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Department of the Treasury

PRESS RELEASES

The following press release numbers were not used:
JS-4197, JS-4198, JS-4206, JS-4227, JS-4228 and
JS-4233.

Page 1 of 1

April 2, 2006
JS-4151
Statement of U.S. Treasury Assistant Secretary
Lowery on lOB Debt Relief

BELO HORIZONTE, BRAZIL--U.S. Treasury Assistant Secretary Clay Lowery, who
is leading the U.S. delegation at the Inter-Development Bank Annual Meetings,
issued the following statement:
"Despite good economic progress in the region, some of the poorest countries
continue to be plagued with unsustainable debt burdens that divert their scarce
public resources to paying off old loans rather than toward investments in new
schools, hospitals, and roads that are so greatly in need.
"The U.S. has led efforts to bring debt relief to the poorest countries around the
world through a series of initiatives in recent years. We think the same opportunity
should be extended to Latin America's and the Caribbean's poorest countries and
have put forward ideas to do so. We think this can be done in a way that is a winwin situation for the lOB, all its member countries, and the entire region.
"I am very encouraged by today's decision by lOB's Board of Governors to establish
a special committee, chaired by Brazil, to move this idea forward."

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March 24, 2006
JS-4152
Assistant Secretary Henry Heads to New York to Discuss
Economic Investment in Low Income Communities

Assistant Secretary for Financial Institutions Emil Henry will give the keynote
address for the Community Development Venture Capital Alliance Annual
Conference in New York City Tuesday, March 28. Assistant Secretary Henry will
discuss the New Market Tax Credit (NMTC), which encourages business
investment in low-income communities.
Treasury's CDFI Fund, which administers the NMTC Program, reported today that
in 2004 almost $1.3 billion was invested into the nation's low-income communities
as a result of NMTC and that more than 90 percent of these loans and investments
went to communities that have higher levels of distress than the program's
threshold requirements. All of these loans and investments were made at better
than market rates and terms.
Treasury is reviewing applications for more than $4 billion in allocation authority
under the 2006 round of the NMTC program, including a recently announced $600
million increase specifically to rebuild communities ravaged by Hurricane Katrina.
Media are asked to register with CDVCA by calling Michael Robinson at (917) 8560458.
Who
Assistant Secretary for Financial Institutions Emil Henry
What
Keynote Address on New Market Tax Credit
When
Tuesday, March 28,12 pm (EST)
Where
Community Development Venture Capital Alliance Annual Conference
Marriott Marquis, Marquis Ballroom, 9th Floor
1525 Broadway
New York, NY

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3/6/2007

Page 1 of2

April 3, 2006
JS-4153
Address by the Temporary Alternate Governor for the United
States of America
Second Plenary Session of the Annual Inter-American Development
Bank Meeting
U.S. Treasury Assistant Secretary for International Affairs
Clay Lowery
Belo Horizonte, Brazil
On behalf of President Bush and Secretary Snow, I would like to thank the people
of Brazil for hosting the Governors of the Inter-American Development Bank. Brazil
is an auspicious setting for the first Annual Meeting of the Bank under President
Moreno. It demonstrates the benefits that come from strong economic policies.
Continued Growth in the Region
Good economic policies in much of the region have permitted countries to take
advantage of the strong global economy and pursue export-led growth. And, in
contrast to experience in previous expansions, countries are maintaining the fiscal
discipline needed to reduce debt ratios, as well as keep inflation on a downward
track. Finance ministries in a number of countries are restructuring their debt
profiles to reduce foreign exchange linkages and develop local debt instruments, in
some cases with long maturities. All of this is reducing vulnerability to external
shocks, but it is critical to lock in fiscal and monetary discipline to protect these hard
won gains.
Yet many of the poor in the region are left behind and out of this progress. The
widening gap between those who benefit from growth and those who do not
polarizes societies. New market opportunities do not raise living standards for
people who are cut off from markets. We must redouble our cooperative efforts in
this region to give the poor the tools to seize opportunity: access to education and
financing, infrastructure links to markets, reductions in barriers to starting and
growing a business, and the capacity to enforce contracts and protect
property. This institution must playa central role in these efforts, concentrating on
those areas where it can produce the largest gains.
Challenges Facing the Bank
The new presidency at the Bank offers an opportunity to reflect on the challenges
and opportunities the institution faces. Tighter fiscal policies and rising national
incomes have reduced demand for the Bank's traditional financing and so the
volume of lending has been falling. To the degree that this reflects better economic
conditions it is no bad thing. But it also raises the question: How does the Bank
remain relevant to the region?
The answer is not simply to increase the volume of loans back to its historical level quantity is not the answer. What matters is quality - assistance that delivers real
and relevant results for people. As President Moreno has frequently said, the
private sector is the number one priority for the lOB. The private sector is the
engine of output, jobs and growth. Our challenge is to find effective ways to ensure
that the poor have full access to all of the opportunities afforded by a thriving private
sector to improve their living standards.
We are very pleased that agreement was reached here in Belo on the proposal to

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Page 2 of2

expand lending to non-sovereign guaranteed entities and expand the bank's
private-sector mandate. We fully appreciate the efforts of everyone to reach this
positive outcome. I also welcome management's commitment to propose a
comprehensive plan to improve the effectiveness and coordination of the lOB's
private sector windows. This is absolutely critical if the Bank is to remain relevant to
the region and we look forward to working with management and other
shareholders on this essential task over the coming months.
We continue to believe that a focus on small and medium enterprises (SMEs)
should be a central priority for the lOB Group. There is research that suggests that
up to ninety percent of job creation in the region is through micro, small, and
medium enterprises. Our Hemisphere's leaders endorsed this approach at the 2004
Summit of the Americas by calling on the lOB to focus on expanding bank lending
to small businesses.
Enterprises need infrastructure and the poor need access to markets. President
Bush proposed last year an innovative fund - the Infrastructure Facility of the
Americas - to catalyze private investment for infrastructure by reducing private
investors' search cost for good projects in the region. The just-approved InfraFund
initiative incorporates this concept as one of its components. We look forward to
working with Bank staff to successfully implement the IFA and to a subsequent
stream of private investment.
Increasing trade must also be a component of any strategy to increase the
economic opportunities available to the region. The United States will continue to
work for bilateral agreements as well as the successful conclusion of the Doha
round of negotiations. The Bank plays a vital role by increasing trade capacity
through technical assistance to lower regulatory and institutional barriers to trade.
Finally, it is also important that the Bank focus on the poorest countries in the
region. The United States recently pushed for and secured agreement on a
landmark debt relief initiative calling for 100 percent cancellation of the region's
poorest countries obligations to the World Bank, the IMF, and the African
Development Bank. We believe that the lOB should play its part easing the debt
burden on the poorest countries, expanding the resources they have available to
invest in health and education, and increasing the effectiveness of the FSO.
We are very encouraged by the decision of the Board of Governors to establish a
special Governors committee to develop a proposal for debt relief and reform of the
FSO. We look forward to the work of this committee, with the goal of bringing
forward a proposal for Governors' consideration by the end of the year.
Poverty exacts an intolerable human toll. The poor in this region are sending a
message to the governments and leaders of this region, including the United States
and to the lOB. It is an urgent message and one that deserves a rapid, serious, and
effective response. We need to spread opportunity to reap the benefits of private
sector led growth to those left out and left behind. Together with President Moreno
and all the bank's shareholders, we look forward to our revitalized efforts to realize
this vision for all of the Hemisphere's citizens, but especially for the poorest among
them.
Thank you very much.

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April 3, 2006
2006-4-3-16-37 -55-21946
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 $65,454 million as of the end of that week, compared to $65,207 million as of the end of the prior week.
I. Official U.S. Reserve Assets (in US millions)
March 24, 2006

TOTAL I

I
11. Foreign Currency Reserves 1
la. Securities

IOf which, issuer headquartered in the US.

I
I
I

65,207
Euro

11,252

TOTAL

10,800

I
I
I

22,052

I
I

March 31, 2006
65,454
Euro

,"". . . JIII

ye~

10,79

b. Total deposits with:

lb. i. Other central banks and BIS
lb. ii. Banks headquartered in the US.

I
I

11,063

16,315

~,L~L

b.ii. Of which, banks located abroad

Ib.iii. Banks headquartered outside the US.

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

Il2. IMF Reserve Position 2

11,165

5,253

16,418

7,636

8,160

8,196

11,044

113. Special Drawing Rights (SDRs) 2

14 Gold Stock 3

5. Other Reserve Assets

7,669

II. Predetermined Short-Term Drains on Foreign Currency Assets
March 24, 2006
Yen

Euro

1. Foreign currency loans and securities

TOTAL
0

I
I
I

March 31,2006
Euro

I
I

Yen

I
TOTAL
0

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

2.a. Short positions

2.b. Long positions

13. Other

III. Contingent Short-Term Net Drains on Foreign Currency Assets
March 24, 2006

I
I

Euro

http://www.treas.gov/press!rcleaees/20064316375521946.htm

Yen

March 31,2006
TOTAL

Euro

I
I

Yen

I
I

TOTAL

I
3/2/2007

Page 2 0[2

1 Contingent liabilities in foreign currency

1.a. Collateral guarantees on debt due within 1
year

11 .b. Other contingent liabilities
2. Foreign currency securities with embedded
options

3. Undrawn, unconditional credit lines

I
0
0

13.a With other central/Janks

IIJ

I Headqual1ered outside the US

4. Aggregate short and long positions of options
in foreign
0

4.a. Short positions

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

I
0

14 a.1 Bought puts

14.b. Long positions

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

14a2 Written calls

the US

3. c. With banks alld other financial instltutlolls

I
I

3.b. With banks and other fllJanCia/ instltulions
1Headquartered

I
I

"
"

II"

"
"

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.

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April 3, 2006
JS-4154

Secretary Snow, Treasury Officials and
U,S. House Leaders
Launch National Financial Education Strategy
U.S. Treasury Secretary John Snow will join U.S. Treasurer Anna Cabral, Deputy
Assistant Secretary for Financial Education Dan lannicola, Jr., Members of
Congress and leaders of federal financial agencies tomorrow at 11 :00 a.m. in the
Treasury's media room as they introduce a plan to improve financial literacy in
America. The event kicks off a nationwide financial education tour for select
Treasury officials.
The Financial Literacy and Education Commission, headed by the Treasury and
comprised of 20 federal agencies, will release its strategy report, Taking Ownership
of the Future - The National Strategy for Financial Literacy, tomorrow. The report
is a blueprint for improving Americans' understanding of issues like
homeownership, credit management, and retirement savings.
"The President's pro-growth policies put more money into Americans' pockets,
created millions of jobs and put homeownership at an all-time high. With good
economic times comes an increased level of economic independence and more
Americans every day know the pride of ownership," Secretary Snow said. "Along
with the power of ownership goes the power of financial knowledge; the two are
inextricably connected. Americans can only manage their money and other assets
if they understand what they own, and they are more able to improve their own
economic situations if they understand the basics of finance."
Title V of the Fair and Accurate Credit Transactions Act of 2003 (P.L. 108-159)
created the Commission, calling for the establishment of a national financial
education toll-free hotline and Web site, as well as the development of the country's
first national strategy for financial education. The Commission launched the Web
site (nwA Illj'lIlonRy (jcw) and toll-free hotline (1-888-mymoney) in 2004 to provide
the public with free, easy access to federal resources on a wide range of personal
finance topics. Materials include information on choosing and using credit cards,
getting out of debt, protecting credit records, understanding Social Security
benefits, using insuring bank deposits and starting a savings and investments plan.
Many of the publications are available in Spanish.
"President Bush's policies provided a jump start for American families' economic
success," said Treasurer Cabral. "But understanding how to manage their finances
plays a crucial role to ensure they may continue their prosperity."
Deputy Assistant Secretary lannicola added, "The President's tax cuts have allowed
Americans to keep more of what they make - financial literacy helps them make
more of what they keep."
He continued, "I want to thank the 19 other agencies that worked so hard on this
effort and commend them for recognizing that while it is our economy that gives us
choices, it is our financial knowledge that gives us the power to make good
choices."
The 19 other federal agencies in the commission include: the Office of the
Comptroller of the Currency; the Office of Thrift Supervision; the Federal Reserve;
the Federal Deposit Insurance Corporation; the National Credit Union

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Administration; the Securities and Exchange Commission; the Departments of
Education, Agriculture, Defense, Health and Human Services, Housing and Urban
Development, Labor, and Veterans Affairs; the Federal Trade Commission; the
General Services Administration; the Small Business Administration; the Social
Security Administration; the Commodity Futures Trading Commission; and the
Office of Personnel Management.
For a copy of the Commission's report, please visit www.mymoney.gov or call 202622-9372.

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Page 1 of7

April 4, 2006
JS-4155

Testimony of Stuart Levey, Under Secretary
Office of Terrorism and Financial Intelligence
U.S. Department of the Treasury
Before the Senate Committee on Banking, Housing, and Urban Affairs
Chairman Shelby, Ranking Member Sarbanes and other distinguished members of
the Committee, thank you for the opportunity to speak to you today about our
progress in combating terrorist financing and money laundering. In the last four
months, we have seen assessments of our progress in both of these arenas - the
9/11 Commission Public Discourse Project's evaluation of our terrorist financing
efforts and the U.S. Government's first-ever Money Laundering Threat Assessment.
These assessments and this hearing provide an opportunity to take stock of how
we are doing with respect to two of the leading concerns of my office. I welcome
this committee's ongoing focus on these threats, and your continued support for our
efforts to help stop illicit flows of money.
Terrorist Financing
The 9/11 Commission's Public Discourse Project awarded its highest grade, an A-,
to the U.S. Government's efforts to combat terrorist financing. This praise truly
belongs to the dozens of intelligence analysts, sanctions officers, regional
specialists, and regulatory experts in the Treasury's Office of Terrorism and
Financial Intelligence (TFI) who focus on terrorist financing, along with their talented
colleagues in other agencies - law enforcement agents who investigate terrorism
cases, Justice Department prosecutors who bring terrorist financiers to justice,
foreign service officers in embassies around the world who seek cooperation from
other governments and many others from the intelligence community. You will not
find a more talented and dedicated group of people, with no trace of ego and a total
focus on the mission.
The 9/11 Commission Public Discourse Project did not provide a detailed
explanation of the reasoning behind its conclusions but I am certain that one
contributor to the high mark was the close interagency teamwork that has been a
hallmark of our government's efforts in this arena. Along with my colleagues here
today - the State Department, FBI, and DHS - as well as the intelligence community
and Deputy National Security Advisor Juan Zarate, we have forged a team with
complementary strengths and outlooks but a single mission and great mutual
respect. That teamwork translates into effectiveness. We have continued to
improve our ability to track key targets and to take the most appropriate action
against the terrorist target. Sometimes that means that the Treasury will take public
action, sometimes it involves persuading another country to take action, and
sometimes we decide to continue to collect intelligence to better map out the
terrorist network. From the formation of TFI, we have been committed to that
philosophy, resisting the application of metrics to our activities that would distort our
incentives, for example, by emphasizing the number of terrorism designations.
In my view, reducing the USG's wide-ranging efforts against terrorist financing to a
single letter is necessarily going to tell only part of the story. So much is being done
to combat terrorist financing, including intelligence collection, enforcement actions,
capacity building, and systemic improvements to safeguard the U.S. and global
financial systems. Our theater of engagement literally spans the world, from the
money changing tables of Kabul to the jungles of South America's Tri-Border Area,
from the finance ministries of the world to the compliance offices of the world's most
sophisticated banks. In some of these areas we have attained far greater success
than in others, perhaps because of deeper intelligence penetration, the availability

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of more effective tools, or closer partnership with certain host governments. No
single grade will be able to convey this nuance.
The indicators that we find meaningful are typically complex and not readily
quantifiable, such as anecdotal reporting about terrorist cells having difficulty raising
money or paying salaries or benefits. In recent months, we have seen at least one
instance of what we look for most - a terrorist organization indicating that it cannot
pursue sophisticated attacks because it lacks adequate funding.
Usually: though, the information we receive is not as clear. As an example, one
interesting trend that we have witnessed is a decrease in the average amount of
transactions that we learn about. Obviously, we are only privy to a subset of the
total transactions, but this observation carries across various financial conduits and
terrorist organizations and we have no reason to believe that it is unrepresentative.
Interpreting this indicator is more difficult. It could reflect an overall decrease in the
amount of money moving to and from terrorists. Just as easily, it could indicate that
terrorists are breaking their transactions out into smaller sums, fearing interception.
Alternatively, the trend could be an outgrowth of a movement by terrorist
organizations away from banks towards less formal mechanisms, like cash
couriers. These couriers may offer concealment, but some get caught and some get
greedy, and so it is very risky to entrust them with large sums of money. Any of
these alternatives would indicate that our efforts are having an impact and this trend
may bear out our assessment that terrorists who fear using the banking system do
not have a ready and reliable alternative for moving large sums of money. We will
continue to monitor developments, but I hope this provides a sense of how complex
a task it is to assess the overall impact of our efforts to combat terrorist financing.
In specific areas, we can point to more concrete indicators of success. We have
made dramatic progress in combating terrorist abuse of charities. Prior to 9/11 and
even afterwards, terrorists used charities as safe and easy ways to raise and move
large sums of money. AI Qaida and Hamas, in particular, relied on charities to
funnel money from wealthier areas to conflict zones with great success. Through a
combination of law enforcement and regulatory actions against several corrupt
charities, both at home and abroad, we have taken out key organizations and
deterred or disrupted others. In tandem, active engagement with the legitimate
charitable sector has succeeded in raising transparency and accountability across
the board.
We have thus far designated more than 40 charities worldwide as supporters of
terrorism, including several U.S charities such as the Holy Land Foundation, the
Global Relief Foundation, the Benevolence International Foundation, the AI
Haramain Islamic Foundation, and the Islamic African/American Relief Agency
(lARA). The impact of these actions is serious, and sometimes decisive. lARA once
provided hundreds of thousands of dollars to Osama bin Laden. More recently,
lARA country offices have experienced increased pressure and its leaders have
expressed concern about the organization's future.
Our most recent action targeted KindHearts, a purported charity in Ohio that was
supporting Hamas. In that instance, we took coordinated action with DOJ
prosecutors and the FBI, which executed a search warrant at the moment that we
froze the group's assets. Although we generally do not disclose specific blocked
asset information, KindHearts has stated that over one million dollars of its assets
were blocked. Overall, engagement with the charitable sector combined with
enforcement actions against bad organizations have radically altered the dynamic,
leaving dirty charities isolated and imperiled.
A second conduit where we have seen a shift is donations from private individuals,
another primary source of terrorist funds. Unlike charities, individual donors to
terrorist organizations do not need to maintain a public profile and are considerably
harder to track. Our advantage in pursuing donors, however, is the heightened
power of deterrence. A person who is willing to commit a suicide bombing cannot
be deterred by fear of punishment. Even those wealthy donors who sympathize with
an extremist cause, however, may well be unwilling to support it at risk of losing
their reputation, their assets, and potentially their freedom. As financial investigators
track donations back to their sources and wealthy individuals are held to account,

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Page 3 of7
we have begun to change the risk calculus of donors and narrowed the set of
individuals who are willing to take that chance.
Accountability and deterrence have been an area of particular focus for me. I
believe we need to heighten our deterrence of donors by treating terrorist financiers
as the terrorists that they are. Those who reach for their wallets to fund terrorism
must be pursued and punished in the same way as those who reach for a bomb or
a gun. In that regard, I was heartened by a recent statement from Saudi Arabian
Foreign Minister Prince Saud al-Faisal, who said that "[t]he extremists who
condone, support, incite, or legitimize terrorism should be held accountable for the
criminal consequences of their message of hatred and intolerance." If Saudi Arabia
and others in the region see this commitment through, it will send a powerful
message of deterrence to would-be terrorist financiers.
Another important measure of our progress is an increase in the number of
countries approaching the U.N. Security Council to seek the designation of terrorist
supporters. This global deSignation program, overseen by the U.N.'s 1267
Committee, might be the most powerful tool for global action against supporters of
al Qaida. It envisages 191 UN Member States acting as one to isolate al Qaida's
supporters, both physically and financially. Increasingly, countries have begun to
look to this committee, and administrative measures in general, as an effective
complement to law enforcement action. In 2005, 18 Member States submitted
names for the Committee's consideration, many for the first time, and we will
continue to support this process and encourage others to do so as well.
In other arenas of this fight, however, we are not where we need to be. State
sponsors of terrorism, like Iran and Syria, present a vexing problem, providing not
only money and safe haven to terrorists, but also a financial infrastructure through
which terrorists can move, store, and launder their funds. While this is a daunting
challenge, I believe that the Treasury Department's tools, combined with
cooperation from responsible financial institutions, can make a difference. In the
past year, for example, we have designated top Syrian officials, including the theninterior minister Ghazi Kanaan and the head of Syrian Military Intelligence, Assaf
Shawkat, in part for their support to terrorist organizations. Also, on March 9, we
issued a final rule under Section 311 of the PATRIOT Act confirming that the
Commercial Bank of Syria (CBS) is a "primary money laundering concern" and
forbidding U.S. financial institutions from holding correspondent accounts for CBS.
Among our reasons for that action was the risk of terrorist financing posed by a
significant bank owned and controlled by an active and defiant state sponsor of
terror like Syria.
We have ample reason to believe that responsible financial institutions around the
world pay close attention to such actions and other similar indicators and adjust
their business activities accordingly, even if they are not required to do so. A recent
example of interest was the announcement by the international bank UBS that it
intended to cut off all business with Iran and Syria. Other financial institutions are
similarly reviewing their business arrangements and taking special precautions to
ensure that they do not permit terrorist financiers or WMD proliferators access to
the global financial system. As discussed below with respect to North Korea, this
sort of voluntary action by responsible firms in the private sector can have
tremendous impact.
Another difficult problem we face is that couriers continue to move terrorist money
across the world's borders with insufficient scrutiny. New international standards for
impeding cash smuggling, issued by the Financial Action Task Force in 2004, are a
very positive step, but we still have an enormous distance to go in ensuring that
trained and capable border agents are implementing these rules. In these and other
areas, there is a great deal still to be done.
So long as terrorists are able to fund their organizations, we will not be satisfied or
complacent. Reading intelligence about terrorist attacks planned and frustrated, I
understand how much hangs in the balance.
The Strength of Financial Measures

