult, without knowing more about the
transactions, to link such suspicious activities to terrorism. Nevertheless, over the past twenty
months, the Treasury's Financial Crimes Enforcement Network (FinCEN) has enhanced its
support to law enforcement in the area of counter-terrorism by proactively analyzing Bank
Secrecy Act (BSA) data to help identify activities indicative of the movement of funds that may
be associated with terrorism. During this period, tactical information was developed and
supplied to law enforcement and others for action, as appropriate. There are ongoing
investigations of such companies and banks that I cannot discuss at this time. As part of our
ongoing efforts with respect to this threat, FinCEN issued an advisory in January 2002 relating to
the Republic of Nauru, pursuant to Section 313 of the USA PATRIOT Act, reminding banks of
their obligation to terminate any correspondent accounts provided to foreign shell banks.
The banking sector plays an important role in monitoring and policing correspondent
accounts and relationships with shell entities. Banks have actively reported information
regarding activity in correspondent accounts that has proven valuable to law enforcement. In
addition, some U.S. banks have voluntarily closed correspondent accounts with foreign-based
hanks when there have been suspicious wire transfers or "shell" entities involved. The reporting
and record keeping rules contained in the Bank Secrecy Act (''BSA''), administered by FinCEN,

create a paper trail to trace funds through the financial system. Information reported under
existing suspicious transaction-reporting rules for banks is currently being forwarded to law
enforcement on an expedited basis through the establishment of a toll-free hotline operated by
FinCEN.
The Treasury Department will continue to investigate the use of correspondent accounts
and shell entities for terrorist financing for blocking purposes as well as to providing assistance
to the Department of Justice.
2.

INFORMAL VALUE AND UNDERGROUND BANKING SYSTEMS

Informal systems of moving money may be used by al-Qaida and other terrorist groups
operating in Third World countries to support related organizations, sleeper cells, or supporters.
One system of transfer is called "hawala" which operates on trust, guaranteed anonymity, outside
traditional regulation and with virtually no paper trail. Operators engaged in this system deliver
money across borders without physically moving it-assured the account will be settled by money
or material goods returned in a future reverse transaction. Used widely in the Middle East and
South Asia for centuries, there are indications that the system is being exploited by Al-Qaida and
other terrorist organizations.
As mentioned above, on November 7, 2001, the Treasury Department blocked the assets
of the al-Barakaat network, which was a global money remitting company being used by Usama
bin Laden to support terrorist activities. Though the operations of Al-Barakaat in the United
States relied on traditional banking systems, internationally it operated as a hawala network that
allowed for funds to be funneled into Somalia through Dubai. This hawala network was not only
used to finance bin Laden's organization, but also to provide logistical support for his network.
Our actions put that hawala network out of business.
At this stage, FinCEN is examining non-traditional money remittance systems, such as
hawala, because funds have the potential of being moved anonymously. In an effort to broaden
its understanding of alternate remittance systems, FinCEN is forming an Alternate Remittance
Branch which will be responsible for the analysis of BSA data and other information to identify
mechanisms and systems used by criminal organizations to move operational funds in support of
domestic and international activity. Analysis will focus initially on Informal Value Transfer
Systems (NTS) such as hawala, hundi and other Asian and South American systems as a
potentially key but inadequately understood methodology for funds movement; development of
indicators of NTS use by criminal organizations to support law enforcement initiatives to
combat criminal activity; and identification of policy implications of NTS for law enforcement
and financial regulators. Analysis will expand to include identification of the methods by which
IVTS intersects with regulated funds transfer systems, and then identification of criminal funds
movement methodologies based entirely on the legitimate financial industry.
The branch will be responsible for monitoring law enforcement support activities
provided by FinCEN as a whole in order to identify trends and patterns in financial or fund
raising activities. Strategic products will include trend and pattern analysis; industry/technology
vulnerability analysis; methodology bulletins and advisories for law enforcement, regulators and

the financial industry; threat assessments; and policy papers. The branch will work jointly
andlor coordinate its analytic efforts with appropriate law enforcement and intelligence
organizations in the production of national threat assessments related to the funding of domestic
and international criminal activity.
3.

BULK CASH SMUGGLING

Law enforcement has always suspected that bulk cash smuggling is used by some
terrorist organizations to move large amounts of currency. In response to the September 11 th
events, Customs utilized an existing outbound currency operation, OPERATION OASIS, and
refocused its efforts to target twenty three identified nations involved in the laundering of money
for terrorist organizations. After September 11 th, Oasis was implemented at seven airports and
five courier hubs around the United States. Customs' success with Oasis has led to the
nationwide expansion of the operation.
To date, Customs Operation Oasis has seized $9,030,100. The Customs Service has
primary jurisdictional authority for enforcing those regulations requiring the reporting of the
international transportation of currency and monetary instruments in excess of $1 0,000 (Title 31
U.S.C. § 5316 et al.). The USA PATRIOT Act has enhanced the Customs Service's ability to
investigate terrorist related financial crimes by making inbound and outbound smuggling of bulk
cash a criminal offense (Title 31 U.S.C. § 5332(a». By criminalizing this activity, Congress has
recognized that bulk cash smuggling is an inherently more serious offense than simply failing to
file a Customs report.
In short, we will continue to pursue all the means and methods that terrorists and their
supporters could use to fund and funnel money intended for terrorist acts. Our vigilance will not
waiver in this mission.
TOOLS AVAILABLE UNDER TITLE III OF THE USA PATRIOT ACT TO COMBAT MONEY
LAUNDERING AND TERRORIST FINANCING

Title ill of the USA PATRIOT Act (pATRIOT Act) supplied Treasury with a host of
new and important weapons to both systematically eliminate known risks to our financial system
as well as to identify and nUllify new risks that develop. The tragic events of September 11 have
taught us three key lessons about financial crime: (1) although distinct in important respects, our
ability to combat terrorist financing is inextricably linked with our ability to combat money
laundering generally; (2) we must remain vigilant in our continuing efforts to identify the new
ways in which criminals and terrorists will attempt to usetOur own financial system to fuel their
enterprises; and (3) the ability of governmental entities to obtain and share financial infonnation
is critical to our success in identifying and bringing down terrorist networks. Title ill of the
PATRIOT Act reflects these lessons, providing us with the mechanisms, the authority, and the
initiative to take the steps necessary to protect our financial system.
As this Committee is aware, Treasury, with the full cooperation and assistance of the

various agencies and departments, continues the ambitious task of implementing the regulatory
provisions of Title ill under their tight deadlines. To utilize existing resources within the

government, we created interagency working groups chaired by Treasury to help develop, and in
some cases, draft the regulations. The cooperation and assistance that we have received has been
tremendous. Though the task is daunting, we accept the challenge. Today I repeat the pledge of
Deputy Secretary Dam that Treasury will work diligently to attempt to meet these deadlines,
while taking the time necessary to .ensure that educated and informed policy decisions are made
along the way. This is especially true for those provisions of the Act that support our financial
war on terrorism. This is a learning process for us. As we focus on each section to draft
regulations, we are better able to identify the vulnerabilities of our financial system and how best
to eliminate them.
I will briefly highlight some of the significant provisions of Title ill that form the
foundation of the regulatory side of Treasury's fresh approach to combating money laundering
and terrorist financing.
1.

Critical Information-Sharing Provisions

One challenge in the financial war on terrorism is to maximize the use of existing
information resources to identify the terrorist financing networks. Because different
governmental entities and financial institutions maintain important information, we must have
the ability to access that information and review it as a whole. Thus, some of the more important
provisions of the PATRIOT Act are those permitting greater information sharing among law
enforcement and other governmental entities. The information sharing provisions found in
section 358 provided an immediate impact in our financial war on terrorism. With this expanded
ability to access and share important financial information, law enforcement and the intelligence
community are working together to identify better the financing mechanisms ofterrorist
networks. Section 358 expanded Treasury's ability to share Bank Secrecy Act information with
the intelligence community, clarified that the Right to Financial Privacy Act does not preclude
the use of financial information to combat international terrorism, and gave law enforcement and
intelligence agencies access to credit reports when the inquiry relates to international terrorism.
Similarly, we will shortly issue regulations implementing section 314 of the Act, a
provision in which the Congress allowed for and encouraged both the sharing of information
among financial institutions as well as the sharing of information between law enforcement and
financial institutions. We are confident that the ability of financial institutions to share
information concerning suspected terrorists or money launderers will allow the financial
institutions-the ones who are uniquely positioned to identify risks early-to work together,
discuss their suspicions, and notify law enforcement of potential criminal activity at an early
stage. Moreover, while we are still developing our proposal for sharing information between law
enforcement and financial institutions, it is clear that open and developed channels of
communication are essential. Along with FinCEN's development of a highly secure computer
network under section 362, we look to improve the timing and efficiency of information sharing
to maximize our ability to identify and respond to threats to our financial system.
With this new information sharing authority, however, comes the responsibility of
ensuring that important privacy interests are not sacrificed. A fundamental principle of

Treasury's implementation strategy is to respect these privacy interests while achieving our goal
of eliminating risks of money laundering and terrorist financing.

The Systematic Elimination of Known or Unacceptable Risks

The approach of this Congress to money laundering is as bold as it is simple: identify
risky financial practices and accounts at the outset and deny them access to our financial system.
Correspondent accounts maintained in the U.S. by foreign banks, under certain circumstances,
form the channel through which illicit funds find their way into our system. The public record is
replete with evidence of their abuse in connection with money laundering. Thus, eliminating the
known risks associated with correspondent accounts was the genesis for several provisions of
Title m.
For example, Section 313's prohibition on U.S. financial institutions maintaining
correspondent accounts for foreign shell banks and section 312's requirement that financial
institutions apply enhanced due diligence when maintaining correspondent accounts for foreign
banks located in jurisdictions lacking sufficient anti-money laundering regimes both require
financial institutions to minimize the risks associated with correspondent accounts. Section 313
in particular is a bold step forward, sending a strong message about our commitment to cutting
off unregulated foreign shell banks. Treasury has already provided guidance to U.S. financial
institutions on how to comply with section 313. We will issue a final rule after we have
reviewed comments submitted. By the April deadline, Treasury intends to issue regulations
setting forth the due diligence procedures required under section 312.
Private banking accounts have likewise proven to present risks of abuse, such as in the
Salinas case. Under section 312, such accounts for foreign individuals, especially accounts
maintained for senior political figures or their family members, are subject to enhanced due
diligence procedures by financial institutions, including the identification of the source offunds.
Due diligence policies for private banking accounts will also be addressed in regulations under
section 312. Similarly, the GAO report on the activities of Raul Salinas described the danger of
concentration accounts in which clients' funds are commingled without linking the client to the
funds. Under section 325, Treasury and bank regulators are working to ascertain whether
regulations governing the use of concentration accounts are needed. Although we have not yet
seen the abuse of these accounts in our terrorist financing investigations, elimination of these
risks may be appropriate to ensure that they are not abused in the future.
This systematic approach to avoiding unreasonable risk is also embodied in two other
important provisions of Title ill: sections 326 and 352, which require customer identity
verification and anti-money laundering programs, respectively, for all financial institutions.
These provisions in particular will allow Treasury to close loopholes in our anti-money
laundering regime and make certain that as terrorists and money launderers move toward less
traditional financial institutions, they will not be able to avoid our regulatory controls. Treasury
is moving aggressively to implement both sections, paying particular attention to financial
institutions such as the insurance industry, the mutual fund industry, credit card companies and
others that are not currently subject to Bank Secrecy Act requirements. We intend to protect our
financial system by preventing migration to these and other unregulated industries. Through this

process in particular, however, we are carefully educating ourselves about the industries in order
to derive sensible regulations that accomplish our objectives without imposing undue or
unnecessary regulatory burdens.
Also, section 371 addressed the known risks associated with the smuggling of bulk cash
and currency by making it an offense under Title 31 not to declare amounts in excess of $1 0,000
to the Customs Service. With lead responsibility for ensuring the safety of our borders, and
primary authority for enforcing section 371, such provisions further aid the Customs Service in
its efforts to disrupt terrorism. As noted, this provision has already netted substantial seizures.

Authority to Identify and Respond to Specific Risks

Equally as important to a comprehensive anti-money laundering regime is the ability to
identify specific risks and take steps necessary to eliminate it. Various provisions in Title ill
help us to do just that. A cornerstone of the Bank Secrecy Act is our reliance on financial
institutions notifying us of suspicious activities. Title ill emphasizes the expansion of suspicious
activity reporting by directing Treasury develop regulations for securities brokers and dealers,
and authorizing such regulations for futures commission merchants, commodities trading
advisors, and commodity pool operators. This is not only consistent with Treasury's
implementation goal to eliminate regulatory arbitrage, but also provides law enforcement with an
increased capacity to identify threats. Similarly, section 365-a provision that Treasury
implemented four months ahead of its statutory deadline-provides Treasury and law
enforcement with access to currency reports filed by non-financial trades or businesses, a fonn
previously difficult to obtain in light of IRS confidentiality restrictions. Because non-financial
trades and businesses were under an existing obligation to file such reports with the IRS,
Treasury issued a regulation permitting the filing of a single fonn to satisfy both statutory
requirements.
The provision that best enables Treasury to respond to specific, identified threats is
section 311, which authorizes the Secretary of the Treasury to require financial institutions to
impose graduated, proportionate measures against a foreign jurisdiction, financial institution,
class of transaction, or account designated a primary money laundering concern. The special
measures range from increased record-keeping requirements to prohibiting certain types of
correspondent or payable through accounts. The statute requires Treasury to define certain key
terms in section 311 by regulation. Because some of those same definitions are incorporated in
section 312 of Title ill, Treasury intends to define such tenns in April in conjunction with the
regulation outlining the due diligence requirements of section 312. Given the need to define key
terms and the significance of naming a jurisdiction or financial institution a primary money
laundering concern, Treasury is proceeding cautiously. Care must be taken to assemble
sufficient evidence to support the designation and to make sure that the designation will not
actually undennine our overall anti-money laundering or anti-terrorist financing strategy.
Furthermore, the Secretary of the Treasury is required to consult with both the Attorney General
and the Secretary of State prior to making any designation. We are now working on internal
procedures for making designations that will ensure compliance with the consultation
requirements while still enabling us to respond quickly to identified threats.

Finally, under section 319(b), the Secretary of the Treasury has the authority to issue
administrative subpoenas to foreign banks maintaining correspondent accounts in the u.s. for
documents related to those accounts, regardless of whether the documents are located in the U.S.
Treasury has already issued interim guidance and a proposed rule covering the record-keeping
portion of this provision. Given the potential impact of this provision on existing fonns of
information sharing between the U.S. and foreign governments, such as mutual legal assistance
treaties, Treasury is looking to create internal procedures for exercising that authority with due
regard for existing practices.
IDENTIFIED LOOPHOLES IN THE ANTI-TERRORIST FiNANCING OR
ANTI-MONEY LAUNDERING REGIME

As we continue to expand our efforts to undermine the financial underpinnings of

terrorism, we learn more about the vulnerabilities of our system. Through the process of
analyzing the applicability of the various provisions of Title ill to the wide range of financial
institutions and drafting implementing regulations, we learn more about how our regulatory
regime can be used to eliminate those vulnerabilities. To this point, our focus has been, first and
foremost, to locate and seize terrorist assets in order to prevent any further attacks. With regard
to the PATRIOT Act, we have spent our time doing everything we can to meet the aggressive
implementation deadlines. As Deputy Secretary Dam noted two weeks ago, we have not yet
identified a need for additional legislation and, correspondingly, we have not identified any
obvious loopholes in the forthcoming regulatory regime. But I stress that we are only at the
beginning of the process of implementing regulations; thus, we may discover loopholes as we
work through the issues.
We are especially aware of the need to carefully examine the proposed regulatory regime
being imposed on those entities not previously subject to Bank Secrecy Act regulation. These
include, for example, the insurance industry and the commodity futures industry. At this
moment, we are working with industry representatives to understand how they operate, how they
can best be regulated under the Bank Secrecy Act, and whether we have the necessary statutory
authority.
Also, as I discussed previously, we are concerned with the ability of alternative
remittance systems or infonnal money transfer systems to avoid regulation. Section 359 of the
Act requests that Treasury notify Congress in October 2002 of the need for additional legislation.
With FinCEN's initiatives in this area, Treasury will be well positioned to offer suggestions.
We look forward to continuing to work with this Committee as issues develop.
CONCLUSION

I was heartened to read the words of Committee Chairman Michael G. Oxley regarding
this hearing when he stated the following: "Make no mistake -- we are in this battle against
terrorist financing for the long haul." Indeed, as President Bush has stated on numerous
occasions, this is a long-term war that will require us to uproot the networks of terror. As part of
this war, the battle against terrorist financing is a long-term mission for the Treasury Department
and the entire U.S. government. We must work tirelessly as a government to choke the flow of

funds so as to prevent further acts of terror such as those we witnessed on September 11 th. Ours
is a long-term campaign to save lives by denying the terrorists the funds they need to train, to
plan, to travel, to hide, and to attack. By denying these evil doers dollars and yen, we are
depriving them of bullets and bombs.
This is a war we must win, with every tool at our disposal, because there is no other
alternative. I thank you for your support. I will be happy to answer any questions you may have.

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February 13, 2002

CONTACT;BETSY HOLAHAN
202-622-2960

Under Secretary of the Treasury Peter R.. Fisher
Bloomberg News' Bonds Roundtable 2002
New York, NY
"Debt Management: Regular and Predictable in a Changing World"

The Treasury's commitment to "regular and predictable" debt management
practices should be understood as a means to an end and not an end in itself The
preeminent objective of the Treasury's debt management is to achieve the lowest
borrowing cost, over time, to meet the government's financing needs. A schedule of
regular and predictable auction dates for particular maturities is one way we seek to
achieve the lowest borrowing costs over time. But in order to serve this ultimate
objective in a constantly changing world, the Treasury's debt management practices must
also change and adapt.
Secretary O'Neill likes to remind us that the real goal is to make excellence a
habit and to do this we must strive for continuous improvement. Applied to our debt
management, this principle drives us to examine all aspects of the issuance of Treasury
securities, from savings bonds to the long bond.
Our decision last fall to suspend auctions of the 30-year bond is only the most
recent big change made to debt management, as I explained in our quarterly refunding
announcement in October. The previous administration also made significant changes
with the introduction of buyback operations and the launch of inflation-indexed
securities. They took the step of introducing these new debt management tools to
improve the efficiency with which Treasury finances the needs of the Federal
government.
Regular and Predictable

Since the mid-1970s, the Treasury has self-consciously adhered to the principle of
a regular and predictable schedule of auction dates for specific maturities. We do not
attempt to ''time the market" - as some countries did and some still do - by holding
"snap" auctions for a given maturity when its yield appears particularly low. Instead, we
provide predictable auction dates for each maturity.
PO-IOIO
For Jnw.s releases, speeches, public schedules and tdJicial biographies, call our 24-1wur flU line at (202) 622-2040
·U.S. Government Printing OfIice: 1998 - 619-559

This provides certainty for investors as to the availability of our securities and,
over time, helps to smooth out the distribution of our overall borrowing costs. This is
why, for instance, we continue issuing bills in late April and May even when we are flush
with cash from tax revenues. While the Treasury may not need the cash, by holding
auctions every week we keep an even, steady presence in the capital markets.
We have used our regular quarterly refunding announcements to provide the
details of any changes to our debt management, providing a substantial lead time for any
specific changes to the instruments we are issuing and also as a means for us to infonn
the markets of any issues we are considering over the medium tenn. In addition, we
provide the market with advance announcements of our anticipated borrowing needs and
the timing of our bill and note auctions.
But the Treasury's commitment to a ''regular and predictable" schedule of
auctions has never meant that debt management is static. Our auction sizes are constantly
shifting, with seasonal changes in our cash flow, structural changes in tax policy and
shifts in the level of government spending, and cyclical changes in the economy. In
practice, we absorb a great deal of the variability in our revenues with our cash balance in
order to smooth out the variance in our month to month borrowing. The Treasury's cash
balance can shift by $30 billion in a day. It has routinely been the case that the very best
forecasts of our annual borrowing needs - both public and private - are routinely offby
roughly $70 billion. As a result, we must build into our debt management strategy the
flexibility to deal with outcomes that do not match our expectations.
More importantly, the capital markets in which we operate and the technology
which we use are constantly changing. Just as financial intennediaries are constantly
adapting to meet customer needs and serve shareholder interests, we - at the Treasury are engaged in a process of continuous improvement and adaptation in order to achieve
the lowest borrowing costs for the American taxpayer.
Over the last three decades this process of adaptation has resulted in the
introduction, and the withdrawal, of numerous securities including: the fifty-two week
bill, the three-year note, the four-year note, the five-year inflation-indexed note, the
seven-year note, the twenty-year bond, the thirty-year bond, the thirty-year callable bond,
the thirty-year inflation-indexed bond, and foreign targeted securities.
More recently, the Treasury has made a number of changes that remain in place
today, including: the move to single price auctions, the introduction of the ten-year
inflation-indexed note, debt buybacks, regular re-openings, and our new four-week bills.
Most significant among all these changes, to my mind, are buybacks and inflationindexed securities.

Debt Buybacks

When the Treasury department introduced the debt buyback program, thenSecretary Summers outlined three main purposes for the program: enhancing the liquidity
of benchmark securities; preventing an increase in the average maturity of the debt
outstanding; and to make more effective use of cash balances at certain times of the year.
Treasury settled into a regular pattern of two-buyback operations per month that persisted
through last December.
In the quarterly refunding announcement made in October of last year, we
announced that we would modify the buyback program beginning in this quarter to
reflect the altered budget outlook for this fiscal year. Specifically, the schedule was
changed so that announcements of buyback operations coincide with the quarterly
refunding process. Our decisions to conduct buyback operations will be based on three
factors: first, our projections of the federal government's annual, unified surplus or deficit
position; second, our projections of that three-month period's cash position; and third, our
analysis of how best to minimize borrowing costs over time. Consistent with this
approach, we announced at the end of January that we will conduct three buyback
operations in April in order to lower high seasonal cash balance at that time.
Inflation Indexed Securities

The boldest initiative of Treasury's debt management in recent years was the
introduction of inflation-indexed securities in 1997. These instruments were designed at
a time when a rising volume of debt was presumed to be the norm, and it was in
Treasury's interest to provide a new product that could expand our investor base by
providing inflation protection.
Even in their brief history, they have undergone a number of changes. Today we
are issuing only a ten-year inflation-indexed security, and we are looking at ways to
develop the market for this security. It may be that we at the Treasury and you in the
investment community have to work at little harder to make these instruments live up to
their potential. As a completely different asset class, inflation-indexed securities present
an opportunity for us to diversify our portfolio of debt instruments, and an opportunity
for investors to take advantage of both inflation and deflation protection. The challenge
for both of us is to see how we can enhance the development of this market.
Both dealers and the Treasury's Borrowing Advisory Committee have suggested
that there may be ways to enhance the Inflation Indexed program's appeal, including
more aggressive marketing to pension consultants and retail investors, more frequent
auctions, a shorter when-issued trading period, and different issuance sizes and/or
calendars.

At our most recent quarterly refunding, Assistant Secretary Brian Roseboro
invited public suggestions on how we can help develop the inflation-indexed market. We
look forward to hearing as many ideas as possible.
We also invited suggestions and ideas from the public on our current reopening
policy and on changes to net long position reporting rule. This latter request was made in
service to our goal of faster auction processing, which is the key to widening the appeal
of direct auction participation - something I hope very much will also help us lower
borrowing costs over time.
It is in pursuit of this goal - the lowest cost of funding over time for the American

taxpayer - that we are constantly pushing forward and searching for new and better ways
to finance the government's operations. We believe that a regular and predictable
schedule is an important tool that has demonstrated its value over the years, and it will
remain our standard as we continue to strive to continuously improve our debt
management practices in a constantly changing world.

To comment on the issues raised by Under Secretary Fisher, email Treasury
Department's Office ofMarket Finance at debt.management@do.treas.gov.
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February 13, 2002

Contact Tasia Scolinos
(202)-622-2960.

TESTIMONY BEFORE THE UNITED STATES SENATE
COMMITTEE ON GOVERNMENTAL AFFAIRS
BY TIMOTHY SKUD
ACTING DEPUTY ASSISTANT SECRETARY
REGULATORY~TAJUFFANDTRADEENFORCEMENT

U.S. DEPARTMENT OF TREASURY

Mr. Chairman, members of the Committee, thank you for inviting me to speak about the
role of the Department of the Treasury and its bureau, the U.S. Customs Service, in enforcing
current sanctions on diamonds, and our possible role in enforcing an international certification
system for trade in rough diamonds.
The role of diamonds in conflicts in Angola and Sierra Leone has been well documented.
More broadly, as a precious commodity, diamonds are often used in trafficking networks rwming
parallel to legitimate international trade channels and offer criminals opportunities to conceal
their financial and organizational relationships. Diamonds can provide a lucrative means of
funding an array of transnational criminal activities. They can be used in money laundering,
anns trafficking, and, potentially, international terrorism. Techniques for illicit trade in
diamonds include physical concealment, mis-description, and undervaluation. Customs' recently
initiated Operation GreenQuest aims to identify and investigate suspected financial or other
crimes, which may utilize diamonds as a means of concealment.
Current Import Prohibitions on Conflict Diamonds
The Customs Service currently enforces prohibitions on importation of diamonds from
three countries: Angola, Sierra Leone, and Liberia. These prohibitions are in place pursuant to
three Executive orders that take into account United Nations Security Council Resolutions.
On September 26, 1993, the President issued Executive Order 12865, declaring a national
emergency in response to military and other actions by the National Union for the Total
Independence of Angola (UNITA) and imposing sanctions on UNITA. In Executive Order
13098 of August 19, 1998, the President imposed additional sanctions on UNITA including
prohibiting the direct or indirect importation into the United States of all diamonds exported
from Angola that are not controlled through the certificate of origin regime of the Angolan
Government of Unity and National Reconciliation.
PO-lOll

For J1ress reietues, speeches, public schedules tmd oJficitzl biographies, mil our 24-hourfax line at (202) 622-2040
·U.S. Government Printing Office: 1998 - 619-559

In Executive Order 13194 of January 18,2001, the President declared a national
emergency in response to the actions of the insurgent Revolutionary United Front (RUF) in
Sierra Leone and prohibited the importation into the United States of rough diamonds from
Sierra Leone that have not been controlled by the Government of Sierra Leone through its
certificate of origin regime. The order's stated purpose was to ensure that the direct or indirect
importation into the United States of rough diamonds from Sierra Leone would not contribute
financial support to the RUF, whose illicit trade in conflict diamonds has fueled the civil war in
Sierra Leone by funding the rebels' aggressive actions and procurement of weapons.

On May 22, 2001, the President issued Executive Order 13213 to expand the scope ofthe
national emergency declared in Executive Order 13194 in order to respond, among other things,
to the Government of Liberia's complicity in the RUF's illicit trade in conflict diamonds through
Liberia. This order prohibits the direct or indirect importation into the United States of all rough
diamonds from Liberia, whether or not the diamonds originated in Liberia.
The regulations for Angola can be found in 31 CFR Part 590; interim final regulations for
Sierra Leone and Liberia were published in the Federal Register on February 6, 2002. Customs
has in all instances been enforcing the import bans as of the effective dates of the underlying
Executive orders.
Customs Enforcement
Consistent with the Executive orders and implementing regulations, Customs requires
that authorized imports of rough diamonds from Sierra Leone and all diamonds from Angola be
accompanied by legitimate government certificates or other documents demonstrating to the
satisfaction of Customs that the diamonds were legally exported from the relevant country.
Under Customs regulations, importers must present appropriate documentation to Customs upon
demand and have the responsibility to keep certificates of origin on file for 5 years after
importation.
In addition to targeted examinations at entry, Customs uses risk management techniques
as a means of identifying those imports that represent the greatest risk of non-compliance and to
focus resources in those areas. This may include post-importation audits to review importers'
overall trade, identify anomalies, and verify claims made at entry. In the case of diamonds,
verification of claims can include verification with exporting authorities of certification validity.
If any intelligence is developed internally, or obtained from outside sources, indicating certain
importers are importing conflict diamonds, Customs can seize shipments or develop leads by
initiating fonnal investigations. Customs' Strategic Investigations Division programs, such as
Operation EXODUS and the newly-initiated SHIELD AMERICA program, aggressively
inVestigate, interdict and disrupt international arms trafficking networks, and are relevant to
diamonds trade and smuggling.
There have been two recent interdictions of diamond imports based on the failure to
present proper export certificates. On December 31, 2001, Customs inspectors at BaltimoreWashington International Airport seized 37 diamonds from a passenger who had arrived on an
international flight. A search of the passenger's luggage revealed documents that led the officers
to believe the passenger may be carrying diamonds.

When the officers asked ifhe was carrying diamonds, the passenger removed a package
from his pocket and the diamonds were detained for formal Customs entry. The Customs entry
was filed, but there was no accompanying certificate from the Republic of Sierra Leone and the
diamonds were seized pursuant to Executive Order 13194.
On February 4,2002, an arriving international passenger declared $12,350 in diamonds
to Customs officers at Baltimore-Washington International Airport. Upon review of the
Certificate of Origin, the Customs inspectors noticed several inconsistencies in the document that
led them to believe the certificate was fraudulent. The stones and the accompanying documents
are currently under detention by Customs.
Kimberley Process
In January of200t, the United Nations General Assembly passed a resolution (55/56)
which, inter alia, encourages member states to devise "effective and pragmatic measures to
address the problem of conflict diamonds" including "the creation and implementation of a
simple and workable international certification scheme for rough diamonds." Over thirty
countries have engaged in discussions to develop such a scheme through the so-called Kimberley
process. The Department of State has led U.S. participation.
Six international meetings on the Kimberley process were held in 2001; another meeting
is scheduled to take place in Canada in March 2002 to continue work on the draft document and
surrounding issues. The objective of the Kimberley certification scheme is to assist in tracking
legitimate diamond trade in order to try to isolate illegal shipments and persons involved in the
trade of illicit conflict diamonds, thus making their infiltration of the legitimate trade more
difficult.
The Treasury Department and the Customs Service have participated in interagency and
international discussions of the draft Kimberley document and have shared information with
participating countries on what we believe are the most modem and effective customs analysis
and interdiction techniques for imports.
The proposed Kimberley certification scheme would require that, at each point of
exportation, every shipment of rough diamonds be accompanied by a certificate, identifying the
shipment as made in a manner consistent with the Kimberley procedures. The exporting country
would validate such a certificate. The importing country would require possession of a valid
certificate at importation.
The U.S. Customs Service would enforce any import regulations concerning Kimberley
certificates as it does under the existing sanctions with respect to shipments from Sierra Leone,
Angola and Liberia. In its enforcement, Customs would use modem risk-assessment techniques,
intelligence, and investigations, as the most effective tools for interdicting diamonds not shipped
in accordance with Kimberley procedures.
While the United States is a significant consumer of polished diamonds, it is a small
importer of rough diamonds, which are primarily processed in Europe, South Africa, Israel and
elsewhere.
3

The United States accounts for only four percent of global imports of rough diamonds,
but 45 percent of global imports of polished diamonds. An effective global regime for excluding
conflict diamonds from legitimate trade will need to rely on effective trade monitoring
mechanisms in countries of first extraction, and in primary importing countries, and on effective
international cooperation to prevent smuggling. Under the Kimberley process, an attempt has
been made to involve the traders and strike a balance between trader vigilance and government
involvement. A system that relies strictly on government enforcement and excludes the industry
.- which is the most knowledgeable about the trade -- would be far less effective.
In summary, we support the objectives of the Kimberley process, and stand ready to
assist in the enforcement of import·related measures designed to address this serious issue. In
addition, Treasury has actively participated in the Administration's dialogue with the House
concerning H.R. 2722. We believe this bill complements the efforts of the Administration to
combat trade in conflict diamonds under the Executive orders and through the Kimberley
process. It would reinforce U.S. leadership on this issue, while respecting our international
obligations. It also envisages enforcement in a manner consistent with Customs risk
management techniques.
Thank you for the opportunity to present Treasury's views. I would be happy to answer any
questions.

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u.s. International Reserve Position

02/13/02

The Treasury Depattment today released US. reserve assets data for the week ending February 8, 2002. As indicated in
this table, U.s. reserve assets totaled $67,856 million on that date, compared to $68,249 million at the end of the prior
week.

us mllOons)

(In

I. Official U.S. Reserve Assets

Februaa 1. 2002

TOTAL
1. Foreign Cul'ntncy Reserves 1
L

Securities

Euro
5,358

Yen
10,270

Of which, issuer hNdqUB1fel8d in the U.S.

b. Total deposits with:
".1. Other cennl banks and SIS
b.lI. BIllies ltudquarlenld III ",. U.S.
b.ii. Of Which, banks located abIoad
".01. Banlcs headqu.""" 0UIsIde ",. U.S.
b.iii. Of which, banks located in the U.S.

Februaa 81 2002
67,856

68,249

9,030

3,962

TOTAL
15,628
0

12,992
0
0
0
0

Yen
Euro
5,388 10,113

TOTAL
15,502
(J

9,079

3,901

12,980
0
0
(J
(l

!.IMF Reserve Position 2

17,828

17,646

I. Spacial Drawing Rights (SORa) 2

10,757

10,682

'. Gold Stock S

11,045

•Other Reserve Aneta

11 Includes holdings of the Treasury's Exchange Stabilization Fund (ESF) and the Federal Reserve's System Open Market Account
(SOMA), valued at amant market exchange rates. Foreign Qlrrency holdings listed as S8Q1rities reflect marked-kHnarket values, and
tIeposits reflect carrying values.

