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v.430

Department of the Treasury

PRESS RELEASES

The following Press Release number was not used:

4107

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March 1, 2006
JS-4079
Statement of International Affairs
Under Secretary Tim Adams
Tokyo,Japan
Thank you for coming today. I am pleased to be here in Japan wrapping up a twoweek trip through Asia. The message of this trip, which I repeated in every capital I
visited, is that East Asia remains of central importance to the United States and to
the global economy. The United States is committed to this region, our relationship
with this region is long and deep, and we want to ensure that it remains vibrant.
This is particularly true of our partnership with Japan. The United States and Japan
are the two largest economies in the world and what takes place in our two
economies is critical to supporting global economic growth.
While here, I met with government economic officials and members of the foreign
and domestic business community to discuss developments in Japan, the United
States, and in the global economy.
I am encouraged by Japan's strengthening recovery and what looks to be the end
of a long and difficult period. Indeed the fundamentals of the Japanese economy
are now stronger than they have been for some time.
Japan's challenges now concern the longer term - how to reduce fiscal deficit in a
way that maximizes growth and how to meet the challenges of an aging society.
Raising Japan's long-term growth rate will be critical to meeting these challenges. It
is our hope that the Japanese government will pursue a policy agenda designed to
boost long-term domestic demand-led growth.
In its financial system, we urge Japan to continue to push forward with financial
sector reforms such as increasing regulatory transparency, improving the quality of
capital at major and regional banks, raising the efficiency of consumer finance, and
ensuring a level playing field in postal privatization.
In Manila I commended the President and the Congress for the difficult but
necessary measures they introduced in the last year to reduce the fiscal deficit and
cut losses in the power sector. I hope that the Philippine government will build on
and extend the momentum that they have created over the past year to put
Philippine public finances on a more sustainable path and reduce its vulnerability to
changes in investor sentiment.
In my meetings with government officials in Kuala Lumpur I congratulated them on
the sound policies that have underpinned Malaysia's growth and encouraged them
to continue with structural reforms, improvements to the investment climate, and
strengthening of the financial services sector. Also, greater exchange rate flexibility
under the new regime would help Malaysia adjust to changes in the world economy
and help ensure continued economic growth.
Singapore is another valuable ally in Asia for the U.S. I met with senior officials
there to discuss the regional economy and the prospects for closer integration in
Southeast Asia. We also discussed the importance of free and vigorous trade in the
region and globally through a successful Doha round.
From Southeast Asia, I flew to Beijing to continue discussions on introducing
greater exchange rate flexibility, strengthening our cooperation on reforming and
opening China's financial sector, and achieving more balanced growth.

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The global economy has enjoyed strong growth in recent years and Asia's
economies are a large factor in this. Continuing good growth will depend on strong
global international financial institutions that reflect large and growing cross-border
capital flows and the evolving reality of today's economy.
I'm pleased to have been able to attend the G-20 Workshop on Reforming the
Bretton Woods Institutions hosted by Japan's Ministry of Finance here in Tokyo.
We discussed how the IMF and World Bank have adapted to serve usefully as the
central institutions for international monetary cooperation and development, even
amid fundamental changes in the global economic and financial system. But all of
us agreed that more fundamental change is needed.
In particular. we discussed the need for the governance structure of the Fund to
better reflect the world economy. including by recognizing such fundamental
changes as the tremendous growth in some parts of Asia and the advent of the
Euro. We in the U.S. are pushing for comprehensive reform of the IMF. including
increased quota shares in the IFls for many fast growing emerging markets.
including those in Asia. and a more streamlined board structure which gives
emerging markets greater prominence at the table. The G-20 will be an important
forum as discussions on this goal move forward.
I also found great support in our meetings for U.S. proposals to strengthen the
IMF's role in foreign exchange surveillance. which is another priority area for
fundamental reform.
Thank you again for coming. I'd be pleased to answer any questions.

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PRESS ROOM

March 1, 2006
js-4080

U.S. Treasurer Visits Denver to Discuss Financial Education, American
Competitiveness and the U.S. Economy
U.S. Treasurer Anna Escobedo Cabral today delivered remarks to more than 3000
Head Start staff, teachers and parents at The 2nd National Head Start Hispanic
Institute in Denver, Colorado.
Treasurer Cabral thanked the participants for their commitment to improving
education and highlighted several Treasury financial education efforts, as well as
the Administration's focus on improving U.S. competitiveness and bolstering
policies that are helping the American economy grow and expand.
"It is never too early to begin preparing our children for the opportunities of
tomorrow. I applaud your efforts to improve early childhood education in all
communities across the country," said Cabral. "President Bush has made
improving education and financial savvy a priority, through programs like No Child
Left Behind and federal financial education efforts like that of the Financial Literacy
and Education Commission, headed by the Department of the Treasury," she
continued.
"As the global economy changes, America will need skilled workers to fill the jobs of
the 21 st century, and individuals will require the knowledge base to better plan for a
secure financial future," she continued. "Improving education at every level, and
advancing sound economic policies, such as making tax cuts permanent, will help
us succeed in this front. Additionally, these efforts will together promote American
competitiveness in the global marketplace, spurring the kind of job creation at home
we've seen this past year - 4.7 million new jobs since May of 2003, with 2 million in
the last year alone. And, as I look out at this room, I am heartened by the fact that
each and every one of you continues to advance the cause of improving our youth's
future opportunities for achieving success."
The National Head Start Hispanic Institute provides an opportunity for the
leadership and staff of Head start programs to explore specific issues related to
providing effective services to Hispanic children and families.
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March 1, 2006
js-4081
Randal K. Quarles
Under Secretary of the Treasury for Domestic Finance
Remarks to Global Association of Risk Professional
March 1, 2006

It's a pleasure to be here this morning, and I want to thank you for giving me the
opportunity to address some of the issues we at the Treasury see as we consider
the management of risk in the financial system and the role of the official sector in
helping ease or improve the system's response to risk.
I should note at the outset that you are meeting to consider these questions in a
remarkably benign environment. Macroeconomic conditions in the United States
have been quite favorable - GDP growth at 3.5% last year and projected to run at
roughly that level for the current year; strong and increasing job creation, which
should inevitably have attendant income effects; strong and durable productivity
growth; household wealth at an all-time high. While these factors do not make
financial sector stability inevitable, they are certainly a favorable context.
Moreover, it is clear that financial markets have a great deal of confidence about
the future. Last week, the Dow was above 11 ,000 for the entire week for the first
time in years. Merrill Lynch's MOVE Index of Treasury bond implied volatilities hit
all time lows. A long period of low realized credit losses, lower volatility in GDP
growth, and low and stable inflation have led to expectations of more of the same,
and thus contributed to a general reduction in risk premia across a wide range of
asset classes.
But, like you, we at the Treasury are among those paid to consider the alternatives,
and some risks can be found even in what are prima facie signs of strength. Low
volatility can create incentives for riskier trading strategies, to maintain return. And
currently there is little cost to highly leveraged trading strategies. Swap spreads are
at pre-LTCM levels. Financial institutions are facing a flat or inverted yield curve
and credit spreads across a number of asset classes are historically tight. This,
too, forces market participants to dig deeper to find returns. Investors are also
willing to extend duration in a rising rate environment because of the low levels of
realized or implied volatility.
Complicating the situation is the fact that traders have become accustomed to the
superior liquidity we have experienced recently. Traders expect to get out of their
positions at the next tic, and the possibility of constrained liquidity does not act as a
discipline on trading strategies. Traders employing riskier strategies to chase return
but expecting liquid markets to protect their downside can lead to steep reversals in
asset prices upon a triggering event.
And as we consider the potential for these phenomena to be sources of stress in
the financial system, we must further consider the substantial structural changes
that the system has undergone over the last 20 to 25 years.
•

First, the banking sector is a materially smaller portion of the overall
financial system than is the past. Non-banks - both securities firms and
insurance companies - playa larger role in the extension of credit and the
distribution of risk.

•

Second, concentration in the system is substantially greater. A smaller
number of larger firms, both banks and nonbanks, have assumed systemic
importance.

• Third, and analogously, the rapid growth of the housing GSEs in the United

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States and the increased demand for their securities over the last decade
have greatly exacerbated the potential for events at these institutions to
have systemic consequences.
•

Fourth, capital accumulation is increasingly accomplished through lessregulated entities such as private equity funds and hedge funds.

•

Fifth, the growth in variety and sophistication of financial instruments
increasingly means that analogous or identical economic relationships can
be created through instruments with different legal character, creating
possibilities for regulatory arbitrage.

•

Finally, the financial sector as a whole is increasingly integrated across the
principal financial markets of the developed world.

In the face of these facts, what are the appropriate responses for policy makers?
would like to focus on three. These three are not comprehensive or novel, but they
are illustrative of the areas where the Treasury is working to address questions of
risk in the financial system and make it easier for private firms to manage those
risks.
GSEs

First, is the question of the housing GSEs, which I mentioned above as among the
substantial changes in the institutional structure of the financial sector that have
contributed to increased systemic risk. While the mortgage securitization activity
conducted by Fannie Mae and Freddie Mac does in fact provide a public benefit by
increasing the amount of capital available to support mortgage credit - thus
decreasing its cost and increasing its supply - their retention of large investment
portfolios does not further this purpose. These retained portfolios do, however,
concentrate rather than distribute the prepayment and interest rate risks associated
with mortgages and mortgage-backed instruments held by them, and concentrate
them in entities that - as a result of the lower levels of capital they are required to
hold - are substantially more leveraged than other financial institutions. Because of
the funding advantage enjoyed by the GSEs, they are able to grow these portfolios
to a much greater degree than a purely private sector entity could, and as they
continue to grow in size it becomes increasingly risky for counterparties to hedge
them, particularly given the complicated hedging strategies run by the GSEs.
The recent report of Senator Rudman to the Board of Fannie Mae, while not
focused on the systemic risk issues, does lay bare the focus of the company during
this period on earnings growth rather than its core housing mission. While the
specific abuses detailed in the report have largely been addressed or are being so,
the principal legacy of this period of abuse and lack of focus on its mission remains
the bloated retained investment portfolios at both Fannie and Freddie. A
satisfactory solution to this risk requires a clear legislative instruction tying the
portfolios to the mission of the enterprises, because their funding advantage
eliminates many of the usual sources of market discipline on this risky growth, and
regulatory discipline has in the past proven of limited effectiveness when not
backed by an unambiguous legislative mandate.
Regulatory Framework

The GSEs are one specific area we have identified where changes in institutional
structure have led to changes in systemic risk. But more broadly, we will be
focused as we look forward on seeking to understand in the most comprehensive
way possible whether and how changes in the structure of the financial services
industry have affected the way markets operate - put another way, whether the
growth of certain types of institutions or instruments has materially affected the
efficiency with which markets intermediate risk, whether risk is placed or pooled in
different ways or different places than it has been in the past - and if so, what
appropriate policy responses might be.
For example, as I noted earlier - and as Tim Geithner also discussed in his remarks
yesterday - the growth of non-bank participation in the financial sector and the
increasing development of legal "technology" to allow the creation of similar
economic relationships through instruments of quite different legal character
creates a very real possibility of regulatory arbitrage, thus limiting the effectiveness

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of safety and soundness regulation promulgated for only one type of regulated
entity. Furthering the already well developed cooperation between our own national
regulators, such as the Fed, the SEC, and the CFTC, will be useful, but when the
additional challenges posed by the growth in capital accumulation vehicles that are
quite lightly regulated and the increasing global integration of financial activity are
factored in, the challenges for the regulatory framework become greater. The
fundamental question we must be focused on is ensuring that we strike the right
balance between the costs of regulatory fragmentation and the benefits of
regulatory competition.
Insurance
One area where policy makers on the Hill and elsewhere will be particularly focused
in assessing the costs of regulatory fragmentation and the benefits of regulatory
competition will be in the insurance industry. After the passage of Gramm-LeachBliley, the insurance marketplace is certainly different from what it was even a few
years ago, even though the expected convergence of banks and insurers still has
not materialized. There is a new financial services marketplace that is accelerating
and being driven by industry consolidation, globalization, and the advent of ecommerce.
These changes have led some insurers to maintain that in this new environment,
they find themselves in direct competition with brokerage firms, mutual funds, and
commercial banks - all of which they perceive as having a competitive advantage
due to regulatory structures that allow for more efficient operations.
In recent years the insurance industry has acknowledged these changes in the
marketplace and called for the modernization of the state-based insurance
regulatory system. For instance in 2000, the National Association of Insurance
Commissioners (NAIC) adopted the "Statement of Intent - The Future of Insurance
Regulation", pledging to design and implement uniform standards for a variety of
regulatory functions.
Despite these efforts, some insurers feel that more has to be done to modernize
state insurance regulation, and have called for some degree of federal
involvement. In evaluating these various proposals, we are also mindful of the
difficulties for the official sector in getting a comprehensive view of risk in an
industry where there are over 50 different regulators, each feeling a portion of the
elephant, but none seeing the whole. For example, take the commonly repeated
suggestion that the very rapid growth in credit derivative transactions has resulted
in credit risk being pooled in the insurance industry in unexpected ways. The
official sector would currently find it difficult to evaluate the truth of this statement,
and, if true, what degree of risk it might pose - if any.
The Treasury has been meeting with a number of insurance industry officials on the
various reform efforts that they and others are proposing. We have not yet taken a
position on what approach, if any, should be taken to involve the federal
government in the regulation of insurance, but we will continue to evaluate these
proposals in light of these risk assessment and management principles we have
been discussing today.
Thank you, and I'll now be happy to take any questions you might have.

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March 1, 2006
JS-4082
Treasury Secretary John W. Snow to Visit Northern California
to Discuss Innovation, Tax Reform, Energy and the U.S. Economy

U.S. Treasury Secretary John W. Snow will travel to Northern California today to
discuss innovation, tax reform, energy and the U.S. economy. While in northern
California, Treasury Secretary Snow will visit a Cisco Academy, a National
Semiconductor and give remarks to the Stanford Institute for Economic Policy
Research Economic Summit. The following events are open to credentialed
media:
Who
U.S. Treasury Secretary John W. Snow
What
Roundtable Discussion with Cisco Academy
When
Thursday, March 2,10:00 a.m. (PST)
Where
Foothill Community College
Room 4309 & 4310
12345 EI Monte Road
Los Altos, CA
Note

Media must RSVP to Tina Franklin a4 (408) 515-4402

***

Who
U.S. Treasury Secretary John W. Snow
What
Roundtable Luncheon with TechNet
When
Thursday, March 2, 12:00 p.m. (PST)
Where
National Semiconductor
Room 105
3689 Kifer Road
Building G
Santa Clara, CA
Note
Lunch is open to the press from 1:00 - 1: 15, immediately followed by
a press availability from 1:15 - 1:30. Media must RSVP to LuAnn Jenkins at (408)
721-2440 or
luann.jenkins@nsc.com
***

Who
U.S. Treasury Secretary John W. Snow

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What
Remarks to Stanford Institute for Economic Policy Research
When
Friday, March 3, 8:15 a.m. (PST)
Where
Frances Arrillaga Alumni Center
326 Galvez Street
Stanford, CA
Note
Media must RSVP to Michelle Mosman at (650) 725-1872 or
rnrnQSffiQn@stanford.. e_du

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March 1, 2006
JS-4083
Testimony of Robert M. Kimmitt, Deputy Secretary
U.S. Department of the Treasury
Before the House Financial Services Subcommittee on Domestic and
International Monetary Policy, Trade and Technology
Ms. Chairman, Ranking Member Maloney, and distinguished members of the
Committee, I appreciate the opportunity to appear before you today to discuss the
Committee on Foreign Investment in the United States (CFIUS) and the
Committee's review of DP World's acquisition of P&O. I am here speaking on
behalf of the Administration, the Treasury Department, and CFIUS.
CFIUS
Exon-Florio
CFIUS was established in 1975 by Executive Order of the President with the
Secretary of the Treasury as its chair. Its main responsibility was "monitoring the
impact of foreign investment in the United States and coordinating the
implementation of United States policy on such investment." It analyzed foreign
investment trends and developments in the United States and provided guidance to
the President on significant transactions. However, it had no authority to take
action with regard to specific foreign investments.
The Omnibus Trade and Competitiveness Act of 1988 added section 721 to the
Defense Production Act of 1950 to provide authority to the President to suspend or
prohibit any foreign acquisition, merger, or takeover of a U.S. company where the
President determines that the foreign acquirer might take action that threatens to
impair the national security of the United States. Section 721 is widely known as
the Exon-Florio amendment, after its original congressional co-sponsors.
Specifically, the Exon-Florio amendment authorizes the President, or his designee,
to investigate foreign acquisitions of U.S. companies to determine their effects on
the national security. It also authorizes the President to take such action as he
deems appropriate to prohibit or suspend such an acquisition if he finds that:
(1)
There is credible evidence that leads him to believe that the foreign investor
might take action that threatens to impair the national security; and
(2)
Existing laws, other than the International Emergency Economic Powers Act
(IEEPA) and the Exon-Florio amendment itself, do not in his judgment provide
adequate and appropriate authority to protect the national security.
The President may direct the Attorney General to seek appropriate judicial relief to
enforce Exon-Florio, including divestment. The President's findings are not subject
to judicial review.
Following the enactment of the Exon-Florio amendment, the President delegated to
CFIUS the responsibility to receive notices from companies engaged in transactions
that are subject to Exon-Florio, to conduct reviews to identify the effects of such
transactions on the national security, and, as appropriate, to undertake
investigations. However, the President retained the authority to suspend or prohibit
a transaction.
The Secretary of the Treasury is the Chair of CFIUS, and the Treasury's Office of
International Investment serves as the Staff Chair of CFIUS. Treasury receives
notices of transactions, serves as the contact point for the private sector,

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establishes a calendar for review of each transaction, and coordinates the
interagency process. The other CFIUS member agencies are the Departments of
State, Defense, Justice, and Commerce, OMB, CEA, USTR, OSTP, the NSC, the
NEC and the newest member, the Department of Homeland Security. Additional
agencies, such as the Departments of Energy and Transportation or the Nuclear
Regulatory Commission are routinely invited to participate in a review when they
have relevant expertise.
The CFIUS process is governed by Treasury regulations that were first issued in
1991
(31 CFR part 800). Under these regulations, parties to a proposed or completed
acquisition, merger, or takeover of a U.S. company by a foreign entity may file a
voluntary written notice with CFIUS through Treasury. Alternatively, a CFIUS
member agency may on its own submit notice of a transaction. If a company fails
to file notice, the transaction remains subject to the President's authority to block
the deal indefinitely.
The CFIUS process starts upon receipt by Treasury of a complete, written notice.
Treasury determines whether a filing is in fact complete, thereby triggering the start
of the 30-day review period. CFIUS may reject notices that do not comply with the
notice requirements under the regulations. Upon receiving a complete filing,
Treasury sends the notice to all CFIUS member agencies and to other agencies
that might have an interest in a particular transaction. CFIUS then begins a
thorough review of the notified transaction to determine its effect on national
security. In some cases, this review prompts CFIUS to undertake an
"investigation," which must begin no later than 30 days after receipt of a notice.
The Amendment requires CFIUS to complete any investigation and provide a
recommendation to the President within 45 days of the investigation's inception.
The President in turn has up to 15 days to make a decision, for a total of up to 90
days for the entire process.
CFIUS Implementation
Although the formal review period commences when CFIUS receives a complete
filing, there is often an informal review that begins in advance. Parties to a
transaction may contact CFIUS before a filing in order to identify potential issues
and seek guidance on information the parties to the transaction could provide to
assist CFIUS' review. This type of informal consultation between CFIUS and
transaction parties enables both to address potential issues earlier in the review
process. The pre-filing consultation allows the parties to answer many of CFIUS'
questions in the formal filing and allows for a more comprehensive filing. In some
cases, CFIUS members negotiate security agreements before a filing is made. In
addition, the pre-filing consultation may lead the parties to conclude that a
transaction will not pass CFIUS review, in which case they may restructure their
transaction to address national security issues or abandon it entirely.
During the initial 30-day review, each CFIUS member agency conducts its own
internal analysis of the national security implications of the notified transaction. In
addition, the U. S. Intelligence Community provides input to all CFIUS reviews. The
Intelligence Community Acquisition Risk Center (CARC), now under the office of
the Director of National Intelligence (DNI), provides threat assessments on the
foreign acquirers. CFIUS will request a threat assessment report from CARC as
early as possible in the review process. In order to facilitate reviews, CFIUS may
request these reports before the parties to the transaction have made their formal
filing. Further, additional agencies such as the Departments of Energy and
Transportation and the Nuclear Regulatory Commission actively participate in the
consideration of transactions that impact the industries under their respective
jurisdictions.
During the review period, there are frequent contacts between CFIUS and the
parties to the transaction. The transaction parties respond to information requests
and provide briefings to CFIUS members in order to clarify issues and supplement
filing materials. Although the CFIUS agencies may meet collectively with the
parties as an interagency group, meetings also often occur between the parties and
the agency or agencies that have a specific interest in the transaction. Typically,
certain members of CFIUS will identify a concern early in the review and then
assume the lead role in examining the issue and providing views and

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recommendations on whether the concern can be addressed. For example, if there
are military contracts, the Department of Defense would lead the CFIUS review and
recommend a course of action.
Depending on the facts of a particular case, CFIUS agencies that have identified
specific risks that a transaction could pose to the national security may, separately
or through CFIUS auspices, develop appropriate mechanisms to address those
risks when other existing laws and regulations alone are not adequate or
appropriate to protect the national security. Agreements implementing security
measures vary in scope and purpose, and are negotiated on a case by case basis
to address the particular concerns raised by an individual transaction. Publicly
available examples of some of the general types of agreements that have been
negotiated include: Special Security Agreements, which provide security protection
for classified or other sensitive contracts; Board Resolutions, which, for instance,
require a U.S. company to certify that the foreign investor will not have access to
particular information or influence over particular contracts; Proxy Agreements,
which isolate the foreign acquirer from any control or influence over the U.S.
company; and Network Security Agreements (NSAs), which are used in
telecommunications cases and often are imposed in the context of the Federal
Communications Commission's (FCC) licenSing process.
CFIUS operates by consensus among its members. A decision not to undertake an
investigation is made only if the members agree that the transaction creates no
national security concerns, or any identified national security concerns have been
addressed to the satisfaction of all CFIUS agencies. The daily operation of CFIUS
is conducted by professional staff at each agency. Each agency sends the filing to
multiple groups in its agency depending on the issues involved in the filing. CFIUS
staff report to the policy level, which is the Assistant Secretary level. A decision can
be elevated to the Deputy Secretary level and on to the Cabinet officials, if
necessary. If within the initial 30-day period there is consensus that the transaction
does not raise national security concerns or any national security concerns have
been addressed, Treasury, on behalf of CFIUS, writes to the parties notifying them
of that determination. This concludes the CFIUS review of the acquisition.
If one or more members of CFIUS believe that national security concerns remain
unresolved, then CFIUS conducts a 45-day investigation. The additional 45 days
enables CFIUS and the parties to obtain additional information from the parties,
conduct additional internal analysis, and continue addressing outstanding
concerns. Upon completion of a 45-day investigation, CFIUS must provide a report
to the President stating its recommendation. If CFIUS is unable to reach a
unanimous recommendation, the Secretary of the Treasury, as Chairman, must
submit a CFIUS report to the President setting forth the differing views and
presenting the issues for decision. The President has up t015 days to announce
The last
his decision on the case and inform Congress of his determination.
report sent to Congress occurred in September 2003, when the President sent a
classified report detailing his decision to take no action to block the transaction
between Singapore Technologies Telemedia and Global Crossing.
The Exon~Florio amendment requires that information furnished to any CFIUS
agency by the parties to a transaction shall be held confidential and not made
public, except in the case of an administrative or judicial action or proceeding. This
confidentiality provision does not prohibit CFIUS from sharing information with
Congress. Treasury, as chair of CFIUS, upon request of congressional committees
or subcommittees with jurisdiction over Exon-Florio matters, has arranged
congressional briefings on transactions reviewed by CFIUS. These briefings are
conducted in closed sessions and, when appropriate, at a classified level. CFIUS
members with equities in the transaction under discussion are invited to participate
in these briefings.
Since the enactment of Exon-Florio in 1988, CFIUS has reviewed 1,604 foreign
acquisitions of companies for potential national security concerns. In most of these
reviews, CFIUS agencies have either identified no specific risks to national security
created by the transactions or risks have been addressed during the review period.
However, to date 25 cases have gone through investigation, twelve of which
reached the President's desk for decision. In eleven of those, the President took no
action, leaving the parties to the proposed acquisitions free to proceed. In one
case, the President ordered the foreign acquirer to divest all its interest in the U.S.
company. In another case that did not go to the President, the foreign acquirer
undertook a voluntary divestiture. Of those 25 investigations, seven have been

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undertaken since 2001 with one going to the President for decision. However,
these statistics do not reflect the instances where CFIUS agencies implemented
security measures that obviated the need for an investigation or where, in response
to dialogue with CFIUS agencies, parties to a transaction either voluntarily
restructured the transaction to address national security concerns or withdrew from
the transaction altogether.
DP World
Contrary to many accounts, the DP World transaction was not rushed through the
review process in early February. On October 17, 2005, lawyers for DP World and
P&O informally approached Treasury Department staff to discuss the preliminary
stages of the transaction. This type of informal contact enables CFIUS staff to
identify potential issues before the review process formally begins. In this case,
Treasury staff identified port security as the primary issue and directed the
companies to DHS. On October 31, DHS and the Department of Justice staff met
with the companies to review the transaction and security issues.
On November 2, Treasury staff requested a CARC intelligence assessment from
the Office of the ON/. Treasury received this assessment on December 5, and it
was circulated to CFIUS staff. On December 6, staff from CFIUS agencies with the
addition of staff from the Departments of Transportation and Energy met with
company officials to review the transaction and to request additional information.
On December 16, after two months of informal interaction, the companies officially
filed their formal notice with Treasury, which circulated the filing to all CFIUS
departments and agencies and also to the Departments of Energy and
Transportation because of their statutory responsibilities and experience with DP
World.
During the 30-day review period, members of the CFIUS staff were in contact with
one another and the companies. As part of this process, DHS negotiated an
assurances letter that addressed port security concerns. The final assurances
letter was circulated to the committee on January 6 for its review, and CFIUS
concluded its review on January 17. In total, far from rushing their review,
members of CFIUS staff spent nearly 90 days reviewing this transaction. There
were national security issues raised during this review process, but any and all
concerns were addressed to the satisfaction of all members of CFIUS. By the time
the transaction was formally approved, there was full agreement among the CFIUS
members.
Another misperception is that this transaction was concluded in secret. Although
the Exon-Florio amendment prohibits CFIUS from publicly disclosing information
provided to it in connection with a filing under Exon-Florio, these transactions often
become public through actions taken by the companies. Here, as is often the case,
the companies issued a press release announcing the transaction on November
29. In addition, beginning on October 30, dozens of news articles were published
regarding this transaction, well before CFIUS officially initiated, much less
concluded its review.
On Sunday, February 26, DP World announced that it would make a new filing with
CFIUS and request a 45-day investigation. Upon receipt of DP World's new filing,
CFIUS will promptly initiate the review process. The additional time and review at
the company's request will enable Congress to obtain a better understanding of the
facts.
Conclusion
Madame Chair, we believe that the review surrounding the DP World transaction
was thorough from a substantive standpoint, as reflected by the unanimous
approval of the members. Nonetheless, it is clear that improvements are still
required. In particular, we must improve the CFIUS process to help ensure the
Congress can fulfill its important oversight responsibilities. Although CFIUS
operates under legal restrictions on public disclosures regarding pending cases, we
have tried to be responsive to inquiries from Congress. I am open to suggestions
on how we foster closer communication in the future. I think that we can find the
right balance between providing Congress the information it requires to fulfill its
oversight role while respecting the deliberative processes of the executive branch
and the proprietary information of the parties filing with CFIUS.

http://www.treas.gov/press/releaseS/js4083.htm

3/3112006

Page 5 of 5
Let me stress in closing, Madame Chair, that all members of CFIUS understand
that their top priority is to protect our national security. As President Bush has said:
"If there was any doubt in my mind, or people in my administration's mind, that our
ports would be less secure and the American people endangered, this deal wouldn't
go forward."
I thank you for your time this afternoon and am happy to answer to any questions.

http://www.t!'eas.gov/press/releaseS/j34083.hlm

3/3112006

<D

federal finan:ino
J

WASHINGTON

DC

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Department of the Treasury
.

Library

MAR 2 8 Z006

FEDERAL FINANCING BANK

February 2006

Brian D~ Jackson; Chief Financial Officer, Federal Financing
Bank (FFB) announced the following activity for the month of
January 2006.
FFB holdings of obligations issued, sold or guaranteed by
other Federal agencies totaled $28.1 billion on January 31, 2006,
posting a decrease of $239.2 million from the level on December
31, 2005.
This net change was the result of a decrease in net
holdings of government-guaranteed loans of $239.2 million. The
FFB made 32 disbursements and received 18 prepayments during the
month of January.
The FFB also extended the maturities of 253
loans guaranteed by the Rural Utilities Service ("RUSH) and reset
the interest rate for one loan guaranteed by the Department of
Education.
Attached to this release are tables presenting FFB January
loan activity and FFB holdings as of January 31, 2006.

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Page 2
FEDERAL FINANCING BANK
JANUARY 2006 ACTIVITY
Interest
Rate

Date

Amount
of Advance

Final
Maturity

1/20
1/20
1/26
1/27
1/31
1/31
1/31

$16,567.00
$4,005.62
$2,975,412.27
$8,361.88
$122,289.26
$21,053.11
$44,100.00

8/01/35
8/01/35
8/01/35
7/31/25
2/01/35
2/01/35
2/01/35

4.657%
4.657%
4.767%
4.747%
4.818%
4.818%
4.818%

1/03
1/17

$13,236,385.32
$730,814.41

7/03/06
3/01/35

4.370% S/A
4.800% S/A

1/03
1/03
1/03
1/03
1/03
1/03
1/03
1/03
1/03
1/03
1/03
1/03
1/03
1/03
1/03
1/03
1/03
1/03
1/03
1/03
1/03
1/03
1/03
1/03
1/03
1/03

$473,272.16
$473,475.02
$613,880.93
$5,197,373.12
$4,920,075.96
$4,618,329.08
$1,845,034.40
$4,701,533.67
$4,798,828.47
$2,790,563.42
$287,740.46
$168,640.04
$120,825.90
$105,263.25
$57,670.81
$87,146.01
$28,048.84
$944,190.33
$185,232.52
$712,712.98
$2,134,868.64
$1,278,515.00
$766,213.53
$462,621.11
$729,625.06
$396,391.50

3/31/06
3/31/06
3/31/06
3/31/06
3/31/06
3/31/06
3/31/06
3/31/06
3/31/06
3/31/06
3/31/06
3/31/06
3/31/06
3/31/06
3/31/06
3/31/06
3/31/06
3/31/06
3/31/06
3/31/06
3/31/06
3/31/06
3/31/06
3/31/06
3/31/06
3/31/06

4.086%
4.086%
4.086%
4.086%
4.086%
4.086%
4.086%
4.086%
4.086%
4.086%
4.086%
4.086%
4.086%
4.086%
4.086%
4.086%
4.086%
4.086%
4.086%
4.086%
4.086%
4.086%
4.086%
4.086%
4.086%
4.086%

Borrower
GOVERNMENT-GUARANTEED LOANS
GENERAL SERVICES ADMINISTRATION
San Francisco Bldg Lease
San Francisco Bldg Lease
San Francisco Bldg Lease
Foley Services Contract
San Francisco OB
San Francisco OB
San Francisco OB

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

DEPARTMENT OF EDUCATION
*Clark Atlanta University
South Carolina State Univ.
RURAL UTILITIES SERVICE
*Adams Rural Electric #706
*Adams Rural Electric #706
*Adams Rural Electric #706
*Atlantic Telephone Mem. #805
*Atlantic Telephone Mem. #805
*Blue Grass Energy #674
*Blue Grass Energy #674
*Blue Grass Energy #674
*Blue Grass Energy #674
*Blue Grass Energy #674
*Brazos Electric #917
*Brazos Electric #917
*Brazos Electric #917
*Brazos Electric #917
*Brazos Electric #917
*Brazos Electric #917
*Brazos Electric #917
*Brazos Electric #917
*Brazos Electric #917
*Brazos Electric #917
*Brazos Electric #917
*Brazos Electric #917
*Brazos Electric #917
*Brazos Electric #917
*Brazos Electric #917
*Brazos Electric #917

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 3
FEDERAL FINANCING BANK
JANUARY 2006 ACTIVITY
Borrower
*BrazOS Electric #917
*BrazoS Electric #917
*BrazoS Electric #917
*BrazoS Electric #917
*BrazoS Electric #917
*BrazoS Electric #917
*Brazos Electric #917
*BrazOS Electric #917
*Brazos Electric #917
*Brazos Electric #917
*Brazos Electric #917
*Brazos Electric #917
*Brazos Electric #917
*Brazos Electric #917
*Brazos Electric #561
*Brown County Elec. #687
*Brown County Elec. #687
*Brown County Elec. #687
*Brown County Elec. #687
*Brown County Elec. #687
*Codington-Clark Elec. #551
*Coast Elec. Power #787
*Central Elec. Power #923
*Central Elec. Power #923
*Central Elec. Power #923
*Central Elec. Power #923
*Central Elec. Power #923
*Central Elec. Power #923
*Citizens Tel (VA) #680
*Citizens Tel (VA) #680
*Citizens Tel (VA) #680
*Citizens Tel (VA) #680
*Citizens Tel (VA) #680
*Clark Energy Coop. #611
*Clark Energy Coop. #611
*Clark Energy Coop. #611
*Clark Energy Coop. #611
*Clark Energy Coop. #611
*Clark Energy Coop. #2087
*Clark Energy Coop. #2087
*Clark Energy Coop. #2087
*Clark Energy Coop. #2087
*Cumberland Valley #668
*Cumberland Valley #668
*Cumberland Valley #2118
*Cumberland Valley #2118

Date
1/03
1/03
1/03
1/03
1/03
1/03
1/03
1/03
1/03
1/03
1/03
1/03
1/03
1/03
1/03
1/03
1/03
1/03
1/03
1/03
1/03
1/03
1/03
1/03
1/03
1/03
1/03
1/03
1/03
1/03
1/03
1/03
1/03
1/03
1/03
1/03
1/03
1/03
1/03
1/03
1/03
1/03
1/03
1/03
1/03
1/03

Amount
of Advance
$1,143,760.50
$1,378,085.10
$1,639,813.18
$670,854.15
$513,229.14
$1,063,845.83
$840,391.74
$1,795,636.64
$2,024,984.97
$328,225.03
$880,631.41
$1,144,229.08
$1,881,170.61
$2,013,586.94
$9,249,408.26
$229,269.81
$550,247.59
$275,168.13
$431,918.06
$340,497.09
$471,494.65
$5,531,612.40
$91,387.31
$93,526.11
$161,885.40
$71,290.46
$85,274.96
$4,020.73
$1,322,135.40
$650,577.92
$562,646.23
$218,470.55
$454,780.15
$2,694,841.80
$1,790,790.23
$3,996,501. 25
$3,342,257.08
$2,420,944.83
$2,479,558.16
$2,479,558.16
$991,823.25
$1,829,913.92
$3,851,733.16
$4,625,926.05
$2,191,649.00
$1,992,408.18

Final
Maturity

Interest
Rate

3/31/06
3/31/06
3/31/06
3/31/06
3/31/06
3/31/06
3/31/06
3/31/06
3/31/06
3/31/06
3/31/06
3/31/06
3/31/06
3/31/06
3/31/06
1/02/35
1/02/35
1/02/35
1/02/35
1/02/35
1/03/34
12/31/30
12/31/13
12/31/13
12/31/12
12/31/12
12/31/12
12/31/12
3/31/06
3/31/06
3/31/06
3/31/06
3/31/06
1/03/11
12/31/12
12/31/12
12/31/15
12/31/15
12/31/35
12/31/35
12/31/35
12/31/35
3/31/06
3/31/06
3/31/06
3/31/06

4.086% Qtr.
4.086% Qtr.
4.086% Qtr.
4.086% Qtr.
4.086% Qtr.
4.086% Qtr.
4.086% Qtr.
4.086% Qtr.
4.086%·Qtr.
4.086% Qtr.
4.086% Qtr.
4.086% Qtr.
4.086% Qtr.
4.086% Qtr.
4.086% Qtr.
4.512% Qtr.
4.512% Qtr.
4.512% Qtr.
4.512% Qtr.
4.512% Qtr.
4.512% Qtr.
4.509% Qtr.
4.335% Qtr.
4.335% Qtr.
4.334% Qtr.
4.334% Qtr.
4.334% Qtr.
4.334% Qtr.
4.086% Qtr.
4.086% Qtr.
4.086% Qtr.
4.086% Qtr.
4.086% Qtr.
4.324% Qtr.
4.333% Qtr.
4.333% Qtr.
4.363% Qtr.
4.363% Qtr.
4.506% Qtr.
4.506% Qtr.
4.506% Qtr.
4.506% Qtr.
4.086% Qtr.
4.086% Qtr.
4.086% Qtr.
4.086% Qtr.

Page 4
FEDERAL FINANCING BANK
JANUARY 2006 ACTIVITY
Borrower
*Consolidated Elec. #2072
*Cooper Valley Tel. #648
*Cooper Valley Tel. #648
*Darien Telephone Co. #719
*Darien Telephone Co. #719
*Darien Telephone Co. #719
*Darien Telephone Co. #719
*Darien Telephone Co. #719
*Darien Telephone Co. #719
*Darien Telephone Co. #719
*Darien Telephone Co. #719
*Darien Telephone Co. #719
*Darien Telephone Co. #719
*Darien Telephone Co. #719
*Darien Telephone Co. #719
*Darien Telephone Co. #719
*Darien Telephone Co. #719
*Darien Telephone Co. #719
*Darien Telephone Co. #719
*Darien Telephone Co. #719
*Darien Telephone Co. #719
*Darien Telephone Co. #719
*E. Iowa Coop. #807
*Fairfield Elec. #684
*Fairfield Elec. #684
*Farmer's Telephone #459
*Farmer's Telephone #459
*Fleming-Mason Energy #644
*Fleming-Mason Energy #644
*Fleming-Mason Energy #644
*Fleming-Mason Energy #644
*Fleming-Mason Energy #644
*Fleming-Mason Energy #644
*Fleming-Mason Energy #644
*Fleming-Mason Energy #644
*Fleming-Mason Energy #644
*Freeborn-Mower Coop. #736
*Freeborn-Mower Coop. #736
*Farmers Telephone #399
*Farmers Telephone #399
*Farmers Telephone #399
*Farmers Telephone #399
*Farmers Telephone #399
*Farmers Telephone #399
*Farmers Telephone #476
*Farmers Telephone #476

Date

Amount
of Advance

Final
Maturity

Interest
Rate

1/03
1/03
1/03
1/03
1/03
1/03
1/03
1/03
1/03
1/03
1/03
1/03
1/03
1/03
1/03
1/03
1/03
1/03
1/03
1/03
1/03
1/03
1/03
1/03
1/03
1/03
1/03
1/03
1/03
1/03
1/03
1/03
1/03
1/03
1/03
1/03
1/03
1/03
1/03
1/03
1/03
1/03
1/03
1/03
1/03
1/03

$293,314.77
$863,275.54
$196,437.61
$1,495,017.48
$344,394.88
$165,992.14
$196,243.03
$142,722.20
$211,756.32
$174,371. 04
$1,184,955.06
$221,067.21
$436,222.78
$317,737.15
$393,768.86
$552,853.14
$619,551.58
$663,840.46
$507,057.40
$733,883.11
$313,890.61
$205,885.11
$2,113,786.50
$2,965,594.39
$86,970.35
$18,129.62
$169,061.13
$2,335,529.55
$1,257,592.80
$1,347,420.91
$1,976,217.31
$1,257,592.80
$2,724,988.30
$2,700,486.81
$2,853,359.69
$2,369,362.05
$185,008.80
$92,499.30
$4,067,084.79
$2,870,794.54
$1,948,577.30
$1,542,394.70
$2,031,877.10
$1,708,433.44
$2,232,896.46
$3,113,595.21

1/03/23
3/31/06
3/31/06
3/31/06
3/31/06
3/31/06
3/31/06
3/31/06
3/31/06
3/31/06
3/31/06
3/31/06
3/31/06
3/31/06
3/31/06
3/31/06
3/31/06
3/31/06
3/31/06
3/31/06
3/31/06
3/31/06
12/31/36
3/31/06
3/31/06
3/31/06
3/31/06
3/31/06
3/31/06
3/31/06
3/31/06
3/31/06
3/31/06
3/31/06
3/31/06
3/31/06
12/31/08
12/31/08
3/31/06
3/31/06
3/31/06
3/31/06
3/31/06
3/31/06
3/31/06
3/31/06

4.423%
4.086%
4.086%
4.086%
4.086%
4.086%
4.086%
4.086%
4.086%
4.086%
4.086%
4.086%
4.086%
4.086%
4.086%
4.086%
4.086%
4.086%
4.086%
4.086%
4.086%
4.086%
4.508%
4.086%
4.086%
4.211%
4.211%
4.086%
4.086%
4.086%
4.086%
4.086%
4.086%
4.086%
4.086%
4.086%
4.346%
4.346%
4.211%
4.211%
4.211%
4.211%
4.211%
4.211%
4.211%
4.211%

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 5
FEDERAL FINANCING BANK
JANUARY 2006 ACTIVITY
Borrower
*Farmers Telephone #476
*Farmers Telephone #476
*Farmers Telephone #476
*Farmers Telephone #476
*Farmers Telephone #476
*Farmers Telephone #2203
*FTC Communications #709
*FTC Communications #709
*FTC Communications #709
*FTC Communications #709
*FTC Communications #709
*FTC Communications #2101
*FTC Communications #2101
*Grayson Rural Elec. #619
*Grayson Rural Elec. #619
*Grayson Rural Elec. #619
*Grayson Rural Elec. #619
*Grayson Rural Elec. #619
*Grayson Rural Elec. #619
*Grayson Rural Elec. #619
*Grayson Rural Elec. #619
*Grayson Rural Elec. #619
*Great River Energy #738
*Great River Energy #738
*Greenbelt Elec. #743
*Greenbelt Elec. #743
*Greenbelt Elec. #743
*Grundy Elec.Coop. #744
*Grundy Elec.Coop. #744
*Grundy Elec.Coop. #744
*Grundy Elec.Coop. #744
*Grundy Elec.Coop. #744
*Harrison County #532
*Harrison County #532
*Harrison County #532
*Harrison County #532
*Harrison County #532
*Hudson Valley Datanet #833
*Hudson Valley Datanet #833
*Hudson Valley Datanet #833
*Inter-County Energy #592
*Inter-County Energy #592
*Inter-County Energy #592
*Inter-County Energy #592
*Inter-County Energy #850
*Inter-County Energy #850

Date

Amount
of Advance

Final
Maturity

1/03
1/03
1/03
1/03
1/03
1/03
1/03
1/03
1/03
1/03
1/03
1/03
1/03
1/03
1/03
1/03
1/03
1/03
1/03
1/03
1/03
1/03
1/03
1/03
1/03
1/03
1/03
1/03
1/03
1/03
1/03
1/03
1/03
1/03
1/03
1/03
1/03
1/03
1/03
1/03
1/03
1/03
1/03
1/03
1/03
1/03

$7,811,722.49
$5,819,175.67
$4,518,905.40
$4,037,055.13
$1,669,228.92
$1,830,005.00
$1,723,021. 28
$2,220,356.57
$2,839,631.25
$1,000,686.01
$1,192,313.24
$419,577.79
$3,257,660.45
$1,077,936.73
$538,968.38
$898,280.60
$1,163,750.17
$919,242.67
$2,328,002.46
$951,119.90
$971,551.17
$1,637,617.17
$12,252,252.28
$4,190,990.99
$1,628,585.84
$470,126.54
$688,995.51
$1,163,369.00
$930,820.51
$474,379.43
$480,754.87
$492,825.39
$894,627.58
$805,164.82
$900,663.34
$1,468,676.12
$1,581,209.02
$4,598,934.65
$3,351,600.00
$1,839,573.86
$1,341,941.34
$1,789,255.16
$2,332,294.06
$198,520.00
$3,827,639.32
$1,913,819.65

3/31/06
3/31/06
3/31/06
3/31/06
3/31/06
3/31/06
3/31/06
3/31/06
3/31/06
3/31/06
3/31/06
3/31/06
3/31/06
3/31/06
3/31/06
3/31/06
3/31/06
3/31/06
3/31/06
3/31/06
3/31/06
3/31/06
3/31/06
3/31/06
3/31/06
3/31/06
3/31/06
3/31/06
3/31/06
3/31/06
3/31/06
3/31/06
3/31/06
3/31/06
3/31/06
3/31/06
3/31/06
3/31/06
3/31/06
3/31/06
3/31/06
3/31/06
3/31/06
3/31/06
3/31/06
3/31/06

Interest
Rate
4.211%
4.211%
4.211%
4.211%
4.211%
4.086%
4.086%
4.086%
4.086%
4.086%
4.086%
4.086%
4.086%
4.086%
4.086%
4.086%
4.086%
4.086%
4.086%
4.086%
4.086%
4.086%
4.086%
4.086%
4.086%
4.086%
4.086%
4.086%
4.086%
4.086%
4.086%
4.086%
4.086%
4.086%
4.086%
4.086%
4.086%
4.086%
4.086%
4.086%
4.086%
4.086%
4.086%
4.086%
4.086%
4.086%

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

Page 6
FEDERAL FINANCING BANK
JANUARY 2006 ACTIVITY
Borrower
*Inter-County Energy #850
*Inter-County Energy #850
*Inter-County Energy #850
*Ironton Telephone Co. #888
*Ironton Telephone Co. #2051
*Jackson Energy #794
*Jackson Energy #794
*Jackson Energy #794
*Jackson Energy #794
*Jackson Energy #794
*Jackson Energy #794
*Jackson Energy #794
*Jackson Energy #2133
*Jackson Energy #2133
*Jackson Energy #2133
*Jackson Energy #2133
*Jackson Energy #2133
*Johnson County Elec. #482
*Kankakee Valley Elec. #857
*Kenergy Corp. #2068
*Kenergy Corp. #2068
*Kenergy Corp. #2068
*Kenergy Corp. #2068
*Licking Valley Elec. #522
*Licking Valley Elec. #854
*Licking Valley Elec. #854
*Lynches River Elec. #634
*Magnolia Electric #560
*Medina Electric #622
*Medina Electric #2050
*Medina Electric #2050
*Moundville Telephone #2159
*New Horizon Elec. #791
*New Horizon Elec. #791
*New Horizon Elec. #791
*New Horizon Elec. #791
*New Horizon Elec. #791
*New Horizon Elec. #791
*New Horizon Elec. #791
*New Horizon Elec. #791
*New Horizon Elec. #791
*New Horizon Elec. #791
*Nolin Rural Elec. #528
*Nolin Rural Elec. #577
*Nolin Rural Elec. #577
*Nolin Rural Elec. #840

Date
1/03
1/03
1/03
1/03
1/03
1/03
1/03
1/03
1/03
1/03
1/03
1/03
1/03
1/03
1/03
1/03
1/03
1/03
1/03
1/03
1/03
1/03
1/03
1/03
1/03
1/03
1/03
1/03
1/03
1/03
1/03
1/03
1/03
1/03
1/03
1/03
1/03
1/03
1/03
1/03
1/03
1/03
1/03
1/03
1/03
1/03

Amount
of Advance
$1,913,939.89
$3,395,636.34
$3,131,576.37
$2,952,817.52
$2,855,564.28
$3,746,028.44
$2,809,521. 31
$4,401,583.41
$1,873,014.20
$2,341,267.76
$1,873,071. 04
$6,972,907.54
$3,000,000.00
$5,000,000.00
$3,000,000.00
$4,000,000.00
$3,656,000.00
$1,428,354.74
$961,619.04
$5,950,939.57
$4,959,116.30
$5,950,939.57
$4,319,178.52
$2,459,331.19
$1,926,314.39
$1,972,824.77
$516,308.55
$4,484,698.05
$2,624,961.83
$1,966,539.19
$983,730.53
$898,000.00
$1,925,912.71
$1,302,403.01
$1,596,586.07
$979,163.68
$953,758.00
$1,430,657.86
$961,700.72
$2,633,220.26
$1,964,306.86
$989,158.45
$1,693,529.95
$2,310,823.01
$2,310,823.01
$3,827,639.32

Final
Maturity

Interest
Rate

3/31/06
3/31/06
3/31/06
3/31/06
3/31/06
12/31/35
12/31/35
12/31/35
12/31/35
12/31/35
12/31/35
12/31/35
1/03/39
1/03/39
1/03/39
1/03/39
1/03/39
12/31/31
3/31/06
3/31/06
3/31/06
3/31/06
3/31/06
3/31/06
3/31/06
3/31/06
12/31/12
3/31/06
3/31/11
3/31/11
3/31/11
3/31/06
3/31/06
3/31/06
3/31/06
3/31/06
3/31/06
3/31/06
3/31/06
3/31/06
3/31/06
3/31/06
3/31/06
3/31/06
3/31/06
3/31/06

4.086%
4.086%
4.086%
4.086%
4.086%
4.510%
4.510%
4.510%
4.510%
4.510%
4.510%
4.510%
4.505%
4.505%
4.505%
4.505%
4.505%
4.635%
4.086%
4.086%
4.086%
4.086%
4.086%
4.086%
4.086%
4.086%
4.333%
4.211%
4.324%
4.324%
4.324%
4.086%
4.086%
4.086%
4.086%
4.086%
4.086%
4.086%
4.086%
4.086%
4.086%
4.086%
4.086%
4.086%
4.086%
4.086%

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

Page 7
FEDERAL FINANCING BANK
JANUARY 2006 ACTIVITY
Borrower
*Nolin Rural Elec. #840
*Northstar Technology #811
*Northstar Technology #811
*Okefenoke Rural Elec. #486
*Owen Electric #525
*Owen Electric #525
*Owen Electric #525
*Owen Electric #525
*Owen Electric #525
*Owen Electric #525
*Owen Electric #2097
*Piedmont Rural Telephone #2002
*PRTCommunications #798
*PRTCommunications #798
*PRTCommunications #798
*PRTCommunications #798
Rock County Electric #2029
*San Miguel Electric #919
*San Miguel Electric #919
*Scenic Rivers Energy #2013
*Shelby Energy Coop. #607
*Shelby Energy Coop. #607
Sioux Val.-Southwestern #2198
*Socorro Elec. #869
*Sumter Elec. #485
*Surry-Yadkin Elec. #534
*Surry-Yadkin Elec. #534
*Surry-Yadkin Elec. #534
*Surry-Yadkin Elec. #534
*Surry-Yadkin Elec. #534
*Surry-Yadkin Elec. #534
*Surry-Yadkin Elec. #534
*Surry-Yadkin Elec. #534
*Surry-Yadkin Elec. #852
*Surry-Yadkin Elec. #852
*Surry-Yadkin Elec. #852
*Surry-Yadkin Elec. #852
*Surry-Yadkin Elec. #852
*Surry-Yadkin Elec. #852
*United Elec. Coop. #870
*Uni ted El ec . Coop. #870
*United Elec. Coop. #870
*United Elec. Coop. #870
*Virgin Islands Telephone #2089
*West Plains Elec. #501
Blackduck Telephone Co. #2215

Date

Amount
of Advance

Final
Maturity

Interest
Rate

1/03
1/03
1/03
1/03
1/03
1/03
1/03
1/03
1/03
1/03
1/03
1/03
1/03
1/03
1/03
1/03
1/03
1/03
1/03
1/03
1/03
1/03
1/03
1/03
1/03
1/03
1/03
1/03
1/03
1/03
1/03
1/03
1/03
1/03
1/03
1/03
1/03
1/03
1/03
1/03
1/03
1/03
1/03
1/03
1/03
1/06

$2,820,970.17
$1,590,614.42
$867,532.78
$3,276,746.78
$1,791,753.24
$1,788,134.76
$902,146.42
$1,819,280.28
$1,853,663.75
$3,062,732.29
$3,958,083.98
$2,229,062.14
$4,130,843.57
$1,548,421.16
$687,963.06
$933,333.34
$86,000.00
$6,193,446.04
$6,503,190.81
$730,668.71
$937,705.75
$1,219,017.51
$2,410,000.00
$1,237,654.63
$903,877.56
$871,073.84
$871,073.84
$435,536.93
$871,073.84
$871,073.84
$885,355.62
$891,119.27
$2,058,566.62
$963,157.18
$1,926,314.39
$481,578.59
$1,961,894.05
$2,688,625.92
$700,000.00
$2,887,297.08
$5,847,545.27
$5,263,161.98
$5,458,093.88
$62,933,653.94
$2,104,083.80
$795,000.00

3/31/06
3/31/06
3/31/06
1/03/33
3/31/06
3/31/06
3/31/06
3/31/06
3/31/06
3/31/06
3/31/06
3/31/06
3/31/06
3/31/06
3/31/06
3/31/06
12/31/37
3/31/06
3/31/06
12/31/12
1/03/34
1/03/34
12/31/35
3/31/06
12/31/31
3/31/06
3/31/06
3/31/06
3/31/06
3/31/06
3/31/06
3/31/06
3/31/06
3/31/06
3/31/06
3/31/06
3/31/06
3/31/06
3/31/06
12/31/36
12/31/36
12/31/36
12/31/36
3/31/06
3/31/06
1/03/22

4.086%
4.086%
4.086%
4.636%
4.086%
4.086%
4.086%
4.086%
4.086%
4.086%
4.086%
4.086%
4.086%
4.086%
4.086%
4.086%
4.506%
4.086%
4.086%
4.333%
4.512%
4.512%
4.510%
4.086%
4.635%
4.086%
4.086%
4.086%
4.086%
4.086%
4.086%
4.086%
4.086%
4.086%
4.086%
4.086%
4.086%
4.086%
4.086%
4.508%
4.508%
4.508%
4.508%
4.086%
4.211%
4.376%

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 8
FEDERAL FINANCING BANK
JANUARY 2006 ACTIVITY
Borrower
Central Georgia Elec. #2010
Kamo Electric #2162
Dunn Electric Coop. #861
Canoochee Elec. #2112
Southern Iowa Electric #2044
North Star Elec. #2098
Brazos Electric #2086
Brazos Electric #2086
Cornbelt Power #2054
Medina Electric #2050
Central Iowa Power Coop. #2240
Northeast Telephone Co. #2251
Licking Valley Elec. #854
McLennan County Elec. #784
Georgia Trans. Corp. #2249
Midstate Communications #780
Buckeye Power #2254
North Carolina RSA 3 Tel #2009
Orange County Elec. #2179

Date

Amount
of Advance

Final
Maturity

Interest
Rate

1/06
1/10
1/12
1/17
1/17
1/18
1/19
1/19
1/19
1/24
1/25
1/25
1/26
1/27
1/30
1/30
1/31
1/31
1/31

$336,000.00
$10,798,000.00
$300,000.00
$390,000.00
$750,000.00
$1,110,000.00
$5,000,000.00
$4,370,000.00
$844,000.00
$146,000.00
$2,800,000.00
$3,103,889.78
$2,000,000.00
$122,000.00
$31,728,000.00
$479,928.00
$52,717,000.00
$724,000.00
$500,000.00

3/31/16
1/03/39
12/31/36
12/31/37
12/31/37
12/31/37
12/31/35
12/31/35
1/03/33
12/31/37
12/31/35
12/31/12
6/30/06
12/31/35
1/03/40
1/03/17
12/31/37
1/02/18
6/30/11

4.332%
4.518%
4.598%
4.482%
4.482%
4.482%
4.492%
4.492%
4.462%
4.504%
4.508%
4.313%
4.506%
4.632%
4.661%
4.478%
4.646%
4.493%
4.442%

1/26
1/30

$120,559.70
$340,619.10

7/17/45
7/17/45

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

DEPARTMENT OF VETERANS AFFAIRS
St. Leo Residence
St. Leo Residence

*

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

4.630% S/A
4.691% S/A

Page 9
FEDERAL FINANCING BANK HOLDINGS
(in millions of dollars)

Program

January 31. 2006

December 31. 2005

Monthly
Net Change

Fiscal Year
Net Change

1/1/06 - 1/31106

10/1/05- 1131/06

Agency Debt:
U.S. Postal Service
National Credit Union Adm.-CLF
Subtotal *

$0.0
$0.0
$0.0

$0.0
$0.0
$0.0

$0.0
$0.0
$0.0

$0.0
$0.0
$0.0

Agency Assets:
Rural Utilities Service-CBO
Subtotal *

$4.270.2
$4.270.2

$4.270.2
$4.270.2

$0.0
$0.0

$0.0
$0.0

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
Rural Utilities Service-GETP
SBA-State/Local Development Cos.
DOT-Section 511
VA Homeless Veterans Housing
Subtotal *

$1.178.7
$126.5
$0.0
$884.0
$2.142.3
$3.9
$257.4
$18.683.5
$500.0
$34.5
$2.6
$1.6
$23.815.1

$1.209.2
$127.0
$0.0
$884.0
$2.148.5
$5.5
$375.7
$18.765.0
$500.0
$35.6
$2.6
$1.2
$24.054.3

-$30.5
-$0.6
$0.0
$0.0
-$6.2
-$1.6
-$118.3
-$81.4
$0.0
-$1.0
$0.0
$0.5
-$239.2

-$65.7
$0.9
-$0.2
-$88.0
-$1.4
-$1.6
-$118.3
$597.6
$50.0
-$5.2
-$0.1
$1.6
$369.7

,

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

$28.085.3

$28.324.5

-$239.2

$369.7

Page 1 of 1

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March 1, 2006
JS-4085
Statement of Donald V. Hammond
U.S. Department of the Treasury Fiscal Assistant Secretary
before the
House Government Reform Subcommittee on
Government Management, Finance and Accountability
March 1, 2006
Financial Report of the United States Government for Fiscal Year 2005

Mr. Chairman and Members of the Subcommittee:
I appreciate your inviting me here today to discuss the Financial Report of the
United States Government for fiscal year 2005. The Treasury Department greatly
appreciates your continued focus on improving the Federal Government's financial
management and reporting. Your sustained attention to these issues highlights
their importance and has led to significant improvements. Today I will briefly
discuss the fiscal year 2005 financial results including the report's long-range,
accrual-based look at the government's liabilities, commitments, and
responsibilities. I will describe the actions we are taking to resolve the auditor's
findings and recommendations and our plans to make the report more useful.
Finally, I will tell you what I believe are the next steps we need to take in
government financial reporting.

REPORTS

•

Statement of Donald V. Hammond

http://www.t!.eas.gov/press/releases/j 3 4085.htm

3/3112006

Statement of Donald V. Hammond
U.S. Department of the Treasury Fiscal Assistant Secretary
before the
House Government Reform Subcommittee on
Government Management, Finance and Accountability
March 1, 2006

Financial Report of the United States Governmentfor Fiscal Year 2005

Mr. Chairman and Members of the Subcommittee:
I appreciate your inviting me here today to discuss the Financial Report of the
United States Government for fiscal year 2005. The Treasury Department greatly

appreciates your continued focus on improving the Federal Government's financial
management and reporting. Your sustained attention to these issues highlights their
importance and has led to significant improvements. Today I will briefly discuss the fiscal
year 2005 financial results including the report's long-range, accrual-based look at the
government's liabilities, commitments, and responsibilities. I will describe the actions we
are taking to resolve the auditor's findings and recommendations and our plans to make the
report more useful. Finally, I will tell you what I believe are the next steps we need to take
in government financial reporting.
The annual financial report reflects Treasury's long-standing responsibility to
provide the Congress and the public with financial information on the government's
operations. Treasury has fulfilled its core responsibility to report on the nation's finances
since Treasury Secretary Alexander Hamilton gave his first report to the Congress in
1790. Our intent is to give you, the Congress, and the public, a timely, reliable, and
useful report on the cost of the government's operations, the sources used to fund them,
and the implications of the government's financial commitments. The report is designed
to encompass the financial results of all three branches of the federal government. We
are constantly striving to improve how we carry out these responsibilities.

I'm pleased that this year, as in 2004, we were again able to issue this report on
December IS. In addition, this year, all 24 CFO Act agencies published their audited
financial statements by November IS. These much more timely submissions are
evidence that both Treasury and the agencies have improved their processes, systems and
data. While we have improved the timeliness of our reporting and made significant
improvements in data reliability, we still have a long way to go. Once again this year,
due to long-standing material weaknesses, GAO issued a disclaimer of opinion on the
statements. Later in my testimony, I will discuss GAO's findings and recommendations
in more detail and describe the steps we are taking to address them.
FY 2005 Results

As Treasury and OMB reported in October, the growing economy increased
revenues to a level of $2.2 trillion. This was nearly a 15 percent increase over the
previous fiscal year and the largest year-over-year percentage increase in receipts in over
20 years. Consequently, the 2005 federal budget deficit of $318 billion, as reported in the
President's Budget, was lower than anticipated and lower than the 2004 deficit of
$413 billion. When expressed as a percent of Gross Domestic Product, the 2005 deficit
was lower than the deficits in 16 of the last 25 years and was on track to meet the
President's deficit-reduction goals.
We reported on December 15 in the Financial Report that the government's
FY 2005 net operating cost was $760 billion. The comparable net operating cost in 2004
was $616 billion. Thus, while the budget deficit improved from 2004 to 2005, the net
operating cost increased. The different amounts and trends stated for the budget deficit
and the net operating cost stem from the different methods of accounting used for the two
reports. The budget report is prepared on a cash basis, the Financial Report on an accrual
basis. For FY 2005, the difference of $442 billion between budget deficit and net
operating cost is primarily due to actuarial increases in federal employee pension and
health liabilities, and an increase in actuarial costs of veterans' benefits, due to changes in
assumptions in Veterans Affairs' actuarial model that calculates the liability. Examples
of some of these assumptions are: the number of veterans and dependents receiving
payments, discount rate, cost of living adjustments, and life expectancy.

2

Reconciliations of Net Operating Cost and Budget Deficits
(In billions of dollars)
2005

2004

($760)

($616)

Veterans' benefits liability

198

(30)

Federal employee benefits

232

212

Increase in capitalized assets

(36)

(3)

~

----.M

442

203

ruw

~

Net Operating Cost
Changes:

Other, Net
Budget Deficit

In preparing the Financial Report's statement of net cost, Treasury makes
consolidating entries and cost allocation adjustments to individual agency results in
accordance with generally accepted accounting principles (GAAP). Two of the largest of
these adjustments are financial transactions between agencies and retirement benefits
managed by the Office of Personnel Management. Transactions between agencies,
internal to the government as a whole, are viewed as double counting under GAAP and
must be eliminated so that only the net results are shown on the government's statements.
The retirement benefits managed by OPM relate to the agencies where employees worked
during their career. Accordingly, standards require that we allocate these costs to the
agencies to better reflect each agency's full costs. The attached schedule, Appendix I,
shows these adjustments.
Summary of Social Insurance Responsibilities
In addition to reporting the financial results of the past year, the Financial Report
provides information on our long-term financial commitments and obligations. One
important measure of the government's fiscal position is the present value cost of its
responsibilities for social insurance programs, primarily Social Security and Medicare.
Including these future financial responsibilities in this report gives a more complete look
at the government's finances. This information is presented in the report on the
Statement of Social Insurance, which will be a primary statement subject to audit in the
FY 2006 report.

3

Each year, the Social Security and Medicare Trustees report on the current
financial status of those programs and provide 75-year projections of program income
and expenditures. The latest set of projections from the Trustees shows that the 75-year
present value of Social Security and Medicare obligations for the Federal Government is
$35.6 trillion. I have attached a summary table of the projections as Appendix II.
The trustees project that costs for Social Security and Medicare, relative to GDP,
will increase sharply between 20 I 0 and 2030 because the number of people receiving
benefits will increase rapidly as the large baby-boom generation retires. Thereafter,
growth in Social Security costs will be slower, but will continue to increase due primarily
to projected increasing life expectancy. Medicare costs are projected to continue to grow
rapidly due to expected increases in the use and costs of health care.

Addressing the Auditor's Findings
As I mentioned earlier, due to long-standing material weaknesses, GAO was
unable to express an opinion on the statements. I recognize that until our statements can
withstand audit scrutiny, we will not benefit from the report's full value in infonning the
Congress and the public of the government's fiscal position. We are in agreement with
GAO on these principal material weaknesses:
(I) serious financial management problems at the Department of Defense,
(2) the federal government's inability to adequately account for and reconcile
intragovernmental activity and balances between federal agencies,
(3) the federal government's ineffective process for preparing the consolidated
financial statements.
GAO raised many valid points in their audits, and there is no one who would like
to see us get a "clean" audit opinion on this report more than I would. Across
government, we have been addressing these challenges, and we are making progress.
The Department of Defense is making headway in improving its systems to correct its
financial reporting problems; however, this will be a long, time-consuming effort. In
addition to Defense, Homeland Security and NASA also have some significant financial
Issues.

4

The Department of Homeland Security, when it was organized, brought together 22
agencies, all, for the most part, having their own financial systems. Consequently DHS
faces some large financial management challenges, but it is making progress. NASA,
which has had weaknesses in internal control procedures and processes related to
property, plant and equipment, has made significant progress in FY 2005 in correcting
some internal control weaknesses, but still has much to do to resolve this issue.
We concur with GAO that a significant material weakness is the out-of-balance
condition that results from intragovernmental transactions, when two agencies record and
report differently on a transaction between the two. We are addressing this issue in
several ways. First, we are requiring significantly greater detail from the agencies, and
we have developed a new tool to track the imbalances, point out where problems exist,
and help us better analyze the data. Surprisingly, we discovered that many of the largest
differences occur when two agencies record a statutory transfer of budget authority and
funds between them. Also, when two agencies conduct business with each other as

trading partners, they sometimes record and report the same transaction differently.
Second, partnering with OMB, we developed reports that show these inter-agency
transfers throughout the government. We find that agencies use these reports, which we
post on the web, to analyze their transfers. Third, we brought the agencies together to
discuss these matters under the auspices of the Chief Financial Officers Council. Fourth,
we have been working with the CFO Council to develop new "business rules" for these
intragovernmental transactions, and we believe these new rules will help bring about
more consistent accounting transactions. Finally, we required agency auditors to review
the out-of-balance condition between their agency and its trading partners in the hope that
greater auditor involvement will encourage the agency to accurately record these
transactions and correct these imbalances. We plan on expanding these auditor reviews
to further assist agencies in resolving their differences, some of which are oflong
standing.
Regarding GAO's findings and recommendations on the report preparation
process, we continue to take steps to address these. We have developed detailed
corrective actions plans and are addressing the material weaknesses. Some of the
individual plans have solutions which are or will be implemented in a short time period
while others will take longer than a year to resolve. Treasury continues to meet with
GAO regularly to discuss the findings and recommendations in detail.

5

This past year, we initiated a process to formally communicate to GAO the
recommendations that we believe are closed, and we will continue the dialogue with
GAO on these issues. In recent discussions with GAO, we agreed to supplement this
process with additional documentation to provide the level of assurance GAO requires to
close out the recommendations. This year GAO closed out over 20 outstanding
recommendations, and they will continue to evaluate the documentation and analyses
provided by Treasury on open recommendations.
This is the second year that the Financial Management Service (FMS) has used
the Governmentwide Financial Report System (GFRS) to prepare the report. GFRS is an
internet application designed to directly link data from agencies' financial statements to
the corresponding line items in the Financial Report. Prior to this, the financial
information came from other Treasury financial systems that mayor may not have tied to
the agencies' audited financial statements. GFRS, through a closing package process,
requires the agencies to reclassify the financial statement line items from their audited
financial reports to the corresponding line items in the Financial Report. It provides the
agencies the opportunity to take the responsibility for how their data should be properly
consolidated. It also requires the agencies to provide additional financial disclosure
information and stewardship information crucial to understanding and supplementing the
content of the primary statements.
In developing GFRS, FMS considered and implemented GAO's audit findings on
the preparation process. Some findings were specifically related to the manner in which
GFRS captured information from the agencies. To address this, FMS modified GFRS to
improve the data entry and linkage by the agencies to their audited financial statements.
To address recommendations on policies and procedures for GFRS and the resultant
compilation process, FMS improved the instructions to the agencies in the Treasury
Financial Manual and its internal policies and procedures related to internal control,
documentation and management review.
FMS made other improvements in the 2005 process. One of these was
accelerating by three days the collection of the budgetary financial information. Also,
using lessons learned during the 2004 reporting process, FMS implemented two key
processes to ensure agency reporting success in 2005. FMS staff were available after
normal working hours to answer agency questions and resolve system problems.

6

FMS also developed and used new analytical tools to specifically identify potential
reporting errors and non-submissions and provided timely feedback to the agencies. All
the agency preparers met their November 16 deadline for submitting the data, and agency
IGs met the November 18 deadline to opine on the data submitted in GFRS. Evidence of
the success of GFRS implementation is that agencies were able to submit their data
earlier than in the prior years, and this enabled FMS to compile and transmit the Financial
Report to the auditor within 10 days of receiving the agency financial information in
GFRS.
Finally, many of GAO's findings related to the note disclosures in the report. As
I testified last year, the Federal Accounting Standards Advisory Board (F ASAB)
undertook a project to provide explicit consideration of disclosures tailored to the
financial report and specifically related to standards issued prior to January 2003. As a
result, FASAB has issued an exposure draft that proposes tailored disclosures that would
enhance the financial report's usefulness to the public and be consistent with a general
purpose report. The proposed standard would require that the report direct readers to the
individual agency financial reports for extensive disclosures that are not viewed as
appropriate at the governmentwide level. We expect that if the exposure draft becomes a
standard, it will resolve many of the remaining findings

Making the Report More Usefu)
We have improved our preparation process and are producing more timely
reports. Because we had to produce the reports within these accelerated timeframes, we
all had to improve our processes and in many cases, our systems. While the acceleration
in and of itself improves government reporting, we now must ask whether our financial
reports are useful to Congress, to agency heads and other decision makers and whether
they serve as a useful and informative report to the citizens.
We recently reached outside Treasury for suggestions and ideas for improving the
governmentwide report. We sought advice from the Government Accountability Project
at the Mercatus Center at George Mason University and also from the Partnership for
Public Service, and we have incorporated several of their suggestions in the 2005 report.
In January, we held a roundtable discussion with Congressional staff, public accounting
professionals, analysts from credit rating agencies, economists and interested members of
the public to ask their advice on possible report improvements.

7

We received many excellent suggestions and are reviewing them to see how we can
prepare a better, more useful report. We are already exploring one suggestion to offer a
shorter, more understandable summary report.
Clearly, if we want to publish government financial information that is used more
broadly, not just by the dedicated reader, we need to do some things differently. The first
question we need to ask is, "Who is our audience?" That answered, we need to think
seriously about what we have in the report that is of value to them. We must then act to
provide them with a better product and service. I welcome this challenge and am
committed to doing this.

Outlook for Federal Reporting
I am also committed to working with OMB and the Chief Financial Officers
Council on developing the government's financial management strategy for the near
future. The improvements in financial systems and business processes that many
agencies have made as a result of audited statements and accelerated timelines has led to
better underlying financial data. We are now looking toward improving efficiency
through standard systems and processes and a common language and structure for
exchanging information and financial data among agencies and between agencies and
Treasury.
To better focus on the objectives it wants to achieve, the CFO Council has just
changed its committee structure and organized along lines that will transform federal
financial management. Among these are modernizing systems and increasing
standardization across the government through standard processes, interfaces and data.
The goal is to improve financial management, increase efficiency, and also to reduce
costs through the use of shared service providers. Closer to home, I will co-chair a
transformation team that will examine Treasury reporting issues, both budgetary and
financial. I believe that this effort will not only lead to near-term efficiencies, but will
also set the stage for changes over the longer term.
Agencies are also putting in place improved internal controls, which are essential
for improving data reliability and fostering improved reporting and accountability. All
agencies are now operating under a stronger governmentwide policy to establish, assess
and report on internal controls.

8

The objectives are to achieve effective and efficient operations, reliable financial
reporting, and compliance with laws and regulations. The improved systems and
processes and better internal controls should help reduce restatements and lay the
groundwork for further improvements and efficiencies. These enhanced processes can
serve as the base of opportunity for more frequent financial reporting, development of
cost accounting data useful to program managers and decision makers, and other
advanced financial management practices.

In conclusion, I believe we have come a long way, but we still have a long way to
go. Our upcoming challenges are significant but manageable, and I am confident that we
will continue to see real progress. Thank you.

9

Appendix I
Consolidation of Net Costs in the Financial Report of the U.S. Government
for the Year Ended September 30, 2005
(in billions of dollars)
Agency
Net
Cost

IntraGov.
Elim

Imputed
Costs

Pension
& Health
Allocation

FR
Net
Cost

Department of Agriculture ...................................

$91.0

$(5.2)

$0.7

$6.2

$92.7

Department of Commerce ...................................

6.3

(0.8)

0.2

2.0

7.7

Department of Defense .......................................

634.9

0.4

4.5

37.2

677.0

Department of Education ....................................

75.2

(4.8)

0.5

70.9

Department of Energy .........................................

40.9

(3.9)

4.2

1.3

43.1

581.3

(1.0)

0.3

3.2

583.8

Department of Homeland Security ......................

66.4

(2.7)

0.7

3.5

67.9

Department of Housing and Urban
Development ...................................................

40.4

1.0

0.1

0.8

42.3

Department of the Interior ...................................

13.4

(1.4)

0.5

3.8

16.3

Department of Justice .........................................

24.3

(0.2)

(3.0)

0.7

4.7

26.5

Department of Labor ...........................................

50.4

0.5

2.0

(4.0)

1.1

50.0

Department of State ............................................

12.0

(0.1 )

0.5

0.1

1.1

13.6

Department of Transportation .............................

56.9

(1.9)

0.5

6.3

61.8

Department of the Treasury ................................

364.9

6.5

79.2

Department of Health and Human Services

Interest on Treasury Securities held by
the public .........................................................

I

Adjustments

0.6

(125.9)

(166.3)

181.2

181.2

Department of Veterans Affairs ...........................

263.4

Agency for International Development ................

12.3

Environmental Protection Agency .......................

8.0

(0.5)

General Services Administration .........................

(0.8)

National Aeronautics and Space
Administration .................................................

15.2

National Science Foundation ..............................

5.4

Nuclear Regulatory Commission .........................

0.1

Office of Personnel Management... .....................

63.6

Small Business Administration ............................

0.8

0.1

(0.2)

Social Security Administration .............................

568.2

2.3

(1.4)

0.5

All Other Non-CFO Act Entities ...........................

21.3

~

-11..1§l

~

Total ................................................................ $3,0158

$ 67 3

(1.7)

1.4

10.1

273.2

0.1

12.8

0.1

1.3

8.9

(0.4)

0.1

0.9

(0.2)

(0.4)

0.1

1.5

16.4

0.1

5.5

0.3

0.4

0.4

(0.1 )
70.0

1

$~

0.1
(11.1)

(103.8)

18.7

0.3

1.0

4.5

. 574.1

~

25.0
$ 2,949 8

Includes adjustments for Earned Income Tax Credit (EITC), $40 billion and Child Tax Credit, $15 billion.