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Before turning to our domestic money laundering challenge, I wanted to briefly
highlight for the committee some of the lessons we have learned in the last year
about the power of financial measures to effectively counteract national security
threats, especially when they are implemented multilaterally by governments and
private financial institutions. Just as terrorist organizations require money to survive,
WMD proliferation networks do as well. By capitalizing on a growing international
consensus that these activities have no place in the legitimate global financial
system, we have been able to apply effective pressure to counteract these threats.
Executive Order 13382, issued by the President in June 2005, authorizes the
Treasury and State Departments to target key nodes of WMD proliferation
networks, including their suppliers and financiers, in the same way we target
terrorist financiers. A designation under this Executive Order cuts the target off from
access to the U.S financial and commercial systems and puts the international
community on notice about the threat the target poses.
Thus far, we have designated eleven North Korean entities, six Iranian entities, and
one Syrian entity engaged in proliferation activity. Just last week, the Treasury
designated two more proliferators, the Swiss company Kohas AG and its President,
Jakob Steiger. Kohas AG acts as a technology broker in Europe for the North
Korean military and has procured goods with weapons-related applications. Nearly
half of the company's shares are owned by a subsidiary of Korea Ryonbong
General Corporation, a previously-designated North Korean entity that has been a
focus of U.S. and allied counterproliferation efforts.
The impact of these actions depends on the extent of international cooperation. As
in the terrorism context, the international community has called for cooperative
efforts to isolate proliferators financially, as set forth in U.N. Security Council
Resolution 1540 and the G-8 statement at Gleneagles. The Treasury and State
Departments are engaging intensively with our international partners to see that
these broad principles are turned into reality.
Confronted with North Korean conduct ranging from WMD proliferation-related
activities to currency counterfeiting and other illicit behavior, the Treasury took two
significant steps in the past year, one offensive and one defensive. Offensively, we
targeted several North Korean proliferation firms under Executive Order 13382, as
described above. Defensively, we took regulatory action to protect our financial
system against Banco Delta Asia (BOA), a Macanese bank that was handling a
range of North Korean illicit activities without any pretense of due diligence or
control. Indeed, BOA officials intentionally negotiated a lower standard of due
diligence with regard to the financial activities of North Korean clients. We
employed section 311 of the PATRIOT Act to cut off this troubling institution's
access to the U.S. financial system.
As a result of our actions and the revelations about North Korea's illicit activities, a
number of responsible jurisdictions and institutions abroad have likewise taken
steps to ensure that North Korean entities engaged in illicit conduct are not
receiving financial services. The combined effect has been described as causing a
"ripple effect around the world," constricting the flow of dirty cash into Kim Jong-Il's
regime.
This example should be of particular note to this Committee as it demonstrates the
impact of financial tools, some of which were created through the leadership and
vision of this Committee.
Money Laundering
While distinct from the threats posed by terrorist financing or proliferation of
weapons of mass destruction, money laundering is a serious threat in its own right
to our national and economic security. Money laundering enables crime and
contributes to an erosion of confidence in our legal and financial systems.
The U.S. Money Laundering Threat Assessment represents an unprecedented step
forward for the U.S. Government's efforts to combat money laundering in the United
States. For years, dedicated regulators, policymakers, law enforcement agents, and

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prosecutors from across the government have worked to safeguard our financial
system against abuse, and to pursue and punish those who laundered illicit
proceeds Never before, however, had so many of the agencies that face these
Issues come together to share their findings and to sketch out a joint assessment of
the depth and contoul-s of America's money laundering threat.
The aim of the Threat Assessment was to provide policymakers, the law
enforcement community, regulators, and supervisors with a picture of how money is
being laundered in and through the United States. It was also intended to identify
the priorities to be addressed in this year's National Money Laundering Strategy.
Ultimately, we cannot successfully treat a problem until we have diagnosed it.
Sixteen federal bureaus and offices from across the law enforcement, regulatory,
and policy communities came together, with each office bringing its own
perspective and experiences to the table. The interagency working group pulled
together arrest and forfeiture statistics, case studies, regulatory filings, private and
government reports, and field observations from those in the trenches.
The report analyzes more than a dozen money laundering methods, identifying how
each method functions, any geographic or other concentrations of activity, the
legal/regulatory backdrop, and vulnerabilities. The Threat Assessment does not tout
our successes - it is a candid look at the serious challenges we face.
Key findings of the Money Laundering Threat Assessment include the following:
* Financial institutions remain key guardians of our country's financial system. Once
illegal proceeds get into the formal financial system, they can be moved instantly by
wire or disguised through commingling with legitimate funds. With the advent of
internet and remote banking, financial institutions face increased challenges in
ascertaining the identity of customers and the sources of funds_

* Criminals and money launderers have exploited corporate vehicles and trusts to
disguise beneficial ownership and hide their activities. When state registries impose
minimal information requirements and exercise lax oversight over the shell
companies and trusts they register, it can be difficult or impossible for financial
institutions to verify who is using a commercial account and for what purpose.
* Money Services Businesses (MSBs) make up a vast and varied alternative
system to banks. Many MSBs operate without federal regulatory supervision due to
their failure to register with U.S. authorities. Some of these unregistered MSBs are
informal money remittance services or check cashers that are operated as a side
business by small retailers.

* Casinos are cash-intensive businesses that can be used to launder funds.
Casinos have been subject to anti-money laundering regulations longer than any
industry other than banking. But the money laundering threat posed by casinos has
grown with the rapid increase in tribal gaming. Last month, the Financial Crimes
Enforcement Network (FinCEN) announced its first enforcement action under the
casino provisions of the Bank Secrecy Act (BSA) against an individual and an
Indian tribe for a broad range of BSA violations.

* Certain sectors of the insurance industry have undergone a transformation. While
traditional insurance policies remain an important part of the life insurance
business, agents and brokers now offer a range of financial products that can be
readily purchased, transferred, and sold, and that are more akin to investment
funds than traditional insurance policies. This evolution has created new
opportunities for money laundering.
* Some of the largest and most complex methods of money laundering harness
trade into and out of the United States. Trade-based money laundering takes many
forms including the Black Market Peso Exchange, which poses a particular
challenge to law enforcement because it separates the crime from the cash early in
the money laundering process. Under this scheme, drug dealers are able to hand

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off their illicit dollars in the US. to professional money launderers, who make clean
currency available in Colombia or elsewhere.
* Smuggling cash out of the United States for deposit elsewhere is a wellestablished money laundering method and appears to be on the rise because of the
barriers criminals face attempting to launder cash domestically. Bulk cash
smuggling is most often used to launder the proceeds from illegal drug sales. Cash
associated with drugs typically flows out of the U.S. across the southwest border
into Mexico, retracing the route that the drugs took entering the United States.
Drugs and illicit proceeds also cross our northern and other borders.

It is only natural that, as we survey the various money laundering threats, we focus
in on emerging technologies and new transaction methods. These developments
certainly warrant our close attention. I would emphasize, though, that - in terms of
dollar volume - some of the oldest methods of money laundering, particularly bulk
cash smuggling, remain the most common.
The overall picture that emerged from the Threat Assessment is both sobering and
promising. Large amounts of dirty money are circulating through the United States
as criminals exploit money laundering methods old and new. At the same time,
there has been considerable progress. The approach of U.S. law enforcement and
regulatory agencies has undergone a sea change over the past decade, such that
money laundering is now treated as an independent and primary priority across all
relevant agencies. Perhaps most encouraging are interagency initiatives and task
forces that, when properly coordinated, focus the talents, expertise, and resources
of multiple agencies to bear problem to great effect.
While the interagency Money Laundering Threat Assessment is an excellent
development, it is, of course, only the beginning of the process. We now need to
build on the cooperation that went into the assessment to craft effective ways to
counteract the vulnerabilities identified. That work is already ongoing. For example,
to get the upper hand on the Black Market Peso Exchange and other trade-based
money laundering schemes, Immigration and Customs Enforcement, with the
support of the State and Treasury Departments, is working with U.S. trading
partners and countries vulnerable to money laundering to create trade transparency
units. These units allow countries to compare import and export logs to uncover
anomalies that may indicate money laundering, and represent a serious advance in
our worldwide anti-money laundering efforts.
We also continue to extend the Bank Secrecy Act, as amended by the USA
PATRIOT Act, to financial sectors deemed to be the most vulnerable to money
laundering and/or terrorist financing. We recently issued regulations requiring
dealers in precious metals, stones and jewels, as well as certain segments of the
insurance industry to establish anti-money laundering programs. A regulation also
requires the insurance industry to file suspicious activity reports. We are presently
working on regulations that would apply to other vulnerable financial industries.
As this committee knows well, we have worked hard to respond to the threat posed
by certain types of correspondent and private banking operations. We recently
published regulations to implement Section 312 of the PATRIOT Act. The rule
requires certain U.S. financial institutions to establish due diligence policies,
procedures, and controls to detect and report money laundering through certain
correspondent and private banking accounts. Having sought additional comment on
the provision of section 312 requiring "enhanced due diligence" for identified, highrisk foreign banks, a top priority is to complete this rulemaking by finalizing this last
provision. We are currently examining options for responding to the other
vulnerabilities identified in the assessment.
While the Money Laundering Threat Assessment focused, by design, on domestic
money laundering, in today's global economy, we cannot ignore the threat posed by
money laundering abroad. To this end, the United States, with Treasury as its head
of delegation, has taken a leadership role in the Financial Action Task Force (FATF)
to establish and promulgate international standards for combating money
laundering and terrorist financing. We and our colleagues devote continuous effort
to shaping and ensuring implementation of these standards, through

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comprehensive assessments as well as international training and assistance. Over
150 nations now subscribe to FATF's standards and have committed to meeting
them.
The Treasury Department has also worked closely with the International Monetary
Fund and the World Bank Group to promote member country programs against
money laundering and terrorist financing. By the end of 2005, the IMF and World
Bank had conducted more than 50 assessments of member countries' compliance
with the FATF standards and had provided technical assistance on related projects
in more than 125 countries. In addition, Treasury continues to encourage the
regional multilateral development banks to conduct internal risk assessments
similar to those undertaken by the World Bank in order to identify additional areas
where anti-money laundering and counter-terrorist financing measures could be
strengthened.
We are also working directly with the private sector in priority regions. Last month
members of my staff helped to organize an extraordinary conference in Cairo,
where private sector bankers and public sector regulators from the United States
met with their counterparts from Egypt, Saudi Arabia, Kuwait, and Lebanon to share
concerns and approaches to combating money laundering and terrorist financing.
Representatives from American Express, Citibank, J.P. Morgan Chase, and
Pershing gave generously of their time, meeting with some 350 bankers from the
Middle East and North Africa. This conference marked the beginning of what we
hope will be an ongoing dialogue that will parallel and augment our work with public
sector counterparts.
Conclusion
The threats of terrorist financing and money laundering remain serious and very
real. I am encouraged, however, by our progress. Over the past few years, there
has been increasing accord in the international community about the threats posed
by these activities to national and economic security and their corrosive effect on
the global financial system. There is also an increasing recognition of the power of
financial measures to disrupt and isolate the sources of these threats. If responsible
nations employ financial measures in a coordinated and consistent manner, we can
make a decisive difference.
Thank you again for holding this hearing and for your sustained commitment to
these issues. I would be happy to take your questions.

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April 4, 2006
JS-4156
Statement of U,S. Treasury Assistant Secretary for International
Affairs Clay Lowery
Working Together to Reduce Poverty in Latin
America
Sao Paulo, Brazil
I am delighted to be here in Brazil, continuing our strong relations and cooperation
and enjoying the warm hospitality of the Brazilian people. I am honored that you
have come to hear me speak today.
When President Bush came here in November, he spoke to Brazilians about
democracy, social justice, and fighting poverty. He said, "Our common ideal of
social justice must include a better life for all our citizens. As elections and
democracies have spread across our hemisphere, we see a revolution in
expectations. Either democracies will meet these legitimate demands, or we will
yield the future to the enemies of freedom."
The people of this Hemisphere are sending a message about what they want to see
on the U.S. agenda in our relations with Latin America. They want poverty
reduction and job creation to be top priorities. We hear the message, and we are
responding.
Poverty exacts an intolerable human toll. It threatens stability and democratic
institutions. It undermines our collective efforts to fight crime, corruption, terrorism,
and drugs, and it prevents people from simply feeling safe in their homes. For
these reasons, poverty reduction must not just be a domestic priority; it must be a
shared foreign policy priority.
Much has been said and written about the lack of progress in reducing poverty in
Latin America. But my message today is that poverty reduction in this hemisphere
is both possible and essential. If we are to do better than we have so far, we have
to look at global experience dispassionately and carefully. The issues are not
simple and there is a lot we still don't understand. But we must heed and use the
evidence of what works.
While I am talking now, I mainly want to listen. I am meeting today with citizens,
small business people, and heads of families. They are perhaps the best judges of
the barriers they face and what they need to lift themselves out of poverty
permanently. We hear the call for more opportunity - education opportunities, job
opportunities, business opportunities. The United States wants to help, and I'll
outline some of the ways we are trying at the end of this speech. But first, I'd like to
look at some of the lessons that we have learned about what works.
Poverty Reduction: What Works
If you look in this region and around the world, three characteristics appear
universal for countries that have achieved substantial and lasting reductions in
poverty. First, all have sustained robust growth. Growth reduces poverty over time
because it raises investment levels, employment, and income. Second, all have
maintained low inflation and sustainable public finances. In short, high inflation and
financial crises are among the worst enemies the poor can face.
Third, all have gone beyond the macroeconomic reform agenda to pursue the

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microeconolllic reforms that spread opportunity. While there is no single recipe for
success, the best performers have all pursued some combination of policies that:
open markets and create competition, reduce the barriers to creating a business,
Invest In health and education, link the poor to markets through infrastructure,
strengthen land and property rights, and spread access to capital.
From empirical research and from what I hear people say, it is clear that the best
way to help the poor is to make it easier for them to extract returns from markets labor markets, capital markets, and goods markets. The truth is that growth and
opportunity do not reach many of the poor in the region because they are cut off
from markets.
•
•
•
•
•
•

They lack the human capital that would give them access to skilled labor
markets.
They lack the opportunity at jobs because tax and regulatory barriers
discourage employers from hiring them in the formal sector.
They lack access to financing from formal capital markets.
They lack a chance to start and grow a business.
They lack infrastructure links to markets.
And, with pervasive weakness in the rule of law, they cannot protect their
property rights or extract returns from their property and assets.

We must not forget that it takes more days to start a business in Latin America than
in any other region of the world except Sub-Saharan Africa, and more days to
enforce a contract than any other region.
In other parts of the world, like South and East Asia, we see poverty reduction
success stories that very much confirm the benefits of macroeconomic stability and
sustained growth, but also of spreading opportunity. For instance, poverty
reduction in those states in India that strengthened land and property rights and
deregulated labor markets was significantly greater than in states that did not.
Korea's poverty reduction success has been linked to its strong financial sector
development, in part due to foreign investment in its banks, which helped the poor
gain access to private credit. Thailand opened its markets but also expanded
health care and financial services access to poor rural areas. The result has been
a drop in the poverty rate to just 10 percent.
For Latin America overall, the reduction in poverty has been weak. But some
countries, especially reforming countries, have done better than others. For the
period 1991-93 to 1999-2003 - according to the World Bank's $2 per day definition
of poverty - Chile cut the poverty rate from 22.5 to 9.6 percent, Mexico from 41.3 to
26.3 percent. Costa Rica from 14.6 to 9.5 percent, and Brazil from 33.1 to 22.4
percent. I would argue these cuts are integrally related to these countries'
decisions to strengthen public finances, slash inflation and debt, spend more
effectively on health and education for the poor, and open markets.
Chile not only put its fiscal house in order, it also made a major effort to expand
investment in health and education. Mexico not only opened its markets, it
expanded the Opportunidades social program which now provides grants to 20
percent of the population conditioned on keeping children in school, improving
family nutrition, and regular health checkups. Brazil's similar Balsa Familia program
is targeted to reach 11 million families. This kind of spending does not break the
budget but it can break the inter-generational cycle of poverty.
Brazil under the Lula Administration has articulated a reform agenda focused on
spreading opportunity and on consolidating the economic reforms begun over a
decade ago. This agenda is likely to produce dramatic gains if implemented.
Already growth and buoyant export performance are generating major employment
gains. Nearly 4 million jobs have been created during the Lula Administration, with
1.3 million jobs created in the last 12 months alone.

u.s.

Priorities

The people of this Hemisphere are calling on their leaders and the United States to

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spread opportunity to those left out and left behind. The Bush Administration is
listening and responding. The U.S. must do all it can to help governments focused
on giving the poor a chance for a better life. Let me tell you about some initiatives
we are advancing.

Debt relief: One of the most potent ways the international community can help the
poor is by writing off debt owed by the poorest, most indebted countries. The
resources freed-up from these cancelled debts can fund education, health, and
other programs for the poor if recipient governments use them wisely. The United
States pioneered the G8 debt reduction initiative that will provide the poorest
countries in the region with $4.6 billion in debt service relief, on top of the $9 billion
in relief received under the earlier Heavily Indebted Poor Countries initiative.
But we want to do more for this region. So we developed a proposal to cancel the
debts to the lOB of the five poorest countries and do it in a way that does not
increase the burden on either the middle-income borrowing countries like Brazil or
donor countries. This proposal will provide roughly another $5 billion in relief,
bringing the total to roughly $19 billion for the region's poorest countries. This
translates into $620 per person. Currently, the poorest countries in the region
spend - on an annual basis - about $50 per person on health. Think for a minute
about how this bold proposal could be translated into real benefits for people: more
schools, more quality teachers, more immunizations and better health services.

Private sector development: One area where the lOB's activities are still limited
is financing private sector investment. Currently, such financing accounts for only
3.4 percent of the lOB's operations. We know that to reduce poverty and create
jobs, Latin American economies need to raise their investment rates from the
current 21 percent of GOP to levels closer to the 35 percent seen in Asia. The lOB
cannot possibly fill these investment gaps. But it can playa much larger role in
catalyzing private investment. We believe that expanding financing to small and
medium businesses that now lack any access to the formal financial sector would
greatly improve the job creation and poverty reduction effectiveness of the
institution. To do that, it must reorganize its fragmented and underperforming
private sector operations. And it must set ambitious and measurable targets for
expanding financing to the private sector.
Bank lending to SMEs: There is research that shows that small businesses create
90 percent of new jobs in Latin America. To be effective, any poverty reduction or
job creation strategy must focus on making it easier to create and grow small
businesses. At the Special 2004 Summit of the Americas in Monterrey, Mexico,
President Bush proposed, and the Leaders agreed to, the goal of tripling bank
lending to small businesses by 2007 with lOB help. A $5,000 or $10,000 loan from
a bank can lift a small business from bare survival to rapid expansion. Experience
shows that banks will lend to micro and small businesses on a large scale if given
the right training and technology. A successful U.S.-supported program in Eastern
Europe, for instance, has helped catalyze over one million bank loans totaling $6
billion to small businesses. What a difference the lOB could make in this region
with such a program. Latin America's own dynamic microfinance sectors illustrates
how much potential exists to expand bank lending to small businesses.
Remittances: Also at the 2004 Summit, the Leaders of the region committed to a
U.S.-proposed goal of creating the conditions necessary to halve the costs of
transferring remittances, so families with members working in the U.S. can get their
savings home quickly and cheaply. Remittances in this Hemisphere reached nearly
$54 billion in 2005. Facilitating these transfers through the formal financial system
and supporting their use for investment in poor communities would provide a
powerful impetus for poverty reduction. Our efforts with Mexico, working with banks
in both countries, dropped remittance costs by up to half, with remittances between
key cities now $5 to $10 a transfer. With the lOB continuing its leading role, let us
spread that success throughout the Hemisphere.
Infrastructure: In last year's Summit of the Americas in Argentina, President Bush
proposed an innovative initiative - the Infrastructure Facility of the Americas - for
catalyzing much more private investment in infrastructure to spread opportunity.
Public funds available to build infrastructure are scarce, so it is imperative to find

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ways to unlock large volumes of private finance. By using official finance in a
targeted way to reduce investors' search costs for good infrastructure projects, we
should be able to catalyze orders of magnitude more in private infrastructure
finance. We are working with the lOB to create a fund for this purpose, to which the
U.S. will contribute. We will not rest until the lOB follows through with bold action.

Millennium Challenge Account: The Millennium Challenge Account launched by
the Bush Administration not only represents a major increase in aid but more
importantly a fundamental shift in our approach to aid delivery. The MCA operates
011 the principle that aid is more likely to promote economic growth and raise living
standards ill countries that are ruling Justly, investing in their people, and promoting
economic freedom. It establishes a partnership in which the developing country,
with full participation of its citizens, proposes its own plan for the use of MCA funds;
and it focuses on measuring project results by making sure that every MCA contract
includes quantitative objectives and clear expected outcomes.
The programs supported by MCA will differ by country. Indeed, that's precisely the
point: it is up to governments in consultation with its citizenry to identify the most
pressing development priorities and concrete programs for addressing them.
Sometimes this will mean developing small businesses, particularly in rural areas.
Other times it will mean strengthening the country's infrastructure so that more local
businesses can reach potential customers. These efforts help the poor take
advantage of the new trade opportunities created by opening markets and FTAs.
Bolivia, EI Salvador, Honduras, and Nicaragua have been selected to be eligible to
receive MCA funding. Paraguay and Guyana are eligible for threshold funds. Last
year, Nicaragua and Honduras signed compacts worth $390 million to develop
agriculture and rural business and to link rural populations to markets. In February,
Paraguay and MCC reached agreement on a $35 million program to help the
Paraguayan government fight corruption and reduce barriers to starting a business.