II The Items, ~. IMF Reserve Position- and -a. Special Drawing Rights (SDRs),- are . . . on data provided by the IMF and are valued In
klllarterms at the official SDRIdoliar exchange rate for the reporting date. The entries in the table above for latest week (shown In Italics)
vIIect any necessary adjustments, including revaluation, by the U.S. Treasury to the prior week's IMF data. The IMF data for the prior week
uefinaJ.
~

GoIcI stock is valued monthly at $42.2222 per fine troy ounce. Values shown are as of December 31. 2001.

lIS $11,045 million.

'0-1012

The November 30, 2001 value

D I', P \ H. T \ I E '\ T

lREASURY

() F

TilE

T REA SUR Y

NEWS

omCE OFPUBUC AFFAIRS -1500 PINNSYLVANIAAVENUE, N.W. - WASHINGTON, D.C•• %0220. (20%) 62%.2960

EMBARGOED UNTIL 10:00 A.M.
February 13, 2002

Contact: Tara Bradshaw
(202) 622-2960

JOINT TESTIMONY OF MARK McCLELLAN, MEMBER,
COUNCIL OF ECONOMIC ADVISERS
AND
MARK WEINBERGER, ASSISTANT SECRETARY OF THE TREASURY (TAX
POLICy),
UNlTED STATES DEPARTMENT OF THE TREASURY
BEFORE THE HOUSE WAYS AND MEANS COMMITTEE ON
HEALTH INSURANCE TAX CREDITS

Mr. Chainnan, Congressman Rangel, and distinguished Members of the Committee, we
appreciate the opportunity to discuss with you today the President's proposals for tax credits for
the purchase of health insurance.
Mr. Chainnan, the Administration looks forward to working with Congress, in a
bipartisan manner, to address the pressing need to expand access to health insurance for
uninsured Americans. Almost 40 million Americans are reported to go without health insurance
coverage for an entire year, and as many as 20 million more are without health insurance
coverage during some part of the year. In addition, millions more Americans are struggling to
afford rising health insurance premiums, with little help from the government. The scope and
persistence of this issue highlights the importance of our making progress this year.
The President'S proposals to introduce health credits for the purchase of health insurance
will enable millions of Americans to purchase private health insurance, improving the
functioning of private markets, empowering patients to make infonned decisions, and increasing
utilization of high quality health care. This proposal is part of a broader vision for promoting
health care quality and access by developing flexible, market-based approaches to providing
patient-centered health care coverage for all Americans.
Health insurance credits use the infrastructure of the tax system to expand access to
health insurance. They are a common element of proposals from both Republicans and
Democrats. Many of the distinguished Members of this Committee have supported such
proposals and sponsored such legislation in prior sessions of Congress. We must seek to bridge
partisan divides to come to agreement on this key issue which enjoys such wide bipartisan
support.
PO-lOl3
ForJwess releases, speeches, public sdu!dules and tJ/icial biographies, call OUT 24-hourfa line at (202) 622·2040

·u.s. Government Printing Office: 1998· 619-559

-2-

To help do so, the President has proposed health insurance credits that build on the best
features of previous proposals, and that include new innovations to address past criticisms of tax
credit proposals. And the President's budget backs up his agenda for using health insurance
credits to improve access to good coverage with over $100 billion in funding. We hope that
these steps forward will provide a foundation for decisive action in Congress this year to address
the serious problem of health care affordability and the uninsured.
The Problem of the Uninsured
In 2000, 14 percent of Americans reported that they were uninsured for the entire year.
They may go without effective health care, or may rely on inefficient episodic care at hospital
emergency rooms. As a result, our health system spends more than it should on complications of
diseases that could have been prevented and on inefficient ways of delivering health care. Even
worse, the absence of insurance makes it harder for Americans to work with health care
professionals to stay healthy.

The uninsured population does not consist only of the poor or the unemployed. In 1999,
81 percent of the uninsured population were in families with at least one full-time worker.
Furthennore, while 36 percent of the uninsured had incomes below the poverty line, a large
fraction, 29 percent, had incomes between 100 and 200 percent of poverty. Nearly three-quarters
of the uninsured below 200 percent of poverty are adults, many of whom do not live in
households with children.
Insurance coverage differs significantly by race and ethnicity. In 2000, 32 percent of
Hispanics were uninsured, compared to 20 percent of blacks and 19 percent of Asians. In
contrast,just 10 percent of whites were uninsured.
The benefits of increasing participation in health insurance markets extend beyond the
ability to have more control over their health care and health realized by the individuals
themselves. First, although some people without insurance could receive subsidized basic health
care through emergency rooms, it is a very expensive way to provide care, and it is either paid at
governmental expense or is uncompensated care that imposes higher costs on others. Second,
improved public health through expanded health insurance coverage is important to control the
spread of disease. Third, as discussed below, greater participation in insurance markets allows
better pooling of health risks - the insurance markets themselves work better.
Problems in Health Insurance Markets

The major goal of health insurance is to allow individuals to join together to reduce their
risk of high medical expenses by sharing that risk. Individuals trade the uncertainty of very
unpredictable health care costs for the greater certainty of a known premium and protection from
very high medical expenses. An important element of insurance is thus the "pooling" of risk people sign up for insurance before they know how much they will spend on health care, and
then the premiums of those who have low expenses help subsidize spending on those with high
expenses.

-3Another important goal of health insurance is to make sure that Americans have access to
the most innovative, high-value health care available. The American health care system leads
the world in Nobel prizes and in the development of new drugs, devices, and other treatments to
prevent and cure illnesses. To make sure these impressive medical breakthroughs translate into
good care, health care coverage must be innovative as well. One need look no further than the
lack of prescription drug coverage in Medicare to understand the consequences of out-of-date
health care coverage. In the years ahead, far more breakthroughs are possible - such as
customized treatments based on a clear Wlderstanding of an individual's genetic makeup, and
specialized "disease management" programs that rely on the Internet and other modern
telecommunications technologies that allow patients with chronic illnesses not only to stay out of
the hospital, but also out of the doctors office. Innovative health care coverage is essential for
creating an environment for medical practice that encourages innovation, value, and continuous
improvement in health care.
Several problems can interfere with the ability of insurance markets to achieve these
goals. A key problem is lack of choice and competition. As the President has said, our health
care system works best when it is centered on helping patients work with health care
professionals to decide the best possible treatments. To give control to patients, Americans need
the opportunity to choose the health care coverage that is best for them. Without good choices,
patients do not have the power to make sure that they are getting the best value from the health
care system for their own needs. Instead, government or health plan bureaucrats effectively
make decisions for them about what is covered, how their care is reimbursed, and how
treatments are provided. In other cOWltries, this has led to queues for treatments, poor quality,
and lagging availability of innovative care. Our country has chosen another path: private sector
health care based on trust in patients and their physicians. This path rewards innovation in
delivering the best possible health care. But the tremendous potential of our health care system
is threatened when patients do not have choices about how to get health care coverage. For this
reason, the President strongly believes that we must take action to improve the health care
coverage options available to Americans
A second problem is adverse selection. If only individuals whose health insurance
expenditures are likely to be high sign up for insurance, then the pooling of risk that is the key to
insurance is undermined. Just as individuals with higher expenses want more insurance,
insurance companies want customers with lower expenses, and may design their pl~ to appeal
to those with low risk.
Health insurance credits can help solve these problems in health insurance markets by
making more coverage options affordable, increasing participation, and reducing adverse
selection. Greater affordability and participation will encourage competition to provide coverage
that delivers high-value, innovative care. Thus, well-designed health insurance credits reinforce
the best features of our private, highly innovative health care system.
In the remainder of our testimony, we discuss the critical design issues in more detail.
Design issues include the mechanics of how people actually use the credits to get assistance with
health insurance purchases. To work effectively, especially for families with modest means,
credits must be refundable, advanceable, and nonreconcilable.

-4-

• Refundability means that the value of the credit does not depend on taxes owed; even persons
who owe no taxes can still receive its full value.
• Advanceability means that those eligible for the credit have the option of using it when they
are actually purchasing insurance, to reduce their monthly premium payments, rather than
having to wait until they file their tax return at the end of the year.
• Nonreconcilability means that eligible persons do not have to wait until they know their
actual income at the end of the year before they know exactly how much assistance they are
eligible to receive. Rather, they can be confident that - as long as they are not committing
fraud - they are entitled to the full value of an advanceable credit.
Health insurance credits are not the only promising direction for a health care policy that
helps patients get high-quality, innovative care. There is no single approach that can work with
the best features of all of our health care institutions to help ensure that our health care system
remains the best in the world. Given the need for a broad approach to this problem, the President
supports both an immediate temporary health insurance tax credit for displaced workers, as
contained in the economic security package, and a permanent new health insurance tax credit to
expand health insurance coverage for others that is not dependent on employment status. The
President's Budget also contains a number of other initiatives designed to expand health
insurance coverage. These include: (i) an above-the-line deduction for the purchase oflongterm care insurance; (ii) expanded flexibility of health flexible spending arrangements; (iii)
reform and permanent extension of Archer Medical Savings Accounts, to permit Americans to
set up health accounts to help them meet the out-of-pocket payments required in many health
plans that do not restrict choices of doctors and treatments; and (iv) an additional personal
exemption for home caretakers of family members.
These proposals are designed to target a diverse group of people while improving the
functioning of insurance markets. In addition, as the President outlined in an address on his
health care agenda on Monday, the President's budget includes many other proposals to give all
Americans access to high-quality, affordable options for health care coverage. Together, these
proposals will provide health security and additional health insurance coverage for millions of
Americans, while preserving the best features of our highly innovative health care system.
Permanent Health Insurance Credit for Americans Who Do Not Have Employer-Provided
Coverage

Current law provides a number of tax incentives fQr individuals to obtain health insurance
coverage. Employer-provided health insurance and reimbursements for medical care are
generally excluded from gross income for income tax pwposes and from wages for employment
tax purposes. Active employees participating in a cafeteria plan may pay their employee share of
premiums and other medical care expenses on the same pre-tax basis. In addition, for selfemployed individuals who are not eligible for subsidized employer coverage, 70 percent of
health insurance premiums are deductible for 2002, and 100 percent are deductible for 2003 and
thereafter.
~

-5-

Proposal
However, as noted above, millions of Americans still are without health insurance
coverage. The refundable health insurance credit proposed in the President's Budget is designed
to provide these incentives to assist uninsured individuals in purchasing health insurance.
The credit is refundable, so even those without income tax liability can receive the
benefit of the credit. In addition, the largest subsidies will be targeted to low-income families,
and only individuals who are not covered by public or employer-based health insurance will be
eligible for the credit. Therefore, the credit will be of most help to individuals who are most
likely to be uninsured-childless adults who are generally not eligible for public insurance and
persons in families with incomes too high to participate in public insurance programs and too
low to find affordable coverage options in the private market. The credit will help families who
prefer the innovation and flexibility of private insurance options to public insurance, and will
enable families to obtain coverage for the entire family from the same providers. The credit is
also designed to be available at the time the individual purchases health insurance. That is,
people eligible for the credit can receive it in advance, before filing their tax returns, to reduce
their monthly checks for insurance premium payments. Finally, because the credit is based on
income from the previous year, it is nomeconcilable - earning more income in the current year
does not reduce the value of the credit. We believe that the availability and certainty of the
advance credit will increase the credit's attractiveness, making it more effective in expanding
health insurance coverage.
The proposal would create a refundable, advanceable income tax credit for the cost of
health insurance purchased by individuals under age 65. Individuals participating in public or
employer-provided health plans would generally not be eligible for the tax credit. In addition,
individuals would not be allowed to claim the credit and make a contribution to an Archer MSA
for the same taxable year. Eligible health insurance plans would be required to meet minimum
coverage standards, including coverage for high medical expenses.
The credit would provide a subsidy of up to 90 percent of a capped amount of health
insurance premiums. The maximum credit would be $1,000 per adult and $500 per child for up
to two children. The maximum subsidy percentage of 90 percent would apply for low-income
taxpayers and would be phased down at higher incomes. While the subsidy percentage would be
phased down with income, the maximum premium that could be taken into consideration in
calculating the credit amount would be fixed at $1,111 for an adult and $556 for a child. These
dollar amounts would be indexed by the Consumer Price Index for all-urban consumers.
Individuals with no dependents who file a single return and have modified Adjusted
Gross Income (AGI) up to $15,000 would be eligible for the maximum subsidy rate of90
percent and a maximum credit of $1 ,000. The subsidy percentage for these individuals would be
phased down ratably from 90 percent to 50 percent between $15,000 and $20,000 of modified
AGI, and then phased out completely at $30,000 of modified AGI. For example, the maximum
credit for these individuals would be $556 at $20,000 of modified AGI.

-6-

All other filers (including single filers with dependents, heads of households, and joint
filers) with modified AGI up to $25,000 would be eligible for the maximum subsidy rate of90
percent, and the maximum credit of $1 ,000 per adult and $500 per child for up to two children.
The subsidy percentage would be phased out ratably between $25,000 and $40,000 of modified
AGI in the case of a policy covering only one individual, and between $25,000 and $60,000 of
modified AGI in the case of a policy or policies covering more than one person.
The maximum credit for these other filers would vary by income and the number of
adults and children covered by a policy. For example, the maximum tax credit would be $3,000
for a low-income family with modified AGI up to $25,000 who obtained a policy covering two
adults and two or more children. The maximum credit would be phased down to $1,714 as the
family's modified AGI rose to $40,000. For a policy covering only two adults, the maximum
credit would be $2,000 for families with modified AGI up to $25,000 and $1,143 for families
with $40,000 of modified AGI.
Examples of the maximum credit:
(l) Individuals with No Dependents Filing a Single Return

Modified AGI
Maximum Credit

$15,000
$1,000

$20,000
$556

$30,000
$0

(2) Other Filers Obtaining a Policy Covering Only One Adult
Modified AGI
Maximum Credit

$25,000
$1,000

$30,000
$667

$40,000
$0

(3) Other Filers Obtaining a Policy Covering Two Adults
Modified AGI
Maximum Credit

$25,000
$2,000

$40,000
$1,143

$60,000
$0

(4) Other Filers Obtaining a Policy Covering Two Adults and One Child
Modified AGI
Maximum Credit

$25,000
$2,500

$40,000
$1,429

$60,000
$0

(5) Other Filers Obtaining a Policy Covering Two Adults and Two or More Children
Modified AGI
Maximum Credit

$25,000
$3,000

$40,000
$1,714

$60,000
$0

Individuals could claim the tax credit for health insurance premiums paid as part of the
nonnal tax-filing process. Alternatively, the tax credit would be available in advance at the time
the insurance is purchased.

-7-

Individuals would reduce their premium payment by the amount of the credit and the
health insurer would be reimbursed by the Department of Treasury for the amount of the advance
credit. Eligibility for the advance credit would be based on the individual's prior year's tax
return.
The credit would be used for qualifying health insurance purchased in the non-group
market. In addition, qualifying health insurance could also be purchased through private
purchasing groups, state-sponsored insurance purchasing pools and state high-risk pools. At
state option, effective after December 31,2003, the tax credit would be allowed for certain
individuals not otherwise eligible for public health insurance programs to purchase insurance
from private plans that already participate in State sponsored purchasing groups, such as
Medicaid, SCHIP, or state government employee programs.
States could, under limited circumstances, provide an additional contribution to
individuals who claim the credit in connection with purchases of private insurance through
Medicaid or SCHIP purchasing groups. The maximum state contribution would be $2,000 per
adult for up to two adults for individuals with incomes up to 133 percent of poverty. The
maximum state contribution would phase down ratably reaching $500 per adult at 200 percent of
poverty. Individuals with income above 200 percent of poverty would not be eligible for a state
contribution. States would not be allowed to provide any other explicit or implicit cross
subsidies.
The health insurance tax credit would be effective for taxable years beginning after
December 31, 2002.
Discussion

This proposal contains a number of important and innovative features. First, the credit
amount varies with family size and composition, reflecting the impact of these factors in the nongroup market. For example, two adults face higher premiums, and will receive a larger credit,
than a single adult. Likewise, families with children face higher premiums, and will receive a
larger credit, than families without children. Second, the credit is "advanceable," and eligibility
for the advance credit is based on the individual's prior year's tax return. This design guarantees
certainty of the amount of the credit and makes it available at the time individuals purchase
health insurance; they do not have to wait until they file their tax returns after the year is over.
Third, the proposal allows the credit to be used toward private insurance purchased through
private purchasing groups, state-sponsored insurance purchasing pools and state high-risk pools.
This provision will increase coverage options, achieve economies of scale, and encourage risk
pooling in the non-employer market.
In designing a policy to expand health insurance coverage to the uninsured, one concern
is that the policy does not inadvertently decrease health insurance options to those presently
insured. Some have suggested that if the purchase of health insurance outside of the employer
market became sufficiently attractive, employers might stop providing health insurance coverage
to their workers, potentially resulting in a net decrease in health insurance coverage among the
popUlation.

-8-

Based on these concerns, the Administration's proposal has been carefully designed to
avoid "crowdout" of subsidized employer coverage, and thus will expand coverage substantially.
Several elements of the credit design contribute to this desirable result. Most importantly, lowincome individuals and families, who are least likely to have employer-based health insurance,
will receive the largest incentives under this proposal. In addition, the health credit subsidy rate
decreases with income, requiring larger individual contributions for any given policy and making
it a less attractive alternative to the employer-provided insurance at higher income levels. The
health credit is further limited by a cap on the amount of premium eligible for subsidy. Although
this capped premium amount is adequate for many individuals to purchase health insurance, it is
typically less generous than most employer plans.
The credit is also designed to be targeted to the individuals who are most likely to be
uninsured during at least some part of the year. Approximately six million such individuals are
expected to gain coverage as a result of the credit. Most of these individuals are neither offered
employer-based insurance nor eligible for public programs over the course of their uninsured
spells. The credit will provide a strong new incentive for these persons to find coverage in the
individual market. It will also allow many families that are already purchasing coverage in the
individual insurance market, and receiving very little government assistance in doing so, to
obtain better coverage at a lower out-of-pocket cost.
The credit will significantly increase participation and quality of coverage in non-group
health insurance markets. These improvements will not come at the expense of employer group
markets. Those low-income Americans who are eligible for the largest credit are less likely to
have employer-sponsored health insurance. Around 80 percent of uninsured workers are not
offered health insurance by their employers. Only 36 percent of people under age 65 with
income below 200 percent of the federal poverty line have employer-sponsored health insurance,
while 77 percent of those above do. Furthennore, the generosity of employer-sponsored
insurance is detennined by the tax benefits for the group of employees, not the attractiveness for
low-income employees only. Tax benefits for employer coverage will remain large for the
middle- and higher-income workers that make up most of the employees of most firms that offer
generous employer-sponsored plans. Those workers' incomes are too high for them to get more
attractive benefits from the proposed health credit. Thus, employer-provided coverage will
remain more attractive for finns that offer generous coverage today. That is, the phase-out and
cap on the credit ensure that employers will continue to offer insurance and that employees will
continue to enroll. The proposed credit will simply eliminate an inequity in the current system
that disadvantages workers without employer coverage, helping them to purchase the coverage
that meets their needs.
Recent research also suggests that the credit would provide good, affordable health
insurance options for the vast majority of individuals who are eligible for the credit. This is the
subject of a detailed analysis by the Council of Economic Advisers. The minority of less healthy
persons who lack any insurance options and find insurance unaffordable or unavailable for their
health status in the individual market could use the credit to buy into the state high-risk pool for
which the premium is usually subsidized. The proposal also permits certain low-income
individuals to purchase private insurance through other state-sponsored health insurance
purchasing groups.

-9-

Coupled with the Administration's other proposals for strengthening employer coverage
and for providing more assistance to individuals with the greatest health care needs, the health
credit is a critical part of our approach for ensuring that all Americans have good, affordable
private health care coverage options.
This proposal is part of a broader Administration goal of achieving more patient-centered
health care by encouraging innovations in the financing and delivery of health care services.
Market-based approaches such as this will encourage high-quality, high-value coverage by
giving patients the ability to choose the coverage that best meets their needs. In tum, innovative
coverage will permit Americans to benefit from the tremendous potential of our health care
system in the 21 st century.
Health Insurance Credit for Displaced Workers

Because the permanent health insurance credit would not be effective until next year, the
President continues to support the immediate health insurance credit for displaced workers,
which was one component of the economic security bill supported by a bipartisan group of
centrist Senators and passed by the House last December.
The health credit for displaced workers is a refundable, advanceable tax credit that could
be claimed by unemployed workers for a period of up to 12 months. The credit can be used to
offset 60 percent of the cost of health insurance premiums for unemployed workers and their
families.
The credit can be applied to the purchase of COBRA or "super-COBRA" continuation
coverage, and other types of qualified private non-employer health insurance. Eligible
unemployed workers include those receiving unemployment insurance benefits and those who
would be eligible for benefits except that their rights to benefits were exhausted or the period
during which their benefits were payable ended.
The design of the health credit for displaced worker reflects the President's goals of
providing targeted, quick assistance to Americans who have lost their jobs in the recession.
Because the proposal builds on the existing infrastructure of programs to assist displaced
workers, and because it strengthens all ofthe coverage options available to displaced workers
now, it can be fully implemented in a matter of a few months. In particular, state workforce
agencies will certify eligibility for the health insurance credit when they certify that a displaced
worker is eligible for unemployment insurance benefits. Almost all unemployed workers who
lose their job involuntarily are eligible for unemployment:insurance, at least initially. The
Administration also supports emergency grants to states to enable them to quickly provide
additional health insurance assistance, without the need for state legislative action. Displaced
workers can claim an advance credit at the time of purchasing health insurance coverage by
providing their insurer their certification along with the remainder of the premium. The insurer
will be reimbursed by the U.S. Treasury for the amount of advance credits it provides.

-10-

We believe the displaced worker credit offers a number of advantages over competing
proposals that limit tax credits or subsidies to COBRA-only policies. Medicaid expansion is also
not an ideal way to provide quick and efficient replacement insurance to the affected individuals.
A COBRA-only credit would provide no benefit to 40 to 50 percent of displaced workers
with health insurance, because they work for small firms not covered by COBRA or they
purchase non-employer policies. The alternative of forcing workers not covered by COBRA into
a State Medicaid plan would require these workers to drop their current insurance coverage and
possibly change health care providers if they do not participate in Medicaid. Extending
Medicaid to cover these displaced workers would require State legislation, and would necessitate
delays before State legislatures were even in session to address this issue. Many States have
made clear that, because of tight budgets, they cannot afford such unprecedented expansions
beyond their core target populations anyway. Moreover, such expansions would take away
resources from their ability to fund better coverage for their priority populations: low-income
children, families, and seniors.
In addition, a COBRA-credit would impose a costly new mandate that employers would
be required to implement immediately. The mandates are most burdensome on smaller finns and
those that have bad significant layoffs - precisely the firms that need the most help now to
prevent further job losses. Further, a COBRA-credit is poorly targeted to workers who lose their
jobs because of the economic downturn. At least 60 percent of those eligible for the COBRAcredit are workers who voluntarily leave their job, not displaced workers. According to
independent estimates, twice as many workers who have lost their jobs in the recession would be
helped by the health credit for displaced workers than by a COBRA credit or subsidy.
As a result, for a similar budgetary cost (and at no budgetary cost to States), the health
insurance credit for displaced workers would be available for a longer period oftirne, would be
more efficiently targeted, would offer workers a greater choice among health insurance plans,
and would not weaken employer incentives to continue to provide health insurance to their
workers. The credit would also reduce adverse selection in both the employer market (because
more healthy workers would choose to remain in COBRA coverage) and in the individual market
(because many people who otherwise would have gone without health insurance will purchase
coverage).
Conclusion

The absence of health insurance coverage for some 40 million Americans is a problem
calling for immediate solutions. The President's Budget sets forth a package of solutions,
including most importantly a proposal for the use oftax credits to offset the cost of obtaining
health insurance that has received broad bipartisan support. If enacted, this proposal can lead to
a significant reduction in the uninsured population and at the same time lead to improvements in
the market for individually purchased health insurance, greater choice and flexibility for
individuals in determining the coverage that best fits their needs, and improvements in the
quality and price of health care provided to all Americans. This Administration desires to work
closely with Congress, in a bipartisan manner, to make this vision a reality.

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

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

FOR IMMEDIATE RELEASE
February 12, 2002

Office of Financing
202-691-3550

RESULTS OF TREASURY'S AUCTION OF 4-WEEK BILLS
28-Day Bill
February 14, 2002
March 14, 2002
912795JK8

Term:
Issue Date:
Maturity Date:
CUSIP Number:
1.720%

High Rate:

Investment Rate 1/:

1. 749%

Price:

99.866

All noncompetitive and successful competitive bidders were awarded
securities at the high rate. Tenders at the high discount rate were
allotted 59.33%. All tenders at lower rates were accepted in full.
AMOUNTS TENDERED AND ACCEPTED (in thousands)
Tender Type

Accepted

Tendered

Competitive
Noncompetitive
FIMA (noncompetitive)

46,094,635
23,954

17,976,160
23,954

SUBTOTAL

46,118,589

18,000,114

Federal Reserve

2,220,925

TOTAL

48,339,514

20,221,039

Median rate
1.700%: 50% of the amount of accepted competitive tenders.
tendered at or below that rate. Low rate
1.660%:
5% of the amount
)f accepted competitive tenders was tendered at or below that rate.

lid-to-Cover Ratio

= 46,118,589 / 18,000,114 = 2.56

./ Equivalent coupon-issue yield.

bttp:llwww.publicdebt.treas.gov

PO-I014

D E P -\ I{ T \1 E \' T

0 F

THE

T R E :-\ SUR Y

NEWS
omCE OF PUBUC AFFAIRS -1500 PENNSYLVANlAAVENUE, N.W. • WASlDNGTON, D.C.• %O2!O. (%02) 622.%960

Embargoed Until: 10 A.M. EST
February 14, 2002

Contact: Michele Davis
(202) 622-2920

TESTIMONY OF TREASURY SECRETARY PAUL O'NEILL
BEFORE THE
SENATE COMMITTEE ON FINANCE
SUBCOMMITTEE ON LONG-TERM GROWTH AND DEBT REDUCTION

Mr. Chairman, and Members of the committee last December,just three months to the
day after the tragic events of September 11, I wrote to Congress requesting an increase in the
statutory debt ceiling by $750 billion. Yesterday I sent another letter, repeating this request with
a revised projection that the debt ceiling will be reached in late March. Failure to enact a
permanent increase in a timely manner would only serve to undermine confidence in our
government and in our economy.
Last August, we forecast that the debt ceiling would be reached in late 2003. Since then,
war, recession and national emergency have intervened. This year's surplus has been eroded by
the economic downturn and the response to the September 11 attacks.
While the timing of the need to increase the statutory ceiling is sooner than we had
anticipated just six months ago because of untoward events, we've always known it would need
to be raised at some point. Payroll taxes that the American people put aside and send to the
Social Security trust fund result in an increase in the level of debt subject to limit because these
funds are invested in special Treasury securities. The same holds true collections for Medicare,
highways, airports and other special purposes for which the government has established trust
funds. Government account holdings of these special Treasury securities increase by more than
$200 billion each year. As these trust funds grow they push up the level of the Treasury's
outstanding debt. Indeed, over time the growth of the Social Security trust fund is - and will
continue to be - the most significant contributor to the increase in the level of the government's
debt subject to limit.
The US Government has the premier position in world capital markets because there is no
doubt the United States will honor its financial commitments. Legislative action on the debt
ceiling is necessary to preserve the US position in world capital markets. Any delay could create
uncertainty that would raise the cost of borrowing for US taxpayers. This is an unnecessary
expense and, of course, any uncertainty added to the early stages of our economic recovery
would be particularly unwelcome at this time.
I urge Congress to enact this increase in the debt ceiling quickly.

PO-lOIS
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releases, speeches, public schedules and official biographies,

•

call our 24-hOUT fax line at (202) 622-2040
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Contact Tony Fratto
(202) 622-2960.

GRANTS AND SOVEREIGN DEBT RESTRUCTURING:
TWO KEY ELEMENTS OF A REFORM AGENDA FOR THE INTERNATIONAL
FINANCIAL INSTITUTIONS
TESTIMONY OF JOHN B. TAYLOR
UNDER SECRETARY OF THE TREASURY FOR INTERNATIONAL AFFAIRS
BEFORE THE JOINT ECONOMIC COMMITTEE

Thank you Chainnan Saxton, Vice-Chainnan Reed, and other members of the Committee
for inviting me to participate in this hearing on the international financial institutions. I know
that reform of these institutions has been a high priority for this Committee. Indeed, many ideas
coming out of the Committee's hearings-including calls for greater transparency and better
accounting of costs-are already having a positive impact on these institutions.
Reform of the international financial institutions has also been a high priority of the Bush
Administration. Our fundamental goals in this reform effort are to raise economic growth and
improve economic stability in the world economy. The international financial institutions can
help us achieve these goals, but there is room for improvement.
The Bush Administration-in a series of speeches by President Bush and Secretary
O'Neill-has put forth a substantial reform agenda for the World Bank and the International
Monetary Fund. In my written testimony today, I would like to discuss two key parts of that
reform agenda -the use of grants rather than loans and the creation of an improved sovereign
debt restructuring process. Both reforms are now a major focus of international discussion and
negotiations.

Higher Economic Growth Through World Bank Grants

Clearly there is too much poverty in the world. We know that the key to reducing
poverty is higher productivity growth. But productivity growth is far below its potential in many
poor countries. We know that we can raise productivity growth by improving education and by
increasing private investment. But educational achievement remains low as do private capital
flows to developing countries and emerging markets in general.
PO-I016

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·U.S. Government Printing Office: 1998· 619-559

So, in order to achieve our goals of raising standards of living around the world, the
World Bank and other multilateral development banks must address the problems of productivity
growth. That is why we have chosen productivity growth as a major theme of our reform effort.
And to be sure that the actions taken actually increase productivity growth, we have emphasized
the importance of measuring results of all actions taken, so we can see what works and what
doesn't. Achieving measurable results and raising productivity growth are the rationales behind
the proposal to shift from loans toward grants at the multilateral development banks.
Last summer in a speech at the World Bank, President Bush first put forth this grant
proposal for the World Bank and the other multilateral development banks. And last month in a
speech to the World Affairs Council at the Organization of American States, he forcefully
reiterated that proposal. He ''urged the World Bank to provide up to 50 percent of its assistance
to the world's poorest nations in the form of grants rather than loans-grants for education, for
health, for nutrition, for water supplies and for sanitation." Why is this grants proposal so
important? Why is moving from loans to grants a major element of our reform effort? How
does it relate to the theme of measurable results?

The Advantages of Grants
The part of the World Bank that provides assistance to the poorest countries is the
International Development Association, or IDA. Funds for IDA are replenished at three-year
intervals by the United States and other donor countries, and U.S. contributions to IDA must be
appropriated each year by Congress. Virtually all of the IDA assistance to poor countries is now
in the form ofloans (these loans are sometimes called IDA credits). The terms on these loans are
highly favorable to the borrowing country-far more favorable than the government of the
country could obtain in private capital markets. The loans have a 40-year maturity; the interest
rate (referred to a "service charge") is 0.75 percent; and there is a 10-year grace period.
Because the terms on these IDA loans are so favorable, they are really not loans in the
everyday sense of the word. The total interest and principal that must be paid back is much less,
in present value terms, than the amount loaned. For example, the present discounted value of all
future payments on a $1,000,000 IDA loan at a 6 percent discount rate is only $337,671. Most
developing countries, however, face interest rates much higher than this: if the discount rate
were 15 percent, then the present discounted value would be only $97,569. Moreover, because
the grace period is so long, a finance minister of a borrowing country could be out of office long
before any principal has to be paid back on such a loan; and while in office there is only the
small 75 basis point interest payment. It is misleading to call such assistance "lending." Such
terminology is not consistent with basic goals of transparency in government. Thus, one reason
that grants are better than IDA-type loans is simply that they are more straightforward and
transparent.
Another reason to prefer grants to loans as a form of IDA assistance is that many of the
countries now borrowing from IDA are part of the Heavily Indebted Poor Country (RIPC)
initiative. HIPCs are poor countries that have unsustainable amounts of debt. As many have
argued, by forgiving this debt the hope is that these countries can achieve a more sustainable
debt situation.

Through the HIPC initiative, the international financial institutions, in effect, write off
their loans to these poor countries and relieve the countries' debt burden. However, at the same
time we are writing off loans to these poor countries, by creating more loans from IDA-even at
favorable tenns-we are adding to their debt burden. This approach seems counter productive.
Grants, on the other hand, are better than loans because they do not add to the debt burden of
these countries.
Grants are particularly advantageous in cases where it is unrealistic to assume that the
activity being supported will generate enough direct economic returns to pay back IDA loans.
The use of grants thus removes a disincentive for governments to focus on the most
disadvantaged people and sectors, e.g., rural poor, girls, indigenous people, and AIDs orphans.
For example, issuing a loan rather than a grant for humanitarian assistance or major social
crises-for instance, to provide assistance to HIV/AIDS patients-seems particularly
inappropriate. That is why President Bush emphasized that grants should be used in certain
social sectors-for "education, for health, for nutrition, for water supplies and for sanitation."
Yet another advantage of grants is that they can easily be tied to measurable performance
or results. Some people think that the President's proposal is for "free" grants. That is certainly
not the case; on the contrary, the grants are to be tied to specific performance. For example, if
there is a grant for education, then the grant would not continue unless there are results-unless
enrollment rises, for example. If the grant is designed to assist HIV/AIDS patients, for example,
then the grant will continue as long as the assistance is being provided. If the assistance becomes
inadequate, then the grant funds should go to another provider. Month by month, quarter by
quarter, the group receiving the grant has to keep delivering the service or the grant stops.