10

Appendix II

Social Security and Medicare Programs
Present Values of Future Expenditures less Future Revenues
(75-year projections)
(in billions of dollars)

2005

2004

$5,704

$5,229

8,829

8,492

Medicare Part B (Fed. Supplementary Medical Insurance)

12,384

11,440

Medicare Part D (Fed. Supplementary Medical Insurance)

8,686

8,119

$35,603

$33,280

Program - (Trust Fund)

Social Security (Fed. Old-Age, Survivors & Disability Ins.)
Medicare Part A (Fed. Hospital Insurance)

TOTAL
Source: 2004 and 2005 Social Security and Medicare Trustees Reports

11

Page 1 0[5

March 2, 2006
JS-4086

Testimony of Robert M. Kimmitt, Deputy Secretary
U.S. Department of the Treasury
Before the Senate Committee on Banking, Housing, and Urban Affairs
Mr. Chairman, Ranking Member Sarbanes, and distinguished members of the
Committee, I appreciate the opportunity to appear before you today to discuss once
again the Committee on Foreign Investment in the United States (CFIUS) and the
Committee's review of DP World's acquisition of P&O. I am here speaking on behalf
of the Administration, the Treasury Department, and CFIUS.
The last time I testified before this Committee, the Committee was engaged in a
broad examination of the CFIUS process in light of the recent report by the
Government Accountability Office. The hearing this morning is an opportunity to
continue that dialogue. Before discussing the review surrounding the DP World
transaction, I would like to generally describe the CFIUS process.
CFIUS
Exon-Florio
CFIUS was established in 1975 by Executive Order of the President with the
Secretary of the Treasury as its chair. Its main responsibility was "monitoring the
impact of foreign investment in the United States and coordinating the
implementation of United States policy on such investment." It analyzed foreign
investment trends and developments in the United States and provided guidance to
the President on significant transactions. However, it had no authority to take action
with regard to specific foreign investments.
The Omnibus Trade and Competitiveness Act of 1988 added section 721 to the
Defense Production Act of 1950 to provide authority to the President to suspend or
prohibit any foreign acquisition, merger, or takeover of a U.S. company where the
President determines that the foreign acquirer might take action that threatens to
impair the national security of the United States. Section 721 is widely known as the
Exon-Florio amendment, after its original congressional co-sponsors.
Specifically, the Exon-Florio amendment authorizes the President, or his designee,
to investigate foreign acquisitions of U.S. companies to determine their effects on
the national security. It also authorizes the President to take such action as he
deems appropriate to prohibit or suspend such an acquisition if he finds that:
(1) There is credible evidence that leads him to believe that the foreign investor
might take action that threatens to impair the national security; and
(2) Existing laws, other than the International Emergency Economic Powers Act
(IEEPA) and the Exon-Florio amendment itself, do not in his judgment provide
adequate and appropriate authority to protect the national security.
The President may direct the Attorney General to seek appropriate judicial relief to
enforce Exon-Florio, including divestment. The President's findings are not subject
to judicial review.
Following the enactment of the Exon-Florio amendment, the President delegated to
CFIUS the responsibility to receive notices from companies engaged in transactions
that are subject to Exon-Florio, to conduct reviews to identify the effects of such
transactions on the national security, and, as appropriate, to undertake
investigations. However, the President retained the authority to suspend or prohibit

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a transaction.
The Secretary of the Treasury is the Chair of CFIUS, and the Treasury's Office of
International Investment serves as the Staff Chair of CFIUS. Treasury receives
notices of transactions, serves as the contact point for the private sector,
establishes a calendar for review of each transaction, and coordinates the
interagency process. The other CFIUS member agencies are the Departments of
State, Defense, Justice, and Commerce, OMB, CEA, USTR, OSTP, the NSC, the
NEC and the newest member, the Department of Homeland Security. Additional
agencies, such as the Departments of Energy and Transportation or the Nuclear
Regulatory Commission are routinely invited to participate in a review when they
have relevant expertise.
The CFIUS process is governed by Treasury regulations that were first issued in
1991
(31 CFR part 800). Under these regulations, parties to a proposed or completed
acquisition, merger, or takeover of a U.S. company by a foreign entity may file a
voluntary written notice with CFIUS through Treasury. Alternatively, a CFIUS
member agency may on its own submit notice of a transaction. If a company fails to
file notice, the transaction remains subject to the President's authority to block the
deal indefinitely.
The CFIUS process starts upon receipt by Treasury of a complete, written notice.
Treasury determines whether a filing is in fact complete, thereby triggering the start
of the 3~-day review period. CFIUS may reject notices that do not comply with the
notice requirements under the regulations. Upon receiving a complete filing,
Treasury sends the notice to all CFIUS member agencies and to other agencies
that might have an interest in a particular transaction. CFIUS then begins a
thorough review of the notified transaction to determine its effect on national
security. In some cases, this review prompts CFIUS to undertake an "investigation,"
which must begin no later than 30 days after receipt of a notice. The Amendment
requires CFIUS to complete any investigation and provide a recommendation to the
President within 45 days of the investigation's inception. The President in turn has
up to 15 days to make a decision, for a total of up to 90 days for the entire process.
CFIUS Implementation
Although the formal review period commences when CFIUS receives a complete
filing, there is often an informal review that begins in advance. Parties to a
transaction may contact CFIUS before a filing in order to identify potential issues
and seek guidance on information the parties to the transaction could provide to
assist CFIUS' review. This type of informal consultation between CFIUS and
transaction parties enables both to address potential issues earlier in the review
process. The pre-filing consultation allows the parties to answer many of CFIUS'
questions in the formal filing and allows for a more comprehensive filing. In some
cases, CFIUS members negotiate security agreements before a filing is made. In
addition, the pre-filing consultation may lead the parties to conclude that a
transaction will not pass CFIUS review, in which case they may restructure their
transaction to address national security issues or abandon it entirely.
During the initial 3~-day review, each CFIUS member agency conducts its own
internal analysis of the national security implications of the notified transaction. In
addition, the U. S. Intelligence Community provides input to all CFIUS reviews. The
Intelligence Community Acquisition Risk Center (CARC), now under the office of
the Director of National Intelligence (DNI), provides threat assessments on the
foreign acquirers. CFIUS will request a threat assessment report from CARC as
early as possible in the review process. In order to facilitate reviews, CFIUS may
request these reports before the parties to the transaction have made their formal
filing. Further, additional agencies such as the Departments of Energy and
Transportation and the Nuclear Regulatory Commission actively participate in the
consideration of transactions that impact the industries under their respective
jurisdictions.
During the review period, there are frequent contacts between CFIUS and the
parties to the transaction. The transaction parties respond to information requests
and provide briefings to CFIUS members in order to clarify issues and supplement
filing materials. Although the CFIUS agencies may meet collectively with the parties

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Page 3 of 5
as an interagency group, meetings also often occur between the parties and the
agency or agencies that have a specific interest in the transaction. Typically, certain
members of CFIUS will identify a concern early in the review and then assume the
lead role in examining the issue and providing views and recommendations on
whether the concern can be addressed. For example, if there are military contracts,
the Department of Defense would lead the CFIUS review and recommend a course
of action.
Depending on the facts of a particular case, CFIUS agencies that have identified
specific risks that a transaction could pose to the national security may, separately
or through CFIUS auspices, develop appropriate mechanisms to address those
risks when other existing laws and regulations alone are not adequate or
appropriate to protect the national security. Agreements implementing security
measures vary in scope and purpose, and are negotiated on a case by case basis
to address the particular concerns raised by an individual transaction. Publicly
available examples of some of the general types of agreements that have been
negotiated include: Special Security Agreements, which provide security protection
for classified or other sensitive contracts; Board Resolutions, which, for instance,
require a U.S. company to certify that the foreign investor will not have access to
particular information or influence over particular contracts; Proxy Agreements,
which isolate the foreign acquirer from any control or influence over the U.S.
company; and Network Security Agreements (NSAs), which are used in
telecommunications cases and often are imposed in the context of the Federal
Communications Commission's (FCC) licensing process.
CFIUS operates by consensus among its members. A decision not to undertake an
investigation is made only if the members agree that the transaction creates no
national security concerns, or any identified national security concerns have been
addressed to the satisfaction of all CFIUS agencies. The daily operation of CFIUS
is conducted by professional staff at each agency. Each agency sends the filing to
multiple groups in its agency depending on the issues involved in the filing. CFIUS
staff report to the policy level, which is the Assistant Secretary level. A decision can
be elevated to the Deputy Secretary level and on to the Cabinet officials, if
necessary. If within the initial 30-day period there is consensus that the transaction
does not raise national security concerns or any national security concerns have
been addressed, Treasury, on behalf of CFIUS, writes to the parties notifying them
of that determination. This concludes the CFIUS review of the acquisition.
If one or more members of CFIUS believe that national security concerns remain
unresolved, then CFIUS conducts a 45-day investigation. The additional 45 days
enables CFIUS and the parties to obtain additional information from the parties,
conduct additional internal analysis, and continue addressing outstanding concerns.
Upon completion of a 45-day investigation, CFIUS must provide a report to the
President stating its recommendation. If CFIUS is unable to reach a unanimous
recommendation, the Secretary of the Treasury, as Chairman, must submit a
CFIUS report to the President setting forth the differing views and presenting the
issues for decision. The President has up t015 days to announce his decision on
the case and inform Congress of his determination. The last report sent to
Congress occurred in September 2003, when the President sent a classified report
detailing his decision to take no action to block the transaction between Singapore
Technologies Telemedia and Global Crossing.
The Exon-Florio amendment requires that information furnished to any CFIUS
agency by the parties to a transaction shall be held confidential and not made
public, except in the case of an administrative or judicial action or proceeding. This
confidentiality provision does not prohibit CFIUS from sharing information with
Congress. Treasury, as chair of CFIUS, upon request of congressional committees
or subcommittees with jurisdiction over Exon-Florio matters, has arranged
congressional briefings on transactions reviewed by CFIUS. These briefings are
conducted in closed sessions and, when appropriate, at a classified level. CFIUS
members with equities in the transaction under discussion are invited to participate
in these briefings.
Since the enactment of Exon-Florio in 1988, CFIUS has reviewed 1,604 foreign
acquisitions of companies for potential national security concerns. In most of these
reviews, CFIUS agencies have either identified no specific risks to national security
created by the transactions or risks have been addressed during the review period.
However, to date 25 cases have gone through investigation, twelve of which
reached the President's desk for decision. In eleven of those, the President took no

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action, leaving the parties to the proposed acquisitions free to proceed. In one case,
the President ordered the foreign acquirer to divest all its interest in the U.S.
company. In another case that did not go to the President, the foreign acquirer
undertook a voluntary divestiture. Of those 25 investigations, seven have been
undertaken since 2001 with one going to the President for decision. However, these
statistics do not reflect the instances where CFIUS agencies implemented security
measures that obviated the need for an investigation or where, in response to
dialogue with CFIUS agencies, parties to a transaction either voluntarily
restructured the transaction to address national security concerns or withdrew from
the transaction altogether.
DP World
Contrary to many accounts, the DP World transaction was not rushed through the
review process in early February. On October 17, 2005, lawyers for DP World and
P&O informally approached Treasury Department staff to discuss the preliminary
stages of the transaction. This type of informal contact enables CFIUS staff to
identify potential issues before the review process formally begins. In this case,
Treasury staff identified port security as the primary issue and directed the
companies to DHS. On October 31, DHS and the Department of Justice staff met
with the companies to review the transaction and security issues.
On November 2, Treasury staff requested a CARC intelligence assessment from
the Office of the DN!. Treasury received this assessment on December 5, and it
was circulated to CFIUS staff. On December 6, staff from CFIUS agencies with the
addition of staff from the Departments of Transportation and Energy met with
company officials to review the transaction and to request additional information.
On December 16, after two months of informal interaction, the companies officially
filed their formal notice with Treasury, which circulated the filing to all CFIUS
departments and agencies and also to the Departments of Energy and
Transportation because of their statutory responsibilities and experience with DP
World.
During the 3~-day review period, members of the CFIUS staff were in contact with
one another and the companies. As part of this process, DHS negotiated an
assurances letter that addressed port security concerns. The final assurances letter
was circulated to the committee on January 6 for its review, and CFIUS concluded
its review on January 17. In total, far from rushing their review, members of CFIUS
staff spent nearly 90 days reviewing this transaction. There were national security
issues raised during this review process, but any and all concerns were addressed
to the satisfaction of all members of CFIUS. By the time the transaction was
formally approved, there was full agreement among the CFIUS members.
Another misperception is that this transaction was concluded in secret. Although the
Exon-Florio amendment prohibits CFIUS from publicly disclosing information
provided to it in connection with a filing under Exon-Florio, these transactions often
become public through actions taken by the companies. Here, as is often the case,
the companies issued a press release announcing the transaction on November 29.
In addition, beginning on October 30, dozens of news articles were published
regarding this transaction, well before CFIUS officially initiated, much less
concluded its review.
Last Sunday, February 26, DP World announced that it would make a new filing
with CFIUS and requested a 45-day investigation. Upon receipt of DP World's new
filing, CFIUS will promptly initiate the review process, including DP World's request
for an investigation. The 45-day investigation will consider existing materials as well
as new information anticipated from the company. Importantly, the investigation
process will also consider very carefully concerns raised by members of Congress,
state and local officials, and other interested parties. We welcome your input during
this process, including issues that will be raised at today's hearing.
Conclusion
Since my last appearance before this Committee, I have worked with my colleagues
to address several of the flaws that you identified in CFIUS reviews. We have
revised the interagency process to ensure that all members, especially the security
agencies, have sufficient time and opportunity to review transactions, identify any
security concerns, and fully address those concerns. Nonetheless, it is clear that

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improvements are still required. In particular, we must improve the CFIUS process
to help ensure the Congress can fulfill its important oversight responsibilities.
Although CFIUS operates under restrictions on public disclosures regarding
pending cases, we have tried to be responsive to inquiries from Congress. I am
open to suggestions on how we foster closer communication in the future. I think
that we can find the right balance between providing Congress the information it
requires to fulfill its oversight role while respecting the deliberative processes of the
executive branch and the proprietary information of the parties filing with CFIUS.
Let me stress in closing, Mr. Chairman, that all members of CFIUS understand that
their top priority is to protect our national security. As President Bush said: "If there
was any doubt in my mind, or people in my administration's mind, that our ports
would be less secure and the American people endangered, this deal wouldn't go
forward."
I thank you for your time this afternoon and am happy to answer to any questions.

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PRESS ROOM

March 2, 2006
JS-4087

Fact Sheet: U.S. - India Financial and Economic Forum
The Indian Ministry of Finance, the U.S. Treasury, and financial regulators from
both countries have engaged in recent years under the auspices of the Financial
and Economic Forum (FEF), part of the U.S.-India Economic Dialogue. This has
provided an important venue to share views and expertise on macroeconomic and
financial sector issues, including fiscal and exchange rate policies, measures to
increase competition and strengthen prudential regulation in the banking sector and
securities markets, insurance and pension reforms, and anti-money laundering
efforts.
Most recently, in November 2005, U.S. Treasury Secretary John Snow and Indian
Finance Minister P. Chidambaram discussed India's efforts to strengthen its
financial system and expand financial services to the poor. The two sides also
reaffirmed their intention to implement the recommendations of the Financial Action
Task Force (FATF) designed to protect financial systems from money laundering,
terrorist financing and other illicit financial threats. The Indian and U.S. sides
agreed that a stronger investment climate would encourage more U.S. investment
in Indian infrastructure development, and underscored the importance of an
effective dispute resolution system to give greater confidence to investors.
Looking forward, the development of the financial sector and trade in financial
services will playa key role in promoting private-sector led growth and economic
stability in India. Opening the financial sector to foreign participation would make
additional long-term financing available for infrastructure development. The
development of a greater array of insurance and savings products (including for
retirement) would provide for greater income security and reduce the need for high
precautionary savings.
Future discussions by U.S. and Indian financial officials will rely heavily on the
recommendations of the U.S. - India CEO Forum. Treasury intends to appoint a
Financial Attache in India to follow up on key initiatives and help deepen this
important relationship.

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PRESS ROOM

March 2, 2006
JS-4088

The Honorable John W. Snow
Prepared Remarks
Visit to: Cisco Academy at Foothill College
Los Altos, Calif.
Good morning, and thanks so much for having me here. What a pleasure to visit a
campus that the San Francisco Chronicle called "the most beautiful community
college ever built."
Being here really is a reminder of the best America has to offer - and the promise
that our future holds. The Cisco Networking Academy is a terrific example of where
technology and innovation meet common sense and good education. When these
elements come together, American workers simply can't be beat.
I'd like to commend the leadership of both Foothill College and Cisco Systems for
working together to create this academy. In an economy as dynamic and everchanging as ours, academies like this are offering timely, essential training that
enables workers to move into new jobs, with new skills, at any point in their
professional careers.
As Treasury Secretary, I'm interested in keeping the American economy strong and
thriving, and education and worker training is a critical component to sustaining our
economic strength. The outstanding American workforce drives our economy, but
workers need the skills to compete. Job training is therefore essential, but it is
meaningless unless it is for jobs that actually exist. That means the priority must be
on job-training programs that are flexible, work with employers, and meet the
demands of the local workplace and global economy. That's happening here at the
Cisco Networking Academy and it's inspiring to see.
Community colleges are one of the most effective ways to get job training. That's
why the Bush Administration so strongly supports community colleges. Our
Community-Based Job Training Grants are designed to do just that - get job
training in high-growth industries. By reforming job training programs and
supporting community colleges, the government is helping workers improve their
lives and ensuring that America remains the world's leading land of opportunity.
A flexible, skilled workforce, combined with good economic policies, will keep the
American economy going strong.
The work being done here at Foothill College and the Cisco Networking Academy is
truly at the forefront of those efforts, and I wish you all continued success in your
careers and in this fine program. Thank you.

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March 2, 2006
JS-4089
Testimony of Clay Lowery, Assistant Secretary
International Affairs
U.S. Department of the Treasury
Before the Committee on Armed Services

Chairman Hunter, Ranking Member Skelton, and distinguished members of the
Committee, I appreciate the opportunity to appear before you today to discuss the
Committee on Foreign Investment in the United States (CFIUS) and the
Committee's review of DP World's acquisition of P&O. I am here speaking on
behalf of the Administration, the Treasury Department, and CFIUS.

Exon-Florio
CFI US was established in 1975 by Executive Order of the President with the
Secretary of the Treasury as its chair. Its main responsibility was "monitoring the
impact of foreign investment in the United States and coordinating the
implementation of United States policy on such investment." It analyzed foreign
investment trends and developments in the United States and provided guidance to
the President on significant transactions. However, it had no authority to take
action with regard to specific foreign investments.
The Omnibus Trade and Competitiveness Act of 1988 added section 721 to the
Defense Production Act of 1950 to provide authority to the President to suspend or
prohibit any foreign acquisition, merger, or takeover of a U.S. company where the
President determines that the foreign acquirer might take action that threatens to
impair the national security of the United States. Section 721 is widely known as
the Exon-Florio amendment, after its original congressional co-sponsors.
Specifically, the Exon-Florio amendment authorizes the President, or his designee,
to investigate foreign acquisitions of U.S. companies to determine their effects on
the national security. It also authorizes the President to take such action as he
deems appropriate to prohibit or suspend such an acquisition if he finds that:
(1) There is credible evidence that leads him to believe that the foreign investor
might take action that threatens to impair the national security; and
(2) Existing laws, other than the International Emergency Economic Powers Act
(IEEPA) and the Exon-Florio amendment itself, do not in his judgment provide
adequate and appropriate authority to protect the national security.
The President may direct the Attorney General to seek appropriate judicial relief to
enforce Exon-Florio, including divestment. The President's findings are not subject
to judicial review.
Following the enactment of the Exon-Florio amendment, the President delegated to
CFIUS the responsibility to receive notices from companies engaged in transactions
that are subject to Exon-Florio, to conduct reviews to identify the effects of such
transactions on the national security, and, as appropriate, to undertake
investigations. However, the President retained the authority to suspend or prohibit
a transaction.
The Secretary of the Treasury is the Chair of CFIUS, and the Treasury's Office of
International Investment serves as the Staff Chair of CFIUS. Treasury receives
notices of transactions, serves as the contact point for the private sector,

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Page 2 of 5
establishes a calendar for review of each transaction, and coordinates the
interagency process. The other CFIUS member agencies are the Departments of
State, Defense, Justice, and Commerce, OMB, CEA, USTR, OSTP, the NSC, the
NEC and the newest member, the Department of Homeland Security. Additional
agencies, such as the Departments of Energy and Transportation or the Nuclear
Regulatory Commission are routinely invited to participate in a review when they
have relevant expertise.
The CFIUS process is governed by Treasury regulations that were first issued in

1991
(31 CFR part 800). Under these regulations, parties to a proposed or completed
acquisition, merger, or takeover of a U.S. company by a foreign entity may file a
voluntary written notice with CFIUS through Treasury. Alternatively, a CFIUS
member agency may on its own submit notice of a transaction. If a company fails
to file notice, the transaction remains subject to the President's authority to block
the deal indefinitely.
The CFIUS process starts upon receipt by Treasury of a complete, written notice.
Treasury determines whether a filing is in fact complete, thereby triggering the start
of the 30-day review period. CFIUS may reject notices that do not comply with the
notice requirements under the regulations. Upon receiving a complete filing,
Treasury sends the notice to all CFIUS member agencies and to other agencies
that might have an interest in a particular transaction. CFIUS then begins a
thorough review of the notified transaction to determine its effect on national
security. In some cases, this review prompts CFIUS to undertake an
"investigation," which must begin no later than 30 days after receipt of a notice.
The Amendment requires CFIUS to complete any investigation and provide a
recommendation to the President within 45 days of the investigation's inception.
The President in turn has up to 15 days to make a decision, for a total of up to 90
days for the entire process.
CFIUS Implementation
Although the formal review period commences when CFIUS receives a complete
filing, there is often an informal review that begins in advance. Parties to a
transaction may contact CFIUS before a filing in order to identify potential issues
and seek guidance on information the parties to the transaction could provide to
assist CFIUS' review. This type of informal consultation between CFIUS and
transaction parties enables both to address potential issues earlier in the review
process. The pre-filing consultation allows the parties to answer many of CFIUS'
questions in the formal filing and allows for a more comprehensive filing. In some
cases, CFIUS members negotiate security agreements before a filing is made. In
addition, the pre-filing consultation may lead the parties to conclude that a
transaction will not pass CFIUS review, in which case they may restructure their
transaction to address national security issues or abandon it entirely.
During the initial 30-day review, each CFIUS member agency conducts its own
internal analysis of the national security implications of the notified transaction. In
addition, the U. S. Intelligence Community provides input to all CFIUS reviews. The
Intelligence Community Acquisition Risk Center (CARC), now under the office of
the Director of National Intelligence (DNI), provides threat assessments on the
foreign acquirers. CFIUS will request a threat assessment report from CARC as
early as possible in the review process. In order to facilitate reviews, CFIUS may
request these reports before the parties to the transaction have made their formal
filing. Further, additional agencies such as the Departments of Energy and
Transportation and the Nuclear Regulatory Commission actively participate in the
consideration of transactions that impact the industries under their respective
jurisdictions.
During the review period, there are frequent contacts between CFIUS and the
parties to the transaction. The transaction parties respond to information requests
and provide briefings to CFIUS members in order to clarify issues and supplement
filing materials. Although the CFIUS agencies may meet collectively with the
parties as an interagency group, meetings also often occur between the parties and
the agency or agencies that have a specific interest in the transaction. Typically,
certain members of CFIUS will identify a concern early in the review and then
assume the lead role in examining the issue and providing views and

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Page 3 0[5
recommendations on whether the concern can be addressed. For example, if there
are military contracts, the Department of Defense would lead the CFIUS review and
recommend a course of action.
Depending on the facts of a particular case, CFIUS agencies that have identified
specific risks that a transaction could pose to the national security may, separately
or through CFIUS auspices, develop appropriate mechanisms to address those
risks when other existing laws and regulations alone are not adequate or
appropriate to protect the national security. Agreements implementing security
measures vary in scope and purpose, and are negotiated on a case by case basis
to address the particular concerns raised by an individual transaction. Publicly
available examples of some of the general types of agreements that have been
negotiated include: Special Security Agreements, which provide security protection
for classified or other sensitive contracts; Board Resolutions, which, for instance,
require a U.S. company to certify that the foreign investor will not have access to
particular information or influence over particular contracts; Proxy Agreements,
which isolate the foreign acquirer from any control or influence over the U.S.
company; and Network Security Agreements (NSAs), which are used in
telecommunications cases and often are imposed in the context of the Federal
Communications Commission's (FCC) licensing process.
CFIUS operates by consensus among its members. A decision not to undertake an
investigation is made only if the members agree that the transaction creates no
national security concerns, or any identified national security concerns have been
addressed to the satisfaction of all CFIUS agencies. The daily operation of CFIUS
is conducted by professional staff at each agency. Each agency sends the filing to
multiple groups in its agency depending on the issues involved in the filing. CFIUS
staff report to the policy level, which is the Assistant Secretary level. A decision can
be elevated to the Deputy Secretary level and on to the Cabinet officials, if
necessary. If within the initial 30-day period there is consensus that the transaction
does not raise national security concerns or any national security concerns have
been addressed, Treasury, on behalf of CFIUS, writes to the parties notifying them
of that determination. This concludes the CFIUS review of the acquisition.
If one or more members of CFIUS believe that national security concerns remain
unresolved, then CFIUS conducts a 45-day investigation. The additional 45 days
enables CFIUS and the parties to obtain additional information from the parties,
conduct additional internal analysis, and continue addressing outstanding
concerns. Upon completion of a 45-day investigation, CFIUS must provide a report
to the President stating its recommendation. If CFIUS is unable to reach a
unanimous recommendation, the Secretary of the Treasury, as Chairman, must
submit a CFIUS report to the President setting forth the differing views and
presenting the issues for decision. The President has up t015 days to announce
his decision on the case and inform Congress of his determination.
The last
report sent to Congress occurred in September 2003, when the President sent a
classified report detailing his decision to take no action to block the transaction
between Singapore Technologies Telemedia and Global Crossing.
The Exon-Florio amendment requires that information furnished to any CFIUS
agency by the parties to a transaction shall be held confidential and not made
public, except in the case of an administrative or judicial action or proceeding. This
confidentiality provision does not prohibit CFIUS from sharing information with
Congress. Treasury, as chair of CFIUS, upon request of congressional committees
or subcommittees with jurisdiction over Exon-Florio matters, has arranged
congressional briefings on transactions reviewed by CFIUS. These briefings are
conducted in closed sessions and, when appropriate, at a classified level. CFIUS
members with equities in the transaction under discussion are invited to participate
in these briefings.
Since the enactment of Exon-Florio in 1988, CFIUS has reviewed 1,604 foreign
acquisitions of companies for potential national security concerns. In most of these
reviews, CFIUS agencies have either identified no specific risks to national security
created by the transactions or risks have been addressed during the review period.
However, to date 25 cases have gone through investigation, twelve of which
reached the President's desk for decision. In eleven of those, the President took no
action, leaving the parties to the proposed acquisitions free to proceed. In one
case, the Presidentordered the foreign acquirer to divest all its interest in the U.S.
company. In another case that did not go to the President, the foreign acquirer
undertook a voluntary divestiture. Of those 25 investigations, seven have been

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undertaken since 2001 with one going to the President for decision. However,
these statistics do not reflect the instances where CFIUS agencies implemented
security measures that obviated the need for an investigation or where, in response
to dialogue with CFIUS agencies, parties to a transaction either voluntarily
restructured the transaction to address national security concerns or withdrew from
the transaction altogether.

Contrary to many accounts, the DP World transaction was not rushed through the
review process in early February. On October 17, 2005, lawyers for DP World and
P&O informally approached Treasury Department staff to discuss the preliminary
stages of the transaction. This type of informal contact enables CFIUS staff to
identify potential issues before the review process formally begins. In this case,
Treasury staff identified port security as the primary issue and directed the
companies to DHS. On October 31, DHS and the Department of Justice staff met
with the companies to review the transaction and security issues.

On November 2, Treasury staff requested a CARC intelligence assessment from
the Office of the ON!. Treasury received this assessment on December 5, and it
was circulated to CFIUS staff. On December 6, staff from CFIUS agencies with the
addition of staff from the Departments of Transportation and Energy met with
company officials to review the transaction and to request additional information.
On December 16, after two months of informal interaction, the companies officially
filed their formal notice with Treasury, which circulated the filing to all CFIUS
departments and agencies and also to the Departments of Energy and
Transportation because of their statutory responsibilities and experience with DP
World.
During the 30-day review period, members of the CFIUS staff were in contact with
one another and the companies. As part of this process, DHS negotiated an
assurances letter that addressed port security concerns. The final assurances
letter was circulated to the committee on January 6 for its review, and CFIUS
concluded its review on January 17. In total, far from rushing their review,
members of CFIUS staff spent nearly 90 days reviewing this transaction. There
were national security issues raised during this review process, but any and all
concerns were addressed to the satisfaction of all members of CFIUS. By the time
the transaction was formally approved, there was full agreement among the CFIUS
members.
Another misperception is that this transaction was concluded in secret. Although
the Exon-Florio amendment prohibits CFIUS from publicly disclosing information
provided to it in connection with a filing under Exon-Florio, these transactions often
become public through actions taken by the companies. Here, as is often the case,
the companies issued a press release announcing the transaction on November
29. In addition, beginning on October 30, dozens of news articles were published
regarding this transaction, well before CFIUS officially initiated, much less
concluded its review.
On Sunday, February 26, DP World announced that it would make a new filing with
CFIUS and request a 45-day investigation. Upon receipt of DP World's new filing,
CFIUS will promptly initiate the review process. The additional time and review at
the company's request will enable Congress to obtain a better understanding of the
facts.
Conclusion
Mr. Chairman, we believe that the review surrounding the DP World transaction
was thorough from a substantive standpoint, as reflected by the unanimous
approval of the members. Nonetheless, it is clear that improvements are still
required. In particular, we must improve the CFIUS process to help ensure the
Congress can fulfill its important oversight responsibilities. Although CFIUS
operates under legal restrictions on public disclosures regarding [lending cases, we
have tried to be responsive to inquiries from Congress. We are open to
suggestions on how we foster closer communication in the future. We think that we

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can find the right balance between providing Congress the information it requires to
fulfill its oversight role while respecting the deliberative processes of the executive
branch and the proprietary information of the parties filing with CFIUS.
Let me stress in closing, Mr. Chairman, that all members of CFIUS understand that
their top priority is to protect our national security. As President Bush said earlier
this week: "If there was any doubt in my mind, or people in my administration's
mind, that our ports would be less secure and the American people endangered,
this deal wouldn't go forward."
I thank you for your time this afternoon and am happy to answer to any questions.

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March 3, 2006
JS-4090

Prepared Remarks
Stanford Institute for Economic Policy Research (SIEPR)
Economic Summit
Stanford, CA
Good morning. It's great to be here at Stanford; thank you so much for having me.
It's an honor to visit the intellectual 'home' of Secretaries Rice and Schultz, my
good friend and former colleague John Taylor, and so many others who I've had the
pleasure to know and work with, like Anne Krueger and Eddie Lazear.
Stanford has produced some of the most influential economic minds of our times,
and certainly of the Bush Administration. John Taylor alone dramatically changed
the direction of conversation among the finance ministers of the G7. He gave
international economic policy direction that was both inspired and sound at a time
when the international financial community was really in need of it that kind of
intellectual leadership.
John's influence over Bush Administration policy began much earlier, of course,
when he served as an economic advisor to the 2000 Presidential campaign. The
economic policies that he was involved in developing - namely tax relief - have led
to a terrific period of economic expansion for this country.
With GOP growth over four percent in 2004, at 3.5 percent last year and this year
promising to be perhaps better yet, there can be little question that smart, steady
economic stewardship deserves some credit.
Well-timed tax relief, combined with sound monetary policy from the Federal
Reserve Board, helped boost 4.7 million Americans onto the payrolls over the past
three years. Our unemployment rate is very low, and with the exception of the peak
of the high-tech bubble in 1999-2000, initial jobless claims have not been this low in
more than 30 years.
Many of you are economists, so I know that I don't have to tell you this, but simple
truths can be worth repeating: You always get less of something you tax.
So by lowering the taxes on capital, the Jobs and Growth Act of 2003 encouraged
increased long-term investment. Increased long-term investment in turn improved
the long-turn outlook of the economy. It made the economy more productive. With
additional capital, labor output rose. And with rising labor output the demand for
labor increased and living standards are now higher.
And while many factors contributed to the improved performance of the economy,
the tax reductions on capital, I think, have been at the heart of the progress we
have seen. By lowering the cost of capital the President's proposals improved the
inherent efficiency of the economy, and this will prove effective for both the short
and long term.
The proof is in the numbers: After nine consecutive declining quarters of real annual
business investment, we have had ten straight quarters of rising business
investment.
Making those tax cuts permanent will help keep our economy on this good path of
growth. And an important part of my job is reminding Congress of that fact. I can't
say it strongly enough: a tax increase would be very bad for this economy, for every
American who still seeks work, and it would be foolish to turn away from this course
that is benefiting so many. Congress must resist the urge to raise taxes.

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Tax relief permanency really is the tax business of the day in Washington. The next
significant step on taxes, of course, being tax reform. Eddie Lazear, who I
mentioned earlier - a proud Stanford alum - was part of a terrific effort on the
President's Panel on Tax Reform. The work of that panel is the beginning of what is
sure to be one of the most Significant policy debates of this decade.
We only get a chance to enact meaningful, broad tax reform once about every
twenty years, so it's important that we do it right. John Kennedy led that
accomplishment in the 1960s, Reagan in the 1980s and it's time to do it again. But
with a tax code that impacts nearly every aspect of all of our lives, reform is a task
that must be thought through and deliberated in a painstaking manner. The panel
got this process started, and I'm thankful for their work. The discussion you will
have later this morning will be part of the ongoing tax reform dialogue, and I look
forward to hearing of your debate and conclusions.
You'll have a panel discussing the United States' economic relationship with China
as well, and I want to touch on that issue, while I'm here.
There is a lot of concern these days about China's growth and challenges it creates
for U.S. economy. I find it interesting that there is far less talk about how a
prosperous China is in the interest of the U.S. For example, while largest U.S.
bilateral deficit is with China, China is also our fastest growing export market.
Keep in mind that United States and China accounted for half of global growth since
2001. We're at the head of the global growth class, together, so we need to work in
partnership for the benefit of all our citizens.
China's impact on world markets now very significant and with this increased role,
comes increased responsibility. In particular, divergent growth rates and saving and
investment patterns among major economies are widening global current account
imbalances. Adjustment of global imbalances is a shared responsibility that must be
undertaken in a way that maximizes sustained global growth.
Appropriate response involves increasing savings in the United States, raising
domestic demand led growth of our largest trading partners and greater exchange
rate flexibility in China and other large economies in emerging Asia to allow for
gradual, market-based adjustments.
The United States is doing its part. But we cannot address this issue alone; U.S.
fiscal consolidation absent offsetting measures to boost domestic demand abroad
will reduce global imbalances but at much lower growth rates.
Through fiscal and regulatory changes, China also needs to continue its efforts to
achieve more balanced growth to reduce heavy reliance on credit-fueled investment
and exports.
This will take time. Savings are high because China is aging and doesn't have
financial and insurance products. and a social safety net, to handle retirement or
health care needs.
Also, China stands to benefit from expertise and capital that U.S. financial services
firms can provide - a win-win for both countries.
Finally, China must make progress to open up and reform its financial sector to
address highly inefficient financial intermediation. This will also lead to more
consumption-led growth.
All of this is playing out against backdrop of rising protectionist pressures, which
pose significant risks to U.S. economic growth, global economic growth and
financial market stability.
The Administration is committed to open trade and investment policy. We believe
that the international trading system works best with free trade, the free flow of
capital and with market-based exchange rates.

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But we need China's help to make this work. China has pledged to be flexible on
the rate of the Yuan, and they've made progress. We need more progress, more
flexibility.
The last topic I want to discuss today - and then I'll let you get started with this
terrific meeting! - is the impact of energy prices on our economy, and what we can
do about that going forward.
Clearly, the price of oil is a drag on the economy. According to standard models of
the U.S. economy, oil price increases have detracted from real GOP growth and
raised the level of inflation. Put in the simplest of terms, high energy prices act like
a tax on businesses, families and individuals.
Energy markets have always been complex, and in recent years have been further
complicated for the U.S. by our tension with oil-producing countries.
The President has said that the best way to break America's dependence on
foreign sources of energy is through new technology. I agree that American
innovation and technology will lead us to a new day of reduced reliance on foreign
sources of energy as well as energy efficiency that is good for American
pocketbooks.
Clean, efficient alternative sources of energy for our vehicles, homes and
businesses are of vital importance to America's ability to remain competitive and
safe, and those energy sources will be developed and produced by American
scientists and entrepreneurs - just as so many solutions have come from American
innovation in our past.
In government, we have a responsibility to encourage and support the research and
development that will lead to these technological breakthroughs. That's why, since
2001, the Administration has spent nearly $10 billion to develop cleaner, cheaper,
and more reliable alternative energy sources. As a result, America is on the verge
of breakthroughs in advanced energy technologies that could transform the way we
produce and use energy. To build on this progress, the President's Advanced
Energy Initiative provides for a 22% increase in funding for clean-energy technology
research at the Department of Energy in two vital areas:
1. Changing the way we fuel our vehicles. We can improve our energy security
through greater use of technologies that reduce oil use by improving efficiency,
expansion of alternative fuels from homegrown biomass, and development of fuel
cells that use hydrogen from domestic feedstocks; and
2. Changing the way we power our homes and businesses. We can address high
costs of natural gas and electricity by generating more electricity from clean coal,
advanced nuclear power, and renewable resources such as solar and wind.
I'm sure that some of these strategies, and others, will be explored in the panel
discussion this morning on energy, and I'm reassured knowing that conversations
like this are taking place in academic and other intellectual establishments all of this
country. Because of great institutions of learning and idea development like
Stanford, because of the great skills of the American workforce, and because of this
country's passionate embrace of entrepreneurship I will never bet against
Americans when it comes to problem-solving and innovation. We'll get it right on
energy, but we'll have to work hard for it.
I know you must be anxious to begin panel discussions, but I'd be happy to take a
few of your questions in the time we have left.
Thanks so much, again, for having me here today.

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March 3, 2006
JS-4091
Treasury Assistant Secretary Tony Fratto to Hold Weekly Press Briefing

u.s. Treasury Assistant Secretary for Public Affairs Tony Fratto will hold the weekly
media briefing on Monday, March 6 in Treasury's Media Room. The event is open
to all credentialed media.
Who
Assistant Secretary for Public Affairs Tony Fratto
What
Weekly Briefing to the Press
When
Monday, March 6, 11 :15 AM (EST)

Where
Treasury Department
Media Room (Room 4121)
1500 Pennsylvania Ave., NW
Washington, DC
Note
Media without Treasury press credentials should contact Frances Anderson at
(202) 622-2960, or frances.anderson@do.treas.qov with the following information:
name, Social Security number, and date of birth.

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Page 1 of 1

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March 3. 2006
JS-4092
Petrodollars and Global Imbalances
Occasional Paper No1
February 2006
REPORTS
•

Petrodollars and Global Imbalances

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PETR0I10l..LARS AND GLOBAL IMBALI\NCfS • OFnCE OF INT[HNATIONAL AFFAIRS OCCI'SSIONAl. PAPER NO, i • FEflRUAHY 2006

Department of the Treasury
Office of International Affairs
Occasional Paper No, 1
February 2006

Petrodollars and Global Imbalances
T. Ashby McCown, L. Christopher Plan tier, John Weeks

DISCLAIMER

This is the first in a series of Occasional Papers from the Treasury Department's Office of International
Affairs, These papers will examine international economic issues of current relevance in an effort to
identify underlying trends and issues for policymakers. These papers are not statements of U.S. Government, Department of the Treasury, or Administration policy and reflect solely the views of the authors,
* The authors thank their Treasury colleagues. especially Kurt Schuler, for their helpful input and suggestions.

In December 1998, the price of high-quality crude
oil briefly fell below $11 a barrel as financial crises
in Asia, Russia, and Brazil dampened demand.
Adjusted for inflation, the price was the lowest
since 1973. As the world economy recovered and
grew, the price of oil rose markedly, peaking at
almost $70 per barrel in 2005 before ending the
year at $61 per barrel. Today, the price continues
to hover at around $65.
This sustained rise in prices has generated hundreds of billions of dollars of extra revenue for oil
exporting countries (e.g. the Bank of International Settlements estimates $1.3 trillion to OPEC
since end -1998). This Occasional Paper examines
the major sources and uses of this windfall and
its impact on global imbalances. The paper is not
intended to be a comprehensive assessment of
the petrodollar phenomenon, but rather to identify issues that warrant further examination. Key
findings of our analysiS suggest that:
• From 2002 to 2005, oil exporters appear to
be spending proceeds from the oil windfall
relatively evenly on increased imports and
reserve accumulation, but import spending
and the percentage spent on imports will
likely rise over time.

2

• Some oil exporters are responding to the
windfall by increasing reserves, retiring debt,
and setting aside money for future generations, measures which should help insulate
them from oil price volatility.
• Many countries are also channeling financing
to productive investments intended to support growth, in contrast to the last oil boom.
However in some cases, domestic spending
increases have included hefty public sector
wage hikes.
• The complexity and integration of financial
markets make it difficult to assess fully where
the oil windfall is being invested, though it is
clear that domestic equity markets, and, to a
lesser extent, real estate markets in the Gulf,
are benefiting.
• Oil producers' current account surpluses have
increased already large global imbalances.
• While inflation remains broadly contained
in oil-exporting countries with pegged exchange rates, more flexible exchange rates
would allow better control over domestic
monetary conditions and promote efficient
external adjustment.
. ..

"

......"'

_-------

..."'...

PETR0I10l..LARS AND GLOBAL IMBALI\NCfS • OFnCE OF INT[HNATIONAL AFFAIRS OCCI'SSIONAl. PAPER NO, i • FEBRUAHY 2006
Figure 1: Crude oil price in current dollars versus 5-year moving average
70

60

50

~

'"

.JJ<I>

Qj

Q.

~

C
~

:;

.!!! U

"0

30

a

10

+---~---

--- ---.--------------------

O~--~----~--~--~----~--_,----r_--~--~----,_--~--~
Jan-91 Apr-92 Jul-93 Oct-94 Jan-96 Apr-97 JUI-98 Oct-99 Jan-01 Apr-02 Jul-03 Oct-04 Jan-06
Sources: Energy Information A.dm;nistration (oii price)

Table 1 lists the 14 countries that exported at least
1 million barrels of oil per day in 2004, led by Saudi
Arabia and Russia' These countries account for
approximately 46% of global oil production. The
data show that oil export revenues for the selected countries increased $410 billion (143%) from
2002 to 2005 and that major exporters increased
their holdings of foreign reserves and imports by

roughly the same amounts ($266 and $272 billion,
respectively).' The lag of import growth relative
to the pace of revenue increases likely reflects two
major factors: 1) conservative oil price assumptions in national budgets (e.g., of about $30-$40
per barrel); and 2) capacity limitations (especially
on capital investments)." The first reflects a prudent initial response to the uncertainty about the
duration of the recent oil price increase and a desire to smooth changes in spending over the medium and long term; the second factor ret1ects the

1 Full-year production figures for 2005 are not yet available; data through mid-2005 suggest that the numbers are only
slightly higher. The period 2002 to 2005 is used since oil prices almost doubled over this period of time, and this time
period reflects the more recent change in oil income.

2This calculation, however, excludes non-oil exports and does not include accumulation of other financial assets, so it is
only illustrative in terms of how large changes in key macroeconomic aggregates are. Also, the doubling of aggregate foreign exchange reserves in Table 1 from 2002 to 2005 may be an underestimate since many central banks' net international
assets rose more than official gross reserves.
3 See

Uribe, Martin (2005), "Habit Persistence"for discussion of habit formation in macroeconomic models, http://www.eco
n.duke.edu/-uribe/habit_persistence.pdf, and for the effects of uncertainty on the current account see Ghosh, Atish R. &
Jonathan D. Ostry (1997),"Macroeconomic uncertainty, precautionary saving, and the current account", Journal of Monetary Economics, Volume 40, Issue 1, pp 121-139.

3

PEfROOOl..LARS ANI) GLOBAL IMBAL,\NC[S • ornCE Of INTEHMHONAL AFFAIHS oCC,'SSIONAL PAPEH NO. ! • FEBRUAHY 2006
Oil revenues and uses in major oil exporters, 2002-2005 (A ~/cha~ge) ..

(Table 1)

'<'

Exports
(mn

bbl)

2004

Oil export revenues
(bn $)

Foreign re,;;,nIiCS
(on $)

·02

·05

,1

·02

·05

,1

·05

"xi

'1-~::
/

Government debito
GOP ('Yu)

Imports (bn $)

·02

/';:

11

·02

'05

,1

Saudi Arabia

8.73

63.7

153.3

89.6

208

23.5

2.7

29.7

55

25.3

97

41

-46

Russia

6.67

39.6

121.6

82.0

44.7

162.3

117.6

61.0

127.4

42.9

34.5

14.1

-20.4

Norway

2.91

34.5

52.9

18.4

32.1

42.5

10.4

52.6

83.0

30.4

Irall

2.55

23.0

46.6

23.6

21.6

33.8

12.2

22.1

45.6

23.5

Venezuela

2.36

21.5

37.7

16.2

9.0

25.1

16.1

14.6

25.1

UAE

2.33

16.6

45.6

29.0

15.2

19.9

4.7

37.5

0.2

8.1

36.1

46.6

b

10.5

8.0

27.5

19.5

10.5

41.9

35.8

-6.1

63.0

25.5

6.6

6.9

0.3

11.1

3.0

32.5

17.1

-15.4

Kuwait

2.20

14.1

39.0

24.9

9.3

9.5

Nigeria

2.19

15.9

45.1

29.2

7.4

24.0

16.6

13.6

24.5

10.9

85.3

42.5

-428

Mexico

1.80

13.4

28.3

14.9

50.6

71.4

20.8

109.4

146.7

37.3

49.7

45.3

-4.4

Algeria

1.68

13.5

36.0

22.5

23.5

54.6

31.1

12.0

19.2

7.2

57.5

37.2

-20.3

Iraq

1.48

10.4

23.4

13.0

0.9

9.6

8.7

7.7

24.1

16.4

-800'

174

-626'

Libya

1.34

10.0

28.3

18.3

14.5

31.9

17.4

7.4

9.3

1.9

31,1

0.1

-31.0

Kazakhstan

1.06

5.0

18.4

13.4

2.6

7,5

4.9

11.6

22.5

10.9

17,6

12.1b

-5,5

Gatar

1.02

4.6

19.1

14.5

1,6

4.5

2.9

4,7

7.5

2.8

47

23.7

-23.3

38,32

286

695

410

254

520

266

392

664

272

NA

NA

NA

Total

Notes: Italics indicate members of OPEC (Organization of Petroleum Exporting Countries). a = 2003. b = 2004. c = Reduction results
mainly from debt relief; Iraqi debt figures are subject to considerable uncertainty. mn bbl = millions of barrels per day; a barrel of oil is 42
gallons. NA = not available. UAE = United Arab Emirates, World oil production in 2004 was 72.48 million barrels per day in 2004, Iranian
data on foreign reserves and imports are for the Iranian calendar year ending in mid March, Figures for 2005 are estimates except that
foreign reserves are actual figures from the latest month available, typically October.
Sources: Exports: Energy Information Administration, "Non-OPEC Fact Sheet," June 2005. Oil expori revenues: Energy Information Administration, "OPEC Revenues Fact Sheet; January 2006; Energy Information Administration, "Major Non-OPEC Countries' Oil Revenues,
January 2006; IMF staff country reports. Foreign reserves: International Monetary Fund, International Financial Statistrcs database,
December 2005. Imports and government debt to GOP: International Monetary Fund staff country reports, CIA World Fadbook, Where
these sources lacked information, national and other sources were consulted.

time needed for adequate planning, implementation and oversight of major public and private
investments.
Table 1 also illustrates that many governments,
including Kuwait, Qatar, Russia, and Saudi Arabia, have used additional oil export revenues to
reduce government debt, thereby improving their
cash flows going forward by lowering future interest payments. In addition, some countries
have also used the additional oil revenue to save
for future generations. Norway, for example, set
aside $31 billion from end-Q3 2004 to end-Q3
2005, equal to about 11 % of GDP in its Government Petroleum Fund (GPF) , Russia has more
than doubled the size of its stabilization fund

4

since its inception in early 2004, which stood at
about $43 billion as of end-2005,
At the same time, strong public pressure to increase wages is proving difficult to resist. In 2005,
a number of countries increased public sector
wages by double-digit amounts, including Saudi
Arabia (15%) and UAE (25% for nationals),
Establishing where oil revenue increases have
been invested overseas is more difficult to determine. A recent study by the Bank for International Settlements (BIS), which examined the
composition of financial assets held by OPEC
countries, concluded that such flows are difficult

PETR0I10l..LARS AND GLOBAL IMBALI\NCfS • OFnCE OF INT[HNATIONAL AFFAIRS OCCI'SSIONAl. PAPER NO, i • FEBRUAHY 2006
to track due to the complexity and integration of
financial markets.' Specifically, the BIS said it was
unable to account for almost 70% of an estimated
$700 billion in OPEC's investable funds generated by the current increase in oil prices (1999
to 2005). This compares to 50% during the last
windfall (1978 to 1982), The BIS study estimates
that of the 30% that the BIS was able to account
for, two-thirds has been deposited in BIS reporting banks (significantly lower than in the previ0us cycle). The remaining third has been used to
purchase U.S. official and private assets and, to a
lesser extent, German assets.
These figures do not capture the full magnitude
of the petrodollar investments, as the BIS report
covers only OPEC members, thus excluding some
major oil-exporting countries, in particular Russia

Real GDP

and Norway. U.S. Treasury International Capital
Reporting System data to end-September 2005
indicate that oil exporting countries made net
purchases of $158 billion of long-term U.S. securities since January 2003 and had net acquisitions
of $113 billion of short-term U.S. securities and
banking liabilities. More funds may have been
placed in U.S. assets indirectly through foreign
intermediaries (e.g., in Europe or Asia). Anecdotal evidence and historical experience suggest that
oil producer investments are also going into construction loans, regional stock markets, private
equity funds, and possibly hedge funds located
outside the United States, which are difficult to
track.
Overall, the macroeconomic situation in most oil
exporting countries looks positive assuming oil

Growth of money
supply {Ufo)

growth (C!o)

Ch,mge in slock market
index (Ufo)

Inflation ilk)

2003

2004

2005

2003

2004

2005

2003

2004

2005

2003

2004

2005

7.7

5.2

6.0

10.2

18.2

12.3

06

0.3

1.0

76.2

84.9

104.1

Saudi Arabia
Russia

7.3

7.2

6.4

45.6

30.5

39.6

13.7

10.9

12.8

58.0

8.3

83.3

Norway

4.4

4.5

4.2

4.8

10.5

16,5

2.5

0.4

1.4

41.2

31.2

35.5

Iran

6.7

5.6

5.7

18.9

14.9

11.8

15.6

15.6

18.5

115.8

24.4

-24.3

Venezuela

-7.7

17.9

7.8

73.7

46.6

50.5

31.1

21.7

16.6

177.0

34.9

-31.9

UAE

11.3

8.5

5.6

23,8

38.7

45,0

2.1

4.6

6.0

45.4

172.3

142.1

Kuwait

9.7

7.2

3.2

26.4

21.6

24.3

1.0

1.8

1.8

101.7

33.8

78.2

Nigeria

10.7

6.0

3.9

29.6

8.6

31.4

14.0

15.0

15.9

69.7

13.1

2.7

Mexico

1.4

4.4

3.0

13.8

8.4

12.1

4.5

4.7

4.3

43.6

46,9

37.8

Algeria

6.9

5.2

4.8

14.6

33.2

39.9

2.6

3.6

3.5

NA

NA

NA

10.8

46.9

31.7

32.8

NA

NA

-29.7

-33.9

46.5

3.7

90.2

65.6

Libya

1.9

4.5

3.8

6.3

21.7

22,6

-2.1

-1.0

1.8

NA

NA

NA

Kazakhstan

9.3

9.4

8.8

25.4

57.7

36.7

6.4

6.9

7.4

0.2

49.9

220.6

Qatar

8.6

9.3

5.5

79.3

29.4

43.7

2,3

6.8

3.0

69.8

64.5

70.2

Iraq

Notes: NA = not available. Change in stock market index is in local currency terms. Algeria's stock exchange is excluded as too small
to be informative. Figures for 2005 are estimates for real GDP growth and inflation, full-year data for stock market index, and 12-month
change for latest available month for growth of money supply.
Sources: Rea.! GDP growth and inflation: International Monetary Fund, World Economic Outlook printed volume and database, September 2005. Growth of money supply: International Monetary Fund, International Financial Statistics database, December 2005 'stock market indexes: Bloomberg and Web site of Federation of Euro-Asian Stock Exchanges. Where these sources lacked Information. national
and other sources were consulted.

4 McGuire, P and

..

N Tarashev (2005), "The International Banking Market", BIS Quarterly Review, December, pp 15-30 .

''''''"~'''''

.

,

~.

5

PETR0I10l..LARS AND GLOBAL IMBALI\NCfS • OFnCE OF INT[HNATIONAL AFFAIRS OCCI'SSIONAl. PAPER NO, i • FEBRUAHY 2006
prices remain firm, but it will remain important
to use the oil windfall wisely. As evidenced by
Table 2, many stock markets have done well in
the last few years on the back of higher oil prices,
improved fundamentals, and some petrodollars
are staying closer to home. Despite high money
growth and strong real GDP growth, inflation has
also remained under control in most cases.
While inflation remains broadly contained in
oil-exporting countries with pegged exchange
rates, flexible exchange regimes would allow better control over domestic monetary conditions.
Flexible exchange regimes would also permit the
domestic economy to respond more rapidly and
efficiently to changes in external financial condi-

Advanced economies

2002

2005

-475

-759

Euro area

49

24

Germany

46

Japan
Other

United States

~

how quickly adjustments in demand and supply
respond to price changes, and perceptions about
the durability of the price change. Price spikes, for
instance, probably have relatively small, in some
cases negligible, effects on global imbalances. In
this case however, the price increase has been
sustained, and the impact on global imbalances
has been significant. For example, the u.s. oil
import bill rose from $104 billion in 2002 to $252
billion in 2005 and the current account surplus of
Saudi Arabia increased from 6% of GDP to over
30% of GDP over the same period. Table 3 below
shows the 3-year change in the estimated external positions of major regions.
As noted, in many oil-exporting countries import

Developing economies

2002

2005

~

-284

Middle East

30

218

188

-25

China

35

116

81

121

75

CIS (Russia, etc.)

32

105

73

113

153

40

Latin America

-16

22

38

87

131

44

Africa

-8

13

21

37

-6

-43

-25

-56

-31

Emerging Asia exd. China
Central and Eastern Europe
Source: Internatonal Monetary Fund, World Economic Outlook, September 2005, pp. 242, 245, 257-9.

tions. For example, an appreciating currency under a flexible exchange rate would increase the
real income of the residents of a country, by reducing the costs to them of both consumer and
capital goods.

Because of the prominence of energy in economic production processes, and the uneven global
distribution of oil resources, a rise in the price
of oil implies a substantial global redistribution
of wealth and, hence, purchasing power. How
changes in oil prices affect global imbalances
depends in part on the time period considered,

6

growth is lagging export growth because some
oil exporters have chosen to increase saving and
pay down debt and some face capacity limits that
constrain import demand. As capital investment
projects get underway and import growth and remittance flows accelerate, particularly for countries that rely on expatriate labor, some of these
current account surpluses will fall. As noted in
figure 2, this reflects past experience (e.g. Saudi
Arabia) when spikes in oil prices were immediately followed by large surpluses that dissipated
as import spending and remittance flows rose.
However, this process of adjustment will not address the impediments that existed before the
recent oil price increase, especially those factors
contributing to the more persistent elements of
global imbalances.

Figure 2: Saudi Arabia's current account balance versus real price of West Texas Intermediate Crude Oil
60%

100

50%

90

80

40%

70
30%

.-----

60
1:1.

"Q

0\1111'1

o

o

20%

N

I I(

U

,

50

i=

40

iii
GI
a:

3:

10%

0%
~f;)

30

"OJ
·10%
20

·20%

10

-30% L-----------------------------------------------------------~O

decline in oil revenues, to prudently accumulate current revenues, and spread future
expenditures evenly over time.
To the extent that oil exporters'revenues accumulate, global imbalances will be higher than otherwise and oil exporters will need to be part of
the global adjustment process, just as emerging
Asia, the United States, Japan and Europe need
to playa role. The appropriate response for oil
exporters will depend on each country's specific
circumstances and prospects for future market
conditions.
• Some lower income oil exporters can be expected to absorb all or most of their higher
oil revenues through increased expenditure
on imports.
• It is reasonable for countries such as Norway,
Russia, and Oman, which anticipate a future

• For large oil producers with limited nearterm absorptive capacity, it is sensible to increase saving and to improve their debt positions against the possibility of future lower
oil prices. If oil prices remain elevated or rise,
however, then policymakers in oil-exporting
countries can be expected to increase spending. Ideally such spending would be concentrated in investments with high social rates
of return in order to strengthen the economy, raise standards of living, and assist with
global adjustment of external imbalances.
• If oil prices remain elevated, large oil exporters should consider the role that the choice
of foreign exchange regime can play in the
adjustment process.

7

Page 1 of2

PRESS ROOM

10 VIew

or print tne

f-'UJ- content on tnlS page, C10WnloaC1 the tree

8C10/Jfl~I4r;rOb<Wf)15eadfJ[(,,),

March 6, 2006
JS-4093

Treasury Announces Auction of Cash Management Bill
The Treasury Department today announced the auction of a cash management bill
(CMB) that will mature on March 14, Treasury is also likely to auction a smaller,
one-day CMB that will settle on March 14 and mature on March 15. These actions
allow us to simultaneously remain below the statutory debt limit and meet our
projected mid-March cash needs.
Today the Department suspended new investments of the Civil Service Retirement
and Disability Fund (CSRDF) and redeemed a portion of CSRDF's existing
investments, as authorized by law. Beneficiaries of the CSRDF will be fully
protected and will suffer no adverse consequences. The CSRDF statute requires
Treasury to restore all due interest and principal to the CSRDF as soon as this can
be done without exceeding the statutory debt limit.
These actions will allow the Department to continue to finance government
operations and to auction and settle the reopening of the 10-year note announced
today according to schedule. Based on current projections, Treasury expects that
the additional borrowing capacity afforded by these measures will be exhausted by
mid-March and therefore urges the Congress to act immediately to increase the
statutory debt limit.
-30-

The letter, attached below, went to:
Ted Stevens, President Pro Tempore, Senate
Harry Reid, Minority Leader, Senate
Bill Frist, Majority Leader, Senate
Susan Collins, Chairman, Homeland Security and Government Affairs Committee,
Senate
Joe Lieberman, Ranking Member, Homeland Security and Government Affairs
Committee, Senate
Judd Gregg, Chairman, Budget Committee, Senate
Kent Conrad, Ranking Member, Budget Committee, Senate
Charles Grassley, Chairman, Finance Committee, Senate
Max Baucus, Ranking Member, Finance Committee, Senate
John Boehner, Majority Leader, House
Nancy Pelosi, Minority Leader, House
Dennis Hastert, Speaker, House
Tom Davis, Chairman, Governmental Reform Committee, House
Henry Waxman, Ranking Member, Governmental Reform Committee, House
Jim Nussle, Chairman, Budget Committee, House
John Spratt, Ranking Member, Budget Committee, House
William Thomas, Chairman, Ways and Means, House
Charles Rangel, Ranking Member, Ways and Means, House

REPORTS

http://treas.gov/press/rdcases/js4093.htm

3/31/2006

Page 2 0[2
• Letter

http://treas.gov/press!rclcll3e3/j s4093.htm

3/3112006

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

March 6, 2006

The Honorable J. Dennis Hastert
Speaker of the House of Representatives
Washington, DC 20515
Dear Mr. Speaker:
I am notifying you, as required under 5 U.S.C. § 8348(1)(2), that it is my determination
that, by reason of the statutory debt limit; I will be unable to invest fully the portion of the Civil
Service Retirement and Disability Fund (CSRDF) not immediately required to pay beneficiaries;
For purposes ofthe CSRDF statute, I have determined that a "debt issuance suspension period"
will begin on March 6, 2006 and last until May 26, 2006. During this "debt issuance suspension
period," the Treasury Department will suspend additional investments of amounts credited to the
CSRDF and redeem a portion of the investments held by the CSRDF, as authorized by law.
Beneficiaries will be fully protected and will suffer no adverse consequences. The CSRDF
statute requires that the Treasury restore all due interest and principal to the CSRDF as soon as
this can be done without exceeding the public debt limit.
It is important to understand that the "debt issuance suspension period" noted above
provides only a few days of additional borrowing capacity, which we expect will be exhausted
by mid-March. Wnen I wrote to Congress on December 29,2005 concerning the debt limit, I
stated that it was imperative that Congress take action to increase the debt limit as soon as
possible. I must advise you that the Treasury has now taken all prudent and legal actions to
avoid reaching the statutory debt limit. I, therefore, strongly urge Congress to pass a debt limit
increase immediately. I know that you share the President's and my commitment to maintaining
the full faith and credit of the U.S. Government.
Sincerely,

John W. Snow

Page 1 0[6

March 6, 2006
JS-4094

Remarks by
Under Secretary of the Treasury for Domestic Finance
Randal K. Quarles
to the National Association of State Treasurers
It's a pleasure to be here this morning, and I want to thank you for giving me the
opportunity to continue the long standing tradition of Treasury officials discussing
key financial and economic policy issues before this distinguished group.
As we at the Treasury consider some of the specific economic and financial
challenges the country needs to address, we are certainly heartened that we do so
against the backdrop of one of the strongest economies in many years.
Macroeconomic conditions in the United States have been quite favorable - GOP
growth at 3.5 percent last year and projected to run at roughly that level for the
current year; strong and increasing job creation, which should inevitably have
attendant income effects; strong and durable productivity growth; robust tax
receipts; and household wealth at an all-time high.
Moreover, it is clear that financial markets have a great deal of confidence about
the future. The Dow was above 11,000 for the second week in a row. Treasury
yields remain low and stable and credit spreads are near historical tights.

In spite of all these encouraging economic statistics, there are some issues of great
importance to America's workforce that need to be addressed. I would like to talk
about one of those issues today, the current state of the country's privately
sponsored defined benefit pension system.
Although the balance of my remarks today focus specifically on defined benefit
plans sponsored by private sector companies, state governments face some of the
same pension challenges that must be met by their sponsor counterparts in the
private sector. Recent declines in funding ratios have increased the demands for
contributions that public plans place on many state government sponsors.
According to data in a September 2005 survey of public retirement systems
performed by the National Association of State Retirement Administrators,
aggregate funding in 127 large public plans, measured using actuarially smoothed
assets and liabilities, fell from 101 percent to 88 percent between 2001 and 2004.
That decline represents a fall in the net position of these plans from a $15 billion
surplus to a $293 billion deficit.
Like their private sponsor counterparts, state governments are also faced with long
term demographic challenges such as the rising longevity of annuitants and the
declining ratio of active to retired plan participants. Of course one crucial difference
between publicly and privately sponsored plans, at least from Treasury's viewpoint,
is that state plans are not covered by the federal pension insurance program.
I think that the complex issues surrounding the funding and administration of our
pension and pension guarantee systems will be among the most challenging and
consequential that our SOCiety will face over the next several years. The
Administration has made pension reform one of its key legislative priorities. The
federal government has an interest in defined benefit pension plans for four key
reasons.
First, the government has an interest in ensuring simple fairness. The
administration wants to make sure that pension plan sponsors deal fairly with their
employees by meeting their pension obligations. It's an elementary principle, really:
a promise made ought to be a promise kept.

http://www.treas.gov!press!releaseS/js-4094.htm

3/31/2006

Page 2 of6
Second, pension benefits are guaranteed by a federal government corporation,
known as the Pension Benefit Guaranty Corporation or the PBGC. When a
company with underfunded pension plans reorganizes, liquidates, or demonstrates
according to strictly defined statutory standards that it cannot continue operations
with its pension plans, the PBGC takes over those pension plans' assets and
liabilities and becomes the plans' trustee. Once it takes over a plan, PBGC
assumes the responsibility of making benefit payments to all employees and
retirees who have earned pensions under the plan. Because the PBGC guarantee
is limited to a fixed dollar amount, workers and retirees can often lose retirement
benefits when such pension terminations occur; benefits that they have earned
through long years of service to the sponsoring company.
Third, when the PBGC takes over a pension plan it is often one of the largest
unsecured creditors. As a sponsoring company works its way through the
bankruptcy reorganization, PBGC can end up with a significant equity interest in the
new company. The federal government being a large equity holder in any private
company - however that stake may have arisen - is inconsistent with the
fundamental principles of a market economy. The continued operation of private
sector companies in our economy should not depend on whether the U.S.
government holds or maintains an equity stake in the company, but rather should
be based on financial market participants' willingness to invest in the on-going
business operations of such companies.
Finally, the rules for funding pension plans are defined in federal law and are jointly
enforced by the Department of Labor and the Internal Revenue Service. Pension
plan contributions and investment returns are tax-advantaged, which means that
government has an interest in ensuring that such advantages are not abused.
Status of the Defined Benefit Pension System
I am sure that many you have read in the newspapers that pension plans and the
pension insurance system are in difficult financial straits, Although most companies
do make benefit payments when due and fund their plans responsibly, an
increasing number in recent years have not. Underfunding in pension plans
increased from $164 billion to $450 billion between 2001 and 2005. During that
same five-year period, PBGC has seen its net financial position decline from a $7.7
billion surplus to a $22.8 billion deficit. The increase in PBGC's deficit has come
about primarily because of the failure of a number of very large pension plans
including those of United Airlines, US Airways, LTV Steel, and Bethlehem Steel.
Claims against the single employer guarantee fund from these and other pension
plans that failed over the past five years totaled $34.1 billion.
Some recent high profile pension plan terminations illustrate the magnitude of
problems in the defined benefit pension system.
•

United Airlines: At the time PBGC moved to terminate United's four pension
plans it estimated that there were sufficient assets to cover only 42 percent
of total obligations. Assets were $7.0 billion while liabilities were $17.2
billion. PBGC guarantees will cover $6.9 billion of the $10.2 billion shortfall.
The remaining $3.3 billion represents lost benefits to plan participants,
• U.S. Airways: U.S. Airways' plans that terminated in 2003 and 2005 had
sufficient assets to cover only 37 percent of liabilities. At the time of
termination assets were $2,9 billion while liabilities were $7.9 billion PBGC's
guarantee covered $2.9 billion of the $5.0 billion shortfall. The remaining
$2.1 billion represents benefit losses.
• Bethlehem Steel: Plans terminated in 2002 had assets sufficient to cover
only 45 percent of liabilities. Assets at the time of termination were $3.5
billion and liabilities $7.8 billon. PBGC's guarantee will cover $3.7 billion of
the $4.3 billion funding shortfall. The difference of $600 million will be lost to
partiCipants.
How is it that the pension system finds itself in this situation? While there are a
number of factors, one of the key reasons is that the current funding rules have not
adequately ensured that companies fund their pension plans and keep the
promises they have made to employees.
One of the key deficiencies in the current funding rules is that it is difficult to get an
accurate measure of the degree of pension plan underfunding. A significant reason

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is that current pension funding rules are designed to make contributions even and
as predictable as possible while the plan sponsor funds to a target that represents
its long run benefit payment obligations. Today's funding rules allow pension plan
assets and liabilities to be measured on a smoothed rather than a current basis.
Liabilities are averaged over a four-year period while assets may be averaged for
up to five years. Smoothed measures that delay recognition of asset and liability
value changes make plans appear to be much better funded than they are on a
current basis when asset values are declining and liability values rise. This has
occurred most recently when stock prices and interest rates both fell at the
beginning of the 2001 bear market.
While the idea of making contributions even and predictable may sound appealing,
one consequence of smoothing rules is that pension plans are permitted to remain
seriously underfunded for years at a time. A convenient way to think of pension
underfunding is to consider it a loan from employees to employers. Accrued
pension benefits are part of an employee's compensation for work already
performed. To the extent that employers are permitted to make less than the
contribution required to fully fund their pension promises the plan is essentially
extending credit to the employer - and employers that take such loans from their
pension plans are shifting some of the risk of meeting pension obligations from
themselves to their employees. In the United States, with its pension guaranty
system, a significant portion of that risk is then transferred to the guarantor, the
PBGC. If a pension sponsor encounters financial trouble while underfunded it is
likely to default on its pension loans resulting in lost benefits to participants and
losses to PBGC's guaranty fund.
Another serious measurement problem is that pension liabilities are measured
using a single, long-term interest rate to discount future benefit payments. Under
normal conditions - that is when the yield curve slopes upward - the use of a single
long-term discount rate systematically understates the liabilities of plans with a
large ratio of retirees to active workers. This is especially problematic in the many
plans of older industrial companies that have more retirees than active workers.
In addition to measurement problems, the current funding rules also provide a
mechanism - called credit balances - that while allowing for the greater
predictability of contributions also can lead to chronic underfunding. Credit
balances, an accounting construct that may be unfamiliar to those outside of the
pension community, may be used by pension plans in lieu of required cash
contributions. Credit balances are created when pension sponsors make
contributions that are higher than the minimum required in a given year. Under the
current rules the value of such a balance, once created, increases each year with
an interest credit that is chosen by the plan and represents the expected long-run
return on pension plan assets. The interest credit is applied each year even if the
value of plan assets declines. These balances may be used instead of cash
contributions even in plans that are very seriously underfunded. It should be noted
that credit balances allowed Bethlehem to avoid making any cash contributions to
its plans for three years before its termination. At the time that PBGC took over the
plan, assets equaled only 45 percent of termination liabilities. Likewise US Airways
was not required to make any cash contributions to its pilots' plans for the four
years preceding its termination even though the plan's assets covered only 33
percent of accrued benefits at the time of termination.
Some other problems in the current pension funding rules are that the funding
targets are set at 90 percent of current liability, which is a smoothed measure that is
well below the level of outstanding obligations. Also payments for new benefits can
be amortized for up to 30 years, which provides incentives to increase benefits
today since most of the funding expense only comes due years in the future.
The current funding rules are not the only problem with today's defined benefit
pension system. Some other problems with the current system include:
•

Pension plan financial disclosures to participants are inadequate. The data
supplied to participants is out of date and consists only of smoothed asset
and liability measures. Participants are unable to monitor how well their
plans are funded with this information. For example, the participants of
Bethlehem steel were told the year before the plan terminated that it was 84
percent funded based on smoothed asset and liability measures and the
current law funding target. When the plan terminated the next year,
however, participants were surprised to learn that plan funding would only

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cover about 45 percent of earned benefits.
The pension insurance system creates moral hazard. The existence of
insurance provides the incentive for employees to accept future promises of
pension benefit as a substitute for current wage increases even if it appears
unlikely the sponsoring firm will be able to fund such promises.
• Premium rates are set below the level needed for PBGC to regain solvency.
PBGC's premium structure includes two parts. The first is a flat rate
premium of $19 per plan participant that has not been increased since 1991
even though maximum insurance coverage automatically increases every
year. Between 1991 and 2006, PBGC's maximum guarantee for an
individual who retires at age 65 increased from $27,000 to $47,659. PBGC
also charges a variable premium of $9 per $1,000 of underfunding. This
premium rate has not been updated since 1996.
• All plan sponsors pay the same flat premium rate and the same variable
premiums for underfunding regardless of the risk that they will terminate
underfunded plans. This creates a set of cross subsidies from stronger to
weaker plan sponsors that results in adverse selection in the pension
system. Strong sponsors have an incentive to leave the system to avoid
paying subsidies; weak sponsors have an incentive to remain to receive
those subsidies.
•

It has become apparent to nearly all interested parties that the defined benefit
pension system is not sustainable in its present form and that action is needed to
protect both pension plan participants and the pension guaranty system.
The Administration's Pension Reform Proposal
In order to encourage the continuation of financially sound pension plans, the
Administration unveiled a comprehensive reform proposal in January of 2005. This
proposal, if adopted would change the focus of pension funding rules from
smoothing contributions to ensuring that plans have adequate assets to meet their
accrued obligations. By promoting sound funding the Administration's proposal will
protect employee's benefits and place the pension guaranty system on a firm
financial footing.
The Administration has proposed the following changes to pension rules.
•

•

•

•

•
•

•
•

Assets and liabilities would be measured at current, market values.
Accurate and current measurement is necessary both as a basis for
implementing sound funding rules and for making the disclosure of pension
plan's financial status transparent to employees, retirees, and financial
market participants.
Liabilities would be valued using a yield curve of high quality (AA) corporate
bonds rather than with a single interest rate in order to capture the time
structure of the underlying benefit payments.
Pension funding targets for most plans will be set at 100 percent of accrued
benefits. Sponsors that are financially weak and pose the highest risk of
terminating underfunded plans would fund to a higher target.
Plans would be required to eliminate increases in underfunding within seven
years. This amortization period will apply to new benefits, as well as to other
causes of underfunding such as investment losses. A short amortization
period will help ensure that plans do not remain underfunded for extended
periods of time.
The use of credit balances would be eliminated. Plans would be required to
make cash contributions to satisfy their funding obligations in the future.
Plans that are underfunded would be restricted in their ability to increase
benefits. This will prevent plans that are already underfunded from making
their situations worse.
Plans will be required to provide new and meaningful financial disclosures to
plan participants.
PBGC's per capita premiums will be increased and rise in the future at the
same rate as PBGC's maximum coverage levels. Risk based premiums that
will reduce the cross subsidies in the current premium system will be
introduced.

Congress has responded to the Administration's call for reform by undertaking
important pension legislative initiatives. The Senate, under the leadership of
Chairman Charles Grassley of the Finance Committee and Chairman Enzi of the
Health, Education, Labor and Pensions Committee passed the Pension Security

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and Transparency Act of 2005 on November 16. The House passed the Pension
Protection Act of 2005 on December 15 under the leadership of House Majority
Leader John Boehner who at the time was Chairman of the Education and
Workforce Committee. The Senate has recently named conferees with the House
soon expected to follow suit. The goal remains completion of a final reform bill by as
early as mid-April.
In addition the Deficit Reduction Act of 2005, signed into law by President Bush on
February 8, raises PBGC flat rate premiums from $19 to $30 per participant and
indexes future rates to the growth of wages, as measured by the Social Security
Administration. The premium rates in the Deficit Reduction Act, which were passed
as part of the budget reconciliation process, will be superseded by rates agreed
upon in a final reform bill.
Although the House and Senate bills are both modeled after the Administration
proposal, both in their current form might actually result in a weakening of pension
plan funding and the pension guaranty system. The fundamental goal of any
pension reform proposal should be to reduce claims on the pension insurance
system, reduce benefit losses to plan participants, and increase plan funding, all
with the goal of ensuring that pension promises are kept. The Administration does
not consider any bill that fails to improve upon current law as an acceptable
legislative outcome. Likewise, the Administration opposes temporary fixes -such as
extending the corporate bond rate as the discount factor - that do not
comprehensively address the problems in the current system. However, we believe
that we can work with the Congress to strengthen current legislation in conference.
Together the Congress and the Administration can produce a bill that will improve
protection for the pension benefits of employees and retirees.
The deteriorating health of private DB pensions system has been widely reported,
it's only recently that the situation in the public DB pension systems has garnered
attention. State and local governments currently employ approximately 14 million
people with an additional 6 million retirees. It is estimated that these workers and
retirees are owed in excess of $2 trillion by different state and local government
entities. Some private sector estimates now put the funding gap of state and local
government defined benefit pension plans at $700 billion.
Against this backdrop of a worsening funding picture, the Federal Reserve's Flow of
Funds data indicates that over the last five years state and local government
retirement funds' holdings of fixed income instruments have continued to decline
while equity holdings grew. This asset allocation trend is troubling and makes little
sense given the deterioration in the funded status of public plans. State and local
government pension sponsors, just like private pension plan sponsors, should not
specifically construct asset allocations in the hope of solving very large and real
funding problems or to minimize the need for pension contributions.
Given the critical importance of these funds to plan beneficiaries, the potential
negative impact of unfunded liabilities on state and local government credit ratings
and the potential significant burden on future taxpayers, I believe a more
conservative approach to asset allocation is merited.
As my remarks would indicate I am skeptical of strategies that rely on increased
equity allocations, growing investment in hedge funds, new allocations to
commodity futures and strategies employing so-called "portable alpha". I would
strongly caution public pension trustees, board members and oversight officials
against asset allocations that rely on "the market" to solve the very real funding
problems facing many public sector plans.
This leads me to consider what assets are appropriate for a state and local
government pension funds. Given that the growth in benefits payable during the
benefit accumulation phase is generally linked to wage growth and that benefits
post-retirement generally include a cost-of-living adjustment, inflation indexed
securities are arguably a natural fit for state and local government pension funds.
However, of the top 10 state pension plans, their holdings of Treasury Inflation
Protected Securities, or TIPS, are on average less than 1 percent of assets. The
argument against TIPS used to be the TIPS market was too small. But with the
value of the TIPS market now at about $350 billion and growing, that argument
rings hollow. In addition to the asset-liability matching benefits from holding TIPS,

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many investment consultants and academics have reported in detail their fairly
unique portfolio diversification benefits. TIPS returns are obviously positively
correlated with inflation - a property that is not true for many financial market
assets.
Finally, for plans with weak finances, the appropriate asset allocation is not a high
risk one, but rather one that seeks to ensure that the underfunded status of the plan
will not weaken further. In sum, I believe that TIPS and long-dated nominal
Treasuries should playa far more prominent role in public pension asset allocations
than they do at present.
Thank you, and I'll now be happy to take any questions you might have.

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Page 1 of2

10 view or pnnt me fJUI- content on thiS page, aownloaa me tree 6qQ/J.eli9 AcrQI)at<~ HeaQ~"RJ

March 6, 2006
JS-4095
Department of the Treasury
First Periodic Update of the
2005-2006 Priority Guidance Plan
Joint Statement by:
Eric Solomon
Deputy Assistant Secretary (Regulatory Affairs)
U.S. Department of the Treasury
Mark W. Everson
Commissioner
Internal Revenue Service
Donald L. Korb
Chief Counsel
Internal Revenue Service
On August 8, 2005, we released the 2005-2006 Priority Guidance Plan listing 254
projects for the plan year beginning July 1, 2005 and ending June 30, 2006, In our
Joint Statement that accompanied the release of the 2005-2006 Priority Guidance
Plan, we emphasized our commitment to increased and more timely published
guidance. We indicated that we would update the plan periodically to reflect
additional guidance that we intend to publish during the plan year. Updating the
plan also provides flexibility to respond to developments arising during the year.
The attached update sets forth the guidance on the original 2005-2006 Priority
Guidance Plan that we have published. Although the update may indicate that a
particular item on the plan has been completed, it is possible that one or more
additional projects may be completed in the plan year relating to that item. The
update also includes 58 items of additional guidance, some of which have already
been published. For example, the update reflects the publication of substantial
guidance providing relief relating to last year's hurricanes, the announcement of a
global tax shelter settlement initiative and an announcement describing the
Compliance Assurance Process pilot program. Similarly, the update reflects the
publication of guidance relating to topics that were previously highlighted such as
guidance relating to Roth retirement plans, the interaction of the grace period for
health flexible spending arrangements and eligibility for contributing to a health
savings account, and proposed revisions to Circular 230 relating to practice before
the IRS. The update also includes the addition of guidance projects implementing
the Energy Policy Act of 2005.
We continue to invite the public to provide us with comments and suggestions as
we identify and write guidance throughout the plan year.
The updated 2005-2006 Priority Guidance Plan will be republished on the IRS
website on the Internet (www.irs.gov) under Tax Professionals, IRS Resources,
Administrative Information and Resources, 2005-2006 Priority Guidance Plan.
Copies can also be obtained by calling Treasury's Office of Public Affairs at (202)
622-2960.

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OFFICE OF TAX POLICY
AND
INTERNAL REVENUE SERVICE
2005-2006 PRIORITY GUIDANCE PLAN
MARCH 6, 2006 UPDATE
CONSOLIDATED RETURNS

Original PGP Projects:
1.

Regulations 1 under section 1502 regarding rate or discount subsidy payments.
Proposed regulations were published on August 13, 2004.

2.

Regulations under section 1502 regarding liquidations under section 332 into
multiple members. Proposed regulations were published on February 22,2004.

3.

Regulations revising section 1.1502-13(g) regarding transactions involving
obligations of consolidated group members.

4.