Trade: Trade is one of the most important tools for spreading opportunity to the
poor. Tariff cuts reduce the cost of products consumed by the poor such as food
and clothing - two areas currently subject to the highest tariffs. Trade also gives
developing countries access to new markets. But its enormous potential for poverty
reduction can only be realized when access to new markets is combined with
access to the tools needed to seize these opportunities - education, infrastructure,
credit. President Bush told Brazilians in November that every nation will gain from
a successful Doha Round, but the developing world and the poor stand to gain the
most. He cited the World Bank estimate that a successful Doha Round could lift
300 million people out of poverty. He stressed that we have to be ambitious in
agriculture, as well as in manufactures and services.
Conclusion
My message today is fundamentally optimistic: the right policy choices and the
right kinds of official support - more than geography, size, resource endowment, or
history - are the most powerful determinants of success in fighting poverty.
Markets and spreading opportunity work in very different cultures and in very
different places.
In a sense we should not be at all surprised. All this merely affirms that the laws of
economics work and people everywhere respond to the right incentives and
opportunities. That has been our experience in the United States, a large and
culturally diverse country, which shares many characteristics with Brazil.
While the message is optimistic, it is also urgent. At this moment, we are in danger
of replaying old and unproductive ideological battles that sidetrack us from the
pressing tasks confronting us. The poor in our hemisphere deserve better. They
deserve leaders capable of learning from, and acting on, global evidence. The
United States stands ready to help such leaders, to continue to expand our arsenal
in the fight against poverty, and to keep it at the center of our agenda in this
hemisphere.

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April 5, 2006
JS-4158
Testimony of Secretary John W. Snow
U.S. Department of the Treasury
House Appropriations Subcommittee on Transportation,
Treasury, and Housing and Urban Development, the Judiciary,
District of Columbia
Chairman Knollenberg, Mr, Olver, and Members of the Subcommittee, I appreciate
the opportunity to appear before you today to discuss the President's fiscal year
2007 budget for the Department of the Treasury,
The President's budget for Treasury in fiscal year 2007 reflects the Department's
dedication to promoting economic opportunity, strengthening national security and
exercising fiscal discipline, The budget supports activities that help ensure all
Americans will have the opportunity to live in a nation that is more prosperous and
more secure,
The Treasury appropriations request for FY 2007 is $11,6 billion, slightly above the
FY 2006 enacted budget. This request is consistent with the President's overall
goal of cutting our deficit in half by 2009, The Treasury Department is committed to
fiscal austerity and to the most efficient and effective use of taxpayer dollars while
at the same time boosting reven,ues through continued economic growth.
Mr. Chairman, we have provided the Committee with a detailed breakdown and
justification for the President's fiscal year 2007 budget request for Treasury. I
would like to take the opportunity today to highlight portions of our request and then
I would be happy to take any questions you may have.
PROMOTING A PROSPEROUS AND STABLE U.S. ECONOMY
The Treasury Department plays a predominant role in the development and
implementation of the President's goals for domestic and international economic
growth, and the communication of his agenda. To reach our greatest potential, the
economy must increase its rate of growth and create new, high quality jobs for all
Americans.
The legal and regulatory framework must also support this growth by providing an
environment where businesses and individuals can grow and prosper without the
burdens and costs of unnecessary taxes and regulations. In addition, the role of the
tax system in supporting economic growth is critical. The economic indicators since
the President signed the Jobs and Growth Act in May 2003 provide validity to this
notion. Since that time, we have seen eleven straight months of positive business
investment; nearly five million jobs have been created; the unemployment rate
stands at a remarkable 4.8 percent; and now we are also seeing a rise in
American's income and wealth. What's also impressive is the fact that tax revenues
are surging; federal revenues for Fiscal Year 2005 totaled $2.15 trillion - the
highest level ever.
The Budget addresses the need to consider the economy when considering tax
policy with the proposed creation of a new Dynamic Analysis Division within
Treasury's Office of Tax Policy. Understanding the full range of behavioral
responses to tax changes, including how tax changes affect the size of the
economy and, eventually, tax revenues, is critical to designing meaningful, effective
tax policy, and tax reform. This small expenditure will have a substantial pay-off for

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FIGHTING THE GLOBAL WAR ON TERROR AND SAFEGUARDING OUR
FINANCIAL SYSTEMS
While promoting financial and economic growth at home and abroad, Treasury
performs a critical and far-reaching role in homeland security. The Department
battles national security threats by coordinating financial intelligence, targeting and
sanctioning supporters of terrorism and proliferators of weapons of mass
destruction (WMD), improving the safeguards of our financial systems, and
promoting international coordination to attack the financial underpinnings of terrorist
and other criminal networks. To support these efforts, the President requests
$388.7 million for fiscal year 2007.
The Office of Terrorism and Financial Intelligence (TFI) supports Treasury's
national security efforts by safeguarding the U.S. financial systems against illicit
use. TFI provides financial intelligence analysis, develops and implements antimoney laundering measures, administers the Bank Secrecy Act, and enforces
economic and trade sanctions. In addition, TFI provides policy guidance for the
Internal Revenue Service's (IRS) Criminal Investigation staff. IRS special agents
are experts at gathering and analyzing complex financial information from
numerous sources and applying the evidence to tax, money laundering, and Bank
Secrecy Act violations. These agents support the national effort to combat
terrorism and participate in the Joint Terrorism Task Forces and similar interagency
efforts focused on disrupting and dismantling terrorist financing.
Financial intelligence exposes the infrastructure of terrorist and criminal
organizations. It provides a road map for investigators to find those who help
facilitate criminal activity. These investigations lead to the recovery and forfeiture of
illegally obtained assets and create broad deterrence against criminal activity.
Treasury plays a crucial role in linking law enforcement and intelligence
communities with financial institutions and regulators. To support these efforts,
Treasury requests an increase of $16.9 million for the Financial Crimes
Enforcement Network to improve coordination with state and local regulators,
strengthen regulatory training and outreach, and enhance Bank Secrecy Act
collection, retrieval, analysis, and sharing.
Treasury exercises a full range of intelligence, regulatory, policy, and enforcement
tools in tracking and disrupting terrorists' support networks, proliferators of weapons
of mass destruction, rogue regimes and international narco-traffickers, both as a

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vital source of intelligence and as a means of degrading the terrorists' ability to
function. Treasury's actions include:
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•
•
•
•

Freezing the assets of terrorists, drug kingpins, and support networks
Cutting off corrupt foreign jurisdictions and financial institutions from the
U.S. financial system
Developing and enforcing regulations to reduce terrorist financing and
money laundering
Tracing and repatriating assets looted by corrupt foreign officials
Promoting a meaningful exchange of information with the private financial
sector to help detect and address threats to the financial system

The FY 2007 President's Budget requests $7.8 million to enable Treasury to
continue to enhance its abilities to identify, disrupt, and dismantle the financial
infrastructure of networks of terrorists, proliferators of WMD, narco-traffickers,
criminals, and other threats. Treasury will also improve its analytical capabilities, to
provide actionable intelligence and to target, designate and implement sanctions
against the financiers of WMD proliferation.
This budget request funds Treasury's national and homeland security mission at a
level that provides increasingly effective support to the war on terror. Treasury will
enhance this support with an increased international presence funded in this
request. Treasury attaches located at critical embassies throughout the world will
enable close liaison with the international financial institutions and foreign
governments to promote the national and economic security interests of the U.S.
COLLECTING TAXES AND MANAGING THE GOVERNMENT'S FINANCES
Treasury's strategic goal to manage the U.S. Government's finances effectively is
the largest part of the President's fiscal year 2007 request for the Department. The
budget request of $10.9 billion - the majority of which is for the Internal Revenue
Service - underscores Treasury's commitment to provide quality service to
taxpayers and enforce America's tax laws in a balanced manner.
The Internal Revenue Service (IRS) provides taxpayers with top-quality services by
helping them understand and meet their tax responsibilities through a commitment
to integrity and fairness. The IRS supports the Administration's goal of reducing the
federal deficit by increasing tax receipts collected through taxpayer services,
enforcement compliance, and identifying improvements that will reduce the cost of
revenue collection. Treasury's enforcement efforts yielded a record $47.3 billion in
enforcement revenue in FY 2005. The fiscal year 2007 budget will provide funding
to continue the IRS's dedication to service and maintain efforts to improve the
enforcement of tax laws.
Increasing compliance with the tax code is at the heart of the Treasury's
enforcement programs. The IRS will continue to expand enforcement efforts by
targeting its casework and enforcement activities to deliver results more effectively.
The IRS will continue to analyze tax information and data from compliance research
studies to better understand and counter the methods and means of those
taxpayers who fail to report or pay what they owe. The IRS is focusing on
discouraging and deterring non-compliance such as corrosive activity by
corporations and high-income individual taxpayers. In order to ensure funding for
tax enforcement, the Administration is again proposing a program integrity cap
adjustment. I am pleased that the Senate Budget Committee included this
adjustment in their Budget Resolution.
To reinforce this effort, the budget proposes new tax legislation that will improve the
ability of the IRS to identify underreporting and collect unpaid taxes, while
minimizing the burden on those who comply with the tax code. These legislative
proposals strategically target areas where research reveals the existence of
substantial compliance issues. The improvements will burden the taxpayers as little
as possible, and the changes support the Administration's broader focus on
identifying legislative and administrative changes to increase compliance with the
tax code.

http://www.tteas.gov/press/releaseS/j£4158.htm

3/2/2007

Page 4 of 5

The IRS continues to make progress with the Business Systems Modernization
(BSM) program. BSM aims to modernize the tax system by providing real business
benefits to taxpayers and IRS employees through new technology. In fiscal year
2006 and continuing in FY 2007, BSM is revising its modernization strategy to
emphasize the Incremental release of projects to deliver business value sooner and
at lower risk.
The Treasury Inspector General for Tax Administration (TIGTA) continues to
partner with the IRS in increasing compliance with the tax code by ensuring that the
IRS can pursue the effective administration of federal tax laws without hindrance
from internal and external attempts to corrupt the tax system. TIGTA serves to
highlight opportunities for cost savings in IRS operations, protect taxpayer rights
and privacy, and generally promote the economy, efficiency and effectiveness of
tax administration.
The Alcohol and Tobacco Tax and Trade Bureau (TTB) also works to ensure that
taxes due become taxes collected. TTB is the nation's leader on regulating alcohol,
tobacco, firearms, and ammunition excise taxes. The bureau is responsible for the
collection of approximately $15 billion annually. TTB ensures that alcohol
beverages are labeled, advertised, and marketed in compliance with the law. TTB's
efforts assure the public that alcohol and tobacco products reaching the
marketplace are unadulterated, thereby providing marketing and sales value to the
industry. The budget proposes to establish user fees to cover a portion of the costs
of these regulatory functions.
Treasury also works to disburse, manage, and account for the nation's monies as it
distributes payments, finances public services, and balances the government's
books.
The Financial Management Service (FMS) is the government's financial manager
and as such administers the government's payments and collections systems. In
fiscal year 2005, FMS issued over 952 million non-defense payments valued at
$1.5 trillion, of which 76 percent were made electronically. The President's Budget
includes proposed legislation that would enhance non-tax debt collection
opportunities, including allowing FMS to collect an estimated $3.8 billion in past due
unemployment compensation debts over the next ten years.
The Bureau of the Public Debt (BPD) facilitates Treasury's debt financing
operations by issuing and servicing Treasury securities. BPD will continue its goals
of increased efficiency and achieve its mission to borrow the money needed to
operate the federal government and to account for the resulting debt.
STRENGHENING FINANCIAL INSTITUTIONS

Treasury, through the Office of the Comptroller of the Currency (OCC) and the
Office of Thrift Supervision (OTS), maintains the integrity of the financial system of
the United States by chartering, regulating, and supervising national banks and
savings associations. Ongoing supervision and enforcement ensure that each
national bank or saving association is operating in a safe and sound manner, which
enhances the reliability of the U.S. financial system. In fiscal year 2005, OCC and
OTS oversaw assets held by these insured depository institutions totaling $7.3
trillion.
The United States Mint and the Bureau of Printing and Engraving (BEP) share the
responsibility of meeting global demand for the world's most accepted coins and
currency. Neither the U.S. Mint nor the BEP receive any appropriated funds from
Congress. In fiscal year 2005, the Mint returned $775 million to the Treasury's
General Fund. The U.S. Mint continues its work to streamline operations and
remain highly effective, while providing coins for circulation and numismatic
purposes. BEP continues its work of developing new methods of designing our
currency to guard against counterfeiting. The bureau plans to release the
redesigned $100 dollar bill later this year.
MANAGING TREASURY EFFECTIVELY

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Page 5 of 5

TREASURY AND THE PRESIDENT'S MANAGEMENT AGENDA
Treasury is meeting the President's challenge to improve the management of the
Department's people and resources. On the most recent President's Management
Agenda (PMA) scorecard, the Department achieved a Green progress score in five
out of six initiative areas, indicating that plans are in place and implementation is
progressing to accomplish the PMA objectives.
The Office of Management and Budget's Program Assessment Rating Tool (PART)
is intended to improve program performance. Treasury made a strong
commitment to improve its program performance, and PART scores subsequently
have improved. Currently, 70 percent of Treasury's PART evaluations have scored
"adequate" or better and Treasury has set a target of 76 percent scoring "adequate"
or better in fiscal year 2006.
Treasury will continue to work closely with the Office of Management and Budget
and other stakeholders to make improvements in implementing the initiatives set
forth in the President's Management Agenda.

CONCLUSION
Mr. Chairman, I look forward to working with you, members of the Committee, and
your staff to maximize Treasury's resources in the best interest of the American
people and our country as we move into fiscal year 2007. We have hard work
ahead of us and I am hopeful that together we can work to make the Treasury a
model for management and service to the American people, and continue to
generate economic growth, increase the number of jobs for our citizens, and keep
our financial systems strong and secure.
Thank you again for the opportunity to present the President's Budget for the
Treasury Department today. I would be pleased to answer your questions.

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Page 1 of2

April 5, 2006
JS-4159

Treasury Secretary Snow to Visit Cincinnati, OH and
Florence, KY to Discuss Education & the U.S. Economy
U.S. Treasury Secretary John W. Snow will travel to Cincinnati, Ohio and Florence,
KY to discuss the important role America's Community Colleges play in keeping the
economy strong. While in Cincinnati, Treasury Secretary Snow will visit a
classroom at The Midwest Culinary Institute. Secretary Snow will also travel to
Florence, KY to meet with Mazak Executives and tour their facility.
The following events are open to credentialed media:

WHO
U.S. Treasury Secretary John W. Snow
WHAT
Classroom Visit at the Midwest Culinary Institute
WHEN
Friday, April 7, 11 :30 a.m. (EDT)
WHERE
Cincinnati State College
Advanced Technology and Learning Center
3520 Central Parkway
Cincinnati, OH
NOTE
Media must RSVP to Michele Imhoff at (513) 569-1519 or
(513) 310-5610

WHO
U.S. Treasury Secretary John W. Snow
WHAT
Site visit to Mazak Corporation
WHEN
Friday, April 7, 2:00 p.m. (EDT)
WHERE
Mazak Corporation
8025 Production Drive
Florence, KY
NOTE
There will be a press availability immediately following the tour. Media must RSVP
to George Yamane at (859) 342-1867

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Page 1 of 1

April 5, 2006
JS-4160
Treasury Under Secretary for International Affairs
Tim Adams Will Visit Houston, TX
To Discuss The U.S. Economy
U.S. Treasury Under Secretary for International Affairs Tim Adams will visit
Houston, Texas to discuss the U.S. and international economy and President
Bush's agenda for continued strong growth and job creation. While in Houston,
Under Secretary Adams will make remarks to the Asia Society.
The following event is open to credentialed media.
WHO
U.S. Treasury Under Secretary for International Affairs Tim Adams
WHAT
Remarks to Asia Society
WHEN
Friday, April 7,1230 p.m. (COT)
WHERE
Houston Society of Financial Analysts
4605 Post Oak Place
Suite 205
Houston, TX

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April 5, 2006
JS-4161
Treasury Assistant Secretary for Economic Policy
Mark Warshawsky Will Visit Philadelphia, PA
To Discuss The U.S. Economy
U.S. Treasury Assistant Secretary for Economic Policy Mark Warshawsky will visit
Philadelphia, Pennsylvania to discuss the U.S. economy and President Bush's
agenda for continued strong growth and job creation. While in Philadelphia,
Assistant Secretary Warshawsky will make remarks at the University of
Pennsylvania Wharton Business School.
The following event is open to credentialed media.
WHO
U.S. Treasury Assistant Secretary for Economic Policy Mark Warshawsky
WHAT
Remarks to University of Pennsylvania Wharton Business School
WHEN
Friday, April 7,10:30 a.m. (EDT)
WHERE
University of Pennsylvania
Huntsman Hall - Room 365
38th and Walnut SI.
Philadelphia, PA

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Page 1 of 5

April 6, 2006
JS-4162
Testimony of Secretary John W. Snow
U.S. Department of the Treasury
Senate Appropriations Subcommittee on Transportation, Treasury, the Judiciary,
Housing and Urban Development, and Related Agencies
Chairman Bond, Senator Murray, and Members of the Subcommittee, I appreciate
the opportunity to appear before you today to discuss the President's fiscal year
2007 budget for the Department of the Treasury.
The President's budget for Treasury in fiscal year 2007 reflects the Department's
dedication to promoting economic opportunity, strengthening national security and
exercising fiscal discipline. The budget supports activities that help ensure all
Americans will have the opportunity to live in a nation that is more prosperous and
more secure.
The Treasury appropriations request for FY 2007 is $11.6 billion, slightly above the
FY 2006 enacted budget. This request is consistent with the President's overall
goal of cutting our deficit in half by 2009. The Treasury Department is committed to
fiscal austerity and to the most efficient and effective use of taxpayer dollars while
at the same time boosting revenues through continued economic growth.
Mr. Chairman, we have provided the Committee with a detailed breakdown and
Justification for the President's fiscal year 2007 budget request for Treasury. I
would like to take the opportunity today to highlight portions of our request and then
I would be happy to take any questions you may have.
PROMOTING A PROSPEROUS AND STABLE U.S. ECONOMY
The Treasury Department plays a predominant role in the development and
implementation of the President's goals for domestic and international economic
growth, and the communication of his agenda. To reach our greatest potential, the
economy must increase its rate of growth and create new, high quality jobs for all
Americans.
The legal and regulatory framework must also support this growth by providing an
environment where businesses and individuals can grow and prosper without the
burdens and costs of unnecessary taxes and regulations. In addition, the role of the
tax system in supporting economic growth is critical. The economic indicators since
the President signed the Jobs and Growth Act in May 2003 provide validity to this
notion. Since that time, we have seen eleven straight months of positive business
investment; nearly five million jobs have been created; the unemployment rate
stands at a remarkable 4.8 percent; and now we are also seeing a rise in
American's income and wealth. What's also impressive is the fact that tax revenues
are surging; federal revenues for Fiscal Year 2005 totaled $2.15 trillion - the
highest level ever.
The Budget addresses the need to consider the economy when considering tax
policy with the proposed creation of a new Dynamic Analysis Division within
Treasury's Office of Tax Policy. Understanding the full range of behavioral
responses to tax changes, including how tax changes affect the size of the
economy and, eventually, tax revenues, is critical to designing meaningful, effective
tax policy, and tax reform. This small expenditure will have a substantial pay-off for

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Page 2 of 5

the American taxpayer.
Treasury's Office of International Affairs also plays a key role in supporting growth
byadvancing our nation's interests in an increasingly complex world economy. The
office Improves access to foreign markets for U.S. financial service firms, promotes
domestic demand-led economic growth abroad, and fosters economic restructuring
and stability. These activities contribute to rising standards of living in both the U.S.
and other countries.
As globalization has progressed, Treasury's on-the-ground presence in
international finance and economic centers has steadily receded. The $9.4 million
requested to increase Treasury's overseas presence will enable the Department to
carry out its international mission in the global economy more effectively. Treasury
attaches will work in tandem with the Office of International Affairs and the Office of
Terrorism and Financial Intelligence to build relationships with foreign officials and
work with local U.S. industry and agency representatives to advance U.S. interests.
They will also provide much-needed intelligence and expertise to U.S. officials in
Washington formulating policy on international economics, trade, finance, and
terrorist finance.
The Budget also seeks $7.8 million for the Community Development Financial
Institutions (CDFI) Fund to administer the New Markets Tax Credit and manage the
existing loan portfolio. The Budget proposes to consolidate CDFI's remaining
programs into the Strengthening America's Communities Initiatives (SACI) within
the Departments of Commerce and Housing and Urban Development.
FIGHTING THE GLOBAL WAR ON TERROR AND SAFEGUARDING OUR
FINANCIAL SYSTEMS
While promoting financial and economic growth at home and abroad, Treasury
performs a critical and far-reaching role in homeland security. The Department
battles national security threats by coordinating financial intelligence, targeting and
sanctioning supporters of terrorism and proliferators of weapons of mass
destruction (WMD), improving the safeguards of our financial systems, and
promoting international coordination to attack the financial underpinnings of terrorist
and other criminal networks. To support these efforts, the President requests
$388.7 million for fiscal year 2007.
The Office of Terrorism and Financial Intelligence (TFI) supports Treasury's
national security efforts by safeguarding the U.S. financial systems against illicit
use. TFI provides financial intelligence analysis, develops and implements antimoney laundering measures, administers the Bank Secrecy Act, and enforces
economic and trade sanctions. In addition, TFI provides policy guidance for the
Internal Revenue Service's (IRS) Criminal Investigation staff. IRS special agents
are experts at gathering and analyzing complex financial information from
numerous sources and applying the evidence to tax, money laundering, and Bank
Secrecy Act violations. These agents support the national effort to combat
terrorism and participate in the Joint Terrorism Task Forces and similar interagency
efforts focused on disrupting and dismantling terrorist financing.
Financial intelligence exposes the infrastructure of terrorist and criminal
organizations. It provides a road map for investigators to find those who help
facilitate criminal activity. These investigations lead to the recovery and forfeiture of
illegally obtained assets and create broad deterrence against criminal activity.
Treasury plays a crucial role in linking law enforcement and intelligence
communities with financial institutions and regulators. To support these efforts,
Treasury requests an increase of $16.9 million for the Financial Crimes
Enforcement Network to improve coordination with state and local regulators,
strengthen regulatory training and outreach, and enhance Bank Secrecy Act
collection, retrieval, analysis, and sharing.
Treasury exercises a full range of intelligence, regulatory, policy, and enforcement
tools in tracking and disrupting terrorists' support networks, proliferators of weapons
of mass destruction, rogue regimes and international narco-traffickers, both as a

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Page 3 of 5

vital source of intelligence and as a means of degrading the terrorists' ability to
function. Treasury's actions include
•
•
•
•
•

The FY 2007 President's Budget requests $7.8 million to enable Treasury to
continue to enhance its abilities to identify, disrupt, and dismantle the financial
infrastructure of networks of terrorists, proliferators of WMD, narco-traffickers,
criminals, and other threats. Treasury will also improve its analytical capabilities, to
provide actionable intelligence and to target, designate and implement sanctions
against the financiers of WMD proliferation.
This budget request funds Treasury's national and homeland security mission at a
level that provides increasingly effective support to the war on terror. Treasury will
enhance this support with an increased international presence funded in this
request. Treasury attaches located at critical embaSSies throughout the world will
enable close liaison with the international financial institutions and foreign
governments to promote the national and economic security interests of the U.S.
COLLECTING TAXES AND MANAGING THE GOVERNMENT'S FINANCES
Treasury's strategic goal to manage the U.S. Government's finances effectively is
the largest part of the President's fiscal year 2007 request for the Department. The
budget request of $10.9 billion - the majority of which is for the Internal Revenue
Service - underscores Treasury's commitment to provide quality service to
taxpayers and enforce America's tax laws in a balanced manner.
The Internal Revenue Service (IRS) provides taxpayers with top-quality services by
helping them understand and meet their tax responsibilities through a commitment
to integrity and fairness. The IRS supports the Administration's goal of reducing the
federal deficit by increasing tax receipts collected through taxpayer services,
enforcement compliance, and identifying improvements that will reduce the cost of
revenue collection. Treasury's enforcement efforts yielded a record $47.3 billion in
enforcement revenue in FY 2005. The fiscal year 2007 budget will provide funding
to continue the IRS's dedication to service and maintain efforts to improve the
enforcement of tax laws.
Increasing compliance with the tax code is at the heart of the Treasury's
enforcement programs. The IRS will continue to expand enforcement efforts by
targeting its casework and enforcement activities to deliver results more effectively.
The IRS will continue to analyze tax information and data from compliance research
studies to better understand and counter the methods and means of those
taxpayers who fail to report or pay what they owe. The IRS is focusing on
discouraging and deterring non-compliance such as corrosive activity by
corporations and high-income individual taxpayers. In order to ensure funding for
tax enforcement, the Administration is again proposing a program integrity cap
adjustment. I am pleased that the Senate Budget Committee included this
adjustment in their Budget Resolution.
To reinforce this effort, the budget proposes new tax legislation that will improve the
ability of the IRS to identify underreporting and collect unpaid taxes, while
minimizing the burden on those who comply with the tax code. These legislative
proposals strategically target areas where research reveals the existence of
substantial compliance issues. The improvements will burden the taxpayers as little
as possible, and the changes support the Administration's broader focus on
identifying legislative and administrative changes to increase compliance with the
tax code.