International Differences and Negotiations
Since the President made the grants proposal last summer, we have been working and
negotiating with other IDA donors to move from loans toward more grants. Of course, the
World Bank is an international institution, so to implement any reform a coalition of support
must be developed. A number of non-governmental organizations and developing countries
have expressed strong support for the proposal, but for the proposal to be implemented it is
necessary to garner the support of major donors to IDA. The current international negotiations
are taking place in the context of the current three-year replenishment of IDA, which we hope to
settle soon. An important and extensive discussion on this subject took place among the G-7
Finance Ministers and Central Bank Governors in Ottawa last weekend.
There is now widespread agreement among G-7 donor countries that a larger proportion
of IDA assistance should be given in the form of grants, as the President proposed. However,
there are still differences of opinion among donor countries about the details and ultimately
about how much should go to grants. For example, the President called for 50 percent grant
assistance for the ~'world's poorest nations." But exactly how poor countries should be before
they qualify for this percentage of grants rather than loans is still an unsettled question.

The United States has shown flexibility in the negotiations, stating that it would be
acceptable to provide 50 percent grant assistance to those countries with annual per capita
incomes less than $365, that is, less than $1 per day. But some donor countries would like a
more exclusive definition of "poor"; some would exclude those countries with annual per capita
incomes above $250. Another difference of opinion is how to define the categories of assistance
that would qualify for grants. Some donor countries would like to exclude education, in contrast
to the President's proposal.
One of the more strongly voiced objections to increasing the proportion of grant
assistance beyond a certain level is that it would reduce the "re-flows" to IDA. Re-flows are
primarily the funds that are paid back into IDA by countries with IDA loans. These payments
can then be lent again to poor countries. But, of course, poor countries themselves pay these reflows. In other words, under the current IDA program the poor are supporting the poor. So
reduced re-flows through the grants really means more support for poor countries.

Signijicant Increase in U.S. Support for IDA, Based On Results
Another objection to moving further toward grants is the argument that U.S. assistance to
IDA will decline under a grants program. The facts say otherwise. Indeed, the United States is
offering a significant increase in its contribution to IDA. The United States in the last six years
has been bringing down its contributions to IDA in real terms. The President intends to reverse
this trend. He proposes to increase our contributions to IDA, as long as the contributions result
in better performance. In the budget he submitted to Congress last week, he is proposing that the
U.S. IDA contribution increase-from previous years' annual total of $803 million-to $850
million in the first year, to $950 million the second year, and to $1,050 million in the third year.
These step-ups will only occur if there is an improvement in performance at the World Bank, but
they would bring the annual U.S. contribution to a level 30 percent above what it was last year.
That is a clear demonstration of support for economic development, tied to the idea that we want
that support to create measurable improvements in peoples' lives.
A Better Sovereign Debt Restructuring Process

The second major reform initiative that I would like to discuss today is sovereign debt
restructuring. It is part of our overall approach to emerging markets and the International
Monetary Fund. The truth is that emerging markets have not been performing very well in the
last four years. The flow of investments going through these markets has declined sharply. We
would like more funds to go to the emerging markets and at lower interest rates. A more
predictable sovereign debt restructuring mechanism can belp achieve that goal.

An Emerging MarketslIMF Reform Strategy
Our sovereign debt restructuring initiatives are part of a multifaceted strategy toward
emerging markets and the IMP. That strategy starts with a greater focus on crisis prevention,
asking the IMF to look more closely at countries where economic trends appear unsustainable,
giving more ownership to countries so that they can make the decisions before the crises get out
of hand, and encouraging more transparency both on the part of countries and the IMF itself.

A related part of the strategy is to narrow the focus of the IMP-both its work and the
conditions it imposes on borrowers. By narrowing the focus to core responsibilities-exchange
rate regimes, monetary policy, fiscal policy, and the financial sector-the IMF will be able to
concentrate more on preventing crises and give countries more ownership of policy.
Limiting official sector support to countries when they reach unsustainable debt
situations is another key element of our emerging markets strategy. Large official sector support
packages can distort incentives for countries and for investors. And, of course, such packages
effectively bailout private sector investors who have already received high rates of return. I
think it is becoming clearer that the official sector support in such cases is now being limited to a
significant degree.
Keeping contagion low is another part of the overall strategy and is a major reason why
official sector support can be limited in many cases. Clearly contagion was an important
characteristic of the Asian crisis in the late 1990s. However, coming into the Bush
Administration, we re-examined this contagion issue and saw that important trends were
developing. People in the markets were paying more attention to economic fundamentals,
differentiating between countries and events. Countries were being more transparent in their
policies. Market research was more thorough. We commented favorably on this change, noting
that contagion is not automatic. This communication with the markets was meant to build on
and encourage the changes in the markets by emphasizing that policy decisions would not be
based on unfounded claims of contagion. In fact, contagion has come down dramatically over
the course of the last year. This is illustrated by the fact that the terrible economic situation in
Argentina has not spread to other countries in the world, let alone the region.

A Decentralized Contract-Based Approach
But even if we are successful in all parts of the strategy mentioned above there is still
something that is missing. Currently, when countries get close to a situation where debt is
unsustainable, it is like approaching a black hole: no one knows exactly what will happen next.
This leads to uncertainty on the part of public officials and market participants alike. It leads to
pressures for IMF bailouts even in situations where debt becomes unsustainable.
A more predictable sovereign debt restructuring mechanism-a workout strategy-for
countries that reach an unsustainable debt position would therefore be useful. Of course, ideally
such a mechanism would never have to be used, but simply having it in place would greatly
reduce uncertainty. There are several alternatives now being considered. We at the U.S.
Treasury have been in close contact with people in the private sector-market participants,
lawyers, and academics-as well as people at the IMF and other governments, especially finance
ministries and central banks.
The most practical and promising proposal now on the table is a decentralized approach
that creates debtor and creditor ownership of, and participation in, the process. This proposal
would encourage borrowers and lenders to put certain clauses in their debt so that when a
country needs to restructure, there is a more orderly process.

For example, now in many bonds, 100 percent of bondholders must agree to restructure
the financial tenns of the bonds. This makes it possible for a small minority to stand in the way
of a restructuring that the majority of bondholders feel is in their best interests. Majority action
clauses in bonds would allow a specified majority to agree to restructuring tenns. The decision
of this majority would be binding on the minority. The clauses would also provide for the
process and timing through which debtors and creditors come together
There are several possible ways to create incentives for countries to use such clauses, and
encourage them to overcome the urge to cut a few basis points from their interest rate by
avoiding such clauses. For example, the official sector could require that these clauses be
utilized by any country with an IMF program. Or the IMF could make it a condition of
exceptional access to its funds that countries utilize these clauses in their debt contracts. A range
of ways to implement this proposal is possible. Of course, introducing new clauses is something
one can only do for new bonds. Consequently, we are also exploring options that would
facilitate more predictable workout processes under existing bond provisions.
Another possible approach to sovereign debt restructuring that is receiving wide
attention is an IMF proposal, in which the IMF would step in and impose a stay on legal actions
in certain circumstances. This proposal obviously calls for a larger role for the IMF than the
more decentralized market-oriented approach described here. But even with the market-oriented
approach there will be a role for the IMF in assessing sustainability and deciding on a new IMF
program, at least for countries that choose to work with the IMF on a program.
As with the grants proposal, it will be necessary to work with other governments to come
to a common agreement on a sovereign debt restructuring proposal. It will also be important to
consult regularly with the private sector and with Congress. And as these discussions proceed
we should never lose sight of the overall objective: to increase predictability and reduce
uncertainty in the emerging markets so that more funds flow through them at lower interest rate
spreads.
Concluding Remarks

In conclusion, there is one final point I would like to make about our refonn efforts with
the international fmancial institutions. A high priority with us is to make our own work with the
institutions more effective and efficient. Currently, we are required to implement a very large
number of mandates legislated by the Congress. These mandates including requirements for
directed voting at the institutions, certifications, notifications, and reports. Our effectiveness in
carrying our responsibilities with the IMF and the development banks could be strengthened if
we are able to reduce and better rationalize these mandates. Some mandates go back 50 years.
Some provisions overlap, or are inconsistent. We have 32 directed vote mandates, over 100
policy mandates, plus numerous reports, certifications, and notifications. We want the Congress
to be fully infonned, but numerous reporting requirements have increased the amount of time
staff spends on these reports to levels that warrant serious concern. We would like to work with
you to rationalize and focus our mandated requirements and reports.

Thank you very much. I would be pleased to answer any questions that you may have
about the reform issues I discussed here, about our overall reform strategy, or about any other
issues relating to the international financial institutions.

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

FOR IMNIEDIATE RELEASE
February 13,2002

Contact: Peter Hollenbach
(202)691-3502

BUREAU OF THE PUBLIC DEBT AIDS SAVINGS BONDS OWNERS
AFFECTED BY ICE STORMS IN OKLAHOMA
The Bureau of Public Debt took action to assist victims of ice storms in Oklahoma 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 those areas of
Oklahoma affected by the storms. These procedures will remain in effect through the end of
March,2002.
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.
Oklahoma counties involved are: Alfalfa, Beaver, Beckham, Blaine, Caddo, Canadian, Cimarron,
Cleveland, Comanche, Creek, Custer, Dewey, Ellis, Garfield, Garvin, Grady, Grant, Greer,
Harmon, Harper, Jackson, Kay, Kingfisher, Kiowa, Lincoln, Logan, Major, McClain, Noble,
Nowata, Oklahoma, Osage, Pawnee, Payne, Pottawatomie, Rogers, Roger Mills, Stephens, Texas,
Tillman, Tulsa, Washington, Washita, Wood and Woodward. Should additional counties be
declared disaster areas the emergency procedures for savings bonds owners will go into effect for
those areas.
Public Debt will also expedite the replacement of bonds lost or destroyed. Bond owners should
complete form PD-1048, 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.publicdebLtreas.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 insClibed, 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

PO-IOI7

PUBLIC DEBT NEWS
Department of the Treasury • Bureau of the Public Debt • Washington, DC 20239
FOR IMMEDIATE RELEASE
February 13,2002

Contact: Peter Hollenbach
(202)691-3502

BUREAU OF THE PUBLIC DEBT AIDS SAVINGS BONDS OWNERS
AFFECTED BY ICE STORMS IN MISSOURI
The Bureau of Public Debt took action to assist victims of ice stOTInS in Missouri 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 those areas of
Missouri affected by the storms. These procedures will remain in effect through the end of March
2002.
Public Debt's action waives the nOlmal 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.
Missouri counties involved are: Adair, Audrain, Bates, Benton, Boone, Buchanan, Caldwell,
Carroll, Cass, Chariton, Clay, Clinton, Cooper, Grundy, Henry, Howard, Jackson, Johnson,
Lafayette, Linn, Livingston, Macon, Monroe, Morgan, Pettis, Platte, Randolph, Ray, Saline,
Shelby, St. Clair, Sullivan, and Vernon. Should additional counties be declared disaster areas the
emergency procedures for savings bonds owners will go into effect for those areas.
Public Debfwill also expedite the replacement of bonds lost or destroyed. Bond owners should
complete form PD-1048, 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.publicdebLtreas.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

PO-IOI8

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

FOR IMMEDIATE RELEASE
February 13, 2002

Contact: Peter Hollenbach
(202)691-3502

BUREAU OF THE PUBLIC DEBT AIDS SAVINGS BONDS OWNERS
AFFECTED BY ICE STORMS IN KANAS
The Bureau of Public Debt took action to assist victims of ice stonns in Kansas 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 those areas of
Kansas affected by the storms. These procedures will remain in effect through the end of March
2002.
Public Debt's action waives the nOImal 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.
Kansas counties involved are: Allen, Anderson, Barber, Bourbon, Butler, Chautauqua, Cherokee,
Coffee, Comanche, Cowley, Crawford, Douglas, Elk, Franklin, Greenwood, Harper, Jefferson,
Johnson, Kingman, Kiowa, Labette, Leavenworth, Linn, Lyon, Miami, Montgomery, Neosho,
Osage, Pratt, Sedgwick, Shawnee, Summer, Wilson, Woodson, and Wyandotte. Should additional
counties be declared disaster areas the emergency procedures for savings bonds owners will go into
effect for those areas.
Public Debt will also expedite the replacement of bonds lost or destroyed. Bond owners should
complete form PD-1048, 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.publicdebttreas.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.

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February 14, 2002

CONTACT:

Office of Financing
202/691-3550

TREASURY OFFERS I3-WEEK AND 26-WEEK BILLS
The Treasury will auction 13-week and 26-week Treasury bills totaling $30,000
million to refund an estimated $29,768 million of publicly held 13-week and 26-week
Treasury bills maturing February 21, 2002, and to raise new cash of approximately $232
million. Also maturing is an estimated $6,000 million of publicly held 4-week
Treasury bills, the disposition of which will be announced February 19, 2002.
The Federal Reserve System holds $12,857 million of the Treasury bills maturing
on February 21, 2002, in the System Open Market Account (SOMA). This amount may be
refunded at the highest discount rate of accepted competitive tenders either in these
auctions or the 4-week Treasury bill auction to be held February 20, 2002. Amounts
awarded to SOMA will be in addition to the offering amount.
Up to $1,000 million in noncompetitive bids from Foreign and International
Monetary Authority (FIMA) accounts bidding through the Federal Reserve Bank of New
York will be included within the offering amount of each auction. These
noncompetitive bids will have a limit of $100 million per account and will be accepted
in the order of smallest to largest, up to the aggregate award limit of $1,000
million.

TreasuryDirect customers have requested that we reinvest their maturing holdings
of approximately $1,073 million into the 13-week bill and $685 million into the 26week bill.
The allocation percentage applied to bids awarded at the highest discount rate
will be rounded up to the next hundredth of a whole percentage point, e.g., 17.13%.
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
rreasury 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

)-1020

For press releases, speeches, public schedules and official biographies, call our 24-IIO"r fax line at (202) 622-2040

HIGHLIGHTS OF TREASURY OFFERINGS OF BILLS
TO BE ISSUED FEBRUARY 21, 2002

February 14, 2002
Offering Amount . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $16, 000 million
Public Offering . . . . . . . . . '" . . . . . . . . . . . . . . . . . $16,000 million
NLP Exclusion Amount . . . . . . . . . . . . . . . . . . . . . . . . $ 5,600 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 JV 4
February 19, 2002
February 21, 2002
May 23, 2002
November 23, 2001
$21,405 million
$1,000

$14,000 million
$14,000 million
None

182-day bill
912795 KX 8
February 19, 2002
February 21, 2002
August 22, 2002
February 21, 2002
$1, 000

The following rules apply to all securities mentioned above:
Submission of Bids:
Noncompetitive bids:
Accepted in full up to $1 million at the highest discount rate of accepted competitive bids.
Foreign and International Monetary Authority (FIMA) bids: Noncompetitive bids submitted through the Federal Reserve
Banks as agents for FIMA accounts.
Accepted in order of size from smallest to largest with no more than $100
million awarded per account.
The total noncompetitive amount awarded to Federal Reserve Banks as agents for FlMA
accounts will not exceed $1,000 million.
A single bid that would cause the limit to be exceeded will
be partially accepted in the amount that brings the aggregate award total to the $1,000 million limit.
However,
if there are two or more bids of equal amounts that would cause the limit to be exceeded, each will be prorated
to avoid exceeding the limit.
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 (NLP) 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 standard time on auction day
Competitive tenders . . . . . . . . Prior to 1:00 p.m. eastern standard 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.

D EPA R T \1 E \' T

0 F

THE

T REA SUR Y

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

Contacts:

FOR IMMEDIATE RELEASE
February 15, 2002

Rob Nichols
202-622-2910
-orNoe Garcia
202-622-0087

Media Advisory
Press Briefing with U.S. and Mexican Officials
to Discuss "Partnership for Prosperity" Meeting
Deputy Treasury Secretary Kenneth Dam, Undersecretary of State Alan Larson, Presidential
Public Policy Coordinator Eduardo Sojo, Deputy Finance Secretary Augustin Carstens, and
Deputy Foreign Relations Secretary Miguel Hakim, will hold a press conference to discuss the
second "Partnership for Prosperity" conference in Washington, DC.
The "Partnership for Prosperity" is a binational working group - aimed at stimulating investment
and generating job opportunities in Mexico - first announced by Mexican President Vicente Fox
and U.S. President George Bush on September 6,2001. The working group's first conference
was convened in Merida, Mexico in December 2001.
The five officials will deliver brief statements followed by Q & A.
The press conference will take place on Tuesday, February 19, 2002 at 2:30 pm in the
Treasury Department's Diplomatic Reception Room (room 3311).
The room will be available for pre-set at 1:30 pm.
Members of the media without Treasury or White House press credentials need to contact the
Treasury Office of Public Affairs at (202) 622-2960 witnthe following infonnation: full legal
name, social security number, and date of birth. This infonnation may also be faxed to (202)
622-1999.
-30-

PO-1021

For press releases, speeches, public schedules and official biographies, call our 24-hour fax line at (202) 622-2040
·u.s. Government Printing Office: 1998· 619-559

THE OFFICE OF PUBLIC AFFAIRS IS ELIMINATING FAXING OUT
NEWS AND ANNOUNCEMENT BY FAX

The Office of Public Affairs is eliminating faxing out news and
announcements by fax, instead we are shifting to using the email system
to deliver all news.
Please email us at publicaffairs@do.treas.gov. Your email should
include your name, title, organization, email address and phone number.
Please also include issue areas that you cover (ex: Tax, Healthcare,
Budget, International Economics).
Also include the email address for your news organization's daybook
and assignment editor.
If you have any questions, please contact the Office of Public Affairs at
(202) 622-2960.
PO-I022

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

Contact:

EMBARGOED UNTIL 11:30 A.M.
February 19, 2002

Office of Financing
202/691-3550

TREASURY OFFERS 4-WEEK BILLS
The Treasury will auction 4-week Treasury bills totaling $23,000 million to
refund an estimated $6,000 million of publicly held 4-week Treasury bills maturing
February 21, 2002, and to raise new cash of approximately $17,000 million.
Tenders for 4-week Treasury bills to be held on the book-entry records of

TreasuryDirect will not be accepted.
The Federal Reserve System holds $12,857 million of the Treasury bills maturing
on February 21, 2002, in the System Open Market Account (SOMA). This amount may be
refunded at the highest discount rate of accepted competitive tenders in this auction
up to the balance of the amount not awarded in today's 13-week and 26-week Treasury
bill auctions. Amounts awarded to SOMA will be in addition to the offering amount.
Up to $1,000 million in noncompetitive bids from Foreign and International
Monetary Authority (FIMA) accounts bidding through the Federal Reserve Bank of New York
will be included within the offering amount of the auction. These noncompetitive bids
will have a limit of $100 million per account and will be accepted in the order of
smallest to largest, up to the aggregate award limit of $1,000 million.
The allocation percentage applied to bids awarded at the highest discount rate
will be rounded up to the next hundredth of a whole percentage point, e.g., 17.13%.
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 BookEntry Tr~asury Bills, Notes, and Bonds (31 CFR Part 356, as amended).
Details about the new security are given in the attached offering highlights.

000

Attachment

PO-I023

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

HIGHLIGHTS OF TREASURY OFFERING
OF 4-WEEK BILLS TO BE ISSUED FEBRUARY 21, 2002
February 19, 2002
Offering Amount . . . . . . . . . . . . . . . . . . . . . $23,000 million
Public Offering . . . . . . . . . . . . . . . . . . . . . $23,000 million
NLP Exclusion Amount . . . . . . . . . . . . . . . . $ 9,000 million
Description of Offering:
Term and type of security . . . . . . . . . . . 28-day bill
CU SIP numb e r . . . . . . . . . . . . . . . . . . . . . . . . 9 12 7 95 JL 6
Auction date . . . . . . . . . . . . . . . . . . . . . . . . February 20, 2002
Issue date . . . . . . . . . . . . . . . . . . . . . . . . . . February 21, 2002
Maturity date . . . . . . . . . . . . . . . . . . . . . . . March 21, 2002
Original issue date . . . . . . . . . . . . . . . . . September 20, 2001
Currently outstanding . . . . . . . . . . . . . . . $34,805 million
Minimum bid amount and mUltiples .... $1,000
Submission of Bids:
Noncompetitive bids: Accepted in full up to $1 million at the highest
discount rate of accepted competitive bids.
Foreign and International Monetary Authority (FIMA) bids: Noncompetitive bids submitted through the Federal Reserve Banks as agents for
FlMA accounts.
Accepted in order of size from smallest to largest
with no more than $100 million awarded per account.
The total noncompetitive amount awarded to Federal Reserve Banks as agents for
FlMA accounts will not exceed $1,000 million.
A single bid that
would cause the limit to be exceeded will be partially accepted in
the amount that brings the aggregate award total to the $1,000
million limit.
However, if there are two or more bids of equal
amounts that would cause the limit to be exceeded, each will be
prorated to avoid exceeding the limit.
Competitive bids:
(1) Must be expressed as a discount rate with three decimals in
increments of .005%, e.g., 4.215%.
(2) Net long position (NLP) 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 standard time on auction day
Competitive tenders:
Prior to 1:00 p.m. eastern standard time on auction day
By charge to a funds account at a Federal Reserve Bank
Payment Terms:
on issue dace.

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
February 19, 2002

CONTACT:

Office of Financing
202-691-3550

RESULTS OF TREASURY'S AUCTION OF 13-WEEK BILLS
Term:
Issue Date:
Maturity Date:
CUSIP Number:
High Rate:

91-Day Bill
February 21, 2002
May 23, 2002
912795JV4
1.730%

Investment Rate 1/:

1. 760%

Price:

99.563

All noncompetitive and successful competitive bidders were awarded
securities at the high rate. Tenders at the high discount rate were
allotted 27.45%. All tenders at lower rates were accepted in full.
AMOUNTS TENDERED AND ACCEPTED (in thousands)
Tender Type
Competitive
Noncompetitive
FIMA (noncompetitive)

SUBTOTAL

31,005,503
1,441,047
150,000

5,772,144

5,772,144
$

38,368,694

14,409,091
1,441,047
150,000
16,000,138 2/

32,596,550

Federal Reserve
TOTAL

Accepted

Tendered

21,772,282

Median rate
1.700%: 50% of the amount of accepted competitive tenders
was tendered at or below that rate. Low rate
1.660%:
5% of the amount
of accepted competitive tenders was tendered at or below that rate.
Bid-to-cover Ratio = 32,596,550 / 16,000,138 = 2.04
1/ Equivalent coupon-issue yield.
2/ Awards to TREASURY DIRECT = $1,185,205,000

http://www.publicdebt.treas.gov

PO-I024

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
February 19, 2002

Office of Financing
202-691-3550

RESULTS OF TREASURY'S AUCTION OF 26-WEEK BILLS
Term:
Issue Date:
Maturity Date:
CUSIP Number:
High Rate:

182-Day Bill
February 21, 2002
August 22, 2002
912795KX8
1.830%

Investment Rate 1/:

1. 872%

Price:

99.075

All noncompetitive and successful competitive bidders were awarded
securities at the high rate.
Tenders at the high discount rate were
allotted 40.63%. All tenders at lower rates were accepted in full.
AMOUNTS TENDERED AND ACCEPTED (in thousands)
Tender Type
Competitive
Noncompetitive
FIMA (noncompetitive)

SUBTOTAL

33,897,435
964,815
50,000

4,950,607

4,950,607
$

39,862,857

12,985,193
964,815
50,000
14,000,008 2/

34,912,250

Federal Reserve
TOTAL

Accepted

Tendered

18,950,615

Median rate
1.805%: 50% of the amount of accepted competitive tenders
was tendered at or below that rate.
Low rate
1.760%:
5% of the amount
of accepted competitive tenders was tendered at or below that rate.
Bid-to-Cover Ratio = 34,912,250 / 14,000,008

2.49

1/ Equivalent coupon-issue yield.
2/ Awards to TREASURY DIRECT = $741,133,000

http://www.publicdebt.treas.gov

PO-I025

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

FOR IM:MEDIATE RELEASE
February 19, 2002

Contact: Peter Hollenbach
(202) 691-3502

AMOUNTS AWARDED TO TREASURY DIRECT REDUCED FOR RECENT AUCTIONS
In the recent Treasury bill and note auctions, conducted during the week of February 4,2002, noncompetitive
tenders totaling $905 million were submitted, accepted in the auctions, and not paid for. The tenders were
electronically submitted through TreasuryDirect. In addition, the tenders were submitted in a manner that
violated existing rules on noncompetitive bidding. Controls were effective in preventing the bidder from
receiving any securities, but the published auction results included these noncompetitive amounts.
Additional controls are now in place to prevent a reCUlTence.
The yields, prices, and percentages allotted at the high rate or yield stand as previously published. This
information is provided to clarify that the reported noncompetitive and total tendered and accepted amounts
were overstated.
This matter is currently under investigation by Federal law enforcement authorities.
The table below shows the reduction in the amounts awarded to TreasuryDirect for each auction.
Security

CUSIP

Auction
Date

Issue Date

13-week biJJ
26-week bill
4 % year note
10-year note

912795JT9
912795KV2
9128277F3
9128277LO

2/4/02
2/4/02
2/5/02
2/6/02

2/7102
2/7102
2/15/02
2/15/02

000

PO-1026

www.publicdebUreas.gov

Reduction in Amount
Awarded to TreasuryDirect
$84 million
$76 million
$375 million
$370 million

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

EMBARGOED UNTIL 2:30 P.M.
February 20, 2002

CONTACT:

Office of Financing
202/691-3550

TREASURY OFFERS 2-YEAR NOTES
The Treasury will auction $25,000 million of 2-year notes to refund $23,628
million of publicly held notes maturing February 28, 2002, and to raise new cash of
approximately $1,372 million.
In addition to the public holdings, Federal Reserve Banks hold $6,735 million
of the maturing notes for their own accounts, which may be refunded by issuing
an additional amount of the new security.
up to $1,000 million in noncompetitive bids from Foreign and International
Monetary Authority (FIMA) accounts bidding through the Federal Reserve Bank of New
York will be included within the offering amount of the auction. These
noncompetitive bids will have a limit of $100 million per account and will be
accepted in the order of smallest to largest, up to the aggregate award limit of
$1,000 million.

TreasuryDirect customers requested that we reinvest their maturing holdings
of approximately $670 million into the 2-year note.
The auction will be conducted
tive and noncompetitive awards will
tenders.
The allocation percentage
be rounded up to the next hundredth

in the single-price auction format. All competibe at the highest yield of accepted competitive
applied to bids awarded at the highest yield will
of a whole percentage point, e.g., 17.13%.

000

Attachment

PO-I027

yor press releases, speeches, public schedules and official biographies, call Ollr 24-hour fax liJle at (202) 622-2040

HIGHLIGHTS OF TREASURY OFFERING TO THE PUBLIC OF
2-YEAR NOTES TO BE ISSUED FEBRUARY 28, 2002

February 20, 2002
Offering Amount
Public Offering

$25,000 million
$25,000 million

Description of Offering:
Term and type of security . . . . . . . . . . . . . . . . . . . . .
Series . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
CUSIP number
Auction date . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Issue date . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Dated date . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Maturity date . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interest rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

2-year notes
K-2004
912827 7M 8
February 27, 2002
February 28, 2002
February 28, 2002
February 29, 2004
Determined based on the highest
accepted competitive bid
Yield . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Determined at auction
Interest payment dates . . . . . . . . . . . . . . . . . . . . . . . . The last day of August & February
Minimum bid amount and mUltiples . . . . . . . . . . . . . . $1,000
Accrued interest payable by investor . . . . . . . . . . None
Premium or discount . . . . . . . . . . . . . . . . . . . . . . . . . . . Determined at auction

STRIPS Information:
Minimum amount required . . . . . . . . . . . . . . . . . . . . . . . $1,000
Corpus CUSIP number . . . . . . . . . . . . . . . . . . . . . . . . . . 912820 GW 1
Due dateCs) and CUSIP number(s)
for additional TINT(s)
February 29,

2004 -

- 912833 YR 5

Submission of Bids:
Noncompetitive bids:
Accepted in full up to $5 million at the highest accepted yield.
Foreign and International Monetary Authority (FIMA) bids:
Noncompetitive bids
submitted through the Federal Reserve Banks as agents for FIMA accounts.
Accepted in order of size from smallest to largest with no more than $100
million awarded per account.
The total noncompetitive amount awarded to Federal
Reserve Banks as agents for FIMA accounts will not exceed $1,000 million.
A
single bid that would cause the limit to be exceeded will be partially accepted
in the amount that brings the aggregate award total to the $1,000 million limit.
However, if there are two or more bids of equal amounts that would cause the
limit to be exceeded, each will be prorated to avoid exceeding the limit.
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 total
bid amount, at all yields, and the net long position is $2 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 Yield . . . . . . . . . . . 35% of public offering
Maximum Award . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35% of public offering
Receipt of Tenders:
Noncompetitive tenders:
Prior to 12:00 noon eastern standard time on auction day.
Competitive tenders:
Prior to 1:00 p.m. eastern standard time on auction day.
Payment Terms:
By charge to a i'..lnds 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.

D EPA R T l\I E N T

0 F

THE

T REA SUR Y

NEWS

1REASURY

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

u.s. International Reserve Position

02/20/02

The Treasury Department today released U.S. reserve assets data for the week ending February 15, 2002. As indicated in

this table, u.s. reserve assets totaled $68,081 million on that date, compared to $68,111 million at the end of the prior
week
(in US millions)

J. Officiai U.S. Reserve Assets

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

February 15: 2002
68,081

February 8: 2002
68,111

TOTAL
Euro

5,388

Yen
10,113

TOTAL

Euro

15,502

Yen

TOTAL

5,393

10,267

15,659
0

9,088

3,960

13,048

b. Total deposits with:

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.

I
I
I

2. IMF Reserve Position

3. Special Drawing Rights (SDRs)
4. Gold Stock 3
5. Other Reserve Assets

9,079

3,901

12,980
0

0
0

17,828

17,646

10,757

10,682

11,045

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 in
dollar terms at the official SDR/doliar exchange rate for the reporting date. The entries in the table above for latest week (shown in italics)
reflect any necessary adjustments, including revaluation, by the U.S. Treasury to the prior week's IMF data. The IMF data for the prior week
are final.
3/ Gold stock is valued monthly at $42.2222 per fine troy ounce. Values shown are as of December 31, 2001. The November 30, 2001 value
was $11,045 million.