Regulations revising sections 1.1502-35T and 1.337(d)-2 regarding treatment of
member stock. Potential revisions to section 1.337(d)-2 were discussed in the
Preamble to that regulation, which was published on March 3,2005. Temporary
regulation section 1.1502-35T was published on March 11, 2003, and amended on
March 17,2004.

CORPORATIONS AND THEIR SHAREHOLDERS

Original PGP Projects:
1.

Guidance regarding dividend-equivalent redemptions of corporate stock.
Proposed regulations were published on October 18, 2002.

2.

Regulations enabling elections for certain transactions under section 336(e).

3.

Final regulations regarding taxable asset acquisitions and dispositions of insurance
companies. Proposed regulations were published on March 8, 2002.

As used in this document, unless otherwise indicated, the term "regulations" refers to
proposed regulations, temporary regulations or final regulations.
I

2

4.

Final regulations revising section 1.338(h)(10)-1T(c)(2) regarding the effect of
elections in certain multi-step transactions. Temporary regulations will sunset in
July 2006.

5.

Regulations revising section 1.355-3 regarding the active trade or business
requirement.

6.

Regulations regarding predecessors and successors under section 355(e).
Proposed regulations were published on November 22, 2004.

7.

Final regulations under section 358 regarding allocation of basis. Proposed
regulations were published on May 3, 2004.
• PUBLISHED 1/26/2006 in FR as TO 9244

8.

Guidance under section 362( e) regarding the importation or duplication of losses.
• PUBLISHED 10/11/2005 in IRB 2005-41 as NOTICE 2005-70

9.

Regulations regarding transactions involving the transfer or receipt of no net equity
value. Proposed regulations were published on March 10, 2005.

10. Regulations revising section 1.368-2(k) regarding transfers of assets after putative
reorganizations. Proposed regulations were published on August 18, 2004.
11. Regulations revising section 1.368-2T(b) regarding statutory mergers. Temporary
regulations will sunset in January 2006; proposed regulations were published on
January 5, 2005.
• PUBLISHED 1/26/2006 in FR as TO 9242
• PUBLISHED 1/26/2006 in FR as TO 9243
12. Revision of Rev. Proc. 81-70 providing guidelines for estimating stock basis in
reorganizations under section 368(a)(1)(B). Comments regarding these guidelines
were requested in Notice 2004-44.
13. Regulations under section 368(a)(1)(F). Proposed regulations were published on
August 12, 2004.
14. Guidance under section 382, including regulations regarding built-in items under
section 382(h)(6) and regulations revising section 1.382-10T regarding the
treatment of certain distributions from qualified trusts. Built-in items under section
382(h)(6) were previously addressed in Notice 2003-65. Temporary regulations
regarding distributions from qualified trusts will sunset in June 2006.
15. Final regulations revising sections 1.1374-8T and -10T. Temporary regulations
were published on December 21,2004.
• PUBLISHED 12/21/2005 in FR as TO 9236

3

Additional PGP Projects:
16. Revenue procedure regarding a new pilot ruling program relating to corporate
reorganizations.
• PUBLISHED 10/11/2005 in IRB 2005-41 as REV. PROC. 2005-68
17. Guidance under section 355( e) regarding whether a distribution of stock in a
controlled corporation subsequent to an acquisition of stock in the distributing
corporation is pursuant to a plan of reorganization.
• PUBLISHED 10/11/2005 in IRB 2005-41 as REV. RUL. 2005-65
18. Revocation of Rev. Rul. 74-503 regarding the transfer of treasury stock to a
corporation controlled by the transferor.
• PUBLISHED 01/09/2006 in IRB 2006-2 as REV. RUL. 2006-2
(released 12/20/2005)
EMPLOYEE BENEFITS

A.

Retirement Benefits

Original PGP Projects:
1.

Guidance on the tax treatment of distributions from Roth retirement plans.
• PUBLISHED 1/26/2006 in FR as NPRM REG-146459-05

2.

Final regulations on compliance with restrictions on in-service distributions from
pension plans and related topics in connection with phased retirement
arrangements. Proposed regulations were published on November 10, 2004.

3.

Final regulations on transmission of notices to participants through electronic
means with respect to distributions from qualified retirement plans. Proposed
regulations were published on July 14, 2005.

4.

Revenue procedure amending and restating the employee plans compliance
resolution system (EPCRS).

5.

Guidance on benefits not permitted in a defined benefit plan.

6.

Guidance on abusive arrangements under section 401 (a)(4).

7.

Revenue procedure implementing the staggered remedial amendment procedures
for determination letters.
• PUBLISHED 9/12/2005 in IRB 2005-37 as REV. PROC. 2005-66
(released 8/26/2005)

4

8.

Final regulations setting forth the definition and requirements for a designated Roth
contribution to a section 401 (k) plan. Proposed regulations were published on
March 2, 2005.
• PUBLISHED 1/03/2006 in FR as TO 9237

9.

Final regulations under section 402 on the valuation of life insurance distributed
from qualified plans.
• PUBLISHED 8/29/2005 in FR as TO 9223

10. Comprehensive final regulations under section 403(b) regarding tax-favored
annuities purchased by section 501 (c)(3) organizations or public schools.
Proposed regulations were published on November 16, 2004.
11. Guidance on the deduction of foreign-sourced dividends by a U.S. subsidiary
under section 404(k).
12. Guidance under section 408A on annuity valuation issues in conversions from a
traditional IRA to a Roth IRA.
• PUBLISHED 1/17/2006 in IRB 2006-3 as REV. PROC. 2006-13
(released 12/27/2005)
13. Guidance on consistency between tax benefit to employer and allocations to
participants in employee stock ownership plans (ESOPs).
14. Final regulations under section 409(p) with respect to synthetic equity and
additional issues relating to ESOPs maintained by S corporations. Temporary
regulations were published on December 17, 2004.
15. Final regulations under section 41 O(b) on the exclusion of employees of section
501 (c)(3) organizations. Proposed regulations were published on March 16,2004.
16. Guidance under section 411 regarding accrual and vesting of benefits provided
pursuant to qualified retirement plans.
17. Regulations under section 411 (d)(6) relating to the elimination of optional forms of
benefit in defined benefit plans and additional issues.
18. Proposed regulations updating the mortality tables used to determine current
liability under section 412(1).
• PUBLISHED 12/2/2005 in FR as NPRM REG-124988-05
19. Guidance under section 414(h)( 1) as to what constitutes a designation by a
governmental unit.

5
20. Update of the regulations on the definition of "highly compensated employee"
under section 414(q) to reflect statutory changes since the existing regulations
were issued.
21. Comprehensive final regulations regarding the limitations on benefits and
contributions under section 415. Proposed regulations were published on May 31,
2005.
22. Final regulations under section 417 on the relative value of optional forms of
benefit. Proposed regulations were published on January 28, 2005.
23. Guidance under section 420 on the impact of the Medicare prescription drug
subsidy on the minimum cost requirement.
• PUBLISHED 9/12/2005 in IRB 2005-37 as REV. RUL. 2005-60
(released 8/25/2005)
24. Guidance on determining the "amount involved" for purposes of calculating the
applicable excise tax under section 4975 for failure to remit employee
contributions in a timely manner.
Additional PGP Projects:
25. Notice on pension funding relief for Hurricane Katrina .
• PUBLISHED 9/26/2005 in IRB 2005-39 as NOTICE 2005-60
(released 9/2/2005)
26.

Notice extending pension funding relief for Hurricane Katrina.
• PUBLISHED 11/14/2005 in IRB 2005-46 as NOTICE 2005-84
(released 10/28/2005)

27. Announcement on hardship distributions and loans from retirement plans as a
result of Hurricane Katrina.
• PUBLISHED 10/3/2005 in IRB 2005-40 as ANN. 2005-70
(released 9/15/2005)
28.

Notice providing guidance on sections 101 and 103 of the Katrina Emergency Tax
Relief Act of 2005.
• PUBLISHED 12/19/2005 in IRB 2005-51 as NOTICE 2005-92
(released 11/30/2005)

29.

Notice on the section 415 grandfather rule for preexisting benefits in defined
benefits plans.
• PUBLISHED 12/12/2005 in IRB 2005-50 as NOTICE 2005-87
(released 11/21/2005)

30.

Notice regarding transitional relief relating to plan amendment timing.

6

• PUBLISHED 12/19/2005 in IRB 2005-51 as NOTICE 2005-95
(released 12/2/2005)
31. Notice containing the 2005 cumulative list of changes in plan qualification
requirements.
• PUBLISHED 12/27/2005 in IRB 2005-52 as NOTICE 2005-101
(released 12/12/2005)
32. Revenue procedure extending the date by which a plan must be in operational
compliance with a reforming amendment to be eligible for certain treatment
described in section 3.02 of Rev. Proc. 2005-23.
• PUBLISHED 12/12/2005 in IRS 2005-50 as REV. PROC. 2005-76
(released 11/23/2005)
33. Proposed regulations on the requirements for designated Roth contributions under
a section 403(b) plan.
• PUBLISHED 1/26/2006 in FR as NPRM REG-146459-05

B.

Executive Compensation, Health Care and Other Benefits, and Employment
Taxes

Original PGP Projects:
1.

Guidance on the tax treatment of beneficiaries of nonexempt trusts described in
section 402(b)(4).

2.

Modification of the section 1.61-21(g) consistency rule in connection with section
274(e)(2) guidance.

3.

Guidance on accountable plans and per diem payments.

4.

Revenue ruling on post-grant restriction on stock.

5.

Guidance on the revocation of section 83(b) elections.

6.

Additional guidance on debit cards in employer-provided medical expense
reimbursements.

7.

Guidance on the impact of providing a 2 % month grace period for dependent care
assistance offered under a cafeteria plan.
• PUBLISHED 9/26/2005 in IRB 2005-39 as NOTICE 2005-61
(released 9/7/2005)

8.

Proposed regulations on cafeteria plans under section 125 updating regulations for
statutory changes and providing additional guidance.

7

9.

Guidance under section 132 on debit cards and qualified transportation fringes.

10. Guidance on the impact of providing a 2 % month grace period for flexible
spending accounts on health savings accounts (HSAs).
• PUBLISHED 12/12/2005 in IRB 2005-50 as NOTICE 2005-86
(released 11/23/2005)
11. Guidance on the application of the "In which or with which ends" rule in section
1.404(a)-12(b).
12. Proposed regulations addressing numerous issues with respect to the taxation of
nonqualified deferred compensation under section 409A as added by the American
Jobs Creation Act of 2004. Interim guidance was issued as Notice 2005-1.
• PUBLISHED 10/4/2005 in FR as NPRM REG-158080-04
13. Guidance under section 419 on deductions for contributions to a welfare benefit
fund.
14. Guidance on the application of SECA to Conservation Reserve Program
payments.
15. Guidance on tips paid to restaurant employees.
16. Final regulations under section 3121 regarding the definition of a salary reduction
agreement. Temporary regulations were published on November 16, 2004.
17. Update of the regulations on withholding for domestic workers to reflect statutory
changes since the existing regulations were issued.
• PUBLISHED 8/26/2005 in FR as NPRM REG-104143-05
18. Final regulations under section 3121 (a)(2)(A) with respect to payments made on
account of sickness or accident disability under a workers' compensation law.
Proposed regulations were published on March 11, 2005 .
• PUBLISHED 12/15/2005 in FR as TO 9233
19. Final regulations on flat rate supplemental wage withholding. Proposed
regulations were published on January 5, 2005.
20.

Final regulations under section 3402(f) relating to Form W-4. Temporary
regulations were published on April 14, 2005.

21.

Regulations under section 4980G on employer comparable contributions to HSAs.

8
Additional PGP Projects:
22. Notice on suspension of employer and payer reporting and wage withholding
requirements with respect to deferrals of compensation under section 409A for
calendar year 2005.
• PUBLISHED 12/27/2005 in IRB 2005-52 as NOTICE 2005-94
(released 12/8/2005)
23. Notice on HSAs and state mandates.
• PUBLISHED 12/5/2005 in IRB 2005-49 as NOTICE 2005-83
(released 11/17/2005)
24. Notice regarding withholding on wages of nonresident alien employees performing
services within the United States.
• PUBLISHED 11/14/2005 in IRB 2005-46 as NOTICE 2005-76
(released 10/31/2005)
25. Guidance under section 409A regarding technical correction in the Gulf
Opportunity Zone Act of 2005.
EXCISE TAXES

Original PGP Projects:
1.

Modification of Notice 2005-4 regarding the credits and payments related to
biodiesel under sections 40A, 6426, and 6427.
• PUBLISHED 8/29/2005 in IRB 2005-35 as NOTICE 2005-62
(released 8/1/2005)

2.

Guidance under section 4051 regarding heavy trucks and trailers to update current
regulations and to reflect recent statutory changes.

3.

Final regulations under section 4081 regarding the entry into the United States of
taxable fuel. Temporary regulations were published on July 30, 2004.

4.

Proposed regulations on excise tax provisions added or affected by the American
Jobs Creation Act of 2004, including issues discussed in Notice 2005-4 related to
kerosene used in aircraft and alcohol and biodiesel fuels.

5.

Final regulations under section 4082 regarding diesel fuel and kerosene that is
dyed by mechanical injection. Temporary regulations were published on April 26,
2005.

6.

Update of Rev. Rul. 74-346 under section 4221 (e) regarding reciprocal privileges
related to fuel used in aircraft.

9

7.

Guidance under section 4252 regarding nondistance-sensitive toll telephone
services. Proposed regulations were published on April 1, 2003.

8.

Guidance under section 4261 regarding airline tickets that are sold to passengers
through intermediaries.

9.

Guidance under section 4291 regarding the duties of the collector of collected
excise taxes when the collector is unable to collect the tax. Temporary regulations
were published on August 10, 2004.
• PUBLISHED 8/25/2005 in FR as TO 9221

EXEMPT ORGANIZATIONS

Original PGP Projects:
1.

Guidance on donee reporting for car donations.
• PUBLISHED 1/23/2006 in IRB 2006-4 as NOTICE 2006-1
(released 1/6/2005)

2.

Guidance on downpayment assistance organizations.

3.

Regulations under sections 501(c)(3) and 4958 on revocation standards.

4.

Guidance under section 501 (c)(15) on the calculation of gross receipts.

5.

Guidance under section 527(1) with respect to the authority to waive taxes and
amounts imposed on political organizations for failures to comply with notice and
reporting requirements.

6.

Regulations under section 529 regarding qualified tuition programs.

FINANCIAL INSTITUTIONS AND PRODUCTS

Original PGP Projects:
1.

Guidance for RICs and REITs concerning the application of section 1(h) to capital
gain dividends.

2.

Guidance on the treatment of fees incurred in credit card transactions.

3.

Final regulations under section 263(g) on the capitalization of interest and carrying
charges properly allocable to straddles. Proposed regulations were published on
January 18, 2001.

4.

Guidance regarding the application of section 265(a)(2) to traders and the
application of section 265(a)(2) and (b) to affiliated entities.

10

5.

Final regulations on notional principal contracts (NPC) relating to the inclusion in
income or deduction of a contingent nonperiodic payment and guidance relating to
the character of payments made pursuant to an NPC. Proposed regulations were
published on February 26, 2004.

6.

Guidance addressing the accrual of interest on nonperforming loans.

7.

Final regulations addressing valuation of certain securities and commodities under
section 475. Proposed regulations were published on May 24, 2005.

8.

Final regulations under section 475(e) and (f) for commodities dealers and
securities or commodities traders regarding the election to use the mark-to-market
method of accounting. Proposed regulations were published on January 28, 1999.

9.

Proposed regulations simplifying the reporting to shareholders of regulated
investment companies with respect to the flow through of the foreign tax credit.

10. Guidance on the treatment of foreign currency gains for purposes of the income
and asset tests for real estate investment trusts.
11. Guidance regarding the application of 010 accruals and writedowns for interestonly REMIC regular interests.
12. Proposed regulations under section 860G(b) regarding withholding obligations of
partnerships allocating income from REMIC residual interests to foreign persons.
13. Guidance on the definition of foreign currency contracts under section 1256(g)(2).
14. Final regulations regarding accruals for certain REMIC regular interests. Proposed
regulations were published on August 25, 2004.
15. Guidance under section 1286(f) as added by the American Jobs Creation Act of
2004 regarding treatment of stripped interests in bond and preferred stock funds.
16. Proposed regulations under section 7872(c)(1)(E) regarding significant effect loans
and section 7872(g) regarding loans to qualified continuing care facilities.
Additional PGP Projects:
17. Revenue ruling under section 851 (b)(2) regarding derivitive contracts that provide
for a total-return exposure on a commodity index.
• PUBLISHED 1/9/2006 in IRB 2006-2 as Rev. Rul. 2006-1
(released 12/16/2005)

11

18. Notice concerning the treatment of hotels, motels, or other establishments as other
than "lodging facilities" under section 856(d)(9) if used to provide temporary
housing to certain persons affected by Hurricane Katrina or Hurricane Rita.
• PUBLISHED 12/5/2005 in IRB 2005-49 as NOTICE 2005-89
19. Revenue ruling under section 860E(c) regarding REMIC NOls.
• PUBLISHED 10/3/2005 in IRB 2005-44 as Rev. Rul. 2005-68
20. Notice illustrating certain transactions that are not the same as or substantially
similar to the transaction described in Notice 2002-35 .
• PUBLISHED 2/27/2006 in IRB 2006-9 as NOTICE 2006-16
(released 2/13/2006)

GENERAL TAX ISSUES
Original PGP Projects:
1.

Regulations under section 21 regarding the credit for household and dependent
care expenses.

2.

Proposed regulations under section 41 regarding the exception from the definition
of "qualified research" for internal use software under section 41 (d)(4)(E).

3.

Final regulations under section 41 regarding the computation of the research credit
in a controlled group, and allocation of the group credit among members of the
group. Temporary regulations were published on May 24, 2005.

4.

Guidance under section 41 regarding whether the gross receipts component of the
research credit computation for a controlled group under section 41 (f) includes
gross receipts from transactions between group members.

5.

Guidance under section 42 regarding the low income housing credit.
• PUBLISHED 11/7/2005 in FR as TO 9228

6.

Proposed regulations under section 42(h) regarding the requirements for a
qualified contract.

7.

Guidance under section 450 regarding how an entity meets the requirements to be
a qualified active low-income community business for purposes of the new
markets tax credit when its activities involve targeted populations.

8.

Guidance under section 45G regarding the credit for maintenance of railroad track.

9.

Guidance under section 45H regarding the certification requirement for complying
with EPA regulations and proposed regulations under section 179B regarding the

12
deduction for capital costs incurred by a refiner in complying with the EPA
regulations.
10. Regulations under sections 46 and 167 relating to normalization.
• PUBLISHED 12/21/2005 in FR as NPRM REG-104385-01
11. Revenue ruling on who can claim the Work Opportunity Tax Credit and the
Welfare-to-Work Credit.
12. Guidance on Rev. Rul. 2003-112 regarding the Work Opportunity Tax Credit.
13. Guidance regarding the tax treatment and information reporting of market gain on
repayments of Commodity Credit Corporation loans.
14. Revenue ruling regarding the treatment under section 61 of employee relocation
costs .
• PUBLISHED 12/19/2005 in IRB 2005-51 as REV. RUL. 2005-74
(released 11/30/2005)
15. Guidance under section 118 regarding whether amounts received by
telecommunications carriers from federal or State universal service programs
constitute nonshareholder contributions to capital.
16. Proposed regulations regarding the definition of dependent under section 152 and
related provisions as amended by the Working Families Tax Relief Act of 2004.
17. Proposed regulations under section 152 regarding the release of a claim for
exemption for a child of divorced or separated parents.
18. Revenue ruling regarding the treatment of payments made by a tax-exempt
organization upon its conversion to a taxable entity to satisfy its public-benefit
obligations.
19. Regulations under section 167 regarding the income forecast method.
20. Final regulations under section 168 relating to like-kind exchanges. Temporary
regulations were published on March 1, 2004.
21. Final regulations under sections 168 and 1400L regarding the special depreciation
allowance. Temporary regulations will sunset in September 2006.
22. Guidance under section 168 on asset classes and activity classes under Rev.
Proc.87-56.
23.

Final regulations under section 168 regarding changes in classification of property.
Temporary regulations were published on January 2, 2004.

13

24. Guidance under section 168 regarding property eligible for the extended placed-inservice date for the special depreciation allowance.
25. Guidance under section 170(f)(11) as added by the American Jobs Creation Act of
2004 regarding reporting of noncash charitable contributions.
26. Proposed regulations under section 170(f)(12) as added by the American Jobs
Creation Act of 2004, and related provisions, regarding contributions of qualified
vehicles. Interim guidance was issued as Notice 2005-44.
27. Guidance under section 174 regarding the treatment of inventory property.
28. Guidance under section 181 regarding the election to treat the cost of qualified film
and television productions as an expense.
29. Proposed regulations under section 199 regarding the deduction for income
attributable to domestic production activities. Interim guidance was issued as
Notice 2005-14.
• PUBLISHED 11/4/2005 in FR as NPRM REG-105847-05
30. Proposed regulations under section 274(e) as amended by the American Jobs
Creation Act of 2004 regarding the disallowance of entertainment expenses.
Interim guidance was issued as Notice 2005-45.
31. Guidance under section 469 regarding the limitation on losses and credits relating
to passive activities.
• PUBLISHED 9/26/2005 in IRB 2005-39 as REV. RUL. 2005-64
32. Revenue ruling under section 1241 on the cancellation of lease or distributor
agreements.
33.

Regulations under section 1301(a) as amended by the American Jobs Creation Act
of 2004 regarding income averaging for fishermen.

34. Guidance under section 14001 regarding the deduction for qualified revitalization
expenditures in expanded renewal communities .
• PUBLISHED 2/27/2006 in IRB 2006-9 as REV. PROC. 2006-16
35. Guidance on the income tax status of wholly-owned corporations chartered under
Indian tribal law.
Additional PGP Projects:
36.

Notice under section 25C regarding the nonbusiness energy property credit.
• WILL BE PUBLISHED 3/13/2006 in IRB 2006-11 as NOTICE 2006-26
(released 2/21/2006)

14

37. Notice under section 30B regarding the advanced lean burn and hybrid motor
vehicles credit.
• PUBLISHED 2/6/2006 in IRB 2006-6 as NOTICE 2006-9
38.

Notice under section 30B regarding the alternative fuel motor vehicle credit.

39. Notice under section 45L regarding the credit for energy efficient manufactured
homes.
• WILL BE PUBLISHED 3/13/2006 in IRB 2006-11 as NOTICE 2006-28
(released 2/21/2006)
40. Notice under section 45L regarding the credit for energy efficient nonmanufactured
homes.
• WILL BE PUBLISHED 3/13/2006 in IRB 2006-11 as NOTICE 2006-27
(released 2/21/2006)
41. Notice under section 48A regarding the qualifying advanced coal projects credit.
• WILL BE PUBLISHED 3/13/2006 in IRB 2006-11 as NOTICE 2006-24
(released 2/21/2006)
42. Notice under section 48B regarding the qualifying gasification projects credit.
• WILL BE PUBLISHED 3/13/2006 in IRS 2006-11 as NOTICE 2006-25
(released 2/21/2006)
43. Guidance regarding the income and employment tax treatment of payments made
pursuant to leave-based donation programs for the relief of victims of Hurricane
Katrina.
• PUSLISHED 10/3/2005 in IRS 2005-40 as NOTICE 2005-68
(released 9/8/2005)
44.

Notice designating the South Asia earthquake occurring on October 8, 2005, as a
qualified disaster for purposes of section 139.
• PUBLISHED 11/14/2005 in IRS 2005-46 as NOTICE 2005-78
(released 10/25/2005)

45. Guidance on the income and employment tax treatment of special allowances paid
by federal executive agencies to employees evacuating from the Hurricane Katrina
core disaster area.
• PUBLISHED 1/30/2006 in IRS 2006-5 as NOTICE 2006-10
(released 1/13/2006)
46. Guidance relating to payments made to tobacco producers in termination of
tobacco marketing quotas and related price supports under the American Jobs
Creation Act of 2004.

15

47.

Regulations under section 302 of the Katrina Emergency Tax Relief Act of 2005
regarding the $500 reduction in taxable income of a taxpayer who provides
housing for an individual displaced by Hurricane Katrina.

48. Guidance postponing the time for making an election under section 165(i) to
deduct in the preceding taxable year certain losses attributable to Hurricanes
Katrina, Rita, and Wilma.
• PUBLISHED 3/6/2006 in I.R.B. 2006-10 as NOTICE 2006-17
(released 2/15/2006)
49.

Notice informing Alabama, Louisiana, and Mississippi of their state population
portion in the Gulf Opportunity Zone for purposes of determining the (1) Gulf
Opportunity housing amount under section 1400N(c)(1 )(B) and (2) maximum
aggregate face amount of qualified Gulf Opportunity Zone Bonds under section
1400N(a)(3).
• WILL BE PUBLISHED 3/20/2006 in IRB 2006-12 as NOTICE 2006-21

GIFTS, ESTATES AND TRUSTS
Original PGP Projects:
1.

Final regulations under section 671 regarding the reporting requirements for
widely-held fixed investment trusts. Proposed regulations were published on June
20,2002.
• PUBLISHED 1/24/2006 in FR as TO 9241
• WILL BE PUBLISHED 3/20/2006 in IRB 2006-12 as NOTICE 2006-29
(released 2/23/2006).

2.

Guidance regarding the consequences under various estate, gift, and generationskipping transfer tax provisions of using a family-owned company as the trustee of
a trust.

3.

Guidance under section 2053 regarding the extent to which post-death events may
be considered in determining the value of a taxable estate.

4.

Revenue procedures under sections 2055 and 2522 containing sample charitable
lead trust provisions.

5.

Guidance under section 2056 regarding qualified terminable interest property
where a marital trust is the named beneficiary of a decedent's individual retirement
account.

6.

Final regulations under section 2642 regarding the definition of, and procedures for
making, a qualified severance of a trust. Proposed regulations were published on
August 24, 2004.

16

7.

Guidance under section 2704 regarding restrictions on the liquidation of an interest
in a corporation or partnership.

Additional PGP Projects:
8.

Notice under section 664 regarding charitable remainder trusts and spousal rights
of election under state law .
• PUBLISHED 2/21/2006 in IRB 2006-8 as NOTICE 2006-15
(released 2/3/2006).

INSURANCE COMPANIES AND PRODUCTS

Original PGP Projects:
1.

Guidance on the taxation of certain annuity contracts under section 72.

2.

Guidance on the qualification of certain arrangements as insurance.

3.

Guidance on the taxation of variable contracts as described in section 817(d).

4.

Final regulations under section 7702 regarding the attained age of the insured for
purposes of testing the qualification of a contract as a life insurance contract.
Proposed regulations were published on May 24, 2005.

INTERNATIONAL ISSUES

A.

Subpart F/Deferral

Original PGP Projects:
1.

Regulations on the allocation of subpart F income.
• PUBLISHED 2/22/2006 in FR as TO 9251

2.

Guidance under the American Jobs Creation Act of 2004 regarding the section 965
temporary dividends received deduction for foreign dividends reinvested in the
United States and other subpart F issues.
• PUBLISHED 9/6/2005 in IRB 2005-36 as NOTICE 2005-64
(released 8/19/2005)

3.

Regulations under section 959 on previously taxed earnings and profits, including
guidance on maintenance of accounts regarding previously taxed earnings and
profits, multiple classes of stock, and basis adjustments.

17

B.

Inbound Transactions

Original PGP Projects:
1.

Guidance under the American Jobs Creation Act of 2004 regarding section 883.

2.

Guidance under sections 897, 1445, and 1446. Final, temporary, and proposed
regulations under section 1446 were published on May 18, 2005.

3.

Guidance on securities lending, the treatment of certain financial products, and
other withholding tax guidance. Proposed regulations under section 1441 were
published on March 30, 2005.
• PUBLISHED 11/21/2005 in IRB 2005-47 as REV. PROC. 2005-71
(released 11/3/2005)

4.

Regulations relating to the reporting of bank deposit interest. Proposed regulations
under section 6049 were published on January 17, 2001.

C.

Outbound Transactions

Original PGP Projects:
1.

Final regulations on the application of section 304 in transactions involving foreign
corporations. Proposed regulations under sections 367(a) and (b) were published
on May 25, 2005.
• PUBLISHED 2/21/2006 in FR as TO 9250

2.

Regulations relating to the carryover of tax attributes in certain international
reorganizations. Proposed regulations under section 367(b) were published on
November 15, 2000.

3.

Regulations on mergers involving foreign corporations. Proposed regulations
under sections 367(a) and (b) were published on January 5, 2005.
• PUBLISHED 10/17/2005 in IRB 2005-42 as NOTICE 2005-74
(released 9/28/2005)
• PUBLISHED 1/26/2006 in FR as TO 9243

4.

Final regulations on corporate continuances. Final and temporary regulations
under section 7701 were published on August 12, 2004.
• PUBLISHED 1/30/2006 in FR as TO 9246

5.

Guidance under section 7874 as added by the American Jobs Creation Act of 2004
regarding the treatment of expatriated entities and their foreign parents.
• PUBLISHED 12/28/2005 in FR as TEMP 9238

18

6.

D.

Other guidance on international restructurings, including finalization of temporary
regulations under section 7701 regarding the Societas Europaea and other foreign
business entities that were published on April 14, 2005.
• PUBLISHED 12/16/2005 in FR as TO 9235
• PUBLISHED 1/9/2006 in IRB 2006-2 as REV. RUL. 2006-3
(released 12/9/2005)

Foreign Tax Credits

Original PGP Projects:
1.

Regulations under section 901 on the allocation of foreign taxes, including in
circumstances involving foreign consolidation regimes and hybrid entities.

2.

Guidance under section 901 (I) as added by the American Jobs Creation Act of
2004, including on exceptions pursuant to section 901 (1)(3).
• PUBLISHED 12/19/2005 in IRB 2005-51 as NOTICE 2005-90
(released 11/30/2005)

3.

Guidance under the American Jobs Creation Act of 2004 related to look-through
treatment for 10/50 company dividends and other foreign tax credit guidance.

E.

Transfer Pricing

Original PGP Projects:
1.

Regulations and other guidance on the treatment of cross-border services.
Proposed regulations under section 482 were published on September 10, 2003.

2.

Regulations and other guidance on global dealing. Proposed regulations under
section 482 were published on March 6, 1998.

3.

Revision of Rev. Proc. 2004-40 regarding advance pricing agreements.
• PUBLISHED 1/9/2006 in IRB 2006-2 as REV. PROC. 2006-9
(released 12/19/2005)

4.

Regulations on cost sharing and other guidance under section 482.
• PUBLISHED 12/27/2005 in IRB 2005-52 as NOTICE 2005-99
(released 12/8/2005)

F.

Sourcing and Expense Allocation

Original PGP Projects:
1.

Final regulations on the tax book value method for interest expense apportionment.
Temporary regulations under section 861 were published on March 26,2004.

19

• PUBLISHED 1/30/2006 in FR as TO 9247
2.

Other guidance on interest expense apportionment, including on issues relating to
partnership structures.

3.

Guidance on mixed source of income, including under sections 863(d) and (e).

4.

Guidance on interest expense allocable to effectively connected income.

G.

Treaties

Original PGP Projects:
1.

Guidance under section 1(h)(11) on the definition of qualified foreign corporation.

2.

Update of Rev. Proc. 2002-52 regarding Competent Authority.

3.

Competent Authority Agreement with Mexico regarding the availability of treaty
benefits for limited liability companies and S corporations.
• PUBLISHED 10/11/2005 in IRB 2005-41 as ANN. 2005-72
(released 9/19/2005)
• PUBLISHED 1/23/2006 in IRB 2006-4 as ANN. 2006-8
(released 12/28/2005)

4.

Other guidance under treaties, including publication of certain other Competent
Authority Agreements.
• PUBLISHED 112312006 in IRB 2006-4 as ANN. 2006-6
(released 12/28/2005)
• PUBLISHED 112312006 in IRB 2006-4 as ANN. 2006-7
(released 12/8/2005)

H.

Other

Original PGP Projects:
1.

Other guidance under section 1(h)(11) on the taxation of dividends from certain
foreign corporations received by individuals.
• PUBLISHED 1/17/2006 in IRB 2006-3 as NOTICE 2006-3
(released 12/22/2005)

2.

Guidance under section 954(i) regarding insurance companies investing through
partnerships.
• PUBLISHED 1/17/2006 in FR as TO 9240

3.

Guidance regarding the residence and source rules involving possessions.
Temporary regulations under section 937 were published on April 11, 2005.

20

• PUBLISHED 1/31/2006 in FR as TD 9248
4.

Other guidance on possession issues, including an update of Rev. Proc. 89-8.

5.

Regulations and other guidance concerning the treatment of currency gain or loss.
Proposed regulations under section 987 were published on September 25, 1991,
and Notice 2000-20 was subsequently issued.

6.

Guidance under section 1503(d). Proposed regulations were published on May
24,2005.
• PUBLISHED 2/21/2006 in IRB 2006-8 as NOTICE 2006-13
(released 1/31/2006)

7.

Guidance on cross-border information reporting issues.

Additional PGP Projects:
8.

Guidance under section 6012 regarding the filing requirements for nonresident
aliens.
• PUBLISHED 11/14/2005 in IRB 2005-46 as NOTICE 2005-77
(released 10/31/2005)

9.

Revenue procedure modifying the Agency Provision in the withholding foreign
partnership and withholding foreign trust agreements.
• PUBLISHED 12/19/2005 in IRB 2005-51 as REV. PROC. 2005-77
(released 11/29/2005)

10. Update of Rev. Proc. 96-52 regarding the application procedures for becoming an
acceptance agent.
• PUBLISHED 1/9/2006 in IRB 2006-2 as REV. PROC. 2006-10
(released 12/16/2005)
PARTNERSHIPS

Original PGP Projects:
1.

Regulations under sections 704 and 737 regarding partnership mergers. Interim
guidance was issued as Notice 2005-15.

2.

Final regulations under section 704(b) regarding the allocation of foreign tax
credits. Temporary regulations were published on April 21, 2004.

3.

Guidance under section 704(b)(2) regarding whether partnership allocations have
substantial economic effect.
• PUBLISHED 11/18/2005 in FR as NPRM REG-144620-04

21
4.

Guidance under section 706(d) regarding the determination of distributive share
when a partner's interest changes.

5.

Final regulations under section 707 regarding disguised sales. Proposed
regulations were published on November 26, 2004.

6.

Guidance under section 707(c) regarding guaranteed payments.

7.

Final regulations under section 721 regarding partnership interests issued for
services or noncompensatory partnership options. Proposed regulations were
published on January 22, 2003 and May 24, 2005. Additional guidance was
issued as Notice 2005-43.

8.

Update of the section 751 regulations.
• PUBLISHED 2/21/2006 in IRB 2006-8 as NOTICE 2006-14

9.

Final regulations under section 752 where a general partner is a disregarded
entity. Proposed regulations were published on August 12,2004.

10. Final regulations regarding the application of section 1045 to certain partnership
transactions. Proposed regulations were published on July 15, 2004.
11. Guidance under sections 704, 734, 743, and 755 as amended by the American
Jobs Creation Act of 2004 regarding the disallowance of certain partnership loss
transfers, and no reduction of basis in stock held by a partnership in a corporate
partner. Interim guidance was issued as Notice 2005-32.
SUBCHAPTER S

Original PGP Projects:
1.

Guidance under section 1367 regarding adjustments in basis of indebtedness.

2.

Guidance under section 1361 as amended by the American Jobs Creation Act of
2004 regarding the determination of the number of shareholders in an S
corporation and the treatment of family members .
• PUBLISHED 12/19/2005 in IRB 2005-51 as NOTICE 2005-91
(released 11/22/2005)

Additional PGP Projects:
3.

Guidance under section 1361 to reflect provisions of the American Jobs Creation
Act of 2004, including the family shareholders provision, and to update obsolete
references.

22
TAX ACCOUNTING

Original PGP Projects:
1.

Proposed regulations under sections 162 and 263 regarding the deduction and
capitalization of expenditures for tangible assets.

2.

Guidance under section 174 regarding changes in method of accounting from an
impermissible method.

3.

Regulations under sections 195, 248 and 709, as amended by the American Jobs
Creation Act of 2004, regarding the elections to amortize start-up and
organizational expenditures.

4.

Proposed regulations under section 263(a) regarding the treatment of capitalized
transaction costs.

5.

Revenue ruling regarding the deduction and capitalization of costs incurred by
utilities to maintain assets used to generate power.

6.

Final regulations under section 263A regarding the definition of property selfproduced on a routine and repetitive basis under the simplified service cost
method provided by section 1.263A-1 (h) and the simplified production method
provided by section 1.263A-2(b). Temporary regulations were published on
August 3, 2005.

7.

Guidance under section 263A regarding whether "negative" additional section
263A costs are taken into account under section 1.263A-1 (d)(4).

8.

Regulations under sections 381 (c)(4) and (5) regarding changes in method of
accounting.

9.

Revenue procedures updating guidance regarding changes in accounting periods.

10. Revenue procedure under section 446 regarding changes in method of accounting
for rotable spare parts.
11. Regulations under section 446 regarding the definition of a method of accounting.
12. Update of Rev. Proc. 2005-9 regarding automatic method of accounting changes
under the rules for capitalization of intangibles .
• PUBLISHED 1/17/2006 in IRB 2006-3 as REV. PROC. 2006-12
(released 12/21/2005)
13. Update of Rev. Proc. 2002-9 regarding automatic changes in methods of
accounting.

23

• PUBLISHED 12/27/2005 in IRB 2005-52 as NOTICE 2005-97
(released 12/6/2005)
14. Final regulations under section 448 regarding nonaccrual of certain amounts by
service providers. Temporary regulations will sunset in September 2006.
15. Guidance under section 460 on contracts that qualify for the rules for home
construction contracts.
16. Revenue ruling under section 461 regarding the proper year for the deduction of
payroll taxes on deferred compensation by accrual method taxpayers.
17. Guidance under section 468B regarding the tax treatment of a single-claimant
qualified settlement fund.
18. Final regulations under section 468B regarding certain escrow funds. Proposed
regulations were published on February 1, 1999.
• PUBLISHED 2/7/2006 in FR as TO 9249
19. Guidance under section 470 as added by the American Jobs Creation Act of 2004
regarding the limitation on deductions allocable to property held by partnerships
and other pass-thru entities having as a partner or other owner a tax-exempt entity
within the meaning of section 168(h)(2).
• PUBLISHED 1/9/2006 in IRB 2006-2 as NOTICE 2006-2
(released 12/16/2005)
20. Guidance on the tax treatment of vendor allowances.
21. Revenue procedure regarding the valuation of parts inventory by heavy equipment
distributors.
• PUBLISHED 1/2312006 in IRB 2006-4 as REV. PROC. 2006-14
(released 1/4/2006)
22. Guidance regarding the permissibility of a moving average cost method for valuing
inventory.
23. Guidance under section 1.472-8 regarding the inventory price index computation
(IPIC) method.
Additional PGP Projects:
24. Guidance regarding updated procedures for requesting changes in the methods of
accounting provided for in certain regulations.
• PUBLISHED 9/6/2005 in IRB 2005-36 as REV. PROC. 2005-63
(released 8/6/2005)

24

25. Guidance on procedures to request a change in method of accounting to comply
with the simplified service cost method under section 1.263A-1T or the simplified
production method under section 1.263A-2T.
• PUBLISHED 1/17/2006 in IRB 2006-3 as REV. PROC. 2006-11
(released 12/21/2005)
26. Proposed regulations under section 468B regarding escrow accounts and other
funds used in like-kind exchanges.
• PUBLISHED 2/7/2006 in FR as NPRM REG-113365-04
TAX ADMINISTRATION

Original PGP Projects:
1.

Revenue procedure under section 3402 regarding the withholding rules applicable
to poker tournaments.

2.

Guidance regarding record retention requirements for tax exempt bonds.

3.

Guidance under sections 6011, 6111, and 6112 regarding the application of the
American Jobs Creation Act of 2004 to tax shelters. Interim guidance was issued
as Notices 2004-80,2005-17 and 2005-22.

4.

Guidance providing that employers invited by the Service to enroll in the Annual
Employment Tax Return Program will be required to file Form 941 annually instead
of quarterly.
• PUBLISHED 1/3/2006 in FR as TEMP 9239

5.

Revenue ruling regarding the res judicata effect of bankruptcy on innocent spouse
claims.

6.

Revenue ruling under section 6020 regarding what constitutes a return of the
taxpayer.
• PUBLISHED 9/12/2005 in IRS 2005-37 as REV. RUL. 2005-59
(released 8/22/2005)

7.

Regulations under sections 6043A, 6043, and 6045 regarding the information
reporting requirements relating to taxable mergers and acquisitions. Interim
guidance implementing changes made by the American Jobs Creation Act of 2004
was issued as Notice 2005-7; Temporary regulations will sunset in November
2005.
• PUBLISHED 12/5/2005 in FR as TO 9230

8.

Final regulations under section 6045(f) regarding the reporting of gross proceeds
to attorneys. Proposed regulations were published on May 17, 2002.

25

9.

Notice addressing issues, including frequently asked questions, regarding
information reporting requirements for qualified tuition and related expenses. Final
regulations were published on December 19, 2002.

10. Regulations under section 6081 simplifying the extension process.
• PUBLISHED 11/7/2005 in FR as NPRM REG-144898-04
11. Regulations under section 6103 regarding the disclosure of tax information in
judicial and administrative tax proceedings, including the disclosure of third party
tax information.
12. Temporary regulations under section 6103 regarding disclosures of additional
items of tax data to the Department of Commerce, Bureau of Economic Affairs, for
statistical purposes.
13. Final regulations under section 6103 regarding disclosures to the Department of
Agriculture for statistical purposes. Temporary regulations will sunset in June
2006.
• PUBLISHED 2/22/2006 in FR as TO 9245
14. Final regulations under section 6103 regarding investigative disclosures for tax
administration purposes. Temporary regulations will sunset in July 2006.
15. Notice under section 6109 regarding PTINs for nonresident alien income tax return
preparers.
• CLOSED WITHOUT PUBLICATION
16. Update of Rev. Ruls. 75-365, 366 and 367 regarding interests in real estate held
by a decedent.
17. Revenue ruling regarding the classification of items as partnership items or
affected items under the TEFRA partnership provisions.
• WILL BE PUBLISHED 3/20/2006 in IRB 2006-12 as REV. RUL. 2006-11
18. Regulations under section 6302 regarding modifications to the de minimis deposit
rule for FICA taxes.
• PUBLISHED 1/3/2006 in FR as TEMP 9239
19. Announcement under section 6306 as added by the American Jobs Creation Act of
2004 regarding the use of private collection agencies.
20.

Proposed amendments to the collection due process regulations under sections
6320 and 6330.
• PUBLISHED 9/16/2005 in FR as NPRM REG-150088-02
• PUBLISHED 9/16/2005 in FR as NPRM REG-150091-02

26

21. Revenue ruling clarifying the Service's position that setoff under sections 6402 and
6411 can apply to liabilities and deficiencies determined in statutory notices of
deficiency.
22. Revenue ruling regarding setoff of liabilities and deficiencies listed in a bankruptcy
proof of claim for which no assessment has been made and no notice of deficiency
issued.
23. Regulations under section 6503 regarding the suspension of the period of
limitations for noncompliance with a designated summons. Proposed regulations
were published on July 31, 2003.
24. Withdrawal of the regulations under former section 6015 regarding the declaration
of estimated tax by individuals.
• PUBLISHED 9/2/2005 in FR as TD 9224
25. Update of the regulations under section 6655 regarding estimated tax payments by
corporations.
• PUBLISHED 12/12/2005 in FR as NPRM REG-107722-00
26. Regulations under sections 6662A, 6662, and 6664 regarding accuracy-related
penalties relating to understatements. Interim guidance implementing changes
made by the American Jobs Creation Act of 2004 was issued as Notice 2005-12.
27. Update of Rev. Proc. 94-69 regarding qualified amended returns filed by CIC
taxpayers. Final and temporary regulations were published on March 2, 2005, and
amended on June 23, 2005.
28. Regulations under section 6708 regarding the penalty for failure to make a list of
advisees available as required by section 6112. Interim guidance implementing
changes made by the American Jobs Creation Act of 2004 was issued as Notice
2004-80.
29. Guidance necessary to facilitate electronic tax administration.
• PUBLISHED 12/8/2005 in FR as NPRM REG-137243-02
• PUBLISHED 12/19/2005 in IRB 2005-51 as NOTICE 2005-93
(released 12/7/2005)
30.

Proposed regulations under section 7430 regarding miscellaneous changes made
by the Tax Reform Act of 1997 and the Internal Revenue Service Restructuring
and Reform Act of 1998.

31. Proposed regulations under section 7477 regarding declaratory judgments
relating to gift tax valuations.

27

32.

Proposed regulations regarding the procedures relating to third party and John
Doe summonses.

33. Proposed regulations under section 7811 regarding taxpayer assistance orders.
34. Revisions to Circular 230 regarding practice before the IRS relating to State and
local bond opinions and various general practice (nonshelter) matters. An
advance notice of proposed rulemaking was published on December 19, 2002,
and Announcement 2004-35 was subsequently issued, concerning nonshelter
matters; proposed regulations were published on December 20, 2004, and Notice
2005-47 was subsequently issued, with respect to State and local bond opinions .
• PUBLISHED 2/8/2006 in FR as NPRM REG-122380-02
35. Notice regarding the procedures for the imposition of a monetary penalty under
Circular 230 as authorized by the American Jobs Creation Act of 2004.
36. Guidance under section 1398 and section 1115 of the Bankruptcy Code as added
by the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005
regarding the income tax and employment tax treatment of post-bankruptcy wages
and self-employment income earned by an individual.
37. Guidance regarding the Tax Exempt Bond Mediation Dispute Resolution Pilot
Program, including extension of the pilot program.
Additional PGP Projects:
38. Guidance under section 7508A regarding the postponement of deadlines for the
Service to perform certain acts with respect to persons affected by Hurricane
Katrina.
• PUBLISHED 10/3/2005 in IRB 2005-40 as NOTICE 2005-66
(released 9/9/2005)
• PUBLISHED 11121/2005 in IRB 2005-47 as NOTICE 2005-81
(released 11/7/2005)
• PUBLISHED 31612006 in IRB 2006-10 as NOTICE 2006-20
(released 2/17/2006)
39. Guidance summarizing and clarifying the relief previously granted by the Service
under sections 6081,6161,6656 and 7508A to persons affected by Hurricane
Katrina.
• PUBLISHED 10/17/2005 in IRB 2005-42 as NOTICE 2005-73
(released 9/21/2005)
40. Guidance under section 7508A regarding the postponement of deadlines for the
Service to perform certain acts with respect to persons affected by Hurricane Rita.
• PUBLISHED 11/21/2005 in IRB 2005-47 as NOTICE 2005-82
(released 11/7/2005)

28
41. Guidance under section 7508A extending the time for payors to comply with
certain obligations with respect to backup withholding on reportable payments
under section 3406.
• PUBLISHED 2/13/2006 in IRB 2006-7 as NOTICE 2006-12
(released 1/30/2006)
42. Guidance under section 6011 describing the circumstances under which a
taxpayer required to file electronically may be eligible for a waiver due to
reasonable cause.
• PUBLISHED 11/28/2005 in IRB 2005-48 as NOTICE 2005-88
(released 11/8/2005)
43. Guidance regarding the Compliance Assurance Process Pilot Program for large
business taxpayers.
• PUBLISHED 12/12/2005 in IRB 2005-50 as ANN. 2005-87
44.

Regulations under section 6103 establishing administrative review procedures for
authorized recipients who fail to adequately safeguard tax data.
• PUBLISHED 2/24/2006 in FR as TEMP 9252

45. Notice regarding the reasonable cause exception to penalties for failure to comply
with the reporting requirements under section 6050S relating to loan origination
fees and capitalized interest.
• PUBLISHED 1/23/2006 in IRB 2006-4 as NOTICE 2006-5
(released 1/10/2006)
46. Guidance regarding the effect of the Patriot's Day holiday on the deadline for filing
documents with the Andover Submission Processing Center that would normally
be due by April 15, 2006.
• WILL BE PUBLISHED 3/13/2006 in IRB 2006-11 as NOTICE 2006-23
(released 2/28/2006)
47. Guidance under section 6011 eliminating the book/tax filter for reportable
transactions.
• PUBLISHED 2/612006 in IRB 2006-5 as NOTICE 2006-6
48. Announcement regarding a settlement initiative aimed at resolving cases involving
certain tax transactions.
• PUBLISHED 11/14/2005 in IRB 2005-46 as ANN. 2005-80
(released 10/27/2005)

29
TAX EXEMPT BONDS

Original PGP Projects:
1.

Update of Rev. Proc. 99-35 regarding the procedures for issuers to request an
administrative appeal to the Office of Appeals of a proposed adverse
determination.

2.

Final regulations under section 141 on refundings. Proposed regulations were
published on May 14, 2003.
• PUBLISHED 12/19/2005 in FR as TO 9234

3.

Proposed regulations under section 141 regarding allocation and accounting
provisions.

4.

Final regulations under section 142 regarding solid waste disposal facilities.
Proposed regulations were published on May 10, 2004.

5.

Final regulations under section 1397E regarding qualified zone academy bonds.
Proposed regulations were published on March 26, 2004.

Additional PGP Projects:
6.

Notice on clean renewable energy bonds.
• PUBLISHED 12/27/2005 in IRB 2005-52 as NOTICE 2005-98
(released 12/12/2005)
• PUBLISHED 3/6/2006 in IRB 2006-10 as NOTICE 2006-7
(released 2/16/2006)

7.

Announcement on Hurricane Katrina tax relief for issuers of tax-exempt bonds.
• PUBLISHED 10/3/2005 in IRB 2005-40 as ANN. 2005-69
(released 11/17/2005)

8.

Regulations on clean renewable energy bonds.

9.

Guidance on credit rate for Gulf Tax Credit bonds.

10. Notice on the definition of the term "qualified highway or surface freight transfer
facility" for purposes of section 142.

30

APPENDIX - Regularly Scheduled Publications

JULY 2005
1.

Revenue ruling setting forth tables of the adjusted applicable federal rates for the
current month for purposes of sections 42, 382, 1274, 1288 and 7520.
• PUBLISHED 7/5/2005 in IRB 2005-27 as REV. RUL. 2005-38

2.

Notice setting forth the weighted average interest rate and the resulting permissible
range of interest rates used to calculate current liability and to determine the
required contribution for plan years beginning in July 2005.
• PUBLISHED 7/25/2005 in IRB 2005-30 as NOTICE 2005-54
(released 7/11/2005)

3.

Revenue ruling under section 472 providing the Bureau of Labor Statistics price
indexes that department stores may use in valuing inventories.
• PUBLISHED 7/25/2005 in IRB 2005-30 as REV. RUL. 2005-45

AUGUST 2005
1.

Revenue ruling setting forth tables of the adjusted applicable federal rates for the
current month for purposes of sections 42,382, 1274, 1288 and 7520.
• PUBLISHED 8/15/2005 in IRB 2005-33 as REV. RUL. 2005-54

2.

Revenue procedure providing the amounts of unused housing credit carryover
allocated to qualified states under section 42(h)(3)(D) for the calendar year.
• PUBLISHED 7/11/2005 in IRB 2005-28 as REV. PROC. 2005-36

3.

Notice providing the inflation adjustment factor to be used in determining the
enhanced oil recovery credit under section 43 for tax years beginning in the
calendar year.
• PUBLISHED 8/8/2005 in IRB 2005-32 as NOTICE 2005-56

4.

Notice providing the applicable percentage to be used in determining percentage
depletion for marginal properties under section 613A for the calendar year.
• PUBLISHED 8/8/2005 in IRB 2005-32 as NOTICE 2005-55

5.

Revenue ruling setting forth the terminal charge and the standard industry fare
level (SIFL) cents-per-mile rates for the second half of 2005 for use in valuing
personal flights on employer-provided aircraft.
• PUBLISHED 9/19/2005 in IRB 2005-38 as REV. RUL. 2005-61

6.

Notice setting forth the weighted average interest rate and the resulting permissible
range of interest rates used to calculate current liability and to determine the
required contribution for plan years beginning in August 2005.

31

• PUBLISHED 8/29/2005 in IRB 2005-35 as NOTICE 2005-63
(released 8/5/2005)
7.

Revenue ruling under section 472 providing the Bureau of Labor Statistics price
indexes that department stores may use in valuing inventories.
• PUBLISHED 8/29/2005 in IRB 2005-35 as REV. RUL. 2005-56

8.

Revenue ruling providing a final determination under section 809 of the differential
earnings rate for 2004 for use by mutual life insurance companies to compute their
income tax liabilities for 2004.
• PUBLISHED 9/6/2005 in IRB 2005-36 as REV. RUL. 2005-58

SEPTEMBER 2005
1.

Revenue ruling setting forth tables of the adjusted applicable federal rates for the
current month for purposes of sections 42,382, 1274, 1288 and 7520.
• PUBLISHED 9/6/2005 in IRB 2005-36 as REV. RUL. 2005-57

2.

Revenue ruling providing the monthly bond factor amounts to be used by
taxpayers who dispose of qualified low-income buildings or interests therein during
the period July through September 2005.
• PUBLISHED 7/18/2005 in IRB 2005-29 as REV. RUL. 2005-44

3.

Revenue ruling under section 6621 regarding the applicable interest rates for
overpayments and underpayments of tax for the period October through December
2005.
• PUBLISHED 9/19/2005 in IRB 2005-38 as REV. RUL. 2005-62

4.

Notice setting forth the weighted average interest rate and the resulting permissible
range of interest rates used to calculate current liability and to determine the
required contribution for plan years beginning in September 2005.
• PUBLISHED 10/3/2005 in IRB 2005-40 as NOTICE 2005-67
(released 9/8/2005)

5.

Revenue ruling under section 472 providing the Bureau of Labor Statistics price
indexes that department stores may use in valuing inventories.
• PUBLISHED 9/26/2005 in IRB 2005-39 as REV. RUL. 2005-63

6.

Revenue procedure under section 62 regarding the deduction and deemed
substantiation of federal standard mileage amounts.
• PUBLISHED 12/19/2005 in IRB 2005-51 as REV. PROC. 2005-78
(released 12/2/2005)

7.

Revenue procedure under section 62 regarding the deduction and deemed
substantiation of federal travel per diem amounts.

32

• PUBLISHED 10/17/2005 in IRB 2005-42 as REV. PROC. 2005-67
(released 10/3/2005)
8.

Update of Notice 2002-62 to add approved applicants for designated private
delivery service status under section 7502(f). Will be published only if any new
applicants are approved.
• CLOSED WITHOUT PUBLICATION

9.

Announcement updating 2005 standard mileage rates.
• PUBLISHED 10/11/2005 in IRB 2005-41 as ANNOUNCEMENT 2005-71
(released 9/9/2005)

OCTOBER 2005
1.

Revenue ruling setting forth tables of the adjusted applicable federal rates for the
current month for purposes of sections 42, 382, 1274, 1288 and 7520.
• PUBLISHED 10/11/2005 in IRB 2005-41 as REV. RUL. 2005-66

2.

Notice setting forth the weighted average interest rate and the resulting permissible
range of interest rates used to calculate current liability and to determine the
required contribution for plan years beginning in October 2005.
• PUBLISHED 10/31/2005 in IRB 2005-44 as NOTICE 2005-71
(released 10/7/2005)

3.

Revenue ruling under section 472 providing the Bureau of Labor Statistics price
indexes that department stores may use in valuing inventories.
• PUBLISHED 10/31/2005 in IRB 2005-44 as REV. RUL. 2005-69

4.

Revenue procedure under section 1 and other sections of the Code regarding the
inflation adjusted items for 2006.
• PUBLISHED 11/21/2005 in IRB 2005-47 as REV. PROC. 2005-70
(released 10/28/2005)

5.

Revenue procedure providing the loss payment patterns and discount factors for
the 2005 accident year to be used for computing unpaid losses under section 846.
• PUBLISHED 12/5/2005 in IRS 2005-49 as REV. PROC. 2005-72
(released 11/14/2005)

6.

Revenue procedure providing the salvage discount factors for the 2005 accident
year to be used for computing discounted estimated salvage recoverable under
section 832.
• PUBLISHED 12/512005 in IRS 2005-49 as REV. PROC. 2005-73
(released 11/14/2005)

33

7.

Update of Rev. Proc. 2005-27 listing the tax deadlines that may be extended by
the Commissioner under section 7508A in the event of a Presidentially-declared
disaster or terrorist attack.

NOVEMBER 2005
1.

Revenue ruling setting forth tables of the adjusted applicable federal rates for the
current month for purposes of sections 42, 382, 1274, 1288 and 7520.
• PUBLISHED 11/7/2005 in IRB 2005-45 as REV. RUL. 2005-71

2.

Revenue ruling providing the "base period T-Bill rate" as required by section
995(f)(4).
• PUBLISHED 11/7/2005 in IRB 2005-45 as REV. RUL. 2005-70

3.

Revenue ruling setting forth covered compensation tables for the 2006 calendar
year for determining contributions to defined benefit plans and permitted disparity.
• PUBLISHED 11/14/2005 in IRB 2005-46 as REV. RUL. 2005-72

4.

Notice setting forth the weighted average interest rate and the resulting permissible
range of interest rates used to calculate current liability and to determine the
required contribution for plan years beginning in November 2005.
• PUBLISHED 11/21/2005 in IRB 2005-47 as NOTICE 2005-72
(released 11/7/2005)

5.

Revenue ruling under section 472 providing the Bureau of Labor Statistics price
indexes that department stores may use in valuing inventories.
• PUBLISHED 11/28/2005 in IRB 2005-48 as REV. RUL. 2005-73

6.

Update of Rev. Proc. 2004-73 regarding adequate disclosure for purposes of the
section 6662 substantial understatement penalty and the section 6694 preparer
penalty.
• PUBLISHED 12/12/2005 in IRB 2005-50 as REV. PROC. 2005-75

7.

News release setting forth cost-of living adjustments effective January 1, 2006,
applicable to the dollar limits on benefits under qualified defined benefit pension
plans and other provisions affecting certain plans of deferred compensation.
• PUBLISHED 11/7/2005 in IRB 2005-45 as NOTICE 2005-75
(released 10/14/2005 as IR-2005-120)

DECEMBER 2005
1.

Revenue ruling setting forth tables of the adjusted applicable federal rates for the
current month for purposes of sections 42, 382, 1274, 1288 and 7520.
• PUBLISHED 12/5/2005 in IRB 2005-49 as REV. RUL. 2005-77

34

2.

Revenue ruling providing the monthly bond factor amounts to be used by
taxpayers who dispose of qualified low-income buildings or interests therein during
the period October through December 2005.
• PUBLISHED 10/24/2005 in IRB 2005-43 as REV. RUL. 2005-67

3.

Revenue ruling under section 6621 regarding the applicable interest rates for
overpayments and underpayments of tax for the period January through March
2006.
• PUBLISHED 12/19/2005 in IRB 2005-51 as REV. RUL. 2005-78

4.

Notice setting forth the weighted average interest rate and the resulting permissible
range of interest rates used to calculate current liability and to determine the
required contribution for plan years beginning in December 2005.
• PUBLISHED 12/27/2005 in IRB 2005-52 as NOTICE 2005-96

5.

Revenue ruling under section 472 providing the Bureau of Labor Statistics price
indexes that department stores may use in valuing inventories.
• PUBLISHED 12/27/2005 in IRB 2005-52 as REV. RUL. 2005-79

6.

Revenue procedure setting forth, pursuant to section 1397E, the maximum face
amount of Qualified Zone Academy Bonds that may be issued for each state
during 2006.

7.

Federal Register notice on Railroad Retirement Tier 2 tax rate.
• PUBLISHED 11/17/2005 in FR

JANUARY 2006
1.

Revenue procedure updating the procedures for issuing private letter rulings,
determination letters, and information letters on specific issues under the
jurisdiction of the Chief Counsel.
• PUBLISHED 1/3/2006 in IRB 2006-1 as REV. PROC. 2006-1

2.

Revenue procedure updating the procedures for furnishing technical advice,
including technical expedited advice, to certain IRS offices, in the areas under the
jurisdiction of the Chief Counsel.
• PUBLISHED 1/3/2006 in IRB 2006-1 as REV. PROC. 2006-2

3.

Revenue procedure updating the previously published list of "no-rule" issues under
the jurisdiction of certain Associates Chief Counsel other than the Associate Chief
Counsel (International) on which advance letter rulings or determination letters will
not be issued.
• PUBLISHED 1/3/2006 in IRB 2006-1 as REV. PROC. 2006-3

35

4.

Revenue procedure updating the previously published list of "no-rule" issues under
the jurisdiction of the Associate Chief Counsel (International) on which advance
letter rulings or determination letters will not be issued.
• PUBLISHED 1/3/2006 in IRB 2006-1 as REV. PROC. 2006-7

5.

Revenue procedure updating procedures for furnishing letter rulings, general
information letters, etc. in employee plans and exempt organization matters
relating to sections of the Code under the jurisdiction of the Office of the
Commissioner, Tax Exempt and Government Entities Division.
• PUBLISHED 1/3/2006 in IRB 2006-1 as REV. PROC. 2006-4

6.

Revenue procedure updating procedures for furnishing technical advice in
employee plans and exempt organization matters under the jurisdiction of the
Commissioner, Tax Exempt and Government Entities Division.
• PUBLISHED 1/3/2006 in IRS 2006-1 as REV. PROC. 2006-5

7.

Revenue ruling setting forth tables of the adjusted applicable federal rates for the
current month for purposes of sections 42,382,1274,1288 and 7520.
• PUBLISHED 1/9/2006 in IRB 2006-2 as REV. RUL. 2006-4
(released 12/20/2005)

8.

Revenue ruling setting forth the prevailing state assumed interest rates provided
for the determination of reserves under section 807 for contracts issued in 2005
and 2006.

9.

Revenue ruling providing the dollar amounts, increased by the 2005 inflation
adjustment, for section 1274A.
• PUBLISHED 12/512005 in IRB 2005-49 as REV. RUL. 2005-76

10. Revenue ruling setting forth the amount that section 7872 permits a taxpayer to
lend to a qualified continuing care facility without incurring imputed interest,
adjusted for inflation.
• PUBLISHED 12/5/2005 in IRB 2005-49 as REV. RUL. 2005-75
11. Revenue procedure providing procedures for limitations on depreciation
deductions for owners of passenger automobiles first placed in service during the
calendar year and amounts to be included in income by lessees of passenger
automobiles first leased during the calendar year.
• WILL BE PUBLISHED 3/20/2006 in IRB 2006-12 as REV. PROC. 2006-18
12. Revenue procedure updating procedures for issuing determination letters on the
qualified status of employee plans under sections 401 (a), 403(a), 409, and 4975.
• PUBLISHED 1/3/2006 in IRB 2006-1 as REV. PROC. 2006-6
13. Revenue procedure updating the user fee program as it pertains to requests for
letter rulings, determination letters, etc. in employee plans and exempt

36
organizations matters under the jurisdiction of the Office of the Commissioner, Tax
Exempt and Government Entities Division.
• PUBLISHED 1/3/2006 in IRB 2006-1 as REV. PROC. 2006-8
14. Notice setting forth the weighted average interest rate and the resulting permissible
range of interest rates used to calculate current liability and to determine the
required contribution for plan years beginning in January 2006.
• PUBLISHED 1/30/2006 in IRB 2006-5 as NOTICE 2006-8
(released 1/12/2006)
15. Revenue ruling under section 472 providing the Bureau of Labor Statistics price
indexes that department stores may use in valuing inventories.
• PUBLISHED 1/30/2006 in IRB 2006-5 as REV. RUL. 2006-6
16. Revenue procedure under section 143 regarding average area purchase price.
17. Revenue procedure providing the maximum allowable value for use of the fleetaverage value and vehicle-cents-per-mile rules to value employer-provided
automobiles first made available to employees for personal use in the calendar
year.
• PUBLISHED 1/30/2006 in IRB 2006-5 as REV. PROC. 2006-15
FEBRUARY 2006
1.

Revenue ruling setting forth tables of the adjusted applicable federal rates for the
current month for purposes of sections 42, 382, 1274, 1288 and 7520.
• PUBLISHED 2/6/2006 in IRB 2006-6 as REV. RUL. 2006-7
(released 1/20/2006)

2.

Revenue ruling under section 472 providing the Bureau of Labor Statistics price
indexes that department stores may use in valuing inventories.
• PUBLISHED 2/27/2006 in IRB 2006-9 as REV. RUL. 2006-8

3.

Notice setting forth the weighted average interest rate and the resulting permissible
range of interest rates used to calculate current liability and to determine the
required contribution for plan years beginning in February 2006.
• PUBLISHED 2/27/2006 in IRB 2006-9 as NOTICE 2006-19
(released 2/8/2006)

MARCH 2006
1.

Revenue ruling setting forth tables of the adjusted applicable federal rates for the
current month for purposes of sections 42,382, 1274, 1288 and 7520.

2.

Notice providing resident population of the states for determining the calendar year
state housing credit ceiling under section 42(h), the private activity bond volume

37

cap under section 146, and the qualified public educational facility bond volume
cap under section 142(k) .
• WILL BE PUBLISHED 3/13/2006 in IRB 2006-11 as NOTICE 2006-22
3.

Revenue ruling providing the monthly bond factor amounts to be used by
taxpayers who dispose of qualified low-income buildings or interests therein during
the period January through March 2006.
• PUBLISHED 1/16/2006 in IRB 2006-3 as REV. RUL. 2006-5

4.

Revenue ruling under section 6621 regarding the applicable interest rates for
overpayments and underpayments of tax for the period April through June 2006.

5.

Revenue ruling setting forth the terminal charge and the standard industry fare
level (SIFL) cents-per-mile rates for the first half of 2006 for use in valuing personal
flights on employer-provided aircraft.

6.

Notice setting forth the weighted average interest rate and the resulting permissible
range of interest rates used to calculate current liability and to determine the
required contribution for plan years beginning in March 2006.

7.

Revenue ruling under section 472 providing the Bureau of Labor Statistics price
indexes that department stores may use in valuing inventories.

8.

Notice providing a tentative determination under section 809 of the recomputed
differential earnings rate for 2004 for use by mutual life insurance companies to
compute their income tax liabilities for 2005.

APRIL 2006
1.

Revenue ruling setting forth tables of the adjusted applicable federal rates for the
current month for purposes of sections 42,382, 1274, 1288 and 7520.

2.

Revenue ruling providing the average annual effective interest rates charged by
each Farm Credit Bank District.

3.

Notice providing the inflation adjustment factor, nonconventional fuel source credit,
and reference price for the calendar year that determines the availability of the
credit for producing fuel from a nonconventional source under section 29.

4.

Revenue procedure providing a current list of countries and the dates those
countries are subject to the section 911 (d)(4) waiver and guidance to individuals
who fail to meet the eligibility requirements of section 911 (d)(1) because of
adverse conditions in a foreign country.

38

5.

Notice setting forth the weighted average interest rate and the resulting permissible
range of interest rates used to calculate current liability and to determine the
required contribution for plan years beginning in April 2006.

6.

Revenue ruling under section 472 providing the Bureau of Labor Statistics price
indexes that department stores may use in valuing inventories.

MAY 2006

1.

Revenue ruling setting forth tables of the adjusted applicable federal rates for the
current month for purposes of sections 42,382, 1274, 1288 and 7520.

2.

Notice setting forth the weighted average interest rate and the resulting permissible
range of interest rates used to calculate current liability and to determine the
required contribution for plan years beginning in May 2006.

3.

Revenue ruling under section 472 providing the Bureau of Labor Statistics price
indexes that department stores may use in valuing inventories.

4.

Revenue procedure providing guidance for use of the national and area median
gross income figures by issuers of qualified mortgage bonds and mortgage credit
certificates in determining the housing cost/income ratio under section 145.

JUNE 2006
1.

Revenue ruling setting forth tables of the adjusted applicable federal rates for the
current month for purposes of sections 42, 382, 1274, 1288 and 7520.

2.

Revenue ruling providing the monthly bond factor amounts to be used by
taxpayers who dispose of qualified low-income buildings or interests therein during
the period April through June 2006.

3.

Revenue ruling under section 6621 regarding the applicable interest rates for
overpayments and underpayments of tax for the period July through September
2006.

4.

Notice providing the calendar year inflation adjustment factor and reference prices
for the renewable electricity production credit under section 45.

5.

Notice setting forth the weighted average interest rate and the resulting permissible
range of interest rates used to calculate current liability and to determine the
required contribution for plan years beginning in June 2006.

6.

Revenue ruling under section 472 providing the Bureau of Labor Statistics price
indexes that department stores may use in valuing inventories.

39

7.

Revenue procedure providing the domestic asset/liability percentages and the
domestic investment yield percentages for taxable years beginning after December
31,2005, for foreign companies conducting insurance business in the U.S.

Page 1 of 1

March 6, 2006
JS-4096
Statement of Treasury Secretary John W. Snow
On the Retirement Announcement of Chairman Thomas
"With Chairman Thomas' announcement today, the Congress is losing a legislative
giant. Bill Thomas has created an enviable and lasting legislative record and has
proven himself to be one of the most significant and effective legislators of our time.
"His imprint has been on every piece of legislation impacting the American
economy for the past six years. Thanks in large part to his efforts to pass the
President's economic program, the American economy is on a strong path and is
the envy of the world

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PRESS ROOM

February 6, 2006
JS-4097
Remarks of
Assistant Secretary for Financial Institutions Emil Henry,

Jr.
before the
National Association of Insurance Commissioners
Conference
Naples, Fla. - Thank you. It is a real pleasure for me to be here with you today and
participate in your Commissioners' Conference and to see some familiar faces. I am
also delighted to do so and represent the Administration against a backdrop of such
a robust and vibrant economic environment in which we now find ourselves.
You can likely infer from that brief introduction, that in my 20 years on Wall Street, I
have trafficked in virtually every corner of our capital markets yet, admittedly, I
cannot hold myself out as an expert in your arena. I am, however, quickly getting up
to speed on all of the specific insurance issues in front of Treasury. Treasury is
following several insurance-related issues which I would like to discuss with you
today. These include the proposed insurance modernization legislation, reinsurance
collateralization, TRIA implementation, flood insurance, and other natural disaster
insurance programs.
In my relatively short time at Treasury, I have become familiar with the state-based
insurance regulatory system, as well as the excellent work that the NAIC has done
on behalf of state regulators. One of the reasons I am here today is to thank you.
The NAIC has distinguished itself in my mind for the cooperation and assistance it
has given to Treasury - especially in the implementation and reauthorization of
TRIA. Our staff repeatedly complements the good work that you have done.
I have already had the pleasure and opportunity to discuss some of these issues
with your leadership. Recently, I visited with your leadership and we had a very
productive discussion. It was most helpful for me to get their insights. I am sure that
our discussions today will be just as fruitful.
Insurance Regulatory Reform
As you know, when Congress passed the Gramm-Leach-Bliley Act in 1999, the
barriers preventing banks, securities firms, and insurers from affiliating and
competing with each other were removed. The Act also provided for the regulation
of financial products by function rather than by institution, and specifically reaffirmed
the McCarran-Ferguson Act (1945). In addition, it recognized state insurance
regulators as the functional regulators of the insurance industry.
After the passage of Gramm-Leach-Bliley, the insurance marketplace is certainly
different from what it was even a few years ago, even though the anticipated
convergence of banks and insurers still has not materialized. There is a new
financial services marketplace that is accelerating and being driven by industry
consolidation, globalization, and the advent of e-commerce.
These changes have led some insurers to maintain that in this new environment,
they find themselves in direct competition with brokerage firms, mutual funds, and
commercial banks - all of which they perceive as having a competitive advantage
due to regulatory structures that allow for more efficient operations.

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I am well aware, of course, that the NAIC acknowledged these changes in the
marketplace and called for the modernization of the state-based insurance
regulatory system. In 2000, you adopted the "Statement of Intent - The Future of
Insurance Regulation," pledging to design and implement uniform standards for
such regulatory functions as producer licensing, market conduct oversight, and rate
and form regulation. Then in 2003, you released the "Insurance Regulatory
Modernization Action Plan," in which time-lines were set for specific regulatory
changes to be made. Your work and progress in carrying out these reforms thus far
has been commendable.
I am also aware of the progress that you have made in formulating an Interstate
Compact to deal with speed-to-market issues for approvals of life, annuity,
disability, and long-term-care products. This is important work.
Despite these efforts, and as you are well aware, some insurers feel that more has
to be done to modernize state insurance regulation, and have called for some
degree of federal involvement. As I understand it, these additional proposals for
federal involvement in the insurance regulatory process fall into three categories:
1) Total Federal Preemption: Back in the 1990s, some in Congress
called for the federal regulation of insurance that would have
preempted the current state-based system. A similar bill was
introduced in 2003 (S.1371 ) that would have created a
comprehensive and preemptive federal regulatory system under the
Department of Commerce. However, there seems to be little support
today for this total preemptive approach.
2) Federal Standards: Here I am referring to the draft legislation
developed by the House Financial Services Committee entitled the
"State Modernization and Regulatory Transparency Act" or SMART.
This proposal grew out of a series of hearings on insurance
regulation, and was referred to by some as an incremental or
"middle way" under which Congress would mandate federal
standards based on various NAIC Model Laws. Even though this
approach drew on suggestions from industry and some state
insurance regulators, I understand this is not something that the
NAIC supports. There are mixed signals as to where this legislation
stands.
3) Optional Federal Charter (OFC): Under the concept of an
Optional Federal Charter modeled after the dual banking regulatory
system, insurers could chose to obtain a federal charter and be
regulated by a federal insurance regulator. Those advocating this
approach have been trying to garner support for the past five years.
I recently discussed the Optional Federal Charter approach with your leadership.
We had a very productive meeting and I received some valuable background and
input from your leadership.
With all the noise and misinformation in the press, I feel compelled to say that
Treasury has not taken a position on what approach, if any, should be taken to
involve the federal government in the regulation of insurance. However, we do want
to continue to consult with you and others as this issue proceeds. As we continue to
examine this issue, there are, as I see it, several basic realities that are self-evident
•
•

•

Most types of businesses that operate across multiple state lines would
prefer not having to abide by 50-plus state standards.
Even though states have improved the current producer licensing process
by granting some degree of reciprocity, a lack of uniformity in many aspects
of state regulation still remains.
A dual regulatory environment as enjoyed by the banks involves regulatory
competition, which can be positive if it leads to general deregulation,
innovation, and increased consumer choice; but we realize that it can also
have potential downsides

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•

•

Property and casualty insurance products appear to be much more statespecific than life insurance products. and thus might call for differing
regulatory approaches.
Big picture. our country IS well-served by an insurance marketplace whose
players can compete and thrive on a level playing field. attracting risk capital
to grow--all within the bounds and mindful of safety and soundness and
proper consumer protection.

Reinsurance Collateralization Requirements
For some three years now. Treasury has been actively monitoring developments at
the NAIC on the reinsurance collateralization issue. Non-U.S. reinsurers continue to
tell us that the current 100 percent collateral requirement is discriminatory and
should be changed. We have followed the discussions of the NAIC's Reinsurance
Task Force.
We are fully aware of just how complicated and controversial this issue is. You
tackled this issue last December in the White Paper on US. Reinsurance
Collateral. The paper appears to have been generally well received by state
regulators as well as by U.S. and non-U.S. reinsurers. and clearly touches on some
key areas of concern. We feel that the paper succeeds in carrying out its goal of
providing a balanced synopsis of the historical arguments in favor of and against
changing the U.S. rule. and that it will. indeed. serve as a good starting point for
future debate on the issue.
We do not believe that the controversy over reinsurance collateral is going away
anytime soon. It is my understanding that you will be holding additional discussions
on the White Paper at this Conference, and I hope that they will lead to some
consensus on the issue .. I can assure you that Treasury will watch closely how this
issue develops.

Terrorism Risk Insurance Act (TRIA).
FollOWing September 11, the President and Congress acted by passing TRIA TRIA
was enacted to address the significant wrenching economic dislocations that
occurred in the wake of the attacks and served as an another unfortunate shock to
our economy which was, at that time. in the midst of sustaining and digesting the
impact of the bursting of the bubble economy preceding 2001. TRIA also ensured
the continued widespread availability and affordability of commercial property and
casualty terrorism coverage. As you know, TRIA placed the federal government in
the commercial property and casualty terrorism risk reinsurance business.
From its inception, TRIA was intended as a temporary program - a "bridge" to allow
the marketplace a transitional period to recover from the 9/11 losses. as well as to
adjust to a new risk and design its own long-term, private-market solution.
In June of last year. Treasury delivered to Congress its report on the effectiveness
of TRIA We concluded that TRIA had been effective in achieving its fundamental
goal of enhancing the availability and affordability of commercial property and
casualty terrorism risk insurance, including allowing time for rebuilding the capacity
of the private sector, but was "crowding out" further private market development.
During the transitional period provided by TRIA. industry surplus levels returned to
and even exceeded pre-9/11 levels. At the same time. the economy had recovered
and grown. Also, insurers had used the time to develop mechanisms to evaluate
their risk accumulations. model their exposures, adjust their underwriting practices,
develop their pricing, and, though not yet tested, develop models for terrorism. If
there was any failure, it was on the part of the private market not preparing for the
return to a TRIA-free marketplace. We are hoping to see more progress in the
private sector in the years to come. I believe many of you would agree that not
enough effort had been put into developing alternative sources to the capacity TRIA
provides.

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As Congress sought to extend TRIA, Secretary Snow laid out the Administration's
key principles for accepting any extension. The Administration maintained that any
extension of the program must:
•
•
•

be temporary in nature:
encourage the private insurance market to develop innovative solutions and
build capacity; and
reduce the exposure to taxpayers.