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Page 4 of 5

The IRS continues to make progress with the Business Systems Modernization
(BSM) program BSM aims to modernize the tax system by providing real business
benefits to taxpayers and IRS employees through new technology. In fiscal year
2006 and continuing in FY 2007. BSM is revising its modernization strategy to
emphasize the Incremental release of projects to deliver business value sooner and
at lower risk.
The Treasury Inspector General for Tax Administration (TIGTA) continues to
partner with the IRS in increasing compliance with the tax code by ensuring that the
IRS can pursue the effective administration of federal tax laws without hindrance
from internal and external attempts to corrupt the tax system. TIGTA serves to
highlight opportunities for cost savings in IRS operations, protect taxpayer rights
and privacy, and generally promote the economy, efficiency and effectiveness of
tax administration.
The Alcohol and Tobacco Tax and Trade Bureau (TTB) also works to ensure that
taxes due become taxes collected. TTB is the nation's leader on regulating alcohol,
tobacco, firearms, and ammunition excise taxes. The bureau is responsible for the
collection of approximately $15 billion annually. TTB ensures that alcohol
beverages are labeled, advertised, and marketed in compliance with the law. TTB's
efforts assure the public that alcohol and tobacco products reaching the
marketplace are unadulterated, thereby providing marketing and sales value to the
industry. The budget proposes to establish user fees to cover a portion of the costs
of these regulatory functions.
Treasury also works to disburse, manage, and account for the nation's monies as it
distributes payments. finances public services, and balances the government's
books.
The Financial Management Service (FMS) is the government's financial manager
and as such administers the government's payments and collections systems. In
fiscal year 2005. FMS issued over 952 million non-defense payments valued at
$1.5 trillion, of which 76 percent were made electronically. The President's Budget
includes proposed legislation that would enhance non-tax debt collection
opportunities, including allowing FMS to collect an estimated $3.8 billion in past due
unemployment compensation debts over the next ten years.
The Bureau of the Public Debt (BPO) facilitates Treasury's debt financing
operations by issuing and servicing Treasury securities. BPO will continue its goals
of increased efficiency and achieve its mission to borrow the money needed to
operate the federal government and to account for the resulting debt.
STRENGHENING FINANCIAL INSTITUTIONS
Treasury, through the Office of the Comptroller of the Currency (OCC) and the
Office of Thrift Supervision (OTS), maintains the integrity of the financial system of
the United States by chartering, regulating, and supervising national banks and
savings associations. Ongoing supervision and enforcement ensure that each
national bank or saving association is operating in a safe and sound manner, which
enhances the reliability of the U.S. financial system. In fiscal year 2005, OCC and
OTS oversaw assets held by these insured depository institutions totaling $7.3
trillion.
The United States Mint and the Bureau of Printing and Engraving (BEP) share the
responsibility of meeting global demand for the world's most accepted coins and
currency. Neither the U.S. Mint nor the BEP receive any appropriated funds from
Congress. In fiscal year 2005, the Mint returned $775 million to the Treasury's
General Fund. The U.S. Mint continues its work to streamline operations and
remain highly effective, while providing coins for circulation and numismatic
purposes. BEP continues its work of developing new methods of designing our
currency to guard against counterfeiting. The bureau plans to release the
redesigned $100 dollar bill later this year.
MANAGING TREASURY EFFECTIVELY

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The President has requested $219.8 million to ensure proper stewardship of the
Department. Treasury is committed to using the resources provided by taxpayers
in the most efficient manner possible.
The Departmental Offices and Department-wide Systems and Capital Investments
Program (DSCIP) account funds technology investments to modernize business
processes throughout Treasury, helping the Department improve efficiency. In
fiscal year 2007. the President's budget requests $34 million for ongoing
modernization and critical information technology projects and to invest in other
new technologies that will improve efficiency and service. Included in this request
is $21.2 million to complete the redesign and modernization of Treasury's Foreign
Intelligence Network (TFIN), a Top Secret/Sensitive Compartmented Information
system critical to the support of Treasury's national security mission.
Included in this budget request is $17.4 million to fund the Department's Office of
Inspector General (OIG) audit and investigative programs. The budget also
includes $136.5 million for the Treasury Inspector General for Tax Administration
(TIGTA) and its efforts to oversee the nation's tax administration.
The Treasury Franchise Fund, recognized as a Financial Management Center of
Excellence. is a self-supporting business-like entity that provides common
administrative services to other Federal agencies on a fully reimbursable basis.
The Fund will continue to support Treasury's stewardship of the Department by
promoting excellence in its management and increase competition for government
and financial services.
TREASURY AND THE PRESIDENT'S MANAGEMENT AGENDA
Treasury is meeting the President's challenge to improve the management of the
Department's people and resources. On the most recent President's Management
Agenda (PMA) scorecard, the Department achieved a Green progress score in five
out of six initiative areas, indicating that plans are in place and implementation is
progressing to accomplish the PMA objectives.
The Office of Management and Budget's Program Assessment Rating Tool (PART)
is intended to improve program performance. Treasury made a strong
commitment to improve its program performance, and PART scores subsequently
have improved. Currently, 70 percent of Treasury's PART evaluations have scored
"adequate" or better and Treasury has set a target of 76 percent scoring "adequate"
or better in fiscal year 2006.
Treasury will continue to work closely with the Office of Management and Budget
and other stakeholders to make improvements in implementing the initiatives set
forth in the President's Management Agenda.
CONCLUSION
Mr. Chairman, I look forward to working with you, members of the Committee, and
your staff to maximize Treasury's resources in the best interest of the American
people and our country as we move into fiscal year 2007. We have hard work
ahead of us and I am hopeful that together we can work to make the Treasury a
model for management and service to the American people, and continue to
generate economic growth, increase the number of jobs for our citizens, and keep
our financial systems strong and secure.
Thank you again for the opportunity to present the President's Budget for the
Treasury Department today. I would be pleased to answer your questions.

http://www.treas.gov/press/releaseS/js4162.htm

3/2/2007

Chart 1

HIGHWAY TRUST FUND RECEIPTS FORECAST
Comparison of FY 2007 Budget and FY 2006 Mid-Session Review Forecasts

Receipts ($ billions)

45
About 54% of the increase in
forecasted receipts are due to the
enactment of SAFETEA-LU and the
Energy Tax Incentives Act of 2005.
43-1

FY 2007 Budget Forecast

~
40 -1

:.;.7'~

:;;;-- "...---

FY 2006 Mid-Session Review Forecast

38 -1

35+1------------~-------------,------------,-------------,-------------~----------~

2006

2007

2008

2009

2010

2011

Receipts
($ billions)

Chart 2
Uncertainty in Treasury"s Forecast of
Tax Receipts Dedicated to the Highway Trust Fund

.~I------~------------------------------------------------------------~

2000

2002

2004

2006

2008

Table 1
Forecast Excise Tax Receipts to the Highway Account of the Highway Trust Fund
Actual Actual
Actual
Actual
Forecast
Forecast Forecast Forecast Forecast Forecast
Actual
Actual
2011
2010
2008
2009
2000
2001
2002
2003
2004
2005
2006
2007
Highway Account
Gross Transfers
Gasoline
Diesel & other fuels
Retail tax on Trucks
Highway-type tires
Heavy vehicle use tax
Gross HA Transfers
Less Aquatic Resources
Net HA Transfers
Less HA Refunds
INet Highwa~ Account Receiets

23,628
9,299
4,075
629
1,422
39,053
423
38,630
1,044
37,586

18,441
7,158
1,489
343
610
28,041
215
27,826
925
26,901

19,273
7,366
1,266
351
982
29,238
353
28,885
919
27,966

19,600
7,531
1,710
403
940
30,184
360
29,824
878
28,946

19,929
7,883
1,847
446
945
31,050
373
30,677
908
29,769

21,181
8,426
2,993
467
1,090
34,157
383
33,774
880
32,894

22,038
8,558
3,128
560
1,094
35,378
371
35,007
956
34,051

22,361
8,631
3,287
556
1,155
35,990
380
35,610
965
34,645

22,696
8,817
3,487
569
1,217
36,786
391
36,395
984
35,411

23,027
9,000
3,679
587
1,282
37,575
402
37,173
1,005
36,168

23,337
9,148
3,864
607
1,351
38,307
412
37,895
1,024
36,871

Year-to-Year Changes
Gross Transfers
Gasoline
Diesel & other fuels
Retail tax on Trucks
Highway-type tires
Heavy vehicle use tax
Gross HA Transfers
Less Aquatic Resources
Net HA Transfers
Less HA Refunds
I Net Highwa~ Account Receiets

-821
-269
-1,832
-99
-311
-3,332
6
-3,338
94
-3,432

832
208
-223
8
372
1,197
138
1,059
-6
1,065

327
165
444
52
-42
946
7
939
-41
980

329
352
137
43
5
866
13
853
30
823

1,252
543
1,146
21
145
3,107
10
3,097
-28
3,125

857
132
135
93
4
1,221
-12
1,233
76
1,157

323
73
159
-4
61
612
9
603
9
594

335
186
200
13
62
796
11
785
19
766

331
183
192
18
65
789
11
778
21
757

310
148
185
20
69
732
10
722
19
703

291
151
211
22
71
746
11
735
20
715

Year-to-Year Percentage Changes
Gross Transfers
Gasoline
Diesel & other fuels
Retail tax on Trucks
Highway-type tires
Heavy vehicle use tax
Gross HA Transfers
Less Aquatic Resources
Net HA Transfers
Less HA Refunds
INet Highwa~ Account Receiets

-4.3%
-3.6%
-55.2%
-22.4%
-33.8%
-10.6%
2.9%
-10.7%
11.3%
-11.3%

4.5%
2.9%
-15.0%
2.3%
61.0%
4.3%
64.2%
3.8%
-0.6%
4.0%

1.7%
2.2%
35.1%
14.8%
-4.3%
3.2%
2.0%
3.3%
-4.5%
3.5%

1.7%
4.7%
8.0%
10.7%
0.5%
2.9%
3.6%
2.9%
3.4%
2.8%

6.3%
6.9%
62.0%
4.7%
15.3%
10.0%
2.7%
10.1%
-3.1%
10.5%

4.0%
1.6%
4.5%
19.9%
0.4%
3.6%
-3.1%
3.7%
8.6%
3.5%

1.5%
0.9%
5.1%
-0.7%
5.6%
1.7%
2.4%
1.7%
0.9%
1.7%

1.5%
2.2%
6.1%
2.3%
5.4%
2.2%
2.9%
2.2%
2.0%
2.2%

1.5%
2.1%
5.5%
3.2%
5.3%
2.1%
2.8%
2.1%
2.1%
2.1%

1.3%
1.6%
5.0%
3.4%
5.4%
1.9%
2.5%
1.9%
1.9%
1.9%

1.2%
1.7%
5.5%
3.6%
5.3%
1.9%
2.7%
1.9%
2.0%
1.9%

Note:

19,262
7,427
3,321
442
921
31,373
209
31,164
831
30,333

The FY 2000 through FY2005 figures are based on the end-of-year Highway Account Income Statement reported by the Bureau of Public Debt. The FY 2006
through FY 2011 figures are forecasts made by the Office of Tax Analysis, Department of the Treasury for the FY 2007 Budget.

Page 1 of8

April 6, 2006
JS-4163
Testimony of Stuart Levey, Under Secretary
Terrorism and Financial Intelligence
U.S. Department of the Treasury
Senate Appropriations Subcommittee on Transportation, Treasury, the
Judiciary
Housing and Urban Development, and Related Agencies
Chairman Bond, Ranking Member Murray, and other distinguished Members of the
Subcommittee, thank you for the opportunity to speak before you today about the
President's Fiscal Year 2007 request for the Office of Terrorism and Financial
Intelligence (TFI) at the Department of the Treasury. This funding will provide us
with the resources needed to support the Department's essential and growing
terrorist financing, money laundering, WMD proliferation, narco-trafficking, and
economic sanctions programs, as well as the intelligence capabilities that are
critical to the success of these programs.
As you know, TFI is a relatively new office. It was created in 2004 to oversee the
Treasury Department's enforcement and intelligence functions aimed at severing
the lines of financial support to international terrorists, WMD proliferators, narcotics
traffickers, and other criminals. The office consolidates the policy, enforcement,
regulatory, and analytical functions of the Treasury and adds to them critical
intelligence components by bringing under a single umbrella the Office of
Intelligence and Analysis (OIA), the Office of Terrorist Financing and Financial
Crimes (TFFC), the Financial Crimes Enforcement Network (FinCEN), the Office of
Foreign Assets Control (OFAC), and the Executive Office for Asset Forfeiture. TFI
also works closely with the IRS-Criminal Investigative Division in its anti-money
laundering, terrorist financing, and financial crimes cases.
Together, we leverage a wide range of tools to pressure obstructionist regimes.
Using various authorities, we also have the ability to freeze the assets of terrorists,
proliferators, and other wrongdoers. We use regulatory authorities to help banks
and other institutions implement systems to detect and halt corrupt money flows.
And, diplomatically, we work with other governments and international institutions,
urging them to act with us against threats and to take critical steps to stem the flow
of illicit finances.
Key Achievements
As Treasury has continued - with your support - to build much-needed resources for
this new office, we have achieved some important successes. Over the past year
alone, TFI has designated and financially isolated front companies, nongovernmental organizations, and facilitators supporting terrorist organizations, such
as al Qaida, Jemaah Islamiyah, and Egyptian Islamic Jihad; implemented targeted
financial sanctions under a new Executive order against North Korean, Iranian, and
Syrian facilitators of WMD proliferation; and struck a deep blow to North Korea's
illicit conduct and ability to abuse the international financial system to facilitate that
conduct. These efforts have required a contribution from all of TFI's components, as
well as the hard work of other Departments and agencies.
These accomplishments are only the tip of the iceberg, but they demonstrate
without question not only that our resources are being put to good use, but that the
Treasury Department is fulfilling its vitally important role to play in deterring and
defending against our country's greatest national security challenges. Our financial
authorities complement other national security instruments, providing policymakers

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with a range of options for isolating and pressuring hostile regimes, terrorists, and
proliferators of weapons of mass destruction. When we are confronted with a
foreign threat that is not susceptible to diplomatic pressure, financial authorities are
among the rare tools short of military force that we can use to exert leverage.
I would like to highlight some of TFI's key achievements in greater detail.
Terrorist Finance
The 9/11 Commission's Public Discourse Project awarded its highest grade, an A-,
to the U.S. Government's efforts to combat terrorist financing. This praise truly
belongs to the dozens of intelligence analysts, sanctions officers, regional
specialists, and regulatory experts in the Treasury's Office of Terrorism and
Financial Intelligence (TFI) who focus on terrorist financing, along with their talented
colleagues in other agencies - law enforcement agents who investigate terrorism
cases, Justice Department prosecutors who bring terrorist financiers to justice,
foreign service officers in embassies around the world who seek cooperation from
other governments and many others from the intelligence community. You will not
find a more talented and dedicated group of people, with a complete focus on the
mission.
Teamwork across agencies has translated into effectiveness. We have continued to
improve our ability to track key targets and to take the most appropriate action
against the terrorist target. Sometimes that means that the Treasury will take public
action, sometimes it involves persuading another country to take action, and
sometimes we decide to continue to quietly collect intelligence to better map out the
terrorist network. From the formation of TFI, we have been committed to that
philosophy, resisting the application of metrics to our activities that would distort our
incentives, for example, by emphasizing the number of terrorism designations.
The meaningful indicators of our success are typically complex and not readily
quantifiable, such as anecdotal reporting about terrorist cells having difficulty raising
money or paying salaries or benefits. In recent months, we have seen at least one
instance of what we look for most - a terrorist organization indicating that it cannot
pursue sophisticated attacks because it lacks adequate funding.
Typically, though, the information we receive is not as clear. As an example, one
interesting trend that we have witnessed is a decrease in the average amount of
transactions that we learn about. Obviously, we are only privy to a subset of the
total transactions, but this observation carries across various financial conduits and
terrorist organizations and we have no reason to believe that it is unrepresentative.
Interpreting this indicator is more difficult. It could reflect an overall decrease in the
amount of money moving to and from terrorists. Just as easily, it could indicate that
terrorists are breaking their transactions out into smaller sums, fearing interception.
Alternatively, the trend could be an outgrowth of a movement by terrorist
organizations away from banks towards less formal mechanisms, like cash
couriers. These couriers may offer concealment, but some get caught and some get
greedy, and so it is very risky to entrust them with large sums of money. Any of
these alternatives would indicate that our efforts are having an impact and this trend
may bear out our assessment that terrorists who fear using the banking system do
not have a ready and reliable alternative for moving large sums of money. We will
continue to monitor developments, but I hope this provides a sense of how complex
a task it is to assess the overall impact of our efforts to combat terrorist financing.
In specific areas, we can point to more concrete indicators of success. We have
made dramatic progress in combating terrorist abuse of charities. Prior to 9/11 and
even afterwards, terrorists used charities as safe and easy ways to raise and move
large sums of money. AI Qaida and Hamas, in particular, relied on charities to
funnel money from wealthier areas to conflict zones with great success. Through a
combination of law enforcement and regulatory actions against several corrupt
charities, both at home and abroad, we have taken out key organizations and
deterred or disrupted others. In tandem, active engagement with the legitimate
charitable sector has succeeded in raising transparency and accountability across
the board.