PO-1028

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

FOR IMMEDIATE RELEASE
February 20, 2002

Contact: Office of Financing
202-691-3550

TREASURY'S INFLATION-INDEXED SECURITIES
MARCH 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 March for the following Treasury inflation-indexed securities:
(1) 3-3/8% 10-year notes due January 15,2007

(2) 3-5/8% 5-year notes due July 15,2002
(3) 3-5/8% 10-year notes due January 15,2008
(4) 3-5/8% 30-year bonds due April15, 2028
(5) 3-7/8% 10-yearnotes due January 15,2009
(6) 3-7/8% 30-year bonds due April 15, 2029
(7) 4-114% 10-year notes due January 15,2010
(8) 3-112% 10-year notes due January 15,2011
(9) 3-3/8% 30-1I2-year bonds due April 15,2032
(10) 3-3/8% 10-year notes due January 15,2012
This information 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 information is available through the Treasury's Office of Public Affairs automated fax
system by calling 202-622-2040 and requesting document number 1027. The information is also
available on the Internet at Public Debt's website (http://www.publicdebUreas.gov).
The information for April is expected to be released on March 21, 2002.
000

Attachment

http://www . pu blicdebt.treas.gov

PO-I029

TREASURY INFLATION-INDEXED SECURITIES
Ref CPI and Index Ratios for
March 2002

Security:
Description:
CUSIP Number:
Dated Date:
Original Issue Date:
Additional Issue Date(s):

3-3/8% 10-Year Notes
Series A-2007
9128272M3
January 15, 1997
February 6,1997
April 15, 1997

3-5/8% 5-Year Notes
Series J-2002
9128273A8
July 15, 1997
July 15, 1997
October 15, 1997

3-5/8% 10-Year Notes
Series A-2008
9128273T7
January 15, 1998
January 15, 1998
October 15, 1998

3-5/8% 30-Year Bonds
Bonds of April 2028
912810FD5
April 15, 1998
April 15, 1998
July 15, 1998

Maturity Dale:
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

Dale
March
March
March
March
March
March
March
March
March
March
March
March
March
March
March
March
March
March
March
March
March
March
March
March
March
March
March
March
March
March
March

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

2002
2002
2002
2002
2002
2002
2002
2002
2002
2002
2002
2002
2002
2002
2002
2002
2002
2002
2002
2002
2002
2002
2002
2002
2002
2002
2002
2002
2002
2002
2002

CPI-U (NSA) for:

Ref CPI

Index Ratio

176.70000
176.71290
176.72581
176.73871
176.75161
176.76452
176.77742
176.79032
176.80323
176.81613
176.82903
176.84194
176.85484
176.86774
176.88065
176.89355
176.90645
176.91935
176.93226
176.94516
176.95806
176.97097
176.98387
176.99677
177.00968
177.02258
177.03548
177.04839
177.06129
177.07419
177.08710

1.11528
1.11536
1.11544
1.11552
1.11561
1.11569
1.11577
1.11585
1.11593
1.11601
1.11609
1.11618
1.11626
1.11634
1.11642
1.11650
1.11658
1.11666
1.11675
1.11683
1.11691
1.11699
1.11707
1.11715
1.11724
1.11732
1.11740
1.11748
1.11756
1.11764
1.11772

November 2001

177.4

Index Ratio

1.09375
1.09383
1.09391
1.09399
1.09407
1.09415
1.09423
1.09431
1.09439
1.09447
1.09454
1.09462
1.09470
1.09478
1.09486
1.09494
1.09502
1.09510
1.09518
1.09526
1.09534
1.09542
1.09550
1.09558
1.09566
1.09574
1.09582
1.09590
1.09598
1.09606
1.09614

1.09249
1.09257
1.09265
1.09273
1.09281
1.09289
1.09297
1.09305
1.09313
1.09321
1.09329
1.09337
1.09345
1.09353
1.09361
1.09369
1.09377
1.09385
1.09393
1.09401
1.09409
1.09417
1.09425
1.09433
1.09441
1.09449
1.09457
1.09465
1.09473
1.09481
1.09489

1.10331
1.10339
1.10347
1.10355
1.10363
1.10371
1.10379
1.10387
1.10395
1.10403
1.10411
1.10419
1.10427
1.10435
1.10444
1.10452
1.10460
1.10468
.1.10476
1.10484
1.10492
1.10500
1.10508
1.10516
1.10524
1.10532
1.10540
1.10548
1.10556
1.10564
1.10572

December 2001

176.7

January 2002

I
I

177.1

TREASURY INFLATION-INDEXED SECURITIES
Ref CPI and Index Ratios for
March 2002

Security:
Description:
CUSIP Number:
Dated Date:
Original Issue Date:
Additional Issue Date(s):
Maturity Date:
Ref CPI on Dated Date:

Date
March
March
March
March
March
March
March
March
March
March
March
March
March
March
March
March
March
March
March
March
March
March
March
March
March
March
March
March
March
March
March

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

2002
2002
2002
2002
2002
2002
2002
2002
2002
2002
2002
2002
2002
2002
2002
2002
2002
2002
2002
2002
2002
2002
2002
2002
2002
2002
2002
2002
2002
2002
2002

CPI-U (NSA) for:

-,
3-7/8% 10-Year Notes
Series 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
October 15, 2000
April 15, 2029
164.39333

January 15, 2009
164.00000

4-114% 10-Year Notes
Series A-201 0
9128275W8
January 15,2000
January 18, 2000
July 15, 2000

3-112% 1 O-Year Notes
Series A-2011
9128276R8
January 15, 2001
January 16, 2001
July 16, 2001

January 15, 2010
168.24516

January 15, 2011
174.04516

Ref CPI

Index Ratio

1.07744
1.07752
1.07760
1.07768
1.07775
1.07783
1.07791
1.07799
1.07807
1.07815
1.07823
1.07830
1.07838
1.07846
1.07854
1.07862
1.07870
1.07878
1.07886
1.07893
1.07901
1.07909
1.07917
1.07925
1.07933
1.07941
1.07948
1.07956
1.07964
1.07972
1.07980

1.07486
1.07494
1.07502
1.07510
1.07518
1.07525
1.07533
1.07541
1.07549
1.07557
1.07565
1.07572
1.07580
1.07588
1.07596
1.07604
1.07612
1.07620
1.07627
1.07635
1.07643
1.07651
1.07659
1.07667
1.07674
1.07682
1.07690
1.07698
1.07706
1.07714
1.07722

1.05025
1.05033
1.05041
1.05048
1.05056
1.05064
1.05071
1.05079
1.05087
1.05094
1.05102
1.05110
1.05117
1.05125
1.05133
1.05140
1.05148
1.05156
1.05163
1.05171
1.05179
1.05186
1.05194
1.05202
1.05209
1.05217
1.05225
1.05232
1.05240
1.05248
1.05255

1.01525
1.01533
1.01540
1.01548
1.01555
1.01562
1.01570
1.01577
1.01585
1.01592
1.01600
1.01607
1.01614
1.01622
1.01629
1.01637
1.01644
1.01651
1.01659
1.01666
1.01674
1.01681
1.01688
1.01696
1.01703
1.01711
1.01718
1.01726
1.01733
1.01740
1.01748

November 2001

December 2001

177.4
_

-----

--------

-----

176.7
--

January 2002

177.1

TREASURY INFLATION-INDEXED SECURITIES
Ref CPI and Index Ratios for
March 2002

Security:
Description:
CUSIP Number:
Dated Date:
Original Issue Date:
Additional Issue Date(s):
Maturity Date:
Ref CPI on Dated Date:

Date
March
March
March
March
March
March
March
March
March
March
March
March
March
March
March
March
March
March
March
March
March
March
March
March
March
March
March
March
March
March
March

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

2002
2002
2002
2002
2002
2002
2002
2002
2002
2002
2002
2002
2002
2002
2002
2002
2002
2002
2002
2002
2002
2002
2002
2002
2002
2002
2002
2002
2002
2002
2002

CPI-U (NSA) for:

Bonds'of April 2032
912810FQ6
October 15, 2001
October 15, 2001

3-3/8% 10-Year Notes
Series A-2012
9128277J5
January 15, 2002
January 15, 2002

April 15, 2032
177.50000

January 15, 2012
177.56452

..r",:i:j'/u

:;u·1i2.·Year Bonds

Ref CPI

Index Ratio

0.99549
0.99557
0.99564
0.99571
0.99578
0.99586
0.99593
0.99600
0.99607
0.99615
0.99622
0.99629
0.99637
0.99644
0.99651
0.99658
0.99666
0.99673
0.99680
0.99687
0.99695
0.99702
0.99709
0.99716
0.99724
0.99731
0.99738
0.99746
0.99753
0.99760
0.99767

0.99513
0.99520
0.99528
0.99535
0.99542
0.99549
0.99557
0.99564
0.99571
0.99579
0.99586
0.99593
0.99600
0.99608
0.99615
0.99622
0.99629
0.99637
0.99644
.0.99651
0.99658
0.99666
0.99673
0.99680
0.99688
0.99695
0.99702
0.99709
0.99717
0.99724
0.99731

November 2001

177.4

December 2001

176.7

---r-"

January 2002

177.1
-,

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
February 20, 2002

Office of Financing
202-691-3550

RESULTS OF TREASURY'S AUCTION OF 4-WEEK BILLS
Term:
Issue Date:
Maturity Date:
CUSIP Number:

28-Day Bill
February 21, 2002
March 21, 2002
912795JL6

High Rate:

1.720%

Investment Rate 1/:

1.749%

Price:

99.866

All noncompetitive and successful competitive bidders were awarded
securities at the high rate.
Tenders at the high discount rate were
allotted 29.12%. All tenders at lower rates were accepted in full.
AMOUNTS TENDERED AND ACCEPTED (in thousands)
Tender Type

Tendered

Competitive
Noncompetitive
FIMA (noncompetitive)

SUBTOTAL
Federal Reserve
TOTAL

Accepted

57,706,611
20,176

22,980,771
20,176

57,726,787

23,000,947

2,134,623

59,861,410

25,135,570

Median rate
1.710%: 50% of the amount of accepted competitive tenders
was tendered at or below that rate. Low rate
1.670%:
5% of the amount
of accepted competitive tenders was tendered at or below that rate.
Bid-to-Cover Ratio

57,726,787 / 23,000,947

2.51

1/ Equivalent coupon-issue yield.

htlp://www.publicdebt.treas.gov

PO-1030

DEPART.MENT

THE

TREASURY

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

FOR IMMEDIATE RELEASE
February 20, 2002

CONTACT: BETSY HOLAHAN
202-622-1997

CORRECTED VERSION
Treasury Department Statement on TreasuryDirect Auction Bids
Yesterday Treasury reported that noncompetitive TreasuryDirect tenders totaling $905
million, from one bidder, had been received but not paid for in four recent auctions. The
following is additional information on these tenders and the investigation of what occurred.
The bids that were submitted and not paid for were noncompetitive tenders submitted
electronically using TreasuryDirect's Internet bidding option that was introduced in 1998. The
bids were submitted for a single TreasuryDirect account.
During the four auctions affected by these bids, controls were in place to limit the amount
of anyone TreasuryDirect tender to the maximum noncompetitive limit for the auction. Further,
there were controls in place that prevented the bidder from receiving any securities without
paying for them. Both of these controls have been in place since the inception of the Internet
bidding option in 1998 and worked as designed. However, there was not a control to prevent
multiple tenders for the same account, which in aggregate exceeded the noncompetitive limit,
from being included in the auction calculations. A control to prevent this was implemented on
2115/02 and is now in place for all auctions. This control detected and prevented an additional
$410 million in tenders, entered at the end of January for the same TreasuryDirect account, from
being included in the 2/27/02 2-year note auction. Treasury Direct accepts tenders for regularly
scheduled securities offerings before announcement to permit efficient management of
reinvestments.
As previously announced, the rate or yield, price per $100, and the percentage of tenders
allotted at the high rate or yield for each of the four auctions will not be changed and stand as
originally published.
The noncompetitive amounts were reduced by $84 million for the 13-week and $76
million for the 26-week bill auctions on 2/4/02. Had these noncompetitive tenders not been
included, there would have been no change to the high rate or price for either of the two bill
auctions. The effect of the $375 million noncompetitive reduction on the 4 %-year note auction
(2/5/02) would have been to raise the yield by less than one-half a basis point to 4.258%. In the
10-year note auction (2/6/02), the effect of the $370 million noncompetitive reduction would
have been to raise the yield by one basis point to 4.890%.
PO-I031
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·u.s. Governmenl Prlnllng Office·

1998· 619·559

The Bureau of the Public Debt, upon learning of these events, immediately engaged the
United States Secret Service to investigate these matters. The Secret Service confirms that it is
pursuing an active, aggressive investigation into the bids that were not paid for, as well as the
$410 million in bids submitted for the 2/27/02 auction. At the direction of the Secretary, Public
Debt and Secret Service, both Treasury bureaus, are devoting all necessary resources to this
investigation. Public Debt, and the relevant depository institution and Federal Reserve Banks
(which act as Treasury's fiscal agent), are fully cooperating in this investigation. The
Department of the Treasury is committed to vigorously pursuing this matter to federal
prosecution by the appropriate U.S. Attorney's office.
-30-

D EPA R T 1\1 E N T

0 F

THE

T REA SUR Y

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

FOR IMMEDIATE RELEASE
February 19, 2002

CONTACT: Tony Fratto
(202) 622-2960

IMPROVING THE REGIONAL DEVELOPMENT BANKS
BY
JOHN B. TAYLOR
UNDER SECRETARY OF TREASURY FOR INTERNATIONAL AFFAIRS
CONFERENCE ON FINANCING FOR DEVELOPMENT
REGIONAL CHALLENGE AND THE REGIONAL DEVELOPMENT BANKS
INSTITUTE FOR INTERNATIONAL ECONOMICS

Reform of the multilateral development banks has been a high priority from the very start
of the Bush Administration. We want to improve the effectiveness of these institutions. We
want them to be highly successful in increasing economic growth and raising the living standards
of poor people around the world. Reform is an even higher priority since the war on terrorism
began last September because the poorest countries are often breeding grounds for terrorism.
In a series of speeches beginning last year President Bush and Secretary O'Neill have put
forth an ambitious reform agenda, and Secretary O'Neill will be joining you tomorrow to share
this agenda with you. I think we have made a good start on implementing this agenda, especially
in the context of the World Bank negotiations to replenish the International Development
Association (IDA). We are setting broad themes, making specific proposals, and working with
our friends at the institutions and fellow shareholders. The most recent proposal was put forth by
President Bush in his 2003 budget: he is calling for a substantial increase in the U.S. contribution
to the IDA replenishment, and at the same time insisting that this contribution be tied to explicit
performance results.
\Ve are promoting the same broad agenda in the regional development banks-the
African Development Bank (AFDB), the Asian Development Bank (ADB), the Inter-American
Development Bank (IDB), and the European Bank for Reconstruction and Development
(EBRD). Of course the specific proposals differ because of the diversity of the regional banks
and because of timing differences. It is the regional bank component of our reform agenda that I
would like to discuss with you today. In particular, I will discuss our reform themes and three
particular reform proposals: grants, results-based replenishments, and private sector
development.
PO-I032
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Reform Themes: High Productivity Jobs and Measurable Results
We have stressed two themes to guide the refonn and to set priorities.
The first theme is productivity growth. A development strategy will be effective if and
only if it raises the growth rate of productivity-the amount of goods or services that a worker
can produce in a set period of time, such as a day or a year. It is nearly a tautology to say that
countries are poor because productivity is low, and that countries are rich because productivity is
high. But there are advantages of focusing on the importance of an economy where workers are
employed in high productivity jobs.
We know about what leads to productivity growth. Both practical experience and fonnal
growth accounting studies show that productivity depends on capital-including human
capital-and on technology in the broadest sense. Thus higher education and more private
investment will raise productivity growth. So will technology transfer and anything that will
encourage it, such as a better rule of law to attract foreign investment. If-when considering a
loan or a grant-you look at its effect on productivity, that will lead you automatically to focus
on activities that will raise living standards and reduce poverty on a sustained basis. We need to
go further in emphasizing that economic growth-productivity growth-is the key to reducing
poverty. This point is made clearly in a recent report of the Inter-American Development Bank,
The Business of Growth. I am glad to hear, as President Iglesias states in the preface to the
report, that economic growth is the "business ofthe Inter-American Development Bank," and
that "private investment and the creation of high-productivity jobs are essential..."
The other theme we stress is measurable results. President Bush emphasizes the
importance of being able to measure results in every activity of government, not only the
operations ofthe development banks. By measuring results you can see if a given activity is
actually making a difference. And if it is not making a difference then we should change and do
something that works. For example, is an education loan or grant raising enrollment, test scores,
or literacy? Are the funds really making a difference to children's skills so that their own
productivity will increase once they are employed? How much of a difference? Compared to
what other kind of educational activity?

From Concessional Loans to Grants at the Regional Development Banks
Last summer, President Bush first proposed using more grants at the multilateral
development banks. Just last month, he reiterated that proposal. He called on the multilateral
development banks to provide up to 50 percent of their assistance to the poorest countries in the
form of grants rather than loans. And he indicated that grants are particularly effective for
education, health, nutrition, water supplies, and sanitation. Why is this grants proposal so
important for our refonn effort?
With the exception of the European Bank for Reconstruction and Development, all the
regional development banks have separate concessionalloan windows for the poorest countries
analogous to IDA at the World Bank.
2

The African Development Bank has the African Development Fund (AFDF), the InterAmerican Development Bank has the Fund for Special Operations (FSO), and the Asian
Development Bank has the Asian Development Fund (ASDF). Donor countries replenish these
windows every few years. This year, replenishments of both IDA and the African Development
Fund are underway.
All except a small fraction of this assistance to poorest countries is now in the form of
loans. About 98 percent of IDA is in the form of loans; about 94 percent of the African
Development Fund is in the form of loans. These loans have terms that are highly favorable to
the borrower. The maturities are very long (30 to 50 years, depending on the institution), the
interest rate is very low (less than one percentage point), and there is a long grace period. We
feel that it is misleading to call such assistance a loan. The total interest and principal that must
be paid back is much less, in present value terms, than the amount loaned; to call it a loan is not
transparent either for the people who are actually giving or actually receiving the assistance. It is
these concessionalloans that President Bush wants to move toward grants. Grants are better than
these highly concessionalloans because they are more straightforward and transparent.
A second reason to convert to grants from loans is that many of the poorest countries now
borrowing from the concessionalloan windows are part of the Heavily Indebted Poor Country
(HIPC) initiative. In other words they are very poor countries with unsustainable amounts of
debt. Under the HIPC program, the development banks are writing off their loans to these poor
countries in order to relieve the countries' debt burdens. However, by creating more loans, even
at favorable terms, the development banks are adding to these debt burdens. Grants would not
add to the debt burden. Grants are particularly appropriate when countries emerge from conflict
and cannot afford to take on loans.
A third reason to prefer grants is that many worthwhile projects do not yield enough of a
direct economic return to pay back loans. Grants thus remove barriers for governments to take
on such worthwhile projects such as raising enrollment rates for girls or assisting HIV/AIDS
orphans. Offering a country a loan rather than a grant to provide assistance to HIVI AIDS
patients is obviously inappropriate. President Bush wants grants to be used for health as well as
for education, nutrition, water supply, and sanitation.
A fourth advantage of grants is that they can easily be tied to measurable results. The
President's proposal is not for "free" grants, but for grants that are tied to specific performance.
A grant for education could be tied to enrollment increases, for example. If the grant were
provided for HIVI AIDS, then the government would have to go to another provider if patients
are not being treated adequately.
Currently, international negotiations on grants are taking place in the context of the IDA
and the African Development Fund replenishments. A new replenishment of the Asian
Development Fund and the IDB's Fund for Special Operations are both several years away,
though we hope that even before negotiations for new replenishments take place these
institutions can begin to explore how existing resources can be devoted to grants. For example,
we have proposed that the IDB establish a grant program from the income of the Emergency
Loans Program.

There is agreement among major donor countries that a larger proportion of IDA and
AFDF assistance should be given in the form of grants. However, there are still differences of
opinion about how much should go to grants. Some are concerned that increasing grant
assistance too much would adversely affect the soft loan windows by reducing "re-flows," the
funds paid back by countries with concessionalloans. However, the reduction in re-flows would
be very small because of the favorable terms on the loans. Also it should be emphasized that it is
the poorest countries themselves that pay these re-flows, so that with the current soft loan
windows, you have the poor helping the poor.
The U.S. has demonstrated its readiness to come to the table with the resources needed to
make a difference in the lives of the world's poor. As I already mentioned the United States is
offering a significant increase in its contribution to IDA, a sharp reversal of the last six years
during which contributions have declined in real terms. Weare also proposing an 18 percent
increase in the U.S. contribution to the African Development Fund, the largest increase in dollar
terms of any donor.

Results-Based Replenishments: From IDA to AFDF, ASDF, and FSO?
Another specific reform proposal is illustrated by this year's U.S. IDA replenishment
proposal. It would have our contributions tied to measurable results. In particular the President
is proposing that the United States' IDA contribution be stepped up from $850 million the first
year, to $950 million in the second year, and to $1,050 million in the third year. But these
increments to the U.S. contribution to the second and third year will only occur ifthere is an
improvement in IDA's performance.
This results-based replenishment concept is a new idea, put forth for the first time in the
President's budget. It is one example of how we are emphasizing measurable results in our
reform efforts. We are hoping it will make a difference and that it will help in getting better
measures of performance, toward achieving the goals of increasing productivity and reducing
poverty.
We hope that this idea can be used for future replenishments not only in IDA, but also in
the regional development banks' assistance for the poorest countries-the ASDF, the AFDF, and
the FSO. Already in the context of the African Development Fund negotiations we have been
successful in obtaining a commitment to significant improvements in the monitoring and
evaluation process to ensure tracking of the achievements of AFDF projects and ultimately real
increases in productivity in the beneficiary country.

Private Sector Development: Bankable Loans to Entrepreneurs
A third specific reform proposal involves the private sector. Investment by private firms
is critical to increasing productivity, employment and economic growth in developing countries.
I am very interested in working with the regional development banks to find new ways to support
entrepreneurs in emerging markets.

Last summer, Secretary O'Neill and I went to Russia and witnessed first hand the
positive impact of the EBRD's activities in promoting small business loans by combining donorfunded technical assistance to train bankers with EBRD's loan resources. The Russia Small
Business Fund has made over 73,000 loans and disbursed over $760 million for small and microbusinesses in 100 cities and towns throughout Russia since its inception in 1994. A U.S.sponsored SME Special Fund in Southeastern Europe, established in 2000, builds on this
approach and combines it with policy dialogue to engage local officials in removing barriers to
SME development and finance.
I believe that the regional development banks can do much more in the area of private
sector development. A vibrant private sector cannot develop without a healthy investment
climate that provides entrepreneurs with access to capital and incentives to build new businesses.
Existing MDB programs have largely failed to integrate policy reform, technical assistance and
private investment. We believe that investment climate reforms and capacity building at the
government and enterprise level should be at the front and center of development policies. A
special focus should be placed on private firms that provide manufactured goods and services for
the global market, since these firms are typically conduits for advanced technologies, new ideas
and best management practices that are the foundation for sustained productivity growth.
We welcome the World Bank's emphasis on investment climate reform and believe that
this should be given high priority in the proposed private sector development strategy. We
would like the regional development banks to become partners in this effort. All need to ensure
that private sector development is a core element of their lending operations and policy dialogue.
To take this initiative further, we are developing a new proposal, which will create incentives for
governments to pursue investment climate reforms and which will increase support for private
entrepreneurs by the multilateral development banks.

Free Trade, Capacity Building, and Education
Freer trade is a sine qua non of economic growth and poverty reduction. Freer trade
means open markets, which lead to greater sales, which lead to higher profits and greater access
to goods and services, all of which leads to increased standards of living. Freer trade also
accelerates the exchange of technology, more productive capital inputs and the transfer of best
practices.
I see a large role for the regional banks to play in assisting countries to take advantage of
growing trade opportunities and in providing technical assistance to put in place necessary
policies and capacity to facilitate trade. Yet liberalization alone is not a sufficient antidote for
sustainable growth and poverty reduction. Building enabling environments for vibrant private
sector and human capital formation is a critical complement. More and better education is an
essential element of increasing productivity. Better educated people are better equipped to take
advantage of economic opportunities and to address family health and nutrition needs, thereby
generating increased individual and national productivity and income. This is why the U.S. has
proposed that the MDBs increase the share of their funding and attention devoted to education.

Concluding Remarks
In conclusion, I want to thank Fred Bergsten for inviting me to participate in this meeting
today and to share some of our ideas with you. I am very glad that Presidents Iglesias and
Kabbaj were also able to attend. I look forward to working with all of you to achieve our
common objective of increasing growth and reducing poverty.

-30-

DEPARTMENT

THE

TREASURY

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

FOR IMMEDIATE RELEASE
February 21,2002

Contact: Michele Davis
(202) 622-2960

OUTLINE OF REMARKS
TO BE DELIVERED BY
TREASURY SECRETARY PAUL O'NEILL
AT THE US CHAMBER OF COMMERCE

For immediate release(These comments can be attributed to Secretary O'Neill)
•

I believe we were on the verge of recovery before the September 11 terrorist
attacks, and that our resilience and determination have brought us back to the
early stages of recovery today.

•

The President's tax relief plan enacted last year certainly softened the economic
downturn.

•

More than 1.4 million Americans lost their jobs during this recession. The
President asked Congress last October to enact an economic security package that
would help employers create and retain jobs.

•

The complexity of our tax code also strangles our prosperity. Our tax code is an
abomination. And it is a drag on our ability to create jobs in this nation.

•

Small businessmen have to read through indecipherable rules for any number of
specific business-related expenses.

•

In the coming weeks, we at Treasury will be producing a series of reports on the
complexities of the tax code, for individuals, for small businesses and for
corporations. We'll highlight possible solutions to specific complexities and
work with Congress to see what we can implement this year.

•

The President has called on Congress to enact Trade Promotion Authority.

PO-I033
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'U S Governmenl Pnnllng Office 1998·619·559

•

A fundamental necessity for a strong economy is confidence. The lack of
confidence lingers in some parts of our economy, because of a lack of terrorism
risk insurance.

•

Recent events have also created some doubts about the confidence investors
should have in corporate financial information.

•

I believe we must have greater accountability for the information that is made
available to shareholders.

•

Our responsibility as a government is to ensure that they have the information
they need to make intelligent choices.

•

The President has called for protections so that employees have as much access to
the company shares in their 401 (k) as corporate officers have to their own shares
in the company.

•

Government has no business telling Americans where they can and can't invest
their money. And government can't ensure that no one ever makes a bad
investment decision. What we can do, and should do, is make every effort to
ensure that Americans have the skills to evaluate their savings and investment
choices.
--30--

D EPA R T 1\;1 E N T

0 F

THE

T REA SUR Y

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

EMBARGOED UNTIL 1 :30 P.M. EST
February 21, 2002

CONTACT: BETSY HOLAHAN
202-622-2960

REMARKS BY
THE HONORABLE SHEILA C. BAIR
ASSISTANT SECRETARY OF THE TREASURY FOR FINANCIAL INSTITUTIONS
NATIONAL ASSOCIATION OF AFFORDABLE HOUSING LENDERS
FEBRUARY 21, 2002

PREDATORY LENDING: CAN BEST PRACTICES BE PART OF THE SOLUTION?
Good morning and thank you for this opportunity to speak before you today about our
ideas for addressing predatory lending.
We should all be proud of the positive developments in mortgage and housing markets
that have taken place during the last decade. During the last decade, the percentage of
Americans who have achieved the dream of home ownership has increased significantly. This
increase in homeownership has, in part, been fueled by the broader availability of mortgagerelated credit to all types of borrowers. This increase in credit availability has been most evident
in the subprime market, which primarily serves borrowers with past credit problems. As noted
recently by Governor Gramlich, from 1993 to 2000, the number of subprime loans to purchase
homes increased from 19,000 to 306,000. The number of sUbprime home equity loans increased
from 66,000 to 658,000 during that same time period.
Clearly much has been done to improve home ownership opportunities and expand access
to credit. However, as President Bush noted in the State of the Union speech, "broader home
ownership, especially among minorities," remains a priority. While the Administration has set
forth an aggressive program for further increasing home ownership opportunities, we are also
focused on preserving those opportunities by keeping people in their homes and protecting them
from unscrupulous lenders. A key component of that goal is eliminating what has come to be
known as predatory lending.
We all know that predatory lending is difficult to clearly define. Predatory lending is
generally characterized by abusive lending practices that include deception, fraud, and other
practices that are unfair to borrowers.

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'U S Government Printing Office 1998 - 619-559

In the most egregious cases, lenders have made loans with little or no regard for a
borrower's ability to repay, and have engaged in mUltiple refinance transactions that result in
little or no benefit to a borrower. These types of abusive lending practices can result in the
stripping of borrowers' equity and, in the worst case, borrowers losing their homes. The result is
not only devastating to the borrower, but it also can contribute to a general decline in the
conditions of the surrounding neighborhood.
As different methods for combating predatory lending are considered, we must be careful
not to damage what has generally been a positive development - the expansion of the availability
of credit through the subprime market. Responsible providers of sUbprime credit provide an
important source of credit to borrowers with damaged credit histories. The current services of
responsible subprime lenders will not be easily replaced by government programs or through the
activities of other lending institutions.
Let me now briefly describe recent and current activities underway in the Administrative
Branch that should be beneficial in combating predatory lending, and some ideas for additional
initiatives that we have been considering at Treasury.

Federal Efforts to Combat Predatory Lending
The Federal government has recently or is currently undertaking a number of efforts
related to disclosures and enforcement that should contribute to a reduction in predatory lending.
First, the Department of Housing and Urban Development (HUD) is taking a new look at
improving mortgage disclosures. In particular, HUD is considering ways to improve disclosures
of mortgage yield spread premiums. High levels of broker compensation are often associated
with predatory lending, and to the extent that improved disclosures can better inform consumers
about broker compensation, some abusive lending practices could be stopped by consumers.
HUD is also considering ways to address predatory lending within its own mortgage
programs. Secretary Martinez has stated his intention to improve accountability within Federal
Housing Administration loan programs by considering rules that that would specify lenders'
responsibilities for the actions of mortgage brokers and appraisers.
Second, the Board of Governors of the Federal Reserve System has recently finalized
revisions to its regulations under the Home Ownership and Equity Protection Act (HOEPA) and
the Home Mortgage Disclosure Act (HMDA). The new HOEPA regulations will expand the
protections available under HOEPA to a broader group of borrowers by reducing the annual
percentage rate threshold for coverage from 10 percent (above the rate on a comparable maturity
Treasury bond) to 8 percent for first-lien mortgages. The Board estimates that this change alone
could triple the amount of first-lien mortgages covered by HOEP A. Other revisions include:
adding fees paid for single premium credit insurance to the HOEPA points and fees trigger;
prohibiting the original lender from refinancing a HOEPA loan within twelve months of
origination unless it is clearly in the borrower's interest; and requiring lenders to verify and
document borrowers' repayment ability.

Third, the Justice Department and the Federal Trade Commission (FTC) have taken
aggressive steps in recent years to crack down on abusive lending. The FTC has undertaken
several high profile cases that could mean broad redress for many consumers. The FTC also
devotes resources to consumer education and the Commission goes on record with its views on
legislative and regulatory proposals in this field. Because many of the practices associated with
predatory lending are already illegal, stronger enforcement is a key component of any solution to
the problem. In addition to stronger enforcement at the Federal level, increased enforcement
activity at the state level is also needed.

Treasury's Ideas for Combating Predatory Lending
While these recent Federal actions should be useful in reducing abusive lending practices
associated with predatory lending, is there more that we can do? At least two areas have stood
out to us - improved consumer education and encouraging greater mortgage industry
responsibility.
We must do more to educate borrowers so they are in a better position to provide a first
line of defense against abusive lending practices. To better prepare consumers for this task, the
Federal government should take a leadership role in educational efforts. My office is working
with others in the Administration and with industry, education, and non-profit groups to enhance
financial literacy. In addition, the Community Development Financial Institutions Fund - also a
part of my office - is increasingly building financial literacy programs into its award-making
process.
There is a lot of great work being done by the private sector - including many of the
institutions and groups that are members of the National Association of Affordable Housing
Lenders - to educate consumers about the mortgage process and the financial responsibilities of
home ownership. We applaud those efforts and hope to continue working with the mortgage
industry and consumer groups to improve borrower education.
The second area we have been considering is what the Federal government can do to
encourage private sector efforts to eliminate abusive lending practices. One area we have been
examining is whether it would be useful for the Federal government to playa role in developing
a national code of best practices that address predatory lending.
Many key players in the prime and subprime mortgage industry - again with the
leadership of many of the institutions and groups that are members of the National Association
of Affordable Housing Lenders - have implemented best practices or lending guidelines to
address predatory lending. Many of these lending guidelines were developed with active
participation of consumer groups.

Some of the practices addressed in current lending guidelines include: prohibiting the
sale and financing of single premium credit life insurance; limiting or prohibiting loans with
balloon terms or negative amortization features; limiting prepayment penalties and providing
borrowers the option of a loan without a prepayment penalty; requiring full credit bureau
reporting; requiring documentation of a borrower's ability to repay; limiting refinancing to
prevent loan "flipping"; and requiring that borrowers be given fair access to prime credit. Many
such codes also address developing standards for third party relationships; implementing
procedures to mitigate foreclosures; restricting charges for points and fees; and requiring fair and
less burdensome arbitration procedures. We have been taking a detailed look at these lending
guidelines and there appears to be a fair amount of agreement in a number of areas.
Given that there is a fair amount of agreement among individual institutions' best
practices and lending guidelines, it seems that it might be possible to build off of what has
already been implemented to develop a national code of best practices to address predatory
lending. We would see such a code as being voluntary, and hopefully a significant number of
institutions would agree to adopt the code. Institutions that agreed to abide by the code and then
failed to do so could be subject to enforcement actions by the FTC. Though we would view the
code as voluntary, we would hope to significantly expand the number oflenders adhering to best
practices through the participation of the secondary mortgage market.
The development of a national code of best practices could help promote consistency and
uniformity among state and local predatory lending laws. By setting national standards for good
lending practices, a code of industry best practices might provide a helpful model for the efforts
of state and local leaders in this area.
A code of best practices could also help consumers navigate the complex mortgage
financing process by giving them some assurance that the lender with whom they are dealing
adheres to certain core standards. I am strongly committed to an aggressive program of financial
education to help consumers better protect themselves against abusive lending practices. The
reality is, however, that home financing is exceedingly complex - I would venture to guess that
many of the homeowners in this room didn't fully understand the documents they signed at their
closing -if you even bothered to read them all. Through a well-publicized national code of best
practices, we could empower consumers with the ability to ask their lender a single question "Do
you adhere to the code?" If the lender said, yes, the consumer would know that they would
receive key protections for which their existed a federal enforcement mechanism. If the lender
said no, the consumer could then consider whether they wanted to look elsewhere for credit.
While a code of best practices is typically thought of as a private sector initiative, the
Federal government could playa leadership role in coordinating and encouraging the
development of a national code of best practices. In my view, the key components of that
leadership role would be: evaluating best practices and lending guidelines that are already in
place; considering the views of all stakeholders - brokers, lenders, consumer groups, secondary
market participants, and government regulators; and working with stakeholders to develop a
national code of best practices that could be broadly adopted.

Some stakeholders have raised concerns over the concept of a national code of best
practices. There is concern that code will not provide consumers with strong enough protection
and that the code will take pressure off of legislative efforts. In the coming weeks I hope to
evaluate these issues more closely, and further consider what role if any the Federal government
should take in encouraging the development of a national code of best practices. The goal of this
potential initiative would be to strengthen consumer protections by building upon the work
already done by a number of lenders in collaboration with consumer groups. In evaluating the
merits of a national code, the key issue is whether there would be value added to consumers.
I would greatly appreciate the thoughts and input of the members of this well-respected
organization on developing a national code of best practices and other steps the Federal
government can take to combat predatory lending. There is a tremendous amount of expertise in
this room, and I look forward to the opportunity to work with you in tackling this important
Issue.