The end-of-year debate then dealt with policy issues related to various aspects of
the competing House and Senate versions. Whereas the Senate's bill extended the
program for two years with the necessary changes sought by the Administration,
the House bill expanded the program and added additional complexities that,
frankly, were not consistent with a temporary program. At the end of a very busy
December, we were successful in keeping TRIA true to its original mission - a
temporary program allowing for the gradual transition back to full private-sector
provision of terrorism risk insurance.
President Bush signed the Terrorism Risk Insurance Extension Act of 2005 on
December 22,2005. The changes made achieved the Administration's key
principles in extending the temporary program. As I am sure you are aware, the
TRIA program continues temporarily until December 31, 2007.
What happens next? A provision in the TRIA extension requires an analysis by the
President's Working Group on Financial Markets (PWG) regarding the long-term
availability and affordability of terrorism insurance, including group life coverage
and coverage for chemical, nuclear, biological, and radiological events. There is
some confusion regarding the PWG. The PWG was created by executive order of
President Reagan in 1988 in response to the 1987 market crash. Following the
issuance of its report in 1988 and follow-up work in 1991, the PWG became largely
inactive until 1994 when, at the urging of Congress and others, it was reactivated by
the Secretary of the Treasury. Since that time, it has met on a regular basis. The
PWG is chaired by the Secretary of the Treasury and includes the chairs of the
Federal Reserve Board, the Securities and Exchange Commission, and the
Commodity Futures Trading Commission. PWG meetings are small and allow for
an open discussion among our economic leaders.
The PWG is required to consult with the NAIC and other industry and policyholder
stakeholders. The report is due to Congress by September 30, 2006.
Treasury staff is coordinating with the staffs of the other PWG representatives. In
my meeting with the NAIC leadership earlier this month we discussed, preliminarily,
coordinating NAIC's consultation role with the PWG and what the NAIC plans to do
independently leading up to that consultation.
As we move forward over the next two years, I want to encourage you to continue
to work to create and incentivize market-based solutions for terrorism insurance.
Treasury looks forward to working with you to achieve this shared objective.

Flood Insurance
In the aftermath of Hurricane Katrina, one of the many areas the federal
government is looking at is strengthening the National Flood Insurance Program
(NFIP). I know that this is also a priority for many of you as well, especially those of
you who represent coastal states and that have tributaries subject to flooding.
As you know, our sister agency, the Department of Homeland Security (DHS)
administers the flood program through FEMA and its Mitigation Division. DHS has
the lead role in reforms involving the actual implementation of the program.
Treasury often is called upon to fund the flood program when it needs to borrow in
order to meet claim obligations.
Hurricanes Katrina, Rita, and Wilma resulted in flood claims that are estimated at

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about $23 billion. The President and Congress have raised NFIP's borrowing
authority twice: the program's current borrowing authority is $18.5 billion. It is
expected that legislation to further increase the borrowing authority (needed soon)
will include reform proposals.
From Treasury's perspective, issues of concern involve the low number of insureds,
deficiencies in the flood maps, subsidization of premiums, and addressing
properties that suffer repetitive losses. We have also been attempting to quantify
the level of compliance by financial institutions.
Several bills are being introduced which include various approaches to address
these and other issues. The Administration continues to evaluate potential
improvements to the NFIP and looks forward to working with Congress on this
important issue.

Natural Disasters
At the same time we know that you are looking more "big picture" at the way natural
disasters are insured throughout the country and whether there is a better model
than the current federal and state insurance and reinsurance programs, such as
high-risk pools. We appreciate you keeping us updated of your proposal for a
natural catastrophe program.
Establishing a long-term, permanent federal government role in insurance or
reinsurance for natural catastrophes presupposes that the private sector or other
state-sponsored mechanisms can not fully manage natural disaster risks. At
Treasury, we are not convinced that a federal government role is necessary but we
are interested in hearing all aspects of the debate so please keep the lines of
communication open.
Thank you for inviting me to speak to you today and thank you for listening. I'll be
happy to answer a few questions.

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Page 1 of6

March 7, 2006
JS-4098
Prepared Remarks
Assistant Secretary Mark J. Warshawsky
The DC Bar, Washington, DC
Introduction
As you know, both the House and Senate passed their versions of pension reform
legislation at the end of 2005. As we wait for a House-Senate conference
committee to convene, I believe this is an excellent opportunity to discuss the need
for fundamental reform and to highlight some areas where the Administration
believes the conference report must do better than either the House or Senate bills
in order to ensure that pensions promises made are pension promises kept.
In addition to defined benefit reforms, I will discuss some of the important defined
contribution provisions that were included in the House and Senate bills as well as
a long-term care provision that we are following at the Treasury Department.
Defined Benefit Pension Reform
Clearly, the current system does not ensure that defined benefit pension plans -whether single employer or multiemployer -- are adequately funded. While many
companies act in good faith to fund their pensions, the law unfortunately allows
employers to comply with pension rules technically without adequately funding the
pension promises they make. When underfunded plans terminate, workers often
lose significant pension benefits that they earned over a long career of service and
upon which their retirement security depended. As a result, current systemic
underfunding of defined benefit pensions represents an ongoing threat to the
financial security of workers.
The termination of seriously underfunded plans also severely strains the pension
insurance system and imposes burdens on the employers who sponsor healthy
pension plans. The current net deficit of the PBGC is approximately $23 billion and,
without meaningful pension reform, is expected to increase significantly. The
PBGC's financial situation represents a serious and ongoing threat to the benefits
of America's workers protected by the insurance system to responsible plan
sponsors and, potentially and ultimately, to taxpayers.
The Administration does not believe that the defined benefit pension system can be
sustained in the long run without meaningful reform. That is why we worked very
hard over the past few years to write a plan to fundamentally reform the rules
governing pension plan funding, disclosure and insurance premiums. Our plan,
which was unveiled last year in the President's budget, is based on the following
three simple principles:
•

Ensuring pension promises are kept by improving opportunities, incentives
and requirements for funding plans adequately;
• Improving disclosure to workers, investors and regulators about pension
plan status; and
• Adjusting the pension insurance premiums to better reflect each plan's risk
and to ensure the pension insurance system's financial solvency.
We are pleased that both the House and the Senate have taken action on this
important problem by passing pension reform legislation, and we remain committed
to working with Congress as they proceed to conference. Nevertheless, the
Administration is concerned that the reforms currently being considered by
Congress are inadequate and that stronger action is needed to improve the
protection of pension benefits, to ensure the integrity of the pension insurance

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Page 2 of6
system.. an? to avert a ta~payer bailout. In the absence of changes to strengthen
the legislation, workers will face an increased risk of losing pension benefits
promised to them by their employers.
We plan on working productively with the conference committee to improve the final
bill. As you may be aware, the Administration issued veto threats against both the
House and Senate bills. We continue to have serious concerns and will insist on a
bill that reduces the risk to workers. Currently, the best available measure of that
risk is projections of future claims on the PBGC. We believe that any acceptable
reform bill should red_u_ceexp~ct~d CI~il]1~9D 1b~PB~~QY~the~~x!JE:my~ars
~Q!Tlp~red ~cu~rElnjlalJ\l. We hope to work with the conference committee to
ensure that the final bill meets this goal.
Already, some structural similarities exist between the Administration proposal and
the House and Senate bills. Congress included some of our key provisions,
including those that
•

Increase funding targets for pension plans to 100 percent of accrued
liabilities;
• Reduce the period over which increases in pension underfunding can be
amortized to no more than 7 years; and
• Require the use of a (modified) yield curve rather than a single long-term
interest rate to compute pension liabilities and lump-sum distributions so
that such computations reflect the liabilities' underlying time structure.
These are all important changes.
In addition, the Administration is pleased that the Senate and House bills include
provisions to provide workers with more information about the financial condition of
their pension plans and to restrict plan sponsors with severely underfunded plans
from making additional pension promises without paying for them. I believe these
two provisions will have a significant, positive impact on ensuring that pension
promises, once made, are kept and encouraging plan sponsors to responsibly fund
their pension plans.
However, despite these structural similarities, there are significant differences
between these bills and the Administration's proposal. These differences include:
• Overly long phase-in periods;
• Continued inaccurate measurement of pension assets and liabilities;
• The use of mortality tables that do not recognize expected future increases
in longevity to compute pension liabilities;
• The lack of any effective mechanism to increase the funding requirements
for pension plans with financially weak sponsoring firms;
• The continued use of credit balances; and
• The inclusion of industry-specific relief and administrative workout programs
that will weaken the entire funding regime.
More specifically, we believe the conference report should not include the myriad
transition rules that delay implementation of the full funding targets and the
establishment of important restrictions on unfunded benefit increases. An effective
date of the legislation to plan years beginning on or after January 1, 2007, will give
plans sufficient time to adapt to the changes if Congress moves swiftly to adopt a
bill. A seven-year amortization schedule will provide a sufficiently generous glide
path to full funding for all plans, without weakening the funding targets with
unnecessary delays.
Moreover, we support limiting asset and liability smoothing to no longer than twelve
months, as currently in the Senate bill. The seven year amortization period
sufficiently limits contribution volatility, and plan sponsors can take additional steps
to reduce contribution volatility, such as taking advantage of generous maximum
deductible limits. It is inappropriate to reduce the accuracy of pension assets and
liabilities measurement as a means of limiting contribution volatility. On this point,
we are very concerned about provisions in both bills that would use discount factors
drawn from the yield curve of investment-grade, corporate bonds. We have been
very clear on this point - the appropriate credit quality for discounting pension
liabilities and computing lump-sum payouts is high-quality, as opposed to merely

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investment-grade.
Mortality assumptions are also a critical component to accurate measurement of
plan liabilities. The Administration believes that mortality tables used to measure
plan liabilities should be automatically and annually self-updating as in the House
bill. However, measurement accuracy requires that the mortality tables reflect
recent and projected improvements in future longevity and should allow the
Treasury Department to continue to refine and update the required tables further to
reflect the latest information about current and expected future mortality conditions.
The Administration opposes allowing companies to use their own mortality
assumptions, a practice that has been misused in the past.
To ensure the fair treatment of financially-strong sponsors of well-funded pension
plans and to reduce losses to workers, it is essential that pension funding rules
appropriately account for the risk that underfunded plans with financially-weak
sponsors pose to the pension insurance system as a whole. For this reason, the
Administration believes the conference report should include an effective and
robust "at-risk" funding measure. PBGC modeling has shown that robust at-risk
funding provisions significantly reduce claims and losses to workers for relatively
small increases in aggregate funding. This is because they are targeted funding
requirements. The Administration's proposal suggested the use of credit ratings for
this purpose of targeting. We look forward to working with Congress to design a
robust at-risk funding provision that includes some measure of plan sponsor
financial health.
This issue of credit balances is also an area of concern. Credit balances permit
sponsors of underfunded plans to skip contributions despite the fact that their
workers' retirement security remains at risk. The House and Senate bills each take
steps to limit the use of credit balances, but the provisions are complex and
continue to allow underfunded plans to use credit balances to take funding
holidays. I hope that the final bill can go further toward eliminating or more severely
restricting the use of credit balances. Credit balances are, at best, an inefficient
means to encourage funding above the minimum and, at worst, a dangerous double
counting of pension assets.
The Administration applauds the House's decision to not provide any targeted
funding relief for airlines or other specific companies or industries and to reject
special administrative workout programs. The Administration opposes these
provisions because it is obvious that allowing underfunded plan sponsors to
negotiate a separate regime of weaker funding rules with a government agency will
weaken the incentives for plan sponsors to fund their pension promises
adequately.
Multiemployer Defined Benefit Pension Reform
While much of the focus has been on single-employer plans, the Administration
supports efforts to improve the funded status of multiemployer plans as well.
However, we are concerned about provisions that would allow the extended
override of the minimum funding rules in the most severely at-risk multiemployer
plans. We believe that the funding improvement plan or rehabilitation plan should
be in addition to minimum funding rules, thus ensuring that plan funding will
improve relative to current law. There is a great deal of uncertainty about exactly
how the multiemployer provisions will operate in practice, which is why I believe that
adopting this "do no harm" approach is the prudent way to proceed. The
Administration also suggests that a provision be included to require a mid-course
review of the effectiveness of funding improvement and rehabilitation plans. This
review should provide for the implementation of appropriate changes if these plans
are not effective.
Defined Contribution Pension Reform
The current legislative agenda is not solely about defined benefit pensions. It is
critical that we improve the regulatory structure around 401 (k)-type defined
contribution plans as they are increasing in popularity. The Center for Retirement
Research at Boston College recently issued a report on the state of private
pensions using current form 5500 data.W The report shows a continued trend
towards the use of DC plans. The percent of workers with a DC plan (alone or in
combination with a DB plan) has risen from 19 percent in 1981 to 45 percent today.

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The same report estimates that in 2003, for the first time ever, DC plans had more
money under management ($2 trillion) than DB plans ($1.945 trillion).
Auto Enrollment

An area of much interest in the DC plan arena is automatic enrollment.
Encouraging firms to adopt automatic enrollment (or AE) is a beneficial goal
because academic research suggests it Significantly increases 401 (k) participation.
The increase in take-up is largest for shorter tenure workers and for groups that
typically have lower take-up, such as lower-paid workers and ethnic minorities.
However, one potential concern related to AE is that the overall contribution rate is
also affected; research suggests that a large majority of workers accept the default
rate after automatic enrollment is implemented. In fact, some research suggests
that the introduction of AE actually induces some workers to choose a lower
contribution rate than they otherwise would have chosen if AE had not been
implemented. However, this concern can be addressed through escalator
provisions that automatically increase employee contributions periodically over
time.
While AE is not widely used, especially among small employers, recent surveys
suggest that more and more firms are either adopting or considering adopting AE.
Broader adoption of AE seems to have been hindered primarily by three barriers:
cost, state laws, and concerns about investment choices.
Cost: When a plan introduces AE, it will expect to have greater employee
participation and therefore pay more in matches to employees. Employers
can, of course, change the terms of their plans, but doing so may run afoul
of nondiscrimination safe harbors. The nondiscrimination rules are
designed to ensure similar treatment of employees under tax preferred
savings arrangements. The current rules offer safe harbor provisions for
plans that meet minimum requirements in terms of plan generosity. The
pension bills pending in Congress provide for a reduction in the minimum
plan generosity to qualify for safe harbor status if using AE.
• State Laws: There are various state laws that prohibit AE; both the House
and Senate pension bills preempt these laws.
• Investment Choices: There is some concern that employers may incur some
legal liability when making decisions about default investments for
employees who are auto-enrolled into 401 (k) participation (for example if
their investments lose value). The pension reform bills direct or authorize
the Labor Department to issue regulations related to default investments.
The Labor Department is currently working on regulations defining a safe
harbor for AE default investments.
•

ill Buessing, Marric and

Mauricio Soto, The State of Private Pensions: Current
5500 Data, The Center for Retirement Research, February 2006, Number 42.

Both the House and Senate bills include provisions aimed at overcoming these
barriers. The Administration applauds these efforts and would like to see a
conference report in which AE provisions apply to all workers and escalator
provisions are included and applied broadly to the worker population, but with a
minimum of complexity. In return, we feel that there can be a reasonable reduction
in the non-discrimination safe harbor required matching contributions, a reasonable
reduction in non-elective matching, and some increases in the vesting period, but
less than the 2 years proposed in the House and Senate.
Other DC Reforms Provisions

In early 2002, the President proposed several other reforms to modernize and
improve the defined contribution system. Congress has acted on some of these
reforms already as part of the Sarbanes-Oxley legislation. However, there still
three reforms outstanding. These reforms have been passed by the House on
several occasions and are contained in the Senate version of the pension
legislation. The House and Senate have approached these remaining three items
in different ways.
•

Increased Access to Investment Advice: Employers should be

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encouraged to make professional investment advice available to workers so
that they can make informed investment decisions with respect to their 401
(k) plans. This is why the Administration supports provisions in the House
pension bill that would allow fiduciary advisors to provide investment advice
to plans, participants, and beneficiaries, subject to certain disclosure
requirements and other safeguards.
• Freedom to Diversify Investments: Workers should be free to choose
how to invest their retirement savings. The Senate bill allows participants to
diversify their investments by selling their company stock after three years,
which we support.
• Better Information through Quarterly Benefits Statements: Workers
need timely information about their 401 (k) accounts. Under current law,
employers are only required to make statements available to workers on an
annual basis. We support a provision in the Senate bill that requires
companies to provide participants with quarterly benefit statements with
information about their individual accounts, including the value of their
assets, their rights to diversify, and the importance of maintaining a
diversified portfolio.
Permanent Extension of EGTRRA Provisions

The Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA) made
many important changes to employer-provided retirement plans. For example,
EGTRRA expanded the contribution limits for IRAs and retirement plans and
created catch-up contributions for those age 50 and older, Roth 401 (k) plans, and
the Saver's credit, and provided incentives for small businesses to offer pension
plans. The EGTRRA provisions will sunset in 2011, unless they are extended by
Congress.
The House bill would permanently extend EGTRRA's retirement savings provisions
- a step we certainly support. The Senate bill does not include provisions to extend
the EGTRRA provisions.
Long-term care and the Life Care Annuity

Another important element of retirement security that the House pension reform bill
addresses is the financing of long-term care expenses. Currently, Medicare and
Medicaid pay for over half of nursing home and home health services for the
Medicare population. With the impending Baby Boom retirement, this burden on
federal and state governments is unsustainable.
As part of the recently enacted Deficit Reduction Act, Congress encouraged better
planning for long-term care needs in retirement. Measures include restrictions on
asset transfers for Medicaid qualification, limiting eligibility for Medicaid long-term
care for people with substantial home equity, and allowing the state to become the
residual claimant of large annuities for Medicaid long-term care beneficiaries.
The House pension bill builds on these reforms to encourage long-term care
planning by clarifying the tax treatment of combined long-term care insurance
policies and other insurance products, including annuities.
It is encouraging to see Congress explore ways to improve the market for long-term
care insurance, an undeveloped market that will be crucial in improving long-term
care financing. The risk of long-term care needs is certainly an insurable risk for
people at or near retirement. Yet long-term care insurance pays for less than two
percent of nursing home costs for the Medicare population. Encouraging innovation
in the private long-term care insurance market would not only relieve the
government of the burden of financing a majority of the long-term care expenses of
the retiree population, but it would also save people from the risk of having to wipe
out all their assets and go on Medicaid in the event of severe disability.
On that note, I'd like to talk about a product that I have had an interest in even
before coming to the Treasury: the life care annuity. The life care annuity combines
an immediate life annuity with the disability form of long-term care insurance--the
kind of product that the House pension reform bill addresses. In return for a single
premium, an insurance company would make steady periodic payments to a retired
household (individual or couple), and would increase them substantially when a
member of the household becomes disabled to the extent that he would require

4098.htm

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Page 6 of6
long-term care services.
Such a product could offer economic security for retirees by providing a steady
stream of income combined with protection in the event of catastrophic costs
associated with disability. The important innovation is that by linking the annuity
with the long-term care insurance, we pool populations with two different risks:
individuals who are likely to be long-lived and individuals who are in relatively poor
health. This pooling allows the integrated product to be sold more cheaply than a
comparable life annuity and long-term care insurance policy purchased separately.
Another benefit is that the pooling of risks also allows most individuals who would
not ordinarily pass underwriting for long-term care insurance to be eligible for the
product, thus expanding the market.
While the long-term care insurance market is young, I believe the life care annuity
could become an important element in financing the long-term care needs of certain
elderly populations. Importantly, such an approach would reduce dependence on
public programs like Medicaid, and would eventually work well as a distribution
mechanism from qualified retirement plans and Social Security PRAs.
The House pension bill takes a couple of steps to make the life care annuity more
marketable. First, it allows long-term care insurance policies to be considered taxqualified when purchased as a rider on an annuity. This means that tax benefits
given to certain long-term care policies will not be denied to policies purchased in
conjunction with an annuity. Second, because annuities and long-term care
policies are subject to different tax treatments, the investment in the annuity is
reduced by the premium for the long-term care policy, and charges against the
annuity for long-term care expenses are excluded from gross income. This allows
the two parts of the policy to be treated, for income tax purposes, similar to standalone policies.
Conclusion
We have before us an historic opportunity to make fundamental improvements to
worker's retirement security in the context of both the defined benefit and defined
contribution systems. While the House and Senate pension reform bills do include
many valuable provisions, we believe that more meaningful reforms are necessary.
We look forward to working with the conference committee to make sure that the
final legislative product ensures that pensions promises made are pension
promises kept.

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March 7, 2006
JS-4099
Treasury Officials Brief North Koreans on Actions to Stem
DPRK Illicit Financial Activity
New York, NEW YORK - The U.S. Department of the Treasury today briefed
representatives of the Democratic Peoples Republic of Korea (DPRK) on the action
taken against Banco Delta Asia (BOA) and measures to protect the U.S. financial
system from illicit activities. Representatives from the State Department and the
National Security Council also attended.
The briefing of North Korean officials focused on the Treasury's authorities to
combat illicit finance and the tools we utilize to protect the U.S. financial system,
and afforded a useful opportunity to clarify numerous issues. It specifically covered
Treasury's designation of BOA in Macau as a "primary money laundering concern"
under Section 311 of the USA PATRIOT Act. "BOA was designated because its
facilitation of North Korean illicit financial activity presents an unacceptable risk to
the U.S. financial system," said Daniel Glaser, the Treasury Deputy Assistant
Secretary for Terrorist Financing and Financial Crimes.
Section 311 is a powerful tool that the U.S. uses to protect itself from corrupt
finance threats worldwide. Treasury clarified that the Section 311 action against
BOA was a regulatory measure to protect the U.S. financial system from abuse, and
not a sanction on North Korea. Treasury further clarified that the designation of
BOA was separate and unrelated to ongoing diplomatic negotiations of the Six
Party Talks.
As described in the Treasury's formal notice in September, the designation of BOA
was based primarily, but not exclusively, on BOA's extensive relationships with
North Korean entities involved in illicit activities.
Since the Patriot Act was enacted in 2001, Treasury has designated nine financial
institutions and three jurisdictions for their involvement in various types of money
laundering activity, including the facilitation of narcotics trafficking, currency
counterfeiting, organized crime and the financing of terrorist groups.
"The Treasury Department will continue to take action as necessary to protect
against threats to our financial system and our institutions," Glaser concluded.

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Page 1 of2

PRESSROOM

March 7, 2006
2006-3-7-17-10-17-22021
U.S. International Reserve Position
The Treasury Department today released U.S. reserve assets data for the latest week. As indicated in this table, U.S. reserve assets
totaled $65,393 million as of the end of that week, compared to $64,959 million as of the end of the prior week.
I. Official U.S. Reserve Assets (in US millions)

I

February 2U006
\1

I

TOTAL.

11. Foreign Currency Reserves 1

Ia. Securities

5

II Of whjch, issuer headquartered in the U. S.

I

64,959

I

I

Euro

Yen

11,113

10,865

I

I

I

March 3, 2006

65,393
TOTAL

I

21,978

II

0

Yen

TOTAL

I
I

I

10,903

I
I

22,136

I

5,300

Euro

I
I

11,233

I
I

11,042

I

0

Si'SWi'h:
ntral banks and BIS

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

I

10,903

I

I
I

5,281

IU,IO"t

0

b.iL Of which, banks located abroad

0

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

0

Ib.iii. Of which, banks located in the U.S.
\2. IMF Reserve Position 2

13. Special Drawing Rights (SDRs) 2

I

I

II

0

II

II

I

7,587

I

I

II

8,166

4. Gold Stock 3

16,342

I
I
I

I

I
I

0
0

II
II

°

II
II
II

II

II
II

0

I

7,672

I
I

8,198

11,044

11,044

0

0

eserve Assets

II. Predetermined Short-Term Drains on Foreign Currency Assets
February 24, 2006
Euro

Yen

March 3, 2006

PO~AL

Euro

II

Yen

1. Foreign currency loans and securities

TOTAL

I

0

I

I

0

I

2. Aggregate short and long positions in forwards and futures in foreign currencies vis-a-vis the U.S. dollar:
0

I

I

0

I

I

0

I

I

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

I

3. Other

0

I

0

III. Contingent Short-Term Net Drains on Foreign Currency Assets

[

February 24, 2006

II

Euro

I

TOTAL

Yen

0

1. Contingent liabilities in foreign currency
1.a. Collateral guarantees on debt due within 1
year

r

I

http://treas.gov!press/releaseS/20063717101722021.htm

II

I

Euro

II

I

I

II

I

II

I

March 3, 2006

I

1/

Yen

I

TOTAL

I

0

\I

I

3/31/2006

Page 2 of2
11.b . Other contingent liabilities

I

I

2. Foreign currency securities with embedded
options

I

I

3. Undrawn, unconditional credit lines
13.a. With other central banks

I

I

II

1\

0

I

I

Headquartered in the U. S.

1\

3.e. With banks and other financial institutions

I

II
II

I
I

~

0

I

3.b. With banks and other financial institutions

I

II
II

Headquartered outside the U. S.

4. Aggregate short and long positions of options
in foreign

I

~rrencies vis-a-vis the U.S. dollar

0

I

0

a. Short positions
~a.1. Bought puts

I

I

14.b. Long positions

1\

1\

I
I

14.b.1. Bought calls

1\

I

I

.a.2. Written calls

14.b.2. Written puts

I

I

II

I

Notes:

11 Includes holdings of the Treasury's Exchange Stabilization Fund (ESF) and the Federal Reserve's System Open Market Account
(SOMA), valued at current market exchange rates. Foreign currency holdings listed as securities reflect marked-to-market values, and
deposits reflect carrying values. Foreign Currency Reserves for the latest week may be subject to revision. Foreign Currency
Reserves for the prior week are final.
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 for the latest week reflect any
necessary adjustments, including revaluation, by the U.S. Treasury to IMF data for the prior month end.
31 Gold stock is valued monthly at $42.2222 per fine troy ounce.

http://treas.gov!press/releaseSIZ0063717101722021.htm

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March 8, 2006
js-4100
Media Advisory:
Treasury Secretary John W. Snow to Visit Pittsburgh to Discuss the U.S.
Economy
U.S. Treasury Secretary John W. Snow will visit southwestern Pennsylvania
on Friday to discuss the U.S. economy and President Bush's agenda for continued
strong growth and job creation. While in Pittsburgh, Secretary Snow will tour the
ANSYS facility and participate in roundtable with local technology company
executives. ANSYS is a company that designs, develops, markets and globally
supports engineering simulation solutions used to predict how product designs will
behave in manufacturing and real-world environments.

a

The following event is open to credentialed media:
Who

U.S. Treasury Secretary John W. Snow

What

Site visit and roundtable

When

Friday, March 10, 11 :00 a.m. (EST)

Where

ANSYS Inc.
Southpointe
275 Technology Drive
Canonsburg, PA

- 30 -

http://www.treas.go y/press/releaseS/js4100.htm

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March 9, 2006
JS-4101

Treasury Launches Consumer Financial Protection Forum
The Treasury Department this week launched the first meeting of the newly created
Consumer Financial Protection Forum which was established to focus exclusively
on financial consumer concerns and to provide a permanent forum for
communication between federal and state regulators on these issues.
The Forum is chaired by the Treasury Department and participants include the
federal banking and credit union regulators, the Federal Trade Commission, and
representatives from state supervisory organizations.
"The strength of our economy and financial services sector depends on confidence
in the system on the part of consumers," said Assistant Secretary for Financial
Institutions Emil Henry, Jr. "The goal of the Forum is straightforward - bring federal
and state regulators together to share information and discuss ways to address
evidence of consumer financial abuse by financial institutions."
The Forum will provide a mechanism for sharing information about patterns of
abuse, including emerging trends and ongoing problems at financial institutions that
are subject to federal or state supervision. It will encourage discussion about
consumer protection issues affecting financial institutions in order to assure that the
most efficient and effective remedies are pursued.
The Forum will review how consumer complaints are handled by the participating
agencies and develop suggestions as to how those processes can be improved. It
will also support public education efforts to help consumers recognize and avoid
abusive practices in the financial services arena.
The Forum will meet periodically to discuss a range of financial services consumer
issues.
-30-

http://www.t!"eas.goy/press/releases/js4101.htm

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March 9, 2006
js-4102
Media Advisory:
Treasury Assistant Secretary to Speak to Local Business Leaders
in Augusta, Georgia

U.S. Treasury Assistant Secretary for Economic Policy Mark Warshawsky will
speak to local bankers in Augusta, Georgia on the Administration's economic
policies as well as the current strength of the U.S. economy.
Who

Assistant Secretary for Economic Policy Mark Warshawsky

What

Meeting with local Augusta business leaders

When

Friday, March 10, 9:00 - 10:15 a.m. (EST)

Where

Georgia Bank & Trust
Cotton Exchange Building
#32 8 th Street (corner of 8th & Reynolds)
Augusta, GA

Note

Meeting will open to press at 9:45 a.m.
-30-

http://www.treas.gov/pressireleases/j34102.htm

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March 9, 2006
jS-4103

Media Advisory:
Treasury Official Will Visit Wheeling, West Virigina to Discuss
the U.S. Economy
Senior Advisor to the U.S. Treasury Secretary Kimberly Reed will visit Wheeling,
West Virginia on Friday to discuss the U.S. economy and President Bush's agenda
for continued strong growth and job creation. While in Wheeling, Reed will meet
with and give remarks to Wheeling area business leaders at the Fort Henry Club.
Reed originally is from Buckhannon, West Virginia, and is a graduate of West
Virginia Wesleyan College and West Virginia University College of Law.
The following event is open to credentialed media:

Who

Treasury Official Kimberly Reed

What

Remarks to Wheeling area business leaders

When

Friday, March 10, 12:00 p.m. (EST)

Where

Fort Henry Club
1324 Chapline St.
Wheeling, WV

- 30 -

http://www.treas.gov/pressireleaseS/j34103.htm

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March 9. 2006
js-4104
Statement of Treasury Secretary John W. Snow on Renewal of the U.S. Patriot
Act
"The President's signature today on the renewal of the U.S.A. Patriot Act enables
us to continue to fight the war on terror with the tools necessary to do the job.
"At the Treasury Department, the Patriot Act has significantly advanced the
financial war on terror. While hatred fuels the terrorist agenda, it is money that
makes it possible for them to carry out their ruthless acts.
"The Patriot Act has greatly advanced the ability of the Treasury, working with
businesses and the people of this great nation, to restrict the flow of terrorist blood
money. Its renewal is good news for Americans, bad news for those who seek to
harm us."
BACKGROUND
The Patriot Act enables the Treasury to better track and identify terrorist funds
through effective sharing of information with the financial sector both vertically between the government and the industry - and horizontally - by providing a safe
harbor that allow s industry members to also share information with each other.
This sheds more light on the financial system as terrorists seek to conceal their
funding.
The Patriot Act has also made America safer by helping the Treasury prevent
money laundering and terrorist financing through greater transparency of
correspondent accounts maintained by U.S. banks on behalf of foreign banks.
Notably the Act expressly prohibits shell banks from participating in the U.S.
financial system and insists upon strict record keeping regarding the ownership of
each non-U.S. bank that maintains a correspondent account with a U.S. institution.
The Act protects our financial system from illicit funds emanating from jurisdictions
or institutions that do not have adequate rules guaranteeing a certain level of
financial transparency. It has authorized the Treasury to designate foreign
jurisdictions or institutions as a . primary money laundering concerns.' Once
designated as such, the Treasury Department may take a range of regulatory
actions to protect the U.S. financial system, including requiring U.S. financial
institutions to terminate correspondent relationships with the designated entity or
jurisdiction. Such a measure essentially excludes the designated entity or
jurisdiction from the U.S. financial system.
-30-

http://www.treas.gov/pressireleases/j34104.htm

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March 9, 2006
JS-4105
Treasury Issues Final Rule Against Commercial Bank of Syria
U.S. Financial Institutions Must Terminate Correspondent Accounts

The U.S. Department of the Treasury today finalized its proposed rule against the
Commercial Bank of Syria (CBS), along with its subsidiary, the Syrian Lebanese
Commercial Bank, requiring U.S. financial institutions to terminate all correspondent
accounts involving CBS.
The Commercial Bank of Syria is owned and controlled by the Syrian government,
a designated State Sponsor of Terrorism since 1979. The Bank has been used by
terrorists to move funds and has acted as a conduit for the laundering of proceeds
generated from the illicit sale of Iraqi oil.
"The Commercial Bank of Syria has been used by terrorists to move their money
and it continues to afford direct opportunities for the Syrian government to facilitate
international terrorist activity and money laundering," said Stuart Levey, the
Treasury's Under Secretary for Terrorism and Financial Intelligence (TFI). "Today's
action is aimed at protecting our financial system against abuse by this arm of a
state-sponsor of terrorism."
The Treasury's Financial Crimes Enforcement Network (FinCEN) today sent to the
Federal Register the final rule that prohibits any U.S. bank, broker-dealer, futures
commission merchant, introducing broker or mutual fund from opening or
maintaining a correspondent account for or on behalf of CBS.
In May 2004, the Treasury found CBS to be of "primary money laundering concern"
pursuant to Section 311 of the USA PATRIOT Act, and FinCEN issued a notice of
proposed rulemaking. No one disputed the grounds for the finding or the need for
protective measures.
"As a state-owned entity with inadequate money laundering and terrorist financing
controls, the Commercial Bank of Syria poses a significant risk of being used to
further the Syrian Government's continuing support for international terrorist
groups," Levey added. "The serious risks posed by CBS have not been adequately
mitigated by the Syrian Government's limited efforts to address deficiencies in
Syria's financial system."
The Syrian Government continues to provide political and material support to
Lebanese Hizballah and Palestinian terrorist groups. HAMAS, Palestinian Islamic
Jihad (PIJ), and the Popular Front for the Liberation of Palestine (PFLP), among
others, continue to maintain headquarters and offices in Damascus, from which
their officers issue guidance and direct affairs. In January 2006, the Syrian
Government hosted a meeting in Damascus between Iranian government officials
and several designated terrorist leaders, including Abdullah Ramadan Shallah of
PIJ, Ahmed Jibril of PFLP-General Command, Hassan Nasrallah of Lebanese
Hizballah, and Khaled Mishal of HAMAS. The Syrian Government also continues to
permit Iran to use Damascus as a transshipment point for re-supplying Lebanese
Hizballah in Lebanon.
For more information on the Treasury's May 2004 designation of CBS as a "primary
money laundering concern," please visit:
http://www .treasury.gov/press/rel~ases/js 1538"htm

http://www.t!'eas.gov/pressireleases/j34105.hlm

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LINKS

http://www.treas.gov/pressireleases/j34105.htm

3/31/2006

BILLING CODE: 481O-02-P

DEPARTMENT OF THE TREASURY
31 CFR Part 103
RIN IS06-AA64

Financial Crimes Enforcement Network; Amendment to the Bank Secrecy Act
Regulations-Imposition of Special Measure Against Commercial Bank of Syria,
Including Its Subsidiary, Syrian Lebanese Commercial Bank, as a Financial
Institution of Primary Money Laundering Concern
AGENCY: Financial Crimes Enforcement Network, Department of the Treasury.
ACTION: Final rule.
SUMMARY: The Financial Crimes Enforcement Network is issuing a final rule
imposing a special measure against Commercial Bank of Syria as a financial institution
of primary money laundering concern, pursuant to the authority contained in 31 U.S.C.
5318A of the Bank Secrecy Act.

DATES: This final rule is effective on [INSERT DATE 30 DAYS AFTER THE DATE
OF PUBLICATION OF THIS DOCUMENT IN THE FEDERAL REGISTER].

FOR FURTHER INFORMATION CONTACT: Regulatory Policy and Programs
Division, Financial Crimes Enforcement Network, (800) 949-2732.

SUPPLEMENTARY INFORMATION:
I.

Background
A.

Statutory Provisions

On October 26, 2001, the President signed into law the Uniting and Strengthening
America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism
Act of 200 1, Public Law 107-56 (USA PATRIOT Act). Title III of the USA PATRIOT

Act amends the anti-money laundering provisions of the Bank Secrecy Act, codified at 12
U.S.c. 1829b, 12 U.S.c. 1951-1959, and 31 U.S.c. 5311-5314 and 5316-5332, to
promote the prevention, detection, and prosecution of money laundering and the
financing of terrorism. Regulations implementing the Bank Secrecy Act appear at 31
CFR Part 103. 1 The authority of the Secretary ofthe Treasury ("the Secretary") to
administer the Bank Secrecy Act and its implementing regulations has been delegated to
the Director of the Financial Crimes Enforcement Network. 2 The Act authorizes the
Director to issue regulations to require all financial institutions defined as such in the Act
to maintain or file certain reports or records that have been determined to have a high
degree of usefulness in criminal, tax, or regulatory investigations or proceedings, or in the
conduct of intelligence or counter-intelligence activities, including analysis, to protect
against international terrorism, and to implement anti-money laundering programs and
compliance procedures. 3
Section 311 of the USA PATRIOT Act added section 5318A to the Bank Secrecy
Act, granting the Secretary the authority, after finding that reasonable grounds exist for
concluding that a foreign jurisdiction, institution, class of transactions, or type of account
is of "primary money laundering concern," to require domestic financial institutions and
domestic financial agencies to take certain "special measures" against the primary money
laundering concern. Section 311 identifies factors for the Secretary to consider and

I The statute generally referred to as the "Bank Secrecy Act," Titles I and II of Pub. L. 91-508, as
amended, is codified at 12 U.S.C 1829b, 12 U.s.C 1951-1959, and 31 U.S.C 5311-5314, 5316-5332. In
pertinent part, regulations implementing Title II of the Bank Secrecy Act appear at 31 CFR Part 103.
2 Therefore, references to the authority of the Secretary of the Treasury under section 311 of the USA
PATRIOT Act apply equally to the Director of the Financial Crimes Enforcement Network.
3 Language expanding the scope of the Bank Secrecy Act to intelligence or counter-intelligence activities
to protect against international terrorism was added by section 358 of the Uniting and Strengthening
America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism ("USA PATRIOT")
Act of2001, Pub. L. 107-56 (Oct. 26, 2001).

2

Federal agencies to consult before we may find that reasonable grounds exist for
concluding that a jurisdiction, institution, class of transactions, or type of account is of
primary money laundering concern. The statute also provides similar procedures,
including factors and consultation requirements, for selecting the specific special
measures to be imposed against the primary money laundering concern.
Taken as a whole, section 311 provides the Secretary with a range of options that
can be adapted to target specific money laundering and terrorist financing concerns most
effectively. These options give us the authority to bring additional and useful pressure on
those jurisdictions and institutions that pose money-laundering threats and allow us to
take steps to protect the U.S. financial system. Through the imposition of various special
measures, we can gain more information about the concerned jurisdictions, institutions,
transactions, and accounts; monitor more effectively the respective jurisdictions,
institutions, transactions, and accounts; and ultimately protect U.S. financial institutions
from involvement with jurisdictions, institutions, transactions, or accounts that pose a
money laundering concern.
Before making a finding that reasonable grounds exist for concluding that a
foreign financial institution is of primary money laundering concern, the Secretary is
required by the Bank Secrecy Act to consult with both the Secretary of State and the
Attorney General.
In addition to these consultations, when finding that a foreign financial institution
is of primary money laundering concern, the Secretary is required by section 311 to
consider "such information as [we] determine to be relevant, including the following
potentially relevant factors:"

3

•

The extent to which such financial institution is used to facilitate or promote
money laundering in or through the jurisdiction;

•

The extent to which such financial institution is used for legitimate business
purposes in the jurisdiction; and

•

The extent to which such action is sufficient to ensure, with respect to transactions
involving the institution operating in the jurisdiction, that the purposes of the
Bank Secrecy Act continue to be fulfilled, and to guard against international
money laundering and other financial crimes.
If we determine that reasonable grounds exist for concluding that a foreign

financial institution is of primary money laundering concern, we must determine the
appropriate special measure(s) to address the specific money laundering risks. Section
311 provides a range of special measures that can be imposed, individually, or jointly, in
any combination, and in any sequence. 4 In the imposition of special measures, we follow
procedures similar to those for finding a foreign financial institution to be of primary
money laundering concern, but we also engage in additional consultations and consider
additional factors. Section 311 requires us to consult with other appropriate Federal
agencies and parties 5 and to consider the following specific factors:

Available special measures include requiring: (I) recordkeeping and reporting of certain financial
transactions; (2) collection of information relating to beneficial ownership; (3) collection of information
relating to certain payable-through accounts; (4) collection of information relating to certain correspondent
accounts; and (5) prohibition or conditions on the opening or maintaining of correspondent or payablethrough accounts. 31 U.S.c. 5318A(b)(I) - (5). For a complete discussion of the range of possible
countermeasures, see 68 FR 18917 (April 17,2003) (proposing to impose special measures against Nauru).
5 Section 5318A(a)(4)(A) requires the Secretary to consult with the Chairman of the Board of Governors of
the Federal Reserve System, any other appropriate Federal banking agency, the Secretary of State, the
Securities and Exchange Commission, the Commodity Futures Trading Commission, the National Credit
Union Administration, and, in our sole discretion, "such other agencies and interested parties as the
Secretary may find to be appropriate." The consultation process must also include the Attorney General if
the Secretary is considering prohibiting or imposing conditions upon the opening or maintaining of a
correspondent account by any domestic financial institution or domestic financial agency for the foreign
financial institution of primary money laundering concern.

4

4

•

Whether similar action has been or is being taken by other nations or multilateral
groups;

•

Whether the imposition of any particular special measure would create a
significant competitive disadvantage, including any undue cost or burden
associated with compliance, for financial institutions organized or licensed in the
United States;

•

The extent to which the action or the timing of the action would have a significant
adverse systemic impact on the international payment, clearance, and settlement
system, or on legitimate business activities involving the particular institution;
and

•

The effect of the action on U.S. national security and foreign policy.6
In this final rule, we are imposing the fifth special measure (31 U.S.c. 5318A(b)

(5» against Commercial Bank of Syria. The fifth special measure prohibits or imposes
conditions upon the opening or maintaining of correspondent or payable-through
accounts for or on behalf of the foreign financial institution of primary money laundering
concern. This special measure may be imposed only through the issuance of a regulation.

B.

Commercial Bank of Syria

Commercial Bank of Syria is based in Damascus, Syria, and maintains
approximately 50 branches and employs about 4,500 persons. All of the branches are
located in Syria. It was established in Syria in 1967 as the single, government-owned
bank specializing in servicing foreign trade and commercial banking, including foreign

Classified information used in support of a section 311 finding of primary money laundering concern and
imposition of special measure(s) may be submitted by Treasury to a reviewing court ex parte and in
camera. See section 376 of the Intelligence Authorization Act for Fiscal Year 2004, Pub. L. 108-177
(amending 31 U.S.C. 5318A by adding new paragraph (f).
6

5

exchange transactions. Commercial Bank of Syria maintains correspondent accounts
with banks in countries all over the world, but we are not aware of any correspondent
accounts with U.S. financial institutions. 7
Commercial Bank of Syria has one subsidiary, Syrian Lebanese Commercial
Bank, located in Beirut, Lebanon. The subsidiary offers banking services, with the
emphasis on providing import/export facilities to individuals in Lebanon and Syria.
Syrian Lebanese Commercial Bank has two branches in Beirut and two representative
offices, one in Aleppo and another in Damascus, Syria. We are not aware of any
correspondent accounts maintained by the Syrian Lebanese Commercial Bank with U.S.
financial institutions. 8
In February 2006, Syria reportedly switched all of its foreign currency
transactions to euros from U.S. dollars to avoid possible settlement problems involving
dollar payment systems, apparently in anticipation of possible future U.S. Government
action. Most of the government's foreign currency transactions are conducted through
Commercial Bank of Syria. Commercial Bank of Syria reportedly has also stopped
dealing in U.S. dollars for international transactions, such as imports, exports, and letters
of credit.

II.

The 2004 Finding and Subsequent Developments
A.

The 2004 Finding

Several u.s. banks terminated their correspondent accounts with the Commercial Bank of Syria after we
found the foreign bank to be of primary money laundering concern and proposed imposing the fifth special
measure.
8 For purposes of this document and unless the context dictates otherwise, references to Commercial Bank
of Syria include Syrian Lebanese Commercial Bank, and any other branch, office, or subsidiary of
Commercial Bank of Syria or Syrian Lebanese Commercial Bank.
7

6

In May 2004, the Secretary, through the Director of the Financial Crimes
Enforcement Network, found that reasonable grounds exist for concluding that
Commercial Bank of Syria, a Syrian government-owned bank, is a financial institution of
primary money laundering concern. This finding was published in the notice of proposed
rulemaking, which proposed prohibiting u.S. financial institutions from, directly or
indirectly, opening and maintaining correspondent accounts for Commercial Bank of
Syria, and any of its branches, offices, and subsidiaries, pursuant to the authority under
9

31 U.S.c. 53l8A. The notice of proposed rulemaking outlined the various factors
supporting the finding and proposed prohibition. In finding Commercial Bank of Syria to
be of primary money laundering concern, we determined that:
•

Commercial Bank of Syria was used by criminals to facilitate or promote money
laundering. In particular, we determined Commercial Bank of Syria had been
used as a conduit for the laundering of proceeds generated from the illicit sale of
Iraqi oil and had been used by terrorists or persons associated with terrorist
organizations. 10

•

Any legitimate business use of Commercial Bank of Syria was significantly
outweighed by its use to promote or facilitate money laundering and other
financial crimes.

•

The finding and proposed special measure would prevent suspect accountholders
at Commercial Bank of Syria from accessing the U.S. financial system to
facilitate money laundering and would bring criminal conduct occurring at or

69 FR 28098 (May 18, 2004).
For a more detailed analysis of the finding of primary money laundering concern, see the notice of
proposed rulemaking.
9

10

7

through Commercial Bank of Syria to the attention of the international financial
community and thus serve the purposes of the Bank Secrecy Act.
We also stated in our finding that Commercial Bank of Syria is licensed in Syria,
a jurisdiction with very limited money laundering controls. Finally, in the notice of
proposed rulemaking containing our finding, we further stated that Commercial Bank of
Syria, as a financial entity under the control of a designated State Sponsor of Terrorism,
provides cause for real concern about terrorist financing and money laundering activities.

B.

Subsequent Developments

Commercial Bank of Syria and Syria did not dispute any of these grounds for our
May 2004 finding of Commercial Bank of Syria as a primary money laundering concern.
Following this finding, however, Commercial Bank of Syria and Syrian government
financial authorities did engage in initial discussions with the U.S. Department of the
Treasury to learn more about the bases for the finding and to consider developing
effective money laundering controls.
Pursuant to this engagement, Syria has taken certain steps to develop an antimoney laundering regime, although these steps are not sufficient to address our concerns
about money laundering and terrorist financing issues within Commercial Bank of Syria.
In response to international pressure to improve its anti-money laundering regime, Syria
passed Decree 33 in May 2005, which strengthened an existing Anti-Money Laundering
Commission (the "Commission") 11 and laid the foundation for the development of a

11 The Anti-Money Laundering Commission, created by legislation passed in 2003, is the financial
intelligence unit for Syria and is charged with overseeing all issues related to money laundering and
terrorist financing, including unveiling bank secrecy; establishing memoranda of understandings with
counterpart financial intelligence units; conducting money laundering and terrorist financing inquiries; and
freezing suspected accounts.

8

financial intelligence unit. 12 Under this law, all banks and non-bank financial institutions
are required to keep records on transactions exceeding an amount specified by the
Commission and also on transactions where it is suspected that money laundering or
terrorist financing is involved. In September 2005, the Commission informed banks that
they must use know your customer procedures to follow up on their customers every three
years and that they must maintain records on closed accounts for five years. Recent
legislation has also provided the Central Bank of Syria, the entity that issues the national
currency, new authority to oversee the banking sector and investigate financial crimes.
Finally, Syria is working on integrating its anti-money laundering efforts with other
countries in the Middle East and North Africa Financial Action Task Force ("MENA
FA TF"). 13 Syria will host a team of assessors from the MENA FATF in early 2006,
which will assess its progress in developing and implementing an effective anti-money
laundering regime.
Despite these recent enhancements, there remain significant jurisdictional antimoney laundering vulnerabilities that have not been addressed by necessary legislation or
other governmental action. Some of these vulnerabilities include the lack of regulation
for hawaladars, 14 the failure to address cash smuggling and other criminal movement
across the country's porous borders and the rampant corruption among Syria's political
and business elite. In addition, Syrian law does not establish terrorist financing as a

12 Financial intelligence units are specialized governmental agencies created to combat money laundering
and terrorist financing. The Egmont Group is an international body comprised of Financial Intelligence
Units from 101 member countries. See http://www.egmontgroup.org.
13 In November 2004, the governments of 14 countries decided to establish a Financial Action Task Force
regional style body for the Middle East and North Africa. The body is known as the Middle East and North
Afiica Financial Action Task Force, or MEN A FATF, and is headquartered in the Kingdom of Bahrain.
See http://www.menafatf.org.
14 Hawala is an alternative or parallel trust-based remittance system. It exists and operates outside of, or
parallel to 'traditional' banking or financial channels. The person who operates a hawala is commonly

9

predicate offense for money laundering. Furthermore, Syria's free trade zones 15 provide
significant opportunities for laundering the proceeds of criminal activities because the
Syrian General Directorate of Customs does not have effective oversight procedures to
monitor goods that move through the zones. Finally, Syria faces serious ongoing
challenges in implementing its anti-money laundering regime. Syria has failed to issue
implementing rules for Decree 33, making adequate implementation and enforcement of
the law questionable. Syria does not appear to have taken any significant regulatory, law
enforcement or prosecutorial action with respect to any money laundering or terrorist
financing activity in Syria, despite the terrorist financing and money laundering concerns
associated with Commercial Bank of Syria as identified in our May 2004 finding.
These jurisdictional money laundering and terrorist financing vulnerabilities are
exacerbated by Syria's ongoing support for terrorist activity. Syria has been designated
by the U.S. Government as a State Sponsor of Terrorism since 1979. 16 As of 2006, the
Syrian Government continued to provide material support to Lebanese Hizballah and
Palestinian terrorist groups. HAMAS, Palestinian Islamic Jihad (PU), and the Popular
Front for the Liberation of Palestine (PFLP), among others, continue to maintain offices
in Damascus, from which their members direct public relations and fundraising activities

referred to as a hawaladar.
15 An area of a country specifically set apart or an adjacent port where there is an exemption of duty rights
for foreign goods.
16 Syria is designated as a state sponsor of terrorism, under section 6(j) of the Export Administration Act
("EAA") of 1979, 50 U.S.c. App. 2405. Section 321 of the Antiterrorism and Effective Death Penalty Act
of 1996 (AEDPA), Pub. L. 104- 132, makes it a criminal offense for U.S. persons, except as provided in
regulations issued by the Secretary of the Treasury in consultation with the Secretary of State, knowingly to
engage in a financial transaction with the government of any country designated under section 6(j) of the
EAA as supporting international terrorism. For the purpose of implementing section 321 of AEDPA,
regulations issued and administered by the Office of Foreign Assets Control (OFAC) of the U.S.
Department of the Treasury effectively prohibit U.S. persons from engaging in financial transactions with
the government of Syria that constitute unlicensed donations to U.S. persons or are such financial
transactions that the U.S. person knows or has reasonable cause to believe pose a risk of furthering terrorist
acts in the United States. See 31 C.F.R. §§ 596,504,542.102.

10

and provide guidance to terrorist operatives and fundraisers in the West Bank, Gaza, and
across the region. For example, according to a significant volume of information
available to the U.S. Government, PH leadership in Damascus, Syria controls all PH
officials, activists and terrorists in the West Bank and Gaza. Syria-based PH leadership
was implicated in the February 2005 terrorist attack in Tel Aviv, Israel that killed five
and wounded over 50.
As late as 2005, Syrian Military Intelligence (SMI) official Assef Shawkat met
with terrorist leaders Hassan Nasrallah of Hizballah, Ahmed Jibril of Popular Front for
the Liberation of Palestine, and Abdullah Ramadan Shallah of Palestinian Islamic Jihad,
in addition to Hamas officials, to discuss coordination and cooperation with the Syrian
government. Shawkat managed a branch of SMT charged with overseeing liaison
relations with major terrorist groups resident in Damascus. 17 In January 2006, the Syrian
Government facilitated a meeting in Damascus between Iranian government officials and
several designated terrorist leaders, including, Abdullah Ramadan Shallah, Ahmed Jibril,
Hassan Nasrallah, and Khaled Mishal of Hamas. The Syrian Government also continues
to permit Iran to use Damascus as a transshipment point for re-supplying Lebanese
Hizballah in Lebanon.
These ongoing terrorist activities supported by Syria as a designated State
Sponsor of Terrorism, coupled with the continuing jurisdictional vulnerabilities
associated with Syria's weak money laundering and terrorist financing controls, continue
to be directly relevant to our 2004 finding that Commercial Bank of Syria is of primary
money laundering concern. As stated above, Commercial Bank of Syria is a Syrian

17 In January 2006, Assef Shawkat was named a Specially Designated National by the U.S. Government
under Executive Order J 3338.

11

government-owned and controlled bank. As such, Commercial Bank of Syria presents a
direct and ongoing opportunity for the Syrian government to continue to support and
finance terrorist activity. This risk, in addition to the uncontested and ongoing money
laundering and terrorist financing concerns associated with Commercial Bank of Syria as
described in our May 2004 finding, further substantiates our belief that Commercial Bank
of Syria is of primary money laundering concern. Accordingly, our finding remains that
Commercial Bank of Syria is a financial institution of primary money laundering
concern.

III.

Imposition of the Fifth Special Measure
Consistent with the finding that Commercial Bank of Syria is a financial

institution of primary money laundering concern, and based upon additional consultations
with required Federal agencies and departments and consideration of additional relevant
factors, including the comments received for the proposed rule, we are imposing the
special measure authorized by 31 U.S.C. 5318A(b)(5) with regard to Commercial Bank
of Syria. 18 That special measure authorizes the prohibition of, or the imposition of
conditions upon, the opening or maintaining of correspondent or payable-through
accounts l9 by any domestic financial institution or domestic financial agency for, or on
behalf of, a foreign financial institution found to be of primary money laundering
concern. A discussion of the additional section 311 factors relevant to the imposition of
this particular special measure follows.
1. Similar Actions Have Not Been or May Not Be Taken by Other Nations or
Supra footnote 4.
For purposes of the rule, a correspondent account is defined as an account established to receive deposits
from, or make payments or other disbursements on behalf of, a foreign bank, or handle other financial
transactions related to the foreign bank (31 U.S.c. 5318A(e)(1)(B) as implemented in 31 CFR
103.175( d)( 1)(ii».
18
19

12

Multilateral Groups against Commercial Bank of Syria
At this time, other countries have not taken any action similar to the imposition of
the fifth special measure of section 311, that which prohibits U.S. financial institutions
and financial agencies from opening or maintaining a correspondent account for or on
behalf of Commercial Bank of Syria or that requires those institutions and agencies to
guard against indirect use by Commercial Bank of Syria. Especially in response to
Syria's recent conversion from U.S. dollars to euros for foreign currency transactions, we
encourage other countries to take similar action based on our finding that Commercial
Bank of Syria is a financial institution of primary money laundering concern.
2. The Imposition of the Fifth Special Measure Would Not Create a Significant
Competitive Disadvantage, Including Any Undue Cost or Burden Associated
with Compliance, for Financial Institutions Organized or Licensed in the
United States
The fifth special measure imposed by this rule prohibits covered financial
institutions from opening or maintaining correspondent accounts for, or on behalf of,
Commercial Bank of Syria. As a corollary to this measure, covered financial institutions
also are required to take reasonable steps to apply due diligence to all of their
correspondent accounts to ensure that no such account is being used indirectly to provide
services to Commercial Bank of Syria. The burden associated with these requirements is
not expected to be significant, given that we are not aware of any U.S. financial
institutions that maintain correspondent accounts directly for Commercial Bank of Syria.
Moreover, there is a minimal burden involved in transmitting a one-time notice to all
correspondent accountholders concerning the prohibition on providing services to
Commercial Bank of Syria indirectly.

13

In addition, U.S. financial institutions generally apply some degree of due
diligence in screening their transactions and accounts, often through the use of
commercially available software, such as that used for compliance with the economic
sanctions programs administered by the Office of Foreign Assets Control of the
Department of the Treasury. As explained in more detail in the section-by-section
analysis below, financial institutions should be able to adapt their existing screening
procedures to comply with this special measure. Thus, the due diligence that is required
by this rule is not expected to impose a significant additional burden upon covered
financial institutions.
3. The Action or Timing of the Action Will Not Have a Significant Adverse
Systemic Impact on the International Payment, Clearance, and Settlement
System, or on Legitimate Business Activities of the Commercial Bank of
Syria
Commercial Bank of Syria is not a major participant in the international payment
system and is not relied upon by the international banking community for clearance or
settlement services. Furthermore, since the issuance of the notice of proposed
rulemaking in 2004, we have become aware of additional financial institutions that have
been established in Syria to engage in international transactions. Thus, the imposition of
the fifth special measure against Commercial Bank of Syria will not have a significant
adverse systemic impact on the international payment, clearance, and settlement system.
In addition, we believe that any legitimate use of Commercial Bank of Syria is
significantly outweighed by its reported use to promote or facilitate money laundering
and terrorist financing.
4. The Action Enhances the United States' National Security and Complements
the United States' Foreign Policy

14

The exclusion from the U.S. financial system of banks that serve as conduits for
significant money laundering activity and that participate in other financial crime
enhances national security by making it more difficult for criminals to access the
substantial resources and services of the U.S. financial system. In addition, the
imposition of the fifth special measure against Commercial Bank of Syria complements
the U.S. Government's overall foreign policy strategy of making entry into the U.S.
financial system more difficult for high-risk financial institutions located in jurisdictions
with weak or poorly enforced anti-money laundering controls.

IV.

Notice of Proposed Rulemaking and Comments
We have not become aware of any information inconsistent with our

determination that there are reasonable grounds to find that Commercial Bank of Syria is
a financial institution of a primary money laundering concern. In response to the 2004
notice of proposed rulemaking, we did not receive any comments from Commercial Bank
of Syria or any other entity disputing that the imposition of the fifth special measure was
warranted. We did receive two comment letters, both from domestic associations
representing segments of the U.S. financial industry, which supported the finding and
special measure, but sought clarification regarding particular obligations of domestic
institutions, as detailed below.
One trade association comment stated that the relative unavailability of certain
banking services in Syria through institutions other than Commercial Bank of Syria,
particularly with respect to foreign currency transactions, would cause undue burden on
legitimate U.S. business activities in Syria, as well as on Syrian diplomatic activities in
the United States. In response to this comment, we note that during the past year, private

15

banks have been established in Syria to conduct foreign transactions. Accordingly,
Commercial Bank of Syria is no longer the only financial institution in Syria that can
engage in international transactions, and legitimate U.S. businesses may continue
transacting with other institutions.
In the notice of proposed rulemaking, we specifically solicited comment on the
impact of the fifth special measure on legitimate business involving Commercial Bank of
Syria, and we understand that this measure may require legitimate businesses to make
alternative banking arrangements. Since the issuance of the notice of proposed
rulemaking, however, the privately owned Syrian banking sector has expanded
significantly, increasing the availability of alternative banking services as mentioned
above.
One trade association comment letter requested clarification of the proposed rule
with regard to standby letters of credit. 2o The commenter stated that a U.S. business
might have contracts in Syria guaranteed by renewable standby letters of credit issued by
a U.S. bank. The commenter sought clarification as to whether this rulemaking would
require the U.S. bank to terminate the letter of credit, which would then require payment
by the U.S. bank to Commercial Bank of Syria.
As described by the commenter, the issuance of a standby letter of credit by a
covered financial institution does not create a correspondent account relationship as
defined in 31 CFR 103.17 5(d)( 1)( ii) between the covered financial institution and
Commercial Bank of Syria. The commenter described a scenario in which a U.S.

20 A standby letter of credit is a credit instrument issued by a bank that represents an obligation by the
issuing bank on a designated third party (the beneficiary), that is contingent on the failure of the bank's
customer to perform under the terms of a contract with the beneficiary. A standby letter of credit is most
often used as a credit enhancement, with the understanding that, in most cases, it will never be drawn

16

business seeks a standby letter of credit in favor of Commercial Bank of Syria so that
Commercial Bank of Syria is ultimately not at risk should the U.S. business fail to
perform on a services contract. In such a situation, no formal banking or business
relationship is established between the covered financial institution and Commercial
Bank of Syria. Thus, this final rule - which only applies to correspondent account
relationships - does not require the termination of standby letters of credit described by
the commenter.
The first trade association commenter requested clarification on whether a final
rule could require a covered financial institution to reject a funds transfer involving
Commercial Bank of Syria. The fifth special measure imposed in this rule prohibits
covered financial institutions from opening or maintaining correspondent accounts for or
on behalf of Commercial Bank of Syria. As explained in detail below, a covered
financial institution must take reasonable steps to identify indirect use of its
correspondent accounts by Commercial Bank of Syria through other foreign banks.
Institutions that detect such indirect access, such as identifying a funds transfer involving
Commercial Bank of Syria, must take all appropriate steps to prevent such indirect
access, including, if necessary, the termination of the correspondent account.
The same commenter also sought guidance on whether there is an expectation for
banks to file suspicious activity reports merely because a transaction with a connection to
Commercial Bank of Syria was attempted or completed. A covered financial institution
is not required to automatically and without inquiry file a suspicious activity report based
solely on the fact that a transaction involves Commercial Bank of Syria. However, a
covered financial institution must file a suspicious activity report if it becomes aware,

against or funded. Barron's Dictionary of Banking Terms (Fourth Edition).

17

after further investigation, that the triggers for filing such a report and the applicable
thresholds have been met.

21

The second trade association comment, addressing the requirement that a covered
institution provide notice to its foreign correspondents regarding this rule, is addressed in
the section-by-section analysis below.

V.

Section-by-Section Analysis
The final rule prohibits covered financial institutions from opening or maintaining

any correspondent account for, or on behalf of, Commercial Bank of Syria. Covered
financial institutions are required to apply due diligence to their correspondent accounts
to guard against their indirect use by Commercial Bank of Syria. At a minimum, that due
diligence must include two elements. First, a covered financial institution must notify its
correspondent account holders that the account may not be used to provide Commercial
Bank of Syria with access to the covered financial institution. Second, a covered
financial institution must take reasonable steps to identify any indirect use of its
correspondent accounts by Commercial Bank of Syria, to the extent that such indirect use
can be determined from transactional records maintained by the covered financial
institution in the normal course of business. A covered financial institution must take a
risk-based approach when deciding what, if any, additional due diligence measures it
should adopt to guard against the indirect use of its correspondent accounts by
Commercial Bank of Syria, based on risk factors such as the type of services offered by,
and geographic locations of, its correspondents.
A. 103.l88(a)-Definitions
1. Commercial Bank of Syria
21

Suspicious Activity Reporting rules are promulgated at 31 CFR §§ 103.17-103.21.

18

Section 103.188(a)(l) of the rule defines Commercial Bank of Syria to include all
branches, offices, and subsidiaries of Commercial Bank of Syria operating in Syria or in
any other jurisdiction. The one known subsidiary of Commercial Bank of Syria, Syrian
Lebanese Commercial Bank, and any of its branches or offices, is included in the
definition. We will provide information regarding the existence or establishment of any
other subsidiaries as it becomes available; however, covered financial institutions should
take commercially reasonable measures to determine whether a customer is a subsidiary,
branch, or office of Commercial Bank of Syria.
2. Correspondent Account
Section 103.1 88(a)(2) defines the term "correspondent account" by reference to
the definition contained in 31 CFR 103.l75( d)(l )(ii). Section 103.175( d)(1 )(ii) defines a
correspondent account to mean an account established for a foreign bank to receive
deposits from, or make payments or other disbursements on behalf of, the foreign bank,
or handle other financial transactions related to the foreign bank.
In the case of a U.S. depository institution, this broad definition includes most
types of banking relationships between a U.S. depository institution and a foreign bank,
established to provide regular services, dealings, and other financial transactions
including a demand deposit, savings deposit, or other transaction or asset account and a
credit account or other extension of credit.
In the case of securities broker-dealers, futures commission merchants,
introducing brokers in commodities, and investment companies that are open-end
companies (mutual funds), we are using the same definition of "account" for purposes of

19

this rule as that established in the final rule implementing section 312 of the USA
PATRIOT Act. 22
3. Covered Financial Institution
Section 103 .188(a )(3) of the rule defines covered financial institution by reference
to 31 CFR 103.175(f)(1). Thus a covered financial institution includes the following:
•

an insured bank (as defined in section 3(h) of the Federal Deposit

Insurance Act (12 U.S.c. 1813(h));
•

a commercial bank;

•

an agency or branch of a foreign bank in the United States;

•

a federally insured credit union;

•

a savings association;

•

a corporation acting under section 25A of the Federal Reserve Act (12

U.S.c. 611 et seq.);
•

a trust bank or trust company that is federally regulated and is subject

to an anti-money laundering program requirement;
•

a broker or dealer in securities registered, or required to be registered,

with the Securities and Exchange Commission under the Securities
Exchange Act of 1934 (15 U.S.c. 78a et seq.), except persons who register
pursuant to section lS(b)(11) of the Securities Exchange Act of 1934;
•

a futures commission merchant or an introducing broker registered, or

required to be registered, with the Commodity Futures Trading
Commission under the Commodity Exchange Act (7 U.S.C. 1 et seq.),

22

See 71 FR 496, 512-13 (Jan. 4, 2006), codified at 31 CFR 103.175( d)(2)(ii)-(iv).

20

except persons who register pursuant to section 4(f)(a)(2) of the
Commodity Exchange Act; and
•

a mutual fund, which means an investment company (as defined in

section 3(a)(1) of the Investment Company Act of 1940 «"Investment
Company Act") (15 U.S.c. 80a-3(a)(1)) that is an open-end company (as
defined in section 5(a)(1) of the Investment Company Act (15 U.S.c. 80a5(a)(I)) and that is registered, or is required to register, with the Securities
and Exchange Commission pursuant to the Investment Company Act.
In the notice of proposed rulemaking, we defined "covered financial institution" by
reference to 31 CFR 103. 175(f)(2), the operative definition of that term for purposes of
the rules implementing sections 313 and 319 of the USA Patriot Act, and also included in
the definition futures commission merchants, introducing brokers, and mutual funds. The
definition of "covered financial institution" we are adopting for purposes of this final rule
is substantially the same.

B. 103 .188(b )-Requirements for Covered Financial Institutions
For purposes of complying with the rule's prohibition on the opening or
maintaining of correspondent accounts for, or on behalf of, Commercial Bank of Syria,
we expect a covered financial institution to take steps analogous to those that a
reasonable and prudent financial institution would take to protect itself from loan or other
fraud or loss based on misidentification of a person's status.
1. Prohibition on Direct Use of Correspondent Accounts
Section 103 .188(b)( 1) of the rule prohibits all covered financial institutions from
opening or maintaining a correspondent account in the United States for, or on behalf of,

21

Commercial Bank of Syria. The prohibition requires all covered financial institutions to
review their account records to ensure that they maintain no accounts directly for, or on
behalf of, Commercial Bank of Syria.
2. Due Diligence of Correspondent Accounts To Prohibit Indirect Use
As a corollary to the prohibition on the opening or maintaining of correspondent
accounts directly for Commercial Bank of Syria, section 103 .188(b )(2) requires a covered
financial institution to apply due diligence to its correspondent accounts that is
reasonably designed to guard against their indirect use by Commercial Bank of Syria. At
a minimum, that due diligence must include notifying correspondent account holders that
the account may not be used to provide Commercial Bank of Syria with access to the
covered financial institution. For example, a covered financial institution may satisfy this
requirement by transmitting the following notice to all of its correspondent account
holders:
Notice: Pursuant to U.S. regulations issued under section 311 of the USA
PATRIOT Act, 31 CFR 103.188, we are prohibited from opening or
maintaining a correspondent account for, or on behalf of, Commercial
Bank of Syria or any of its subsidiaries (including Syrian Lebanese
Commercial Bank). The regulations also require us to notify you that your
correspondent account with our financial institution may not be used to
provide Commercial Bank of Syria or any of its subsidiaries with access to
our financial institution. If we become aware that Commercial Bank of
Syria or any of its subsidiaries is indirectly using the correspondent
account you hold at our financial institution, we will be required to take
appropriate steps to prevent such access, including terminating your
account.
The purpose of the notice requirement is to help ensure that Commercial Bank of
Syria is denied access to the U.S. financial system, as well as to increase awareness
within the international financial community of the risks and deficiencies of Commercial
Bank of Syria. However, we do not require or expect a covered financial institution to

22

obtain a certification from its correspondent account holders that indirect access will not
be provided in order to comply with this notice requirement. Instead, methods of
compliance with the notice requirement could include, for example, transmitting a onetime notice by mail, fax, or e-mail to a covered financial institution's correspondent
account holders, informing those holders that the accounts may not be used to provide
Commercial Bank of Syria with indirect access to the covered financial institution, or
including such information in the next regularly occurring transmittal from the covered
financial institution to its correspondent account holders.
In its comment letter, one trade association requested that we consider permitting
other methods of providing notice to correspondent account holders or allowing sufficient
flexibility so that covered financial institutions can use systems already established under
other provisions of the USA PATRIOT Act to provide notice. As we stated in the notice
of proposed rulemaking, a covered financial institution is not obligated to use any
specific form or method in notifying its correspondent account holders of the special
measure. We suggested the provision of written notice containing certain language as
only one example of how a covered financial institution could comply with its obligation
to notify its correspondents. The trade association further suggested that we specifically
consider means such as including the notice within the certificates used by financial
institutions to comply with the rules issued under sections 313 and 319 of the USA
PATRIOT Act. While there may be circumstances where this would be appropriate, we
note that those certificates are renewable every three years, and that relying solely on the
certification process for notice purposes would not be reasonable where are-certification
would not be made within a reasonable time following the issuance of this final rule.

23

Furthermore, we are not requiring that covered financial institutions obtain a certification
regarding compliance with the final rule from each correspondent accountholder.
This rule also requires a covered financial institution to take reasonable steps to
identify any indirect use of its correspondent accounts by Commercial Bank of Syria, to
the extent that such indirect use can be determined from transactional records maintained
by the covered financial institution in the normal course of business. For example, a
covered financial institution is expected to apply an appropriate screening mechanism to
be able to identify a funds transfer order that, on its face, lists Commercial Bank of Syria
as the originator's or beneficiary's financial institution, or otherwise references
Commercial Bank of Syria in a manner detectable under the financial institution's normal
business screening procedures. We acknowledge that not all institutions are capable of
screening every field in a funds transfer message, and that the risk-based controls of some
institutions may not require such comprehensive screening. Alternatively, other
institutions may perform more thorough screening as part of their risk-based
determination to perform "additional due diligence," as described below. An appropriate
screening mechanism could be the mechanism currently used by a covered financial
institution to comply with various legal requirements, such as the commercially available
software used to comply with the sanctions programs administered by the Office of
Foreign Assets Control.
Notifying its correspondent account holders and taking reasonable steps to
identify any indirect use of its correspondent accounts by Commercial Bank of Syria in
the manner discussed above are the minimum due diligence requirements under this final
rule. Beyond these minimum steps, a covered financial institution should adopt a risk-

24

based approach for determining what, if any, additional due diligence measures it should
implement to guard against the indirect use of its correspondent accounts by Commercial
Bank of Syria, based on risk factors such as the type of services it offers and the
geographic locations of its correspondent account holders.
A covered financial institution that obtains knowledge that a correspondent
account is being used by a foreign bank to provide indirect access to Commercial Bank of
Syria must take all appropriate steps to prevent such indirect access, including, when
necessary, terminating the correspondent account. A covered financial institution may
afford the foreign bank a reasonable opportunity to take corrective action prior to
terminating the correspondent account. We have added language in the final rule
clarifying that should the foreign bank refuse to comply, or if the covered financial
institution cannot obtain adequate assurances that the account will not be available to
Commercial Bank of Syria, the covered financial institution must terminate the account
within a commercially reasonable time. This means that the covered financial institution
should not permit the foreign bank to establish any new positions or execute any
transactions through the account, other than those necessary to close the account. A
covered financial institution may reestablish an account closed under this rule if it
determines that the account will not be used to provide banking services indirectly to
Commercial Bank of Syria.
3. Reporting Not Required
Section 103.1 88(b)(3) of the rule clarifies that the rule does not impose any
reporting requirement upon any covered financial institution that is not otherwise
required by applicable law or regulation. A covered financial institution, however, must

25

document its compliance with the requirement that it notify its correspondent account
holders that the accounts may not be used to provide Commercial Bank of Syria with
access to the covered financial institution.

VI.

Regulatory Flexibility Act
It is hereby certified that this rule will not have a significant economic impact on

a substantial number of small entities. Commercial Bank of Syria no longer holds
correspondent accounts in the United States. The U.S. correspondent accounts that the
bank previously held, as well as the U.S. correspondent accounts of foreign banks that
still maintain a correspondent relationship with Commercial Bank of Syria, were with
large banks. Thus, the prohibition on establishing or maintaining such correspondent
accounts will not have a significant impact on a substantial number of small entities. In
addition, all covered financial institutions currently must exercise some degree of due
diligence in order to comply with various legal requirements. The tools used for such
purposes, including commercially available software used to comply with the economic
sanctions programs administered by the Office of Foreign Assets Control, can be
modified to monitor for the use of correspondent accounts by Commercial Bank of Syria.
Thus, the due diligence that is required by this rule -

i.~.,

the one-time transmittal of

notice to correspondent account holders and screening of transactions to identify any
indirect use of a correspondent account - is not expected to impose a significant
additional economic burden upon small U.S. financial institutions.

VII.

Paperwork Reduction Act of 1995
The collection of information contained in the final rule has been approved by the

Office of Management and Budget (OMB) in accordance with the Paperwork Reduction

26

Act of 1995 (44 U.S.C. 3507(d», and assigned OMB Control Number 1506-0036. An
agency may not conduct or sponsor, and a person is not required to respond to, a
collection of information unless it displays a valid control number assigned by OMB.
The only requirements in the final rule that are subject to the Paperwork
Reduction Act are the requirements that a covered financial institution notify its
correspondent account holders that the correspondent accounts maintained on their behalf
may not be used to provide Commercial Bank of Syria with access to the covered
financial institution and the requirement that a covered financial institution document its
compliance with its obligation to notify its correspondents. The estimated annual average
burden associated with this collection of information is one hour per affected financial
institution. We received no comments on this information collection burden estimate.
Comments concerning the accuracy of this information collection estimate and
suggestions for reducing this burden should be sent (preferably by fax (202-395-6974» to
Desk Officer for the Department of the Treasury, Office of Information and Regulatory
Affairs, Office of Management and Budget, Washington, DC 20503 (or by the Internet to
Alexander T. Hunt@omb.eop.gov), with a copy to the Financial Crimes Enforcement
Network by paper mail to FinCEN, P.o. Box 39, Vienna, VA 22183, "ATTN: Section
311-Imposition of Special Measure Against Commercial Bank of Syria" or by
electronic mail to regcomments@fincen.treas.gov with the caption "ATTN: Section
311-Imposition of Special Measure Against Commercial Bank of Syria" in the body of
the text.

27

VIII.

Executive Order 12866
This rule is not a significant regulatory action for purposes of Executive Order

12866, "Regulatory Planning and Review."
List of Subjects in 31 CFR Part 103
Administrative practice and procedure, Banks and banking, Brokers, Countermoney laundering, Counter-terrorism, and Foreign banking.
Authority and Issuance
For the reasons set forth in the preamble, Part 103 oftitle 31 of the Code of
Federal Regulations is amended as follows:
PART 103 - FINANCIAL RECORDKEEPING AND REPORTING OF
CURRENCY AND FINANCIAL TRANSACTIONS
1. The authority citation for part 103 is amended to read as follows:
Authority: 12 U.S.c. 1829b and 1951-1959; 31 U.S.c. 5311-5314, 5316-5332;
title III, sees. 311, 312, 313, 314, 319, 326, 352, Pub. L. 107-56,115 Stat. 307.
2. Subpart I of Part 103 is amended by adding new § 103.188 as follows:

§ 103.188 Special measures against Commercial Bank of Syria.
(a) Definitions. For purposes of this section:
(l) Commercial Bank of Syria means any branch, office, or subsidiary of

Commercial Bank of Syria operating in Syria or in any other jurisdiction, including
Syrian Lebanese Commercial Bank.
(2) Correspondent account has the same meaning as provided in §
103.175(d)(1)(ii).
(3) Covered financial institution includes:

28

(i) An insured bank (as defined in section 3(h) of the Federal Deposit Insurance
Act (12 U.S.c. 1813(h»);
(ii) A commercial bank;
(iii) An agency or branch of a foreign bank in the United States;
(iv) A federally insured credit union;
(v) A savings association;
(vi) A corporation acting under section 25A of the Federal Reserve Act (12
U.S.c. 611 et seq.);
(vii) A trust bank or trust company that is federally regulated and is subject to an
anti-money laundering program requirement;
(viii) A broker or dealer in securities registered, or required to be registered, with
the Securities and Exchange Commission under the Securities Exchange Act of 1934 (15
U.S.c. 78a et seq.), except persons who register pursuant to section 15(b)(11) of the
Securities Exchange Act of 1934;
(ix) A futures commission merchant or an introducing broker registered, or
required to be registered, with the Commodity Futures Trading Commission under the
Commodity Exchange Act (7 U.S.C. 1 et seq.), except persons who register pursuant to
section 4(f)(a)(2) of the Commodity Exchange Act; and
(x) A mutual fund, which means an investment company (as defined in section
3(a)(1) of the Investment Company Act of 1940 «"Investment Company Act") (15
U.S.c. 80a-3(a)(1») that is an open-end company (as defined in section 5(a)(1) of the
Investment Company Act (15 U.S.c. 80a-5(a)(1») and that is registered, or is required to
register, with the Securities and Exchange Commission pursuant to the Investment

29

Company Act.
(4) Subsidiary means a company of which more than 50 percent of the voting
stock or analogous equity interest is owned by another company.
(b) Requirements for covered financial institutions=< 1) Prohibition on direct use
of correspondent accounts. A covered financial institution shall tenninate any
correspondent account that is open or maintained in the United States for, or on behalf of,
Commercial Bank of Syria.
(2) Due diligence of correspondent accounts to prohibit indirect use. (i) A
covered financial institution shall apply due diligence to its correspondent accounts that is
reasonably designed to guard against their indirect use by Commercial Bank of Syria. At
a minimum, that due diligence must include:
(A) Notifying correspondent account holders that the correspondent account may
not be used to provide Commercial Bank of Syria with access to the covered financial
institution; and
(B) Taking reasonable steps to identify any indirect use of its correspondent
accounts by Commercial Bank of Syria, to the extent that such indirect use can be
determined from transactional records maintained in the covered financial institution's
normal course of business.
(ii) A covered financial institution shall take a risk-based approach when deciding
what, if any, additional due diligence measures it should adopt to guard against the
indirect use of its correspondent accounts by Commercial Bank of Syria.
(iii) A covered financial institution that obtains knowledge that a correspondent
account is being used by the foreign bank to provide indirect access to Commercial Bank

30

Page 1 of6

PRESS ROOM

March 9, 2006
JS-4106

Remarks of
Deputy Assistant Secretary for International Monetary
and Financial Policy Mark Sobel
U.S. Treasury Department
At the European Union Studies Center
Graduate Center, City University of New York
"Finding Common Ground: Inside the
US-EU Financial Dialogue"
It i~ a g~eat pleasure to speak to the European Union Studies Center of the City
University of New York. I thank Dr. Kaufmann for graciously inviting me and for his
kind introductory words.
Tonight, I would like to speak about a process I have been involved in for four years
~ the US-EU Financial Market Regulatory Dialogue (Dialogue). It is a good
process. It is a nitty-gritty process. Many observers who have delved into its
details have found the agenda - not to be pejorative - slightly soporific. Be that as
it may, the Dialogue is important, and the stakes are large for global financial
markets. Let me tell you about the international setting for the Dialogue; its history
and objectives; the agenda, its importance and the challenges ahead; and the
process.