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We have thus far designated more than 40 charities worldwide as supporters of
terrorism, including several U.S. charities such as the Holy Land Foundation, the
Global Relief Foundation, the Benevolence International Foundation, the AI
Haramain Islamic Foundation, and the Islamic African/American Relief Agency
(lARA). The Impact of these actions is serious, and sometimes decisive. lARA once
provided hundreds of thousands of dollars to Osama bin Laden. More recently,
lARA country offices have experienced increased pressure and its leaders have
expressed concern about the organization's future.
Our most recent action targeted KindHearts, a purported charity in Ohio that was
supporting Hamas. In that instance, we took coordinated action with DOJ
prosecutors and the FBI, which executed a search warrant at the moment that we
froze the group's assets. Although we generally do not disclose specific blocked
asset information, KindHearts has stated that over one million dollars of its assets
were blocked. Overall, engagement with the charitable sector combined with
enforcement actions against bad organizations have radically altered the dynamic,
leaving dirty charities isolated and imperiled
Another important measure of our progress is an increase in the number of
countries approaching the U.N. Security Council to seek the designation of terrorist
supporters. This global designation program, overseen by the U.N.'s 1267
Committee, is a powerful tool for global action against supporters of al Qaida. It
envisages 191 UN Member States acting as one to isolate al Qaida's supporters,
both physically and financially. Increasingly, countries have begun to look to this
committee, and administrative measures in general, as an effective complement to
law enforcement action. In 2005, 18 Member States submitted names for the
Committee's consideration, many for the first time, and we will continue to support
this process and encourage others to do so as well.
In other arenas of this fight, however, we are not where we need to be. State
sponsors of terrorism, like Iran and Syria, present a vexing problem, providing not
only money and safe haven to terrorists, but also a financial infrastructure through
which terrorists can move, store, and launder their funds. While this is a daunting
challenge, I believe that the Treasury Department's tools, combined with
cooperation from responsible financial institutions, can make a difference. In the
past year, for example, we have designated top Syrian officials, including the theninterior minister Ghazi Kanaan and the head of Syrian Military Intelligence, Assaf
Shawkat, in part for their support to terrorist organizations. Also, on March 9, we
issued a final rule under Section 311 of the PATRIOT Act confirming that the
Commercial Bank of Syria (CBS) is a "primary money laundering concern" and
forbidding U.S. financial institutions from holding correspondent accounts for CBS.
Among our reasons for that action was the risk of terrorist financing posed by a
significant bank owned and controlled by an active and defiant state sponsor of
terror like Syria.
We have ample reason to believe that responsible financial institutions around the
world pay close attention to such actions and other similar indicators and adjust
their business activities accordingly, even if they are not required to do so. A recent
example of interest was the announcement by the international bank UBS that it
intended to cut off all business with Iran and Syria. Other financial institutions are
similarly reviewing their business arrangements and taking special precautions to
ensure that they do not permit terrorist financiers or WMD proliferators - which we
are increasingly able to identify and combat using a new authority - access to the
global financial system
WMD Proliferation
The exposure of the WMD proliferation network headed by A. Q. Khan - father of
Pakistan's nuclear bomb and, more recently, nuclear technology dealer to Libya,
Iran, and North Korea - provided the world with a window into one of the most
frightening scenarios that we face. The U.S. government is doing everything in its
power deter, disrupt, and prevent the spread of weapons of mass destruction and
ensure that they do not fall into the hands of terrorists. Treasury plays a key role in
this effort.

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Proliferators, like terrorists, require a substantial support network. By cutting off the
support lines of that network, we can isolate individual proliferators, paint a clearer
picture of how, and with whom, they operate, and erode the infrastructure that
supports them. In June of 2005, the President issued Executive Order 13382, which
allows us to do just that. This Executive Order authorizes the Treasury and State
Departments to target key nodes of WMD proliferation networks, including their
suppliers and financiers. A designation under this Executive Order cuts the target
off from access to the U.S. financial and commercial systems and puts the
international community on notice about the threat it poses. Based on evidentiary
packages prepared primarily by OFAC, the President initially designated a total of
eight entities in North Korea, Iran, and Syria. Continuing investigations by OFAC
resulted in the subsequent designation of eight additional North Korean, and two
additional Iranian, entities. And, just last week, Treasury designated two more
proliferators, Kohas AG and its president, Jakob Steiger. Kohas AG, a Swiss
company, acts as a technology broker in Europe for the North Korean military and
has procured goods with weapons-related applications. Nearly half of the
company's shares are owned by a subsidiary of Korea Ryonbong General
Corporation, a previously-designated North Korean entity that has been a focus of
U.S. and allied efforts to stop the spread of controlled materials and weaponsrelated goods, particularly ballistic missiles.
OFAC's efforts to prepare additional designation packages - with the support of the
Office of Intelligence and Analysis - are ongoing and will continue throughout Fiscal
Years 2006 and 2007. In fact, one major OFAC initiative for 2007, which I will
discuss shortly, relates directly to the WMD program.
This new authority provides a powerful tool to combat the financial underpinnings of
WMD proliferation and also underscores the President's commitment to work with
our international partners to combat this threat. We hope our program can provide a
model for other governments to draw upon as they develop their own laws to stem
the flow of financial and other support for proliferation activities, as called for in U.N.
Security Council Resolution 1540 and by the G-8 at Gleneagles.
The Treasury and State Departments have been engaged in aggressive
international outreach in order to promote this important concept. Assistant
Secretary Pat O'Brien, Deputy Assistant Secretary Daniel Glaser, and I have met
with our counterparts in a number of countries in Europe, Asia, and the Middle East
to urge them to ensure that U.S. designated proliferators are not able to do
business in their countries and to develop their own 13382-like authorities.
Although our WMD program is in its early stages, and while I am limited in what I
can say in this public forum, I am pleased to be able to assure you that, through
cooperation with both governments and the private sector, we are already seeing
an impact on our targets. Indeed, this program has significantly enhanced the U.S.
Government's overall counterproliferation efforts.
Section 311 Designation of Banco Delta Asia SARL
In September 2005, not long after the President signed this new WMD Executive
Order, the Treasury Department used a separate authority - Section 311 of the USA
PATRIOT Act (Patriot Act) - to list Banco Delta Asia SARL (BOA) as a "primary
money laundering concern." This regulatory action against a bank facilitating a
range of North Korean illicit activities has dealt a blow to Pyongyang's ability to
engage in illicit conduct and obtain financial services to facilitate that conduct. Along
with our offensive targeting of several entities under E.O. 13382 for supporting
North Korea's WMD and missile proliferation-related activities, it has frustrated
North Korea's efforts to conduct proliferation-related transactions.
Section 311 authorizes the Secretary of the Treasury - in consultation with the
Departments of Justice and State and appropriate Federal financial regulators - to
find that reasonable grounds exist for concluding that a foreign jurisdiction,
institution, class of transactions, or type of account is of "primary money laundering
concern" and to require U.S. financial institutions to take certain "special measures"
against those jurisdictions, institutions, accounts, or transactions. Potential
measures include requiring U.S. financial institutions to terminate correspondent

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relationships with the designated entity Such a defensive measure effectively cuts
that entity off from the U.S. financial system. It has a profound effect, not only in
insulating the U.S. financial system from abuse, but also in notifying financial
institutions and jurisdictions globally of an illicit finance risk.
The success of the BOA action offers an instructive case study of the impact of this
authority. BOA provided financial services for over 20 years to North Korean
government agencies and front companies, some of which were engaged in illicit
activities, including currency counterfeiting, narcotics trafficking, production and
distribution of counterfeit cigarettes and pharmaceuticals, and the laundering of the
associated proceeds. We also know that North Korean entities engaged in WMD
proliferation, including Tanchon Bank - the primary financial facilitator of North
Korea's ballistic missile program - held accounts at BOA. BOA tailored its services
to the needs and demands of North Korean entities with little oversight or control. In
fact, bank officials intentionally negotiated a lower standard of due diligence with
regard to the financial activities of these clients.
•

BOA helped North Korean agents conduct surreptitious, multimillion dollar
cash deposits and withdrawals without question for the basis of those
transactions.
• BOA knowingly accepted counterfeit currency from North Korean
companies. In that regard, it is worth noting that the U.S. Secret Service has
been investigating North Korean counterfeiting since 1989, and, over the
past 16 years, has seized more than $48 million in high quality U.S.
currency, or "supernotes."
• A well-known North Korean front company that has been a client of BOA for
over a decade has conducted numerous illegal activities, including
distributing counterfeit currency and smuggling counterfeit tobacco
products. In addition, the front company has also long been suspected of
being involved in international drug trafficking.
Treasury's ongoing investigation of BOA has not only confirmed our original
concerns about BOA's complicity in facilitating this type of conduct, but has shed
additional light on the wide spectrum of North Korea's corrupt and dangerous
activities, as well as its vast illicit financial network.
As a result of the 311 action against BOA and TFI's subsequent and continuing
international outreach efforts, a number of responsible jurisdictions and institutions
have taken proactive steps to ensure that North Korean entities engaged in illicit
conduct are not receiving financial services. Press reports indicate that some two
dozen financial institutions across the globe have cut back or terminated their
financial dealings with North Korea, constricting the flow of dirty cash into Kim Jong
II's regime.
Treasury's efforts with respect to Banco Delta Asia, specifically, and combating
North Korea's illicit activities, more generally, are ongoing. The Internal Revenue
Service - Criminal Investigation Division is leading an investigation to exploit
underlying North Korean account information at Banco Delta Asia provided by the
Macau authorities. This investigation will allow the U.S. to gain an even greater
understanding of the illicit activities highlighted in our Section 311 designation, and
to uncover additional leads regarding DPRK entities of concern. Additionally, TFI
officials continue international outreach efforts to raise awareness of North Korea's
illicit conduct, explain the actions that Treasury has taken, and encourage
governments and institutions to not to do business with individuals and entities
engaged in illicit conduct. By all accounts, that outreach is working.
Overview of the Fiscal Year 2007 TFI Request
The 2007 request of $135.2 million for TFI, including $89.8 million for the Financial
Crimes Enforcement Network, provides critical funding to expand TFI's ability to
combat terrorist financing and other key national security challenges. It will allow us
to continue and build upon these past achievements and current efforts. I know the
Members of the Subcommittee are aware of this request in detail, so I will just touch
on a few important highlights of new initiatives.

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Office of Intelligence and Analysis
TFl's Office of Intelligence and Analysis (OIA) was created to focus expert
analytical resources on the financial and other support networks of terrorists, WMD
proliferators, and other key national security threats. Over the past year, OIA has
assumed an increasingly important role in the Treasury's efforts to combat key
national security threats in Iran, Syria, and North Korea. OIA's top strategic priority
is to provide policymakers with relevant intelligence and expert analysis to support
policy formulation and carry out the Treasury's role in the war on terror. Other OIA
strategic priorities include providing intelligence support to senior Treasury officials
on the full range of economic and political issues and communicating with other
members of the Intelligence Community.
As Assistant Secretary Janice Gardner will describe shortly, the 2007 request
provides funding for OIA to continue its efforts to build Treasury's intelligence
capabilities by improving its key infrastructure and adding to its analytic breadth and
expertise.
Office of Foreign Assets Control
The Office of Foreign Assets Control (OFAC) administers and enforces economic
and trade sanctions based on U.S. foreign policy and national security goals
against targeted foreign countries, terrorists, international narcotics traffickers, and
those engaged in activities related to the proliferation of weapons of mass
destruction. Since receiving expanded designation authority in 2001, the United
States has designated 428 terrorist-related individuals and entities; 320 of those
designations have been carried out in coordination with our allies and designated at
the United Nations. The FY 2007 budget provides additional resources for OFAC to
monitor and update existing designations and track the development of new support
structures and funding sources. It includes:
•

•

Ten additional positions to continue to implement and administer the new
Executive Order 13382, combating the proliferation of weapons of mass
destruction.
Fifteen additional positions to monitor and update existing terrorist
designations. This is critical given that Specially Designated Global
Terrorists and their support networks continuously seek new ways of
evading U.S. and international sanctions by changing the names and
locations of front companies and altering their financing methods.

Office of Terrorist Financing and Financial Crime
As the policy development and outreach office for TFI, the Office of Terrorist
Financing and Financial Crime (TFFC) collaborates with the other elements of TFI
to develop policy and initiatives for combating money laundering, terrorist financing,
WMD proliferation, and other criminal activities both at home and abroad. TFFC
works across the law enforcement, regulatory and intelligence communities and
with the private sector and its counterparts abroad to identify and address the
threats presented by all forms of illicit finance to the international financial system.
TFFC advances this mission by promoting the transparency of the financial system
and by developing and facilitating the global implementation of targeted financial
authorities to identify and intercept those illicit actors that operate within the
financial system. TFFC's efforts focus on:
•

•

developing and facilitating the implementation of global anti-money
laundering and counter-terrorist financing standards, primarily by working
with and through the Financial Action Task Force the various regional
bodies, including the IMF and World Bank and each of the regional
development banks;
promoting the development of effective targeted financial sanction regimes
and the use of other targeted financial authorities through the G7, G20,
FATF, United Nations, European Union, and bilaterally with countries of
strategic importance;
addressing financing mechanisms of particular concern by developing

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•

AMLlCFT protective measures, initiatives, and best practices in vulnerable
sectors such as charities, alternative value transfer systems and emerging
payment systems; and
conducting direct outreach to the domestic and international private sector
to facilitate and Improve development and implementation of sound
AMLlCFT controls.

In all of these areas, TFFC relies on and works closely with other elements of TFI,
the Treasury Department, the interagency and international communities to
effectively combat the threats that illicit finance presents to the international
financial system. Recently, for example, TFFC worked closely with sixteen federal
bureaus and offices from across the law enforcement, regulatory, and policy
communities to produce the U.S Government's first-ever Money Laundering Threat
Assessment. This working group pulled together arrest and forfeiture statistics,
case studies, regulatory filings, private and government reports, and field
observations. The report analyzes more than a dozen money laundering methods
and serves as a first step in a government-wide process to craft strategic ways to
counteract the vulnerabilities identified.
The FY 2007 request continues the Administration's support of TFFC's important
efforts.
Treasury Overseas Presence
Treasury attaches serve as the U.S. Treasury's representatives in key economies
overseas. Because of their technical expertise, Treasury attaches enjoy unique
access to foreign Ministries of Finance and Central Banks. This access provides the
U.S. Government with a direct channel to key decision makers on economic policy
issues, including foreign exchange policy and financial service regulatory policies.
Working in tandem with TFI and Treasury's Office of International Affairs, Treasury
attaches will be working to prevent the abuse of the international financial system
for terrorist finance, money laundering, or other illicit purposes.
•

Treasury proposes to increase its overseas presence from 5 attaches to 18
attaches in FY 2007.

Financial Crimes Enforcement Network
TFI's Financial Crimes Enforcement Network (FinCEN) helps to safeguard the U.S.
financial system from the abuses of financial crime, including terrorist financing,
money laundering, and other illicit activity. This is accomplished primarily through
the Bank Secrecy Act, which requires financial institutions to report financial
transactions, such as suspicious activities that may be indicative of financial crimes.
FinCEN also supports law enforcement, intelligence, and regulatory agencies
through sharing and analysis of financial intelligence, and building global
cooperation with financial intelligence units (FlUs) in other countries. The FY 2007
request provides additional resources to FinCEN to streamline data processing and
enhance its e-filing capabilities to increase the ease of compliance with regulations
and improve its abilities to track users' needs. It includes:
•

•

Enhancing components of the BSA Direct Umbrella System, including
electronic filing and secure access components. Although FinCEN has
entered a stop work order with respect to development of the data storage
and retrieval component of the BSA Direct system in order to permit it to
assess delays in deploying this component, both the electronic filing
component and secure access components are presently operational and
need to be upgraded to allow direct input of the BSA filings into the
collection system and meet expanded user base.
Development funding for FinCEN's Cross-Border Wire Transfer System
Initiative. The authorizing language (Section 6302 of the Intelligence Reform
Act of 2004 (S.2845 PL. 108-458)) presents the Bureau with two tasks (1) a
feasibility study to be completed as soon as practicable; and (2) the
implementation of enabling regulations and a technological system for
receiving, storing, analyzing, and disseminating the reports, to be completed

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by December 2007. The feasibility study will address whether it is possible
to complete the development and implementation of the system by the
statutory deadline of December 2007. We anticipate delivery of the study to
the Secretary of the Treasury by late spring 2006.
Conclusion
Mr. Chairman, the Treasury Department - worklllg closely with other Departments
and agencies across the US Government - is playlllg a key role in deterring and
defending agaillst the greatest threats to our security Indeed, we have achieved
some important successes in our two-year history. I look forward to working closely
with you, oliler Members of the Committee, and your staff to ensure that TFI has
the resources It needs in Fiscal Year 2007 to build upon that success. Together we
can work to maximize the Treasury Department's ability to protect the American
people.
Thank you again for the opportunity to testify today.

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April 6,2006
JS-4164
Testimony of Janice Gardner, Assistant Secretary
Office of Intelligence and Analysis
U.S. Department of the Treasury
Senate Appropriations Subcommittee on Transportation, Treasury, the
Judiciary, Housing and Urban Development, and Related Agencies
Introduction
Chairman Bond, Ranking Member Murray, and Members of the subcommittee, I
thank you for the opportunity to testify today on the Office of Intelligence and
Analysis' 2007 budget request. The Department of the Treasury greatly
appreciates the Committee's support to this point for our efforts to establish and
build the Office of Intelligence and Analysis (OIA).
I request that a copy of OIA's report on its Fiscal Year (FY) 2006-2008 strategic
direction be entered into the record. We produced this report for your committee in
response to the conference report accompanying the FY 2006 appropriations bill.
OIA was required to submit a report that detailed "how OIA will implement the
purpose of the Office as intended by the Congress." OIA's report defines its
mission, establishes strategic objectives, and outlines OIA's priorities and direction
for the next several years. In addition, it describes the role that OIA will play in the
Treasury Department's intelligence activities, and expands on OIA's plans to better
integrate the office into the Intelligence Community (IC). We hope that the
Committee members will find the report to be helpful as they consider OIA's 2007
budget request.
I will discuss a number of the themes covered in the OIA report in my prepared
remarks today. I will provide some background on our office, provide an overview
of the significant progress we made in FY 2005, update you on where we stand with
our FY 2006 efforts, and explain how we would plan to use the funds we have
requested in FY 2007.
Background on OIA
OIA was established by the Intelligence Authorization Act for FY 2004. The Act
specifies that OIA shall be responsible for the receipt, analysis, collation, and
dissemination of foreign intelligence and foreign counterintelligence information
related to the operation and responsibilities of the Department of the Treasury.
Prior to the creation of OIA, Treasury did not have an in-house intelligence analytic
element.
On April 28, 2004, Secretary of the Treasury John Snow established the Office of
Terrorism and Financial Intelligence (TFI) by Treasury Order, which placed OIA
within TFI. As the Assistant Secretary, I report directly to Under Secretary Levey,
who heads TFI.
OIA's mission is to support the formulation of policy and execution of Treasury
authorities by:
•

•

Producing expert analysis of intelligence on financial and other support
networks for terrorist groups, proliferators, and other key national security
threats, and
Providing timely, accurate, and focused intelligence on the full range of

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economic, political, and security issues.
Significant Progress in FY 2005
While OIA is still a fairly new entity, it took a number of significant steps in 2005
towards building the robust intelligence and analytic program necessary to fulfill its
critical mission. Moving the OFAC Foreign Terrorist Division (FTD) analysts to OIA
was instrumental in transforming Treasury from a passive consumer of analytic and
intelligence products to a full contributing member of the IC. OIA has been using
the expertise of these analysts - as well as that of the new hires - as a foundation
for a true center of expertise on material support to terrorist organizations. As a
result, OIA has considerably improved its analytic coverage and capability in priority
areas, such as Iraqi insurgency funding.
OIA's top priority, as we mentioned in our report to your committee, is to help
translate intelligence into policy. OIA analysts conduct "all source" analysis,
regularly reviewing a broad range of information from the IC, including human and
signals intelligence reports, other agencies' analytic assessments, as well as open
source information. OIA's role in this regard is to then ensure that the current
intelligence information and analysis are incorporated into all aspects of policy
deliberations. OIA took several steps in 2005 to address this objective.
Perhaps most significantly, OIA initiated weekly targeting sessions, which are led by
Under Secretary Levey and include officials from OIA, OFAC, and FinCEN as well.
At these sessions, potential targets are presented and discussed. The participants
assess the full range of potential Treasury actions, including designation, and then
assign follow up action.
•

OIA also began producing analytic papers for Under Secretary Levey,
primarily on Non Governmental Organizations (NGOs), which may be
providing support to terrorists. Under Secretary Levey has passed a
number of these papers to the foreign governments where these NGOs are
based, asking them to take appropriate action. He has then followed up to
ensure that the governments are taking the necessary steps to put a halt to
this activity.

In addition to these diplomatic papers, in 2005 Treasury's intelligence office
prepared a number of other all source intelligence analytic products on terrorist
financing and other national security threats. In fact, OIA has disseminated over 50
cables to the IC over the past year. OIA analysts also participated in the drafting
and coordination on a variety of IC analytic products. These include:
•
•
•

National Intelligence Estimates
CIA studies
Articles for senior administration officials, such as the Senior Executive
Intelligence Brief.

There were two key reasons why OIA was able to improve its capability to produce
all source intelligence analytic products. First, Treasury - through OIA - is
becoming far better integrated into the IC than it has been in the past. In 2005, OIA
hired its first full time Requirements Officer, who has played a key role in bringing
OIA into the IC. This officer is sending in specific questions and inquiries on behalf
of all Treasury entities, including OFAC, to the IC. In these "requirements
submissions" Treasury includes comprehensive background information as well as
a detailed statement of Treasury's intelligence gaps to help focus the IC on
Treasury's needs. In response to these detailed requirements, Treasury has
received a greatly increased level of tailored support from the IC.
Second, OIA has also built its analytic expertise and improved its access to
intelligence information by establishing detail arrangements with various
intelligence, law enforcement and military agencies. These detail assignments
include:

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•

•
•

Military: OIA has analysts detailed to 3 of the military commandsCENTCOM, PACOM, and EUCOM-and a military officer from CENTCOM is
assigned to OIA. OIA also has an established liaison relationship with
SOUTCOM. SOCOM is also preparing to assign an officer to OIA.
Law Enforcement: The FBI has detailed an intelligence analyst to OIA.
Intelligence: A representative from NSA is assigned to OIA to provide
support to senior Treasury officials.