In closing, I would like to thank the National Association of Affordable Housing Lenders
for inviting me to speak at your annual meeting.

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OFFICE OF PUBliC AFFAIRS -1500 PENNSYLVANIA AVENUE, N.W. - WASIflNGTON, D.C. - 20220 - (202) 622-2960

FOR IMMEDIATE RELEASE
February 21,2002

Contact: Tara Bradshaw
(202) 622-2014

U.S., NETHERLANDS TO NEGOTIATE REVISIONS TO INCOME TAX TREATY
Today the Treasury Department announces the United States and the Netherlands have
scheduled the negotiation of revisions to their current income tax treaty. The negotiations are
scheduled to begin in Washington, D.C. in April 2002. The revisions would modify the treaty
currently in force between the two countries, which has been in effect since 1993.
The Treasury Department invites written comments from the public regarding the
upcoming negotiations. Comments on the proposed treaty revisions should be sent to Barbara M.
Angus, International Tax Counsel, Room 1000 Main Treasury, Washington, DC 20220.
Comments may also be sent by fax to (202) 622-1772.

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PO-I035

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'U 5 Government Printing Oilice 1998· 619·559

DEPARTMEl"T OF THE TREASURY

TREASURY

NEWS

OFFICE OF PUBLIC AFFAIRS "1500 PENNYSYLVANIA AVENUE, N.W. "WASHINGTON, D.C." 20220 "(202) 622-2960

EMBARGOED UNTIL 2:30 P.M.
February 21, 2002

CONTACT:

Office of Financing
202/691-3550

TREASURY OFFERS 13-WEEK AND 26-WEEK BILLS
The Treasury will auction 13-week and 26-week Treasury bills totaling $29,000 million to
refund an estimated $38,860 million of publicly held 13-week, 26-week and 52-week Treasury bills
maturing February 28, 2002, and to pay down approximately $9,860 million. Also maturing is an
estimated $10,000 million of publicly held 4-week Treasury bills, the disposition of which will be
announced February 25, 2002.
The Federal Reserve System holds $16,444 million ofthe Treasury bills maturing on
February 28, 2002, in the System Open Market Account (SOMA). This amount may be refunded at
the highest discount rate of accepted competitive tenders either in these auctions or the 4-week
Treasury bill auction to be held February 26, 2002. Amounts awarded to SOMA will be in addition
to the offering amount.
Up to $1,000 million in noncompetitive bids from Foreign and International Monetary
Authority (FIMA) accounts bidding through the Federal Reserve Bank of New York will be included
within the offering amount of each auction. These noncompetitive bids will have a limit of $100
million per account and will be accepted in the order of smallest to largest, up to the aggregate award
limit of SI,OOO million.
TreasuryDirect customers have requested that we reinvest their maturing holdings of
approximately SI,187 million into the 13-week bill and $1,099 million into the 26-week bill.
The allocation percentage applied to bids awarded at the highest discount rate will be
rounded up to the next hundredth of a whole percentage point, e.g., 17.13%.
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.

PO-I036
Attachment

000

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

HIGHLIGHTS OF TREASURY OFFERINGS OF BILLS
TO HE ISSUED FEBRUARY 2R. 2002
February 21, 2002
Orrering_A'!I.~un!

............ '" .................... .
Public Offering ...................................... .
NLP Exclusion Amount.. .......................... .

$15,000 million
$15,000 million
$ 5,600 million

$14,000 million
$14,000 million
None

Qesc.ripHQn ofOfferj~g:
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 JW 2
February 25, 2002
February 28, 2002
May 30, 2002
November 29, 2001
$22,011 million
$1,000

182-day bill
912795 KY 6
February 25, 2002
February 28, 2002
August 29, 2002
February 28, 2002
$1,000

I!J.! following rules apply to all securities mentioned above:
Submission of Bids:
Noncompetitive bids: Accepted in full up to $1 million at the highest discount rate of accepted competitive bids.
Foreign and International Monetary Authority (FIMA) bids: Noncompetitive bids submitted through the Federal Reserve
Banks as agents for FIMA accounts. Accepted in order of size from smallest to largest with no more than $100
million awarded per account. The total noncompetitive amount awarded to Federal Reserve Banks as agents for FIMA
accounts will not exceed $1,000 million. A single bid that would cause the limit to be exceeded will
be partially accepted in the amount that brings the aggregate award total to the $1,000 million limit. However,
if there are two or more bids of equal amounts that would cause the limit to be exceeded, each will be prorated
to avoid exceeding the limit.
Competitive bids:
(I) Must be expressed as a discount rate with three decimals in increments of .005%, e.g., 7.100%, 7.105%.
(2) Net long position (NLP) 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 standard time on auction day
Competitive tenders .......... Prior to I :00 p.m. eastern standard 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.

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

Contact: Tara Bradshaw
(202) 622-2014

FOR IMMEDIATE RELEASE
February 22,2002

LINE 47 EXISTS TO GIVE MORE MONEY BACK TO TAXPAYERS
Krugman got it Backwards in Today's New York Times

Statement ofMichele Davis, Treasury Assistant Secretary for Public Affairs:

In the EditoriaVOp-Ed pages oftoday's New York Times, Paul Krugman's "The W
Scenario," is totally incorrect in stating that last summer's checks from the IRS are about to be
"snatched away" by the new line 47 on Form 1040. In fact, line 47 takes nothing away from any
taxpayer, and instead provides a tax cut for millions of taxpayers.
Here's the true story behind line 47:
Last summer Congress passed, and the President signed into law, a bill that provided
immediate tax relief for taxpayers. The bill created a new 10% bracket that did not go into effect
until January 1,2002. In order to give taxpayers the benefit of the new 10% bracket
immediately, Advance Payment checks were sent in the maximum amounts of $300 for singles,
$500 for head of households, and $600 for married filing jointly.
Line 47 of Form 1040 (line 30 of Form 1040A and line 7 of Form 1040EZ) provides a
Rate Reduction Credit for those taxpayers who did not get the maximum benefit from last
summer's Advance Payments, and whose 2001 income or tax amounts qualify them for an
additional amount.
Contrary to the column's assertion, last summer's checks did not reduce refunds or
increase tax bills. In fact, the most recent figures show that the average amount for nearly 23
million refunds processed has actually increased by $232, to $2,210.
Taxpayers who received the maximum Advance Payment for their filing status should
leave line 47 blank. The Advance Payment check they received last year is theirs to keep.
Period.
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_ For press releases, speeches, public schedules and official biographies, call our 24~our fax line at (202) 622-2040
• U 5 Government PrintIng Office 1998· 619.559

DEPART1\IENT

THE

TREASURY

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

Contact: Tasia Scolinos
(202) 622-2960

For Immediate Release
February 25, 2002

MEDIA ADVISORY

WHAT:

Treasury Secretary Paul O'Neill will provide an update on the war against
terrorist financing to Customs Service employees at the Naval Air Station
in Jacksonville, Florida.

WHEN:

Tuesday, February 26, 2002

TIME:

Press Conference will begin at 2: 15 p.m.

WHERE:

Naval Air Station Jacksonville
Highway 17, Jacksonville, FL

To access this press event please meet at the Main Gate ofthe Naval Air Station at 1:30
p.m. Base persOlmel will escort members of the media onto the base at this time. For
questions regarding access to this event please contact Rick Crews, Public Affairs NAS
Jacksonville at (904) 542-4032.

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For ~bress releases, speeches, public schedules and official biographies, call our 24-hour fax line at (202) 622-2040
'U.S. Government Printing Office 1998 - 619-559

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TREASURY

OFFICE OF PUBLIC AFFAIRS. 1500 PENNSYLVANIA AVENUE, N. W. e WASHINGTON, D.C.e 20220 e (202) 622.2960

EMBARGOED UNTIL 11:30 A.M.
February 25, 2002

Contact:

Office of Financing
202/691-3550

TREASURY OFFERS 4-WEEK BILLS
The Treasury will auction 4-week Treasury bills totaling $23,000 million to
refund an estimated $10,000 million of publicly held 4-week Treasury bills maturing
February 28, 2002, and to raise new cash of approximately $13,000 million.
Tenders for 4-week Treasury bills to be held on the book-entry records of
TreasuryDirect will not be accepted.
The Federal Reserve System holds $16,444 million of the Treasury bills maturing
on February 28, 2002, in the System Open Market Account (SOMA). This amount may be
refunded at the highest discount rate of accepted competitive tenders in this auction
up to the balance of the amount not awarded in today's 13-week and 26-week Treasury
bill auctions. Amounts awarded to SOMA will be in addition to the offering amount.
Up to $1,000 million in noncompetitive bids from Foreign and International
Monetary Authority (FIMA) accounts bidding through the Federal Reserve Bank of New York
will be included within the offering amount of the auction. These noncompetitive bids
will have a limit of $100 million per account and will be accepted in the order of
smallest to largest, up to the aggregate award limit of $1,000 million.
The allocation percentage applied to bids awarded at the highest discount rate
will be rounded up to the next hundredth of a whole percentage point, e.g., 17.13%.
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 BookEntry 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

PO-I039

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

HIGHLIGHTS OF TREASURY OFFERING
OF 4-WEEK BILLS TO BE ISSUED FEBRUARY 28, 2002
February 25, 2002
Offering Amount ..................... $23,000 million
Public Offering ..................... $23,000 million
NLP Exclusion Amount ................ $ 9,000 million
Description of Offering:
Term and type of security ........... 28-day bill
CUSIP number ........................ 912795 JM 4
Auction date ........................ February 26, 2002
Issue date .......................... February 28, 2002
Maturity date ....................... March 28, 2002
Original issue date ................. September 27, 2001
Currently outstanding ............... $35,113 million
Minimum bid amount and multiples .... $1,000
Submission of Bids:
Noncompetitive bids: Accepted in full up to $1 million at the highest
discount rate of accepted competitive bids.
Foreign and International Monetary Authority (FIMA) bids: Noncompetitive bids submitted through the Federal Reserve Banks as agents for
FIMA accounts. Accepted in order of size from smallest to largest
with no more than $100 million awarded per account. The total noncompetitive amount awarded to Federal Reserve Banks as agents for
FIMA accounts will not exceed $1,000 million. A single bid that
would cause the limit to be exceeded will be partially accepted in
the amount that brings the aggregate award total to the $1,000
million limit. However, if there are two or more bids of equal
amounts that would cause the limit to be exceeded, each will be
prorated to avoid exceeding the limit.
Competitive bids:
(1) Must be expressed as a discount rate with three decimals in
increments of .005%, e.g., 4.215%.
(2) Net long position (NLP) 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 standard time on auction day
Competitive tenders:
Prior to 1:00 p.m. eastern standard time on auction day
Payment Terms: By charge to a funds account at a Federal Reserve Bank
on issue date.

CONTACT:

Office of Financing
202-691-3550

RESULTS OF TREASURY'S AUCTION OF 13-WEEK BILLS
91-Day Bill
February 28, 2002
May 30, 2002
912795JW2

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

1.735%

Investment Rate 1/:

1.769%

Price:

99.561

All noncompetitive and successful competitive bidders were awarded
securities at the high rate. Tenders at the high discount rate were
allotted 35.04%. All tenders at lower rates were accepted in full.
AMOUNTS TENDERED AND ACCEPTED (in thousands)
Tender Type
Competitive
Noncompetitive
FIMA (noncompetitive)

Tendered
$

33,403,615
1,622,527
207,000

SUBTOTAL

35,233,142

Federal Reserve

6,754,463

TOTAL

41,987,605

Accepted
$

13,170,535
1,622,527
207,000
15,000,062 2/
6,754,463

21,754,525

Median rate
1.720%: 50% of the amount of accepted competitive tenders
was tendered at or below that rate.
Low rate
1.700%:
5% of the amount
of accepted competitive tenders was tendered at or below that rate.
Bid-to-Cover Ratio = 35,233,142 / 15,000,062 = 2.35
1/ Equivalent coupon-issue yield.
2/ Awards to TREASURY DIRECT = $1,296,900,000

http://www.publicdebt.treas.gov

PO-I040

CONTACT:

Office of Financing
202-691-3550

RESULTS OF TREASURY'S AUCTION OF 26-WEEK BILLS
Term:
Issue Date:
Maturity Date:
CUSIP Number:

182-Day Bill
February 28, 2002
August 29, 2002
912795KY6

High Rate:

1.850%

Investment Rate 1/:

1. 893%

Price:

99.065

All noncompetitive and successful competitive bidders were awarded
securities at the high rate. Tenders at the high discount rate were
allotted 21.71%.
All tenders at lower rates were accepted in full.
AMOUNTS TENDERED AND ACCEPTED (in thousands)
Tender Type

Tendered

Competitive
Noncompetitive
FIMA (noncompetitive)

SUBTOTAL

30,782,003
1,600,550
485,000

Accepted
$

32,867,553

TOTAL

14,000,388 2/

5,810,002

Federal Reserve
$

38,677,555

11,914,838
1,600,550
485,000

5,810,002
$

19,810,390

Median rate
1.835%: 50% of the amount of accepted competitive tenders
was tendered at or below that rate.
Low rate
1.800%:
5% of the amount
of accepted competitive tenders was tendered at or below that rate.
Bid-to-Cover Ratio

32,867,553 / 14,000,388

2.35

1/ Equivalent coupon-issue yield.
2/ Awards to TREASURY DIRECT = $1,162,243,000

http://www.publicdebUreas.gov

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

EMBARGOED UNTIL 8:45 A.M.
February 26, 2002

CONTACT: BETSY HOLAHAN
202-622-2960

REMARKS BY
THE HONORABLE PETER R. FISHER
UNDER SECRETARY OF THE TREASURY FOR DOMESTIC FINANCE
BEFORE THE
CREDIT UNION NATIONAL ASSOCIATION'S
2002 GOVERNMENTAL AFFAIRS CONFERENCE
ENHANCING FINANCIAL UNDERSTANDING

Good morning and thank you for this opportunity to speak before you today.
Credit unions have a long and proud tradition of providing basic financial services to the
working men and women of America. The history of the credit union movement is, in many
ways, a story of volunteers, something the President has recently called upon Americans to take
up. As volunteer organizations, credit unions have helped to build communities for almost a
hundred years. While the credit union movement has since grown to include large and
sophisticated financial institutions, offering a broad menu of services, I hope that you never lose
sight of your roots and of the importance ofvolunteerism to the credit union ideal.
I would like to talk with you this morning about an issue of great importance to you and
your members, and to ask for your assistance.
Secretary O'Neill has demonstrated great leadership on the issue of financial education
and has made it a high priority issue at the Treasury Department. As the Secretary explained it
to the Senate Banking Committee earlier this month, "[T]he evolution of our nation's financial
system has created wonderful new opportunities for Americans to meet their needs as consumers,
while at the same time, building wealth and security for their and their families' economic
futures. However, Americans need to be fully prepared and financially educated to take
advantage of these opportunities. If we do not understand the most important concepts of
personal finance, such as how we budget and save, invest and use credit wisely, then we are
missing our full potential as individuals, as well as our potential as a country."

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This morning I would like to talk about financial education, but even more broadly,
financial understanding. As managers and directors of financial institutions that serve 80 million
Americans, you are directly involved with your members in their financial transactions. With
that in mind, I seek your assistance as we work to enhance both financial understanding and
financial opportunity for all Americans.
Regrettably, for some Americans, problems with financial literacy begin with literacy
problems and basic arithmetic. As you know, the President made the establishment of
meaningful education standards one of the first priorities of his new Administration, and
important legislation to improve our education system has already been enacted. In all that we
do in developing and overseeing our financial system, we must work diligently to help those who
lack the most basic skills. As financial institutions, you know the importance of ensuring your
members' understanding of your products and services for them to achieve their personal goals
and for your credit union to remain viable.
One direct way in which credit unions could help us draw more Americans into the
financial mainstream is through our First Accounts program. The paramount goal of First
Accounts is to move a maximum number of unbanked low- and moderate-income individuals to
a banked status with either an insured depository institution or an insured credit union through
the development of financial products and services that can serve as replicable models in meeting
the financial services needs of such individuals. Additional goals include the provision of
financial education to unbanked low- and moderate-income individuals to enhance the
sustainability of the new financial relationships.
On December 27 th , we published a notice of funds availability in the Federal Register
inviting applications for First Accounts grants. The amount available is approximately $8
million to fund projects that can serve as models to connect unbanked low- and moderate-income
individuals to mainstream financial services. A wide variety of entities are eligible to apply for
the grants, including credit unions. I encourage you to visit our web site and consider this
opportunity (www.treas.gov/firstaccounts/).
Looking beyond the problem of financial literacy, many otherwise educated, even highly
educated, Americans are not conscious of the basic financial concepts that are familiar, even
second nature, to everyone in this room. I would submit that part of the difficulty this group may
have in managing their financial affairs is a basic shortcoming in their understanding not just of
finance and economics, but of probability and statistics.
For most household financial decisions, the data needed for decision-making are
available. Indeed, in today's digital age, some might say we are swimming, or even drowning in
financial data. Yet what good is the data without the understanding of how to use it to make
informed decisions? As we seek to improve our country's financial education, we should
consider the importance of teaching our children probability and statistics. Armed with this
knowledge, they will be far better prepared to manage their financial affairs and chart a course
for their own financial security.

To deal with financial decision-making in the computer age, the Internet age, we all
need to develop our understanding not of computers but of statistics and probability. To keep up
with the changing world of finance, we all have to be able to know what to do with the financial
data at our disposal.
Before we sell ourselves and the American people short, we do need to recognize that
millions of Americans have demonstrated in practice a financial understanding that many may
not be able to articulate. Put simply, many Americans have shown in their financial behavior an
intuitive understanding of basic financial concepts even if they would not be able to articulate the
rationale for their financial decision-making the way a professor of finance -- or a credit union
executive - might. Consider:
The active mortgage refinance market today shows that millions of homeowners
functionally understand the prepayment option in their mortgage. The development of numerous
mortgage products reflects an ability of households to select among a diverse array of mortgage
payment structures. In short, the way in which millions of Americans use the mortgage credit
options available to manage their personal cash flows and balance sheets reflects an
understanding of rather complex financial principles.
Automobile purchase arrangements offer another example. Decisions to buy or lease,
and to think about auto purchases in terms of personal cash flows rather than just price and color,
reflect an essential principle of finance. Thirty or forty years ago this kind of financial analysis,
thinking in terms of prospective cash flows rather than asset prices or purchase prices, was
something for CFOs, not for the mass market of auto purchasers. Yet today it is there at the end
of all the auto ads on TV - comparing lease payments with APR.
We need your help not only with First Accounts but also to make sure that we in this
town don't underestimate the ability of the American people to make financial decisions for
themselves. Limiting people's choices is no way to enhance and further their financial
understanding.
In closing, I thank you for this opportunity to talk with you and wish you continued
success.

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EMBARGOED UNTIL 8:45 PM EASTERN TIME
Monday, February 25,2002

CONTACT:

Rob Nichols
(202) 622-2910

ADDRESS OF TREASURY SECRETARY PAUL O'NEILL
BEFORE THE
CHICAGO ECONOMIC CLUB
CHICAGO, ILLINOIS
I am an optimist about the U.S. economy. Let me tell you why. In 1977, after working
for the federal government for 15 years, I moved to the private sector, affording me a front row
perspective on the U.S. economy and on many other countries of the world economy as a product
supplier. Let me remind you of the circumstances then. At that time and through the early
1980s, our situation was characterized by a struggling economy - relatively high unemployment
rates, high inflation and high interest rates and a general sense that we were being eclipsed by
Japan and that Russia was probably our equal.
If you fast forward to today and look back you see a U.S. economy that has had a
remarkable period of income and productivity growth while Japan has had 11 years of average
growth of less than 1% and Russia's economy by their own reckoning is the size of Portugal's.
Why the change? We have an enabling economic structure - not perfect, but as
compared to other economies it is truer to the fundamentals that are necessary to economic
growth and rising living standards. Our government system provides the rule of law, enforceable
contracts and minimal corruption, buttressed by a relative openness to world competition and
flexibility in our labor markets.
The energies of the private sector were awakened by the realization that we were
slipping. We stopped complaining about low wage rates and subsidized products in other places
and focused on winning the world as it was. And we have prospered.
Robust growth and prosperity began in the early 1980s, and hardly flagged until the year
2000. In the last half of the 1990s we grew at an unsustainable rate. The excesses of the dotcorns and telecom began a correction, first seen in order rates in mid-2000. By December of
2000 we were clearly in a correction phase that deepened through the first half of 2001. The
Federal Reserve responded with rate cuts and Congress passed tax reform which began releasing
rd
money to the taxpayers on July 23 .

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I believe we were headed for a recovery - a correction without a recession - until our
economy was basically shut down for a period following the attacks of September 11. The third
quarter negative growth came as no surprise and those who crunch the economic models were
certain the fourth quarter would be even worse, estimating 2.5% or even 3% negative growth.
As I looked at the data and talked to people around the country I heard a lot of doom and gloom
but when I asked business leaders about their own businesses I found they were taking action.
As a consequence when the third quarter numbers were released I said I thought there was a
possibility that the fourth quarter would show positive growth. Businesses were discounting
product prices to move goods and services and they were pulling down rates of production to
eliminate inventory. They also rethought capital spending plans. On balance they took the
actions necessary to sharply improve productivity and together these actions produced a modest
rate of real growth in the fourth quarter - a rate I expect with be adjusted up when the regular
reviews are made.
The best of the best around the world take their ideas and made them reality - creating
jobs and improving living standards of people everywhere. The leading edge innovators in every
sector of the economy are miles ahead of their competition - and that large gap means there is
immense untapped potential for improvement.
It is useful to remember how the improvement is realized. Last summer after the tax
reform bill was passed, I met the owner of a small florist shop who told me he was hiring one
new person because the tax reform freed up the money to do it. This is an important story that
makes this point: job growth in this country occurs one at a time. And when we leave people
with more of what they earn, they pursue their individual goals, creating jobs and developing
products and processes that make our lives healthier and more comfortable.

This individual story links to an important observation about our fiscal condition. Those
who think American workers are getting to keep too much of their own incomes after last
summer's tax reforms don't realize we are looking at a tax system that will still take in 19% of
the GDP compared to an average rate of 18% since 1945. I think they also don't understand that
a vibrant growing economy is what produces the basis for taxes that can be used for shared
public purposes. But most people do understand this, and that is the reason not many voices are
calling for tax increases as our economy is only in the early stages of recovering to the 3-3.5%
annual growth rates that will create jobs for the 1.4 million people who have been displaced in
the last year, and provide jobs for each year's increment of new job seekers. As we get back to a
good rate of economic growth, budget surpluses with reappear so long as we exercise discipline
in federal spending. It is true that the President's budget plan for fiscal year 2003 would produce
a modest unified budget deficit because of funding requirements for the war and homeland
security, but we believe this is the correct balance for the current circumstances.
Our job in government is to continuously improve the framework for our economy.
While our recovery is underway, there are significant obstacles imposed by government that
slow its speed. The President doesn't want to sit still and wait for the recovery to gain strengthhe wants to speed Americans' return to work.

We are hopeful the Senate will act soon to take up a stimulus package as the President
requested, to reduce the tax burden on job-creating investments. The Senate has voted to extend
unemployment benefits, but I hope they will also see the need to vote to boost job creation.
The complexity of our tax code is a take away from our economic potential. Estimates of
how much taxpayers spend complying with the tax code range from $70 to $125 billion a year.
That's a lot oflawyers and accountants. The cost of their services has to be included in the price
of products. I wonder how many of you think your food tastes better or your car performs better
or your clothes fit better because of the added cost you pay to cover the cost of lawyers and
accountants figuring out the tax code. Apologies to lawyers and accountants, but it would be
great to have the need for a federal retraining program to convert you into product engineers.
We at Treasury are conducting a comprehensive review of the tax laws and their
complexities, and the options for fixing some of the biggest headaches. We'll begin releasing
these reports in the coming months. Did you know there are five different definitions of child in
the tax code? You'd think it would be easy to know if you have a child living in your household
or not. Guess again. And it doesn't end there. Take a look at all the provisions that allow for
deducting different higher education expenses. Or all the different rules and requirements for
various types of retirement savings.
It's not just individuals who suffer, either. Small businessmen have to read through
indecipherable rules. Determining whether someone who works for you is an independent
contractor or an employee can be an incredible headache. Small businessmen spend countless
hours battling the IRS over timing of a deduction - not whether or not the cost can be deducted,
just whether the deduction should be taken this year or next.
Our tax code is an abomination. And it is a drag on our ability to create jobs in this
nation. I hope that by publishing detailed descriptions of these complexities, we can begin a
cooperative effort with the Congress to undo some of these complexities that give individuals
headaches and force small business to pay for tax advice instead of expanding their businesses
and creating jobs.
Our agenda for prosperity encompasses other important policy objectives. The President
has called on Congress to enact Trade Promotion Authority, to open foreign markets to U.S.
products and services and create jobs here at home. The House has passed TPA, and it is
awaiting action in the Senate. The President has also put forth a national energy strategy, to
assure cleaner energy and stable prices. His plan would create jobs in the energy sector, and also
in the technology sector as it spurs innovation to make our energy sources cleaner.
And now just a few words about a topical subject. Let me say that the subject is TRUST.
.
When publicly traded companies provide information to their shareholders or potent~al
shareholders, there must be accountability for the accuracy and completeness of the mformatIOn
put forward.

In the wake of recent events, the President asked me to work with Alan Greenspan,
Harvey Pitt of the SEC and Jim Newsome of the CFTC to review the current requirements for
disclosure and corporate governance, to assure that investors are getting the information they
need to make informed decisions. We will make recommendations to the President in the coming
weeks.
I start from this premise: with the highest position in an organization goes the highest
responsibility. Let's tighten the meaning of what it means to be responsible. CEOs are the ones
who know what's going on in their companies - there's no excuse for them not to know the
position of the company and what variables will determine the company's future success. Every
quarter the CEO should say I know what every investor needs to know and I've given it all to
you. That doesn't mean investors should be forced to figure out what's important in a dense
report the size of the NYC phonebook. The CEO should also identify the 5 or 10 most important
things. And ifthere's negligence, there should be some recourse.
On a related subject, I believe government has no business telling Americans where they
can and can't invest their money. And government can't ensure that no one ever makes a bad
investment decision. What we can do, and should do, is make every effort to ensure that
Americans have the skills to evaluate their savings and investment choices. We at Treasury are
devoting serious attention to how best to improve Americans' financial literacy. I'm very
pleased that Rosario Marin, the Treasurer of the United States, is going to lead an effort for us to
make financial education part of the school curriculum for children everywhere - not as a
separate course to take, but integrated into math and reading classes, so they learn at a young age
the reward to saving and the costs and benefits of assuming debt.
Financial literacy is part of the foundation of a vibrant entrepreneurial economy - it
ensures that everyone can join in and make the most of their ideas in a world where hard work is
rewarded and capital flows freely to develop and implement good ideas.
Let me say again, as I did at the outset, I am an optimist about the U.S. economy and
more broadly about our society. I believe the progress we will make in the next 25 years will
dwarf the progress of the past 25 years. Together we can do it and together we will do it.
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OFFICE OF PUBUC AFFAIRS -1500 PENNSYLVANIA AVENUE, N.W. - WASHINGTON, D.C. - 20220 - (202) 622-2960

FOR IMMEDIATE RELEASE
February 26, 2002

CONTACT: BETSY HOLAHAN
202-622-2960

Treasury Announces USA PATRIOT Act Regulations
To Improve Information Sharing
The Department of the Treasury announces the issuance of additional regulations
implementing the anti-money laundering and anti-terrorism provisions of the USA PATRIOT
Act. The regulations, sent today to the Federal Register for publication, set forth the
requirements of two important information-sharing provisions contained in section 314 of the
Act.
First, in a proposed rule, the regulations seek to utilize the existing communication
resources of Treasury's Financial Crimes Enforcement Network (FinCEN) to establish a link
between federal law enforcement and financial institutions for the purpose of sharing information
concerning accounts and transactions that may involve terrorist activity or money laundering.
Second, in a regulation effective as soon as it is published in the Federal Register, certain
financial institutions will be able to share information amongst themselves for the purpose of
identifying and reporting suspected terrorism and money laundering once the financial
institutions have notified FinCEN that they intend to share such information and that they will
take adequate steps to maintain confidentiality.
The USA PATRIOT Act, in particular Title III of the Act, authorized bold, new measures
to protect our financial system from money laundering and terrorism by reducing the barriers to
the sharing of financial information among governmental entities as well as financial institutions,
systematically targeting known risks to the financial system, and providing Treasury with the
ability to identify new risks as they develop and take appropriate action to counter them. Section
314 of the Act bolsters the information exchange regime by enhancing two key channels for
sharing information: (1) information exchange between the government and financial
institutions (section 314(a»; and (2) information exchange among financial institutions (section
314(b

».

Information Sharing Between the Government and Financial Institutions
The proposed rule released today seeks to create a communication network to link federal
law enforcement with financial institutions so that vital information relating to suspected
terrorists and money launderers can be exchanged quickly and without compromising pending
investigations.

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FinCEN, a bureau of Treasury, already maintains a government-wide data access
service to assist federal, State, and local law enforcement agencies in the detection, prevention,
and prosecution of terrorism, organized crime, money laundering, and other financial crimes.
Under the proposed rule, federal law enforcement will have the ability to locate accounts of, and
transactions conduct by, suspected terrorist or money launderers by providing their names and
identifying information to FinCEN, which will then blast that information, both electronically
and by fax, to financial institutions so that a check of accounts and transactions can made. If
matches are found, law enforcement can then follow up with the financial institution directly.
The rule is intended to formalize and streamline the information sharing and reporting process
that the federal government undertook following the attacks of September 11, 200 I, by
permitting FinCEN to serve as a conduit for information sharing between federal law
enforcement agencies and financial institutions.
This regulation is a proposed rule, meaning that it will not go into effect until publication
of a final rule that considers comments received.
Information Sharing Among Financial Institutions
In order to facilitate financial institutions' ability to identify and report to the federal
government instances of money laundering or terrorism, Congress authorized the sharing of
information among financial institutions about those suspected of terrorism and money
laundering. Once notice has been provided to Treasury, financial institutions are free to share
such information amongst themselves solely for the purpose of identifying and reporting to the
federal government such activities.
The regulation issued today sets forth a notice provision requiring financial institutions to
file a yearly certification if they wish to share information under this provision. The
certification, which can be completed online at FinCEN's webpage
(http://www.treas.gov/fincen), requires financial institutions to take the steps necessary to protect
the confidentiality of the information and to use the information only for purposes specified in
the rule.
Given the importance of this information sharing provision, Treasury is issuing this
regulation as an interim final rule, effective when published in the Federal Register. By also
issuing this provision in the proposed rule, Treasury ensures that the public has an opportunity to
comment on the rule.
This news release and links to the regulations can be found at www.treas.gov/press.
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EMBARGOED UNTIL 1:30 P.M.
February 26, 2002

CONTACT: BETSY HOLAHAN
202-622-2960

REMARKS BY THE HONORABLE SHEILA C. BAIR
ASSIST ANT SECRETARY FOR FINANCIAL INSTITUTIONS
BEFORE MULTILATERAL INVESTMENT FUNDI
INTER-AMERICAN DEVELOPMENT BANK
SECOND REGIONAL CONFERENCE
ON IMPACT OF REMITTANCES AS A DEVELOPMENT TOOL

INTRODUCTION

Thank you for that kind introduction. I am pleased and privileged to have this
opportunity to speak before such a broad range of dedicated organizations that recognize the
importance and impact that U.S. remittances have on Latin America and the Caribbean. I would
first like to thank Mr. Enrique Iglesias and Mr. Donald Terry for inviting me to speak today and I
look forward to our continued dialogue on this issue.
The IDB has been a leader on the issue of remittances to Latin America and the
Caribbean. In addition to today's conference and the release of the Survey of Remittances
Senders: U.S. to Latin America, the IDB held a regional conference last May to highlight the role
of remittances as a development tool. Through today's conference and the two regional
roundtables that preceded it, the IDB fulfills an important role in raising awareness of the issue
surrounding remittances, proposing innovative solutions, and promoting cooperation among the
many public- and private-sector groups involved in remittances.
My role as the Treasury Assistant Secretary for Financial Institutions encompasses a wide
range of responsibilities, but one that holds a particular interest to me is that of consumer policy.
As you know, the majority of remittances sent to Latin America and the Caribbean are generated
at the consumer level - with individuals making investment decisions on how to spend their
money. These remittances, although small in individual transaction size, have a significant
global impact in the aggregate. Some estimates show that the level of U.S. remittances sent
annually to Latin America and the Caribbean has reached the $15 to $20 billion mark. With the
increasing number of Latin American workers residing in the U.S. and the familial ties that are
maintained abroad, the level of remittances will continue to grow as well.

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At Treasury, we recognize the importance of remittances to Latin America and support
the efforts of the IDB and other groups and entities to improve existing remittance systems and
provide remittance services at reasonable prices. This has been a special focus of the Partnership
for Prosperity, a key initiative of President Bush and President Fox, launched during Fox's State
visit in September 2001. The Partnership, led by senior government officials from both the U.S.
and Mexico including Deputy Secretary of the Treasury Kenneth Dam, is a pUblic-private
alliance that aims to boost the social and economic well being of citizens in Mexico particularly
in regions and sectors where economic growth has lagged and fueled migration. Since the
Partnership focuses on private capital flows of capital, the focus on remittances is a natural area
to address. I also look forward to having an ongoing dialogue with IDB and the other
organizations represented here today as we work together to expand the availability and
affordability of remittance services in the United States.