The US-EU Dialogue is a product of the transformation sweeping global financial
markets. Cross-border global capital flows are growing exponentially and new
financial products, which enhance welfare, are being invented every year.
Financial sector consolidation is taking hold. In the United States, interstate
banking and consolidation have become a reality. Glass Steagall gave way to
Gramm-Leach-Bliley. A wave of consolidation has swept major banks, and a
handful of banks hold the bulk of the system's assets and are responsible for nearly
all international activity. In Japan, many major banks have given way to three
mega-banks, In Europe, large banks such as HSBC, Deutsche Bank, BNP, and
ING are global players. Though intra-European bank consolidation has far to go,
progress is being made with the strong backing of EU Internal Markets
Commissioner McCreevy. It is seen in the transactions between the Spanish bank,
Santander, and the UK bank, Abby; the Italian bank, Unicredito, and the German
bank HVB; and the infamous Banco Antonveneta takeover by ABN Amra.
Securities markets are being transformed. Stock market trading around the world is
going electronic. Exchanges are merging. OTC trading is growing. The
distinctions between banking and securities business are further eroding.
Securities regulation and corporate governance are being revolutionized, as seen in
the Sarbanes-Oxley legislation and the National Market Structure Review in the
U.S., and in the Markets in Financial Instruments Directive (MIFID) and the
Corporate Governance Action Plan in Europe.
The EU, following the advent of the euro, launched a bold Financial Services Action
Plan - the FSAP - aimed at creating an integrated pan-European financial market.
The FSAP's dramatic vision is no less than to take 25 different financial regimes
and fuse them into one in a mere decade. The stakes are clear - several studies
have concluded that full implementation of the FSAP would raise the EU's growth
rate by one percentage point plus in a decade's time - that's. about $130 billion per
annum in current dollars. Strong European growth IS essential for Europe to
manage its economic destiny, and to lessen the world's unhealthy reliance on the
U.S. economic engine. The United States is a strong supporter of the FSAP, and

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Page 2 of6
anchoring it in the global financial system.
Regulation is inherently a national activity aimed at promoting financial stability and
invest?r protection. But it should be as "light" as possible to accomplish its
obJectives; It should encourage market discipline, and not stifle market dynamism . It
also must take globalization into account. G lobal firms face different legal and
financial regimes in each country of operation and this can prove costly. They
would prefer one set of rules to apply to their business. In this connection .
regulators have strengthened their cooperation in global standard-setting bodies including the Basle Committee on Banking Supervision, the International
Organization of Securities Commissions, and the International Association of
Insurance Supervisors.
This is a cursory list. But the bottom line is that these changes are having profound
effects on the global financial system, capital flows, and the daily lives of policymakers.
Th~ DialOQ1J..e - History~Obje_ctiv~s

The Dialogue began four years ago The participants in that meeting had no clue as
to what that gathering would spawn during the next four years .
On the U.S . side, I have chaired the Dialogue on behalf of Treasury, along with my
wonderful and outstanding colleagues from the SEC and Fed; other agencies,
especially the National Association of Insurance Commissioners (NAIC), have
participated on an ad hoc basis. It is a team effort. The European Commission
staff represents Europe.
The initial gathering involved SEC and Fed presentations to European regulators on
how U.S. regulators conducted consolidated supervision , as a means of helping
Europe reach a judgment that U.S. supervision was "equivalent" for the purposes of
the EU Financial Conglomerates Directive (FCD). Absent such a judgment, U .S.
firms operating in Europe would have been forced to undertake complex and costly
legal changes in their organizational structures and deploy capital ineffiCiently. The
U.S. also engaged the Commission in a broader review of the FSAP and its global
impacts. Likewise , the Commission asked about U.S. financial sector
developments.
Shortly thereafter, En ron and World Com hit U.S . financial markets. SarbanesOxley ensued. Just as the FCD had ramifications for U.S. firms' operations, so
Sarbanes-Oxley had spillover effects on European firms. We met again, and then
again and again.
We realized early on that we shared the common objective of helping facilitate the
smooth functioning of global capital markets. But we also recognized that we did
things differently because of diverse legal , historical and cultural traditions. Our first
challenge was to manage spillover effects in order to achieve our common
objectives.
Since that time, the technical teams have met two to four times a year and
reviewed: FSAP measures and U.S . financia l sector developments and their global
impacts; common international financial issues such as hedge funds and credit
rating agencies; and our dialogues with other quarters of the world. Participants
see and communicate with each other throughout the year. Our technical
discussions have become "virtual".
Pulling together some of these strands, what do I see from the U.S. perspective as
the key objectives that discussion in the Dialogue can help promote?
•
•
•
•
•

Promoting strong growth, both globally and in Europe.
Facilitating movement toward greater convergence of U .S., EU and global
financial market policies and regulation around high quality practices.
Helping Europe fuse 25 financial systems into one, and anchoring
European financial markets in the global system.
Managing spillovers .
.
.
.
Ensuring that U.S. firms face a level plaYing field In Europe.

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Page 3 0[6
Til!'!

.Agend~

and Its Importanc(,;)

The U.S. and the EU are the world's largest two economic areas. Capital
movements between them are enormous. As Bernhard Speyer laid out in an
excellent Deutsche Bank Research publication last November:
•

In 2003, the EU and U.S. accounted for 80 percent of the world's FDI
outflows and 60 percent of the inflows.
• 60 percent of U.S. foreign corporate assets are in Europe and 75 percent of
Europe's are in the U.S.
• The EU and U.S. together account for two-thirds of global stock market
capitalization and bonds outstanding worldwide.
• The Securities Industry Association of America finds that its largest
. mernbers receive 20 percent of their net revenues from Europe and employ
35,000 Europeans.
The issues the Dialogue grapples with are at the cutting edge of the global financial
landscape, and both sides have their concerns. Let me start with a few the U.S.
has raised, and in doing so, let me underscore that while I will remark on aspects of
banking and securities issues, these issues are solely in the domain of our
independent regulators.

Financial Conglomerates Directive (FeD): The FCD was discussed for tvvo plus
years in the Dialogue. These discussions informed the SEC's rule proposal
formalizing the SEC's supervision of broker dealers on a consolidated group-wide
basis. The Office of Thrift Supervision also is now playing a lead supervisory role in
the context of the FCD.
Transparency: Two of the initial FSAP measures were released without adequate
consultations with market participants. The U.S. observed that while regulators
must ensure appropriate investor protection, they are always a step behind dynamic
markets, that market participants know their business better, that good rule-making
requires open consultations, and that if afforded an 0pPoliunity to weigh into the
process participants are more likely to buy into the final product. Since then, the
Commission has become more transparent and open to consultation. I have
actually heard market players fret about consultation fatigue. Better consultation
fatigue than consultation deprivation.
MIFIO: MIFID will govern the execution of investor transactions by exchanges,
other trading systems, and investments firms in Europe. Firms will then have a
"passport" to operate EU-wide on the basis of home supervisory authority. MIFID's
enormity is obvious. Some European countries required that any securities trading
take place on exchanges - the so-called "concentration rule". Others allowed firms
to "internalize" transactions, a practice familiar in the UK and the United States. In
the end, after much debate, a delicate compromise was reached aI/owing
"internalization" throughout the EU and putting the "concentration rule" aside. This
was progress. Not surprisingly, since then there has been continued active
discussion about the conditions under which internalization could take place. The
U.S. side has monitored this debate. The devil lies in the details. We stressed in
the Dialogue that the goal is about rewarding innovation and allowing regulation to
support different market practices in a neutral manner and that the terms under
which internationalization is permitted are critical for the future vibrance of
European financial markets. Brussels agrees.

The Commission has raised many issues with us.
Sarbanes-Oxley (SOX): As Secretary Snow has stated, SOX came quickly upon
us, but it was a necessary response to serious corporate governance weaknesses
in the U.S. SOX did indeed give rise to spillover effects, and in its wake, the SEC
thoroughly discussed with the EC such issues as auditor independence, loans to
bank executives and directors, certification of financial statements by CEOs and
CFOs, auditing of internal controls, and standards related to audit committees.
While the letter and spirit of SOX were fully observed, EU concerns were generally
accommodated. The peAOS and the Europeans are working out arrangements for
cooperation on inspections.

Accounting Equivalence: In 2002, Europe took the dramatic step of requiring all EU

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publicly listed companies to adopt International Financial Reporting Standards
(IFRS) in preparing their financial statements for years ending in 2005 and beyond.
Information requirements in various EU directives permit non-EU issuers to publish
financial statements based on accounting standards other than IFRS, if the
European Commission has deemed these standards "equivalent". U.S. firms for
decades have listed in Europe on the basis of financial statements using U.S.
GMP. Unless the EC acts, however, starting in January 2007, U.S. firms listed in
Europe will be required to "reconcile" U.S. GAAP financial information to IFRS.
Non- U.S. issuers listed on U.S. exchanges which publish financial information on
the basis of accounting standards other than U.S. GAAP have long been required
by the SEC to "reconcile" their financial information to U.S. GAAP. U.S. firms listed
on European exchanges clearly do not want a reconciliation requirement to arise.
And Europeans have questioned why the SEC could not accept IFRS statements
going forward for public listings, especially as it was expensive to reconcile existing
statements to U.S. GAAP?
Last year, then SEC Chairman Donaldson and Charlie McCreevy agreed on a
landmark "roadmap" for the United States to accept IFRS statements as a basis for
U.S. public listings as early as 2007 and no later than 2009. SEC Chairman Cox
recently confirmed this agreement. In the "roadmap," the SEC set forth several
markers, especially the consistent implementation and enforcement of IFRS across
the 25 member states.
Discussion has arisen as to how to handle the question of equivalence for U.S.
GAAP for U.S. firms listed in Europe beginning in 2007. The SEC is not likely to be
in the position of eliminating the reconciliation requirement by the beginning of
2007, simply because more time will be needed to study the consistency of IFRS
accounts and their application. Recognizing this, Commissioner McCreevy has
stated his intention to propose a postponement of a decision on the equivalence of
U.S. GAAP with IFRS for two years to align it with the roadmap. He has stressed
the importance he attaches to such a postponement. We welcome Commissioner
McCreevy's proposal.

DeregistrationlDefisting of Securities in the US.: Many Europeans have lamented
that though EU firms listed in the United States can delist from exchanges, if they
have a small number of U.S. investors they are still subject to onerous reporting
requirements and cannot deregister. From here, they argue that the U.S. capital
market is a "roach motel" or the "Hotel California" -- one can check in, but not out.
To add spice, some argue thatthey want out because the cost of SOX is high.
Putting hyperbole aside, SEC officials indicated that it is certainly not their intent to
"trap" issuers in the U.S. market, that rules concerning de-registration were
developed decades ago, and that the SEC would table proposals making it easier
for foreign companies to terminate SEC registration and reporting requirements.
This was done late last year. The comment period on the rule proposal just closed.
European firms and officials have submitted comments.
Reinsurance: In the United States. insurance regulation is delegated to states, and
for an unlicensed non- U.S. reinsurer to conduct business in a state, it must post
collateral of 100 percent of its obligations to assure regulators it could meet its
obligations if it became insolvent. Let's be clear - the U.S. reinsurance market is
wide open: foreigners account for nearly 85 percent of the market. But several EU
reinsurers have argued that the cost associated with raising capital to meet
collateral requirements is excessive. In the meantime, the EU is working on
implementing a new Reinsurance Directive, which sets uniform EU standards in this
area for the first time and will end member state collateral requirements by 2009.
Many in Europe see this development as a precursor to abolishing or modifying
U.S. collateral requirements. Earlier this week, the Executive Committee of the
NAIC directed its Reinsurance Task Force to develop alternatives to the current
framework pertaining to reinsurance collateral by December 2006 and to consult
with international regulators in so doing. The issue is a difficult one, but good talks
are underway in the NAIC and between the NAIC and Europe.
Together, the EU and U.S. also exchange information through the Dialogue.

Basle 2: Both the US and EC have provided information on their plans and
timelines for implementing Basle 2, recognizing that technical issues are dealt with
in the Basle Committee's Accord Implementation Group. These talks have been

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valuable in helping the US understand the legal processes and timetable for
European implementation of the so-called Capital Requirements Directive, and for
Europe to understand US decisions with respect to the scope of application of
Basle 2 to US banks. More recently, with Europe slated to begin implementing
Basle 2 in 2008 and the US in 2009, the Dialogue has provided a venue for bringing
attention to technical "gap year" issues.
Clearing, Settlements and Payments in Europe: Clearing and settling transactions
and making payments within European countries is inexpensive, but cross-border
transactions can cost 5 to 10 times more. The ECB has estimated that European
firms could save $60 to $120 billion per annum in costs with a more efficient crossborder payments system. The US is watching these areas closely -- they hold the
promise of major welfare gains for Europe but also may give rise to spillover issues

Investment Issues: The Dialogue has also been a forum for discussing transatlantic
investment. As cited previously, investment flows between our two economic areas
are enormous. The United States has strongly commended the Commission for its
staunch defense of the principle of creating an integrated economic space in
Europe for M&A and underscored that notwithstanding complex legal provisions of
the Takeover Directive, Europe should clearly state that reciprocity vis-a-vis third
countries be avoided, lest unnecessary uncertainty deter badly needed investment.
More generally, we have commended Commissioner McCreevy for his efforts to
promote cross-border M&A among European financial institutions. and we have
also stated that the world is better served by global - not national - champions.
This is a snapshot of the Dialogue. I hope you will take away that the Dialogue is
technical, but the issues it considers are critical to the health of global capital
markets.
For the future, the U.S. and EU will continue to face challenges. The Dialogue will
need to: continue discussing problems which inevitably arise; focus on a forwardlooking and cooperative agenda that identifies issues looming on the horizon and
work to address these in a way that enhances global welfare. Further, it will need
to continue to reach out within the confines of the Dialogue's informal structure to
legislatures, member states and market participants to keep them informed of our
work and seek their input.

Let me address the "process" of the Dialogue. The Dialogue occurs at the
"technical" level. The participants agreed from the outset that discussions should
be informal, low-key, and two-way in nature. Either side can put any item on the
agenda.
It was recognized that financial market regulations cannot be negotiated. Why?
Regulators are independent each regulator's fundamental duty is to protect its own
investors and the safety and soundness of its institutions; regulators must follow
domestic processes in implementing regulations such as filings through the Federal
Register and taking on board comments. We also recognized that we would not
always see eye-to-eye, but that the way to address differences was to continue
discussing them, avoid public recrimination, and agree to disagree if need be, while
moving ahead. That said, by holding periodic discussions, the exchanges of view
have been able to infuse policy and rule-making with additional insights, sensitize
officials on both sides to the other's thinking and ways of conducting business, and
ultimately improve the quality of the end product The participants at the table have
considerable trust in the process.
As the Dialogue's technical-level discussions have taken hold, senior officials have
also increasingly met. Secretary Snow spent a week last June discussing the
Dialogue with European officials in Brussels and several countries. He has seen
Commissioner McCreevy four times in the last year. The European Financial
Services Committee - a high-level policy body with officials from the 25 member
states - invited the Fed, SEC and Treasury to a meeting in Brussels last
September. SEC Commissioners are increasingly in Brussels for discussions.
Members of the Board of Governors of the Federal Reserve engage often with EC
Commissioners.

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The Dialogue is taking hold in other ways. If a European rule is adopted but
implemented and applied 25 ways, it is questionable whether progress is being
made. To facilitate harmonization, Europe formed the Committee of European Bank
Supervisors (CEBS), the Committee of European Securities Regulators (CESR)
and the Committee of European Insurance and Occupational Pensions Supervisors
(CEIOPS). U.S. regulators meet with these new European groups to discuss
issues of common interest.
The U.S.-EU Financial Market Regulatory Dialogue is alive and well. It is no longer
just an episodic meeting of lowly bureaucrats. It has facilitated multiple informal
and unstructured contacts among senior officials and experts. It has dramatically
increased understanding on both sides of the Atlantic!

Dr. Kaufmann, you asked me whether the Dialogue is a success and if it could be a
model for other regulatory discussions. I will let others judge whether the Dialogue
is successful. From my vantage point, the Dialogue works for its participants.
Whether the process of the Dialogue can be translated into other regulatory arenas
is for others with a better knowledge of their realms to determine. I do think that
regulators of, and participants in, wholesale financial markets accept competition
and innovation, and do not view the world through a zero sum prism. The push for
financial globalization and global standards adds impetus to international regulatory
cooperation. In addition, the inability to "negotiate" financial regulations may be a
plus. But these properties may not be readily transferable to other realms of
regulatory endeavor, where hard-working officials on both sides of the Atlantic have
rolled up their sleeves to do the best job possible and toil just as earnestly as we
do.

In a recent book, "The Vital Partnership", Professor Simon Serfaty of the Center of
Strategic and International Studies argues that the U.S. and EU partnership, while
at a crossroads, is as essential now as in the past, and will be conditioned going
forward, inter alia, by the forces of globalization and European integration. The
U.S.-EU Financial Market Regulatory Dialogue is only a microcosm. But it shows
that the EU and U.S. have strong mutual interests and can work closely together in
building a more dynamic world economy. If the U.S. and EU can lead and
cooperate on financial markets when cross-border flows between them are some
two-thirds of the world's total, others countries will take notice. By aiming at
facilitating regulatory convergence around high quality global practice,
strengthening global competition and growth, and helping foster the emergence of a
more integrated European marketplace, the U.S.-EU Dialogue is an important
contribution in the construction of the architecture for the global financial markets of
the 21 st Century. There is much to do.

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PRESS ROOM

March 10,2006
JS-4108

Statement of Treasury Secretary John W. Snow
On the February Employment Report
"Today's employment report showing 243,000 new jobs in February is further
evidence that the President's economic policies are working. Since the signing of
the President's Jobs and Growth Act of 2003 we have seen consistent, strong
employment growth totaling nearly five million new jobs. This is great news for
American workers and families. We are clearly moving in the right direction, and I
am confident that we will remain on a good path with continued labor market
strength creating many good job opportunities for American workers in the days
ahead.
"Lower tax rates, especially on investment, lie at the heart of this strong expansion.
The record is clear; now congress needs to act to extend the tax relief and make it
permanent."

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PRESS ROOM

March 10, 2006
JS-4109

Treasury Official Will Visit Wheeling,
West Virginia
To Discuss The U.S. Economy
Senior Advisor to the U.S. Treasury Secretary Kimberly Reed will visit Wheeling,
West Virginia on Friday to discuss the U.S. economy and President Bush's agenda
for continued strong growth and job creation. While in Wheeling, Reed will meet
with and give remarks to Wheeling area business leaders at the Fort Henry Club.
Reed originally is from Buckhannon, West Virginia, and is a graduate of West
Virginia Wesleyan College and West Virginia University College of Law.
The following event is open to credentialed media:

Who
Treasury Official Kimberly Reed
What
Remarks to Wheeling area business leaders
When
Friday, March 10, 12:00 p.m. (EST)
Where
Fort Henry Club
1324 Chapline St.
Wheeling, WV

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PRESS ROOM

March 10, 2006
JS-4110
Treasury Assistant Secretary to Hold
Weekly Press Briefing

Treasury Assistant Secretary for Public Affairs Tony Fratto will hold the weekly
media briefing on Monday, March 13 in Treasury's Media Room. He will be joined
by Treasury Assistant Secretary for Economic Policy Mark Warshawsky who will
brief the press on the monthly employment report. The event is open to all
credentialed media.
Who
Assistant Secretary for Public Affairs Tony Fratto
Assistant Secretary for Economic Policy Mark Warshawsky
What
Weekly Briefing to the Press
When
Monday, March 13. 11:15AM (EST)
Where
Treasury Department
Media Room (Room 4121)
1500 Pennsylvania Ave., NW
Washington, DC

NOTE

Media without Treasury press credentials should contact Frances Anderson at
(202) 622-2960, or U:.<JncesangersQ!l@.do.treasgov with the following information:
name, Social Security number, and date of birth.

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PRESS ROOM

March 9, 2006
js-4111

Remarks of Emil E. Henry Jr.
Assistant Secretary of the Treasury
Before the Fixed Income Forum
"Hedge Funds and Derivatives Markets: History, Issues, and Current
Initiatives"
March 9, 2006
INTROOUCTION
Good afternoon. It is a pleasure to be here with all of you. Thank you for the
invitation to speak today. Before coming to Treasury, I spent the last 20 years on
Wall Street, as an investment banker and also founder of investment organizations
including a hedge fund business. This is my first public service position. And
although I am truly enjoying my time at Treasury, I probably do not have to teli you
that Washington is very different than Wall Street. So, in a sense, I feel very much
at home addressing people like yourselves who manage money and whose
livelihood is tied directly to the financial markets, asset allocation and profitable
investment decisions.
One of the reasons the Administration asked me to come to Washington was
because of the importance of having Wall Street expertise at Treasury. It is critically
important for the government to stay ahead of the curve on issues like financial
market system risks, especially systemic risks inherent in new and growing vehicles
populating our complex and rapidly evolving capital markets. While this might not
be the topic du jour in DC, if things start to go wrong, then I can guarantee you that
it will be.
With that in mind, I wanted to take our time together today to talk about two
interrelated topics: hedge funds and derivatives.

As you know, in the last few years, hedge funds have garnered much attention in
Washington, largely the result of the Securities and Exchange Commission's
rulemaking to bring hedge fund advisers further within the SEC's regulatory reach.
Despite all of the attention directed towards this asset class in recent years, there is
still significant misunderstanding surrounding it. Therefore, please accept my
perspective as a Wall Street investment practitioner who also happens to be a
Washington neophyte.
As you likely know, hedge funds represent about a trillion dollars of capital today.
While the growth of hedge funds has not been perfectly linear, you can expect that
the space will continue to grow. To understand why, it helps to look at how we got
to where we are.
Hedge funds found their genesis in entrepreneurs reacting to the Investment
Company Act of 1940's restrictions and limitations inherent in more traditional forms
of money management. For example, mutual funds typically invest only in 'long'
positions, must be nearly 100 percent invested at all times, and might be further
limited by a fund's charter's restrictions - for example, a health care mutual fund
may only invest in health care equities. Other traditional money managers often
place these very same restrictions upon themselves.
A hedge fund, by contrast, has virtually unlimited flexibility. All strategies are on the
table - long positions, short selling, leveraged holdings, equities, bonds, currencies,
derivatives, multiple industries, etc. All of these approaches are available and
widely utilized by the hedge fund community. Because capital tends to gravitate to

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where it is least encumbered and restricted, and hence earns the highest riskadjusted return, it is not surprising that capital migrated from traditional funds to
hedg~ funds. Of course, like most things in life, one thing's greatest strength is
often Its greatest weakness. The great flexibility of the hedge fund structure also
lends itself to conduct that can lead to trouble, the most common being outsized
risk-taking, concentrated positions and over-leveraging.
Initially, hedge funds were solely the province of sophisticated high net-worth
investors comfortable with the risk profile of such funds and lacking the risk
aversion of the institutional investor class. During the 1990s, however, the growth of
hedge funds began in earnest both in the size of the asset class and the profile of
investor choosing to access the class. Such growth now has an inexorable feel of
inevitability. It is a legitimate asset class widely sought out by institutions and
validated by a vast community of pension consultants.
Why did this happen? For a number of reasons, all driven by the power of freemarket capitalism. As the rising equity tide of the 1990s lifted all boats, traditional
investment vehicles obviously delivered handsome returns, but alternative asset
classes such as hedge funds did even better. It is, after all, not a tall order to beat
positive indexes merely by adding leverage. Also, because of far superior
compensation structures, skilled asset managers left traditional money
management shops in droves to open hedge funds -- the so-called "brain drain",
These funds required little infrastructure and offered the potential for outsized
compensation.
With the bursting of the bubble, and the ensuing 3 year decline in equities (20002002) many hedge fund watchers anticipated the "unclothing" of the legions of
newly-minted hedge fund stars - the theory being that all the leverage in the system
would amplify returns negatively in the downdraft in mirror fashion to the updraft.
Indeed, the opposite happened for a number of reasons.
First, it turned out that those institutions that invested most heavily in hedge funds
during this period turned in the best relative returns. For example, sophisticated
university endowments, with significant hedge fund exposure, were rewarded
handsomely. While they did not shoot the lights out, those endowments most
heavily allocated to hedge funds actually turned in positive returns amidst the
market meltdown. Their hedge fund managers, it turned out, exploited their natural
flexibility to short stocks and, importantly, move to cash during market dislocations
limiting exposure and mitigating loss.
Secondly, the endowment phenomenon did not go unnoticed by the broader
investment community that was in tatters. Pension funds with traditional exposures
_ say 60 percent bonds, 40 percent equities - were devastated during this period of
strain. The stark contrast of performance between the sophisticated endowment
community and pensions put a white hot light on the protection ostensibly afforded
by hedge funds in times of trouble.
Third, the underperformance of pension funds caught the attention of corporate
CEOs. The corner office, often oblivious to sleepy pension activities, suddenly woke
up to demonstrable negative returns that impacted that which CEOs hold dear: their
income statements and earnings per share.
When the smoke cleared and the dust settled, the wrenching dislocation of the early
millennium served, in a way, to define hedge funds, and many in the investment
community - rightly or wrongly -- drew the following conclusion about hedge funds:
they will reward you in good markets and protect capital in bad markets. A recipe
for superior risk-adjusted returns.
That rubric, music to the ears of the institutional pension fund community, served as
a catalyst for growth. The necessity to meet actuarial return targets and match
liabilities drove pension interest in an asset class that held out the alluring
possibility of delivering year-in year-out, positive, absolute-type returns. As a result,
the pension community likely will continue to pour capital into this space. And when
the pension community validates an alternative asset class, a flood of capital
follows.

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Even with the n~table ~emise of LTCM, highlighting the "headline risk" and potential
embarrassme~t It entailed for hedge fund investors, pensions are increasingly
comfortable with the asset class because they recognize that market forces have
acted in response to many of the concerns that lead to LTCM's doom. For example:
• Counterparties became more disciplined about extension of leverage and
collateral requirements:
• Capital became more reluctant to seed a new hedge fund comprised of the
proverbial "Three guys in a garage";
• Investors now demand transparency (you may recall that LTCM principals
notoriously provided little, if any, transparency);
• There is now a more profound recognition among hedge fund professionals
that liquidity is, indeed, king and that in its absence, all bets might be
directional;
• Investors recognize the infrastructure requirements of many arbitrage
strategists (who seek Street treatment) and demand to see such
infrastructure before committing their capital.
So, with all of the uncertainty in our financial marketplace, one thing seems likely:
hedge funds will continue to grow.
I do not share the view of some in Washington that just because something is large
and growing it needs to be feared. Indeed, market driven growth, as we have seen
in the hedge fund space, is a reflection of healthy and functioning financial markets.
Instead, perhaps what we should fear most is the paucity of knowledge and/or
interest around a space that is so dynamic and worthy of our attention. And of
course, we must guard against knee-jerk impulses that might impede the growth of
an asset class that adds to the efficiency and liquidity of our capital markets.
Instead. fact finding and education are necessary threshold steps prior to a political
response. As economic thought leaders, the Treasury is well served to take a closer
look at this important subject.
So with that fact-finding framework in mind, at Treasury, we are asking: what impact
will the growth of hedge funds have on our financial markets? The SEC - asking
the same question -- concluded that this growth presented investor protection
issues that needed to be addressed. I am not here to opine on that decision. I do
believe that Treasury needs to look at the growth of hedge funds differently. From
our perch at Treasury, we have the ability to study and analyze the financial
markets broadly. We should look to see if the explosive growth of this asset class
presents systemic concerns that require a proactive approach.
One area that deserves our attention is the nexus of the over-the-counter (OTC)
derivatives markets with the hedge fund community. As an asset class, hedge
funds are among the largest users of OTC derivatives, especially credit derivatives.
This significant investment in credit derivatives by hedge funds presents overall
market considerations that merit our attention.

DERIVATIVES
In order to appreciate fully the ramifications of hedge fund growth, we need to
understand the dynamics of the OTC derivatives marketplace and how that
marketplace IS changing. Like hedge funds, derivatives suffer from a lack of
understanding by many in Washington and for that matter on \/Vall Street. Most
acknowledge their complexity and this complexity breeds a certain amount of
skepticism and fear. I think Jerry Corrigan said it best when he said "Derivatives are
like Major League Baseball pitchers; they get too much of the credit and too much
of the blame."
As we explore issues in and around derivatives, we must not forget the multitude of
benefits derivatives provide our financial system and the economy as a whole. Most
notably, they provide opportunities to measure, manage, distribute, and transfer
risk. They are significant and important risk management tools.
At the same time, as in many fast growing markets, there are questions at times
about the availability of information and the adequacy of market infrastructure and
market practices. Regulators face a delicate balancing act in developing policies

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that encourage financial innovation and competition and that also foster financial
stability and well-functioning markets.
Just for some perspective, let me briefly note the long and colorful history of
derivatives:
The existence of derivatives, in the broadest sense, dates back to Biblical times.
The first exchange-traded derivatives are thought to have been traded on the Royal
Exchange in London around 1565. The first futures contract apparently originated at
the Yodoya rice market in Osaka, Japan around 1650.
Two hundred years later, the dramatic growth in the derivatives markets began
much closer to home. The Chicago Board of Trade and the predecessor of the
Chicago Mercantile Exchange were formed in 1848 and 1874. Given the enormous
uncertainties faced by farmers and ranchers. the CBT and CME initially developed
around contracts based on agricultural products. Financial derivatives took off in the
1970s when the CME and CBT--spurred by the surge in interest rate and exchange
rate volatility during the 70s--introduced a number of contracts allowing investors to
better hedge interest rate and exchange rate risk.
Advances in technology and in pricing models, most notably the Black-Scholes
option pricing model in 1973. contributed greatly to the further growth of derivatives.
During the 80s, market participants increasingly recognized the benefits of
derivatives in hedging and risk management. Indeed, for the first time, derivatives
became an important part of business school curricula.
During the nineties, we experienced some notable setbacks. Large derivatives
users, such as Procter & Gamble. Orange County, and Barings Bank suffered large
losses due to derivatives usage. These episodes spurred regulators and market
participants to develop improved trading practices and conventions.
Because of the nature of derivatives our data is not preCise, but the International
Swap and Derivatives Association (ISDA) estimates that the notional value of global
derivatives contracts today is about $219 trillion. It has grown from $29 trillion in the
1997 and $866 billion in the 1980s. One specific and important segment of the huge
OTC derivatives market--credit derivatives has attracted a great deal of attention
lately.
The birth of credit derivatives can be traced back to the 1980s with the introduction
of collateralized debt obligations (COOs). It is interesting to note that the growth of
credit derivatives was, in part. the unintended consequence of a regulatory action the Basel I Accord in 1988. The Basel I capital rules created incentives for banks to
use credit derivatives to manage their exposure to corporate loans. Banks could
transfer credit risk to entities that were not subject to the Basel capital
requirements, while retaining ownership of and returns on such loans.
Thus, in the early 1990s, non-bank counterparties such as hedge funds, insurance
companies, financial guarantors, securities firms, asset managers, and even some
pension funds became active in this market The market fully matured into a truly
liquid market in 1999 when the ISDA developed standardized documentation for
these transactions.
Although the notional value of all credit derivatives is estimated to be about $12-13
trillion, or only about four or five percent of financial derivatives, they have been the
fastest growing segment, roughly doubling each year. This has resulted in some
"growing pains," as the trading. processing, settlement, and legal infrastructures
struggle to keep pace with product development and growth in volume.
Policymakers have been actively working with industry to work toward a robust
market infrastructure for credit derivatives. Some positive developments on that
front -- indicating a market that is properly adjusting include:
•

The Federal Reserve Bank of New York has initiated a project to improve
trade confirmation and assignment, particularly with respect to credit
derivatives. Processing backlogs of unconfirmed trades have been reduced
by 54 percent since September 2005.
• The "Corrigan Group" has released two reports, and held a symposium last
week, that contained recommendations related to trade processing.

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techno.logi~al de~~lopments, and enhanced risk management, particularly

•
•

•
•
•

regarding risk pricing and modeling, collateral, stress testing, transparency,
and concentration risk.
The ~ev:' Basel" Accord recommendations are expected to clarify certain
permissible uses of credit derivatives. which are expected to increase Asian
bank participation.
BIS's Committee on Payment and Settlement Systems has formed a
working group to assess broader settlement and payment issues, and
hopes to release a report in early 2006.
The FASB has proposed rules that would make the accounting treatment of
Credit Linked Notes more favorable.
ISDA has sponsored two VOluntary industry-wide protocols.
And lastly, there are private-sector initiatives such as the Depository Trust
and Clearing Corp. expansion of its automated bilateral confirmation service
DerivlSERV and its plan to create and provide a central database to record
every CDS transaction as early as June 2006.

These are all very heartening developments and proof of self-correcting free market
capitalism at its best.
Many of these efforts are focused on market infrastructure and operational risks.
But there are broader financial stability issues associated with credit derivatives as
well, particularly in connection with the activities of hedge funds.
As I mentioned earlier, the hedge fund asset class is very large - about a trillion
dollars. The derivatives to which they are counterparties to is an even larger
number. These kinds of numbers should make anyone stand up and take notice.
Treasury is seeking to be proactive here. We are not expecting or responding to a
particular crisis, but trying to prevent one from occurring. And the best way for us to
be prepared is to ask a lot of good questions. Let me share with you some of the
questions to which we are seeking answers.
•
•

•
•

•

•

•
•

What are the unintended consequences of hedge fund growth on
competition for lending and the provision of private equity?
Is leverage properly disclosed for transactions such as credit default swaps
in which no money is actually borrowed but where there can be high implied
leverage?
Do our largest financial institutions properly value and disclose their
derivative exposure?
Is the settlement infrastructure - even with recent attention and modification
-- capable of handling the volume of activity in a manner that does not
create undue risk - especially in a meltdown environment?
Do counterparties such as banks and prime brokers take a false comfort in
their myopic views of their individual exposure to and collateral with an
individual hedge fund when there is little transparency on the broader
financial community's aggregate exposure to that very same fund?
Can the regulatory regime keep pace with the quickly evolving marketplace?
Even so, will our oversight system devolve into tacit acceptance of the risk
metrics they are provided.
Are investment managers using derivatives to create near-term return in
"hail Mary" fashion at the potential expense of their entire franchise?
As prime brokerage grows to meet the needs of the hedge fund community,
will such providers increase leverage and relax collateral requirements as
these are their principal means of competition?

As we evaluate these questions, we also need to evaluate our current regulatory
framework to ensure that this framework provides us with the tools and the
information we need to get the job done. We seek to understand, in the most
comprehensive way possible, whether and how changes in the structure of the
financial services industry that I have referenced today have affected the way
markets operate. Put another way, we need to examine whether the growth of
certain types of institutions or instruments like hedge funds and derivatives have
materially affected the manner in which markets intermediate risk, whether risk is
placed or pooled in different ways or different places than it has been in the past and if so, what appropriate policy responses might be.
For example, as Tim Geithner of the NY Federal Reserve Bank noted in a recent

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speech, the growth of non-bank participation in the financial sector and the
increasing development of legal "technology" to allow the creation of similar
economic relationships through instruments of quite different legal character
creates a very real possibility of regulatory arbitrage, thus limiting the effectiveness
of safety and soundness regulations promulgated for only one type of regulated
entity. Furthering the already well-developed cooperation between our own national
regulators, such as the Fed, the SEC, and the CFTC, will be useful, but when the
additional challenges posed by the growth in capital accumulation vehicles that are
quite lightly regulated and the increasing global integration of financial activity are
factored in, the challenges for the regulatory framework become greater. The
fundamental question we must be focused on is ensuring that we strike the right
balance between the costs of regulatory fragmentation and the benefits of
regulatory competition. These are very difficult issues, but they are ripe for
discussion.

CONCLUSION
As the Treasury focuses in on these issues, it is important to emphasiLe that we
need the private sector's continued help with these endeavors. We are eager to
work closely and cooperatively with industry representatives to ensure we make the
most informed judgments.
In this regard, I would like to announce that I plan to host a series of meetings symposiums if you will- with the private sector over the next 12 months. In these
candid, off-the-record discussions, I would like to discuss some of the questions I
have raised here. I would welcome your suggestions as to participants. I expect that
these will be wide-ranging fruitful discussions. Here at Treasury we have the unique
ability to bring informed policymakers to the table. With the assistance of groups
like yours, we can have the right members of the financial community there as well.
Thank you for the opportunity to be with you this afternoon, and I would be happy to
take questions.

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PRESS ROOM

March 10,2006
JS-4112

Treasury to Host Tax Relief Symposium Investing in America's Future-Preserving the Lower Tax Rates on Dividends and Capital Gains
The U,S, Department of Treasury will host symposium on preserving the lower tax
rates on dividends and capital gains, The event will feature several speakers,
including Treasury Secretary John Snow, CEA Chairman Ed Lazear, and former
CEA Chairman Martin Feldstein,

Who
Secretary John W, Snow
Treasury Assistant Secretary for Economic Policy Mark Warshawsky
Treasury Deputy Assistant Secretary for Tax Analysis Robert Carroll
CEA Chairman Ed Lazear

What
Tax Relief Symposium: "Investing in America's Future -- Preserving the Lower Tax
Rates on Dividends and Capital Gains"

When
Tuesday, March 14,9:00 a,m, -12:00 p.m. (EST)
Where
The Cash Room Main Treasury
1500 Pennsylvania Ave, NW
Washington, DC 20220
Note: Media without Treasury press credentials should contact Frances Anderson
at (202) 622-2960, or franC8i)anderson@do,treas.gQY with the following
information: name, Social Security number and date of birth,

-30-

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PRESS ROOM

March 10, 2006
JS-4113

Speech to Augusta, Georgia Business Leaders
Assistant Secretary Mark J. Warshawsky
It .is a pleasure to be in your lovely city today and to have the opportunity to discuss
~Ith you the current state of the U.S. economy In addition to a general overview, I'd

like to devote a few extra moments to looking at two special aspects of economic
activity. Given that this is the day of the monthly Department of Labor release on
the employment situation, a review of recent labor market developments seems to
be in order. Secondly. I'd like to touch on the role of foreign direct investment in the
U.S. economy, a topic which is currently receiving considerable public attention.
In recent years, the economy's resilience in the face of a range of unprecedented
shocks has been perhaps its most outstanding characteristic. That resilience was
evident once again last year in the face of the energy price shock and curtailment of
business activity generated by the Gulf of Mexico hurricanes. Despite, at times,
record high oil prices, the expansion has continued with solid growth of real GOP,
steady job creation, and low core inflation, and remains well-positioned to continue
this growth going forward.
The year 2005 marked the fourth straight year of expansion and, in our view.
economic performance was right on target. Real GOP grew 3.5 percent on an
annual average basis. Personal consumption expenditures rose by 3.6 percent
during 2005 while business investment in equipment and software increased at a
double-digit pace for the second straight year. Residential building was a source of
strength again in 2005: housing starts hit a 33-year high, and single family homes
sales posted a fresh record. The economy generated 2 million jobs over the course
of the year, and the unemployment rate fell by one-half percentage point to 4.9
percent by year's end.
This performance was particularly remarkable given the continued hike in energy
prices. The energy component of the consumer price index rose by 17 percent
during 2005 for the second straight year, as hurricanes battered oil- and gasproducing facilities in the Gulf of Mexico. While headline consumer price inflation
was 3.4 percent last year, core price inflation (excluding food and energy) remained
low at 2.2 percent, the same as in 2004. Part of the explanation for benign core
inflation lies in the continued strong growth of productivity. or output per hour.
Productivity in the nonfarm business sector grew by a solid 2.5 percent during
2005. virtually the same pace as during 2004. Growth of unit labor costs -- the
biggest single cost for most businesses - was held to just 1.3 percent last year,
helping to restrain inflation The ability of the economy to grow strongly in the face
of the energy price increases without these costs being passed into other prices is a
tribute to the flexibility and ingenuity of American business. The economy recovered
quickly from the hurricanes and the related spike in energy prices and is now on
firm footing.
The economy's trend performance has been good but, as usual, shorter-term
movements have been more varied. For example, real gross domestic product rose
by a fairly modest 1.6 percent annual rate in the fourth quarter. a deeper look at the
GDP numbers shows that growth was restrained by a number of special factors.
Real consumer spending slowed to only a 1.2 percent pace after employee pricing
incentives in the auto industry pulled motor vehicle sales into the third quarter; oil
imports surged to replace domestic oil production disrupted by the hurricanes; and
defense spending plunged temporarily because of budget and accounting issues.
All of these developments are expected to be transitory.
In fact, we are now far enough along in the first quarter to have a reasonably clear
view on how real GOP in this quarter is shaping up and solid growth appears to be
underway. Real consumer spending in January was well above its fourth-quarter

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level and is on tr~ck for a si~nificant gain in the first quarter. The manufacturing
sector IS performing well, with manufacturing output up by 0.7 percent in January, a
fourth straight strong monthly gain. Shipments of nondefense capital goods
excluding aircraft: a guide to the likely growth of business capital spending, also
appears to be pOised for a solid gain in the first quarter. Indexes on activity in
manufacturing a~d non-manufacturing from the Institute for Supply Management
both pOint to an Improved pace of growth in February.
January foreign trade figures showed strength in both imports and exports. Imports
rose in January, led by increases in imports for petroleum products, consumer
goods, and auto-related goods. Imports of crude oil were actually down in January.
Exports also strengthened in January, rising by 2.5 percent to a record
$114.4 billion. As was the case with imports, the export gain was spread widely
across major categories. Overall, goods and services exports are running 12
percent ahead of year-earlier levels.
The news on inflation at the start of 2006 shows the split between energy prices
and prices in the rest of the economy is continuing. The total consumer price index
rose by 0.7 percent in January, boosted by a 5.0 percent jump in energy prices
following two large monthly declines. The total CPI for the month was 4.0 percent
above the year earlier level. While the overall CPI measure is important, many
monitor underlying inflation trends by the core index - consumer prices excluding
food and energy. Here the news reasonably good: core prices rose 0.2 percent in
January and were up only 2.1 percent over the past year. That's about what core
prices have been rising at since the end of 2003.
Strong, steady job growth is the hallmark of a sustainable expansion and labor
market developments over the past two and a half years have been quite favorable.
Through the first eight months of 2005, nonfarm payroll job growth averaged
175,000 a month, or equivalent to a little more than 2 million annually - the same as
during all of 2004. Progress was temporarily delayed last fall by the hurricanes and
the attendant hike in oil prices, however. In September and October, only 41 ,000
jobs were added each month on average as the hurricanes devastated the Gulf
Coast area and oil and gas production was shut in. But the economy shook off the
effect of the hurricanes quickly. In November, job growth rebounded and has
continued to rise strongly in the subsequent months. In February, 243,000 jobs
were created and job gains have averaged 228,000 in the four months since
October.
Measured from the low point in payroll employment in August 2003 through
February of this year, the economy has generated about 5 million new jobs and
since June 2003, the unemployment rate has fallen from 63 percent to 4.8 percent.
This is quite a strong performance, bringing the unemployment rate within a range
that many economists consider to represent full employment. Other indicators also
suggest that the labor market has hit its stride. Initial claims for state unemployment
insurance benefits have recently been at levels last experienced in early 2000 and those earlier levels were lows for the previous economic expansion. Continued
unemployment claims are at five-year lows and the Conference Board consumer
confidence survey indicates that consumer perceptions of job availability are at a
four-and-a-half year high.
Overall, economic activity appears to be on a steady, sustainable upward path.
Most private forecasts for the first quarter point to real GOP growth in the 4 to 5
percent annual rate range, figures that are plausible given the available data. For
the entire year, the Administration projects real GPD growth of 3.4 percent and
payroll job growth averaging 178,000 a month - results also compatible with most
private-sector forecasts.
One of the key reasons for the recent success of the U.S. economy is that it is open
to foreign trade and investment. The U.S. is the world's top single mark:t for any
goods and services. Producers from around the world compete on a daily baSIS to
bring their goods and services to the vast U.S. market. U.S. consume.r~ ben~flt
because foreign producers are competing in the U.S. marketplace, driVing prices
down and quality up.

n:

In addition to being an attractive destination for foreign goods and services, the
U.S. economy is an attractive place to build and grow businesses. ~.S. workers are
highly productive, well-trained, and - more than most countnes - highly adaptable.

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We have deep capital markets and comparatively few of the bureaucratic restraints
that prevent businesses from starting or growing in other countries. All of these
characteristics make the U.S. the destination of choice for capital seeking good
returns. In many respects, the pace of the flow of foreign capital into a country is a
referendum on the success of the economy. Judging by foreign investment the
U.S. economy is a resounding success.
'
Foreign investment can flow into a country primarily in two forms: as portfolio
capital, (through the purchases of U.S. securities) and as foreign direct investment
(the direct purchase of a business). In 2004, about one-fifth of the $12.5 trillion in
foreign-owned assets in the United States were in the form of foreign direct
investment (FOil· FDI in the United States has wown rapidly over the past decade.
In the first three quarters of 2005, net financial inflows for FDI in the U.S. averaged
$118 billion at an annual rate - double the average flow of FDI recorded in the mid
1990s.
Canada is the single largest source of FDI in the United States, accounting for 33
percent of all FDI inflows in 2004. The United Kingdom accounted for 20 percent of
2004 FDI flows, and Japan accounted for an additional 17 percent.
U.S. manufacturing is a large recipient of FDI, accounting for 20 percent of all FDI
inflows in 2004. Within manufacturing, the biggest recipient industries were
chemicals (8 percent of total FOI) and transportation equipment (5 percent of total
FOI).
FDI is an important source of high-skilled, high-wage jobs. While the FDI-related
data on jobs is collected less frequently than the financial flow data, in 2003, FDI
supported a little over 5.2 million jobs in the nonbank sector (i.e. excluding
depository institutions) in the United States, or about 5 percent of private nonbank
employment. And about 40 percent of all FDI-supported jobs are in manufacturing,
a relatively high-paying sector.
Several academic studies have confirmed that FDI-supported jobs pay higher
wages on average than jobs at domestically-owned firms. One study suggests the
foreign-firm wage premium is as high as 30 percent.
Beyond the direct wage effect of FDI, there is also evidence that in the U.S. a high
level of foreign ownership in a given location has a "spillover" effect, causing
domestic establishments in the same area to pay higher wages - even domestic
firms in other industries. Positive spillovers are not limited to wages. Foreign-owned
firms also tend to be more productive than their domestic counterparts, and some of
this superior productivity spills over to domestic firms.

It appears that not only do foreign affiliates employ U.S. citizens at higher-lhanaverage wages and generate higher productivity, but that foreign affiliates help spur
technological innovation. Research and development expenditures by foreign
affiliates in the U.S. are substantial- totaling $29.5 billion in 2003 (latest available)
and accounting for about 14 percent of U.S. R&D performed by all U.S. businesses
About three-quarters of total R&D spending by U.S.-based foreign affiliates is done
by manufacturing firms. Among manufacturing industries the biggest spender is
chemicals (43 percent of all R&D spending in manufacturing), followed by
computers and electronic products (23 percent spending in manufacturing). U.S.based affiliates of European firms perform the most R&D in the US., accounting for
75 percent of total R&D spending by foreign affiliates. U.S.-based affiliates of firms
headquartered in Asia and the Pacific region account for about 12-1/2 percent of
total foreign R&D spending in the United States. Roughly 90 percent of Asia/Pacific
R&D spending here is performed by Japanese companies.
Overall, it appears that one reason the U.S. economy is so vibrant and reSilient, and
on the cutting edge of economic innovation, is that we are open to foreign products,
foreign ideas, and foreign capital. A recent careful study suggests that FDI has
helped to raise both overall U.S. economic growth and total factor productivity
growth. Now among economists, raising total factor productivity - the part of
productivity that is not the result of more machines or ~ better-educated workforce - is the key to a sustained increase in the standard of liVing. But economists have
had a hard time figuring out exactly what to do to increase total factor productivity.

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Research suggests that at least a partial recommendation is to encourage FDI.
Looked at this way, foreign investment is an important component of future U.S.
economic growth. But our investment in business abroad is also a key element in
maintaining strong growth and high levels of innovation. At the end of 2004, the
U.S. held about $3.3 trillion in directly invested assets abroad. From 1982 through
2004, our return on these foreign assets has averaged about 7.6 percent. That
return was considerably above the 2.2 percent average rate earned by foreigners in
the U.S. As a result U.S. investment income from investments abroad is larger than
the outflow to foreigners. The income we receive on these foreign holdings gets
spent in the U.S., supporting overall income and job growth. If these foreign
opportunities were not available to U.S. investors, the overall rate of return on U.S.
capital would be lower and U.S. GOP and employment would be smaller.

4113.htrn

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Page 1 of 4

PRESS ROOM

March 13, 2006
js-4114

Under Secretary of the Treasury for Domestic Finance
Randal K. Quarles
Remarks to liB's Annual Washington Conference
Good morning, it is a pleasure to be speaking to the Institute of International
Bank~rs (liB). ~gain. Thank you for giving me the opportunity to continue the long
standing tradition of Treasury officials discussing key financial and economic policy
issues before this distinguished group.
As we meet here today I am heartened that we do so against the backdrop of one
of the strongest economies in many years. Macroeconomic conditions in the United
States have been quite favorable - GOP growth at 3.5 percent last year and
projected to run at roughly that level for the current year; strong and increasing job
creation, which should inevitably have attendant income effects; strong and durable
productivity growth; robust tax receipts: and household wealth at an all-time high.
Moreover, it is clear that financial markets have a great deal of confidence about
the future. The Dow is above 11,000, Treasury yields remain low and stable and
credit spreads are at historically narrow levels.
This benign environment allows scope for reflection on policy development, and
four items we will be working on in 2006 that are of particular interest to the liB and
that I would like to discuss with you today are: the Basel Accords, regulatory relief,
GSE reform and the Treasury's examination of changes in the financial markets.

Basel II made headlines recently when the issue came up during Chairman
Bernanke's testimony to the Senate Banking Committee. Both Senators Sarbanes
and Shelby threatened to stop the implementation of the Basel" accords if it
resulted in capital levels dropping dramatically.
As we all know reforming the risk-based capital standards for domestic and
international banks through the Basel II process has been a long and painstaking
exerCise, and the implementation of the most recent version of the Basel II
framework announced in June 2004 has posed many challenges for U.S. and
international regulators. In an Advance Notice of Proposed Rulemaking issued in
September of last year, the banking regulators announced a delay in the
implementation of the phase-in period for Basel II, which will not begin until 2008, a
year after European banks will begin implementing Basel II. That delay was
predicated on the returns from a Quantitative Impact Analysis (QIS-4) involving 26
surveyed institutions that resulted in a 17 percent reduction in aggregate minimum
required risk-based capital for the group and a wide dispersion of required capital
across individual institutions and types of asset portfolios. The proposed rulemaking
is expected this quarter.
Beginning in 2008, the 20 U.S. banks that will adopt the new accord will be required
to comply with both the e><isting capital standard and Basel II. In 2009, if regulators
are satisfied with the results, the banks would be allowed to use the new standard,
but with specified limits on how much capital levels could drop.
Over the past months, the U.S. banking agencies have been undertaking a more
complete assessment of the QIS-4 results to determine the essential steps that
must be undertaken to effectively implement the Basel II framework for U.S. banks.
Our regulatory agencies remain committed to the Basel process and are
proceeding as quickly as they can to implement the Basel" Accord, but, most
importantly, to make sure it is implemented correctly and in a way that reduces
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Page 2 of 4
competitive inequities between financial institutions as much as possible. We will
continue to urge the regulatory agencies to work cooperatively in this effort and
move the process forward in a timely fashion.
Regulatory Relief

There a number of efforts currently underway in Congress to address unnecessary
regulatory burdens imposed on financial institutions. To promote the efficient
operations of our Nation's financial institutions, it is important that we continue to
evaluate the structure of our regulatory oversight system with an eye toward
eliminating outdated regulations and unnecessary requirements
At the same time, we must remain aware of the fundamental purpose of existing
regulations, both in terms of chartering differences among financial institutions and
basic safety and soundness requirements. It seems to me that if we are going to
move regulatory relief legislation forward, it is important that we stick to the basic
task as opposed to using regulatory burden relief bills to address other more
fundamental structural changes.
We also understand the banking industry's concerns with the regulatory burden
associated with Bank Secrecy Act regulations. A number of important steps have
been taken in this regard, and I continue to work with my enforcement counterparts
to develop a regulatory structure that is tough where it needs to be, but is also fair
and flexible in its overall approach to addressing this issue.

The release of the "Rudman Report" a couple weeks ago may be the catalyst that
gets the Government Sponsored Entity (GSE) reform effort moving again. As many
of you know, the topiC of reforming the regulatory structure of the housing GSE's Fannie Mae, Freddie Mac, and the Federal Home Loan Bank System - has been
hotly debated for the last couple of years in Washington. I believe this deliberation
will come to a head in 2006.
The Administration's key focus on GSE reform is to maintain a strong national
housing finance system that meets the mortgage credit needs of our nation and
provides financing opportunities for new homeowners. In light of the recent events
at the GSE's--such as significant financial restatements--the need for meaningful
reform is even clearer.
As we originally outlined in detail in 2003, the regulator for the GSE's should have
powers comparable in scope and force to those of other financial regulators. As
bankers, you will understand that we would like to see a regulator with all the
powers of the regulators you deal with daily. It must have clear general regulatory,
supervisory, and enforcement powers with respect to the GSE's. These powers
must include enhanced authority to set capital standards: the ability to assess the
entities for independent funding outside of the appropriations process; approval
authority over new activities; and the ability to place a failed GSE in receivership.
The issue that has received the most attention recently is the recommendation by
the Administration to place limits on the GSE's retained mortgage portfolios. The
need for portfolio limits stems from a combination of factors that pose potential
systemic risk to our financial system: the large size of the GSE's retained portfolios;
the link between the GSE's financing and hedging activities and the rest of our
financial system, and a general lack of market discipline.
We'd like to see these holdings significantly reduced. With an appropriate phase-in
period, we believe that our capital markets could adjust to a significant reduction in
the presence of the GSE's as mortgage investors. Now, in the 21 5t century--so very
different from the markets in which Fannie Mae was born--we have a vast and
prolific liquid market for mortgage credit that could readily absorb such a divestment
program. Our country has seen great advances in securitization and there is a wide
and sophisticated pool of mortgage investors.
The housing mission of the GSE's is still a vital one--helping to provide a liquid
secondary market for housing credit. Even with a significant reduction in their

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portfolios, the GSE's would still be able to stay true to their mission. Their
securitization and guarantee activities are now an integral and large part of the
fabric of our housing credit markets and, as such, these businesses serve well the
original GSE mandate.
I am hopeful that there will be a progress on the GSE reform debate in 2006.

Examination of Changes to the Financial Markets
In addition to these issues, we at Treasury are focusing on our ability to understand
and stay well ahead of the risks in our fast-changing financial markets. Specifically,
the Treasury is examining whether the growth of certain sophisticated and
complicated financial instruments and vehicles, such as derivatives and hedge
funds, hold the potential to change the overall level or nature of risk in our markets
and financial institutions.
For instance derivatives now serve a key role in our capital markets primarily by
increasing efficiency, liquidity and the ability to segregate and distribute risk. In
testament to their utility, derivative contracts are growing rapidly in size--their
aggregate notional value now reaches into trillions of dollars. They are
concentrated in our largest financial institutions that tend to have the capital and
sophistication to act as high volume counterparties. We at Treasury, given the
explosion in the type and use of derivatives, and institutions that use them, want to
ensure that the magnitude of risk and exposure are properly measured and that
investors and market participants have full and adequate disclosure upon which
they can make informed decisions.
We are also reviewing several structural changes we see in our markets:
•
•
•
•
•
•
•

The greater systemic importance of a smaller number of large bankcentered financial institutions;
The greater role played by non-bank financial institutions;
The rapid growth of GSEs and appetite for their securities;
The growth of capital accumulation through less-regulated entities such as
private equity funds and hedge funds;
Greater operational demands on the core of the clearing and settlement
structure;
An increase in the complexity of risk management and compliance
challenges; and
The extent of global financial integration.

Looking forward, the Treasury will be focused on seeking to understand in the most
comprehensive way possible whether and how changes in the structure of the
financial services industry have affected the way markets operate - put another
way, whether the growth of certain types of institutions or instruments have
materially affected the efficiency with which markets intermediate risk, whether risk
is placed or pooled in different ways or different places than it has been in the past
- and if so, what appropriate policy responses might be.
We will seek to be forward looking and to think about these changes not in a
fragmented fashion - as has too often been the case up to now - but in a
comprehensive way. At the moment it is too soon to say what initiatives will result
from this focus - we do have a fairly signIficant agenda to execute on in the next
few months - but this is the lens through which we will filter the various ideas and
efforts with which we will a\l be grappling over the next few years.
Thank you, and 1'/1 now be happy to take any questions you might have.

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PRESS ROOM

March 13,2006

2006-3-13-17-44-0-13054

U.S. International Reserve Position
The Treasury Department today released U.S. reserve assets data for the latest week. As indicated in this table, U.S. reserve assets
totaled $64,689 million as of the end of that week, compared to $65,393 million as of the end of the prior week.

I. Official U.S. Reserve Assets (in US millions)

I

March_3,~OQ6

II

March J 0, ~OO6

65,393

II

64,689

TOTAL I'

11. Foreign Currency Reserves 1

Euro

II a. Securities

11,233

~Ch. issuer headquarlered in the US.

II

Yen

II

10,903

II

II
II

TOTAL

II

Euro

II

Yen

22,136

II

11,099

II

10,666

II

0

II

,

16,342

II

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

I

Ib.ii. Banks headquartered in the US

11,042

II
II
II

II

I

Ib.ii. Of which, banks located abroad
Ib.iii. Banks headquartered outside the US.

5,300

,

II

Ib.iii. Of which, banks located in the U.S.

II

I

2. IMF Reserve Position 2
3. SpeCial Drawing Rights (SDRs) 2

4. Gold Stock 3
5. Other Reserve Assets

II

II
5,184

II

21,765

a
16,101

a

II

II

II

0

II

II

II

0

0

II

II
II

II

0

0
7,672

II

8,198

II

10,917

II

TOTAL

0

II
II

II

1\

,

I

II
I

I
I

11,044
0

I

I

I

I

a
7,628
8,152
11,044
0

II. Predetermined Short-Term Drains on Foreign Currency Assets
March~Q06

[

II

I

1. Foreign currency loans and securities

Euro

II

Yen

II

I

~rch

II

II

TOTAL

II

0

II

Euro

II

II

1CL2006

Yen

II

I
TOTAL

I

II

0

I

II

0

I

II

0

I

II

0

I

II

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

II

I

2.b. Long positions

II

I

3. Other

I

0

II

0

II

0

II
II

II
II
II

II

III. Contingent Short-Term Net Drains on Foreign Currency Assets

[
1. Contingent liabilities in foreign currency
1.a. Collateral guarantees on debt due within 1
year

r

March 3,2006

II

I

Euro

II

Yen

II

I

II

II

II

I

II

CJI

Jt p:l/treas.gov/pr~<:-::/rPTpM~<:/20(1(j3131 74-4013054.htm

II

MarchJQ, 2_QOJl

II
TOTAL

II

0

Euro

Yen

I

I

TOTAL

II

I

0

II
II

II
II

II
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Page 2 of2
!1.b. Other contingent liabilities

I

I

2. Foreign currency securities with embedded
options
[

0

Undrawn, unconditional credit lines

I
I
I

3.8. With other central banks
3.b. With banks and other financial institutions
Headquartered in the US.

I

0

II

4. Aggregate short and long positions of options
in foreign

14.8. Short positions
14.a.1. Bought puts
14.a.2. Written calls

I

0

IIA

h') 1/\

II

I
I
I

II
II

I

I

II

II

II
1

II

"II

1

I
I

II

4.b. Long pOSitions
II ......

1/

I

II

I

II
0

0

I

1

0

I
I
1

II
1

I
I
I

I

uts

I

I

I

ght calls

I

I

Headquartered outside the US.

1
1

I
I

3.c. With banks and other financial institutions

ICurrencies vis-a-vis the U.S. dollar

I

Notes:

11 Includes holdings of the Treasury's Exchange Stabilization Fund (ESF) and the Federal Reserve's System Open Market Account
(SOMA). valued at current market exchange rates. Foreign currency holdings listed as securities reflect marked-to-market values, and
deposits reflect carrying values. Foreign Currency Reserves for the latest week may be subject to revision. Foreign Currency
Reserves for the prior week are final.
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/dollar exchange rate for the reporting date. The entries for the latest week reflect any
necessary adjustments, including revaluation, by the U.S. Treasury to IMF data for the prior month end.
31 Gold stock is valued monthly at $42.2222 per fine troy ounce.

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Page 1 of 4

PRESS ROOM

March 14,2006

JS-4115
The Honorable John W. Snow
Prepared Remarks
America's Community Bankers
Annual Government Affairs Conference
Thank you so much for inviting me here today; its always a pleasure to come to this
conference and to work with your group.
I want to talk to you today in large part about the importance of investment for
building a strong America.
You are at the forefront of investing in America's local communities. You're doing
great work. Loans to small business and home mortgages literally build
communities from the ground up. You invest in financial education. Your work in
partnership with the government to fight the financial war on terror helps keep our
financial system safe. You are such an important part of your customers' lives and
of the economic fabric of this country. Community banks, including many of ACB's
members, form the backbone of our local communities. You understand the
businesses in local communities and are vitally important for ensuring that credit for
investment continues to be made available in your communities.
I can't imagine an America without community bankers. and I deeply appreciate
what you do.
The country is moving in the right direction now, economically, and you're part of
that success. With nearly five million new jobs created in the past three year--two
million of them in the last year alone--and unemployment at a very low rate of 4.8
percent- that's lower than the average for the 1970s, 1980s and 1990s--there is
much for you and your customers to be proud of and optimistic about.
Looking back, there can be no question today that well-timed tax relief, combined
with responsible leadership from the Federal Reserve Board, created an
environment in which small businesses, entrepreneurs, and workers could bring our
economy back from its weakened state of just a few years ago.
Importantly, tax relief encouraged investment, which has ultimately led to job
growth. The American economy is now unmistakably in a trend of expansion, and
those trend lines can clearly be traced to the enactment of pro-growth tax relief.
In the past two years, the economy has generated more than 170,000 jobs per
month. and that includes the two-month slowdown in job growth in the aftermath of
Hurricanes Katrina and Rita. In the past 32 years, new claims for unemployment
insurance have almost never been as low as they have been so far this year, the
only exception being the peak of the high-tech bubble from late199g to early 2000.
Good, steady job growth is no surprise, given that GOP growth was three and a half
percent last year. Private forecasters, like the National Association for Business
Economics and others. are expecting very strong growth to continue this quarter.
The American economy proves to be on solid footing. The question that those of us
in government must look at now is this: what can we do to continue these positive
trends?
The answers as I see them: First, keep taxes lower on both investment and
incomes. The conference committee on tax relief reconciliation is considering this
matter now and I have been strongly urging them to keep tax rates low. We must

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protect and nurture our economic growth - not put it in jeopardy with tax increases.
I know that, in your business, yo~ see the economic benefits of investment every
day. Money for business expansion or development improves the communities
~here it's in~ested. So I'm sure it's no surprise to people in this room that since the
Implementation of a lower, 15 percent rate on investment capital in May of 2003 we
hav~ ~een a remarkable turn-around in the economy. After nine consecutive
declining qu~rters of real annual business investment, we have had 10 straight
quarters of nSlng business Investment. This business expansion led to a substantial
increase in empl.oyment, as I just mentioned - nearly five million new jobs. There
can be. n? questl?n that we need to keep the tax rate on capital gains and dividends
wher~ It IS; a tax Increase would be a terrible mistake. While many factors
contnbuted to the Improved performance of the economy, the tax reductions on
capital have been at the heart of the progress we have seen.
Extending the lower tax rates on investment capital is just about at the top of the
Administration's priority list for Congress right now, but there is a critical matter
before Congress that must be resolved this week, before they go out.
As bankers, you know that it's essential to any investor that you meet your financial
obligations. Timely action on the debt ceiling this week, before Congress leaves for
recess, is critical to assure financial markets and investors that the integrity of the
obligations of the United States will not be compromised, nor will even a risk of
such compromise be countenanced.
As you well appreciate, the "full faith and credit" of the United States is a unique
and precious asset. It says to investors around the world, "your money is safe
here." Accordingly, any effort to use this "must pass" legislation as a means of
achieving leverage on other issues should be set aside and avoided.
We have to remember that current federal borrowing needs today are simply the
product of past decisions. While we always welcome a debate on budget priorities,
swift action on the debt limit must still be taken this week. There should be no doubt
over whether the government will be able to pay its bills on time, this time next
week.
I look forward to working with members of Congress to ensure that the bill to
increase the debt limit is not encumbered with extraneous matters that could
needlessly delay its timely enactment. I am urging members of Congress in the
strongest possible terms to resist coupling an increase in the debt ceiling with other
issues. Rather, they should vote to raise the ceiling this week. It would be
unthinkable for them not to take action.
I talked just a moment ago about how important investment in the United States is
to creating plenty of good jobs. In fact, it has been an essential ingredient behind
our recovery. But as you know, questions have now been raised about how best to
handle investments in the U.S. that come from overseas.
As we work with Congress on how to improve this process, we would all be welladvised to take a lesson from the senior Senator from my home state of Virginia:
John Warner, an unquestioned champion of U.S. national security. His approach
to this matter has been a calming: "Let's look at the facts."
As I travel the country, the fact is I often encounter local officials who report with
pride on a recent investment in their community-a new plant, a new headquarters, a
new research facility-that was built by investors often from outside the U.S. In fact,
Governors, Mayors, and Members of Congress for example, no.rmally an~ounce
with great pride when a company is locating in their state, bringing good Jobs and
new tax revenues. Often, there is fierce competition among states for these
investments that can breath new life into a community-perhaps a community where
you live. The officials understand the e~ployment power of investment-whether is
by U.S. companies, or in this case from Investors abroad.
Indeed, 5.3 million U.S. workers alone - that's the equivalent of 4.8 per~~nt of total
private non-agricultural employment - are directly e~ployed by U.S. afflhat~s of
international companies. These tend to be well-payr~g Job~, too. Internalional
companies support an annual U.S. payroll of$318 billion, With average

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Page 3 of 4
compensation per employee of nearly $60,000. And this doesn't count the
multiplier effect as all that spending moves through other businesses in local
communities.
Direct investment from overseas can bring in new research, technology,
techniques, and skills. And of course it contributes to U.S., state and local tax
revenues. This kind of trade and investment are good for America, and good for its
workers. It can also help U.S. companies penetrate international markets and
therefore increase U.S. exports. After all, 95% of the global market lives outside
the U.S. We need to keep our doors open or risk having the doors of the world
closed to us. Clearly, the American people stand to lose a great deal if investment
stops flowing into the U.S. from willing investors.
As you know, Treasury chairs an interagency committee that reviews foreign
investments that may affect national security, like the recent ports deal - the
Committee on Foreign Investment in the United Stales, or CFIUS. As we enter into
the debate over its reform one point must stand clear: National Security is our top
priority, and the only consideration in the CFIUS process. CFIUS includes, with
equal standing, the arms of government charged with protecting America's national
security, homeland security. and law enforcement. This is not a question of a tradeoff between investment and security. We have never made that trade-off and the
CFIUS review process exists to make sure that there never is such a trade-off.
It is vital that we avoid taking steps in the name of national security that instead are
isolationist, having the effect of choking off vital investments in America. For
example, some have called for automatic investigation of any investment that could
affect "economic security" - that's a very vague concept and would create
uncertainty, which could chill investment.
An example of such an approach in practice is what France calls their "economic
patriotism" policy. Here's a chilling example: When Pepsi, an American company,
recently sought to purchase Danone, a French yogurt company, the government of
France said "non." Yogurt-making is an essential national industry, they ruled. And
so France no longer allows international investment in the "critical" French yogurt
business. Clearly economic isolationism is not the way to go, as it would threaten
opportunity and prosperity for Americans, and billions of people all over the world.
This Sunday, the Washington Post, a publication that I do not ordinarily quote,
summarized the central question of this issue succinctly: whether this incident
"exposed a strain of American economic nationalism that will prompt other nations
to pull back from making investments in, or doing business with, the United
States."
We will be working with the committees handling the legislation to discuss changes
and updates they are considering. To work towards a sensible outcome that is in
the best interests of our great country, we believe the reform of CFIUS should be
guided by the following principles:
•
•
•

Further integration of national and homeland security interests for a post
9/11 environment:
Continuation of a welcoming stance towards investments in the United
States because it creates good jobs for American workers:
PreseNation of that which works about CFIUS with improvements and
updates where needed, while maintaining the integrity of the decisionmaking process.

In implementing these principles, we will work to:
Update the scope of national and homeland security considerations;
•

PreseNe the professionalism and !~dependence o~ CFIUS. intelligence and
security reviews, and protect sensitive propnetary Information prOVided by

•
•
•

companies:
.
.
. .
Strengthen scrutiny of CFIUS cases involVing state-owned companies,
Strengthen the President's authority to enforce CFIUS. actions;. .
Expand notifications of decisions to Congress so that It can fulfill ItS
important oversight responsibilities.

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All the while we must remember that investment and security are not opposing
forces. They are not in conflict. There is instead an inherent consistency between
our national security interests and a strong US economy. A growing, productive and
efficient economy gives policy makers the resources needed to pursue US national
interests such as national and homeland security.
As we work together to keep America strong, thank you for all that the nation's
community banks do investing in local communities to make them prosper.
I thank you for the work you do, and the chance to speak to you today.

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PRESS ROOM

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or pmH the r'U~ content on tnlS page.

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March 14,2006
JS-4116
Treasury Hosts Tax Relief Symposium
"Investing in America's Future - Preserving the
Lower Tax Rates on Capital Gains and
Dividends"
Washington, DC- Treasury Secretary John Snow welcomed a distinguished panel
of guests to Treasury's historic Cash Room this morning for an event that
emphasized the importance of maintaining lower tax rates on capital gains and
dividends in order to sustain U.S. economic strength.
Secretary Snow highlighted the economic impact of lower rates on investment
capital by pointing out the dramatic economic turnaround that occurred after the
enactment of the Jobs and Growth Act in May of 2003. "While officially the
recession had ended in late 2001, the pace of the recovery was too slow. Growth
was anemic, business confidence low and -- of critical importance -- capital
investment was way down. As a result job growth was nonexistent," Snow
explained.
"President Bush recognized that something needed to be done; a more favorable
climate was needed to encourage capital investment and spur job growth. With the
enactment of the Jobs and Growth Act of 2003, the U.S. economy made a
remarkable turn-around. From capital investment suffering nine consecutive months
of decline, businesses took advantage of the much-needed incentives and almost
overnight began investing more. And since that time, almost five million new jobs
have been created.
Today we have brought together a remarkable group of experts that work both in
and out the Administration to discuss how sound tax policy leads to a strong
economy. It is our intent that the discussions here today will encourage members
of Congress to move forward in making the President's tax relief permanent."

The event brought together a renowned group of experts.
•

Council of Economic Advisors Chairman Edward Lazear provided remarks
on "Capital Taxation and Economic Growth;"
• Treasury Deputy Assistant Secretary for Tax Analysis Robert Carroll led a
panel discussion on the "Economics of Dividend and Capital Gains
Taxation." The panel included MIT Professor of Economics Dr. James
Poterba, President of the Institute for Research on the Economics of
Taxation Stephen Entin and Director of Economic Policy Studies for the
American Enterprise Institute Kevin A. Hassett;
• President of the Tax Foundation Scott A. Hodge spoke on "Putting A Face
on the American Taxpayer;"
• Former CEA Chair for President Reagan and current Harvard professor of
economics and President of the National Bureau of Economic Research Dr.
Martin Feldstein addressed the group on the "Distorting Effects of Capital
Taxes;" and
• Treasury Assistant Secretary for Economic Policy Mark Warshawsky closed
the event with remarks on the current state of the economy.

httll'/treasgov/pres5/rcledBe~/js4116 .htm

3/3112006

Page 2 of2
As a final cap, the symposium marked the release of a Department of Treasury
report entitled "The Economic Effects of Cutting Dividend and Capital Gains Taxes
in 2003." The report examines the economic rationale for reducing the double tax
on corporate profits and identifies initial evidence on the economic effects.
Specifically, the report expands on three determinations:
1.

Reducing the tax rate on capital gains and dividends promotes economic
growth and takes an important significant step toward removing taxes from
important economic decisions;
The economy has performed strongly in the months since the passage of
the 2003 Jobs and Growth Act; and
The tax relief provided over the past several years has increased
employment substantially above what would have occurred otherwise

2.
3.

Visit w_wwJrea!!>my.gQv to download the complete Treasury report as well as other
materials handed out during the symposium.

LINKS

REPORTS
•
•

The Economic Effects of Cutting Dividend and Capital Gains Taxe~ iD 20_QJ
E(;;onomic Growth Slides

httll'/treasgov!press!rcleases!Js4 11 6. h ~1

3/31/2006

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REpORT OF THE DEPARTMENT OF THE TREASURY
ON
THE ECONOMIC EFFECTS OF CUTTING DIVIDEND AND
CAPITAL GAINS TAXES IN 2003

MARCH 14, 2006

EXECUTIVE SUMMARY

Corporate profits are subject to a double level of taxation in the United States, which discourages
productive capital formation and ultimately reduces wages and the living standards of U.S.
citizens. In January 2003, President Bush proposed to eliminate the double tax on corporate
dividends. In May of2003, Congress passed, and the President signed, the Jobs and Growth Tax
Relief Reconciliation Act of 2003, which reduced the double tax on corporate profits by
lowering the top individual tax rate on dividends and capital gains to 15 percent through 2008.
This Act also accelerated the reduction in individual tax rates, and increased the amount of
temporary bonus depreciation from 30 to 50 percent. This report examines the economic
rationale for reducing the double tax on corporate profits and documents initial evidence on the
economic effects.
•

Reducing the tax rate on capital gains and dividends promotes economic growth and takes an
important significant step toward removing taxes from important economic decisions. The
reduction in the double tax:
1. Increases capital in the corporate sector, and generally improves the allocation of capital
throughout the economy by reducing the role played by taxes in investment decisions.
2. Reduces tax-motivated reliance on debt finance for corporate investment.
3. Increases corporate dividend payments by reducing the tax bias in favor of retained
eammgs.
4. Increases investment, capital formation, and, ultimately, living standards, by lowering the
cost of capital.

•

The economy has performed strongly in the months since the passage of the 2003 Jobs and
Growth Act.
o

Dividend payments by S&P 500 companies have increased by over 35 percent in 2005 as
compared to 2002 and will likely increase more.
o The S&P 500 has increased by approximately 40 percent since the President announced
his dividend exclusion proposal.
o Real private nonresidential investment increased by an average rate of 8.7 percent in the
first 11 quarters after passage of the 2003 Jobs and Growth Act, after declining for nine
consecutive quarters prior to the second quarter of 2003.
o The growth rate in real GDP in the first 10 quarters after the passage of the 2003 Jobs and
Growth Act averaged 3.9 percent.
•

The tax relief provided over the past several years has increased employment substantially
above what would have occurred otherwise.
o

The Treasury Department estimates that absent the tax relief from 2001 through 2004 the
economy would have created as many as 1.5 million fewer jobs, by the second quarter of
2003 and as many as 3 million fewer jobs by the end of 2004 (assuming interest rates set
by the Federal Reserve were unchanged from their actual levels).

2

THE ECONOMIC EFFECTS OF CUTTING DIVIDEND AND CAPITAL GAINS TAXES IN

2003

Introduction
In January 2003, President Bush proposed to eliminate the double tax on corporate profits - the
so~called dividend tax cut. In May of2003, Congress passed, and the President signed, the Jobs
and Growth Tax Relief Reconciliation Act 0[2003, which lowered the top individual tax rates on
capital gains and dividends to 15 percent through 2008, accelerated the reduction in individual
tax rates, and increased the amount of temporary bonus depreciation from 30 to 50 percent. I
This report examines the economic rationale for reducing the double tax on corporate profits
through lower shareholder taxes and documents initial evidence of the economic effects.
The double tax on corporate profits discourages productive capital formation. First, by taxing
corporate investments more heavily than investments elsewhere in the economy, the double tax
leads to a misallocation of capital; productive corporate investments are passed over in favor of
less productive investments elsewhere in the economy. Second, by contributing to the overall
tax burden on capital income, the double tax on corporate profits reduces aggregate investment
and capital fonnation, which eventually contributes to lower labor productivity. In short, by
injecting tax considerations into investment decisions, the double tax reduces the productive
capacity of the U.S. economy and serves, ultimately, to reduce the living standards of U.S.
citizens.