In 2005, OIA also began to build its analytic expertise and coverage in another key
area - proliferation financing. The Treasury Department's ability to target
proliferators of weapons of mass destruction (WMD) was enhanced in June, 2005
with the issuance of Executive Order 13382. This order applies the same tools
Treasury has used to successfully block the assets of terrorist supporters to those
who aid in the spread of WMD. OIA analysts were integrally involved in supporting
OFAC in developing the designation targets listed in the annex of the Executive
Order, and continue to assist OFAC investigators in identifying intelligence reporting
that may be useful to support future designations.
Building Analytic Coverage and Depth in FY 2006
The funding allocated by the Congress for FY 2006 is allowing OIA to make
significant additional improvements in a number of areas this year. For example,
the additional personnel and the infrastructure improvements funded in FY 2006 are
enabling OIA to increase its analytic coverage and to further develop its expertise
on the financial aspects of key threats to U.S. national security, including terrorism
and WMD proliferation.
In FY 2006, OIA analysts will be completing strategic research papers on high
priority terrorist and proliferation financing topics. OIA has completed a research
and production plan for FY 2006 to help guide OIA's activities during the upcoming
year. The plan was coordinated with OIA's primary customers, including TFFC,
OFAC, and FinCEN, and is consistent with IC, NSC, and Treasury priorities.
•

Terrorist Financing: Over the past several years, the terrorist threat has
become far more decentralized in nature, and many terrorist groups
affiliated with al Qaida increasingly pose a serious threat to U.S. national
security. In FY 2006, OIA will continue to develop its analytic expertise and
expand its analytic coverage on the financial and other support networks of
the various terrorist groups and networks bent on attacking the U.S. and its
allies.
• Insurgency Financing: OIA will attempt to improve its understanding of the
insurgency financing in FY 2006, primarily through the Baghdad-based Iraq
Threat Finance Cell (ITFC) for which Treasury serves as the co-lead with
Department of Defense. ITFC was established to enhance the collection,
analysis and dissemination of intelligence to combat the Iraqi insurgency.
Such intelligence is critical to support and strengthen U.S., Iraqi and
Coalition efforts to disrupt and eliminate financial and other material support
to the insurgency.
• In fact, the Treasury presence in Iraq on the ITFC is already paying
dividends. More and better detailed information on the insurgency finance
issues is becoming available. In addition, the financial intelligence analysts
have provided great support to the military in identifying trends and patterns
in insurgency financing in the context of a cash-based economy.
• Rogue Regimes/Proliferation Financing: Over the past year, OIA has
assumed an increasingly important role in Treasury's effort to combat
national security threats, including rogues regimes involved in WMD
proliferation, such as Iran, Syria, and North Korea. In FY 2006, OIA is
continuing to build on its nascent effort in this critical area.
To accommodate its rapid growth, and to achieve the ambitious goals that have
been laid out for OIA, we have developed a hiring strategy to ensure that we are
recruiting a high quality work force with the appropriate skill mix. OIA has been
taking advantage of a number of different recruiting fora and using a variety of
federal recruiting programs, such as the Presidential Management Fellows
Program. In terms of our analytic hires, OIA is hiring all source analysts with a

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variety of experience, ranging from junior analysts directly out of graduate school to
senior analysts with years of relevant experience. OIA is also targeting analysts
with prior IC and financial sector experience, as well as relevant regional/area
expertise.
OIA is also targeting economists in its FY 2006 hiring efforts. The Treasury
Department has made Significant strides over the past several years designating
terrorism - and more recently proliferation - targets. Developing a better
assessment of the economic impact of the sanctions is essential in determining
whether Treasury is focusing on the appropriate types of targets. This kind of
analysis is extremely valuable not only for Treasury policymakers, but for
policymakers elsewhere in the government as well. It can help shed light on what
poliCY tools the U.S. Government should use - and are likely to be effective _
against particular countries or targets.
In sum, we believe that we are on track to succeed with our rapid expansion, and
that we will make - and are already making - major strides in FY 2006 to continue
transforming OIA into a center of analytic expertise on the issue of financial and
other support networks for terrorist, proliferators, and other key national security
threats.
FY 2007 Budget Request
The funding request for FY 2007 would enable OIA to continue its efforts to build
Treasury's intelligence capabilities by improving its key infrastructure and adding to
its analytic breadth and expertise.
Our key initiatives in our FY 2007 request include:
TFIN: The modernization of Treasury's Foreign Intelligence Network (TFIN). the
sole information technology system in the Department authorized for Top Secret
information. With the creation of Treasury's Office of Terrorism and Financial
Intelligence (TFI) and OIA, the Department's counterterrorism-related
responsibilities were expanded dramatically. A new information technology
architecture was required to support this broader, Congressionally-mandated
mission. The current system is unstable and has not been modified or upgraded to
keep pace with the changes in intelligence, user, or technological requirements.
The operating system is no longer supported and the entire system is at risk of
catastrophic failure. The frequent system crashes have been preventing senior
Treasury officials from receiving intelligence reporting from other agencies in a
timely manner. In addition, the system's performance issues have been hampering
the ability of Treasury's intelligence analysts to perform their jobs.
Ultimately, the upgraded TFIN system will allow Treasury to interact seamlessly
within the IC and provide Treasury analysts with the common software tools used
throughout the Community. It will allow timely and efficient collaboration with other
intelligence analysts in the IC, other government departments/agencies, and the
Department of Defense.
ITFC: Our request will allow Treasury to sustain its co-lead role in the Baghdadbased ITFC. Two Treasury officers have already been assigned temporarily to Iraq,
where they conducted the initial assessment or "Phase I." "Phase II," which calls
for the assignment of Treasury personnel to Iraq on an ongoing basis to bolster the
all-source intelligence analysis on the insurgency, is now in progress. Improving
the U.S. Government's understanding of the insurgency funding is a key goal for
our office, and I as mentioned earlier, this interagency initiative is already paying
important dividends.
All Source Analysis Capability: The additional analysts OIA is requesting in FY 2007
will allow OIA and Treasury to further increase the depth and breadth of its analytic
coverage and expertise in priority areas, such as terrorist financing, and
proliferation financing. Over the past year, as OIA has grown and policymakers both at Treasury, in the White House and elsewhere - have become more aware of
its capabilities, OIA has been increasingly tasked with addressing the most pressing

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national security issues. Given its small size and increasing importance, bringing
new analysts on board as quickly as possible is essential for OIA's continued
success. These additional positions would also allow OIA to engage in increased
analyst exchanges with other national security and IC agencies, in accordance with
the Intelligence Reform and Terrorist Prevention Act of 2004.
Secure Space: As the committee is aware, in addition to the proposed OIA growth,
the Office of Foreign Assets Control (OFAC) is expanding its terrorism and WMD
designations programs. Both OIA and OFAC's expansion is necessary, in part, as
a result of the June 2005 Executive Order, giving the Treasury Department
additional authority to target proliferators of WMD. The highly classified work of
these expanding units can only be accomplished in specially constructed secure
areas, known as Sensitive Compartmented Information Facilities (SCIFs). Once
the FY 2006 hires have been assigned their work spaces in existing SCIFs, there
will be no available SCIF space remaining in the Department. Both OIA and OFAC
are requesting additional positions in FY 2007; the Secure Space Initiative is
directly linked to that request. Given the lack of remaining available SCIF space in
the Treasury Department, we will have to build additional SCIF space to
accommodate any FY 2007 OIA and OFAC hires. Adequate security infrastructure
is critical to protecting the intelligence and national security functions of the
Department. Approval of this initiative will ensure Treasury personnel have the
required secure workspaces to support the mission of disrupting and dismantling
the financial infrastructure of the terrorists and isolating their support networks.
Conclusion
Thanks again for your continued support for OIA and TFI. We appreciate the
confidence that your Committee has shown in our office to this point. We believe
that the resources that we requested in FY 2007 will enable OIA to take the next
steps in building the type of robust intelligence capability that Congress envisioned
when you created our office.
That concludes my prepared remarks. I would be happy to answer any questions.

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April 6, 2006
JS-4165

Under Secretary Quarles Visits Philadelphia
to Discuss State of U.S. Economy
Under Secretary for Domestic Finance Randal Quarles will address the Rotary Club
of Philadelphia tomorrow at 12:30 p.m. EST. Under Secretary Quarles will visit the
Union League to discuss tax cuts, the current account deficit and the domestic
economy.

Who
Under Secretary for Domestic Finance Randal K. Quarles
What
Remarks on the U.S. Economy
When
Thursday, April 6, 12:30 pm (EST)
Where
Rotary Club of Philadelphia
Union League
140 South Broad Street
Philadelphia, PA

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April 6, 2006
JS-4166

Testimony of William Larry McDonald
Deputy Assistant Secretary for Technical Assistance Policy
U.S. Department of the Treasury
House Financial Services Subcommittee on Oversight and Investigations
Chairwoman Kelly, Congressman Gutierrez, members of the Committee, I
appreciate this opportunity to speak to you today regarding the Government
Accountability Office's October 2005 report on U.S. efforts to deliver training and
technical assistance abroad to combat terrorist financing. In my testimony I will
focus on the role of the Treasury Department in the interagency process for
coordinating the provision of technical assistance and training. I will briefly describe
the work of the Treasury Department's Office of Technical Assistance (OTA), and
will review some examples of training and technical assistance that illustrate the
Treasury Department's track record and how we fit in with both: (i) the broader U.S.
Government technical assistance and training mission abroad to combat terrorist
financing, and (ii) Treasury's broader technical assistance mission in countries of
strategic interest.
It is important to note that the U.S. Government's counter-terrorist financing
technical assistance and training abroad are crucial components of the U.S.
Government's overall strategy to combat terrorist financing abroad. As the Treasury
Department noted in its response to the GAO's October 2005 Report, other
elements of the Treasury Department and the U.S. Government are focused on
other crucial components of this U.S. Government counter-terrorist financing
strategy.
Today the Treasury Department is fully and cooperatively engaged with other
agencies to ensure the timely delivery of quality training and technical assistance
abroad, and that our collective effort is producing results. Recognizing that there is
always room for improvement, Treasury is working with the Departments of State,
Justice, and Homeland Security to make any needed adjustments that would
enhance our coordination and effectiveness in this critical area.

Treasury's Office of Technical Assistance
The Department of the Treasury, through OTA, provides policy advice and technical
assistance to select reform-minded governments seeking to strengthen their
management of public finances. Most of these countries are in the process of
development or transformation. Others have suffered severe deterioration of their
financial institutions as a result of war, civil strife, or prolonged neglect. In all cases,
OTA's assistance aims to increase transparency and accountability, reduce
corruption, and strengthen the development of market-based policies and practices
that support growing economies and stable democracies.
OT A focuses its assistance on five core disciplines:
• budget policy and management;
• banking and financial services;
• government debt issuance and management;
• tax policy and administration; and
• financial enforcement.

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Assistance may take a number of forms, both broad and specific: supporting the
development of sound macroeconomic and financial policies; helping governments
to strengthen the legal and regulatory foundation for their financial system; and
assisting governments in their effort to plug leaks in their "financial plumbing"
through the development of improved financial processes and systems.
Treasury's approach to technical assistance and its role in the interagency effort
have certain defining features. One important feature is that Treasury, unlike many
other agencies, has a standing, specialized technical assistance program, funded in
large part by the Treasury International Affairs Technical Assistance component of
the 150 Account appropriation. As Deputy Assistant Secretary for Technical
Assistance Policy, I oversee a program that currently fields approximately 140
advisors in some 70 countries around the world. Many of these experts are longterm, resident advisors. Treasury's experience suggests that, while short-term
assistance can be effective, the presence of a resident advisor can be critical to
strengthening capacity and affecting change in certain environments.
A second defining feature of Treasury's program is our emphasis on the benefits of,
and our ability to deliver, an integrated financial assistance package, utilizing
experts from a number of OT A's five core disciplines. This is particularly important
for Treasury's efforts in the financial enforcement area. As I will discuss further
below, reducing a country's vulnerability to terrorist financing may require
addressing weaknesses in the banking system, strengthening the monitoring and
investigative capacity of tax authorities, and establishing wholly new institutions
such as financial intelligence units.
Financial Enforcement and Combating Terrorist Financing Post 9/11
Financial enforcement includes initiatives specifically intended to combat the
financing of terrorism - the focus of today's hearing - but also encompasses a
broad array of financial crimes, such as money laundering, white-collar crime, and
corruption in the management of public finances. One of the lessons of the post
9/11 era is that there can be overlap between terrorist financing and financial
crimes more broadly, and that a comprehensive approach is needed to eliminate
financial safe havens for terrorists throughout the world.
Since the 9/11 terrorist attacks Treasury OTA has sought to strengthen its financial
enforcement program. Indeed, we have made this OTA's highest priority. Over the
last four years the enforcement program has grown substantially. Currently, it has
advisors in 43 countries in the Greater Middle East, Asia, Latin America, SubSaharan Africa, Central and Eastern Europe and the Former Soviet Union.
The strengthening of our program was made possible by the financial support of
Congress and the patriotic response of former government officials. In response to
9/11, Congress enacted the 2001 Emergency Supplemental Appropriations Act.
Pursuant to that authority, the Office of Management and Budget released the first
tranche from the President's emergency response fund on September 24, 2001. Of
these funds, $3 million was made available in December 2001 to OTA for technical
assistance in anti-money laundering/countering the financing of terrorism
(AMLlCFT). In parallel, immediately after September 11, Treasury was inundated
with resumes from recently retired federal law enforcement officers and federal
prosecutors asking simply, "What can I do to help?" Their commitment has allowed
Treasury to reinforce its ranks via personal services contracts and establish a cadre
of over sixty financial experts with extensive backgrounds in investigating and
prosecuting financial crimes totaling nearly 1,000 years of senior level USG
experience.
The appropriateness of using "contractors" for technical assistance in combating
terrorist financing and financial crimes is an issue that has arisen in the GAO
review. There are pros and cons to using contractors. In my view it is important to
understand who these contractors are. OTA Financial Enforcement Advisors,
retained under personal services contract, include:
•

retired Assistant U.S. Attorneys who have worked in U.S. Attorneys Offices

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•

•
•

•

in various U.S. cities, and attorneys who worked in the Department of
Justice, specializing in white-collar and organized crime, money laundering,
financial and other major crimes;
former agents from the Criminal Investigation Division of IRS with
experience in the investigation of complex financial crimes including money
laundering, financial fraud, terrorist financing, tax fraud/evasion, and the
inspection and oversight of money service businesses;
retired agents from the FBI with experience in the investigation of financial
crimes and public corruption, and in the training of law enforcement officers;
former regulators and examiners from the Federal Reserve, the FDIC, and
the OCC with expertise in the examination, audit and regulation of financial
institutions; and
former agents of the U.S Customs Service, the Immigration and
Naturalization Service, the Financial Crimes Enforcement Network, and the
Drug Enforcement Administration.

These experts are the backbone of OTA's assistance program in areas directly and
indirectly related to combating terrorist financing. I have personally met many of
these "contractors," and I can assure you there is no finer, more qualified, or more
trustworthy group of men and women to complement the limited number of
permanent USG officials available to address the enormous need for training and
technical assistance, including training, in this area.

Work on the Ground
My colleague from the State Department has described the interagency process for
identifying priority countries, assessing their needs, and coordinating the provision
of training and technical assistance. I will focus on noting some examples of
assistance that Treasury has provided in order to illustrate the range of countries
where we have been active and, in particular, the kinds of assistance we deliver.
Examples are drawn from both the period prior to the creation of the interagency
coordination group, and following its creation. A common element from both periods
is that assistance has been needed in many areas resulting in the involvement of
various agencies reflecting their particular mandate and expertise. The purpose of
creating an interagency process, as my colleague has noted, was to try to ensure
that limited resources were focused on those governments with the greatest needs
and strategic importance, and to ensure that coordination was as systematic and
efficient as possible.
Prior to the implementation of the interagency coordination process, OT A deployed
Financial Enforcement teams to the following countries:
•

•
•
•
•

•

•
•

•

Afghanistan, to place a resident advisor to help ensure that international
donor funds were used for development purposes and not "leaked" to
warlords or any remaining terrorist elements.
Azerbaijan, to incorporate AMLlCFT provisions in work that was being done
on criminal tax enhancements.
Ukraine, to strengthen that country's compliance systems, after Ukraine was
designated a Financial Action Task Force (FATF) Non-Cooperating Country.
Thailand, to support the work of an OTA resident advisor already assigned
to the Anti-Money Laundering Office there.
Uganda and Tanzania, to provide training and mentoring on financial crimes
investigations and to assist in the development of a comprehensive
AMLlCFT law.
Senegal, to work with the West Africa Economic and Monetary Union on
harmonization of AMLlCFT laws and regulations among its francophone
member states.
Bangladesh, to assist the OTA Banking and Financial Services advisor to
the Central Bank with banking sector compliance on anti-money laundering.
Colombia, to integrate counter terrorist financing concerns with the antinarcotics-based money laundering work in cooperation with IRS-Criminal
Investigative Division.
The countries of the Eastern Caribbean, to develop a regional approach for
the many non-compliant island nations to meet FATF standards.

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Since the creation of a formal interagency coordination process, OTA's
engagement has continued apace, complementing assistance provided by other
agencies. A critical part of the formal interagency coordination process has been
the designation of priority countries. Because this designation of priority countries is
classified, I cannot share their names with you here but would do so in a closed
session.
•

•

In Eastern Europe, an OTA advisor identified financial information related to
a terrorist named on a UN list. The courts later released these assets due to
lack of legal authority. OTA then requested and funded the travel of a
Department of Justice attorney, who had already been working with that
country on the passage of their AML law, to assist this government in
drafting an asset forfeiture law that now effectively eliminates the loophole
that allowed terrorists to shelter assets. This is one example of a success
story on interagency coordination.
In one African country, OTA has been providing an information technology
expert to help build the capacity of that nation's Non-Government
Organization (NGO) Bureau in registering and monitoring the enormous
community of NGOs and public charities there.
In one Asian country, we are providing two resident advisors, one to work
with the country's financial intelligence unit on law enforcement issues, and
the other to work within the Southeast Asia region on a multilateral basis
with the Asian Development Bank. The work with the financial intelligence
unit resulted in that country adopting a cross-border cash reporting
mechanism consistent with FATF Special Recommendation Number Nine
on Cash Couriers.
In one South American country, we are providing a resident advisor to work
on developing the financial intelligence unit and strengthening the law
enforcement entities responsible for AMLlCFT issues. We are working with
DHS/lmmigration and Customs Enforcement in the implementation of a
Trade Transparency Unit to monitor trade flows to detect money laundering.
The work in this country was praised by the GAO in its review as a model of
interagency cooperation.
In one South Asian country, we are providing a resident advisor to work with
the central bank in the development of a financial intelligence unit. This is
one of the highest priority engagements for the USG and the work should
curb a major flow of terrorist financing.
In one North African/Middle East country, we are providing a resident
advisor to work with the development of a financial intelligence unit that will
be part of a regional approach to AMLlCFT. This regional approach should
result in a superior information sharing mechanism in a critical part of the
world.

The work done by OTA Financial Enforcement advisors, and others, has produced
results. Eight of the countries identified by the FATF as Non-Cooperative Countries
and Territories (NCCT), and which were then provided OTA technical assistance,
have been removed from the FATF "blacklist," some within just one year of
receiving assistance.
In addition to those eight NCCT countries, OTA resident advisors have assisted in
creating fully functioning financial intelligence units in four other countries where no
formal systems had existed prior to Treasury engagement. These twelve countries,
exclusive of the Eastern Caribbean Nations, include Peru, Paraguay, Serbia and
Montenegro, Albania, Bulgaria, Poland, Russia, Ukraine, Guatemala, Philippines,
Georgia, and Romania. Requests for work on new financial intelligence unit projects
have come from many countries, including: Afghanistan, Sri Lanka, Jordan,
Zambia, Tanzania, Malawi, Senegal, Armenia, and Kyrgyzstan.
Treasury is actively involved in providing training in financial investigative
techniques. Our courses address all of the FATF 40 recommendations and the
Special 9 recommendations on Terrorist Financing. Work is on-going to create
additional training courses to meet requests in the areas of gaming, insurance, and
securities. The number of requests for such courses has been, frankly, staggering.
Treasury has created four training teams to begin to respond to demand.

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While Treasury and other agencies have enjoyed success in our efforts to provide
results-oriented technical assistance, we must acknowledge that technical
assistance is only as effective as the political will of the recipient country. Inevitably,
there are cases where progress has not occurred or been frustratingly slow. Bills
that provide for a fully compliant AMLlCFT law in two African countries are
languishing in their parliaments. A South American country has been slow to enact
its anti-terrorism financing law. Corruption in other countries causes lax
enforcement and oversight by regulatory entities. And cultural hurdles, particularly
dealing with the informal financial sectors. can make compliance very difficult. This
underscores the need for strong interagency coordination. Speaking with one voice
makes for a more powerful message
In the spirit of enhanced coordination, OTA is sponsoring a Regional Coordination
Meeting in April with representatives from other agencies invited to discuss ongoing projects. best practices, vulnerabilities, and agency capacities. Treasury
expects that these efforts will lead to the development of regional perspectives on
financial crimes that will identify patterns of illegal activity that can ultimately be
disrupted.
New technology offers unique challenges. For example, the stored value chips in
cellular telephones currently being used throughout Asia present a vulnerability just
now being addressed by the international community. Addressing such challenges
will require the cooperation of many USG agencies and indeed the international
community.
Conclusion
Chairwoman Kelly, Congressman Gutierrez, members of the Committee, the GAO
report provided us with an opportunity to reflect upon our efforts over the past
several years and to consider what has worked well and what needs improving. In
the time that I have been in my position I have seen that steps have been taken to
strengthen the interagency process. I agree with my colleagues on the panel that
key to our continued success in tackling terrorism finance is strong, effective U.S.
interagency coordination. I assure you that OTA and the rest of the USG community
are committed to work together toward that goal.
Thank you and I look forward to answering any questions that the Committee may
have.

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April 6, 2006
JS-4167

Treasury Official Makes First Stop on Nationwide Tour
for National Financial Literacy Month
Deputy Assistant Secretary for Financial Education Dan lannicola, Jr. will visit New
York City tomorrow for the first stop on the Treasury Department's tour to promote
financial education during national financial literacy month. lannicola and leaders of
the Securities Exchange Commission (SEC) and NASD will discuss investor
protection as part of the recently released National Strategy for Financial Literacy.
Earlier this week, Treasury Secretary John Snow joined lannicola, U.S. Treasurer
Anna Cabral, Members of Congress and leaders of federal financial agencies as
they introduced their plan to improve financial literacy in America. Their strategy,
titled "Taking Ownership of the Future," is available at www.mymoney.gov.
Friday's stop is one of more than a dozen visits across the country Treasury
officials will make this month to promote financial literacy with organizations ranging
from seniors groups to Girl Scout troops.
This event is open to the press. Members of the media who wish to attend should
RSVP with Herb Perone at Herb.Perone@nasd.com.