II.

BACKGROUND

According to an IDB study, Latin American immigrants living in the United States send
an average of $250 home to their native countries eight to ten times per year. This activity
translates into Latin American countries receiving close to $20 billion annually - about one-fifth
of total worldwide remittances. In a number of Latin American countries, income from
remittances accounts for a significant percentage of the gross domestic product. If current
growth rates are maintained, cumulative remittances to Latin America could reach $300 billion
for the ten-year period ending in 2010.
Although the sheer volume of remittances to Latin America is a key indicator of their
importance, how recipients are using these funds further demonstrates their significance. In
Latin American countries, most remittances are used to pay for daily household expenses,
including food, clothing, and health care, and comprise a substantial portion of household
income. Recipients may also use remitted funds to improve their standard of living through
spending to build or improve housing or the purchase of durable consumer goods, such as
washing machines. Finally, some of funds that are remitted to Latin America are spent on
income- and employment-generating activities, such as starting a business or for community
deVelopment projects.
As the volume of funds remitted to Latin American countries is expected to continue to
grow rapidly, and in light of the importance of remittances to the recipient nations' economies,
we intend to support efforts aimed at improving the U.S. remittance infrastructure and making
remittance services more affordable.
Treasury also is seeking ways to ensure that remittances to Latin America are put to the
most economically efficient uses. In this regard, it is important that the countries receiving
remittances have the financial services infrastructures in place to translate capital into productive
investments. Accordingly, we invite the IDB, in particular the MIF, to continue funding projects
that improve the financial services infrastructures of Latin American and Caribbean countries,
such as the recent $3.5 million grant to Mexico's Ministry of Finance and Public Credit for a
project to strengthen the Mexican popular savings and loan sector.

III.

THE REMITTANCE INDUSTRY

The IDB's study of remittances has found that although charges have declined
significantly over the past two years, transfer costs for remittances are still high. The average
transfer fee and exchange rate commission to send $200 varies from approximately $15 to $26.
The cost varies as a result of the type of institution used to send the money and the country
where the money is being sent, but can often reach up to 20% of the amount being sent, when
transmission fees and losses on the exchange rate are both factored in. One of the reasons that
prices have remained high is a lack of competition in the money transfer business. The industry
continues to be dominated by a small number of money transmitters that generally tend to charge
higher fees than banks or credit unions. By increasing competition, the price of remittances
should continue to drop.
With respect to competition, an important recent trend in the area of remittances has
involved traditional banking institutions increasing their efforts to provide money transfer
services to the immigrant market at lower prices. Wells Fargo recently introduced a remittance
service that charges a flat fee of$10 for remittances to Mexico of up to $1000. The service is
offered through ajoint venture with Mexico's Bancomer. Bank of America is also working on a
safe, low-cost, and convenient remittance product that can be offered to Latino workers.
MetroBank in Houston now offers a Matricula Checking account that allows the account holder
to designate an individual in Mexico to have ATM access to the account. Another bank that has
successfully targeted remittance services to a particular population is EI Salvador's Bancomerio.
Credit unions provide an alternative for remittance activities in certain markets. For
example, in Durham, North Carolina, the Latino Community Credit Union, which opened in
June 2000 to serve the area's Hispanic population, offers a remittance service that charges $6.50
to $10 for money transfers to Latin America. Another credit union initiative is IRnet, the World
Council of Credit Unions, Inc.' s international remittance service, which facilitates credit unions'
ability to transfer of money at reasonable prices to a large of number of countries throughout the
world.
I am excited to see a focus at these and other depository institutions as they recognize that
large segments of the U.S. population have yet to be courted into the traditional banking system
- a move that makes good business sense and at the same time can make remittance products
more affordable. The recent efforts of these to entities reach out to the Hispanic population in
the United States and to offer reasonably-priced remittance services is an excellent first step
toward achieving the goal of a more efficient and affordable remittance system.
We encourage depository institutions to continue their efforts to serve the Hispanic
community in the United States and to take advantage of technological advances to offer
remittance and other services to this population on a broad basis and at a reasonable price. One
example of a depository institution using technology in this way is Wells Fargo's "Intercuenta
Express" service. Intercuenta Express allows a customer of Wells Fargo to initiate a funds
transfer to Mexico using an ATM, the Internet, or telephone banking, thereby making such
transactions easier for customers by eliminating the requirement to visit a branch location.

At Treasury, we understand that the remittances sent to Latin America can serve as a vital
piece of foreign aid that goes beyond consumption. We support any efforts made to make the
process of sending remittances more affordable for the people that use it - most of whom earn
low wages to begin with.
IV.

USA PATRIOT ACT'S EFFECT ON REMITTANCES

On October 26,2001, President Bush signed into law the USA Patriot Act. The Patriot
Act requires financial institutions, including money services businesses such as money
transmitters, to establish anti-money laundering programs and verify the identification of their
customers. These requirements are in addition to the suspicious activity reporting requirements
that already apply to money services businesses.
With respect to the promulgation of any regulations under the Act, Treasury will seek to
minimize the regulatory burdens on financial institutions in a manner that is consistent with
fighting terrorism and money laundering. The Act's anti-money laundering provisions, however,
undoubtedly will affect industries engaged in transmitting money to Latin America.
Financial institutions engaged in the remittance business may face special challenges in
complying with the identification requirement because many of their customers may not have
standard forms of U.S. identification. The issue of how to deal with identification of non-U.S.
persons is being considered carefully by Treasury Domestic Finance, along with Treasury
Enforcement, as they chair an intra-governmental effort to develop identification standards for
the various types of financial services providers. Recognizing the importance of remittances to
Latin America, the Treasury will strive to find a balance between the need for strong regulation
that provides a real benefit to those working to achieve national security and law enforcement
objectives and the ability of financial institutions to serve Latin American migrant communities
and provide remittance services at a reasonable price.
Non-banking institutions, including those engaged in the remittance business, are likely
to face higher compliance burdens both as a result of the Patriot Act and the recently effective
requirement that such institutions register with the Treasury as money services businesses.
These requirements should provide additional consumer protections to the individuals utilizing
these businesses.
Subjecting non-banking institutions to requirements that are similar to those applicable to
banking institutions will create a more level playing field between the two industries with respect
to providing remittance services. A level playing field provides an incentive for traditional
banking institutions to enter the remittance business, thereby providing additional market
competition and leading to lower prices for remittance services.
The entry of traditional banking institutions into the remittance business also should
result in an increase in the number of Latin American migrants being incorporated into the
mainstream banking system.

By attracting Latin American migrants through reasonably priced remittance services,
traditional banks have an opportunity to extend these relationships to account relationship.

FIRST ACCOUNTS

In addition to seeking improvements in remittance systems, I am also working on a
closely related topic - increasing the number of people using mainstream financial services. As
we bring more mainstream financial institutions into providing remittance services, we also want
to encourage more "unbanked" families and individuals to use mainstream financial services.

There are at least three benefits to being banked:
First, increased safety and security - Carrying large amounts of cash is dangerous.
Keeping cash at home is risky.
Second, lower financial transaction costs - The costs of financial transactions outside the
banking system are high. Recent Treasury research indicates that a minimum wage
worker can pay an average of $18 per month for cashing paychecks at a check casher. A
Social Security recipient would pay an average of $9-16 a month to cash his or her riskfree government check.
And, third, the opportunity to build a promising future - It is difficult to participate in the
mainstream economy without a checking account. It is more difficult to establish a sound
credit record, qualify for a car loan, obtain a home mortgage, and receive a small business
loan. Bank accounts can help families to save and manage their money.
Our initiative to move unbanked families and individuals into mainstream financial
services is called First Accounts. This past December 27 th , Treasury published a notice of funds
availability, a NOF A, in the Federal Register inviting applications for First Accounts grants. The
amount available is approximately $8 million to fund projects that can serve as models to
connect unbanked low- and moderate-income individuals to mainstream financial services.
A wide variety of entities are eligible to apply for the grants - such as employers,
financial services electronic networks, insured depository institutions, labor organizations, local
governments, nonprofit organizations, and States. Given the number of calls and e-mails
Treasury has received, many applications are expected from a wide range of entities.
The paramount goal of First Accounts is to move a maximum number of unbanked lowand moderate-income individuals to a banked status with either an insured depository institution
or an insured credit union through the development of financial products and services that can
serve as replicable models in meeting the financial services needs of such individuals.
Additional goals include the provision of financial education to unbanked low- and moderateincome individuals to enhance the sustainability of the new financial relationships. We will also
undertake research to evaluate the success of the funded projects and to understand what
products, services, educational initiatives, marketing techniques or incentives are needed.

VI.

CONCLUSION

In closing, I would like to reiterate Treasury's support for efforts that will expand the
availability and affordability remittances to Latin America. We particularly encourage initiatives
that, in addition to providing remittance services, will bring groups that have traditionally been
outside of the mainstream banking system into it. I look forward to learning from the innovative
experience of the MIF and my Latin American colleagues and gaining knowledge from your
valuable insights with respect to this issue. Working together, I am confident that we can
improve the current remittance system in a manner that is consistent with the global effort to
combat money laundering and terrorism.
Thank you.
-30-

DEPARTMEl"T OF THE TREASURY

TREASURY

NEWS

OFFICE OF PUBLIC AFFAIRS "1500 PENNYSYLVANIA AVENUE, N.W. "WASHINGTON, D.C." 20220 "(202) 622-2960

For Immediate Release
February 26,2002

Contact: Tara Bradshaw
(202) 622-2014

TESTIMONY OF MARK WEINBERGER
ASSIST ANT SECRETARY OF THE TREASURY (TAX POLICY)
COMMITTEE ON WAYS AND MEANS
UNITED STATES HOUSE OF REPRESENTATIVES

Mr. Chainnan, Congressman Rangel and distinguished Members of the
Committee, I thank you for the opportunity to testify before the Ways and Means
Committee on the important issue of retirement security -- specifically, employer
sponsored tax-qualified retirement savings plans, such as 401(k) plans.
My testimony this afternoon will address the President's Retirement Security
Plan. As background, I will also address the current structure of the employer-provided
retirement system as it is reflected in the Internal Revenue Code (the Code), especially
plans that invest in company stock, and the expansions brought about by last year's
Economic Growth and Tax Relief Reconciliation Act of2001 (EGTRRA).
The members ofthis Committee have always been serious proponents of the
expansion of the retirement system for American workers, retirees, and their families.
Mr. Portman and Mr. Cardin have lead the way in promoting retirement legislation.
Their efforts over the last few years resulted in retirement legislation that had
overwhelming bipartisan support in the House of Representatives. Most of the provisions
in their retirement bill were enacted last year as part of EGTRRA and we, at Treasury and
the IRS, are working hard to make sure that these provisions have been implemented.
Thank you for your leadership.
There are many more members of this Committee who also lead the way when it
comes to expanding and protecting American retirement security. Mr. Johnson is one of
those leaders both by using his position on this Committee and as the Chairman ofthe
Employer-Employee Relations Subcommittee of the Education and the Workforce
Committee. Mr. Neal has always shown great interest in retirement savings over the
years. Both Mr. Weller and Mr. Matsui have been champions for greater disclosure to
participants when employers change plan forn1Ulas. Mr. Ramstad has been a great friend
of employee stock ownership plans, especially when used by small business. Ms. Dunn
has always been an advocate of retirement issues, especially as they relate to women.
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She was a passionate proponent of the catch-up contribution, which is now
available to those over age 50. Mr. Pomeroy, although new to this Committee, has a
longstanding interest in retirement policy, especially the revitalization ofthe defined
benefit plan. Mr. Rangel has demonstrated interest solving some of the problems that
have arisen in the defined contribution world. And finally, you, Mr. Chairman, have
been a long-time sponsor of legislation that expands retirement savings through the
expansion of IRAs. We at Treasury appreciate all of your efforts in this area.
The issues relating to promoting and protecting retirement savings can be difficult
and the proper balances hard to strike. The substantial experience of this Committee will
be a valuable asset.
In talking about retirement security and the defined contribution system, let us
follow the path of bipartisanship that the House of Representatives has been following
when dealing with retirement issues. When looking at how to further improve the
system, both sides having common goals. They include the promotion of the use of the
voluntary, employer-based retirement system to provide retirement benefits to Americans
and to protect participants' savings and retirement income. These laudable goals are
reflected in all the various legislative proposals that have been introduced. Let us
remember that we have the same goals when commencing this debate.
While the universal goal ofthe system is to provide for retirement security, each
individual's personal goals for retirement savings differ. All agree that we must equip
participants with tools to accomplish individual goals in a rational manner. Artificial
restrictions may not be appropriate for all employees who are making personal decisions
on how much to contribute to a plan and how to invest their contributions. Employees
who determine their own investment goals do not want a government to restrict the
amount of their investment that can be invested in specific funds.
Last month, President Bush formed a task force on retirement security. He asked
Treasury Secretary O'Neill, Labor Secretary Chao and Commerce Secretary Evans to
analyze our current pension rules and regulations and make recommendations to create
new safeguards that protect the pensions of millions of American workers. In his State of
the Union speech, the President reiterated this commitment when he said:
"A good job should lead to security in retirement. I ask Congress to enact new
safeguards for 401(k) and pension plans. Employees who have worked hard and
saved all their lives should not have to risk losing everything if their company
fails."
The President's Retirement Security Plan, announced on February 1,2002, would
strengthen workers' ability to manage their retirement funds by giving them freedom to
diversify their investments and better information for making savings and investment
decisions, including access to professional investment advice.

It would ensure that senior executives are subject to the same restrictions as
American workers during temporary blackout periods and that employers assume full
fiduciary responsibility during such times. I will talk more about the specifics of his
proposal later in my testimony.
Under our retirement system, no employer is obligated to provide a retirement
plan for employees; the private retirement plan system is completely voluntary. There
are clear benefits to employers who provide retirement plans - not only tax benefits but
also the benefits of hiring and retaining qualified employees who help the business
prosper. Because of these benefits, we must be careful not to overburden the system. If
costs and complexities of sponsoring a plan begin to outweigh advantages, employers
will stop sponsoring plans. What benefit does an elaborate protection mechanism
provide for retirement savings if the employer ceases sponsoring a plan? We should join
together in a bipartisan fashion to ensure that the legislative proposals we advance will
not result in a reduction in the number of employers' sponsoring plans.
An important point I would like to make is that the retirement system is thriving.
Some statistics illustrate the strengths of the system.
•

In 1998 (the most recent data available from the Department of Labor), qualified
retirement plans for private employers covered a total of 41 million defined benefit
plan participants and 58 million defined contribution plan participants. These plans
held assets of $4 trillion. Contributions of $202 billion were made and benefits of
$273 billion were paid.

•

Currently, it is estimated that 42 million workers participate in 401(k) plans, which
hold $2 trillion in assets (of which 19 percent are invested in employer securities).
Employees contribute about $100 billion per year to 401 (k) plans, and employers
contribute another $50 billion per year. About half of 401(k) participants are also
covered by another pension plan.

These statistics underscore the breadth of coverage of employer-sponsored plans
and the strength and vitality of the 401(k) plan system. Other statistics, however, point
out the lack of coverage in small business - something that EGTRRA was designed to
remedy. I In 1998,86 percent of the employers with 500 or more employees sponsored a
retirement plan. Fewer than 14 percent of the smallest employers sponsored a plan.

Tax Principles Regarding Retirement Plans and Company Stock
The importance of the retirement system under the tax code is long-standing.

For example, EGTRRA provided a small business tax credit for qualified plan contributions and new plan
expenses for small businesses.
I

In the Revenue Act of 1921, Congress provided that contributions by an
2
employer to a stock bonus or profit sharing plan are deductible by the employer and not
taxable until the amounts contributed are distributed or made available to the employee.
Five years later, in the Revenue Act of 1926, the Congress extended this tax treatment to
pension plans. The concepts of profit-sharing and stock bonus plans date back to the
1920's, and some of the oldest defined contribution plans now maintained by well-known
and well-run companies began as stock bonus plans. Many companies that contribute
stock to their retirement plans have employees who end up with very comfortable
retirements. For example, the average rate of return from 1990 to 1997 for employee
stock ownership plans was 13.3 percent, while for 401(k) plans it was 1l.9 percent.

Some assert that having company stock in a retirement plan is a gamble that
employees should not take. We believe that company stock, as part of one's overall
retirement nest egg, has generally proven to be a favorable for employees. We all know
examples of employees who did not fare well. While appropriate steps should be taken to
enable employees to better protect themselves, we should not abandon the long-standing
and successful employer-provided plan retirement system. Rather we should give
employees more flexibility and more information so that they can better manage their
retirement nest egg.
Tax qualified plans are accorded favorable tax treatment. A sponsoring employer
is allowed a current tax deduction for plan contributions, subject to limits, and employees
do not include contributions or earnings in gross income until distributed from the plan.
Trust earnings accumulate tax-free.
Qualified plans are also subject to rules protecting participants and restricting the
use of plan assets, including the following:
•

Plan funds must be used only for the exclusive benefit of employees or their
beneficiaries.

•

To ensure that employers provide benefits under these plans to moderate and
lower-paid employees, qualified plans are subject to rules that prohibit
discrimination in favor of highly compensated employees (the
nondiscrimination rules).

•

To encourage participants to keep amounts in plans to satisfy retirement
needs, sanctions are imposed if funds are withdrawn from a qualified
retirement plan prior to retirement.

2 A "profit sharing" plan is a tax qualified plan under which employer's contributions on behalf of covered
employees are allocated according to a definite predetennined formula and distributed after a fixed number
of years, the attainment of a stated age, or upon the OCCUlTence of some event such as layoff. illness,
disability, retirement, death, or severance of employment. An employer does not have to have profits to
make contributions to a profit sharing plan. A "stock bonus" plan is similar to a profit sharing plan. except
that the contributions by the employer are distributable in stock of the employer.

•

To ensure that plan assets are accumulated for retirement purposes and not
accumulated as a death benefit, sanctions are imposed for not taking
distributions during a participant's retirement years.

Since 1974, many of the tax qualification rules have also been addressed in
provisions of the Employee Retirement Income Security Act of 1974 (ERISA).3

Types of Retirement Plans.
There are two broad categories of tax qualified retirement plans: defined benefit
plans and defined contribution plans. While many ofthe tax rules regarding these types
of plans are similar, there are important differences.
A defined benefit plan provides a participant with a benefit defined by the plan.
The employer makes plan contributions that are actuarially determined to fund the benefit
over the working life of the employee. The employee has no risk that his or her entire
pension benefit will be lost. If the funds of the plan are insufficient to pay the benefits
promised and the company is bankrupt, the Pension Benefit Guaranty Corporation
provides a guarantee of benefits up to a statutory maximum, which in most cases exceeds
the promised benefits. Conversely, if the investment experience of the underlying fund
outpaces the promised benefits, the employer benefits through a lower contribution
obligation. While excess funds are held for employees, they are not required to be used
to increase pension benefits.
In a defined contribution plan, the employer makes a contribution that is allocated
to participants' accounts under an allocation formula specified by the plan. Investment
gains or losses increase or decrease the participant's account, without obligating the
employer to make further contributions. Earnings increase the participant's ultimate
retirement benefit; losses will decrease that ultimate benefit. Under a defined
contribution plan the plan sponsor may, but is not required to, give participants the ability
to allocate assets in their accounts among a number of investment alternatives. If a
participant has the ability to direct plan investments, his or her investment decisions will
determine the ultimate retirement benefit.
Due to a number of factors, there is a recent trend among employers to shift
toward defined contribution plans. One of these factors has been the increasing mobility
of the American workforce and demands by employees for a portable benefit.

3 For example, most of parts 2 and 3 of Title I of ERISA (the vesting, participation, and funding rules) are
virtually identical to tax qualification rules in the Intemal Revenue Code. The Intemal Revenue Service
makes determinations as to the qualified status of the form of a plan and audits whether plans operate in
accordance with their terms. Generally, an employee cmIDot bring an action to enforce tax qualification
requirements, which are enforced by the Intemal Revenue Service. If a tax qualification requirement is
also contained in ERISA, however, it can also be enforced by a plan participant or by the Department of
Labor. The Reorganization Plan No.4 of 1978 provides that, in general, the Secretary of the Treasury has
the regulatory authority for those provisions that are contained in both the Intemal Revenue Code and
ERISA.

It is difficult for an employee who changes jobs frequently to vest in a significant
defined benefit. From 1985 to 1998, the number of defined benefit plans fell by 67
percent and the number of active defined benefit participants fell by 21 percent. Over the
same period, the number of defined contribution plans rose by 46 percent and the number
of active defined contribution plan participants rose by 52 percent. In particular, the
growth in the number of defined contribution plans and participants is due to an
explosion in the number of 401(k) plans and participants.
Employees and employers both appreciate many of the advantages of defined
contribution plans. Employees have become more mobile and defined contribution
benefits are more valuable than defined benefits for employees who change employers
during their working life. Employees also appreciate the ability to control the allocation
of the assets in their accounts. Employers appreciate the more predictable funding
obligations of defined contribution plans.

401(k) Plans.
A very popular feature in defined contribution plans is the cash or deferred
arrangement, codified under section 401(k) of the Code (hence, the term "401(k) plan").
Section 401 (k) of the Code permits a participant to elect to contribute, on a pre-tax basis,
to a defined contribution plan instead of receiving cash compensation.
There are restrictions on these elective contributions, including a requirement that
the average amount of elective contributions made by highly compensated employees (as
a percentage of compensation) may not be greater than a certain percentage of the
average amount of contributions made by non-highly compensated employees. This test
is referred to as the Actual Deferral Percentage (ADP) test and must be satisfied annually.
One result oftheADP test is that employers encourage participation by lower-paid
employees. Employer matching contributions give an incentive to lower-paid employees
to contribute to the plan. A new EGTRRA provision requires that matching contributions
be 100 percent vested after three years of service or vested ratably over six years.
Another important provision of EGTRRA, the Saver's Credit, provides a tax credit equal
to 50 percent of the retirement savings (up to $2,000) of many lower paid employees.
The more lower-paid employees save for retirement the more higher-paid employees can
save.
Matching contributions are subject to a nondiscrimination test similar to the ADP
test. This test, the Actual Contribution Percentage (ACP) test, is used to make sure that
matching contributions do not disproportionately favor the highly compensated (as a
percentage of compensation) relative to non-highly compensated employees. Prior to
EGTRRA, an additional nondiscrimination test - called the Multiple Use Test -had to be
passed. EGTRRA eliminated this third nondiscrimination test because it unnecessarily
complicated 401(k) plan testing. Congress and the Administration agreed that the ADP
and ACP tests are adequate to prevent discrimination in favor of highly compensated
employees.

The ADP and ACP tests can be avoided through the use of one of two statutory
safe harbors. Under one of the safe harbors, the employer matches 100 percent of an
employee's contributions, up to 3 percent of compensation, and 50 percent of the
employee's contributions between 3 percent and 5 percent of compensation. The other
safe harbor requires the employer to make a contribution on behalf of all eligible
employees (regardless of whether the employee actually makes a 401(k) contribution)
equal to 3 percent of compensation.

Employee Stock Ownership Plans.
A stock bonus plan may be designated in whole or in part as an employee stock
ownership plan, or ESOP. An ESOP is a plan that is designed to invest primarily in
company stock. Currently, it is estimated that there are about 11,500 ESOPs, covering
about 8.5 million workers. Only about nine percent ofESOPs are in publicly traded
companies. However, these tend to be large companies and hence account for about half
of ESOP-covered workers. In 1999, ESOPs held about $500 billion in assets and received
$20 billion in contributions.
If a plan or a portion of a plan is an ESOP, the ESOP generally must pass voting
rights on publicly traded stock held in participants' accounts to participants. An ESOP
must give participants the right to request the distribution in stock, and, ifthe distribution
is made in stock, the right to "put" (i.e., sell) the stock back to the company or the plan.
In addition, participants who are age 55 and have at least 10 years of participation in the
plan must be given the opportunity to diversify a portion of the stock held in their ESOP
account.
Employers establish ESOPs for many reasons. In addition to providing retirement
benefits to employees, an ESOP transfers employer stock to employees, thereby
encouraging employee ownership and aligning employees' interests with the success of
the company. An ESOP can be used to transfer ownership from a company founder to
employees by having the ESOP borrow funds to purchase company stock as the owner
retires or to provide additional capital for employer expansion. Tax-deductible ESOP
contributions can be used by the ESOP to repay a loan. As the loan is repaid, the stock
purchased with loan proceeds is allocated to participants. About three-quarters of ESOPs
have used borrowed funds to acquire employer securities.
Another advantage to establishing an ESOP is the ability of the employer to
deduct dividends paid on employer stock held in the plan. EGTRRA made this feature
even more attractive by extending this deductibility feature to all ESOP dividends
provided that participants are given the opportunity to elect to receive the dividend in
cash. Because of the value of this expanded deduction for ESOP dividends, we
understand that most publicly traded companies that have a non-ESOP employer stock
fund will convert that stock fund to an ESOP and offer participants the opportunity to
take a distribution of the dividend in cash.

When talking about ESOPs, many people refer to K-SOPs and M-SOPS. A KSOP is an ESOP that uses an employee's 401(k) contributions to purchase employer
stock or repay a loan whose proceeds had been used to purchase employer stock for the
plan. Likewise, an M-SOP is an ESOP that uses the employer's matching contributions
to purchase employer stock or repay an ESOP loan.

The President's Retirement Security Plan.
The President's plan puts employees in better control of amounts that they
contribute to a 401(k) plan and improves employees' ability to make good individual
investment decisions and reach their retirement goals. The President's plan focuses on the
following four areas:
1. Giving Employees Investment Choice

The President believes that federal retirement policy should expand, not limit
employee ability to invest their contributions or matching contributions as they see fit.
Under the President's plan, employers cannot require that accounts of employees who
have three or more years of participation in the plan be invested in employer stock.
However, the employee is not required to diversify these amounts; it is the employee's
choice. The three-year rule provides a balance between the employer's desire to have
employees invested in employer stock and the employee's interests in diversification. The
three-year period is consistent with the shorter vesting rule for employer matching
contributions.
ESOPs are intended to be invested primarily in employer securities and are an
accepted method of transferring ownership of a company to employees. Requiring
diversification in all ESOPs would make it virtually impossible to accomplish the wellaccepted purposes of an ESOP, including the encouragement of employee ownership and
a source of financing to the employer. Moreover, ESOPs are subject to special
diversification rules already in the Code. Therefore, the President's plan provides that a
stand-alone ESOP (i.e., an ESOP that holds no 401(k) contributions, matching
contributions, or other contributions used to satisfy the Code's nondiscrimination tests)
will not be subject to these diversification requirements. K-SOPs and M-SOPs will be
required to offer diversification rights to plan participants.
This new diversification requirement will be an addition to the overall tax
qualification requirements under the Code. Since the diversification rule will be a tax
qualification requirement, the plan document must specifically provide for the
diversification right. Ifthe diversification right is not contained in the plan, the IRS will
refuse to issue a fav_orable detennination letter stating that the plan meets the
qualification requirements. 4 The diversification requirement would also be added to Title
I of ERISA, thereby giving participants and the Department of Labor the ability to
enforce the diversification right.
The IRS estimates that it will review approximately 120,000 plans during this year's filing season to
determine whether they meet the qualification rules of the Code_

2. Clarifying Employers' Responsibilities During Blackout Periods and Creating
Parity Between Senior Corporate Executive and Rank-and-File Workers
The President's plan provides fairness by eliminating double standards with
respect to the ability to sell employer stock during the time plan recordkeepers or plan
investments change - the so-called blackout period. This is accomplished by placing
restrictions on corporate executives trading employer stock outside of a plan that parallel
restrictions on employer stock transactions inside the plan during a blackout period. In
addition to being fair to employees, this rule would create a strong incentive for corporate
management to shorten the blackout period to the minimum time required to make
changes.
Section 404(c) of ERISA provides employers with a defense against lawsuits
when employers give workers control of their individual account investments. The
President's plan would clarify ERISA to disallow employers from utilizing this 404( c)
defense for fiduciary breaches that occur during a blackout period. Because the 404( c)
defense is based on the premise that employers have given investment control to their
workers, the defense logically is inappropriate during blackout periods when employers
have suspended investment control from their workers.

3. Giving Emplovees Better Information about Their Pensions
To make sure that employees have maximum control over the investment of their
retirement savings, the President's plan requires that notice be given to employees 30
days before the blackout period begins. With this notice, employees will be able to adjust
investment selections in anticipation of the blackout period. Failure to provide this notice
will result in a penalty on the plan sponsor of $1 00 per day per employee for every day
that an employee did not get the notice.
The President also wants to make sure that employees get up-to-date information
on plan investments and reminders of sound investment principles. The President's plan
expands the current reporting requirements for 401 (k)-type plans so that quarterly
statements are required. In addition, the quarterly statement should address appropriate
investment diversification. We believe that the more employees hear about
diversification, the more they can decide for themselves whether their overall retirement
savmgs are secure.

4. Expanding Workers' Access to Investment Advice
In order for employees to get the investment advice they need, the
President advocates the enactment of the Retirement Security Advice Act - which passed
the House with overwhelming bipartisan support. Currently, ERISA impedes employers
from obtaining investment advice for their employees from the financial institutions that
often are in the best position to provide advice.

The Retirement Security Advice Act would address this by providing employees
with access to advice from fiduciary advisers that are regulated by Federal or State
authorities. As fiduciaries, these advisers would be held to the standard of conduct
currently required by ERlSA. This legislation encourages employers to make investment
advice more widely available to workers and only allows qualified financial advisors to
offer advice if they agree to act solely in the interests of employees. The Retirement
Security Advice Act would also add important protections by requiring information about
fees, relationships that may raise potential conflicts of interest, and limitations on the
scope of advice to be provided. The legislation also would place advisers who have
affiliations with investment products on a more equal footing with non-affiliated advisers,
foster competition among firms, and promote lower costs to participants.
I reiterate the Administration's desire to achieve consensus on both the problems
and solutions surrounding the retirement security of all Americans. I hope that we can
work together to improve the employer-based retirement system and provide more
retirement security for all Americans by providing more investment choice, plan
information, and investment education to employees.
I appreciate the opportunity to discuss these important issues with the Members of
this Committee, and would be pleased to explore these issues further.
Mr. Chairman, this concludes my formal statement. I will be pleased to answer
any questions you or other Members may wish to ask.
-30-

DEPARTMEl"T OF THE TREASURY

TREASURY

NEWS

OFFICE OF PUBLIC AFFAIRS "1500 PENNYSYLVANIA AVENUE, N.W. "WASHINGTON, D.C." 20220 "(202) 622-2960

Embargoed until 2:15 pm [eastern]
February 26, 2002

Contact:

Rob Nichols, Tasia Scolinos
202-622-2960

REMARKS BY TREASURY SECRETARY PAUL O'NEILL ON NEW TERRORIST
FINANCING DESIGNATIONS
U.S. CUSTOMS AIR AND MARINE BRANCH
JACKSONVILLE, FLORIDA
First, let me say thank you for having me here today, and thank you for the job you are
doing protecting our homeland. Each and every member ofthe Customs Service has responded
to the call for greater vigilance since the attacks of September 11, and your nation appreciates
your hard work.
Immediately after September 11, President Bush said our enemies are terrorist
organizations of global reach, and all who harbor them, and all who support them. He asked me
to pursue the money that fuels terrorism, and every asset of the Treasury Department has been
deployed in that pursuit. The Customs Service and other Treasury bureaus and offices have
created an international effort to track and block terrorist money. Today, the Treasury
Department has designated 21 more individuals under Executive Order 13224 as financiers of
terrorism.
These individuals have acted for or on behalf of ETA, also known as the Basque
Fatherland and Liberty. The United States Department of State previously designated ETA as a
"foreign terrorist organization," our government's gravest categorization.
Today's blocking action is the result of close cooperation with the Government of Spain
and the European Union - a collaboration that symbolizes a new and extremely important
chapter in the financial war against terrorism. I am very pleased to share the podium with
Carmen Guttierez, who is here today representing the Government of Spain. Our two nations
have a common goal. We are not only committed to cooperating in the financial war against
terrorism, but we are playing a leadership role together.
The United States wholeheartedly welcomes this international cooperation. It is our hope
that other governments will take the lead in identifying terrorists and their supporters, so that
together the civilized world can shut down their organizations and eradicate their sources of
support.