Double Taxation of Corporate Income
The tax system imposes a heavy tax burden on equity~financed corporate investment through the
double tax on corporate income. Corporate income from a newly equity~financed project is
subject to two layers of tax. First, the corporate tax is paid on earnings at the finn level at a
maximum rate of 35 percent. For income distributed as a dividend, the second layer of tax is
paid by individual shareholders at a maximum rate of 15 percent. Alternatively, shareholders
pay tax at a maximum statutory rate of 15 percent on the appreciation in stock value that arises
from corporate earnings that are retained and reinvested in the firm. The total tax on corporate
income is calculated by combining these two layers of tax. For corporate income distributed to
shareholders as dividends, the combined tax can be nearly 45 percent (not counting state and
local taxes)? For corporate income that is retained by the finn and realized by a shareholder as a
3
capital gain, the combined tax rate can be nearly 40 percent, after accounting for deferral. The
double tax on corporate profits affects economic decisions in a number of important ways that
1 The 2003 Jobs and Growth Act lowered the maximum tax rate on net capital gains for sales and exchange of capital assets after May 5, 2003
and before January I, 2009 from 20 percent to 15 percent, and for lower income taxpayers. the rate dropped from 10 percent (8 percent on assets
held over 5 years) to 5 percent (zero in 2008). Also, qualified dividends received by individual shareholders from domestic and foreign
corporations would be taxed at the capital gains rates (5 and 15 percent) for taxable years beginning after December 31, 2002 and before JanL1ary
I. 2009. The 2003 Jobs and Growth Act also accelerated into 2003 the individual rate cuts. bracket changes, and increase in the child tax credit
that were to be phased in over tim: as a result of the Economic Gro\\1h and Tax Re:ief Reconciliation Act of 200\, so that individuals now face
marginal rates of 10, 15,25,28,33, ald 35 percent. In addition, the 2003 Jobs and Growth Act increased the temporary bonus depreciation
provided to certain property (mostly equipment) from 30 to 50 percent and extended the expiration date from September 11.2004 to January I,
2005. Finally, the 2003 Jobs and Growth Act also increased the limit for section 179 expensing allowed to small busmess from $25.000 to
$100.000 for the years 2003, 2004, and 2005.
'The fonnula for computing the total tax equals I, + (I - t.)*4J, where t., is the corporate rate (35 percent) "nd to is the dividend tax rate (15
percent). Without the dividend tax cut, the total rate could be as high as 0.35 + (1 - 0.35)*0.35 = 58 percent.
J The effective tax rate on capital gains is lower than the effective rate on dividends because of the ability to defer the tax on capital gains until
realized.

3

may reduce corporate investment, encourage debt finance over equity finance, discourage the
payment of dividends, and discourage investment generally.
Economists often use marginal effective tax rates to measure the impact of taxes on investment
decisions. Marginal effective tax rates summarize how various provisions in the tax code,
including the statutory tax rate, depreciation deductions, interest deductions, deferral of tax
liability, and both the individual and corporate levels of tax affect the after-tax rate of return to a
new investment. In other words, marginal effective tax rates estimate the extra share of an
investment's economic income needed to cover taxes over its lifetime. In addition to the double
taxation of equity-financed corporate investment, many types investment face uneven tax
treatment because of the various ways tax rates, depreciation deductions, deferral of tax, and
inflation, interact and lead to different effective tax rates on different types of investment.
Table 1 shows the marginal effective tax rates on different types of investment by type of
financing and economic sector for both current law and for the case with increased dividend and
capital gains tax rates that would occur if the shareholder tax cuts enacted as part of the 2003
Jobs and Growth Act were allowed to expire. 4 Currently, the overall effective tax rate on an
investment is 17.3 percent economy-wide, and 25.5 percent for investment within the business
sector. The effective tax rate in the corporate sector is 29.4 percent, nearly 50 percent higher
than thc effective tax rate for the non-corporate sector because of the double tax on corporate
profits. Equity-financed investment in the corporate sector faces an effective tax rate of 39.7
percent, while a debt-financed investment is effectively subsidized at a rate of 2.2 percent.

Table 1. Marginal Effective Tax Rates for Different Types of Investment
Current Law *

Without Lower Dividends and
Ca ital Gains Tax Rates'

Economy wide

17.3

19.1

Business Sector
Corporate
Debt financed
Equity financed
Non-corporate

25.5
29.4
-2.2
39.7
20.0

28.1
33.5
-2.2
44.2
20.0

Owner-occupied housing

3.5

3.5

Effective Tax Rates

Source: Department ofthe Treasury, Office of Tax Analysis.
'The estimates of the effective marginal tax rates under current law and with the expiration of the lower tax rates on dividends and capital gains
do not incorpOIatc the deduction for certain production activities enacted as part of the American Jobs Creation Act of2004.

Without the reduction in the double tax on corporate profits enacted as part of the 2003 Jobs and
Growth Act, the overall effective marginal tax rate on investment economy wide would be 10
percent higher (i.e., 19.1 percent) than under current law. The effective marginal tax rate for
investment in the business sector would also be about 10 percent higher (i.e., increasing to 28.1
percent) than under current law. This higher level of tax on investment, particularly investment
41n other words, the comparison is between current law marginal effective tax rates assumingthat dividend andcapital gains cuts are permanent,
and the marginal effective tax rates that occur under current law If the dividend and capital gams rates were not to place.

4

in the business and corporate sectors, would discourage investment and would reduce labor
productivity, and, ultimately, living standards.
The reduction in the double tax on corporate profits also results in a more even taxation of
different types of investment by reducing the effective marginal tax rate of equity-financed
investment in the corporate sector relative to investment elsewhere in the economy. More even
or neutral taxation of investment improves the allocation of capital in the economy. That is,
investment decisions will be based more on their underlying economic merits rather than their
tax treatment. The improved allocation of capital from reducing the effect of taxes on
investment decisions allows economic resources to be used morc productively in the economy,
thereby improving long-run economic growth and living standards.
Reducing the double tax on corporate profits reduces the distortionary impact of the high level of
tax on a number of important economic decisions:
1. The decision to invest in the corporate or noncorporate sectors. The double tax on
corporate investment implies that the before-tax rate of return on corporate capital is
larger than the before-tax rate of return on noncorporate capital, assuming that after-tax
risk adjusted rates of return are equal. This tax bias against investment in the corporate
sector means that there is too little investment in the corporate sector. This misallocation
of investment and capital translates into lower national income than would occur absent
the distorting effects of the double tax. The greater tax burden on corporations
encourages business owners to choose organizational forms, such as partnerships and
other pass-through entities, that enjoy a single level of taxation, but do not have the
benefits of limited liability or centralized management found in the corporate structure.
Also, investment in inherently corporate industries is discouraged by the double tax.
2. The decision to finance new investment with debt or equity. The greater taxation of
equity investments leads to an over-reliance on debt finance for corporate investment.
Higher debt burdens increase a firm's risk of bankruptcy during temporary industry or
economy-wide downturns. Business failures generate losses to both shareholders and
employees, and the heightened bankruptcy risk can make the entire economy more
volatile. Over-reliance on debt also leads to misallocation of resources in the economy
and, by extension, lower economic performance and lower living standards.
3. The decision to retain or distribute earnings through dividends or share
repurchases. Corporations are discouraged from paying out earnings through dividends
to the extent that dividends are more heavily taxed than capital gains generated through
share repurchases or retained earnings. This distortion in dividend payout policy may
lead to an over investment in established firms that are able to finance investment through
retained earnings and a less efficient allocation of investment among firms in the
economy. The payment of dividends also may improve corporate governance by
providing a signal to investors of a company's underlying financial health and
profitability, as a firm cannot pay dividends for a long period of time unless the company
has earnings to support such payments. Regular dividend payments also limit funds over

5

which corporate managers have discretion and may be one way for shareholders to ensure
that managers invest only in proj ects that raise shareholder value. 5
4. The decision whether to consume today or invest and consume in the future. Table 1
indicates that the 2003 Jobs and Growth Act lowered the overall tax burden on capital
income. Taxing capital income increases the price of future consumption (i.e., savings)
compared to consuming today, as income consumed today will be taxed once, while
income saved for consumption in the future will be taxed today and again in the future as
the return to saving is included in income. Lowering the price of future consumption
should increase savings and capital accumulation, which raises living standards over time
as the larger stock of capital increases worker productivity.
The effects of these economic distortions and options to reduce them through integrating the
corporate and individual income tax systems are discussed in detail in a 1992 report of the U. S.
Department of the Treasury titled, Integration of the Individual and Corporate Tax Systems.
That study suggested that eliminating the double taxation of corporate profits could eventually
raise economic welfare in the United States by about 0.5 percent of national consumption, or
about $43 billion per year (in 2005 dollars), not including the economic gains from reducing the
distortion between present and future consumption. Put differently, the reduced distortion of
business decisions would be equivalent to receiving additional income of $43 billion every year
in perpetuity.
The lower dividend and capital gains tax rates passed in 2003 reduced, but did not eliminate the
double tax on corporate profits. Thus, the economic gains are likely smaller than estimated in
the 1992 Treasury Integration Study.
The reduction in the double tax on corporate profits not only improves the allocation of capital,
but also reduces the overall level of tax on capital income. As shown in Table 1, the overall
effective marginal tax rate on investment would be 10 percent higher economy-wide without the
reduction in the double tax on corporate profits under the 2003 Jobs and Growth Act.

I For a review of research on dividends and corporate governance issues, see Randall Morek and Bernard Yeung. 2005. "Dividend Taxation and
Corporate Governance." Journal of Economic Perspectives VoL 19, No.3, pp. 163-180.

6

International Comparisons
All of our major trading partners provide relief from the double tax on corporate profits. As
shown in Table 2, in 2004, a11 countries in the G-7 provide relief at the shareholder level through
either an imputation credit system, in which shareholders receive a credit for taxes paid at the
corporate level, a dividend exclusion, or lower tax rates. With a 15 percent rate on dividends, the
dividend tax rate for the United States is 50.6 percent (including state and local taxes), just below
the average of the other 0-7 countries (54.0 percent).6 Without the 15 percent rate, the United
States would have an effective dividend tax rate of 56.7 percent, higher than all other G-7
countries except Japan and roughly 10 percentage points higher than both Italy and the United
7
Kingdom.
Table 2: Tax Rates on Corporate Income Paid Out
as Dividends in G-7 Countries, 2004 11

Country

Type of dividend
treatment

Corporate Tax
Rate on
Distributed
Profits

Net
Personal
Tax Rate

Combined
Corporate and
Personal Tax
Rate

Japan

Partial imputation

40.9

40.0

64.5

France 2/

Partial exclusion

35.4

33.9

57.3 (52.5)

Canada

Partial imputation

36.1

31.3

56.1

Germany

Partial exclusion

38.9

23.7

53.4

United Kingdom

Partial imputation

30.0

25.0

47.5

Italy

Partial exclusion

33.0

18.4

45.4

35.7

28.7

54.0

Average of other G-7
Countries
United States:
Current Law

Lower rate

39.3

18.7

50.6

Without lower tax
rates on dividends and
capital gains

Lower rate

39.3

28.6

56.7

Source: OECD Tax Database, wwwoeed org.
Notes:
II Tax rates reflect statutory tax rates on corporate income paid out as dividends and include taxes of subnational govemments. The net
personal rate incorporates any exclusions or imputation credits for taxes paid by corporations.
21 France implemented a 50 percent dividend exclusion starting in 2005 that lowered the combined maximum rate on corporate dividends to
52.5 percent. This would also reduce the average for the other G-7 countnes to 53.2 percent
Partial imputation: dividend tax credit at shareholder level for pan ofunderiying corporate profits tax.
Partial exclusion: part of received dividends is excluded from taxable mcome at the shareholder level.

6 This only reflects statutory tates and ignores the effect of accelerated depreciation deductions and other items that enter into the marginal
effective tax rates shown in Table I.
7 The tax rate in France recently dropped to 52.5 percent.

7

Economic Effects of the Dividend Tax Cuts
Effect on Dividend Payouts

The economics literature suggests dividend payments are sensitive to the difference between the
effective tax rates on dividends and capital gains. By reducing the distortion in the treatment of
dividends and capital gains, the 2003 Jobs and Growth Act should increase dividend payments.
One study estimates that dividends will eventually increase by approximately 30 percent. 8 The
empirical evidence on actual dividend payments has found that dividend payments have
increased significantly as a result of the tax cut.
Several studies indicate that prior to the recent dividend tax cuts, corporations were steadily
reducing dividend payments over the past two decades. One study documented that the portion
of firms paying cash dividends in their sample fell from 66.5 percent in 1978 to 20.8 percent in
1999.9 Other studies have found that aggregate payout ratios have been more stable, as the
remaining dividend paying firms are large and profitable, but these ratios also declined in the
decade preceding the 2003 tax cut. 10 These trends of declining dividends reversed beginning in
2003 at the time the dividend tax cuts were enacted. One study found that the dividend tax cut
increased regular dividend payments by publicly traded corporations by approximately 20
percent by the end of the second quarter in 2004. 11 The same study found that the portion of
firms paying dividends increased from under 20 percent in 2002 to almost 25 percent by the
middle of2004. Similarly, as shown in Figure 1, the percent of firms in the S&P 500 paying
dividends declined from 94 percent in 1980 to 70 percent in 2002, but has since increased to 77
percent.
Recent data from Standard and Poor's (S&P) indicate that these dividend increases have
continued through 2004 and 2005. Among the approximately 7,000 publicly owned companies
that report dividends to S&P, 1,745 reported an increase in dividends in 2004, a 7.2 percent
increase over 2003. For the first 9 months of 2005, 1,446 firms reported dividend increases, a
12.4 percent increase from the same period in 2004. In 2004, dividends paid by S&P 500
companies reached a record level of $181 billion (not counting Microsoft's special one-time
payout of $32.6 billion), an increase of 13 percent over 2003. In 2005, dividend payments set
another record of $203 billion, an increase of 12.4 percent over 2004. Dividend payment by S&P
500 companies were up 36.5 percent in 2005 as compared to 2002.
It is too early to know whether these dividend increases represent a long-term change in
corporate payout policies. An important factor is whether firm managers and shareholders
believe that the lower tax rate on dividends will remain in place in the future.

, Poterba, James. 2004. "Taxation and Corporate Payout Policy." American Economic Review Vol. 94, No.2. pp. 171·175.
'Fama, Eugene F. and Kenneth R. French. 2001. "Disappearing Dividends: Changing Firm Characteristics or Lower Propensity to Pay." Journal

ofFinancial Economics, 60:3-43.
10

For example, see Gustavo Grullon and Roni Michealy. 2002. "Dividends, Share Repurcnases, and the Substitution Hypothesis." The Journal

of Finance, Vol. LVII, No.4, pp. 1649-1684.
II Chetty, Raj and Emmanuel Saez. 2005. "Dividend Taxes and Corporate Behavior: Evidence from the 2003 Dividend Tax Cut." Quarterly
Journal of Economics, Vol. CXX, No.3, pp. 791-833. As with the previous two studies, financial and utility companies are excluded from the

sample. The 20 percent figure is likely to increase over time and suggests a faster adjustment that preViOusly eSllmated by Poterba (2004).

8

Effect on Stock Market
With the bursting of the tech bubble in late 2000, the terrorist attacks in 2001 , and revelations of
numerous high profile corporate accounting scandals during 2000 through 2002, the S&P 500
stock price index declined nearly 50 percent, from a high of 1527 in March 2000 to just under
777 October 2002. In the months from October 2002, through the passage of the 2003 Jobs and
Growth Act in May 2003, the S&P 500 traded in a range between that level and 962 with a series
of rises and falls. However, as shown in Figure 2, equity prices rose steadily in the months after
the tax cut was passed and in the almost three years since the time the President announced his
proposal to repeal the double taxation of corporate profits, the S&P 500 index has increased by
approximately 40 percent.
While numerous factors contributed to the rise in stock prices during the past three years, the
dividend and capital gains tax cuts likely played an important role. One study estimated that the
likely increase in aggregate equity values due to capitalizing the annual flow of permanent
dividend and capital gains tax cuts would be 6 percent. 12 Given the forward looking nature of
the markets, it is not clear exactly when the effects of the dividend tax cut were capitalized into
share prices or what the expected duration of the tax cut was. Assuming that the increase in
equity values due to the tax cut occurred entirely in 2003, then as much as one-quarter of the 26
percent increase in the S&P 500 index for 2003 could be attributed to the capitalized value of the
dividend and capital gains tax cut. This estimate is rough and ignores the influence of the tax cut
on future investment behavior .13
Effect on Investment and Economic Growth
The turnaround in private investment is more strongly correlated with the passage of the 2003
Jobs and Growth Act than is the stock market turnaround. As shown in Figure 3, real private
nonresidential investment declined for 9 consecutive quarters prior to the second quarter of2003.
Investment has surged in the 11 quarters since then, with the percentage increases over 10
percent in several quarters and an average rate increase of 8.7 percent. Of course, separating the
independent effects of the dividend tax cut from other factors that might influence investment is
difficult, especially in view of other tax changes included in the 2003 Jobs and Growth Act, such
as the increase in bonus depreciation to 50 percent that would be expected to affect investment. 14
The extent to which dividend taxation influences corporate investment is an unsettled issue.
Economists generally agree that investment financed with issuing new shares of stock is made
more costly when dividends are taxed. However, dividend taxation may playa less significant
role for determining investment financed through retained earnings where dividend taxes are
primarily reflected through share prices. IS Some recent evidence suggests that for some firms
" Poterba, James. 2004. ''Taxation and Corporate Payout Policy." American Economic Review Vol. 94, No.2, pp. 171-175.
For some firms, economy theory suggests that the decrease in dividend taxes would have only a temporary effect on share prices. although
stock market capitalization for these firms would increase in the long-run as the corporate capital stock would increase with greater investment
financed by new share issues.
14 Preliminary research suggests that the bonus depreciation provision increased investment. See Christopher L. House and Matthew D. Shapiro.
2005. "Temporary Investment Tax Incentives: Theory with Evidence from Bonus Depreciation." Working Paper.
IS In other words, firms that face a permanent increase in share prices would not alter investment behavior due to the dividend tax cut; for firms
where the dividend tax. cut lowers the cost of capital and encourages investment, share prices would not increase in the long-run.
13

9

dividend taxation reduces investment so that the recent dividend tax cut would be expected to
•
•
16
mcrease corporate mvestment.
Since the passage of the 2003 Jobs and Growth Act, national output has increased dramatically.
The recovery from the economic downturn of 200 1 had been sluggish up through the first quarter
in 2003, as shown in Figure 4. The real growth rate in GDP in the nine quarters preceding the
dividend tax cut averaged 1.1 percent, while the growth rate in the 10 quarters since the passage
of the tax cut has averaged 3.9 percent. The increase in national output results from both the
increase in capital use as indicated by the investment figures cited above and the increase in
labor inputs as evidenced by growing employment during this time period. For example,
approximately 4.7 million jobs have been created since the 2003 Jobs and Growth Act became
law. Economic growth since the tax cut easily exceeds historical averages. For example, since
1970 real economic growth has averaged 3.2 percent. These output gains reflect the combination
of many factors, including the resilience of the American economy, and do not solely reflect the
effect of the 2003 Jobs and Growth tax cuts. However, the benefit of less distorting tax system
resulting from cutting dividend and capital gains taxes likely contributed to these gains.
The effect on employment of the dividends and capital gains tax cuts made as part of JGTRRA
are difficult to quantify. In the shorter run, when the economy was away from its long-run GDP
growth and unemployment rates, factors such as the stance of monetary policy and the state of
consumer and business confidence can affect how a tax cut influences the economy. In the
longer run, a tax cut could result in small job gains, but sizable output gains and increases in
living standards. For example, dividend and capital gains tax cuts make the economy more
efficient by improving the allocation of resources within the economy and increasing the capital
stock. The ultimate effect on the level of employment itself would be very small unless the tax
cuts significantly raised the incentive to participate in the labor market. The level of
employment in the long run is largely set by labor-leisure choices and the growth in the
population - factors that determine the supply oflabor. If the long-run "equilibrium"
unemployment rate, for example, were not much affected by the lower tax rates on dividends and
capital gains, then the level of employment in the long run would likely be, to a large extent,
unaffected. However, the productivity of labor would certainly be enhanced, and the higher
level of labor productivity would translate into a higher standard of living.
In the shorter term, however, and when the economy is below full employment, as it was when
the 2003 Jobs and Growth Act was enacted, employment increases along with the level of
economic activity. There can be little doubt that 2003 Jobs and Growth Act played a key role in
stimulating the economy in mid-2003. The short-run effect of the 2003 Jobs and Growth Act on
(the President's proposals made in early 2003) could be substantial.

J<

For further discussion of these issues, see Alan Auerbach and Kevin Hasse!. 2003. "On the Marginal Source of Investment Funds." Journal of

Public Economics. Vol. 87, pp. 205-232. and Robert Carroll, Kevin A. Hasset and James B. Mackie III. 2003. "The Effect of Dividend Tax
Reliefon Investment Incentives." National Tax}ournalVol. LVI, No.3, pp. 629-651.

10

•

The Council of Economic Advisers estimated that the Act would increase the number of jobs:

"Stronger GDP growth would lead to an estimated 510, 000 new jobs expected to be created
as a result of the proposal over the course of2003. Another 891,000 new jobs would be
created ill 2004. all average, the level of employment in 2003 would be 192,000 higher than
without the proposal and 900,000 higher in 2004 than in 2003. "(Strengthening America '.'I
Economy, February 4, 2003)
•

Simulations done by the Congressional Budget Office (CBO) with two macroeconomic
models also suggested that there would be significant employment gains associated with the
President's proposal. Both the Macroeconomic Advisers (MA) model and the Global Insight
model predicted that the proposals would raise the level of employment in 2004 about 1
percent above the baseline level (a little more than 1 million jobs). (An Analysis of the
President's Budgetary Proposals for Fiscal Year 2004, March 2003, page 53.)

The effect of all of the fiscal stimulus measures together - including the Economic Growth and
Tax Relief Reconciliation Act of 200 1 (EGTRRA, June 2001), the Job Creation and Worker
Assistance Act of2002 (JCWAA, March 2002), and the Jobs and Growth Tax Relief
Reconciliation Act of2003 (JGTRRA, May 2003) - has been to increase employment
substantially above what would have occurred otherwise.
•

The Treasury Department used the MA macro-econometric model to estimate how the
economy would have performed had there been no fiscal stimulus from 2001 through 2004.
This analysis found that: (1) by the second quarter in 2003,the economy would have created
as many as 1.5 million fewer jobs, and (2) by the end of 2004, the economy would have
created as many as 3 million fewer jobs (interest rates set by the Federal Reserve were taken
as unchanged from their actual levels),

Effects on Taxpayers
In 2004, the latest year for which tax return data are available, over 24 million taxpayers (18.5
percent of all taxpayers) reported $110 billion of dividend income eligible for the new
preferential tax rates. 17 In addition, 25 million taxpayers reported capital gains totaling $471
billion, up from $323 billion in 2003.
Reflecting the widespread holding of corporate stock, dividends were received by taxpayers in
all income groups. For example, 23.2 percent of taxpayers with incomes of$50,000 to $75,000
received eligible dividends as did 10.3 percent of taxpayers with incomes $20,000 to $30,000.
Also, about 43 percent of taxpayers who reported dividends eligible for the lower tax rate had
incomes below $50,000 and 73 percent had incomes below $100,000.
Older taxpayers were particularly likely to benefit from the lower tax rates on dividends. In
2003, nearly 7 million taxpayers age 65 and over - 40 percent of all elderly taxpayers and 30
percent of all taxpayers with dividends - reported dividends eligible for the lower tax rate in
2003.
17

This percentage is likely to increase in future years as taxpayers become more familiar with the provision.

11

In addition, it is estimated that for 2006, the lower tax rates on dividends and capital gains in the
2003 Jobs and Growth Act will benefit 28 million taxpayers who will receive an average tax cut
of$989 from the provision. Among those benefiting are 8.5 million elderly taxpayers who will
receive an average tax cut of $1,144.

Conclusion
The economy has performed strongly since the passage of the lower tax rates on dividends and
capital gains: stock market valuations, dividend payments, investment, employment and GDP
have increased noticeably since early 2003. These gains are the result of a combination of many
factors that include the benefits from reducing the double tax on corporate profits and the ways
in which this double tax distorts economic decisions.

12

Figure 1, Percent of Firms in the S&P 500 Paying Dividends, 1980-2005
Percent
100

95

··

90

·-.·

85

80

··

75

-!>

·.--

70

65

60

I!

55

iI ---

50

L I_ _ _ _ _ _ _ _ _ _ _

~

1980 1981 1982 1983 1984 1985 1986 1997 19881989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 200220032004 2005

Year

Source Standard & Poor's

Figure 2, S&P 500 Index Closing Prices
1600

1400

1200

800

•·
·•

600

40D
1JanD1

1Apr01

30-

28-

27-

27-

25-

Jun01

Sep01

Dec01

Mar02

Jun02

2223Sep- Dec02
D2

22Mar03

20Jun03

Source: Standard & Poor's

13

18Sep03

Dec-

16Mar-

14Jun-

12Sep-

03

04

04

04

17-

11Dec04

11Mar05

g.
Jun05

7Sep-

6Dec-

05

05

Figure 3. Percent Change in Real Private Nonresidential Investment Over the Previous Period
15

-----.-.

10

-5

III-

I

I

I
..

-10

·
...··
*

_._--_

-15

2001 2001 2001 2001 2002 2002 2002 2002 2003 2003 2003 2003 2004 2004 2004 2004 2005 2005 2005 2005
QI
02
03 04 01 02 03 04 01 Q2 03 Q4 01 02 03 04 Q1 02
03 04p
p: Preliminary
Source: Bureau Of Economic Analysis

Figure 4. Percentage Change in Real GOP Over the Previous Period
Percent
..

8

'fl"'~

4

3
2

-2
2001
01

2001
02

2001

03

2001
04

2002
Q1

2002
02

2002
03

2002
04

2003
01

2003
Q2

p: Preliminary
Source: Bureau of Economic Analysis

14

2003
03

2003
Q4

2004
01

2004
Q2

2004
03

2004
04

2005
01

2005
02

2005
Q3

2005
Q4p

i

·i·········t·········
I

I

JS-4117 - TU!glury International Capital Data for January

Page 1 of2
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PRESS ROOM

FROM THE OFFICE OF PUBLIC AFFAIRS
We recommend printing this release using the PDF file be/ow,
To view or print the PDF content on this page. download the free Adobo@ Acrob&ttj<~ Rcacior£J.

March 15, 2006
JS·4117

Treasury International Capital Data for January
Treasury International Capital (TIC) data for January are released today and posted on the U.S. Treasury web site (lNww.tr:ea,~.9oY.LtLc;),
which will report on data for February. is scheduled for April 17,2006.
Net foreign purchases of long-term securities were $66.0 billion.
Net foreign purchases of long-term domestic securities were $78.0 billion, $202 billion of which were net purchases by foreign (
$57.9 billion of which were net purchases by private foreign investors.
• U.S. residents purchased a net $12.0 billion in foreign issued securities.
•

Foreigners' Transactions in Long-Term Securities with U.S. Residents
(Billions of dollars. not seasonally adjusted)

Foreigners' Transactions in Long-Term Securities with U.S. Residents
(Billions of dollars, not seasonally adjusted)
12 Months Though
Oct-

Nay-OS

2004

2005

Jan-

Jan-

15178.9
14262.4

17043.2
16018.1

15335.9
14425.2

17187.8
16173.2

1445.7
1336.1

1426.6
1321.7

3 Domestic Securities Purchased, net (line 1 less line

916.5

1025.1

910.7

1014.7

109.6

104.9

4
5
6
7
8

Private, net 12
Treasury Bonds & Notes, net
GOy't Agency Bonds, net
Corporate Bonds, net
Equities, net

680.9
150.9
205.7
298.0
26.2

913.6
288.5
193.5
352.1
79.4

690.8
154.6
203.1
304.4
28.7

897.5
261.6
191.8
358.6
85:5

96.7
25.0
29.4
34.6
7.8

99.0
50.8
8.6
34.9
4.7

9
10

Official, net
Treasury Bonds & Notes, net
GOy't Agency Bonds, net
Corporate Bonds, net
Equities, net

235.6
201.1
20.8
2.2

111.5
59.5
32.9
18.6
0.5

219.9
182.0
23.3
12.3
2.4

117.2
60.3
35.3
19.6
2.0

13.0
4.9
6.2
1.7
0.2

3.7
0.4
1.7
0.1

15 Gross Sales of Foreign Securities

3123.1
3276.0

3702.1
3859.3

3100.7
3245.7

3829.5
3992.9

374.3
377.5

337.4
353.8

16 Foreign Securities Purchased, net (line 14 less line

-152.8

-157.2

-145.0

-163.4

-3.2

-16.4

-67.9
-85.0

-30.3
-126.9

-65.0
-80.0

-28.9
-134.5

2.8
-6.0

0.9
-17.2

1 Gross Purchases of Domestic Securities
2 Gross Sales of Domestic Securities

11

12
13

14 Gross Purchases of Foreign Securities

17
18

Foreign Bonds Purchased, net
Foreign Equities Purchased, net
httR'/treasgovipressircleasesi]s411 7.htrr1

11.5

5.9

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Page 2 of2

J5-4117 - Tu!OIury International Capital Data for January
763.6

19
11
12
13

867.9

88.5

106.5

Net foreign purchases of U.S. securities (+)
Includes International and Regional Organizations
Net U.S. acquisitions of foreign securities (-)

REPORTS
• (E'.Qf) fS1reigners' TransClctionsin LQng-Term Securities with U.~. ~~esidents (Billions of doliarsLnot seasonally adlusJs:dJ

httJl'/treasgov!press!rcleases!Js 4117. htm

3/3112006

DEPARTMENT OF THE TREASURY
OFFICE OF PUBLIC AFFAIRS
EMBARGOED UNTIL 9 AM (EST) March 15, 2006
CONTACT Brookly McLaughlin (202) 622-1996

TREASURY INTERNATIONAL CAPITAL DATA FOR JANUARY

Treasury International Capital (TIC) data for January are released today and posted on the U.S. Treasury web
site (www.treas.gov/tic). The next release date, which will report on data far February. is scheduled for
April 17,2006
Net foreign purchases of long-tenn securities were $66.0 billion.
•

•

Net foreign purchases of long-tenn domestic securities were $78.0 billion, $20.2 billion of which
were net purchases by foreign official institutions and $57.9 billion of which were net purchases by
private foreign investors.
u.s. residents purchased a net $12.0 billion in foreign issued securities.

Foreigners' Transactions in Long-Term Securities with U.S. Residents
(Billions of dollars, not seasonally adjusted)

12 Months Thr0lil:\.h
Jan-OS
Jan-06

2004

2005

15178.9
14262.4
916.5

170432
16018.1
1025.1

15335.9
14425.2
910.7

16173.2
1014.7

1445.7
13361
109.6

1426.6
1321.7

8

Private, net 12
Treasury Bonds & Notes, net
Gov't Agency Bonds, net
Corporate BOllds, nct
Equitles, net

680.9
150.9
205.7
298.0
26.2

913.6
288.5
193.5
352.1
79.4

690.8
1546
203 I
3044
28.7

897.5
261.6
191.8
358.6
855

9
10
II
12
13

Official, net
Treasury Banns & Notes, net
Gov't Agency Bonds, net
Corporate Bonds, net
Equities, net

235.6
201 1
208
11 5
2.2

111.5
59.5
32.9
186
0.5

219.9
182.0
23.3
12.3
2.4

3123. 1
3276.0
-152.8

3702 I
38593
-\57.2

-67.9
-85.0
763.6

I

Gross Purchases of Domestic Securities

2 Gross Sales of Domestic SeCUrIties
3
4

5
6

7

14
15
16
17
18
19

11
12
13

Domestic Securities Purchased, net (line I less line 2) 11

Gross Purchases of Foreign Securities
Gross Sales of Foreign Securities
Foreign Securities Purchased, net (line 14 less line 15) 13
Foreign Bonds Purchased, net
Foreign EqUitIes Purchased, net
Net Lonl!-Term Flows (line 3 plus line 16)
Net foreign purchases of U.S. securities (+)
Includes International and Regional Orgamzations
Net US. acqUIsItIons offoreign securitIes (-)

171~7.~

Oct-OS

Nov-05

Dec-OS

Jan-06

104.9

1201.8
11272
74.6

1439.5
1361.4
78.0

96.7
25.0
29.4
34.6
78

99.0
50.8
8.6
34.9
47

64.2
127
9.2
32.7
96

57.9
·4.0
18 I
23.5
20.3

117.2
60.3
35.3
19.6
2.0

13.0
4.9
6.2
1.7
0.2

5.9
3.7
04

10.4
5.6

3 toO.7
32457
-145.0

38295
39929
-163.4

-30.3
-1269

-650
-800

867.9

765.7

851.3

1.7

2.4
2.4

0.1

-0.1

20.2
8.4
8.5
2.3
09

374.3
3775
-3.2

3374
3538
-16.4

338.9
3596
-20.8

J77.0
3891
-12.0

-28.9

28

-1345

-60

09
-17.2

-4.0
-16.7

07
·12 8

106.5

88.5

53,8

66.0

Page 1 of 1

PRESS ROOM

March 15, 2006
JS·4118

Treasury Statement on Release of TIC Data
Some of the tables associated with Treasury's International Capital data release
were inadvertently posted to the Treasury Web site early. The Department
apologizes for any problems this may have caused. We believe that data releases
should always occur in a reliable and predictable manner and will work to ensure
that problems like this are not repeated.

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Page 1 of 4

PRESS ROOM

March 16,2006
JS-4119

Prepared Remarks by Under Secretary Stuart Levey
Terrorism and Financial Intelligence
Before the Netherlands' Terrorist Financing Conference
The Hague, NETHERLANDS -I am pleased to be here today representing the
Treasury Department of the United States. At Treasury, we recognize the
importance of a healthy global financial system and Secretary Snow has advocated
for three main principles that form the foundation of such a financial system: the
promotion of free trade, the free movement of capital, and flexible exchange rates.
The free movement of capital is critical in that equation, and it depends on a global
environment that fosters open investment and liberal financial markets.
None of this is possible without mechanisms to protect the financial sector from
abuse.
While the complex nature of the global financial network allows our financial
institutions to be innovative - creating financial products and systems that better
enable us to conduct international commerce - so too does it provide gateways for
those who abuse it. Online banking is just one example; stored value cards is
another. These advances are of great utility and benefit to the public, but they
present us with obvious challenges as well.
The Treasury Department, like your Finance Ministries, has at its disposal powerful
tools that can accomplish the dual mission of protecting financial markets from
abuse and combating threats to our national security. That Minister Zalm has
hosted this conference, bringing together such distinguished participants from
Finance Ministries from around the world, demonstrates clearly the importance of
our ministries in fighting the War on Terror He is absolutely right to say that "since
financial markets are such a crucial partner in the fight against terrorist financing,
ministers of finance can not but have the ultimate responsibility within government
to make this fight a success."
We have come a long way since the terrorist attacks of September 11, 2001 in
developing and implementing - nationally and internationally - financial authorities
to disrupt and dismantle terrorist networks: we still have much work to do. But the
same lessons we have learned and the same tools we have applied in this area can
and should be used in combating threats of all kinds, including the proliferation of
weapons of mass destruction. While we are keenly aware of the threat of terrorism,
perhaps even more frightening is the potential that terrorists will acquire weapons of
mass destruction. It is no secret that terrorist groups, like al Qaida, actively pursue
such capabilities. Fortunately, we have tools that allow us to combat these threats
in the most comprehensive manner - and Finance Ministries are well poised to
contribute to this global effort.
Our use of these types of financial authorities has proven to have a demonstrable
impact. These authorities bridge the divide between pure diplomacy on the one
hand, and the use of military force on the other. As we have seen in the terrorism
context, they give us a concrete way in which to target directly those individuals and
entities we know are bad actors and to strike at the heart of their operations.
The creation of my position in the US Treasury embodies a new approach to
deterring and defending against key national security threats, be it terrorism, the
proliferation of weapons of mass destruction, narcotics trafficking or organized
crime, by attacking the financial underpinnings of those threats. I am responsible for
marshaling Treasury's resources in thal battle and leveraging a full range of
financial enforcement authorities to safegu<1rd our financial system from these and
other illicit activities. Our national security and long-term economic health are

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Page 2 of 4
dependent upon success in this regard.
Within the U.S. government, Treasury plays a unique role in combating terrorisma role only finance ministries can play. We bring to national security policy-making
discussions our insights into financial transactions, connections with the private
sector, and tools to apply pressure on a great range of targets. When it comes to
disrupting and dismantling the support structures of terrorist networks, our
government turns to us. Thanks to international cooperation and sustained
pressure, those operations are evolving. Indeed we have information that terrorist
cells are increasingly relying on alternative methods, such as petty crime and cash
couriers, to move money and fund their operations. While I will address this new
development shortly, I first want to stress that terrorist networks continue to depend
on sustained access to the global financial system.
A few thousand euros raised through crime is not sufficient to support the
communications, logistics, welfare, and travel expenses incurred by global terrorist
networks working across borders to execute deadly operations. Terrorists and their
supporters will always need to exchange cash for airline tickets, illegal rent
payments, and weapons purchases. They also need money for training and
recruiting other terrorists, bribing officials, and obtaining false travel documents.
These activities necessitate an interface with the global financial system. Their
entry into that system is not only a vulnerability that can be exploited by financial
enforcement authorities, but also can serve as a highly valuable source of
intelligence.
As I have discussed this issue with government officials around the world, I have
met some who prefer to deal with terrorist financing quietly_ They are concerned
that taking strong action, such as designating the donor, will be perceived as
discriminating or will "rally" the donor's community in support around him. Some
also believe that their actions may diminish the reputation of the country in the eyes
of the world if it is known that terrorists exist within their jurisdiction. I view this
approach as dangerously short-sighted. It often results in allowing such donors to
continue to foment and fund terrorism beyond the borders of the country they are
living in. That. of course, puts all of us at risk. It also deprives us of a powerful tool
against terrorist financing - the tool of deterrence. One key advantage of the
designations we have pursued since 9/11 is that it can make a potential donor or
facilitator think twice or refuse to support terrorism. This is especially true with
respect to the significant donors who wish to maintain a place in society.
It is our responsibility as finance ministries to develop and implement effective
targeted financial sanctions regimes. We must monitor the financial activities of
designees and prohibit their future access to the financial system. We must also go
beyond simply "designating" individuals and entities that have been listed by the
United Nations by proactively identifying terrorist supporters that threaten our
societies, holding them publicly accountable, and isolating them financially.
We must also aggressively and pragmatically implement the security obligations
that we have agreed to under the auspices of the United Nations, the FATF, and
other international and regional organizations. These bodies have universally
recognized that finance ministries have an important role to play in the maintenance
of global security.
This is increaSingly seen in the resolutions our UN leaders have developed to
address specific threats: UNSCR 1267 on al Qaida, Usama bin ladin and the
Taliban, UNSCR 1373 on global terrorism, UNSCR 1540 on WMD Proliferation,
UNSeR 1483 on the former Hussein regime in Iraq, UNSCR 1636 on the
assassination of former lebanese Prime Minister Hariri. There are UN Security
Council Resolutions for liberia and Zimbabwe as well. All of these Resolutions call
for jurisdictions to, among other things, utilize financial enforcement authorities to
combat an identified international security threat. This means not only strengthening
our existing tools, but also creatively applying new tools as well.
The United States continues to look to innovative ways to meet this goal. One such
tool we have used to protect our financial sector is an authority given to us under
Section 311 of the USA PATRIOT Act (Patriot Act). As many of you may know,
Section 311 authorizes the Secretary of the Treasury to designate a foreign
jurisdiction, financial institution, or type of transaction as a "primary money
Irwnrlp.rina mnr<:,r'l." Once deSignated as such, the Treasury Department may take

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Page 3 of 4
a range of regulatory actions to protect the U.S. financial system, up to and
including requiring U.S. financial institutions to terminate correspondent
rela.tionships with a designated entity. Such a measure effectively cuts the
designated entity off from the U.S. financial system This defensive regulatory
me~sur~ .has. ~ profound e~fect, not only in insulating the U.S. financial system from
an Identified Illicit finance risk, but also in notifying the global system on notice of
such a threat as well.
A recent case worth noting was the September 2005 designation of Banco Delta
Asia (BOA) in Macau, in which the United States identified the institution for
facilitating variety of illicit activities, including on behalf of North Korea. BOA
financially facilitated North Korean front companies and government agencies
engaged in narcotics trafficking, currency counterfeiting, production and distribution
of counterfeit cigarettes and pharmaceuticals, and the laundering of proceeds
therefrom.
Our designation of BOA has produced encouraging results. Jurisdictions in the
region have begun conducting investigations and taking necessary steps to identify
and cut off illicit North Korean business. Responsible financial institutions are also
taking a closer look at their own operations, terminating or declining to take on such
business. These are welcome steps - but our continued and constant vigilance will
be needed to ensure these results do not wane.
This case and other 311 designations are protective measures to ensure our
financial system does not fall prey to illicit funds and bad actors. I sometimes hear
that this type of vigilance is bad for business. The reality is that a healthy financial
sector cannot exist without authorities to protect it from abuse. In fact, healthy
financial sectors, effectively protected from such abuse, bring increased investment
and business. We have recently refined our use of targeted finanCial sanctions to
address emerging threats. particularly the proliferation of weapons of mass
destruction that could find their way into the hands of terrorists.
As we have seen with terrorists, weapons proliferators require a substantial support
network. By attacking that system, we can isolate individual proliferators, paint a
clearer picture of how, and with whom, they operate and erode the infrastructure
that supports them.
The international community has recognized the need to combat this threat through
finanCial enforcement tools. U.N. Security Council Resolution 1540 calls on all
states to develop and implement authorities to combat proliferation, including by
denying proliferators and their supporters access to the financial system. The U.S.
has taken a first step by applying targeted financial sanctions to proliferators just as
we have to terrorists.
Our Executive Order 13382, which authorizes the freezing of assets of WMD
proliferators and their supporters, and forbids US persons from engaging in
commercial transactions with them, was issued by President Bush last June. Under
that Executive Order, we have designated 11 North Korean entities, six Iranian
entities and one Syrian entity engaged in proliferation activity. No longer should
these designated entities be able to claim legitimacy, and no longer should they be
able to reap the benefits of access to the international financial system.
You may view our executive order or Section 311 authority as unrealistic within your
system, but the threat from WMD proliferation - especially in the hands of terrorists is too critical to ignore. In the short-term, your ministries can build upon the
foundation laid by U.N. Security Council Resolution 1540 by sharing information on
U.S. designated entities, urging financial institutions to close or freeze any accounts
they hold at institutions in your jurisdictions, and taking steps to ensure that the
private sector ceases any dealings with these entities. Over the long-term, you can
bring significant weight to these actions by developing and implementing authorities
that will similarly allow you to freeze the assets, accounts, or transactions of
proliferators, denying them access to the financial system.
Let me close with the following observation: I worry every day about stopping the
flow of money to individuals intent on committing violent, terrorist acts against the
United States and its allies. I want to expose the infrastructure that facilitates such
activity and cut it off from the international financial system. I want my finance
ministry, the U.S. Department of the Treasury, to do everything in its power to
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Page 4 of 4
counter not only terrorists, but also WMD proliferators, narcotics traffickers,
organized criminals and their support networks. And I want to do this in partnership
with aI/ of you. It is our duty as government officials to do everything we can to
counter these profound threats to international and financial security.

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Page 1 of 1

PRESS ROOM

March 16, 2006
JS-4120

Treasury Postpones Auction Announcement
The announcement of 13-week and 26-week bills to be auctioned March 20, 2006
has been postponed pending action in Congress on legislation increasing the debt
ceiling.

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3/31/2006

Page 1 of 12

PRESS ROOM

10 view or prmt me f-Jut- content on tnlS page, download tne tree AOol)eQ<J ACrOi)a~!') Keacert<J

March 16,2006
JS-4121

Acting Deputy Assistant Secretary For Tax Policy Eric Solomon Testimony
Before
The Subcommittee On Select Revenue Measures Of The Committee
On Ways And Means
Chairman Camp, Mr. McNulty and distinguished members of the Subcommittee:
I appreciate the opportunity to discuss with you today some of the Federal tax
issues surrounding the use of tax-preferred bond financing. There are two general
types of tax-preferred bonds: tax-exempt bonds (including governmental bonds
and qualified private activity bonds) and tax credit bonds. Tax-preferred bonds
have long been an important tool for State and local governments to finance public
infrastructure and other projects to carry out public purposes. The Federal
government provides important subsidies for tax-preferred bond financing that
significantly reduce borrowing costs for State and local governments, most notably
through the Federal income tax exemption afforded to interest paid on tax-exempt
bonds. While steady growth in the volume of tax-preferred bonds and
Congressional proposals to expand them reflect their importance as incentives in
addressing public infrastructure and other needs, it is appropriate to review these
programs to ensure that they are properly targeted and to ensure that the Federal
subsidy is justified.
The first part of my testimony today will provide an overview of existing types of taxpreferred bonds and summarize the current market for these bonds. The second
part of my testimony will give a basic explanation of the Federal subsidy that is
provided for each type of tax-preferred bond, The third part of my testimony will
describe various technical rules in the tax law that ensure that the Federal subsidy
for tax-preferred bonds is used properly. The fourth part of my testimony will
summarize the recent growth in special purpose tax-exempt bonds and tax credit
bonds. The fifth and final part of my testimony will highlight administrative and tax
policy concerns that are raised by the recent growth in special purpose bond
financing.

Overview of Tax-Preferred Bonds

State and local governments issue tax-exempt bonds to finance a wide range of
public infrastructure, including schools, hospitals, roads, libraries, public parks, and
water treatment facilities. The interest paid on debt incurred by State and local
governments on these bonds is generally excluded from gross income for Federal
income tax purposes if the bonds meet certain eligibility requirements, There are
two basic kinds of tax-exempt bonds: governmental bonds and qualified private
activity bonds. Bonds generally are treated as governmental bonds if the proceeds
of the borrowing are used to carry out governmental functions and the debt is
repaid with governmental funds.
Under the general tax-exempt bond provisions of the Internal Revenue Code
(Code), bonds are classified as governmental bonds under a definition that limits
private business use and private business sources of payment for the bonds and
also limits financing of private loans. Bonds that have excessive private
involvement under this definition are classified as "private activity bonds," the
interest on which is tax-exempt only in limited circumstances,
In order for interest on tax-exempt bonds, including governmental bonds, to be

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3/3112006

Page 2 of 12
excluded from income, a number of specific requirements must be met.
Requirements generally applicable to all tax-exempt bonds include arbitrage
limitations, registration and information reporting requirements, a general prohibition
on any Federal guarantee, advance refunding limitations, restrictions on unduly
long spending periods, and pooled bond limitations.
The total volume of new, long-term governmental bonds has grown steadily since
1991, as shown in Figure 1. The Federal tax expenditures associated with the
income exclusion for interest on governmental bonds has also grown over the
years, as shown in Figure 3.
Private Activity_Bonds.
Bonds are classified as "private activity bonds" if more than 10% of the bond
proceeds are both: (1) used for private business use (the "private business use
test"); and (2) payable or secured from private sources (the "private payments
test"). Bonds also are treated a5 private activity bonds if more than the lesser of $5
million or 5% of the bond proceeds are used to finance private loans, including
business and consumer loans. The permitted private business thresholds are
reduced from 10% to 5% for certain unrelated or disproportionate private business
uses.
Private activity bonds may be issued on a tax-exempt basis only if they meet the
requirements for "qualified private activity bonds," including targeting requirements
that limit such financing to specifically defined facilities and programs. For
example, qualified private activity bonds can be used to finance eligible activities of
educational and other charitable organizations described in section 501(c)(3). Taxexempt private activity bond financing is also available for certain qualified facilities
such as airports, docks, wharves, transportation infrastructure, utility and sanitation
infrastructure, low-income residential housing projects, and small manufacturing
facilities. Qualified private activity bonds may also be used to finance home
mortgages for veterans and to facilitate single-family home purchases for first-time
home buyers who satisfy income, purchase price, and other qualifications.
Qualified private activity bonds are subject to the same general rules applicable to
governmental bonds, including the arbitrage investment limitations, registration and
information reporting requirements, the Federal guarantee prohibition, restrictions
on unduly long spending periods, and pooled bond limitations. Most qualified
private activity bonds are also subject to a number of additional rules and
limitations. in particular the volume cap limitation under section 146 of the Code.
Unlike the tax exemption for governmental bonds, the tax exemption for interest on
most qualified private activity bonds is generally treated as an alternative minimum
tax (AMT) preference item, meaning that the tax preference for these bonds is often
taken away by the AMT.
The current private activity bond regime was enacted as part of the Tax Reform Act
of 1986 and was designed to limit the ability of State and local governments to act
as conduit issuers in financing projects for the use and benefit of private bUSinesses
and other private borrowers. Prior to enactment of this regime, States and
municipalities were subject to more liberal rules governing tax-exempt "industrial
development bonds," the proceeds of which could be used for the benefit of private
parties. The dramatic impact that enactment of the private activity bond regime in
1986 had on the volume of tax-exempt bonds benefiting private parties is reflected
in Figure 4.
The total volume of new, long-term qualified private activity bonds issued since
1991 is shown in Figure 1. In 2003, the most recent year for which the Internal
Revenue Service Statistics of Income (SOl) division data are available,
approximately $200 billion in tax-exempt bonds were issued, 22 percent of which
were private activity bonds. Between 1991 and 2003, private activity bonds
accounted for an average of 27 percent of total annual tax-exempt bond issuances.
Figure 2 shows the allocation of private-activity bonds among various qualified
projects and activities. As can be seen, the largest issuance category in 2003 was
tax-exempt hospitals, followed by non-profit education, rental housing, airports and
docks, mortgages, and student loans. Tax expenditure estimates for tax-exempt

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bond issues between 1996 and 2005 are shown in Figure 3.
Tax Credit Bonds
Tax credit bonds are a relatively new type of tax-preferred bond that differ from
governmental or qualified private activity bonds in that the economic equivalent of
"interest" is paid through a taxable credit against the bond holder's Federal income
tax liability. Tax credit bonds are designed to be "zero coupon" bonds that pay no
interest. Recent programs for tax credit bonds encompass less than $5 billion in
total authorized or outstanding issues. By comparison, the tax-exempt bond market
(including governmental and qualified private activity bonds) encompassed over $2
trillion in outstanding issuances as of the end of 2005.
In general, the Federal subsidy provided to tax credit bonds is "deeper" than that
provided to tax-exempt bonds. In simplified terms, the Federal subsidy to State and
local governments on tax credit bonds is equivalent to the Federal government's
payment of interest on those bonds at a taxable rate. By comparison, the Federal
subsidy on tax-exempt bonds is equivalent to the Federal government's payment of
the interest differential between taxable and lower tax-exempt interest rates as a
result of the exclusion of the interest from income for most Federal income tax
purposes.
Existing law provides for three types of tax credit bonds, Qualified Zone Academy
Bonds ("QZABs"), Clean Renewable Energy Bonds ("CREBs") and Gulf
Opportunity Zone Tax Credit Bonds ("GO Zone Tax Credit Bonds"), each of which
is described in more detail below.

Federal Subsidy for Tax-Exempt Bonds and Tax Credit Bonds
A rationale for Federal subsidization of local public projects and activities exists
when they serve some broader public purpose. The most straightforward means of
delivering this subsidy is through direct Federal appropriations for grants to State
and local governments. The tax exemption for interest paid on tax-exempt bonds,
and the interest equivalent paid on tax credit bonds, are alternative means of
delivering a Federal subsidy. The policy justification for delivering these subsidies,
whether through direct appropriations, a tax exemption, or a tax credit, is
weakened, however, as use of the proceeds gets further away from traditional
governmental purposes.

The Federal government's exemption of the interest on certain bonds from income
tax lowers the rate of interest that investors are willing to accept in order to hold
these bonds as compared to taxable bonds, thereby lowering State and local
governmental borrowing costs. Governmental bonds also often have tax
exemptions for various State tax purposes. The amount of the Federal subsidy
enjoyed by State and local governments depends on the overall supply and
demand for tax-exempt bonds and on the marginal tax bracket of the investor
holding the bonds. For example, if taxable bonds yield 10 percent and equivalent
tax-exempt bonds yield 7.5 percent, then investors whose marginal income tax
rates exceed 25 percent will prefer to invest in tax-exempt bonds. On an after-tax
basis, these investors will be better off giving up the extra 2.5 percent yield on a
taxable bond in exchange for a greater than 25 percent reduction in their income
tax liability for each dollar in tax-exempt interest they receive. At the same time, the
State or local government issuing the bond will enjoy a 25 percent reduction in its
borrowing costs.
This "tax wedge" between the tax-exempt and taxable bond interest rates highlights
the inefficiency of the Federal subsidy provided by tax-exempt bond financing.
Investors whose marginal tax brackets exceed the prevailing tax wedge (25 percent
in the example above) reap a windfall from investing in tax-exempt bonds, because
they would have been willing to accept a lower interest rate to hold tax-exempt
debt. Therefore, although tax-exempt issuers spend less on interest than they
would if they had to issue taxable debt, they nonetheless spend more on interest
than they would if they were able to pay each investor just enough to make him
hold tax-exempt debt. The size of the windfall to high-braCket investors can be
large: since 1986, the average tax wedge between long-term tax-exempt bonds

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and high-quality corporate bonds has been about 21 percent, well below the top
marginal personal income tax rates of 28 to 39.6 percent during that period. The
Federal government pays this premium through a tax exemption.
Subsidy for Tax Credit Bonds
Tax credit bonds provide a Federal tax credit that is intended to replace a taxable
interest coupon on the Bonds. Existing tax credit bond programs provide that the
credit rate is based on a taxable AA corporate bond rate at the time of pricing, In
theory, an investor who has sufficient Federal tax liability to use the credit will have
a demand for a tax credit bond. Tax credit bonds are more efficient than taxexempt bonds, although unlike tax-exempt bonds they shift the entire interest cost
to the Federal government.
Instead of having cash coupons, tax credit bonds provide tax credits (at a taxable
bond rate), which are added to the investor's taxable income and then subtracted
from the investor's income tax liability. For example, if the taxable rate is 10
percent, a $1,000 bond would yield $100 in tax credits. If the investor were in the
35 percent tax bracket, he would include $100 in income and pay an extra $35 in
tax (before the credit). He would then take the $100 credit against this total tax bill,
for a net reduction in tax liability of $65. For investors with sufficient positive tax
liabilities to utilize the full value of the credit, tax credit bonds are equivalent to
Federal payment of interest at a taxable interest rate. Thus, an investor who
received $100 in taxable interest and paid $35 in tax would have $65 in hand after
taxes. Similarly, the holder of a tax credit bond who receives $100 in credits would,
after paying $35 in tax on those credits, end up with $65 more in hand after taxes.
From an economic perspective, the Federal subsidy for tax credit bonds may be
viewed as more efficient than the subsidy for tax-exempt bonds, This is because
the Federal subsidy for tax credit bonds is based on taxable interest rates and an
investor may have a demand for tax credit bonds so long as the investor has
sufficient Federal tax liability to use them. By comparison, the Federal subsidy for
tax-exempt bonds may be viewed as inefficient in the sense that the tax-exempt
bond market does not pass the full Federal revenue cost to State and local
governments through correspondingly lower tax-exempt bond rates. As discussed
in more detail below, however, tax credit bonds have a number of practical
inefficiencies that may out\Neigh any economic advantage they have in delivering a
Federal subsidy.

Rules Governing Tax-Preferred Bonds

Federal tax law contains a number of detailed rules governing tax-exempt bonds
that reflect a longstanding, well developed regulatory structure. Additional rules
provide detailed targeting and other restrictions for qualified private activity bonds.
In contrast, the three existing tax credit bond programs provide disparate statutory
rules with varying incorporation of the general tax-exempt bond rules.

Arbitrage Yield Restrictions and Arbitrage Rebate. In order to properly target the
Federal subsidy for projects financed with tax-exempt bonds, the Code contains
arbitrage rules that prevent State and local governments from issuing more bonds
than necessary for a particular project, or from issuing bonds earlier or keeping
bonds outstanding longer than necessary to finance a project. Subject to certain
exceptions, these "arbitrage yield restrictions" limit the ability of State and local
governments to issue tax-exempt bonds, any portion of which is reasonably
expected to be invested in higher-yielding investments. The arbitrage rules also
require that certain excess earnings be paid to the Federal government (the
"arbitrage rebate" requirement).
Advance Refunding Limitations. The Code contains detailed "advance refunding"
limitations designed to limit the circumstances in which more than one tax-exempt
bond issuance is outstanding at the same time for the same project or activity,
Refunding bonds are often issued to retire outstanding debt in an environment of
declining interest rates. Limitations on the ability to "call" outstanding debt often
lead to circumstances in which issuers seek to do advance refundings. In an

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advance refunding, the issuer uses proceeds from refunding bonds to defease its
obligation on the original "refunded bonds," but does not payoff the refunded bonds
until more than 90 days after the refunding bonds are issued.
Advance refundings are inefficient and costly (0 the Federal government because
they result in more than one Federal subsidy being provided for the same project at
the same time. In 2002 and 2003, when interest rates were falling, current
refundings and advance refundings accounted for 40 percent and 36 percent of
total governmental bond issuances, respectively. By contrast, in 2000, a year of
relatively high interest rates, advance refundings accounted for 20 percent of total
governmental bond issuances.
Prior to the Tax Reform Act of 1986, advance refundings were a greater concern
because issuers could advance refund governmental bonds an unlimited number of
times. The Code now generally permits only one advance refunding for
governmental bonds and prohibits advance refundings entirely for qualified private
activity bonds other than qualified 501 (c)(3) bonds. Less restrictive rules apply to
"current refundings" in which the refunded bonds are fully retired within 90 days
after the issuance of the refunding bonds.
Prohibition Against Federal Guarantees. Under the Code, interest paid on bonds
that carry a direct or indirect Federal guarantee is generally not excluded from
income. The broad prohibition against Federal guarantees of lax-exempt bonds is
designed to avoid creating a tax-exempt security that is more attractive to investors
than Treasury securities because it has both the credit quality of a Treasury security
and a Federal tax exemption. There are a limited number of exceptions to the
prohibition on a Federal guarantee, most of which date back to enactment of the
Federal guarantee prohibition in 1984.
Registration Requirement and Information Reporting. In order to ensure the
liquidity of lax-preferred bonds in the financial markets and to prevent abuse
through use of bearer bonds, most tax-exempt bonds are subject to registration
requirements. In addition, issuers of these bonds must file certain information
returns with the IRS at the time of issuance of the bonds in order for the interest to
be tax exempt or for the holder of a tax credit bond to claim the credit.
Hedge Bond Restrictions. "Hedge bond" provisions generally prohibit the issuance
of tax-exempt bonds in circumstances involving unduly long spending periods in
which issuers cannot show reasonable expectations to spend most of the bond
proceeds within a five-year period.
Pooled Bond Financing Limitations. "Pooled bond" financing limitations generally
impose restrictions on the use of tax-exempt bonds in pooled bond financings
involving loans of bond proceeds to two or more borrowers. These restrictions are
designed to encourage prompt use of the bond proceeds to make loans to carry out
ultimate governmental purposes.

Qualified private activity bonds are generally subject to the rules described above
and to additional limitations. Most significantly, with some exceptions, the amount
of tax-exempt qualified private activity bonds that can be issued by each State (or
its political subdivisions) is subject to a unified annual State volume cap based on
population. Presently, the annual State volume cap is equal to the greater of $75
per resident or $225 million (increased for inflation for every year after 2002) In
general, the unified State volume cap on qualified private activity bonds has
provided a fair, flexible, and effective constraint on the volume of tax-exempt private
activity bonds.
The Code also places limitations on the types of projects and activities that can be
financed by qualified private activity bonds. For example, the proceeds from
qualified private activity bond cannot be used to finance sky boxes, health clubs
owned by an entity other than a Section 501 (c)(3) entity, gambling facilities, or
liquor stores. In addition, there are a number of more technical rules that apply to
qualified private activity bonds, including limits on the tax exemption for bonds held
by persons who are users of projects financed by the bonds. There are also limits
on the maturity date of the bonds, which unlike governmental bonds is statutorily

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linked to the economic life of the financed property. Furthermore, conduit
borrowers who use the proceeds of qualified private activity bonds are subject to
penalties if they use the bond proceeds in an inappropriate manner.
;;ppli~ation of the Operating Rules to Tax Credit Bonds

The general operating rules for tax-exempt bonds are established in the Code and
Treasury Department regulations. In theory, similar rules should apply to tax credit
bonds in order to ensure that the proceeds from these bonds are being properly
utilized, and to ensure that the Federal subsidy is properly targeted. The three
existing tax credit bond programs, however, provide disparate statutory rules with
inconsistent incorporation of the general tax-exempt bond rules. For example, the
Code provides that the arbitrage rules and information reporting requirements apply
to certain tax credit bonds but not to others. Similarly, remedial action rules are
applied inconsistently to tax credit bonds. In addition, due to the novelty and limited
scope and application of tax credit bonds, the rules otherwise applicable to taxexempt bonds cannot be applied without statutory authorization or appropriate
modification of existing regulations. Tax credit bonds also raise new issues and
challenges, including those highlighted below:
•

Eligible Uses. The projects and activities for which qualified private activity
bonds can be used are articulated in the Code and defined in regulations
that have been developed over time. While the statutory provisions
authorizing tax credit bonds similarly describe eligible uses for the proceeds
of these bonds, there is little guidance on the specific types of projects or
activities that qualify. Moreover, because the permitted uses are often
highly technical and differ from the uses authorized for qualified private
activity bonds, entirely new sets of rules may need to be published.
• Application to Pass- Through Entities. The complex nature of tax credit
bonds raises Significant issues when those bonds are held by pass-through
entities or mutual funds. Accordingly, new rules need to be developed to
describe how the tax credit is both included in income for members of a
pass-though holder of a tax credit bond, and to describe how the credit is
ultimately used by the members or partners.
• Credit Rate. For tax-exempt bonds, the markets set the applicable interest
rate. While there are some market inefficiencies that arise from the limited
size of some issuances, the market can generally take them into
consideration. In contrast, the Treasury Department sets the rates for tax
credit bonds. While the credit rate-setting mechanism is designed to result
in rates that penmit the bonds to be sold at par, that objective has not always
been achieved in practice and the Treasury Department may be less suited
than the market in determining the appropriate rate.
• Maturities. For qualified private activity bonds, the Code generally requires
that the weighted average maturity of the bonds be based on the economic
lives of the financed projects or activities. In contrast, the Treasury
Department is charged with determining the maturity date for all existing tax
credit bonds at a level at which the present value at issuance of the
obligation to repay the principal of the bonds is equal to 50% of the face
amount of the bond. This rate-setting methodology does not involve the
typical consideration of the economic life of the financed projects.
• Volume Cap. The authorizing statutes for the three existing types of tax
credit bonds each limit the aggregate amount of bonds that can be issued.
Under the volume cap rules that apply to most qualified private activity
bonds, the IRS is only required to determine the total amount of volume cap
a State may allocate and States are given the discretion to allocate their
volume caps among permitted types of projects in accordance with their
specific needs. In contrast, for some tax credit bonds the IRS is required to
make allocations to specific projects. This raises complex questions about
how to allocate bond authority when demand exceeds supply and how to
determine the technical merits of an application for bond authority. Although
the Treasury Department and IRS are responsible for answering these
questions, they often lack the non-tax expertise needed to do so and must
make judgment calls on which projects will be allocated bond authority.
Moreover, allocations of tax credits by the Federal government outside of
State volume caps weighs against the flexibility and efficiency associated
with allowing States to allocate limited volume cap in accordance with Stale
and local needs and priorities.
Special Purpose Tax-Preferred Bonds

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In recent years, a number of new types of qualified private activity bond programs
have been created outside of the general volume cap rules for specific targeted
projects or activities. In addition, three tax credit bond programs have been
enacted for specific targeted projects or activities that would not otherwise be
covered by the qualified private activity bond rules. A number of proposals for
additional types of private activity bonds and tax credit bonds have been proposed,
including recent proposals for high-speed rail infrastructure bonds, transit bonds
and Better America Bonds.
Special Purpose Private Activity Bonds
Recently enacted special purpose qualified private activity bonds include those
described below.
New York Liberty Zone Bond Provisions. The Job Creation and Worker Assistance
Act of 2002 provided tax incentives for the area of New York City (the "New York
Liberty Zone") damaged or affected by the terrorist attack on September 11, 2001.
New York Liberty Zone tax incentives include two provisions relating to tax-exempt
bonds: (1) $8 billion of tax-exempt private activity bonds that are excluded from the
general volume cap rules and that are allocated by the Governor of New York and
they Mayor of New York City in a prescribed manner; and (2) $9 billion of additional
tax-exempt, advance refunding bonds. The dates originally established for issuing
bonds under the New York Liberty Zone authority were extended by the Working
Families Tax Relief Act of 2004. New York City has not used all of its allocated
bond authority.
GO Zone Act Bond Provisions. The Gulf Opportunity Zone Act of 2005 (GO Zone
Act) increased the otherwise applicable volume cap for qualified private activity
bonds issued by LOUisiana, MissiSSippi and Alabama. For each of these States, the
GO Zone Act provided additional volume cap through the year 2009. The GO Zone
Act also provided that interest paid on additional private activity bonds issued by
under this provision would be exempt from AMT. The additional volume cap
authority is estimated to be $7.9 billion, $4.8 billion, and $2.1 billion for LouiSiana,
Mississippi, and Alabama, respectively. These States collectively had over $1.8
billion in unused, carryover volume cap at the end of 2004, raising some question
as to whether, as happened with the New York Liberty Zone bond authority, the
additional volume cap authority will be used.
Green Bonds. As part of the American Jobs Creation Act of 2004, Congress
authorized up to $2 billion of tax-exempt private activity bonds to be issued by State
or local governments for qualified green building and sustainable design projects.
"Qualified green building and sustainable design projects" are defined to mean any
project that is designated by the Treasury Secretary, after consultation with the
Administrator of the Environmental Protection Agency, to be a qualified green
building and sustainable design project and that meets certain other requirements.
The Treasury Secretary is responsible for allocating the dollar limit among qualified
projects. Only four qualified applicants submitted applications for green bond
authority. The IRS has made allocations among those qualified applicants.
Because the demand for an allocation of the limit was greater than the limit, the
allocation was made using a pro rata method.
Qualified Highway and Surface Freight Transfer Facility Bonds. The Safe,
Accountable, Flexible, Efficient Transportation Equity Act of 2005 authorizes the
Secretary ofTransportation to aI/ocate a $15 billion national limitation to States and
local governments to issue bonds to finance surface transportation projects,
international bridges or tunnels or transfer of freight from truck to rail or rail to truck
facilities, if those projects receive Federal assistance. Bonds issued pursuant to
such allocation do not need to receive volume cap under the normal bond rules.
The statute generally requires proceeds to be spent within 5 years from the date the
bonds were issued.

The three existing special purpose tax credit bond programs are described below:
Qualified Zone Academy Bonds. Qualified Zone Academy Bonds (QZABs) were
first introduced as part of the Taxpayer Relief Act of 1997. State and local

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governments can issue QZABs to fund the improvement of certain eligible public
schools. Eligible holders are banks, insurance companies, and corporations
actively engaged in the business of lending money. QZABs are not interest-bearing
obligations. Rather, a taxpayer holding QZABs on an annual credit allowance date
is entitled to receive a Federal income tax credit. The credit rate for a QZAB is set
on its day of sale by reference to credit rates established by the Treasury
Department and is a rate that is intended to permit the issuance of the QZABs
without discount and without interest cost to the issuer. The credit accrues annually
and is includible in gross income (as if it were an interest payment on a taxable
bond) and can be claimed against regular income tax liability. The maximum term
of a QZAB issued during any month is determined by reference to the adjusted
applicable Federal rate (AFR) published by the IRS for the month in which the bond
is issued. The arbitrage investment restrictions and information reporting
requirements that generally apply to tax-exempt bonds are not applicable to
QZABs.
Because issuers of QZABs are not currently required to file Form 8038 information
returns, there is no reliable data on the volume of QZABs that have been issued.
Total QZAB issuances of $400 million per year have been authorized since 1998,
so the maximum aggregate volume would be $3.2 billion. Although data is not
generally available, it is likely that a significant portion of this volume remains
unused, since many States did not use their full allocation in the early years of the
program, when the instruments were new to both issuers and investors.

Clean Renewable Energy Bonds. The Energy Tax Incentives Act of 2005
introduced a new tax credit bond for clean renewable energy projects. This
provision provides for up to $800 million in aggregate issuance of clean renewable
energy bonds ("CREBs") through December 31,2007. CREBs are similar, but not
identical, to QZABs in how they work. Like QZABs, CREBs are not interest-bearing
obligations. Rather, a taxpayer holding CREBs on a quarterly credit allowance date
(versus annual credit allowance dates for QZABs) is entitled to a Federal income
tax credit. Unlike QZABs, there are no limits on who may hold these bonds. The
amount of the credit is determined by multiplying the bond's credit rate by the face
amount on the holder's bond. The credit rate on the bonds is determined by the
Treasury Department and is a rate that is intended to permit issuance of CREBs
without discount and interest cost to the qualified issuer. The credit accrues
quarterly and is includible in gross income (as if it were an interest payment on the
bond), and can be claimed against regular income tax liability and alternative
minimum tax liability. Unlike QZABs, CREBs are subject to arbitrage rules and
information reporting requirements.
Gulf Opportunity Zone Tax Credit Bonds. The Gulf Opportunity Zone Act of 2005
(GO Zone Act), authorized a third type of tax credit bond referred to as "GO Zone
Tax Credit Bonds." These tax credit bonds can be issued by Louisiana, Mississippi
and Alabama in order to provide assistance to communities unable to meet their
debt service requirements as a result of the Hurricane Katrina. Gulf Tax Credit
Bonds operate in much the same way as QZABs and CREBS, with the economic
equivalent of interest being delivered through a Federal income tax credit that the
holder can claim on its tax return. GO Zone Tax Credit Bonds must be issued by
December 31 , 2006, and must mature before January 1, 2008.
There have been other recent proposals for tax credit bonds as to which the
Administration has expressed strong reservations.

Tax Policy and Administrative Concerns Highlighted by Tax-Preferred Bonds

In general, it would be preferable to subject any new or expanded programs for taxpreferred bond financing to the existing regulatory framework for tax-exempt bonds
or to impose comparable general restrictions and targeting restrictions. The
general tax-exernpt bond provisions have well developed general restrictions. To
take one illustrative example, the tax-exempt bond provisions have extensive
arbitrage investment restrictions that limit the investment of tax-exempt bond
proceeds at yields above the bond yield and which require that excess earnings be
rebated to the Federal government, subject to certain prompt spending and other
exceptions. Similarly, the general tax-exempt bond provisions have an information
reporting requirement to the IRS which assists Treasury and the IRS in analyzing

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use of tax-exempt bonds. The tax credit bond program for OZABs, however. does
not impose arbitrage investment restrictions or information reporting requirements,
raising targeting and administrability concerns. In this regard, various special other
tax-exempt bond programs and tax credit bond programs outside the general taxexempt bond framework present many administrability issues for Treasury and the
IRS in assessing how or to what extent to impose comparable rules by analogy.
Liquidity Concerns
The tax-exempt bond market generally caters to tax-sensitive investors. Even in
this large market, liquidity is low due to the small size of individual issues and the
limited attractiveness of the Federal tax exemption. Low liquidity creates a number
of problems that are magnified in the context of special purpose bonds, all of which
have very small relative volume. Most notably, low liquidity requires the issuer to
offer a higher tax-exempt interest rate in order to ensure a market for the bonds.
This problem is magnified as the volume of tax-exempt and tax credit bonds
increases, forcing issuers to offer higher rates in order to appeal to the same limited
universe of holders. An increased interest rate, in turn, increases the Federal
subsidy for the bonds.
T.Q~Cr~<!itBQDq c;onsider~1ioDS

For the three existing tax credit bond programs, the credit rate is set at a rate
equivalent to an AA corporate bond rate with the intention that this pricing allow the
bonds to be sold at par. In practice, however, this has proven to be difficult.
Investors in tax credit bonds generally demand a discounted purchase price in
comparison to similar interest-bearing bonds in order to account for a number of
additional risks, including the possibility of not having sufficient tax liability in the
future to use the credit and liquidity concerns.
While more efficient from a broader economic perspective in delivering a Federal
subsidy, tax credit bonds have a number of practical inefficiencies. The tax-exempt
bond market is a longstanding, established market with over $2 trillion in
outstanding bond issues. The market generally operates independently to set
appropriate interest rates. In addition, the general tax-exempt bond provisions
under the Code reflect a well developed set of rules and targeting restrictions aimed
at ensuring that the tax-exempt bonds carry out public purposes. By comparison,
the existing tax credit bond market is limited and illiquid, and requires some
inefficient, less market driven involvement by the Treasury Department in setting
the credit rates. These rates are designed to allow zero interest tax credit bonds to
price at par, although this often does not happen in practice. In addition, tax credit
bonds introduce a number of new complexities, including issues involving the timing
of ownership relative to eligibility for using the tax credits in the case of passthrough entities and other holders, the inflexibility of tax credit bond maturity rules
that are not tied to project economic life considerations, and the inconsistent
application of general restrictions (e.g., arbitrage investment limitations) and other
restrictions comparable to those under the general tax-exempt bond provisions.
In general, tax-exempt bonds and tax credit bonds have the same fundamental
purpose of providing a Federal subsidy as an incentive to promote financing of
public infrastructure and other public purposes for State and local governments.
That said, absent completely replacing the tax-exempt bond subsidy with a broadbased tax credit bond subsidy having carefully developed program parameters, the
complexity and awkwardness associated with parallel regulatory regimes for the
large tax-exempt bond program and the various limited tax credit bond programs
raises concerns.

Statutes authorizing special purpose bonds typically carry specific dollar amount
authority, either as an exception to the normal volume cap rules or as a targeted
amount for tax credit bond issuances. With bond financing, however, it is often
difficult to predict the market for the issuance, raising questions as to whether the
authorization can and will be utilized for its intended purpose. For example, the
New York Liberty Bond provision overestimated demand for private activity bonds
as a tool in rebuilding lower Manhattan after September 11 ttl. Accordingly, the full
intended Federal subsidy was not delivered. New York Liberty Bonds were seen as
a model for delivering relief in the GO Zone Act through authorizations of additional

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private activity bond authority. The original New York Liberty Bond authority was
carefully targeted to a very small geographic area in lower Manhattan and, for this
reason, could be targeted to the economic character of that area. Expanding the
concept to such a large and economically diverse area as the Gulf coast region
damaged by Hurricane Katrina may raise additional targeting concerns.
The experience with QZABs is also illustrative. While no statistics are available
(because QZABs are not subject to the normal information reporting rules), we
understand that many States do not use their allocated aZAB tax credit bond
authority while others would, if able, use more. Thus, the incentive that was
intended to be provided by aZABs appears to have been both over-inclusive (for
those States that do not use the full amounts of their allocations) and underinclusive (for those States that could use more bond authority). In both scenarios,
targeting of the Federal subsidy has missed its mark.
Related to the problem of targeting the Federal subsidy is competition between taxpreferred financing and other forms of financing. This problem is exacerbated the
further a bond-financed project is from traditional governmental activities. When
tax-preferred bonds are used to finance necessary projects that would not be built
without a Federal incentive, the justification for the subsidy is apparent. Where
projects would have been built even without the subsidy, or where the broader
public justification for a project is absent, the Federal incentive can result in a
misallocation of capital.

In general, the classification system for governmental bonds and private activity
bonds effectively targets the use of tax-exempt qualified private activity bonds to
specified exempt purposes with extensive program requirements and effectively
constrains those bonds with the unified annual State volume cap. One structural
weakness of this general classification system is that, under the definition of a
private activity bond, a State or local government remains eligible to use
governmental bonds in circumstances involving substantial private business use,
provided that it secures the bonds predominantly from governmental sources.
While political constraints generally deter State and local governments from
pledging governmental sources of payment to bonds used for private business use,
this is nonetheless a structural weakness of the definition of a private activity bond.
A classic example is financing for a stadium in which a professional sports team
uses more than 10% of the bond proceeds, but the State or local government is
willing to subsidize the project with generally applicable governmental taxes and
thus the stadium remains eligible for governmental bond financing.
The unified annual State volume cap on qualified private activity bonds generally
has provided a fair, flexible, and effective constraint on the volume of tax-exempt
private activity bonds. The unified State volume cap is fair in that it appropriately
provides for allocation of bond volume based on population, with some additional
accommodation for small States. In addition, the unified State volume cap is
flexible in that it accommodates diverse allocations of volume cap within States to
different kinds of eligible projects tailored to State and local needs. In general, the
unified State volume cap has been an effective way to control private activity bond
volume and Federal revenue costs. In this regard, it is important to recall that, in
the early 1980s before the enactment of any volume caps, private activity bond
volume grew at an unchecked, accelerated pace. Between 1979 and 1985, private
activity bond volume grew from about $8.9 billion to $116.4 billion. While the
unified State volume cap has been somewhat less of a constraint in the last several
years since the volume cap was raised effective in 2002 (from the greater of $50
per resident or $150 million to the greater of $75 per resident or $225 million, with
annual inflation adjustments thereafter), the unified State volume cap basically has
been effective and is preferable to alternatives.
While the case appropriately can be made for separate volume caps for particular
activities (e.g., New York Liberty Bonds) or for Federal involvement in allocations
(e.g., the new private qualified highway and surface freight transfer facility bond
program), as a general structural and tax policy matter, the private activity bond
volume caps work best when imposed within the framework of the unified State
volume cap under section 146.
Allocationi'

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Page 11 of 12
Under the general private activity bond volume cap rules, each State is required to
allocate volume cap to the projects it deems most worthy of a Federal subsidy.
Some recent special purpose bonds diverge from this historical State-based
allocation system and require the IRS or other Federal agencies to allocate new
bond authority. For example, the IRS has recently allocated the Green Bond
national limit and the Department of Transportation is responsible for allocating the
volume cap on the new exempt facility category for highway and surface freight
transfer facility projects
Requiring the IRS to make allocations raises a number of concerns. Historically,
allocations have been made by the States on the theory that they are in a better
position to understand local demands for Federally-subsidized financing. In
addition, because allocations have historically been done by the States, there is no
mechanism in place for the IRS to perform bond allocations among proposed
projects. More significantly, with highly technical provisions such as Green Bonds
and CREBs, the IRS is not in the best position to determine how to allocate a
Federal subsidy to renewable energy projects or energy-efficient projects. Thus,
tax administrators are placed in the difficult position of selecting between qualified
applicants, without necessarily having the technical knowledge needed to make
informed allocation decisions. While the Treasury Department and IRS do consult
regularly with other agencies having technical expertise, coordination can be timeconsuming and difficult. For example, tax administrators need to learn the
intricacies of energy policy while energy administrators need to learn the nuances
of tax-exempt bond law It is questionable whether this approach represents the
most efficient use of limited government resources.
Allocation problems also arise when a special purpose bond provision is over or
under-subscribed. If over-subscribed, the Treasury Department and the IRS may
have to pick among largely indistinguishable qualified applicants or reduce all
allocations pro-rata, which may have consequences for the feasibility of a project. If
under-subscribed, unless the volume cap goes unused, the Treasury Department
and the IRS may need to reopen the application process for further submissions.
Given the limited time frame over which special purpose bonds are generally
authorized, additional rounds of applications are often precluded.
Illustrative of other problems that can arise with allocations is the American Jobs
Creation Act provision authorizing Green Bonds as a new category of qualified
private activity bonds subject to an exception to the normal volume cap rules. In
providing an exception to the volume cap, the statute also mandated that at least
one qualified applicant from a "rural state" be awarded an allocation of Green Bond
authority. The Treasury Department and IRS published a notice specifically
soliciting rural State applicants for Green Bonds, but no applications were received.