Who:
Deputy Assistant Secretary for Financial Education Dan lannicola, Jr.
What:
Discussion on investor protection as part of the financial literacy campatgn
When:
Friday, April 7 9:30 a.m. (EST)
Where:
NASD Investor Education Foundation
NASD Board Room
One Liberty Plaza
165 Broadway, 48th Floor
New York, NY 10006

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April 6, 2006
js-4168

Remarks of Randal Quarles, Under Secretary
for Domestic Finance
U.S. Department of the Treasury
Before the Rotary Club of Philadelphia
Philadelphia, PA -Thank you for that introduction. It is a pleasure to be here in
Philadelphia this morning, and a particular pleasure to be at the Union League with
the Rotary Club of Philadelphia, which does so much not only to foster professional
fellowship amongst the business community in Philadelphia, but also contributes
greatly to the community through its charitable efforts. Forums like your weekly
luncheons and meetings greatly promote the informed debate that is crucial to the
development of intelligent business decisions and public policy. I hope our
discussion here this morning is a useful contribution to that effort.
The topic which your Chair suggested I might address this morning was "Tax Cuts,
Deficits, 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 tour 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
molding 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 about the operation of the hydraulic apparatus, the cleverly concealed air
conditioning vents, the sound system, the security cameras, and the back-up
power. When we looked at the exquisite screens of 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 taking me to Union Station this morning wants to discuss the unsustainability
of our current account deficit, is a nation obsessed with plumbing.

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I don't want to deny the importance of finance - it's how I make my living these
days, dry and technical 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
dining room is standing in an inch 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.
First, let's look at our 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, that 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 than 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 income 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 industrial 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 all-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 administration 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%.

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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
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 seems 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 deficit 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. Debt as a
percentage of GOP was projected to be 4.2% in the year this objective was set out,
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

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had been projected at over $477 billion in fact came in at only 3.6% of GOP and last
year's deficit at only 2.6%. We currently project that the deficit will be 1.4% of GOP
in 2009, substantially lower than the 2.1 % goal.
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 discretionary
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, government 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 Oecember 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
even!. 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
1990s 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(ish) 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 strong 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 capital 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
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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
effects in perpetuity of course but the available data suggests that they have
continued throughout 2005 thus at the very least postponing for a further period the
time when US net external liabilities will begin to rise from their current moderate
level.
The large US holdings of foreign assets have another implication as well, beyond
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 heavily 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 in light of our sizable current
account deficit - the United States continued to receive from its foreign investment
more than it paid out 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 interest rates have risen, but it demonstrates that we are likely to
wait 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 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 have 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 account?
Well, part of the answer, or course, is that to make a comprehensible point in 20
minutes on a Thursday 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 right 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 H, we can't afford it." And for those who wish to oppose the policy without
engaging it directly, this approach has the advantage of being very easy to

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articulate while the answers are - well, complicated. For these people then, keeping
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.
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 that anyone in the audience may have.
-30-

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April 7, 2006
JS-4169
Statement of Treasury Secretary John W. Snow
On the March Employment Report

"Today's employment report showing 211,000 new jobs in March is clear-cut
evidence that the President's economic policies are working.
"Since the President's Jobs and Growth Act took effect, we have seen 5.2 million
new jobs. This really speaks to the strength of the U.S. economy, with more
Americans working than at any time in our history. Moreover, they have more
money in their pockets.
"The American economy is clearly moving in the right direction, and I am confident
that we will remain on a good path.
"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 President's tax relief
and make it permanent. I commend Congress for making real progress this past
week on a package to extend the President's tax relief for capital gains and
dividends for two years and providing AMT relief. I strongly urge them to complete
work on this package when they return from recess."

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April 7, 2006
JS-4170
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 10 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 10, 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 fl·ances.C1llcJel·soll(licJo.lrpcls.qo'/ with the following information:
name, Social Security number, and date of birth.

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April 7, 2006
JS-4171
Treasury Assistant Secretary Warshawsky to
Hold Monthly Economic Briefing

U.S. Treasury Assistant Secretary for Economic Policy Mark Warshawsky will hold
a media briefing to review economic indicators from the month of March as well as
discuss the state of the U.S. Economy. The event is open to credentialed media:
Who
U. S. Treasury Assistant Secretary Mark Warshawsky
What
Economic Media Briefing
When
Monday, April 10, 1:30 p.m. (EDT)
Where
Media Room - Main Treasury
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.gov with the following information:
name, Social Security number and date of birth.

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April 7, 2006
JS-4172
Remarks of
Treasury Under Secretary for
International Affairs
Timothy D. Adams
to the Asia Society and Houston Society of
Financial Analysts
Houston, Texas
Thank you for coming today. I've come to Houston with some very good news. The
American economy created 211,000 new jobs in March. That makes March the
31 st consecutive month of uninterrupted job growth. Since President Bush signed
the Jobs and Growth Act in May 2003, the American economy has created almost 5
million new jobs, two million of them in the last year alone, more than all the rest of
the G7 combined.
The performance of the U.S. economy has been greatly underappreciated. Byany
measure, our economic performance is strong. 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%).
What is more, our growth is broad-based: hourly productivity in the non-farm
business sector has risen at an average annual rate of 3.2% since 2001, faster than
any five-year period in the 1970s, 1980s, or 1990s. Unemployment is down to
4.7%, running lower than the 70s, 80s, and 90s. Real disposable incomes have
risen 2.2% over the past 12 months, and since 2001 real after-tax income per
person has risen 8.2%, providing continued support for consumer spending. And
according to the Federal Reserve, over the past 12 months total industrial
production rose 3.1 %, and manufacturing industrial production rose 4.5%, with 33
consecutive months 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 and
home ownership is at 70%, another all-time high. 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%.
It is important to remember, however, that we are not growing in isolation. As the
President noted in the State of the Union: "Keeping America competitive requires
us to open more markets for all that Americans make and grow." The American
economy is increasingly integrated into the world economy and America and Asia
together are driving global growth with the U.S. and China by themselves
accounting for almost half of global growth since 2000.
About a month ago I wrapped up a two-week trip through Asia. My message on
that trip is the same one I bring here today: Asia is of central importance to the
United States and to the global economy. In fact, five of our ten largest trading
partners are now in Asia. Today, on a purchasing power parity basis, over a third of
global GOP is contributed by Asian countries and three of the world's four largest
economies are in Asia. Asia is the most dynamic region of the world, and its
importance to us will continue to grow in the future.
My trip started off with a swing through three important southeast Asian nations the Philippines, Malaysia, and Singapore. The common theme in these countries

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was a commitment from the political leadership to the policies that are needed to
bolster faster domestic growth. Already we have in place a strong free trade
agreement with Singapore, which took effect in 2004 and contributed to a 12%
increase in trade in one year We will begin negotiations with Malaysia, America's
th
10 largest trading partner, later this year. In the Philippines, the government is
reducing their fiscal deficit and making efforts to reform the power sector to stop the
drain on public resources. And in Malaysia, the government has recently allowed
greater exchange rate flexibility and is committed to structural reform, investment
climate improvement, and financial sector modernization.
While I was in Southeast Asia, the President was in India, the world's largest
democracy and clearly a rising economic power. Last November I visited India and
saw firsthand the progress that country is making to open up its economy to world
markets and expand economic freedom. Since 1985, a time when India began
dismantling trade and foreign investment barriers, trade has risen by almost 7 times
in nominal terms and more than doubled in India as a share of GOP. Foreign
portfolio investment has also risen dramatically, and FOI flows, while relatively
modest, are poised to become stronger. India's strong growth has led to an 11
point reduction in the poverty rate since 1987, lifting tens of millions out of poverty.
While India has made impressive progress, further steps to open the economy and
improve the investment climate will be needed to maintain these trends.
Another country that is returning to vibrant growth after a long and difficult period is
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 in Tokyo, I was encouraged by Japan's strengthening and notably,
domestic demand-led recovery. The fundamentals of the Japanese economy now
stronger than they have been for some time. Large corporations' capital investment
in the fiscal year that ended last week was projected to have increased by over
10%, the largest rise in 15 years. Labor markets are tightening -- the average
unemployment rate in 2005 was the lowest in 7 years and there were 104 job offers
per 100 applicants in February 2006.
Japan's challenges now concern the longer term - how to reduce a fiscal deficit of
5.6% of GOP 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. Privatization of the nation's postal savings system, the largest
financial institution in the world, should help. But, many more bold reforms will be
required to open sectors to more competition and encourage greater labor mobility.
I also stopped in Beijing where I continued Treasury's intensive engagement with
China on introducing greater exchange rate flexibility, reforming and opening
China's financial sector, and achieving more balanced and sustainable growth.
The U.S. relationship with China may be the single most important economic
relationship of the 21 st century. More than twenty-five years have passed since
China began its transition to a market economy, and China has seen its standard of
living surge. The growth of China's income per capita is much faster than that of
any region in the world, and especially noteworthy considering the country's size
and extreme regional differences. Rural poverty has declined significantly, dropping
89% from 1978-2002. China is now the world's 3rd largest economy on a
purchasing power parity basis and the 3rd largest trading nation. The United States
has benefited from China's growth: U.S. exports to China have grown at four times
the rate of our exports to the rest of the world since China joined the WTO, and
China has risen to become our fourth largest export market.
China's rapid growth and the character of that growth pose challenges - for China
and for the rest of the world. China's overall current account surplus has risen
sharply, from $17 billion in 2001 to $69 billion in 2004. Estimates for 2005 are near
$150 billion, or almost 7% of China's GOP. In the process, China has accumulated
massive amounts of foreign currencies. China's holdings are now estimated to total
over $850 billion, surpassing Japan as the world's largest holder of foreign
exchange reserves. 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 global growth and to China's

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development.
This Administration has been working this relationship for five years now. Last fall,
we articulated the three pillars of what China needs to integrate into the global
economy in a manner that maximizes growth and minimizes possible disruptions.
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.
This strategy is receiving widespread support and there is an emerging global
consensus that it is the appropriate policy agenda. In fact, the Chinese have
embraced this agenda, making some important achievements, but they still have
much to do.
Exchange rate flexibility, which garners most of the attention, is first and foremost in
the China's interest. With a rigid exchange rate, China's monetary policy is
effectively set by the Federal Reserve. China must absorb large inflows of capital
and can't raise its own interest rates without attracting even larger flows. 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 and prudent financial intermediation, and help
avoid credit-fueled investment booms and resulting buildups of non-performing
loans.
In fact, in July of last year, the Chinese leadership publicly committed to greater
exchange rate flexibility and Premier Wen reaffirmed that commitment just last
month. Our engagement with China on exchange rate policy is now not about
"whether" but about "how quickly." To date China's progress has been far too
cautious. The Obstacles are no longer technical; China could easily move more
rapidly towards greater flexibility. It should do so now.
The second pillar of our strategy is achieving a better balance among sources of
Chinese growth. This is critical to sustaining China's growth in the future and
avoiding huge imbalances in trade. While China's growth has been rapid, it has
depended too heavily on investment growth and increasingly on net exports. Since
the early 1990s increased capital and labor input, rather than greater productivity,
has accounted for the bulk of China's growth. China is also increasingly dependent
on exports for growth, with 12% of 2004 real GOP growth accounted for by net
exports. 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% of China's GOP. China is now simply too large to rely on export-led
growth to pick up the slaCk when other sources of growth falter.
The counterpart to China's high investment and its current account surplus is a
savings rate of roughly 50% of GOP, which may be the highest in the world.
Chinese households save 25% of their income, on average, mostly in the form of
low interest-earning bank deposits. These "precautionary" savings reflect the weak
social safety net and the limited access to financing and insurance.
What's more, in China, enterprise savings exceed household savings. Chinese
companies, whether state-owned or private almost always reinvest profits rather
than pay dividends. This has amplified China's inefficient investment, potential
build-up of excess capacity, and boom/bust cycles.
China's leaders recognize that achieving more balanced growth is central to current
Chinese policy. To spur consumption, China has placed strong emphasis on rural
development in its most recent Five-Year Plan, deciding 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. Household savings could be reduced by
making insurance policies covering disability and catastrophic illness more widely
available, by allowing the creation of financing instruments to finance education and
other major expenses, and by making higher return investment options available to
households, including those overseas.

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Page 4 of 4
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. To help modernize China's financial system and capital
markets. Treasury has identified a number of priorities.
First. 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. We are also pressing
China to make substantial new commitments in financial services as an essential
element of any Doha agreement
Second. China's regulators and firms need to improve capacity for risk
management.
Third, China needs to improve opportunities for private companies to obtain finance
so that capital can be channeled to its most productive uses. They need to develop
corporate bond and equity markets and continue to privatize their state-owned
enterprises. China made impressive progress since 1998, privatizing over half of its
roughly 65,000 state-owned enterprises. with privately controlled firms now
accounting for over half of output value-added. As this process continues, it will be
more and more important to have competitive source of finance for private firms.
Asia is a region of tremendous opportunity and dynamism. From India to Japan
and from Singapore to China. this region has shaken off the Asian financial crisis
and stands at a moment of tremendous opportunity. The decisions we take in the
next few years will guide the U.S. role in Asia over the next generation - and
determine the shape and pace of global growth for years to come. It is important
that we manage our relations with this region in a way that preserves global growth
and maintains broad support on both sides of the Pacific for an open trade and
investment policy, which is a "win-win" proposition for both economies.
As today's jobs numbers illustrate. the American economy is strong and growing.
But we cannot rest on our laurels. we must continue to pursue the policies - at
home and abroad - that foster that growth and will lead to continued prosperity.

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April 7, 2006
JS-4173

Media Advisory, Photo Opportunity
US Treasury Official to Teach
Financial Literacy Class in Columbus
Deputy Assistant Secretary for Financial Education Dan lannicola, Jr. will visit
Columbus, Ohio on Tuesday, April 11 to meet with community leaders and to teach
fifth and sixth-graders the fundamentals of financial literacy. Congressman Pat
Tiberi will join the Treasury official as they participate in a panel discussion at Fifth
Third Bank. lannicola will then head to Moler Elementary School to speak to
students with Don Shackelford, Chairman of the Fifth Third Bank Board of
Directors.
Last week, Treasury Secretary John Snow joined lannicola, U.S. Treasurer Anna
Cabral, Members of Congress and leaders of federal financial agencies as they
introduced their plan to improve financial literacy in America. Their strategy, titled
Taking Ownership of the Future, is available at wwwITlYlllolleY·~Jov.
Tuesday's stop is one of more than a dozen visits across the country Treasury
officials will make this month to discuss financial literacy with organizations ranging
from seniors groups to elementary students.

Who:
Deputy Assistant Secretary for Financial Education Dan lannicola, Jr.
What:
Panel Discussion at Fifth Third Bank,
Moler Elementary Class on Financial Literacy
When:
Tuesday, April 11
Panel Discussion 9:30 a.m. (EST)
Class 12:00 p.m. (EST)
Where:
Panel Discussion Fifth Third Bank
21 East State Street
Class Moler Elementary School
1560 Moler Road
Columbus, OH

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April 10, 2006
2006-4-10-15-29-51-11561
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 $65,054 million as of the end of that week, compared to $65,454 million as of the end of the prior week.
I. Official U.S. Reserve Assets (in US millions)
March 31, 2006

April 7, 2006

65,454

65,054

TOTAL
1. Foreign Currency Reserves

Euro

a. Securities

,j.54

Yen

TOTAL

Euro

10,79

22,127

11,313

Of which, issuer headquartered in the US.

Yen

TOTAL

I
I

10,716

I
I

22,029

16,358

I
I

b. Total deposits with:

b.i. Other central banks and BIS

11,165

5,253

418

11,142

5,216

b.ii. Banks headquartered in the US.

b.ii. Of which, banks located abroad

7,669

7,Ltvv

Ilb.iii. Banks headquartered outside the US.
b.iii. Of which, banks located in the U.S.
2. IMF Reserve Position 2
13. Special Drawing Rights (SDRs) 2

8,196

8,223

11,044

4. Gold Stock 3

5. Other Reserve Assets

II. Predetermined Short-Term Drains on Foreign Currency Assets
March 31, 2006

Yen

Euro

April 7, 2006
TOTAL

;

Euro

1. Foreign currency loans and securities

Yen

I
I

TOTAL

II
II

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

2.8. Short positions

12.b. Long positions

13. Other

I
I

I
I
I

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

I
I
I

March 31, 2006
Euro

http://www.trcas.gov/presslrelease~!200641015295111561.htm

Yen

TOTAL

I
I

April 7, 2006
Euro

TOTAL

3/2/2007

Page 2 of2

1 Contingent liabilities in foreign currency

1.a. Collateral guarantees Oil debt due within 1
year

11.b. Other contingent liabilities

2. Fmeign currency securities with embedded
options

3. Undrawn, unconditional credit lines

0
0

With other centrallJanks

3.1J. Wtth banks and other financial institutIOns
Headquartered in the US
. With banks and other financial institulions
adquartered outside the US

4 Aggregate short and long positions of options
In foreign
Icurrencles vis-a-vis the US dollar

l..Ja.

Short posilions

II
II

14a.1. Bought puts
14a2 Written calls
141J Long posttio/1s

14b 1. Bought calls

4b2 Written puts
1

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 SDRldoliar 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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April 10, 2006
JS-4174
Schedule Update: US Treasury Official to Visit Columbus for Community
Meeting on Financial Literacy

Deputy Assistant Secretary for Financial Education Dan lannicola, Jr. will visit
Columbus, Ohio tomorrow to participate in a panel discussion on financial literacy.
Congressman Pat Tiberi and Don Shackelford, Chairman of the Fifth Third Bank
Board of Directors, will join lannicola for the discussion titled "Taking Ownership of
the Future: A Community Meeting on Financial Education."
Last week Treasury Secretary John Snow joined lannicola, U.S. Treasurer Anna
Cabral, Members of Congress and leaders of federal financial agencies as they
introduced their plan to improve financial literacy in America. Their strategy, titled
Taking Ownership of the Future, is available at www.lllymoney.gov.
Tuesday's stop is one of more than a dozen visits across the country Treasury
officials will make this month to discuss financial literacy with groups ranging from
seniors organizations to investors.
Who:
Deputy Assistant Secretary for Financial Education Dan lannicola, Jr.
What:
Community Meeting on Financial Education
When:
Tuesday, April 11
9:30 a.m. (EST)
Where:
Fifth Third Bank
21 East State Street
Columbus, Ohio
- 30 -

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April 11, 2006
JS-4175

US Treasury Official To Visit Midwest
To Discuss Outreach to 10 Million Unbanked Americans
Deputy Assistant Secretary for Financial Education Dan lannicola, Jr. will continue
his national tour for Financial Literacy month with a visit to Madison, Wisc. on
Thursday, April 13. lannicola will discuss the strategy for improving financial literacy
in America and reaching out to the unbanked. Joann Johnson, chairman of the
National Credit Union Administration (NCUA), will speak about credit unions' role in
bringing Americans to the financial mainstream.
More than 10 million unbanked households in America do not have accounts at
mainstream financial institutions and must pay extraordinarily high fees for basic
financial services. Chapter eight of the National Strategy discusses issues facing
this population and ways to bring them into the financial mainstream.
Last week, Treasury Secretary John Snow joined lannicola, U.S. Treasurer Anna
Cabral, Members of Congress and leaders of federal agencies as they released the
Financial Literacy and Education Commission's strategy to improve financial
literacy in America. Their plan, titled Taking Ownership of the Future: The National
Strategy for Financial Literacy, is available at www.mymoney.gov.