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Weare starting to see this occur. At the end of December the ED designated several
terrorist entities and organizations, including extremist groups who threaten peace in Europe. We
were pleased to follow the EU's lead and designate those entities, too.
This trend must continue, as terrorists are as likely to attack in New Delhi or Nairobi, as
they are in N ew York. This designation is a crucial step in the right direction, and I hope this
serves as a model for more countries to independently initiate more designations.
Now, speaking from this facility, in front of this impressive P3, affords me the
opportunity to highlight the role the U.S. Customs Service has played in combating terrorism
financing, specifically through Operation Green Quest, a Treasury-led inter-agency task force
with vigorous participation from IRS-CI, DSSS, FinCEN, OFAC, FBI, DOl, the Postal Service,
and Naval Criminal Investigative Service. Green Quest - founded in October - is a unique
operation. It brings the full scope of the government's financial expertise to bear against
systems, individuals, and organizations that serve as sources of terrorist funding.
In the four months it has existed, Operation Green Quest has seized approximately $10.3
million in smuggled U.S. currency and $4.3 million in other assets. Operation Green Quest's
work has also resulted in 21 search warrants/consent searches, 12 arrests, and 4 indictments.
Currently, Operation Green Quest has more than 300 ongoing investigations into terrorist
finances. Green Quest, along with the FBI and other law enforcement and intelligence agencies,
has also traveled abroad to follow leads, exploit documents recovered, and to provide assistance
to foreign governments.
This model of international co-operation - demonstrated by today's blocking action coupled with our domestic enforcement efforts - like Green Quest - have begun to put a dent in
the global infrastructure that finances terrorism. But there are more terrorist networks of global
reach, and more front groups who seek to support them. We must, and we will, remain vigilant.
-30-

For Immediate Release

February 26, 2002

Fact Sheet

Designations of Basque Fatherland and Liberty (ETA) Members
"Our crackdown on terrorists is blind to nationality and origin. Rather, it's a net that is being
cast on all terrorist parasites that threaten our allies and our national security. By taking this
action we join many nations to act forcefully against such terrorists. "
Treasury Secretary PaulO 'Neill
February 26, 2002
Basque Fatherland and Liberty, also known as Euzkadi Ta Askatasuna, also known as ETA
(hereinafter "ETA"), was founded in 1959 with the aim of establishing an independent homeland
based on Marxist principles in the northern Spanish provinces of Vizcaya, Guipuzcoa, Alava,
and Navarra and the southwestern French departments ofLabourd, Basse-Navarra, and Soule.
Its terrorist activities consist primarily of bombings and assassinations of Spanish Government
officials, especially security and military forces, politicians, and judicial figures. ETA finances
its activities through kidnappings, robberies, and extortion. The group has killed more than 800
persons since it began lethal attacks in the early 1960s. In November 1999, ETA broke its
"unilateral and indefinite" cease-fire and began an assassination and bombing campaign that
killed 23 individuals and wounded scores more by the end of 2000.

ETA's current strength is unknown, though it may have hundreds of members, plus supporters.
It operates primarily in the Basque autonomous regions of northern Spain and southwestern
France, but also has bombed Spanish and French interests elsewhere. ETA has received training
at various times in the past in Libya, Lebanon, and Nicaragua. Some ETA members allegedly
have received sanctuary in Cuba while others reside in South America. ETA also appears to have
ties to the Irish Republican Army through the two groups' legal political wings.

ETA was designated by the U.S. Government as a Foreign Terrorist Organization ("FTO") on
October 8, 1997, and has been re-designated every two years, most recently on October 5, 200l.
On October 31, 2001, ETA was also designated by the U.S. Government as a Specially
Designated Global Terrorist ("SDGT") under the President's September 23,2001, Executive
Order 13224 blocking property and prohibiting transactions with persons who commit, threaten
to commit, or support terrorism. Based on inforn1ation provided by the Spanish government, the
Department of the Treasury is designating 21 individuals as Specially Designated Global
Terrorists ("SDGT") pursuant to Executive Order 13224. The 21 individuals are members of,
assist in, sponsor, or provide financial, material, or technological support for, or financial or
other services to or in support of ETA's acts of terrorism, and are otherwise believed to be acting

for or on behalf of. These individuals were designated by the European Union on December 27,
2001, for their involvement in terrorist acts. 1
I EU Council Common Position of 27 December 2001 on the application of specific measures to combat terrorism
(200119311CFSP)

Individuals Designated by the Department of Treasury
February 26, 2002
Abaunza Martinez, Javier
DOB 01 January 1965; POB Guemica (Vizcaya), Spain
D.N.!.78.865.882
Alberdi Uranga, Itziar
DOB 7 October 1963; POB Durango (Vizcaya), Spain
D.N.I. 78.865.693
Alcalde Linares, Angel
DOB 2 May 1943; POB Portugalete (Vizcaya), Spain
D.N.!. 15.390.353
Albisu Iriarte, Miguel
DOB 7 June 1961; POB San Sebastian (Guizpucoa), Spain
D.N.I. 15.954.596
Arzallus Tapia, Eusebio
DOB 8 November 1957; POB Regil (Guipuzcoa), Spain
D.N.I. 15.927.207
Elcoro Ayastuy, Paulo
DOB 22 October 1973; POB Vergara (Guipuzcoa), Spain
D.N.I. 15.394.062
Figal Arranz, Antonio Agustin
DOB 2 December 1972; POB Baracaldo (Vizcaya), Spain
D.N.I. 20.172.692
Gogeascoechea Arronategui, Eneko
.
DOB 29 April 1967; POB Guemica (Vizacaya), Spam
D.N.I. 44.556.097
Goiricelaya Gonzalez, Cristina
.
DOB 23 December 1967; POB Vergara (Guipuzcoa), Spam
D.N.I. 16.282.556

Iparraguirre Guenechea, Maria Soledad
DOB 25 April 1961; Escoriaza (Guipuzcoa), Spain
D.N.I. 16.255.819
Morcillo Torres, Gracia
DOB 15 March 1967; POB San Sebastian (Guipuzcoa), Spain
D.N.I. 72.439.052
Mugica Gom, Ainhoa
DOB 27 June 1970; POB San Sebastian (Guipuzcoa), Spain
D.N.I. 34.101.243
Munoa Ordozgoiti, Alona
DOB 6 July 1976; POB Segura (Guipuzcoa), Spain
D.N'!.35.771.259
Narvaez Goni, Juan Jesus
DOB 23 February 1961; POB Pamplona (Navarra), Spain
D.N.!.15.841.101
Olarra Guridi, Juan Antonio
DOB 11 September 1967; POB San Sebastian (Guipuzcoa), Spain
D.N.!. 30.084.504
Orbe Sevillano, Zigor
DOB 22 September 1975; POB Basauri (Vizcaya), Spain
D.N.!.45.622.851
Otegui Unanue, Mikel
DOB 8 October 1972; POB Itsasondo (Guipuzcoa), Spain
D.N.!. 44.132.976
Perez Aramburu, Jon lfiaki
DOB 18 September 1964; POB San Sebastian (Guipuzcoa), Spain
D.N.!. 15.976.521
Saez de Eguilaz Murguiondo, Carlos
DOB 9 December 1963; POB San Sebastian (Guipuzcoa), Spain
D.N.I. 15.962.687
Uranga Artola, Kernen
DOB 25 May 1969; POB Ondan'oa (Vizcaya), Spain
D.N.I. 30.627.290

Iparraguirre Guenechea, Maria Soledad
DOB 25 April 1961; Escoriaza (Guipuzcoa), Spain
D.N.I. 16.255.819
Morcillo Torres, Gracia
DOB 15 March 1967; POB San Sebastiim (Guipuzcoa), Spain
D.N.I. 72.439.052
Mugica Gofii, Ainhoa
DOB 27 June 1970; POB San Sebastian (Guipuzcoa), Spain
D.N.I. 34.101.243
Mufioa Ordozgoiti, Alofia
DOB 6 July 1976; POB Segura (Guipuzcoa), Spain
D.N.I. 35.771.259
Narvaez Gofii, Juan Jesus
DOB 23 February 1961; POB Parnplona (Navarra), Spain
D.N.I. 15.841.101
Olarra Guridi, Juan Antonio
DOB 11 September 1967; POB San Sebastian (Guipuzcoa), Spain
D.N.I. 30.084.504
Orbe Sevillano, Zigor
DOB 22 September 1975; POB Basauri (Vizcaya), Spain
D.N.I. 45.622.851
Otegui Unanue, Mikel
DOB 8 October 1972; POB Itsasondo (Guipuzcoa), Spain
D.N.I. 44.132.976
Perez Aramburu, Jon Ifiaki
DOB 18 September 1964; POB San Sebastian (Guipuzcoa), Spain
D.N.I. 15.976.521
Saez de Eguilaz Murguiondo, Carlos
DOB 9 December 1963; POB San Sebastian (Guipuzcoa), Spain
D.N.I. 15.962.687
Uranga Artola, Kernen
DOB 25 May 1969; POB Ondarroa (Vizcaya), Spain
D.N.I. 30.627.290

Vila Michelena, Fennin
DOB 12 March 1970; POB lrun (Guipuzcoa), Spain
D.N.I. 15.254.214

Vila Michelena, Fennin
DOB 12 March 1970; POB Irllll (Guipuzcoa), Spain
D.N.I. 15.254.214

Vila Michelena, Fennin
DOB 12 March 1970; POB Inlll (Guipuzcoa), Spain
D.N.I. 15.254.214

DEPARTME~TOFTHETREASURY

TREASURY

NEWS

omCE OF PUBLIC AFFAIRS -1500 PENNYSYLVANIA AVENUE. N.W. -WASHINGTON. D.C. -20220 -(202) 622-2960

IMMEDIATE RELEASE
February 27, 2002

Contact: Tara Bradshaw
(202) 622-2014

TESTIMONY OF BARBARA ANGUS, INTERNATIONAL TAX COUNSEL,
UNITED STATES DEPARTMENT OF THE TREASURY
BEFORE THE HOUSE COMlVIITTEE ON WAYS AND MEANS
ON THE WTO DECISION REGARDING THE EXTRATERRITORIAL INCOME
EXCLUSION PROVISIONS

Mr. Chairman, Congressman Rangel, and distinguished Members of the Committee, we
appreciate the opportunity to appear today at this hearing on the World Trade Organization's
recent decision regarding the extraterritorial income exclusion (ETl) provisions of the U.S. tax
law.
th

On January 29 , the WTO Dispute Settlement Body adopted a final report finding that
the ETI provisions of the U.S. tax law are inconsistent with the United States' obligations under
the WTO. We all are very disappointed with this outcome. This decision is the culmination of a
chapenge brought by the European Union in late 1997 against the foreign sales corporation
(FSC) provisions then contained in the U.S. tax law. However, the origins of this dispute go
back almost 30 years, predating the WTO itself. The United States has vigorously pursued this
matter and defended its laws because of the importance of the provisions and principles at stake.
At its core, this case raises fundamental questions regarding a level playing field with
respect to tax policy. Few things are as central to a country's sovereignty as the right to choose
its own tax system. The ETI provisions, like the FSC provisions that preceded them, represent
an integral part of our larger system of intemational tax rules. These provisions were designed to
help level the playing field for U.S.-based businesses that are subject to those intemational tax
rules. As we contemplate our next steps, we should not lose sight of that.
The Congress has demonstrated its commitment to the U.S. businesses, both large and
small, that operate in the global marketplace and to the U.S. workers that produce the output that
is sold in markets around the world. The Congress took decisive action, under significant time
pressure, in passing legislation in November 2000 to respond to the first WTO decision in this
dispute by repealing the FSC provisions and enacting the ETI provisions. That legislation
represented a good faith effort to bring the United States into compliance with its WTO
obligations while protecting the level playing field for U.S. businesses.

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To be facing the same issue again so soon certainly is a disappointment. Nevertheless,
we must look forward and pursue all options to resolve this matter so that American workers and
the businesses that employ them will not be disadvantaged.
Mr. Chairman, the Administration looks forward to working closely with the Congress,
on a bipartisan basis, to find a solution that will protect America's interests and honor our
obligations in the WTO.
Our testimony today will focus on the particular provisions of our tax law at issue, the
history of the dispute in the WTO over these provisions, and the findings and analysis ofthe
WTO Dispute Settlement Body with respect to these provisions.
The Foreign Sales Corporation Provisions

The FSC provisions were enacted in 1984. They provided an exemption from U.S. tax
for a portion of the income earned from export transactions. This partial exemption from tax was
intended to provide U.S. exporters with tax treatment that was more comparable to the treatment
provided to exporters under the tax systems common in other countries.
A FSC that elected to be subject to these provisions generally was a foreign subsidiary of
a U.S. manufacturer. The U.S. manufacturer sold its products to the FSC for resale abroad or
paid the FSC a commission in connection with its sales of products abroad. In order to qualify
for these provisions, the FSC was required to be managed outside the United States and was
required to conduct certain economic processes outside the United States with respect to these
export transactions. These economic processes related to the solicitation, negotiation, and
making of contracts with respect to such transactions.
The sales or commission income of the FSC on these transactions was determined under
specified pricing rules. The exemption from tax applied to a portion of the FSC's income from
sales and leases of export property and from related services. The FSC was subject to current
U.S. tax on the remainder of its income from these transactions.
The FSC provisions were enacted to resolve a General Agreement on Tariffs and Trade
(GATT) dispute involving a prior U.S. tax regime - the domestic international sales corporation
(DISC) provisions enacted in 1971. Following a challenge to the DISC provisions brought by
the European Union and a counter-challenge to several European tax regimes brought by the
United States, a GATT panel in 1976 ruled against all the contested tax measures. This decision
led to a stalemate that was resolved with a GATT Council Understanding adopted in 1981 (the
"1981 Understanding"). Pursuant to this 1981 Understanding regarding the treatment of tax
measures under the trade agreements, the United States repealed the DISC provisions and
enacted the FSC provisions.
The WTO Decision Regarding the FSC Provisions

The European Union fonnally challenged the FSC provisions in the WTO in November
1997, thirteen years after their enactment. Consultations to resolve the matter were unsuccessfuL
and the EU challenge was referred to a WTO dispute resolution panel. In October 1999, the
WTO panel issued a report finding that the FSC provisions constituted a violation of WTO rules.
The United States appealed the panel report; the European Union also appealed the report. In
February 2000, the WTO Appellate Body issued its report substantially upholding the findings of
the panel.
Although the United States believed that the FSC provisions were blessed by the 1981
Understanding, the WTO panel completely dismissed this argument, concluding that the 1981
Understanding had no continuing relevance in the interpretation of current WTO rules. The
panel's analysis focused mainly on the application of the WTO Agreement on Subsidies and
Countervailing Measures. The panel found that the FSC provisions constituted a prohibited
export subsidy under the Subsidies Agreement.
Under the Subsidies Agreement, a subsidy exists if (1) government revenue otherwise
due is foregone and (2) a benefit is thereby conferred. The Subsidies Agreement prohibits
subsidies that are contingent, in law or in fact, on export performance. Looking first at the
subsidy issue, the panel concluded that three specific aspects of the FSC provisions, taken
together, resulted in an exception from taxation for income that otherwise would be subject to
U.S. tax; the panel therefore concluded that the FSC provisions resulted in foregone government
revenue through which a benefit was conferred. The panel then concluded that this subsidy
provided by the FSC provisions was export-contingent, and therefore prohibited, because the tax
treatment under the FSC provisions depended upon the exportation of U.S. goods. The panel
further found that the FSC provisions constituted an export subsidy in violation of the WTO
Agreement on Agriculture. The panel declined to rule on the European Union's additional
arguments that the pricing rules and "domestic content" rules contained in the FSC provisions
constituted separate violations of the WTO rules. The panel recommended that the subsidy
provided by the FSC provisions be withdrawn with effect from October 1, 2000 (which date was
later extended to November 1,2000, under a procedural agreement between the parties).
The Extraterritorial Income Exclusion Provisions
In response to the WTO decision against the FSC provisions, the FSC Repeal and
Extraterritoriallncome Exclusion Act was enacted on November 15, 2000. This legislation had
been voted out of this Committee with a vote of 34 to 1, and was passed by the House with a
vote of 316 to 72. The legislation repealed the FSC provisions and adopted in their place the ETI
provisions. The legislation was intended to bring the United States into compliance with WTO
rules by addressing the analysis reflected in the WTO decision. The new regime addressed the
subsidy issue by establishing a new general rule of taxation under which extraterritoriai income
is excluded from gross income; the new regime addressed the export-contingency issue by
applying to income from all foreign sales and leases of property, without regard to where the
property is manufactured. At the same time, the legislation also was intended to ensure that L .S.
businesses not be foreclosed from opportunities abroad because of differences in the U.S. tax
laws as compared to the laws of other countries.

The ETI provisions provide an exclusion from U.S. tax for certain extratelTitorial income.
This exclusion applies to a portion of the taxpayer's income from foreign sales and leases and
certain related services. The ETI provisions apply to foreign sales and leases of property
manufactured in the United States and also to foreign sales and leases of property manufactured
outside the United States. In the case of property manufactured outside the United States, the
manufacturer either must be subject to the taxing jurisdiction of the United States or must elect to
subject itself to such jurisdiction. Thus, the income from transactions to which the ETI
provisions apply is subject to consistent U.S. tax treatment.
Unlike the FSC provisions, the ETI provisions do not require the filing of an election or
the formation of a special entity to which sales are made or commissions are paid. Also unlike
the FSC provisions, the ETI provisions apply to both corporations and individuals in the same
manner.
The exclusion provided under the ETI provisions generally is available only if certain
economic processes are conducted outside the United States. As under the FSC provisions, these
economic processes relate to the solicitation, negotiation, and making of contracts. A portion of
the income from foreign transactions covered by the ETI provisions is exempt from U.S. tax.
Because this exclusion is an alternative approach to addressing potential double taxation, foreign
tax credits are not allowed with respect to the excluded income.

The WTO Decision Regarding the ETI Provisions
Immediately following the enactment of the ETI Act, the European Union brought a
challenge in the WTO. In August 2001, a WTO panel issued a report finding that the ETI
provisions also violate WTO rules. The panel report contained sweeping language and
conclusory statements that had broad implications beyond the case at hand. Because of the
importance of the issues involved and the troubling implications of the panel's analysis, the
United States appealed the panel report.
The WTO Appellate Body generally affirmed the panel's findings. However,
significantly, the Appellate Body modified and nalTowed the panel's analysis. The Dispute
Settlement Body adopted the report as modified by the Appellate Body on January 29,2002.
The Appellate Body report makes four main findings with respect to the ETI provisions:
(1) the ETI provisions constitute a prohibited export subsidy under the WTO Subsidies
Agreement; (2) the ETI provisions constitute a prohibited export subsidy under the WTO
Agriculture Agreement; (3) the limitation on foreign content contained in the ETI provisions
violate the national treatment provisions of Atiicle IIl:4 of GATT; and (4) the transition rules
contained in the ETI Act violate the 'NTO's prior recommendation that the FSC subsidy be
withdrawn with effect from November l, 2000.

Prohibited Export Subsidy Under the Subsidies Agreement
The analysis of the prohibited export subsidy under the Subsidies Agreement involved
three separate issues.
First, the Appellate Body found that the ETI provisions constitute a subsidy under Article
1. 1(a)(ii) of the Subsidies Agreement. The Appellate Body compared the ETr exclusion to the
tax rules that otherwise would have applied to income from this type of transaction. Based on
that analysis, the Appellate Body found that the ETI exclusion constitutes the "foregoing of
revenue which is 'otherwise due'," that it confers a benefit, and that it is therefore a subsidy.
Second, the Appellate Body found that the ETI provisions are export contingent because
of the provisions' application only to income from transactions involving property that is sold,
leased, or rented for direct use, consumption, or disposition outside the United States. As did the
lower panel, the Appellate Body bifurcated the ETI provisions, separating the application to
transactions involving property produced within the United States from the application to
transactions involving property produced abroad. For property produced within the United
States, the foreign use requirement could be met only by exporting the property. Based on this
bifurcation, the Appellate Body found that the ETI provisions are export contingent with respect
to domestically produced products. This conclusion was not affected by the fact that the ETr
provisions apply in circumstances that are plainly not export contingent (i.e., with respect to
property produced outside the United States and sold for use outside the United States).
Third, the Appellate Body rejected the U.S. argument that the ETr provisions constitute a
permitted measure for avoidance of double taxation. The United States believed that the ETI
provisions fell within the fifth sentence of footnote 59 of the Subsidies Agreement which
effectively permits a country to "tak[ e] measures to avoid the double taxation of foreign-source
income," even if the measures constitute export subsidies. The Appellate Body found that
footnote 59 applies only to "foreign-source income" and that, to be considered "foreign-source
income," the income must have sufficient links to another country that the income could be taxed
by that other country. The Appellate Body further viewed the ETI provisions as potentially
applying to income that would not fall within the reach of this rule as so interpreted. Therefore,
the Appellate Body found that the ETr provisions do not constitute a measure to avoid double
taxation under footnote 59.

Export Subsidy Under the Agriculture Agreement
Because the Appellate Body held that the ETr provisions constitute a prohibited export
subsidy under the Subsidies Agreement, it followed that the ETr provisions also violate the
export subsidy provisions of the WIO Agriculture Agreement.

National Treatment Under GATT Article IH:4
The Appellate Body affim1ed the panel's finding that the 50 percent limitation on foreign
articles and direct labor costs contained in the ETI provisions violates GATT Article IlI:4.

The Appellate Body dismissed the U.S. factual point that taxpayers may meet this
requirement without using any U.S. content whatsoever. The Appellate Body found that this
limitation in the ETl provisions represents an encouragement of domestic manufacturers to use
domestic over imported components, thereby providing less favorable treatment to imported
products than to like domestic products.

Withdrawal of FSC Benefits
The Appellate Body also rejected the transition rules included in the ETl Act, finding no
basis for permitting the continuance of the application of the FSC provisions beyond the
November 1, 2000 date specified for withdrawal of the subsidy found to have been provided by
the FSC provisions. The Appellate Body rejected the U.S. position that efficient and fair
administration of the tax laws frequently requires tax legislation to include transition rules and
binding contract relief for taxpayers that acted in reliance on the prior law provisions.

Current Arbitration Proceeding
When it challenged the ETl Act in November 2000, the European Union simultaneously
requested authority from the WTO to impose trade sanctions on $4.043 billion worth of U.S.
exports. The United States responded by initiating a WTO arbitration proceeding on the grounds
that the amount of trade sanctions requested by the European Union was excessive under WTO
standards. This arbitration was suspended pending the outcome of the European Union's
th
challenge to the WTO-consistency of the ETl Act, and resumed on January 29 with the Dispute
Settlement Body's adoption of its final report. The parties are filing written submissions and will
meet with the arbitration panel, which will issue its report on the appropriate level of trade
sanctions on April 29 th . Following adoption of that report, the European Union will be
authorized to begin imposing trade sanctions on U.S. exports up to the level set by the
arbitrators.

-30-

DEPARTMEl"T OF THE TREASURY

TREASURY

NEWS

ornCE OF PUBLIC AFFAIRS 01500 PENNYSYLVANIA AVENUE. N.W. ·WASHINGTON. D.C.· 20220 "(201) 611-1960

FACT SHEET

February 27,2002

FUTURE OF US LEADERSHIP AND US ECONOMY REQUIRE AN
IMMEDIATE PERMANENT INCREASE IN THE DEBT LIMIT
In just the next few weeks, the federal government is proj ected to reach the
statutory debt limit. An immediate permanent increase in the debt limit is crucial to
preserve the confidence of our global allies in the US Government as we lead the effort to
end terrorism, and an immediate permanent increase is essential to prevent uncertainty
that could damage our economic recovery. The Full Faith and Credit of the United States
is a unique asset that underlies the leadership position of our nation. People here and
around the world can count on the US government to pay its bills on time, no matter
what, and that certainty is an invaluable part of our economic strength. America is and
must remain a safe haven for investors around the world. Any delay in raising the
statutory debt limit could create uncertainty that would raise the cost of financing
essential government services for US taxpayers. We should not play politics with the full
faith and credit of the United States.

WHY ACTION IS NEEDED NOW
Treasury will be forced to take actions to preserve cash balances even before we
actually reach the debt limit, in order to preserve a cushion to ensure we stay within the
law. Even before we reach the actual limit, Treasury could be forced to cancel the sale
of Patriot Bonds and State and Local Government Securities. As we approach the ceiling
and are unable to issue more debt, Treasury must take other steps to provide cash
balances so that the government can pay its bills. In the past, inaction on the debt ceiling
has forced Treasury to disinvest or delay the investment of federal employees 401 (k) and
retirement fund contributions in order to have cash on hand to meet our obligations.
A failure to increase the debt limit threatens our very ability to meet our
fundamental priorities. A lack of cash on hand in the Treasury would endanger our
ability meet our obligations - including our obligations to pay Social Security benefits,
make Medicare payments, and purchase the tools necessary to protect our homeland and
prosecute the war on terrorism.
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~998

- 619-559

RECESSION AND SEPTEMBER 11 SPED APPROACH TO DEBT LIMIT
The current debt ceiling is $5.95 trillion. The President's budget projects that
debt subject to limit will rise to $6.099 trillion at the end of fiscal year 2002 and to
$6.489 trillion at the end of fiscal year 2003.
Last August, the Office of Management and Budget projected that the debt ceiling
would not be reached until late 2003. The recession and the response to the September
11 attacks have moved that projection forward, and today we expect to reach the debt
ceiling in March of this year.
The Secretary of the Treasury has requested a $750 billion increase in the debt
ceiling. That amount would simply restore the debt limit time horizon to where it was
just prior to September 11. Since November 1983, there have been four increases in the
debt limit that were larger than the current request when measured relative to GDP, as a
percentage of total debt, as a percentage of the federal budget. The current request is the
same size as the last increase enacted during the Clinton Administration in 1997 ($755
billion).

Permanent Increases in the Debt Ceiling

1983
1984
1984
1984
1985
1986
1987
1989
1990
1993
1996
1997
2002
RANK

$ billions

constant
1996 dollars
$billions

as % of
ceilim!

as % of
bud2et

as 01.) of
GDP

101
30
53
251
255
32
689
323
1,022
755
600
450
750

147
42
75
353
347
43
891
389
1,188
804
625
441
725

7%
2%
3%
16%
14%
2%
33%
12%
33%
18%
12%
8%
13%

12%
4%
6%
29%
27%
3%
69%
28%
82%
54%
38%
28%
37%

3%
1%
1%
7%
6%
1%
15%
6%
18%
12%
8%
5%
7%

6th

5th

GOVERNMENT DEBT GROWS AS SOCIAL SECURITY SURPLUSES GROW

While the timing of the need to increase the statutory ceiling is sooner than we
had anticipated just six months ago because of untoward events, we've always known it
would need to be raised at some point. The growth of the Social Security trust fund is and will continue to be - the most significant contributor to the increase in the level of
the government's debt subj ect to limit. The President's budget forecasts a $158 billion
Social Security surplus in 2002. That is, Social Security payroll taxes and other receipts
coming in to the Social Security trust fund will exceed payments from the trust fund by
$158 billion. That surplus is, by law, immediately invested in Treasury securities, and
therefore increases the government debt that is subject to limit. In 2003, the President's
budget forecasts the Social Security surplus will be $177 billion. Thus, over two years,
the surplus revenues to the Social Security Trust Funds will add more than $335 billion to
the debt subject to the statutory limit.
There are nearly 200 trust funds of this kind maintained by the federal
government (although no other as large as Social Security.) Other federal government
trust funds similarly bring in more revenues than are spent each year, including the
Medicare Part A trust fund, the civil service retirement trust fund and the military
retirement trust fund. Similarly, these surplus revenues to those trust funds are invested
in Treasury securities and therefore increase the government debt.
Overall, the expected growth in government trust funds alone is over $400 billion
over the next two years. According to an OMB summary table in the fiscal year 2003
budget: The trust fund total surpluses total $212.6 billion for fiscal year 2002, $257.3
billion in fiscal 2003, and $289.5 billion in fiscal 2004; or $759.7 billion over fiscal
years 2002-04.

PUBLICLY-HELD DEBT

SHARE OF ECONOMY IS DECLINING

Even as trust fund surpluses increase total government debt, publicly held debt as
a share of our economy is declining, and continues to fall under the President's budget.
In 1995, publicly held debt amounted to 49% of GDP. By 2001 that had fallen to 33% of
GDP, and by 2007, that percentage will fall to 25%.

INTEREST AS SHARE OF FEDERAL OUTLAYS IS DECLINING
Similarly, net interest on the debt is consuming a smaller share of federal
government outlays (Table 8.3 in Historical Tables for fiscal 2003 budget). In 1995,
jnterest payments consumed 15.3% ofthe federal outlays. As the economy grew and the
budget returned to surpluses, interest payments as a share of outlays fell. In 2001,
interest payments consumed 11.1 % of federal spending, and the President's budget
projects that interest will consume just 7.5% of federal spending in 2007, leaving more
resources available for priority programs.

DEPARTMEl"T OF THE TREASURY

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EMBARGOED UNTIL 3:00 P.M. EST
February 27, 2002

CONT ACT: BETSY HOLAHAN
202-622-2960

Economic Impact of the Lack of Terrorism Risk Insurance
Testimony of Mark J. Warshawsky,
Deputy Assistant Secretary for Economic Policy, U.S. Treasury
Before the Financial Services Subcommittee on Oversight and Investigation
United States House of Representatives
Wednesday, February 27, 2002
Chairwoman Kelly, Representative Gutierrez, Members of the Subcommittee, I
appreciate the opportunity to present to you the views of the Office of Economic Policy at the
Treasury Department on the current and possible future impacts of the lack of terrorism risk
insurance on the American economy. We appreciate the speedy action ofthe House in passing
legislation last year that would have created a temporary federal back-stop to insured losses from
terrorist attacks. We look forward to continuing to work with you to achieve our shared
objective of restoring private insurance coverage for this risk. Terrorist attacks have the
potential for significant nationwide costs and thus justify a carefully designed collective
approach to insuring against the losses from such events, utilizing the already existing coverage
and payment mechanisms of private insurance markets.

The terrorist attacks have had a negative impact on the ability of businesses and property
owners to insure against risk.
Industry estimates of insured losses resulting from the attacks of September 11, over all
principal lines of coverage, range from $30 billion to $90 billion, with the consensus estimates in
the $36 billion to $54 billion range. These losses hit many major lines of the property/casualty
insurance business including property, business interruption, workers' compensation, and
liability, as well as life and health. Wherever the final figures settle, these will be the largest
insured losses in history. By contrast, Hurricane Andrew, which led to significantly higher
premiums and reduced availability of insurance in flood prone areas, caused, in today's dollars,
$19.3 billion of insured losses in all lines, although it should be noted that the industry was much
better capitalized on the eve of the September 11 th tragedy than it was when Andrew hit.

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Investment losses experienced by primary property/casualty (P/C) insurance and
reinsurance companies, which had been growing prior to September 11, accelerated dramatically
immediately after that date. Hence, unlike other insured events, the insurance losses from these
terrorist attacks were highly correlated with investment losses at the time -- a difficult and risky
situation for insurance and reinsurance companies.
In addition to these two types of losses actually experienced, the attacks revealed to the
insurance industry a potential for huge future losses which it had not priced before and cannot
yet readily model. Terrorism creates the possibility of a large loss, but it does so with an
uncertain probability. This is unlike other insurable events where the law of large numbers
operates to effectively pool risk, as in personal lines such as life, health, long-term care or
automobile. It is more comparable to dramatic natural catastrophes, such as hurricanes or
earthquakes, causing large losses. But unlike terrorism risk, natural catastrophes have
predictable patterns and probabilities quantifiable by sophisticated models, based on past weather
conditions or seismic activity, that better allow the assumption and diversification of risk.
It is well known that primary insurers in most lines of coverage reduce their risk by
laying it off to reinsurers. Reinsurance is a valuable, sensible, and well-established way of
spreading risk. Many participants in the reinsurance market are large sophisticated
organizations, are often foreign-owned and operate world wide, thus assuring that risks in any
one country or type of business are spread around the world. As a consequence of the September
11 losses, which reduced their capital base, and the inability to model terrorism risk, at least at
the present time, the reinsurance industry has almost entirely stopped assuming terrorism risk.
Primary insurers have also withdrawn, and continue to withdraw, from covering this risk in states
and lines of coverage where the law or insurance regulators have not prevented them from so
doing.

I will be brief in summarizing the insurance market impacts; I understand that the
testimony of the GAO will cover this in detail.
Primary insurers are being allowed by insurance commissioners in all states, with the
prominent exceptions of New York, California, and Georgia, to exclude terrorism coverage
above certain dollar amounts from smaller, regulated commercial policies. Most states, however,
do not allow an exclusion from damage caused by fire following a terrorist attack. No states
have allowed the exclusion of terrorism risk in personal insurance lines.
Terrorism is defined broadly in the exclusion as activity that involves the threat of, or
actual use of, violence if the effect is to intimidate the government or disrupt some segment of
the economy and the intent is to further political or ideological objectives. The definition
includes the use of nuclear, chemical or biological weapons. It apparently does not make a
distinction between the foreign or domestic origin of the act ofterrorism.
Because state laws do not allow companies offering workers' compensation insurance to
exclude terrorism risk, some primary insurers have chosen to drop the workers' compensation
line completely, rather than underwrite terrorism risk absent reinsurance. Others are issuing it on
a more selective basis, forcing many businesses into state sponsored insurance pools.