The Treasury Department and the IRS are increasingly charged with regulatory
responsibility for writing rules for allocating and auditing unique special purpose
bond issuances. Because these special bond programs are often created as
independent programs outside the well-developed structure of tax-exempt bonds
rules (including established volume cap rules), they present unique challenges in
trying to ensure that the myriad technical rules governing tax-preferred bonds
correctly apply. Uncertainty in the application of these rules can lead to delay in
implementing guidance (and, in turn, delay in issuing the bonds) and can create
uncertainty in the market, limiting the number of investors and the effectiveness of
the special purpose bond program.
Special purpose bond provisions require the Treasury Department and the IRS to
evaluate whether special rules are needed in order to implement them. Because
these provisions have such limited scope and are highly complex, they require a
disproportionate allocation of administrative resources. Further, to help issuers
comply with interest arbitrage rules, the Treasury Department provides State and
local government issuers with the option to purchase non-marketable Treasury
securities known as State and Local Government Securities, or "SLGS."
Administration of this $200 billion program adds to the cost to the Federal
government in facilitating tax-exempt bond financing,

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Page 12 of 12
Special purpose bond provisions often contain unique rules defining the projects or
activities for which their proceeds can be used. For example, with respect to
CREBs, qualified projects are linked to the technical eligibility requirements for the
renewable energy credit. Failure of a bond issuance to comply with eligibility
requirements results in disallowance of the credit to a third-party holder who had
nothing to do with operation of the bond-financed facility. The technical nature of
many special purpose bond provisions, combined with the absence of historical
rules and practices interpreting these provisions, compounds an existing problem
for tax-exempt bonds. For tax-exempt bonds generally, the tax consequences of
failure to comply fall on the holder, who generally is without the information
necessary to determine whether the bonds comply.
Conclusion

The Administration recognizes the important role that tax-preferred bond financing
plays in providing a source of financing for critical public infrastructure projects and
other significant public purpose activities. The Tax Reform Act of 1986 enacted a
number of important prOVisions such as the volume cap limitation that help to
ensure that the Federal subsidy being delivered is properly targeted and used for its
intended purpose. Over the past 20 years, a carefully structured set of general
statutory and regulatory rules have been developed under the general tax-exempt
bond provisions to further this goal. On balance, tax-preferred bond financing
works most effectively to target uses to needed public infrastructure projects and
other public purpose activities when it is provided for within the existing general
framework of the tax-exempt bond rules, rather than within small independent
special regimes.
The cost to the Federal government of tax-preferred financing is significant and is
growing. Unlike direct appropriations, however, the cost often goes unnoticed
because it is not tracked annually through the appropriations process. In addition to
the cost to the Federal government that results from prOViding a tax exemption or
credit, there are indirect costs, such as administrative burdens on issuers and the
IRS, imposed by the complex rules. These more indirect costs are magnified in the
context of special purpose tax-preferred financing.
When considering further expansions of tax-preferred bond financing, it is
necessary to ensure that the Federal subsidy is properly targeted and used for its
intended purposes, and that the direct and indirect costs of the subsidy are carefully
considered.

REPORTS

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Figure 1
New Money Long-Term Tax-Exempt Government Bonds, 1991-2003
250,00 0

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Figure 2: Uses of Private Activity Bonds, 1987-2003
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------- -

• Hospitals
• Small Issue

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

0 Mortgages

• Airports, Docks

o Private Education

OPoliL

[] Student Loans

• Rental Housing

OVeterans Housing

.Ener

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

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Figure 3: Tax Expenditure Estimates for Tax-Exempt Bond Interest, 1996-2005

30000

25000

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Private Activity Bond New Issues
120.0
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- - - - - - - --- - - -

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1998

Page 1 of 1

PRESS ROOM

March 16,2006
JS-4122
Weinberger Named U.S. Treasury Department
Executive Secretary
The Treasury Department announced this week that Jonathan R. Weinberger will
serve as the Department's Executive Secretary. In this position, Weinberger is
responsible for the coordination of Department-wide reviews and analyses of
Treasury policy initiatives, regulations, testimony, correspondence, memoranda,
reports and briefing materials for the Secretary and Deputy Secretary.
From 2005-2006, Weinberger served as a senior advisor in Treasury's Office of
Terrorist Financing and Financial Crimes. In this capacity he provided advice and
counsel to Department principals and other members of the interagency team that
are responsible for the combating of money laundering and terrorist financing.
Weinberger also played a vital role with the Financial Action Task Force (FATF), the
premier international body that combats money laundering and terrorist financing.
He was closely involved with FATF's evaluation of the United States financial
system, and served as the United States' representative on the six-nation inaugural
Financial Experts Review Group at the Cape Town, South Africa Winter Plenary.
The Experts Review Group acted as arbiters for the FATF mutual evaluations of
Ireland and Sweden.
Weinberger served as an Honors Attorney from 2003-2005 in Treasury's Office of
the General Counsel. As an attorney, Weinberger worked with the Assistant
General Counsel for Litigation, Legislation and Financial Enforcement on a variety
of issues. He also worked closely with the General Counsel on various national
security issues and other Treasury related activity including coinage, Health
Savings Accounts and tax issues among others.
Before coming to the Treasury Department, Weinberger spent several years with
the U.S. Department of State. From 2000 to 2003, he served in the Executive
Secretariat in the Office of the Secretary of State where he coordinated briefing
materials, testimony and other matters. From 1998 to 2000, Weinberger served in
the Office of Central American Affairs where he dealt with issues such as the
Panama Canal transfer and the rebuilding of several countries after Hurricane
Mitch. In 1999, he also served at the U.S. Embassy in Rome where he conducted
studies with the U.S. Labor Counselor and delivered speeches, in Italian, to labor
union meetings and conferences.
Originally from Scranton, Pennsylvania, Weinberger received his Bachelors Degree
in International Affairs and Italian from The Johns Hopkins University in 1998. He
also earned a Masters Degree in U.S. Foreign Policy from the Elliott School of
International Affairs at George Washington University in 2000, a Juris Doctor
degree from the Washington College of Law at American University in 2003, and a
Masters of Law (LL.M) in international finance and national security law with
distinction from The Georgetown University Law Center in 2005.

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Page 1 of 1

PRESS ROOM

March 16, 2006
JS-4123
Statement of Secretary John W. Snow on Debt Limit
I commend Congress for protecting the full faith and credit of the United States with
today's action on the debt limit. This legislation ensures that the U.S. can deliver on
promises already made, such as Social Security and Medicare payments and aid
for the victims of the 2005 hurricanes.

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Page 1 of2

•

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February 10, 2006
JS-4124
Statement by G8 Finance Ministers
Moscow
February 10-11, 2005

G8 Finance Ministers met In Moscow to prepare for the G8 summit in St Petersburg
and had discussions on the global economy in the context of energy market
developments, further steps for the development agenda, and economic
dimensions of fighting infectious diseases worldwide.
1. Overall global growth remains solid and this is expected to continue in 2006.
Risks remain, including high and volatile energy prices, We agreed that further
progress needs to be made in implementing policies that contribute to the gradual
resolution of global imbalances and promote sustainable growth of the global
economy.
2. We reaffirm that an ambitious outcome to the Doha Development Round by the
end of 2006 is essential to enhancing growth and reducing poverty. Following the
Hong Kong Ministerial Meeting, we recognize that further efforts are needed, We
urge all participants to agree on a comprehensive package that achieves significant
progress in agriculture, industrial products, services, Including financial services,
intellectual rrorerty and WTO trade rules, and that addresses the concerns of
developing countries, In particular the least developed countries. These countries
also need substanllal aid for trade to help them take advantage of general
liberalization.
3. We reviewed the global energy outlook and welcomed the decisior\ to focus on
energy security for the G8 summit in St Petersburg. Market mechanisms are vital to
the effective functioning of the global energy system. In order to improve the
smooth functioning and stability of markets, we agreed to take forward work on
enhancing the global energy policy dialogue between oil producing and consuming
countries and the private sector. Ongoing efforts including in existing energy fora
such as the lEA and the IEF, are important to help enhance transparency,
timeliness and reliability of demand and supply data, facilitate necessary
investments in exploration, production, transportation, and refining capacity, as well
as Improve energy efficiency. This may also facilitate diversification of energy
production and consumption develop alternative sources of energy, and protect the
environment.
4. We call on the World Bank to work with low-income countries to develop countryspecific energy strategies to help them achieve the Millennium Development Goals.
The initiative launched by a number of donors and IFls on infrastructure will
complement this work. We look forward to the launch at the Spring Meetings of the
World Bank led framework to enhance investment In low carbon energy and energy
efficiency in developing countries with the full participation of Regional
Development Banks. We welcome the creation of the IMF's Exogenous Shocks
Facility (ESF) to provide poliCY support and address financing requirements of
energy-poor developing countries. We welcome financial commitments already
made to the ESF and encourage other donors, including oil producing countries, to
make contributions. We reiterate our commitment, after the 2005 Gleneagles
Summit. to a successful replenishment of the Global Environment Facility.
5. We recognize the importance of the development agenda and call for full
implementation of commltrnents made on the Multilateral Debt Relief Initiative, aid
effectiveness, and increasing resources for development. Specifically, we support

•

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Page 2 of2

the decision by the IMF Board to implement 100 per cent debt relief and the
callceilation of the debts of 19 countries at the beginning of 2006 and encourage
IDA and AfDf to finalize urgently all necessary steps for implementation. We
welcome the fact that Russia's good economic performance and Improved fiscal
position will allow it to join other G8 countries in the area of development finance by
stepping up its efforts in this field.
6 We also welcome that Russia's improved fiscal position will allow it to seek
further prepayment of its eligible debt owed to the Paris Club of creditors.
7. We acknowledge the fisk of a possible avian flu pancemic and its potential
econonlic and financial impacts. We welcome progress made at the donors'
conference in Beijing in securing financial support for the national and International
efforts to minimize the risk posed by a pandemic influenza and confirm our
commitments made at thiS conference. We call on the donor community to provide
financial support to poor countries fighting the epidemic through the existing
mechanisms, recognizing that donor coordination and harmonization in this area
are critical. We note the IMF's work to promote best practices in contingency
planning for financial systems. We welcome the work under way on Advance
Market Commitments for vaccines and look forward to a specifiC AMC proposal at
next meeting in April.
8. We welcome progress made in combating money laundering and terrorist
financing and commit to continue our support for regional cooperation. We also
commend the active role and strong leadership by Russia in the creation of a
regional FATF-style organization with the participation of countries of Central Asia
and China. We call on the IMF and World Bank to continue to support these efforts.
We reiterate our resolve to fight money laundering and terrorism financing through
implementing the 2005 AMLlCFT action plan within the framework of the G8, the
FATF, and other fora. We are committed to strengthening our systems for freezing
assets, information sharing, and multilateral financial tools to disrupt criminal and
illicit activities.
9. We welcome Russia's initiative in promoting research on aspects of good
governance in public finance and will discuss thiS at our next meeting.

Page 1 of 4

PRESS ROOM

March 16, 2006
JS-4125

Remarks of U.S. Treasurer Anna Escobedo Cabral
Genworth Financial Luncheon
Thank you, Javier, for that kind introduction.
Good afternoon. I am very pleased to be here with you today, and to have had the
opportunity to hear the results of this new Hispanic Market Study. I am sure
everyone in the financial education community will gain new knowledge and benefit
from it.
I have the distinct honor and privilege of serving as the 42 nd Treasurer of the United
States as part of President Bush's and Secretary Snow's team as well as the whole
Treasury team.
First. I would like to commend today's event organizers for convening such a
distinguished group of panelists, each committed to improving financial education in
the United States. It is heartening to note that more and more attention is being
directed toward improving financial education - through improved resources,
services and products, as well as improved methods of delivery, for all people of
this country, and in particular for the U.S. Latino community.
The theme of today's event "protect the financial future of U.S. Hispanics" is
incredibly important to individuals and to the U.S. and our growing economy as a
whole. I look forward to hearing from each of loday's panelists on the topic of how
to better serve the changing needs of the growing US. Hispanic community.
We at Treasury are committed to improving financial education for all people, and
understand that maintaining an open discussion about this issue is one important
way to improve our efforts. That is why I am so glad to share this opportunity with
the people here today. I am always truly happy about opportunities such as this
one, where folks like you get together - people who really are focused, impassioned
and stand ready to find ways to help improve the lives of those they serve in a
variety of capacities.
I am also especially pleased that this gathering provides an important opportunity to
highlight just how crucial it is for the government, nonprofit. private and public
sectors to continue to work together toward building our knowledge about the
personal finance needs of the people of this country, particularly in the context of
our growing economy. In this instance, we gather today to learn about important
challenges to improving financial education in the Latino community.
What I would like to do is to share some thoughts with you, concentrating on three
major areas:
1) Financial Education: federal efforts, specifically Treasury's work, in helping
improve financial education across the country;
2) Health Savings Accounts: the importance of saving and planning for the future
through vehicles such as Health Savings Accounts;
3) Opportunities for Success in a Growing Economy: a burgeoning economy such
as ours provides the Latino community with opportunities for new jobs and wealth
creation, which must be safeguarded and protected.

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Page 2 of 4
First, I would like to start off by highlighting some of the great work that we are
engaged in at Treasury, and really the whole federal government. At Treasury, we
are working hard to provide our citizens with the right tools that can teach them how
to make sound financial decisions, as well as how to build a nest-egg for the future
For instance, Treasury currently leads the efforts of a commission comprised of
twenty federal agencies - the Financial Literacy and Education Commission - to
improve financial literacy for people across the country. At Treasury, we
understand that acquiring knowledge, and in particular personal financial savvy, is
crucial to helping improve individual lives. Not only that, it is also important to
helping our economy to continue to thrive.
Noting the importance of enhancing access to tools that can help people make
wiser financial decisions, in December 2003, the President signed legislation
establishing this commission.
As part of its work, the Commission in 2004 launched a national financial education
web site and national toll-free hotline: www.mymooey.gov and 1-888-mymoney.
I encourage you to visit mymoney.gov. The information provided on that site is
available in English and Spanish. The site has reSOurces on a whole host of
personal finance topics from the federal government including: budgeting, taxes,
credit, financial planning, paying for education, retirement planning and more.
However, I also ask all of you to encourage the community-based organizations you
work with to use these great tools so that they may share them with the customers
they serve at the grass roots level
As has been noted here today, developing the information is only the first step to
improving financial education. We need the help of our private and nonprofit
colleagues to deliver this information in the venues and in the language that people
in the Latino community feel most comfortable with.
Finally, very soon, a national strategy for financial education will also be released to
the public by the Commission. We hope that this document will provide more
opportunities for continued discussion on how to identify ways to improve folks'
access to financial education resources.
The first step of course, although there are many issues of concern, is helping our
community understand the importance of saving and planning for their future, as
well as preparing for the unexpected.

There is a Spanish saying that says: nEt que guarda siempre encuentra." This
"dieM" or saying has been passed down through generations of my family, and tells
us why it is important to save. Let me explain what it gets at: The message is that if
you save now, you will always find what you need, in the moment you need to find it
in the future. Savings is in essence a tool that can truly equip us with assets to
better manage the unexpected.
President Bush is focused on providing folks with options on how to secure their
future needs - including health care needs. One example of how this is being done
is through Health Savings Accounts.
HSA's put patients back in control of their health care. They aid in allowing small
businesses to band together and negotiate more affordable prices on behalf of their
employees and their families.
The Administration would like Americans with HSA's and their employers to make
annual contributions to their accounts. These contributions would cover all out-ofpocket costs under their HSA policy, not just their deductible as provided under
current law. These out-of-pocket expenses would be ta)(-free through their HSA.
The new proposal would also provide a credit for payroll taxes paid on HSA
contributions made by individuals. Currently in 2006 there are 3.2 million

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Page 3 of 4
American's covered by HSA type insurance plans, with the Treasury Department
projecting that number to rise to 25-30 million individuals by the year 2010. The
President's HSA proposals are projected to increase the number of Americans with
HSA's from 30 million to 45 million individuals by 2010, a 50-percent rise. We also
need to expand the development of health information technology and enact
common-sense medical liability reforms that will allow doctors to focus on the most
important element in health care - the patient.
THE ECONOMY
Good news! Fortunately, our economy is thriving, and when more people have jobs,
they have more opportunities to save for a rainy day and protect themselves.
Again, a thriving economy is key to our continuing efforts to ensure we achieve an
ownership society.
For quite some time. we have seen our economy move upward in the right
direction. Nearly five million new jobs were created in the past three years - two
million of them just in the past year alone.
These are remarkable figures. especially if you also consider low 4.8% rate of
unemployment - lower than the average of the 1970s, 1980s and 1990s. This
means that more Americans now have the opportunity to convert their hard work
and new professional skills into accumulating assets and wealth building becoming real property owners of homes, small businesses and the like.
This is fantastic news, especially when you consider these remarkable happenings
amidst the backdrop of the historic challenges we together faced as a country in the
past few years - the 9/11 terror attacks, the burst of the stock market bubble, and
last year's Gulf Coast Hurricane.
Additionally, more Americans than ever before own their own homes, bringing our
country ever closer to realizing the ownership society the President speaks of.
Household wealth totaled $51.1 trillion in the third quarter - an all time high. And tax
revenues are surging.
Again. all in all. the American economy proves to be on solid footing. But we need
to ask ourselves what we can do to continue promoting this trend and to protect
people's hard earned assets.
I can not emphasize enough, how important it is for our leaders to remain
consistent about the policies that helped us achieve these results in the first place.
Keeping in mind the steps the government has taken in the past. there is no
question that well-timed tax relief. combined with sound fiscal policy from the
Federal Reserve Board, created an environment in which workers could help
secure their livelihood today and improve their chances of ensuring a secure
financial future. It created an environment where workers could become home and
business owners.
These policies work. And so, it will be important to ensure that we keep taxes low
on both investments and incomes.
We must first protect our economic growth. and thereby protect the opportunities
that help all Americans build a nest-egg, create wealth, and become home and
business owners.
More Americans have jobs. This provides an ideal opportunity for continued
economic growth, and provides fertile ground to lay the seeds of improved
education - including financial education.
It is a cycle. Improved education in turn will also aid in keeping the economy
moving in the right direction. With sound financial policies and working togethor to
achieve improved education, there will still be many opportunities to continue
achieving.

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Page 4 of 4
In closing, allow me to reiterate that we need to continue working toward identifying
the best practices for improving personal finance education and improving the way
we get the right information and services, to the right folks, at the right time information about not only how to build assets, but also how to protect them against
the regrettable or the unforeseeable.
I want to thank you all for making these issues a priority. And, I want to again
express my gratitude for extending to me this invitation to join you today and
allowing me to share my thoughts with you. Please enjoy the rest of your
aftemoon.

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PRESS ROOM

10

View or print the /-,UI- contenr on thiS page. download the tree A(Jobe'!'J Acrobat',') KeaCierQ';.

March 15, 2006
JS-4126

Remarks by Robert Carroll,
Deputy Assistant Secretary for Tax Analysis
U.S. Department of the Treasury
Before the 17th Annual Tax, Budget and Legislative Policy Seminar
(Co-sponsored by Baker & Hostetler LLP, Clark Consulting,
and the Yale Club of Washington, DC)
March 15. 2006
Thank you very much for the opportunity to talk with you today. There are several
tax issues before the Congress that I would like to address.
Preserving the lower tax rates on dividends and capital gains is an issue that is at
the center of the current discussions on tax reconciliation. Preserving these lower
tax rates is a top priority of the Administration. As you know, conferees were
named several weeks ago and deliberations are underway.
It is important to consider the lower tax rates on dividends and capital gains against
the backdrop of the current strength of the economy. When this tax relief was
enacted in May 2003, there were some who suggested that this policy would not
contribute to economic growth, would not boost investment, and would not support
government revenues. Over the past few years we have seen a very different story
emerge.
This is a policy that has met expectation. In a phrase, the economy is doing
remarkably well. By virtually every indicator, the economy shows robust and
continuing growth. We are now in a period where the economy has grown at an
average rate of more than 3.9 percent for 10 consecutive quarters. Americans net
worth is the highest ever. Homeownership rates are the highest ever. Inflation is
not a concern and long-term interest rates remain at historic lows.
We have come a long way in the past several years. We have gone from a period
of several substantial shocks to the economy - the bursting of the high-tech bubble
and a loss of $7 trillion dollars in the equity markets, the 9/11 attacks and the loss of
several million jobs over the next several months, the corporate scandals, the
uncertainty in the aftermath of 9/11 and the war in Iraq.
Investment was a weak spot in the economy in 2001 and 2002 and the beginning of
2003. After nine consecutive quarters of declining business investment, we have
now seen eleven straight quarters of growth in investment averaging 8.7 percent.

REPORTS
•

"RemQrks.byQepu,ty Assistant Secretary Carrol! ()nJ2!,;nefit~ olIaxB~lief'

nno://treas.gov/rress/releases!is4126.htm

3/3112006

Thank you very much for the opportunity to talk with you today. There are several tax issues
before the Congress that I would like to address.
Preserving the lower tax rates on dividends and capital gains is an issue that is at the center of the
current discussions on tax reconciliation. Preserving these lower tax rates is a top priority of the
Administration. As you know, conferees were named several weeks ago and deliberations are
underway.

It is important to consider the lower tax rates on dividends and capital gains against the backdrop
of the current strength of the economy. When this tax relief was enacted in May 2003, there were
some who suggested that this policy would not contribute to economic growth, would not boost
investment, and would not support government revenues. Over the past few years we have seen a
very different story emerge.
This is a policy that has met expectation. In a phrase, the economy is doing remarkably well. By
virtually every indicator, the economy shows rohust and continuing growth. We are now in a
period where the economy has grown at an average rate of more than 3.9 percent for 10
consecutive quarters. Americans net worth is the highest ever. Homeownership rates are the
highest ever. Inflation is not a concern and long-tenn interest rates remain at historic lows.
We have come a long way in the past several years. We have gone from a period of several
substantial shocks to the economy - the bursting ofthe high-tech bubble and a loss of $7 trillion
dollars in the equity markets, the 9/11 attacks and the loss of several million jobs over the next
several months, the corporate scandals, the uncertainty in the aftermath of9/11 and the war in Iraq.
Investment was a weak spot in the economy in 2001 and 2002 and the beginning of 2003. After
nine consecutive quarters of declining business investment, we have now seen eleven straight
quarters of growth in investment averaging 8.7 percent.

While the recession officially ended in late 200 1, the President recognized that the recovery was
too slow. Growth was anemic and business confidence low. Capital investment was weak and
jobs were not being created.
The President acted to overcome those headwinds, and, in particular, create a more favorable
climate for capital investment. The lower tax rates on dividends and capital gains encouraged
investment by lowering the tax on investment returns. By Treasury Department estimates, the tax
relief enacted in 2003 lowered the effective marginal tax rate on business investment by roughly
15 percent.
Not only have we seen a rebound in investment, but the economic expansion has led to a
substantial increase in employment. Since May of 2003,4.9 million jobs have been created and
the unemployment rate, which was 6.3 percent in May 2003, is now at 4.8 percent, lower than the
average of the 1970s, 1980s, and 1990s.
But the lower tax rates on dividends and capital gains have accomplished much more. The
Treasury Department held a symposium yesterday where a number of experts described the
economic distortions associated with the tax on dividends and capital gains and the economic
benefits of the lower tax rates.

2

The tax on dividends and capital gains reflects a second layer of tax imposed on income earned in
the corporate sector. Corporate profits are taxed once through the corporate income tax, and then
again when the income is received by shareholders as dividends or realized as capital gains. This
double tax can lead to very high tax rates on income earned through the corporate form. The
effective tax rate is nearly 4S percent for income distributed to shareholders as dividends.
Without the benefit of the lower tax rate on dividends enacted in 2003, the effective tax rate can
reach 58 percent (and even higher when state and local taxes are included).
It is important to contrast this high rate of tax to income received in other forms to fully appreciate
how the double tax on corporate profits distorts economic decisions. Business income earned
outside of the corporate sector is subject to only one layer of tax at the individual level when the
income is received by owners. That is, business income received outside of the corporate sector is
taxed at a maximum rate of35 percent. Consequently, the double tax on corporate profits will
discourage investment in the corporate sector and lead to an inefficient allocation of capital in the
economy. Put another way, reducing the double tax reduces this distortion and means capital will
be allocated throughout the economy based more on economic merit than its taxation.

The high rate of tax on dividends that was in effect prior to 2003, also meant that firms were
discouraged form distributing income to shareholders as dividends. While the effective tax rate on
income received as dividends prior to 2003 could be as high as 58 percent, income retained by
firms and taxed to shareholders when realized as capital gains would generally face a much lower
effective tax rate of about 40 percent, depending on the benefits of tax deferral. The 2003 tax
relief taxes dividends and retained earnings more evenly, which has reduced the tax bias against
dividend payout.
More firms are now choosing to pay dividends for the first time. Dividend payments by S&P 500
companies have increased by 36.5 percent in 2005 as compared to 2002. In 2004, dividends paid
by S&P 500 firms companies reached $181 billion - a record and not including Microsoft's special
one-time payout of $32.6 billion. In 2005, dividend payments set another record of $203 billion, a
12.4 percent increase over 2004.
The double tax on corporate profits also distorts financing decisions. The double tax falls on
equity-financed investments and leads to an over-reliance on debt finance for corporate
investment. Higher debt burdens increase a finn's risk ofbankmptcy, particularly during
temporary industry or economy-wide downturns. Over reliance on debt finance also leads to a
misallocation of capital in the economy. The lower tax rates on dividends and capital gains help
reduce the tax distortion between debt and equity finance which improves the allocation of capital
and reduces the economic waste created by the tax system.
The double tax on corporate profits also makes the United States less competitive relative to our
major trading partners. All of the G-7 countries make at least some attempt to integrate their
corporate and individual income taxes. A comparison of the United States to the other G-7
countries finds that without the lower tax on dividend and capital gains the United States would
have the second highest tax on corporate profits paid out as dividends. France would have had a
higher combined effective tax on corporate profits paid out as dividends had they not implemented

3

a 50 ~ercent div~dend exclusion beginning in 2005. Only Japan would have had a higher
combmed effectIve tax on corporate profits paid out as dividends.
Tax Rates on Corporate Income Paid Out
as Dividends in G-7 Countries, 2004 1/

Country

Japan
France 21
Canada
Germany
United Kingdom
Italy
Average of other G-7
Countries
United States:
Current Law
Without lower tax
rates on dividends and
capital gains

Type of dividend
treatment

Combined
Corporate Tax
Corporate and
Rate on
Net Personal Personal Tax
Distributed
Rate
Tax Rate
Profits

40

33

33.9
31.3
23.7
25
18.4

64.5
57.3 (52.5)
56.1
53.4
47.5
45.4

35.7

28.7

54

Lower rate

39.3

18.7

50.6

Lower rate

39.3

28.6

56.7

Partial imputation
Partial exclusion
Partial imputation
Partial exclusion
Partial imputation
Partial exclusion

40.9
35.4
36.1
38.9

30

Source: OECD Tax Database, www.oecd.org.
Notes:
liT ax rates reflect statutoI)' tax rates on cOIporale income paid out as dividends and include taxes of subnallonal governments.
The net personal rate incorporates any exclusions or Imputation credits for taxes paid by corporations

21 France implemented a 50 percent dividend exclusion starting in 2005 that lowered the combined maximum rate on corporate
dividends to 52.5 percent This would also reduce the average for the other G-7 countries to 53.2 percent

Partiallmputatlon divIdend tax credit at shareholder level for part of underlying corporate profits tax.
Partial exclusion part of received dividends is excluded from taxable income at the shareholder level.

Many factors have contributed to the economic growth we see today. The reduction in interest
rates by the Federal Reserve Board - the 11 reductions in the federal funds target rate in 2001
alone - clearly played a role. But the tax reductions on dividends and capitals gains were crucial.
This policy did not only have the goal of providing economic stimulus in the near-term, but was
also intended to lay the groundwork for continued economic growth and higher livings standards.
From the period of 1973 through 1995 productivity growth averaged 1.4 percent annually.
Compensation and livings standards are tied directly to productivity growth. When productivity
growth rises by 1.4 percent annually, its takes 50 years for living standards to double. Since
President Bush has taken office, productivity growth has averaged 32 percent. While productivity

4

growth at this level may not be sustainable, if productivity growth can be kept at around 2.8
percent annually, living standards would double in half the time - 25 years rather than 50.
The Congress will likely consider whether to extend the lower tax rates on dividends and capital
gains over the next several weeks. This is an issue that is important to all Americans because
without this extension, the tax rate on dividends and capital gains increase, which could have
exactly the opposite effect of the changes made in 2003. Investment would be discouraged, which
would adversely affect the economy and lower living standards over the longer term.
The Congress is also considering a provision concerning the alternative minimum tax (AMT). Of
course, the AMT is a tax system that runs parallel to the regular income tax. It is bad enough that
taxpayers need to understand and navigate our current income tax system. It is quite another thing
to ask them to comply with two parallel tax systems.
The AMT was created in the late 1960s to address the prob lem of just a few hundred taxpayers
with high incomes, but who paid no income tax because they took extraordinary use of a few
narrowly available tax provisions in the code. In tax year 2005, some 4 million people were
subject to the AMT. In 2006, this number could exceed 22 million, unless the Congress acts to
extend tax provisions that provided temporary relief from the AMT - a higher AMT exemption
and allowing personal credits to be claimed against the AMT. The President proposed in his FY
2007 Budget to extend these provisions through 2006 to prevent a large increase in the number of
taxpayers caught by the AMI.
The AMT is also a long-tenn problem. If left unchanged, Treasury estimates that by 2016 the
number of taxpayers subject to the AMT will grow to 56 million or nearly one-half of all taxpayers
who owe individual income taxes. Because of the way the AMT is intertwined with the rest of the
tax system, the Administration believes the best way to address this longer-tenn problem is
through fundamental reform of the entire income tax system. This is a project that we are actively
engaged in at the Treasury Department.
Finally, I would like to draw your attention to one other initiative the President has included in his
FY 2007 Budget. The President has put forward an initiative to help make health care more
affordable and accessible and to update our institutions to better reflect the economy's dynamic
labor markets. Expanding access to Health Savings Accounts (HSAs) helps contribute to this goal
by putting patients more in control of their health care. This initiative will help make the health
care system more efficient, more portable, and help reduce health care costs.
Currently, about 3.2 million people have high deductible health plans even though HSAs have
been available for only a few years. The growth in HDHPs has been dramatic - a three-fold
increase in less than a year. Importantly, 37 percent of those who have HSAs were previously
uninsured and over 40 percent have incomes below $50,000. HSAs provide an additional option to
individuals that helps reduce the number of uninsured and helps lower income Americans.
The President's initiative would expand HSAs so that people who purchase insurance directly have
the same tax advantage as those who receive their insurance through their employers. Many of the
uninsured work for small businesses, who cannot afford to offer insurance. But those who work

5

for larger companies receive a significant tax advantage: They pay neither income taxes nor
payroll taxes on their health insurance premiums. [n contrast, those who purchase insurance
directly - for example those who work for a small business that does not offer insurance - pay for
insurance with after-tax dollars after paying income and payroll taxes. Owners of small businesses
are also disadvantaged. They can deduct their insurance premiums for income tax purposes, but
only after paying payroll taxes. The President's proposals would eliminate this inequity.
Simply, this initiative would provide health care purchased directly by individuals with a high
deductible health plan with the same tax advantages already provided to insurance purchased
through employers.
The President's initiative not only addresses an inequity in the tax code, but it also gives
individuals a greater stake in health care decisions. When they are making their own health care
decisions with their own money, we can expect those decisions to be better ones. Also, and
importantly, HSAs are portable. When workers change jobs, they take their HSAs with them.
With the increasing frequency that workers choose to change jobs today - to gain more experience,
pursue better paying jobs, get more flexibility in the workplace - portability is more and more
important. Again, it is just a matter of letting our institutions evolve and adapt to our increasingly
dynamic economy.
I'd be happy to take any questions.

6

Page 1 of 1

PRESS ROOM

March 17, 2006
JS-4127
Treasury Assistant Secretary to Hold Weekly Press Briefing
Treasury Assistant Secretary for Public Affairs Tony Fratto will hold the weekly
media briefing on Monday, March 20 in Treasury's Media Room. The even! is open
to all credentialed media.
Who
Assistant Secretary for Public Affairs Tony Fratto
What
Weekly Briefing to the Press
When
Monday, March 20, 11: 15 AM (EST)
Where
Treasury Department
Media Room (Room 4121)
1500 Pennsylvania Ave., NW
Washington, DC
Note
Media without Treasury press credentials should contact Frances Anderson at
(202) 622-2960, or frallces.anderson@do.treas.go-,", with the following information:
name, Social Security number, and date of birth.

httJl'ltreasgovipressirclefisesijs4127.htlYI

3/31/2006

Page 1 of 1

PRESS ROOM

March 20, 2006
js-4128
U.S. Treasurer To Speak at the Executive Women in Government Summit

u.s. Treasurer Anna Escobedo Cabral will deliver keynote address to the Executive
Women in Government Summit at the U.S. Chamber of Commerce this
Wednesday. Each year, Executive Women in Government marks National
Women's History Month with a full-day conference to help women build and
sharpen critical leadership and executive skills, refresh their knowledge and
enhance professional networking opportunities.
The following event is open to credentialed media:
Who

U. S. Treasurer Anna Escobedo Cabral

What

Keynote address at Executive Women in
Government Summit

When

Wednesday, March 22, 2006 10:30 a.m. EST

Where

u.s. Chamber of Commerce
1615 H St. NW
Washington. DC

-30-

httll'/treasgov/pres5/rcled5e~/js412R. htm

3/31/200(\

U.S. Treasury - HIStory ofth"e An~ Escobedo Cabral, Treasurer

Page 1 of 1

TREASURY OFFICIALS

. Anna Escobedo Cabral
Treasurer

Anna Escobedo Cabral was nominated on July 22, 2004, by President Bush to
serve as Treasurer of the United States. She was confirmed by the United States
Senate on November 20, 2004.
Immediately prior to taking this office, Ms. Cabral served as Director of the
Smithsonian Institution's Center for Latino Initiatives, where she led a paninstitutional effort to improve Latino representation in exhibits, and public
programming among the Institution's 19 museums, five research centers, and the
National Zoo. From 1999 to 2003, Ms. Cabral served as President and CEO of the
Hispanic Association on Corporate Responsibility, a non-profit organization
headquartered in Washington, DC, which partners with Fortune 500 companies to
increase Hispanic representation in employment, procurement, philanthropy and
governance. Under her leadership, the organization published a best practices
series, and instituted a partnership with Harvard Business School to provide
executive training programs in Corporate Governance Best Practices to community
leaders.
From 1993 to 1999, Ms. Cabral served as Deputy Staff Director for the United
States Senate Judiciary Committee under Chairman Orrin G. Hatch. The
Committee's jUrisdiction ranges from oversight of the Department of Justice and our
nation's criminal and drug enforcement laws to approving federal judicial
nominations, and it includes review of immigration, antitrust, patents and trademark,
and technology-related legislation. In addition, she simultaneously served as
Executive Staff Director of the U.S. Senate Republican Conference Task Force on
Hispanic Affairs, a position she held since 1991. Ms. Cabral managed this task
force of 25 senators dedicated to ensuring that the concerns and needs of the
Hispanic community are addressed by Congress through legislation.
A native of California, Ms. Cabral majored in Political Science from the University of
California, Davis, and earned a Master's degree in Public Administration with an
emphasiS in international trade and finance from the John F. Kennedy School of
Government at Harvard University.
Ms. Cabral and her husband Victor have four children, Raquel, Viana, Catalina, and
Victor Christopher.

http://WWw.tres.sury.gov!organization!blo5/cabral-p.html

3/3112006

Page 1 of3

U.S. Treasury - HlStOry ofth"e 1 reasurer's Office

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,'~;

History of the Treasurer's Office
Over the years the Office of the Treasurer has seen tremendous
changes ard reflected the often turbulent history of our nation, It is
the only office in the Treasury Department that is older than the
Department itself. Originally. the Continental Congress created
joint treasurers of the United Colonies on July 29, 1775. At that
time, the Continental Congress appointed Michael Hillegas and
George Clymer to serve. They were instructed to reside in
Philadelphia, which was the home of the Continental Congress.
Their major responsibility was to raise money for the Revolutionary
War. Unlike today's Treasurer, neither of their signatures appeared
on the "continentals" as the paper money was then called.
On August 6,1776, George Clymer resigned and the Continental
Congress appointed Michael Hillegas as the sole Continental
Treasurer. After the name of our nation was changed from the
United Colonies to the United States, on September 9, 1776,
Michael Hillegas continued as the Treasurer of the United States,
although his title was not officially changed to reflect the new
reality until March 1778. Treasurer Hillegas served the new nation
until September 11, 1789 and was succeeded by Samuel Meredith
who served until October 3.1801 (for a complete list of U.S.
Treasurers, please visit our index of Tre:l';lIreJ's of till: Unted

S::lIe'O ).
Both before and after the Revolutionary War, the United States
recognized the need to safeguard the integrity of its currency and
to prevent counterfeiting. Just as today, the new government
realized that it needed to stay ahead of counterfeiters by
employing teChnology to design bank notes. At that time, though,
private printers produced the notes that were then issued to banks.
Benjamin Franklin came up with several simple but ingenious
methods to slow down counterfeiters. On one design for a bank
note, he deliberately misspelled the name "Philadelphia." But his
most original idea was to create a print of a leaf design on the
currency. The intricacy of the leaf's pattern was impossible to
duplicate because no two leaves are ever exactly alike in design,
An example of the "leaf note" remains in the Smithsonian
collection.
The job of fighting counterfeiting continued during the Civil War. At
that time, the government took over the printing of currency from
private banks and printers to standardize the design of the money,
which was quickly dubbed "greenbacks" On July 17. 1861,
Congress passed the first federal law authorizing the U.S
Government to Issue paper money.
At that time, Frances Spinner was servlIlg as Treasurer, under
Abraham Lincoln, and he stirred up a great deal of controversy by
hiring the first female employees at Treasury In 1862, he hired
Jennie Douglas to cut and trim paper This was a hand operation
that had previously been done entirely by men. Treasurer Spinner
was so pleased with his experiment that he remarked, "the first day
Miss Douglas spent on the job settled the matter in her behalf and
in women's favor." He subsequently appointed many women to
positions in the Treasury.

~

History of the
Treasurer's Office
US. Mint Overview
Bureau of Engraving &
Printing (BEP)
Overview
Introduction 10 Savings
Bonds
Conlact Us

U.S, Treasury - History ofrtre 1 reasurer's Office

Treasurer Spinner came under a lot of criticism from opponents.
The tax collector of Kalamazoo declared, "I do not think the service
of females could be made efficient in the collecting department or
be br-ought within the range of propriety"
A New York tax assessor JOined in, "if the nerves and firmness 0: a
man can rarely be found to withstand the wily exactions of
dishonest taxpayers, I doubt ttle wisdom of filling their places with
females."
The women. however, were not without support. The assessor of
Manchester wrote. "female clerks are more attentive, diligent and
efficient than males and make better clerks. I intend very soon to
have none but females In my office."
Treasurer Spinner declared that the women in the Treasury were
"hardworking, efficient, 'lad excellent work habits and integrity."
For his innovation and his spirited defense of female employees,
the women of New York erected a statue of him in his hometown
of Herkimer, New York.
Meanwhile, at the same time that we were taking steps to protect
our money by standardizing and printing it at in the basement of
the Treasury building, the government was engaged in efforts to
destabilize the Confederate currency.
Over the years, the Office of the Treasurer grew and under various
reorganizations, reported to various senior executives. By 1921,
Secretary Andrew Mellon assigned the Treasurer to report directly
to the newly created position of Under Secretary of the Treasury,
the second ranking offiCial in the Treasury Depc!l1rnent. At the
same time, tile role of tile Treasurer greatly expanded until in the
1940s the Treasurer was reporting to the Fiscal Assistant
Secretary. The Treasurer's Office continued to receive and
disburse government funds. By the 1970s, the Treasurer's Office
had a staff of over 1,000 employees to fulfill these responsibilities.
In a reorganization on February 14, 1974, the Office of the
Treasurer was separated from the Fiscal Service and the
Treasurer undertook new duties and responsibilities. On July 71,
1974. Francine Neff was sworn in as Treasurer and was the first
Treasurer to fill the newly defined position. Her first responsibility
was to manage the Treasury-wide bicentennial Program On
January 6, 1975, the Treasurer was also named head of the
Savings Bonds Division With ttle title National Director. Francine
Neff was the first Treasurer to hold the position of National Director
and to manage a bureau. The new treasurer reported directly to
the Undersecretary for Monetary Affairs.
Although the duties and responsibilities of the office did not
change, on September 12,1977, history was made once again
when Azie Taylor Morton was named the first African American
Treasurer.
The Office of the Treasurer underwent further reorganization In
1981 when the Treasurer was given supervision of the Bureau of
Engraving and Printing and the U.S. Mint. As a result. both
directors now reported directly to the Treasurer, who then reported
to the Deputy Secretary.
In another major change in 1993 the Savings Bonds Division was
abolished and their functions and employees were put under the
supervision of the Bureau of PubliC Debt in an effort to streamline
the federal government.

Page 20f3

U.S. Treasury - HlStory ofme 1 reasurer's Office
In 2002, tile Office of the Treasurer underwent further
reorganization. The Treasurer currently advises the Director of the
Mint. the Director of the Bureau of Engraving and Printing, the
Deputy Secretary and the Secretary on matters relating to coinage,
currency and the production of other instruments by the United
States. The Treasurer also serves as one of the Treasury
Department's principal advisors and spokespersons in the area of
flnancialli,teracy and education.

Page 3 of3

Page 1 of2

PRESS ROOM

March 20, 2006
2006-3-20-17 -7-7 -12504
U.S. International Reserve Position
The Treasury Department today released U.S. reserve assets data for the latest week. As indicated in this table, U.S. reserve assets
totaled $65,864 million as of the end of that week, compared to $64,689 million as of the end of the prior week.

I. OffiCial U.S. Reserve Assets (in US millions)

I

TOTAL

March H, ~O06

64,689

65,864

I

11. Foreign Currency Reserves 1

la. Securities

Marchi 0,.2006

II

Euro

II

11,099

Of which, issuer headquartered in the US.

II

Yen

II

10,666

II

I

11

TOTAL

Euro

II

21,765

II

11,389

II

°

II

16,101

II

°

II

b. Total deposits with:

IbJ Other central banks and BIS

II

10,917

Ib.ii. Banks headquartered in the US.
b.ii. Of which, banks located abroad

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

12. IMF Reserve Position 2

II

II
II

"

"

I
I

0
0

II

II

0

II

I

7,628

I
II

8,152

13. Special Drawing Rights (SDRs) 2

II

4. Gold Stock 3

I

5. Other Reserve Assets

5,184

II

I

II
1/

Yen
10,952

II
11,207

II
II

I

II

22,341

I

°

I

16,533

"II

II
II
II
II
II

I

II

7,709

I

II

8,238

I

II

11,044

I

II

0

I

TOTAL

I

0

I

II

5,326

II
II

0

TOTAL

II

"II

11,044

II

II

0

0
0
0

II. Predetermined Short-Term Drains on Foreign Currency Assets

[

~

I

1. Foreign currency loans and securities

M~rch

Euro

II

10, 2006

Yen

II

II

II
II

MarchJ UOO6

1

TOTAL

0

I

Yen

Euro

I

I

I

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

II

II

II

[2.b. Long positions

II

II

II

II

II

~. Other

0

I

0

I

0

I

0

0

II

II

0

I

"
III. Contingent Short·Term Net Drains on Foreign Currency Assets

[

Marj:hJ 0. 2006

II

Euro

1. Contingent liabilities in foreign currency

Yen

I
I

1.8. Collateral guarantees on debt due within 1

I

year

r

I
httll'/treasgov/preS5/rclefise~/20·06320 177712504.htm

I

TOTAL
0

II
II

Euro

II

II

II

II

II
II

II

I

Marchi1... 200_6
Yen

I i TOTAL

0

"II
II

I

I
I
I

3/3112006

Page 20[2
~ .b. Other contingent liabilities

/I

I

I

2. Foreign currency securities with embedded
options

0

3. Undrawn, unconditional credit lines

I

0

I

3.a. With other central banks

II

3.b. With banks and other financial institutions

IHeadquartered in the U. S.
3.c. With banks and other financial institutions
Headquartered outside the U. S.

I

II

I"

I
I

I

II
0

II _

0

I

I

I

I

"

II

4. Aggregate short and long positions of options
in foreign

I

Currencies vis-a-vis the U.S. dollar

[4.8

Short positions

14.a.1. Bought puts
14.a.2. Written calls

14.b. Long positions

0

0

II

II

I

I

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

"

II

I"
I
I
I

I
I

I

"

Notes:
11 Includes holdings of the Treasury's Exchange Stabilization Fund (ESF) and the Federal Reserve's System Open Market Account
(SOMA), valued at current market exchange rates. Foreign currency holdings listed as securities reflect marked-to-market values, and
deposits reflect carrying values. Foreign Currency Reserves for the latest week may be subject to revision. Foreign Currency
Reserves for the prior week are final.

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 SDRfdoliar exchange rate for the reporting date. The entries for the latest week reflect any
necessary adjustments, including revaluation, by the U.S. Treasury to IMF data for the prior month end.

31 Gold stock is valued monthly at $42.2222 per fine troy ounce.

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PRESS ROOM

March 21 , 2006
JS-4129
Deputy Assistant Secretary lannicola Meets
with
Financial Literacy Experts in Australia and
New Zealand

Treasury Deputy Assistant Secretary for Financial Education Dan lannicola Jr.
discussed financial literacy topics with Australian leaders from the government,
financial services industry and community-based organizations in Melbourne,
Hobart and Sydney from March 8 through March 13. He also met with the New
Zealand Retirement Commissioner on March 21 in Wellington, NZ. All the talks
focused on the problems and solutions involved in raising the level of financial
literacy in the United States, Australia and New Zealand.
"Throughout these conversations it has become clear that many developed
economies struggle with some of the same problems - helping adults plan for their
financial futures, teaching young people the basics of money and equipping
consumers to protect themselves from bad deals and bad decisions. We also have
discovered some of the same solutions for these problems - the use of
public/private partnerships, public outreach and seizing upon teachable moments,"
said lannicola.
While in Australia, lannicola also met with government officials and financial
services industry representatives including the Credit Union Industry Association,
the Australian Bankers Association, the Association of Superannuation Funds of
Australia. the Investment and Financial Services Association and the Australian
Stock Exchange. lannicola met with John McFarlane. the CEO of ANZ Bank. ANZ
Bank raised the visibility of financial literacy in Australia when it released its first
study, the ANZ Survey of Adult Financial Uteracy, in May 2003. Since then, the
Australian government has established a Financial Literacy Foundation as part of
the Federal Treasury and ANZ has made a commitment to improving the financial
literacy and inclusion of adult Australians into the financial mainstream, particularly
the most vulnerable populations.
"/ hope the American experience of trying to raise financial literacy can be
instructive to our Australian and New Zealander colleagues," said lannicola. "Their
approaches to the issue have certainly given us things to consider. For instance in
Australia one organization. a bank, took the national conversation about financial
education to a higher level, just by sponsoring important research. There is
tremendous opportunity for this type of private sector involvement in the U.S."

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PRESS ROOM

March 21,2006
JS-4130
Treasury Secretary John W. Snow to Visit
Hagerstown, Maryland to Discuss the U.S. Economy
and Foreign Investment

U.S. Treasury Secretary John W. Snow will travel to Hagerstown, Maryland to
discuss the U.S. economy and the importance of foreign investment. While in
Hagerstown, the Secretary will visit Volvo Powertrain North America which is one of
the world's leading manufacturers of commercial vehicles -- trucks, buses,
construction equipment, marine and industrial engines -- where he will tour the
facility and give remarks to over 200 Volvo Powertrain employees.
The following event is open to credentialed media:
Who
U.S. Treasury Secretary John W. Snow
What
Site visit and remarks
When
Thursday, March 23, 9:45 a.m. {EST)
Where
Volvo Powertrain North America
13302 Pennsylvania Ave
Hagerstown, MD

Note
Media must RSVP to Marjorie Meyers at (212) 418-7434 or
ma rjo ri~} meYills@'lillvo,com

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PRESS ROOM

March 22, 2006
JS-4131

U.S. Treasurer Cabral speaks to the Executive
Women in Government Summit
U.S. Treasurer Anna Escobedo Cabral today delivered remarks to the Executive
Women in Government's (EWG) annual summit and training conference.
Treasurer Cabral thanked the EWG members present for their continual hard work
in their respected fields and spoke on the President's continued efforts to maintain
the economy's momentum and ensure that America remains the leader of the
global economy
"Economic opportunity and freedom go hand-in-hand and they are the reasons my
family came to this country. They are reasons that a daughter of financially
challenged parents can, today, have her signature on the United States currency.
She can make her parents proud and she can help her own children do well," said
Cabral. "That's why it means so much to me, personally, to help the President
advance his economic agenda."
"I believe that a rising tide lifts all boats, and the performance of our economy over
the past three years is proving that theory. Almost five million net new jobs have
been created in the last three years. That is the best possible news for millions of
American families," said Cabral. "Our growth rate is very strong - and we
anticipate continuing strong economic growth, job creation and wage increases.
The ingredients of our economy, which is the envy of the world, are uniquely
American. They include: an embrace of entrepreneurship, an outstanding
workforce, and an open attitude towards trade and investment."

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PRESS ROOM

March 22, 2006
JS-4132

Prepared Remarks by Daniel Glaser,
Deputy Assistant Secretary
--The Importance of AMLlCFT Controls in
Financiallnstitutions-Before the International AMLlCFT Inaugural
Conference of the
U.S.lMENA Private Sector Dialogue
Cairo, EGYPT - Good morning. Thank you for the opportunity to speak to you
today and help launch this important initiative. The fact that you are all here
underscores a growing trend across the globe: the importance of the international
financial community in combating a range of international threats. The international
community is looking to finance ministries and financial institutions to take a leading
role in protecting our financial system from those who abuse it to support a range of
illicit conduct, including money laundering, terrorist financing, weapons proliferation,
narcotics trafficking and other criminal behavior. We are uniquely positioned to
hinder and over time eliminate these illicit activities from finding safe haven in our
financial systems. This can be achieved only through vigilance, acuity and
cooperation. Today's conference is the first of its type between our regions. We
have, sitting in the same room, a collection of experts and practitioners from the
U.S. and MENA financial systems asking the difficult questions about building antimoney laundering and counter-terrorist financing (AMLlCFT) regimes, and sharing
expertise. Through conferences like this, I hope that we not only share our current
experiences but also ultimately devise new solutions to the challenges that we all
face in our roles as custodians of the international financial system.

I would like to thank several pivotal people for hosting this conference and making it
a reality here in Cairo: the Arab Republic of Egypt's Prime Minister Ahmed Nazif;
the Union of Arab Banks Chairman of the Board of Directors, Dr. Joseph Torbey;
and the UAB's Director for Conferences, Wissam Fattouh. This conference would
not have been possible without the support of the Middle East North Africa
Financial Action Task Force's (MENAFATF) President Mahmoud Abdel-Latif, and
the Chairman of the U.S'/MENA Private Sector Dialogue (PSD) Dr. Muhammad
Baasiri. Also supporting the conference are the Union of Arab Banks, the
MENAFATF, the Arab Banker's Association of North America, the Banker's
Association for Finance and Trade, senior-level bankers and industry experts from
both the U.S. and the MENA region, and the U.S. Treasury Department. I am also
pleased that representatives from almost every U.S. regulatory agency were able to
join us today, including from FinCEN, OFAC, the Fed and the OCC.
In my capacity as an official of the U.S. Treasury Department, I want to share some
reflections on the role of the private sector in international security. The
international community is coming to realize that the financial sector plays an
instrumental role in preventing abuse of its system by reducing vulnerabilities and
proactively attacking the financial networks of nefarious and dangerous actors. This
realization is clearly manifested in the work of the United Nations Security Council,
which is turning increaSingly to targeted financial measures as an integral
component of its response to international security crises Merely reciting the recent
U.N. Security Council resolutions that contain significant financial components
makes this trend clear:
• UNSCR 1267/1617 - AI Qajda, Taliban, and Usama bin Ladin;
• UNSCR 1373 - Global terrorism;
• UNSCR 1483 - Senior officials of the former Iraqi regime;
• UNSCR 1532 - Charles Taylor, Jewell Howard Taylor, and Charles Taylor
Jr.;
• UNSCR 1540 - Proliferators of weapons of mass destruction;
• UNSCR 1636 - Suspects in the Hariri assassination.

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We will.und~ubtedly. receive more of these calls to financial action, and this reality
has serious Implications for financial Institutions worldwide. To meet our
responsibilities effectively, we must strengthen our existing tools, creatively apply
new ones, and ask every part of the financial community to lead by example. For
our part, .the U.S. Treasury Department is responding to this challenge by
undertaking a van~ty of n~w initiatives and actions. And we will be looking to you as
experts and practitioners In an Important region to solicit your support and creative
solutions for confronting the challenges of our time.
The U.S. Treasury Department, like other Finance Ministries, has three main goals:
•
•
•

Encouraging open and free financial markets,
Maintaining flexible exchange rates, and
Protecting the U.S. and international financial system from abuse.

The importance of this final goal can not be underscored enough, and complements
our efforts to achieve the first two. It is at times suggested that there is a trade-off
between developing and implementing strong AMLlCFT controls, on the one hand,
and maintaining a healthy financial sector, on the other. The reality is that a healthy
financial sector cannot exist without the implementation of authorities to protect it
from abuse. In fact, healthy financial sectors, effectively protected from such abuse,
bring with it increased investment and are more attractive to international markets.
To achieve the goal of protecting the U,S. financial system from abuse, the U.S.
Treasury Department engages in two interrelated efforts:
•

Identifying and closing illicit finance vulnerabilities in the U.S. and
international financial system;
• Disrupting and dismantling financial networks that support international illicit
activity, including terrorism, organized crime, weapons of mass destruction
proliferation and narcotics trafficking.
In fact, the U.S. Treasury Department has reorganized significantly to meet these
challenges. We have established the Office of Terrorism and Financial Intelligence,
which combines and integrates the efforts of the Treasury Department policy,
intelligence analysiS, sanctions enforcement, and AMLlCFT regulatory offices.
Working together we bring to national security discussions our insight into financial
transactions, our connections with the private sector. and a set of financial tools that
can be deployed to apply pressure on a great range of targets, We work closely
with counterparts in the law enforcement, diplomatic, and the intelligence
communities to strangle the funds that support international terrorist groups,
criminal organizations, narcotics traffickers and weapons proliferators.
The first type of activity mentioned above involves adopting protective measures to
safeguard our systems from abuse, including by creating strong anti-money
laundering and counter-terrorist financing regimes. In the U.S. our AMUCFT regime
is built primarily on the Bank Secrecy Act, as amended by the USA PATRIOT Act.
In addition to strengthening our standard AMUCFT controls, the Patriot Act
provides us with some unique authorities. Worth mentioning in this forum are
Section 314 and Section 311.
Section 314 mandates increased information sharing among the Treasury
Department, law enforcement, and financial institutions. This allows for increased
information exchange not only between the government and financial institutions,
but also among financial institutions themselves once they have notified the
Treasury Department that they will do so. I highlight this provision because it
underscores the need for all elements of the financial community, between the
public and private sectors, and among private financial institutions themselves to
exchange information on an ongoing basis. We must create a culture of
information-sharing within and among our institutions in order to act quickly and
effectively.
Section 311 authorizes the U.S. Treasury Department to protect the U.S. financial
system from the illicit activities of jurisdictions and institutions we find to be of
"primary money laundering concern." Section 311 is based on the recognition that
the global financial system is interconnected, and that our domestic efforts to
protect the U.S. financial system can be rendered ineffective if criminals can gain

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acce.ss through vulnerable points of entry in the international financial system.
Section. 311 e.nabl~s the Treasury Department to identify vulnerable points in the
mternatlonal financial system and to instruct U.S. financial institutions to take
defensive measures.
To date, we have utilized Section 311 to designate a total of three jurisdictions and
nine financial institutions, including entities in Macau, Latvia, Burma. Syria, and the
"Turkish Republic of Northern Cyprus." A recent case worth noting was the
September 2005 deSignation of Banco Delta Asia (BOA) in Macau for facilitating a
var!~ty of illicit activities, including on behalf of North Korea. BOA financially
faCIlitated North Korean front companies and government agencies engaged in
narcotics trafficking, currency counterfeiting, production and distribution of
counterfeit cigarettes and pharmaceuticals, and the laundering of proceeds
therefrom.
Our designation of BOA has produced encouraging results. Jurisdictions in the
region have begun conducting investigations and taking necessary steps to identify
and cut off illicit North Korean business. Responsible financial institutions are also
taking a closer look at their own operations, terminating or declining to take on such
business. These are welcome steps - but our continued and constant vigilance will
be needed to ensure these results do not wane. We also recently finalized our
Section 311 rule regarding the Commercial Bank of Syria along with its subsidiary,
the Syrian Lebanese Commercial Bank.
These measures have had far-reaching effect that we believe will preserve the
safety and soundness of our financial sector. When used judiciously and
appropriately, Section 311 has the dual effect of protecting the U.S. financial sector
from abuse and undermining the financial networks that support criminal activity
worldwide. We encourage all countries to think about ways to develop this type of
authority, which will provide you the leverage and flexibility to protect your systems
from abuse.
In addition to the efforts we pursue to protect our system from abuse. our second
charge is to undermine illicit support networks which depend on the international
system to conduct their dangerous activity. Perhaps the most important tool at our
disposal is targeted financial sanctions. In the U.S. we have developed a range of
flexible measures to target those involved in vast networks supporting terrorist
activity, weapons proliferation and narcotics trafficking. In the terrorism context, we
have deSignated over 400 individuals as supporters of terrorism through our
domestic authority, Executive Order 13224. This authority corresponds with United
Nations Security Council Resolutions 1267 and 1373, both of which address the
need to isolate and freeze the assets of global terrorists and their support networks.
We are also focused on the threat of weapons proliferation. U. N. Security Council
Resolution 1540 calls on all states to develop and implement authorities to combat
proliferation, including by denying proliferators and their supporters access to the
financial system. The U.S. has taken a first step by applying targeted financial
sanctions to proliferators just as we have to terrorists and their support netvvorks.
Issued by President Bush last June, Executive Order 13382 authorizes the freezing
of assets of WMD proliferators and their supporters, and forbids U.S. persons from
engaging in commercial transactions with them. Under that Executive Order, we
have deSignated eleven North Korean entities, six Iranian entities, and one Syrian
entity engaged in WMO proliferation activity. We are actively investigating other
entities of concern. When anyone of these designated entities attempts to
complete a transaction, their assets will be blocked as soon as they come into
contact with a U.S. financial institution.
This is a powerful proposition. Not only are we able to block an entity's assets that
comes into contact with the U.S. financial system, but we are able to disrupt future
transactions and exercise a powerful deterrent on those who would transact
business with that entity. This is why we prefer to use the term "targeted financial
sanction" rather than the more common term of "asset freeze," which tends to focus
only on the first element of this power tool.
When the international community works in concert in applying targeted financial
sanctions, deSignated entities - be they terrorists, weapons proliferators, or other
international threats - are squeezed out of the international financial system. We
are confident that these types of targeted measures are having wide effect, and we

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hope that all countries will realize the importance of implementing these UN
resolutions comprehensively. The threats that we face can be effectively addressed
in the financial system with relevant and innovative tools, many of which the UN has
already authorized. It is now our job to resolutely and proactively implement them.
Private Sector Dialogue

Government-to-government engagement on illicit financing has been a centerpiece
of our policy for many years. That ongoing conversation has been productive and
has set the stage for increased coordination in our public sectors. But it is our
private sectors that sit on the front lines, protecting our financial systems from the
threats we face. This conference is a testament to your critical role in the fight
against money laundering, terrorist financing, and other illicit financing working to
gain access to our financial systems. Our financial sectors must work in lockstep
together to make our respective efforts as effective as possible.
There is no question that a strong AMUCFT regime provides the necessary
framework for regulators, policy makers, law enforcement authorities, and financial
institutions to thrive in a secure environment. While a sound framework is
necessary, the implementation of its principles and measures reflects true
leadership. An effective application of authorities requires governments to ensure
that their financial sectors remain transparent, accountable, and well protected. This
will only work if banks themselves effectively implement the international standards
and best practices of due diligence, record keeping, AMIJCFT compliance, and
other measures that are expected of globally recognized financial institutions. This
also requires a healthy private-to-public sector dialogue so that financial institutions
can continue to educate government on the application of regulations, while
governments can educate the private sector on global threats to their institutions
and the methodologies to combat them. As I mentioned earlier, there is real value
to information exchange among private financial institution themselves, a fact which
this conference highlights. We should be encouraging our own private financial
institutions to exchange information and ideas with each other as well as with
institutions in other jUrisdictions.
Today's inaugural conference marks the beginning of an on-going dialogue
between the private sectors of our region, supported by elements of our official
sector. As you discuss strategies and compare current best practices over the next
two days, I ask that you also think about how we can creatively address the
challenges that face us. The international community is looking to us because we
can do something to protect our financial systems. We are buttressed by support at
the UN as reflected in the many Security Council resolutions that address our most
critical international security concerns. These resolutions recognize the influence
and ability of the financial sector to playa key role in addressing these threats. We
can not afford to be content with our current progress. We must maximize the
capacity of this inter-regional initiative and use it to advance innovative solutions to
the daily threats to our global financial community.

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PRESS ROOM

March 23, 2006
JS-4133
Treasury Secretary Visits Truck Manufacturer
Investment from Abroad Proves Beneficial to Maryland Workers
HAGERSTOWN, MD- Treasury Secretary John Snow visited Volvo Powertrain
North America today to talk with employees and company managers about the
American economy and the role of investment, including investment from abroad, in
creating good jobs.

The facility visited by Snow today was purchased by Volvo - a Swedish truck
manufacturer - in 1999 to produce the Volvo product in conjunction with the Mack
truck engines that were already being produced. Volvo retained the facility's highlyskilled local workers and has since invested $150 million to upgrade the facility and
construct a state-of-the-art Engine Development Laboratory that employs hundreds
of engineers who work on more advanced, cleaner-running engines. Today, Volvo
Powertrain North America's Hagerstown location employs 1,750 workers producing
hundreds of Volvo and Mack engines and transmissions each day.
"We know that investment in America lies at the heart of creating good jobs. This
facility is a great example of the good that can come of global investment in the
United States," Snow said. "Thanks to the Volvo investment, Hagerstown has
retained and gained good jobs and tax revenue, and the research and technology
being developed here will ultimately benefit all Americans."
"Indeed, 5.3 million U.S. workers alone are directly employed by U.S. affiliates of
international companies," Snow said. That's the equivalent of 4.8 percent of total
private non-agricultural employment. "These tend to be well-paying jobs, too,"
Snow pointed out. "International companies support an annual U.S. payroll of $318
billion, with the salary for employees averaging nearly $60.000. And this doesn't
count the multiplier effect as all that spending moves through other businesses in
local communities."
Snow went on to say that the success of the American economy - including a
growth rate of around 3.5 percent and the creation of nearly five million new jobs
over the past three years - is the result of a strong foundation, including sound
monetary policy, lower tax rates, an outstanding workforce, an embrace of
entrepreneurship and ongoing openness to trade and investment.
"The American economy was in trouble a few years ago, and there can be no
question today that well-timed tax relief, combined with responsible leadership from
the Federal Reserve Board, created an environment in which entrepreneurs and
workers could bring our economy back from that weakened state," he said.
"Investment in the United States has been another essential ingredient behind our
outstanding economic recovery, largely due to the jobs it creates and sustains. That
is why it is essential for Congress to make the President's jobs and growth tax relief
permanent, especially to act right now to extend job creating dividends and capital
gains tax relief for as long as possible."
Snow concluded his visit by congratulating plant employees and managers on a
successful merger. "Thank you for the work you do for your industry, and for the
advancement of clean-engine technology. It's great to see to companies from two
countries join together for the greater good."

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PRESS ROOM

March 23, 2006
JS-4134

U.S. Designates AI·Manar as a Specially Designated Global
Terrorist Entity
Television Station is Arm of Hizballah Terrorist Network
The U.S. Department of the Treasury today designated pursuant to Executive Order
13224 al Manar, a satellite television operation owned or controlled by the Iranfunded Hizballah terrorist network. Additionally designated today were al Nour
Radio and the Lebanese Media Group, the parent company to both al Manar and al
Nour Radio.

AI Manar and al Nour
AI Manar and al Nour are the media arms of the Hizballah terrorist network and
have facilitated Hizballah's activities.
"Any entity maintained by a terrorist group whether masquerading as a charity, a
business, or a media outlet - is as culpable as the terrorist group itself," said Stuart
Levey, Treasury Under Secretary for Terrorism and Financial Intelligence.
AI Manar has employed multiple Hizbalfah members. One al Manar employee
engaged in pre-operational surveillance for Hizballah operations under cover of
employment by al Manar.
AI Manar and al Nour have supported fund raising and recruitment efforts by
Hizballah. AI Manar raised funds for Hizballah through advertisements broadcast
on the network and an accompanying website that requested donations for the
terrorist organization. As recently as late 2005. Hizballah-affiliated charities aired
commercials on al Manar, providing contact information and bank account numbers
for donations. Moreover, Hizballah Secretary General Nasrallah publicized an
invitation for all Lebanese citizens to volunteer for Hizbailah military training on al
Manar and al Nour.
In addition to supporting Hizballah, al Manar has also provided support to other
designated Palestinian terrorist organizations, including the Palestinian Islamic
Jihad (PIJ) and al Aqsa Martyrs Brigade, notably transferring tens of thousands of
dollars for a PIJ-controlled charity. PIJ is listed as a Specially Designated Global
Terrorist and a Foreign Terrorist Organization by the U.S. Government, and is also
named on the European Union's list of terrorist entities.
Hizballah Secretary General Hasan Nasrallah, along with Hizballah's Executive
Council, managed and oversaw the budgets of ai Manar and al Nour.

The Lebanese Media Group
The Lebanese Media Group is the parent company of both al Manar and al Nour.
Prominent Hizballah members have been major shareholders of the Lebanese
Media Group.

Background on Hizballah
Hizballah is a Lebanon-based terrorist group Until September 11, 2001, Hizballah
was responsible for more American deaths than any other terrorist organization.
Hizballah is known or suspected to have been involved in numerous terrorist
attacks throughout the world, including the suicide truck bombings of the U.S.
Embassy and U.S. Marine Corps barracks in Beirut in 1983 and the U.S. Embassy

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annex in Beirut in September 1984. Hizballah also executed the 1985 hijacking of
TWA Flight 847 en route from Athens to Rome and assumed responsibility for the
suicide bombing of the Israeli embassy in Argentina in 1992. It also attacked the
Israeli cultural center in Buenos Aires in 1994,
On January 25,1995, the Annex to Executive Order 12947 listed Hizballah as a
Specially Designated Terrorist. The Department of State designated Hizballah as a
Foreign Terrorist Organization in 1997. Additionally, on October 31,2001,
Hizballah was designated as a Specially Designated Global terrorist under
Executive Order 13224.
Today's action prohibits transactions betvveen U,S. persons and the designated
entities and also freezes any assets they may have under U,S. jurisdiction,
The U,S, Department of State added al Manar to the Terrorism Exclusion List (TEL)
in December 2004. For more information on this action, please visit:
http://www.state.gov/r!pa!prs/ps/200414QC6J.htm.

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PRESS ROOM

March 23, 2006
js--4135
Taxpayer Advocacy Panel Recruitment Applications Now Being Accepted
Deadline to Apply is April 28, 2006
Washington, DC - The Department of Treasury, along with the Internal Revenue
Service, is inviting individuals to help improve the nation's tax agency by applying to
be members of the Taxpayer Advocacy Panel (TAP). The mission of the Panel is to
listen to taxpayers, identify taxpayers' issues, and make recommendations for
improving IRS service and customer satisfaction. TAP provides citizen input by
identifying problems and making recommendations for improvement of IRS systems
and procedures; elevating the identified problems to the appropriate IRS official;
and referring individual taxpayers to the appropriate IRS office for assistance in
resolving their problems. The Panel's subcommittees will consist of 10-1B
volunteer members who serve at the pleasure of the Secretary of Treasury and will
function solely as advisory bodies.
The TAP program is supported by the National Taxpayer Advocate's Office and
works on issues identified by the IRS, taxpayers and the Taxpayer Advocacy Panel
members. The National Taxpayer Advocate is the taxpayers' voice within the IRS
and reports directly to the Commissioner of Internal Revenue and to Congress
through two annual reports.
"As the IRS continues to examine taxpayers' needs in the area of service, the
Taxpayer Advocacy Panel has emerged as a vital source for gathering and
providing information from the perspective of taxpayers," stated Nina E. Olson,
National Taxpayer Advocate. "TAP's role will ultimately aid taxpayers by supplying
them with the top quality service that they deserve."
Taxpayer Advocacy Panel members:
•
•
•

Get direct input from taxpayers about their experiences with the IRS.
Identify and prioritize issues of greatest concern to taxpayers.
Make recommendations to the IRS and Treasury on customer-service
issues.
• Work with the IRS to help taxpayers address key issues and concerns.
• Report annually to Treasury. the Commissioner of Internal Revenue, and
the National Taxpayer Advocate.
To qualify as a TAP member, applicants must be U.S. citizens, be able to make a
significant time commitment to the panel, and meet certain other eligibility
requirements.
Further details and the application are available on-line at vywwjmnroveirs..oorg or by
calling 1-888-912-1227. You can apply on-line or download the form and mail it to:
Milwaukee TAP Office
Stop 1006MIL
310 West Wisconsin Avenue
Milwaukee, WI 53203-2221
Applications must be received by the TAP Office by April 28. 2006.

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PRESS ROOM

March 24, 2006
JS-4136

Treasurer To Discuss Financial Education and U.S. Jobs
with Hispanic Higher Education Group
U.S. Treasurer Anna Escobedo Cabral will address the Hispanic Association of
Colleges and Universities Monday, March 27 at 8:30 a.m. In Washington, D.C. The
Treasurer will discuss financial education and U.S. job growth at the organization's
11th Annual National Capitol Forum.

Who
U.S. Treasurer Anna Escobedo Cabral
What
Keynote Address on Financial Education and U.S. Jobs Growth
When
Monday, March 27, 8:30 AM (EST)

Where
Washington Plaza Hotel,
National Hall Conference Center
10 Thomas Circle. NW

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PRESS ROOM

March 28, 2006
JS-4137
Statement of Assistant Secretary Clay Lowery
before the Senate Foreign Relations Committee
on the Multilateral Development Sanks and the Fight
Against Corruption

Chairman Lugar, Senator Biden, Members of the Committee, I'm pleased to testify
today on a critical imperative facing us at the multilateral development banks
(MDBs). The Administration has one fundamental policy goal for the MDBs - to use
programs, projects, and advice to assist countries in reducing poverty by increasing
economic growth. There is no issue that undermines that goal more than that of
corruption. Corruption compromises development like no other impediment,
resulting in squandered resources and ineffective efforts to combat illiteracy,
disease, high infant mortality. and a polluted environment. This has been a top
priority from the first day of the Bush Administration, and we know it has been a top
priority for you, Mr. Chairman, and your whole committee.
We see two great challenges. First, we must attack the corruption around the world
that keeps nations poor. President Bush has launched a series of initiatives to
tackle this problem - from crafting the Monterrey Consensus on Financing for
Development, to creating the Millennium Challenge Account, to launching anticorruption initiatives through the G8, to taking on money laundering, terrorist
financing, and searching out and returning the stolen assets from the kleptocrats of
the world.
The second challenge is reforming the MDBs to root out any corruption within the
institutions themselves and to make them effective instruments for attacking
corruption in borrowing nations.
We are advancing a comprehensive reform agenda at the MOBs to address both of
these challenges. And we have a strong new ally at the World Bank in its new
President, Paul Wolfowitz. He has made fighting corruption in all areas of the World
Bank's engagement one of his primary goals since coming to the Bank. Examples
of this commitment thus far include:
Chad where the Bank has suspended disbursements in response to the
government's recent unilateral amendments to the Petroleum Revenue
Management law, which was negotiated with the World Bank to improve
transparency and ensure allocation of oil revenues to priority sectors such
as health and education;
• India where the Bank has held up consideration of a health project due to
concerns about procurement irregularilies and has suspended
disbursements of approximately $400 million for transportation projects due
to safeguard violations;
• Republic of Congo, where concerns about allegations of corruption in the
state-owned oil company resulted in President Wolfowitz's insisting on the
significant strengthening of conditions for debt relief under the HIPe
initiative;
• Uzbekistan where consideration of the Country Assistance Strategy has
been delayed due to good governance concerns;
• The Bank's Department of Institutional Integrity (I NT), which President
Wolfowitz has reinvigorated and restructured to make its authority clear and
its operations more effective.
•

The United States supports President Wolfowitz's leadership on corruption and his
progress to date. We also sought and continue to support the recent commitment of
all MOB Heads to harmonize their strategies in the fight on corruption. But the job is
far from finished, and we will continue to work with all the MOBs to advance the
anti~corruption agenda as our highest priority.