In one case brought to our attention workers compensation insurance was not renewed
because the insured had over 500 employees located in a tall office building in Pennsylvania.
Insurance brokers report that terrorism coverage for large commercial properties, whose
insurance policies are unregulated, is difficult to obtain, and importantly, subject to limits of
coverage that are much lower than customers want. And premiums for these properties have
increased dramatically. In some instances the total policy cost with limited terrorism coverage is
reported to be roughly double the cost of the PIC policy without the terrorism coverage. Stand
alone coverage for terrorism risk is very limited and quite expensive where it is available. In
fact, separate terrorism risk coverage costs more than the insurance covering all other risks while
it provides a lower limit and responds to only one event.
Owners of large commercial properties and holders of mortgages on such properties
(pension funds, trusts, etc.) are reluctant to discuss the extent and nature of their insurance
coverage because few property owners want to make public the fact that they are uncovered or
inadequately covered. This makes it especially difficult to gage the extent of the coverage and
cost problems, but we have indications that they are widespread on many types of properties,
especially those currently thought to be most at risk from terror attacks.
The effects of conditions in the market for terrorism risk insurance are being heightened
by rising rates for types of insurance coverage unrelated to terrorism risks, where the insurance
market is tightening. Insurance brokers, who deal in most commercial PIC coverage, report that
median rate increases are 30-50 percent and mean rate increases are 40-70 percent. Industry
sources report that rates had begun to rise and coverage shrink well before September 11 as part
of the classic underwriting cycle. This cycle is generally started when insurance company
earnings on investments decrease, reducing their capacity to underwrite insurance. Insurance
industry capital losses as a result of September 11, however, have exacerbated the cycle, as has
the increased risk for primary insurers remaining after excluding allowable terrorism risk
coverage. While some increase in premiums might be expected in response to the low earnings
in the insurance industry before September 11 and the attacks themselves, the recent increases
have been so dramatic that they harm the Nation's economic recovery.
These insurance difficulties in turn are affecting the financing of new real estate projects
and sales of existing properties.
Reports to us indicate that financing is limited for new construction andlor acquisition of
high-profile properties which are at risk for terrorist attack and inadequately insured. Lenders are
carefully screening the location and size of buildings. Some are simply refusing to lend on trophy
properties that are not fully insured. Others will lend on underinsured properties, but only ifthe
owner will provide recourse. In one case, a large constmction project in the Midwest known to
be financially viable prior to September 11 is now at risk of being abandoned because of gaps in
the available terrorism coverage. Eventually the market might be able to price for the new risks
facing such properties. Both the severity and timing of changes to date, however, make them
harmful to the economy.
The impact on existing properties at risk is equally troubling. While, technically,
properties without adequate insurance are in default of financing covenants, lenders may well not
foreclose but , rather , raise their fees to cover their own risk.

Rating agencies have indicated that they will substantially increase subordination levels
on new issues of commercial mortgage backed securities whose collateral properties have
inadequate insurance coverage. They are also in the process of establishing risk criteria that
would lead to the downgrading of securities collateralized by properties inadequately insured and
at an elevated risk of attack. Those deemed high risk by the agencies include trophy assets,
symbols of America, structures for large gatherings of people (arenas, stadiums, and convention
centers), critical infrastructure (major bridges, tunnels, and transportation hubs), and critical
energy-providing structures. It also includes structures that are tall, located in a central business
district, or with a highly visible tenancy.
Ratings downgrades would, of course, have a major negative impact on the value of such
securities, which are widely held by mutual funds and pension plans. Spreads between the yields
for large property commercial mortgage backed securities and Treasury securities have in fact
widened recently, especially for properties with greater exposure to terrorism risk. And we have
received reports that the volume of commercial mortgage backed securities issued since the
beginning of the year has fallen.
We have particular concern about the impact of high premium rates and lack of insurance
availability for smaller projects being built near what is considered potential terrorist targets.
Hospitals, municipal entities and other nonprofits where trustees feel a fiduciary responsibility
may well forgo terrorism coverage if they see the cost is equal or greater than what they're
paying for all other perils.
Of equal concern to us is the steep rise in rates for commercial and other insurance
policies for all developers, because this rise has the potential to cause significant impact on the
economy and is likely to last for the next year or two. While low interest rates may be offsetting
some of the increased insurance costs right now, we cannot count on that situation to remain
constant.
Finally, the full effects of the terrorist attacks on insurance conditions have yet to be felt,
because about a third of the reinsurance treaties and many primary insurance contracts negotiated
prior to September 11 have not yet expired. Many real estate lenders are still deciding how to
adjust their lending strategies to the lack of coverage for their properties. Others may delay
bringing properties to markets in hopes of improvement later. These impacts are difficult to
quantify and document because they are dispersed, and the affected policyholders may be
reluctant to publicize that they are having trouble finding financing for real estate projects, or
that outstanding debt secured by inadequately insured property risks a ratings downgrade. In this
regard, I understand that the SEC is considering whether to require businesses left without
commercial terrorism risk insurance after the September 11 attacks to disclose the loss to
investors as a material risk factor.
The implication of these insurance market conditions and economic consequences makes it
critical for Congress to enact a federal terrorism risk insurance backstop for at least four
reasons.

1. The lack of coverage and high premium rates imply a drag upon our economv and a
burden to the nascent recovery, including the potential for a loss of even more jobs. So-me are
now arguing that the lack of a dramatic economic impact resulting from Congress' failure to
enact a federal terrorism risk insurance backstop prior to January 1 means that the legislation is
not necessary. This argument reflects a fundamental misunderstanding of the nature of the
problem and the drag that terrorism risk is placing on an economy that is in the early stages of
recovery. As I've indicated, the insurance industry has been significantly destabilized, with
coverage well below "equilibrium", and prices for coverage well above normal levels. Investors
in new properties and lenders on properties on which contracts have expired are paying
disequilibrium costs, either directly, because of the spikes in renewal policy costs, or indirectly,
because they are the ones now bearing this risk.
The economic impact is therefore two-fold: first, the decreased returns and higher risk
experienced by businesses and developers are a disincentive to future investment over this
interim period. Second, as suppliers of capital in tum seek to lay off the cost, the impact is
passed through to consumers and workers. Further, it will increase as more and more insurance
contracts come up for renewal. In brief, the impact is just like a "tax" increase on productive
capital. What is the ultimate impact on consumer prices and jobs? While it is always difficult to
estimate accurately, we know that in the long run, in our open and elastic capital markets,
workers and consumers will bear the brunt of the burden.

2. The cost of lost and postponed investment opportunity is potentially large for future
economic growth. Many real estate lenders are still deciding how to adjust their lending
strategies to the lack of coverage for their properties. Many developers may be delaying
bringing properties to capital markets in hopes of improvement in insurance conditions later,
which in tum is now dependent on government action. Thus capital is not committed to worthy
projects--that would have received financing and created jobs had insurance markets been in a
better equilibrium.
3. Inaction paralyzes the private sector. Furthermore, the lack of government action,
one way or another, is itself costly as insurers, financiers, and businesses wait to see what new
institutions the government might set up before themselves committing to creating new insurance
mechanisms, even ones significantly less efficient than a robust private insurance market.
Moreover, economic activity itself could adjust in the design and location of building projects.
Planning and decision making would be much better if they knew the insurance environment
they faced. We can do better by our investors, consumers, and workers than this.
4. The economic impact of another terror attack could be even greater t!zan the
September 11 attack. Finally, there is a real concern about the potential costs to the federal
government and the economy in the event of another attack, with no backstop program in place
to stem the tide of uninsured and underinsured properties. Private insurance covered a
significant percentage of losses arising from the September 11 attacks. Following the attacks,
insurance companies quickly stated that they would pay claims on the World Trade Center and
other losses (including business interruption) incurred because of its destruction.

The ability of the insurance industry to make this simple and credible promise was
likely instrumental in calming investors after the attacks and giving business confidence that
funds would be available to resume business operations, particularly in New York City.
The subsequent rapid disbursement of payments has been vital in speeding New York
City's recovery according to a report commissioned by that city's Chamber of Commerce.
Nearly half of the projected payouts are expected to be made within a year of the attack. Such
rapid disbursement will be possible only because a payment scheme (via well-established
insurance conduits) was in place prior to the attacks. Trying to devise such a scheme on short
notice and in the aftermath of another terror attack would be considerably less effective and
would slow recovery.
But without a backstop program in place to encourage participation by private insurance
that might well happen. In the event of a major terrorist strike, many of the losses would likely
be borne by the federal government. We would expect defaults on commercial mortgages and
other losses. It might be difficult to resist the call for federal assistance to compensate uninsured
property owners and businesses victimized by the terrorist strike. Compensation for losses by
private insurance industry has worked smoothly and efficiently. It is highly unlikely that a
federal payment system, hastily conceived in the aftermath of a major attack, could perform as
well.

We need action now.
As the President has stated strongly, our enemies are persistent, clever, and should not be
underestimated: future incidents may be quite different from the attacks we have already
experienced. Our enemies have stated that their intent is to cause economic harm, as well as
physical harm, to us. We finnly believe that our Nation's battle against the scourge of terrorism
will ultimately be successful. We-also believe that private markets will stabilize--capitallevels
will be restored and insurers' ability to price this risk will improve. But we now know how
difficult and costly it can be for an economy to adjust to terrorist events. We bear responsibility
for assuring that our citizens are adequately protected against terrorism. This includes our
citizenry's ability to obtain insurance in the interim against this insidious threat, as well as
reducing the costs of restoring their financial well-being were another event to occur. And we
want to encourage economic growth. Hence, we have proposed a federal insurance backup.
Congress should act before the economic damage caused by lack of terrorism risk
insurance takes too great a toll. We want to work with you to create the best possible support for
our economy, job creation, and consumers.
-30-

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
February 27, 2002

Office of Financing
202-691-3550

RESULTS OF TREASURY'S AUCTION OF 2-YEAR NOTES
Interest Rate:
Series:
CUSIP No:

Issue Date:
Dated Date:
Maturity Date:

3%
K-2004
9128277M8
High Yield:

Price:

3.059%

February 28, 2002
February 28, 2002
February 29, 2004

99.886

All noncompetitive and successful competitive bidders were awarded
securities at the high yield. Tenders at the high yield were
allotted 35.07%. All tenders at lower yields were accepted in full.
AMOUNTS TENDERED AND ACCEPTED (in thousands)
Accepted

Tendered

Tender Type
$

Competitive
Noncompetitive
FIMA (noncompetitive)

43,897,415
1,320,420

°
25,000,000 1/

45,217,835

SUBTOTAL

6,734,810

Federal Reserve
$

TOTAL

51,952,645

23,679,580
1,320,420

31,734,810

Median yield
3.014%:
50% of the amount of accepted competitive tenders
was tendered at or below that rate.
Low yield
2.980%:
5% of the amount
of accepted competitive tenders was tendered at or below that rate.
Bid-to-Cover Ratio

45,217,835 / 25,000,000

1/ Awards to TREASURY DIRECT

1.81

$902,693,000

http://www.publicdebt.treas.gov

1-1051

CONTACT:

Office of Financing
202-691-3550

RESULTS OF TREASURY'S AUCTION OF 4-WEEK BILLS
28-Day Bill
February 28, 2002
March 28, 2002
912795JM4

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

1.745%

Investment Rate 1/:

1.775%

Price:

99.864

All noncompetitive and successful competitive bidders were awarded
securities at the high rate.
Tenders at the high discount rate were
allotted 63.17%.
All tenders at lower rates were accepted in full.
AMOUNTS TENDERED AND ACCEPTED (in thousands)
Accepted

Tendered

Tender Type
Competitive
Noncompetitive
FIMA (noncompetitive)

22,971,226
29,358

SUBTOTAL
Federal Reserve
$

TOTAL

50,986,401
29,358
51,015,759

23,000,584

3,879,529

54,895,288

26,880,113

Median rate
1.730%: 50% of the amount of accepted competitive tenders
was tendered at or below that rate.
Low rate
1.700%:
5% of the amount
of accepted competitive tenders was tendered at or below that rate.
Bid-to-Cover Ratio

51,015,759 / 23,000,584 = 2.22

1/ Equivalent coupon-issue yield.

http://www.publicdebt.treas.gov

PO-I052

DEPARTMENTOFTHETREASURY

TREASURY

NEWS

omCE OF PUBLIC AFFAIRS -1500 PENNYSYLVANIA AVENUE. N.W. -WASHINGTON. D.C. -20220 -(202) 622-2960

Embargoed until delivery
February 28, 2002

Contact Michele Davis
(202) 622-2920

U.S. LEADERSHIP IN THE GLOBAL ECONOMY
TESTIMONY OF TREASURY SECRETARY PAUL H. O'NEILL
BEFORE THE COMMITTEE ON FINANCIAL SERVICES
OF THE HOUSE OF REPRESENTATIVES
I.

Introduction

Chairman Oxley, Representative LaFalce and Members of the Committee, thank you for
inviting me here today to discuss President Bush's international economic agenda and our efforts
at the Treasury Department to advance that agenda.
Mr. Chairman, when I accepted the job of Secretary of the Treasury, President Bush
directed me to meet a number of important challenges. One of those challenges - one I take very
seriously and personally - is our nation's role in international economic growth and
development. The President's message to me was very clear: if we care, and we have simple
respect for human dignity, then we must finally begin to deliver on a half-century of unfulfilled
promises to raise the standard ofliving of poor people living - and dying - in the world today.
President Bush feels that U.S. leadership is essential to meet this challenge and I agree with him.
The United States should be a locomotive of global economic growth and a champion of
economic development in those parts of the world that have lagged behind.
Let me be clear: the creation of economic growth and jobs in the U.S. economy is our
overriding concern. In fact, I believe that getting our economic policies right at home is one of
the best contributions we can make to global economic growth.
It is also true that growth and prosperity in the global economy are vital interests of the
United States because economic growth is associated with peace, stability, democracy,
innovation, and the expansion of markets. These are important national goals. An even more
fundamental goal for our nation is to see that the people ofthe world have the opportunity to live
at their potential. That is a hope each and everyone of us holds out for the world, and we have
an obligation to do what we can to achieve it.

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When the leaders ofthe free world joined together more than fifty years ago with a
commitment to speed the progress of the underdeveloped world, they could not have imagined
how slow progress would be. This is especially unsettling since over those same fifty years, we
have also witnessed incredible feats of human progress. Countries have risen from the ashes of
war to become vibrant, thriving members of the community of nations. People have struggled
and succeeded in discarding the yoke of totalitarian regimes to create free democracies. Today,
more people than ever before in the history of the world have the opportunity to compete, to reap
the benefits of their labor and creativity in free markets, and to create wealth. And the resultant
miracles of science, health, and technology are truly inspiring.
So why are so many people still poor? Why have so many people been left behind?
It is not because the people in developing countries aren't capable of all the same
advances the rest ofthe world has created. In my experience running a global enterprise, I saw
brilliant ideas put forward by people in every corner ofthe world. What is lacking in the nations
that have failed to progress is a system that supports the deployment of new ideas. Most of the
basic building blocks of such a system are relatively inexpensive: good government, good
educational systems, the rule of law, respect for property rights, a commitment to free markets, a
commitment to peaceful relations with neighboring countries.

But for many countries these foundations for development are beyond their reach - either
for lack of money, lack of know-how, or lack of encouragement or incentives to do the right
thing. And in some cases, countries have simply been led down the wrong road because of
policy prescriptions from the international community and the sometimes perverse incentives our
international assistance programs have created.
I believe that we can succeed in effecting change. Let me take a few minutes to discuss
some of the ways we are trying to drive change.

II.

Strengthening International Economic Cooperation

Achieving economic growth and stability is absolutely fundamental to improving the
lives of our citizens and those all around the world. And it is vital to greater security for all of
us. With this in mind, we spend an enormous amount of time and effort working with other
countries toward these goals.
One of the challenges we face in this task is balancing the need to provide leadership and
impetus with the importance of respect and deference to other countries' decision-making
processes. As President Bush has said, the United States should not lecture other countries but
rather should respect their sovereignty concerning their own policies. Indeed, a fundamental
principle of our approach is that other countries should have ownership of their economic
policies. Governments need to bear the responsibility for addressing their own economic
problems and challenges - and ensuring that they choose prudent policies that will bring them
sustained growth and stability over the medium and long term.

We would accomplish little if we tried to force them to follow our wishes, since only
lasting and committed implementation of economic policy measures will deliver real results.
This is why, while seeking to deepen and enrich our contacts and cooperation with other
countries on economic and financial issues, we avoid pressuring countries to adopt our solutions
to their problems. The ongoing dialogue that we maintain with our Group of Seven (G-7)
partners has embodied this approach. We value our interactions with our G-7 colleagues. At the
same time, we are careful in these sessions to be sensitive to the fact that each country needs to and should be encouraged to - pursue policies appropriate for its own circumstances.
G-7 meetings provide key opportunities to share infonnation, discuss policy
considerations in our own economies and pursue innovative approaches to international policy
issues of shared concern. In recent months, we have had concrete discussions with others in the
G-7 on how to achieve our common obj ective of higher global economic growth. We expect to
issue a quantitative, fact-based study around the time ofthe G-8 Heads of State Summit in June
that discusses a number of policy changes that could vastly improve global economic growth.
The G-7 is also working together on a variety of other issues, including our efforts to rid the
world's financial system from terrorist fundraising activities and refonn of the international
financial institutions.

III.

Enhancing Stability and Growth: Reform of the International Monetary Fund

To unleash human economic potential, it is vital that economies have a sound and stable
basis on which to grow. Cultivating conditions in the international economic and financial
system that support growth is the job ofthe International Monetary Fund. Indeed, rather than
serving as a firefighter for crises, the IMF should become more like a gardener, nurturing the
seeds of private sector growth.
The first task is to prevent the eruption of crises that undennine and reverse growth. This
is a fonnidable intellectual challenge, since it is difficult at best to identify trouble far enough
ahead so that something can be done to prevent it. And it is equally a leadership challenge, since
prevention requires the political will to take decisive and often unpopular steps early in order to
avert a crisis that may not yet be apparent to others. Enhancing its crisis prevention role means
that the IMF must take a number of steps. It needs to do better in detecting signs of trouble
itself, and with our encouragement the IMF is taking steps to strengthen its internal early
warning systems. Greater transparency is also fundamental, both on the part of the IMF and its
member countries, so that financial markets can discern the true perfonnance and potential risks
of individual economies and the system as a whole. When countries publish timely data on their
performance, markets can make infonned decisions - and this is indeed happening now, with
forty-nine countries complying with the new standards for data disclosure. For its part, in
addition to being more transparent about its operations, the IMF needs to speak out when it sees
trouble looming. It is up to countries themselves to make policy changes to avoid crises, but the
IMF must make itself more vocal in identifying problems as they develop.

I want to touch briefly here on contagion. I was criticized last year when I said that
contagion was not something that God intended us to have. But I saw that something important
was changing in international financial markets, and I thought that it was important to draw
attention to it to further drive that change. Fear of contagion can cause the IMF and others to do
things that shield investors from the risks of their investments, which only increases the chances
that a crisis will recur. In fact, financial markets, aided by greater access to information, are now
increasingly differentiating between those countries that are pursuing strong, growth-oriented
policies and those that are not. This is an important development.
To be more effective in cultivating growth, the IMF also needs to narrow the focus of its
involvement in member economies. In the past, the IMF allowed its activities to expand into
areas outside those central to its mission and thus to overlap with the mandates of the multilateral
development banks, for instance in promoting agricultural reform and judicial reform. The IMF
does not have a comparative advantage in addressing such issues, and attempting to do so
arguably diminishes the Fund's effectiveness in pursuing more central objectives. Rather, the
Fund should focus on monetary, fiscal, exchange rate and financial sector policies that lay the
macroeconomic framework for growth.
The IMF is already making progress in narrowing the focus of its work. New country
programs reflect a sharper concentration on key areas and a prioritization of measures necessary
for reforms to succeed. This is a welcome change. And a broader review of the conditions
attached to IMF lending continues. As part of this review, we are emphasizing the need for the
IMF to be selective in providing financial support. The IMF needs, in short, to demonstrate a
greater willingness to focus its support on countries doing the most to help themselves, and to
decline to finance cases in which a country is not prepared to take the steps required to achieve
credible reforms and a sustainable growth path.
One important mechanism for identifying and supporting countries that are truly
committed to reform is to make greater use of "prior actions." These are conditions that
countries must meet before a program is approved and Fund resources are disbursed. As such,
they provide the opportunity for countries to demonstrate their strong commitment and
ownership of sound economic policies - and for the IMF to ensure up front that reforms will be
implemented. This approach was important to the IMF's support for Turkey in May last year,
when Turkey took decisive steps to implement nine key prior actions before the IMF agreed to a
new program with increased financing.
But this in itself is not enough to change fundamentally the role of the IMF in the
international system. Rather, we need to make clear that there are limits on official support to
countries in unsustainable situations - that they will not be "bailed out" despite a history of bad
policy choices and a lack of commitment to reform. This is essential to avoid distorting
incentives for countries and investors alike. It is up to the IMF and its members to impose such
limits. This does not mean that we should set rigid ceilings on the amount of financing that the
IMF can provide when a country is adopting a strong reform program. But it does mean reining
in the tendency to provide generous financing packages when a country's debt situation is
unsustainable and tough-minded refonns are needed.

This brings me to a particularly difficult but critical issue - what to do when a country's
debt situation is unsustainable. Despite several recent incidents, there remains no clear, agreed
approach to dealing with such a situation. And the uncertainty that remains simply creates too
much pressure for large-scale official lending by the IMF and may contribute to decreased
investor willingness to invest in some emerging markets.
To help reduce this uncertainty, we are working with others in the official sector in
considering the development of a sovereign debt restructuring mechanism that will provide a
more predictable framework for debt workouts. Having such a workout strategy in place may
help reduce the pressure for large-scale financing - and it may also create the potential for
increased capital flows to emerging markets at lower interest rates. Of course, creating and
implementing such a mechanism are not simple tasks. A number of options for the design and
implementation of this mechanism are being considered. For our part, the U.S. Treasury is
emphasizing the need for a mechanism that is market-based, encourages creditor and debtor
ownership of the process, and avoids raising concerns about conflict of interest. One option that
fulfills these criteria would encourage borrowers to put certain clauses in their debt documents to
help facilitate a more orderly process if a restructuring is necessary. Of course, there are many
issues that would need to be considered in implementing such an approach, including how to
encourage the use of these clauses in debt contracts. As we proceed, we are consulting with
various experts in the private sector, and we look forward to continuing to consult with the
Congress as well.

IV.

Building Key Bilateral Economic Relationships

Let me spend a few minutes discussing some of our key initiatives in the bilateral area,
where we have made a major effort to focus our economic relationships on concrete, measurable
goals, with specific time lines for achievement.
Economic Component of the Strategic Framework with Russia
First, Russia. During our meeting with President Putin last summer, Commerce
Secretary Evans and I agreed to develop a checklist - a time-bound list of concrete
accomplishments that both countries want to achieve in the economic sphere - that would allow
the United States and Russia to measure progress on our bilateral economic agenda. In the
ensuing months, we worked with President Putin's economic team to develop a list that includes
specific steps to advance Russia's WTO accession, to help Russia build a business climate to
attract private investment, and to further our common goal of fighting money laundering and
terrorist finance. Two important items on this checklist relate to the creation of a sound Russian
banking system - capital needs to be much more broadly available in Rus.sia to t~ose o~tside the
natural resource-based sectors. First, we have helped launch a u.S.-RussIa Bankmg DIalogue as
a vehicle for practical private sector ideas. And, second, we suppo~ e~p~nding the E~RD's
Russia Small Business Fund which has been extremely successful m gIVmg small busmesses all
over Russia access to credit on market terms.

Additionally, it is important to give credit for strong policy refonn where credit is due.
Following the August 1998 financial crisis, Russia floated its currency and undertook
comprehensive tax refonn, including the establishment of a flat 13 percent personal income tax
and a dramatic overhaul of its tax administration system. Growth has rebounded strongly,
averaging over 6 percent a year in 1999-2001. And because of these policy actions, what was a
fiscal deficit of 6 percent of GDP in 1998 became a fiscal surplus of 2.5 percent of GDP in 2000.
The reduction in the corporate income tax from 35 percent to 24 percent, which went into effect
in January 2002, will help support this trend.

US.-Mexico Partnership for Prosperity
Second, Mexico. President Bush has said, "The stronger Mexico is, the less pressure on
our border; the stronger Mexico is, the more prosperity there will be in both our countries." And,
"Trade with Mexico is an integral part of making sure that our hemisphere is safe, secure and
prosperous." Mexico and the United States share more than just a geographical border. Since
signing the North American Free Trade Agreement in 1993, Mexico has become the U.S.'s
second largest trading partner and fastest growing export market. Our business cycles are
closely aligned, and financial markets increasingly view Mexico's economy as more closely
linked to the U.S. than to Mexico's Latin American neighbors.
These growing links and the close relationship between President George W. Bush and
Mexican President Vicente Fox prompted the leaders to fonn the U.S.-Mexico Partnership for
Prosperity in September 2001. The goal of the Partnership is (i) to unleash the economic
potential of every citizen, (ii) to harness the power of open markets and private enterprise in
order to spur economic development in Mexico, and (iii) to do so through an authentic
Partnership not just between governments, but also between our respective private sectors.
Official flows from the U.S. and the international financial institutions are dwarfed by
private flows to Mexico. The Partnership is dedicated to facilitating those private flows,
maximizing them, and leveraging them through coordination with other private flows and
official flows. Along with top government officials from the U.S. and Mexico, experts from
business and academia have come together in a series of roundtable discussions to develop ideas
to stimulate investment and growth in Mexico and achieve the goals of the Partnership.
A final report is being drafted jointly with public and private sector participants from
both Mexico and the U.S. and will be presented to President Bush and President Fox on March
22 at the UN Financing for Development Conference in Monterrey, Mexico.

Reconstuction of Afghanistan
Finally, Afghanistan. The international donor community is committed to close
coordination on reconstruction efforts for Afghanistan.

Treasury, working closely with the State Department, initiated efforts to begin the multiyear, multi-bill ion-dollar process of Afghanistan's reconstruction. On November 20 th 2001 even before the forn1ation of the Afghan Interim Authority - senior officials of the intemational
donor community came together in Washington, D.C., to begin discussing a structure and
process for Afghan reconstruction assistance. An early accomplishment was the fonnation of the
Afghanistan Reconstruction Steering Group (ARSG), co-chaired by the United States, Japan,
EU/EC, and Saudi Arabia. This group's role is to provide political impetus, encourage
contributions and provide overall policy guidance to the intemational economic reconstruction
effort. The first ARSG meeting was held in Brussels on December 20-21, 2001.
Since November, the United States has been a leader in catalyzing international donor
efforts. Secretary Powell and I led the U.S. delegation to a January 2002 Tokyo meeting of the
Steering Group, where donors pledged some $1.8 billion for Afghan reconstruction efforts in
2002, and a preliminary initial total of $4.8 billion for the 2002 - 2006 period. Ministers and
representatives from 61 countries and 21 international organizations attended. The Conference
demonstrated the strong commitment of the international community to reconstruction assistance
to Afghanistan by making specific commitments and pledges. Afghan and international NGOs
held a separate meeting. Experts also met to discuss military demobilization, military and police
training, counter-narcotics issues and alternative development.

IV.

Raising Economic Growth and Reducing Poverty: Reform of the Multilateral
Development Banks

President Bush has said: "A world where some live in comfort and plenty, while half of
the human race lives on less than $2 a day is neither just, nor stable." Poverty today remains
widespread and deep. About 10 million children die each year, most from preventable diseases.
More than 113 million primary school age children do not attend school, with forty percent of
the children in Sub-Saharan Africa out of school. Approximately 1.3 billion people lack access
to adequate quantities of clean water and nearly 3 billion people are without adequate sanitation,
leaving them vulnerable to disease. The HIV/AIDS epidemic continues to spread relentlessly,
with over 12 million orphans aged 14 or less in Africa alone, and is rapidly reversing the hardwon development achievements of many countries. The magnitude and human consequences of
the development challenge we now confront underscore the need for international development
assistance efforts to do a much better job than they have been doing in increasing opportunities
for people to create a decent living for themselves and their families. We can and must do better.
In mv travels around the world, I have seen an untapped reservoir of human potential in
all countries, including the poorest. To fully realize this potential. countries need to create an
environment with the institutional conditions and incentives - including the rule of law,
enforceable contracts, stable and transparent gO\'ernmenL and a serious commitment to eliminate
cOtTuption - required to encourage individual enterprise and to provide indi\'iduals with the
health, knowledge, and skills they need to participate in and contribute to economic acti\·ity.
Donors and external assistance can help only if the right fundamentals (including policy
environment and institutions) arc in place to harness human potential.

For this reason, we have worked hard with other shareholders in the multilateral
development banks (MDBs) to concentrate assistance on those countries with sound economic
policie.s and good governance practices. For example, for the IDA-13 replenishment period, 17
countnes will have their IDA lending allocations significantly reduced due to poor governance
ratings.
Rising productivity is the driving force behind increases in economic barowth and risin ba
per capita income. We have been pressing the MDBs to focus more intently on operations that
raise productivity growth, concentrating on such operations as:
•
•
•
•

Improving education and health;
Promoting private enterprise, including small and medium enterprises;
Promoting rule of law, effective public expenditure management, accountability
and anti-corruption; and
Opening economies and strengthening trade capacities and investment
environments.

Mexico's homegrown PROGRESA program provides a good example of a productivity
enhancing investment in children's human capital that should have enormous future dividends.
The program, initiated in 1996 and supported by the MDBs, provides financial transfers to the
rural poor conditional on keeping children in school and providing them with basic preventive
health care and nutrition. Education grants are supporting schooling for 3.6 million poor
children, and nutrition and health grants are benefiting 1.6 million children aged 0-5 years of age.
It is estimated that children's educational achievement has increased by about 10 percent in the
first three years of the program.
As a result of U.S. efforts, productivity is receiving more emphasis in the debate on MDB
policies within the institutions and among other shareholders. We will continue working actively
to ensure it becomes a hallmark of actual operations. Our goal is to raise economic growth,
improve living standards, and improve economic stability in the world economy.
The scale of global poverty and unrealized human potential underscores the importance
of the MDBs (and all other donors) focusing much greater attention on improving the
effectiveness of their assistance. We are pressing all the MDBs to establish monitoring and
evaluation systems that measure development results. In IDA-13, the U.S. is providing
supplementary funding conditioned on measurable results in areas crucial to economic growth
and poverty reduction. In response to a request I made of World Bank President Jim
Wolfensohn in Ottawa last November, the World Bank is undertaking a study of development
effectiveness and the "lessons learned" from operational successes and failures. This study will
feature prominently in discussions at the upcoming Financing for Development Conference in
Mexico and the G-8 Summit in Canada. Our challenge, going forward, will be to ensure that the
successes and failures of the past fifty years guide and improve development efforts in the future.
Private sector development is crucial to economic growth and poverty reduction.

We believe that the MDBs can playa larger role in promoting needed investment climate
reform and in channeling technical assistance and project finance to fund viable private sector
projects in countries that are committed to implementing policy and regulatory changes to ensure
a sound investment climate.
President Bush has also proposed that up to 50 percent of the World Bank and other
MDB funds for the poorest countries be provided as grants rather than as loans. This is an
important part of the Administration's MDB growth agenda. Why? Because grants are the best
way to help poor countries make productive investments without saddling them with ever-larger
debt burdens. Investments in crucial social sectors (e.g., health, education, water supply and
sanitation) do not directly or sufficiently generate the revenue needed to service new debt.
Take, for example, IDA's effort to address the HIV/AIDS pandemic in Africa. The Multicountry AIDS Program (MAP2) is a framework arrangement providing for a series of
independent IDA credits/grants with a total value of $500 million to be committed over the next
three years in Africa. Unfortunately, IDA's proposal for MAP2 would allow for only a
maximum of 20 percent (or up to $100 million) of total financing to be provided in the form of
grants instead of loans. I believe such assistance should be delivered on entirely grant terms.
How can we expect countries to take on additional debt to fight the scourge ofHIV/AIDS?
There are no revenue streams directly associated with controlling the spread ofHIV / AIDS or
treating its victims. Development assistance on grant terms in such cases is the only viable
alternative.
This project also demonstrates the important role the World Bank has to play on critical
development issues. That is why we have supported and will continue to support the World
Bank as well as the other MDBs. President Bush's budget calls for an 18 percent increase in the
U.S. contribution to IDA linked to improvements in IDA's performance. He has also called for
an 18 percent increase in the U.S. contribution to the African Development Fund.
Unfortunately, the U.S. proposal on grants has been opposed strongly by other donors
participating in the IDA-13 and African Development Fund replenishments. It is important to
reach an agreement on grants that will facilitate closure on these important replenishments. The
United States has demonstrated flexibility on this issue. Final agreement will depend on other
donors also demonstrating commensurate flexibility.
The Administration's FY 2003 budget request of $1 ,447 million for Treasury's
international programs reflects our development priorities. Economic progress in the
developing world is enormously important to the United States. The need to reduce extreme
poverty and improve the lives of people around the world is a priority in and of itself. Because
poverty and economic instability can be a breeding ground for terrorism, our fight against
terrorism makes our collaborative efforts with our partners to improve the lives of the world's
poor take on a new and more strategic dimension.
The Administration's request provides for:
•

$1,259.4 million to fully fund aru1Ual U.S. commitments to the MDBs;

•

$177.7 million to fund the first year of a three-year plan to clear US. arrears to the MDBs;
and

•

$10 million for teclmical assistance to finance expert advisors to countries facing economic
transition or security issues and for training governments' finance ministries and offices to
combat terrorist financing.

This request will enable the MDBs to address critical development issues in key regions.
It projects U.S. leadership, and it complements our reform efforts to strengthen the effectiveness
of these institutions.

Promoting Global Free Trade

·
The global economic slowdown also brings into sharp focus the reasons why we need
Increased trade. The drop in U.S. trade (both exports and imports) coincided with a deceleration
of U.S. growth during 2001. Trade is important to the US. economy, and freer trade can help
stimulate growth: it fuels competition and innovation, it helps to increase productivity, and it
stimulates sustained growth with low inflation. Trade has created millions of jobs that pay
above-average wages, and has helped promote the global growth upon which America's own
growth and prosperity ultimately depend.
Trade now accounts for about one quarter of our economy, and export growth accounted
for one-fifth of U.S. economic growth during the past decade. Together, NAFTA and the
Uruguay Round Agreements boosted the annual income and lowered the cost of purchases for an
average American family of four by $1,300 to $2,000. In 2001, the United States exported more
that $1.0 trillion in goods and services, which generated about 10 cents of every dollar that

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