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Page 2 of 5
Progress Made and the U.S. Plan to Further the Anti·Corruption Agenda
Only 10 years ago did the discussion of corruption begin in earnest at the MOBs,
thanks in large measure to James Wolfensohn, former president of the World Bank.
But U.S. leadership also played an important role in focusing the discussion and
providing support for efforts on anti-corruption reform. The result is that each MOB
has recognized the importance of fighting corruption and, with varying degrees of
success, has taken on reforms at both the country and the institutional level.
Fighting corruption is not easy, however, even in the United States, where there are
high fiduciary standards, well developed legal systems, and a relatively open and
transparent society that demands accountability. For countries where institutions
and standards are weak, where the political system is neither accountable nor
transparent, and where individuals may have been beaten down and become
resigned to corruption as a way of life, fighting this scourge is an extremely
daunting challenge. Although the MOBs have developed and mobilized a variety of
tools to focus on the quality of pUblic-sector institutions, the World Bank's Review of
Development Effectiveness for 2004 indicates that there is "little evidence that
governance is improving and corruption decreasing." Because of corruption's
pervasive nature, deep institutional changes are necessary across the multilateral
development banks in order to make real progress in the fight
That is why we appreciate the added attention to these efforts that this committee
has provided in recent years. We fully support the implementation of the policy
goals laid out in the FY06 appropriations legislation, and in particular -- we endorse
the aim of the legislation to improve transparency of operations, link project results
to staff performance, strengthen procurement standards, and enhance coordination
across the MOBs on definitions of fraud and corruption and cross-debarment
procedures. These are important, necessary, and logical steps in eliminating
corruption. In support of these goals, each U.S. Executive Director has developed
an action plan for implementation, including time lines.
To make inroads on corruption, there must be a system of mutual accountability in
place. To strengthen the system of accountability, the most critical areas of focus
for the anti-corruption campaign involve four key policy objectives: strengthening
institutional transparency and accountability, promoting good governance in
recipient countries, improving fiduciary safeguards, and advancing the results
agenda.
Institutional Transparency and Accountability
To protect against internal corruption, it is essential to ensure that each MOB has its
own house in order. This committee has held a series of hearings over the last few
years about progress -- or the lack thereof -- in fighting corruption in these
institutions. Instead of recapping all of that, I thought it would be most valuable to
highlight where, with strong backing from the United States, the MOBs have made
specific progress in the areas related to the legislation you passed last year, with
particular emphasis on the areas of harmonizing anti-corruption and procurement
efforts, strengthening whistleblower protections, increasing transparency, and
building internal mechanisms to ensure accountability.
In order to strengthen the operations of the internal investigative function in each
institution, the MOBs must move forward to standardize their definition of corruption
and to ensure that compliance and enforcement actions taken by one institution are
supported by all others. To this end, we welcome the recent announcement by the
Heads of MOBs to establish a task force to develop a uniform Framework for
Preventing and Combating Fraud and Corruption for agreement by the September
World Bank Annual Meeting. This is the first step in harmonizing the MOB response
to corruption. A working group will continue to refine these definitions and work
toward harmonizing other aspects of the sanctioning of fraud and corruption at the
MOBs. In fact, the Inter-American Oevelopment Bank (lOB) has already adopted
the current definitions agreed to by the working group, including a common crossdebarment policy.
The MOB's whistleblower policies also bear reviewing, as it is critical that
employees feel they can report abuse without reprisal. We see .the strengthened
INT operations at the World Bank as one way of supporting whlstleblower
protections, but all the MOBs need to continually update their whistleblower policies

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to reflect best practices in the public and private sectors. The Asian Development
Bank, for example, has recently implemented measures to protect the identity of
whistleblowers, including secure phone lines, emails, faxes and confidentiality
procedures and is planning further enhancements.
Another way to improve accountability is through increasing transparency of
operations at the MOBs. The U.S. insistence on institutional transparency over the
last several years has led to revised disclosure poliCies at virtually all the
development institutions. Just last month, for example. the Board of Directors at the
International Finance Corporation (IFC) approved a new policy that includes the
presumption of disclosure of non-proprietary information about IFC activities and
the release of Board minutes.
Internal audit departments can playa key role in strengthening the accountability of
the institutions themselves. We are encouraged that the World Bank's Internal Audit
Department (lAD) is implementing a strong audit work program. lAD, reporting
regularly both to President Wolfowitz and the Board's Audit Committee, is making
significant contributions to risk management of the World Bank Group and to
increasing the efficiency and effectiveness of the Group's operations. It is important
that internal audit function in all the MOBs be given appropriate status by
management and be provided adequate staff and resources to conduct audits and
to follow up to ensure the implementation of recommendations. The progress to
date at all institutions is commendable, and it is encouraging that the MOBs are
taking action on these issues, thanks in no small part to the advocacy of the U.S.
government on these issues.
Good Governance in ReCipient Countries

In order to make inroads on corruption at the country-level, however, the MOBs
need to help countries improve accountability by increasing country capacity and
advocating good governance. This is an area in which the MOBs have committed
significant resources, but unfortunately projects focusing on governance have had
mixed success. To really be effective in the fight on corruption, the MOBs need to
continue their work on building governance and institutional capacity, but with a
better eye to ensuring ownership and results.
Assistance to help countries build successful and accountable pUblic-sector
institutions continues to be substantial, with the World Bank alone providing over
$2.83 billion in FY 2005. When adding sectors of law and justice, the assistance to
improving governance and building capacity equates to roughly 25 percent of total
commitments of both IBRD and IDA in 2005. Spending on governance projects
increased by one-third at the Asian Development Bank (AsOB) to 14 percent of all
lending in 2005 and accounted for 15 percent at the lOB. The assistance is directed
to a wide range of governance issues, such as judicial reform to strengthen the rule
of law, tax policy and revenue col/ection measures aimed at ensuring tax
compliance and accountability, fiscal transparency and accountability, and
procurement reform to help remove incentives for government corruption.
Despite the challenges in developing countries, there are projects that are helping
countries make important strides to improve governance. In the Philippines, for
example, the Supreme Court adopted recommendations ariSing from a recently
completed AsDB technical assistance project on reforms to the judicial system.
These recommendations will be implemented under a World Bank loan. In Bolivia,
the lOB has a project to strengthen capacity in the Finance Ministry to develop an
e-government procurement program. The program will have an additional indirect
effect of permitting greater public accountability for the Ministry's funds.
Recognizing that building capacity can be significantly more challenging sometimes
than building a road or school, we are nevertheless troubled that building
governance and capacity has produced mixed results.
Reasons for the mixed results were presented in a recent internal AsDB review of
the implementation of its anticorruption and governance policies. The AsDB
concluded that the Bank has not yet completed the process of main streaming
governance and anticorruption throughout the instit~tion: Challenges included.
inadequate identification of governance and corruptton risks In country strategies,
too many small projects covering too many areas, thinly-deployed staff resources,
and insufficient emphasis on public financial management systems. While the
review identified a number of weaknesses, the candidness of the report and

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Page 4 of5
management's decision to prioritize strengthening its anticorruption and governance
efforts under the next Medium Term Strategy illustrate the AsOB's enhanced
commitment to fight corruption.
Despite these challenges, there are promising steps to improve governance
through the MOBs because of the changing incentives. For example, indicators in
the World BankllFC DOing Business report highlight where countries need to
dedicate resources to improve the business environment. Increasingly countries are
asking how they can improve their rankings, with the recognition that through
improved efficiency and systems, there is less government waste, fewer
opportunities for corruption, and more opportunities for investment.
AI the institutional level, the World Bank has embraced good governance as a key
area in the focus of its Country Assistance Strategies because of its importance to
development sustainability. The World Bank and IFC, supported by other donors,
have developed indicators to measure and track country performance in public
financial management. Finally, the country incentives for good governance are
driven by the performance-based allocation (PBA) systems, which allocate
resources of the concessional windows across the MOBs on the basis of
performance. Scarce resources should go where they will be used most effectively,
and the PBA systems serve as a critical part of this incentive structure. For
instance, the AsOF's weighting on governance factors in terms of measuring
country performance has increased from 30 percent to 50 percent in just the last
year. And in IDA, in the mid 1990s, the best performers received roughly 40 percent
more on a per capita basis than the worst performers; today that figure is over 350
percent.
Strengthening Fiduciary Safeguards
When we think about corruption it is easy to have a picture of cases of grand-scale
corruption, such as those of former Liberian leader Charles Taylor or the late
Nigerian dictator Sani Abacha. The most egregious cases are often much easier to
identify than the much smaller abuses, but it is the smaller scale mishandlings that
can really add up, unless the appropriate fidUCiary safeguards are in place. Thus,
effective MOB project supervision and rules for procurement, disbursement, and
audit are essential for protecting development resources, as well as for achieving
and sustaining development results.
Unfortunately, on one key aspect of international standards the U.S. is finding itself
increasingly at odds with the donor community. The harmonization agenda of the
OEeO Development Assistance Committee (OAC) is encouraging development
assistance providers to use countries' own procurement systems rather than
internationally agreed standards. The appropriate direction of harmonization should
be upward and to a widely accepted international standard.
We believe countries should use the World Bank's procurement standards - not
only because they are the best in the business -- but also because the international
business community is familiar with them and this promotes fair competition. At the
other MOBs, we are trying to hold procurement standards to the highest-common
denominator rather than the lowest. We have been urging all the MOBs to
harmonize strong procurement standards by adopting the World Bank's
procurement guidelines. The lOB did so last year. Unfortunately the AsOB failed to
follow suit despite recent attempts to work with them on this. Strong procurement
and disbursement guidelines create accountability and transparency, without which
there is room for corruption.
Results Measurement and Performance
A critical win for the U.S. has been the acceptance in the donor community of the
results agenda - embracing results measurement at the country and now
increasingly at the institutional level. We believe this will improve accountabi!ity and
effective use of scarce development resources. Results measurement IS an integral
aspect of the anti-corruption discussion because it is a way to ensure that
resources are allocated on the basis of tangible outcomes. Focus on results
demands country and institutional accountability for actions and hopefully can
improve institutional efficiency as well.

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The measurable results agenda supported by the U.S. has been broadly
recognized in the donor community as an essential tool for ensuring effective aid
delivery at the project level. The good news is that now all project documents
considered by the Executive Directors of the World Bank, AfOB, AsDB, IDB, and
EBRO identify project objectives, which are subject to subsequent evaluation. The
World Bank and AsDB are now incorporating results frameworks in all their new
country strategies. For example, the AsDB's recent Bangladesh country strategy,
which was the product of extensive consultations with civil society groups,
comprises detailed and time bound development targets, including those on critical
structural reforms related to governance.
Incorporating a matrix of expected results in project planning is the first step;
however, as a next step, the MOBs now need to ensure that effective oversight
occurs during project implementation, allowing managers to recognize early on
when a project is off-track and corrective action needs to be taken. The track record
on this is improving, and one encouraging example of accountability is in Honduras
where the community monitored all aspects of health and education projects and
met regularly with World Bank staff. The community volunteers assessed the
projects on an ongoing basis and were in a position to let staff know if things were
off-track.
At the institutional level, the U.S. has pushed for stronger links between project
performance, staff compensation, and budget allocations. The AsDB recently
implemented a new performance management system that assesses staff on the
basis of performance against development outputs and rewards the top 10 percent
of achievers. The World Bank is currently preparing to implement fully an
Operational Policy of Results Measurement, which will effectively codify the
importance of results at the center of Bank operations.
However, despite their commitment to results, significant hurdles to the
implementation of the results agenda within the institution remain. The World Bank
needs to link the decision-making processes of human resources, operations, and
the budget, allowing the results agenda to have an impact in the form of allocation
of resources. The IBRD and lOA have not yet fully tied program budgets to results,
but Bank management anticipates completion of this project by the beginning of its
2008 fiscal year. Meanwhile, at all of the MOBs except the IFC, there is a missing
link to the results agenda as there does not appear to be any move to directly link
staff or management compensation to project performance. Bottom line: while there
is progress on the results agenda across the MOBs, more needs to be done in
terms of implementation of results measurement at the institutional level.
Making results measurement and strong fiduciary policies our priority in the MOB
reform process serves a distinct purpose in the fight on corruption because it helps
ensure accountability. In turn, accountability ensures that donor resources are used
effectively and serves as an effective method to decrease the opportunities for
corruption at the project and institutional level.

Conclusion
There is no easy fix or answer to corruption, and it remains a very serious
impediment to growth, poverty reduction and improved living standards in the
world's poorest countries. While we have made progress in focusing the MDBs on
the fight against corruption, we are still a long way from victory. As I testify before
you today I find reason for optimism in the recent steps taken by President
Wolfowitz and other MDB Heads to intensify their efforts to tackle the problem both
systematically and systemically. We will continue our intense efforts to push this
agenda and look forward to our continuing cooperation and dialogue with Congress
on the best ways to achieve concrete results. I can assure you that we will continue
to pursue this cause tirelessly. Thank you for your time, and I look forward to
answering any questions you may have.

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Page 1 of3

PRESS ROOM

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March 28,2006
JS-4138
The Honorable John W. Snow
Prepared Remarks
The Tax Executives Institute
Good morning. It's great to be here with you, and I hope your meeting is going well.
I know you've heard already from our fine IRS Commissioner, Mark Everson. I
always hope that anything I say after the IRS Commissioner has to sound good!
More seriously, this is the second time I've had the privilege of speaking to your
group. I am always humbled and impressed by the detailed knowledge and
expertise about the tax code that is assembled under your sponsorship.
But I'm also reminded of the now-famous statement by Albert Einstein, about that
same tax code being the only thing in his estimation that was "impenetrable to the
human mind." So, yours is truly a special calling--perhaps a "mission impossible." I
feel as if you are owed an apology for the current state of the tax code - it is neither
simple, nor fair, nor does it do what it should to promote a growing economy.
I'm here to let you know how dedicated I am, and how dedicated President Bush is,
to making the tax code better for all Americans. That means simpler and better for
businesses and individuals, fairer and more pro-growth. The President has shown
real leadership on improving the tax code already throughout his term, acting on
major pro-growth tax relief measures in 2001, 2002, and 2003, and in signing the
JOBS bill in 2004 - something I know many of you were an important part of.
Simpler-but-fair, as you well know, is a hard balance to stnke. The President's
Panel on Tax Reform did some excellent work on this subject, and it was an
important first step toward eventual overhaul of the code. This is something that we
only get the chance to do every 20 years or so. And so we need to take the time to
do it right, to build understanding and to build support for change. On all my many
travels around the country, not once has anyone put their hand up and said: "Mr.
Secretary, please tell Congress to keep the tax code just the way it is--don't change
a word ... " The realization that something has to be done about the tax code--which
the PreSident has led--is now starting to take hold with people from across the
political spectrum. But we have to be very careful to avoid the temptation by some
to use "tax reform" as cover to actually raise tax rates! That is not real tax reform-and it would be a step in the wrong direction. As virtually all main-stream
economists will tell you, higher tax rates actually create dead-weight losses by
reducing economrc output.
Rather, as we move along toward pro-growth tax reforms, Congress must take
action right now to make sure we keep tax rates low. We need to make the
President's tax relief permanent, period. Congress especially needs to extend
capital gains and dividends tax rates which have been at the center of millions of
new jobs, and rising incomes for American families and businesses.
I mention keeping tax rates lower first because there really isn't anything that ranks
higher in importance in terms of the strength and health of the American economy. I
know that all of you witness, first-hand, how taxation impacts business decisions.
I'm sure you won't be surprised to hear that the American Shareholders Association
estimates that S&P 500 shareholders will receive $201 billion in regular dividend
payments this year - a 36 percent increase over 2002, the year before the
President's tax reductions on dividends took effect. The dividend tax reduction
reversed a 25-year decline in companies paying dividends to their shareholders. In
fact, today 77 percent of S&P companies now pay a dividend.

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Tax cuts work. In the case of the President's jobs and growth tax initiatives, the
impact has been undeniably positive, making President Bush a very good steward
of the U.S. economy. The facts are clear:
Nearly five million new jobs have been created in the past three years - two million
of them in the last year alone. Unemployment is at a very low rate of 4.8 percent that's lower than the average for the 1970s, 1980s and 1990s. So there is much for
both the American worker and the American employer to be proud of, and there is
no reason to abandon the policies that helped them achieve this success.
Looking back, there can be no question today that well-timed tax relief, combined
with responsible leadership from the Federal Reserve Board, created an
environment in which businesses, entrepreneurs, and workers could bring our
economy back from its weakened state of just a few years ago.
Importantly, tax relief encouraged investment - again, you all saw this, first-hand in
the work that you do - and investment has ultimately led to job growth. The
American economy is now unmistakably in a trend of expansion, and those trend
lines can clearly be traced to the enactment of pro-growth tax relief.
In the past two years, the economy has generated more than 170,000 jobs per
month, and that includes the two-month slowdown in job growth in the aftermath of
Hurricanes Katrina and Rita. In the past 32 years, new claims for unemployment
insurance have almost never been as low as they have been so far this year.
Good, steady job growth is no surprise, given that GOP growth was 3.5 percent last
year. Private forecasters, like the National Association for Business Economics and
others, are expecting very strong growth to continue this quarter.
It has been a long time since I've been asked about a "double dip" or a "jobless
recovery." A more recent criticism has been that income and wealth gains are
uneven, and that average Americans are somehow not better off.
Yet again, we are able to prove the critics wrong. Federal Reserve data shows that
median family income is picking up. We can see, when we compare wages at this
pOint in the business cycle with the same point in the last business cycle, that we're
doing better during this recovery. We are at a point in this recovery where it is
reasonable to expect real labor earnings to rise over a short period of time.
We are, it appears, at the tipping point on returns to labor - when incomes rise for
workers and business combined, but workers once again increase their incomes
faster than businesses. Once businesses have been doing well for a while - which
I'm sure you can confirm first hand--they ultimately compete those increases in
income away by competing harder for labor. The result is higher wages and higher
standards of living for workers.
Given the trends that we are seeing, the strength of the economic recovery and the
underlying strong fundamentals of our economy, I'm confident that median income
will eclipse the previous peak before the end of this Administration.
The question that those of us in government must look at now is this: what can we
do to ensure that these positive trends continue?
The answers as I see them: First, keep taxes Iowan both investment and incomes.
The conference committee on tax relief reconciliation is considering this matter now
and I have been strongly urging them to keep these tax rates low. We must protect
and nurture our economic growth - not put it in jeopardy with tax increases.
Some observers have started to opine about the "inevitability" of a tax increase in
coming years. Those who argue for tax increases seem to think that the American
people and American businesses are not taxed enough. But tax revenues are now
at an all-time high. If anything, it's not that we're taxed too little, but that we spend
too much. That's why the President is so right to demand that Congress g!v~ him
the line-item veto to rein in wasteful spending, help reduce the budget defiCit, and
improve accountability.

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Page 3 of3
While we work with Congress to control spending and keep taxes low, we at the
Treasury and the IRS have an awfully important job to do in administering the
current tax laws. I want to particularly recognize Eric Solomon and his team at the
Treasury, who do such terrific work to provide individual and business taxpayers
with the guidance that they need to know where they stand, and know what they
need to do to follow the law.
The President's Budget proposal included a very important piece for Treasury's
Office of Tax Policy, and I hope the Congress grants them this wish: to create a
dynamic analysis function within their office. I see this as an enormous opportunity
for Congress to have access to the information it needs to make good policy. Tax
policy has such a profound impact on the economy - as all of you know - so it's
really important that we be able to look at the impact of tax cuts or increases in an
economic light.
As those of us in government work through the public policies of taxation we very
much appreciate the perspective and counsel of America's tax executives. You are
living and working at the intersection of tax policy and bottom-line business results,
and we need that perspective. Let's keep up a good, open dialogue, for when tax
policy works well, we share in that Victory together.
Thanks again for having me here today.

REPORTS

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48,000 r----r;--r-r-...,.,,-r----.,..,-------,-,.--

REAL MEDIAN HOUSEHOLD INCOME
IN THE TWO LATEST BUSINESS
CYCLES

46,000

108

REAL MEDIAN HOUSEHOLD INCOME
Constant 2004 Dollars

44,000

104

42,000

.. .:
..

Legend
-Peak=2000

"·'··'Peak=1989

100~--~~~---------~·-·--~

40,000

96

38,000
36,000

-2

34,000 L...!............L..L.....-o...IL~~.....J........L..._~JlJ....__.l~<--LJ..L....o....L...J
1965 1970 1975 1980 1985 1990 1995 2000 2005

REAL MEDIAN FAMILY INCOME
Constant 2004 Dollars

120
110

50

P

2

4

Years from Cycle Peak

REAL MEDIAN FAMILY NET WORTH
Constant 2004 Dollars

Thousands

100
40

90

30

70

80
60
20

1989

1992

1995

1998

2001

2004

50

6

1989 1992 1995 1998 2001 2004

8

10

Page 1 of2

PRESS ROOM

March 28,2006
2006-3-28-16-17-47-2581
U.S. International Reserve Position
The Treasury Department today released U.S. reserve assets data for the latest week. As indicated in this table, U.S. reserve assets
totaled $65,207 million as of the end of that week, compared to $65,864 million as of the end of the prior week.

I. Official U.S. Reserve Assets (in US millions)

I

Mar~ 17,;2Q06

II

March_24,20tlli

65,864

I

65,207

I'

TOTAL.

11. Foreign Currency Reserves 1

II

Euro

I

Yen

TOTAL

I

Euro

II

Yen

la. Securities

I

11,389

I

10,952

22,341

I

11,252

I

10,800

Of which. Issuer headquartered in the U. S.

Ib.i. Other central banks and BIS

11,207

b.ii. Banks headquartered in the US.
b.ii. Of which, banks located abroad

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

14. Gold Stock 3

15. Other Reserve Assets

5,326

II

I

13 Special Drawing Rights (SDRs) 2

I
I
I
I

0

II

0

II

0

I

I

11,063

252

7,709

II
II

11,044

I

5,

0

8,238

I
I
II

I

0

16,533

I
I

TOTAL
22,052

0

b. Total deposits with:

12. IMF Reserve Position 2

I

I
I

I

0

=i

16,315
0

I
I

0

II
II
II
II
II

0

0

7,636
8,160
11,044
0

II. Predetermined Short-Term Drains on Foreign Currency Assets

I

I
1. Foreign currency loans and securities

March 17, 2006
Euro

I

II
II

Yen

II
II

TOTAL
0

I
I
I

Euro

March__24, 2(106
II
v.
TOTAL

I
I

JI

0

I
I

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

I
I
I

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

I

0

I

0

I

0

II

I
I
I

I
I
I

II
II
II

0
0
0

I

I
I

III. Contingent Short-Term Net Drains on Foreign Currency Assets

[
1. Contingent liabilities in foreign currency
1.a. Collateral guarantees on debt due within 1
year

I

,I

March.17,2006

I

I
I

/I

I

Euro

Yen

~ttP:l;treas.gov/pt'ess/releases!2U063 28161 7472 581.htm

Euro

II

TOTAL

\I

\I

0

I

II
II

II

JI

CJCJI
/I

/I

I

M~rkb 2_4,_2006

II

/I

Yen

I

TOTAL

II

0

II
II

I

I

II
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Page 2 of2
l1.b. Other contingent liabilities

I

II

3. Undrawn, unconditional credit lines

@.b. With banks and other financial institutions
[HeadqUartered in the US.
3.c. With banks and other financial institutions

II

I

II

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

I
0
0

I
I
I

@.a. With other central banks

IHeadquartered outside the US

I

CJCJII

2 Foreign currency securities with embedded
options

I

I
I"

I

I

I

Ic=JGJ
I
0

II

I

II
II

II

I

II

II

I
I

II
0

1/

I

II

II"

"II
I
II

I

I

II

II

0

I

I

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

I

I

4.b. Long positions

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

I

II

II

I

I

Notes:

11 Includes holdings of the Treasury's Exchange Stabilization Fund (ESF) and the Federal Reserve's System Open Market Account
(SOMA), valued at current market exchange rates. Foreign currency holdings listed as securities reflect marked-to-market values, and
deposits reflect carrying values. Foreign Currency Reserves for the latest week may be subject to revision. Foreign Currency
Reserves for the prior week are final.

2/ 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/dollar exchange rate for the reporting date. The entries for the latest week reflect any
necessary adjustments, including revaluation, by the U.S. Treasury to IMF data for the prior month end.

31 Gold stock is valued monthly at $42.2222 per fine troy ounce.

http://treas.gov/nress/releases/20063l8[617472581.htm
I

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Pagelof6

PRESS ROOM

March 29, 2006

JS-4139
Statement of
Under Secretary for International Affairs
Timothy D. Adams
Before the Senate Finance Committee
U.S.-China Economic Relationship Revisited
Mr. Chairman and distinguished members of the Committee, I am pleased to be
with you today to discuss Treasury's economic engagement with China, what we
have achieved and the critical work to be done. The U.S. relationship with China
may be the single most important economic relationship of the 21st century.
Underlying Treasury's engagement is the fundamental belief that a broad, mature,
candid, and constructive relationship with China will bring results that are good for
the American people.
When Secretary Snow traveled to China last fall, he articulated the three pillars of
what China needs to do to contribute to sustained global growth and eliminate
distortions and imbalances. These are: (1) adopt a more market-based, flexible
exchange rate; (2) shift from investment- and export-oriented growth to a more
consumption-based economy; and (3) reform and open up China's financial sector,
including its capital markets. Implementing these reforms will promote an orderly
reduction of global imbalances and lead to sustained and less volatile Chinese
growth to the benefit of its own population and the global economy
The Chinese have made some important achievements on these three pillars, but
they still have much to do. Today I would like to describe those areas where greater
efforts are needed. The best place to begin is by discussing more broadly U.S.
economic relations with China .

.China'lirrmortance
Almost 20 years have passed since China began its transition to a market
economy, and China has seen its standard of living surge. It has gone from
maintaining an autarkic trade policy to subscribing to the WTO principles of open
and fair trade, and from being a minor player in global trade to a major player in the
global economy. China is now the world's 4th largest economy and the 3rd largest
trading nation. The United States has benefited from China's growth: U.S. exports
to China have grown at five times the rate of our exports to the rest of the world
since China joined the WTO. Growth in exports to China has exceeded 20 percent
over the last three years and China has risen to our fourth largest export market.
Variations in China's growth rate now have a significant impact on the global
economy and a major impact on markets for steel, oil, copper and a variety of other
products. Moreover, the U.S. and China together have accounted for almost half of
global growth since 2000. A prosperous and secure China that meets its
international obligations and is fully integrated and engaged in the global economy
and global economic institutions is in our interest, and in China's interest It
presents enormous opportunities for U.S. workers and firms.

China's rapid growth and the character of that growth also pose challenges - for
China and for the rest of the world. While China's growth has been rapid. it has
depended too heavily on investment growth and increasingly on net exports.

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Page 2 of6
Opening the Chinese economy to trade was a major factor in the development
toward a market economy in China and the acceleration of Chinese growth,
Chinese imports have grown rapidly along with Chinese exports, so that increases
in the trade surplus have until recently made only a small contribution to Chinese
growth, But the last two years have seen a dramatic increase in China's global
trade surplus - from $25 billion in 2003 to $102 billion in 2005, Net exports
accounted for 12 percent of real GOP growth in 2004, China's overall current
account surplus has also risen sharply, from $17 billion in 2001 to $69 billion in
2004, and estimates for 2005 are near $150 billion, or almost 7 percent of China's
GOP, China's current account surplus is now a major component of global
imbalances, and its continuation risks undermining support for the open trade
policies which have contributed so much to China's development China is now
simply too large to rely on export-led grow1h to pick up the slack when other
sources of growth falter,
Investment
The dependence of Chinese growth on investment is even more striking, In each of
the years since 2001, investment has accounted for more than 60 percent of GOP
growth. Even with the new, revised GOP figures, China's investment is over 40
percent of GOP - significantly higher than other East Asian countries - and that
share is still climbing. The result is an economy that has been skewed too heavily
towards investment, much of it with little return,
Overall productivity growth has fallen since the early 1990s, and increased capital
and labor input, rather than greater productivity, now accounts for the bulk of
China's growth, The heavy dependence of growth on investment raises risks to the
Chinese and global economy. China has a long history of credit-fueled cycles of
investment-led booms and busts, To sustain rapid and stable growth in the future,
China will need more selective and more productive investment. Given China's
current size and integration into the global economy, the next Chinese downturn will
have a global impact, and affect U,S, jobs and prosperity.

Treasury is in frequent and substantive consultations with the Chinese government
on exchange rate and financial market reform issues. Secretary Snow and Finance
Minister Jin convened the 17th Joint Economic Committee (JEC) meeting last
October in Beijing, which covered a wide array of economic policy, financial sector,
and capital markets issues. Over the past few years, we have broadened the JEC
to include a range of senior Chinese and U ,S, financial officials, including the
National Development and Reform Commission (NORC), and China's chief
financial regulators, Treasury also conducted the first meeting of the Sino-U ,S,
Financial Sector Working Group, which brings together U,S, and Chinese financial
regulators at a more technical level. We will host the next session in April.
In 2005, Secretary Snow dispatched a high-level envoy to conduct quiet and
meaningful talks on the three pillars of our strategy, with special focus on exchange
rate flexibility. Next month, Treasury's financial attache, Dave Loevinger, will take
up residence in Beijing, Getting more representatives on the ground, where they
can advocate for U.S, interests, is part of Secretary Snow's initiative to place
Treasury staff in the largest and fastest growing emerging markets, and is included
in the President's FY 2007 budget request.
Two years ago, Secretary Snow launched a Technical Cooperation Program (Tep)
to help the Chinese authorities overcome the technical obstacles they had identified
to greater exchange rate flexibility, Treasury has hosted a number of exchanges,
including training on developing and regulating financial futures markets,
Encouraging China to meet its responsibilities is a global task as it has global
implications, To leverage our own efforts, we have enlisted support from China's
major trading partners particularly through the G-7, APEC, and the IMF,
We believe the most effective way to promote change in China, including on the
exchange rate, is by working in cooperation with our Chinese counterparts. T,here
are several bills in Congress that would close our markets to Chinese goods If
China does not move more on its exchange rate, We do not support those

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Page 3 of6
isolationist approaches. They would damage our economy and not achieve our
shared goals.
In addition, we are reviewing the legislation Chairman Grassley and Senator
Baucus Introduced yesterday and look forward to providing our views on that
legislation once our review is complete.
With this strategy in place, it is useful to take stock now of how China has
responded to the three pillars: greater eXChange rate flexibility, balanced growth,
and reform of China's financial sector.
Three Priority Issues
I. Exchange Rate Policy: Encouraging China to move more rapidly to a more
market-based, flexible exchange rate regime is Treasury's number one priority.
Exchange rate flexibility is in China's interest. Greater exchange rate flexibility will
strengthen the ability of Chinese monetary policy to help assure sustained growth,
avoiding the boom-bust cycles that have characterized Chinese growth to date.
Greater ability to control domestiC interest rates will also lead to more efficient
financial intermediation, and help avoid credit-fueled investment booms and
resulting buildups of non-performing loans. As China's transition to a market
economy proceeds command-and-control tools will lose their effectiveness and
interest rates and other price mechanisms will become more important. Th~ price
signals that come from a flexible exchange rate will be a critical part of readjusting
China's economy to produce more balanced and sustainable growth. Finally, a
more flexible Chinese exchange rate will help address global imbalances,
particularly as it is likely to allow other Asian economies to adopt more flexible
exchange rate regimes.

The Chinese leadershir; has publicly committed to greater exchange rate flexibility.
Despite internal criticism on the pace of market reforms in China, Premier Wen
reaffirmed this commitment in his press conference following the closing of the
National People's Congress on March 14, saying China "will expand the foreign
exchange market and allow more flexibility and fluctuation of the currency."
Our engagement with China on exchange rate policy is not now about "whether" but
about "how quickly." China has made some progress in making its currency more
flexible and market-determined, starting with the adoption of its new exchange rate
mechanism last July. It has gradually allowed more movement and flexibility. It has
authorized inter-bank trading of currency and more participants in the foreign
exchange market. China has also introduced new financial products to hedge
against currency risk, and strengthened its banks and its supervision of the financial
system.
But to date China's progress has been far too cautious. Since China began
changing its exchange rate last July, the RMB has appreciated by only 3.2 percent
and the day-to-day fluctuation has been severely constrained. It has also failed to
test the limits of the current narrow intra-day trading bands. That said, the RMB
continues to be much more stable against the dollar than it is against a tradeweighted basket of the Yen, the euro, and the dollar (the renminbi's nominal
effective exchange rate appreCiated by around 9 percent in 2005). This tight control
over the exchange rate prevents the market incentive needed to develop liquidity
and hedging instruments. And China continues to accumulate foreign exchange
reserves at an excessive pace. China's foreign exchange reserves are almost 600
percent of its short-term debt in 2004, while economists consider 100 percent
coverage prudent. As a result neither China, nor the global economy, has reaped
the benefits of a more flexible exchange rate. The Chinese government must allow
market forces to playa much greater role in the determination of the RMB's value.
The obstacles are no longer technical; China could easily move more rapidly
towards greater flexibility. It should do so now.
LRebc:llancingc;rowth Toward~Moce_Domestic Oemancl: In addition to greater
exchange rate flexibility, sustaining rapid and steady growth I.n the ~htneSe
economy without the buildup of a large external Imbalance Will reqUIre a more
balanced pattern of Chinese growth, With a much greater role for consumption,
which is an estimated 47 percent of GDP under China's revised GDP statistics,
compared to over 60 percent for India, 57 perce~t for Japa.n in the 1960s, and 67
percent for Korea in the 1970s, all periods of rapid growth In those economies.

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Page 4 of6
The counterpart to China's high investment and its current account surplus is a
savings rate of roughly 50 percent of GOP, which may be the highest in the world.
One World Bank study estimated that China's savings rate was 10 percent of GOP
higher than one would predict from China's economic and demographic
characteristics. Chinese households save 25 percent of their income, on average,
mostly in the form of low interest-earning bank deposits. Household saving reflects
a weak social safety net and limited access to financing and insurance; households
need high savings in the event of serious illness, disability, or to pay for children's
education. The "iron rice bowl" of cradle to grave wages and benefits is gone and a
modern social safety net has not yet been erected. Chinese state and private firms
also save heavily - and invest the earnings they have rather than paying out
dividends.
China's leaders recognize the importance of lowering the savings rate and boosting
domestic demand, and achieving more balanced growth is central to current
Chinese policy. To spur domestic demand, China has placed strong emphasis on
consumption and rural development in its most recent Five-Year Plan. To boost
disposable incomes of the rural poor, the government has recently decided to cut
agricultural taxes and eliminate fees for rural primary education. It also plans to
direct more capital and social spending to the rural sector.
There are a number of additional steps that China could take to lower savings and
boost domestic demand. Policies to encourage China's state-owned enterprises to
pay some of their earnings as dividends would reduce their savings and their
inefficient investment, and could contribute to greater social welfare expenditure or
reduced taxes. Strengthening and increasing enrollments in public pension and
health insurance systems, particularly in rural areas, are also important steps.
Increasing the range of financial products available to households is also a critical
component. Household saving could be reduced by insurance policies covering
disability and catastrophic illness, by the ability to finance education and other
major expenses, and by making higher return investment options available to
households, including those overseas.

ill-- FlD~nciaLS~goLRefQrl1J: This brings me to the third pillar of our strategy financial sector and capital markets reform. Inefficient financial intermediation
remains the Achilles heel of the Chinese economy. China's financial institutions
were built as an appendage to the planning system, their funds still go primarily to
state-owned enterprises. The large amount of non-performing loans reflects the
failures of the planning system.
There has been notable progress on banking reform. In the last 18 months, foreig n
strategic investors - including U.S. institutions such as Bank of America and
Citigroup - have invested more than $17 billion in Chinese banks. In addition,
international institutional investors invested around $11 billion in the Hong Kong
IPOs of two of China's five largest banks. On the regulatory front, China has been
tightening its risk classification system for bank loans, deregulating bank lending
rates, and developing financial-sector infrastructure, such as the nationwide credit
bureau launched in January and a deposit insurance system expected later this
year.
China has also undertaken a number of steps to develop its capital markets.
Reforms to reduce the overhang of non-tradable (predominantly governmentowned) shares are moving forward. China expanded the Qualified Foreign
Institutional Investor (QFII) program to allow more access for foreign investors to
companies listed on local stock exchanges and has also launched a separate
program to allow large, long-term strategic investors to purchase local shares
above and beyond the QFII program. U.S. securities companies are also benefiting
from Chinese equity offerings overseas. In 2005, Chinese companies raised more
than $25 billion in equity in Hong Kong alone, and U.S. securities companies (such
as Morgan Stanley, Merrill Lynch, Goldman Sachs, and JP Morgan) were the lead
arrangers for 44 percent of those issuances. Assuming underwriting fees of
between 3 percent and 5 percent, U.S. securities companies earned between $335
million and $560 million in revenue from leading these Chinese equity offerings.
Despite this progress, much needs to be done to improve China's. financial markets.
China's stock markets are still too often viewed as a way to keep ineffiCient state
enterprises afloat rather than as a way to channel capital to the most competitive

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Page 5 of6
firms and sectors and a way to transfer control to more productive owners. Deeper
bond markets would reduce corporate reliance on state-controlled lenders and
more active derivatives trading would allow firms to better manage risk. On the
banking side, the state dominates: government entities own ali but one Chinese
bank, and the central government's "Big 4" banks account for more than half of
financial sector assets. This pervasive state involvement has led to inefficient
allocation of resources and a large build-up of non-performing assets.
To help modernize China's financial system and capital markets, Treasury has
identified a number of priorities. Firs1, we believe it would be in China's best interest
to allow more competition and market forces into the sector, in particular, by
eliminating ownership caps on foreign stakes and expanding the scope of products
they can offer.
Second, China's regulators and firms need to improve capacity for risk
management. This involves better accounting and financial reporting, and
institutions such as an effective nationwide credit bureau accessible to all financial
services providers (including foreign bal1ks and other non-bank financial
companies). An essential component of this effort will be to establish a consolidated
supervisiol1 framework for financial institutions in China.
Third, China needs to improve opportunities for private companies to obtain fil1ance
so that capital can be channeled to its most productive and efficient uses and
support more balanced growth. In the corporate bond market, we have encouraged
the authorities to eliminate duplicative government approvals and move to a more
disclosure-based system. Such a system will require professional institutional
investors and independent, credible credit rating agencies. On the equity market
side, we are arguing for an end to the moratoriums on new listings and sales of
domestic securities companies to foreign investors. Finally, China needs to
continue to privatize its extensive portfolio of state-owned enterprises.
We are also pressing China to make substantial new commitments in financial
services as an essential element of any Doha agreement. Chil1a can open its
financial system to competition by improving its WTO offer to allow 100 percent
foreign ownership of subsidiaries, whether by new investment or acquisition, and
allowing them to perform a full range of securities al1d asset management services.
China's plan to open completely the banking sector to foreign participation by the
end of 2006 is a key WTO commitment and something that Treasury will watch
closely to ensure that regulatory impediments do not undermine China's meeting its
commitment.
Another important area of engagement with China is protecting China's financial
system from abuse. Overall, the U.S. has been favorably impressed by the political
commitment to anti-money laundering and countering the financing of terrorism
(AMLlCFT) issues demonstrated by Chinese authorities. The U.S. is working in
cooperation with the Chinese financial authorities to update their current legal
provisions and improve regulations in their final1cial sector to combat money
laundering and terrorist financing. These continued efforts will help reduce fraud
and tax evasion, and help improve Chinese banks' access to other markets. We
have been working closely - bilaterally and multilaterally - with the Chinese
authorities on these issues in order to ensure that China joins the global community
in adopting and implementing the international standards to combat money
laundering and terrorist financing.
China must strengthen its draft AML law, as it falls short in some key areas, such as
its definitions of money laundering offences and rules for financial il1stitutions to
identify the beneficial owners of accounts.
Finally, let me address the concern of some members of this committee regarding
China's holdings of Treasury securities. Chinese holdings are 3.2 percent of the
$8.2 trillion in total public debt outstanding, or 6.6 percent of the $4.0 trillion in total
privately held public debt outstanding. China has purchased around $34 billion in
Treasury securities in 2005. This is in the context of the extraordinarily deep and
liquid Treasury market where daily turnover exceeds $500 billion. China holds only
about $470 billion, or 2 percent, of a total of $23 trillion in U.S. credit market debt
securities.
Conclusion

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China continues to undergo a historic economic transformation. Developing a
constructive and mutually-beneficial economic relationship with China now is vitally
important since the decisions we take in the next few years will guide the U.S.China relationship over the next generation - and the shape and pace of global
growth for years to come. As a significant member and beneficiary of the
international economy, China should make a greater contribution to sustaining
strong global growth by reducing its large current account surplus and working to
maintain global support for open trade and investment. To put it simply, China must
play be the rules of the system. Failure to do so entails consequences both for
China and for the global economy. It is important that we manage our relations in a
way that preserves global growth and maintains an open trade and investment
policy, which is a "win-win" proposition for both economies. The U.S. Treasury is
committed to promoting a path of mutual prosperity and global leadership in our
economic relations with China.
Thank you for this opportunity to appear before the Committee. I am happy to take
your questions.

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Page 1 of 1

PRESS ROOM

March 29, 2006
JS-4140

Treasury Designates Series I Savings Bonds as
Gulf Coast Recovery Bonds
Treasury is designating Series I inflation-indexed
savings bonds purchased through financial institutions
as "Gulf Coast Recovery Bonds" to help encourage
public support for the ongoing recovery and rebuilding efforts in those areas
devastated by Hurricanes Katrina, Rita and Wilma. Beginning, today, March 29,
through December 2006 paper Series I saving bonds will be specially inscribed with
the legend "Gulf Coast Recovery Bond."
The Gulf Opportunity Zone Act of 2005 contained a provision sponsored by Rep.
Hal Rogers of Kentucky encouraging Treasury to make this designation. "We've
seen an amazing outpouring of generosity from all across the nation to our fellow
citizens affected by the storms," said Treasury Secretary John W. Snow. "The Gulf
Coast Recovery Bond deSignation symbolizes the efforts of our nation's citizens
and their government to rebuild communities along the Gulf coast."
Treasury's inflation-indexed I bonds are designed to offer all Americans a way to
save that protects the purchasing power of their investment by assuring them a
fixed rate of return above inflation for as long as 30 years. I bonds with issue dates
from November 2005 through April 2006 have a rate of 6.73% per year,
compounded semiannually, for the first six months. The rate is a combination of a 1
percent fixed rate with an annualized inflation rate of 5.70 %. They are sold in
electronic form in amounts of $25 and above or in paper form at face value in
denominations of $50, $75, $100, $200, $500. $1,000, $5,000, and $10,000, and
earn interest for as long as 30 years. The special designation applies only to paper
bonds.
I bond earnings are added monthly and interest is compounded semiannually. They
are state and local income tax exempt, and Federal income tax on I bond earnings
can be deferred until the bonds are cashed or they stop earning interest after 30
years. Investors cashing I bonds before five years are subject to a 3-month
earnings penalty.

LINKS
•

click here for more information on Gulf Coast Recovery Bonds

nttp://treas.gov/press/releases/is 4140.htn

3/31/2006

Gulf CoUl Recoyer}' Bonds

Page 1 of 1

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Gulf Coast Recovery Bonds
Starting March 29, 2006, the Series] savings bonds you buy through
financial institutions will be inscribed with the legend "Gulf Coast
Recovery Bond." I Bonds get this designation to encourage continued
public support for ongoing recovery efforts in the region severely
damaged by hurricanes. The Gulf Opportunity Zone Act of 2005 contained
a provision encouraging Treasury to make this designation. Please follow
the links below for more information about Gulf Coast Recovery Bonds.

Gulf Coast p'ccovery- Bond Q&A

What does theC;tJlf Coast Reco,{ery Bond look like?
"1y Accollnts I Treasury PrQcllicts I RcsC'an:;}l CQ.ntcr I PL:lrlnjng & Giving I Hgip
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~ttp:l/WWw.treasUrydirect.govlInd!vlreseorch/indepth/ibonds/gulfcoastrecoverybonds.htm

3/31/2006

Page 1 of 1

PRESS ROOM

March 28, 2006
JS-4141

Statement of Treasury Secretary John W. Snow
On the Conference Board's Consumer
Confidence Index
'Today's news that consumer confidence in the U.S. economy is at the highest level
in almost four years is very good to see, and it bodes well for good, strong job
creation in the coming months.
"This level of confidence reflects the buoyancy that job creation and wage gains are
giving to the American people. With lower taxes on income and investment having
led to strong growth and improved standards of living, there can be no doubt that
the economy is heading in the right direction, and so it is not surprising to see
consumer confidence at this level.
"With so much evidence that the President's economic policies are working, now
would be the wrong time to stray from those policies. Lower tax rates, especially on
investment, lie at the heart of this strong expansion. The record is clear; now
Congress needs to act to extend the tax relief and make it permanent."

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PRESS ROOM

March 28, 2006
JS-4142
Treasury Names New Financial Attache in Iraq

Treasury announced today that it is appointing Jeremiah S. Pam as the
Department's Financial Attache in Iraq. Pam will work closely with the U.S.
Embassy in Baghdad on financial, reconstruction, economic reform and institutionbuilding issues and serve as the U.S. Treasury's representative in Iraq upon taking
up the post in mid-spring.
Pam will succeed Kevin Taecker who has served as Treasury's attache in Baghdad
since July of 2004.
Pam has recently worked as a lawyer at Cleary Gottlieb Steen & Hamilton LLP in
New York, where he specializod in sovereign debt restructuring and international
finance. During 2003 and early 2004, Pam advised the international consortium of
banks selected to restart trade finance in Iraq in conjunction with the Trade Bank of
Iraq. From July 2004 through this month, Pam advised the Ministry of Finance of
Iraq and the Central Bank of Iraq on all aspects of the restructuring of Iraq's
approximately $130 billion in external debt. In that capacity, he played an important
role in the historic debt relief agreement reached with the Paris Club of creditor
countries in November 2004, in multiple successful commercial restructuring offers
in 2005 and early 2006 and in the ongoing negotiations with some 30 other creditor
countries of bilateral agreements providing debt relief on terms at least comparable
to those of the Paris Club agreement.
During 2005, Pam was also a visiting lecturer in law at Yale Law School, where he
co-taught the course on international business transactions.
Pam served as an officer in the U.S. Air Force from 1993 to 1997 and in 1997 he
also served as a desk officer at the U.S. National Security Council.
Pam earned a J.D. degree and a Parker School Certificate in International and
Comparative Law from Columbia University School of Law in 2000, and he received
an M.A. degree in Political SCience from Columbia University in 1996. Pam
received an A.B. degree in Social Studies from Harvard College in 1991. Pam is a
member of the Bar of the State of New York and the Association of the Bar of the
City of New York and is a term member of the Council on Foreign Relations.

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PRESS ROOM

March 30, 2006
JS-4143

The Honorable John W. Snow
Prepared Remarks
Edison Electric Institute Board of Directors
Good morning. Thanks for having me here - I appreciate the invitation from your
President, Tom Kuhn. It's a pleasure to have the chance to speak to this group of
leaders because you are doing business at the intersection of so many of tOday's
most important economic issues.
I'm particularly concerned these days about enacting policy changes that would
prompt companies from other countries to scale back or pull back their investments
in the United States.
America is, and must remain, open for foreign investment. We attract an enormous
amount of foreign investment every year and it helps our economy, it helps job
creation. Indeed, 5.3 million U.S. workers alone are directly employed by U.S.
affiliates of international companies. These tend to be well-paying jobs, too.
International companies support an annual U.S. payroll of $318 billion, with the
salary for employees averaging nearly $60,000. And this doesn't count the
multiplier effect as all that spending moves through other businesses in local
communities.
I visited a company in Hagerstown, Maryland last week that was a case-study in the
importance of investment from abroad. It was a truck engine manufacturing facility
that was purchased by Volvo - a Swedish truck manufacturer - in 1999 to produce
the Volvo product in conjunction with the Mack truck engines that were already
being produced. Volvo retained the facility's highly-skilled local workers and has
since invested $150 million to upgrade the facility and construct a state-of-the-art
Engine Development Laboratory that employs hundreds of engineers who work on
more advanced, cleaner-running engines.
The chief executive of Volvo's Mack unit put it best when he said, Simply: "Mack
could not exist as a North American-only company." Volvo's takeover, he said, was
"mandatory for us."
We want the employees of companies like Mack to continue to have the
opportunities that global investment offer. That means we want to continue to make
America the best place in the world to invest.
Again, the people in this room appreciate what I'm talking about because you
yourselves are dedicated to working with the groups from your industry all over the
world. You are keenly aware of how small the world has become and how great the
opportunities offered by international business activity are.
I want to outline a few more issues that impact our economy, and the work the
Administration is doing to address them, but it's important to first note how very well
the American economy is doing. We'll have to work hard to keep it on this path, but
the good news is that it's got a full head of steam and is creating jobs and raising
living standards for millions of Americans.
I really can't say this often enough: tax cuts work. In the case of the President's jobs
and growth tax initiatives, the impact has been undeniably positive, proving that
President Bush is a very good steward of the U.S. economy. The facts are clear:
Nearly five million new jobs have been created in the past three years - two million
of them in the last year alone. Unemployment is at a very low rate of 4.8 percent -

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Page 2 of3
that's lower than the average for the 1970s, 1980s and 1990s. We found out
yesterday that consumer confidence in the U.S economy is at the highest level in
almost four years, and that bodes well for good, strong economic growth and job
creation in the coming months.
In short, there is much for both the American worker and the American employer to
be proud of.
Well-timed tax relief, combined with responsible leadership from the Federal
Reserve Board, clearly created an environment in which businesses
entrepreneurs, and workers could bring our economy back from its ~eakened state
of just a few years ago. What's important going forward is that we preserve the
policies that will sustain U.S. economic strength for future generations.
An under-reported fact is how much tax relief encouraged investment, which is so
important because investment has ultimately led to job growth. Those who call for a
tax increase on capital gains and dividends are, in my opinion, playing Russian
roulette with our economic strength. As virtually all main-stream economists will tell
you, higher tax rates actually create dead-weight losses by reducing economic
output. Put more bluntly, you always get less of what you tax, and we don't want
less investment and job creation.
Another aspect of tax relief that I think is important to touch on here today since it is
often on the minds of American taxpayers, in particular families and small
businesses, is the estate tax, the death tax. This tax is Without a doubt one of the
larger undue burdens weighing on taxpayers today. And I want to make it clear that
Congress needs to pass legislation that permanently repeals the death tax, without
compromise. As a matter of good tax policy, we should always avoid taxing income
more than once.
Of course, the President understands all this and he won't accept any tax
increases, period.
I know that I'm 'preaching to the choir' on this pOint, and I appreciate how much
work this group has done to champion the cause of lower rates on investment.
Your steadfast support has rewarded the American economy and the American
workforce. In the past two years, the economy has generated more than 170,000
jobs per month, and that includes the two-month slOWdown in job growth in the
aftermath of Hurricanes Katrina and Rita. In the past 32 years, new claims for
unemployment insurance have almost never been as low as they have been so far
this year.
Good, steady job growth is no surprise, given that GDP growth was a strong 3.5
percent last year. Private forecasters, like the National Association for Business
Economics and others, Clre expecting very strong growth to continue this quarter.
It has been a long time since I've been asked about a "double dip" or a "jobless
recovery," A more recent criticism has been that income and wealth gains are
uneven, and that average Americans are somehow not better off.
Well, the answer to the question of whether Americans today have more money in
their pockets is, unequivocally, yes. Yet again, we are able to prove the critics
wrong. Federal Reserve data shows that median family income is picking up. We
can see, when we compare wages at this point in the business cycle with the same
point in the last business cycle, that we're doing better during this recovery. We are
at a point in this recovery where it is reasonable to expect real labor earnings to
rise.
We are, it appears, at the tipping point on returns to labor - when incomes rise for
workers and business combined, but workers once again increase their incomes
faster than businesses. Once businesses have been doing well for a while - which
I'm sure you can confirm first hand--they ultimately compete those increases in
income away by competing harder for labor. The result IS higher wages and higher
standards of living for workers.

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Given the trends that we are seeing, the strength of the economic recovery and the
underlying strong fundamentals of our economy, I'm confident that median income
will eclipse the previous peak before the end of this Administration.
So a continuation of lower tax rates is critical. But there are so many policies that
impact the economy, and we must be mindful of doing the right thing on each one.
One more economic issue that I want to point to before I take your questions relates
directly to your industry, and that's the importance of innovation and technology,
particularly when it comes to energy. In his State of the Union Address, President
Bush pointed out that the best way to break America's dependence on foreign
sources of energy is through new technology. There's a national security
component to this as well a critical economic one, and I can tell you it's good to
have the leadership of Sam Bodman - a former Deputy Secretary at the Treasury on these efforts.
The President knows that accelerating research in clean coal technologies, clean
and safe nuclear energy, and revolutionary solar and wind technologies will reduce
overall demand for natural gas and lead to lower energy costs, so his Advanced
Energy Initiative proposes speeding up research in those areas
President Bush also knows that we are on the verge of dramatic improvements in
how we power our automobiles, so he wants to accelerate the development of
domestic, renewable alternatives to gasoline and diesel fuels.
As you know, at Treasury we help to encourage good energy practices through tax
credits. For example, as part of the energy bill passed last year, Treasury is proud
to offer tax credits to homebuilders to build energy-efficient homes, homeowners
who improve the energy efficiency of existing homes and individuals who purchase
vehicles that utilize hybrid technology.
We had a wonderful event with a weatherization expert from Dominion down in
Richmond at the end of February, where we actually visited with a homeowner to
discuss ways they could improve their energy efficiency and qualify for a tax credit.
I appreciated Tom Farrell's invitation for that event - thanks, Tom - it really
showcased the impact that individual families can have on energy conservation.
The President understands, and I understand, that government can and should
encourage innovation, but it is business, entrepreneurs, and individuals who must
and will take the lead. I know your industry is dedicated to innovation, and I
appreciate the work that you are doing today to have a more energy-independent
future for America.
The involvement of the electric industry in all of the efforts I've discussed today is
critical. I encourage you to keep up a dynamic dialog with both Congress and the
Administration.
Once again, I appreciate the chance to meet with you all today; I'd be happy to take
your questions.

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PRESS ROOM

March 30, 2006
JS-4144

Swiss Company, Individual Designated by
Treasury for Supporting North Korean WMD
Proliferation
The U.S. Department of the Treasury today added a Swiss company and individual
to its list of designees supporting the proliferation of weapons of mass destruction
(WMO). Kohas AG and Jakob Steiger were designated pursuant to Executive Order
13382, an authority aimed atfreezing the assets of WMD proliferators and their
supporters.
"North Korea's efforts to build and sell weapons of mass destruction depend on a
vast network, the reach of which extends beyond Asia," said Stuart Levey,
Treasury's Under Secretary for Terrorism and Financial Intelligence (TFI). "The
Treasury will continue to track and combat this network aggressively to exclude
North Korea's illicit activity from the financial system."
Kohas AG is an industrial supply wholesaler located in Switzerland that is named
today for its ties to Korea Ryonbong General Corporation, which was designated by
President Bush in the annex of E.O. 13382 on June 29, 2005. Nearly half of Kohas
AG's shares are owned by a subsidiary of Korea Ryonbong General Corporation
known as Korea Ryongwang Trading Corporation, which was previously designated
by the Treasury on October 21,2005. Jakob Steiger, a Swiss national, is the
president of Kohas AG and owns the remainder of the company's shares.
Kohas AG acts as a technology broker in Europe for the North Korean military and
has procured goods with weapons-related applications. Kohas AG and Jakob
Steiger have been involved in activities of proliferation concern on behalf of North
Korea since the company's founding in the late 1980s.
Today's action prohibits transactions between the designees and any U.S. person
and freezes any assets the designees may have under U.S. jurisdiction.

Today's action builds on President Bush's issuance of E.O. 13382 on June 29,
2005. Recognizing the need for additional tools to combat the proliferation of WM 0,
the President signed the E.O. authorizing the imposition of strong financial
sanctions against not only WMD proliferators, but also entities and individuals
providing support or services to them. The E.O. carried with it an annex that
deSignated eight entities operating in North Korea, Iran, and Syria for their support
of WMD proliferation. The President at that time also authorized the Secretaries of
Treasury and State to designate additional entities and individuals.
Since the issuance of E.O. 13382, the Treasury has designated an additional 10
individuals and entities tied to North Korea proliferation and two Iranian entities
facilitating proliferation.
The designations announced today are part of the ongoing interagency effort by the
United States Government to combat WMO trafficking by blocking the property of
entities and individuals that engage in proliferation activities and their support
networks.

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PRESS ROOM

March 30, 2006
JS-4145
Treasury Secretary Snow to Visit Western North Carolina to Discuss
Education & Innovation
U.S. Treasury Secretary John W. Snow will travel to Western, North Carolina to
discuss the important role America's Community Colleges play in keeping the
economy strong and the strength of the economy in Western, North Carolina based
on the innovative companies in the area. While in North Carolina, Treasury
Secretary Snow will participate in a roundtable discussion at Blue Ridge Community
College and tour the SELEE Corporation facility. The following events are open to
credentialed media:
WHO
U.S. Treasury Secretary John W. Snow
WHAT
Roundtable Discussion and Tour of Blue Ridge Community College
WHEN
Friday, March 31,10:30 a.m. (EST)
WHERE
Blue Ridge Community College
180 West Campus Drive
Flat Rock, NC
NOTE
Media must RSVP to Lee Anna Haney at (828) 243-1534

***

WHO
U.S. Treasury Secretary John W. Snow
WHAT
Tour of SELEE Facility
WHEN
Friday, March 31,1:00 p.m. (EST)
WHERE
SELEE Corporation I Porvair Advanced Materials
700 Shepherd Street
Hendersonville, NC
NOTE
There will be a press availability immediately following the tour. Media must RSVP
to Anison Knaperek at (828) 694-3306

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PRESS ROOM

March 30, 2006
js-4146
World Airways Repays ATSB Guaranteed Loan

The Air Transportation Stabilization Board (ATSB) announced today that World
Airways has fully repaid the remaining balance of its ATSB-guaranteed loan of $30
million, which was made on December 30,2003. The loan was backed by a $27
million guarantee issued under the Air Transportation Safety and System
Stabilization Act. The remaining balance on the loan at the time it was paid off was
$24 million; the guaranteed portion was $21.6 million.
The ATSB now has no outstanding loan guarantees. The Board has a direct loan of
$86 million to ATA Airlmes as a result of the airline's bankruptcy. During ATA's
bankruptcy, the ATSB's loan guarantee was called by the lenders and paid by the
Board. The ATSB's resulting secured claim was reinstated as a direct loan on the
company's exit from bankruptcy last month. In addition, the Board is continuing to
explore the sale of its remaining warrants in Frontier Airlines and World Airways.
-30-

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PRESS ROOM

March 31, 2006
JS-4147
Assistant Secretary Lowery to Travel to Brazil

Assistant Secretary for International Affairs Clay Lowery will travel to Brazil this
weekend to lead the Treasury delegation at the Annual Meeting of the InterAmerican Development Bank in Bela Horizonte.
Following the lOB meetings, Lowery will travel to Sao Paulo to deliver a speech on
reducing poverty in Latin America. In Sao Paulo, Lowery will also meet with
business leaders, infrastructure investors, bankers and micro-entrepreneurs to
discuss how to accelerate economic growth and poverty reduction. He will tour a
Sao Paulo neighborhood to see how innovative anti-poverty programs are
improving the lives of Brazil's poor and expanding opportunity for the next
generation.
The following events are open to media:
Who
Assistant Secretary for International Affairs Clay Lowery
What
Press Conference
When
Monday, April 3, 2 p.m. (Local Time)
Where
Expominas Convention Center
Belo Horizonte
Who
Assistant Secretary for International Affairs Clay Lowery
What
Speech on Poverty Reduction
When
Tuesday, April 4. 11 :30 a.m. (Local Time)
Where
Fundagao Getulio Vargas (FGV). Salao Nobre
Av. 9 de Julho, 2029
Bela Vista - Sao Paulo
Who
Assistant Secretary for International Affairs Clay Lowery
What
Site Visit to Tiradentes Neighborhood
When
Tuesday, April 4, 3:30 p.m. (Local Time)
Where
Cidade Tiradentes City Offices
Estrada do Iguatemi, 2751
Sao Paulo

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Page 1 of 1

PRESS ROOM

March 31 , 2006

JS-4148
Treasury Secretary Visits North Carolina
to Discuss Worker Training, Energy Technology

Henderson County, N.C. - United States Treasury Secretary John Snow will be
in Hender~on County, N.~. today to visit a local community college and a company
that IS an Industry leader In fuel cell technology, an alternative energy source.
"As Treasury Secretary, I'm dedicated to sustaining the strength of the U.S.
economy for future generations. Worker training and innovative energy solutions
are two critical components of that ongoing effort," Snow said.
At Blue Ridge Community College, Snow will receive a tour of the campus and talk
with college leaders and community partners. "Community colleges are playing a
critical role today because while the outstanding American workforce drives our
economy, workers will always need to adapt their skills to compete in what's
becoming, more and more, a global economy," Snow said. He cited a recent
Department of Labor study that showed 90 percent of the fastest growing jobs in
our economy require education beyond high school. "It is clear that job training is
essential, but we also know that it is meaningless unless it is for jobs that actually
exist. That means the priority must be job-training programs that are flexible and
work with local employers and community leaders to meet the demands of both the
local workplace and the global economy. That's precisely what Community
Colleges offer, in an efficient and low-cost way."
By reforming job training programs and supporting community colleges, the
Administration is helping workers improve their lives and ensuring that America
remains the world's leading land of opporlunity. The Administration's commitment to
community colleges is illustrated in the Community-Based Job Training Grants
program, administered by the U.S. Department of Labor, that are designed to
provide job training in high-growth industries. This commitment has been supported
by $125 million in 2005 and 2006 for the program to provide training for 100,000
workers. The President's Fiscal Year 2007 budget supports these efforts with a
$150 million request, which would provide training for 160,000 workers.
Snow's visit to SELEE Corporation will include a tour of the facilities and a
roundtable with area business leaders. SELEE is a technical ceramics firm that
reinvests approximately half of company profits in fuel cell technology. "America
needs to be focused on having alternative energy resources for the future," Snow
said. "The potential for hydrogen-powered fuel cells to power vehicles, homes and
businesses with no pollution or greenhouse gases is tremendous, and it is
important to the U.S. from environmental, economic and national security
perspectives. That's why the President is dedicated to promoting the development
of commercially-viable cells, announcing in his State of the Union Address a $1.2
billion Hydrogen Fuel Initiative aimed at developing the technology for hydrogen
fuel cells."
Snow went on to say that "The work being done at SELEE is a wonderful example
of how innovation and technology will lead us to a new day of reduced reliance on
foreign sources of energy. Clean, efficient alternative sources of energy for our
vehicles, homes and businesses are of vital importance to America's ability to
remain competitive and safe, and those energy sources will be developed and
produced by American scientists and entrepreneurs like those at SELEE."

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PRESS ROOM

March 31, 2006
JS-4149
Treasury Assistant Secretary to Hold Weekly Press Briefing

Treasury Assistant Secretary for Public Affairs Tony Fratto will hold the weekly
media briefing on Monday, April 3 in Treasury's Media Room. The event is open to
all credentialed media.

Who
Assistant Secretary for Public Affairs Tony Fratto
What
Weekly Briefing to the Press
When
Monday, April 3, 11 :15 AM (EST)
Where
Treasury Department
Media Room (Room 4121)
1500 Pennsylvania Ave., NW
Washington, DC
Note
Media without Treasury press credentials should contact Frances Anderson at
(202) 622-2960, or frcmce~.~QdeL"OIJ@QPlrei:'lli.9Qv with the following information:
name, Social Security number, and date of birth.

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PRESS ROOM

March 31. 2006
JS-4150
Remarks of
Treasury Under Secretary for Domestic Finance
Randal Quarles
to the Hinckley Institute University of Utah

Salt lake City. UT-Thank you Kirk [Jowers] for that introduction. It is a pleasure to
be here in Utah. this morning. and a particular pleasure to be at the University of
Utah and the Hinckley Institute. which do so much to foster the informed debate
that is cruCial to the development of intelligent public policy. I hope our discussion
here this morning is a useful contribution to that effort
The topic Kirk suggested I might address this morning was "Tax CUts. LJeficits. and
the Economy". so let me begin where you would expect - with a tour of the
headquarters building of the Organization of Arab Petroleum Exporting Countries. I
happened to find myself in Kuwait City last week at the end of a long day of
meetings and - having a little down time before our flight to Abu Dhabi - we had
arranged for a lour of this famous building, which is a showplace designed to
display the history and culture of the Arab world not only in the interior exhibits but
in the exotic marbles and rare woods of the structure itself. Every stone and
moulding told a story. and OAPEC had graciously agreed to provide a guide to help
us decipher and understand it.
Interestingly, however, when we arrived at the entrance plaza the guide they had
for us was not the architect, nor was it a cultural historian nor an anthropologist nor
a curator nor even an expert in comparative politics. Instead. they had chosen to
have us taken through the building by the building's ... engineer And so. as we
toured this exotic and evocative architectural monument, we learned in minute
detail abollt the operation of the hydraulic apparatus. the cleverly concealed air
conditioning vents, the souild system. the security cameras. and the back-up
power. When we looked at the exquisite screens ot Tunisian plaster work, we talked
about the utility closets hidden behind them, and when we examined the elaborate
walls of Moroccan mosaics, we talked about the grout. Essentially, we were on a
tour of the plumbing
And it struck me that this was a reasonably good metaphor for an increasingly
prominent thread in the political debate over economic policy in this country right
now.
In the ordinary course, we might expect the focus of economic debate to be on the
performance of the real economy and the ways in which that performance might be
improved - the equivalent of a building's architecture. Instead, our debate is
increasingly not about economics, but about finance - not about our policy choices.
but about the ways we have chosen to fund those choices - and finance is not
architecture. It is plumbing. but without the human drama. A nation in which the
ticket agent printing my boarding pass notices my Treasury 10 and wants to ask not about the unemployment rate, or our economic productivity, or disposable
income - but about our national debt as a percentage of GOP. or where the cab
driver bringing me in from the airport Wednesday night wants to discuss the
unsustainability of our current account deficit. is a nation obsessed with plumbing.
I don't want to deny the importance of finance - it's how I make my living these
days. dry and tecllnical though it may be - and there are times when questions of
finance might quite appropriately take priority over the more fundamental questions
of economic policy, Just as plumbing might clearly be the thing to focus on If the

Page 2 of6

dining room is standing in an inc'l of water. I do not, however, think we are in such
times. and thus this current obsession with finance is misguided. In the time I have
this morning I hope to make that case.
FirsUet's look at OLir economic performance - the "architecture", if you will, that we
are diSCUSSing. By any measure, economic performance in the United States IS
quite strong, and looks set to continue so for a good while. Gross domestic product
grew 3.5% last year - well above our historical average over the last 20 years of
right around 3%. and particularly strong when compared with GOP growth in other
developed economies Germany (1.1 %). France (1.5%), Italy (0%), UK (1.8%).
Virtually every observer forecasts similarly strong growth in the United States to
continue. The President's budget projects a 3.4% growth rate for the current fiscal
year, and many private sector forecasters project an even stronger rate.
What is more. the drivers of this economic growth are solidly diverse. Productivity
growth remains very strong. Output per hour in the non-farm bUSiness sector has
risen at an average annual rate of 3.2 percent since 2001. faster than any five-year
period in the 1970s, 1980s. or 1990s. And while high levels of productivity growth
can sometimes Imply low levels of job creation, IIlat does not seem to be the case
currently. Unemployment IS down to 4.8%, again running lower than the 70s, 80s,
and 90s. The economy has created almost 5 million new jobs since May of 2003:
two million of them in the last year alone. more :han all the rest of the G7 combined.
Real disposable Incomes have risen 2.2 percent over the past 12 months, and
Since 2001 real after-tax ncome per person has risen 8.2 percent, providing
continued support for consumer spending. And according to the Federal Reserve,
over the past 12 months total industrial production rose 3.1 percent, and
manufacturing industria I production rose 4.5 percent, including 0.7 percent in
January - the 33rd consecutive month of growth in manufacturing activity.
This robust economic performance is reflected not just in income flows, but in asset
values as well. Real household net worth is at an all-time high of $51.1 trillion,
home ownerShip IS at 70%, another ail-time high, and the median net worth of
American households rose 1.5 percent between 2001 and 2004. And these asset
values are neither being driven nor eroded by inflation: core inflation is a little over
2%, well below our 20-year average of a little over 3%.
All in all. an impressive and encouraging picture. Yet it is one that is rarely
discussed in any detail. because our economic debate has come to take these
outcomes for granted and to focus instead on what are sometimes quite technical
questions of domestic and international finance. It has become common to hear
that our economic performance has been generated at the cost of our financial
health, or even that our financing practices are already impeding economic
progress. In the language of the metaphor that I am beating to death with a stick
this morning, the critics argue that the house mayor may not be attractive, but that
It is fundamentally unlivable because the drains don't work.
What are some of these critiCisms? Let's begin with what is probably the most
common concern expressed about the federal government's finances the sheer
size of the debt Federal debt held by the publiC now totals over $4.2 trillion, up from
$3 trillion at the end of the Clinton administration, and almost 6 times the roughly
$700 billion outstanding at the outset of the Reagan adrninistration 25 years ago.
Stated that way, the situation certainly sounds alarming. But the absolute size of
any debtor's obligations - whether that debtor is an individual, a corporation, or the
federal government - tells us very little without looking at the ability of that debtor to
service its obligations. One measure of that ability is to compare the size of the debt
to total GOP, just as an individual might compare the size of his debt to his total
income to see if he has a financing problem. At the end of FY 2005, debt held by
the public amounted to 37% of GOP. This ratio is significantly lower than the
average of 47% for the 1990s and has remained fairly stable since the Bush
Administration took office, ranging from 33% to 37%.
Another way of evaluating the country's debt burden is to calculate interest costs on
the debt as a percentage of GOP, again just as an indiVidual might compare hiS
annual payments on his debts to his annual income to determine If he can afford

Page 3 of6

them. In FY 2005, interest expense represented just 1.5 percent of GOP, well below
the 3% average of the 1990s. In fact, the average interest expense ratio since FY
2001 has been at the lowest level in more than 25 years. That expense has risen
somewhat as monetary policy has tightened and short-term interest rates have
risen. But we have a lot of headroom - we could double the interest expense of
2005 before returning to the 1990s average, and even then we would still be well
below the average of the 1980s
We can put our debt burden In further context by comparing it to that of other
countries. Even if our debt seellls reasonable compared to our own historical
practice, are we in a substantially worse fiscal position than other countries of the
developed world? To make that comparison, we need to calculate not just the
federal debt burden, but those of the states as well, given that international
statistics are generally kept for countries as a whole. Adding in the states, our net
government debt is roughly 46% of GOP. This is almost a third less than the
average of 66% for the rest of the G7, and modest compared to Italy's 106% or
Japan's 93%.
So it would appear hard to argue that our debt is currently an unsustainable burden
of any sort. It is in fact relatively modest compared to the country's GOP, compared
to our capacity to service the interest, compared to our own historical practice, and
compared to the rest of the world's advanced economies.
But this brings us to a second concern that is commonly expressed. Perhaps the
debt is not currently an excessive burden -- but have our financing practices put it
on a dangerous path? We have run a budget deficit for each of the last 4 years, and
we are projecting to run a deficit for an additional 4 years. We are currently
projecting a deficit of $423 billion for FY 2006, one of the largest dollar figures in
history. We finance these deficits by borrowing from the public, and won't borrowing
at this rate cause the total debt to become an excessive burden relatively quickly?
In evaluating the consequences of the deficit, the first place to begin is with the
stock of debt. Obviously, the implications of adding to the debt stock by running a
deficit are different if that stock is quite high when the country begins to run the
deficit than if the stock is quite low. As we have just seen, the US total stock of debt
was moderate when the country most recently began to run a deficit and has
remained moderate throughout thiS period. This suggests that running a moderate
and contained deficit for a specified period is unlikely to materially affect our terms
of financing or otherwise create a financing problem.
Another obvious factor determining how likely a series of deficits is to create a
financing problem is how large those deficits are as a share of the economy. The
40-year histOrical average of the deficit as a share of GOP is 2.3%. Last year our
deficit was 2.6% of GOP, well within historical norms and substantially below the
3.5% growth rate in GOP itself. So the defic,t is making only relatively modest
additions to the total stock of debt as a share of GOP. In fact. as I indicated earlier,
that share has not increased by more than 4 percentage points since January of
2001.
Finally, the likelihood of a deficit to create a financing problem depends very much
on the trend in the deficit itself. Is it projected to be constant or even to grow? Or is
it reasonably projected to shrink substantially over the near term? If the former,
investors might well incorporate the expected effects of future fiscal deterioration
into the current terms of financing. If the latter, then the deficit would be unlikely to
have a substantial finanCing consequence since its contribution to the future fiscal
outlook would be limited.
It is for that reason that the administration in 2004 articulated a program of shrinking
the deficit in half as a percentage of GOP over the following five years. Oebt as a
percentage of GOP was projected to be 4.2% in the year this objective was set oul,
and thus the aim was to reduce the deficit to 2.1% of GOP by 2009. in fact. the
administration is ahead of schedule in meeting this objective: the 2004 deficit, which
had been projected at over $477 billion in fact came in at only 3.6% of G~P and last
year's deficit at only 2,6%. We currently project that the defiCit Will be 1410 of GOP
in 2009, substantially lower than the 2.1 % goal.

Page 4 of6
It is important to note that this improvement In our deficit position is being driven not
simply by expenditure control. though that is important - the President's current
budget proposal. for example. would limit overall discretionary expenditure
increases. including defense and homeland security. to below the rate of inflation
and would actually reduce the amount of non-defense. non-security dlsr.retion8ry
expenditure - but IS also being driven by an increase in government revenue. Often.
we hear the concern expressed that our tax framework - and particularly the tax
cuts of 2001 and 2003 - have starved the federal government of customary
receipts. and this has resulted in the current period of deficits.
In fact, however. goverrment revenues have been increasing strongly. Net receipts
grew 5% In 2004. but then 15% in 2005 - the largest percentage Increase in history.
And this is not merely a "percentage" phenomenon: total quarterly tax payments in
June of 2005 were the largest amounts received in the history of the country. until
the September quarterly tax date when that record was broken, a record that lasted
until December when it was broken again The Treasury received roughly $2.2
trillion In taxes in FY 2005. the largest amount ever. And this was not a one-year
event. For the first five months of FY 2006 revenue has grown at 10.3%. Corporate
taxes are up 30% so far thiS year. while individual income tax payments have
increased over 10% through February. Revenue increases at almost 3 times the
rate of inflation. and a revenue to GOP ratio of 18% (in line With the average for the
19905 and somewhat higher than the average for almost any other period of the
country'S history since World War II), indicate that this is not a question of a tax
regime that is starving the government of resources.
But if the level of our debt is on the low(ish) end of most relevant measures and
fairly stable. and the level of our budget deficit is moderate as a share of GOP and
trending downward. and the level of government revenue is on the high(lsh) end of
historical averages and rising. are there other concerns that explain this distress
about our financial position? The last commonly expressed concern that I will
discuss this morning is the view that the United States - not merely the government
but the country as a whole - IS relying too heavily on foreign capital to finance its
activity. We may indeed have a s,rong economy generating a wealth of investment
opportunities. but as a nation we refuse to provide enough savings to fund those
opportunities. This difference between national savings and investment is
equivalent to the current account deficit and it has grown steadily over the last 9
years to reach over 7% of GOP. This is a high figure. and by most rules of thumb a
country running that high of a current account deficit is In Immediate risk of a
marked reduction in the willingness of outside r.apital to continue funding activity in
the country. If such a reduction happens abruptly. the sudden change in financing
conditions can be quite disruptive. and have serious effects on the level of real
economic activity
There are a number of reasons to believe. however. that the United States is
capable of maintaining a sizable current account deficit for a much longer period
than most other countries. and thus that the current financing situation does not
pose a near or medium term risk to the US economy First, since the risk of a
sustained current account deficit is in the accumulation of net external liabilities to a
level that foreign creditors are no longer willing to allow to increase, it is important to
look at the current level of those liabilities. Just as a budget deficit can be run for a
longer period if it begins when the stock of debt is low. so for a current account
deficit. The net external liabilities of the US were quite low relative to the size of the
economy when the existing period of current account deficits began in 1995. rose
markedly during the next 5 years to between 20% and 25% of GOP, then stabilized
at roughly that level Since 2002. A net external liability position of 20% - 25% of
GOP is very manageable for the United States. and suggests that there IS
substantial room for it to increase before it would begin to pose a financing problem.
In addition. because US citizens have a large store of foreign assets. changes in
our net external liability position are not simply a function of the current account
deficit. but can be affected - for both good and ill - by changes in the valuation of
those assets. This is why the US net external position has remained fairly stable
over the last few years even In the face of a large and growing current account
deficit. The dollar value of our foreign assets has increased in a way that has
substantially reduced the effect of the additions to foreign holdings of US assets
implied by the current account deficit. We cannot expect such Sizable valuation

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effects in perpetuity of course but the available data suggests that they have
contrnued throughout 2005 ttlUS at ttle very least postponing for a further period the
time when US !let external liabilities will begin to rise from their current moderate
level.
The large US holdings of foreign assets have another implication as well, Deyond
the potential for these valuation effects Because US holdings abroad tend to be
more heavily in equity investments, both direct and portfolio, and foreign holdings of
US assets tend to be more heavdy in debt instruments, the return on US
international investment has tended to be substantially higher than the return on
foreign holdings of US instruments, even though the overall valuations show us with
net external exposure As recently as 2005 - and even III light of our sizable current
account deficit - the United States continued to receive from its foreign investment
more than it paid oul and thus by one quite relevant measure remained a net
creditor of the world, This, too, is likely to change as monetary policy has tightened
and US short-term tnterest rates have risen, but it demonstrates that we are likely to
walt for qUite some time before the growth in our net external liabilities actually
beginS to pose a financing problem for the United States. And both Alan Greenspan
and Ben Bernanke have put forward quite persuasive arguments that, at such time
in the future when international capital flows do begin to find destinations outSide
the United States to a greater degree, we should expect the US economy to adjust
quite smoothly Without serious consequences for either short-term or long-term
growth. Mercifully, given the length of time we've already been at this this morning, I
Will not walk you through those arguments here, but simply refer you to their
speeches over the last few years.
So, after all of this you might reasonably ask, If the US financial pOSition really is as
eminently manageable - even routine - as I Ilave claimed this morning, why have so
many smart people become concerned? Why has our national debate on economic
policy become largely oblivious to the solid marble edifice of economic growth and
productivity increase we see all around us and concentrated instead on the pipes
and drains of the debt stock and the current accounP
Well, part of the answer, or course, is that to make a comprehensible point in 20
minutes on a Friday morning, I have necessarily had to make things appear a little
simpler than they really are. Not misleadingly simpler, I think, and not in any way
that distorts the basic understanding of the case. But the analysis of some of these
issues is complex and it is important that the professionals and academics who
think about them get it right. So discussion that makes those of us in the offiCial
sector question our assumptions, review our analyses, and justify our actions is
always necessary and welcome I think - given the circumstances I have described
-- this particular effort has unnecessarily become too much the center of debate and
sucked too much oxygen from the more fundamental questions of economic policy
that I think are more relevant right now, and more worth the limited time that the
informed general public has to devote to reflection on economics. But I would not
want to suggest that there are no issues worth the discussion of intelligent
specialists at the nght volume level.
But part of the answer, too, IS less welcome. For some, particularly in Washington,
raising alarms about our ability to finance our poliCY choices is a way of avoiding a
direct and unbiased discussion of those poliCY choices themselves. We might
believe that it is appropriate for government to scale back the burden it places on
private enterprise and for families to retain more of the wealth that they work so
hard, sometimes over generations, to earn. I certainly do. But if told that these
choices have put us at financial risk - that we are relentlessly building a crushing
burden of debt for our children and grandchildren or recklessly relying on the rest of
the world to fund our living beyond our means and courting an imminent day of
reckoning - then any reasonable person would have second thoughts. A
responsible citizen might well think "This is the tax regime I prefer, but if we can't
afford it, we can't afford it." And for those who wish to oppose the policy Without
.
engaging it direc:ly, this approach has the advantage of being very easy to
articulate while the answers are - well, complicated For these people then, keeptng
the public drumbeat on these questions of finance is the most effective way they
have found of avoiding the debate on the more fundamental Issues. They fear they
would lose that debate, as they have repeatedly lost it in the past.

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I would hope that, as we move forward, we will return questions of finance to their
appropriate role. Not unimportant, but - at least in our current circumstances - not
central. Thank you again for the opportunity to speak to you this morning, and I'd be
happy to answer any questions lila! anyone in the audience may have.