Who:
Deputy Assistant Secretary for Financial Education Dan lannicola, Jr.
What:
Keynote Address on Strategy for Banking the Unbanked
When:
Thursday, April 13
Remarks
12:45 p.m. (CST)
Where:
CUNA International Building
5810 Mineral Point Road
RoomlC3
Madison, Wi

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April 11, 2006
JS-4176
U.S. Treasurer to Visit Virginia Beach, VA
to Discuss Medicare
U.S. Treasurer Anna Escobedo Cabral will travel to Virginia Beach, Virginia
Wednesday to discuss how the President's Medicare prescription drug benefit is
helping seniors and Americans with disabilities receive the drugs they need at
reduced costs. While in Virginia Beach, Treasurer Cabral will participate in a Press
Conference on Virginia Lewin Savings Study.
The following event is open to credentialed media:

WHO
U. S. Treasurer Anna Escobedo Cabral
Treasurer Cabral's bio: http://www.treasury.gov/organization/bios/cabral-e.html
History of the Treasurer's Office: http://www.treas.gov/offices/treasurer/officehistory.shtml
WHAT
Press Conference on Virginia Lewin Savings Study
WHEN
Wednesday, April 12, 10:00 a.m. (EDT)
WHERE
Senior Services of Southeastern Virginia
6350 Center Drive, Building 5
Suite 101
Norfolk, VA

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April 11, 2006
JS-4177

Treasury Secretary John W. Snow to Visit Oxford, MS
to Discuss Medicare and the U.S. Economy
U.S. Treasury Secretary John W. Snow will visit Oxford, Mississippi to discuss how
the President's Medicare prescription drug benefit is helping seniors and Americans
with disabilities receive the drugs they need at reduced costs and the President's
agenda for continued strong growth in the economy and job creation. While in
Oxford, Secretary Snow will give remarks to Senior Citizens on Medicare, tour the
Lott Leadership Institute with U.S. Senator Trent Lott and teach an Econ - 203
class at the University of Mississippi.
The following events are open to credentialed media:

Who
U.S. Treasury Secretary John W. Snow
What
Remarks on Medicare to residents and senior citizens
When
Wednesday, April 12, 10:00 a.m. (COT)
Where
Azalea Gardens
100 Azalea Drive
Oxford, MS

Who
U.S. Treasury Secretary John W. Snow
What
Tour of Lott Leadership Institute
When
Wednesday, April 12, 100 p.m. (COT)
Where
University of Mississippi
Cross Street
Oxford, MS
Note
Tour will be preceded by a press availability at 12:30 p.m. (COT)

Who
U.S. Treasury Secretary John W. Snow

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What
Teaching Econ 203 Macro-Economics Class
When
Wednesday, April 12, 2:00 p.m. (COT)
Where
University of Mississippi
111 Conner Hall, Library Loop
Oxford, MS

Who
U.S. Treasury Secretary John W. Snow
What
Remarks to Students
When
Wednesday, April 12, 3:00 p.m. (COT)
Where
University of Mississippi
30 Holman Hall, Library Loop
Oxford, MS

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April 12, 2006
JS-4178

The Honorable John W. Snow
Prepared Remarks
The University of Mississippi
Good afternoon; thanks so much for inviting me here. I appreciate the hospitality of
everyone here at "Ole Miss" and want to extend a particular thanks to Senator Trent
Lott. He loves this university and he loves this state, and it shows. Thank you,
Senator, for sharing your home with me today.
Universities like this one are a great place for intellectual and philosophical debate
- indeed, open debate and dynamic discourse are key elements of a fine education
and a free society. And a larger philosophical debate is taking shape in America
today--one that may sound somewhat familiar, but also one that has taken on new
importance for our country's future.
On the one hand are those who believe that the future of our economy is best
served by a larger role for government in the economy. On the other side are those,
like myself, who maintain that while the role of government is to create the
conditions for prosperity, the citizens and taxpayers are the best judge of how to
spend their own money, not the government. One view necessitates higher taxes, a
more expansive role for government, and more government spending. The other
holds that low tax rates, a reduced role for government and a vibrant private sector
is the best path to prosperity for all Americans.
Recently the former view was exemplified in a presentation in Washington by a
number of past officials of the previous Administration. They styled their
undertaking the so-called "Hamilton Project," drawing on the name of the first U.S.
Treasury Secretary. Based on what was said, it appears that Hamilton's name may
have been misappropriated. Hamilton after all was foremost among the founding
fathers in seeing that the new republic's future depended upon the vitality of
commerce and the private sector while the authors of the Hamilton Project argue for
a larger government role.
The stated goal of this group was to put policy for our economy on a course
"diametrically opposed to the current policy regime," calling the current path "on the
wrong track on almost every front." They argued for a deceptively simple approach
as an alternative, calling for both "fiscal discipline, and for increased public
investment in key growth-enhancing areas." Well, if you do the math, growing the
public sector--that is, making government bigger--and achieving fiscal discipline,
can only lead to one thing: higher taxes. And higher taxes always mean a larger
role for government and a smaller role for the private sector. Is that the way we
want to go? I don't think so.
They also claim to want economic growth to be "broad based." But, they intend a
recipe of more government and higher taxes that is antithetical to growth itself. In
that scenario, the only way for some to have more, is for others to do with less. That
sounds to me like nothing more than the same old "class warfare." Hamilton on the
other hand saw the boundless opportunity for all to benefit from an expanding
economy.
In light of the facts, one wonders why anyone would want to change course now,
when the current low tax, high growth policies of this President have worked so
well. Is it the 5.2 million new jobs that they disagree with? Is it the unemployment
rate of 4.7 percent, which is lower than the average of the 60's, 70's, 80's and the

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90's? Perhaps it's the record home ownership or household wealth? Or maybe it's
the rising real after tax income that they object to. I don't think they would find
Alexander Hamilton an ally on any of these points.
Perhaps it is, as Hamilton once said, that "men often oppose a thing merely
because they have had no agency in planning it, or because it may have been
planned by those whom they dislike."
From where I stand, and from where 5.2 million American workers with new jobs
stand, the President's economic policies have been an unambiguous success and
the underlying fundamentals of the economy are very strong indeed.
There are still challenges ahead, of course, and we won't rest until every American
who is looking for work can find a job, until the opportunity for an improved standard
of living is truly within the reach of every American. That's the President's objective,
and it's a goal we pursue every day.
We have seen that the economy is doing well. That was not the case, however,
when the President took office. In fact, he inherited an economy in steep decline.
The turnaround of the economy can be directly traced to the two rounds of tax cuts
- complemented by sound monetary policy set by the Federal Reserve - which the
President worked with Congress to enact.
While officially the recession had ended in late 2001, the pace of the recovery was
at first too slow because of the need to work down overcapacity created during the
bubble economy of the late 1990s, the impact of 9/11 , and the decline in investor
confidence as a result of the corporate accounting scandals. Growth was anemic,
business confidence low and - of critical importance - capital investment was way
down. As a result job growth was nonexistent.
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, over five million new
jobs have been created.
I commended Congress for making real progress before they left for recess on a
package to extend the President's tax relief for capital gains and dividends for two
years and providing AMT relief. I strongly urge them to complete work on this
package as soon as possible when they return from recess.
With the President's tax cuts made permanent, we will secure a bright future for the
country, with good economic growth, strong investment and robust job creation. A
landscape of economic growth is also one that produces an appropriate amount of
tax revenues to fund the necessary functions of government.
I'm frankly puzzled by critics who call for tax increases - a reversal of effective
policy - at this point of success for workers and families. These critics turn a blind
eye to the economic success of the tax cuts - and that success is big enough that
it's pretty hard to miss.
The basic economics of taxation is clear, you always get less of anything you tax. It
is as if the critics of the President's policies don't want to accept that basic fact.
They are interested in tax increases, but won't acknowledge the inevitable shrinking
of investment and job growth that would result.
Good debates involve points of agreement, and there is one point of the economic
debate on which both sides can agree: We need to bring our budget deficit down.
Economic growth is helping to shrink the deficit because growth has increased
Treasury receipts to historic levels. Low tax rates are fully consistent with higher tax
revenues. Our recent experience is clear on this point. The President's

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prescription, therefore, is for continued growth paired with tight spending restraint.
That's why action by Congress on his proposal for a line-item veto is so important.
With tax revenues expected to rise above their historic levels of around 18 percent
of GOP, even with the tax cuts, the President and I agree that the problem is not
that Americans are taxed too little - it is that government spends too much.
Spending restraint is the real key to deficit reduction, period.
This is where we part ways with the opposition. They would prefer higher spending
and more government. It is clear that they would call for more taxes to pay for that
government expansion, and also tax their way out of deficits. They are not satisfied
with revenue levels that are objectively very highl
I believe raising taxes and increasing spending is an entirely unnecessary path, and
a dangerous one as well. Increased taxation puts growth and prosperity at risk.
Another point on which there is some agreement, some acknowledgement, is that
this country faces one of its greatest economic challenges ever as the· baby boom'
generation heads into retirement. Government entitlement programs--like Social
Security and Medicare--must be reformed if they are to be saved. President Bush
has provided leadership on this issue, with a brave and critical call to reform and
save Social Security. But where were the current critics when the President made
that call? Nowhere to be found. We welcome them to the debate nonetheless,
because our country's future depends on finding bipartisan solutions that won't
cripple our economy, or bankrupt our government.
The economic future of our country is important to each of us, to every American,
and to the world as well, for we are the economic leader and envy of the world. So
an open debate about the issues will always be important. And while I know which
side of the debate I'm on, I want the debate to go forward.
Another important voice from our illustrious history, Thomas Jefferson, seems to
have well-anticipated the current debate when he said: "I predict future happiness
for Americans if they can prevent the government from wasting the labors of the
people under the pretense of taking care of them."
So we'll stay engaged with those who hold other views- even those who claim to
have adopted Jefferson's intellectual rival, Alexander Hamilton.
For those who criticize the economic policies of President Bush, I simply ask two
things: which of the facts about the current economic picture of growth and job
creation do you dispute? And where is your plan for the future?
This is a debate that should be free from partisan considerations. It should be
serious, and analytical.
Bi-partisan collaboration on the biggest issues is not just desirable, it is critical. I am
reminded, seeing him today, that Trent Lott has taught Capitol Hill about working
together for the good of the nation, and we should all keep his lessons in mind as
we debate economic policy today and in the future.
Thank you again for having me here today; I look forward to taking your questions.

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April 13, 2006
JS-4179
Treasury Designates Four Leaders of Terrorist Group "Jemaah Islamiyah"
The U.S. Department of the Treasury today designated four top leaders of the al
Qaida-linked Southeast Asian terrorist organization that calls itself "Jemaah
Islamiyah" (JI). Today's action was taken pursuant to Executive Order 13224,
which is aimed at prohibiting transactions with terrorists and their supporters and
freezing their assets.
"Members of JI have been trained, funded and directed by al Qaida to pursue a
like-minded terrorist agenda, including executing some of the deadliest terrorist
attacks against innocents since the war on terror began," said Pat O'Brien,
Assistant Secretary for Terrorist Financing and Financial Crime. "The Treasury's
designation today targets four individuals for their respective roles in carrying out
JI's deadly agenda."
The U.S. is Joining with Australia and other countries to submit these individuals to
the United Nations 1267 Committee, which will consider adding them to the
consolidated list of terrorists tied to al Qaida, UBL and the Taliban.
Operating primarily in Southeast Asia, JI aims to establish, through violent jihad, a
pan-Islamic state in Southeast Asia.
On October 12, 2002, JI members carried out the brutal near-simultaneous
bombings in Bali, Indonesia, that killed 202 people. Two of the three blasts
occurred in a popular tourist district, and one occurred near the U.S. Consulate.
The attacks killed citizens from over 20 countries worldwide. Australia suffered the
greatest number of casualties with 88 Australian nationals killed.
On October 1, 2005, suicide bombers attacked Bali again in what appeared to be
the work of JI. These latest suicide bombings at restaurants frequented by tourists
killed 23 people, including the suicide bombers, and injured at least 135.
JI was involved in the bombing of the Marriott hotel in Jakarta, Indonesia, on August
5, 2003 that killed 12 people, including the suicide bomber The attack took place
during the busy lunch hour in Jakarta's central business district. JI was also behind
the September 9, 2004 suicide bombing outside the Australian Embassy in Jakarta.
That attack killed nine people and injured 182.
In December 2001, Singapore authorities arrested 13 JI members, eight of whom
had trained in al Qaida camps in Afghanistan, who planned to bomb the U.S. and
Israeli embassies, British and Australian diplomatic buildings, and U.S. and
Singapore defense targets in Singapore. Members of the group had conducted
videotaped surveillance of the potential targets. A copy of the videotape was found
that same month in Afghanistan in the destroyed house of Muhammad Atif, al
Qaida's former military commander.
The U.S. Government possesses sufficient credible evidence that the following
individuals designated today act on behalf of JI through acts of terrorism and
support for terrorism.
IDENTIFIER INFORMATION

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Abu Bakar Ba'asyir
AKAs: BAASYIR, Abu Bakar
BASHIR, Abu Bakar
Abdus Samad
Abdus Somad
DOB: August 17,1938
POB: Jombang, East Java, Indonesia
Nationality: Indonesian
As JI's top leader, Ba'asyir has authorized terrorist operations and the use of JI
operatives and resources for multiple terrorist attacks in Southeast Asia. According
to JI members, Ba'asyir needed to approve significant JI operations, either
personally or through his leadership council. Ba'asyir authorized the Bali bombings
of October 12, 2002, that killed 202 people. He authorized the use of JI operatives
and resources for a plan to conduct simultaneous bomb attacks against U.S.
embassies in Southeast Asia on or near the first anniversary of the September 11,
2001 attacks. Ba'asyir also ordered a series of bomb attacks on Indonesian
churches on December 24, 2000. The Christmas Eve bombings, carried out in 38
locations in 11 cities, killed 19 people and wounded approximately 120.
Upon the death of Abdullah Sungkar in 1999, Abu Bakar Ba'asyir assumed the
position of the overall leader, or emir, of JI. Following his arrest in 2002, Abu
Rusdan, who was previously designated by the Treasury, fulfilled Ba'aysir's day-today duties as emir.
As JI's top leader, Ba'asyir also made or approved important decisions regarding
the JI organization. Ba'asyir appointed Nurjaman Riduan Isamuddin, aka Hambali,
as the head of the JI organization in Malaysia and Singapore, which came to be
referred to as Mantiqi I. Hambali was captured in 2003.
Ba'asyir called for the destruction of the United States, England, Australia,
Singapore, Thailand and the Philippines in early 2005 and appealed for the
destruction of national leaders while urging his followers to commit violent acts of
jihad.
In March 2005, Ba'asyir was convicted in Indonesia of conspiracy in the 2002 Bali
bombings and was sentenced to 30 months in prison. As a result of two sentence
reductions, Ba'asyir is currently scheduled to be released in June 2006.

Gun Gun Rusman Gunawan
AKAs: GUNAWAN, Rusman
Abd AI-Hadi
Abdul Hadi
Abdul Karim
Bukhori
Bukhory
DOB: July 6, 1977
POB: Cianjur, West Java, Indonesia
Nationality: Indonesian
Gun Gun Rusman Gunawan was a leader and founder of a JI group in Pakistan
known as AI-Ghuraba. This group was established with the approval of Gunawan's
older brother, al Qaida leader, and former JI chief of operations Hambali. The AIGhuraba group was formed to groom the next generation of JI leaders, provide
them with training in weapons and explosives, and give them firsthand experience
in militant operations. The group reportedly also served as a JI sleeper cell.
Gunawan instructed AI-Ghuraba cell members on the need for jihad against the
United States and for the forceful overthrow of governments in Southeast Asia.
Among other things, he provided instruction on suicide and hijacking operations.
Gunawan was also an al Qaida facilitator and was given authority to coordinate
contact between the AI-Ghuraba cell and the Taliban. He frequently met with al
Qaida members and served in the role of a Karachi al Qaida conduit for jihadis in
Pakistan. He also served as an e-mail conduit between a senior al Qaida member

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and Hambali.
Gunawan was arrested in Pakistan in September 2003 and deported to Indonesia
in December 2003. In October 2004, he was convicted in Indonesia on charges
that he helped fund the August 2003 bombing of the Marriott hotel in Jakarta that
killed 12 people and was sentenced to four years in jail. Gunawan admitted to
facilitating the transfer of al Qaida money to Hambali and to carrying out orders
from Hambali.

Taufik Rifki
AKAs: REFKE, Taufek
RIFQI, Taufik
RIFQI, Tawfiq
Ami Iraq
Ami Irza
Amy Erja
Ammy Erza
Ammy Izza
Ami Kusoman
Abu Obaida
Abu Obaidah
Abu Obeida
Abu Ubaidah
Obaidah
Abu Obayda
Izza Kusoman
YACUB, Eric
DOB: August 29,1974
AL T DOB: August 9,1974
ALT DOB: August 19,1974
ALT DOB: August 19,1980
POB: Dacusuman Surakarta, Central Java, Indonesia
Nationality: Indonesian
As JI's finance officer in the Philippines, Taufik Rifki has served as a major conduit
for funding terrorist operations and training activities in the Philippines. Rifki has
also served as JI's logistics officer and as a liaison to other militant groups in the
Philippines. In 1998, Rifki trained in weapons, explosives and map reading at a
terrorist training camp in the Philippines and later was an instructor at the camp.
He is also suspected of involvement in various attacks across the southern
Philippines, including a series of deadly bombings in Mindanao, the Philippines, in
2003. In October 2003 Rifki was arrested in a JI safe house in Cotabato City, the
Philippines, that reportedly held biological and chemical warfare manuals. He is
currently in detention in the Philippines.

Abdullah Anshori
AKAs: Abu Fatih
THOYIB, Ibnu
TOYIB,lbnu
Abu Fathi
DOB: 1958
POB: Pacitan, East Java, Indonesia
Nationality: Indonesian
Abdullah Anshori was associated with JI emir Abu Bakar Ba'asyir while in Malaysia
and served as the head of the JI organization in Indonesia, which came to be
known as Mantiqi II. Additionally, Anshori represented JI at meetings of Rabitatul
Mujahidin (League of Mujahidins), an association of militant groups in the region.
Anshori is one of the most senior Jlleaders still at large.

Background on Jemaah Islamiyah
The United States named JI a Specially Designated Global Terrorist (SDGT) and a
Foreign Terrorist Organization (FTO) on October 23, 2002. Two days later, JI was
added to the United Nations 1267 Committee's consolidated list of terrorists tied to

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Usama bin Laden (UBL), al Qaida or the Taliban. Notably, 36 countries supported
the UN listing of JI, the single largest designation action to occur since the attacks
of September 11, 2001. All UN member states are required to block the assets of
persons on its consolidated sanctions list, as well as institute an arms embargo and
travel ban against them.
On January 24, 2003, two senior JI leaders, Nurjaman Riduan Isamuddin, aka
Hambali, and Mohamad Iqbal Abdurrahman, aka Abu Jibril, were designated as
SDGTs under E.O. 13224. They were added to the UN 1267 Committee sanctions
list on January 28, 2003.
On September 5, 2003, an additional 19 individuals supporting and/or committing
acts of terrorism on behalf of JI, and one non-JI co-conspirator in the 1995 plot to
simultaneously blow up 12 U.S. commercial airliners while airborne, were
designated as SDGTs under E.O. 13224. These individuals were added to the UN
1267 Committee sanctions list on September 9, 2003.
On May 12, 2005, three additional key JI members were designated as SDGTs
under E.O. 13224. These individuals are Abu Rusdan, Zulkarnaen and Joko
Pitono, aka Dulmatin. They were added to the UN 1267 Committee sanctions list
on May 16, 2005.

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April 13, 2006
JS-4180

Treasury Assistant Secretary Tony Fratto to Hold Weekly Press Briefing
Treasury Assistant Secretary for Public Affairs Tony Fratto will hold the weekly
media briefing on Monday, April 17 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 17, 11: 15 AM (EDT)
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.gov with the following information:
name, Social Security number, and date of birth.

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April 14, 2006
JS-4181
Assistant Secretary Henry to Speak at Atlanta Fed
Assistant Secretary for Financial Institutions Emil Henry will speak at the Federal
Reserve Bank of Atlanta on Tuesday, April 18. Assistant Secretary Henry will
discuss current events at the Treasury and the economy at the Bank's Modern
Financial Institutions, Financial Markets and Systemic Risk Conference.
All members of the media must register with Pierce Nelson or Jean Tate of the
Federal Reserve Bank of Atlanta. Please call 404-498-8748 to register.
Who
Assistant Secretary for Financial Institutions Emil Henry
What
Remarks on the Current Events at the Treasury and the Economy
When
Tuesday, April 18, 8 a.m. (EST)
Where
Federal Reserve Bank of Atlanta
1000 Peach Street, NE
Atlanta, GA

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April 14,2006
JS-4182
Treasury Official To Visit Colorado
To Work on Advancing Youth Financial Literacy
Deputy Assistant Secretary for Financial Education Dan lannicola, Jr. will visit
Colorado Springs, Colo. on Tuesday, April 18 to discuss financial education for
students in Kindergarten through high school. lannicola will join Junior Achievement
as the group releases the results of its survey on the personal finance practices of
America's teenagers.
Treasury Secretary John Snow and other members of the Financial Literacy and
Education Commission recently released their strategy to improve financial literacy
in America. Their plan, titled Taking Ownership of the Future: The National
Strategy for Financial Literacy, is available at wwwlllyrnoney.gov. Chapter ten of
the National Strategy discusses ways to improve elementary and high school
students' financial literacy.
Who:
Deputy Assistant Secretary for Financial Education Dan lannicola, Jr.
What:
Panel Discussion on Financial Literacy and K-12 Education
When:
Tuesday, April 18 11 :30 a.m. (MST)
Where:
Junior Achievement at the American Numismatic Association
818 North Cascade Avenue
Colorado Springs, CO

http://www.tfcas.goy/press/releases/js4182.htm

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.... -..

::.~ ~\

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u.s. TREASURY DEPARTMENT OFFICE OF PUBLIC AFFAIRS
FOR IMMEDIATE RELEASE April 17,2006,9 a.m. EST
CONTACT Brookly McLaughlin (202) 622-2920

TREASURY INTERNATIONAL CAPITAL DATA FOR FEBRUARY
Treasury International Capital (TIC) data for February 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 for March,
is scheduled for May 15,2006.
Net foreign purchases of long-term securities were $86.9 billion.
•

Net foreign purchases oflong-term domestic securities were $99.5 billion, $15.7 billion of
which were net purchases by foreign official institutions and $83.8 billion of which were net
purchases by private foreign investors.

•

U.S. residents purchased a net $12.6 billion in foreign issued securities.

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

I
2
3

Gross Purchases of Domestic Securities
Gross Sales of Domestic Securi ties
Domestic Securities Purchased, net (line I less line 2) II

12 Months Through
Feb-05
Feb-06

2004

2005

Nov-05

Dec-05

15178.9
14262.4
916.5

16914.7
15871.6
1043.1

15526.2
14588.5
937.7

17173.2
16132.7
1040,4

1427.6
1322.7
104.9

1202.7
1128.1
74.6

1444.2
1362.5
81.7

1457.1
1357.6
99.5

Jan-06

Feb-06

4
5
6
7
8

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

680.9
150.9
205.7
298.0
26.2

932.0
304.9
191.9
356.8
78.3

721.6
182.7
197.1
315.0
26.8

924.5
252.6
210.1
360.3
10l.5

99.3
51.0
8.6
34.9
4.8

63.9
12.7
8.9
32.8
9.6

59.4
-3.8
19.4
23.5
20.3

83.8
10.8
28.7
27.2
17.1

9
10
II
12
13

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

235.6
201.1
20.8
11.5
2.2

111.1
59.3
32.6
18.4
0.8

216.1
175.3
24.3
14.2
2.3

115.9
59.6
34.1
20.7
1.5

5.6
3.5
0.4
1.7
0.1

10.7
5.6
2.7
2.4
0.0

22.3
8.0
11.1
2.3
0.9

15.7
11.2
1.9
3.3
-0.7

3123.1
3276.0
-152.8

3640.7
3794.5
-153.8

3095.9
3242.8
-146.8

3903.8
4061.3
-157.5

337.4
353.8
-16.4

338.9
359.7
-20.8

374.4
387.0
-12.6

403.7
416.3
-12.6

-67.9
-85.0

-27.1
-126.7

-57.5
-89.3

-28.3
-129.2

0.8
-17.2

-4.1
-16.7

-2.3
-10.4

-0.3
-12.4

763.6

889.2

790.9

882.9

88.5

53.8

69.1

86.9

14
15
16
17
18
19
II
12
13

Gross Purchases of Foreign Securities
Gross Sales of Foreign Securities
Foreign Securities Purchased, net (line 14 less line 15) 13
Forei~,'l1 Bonds Purchased, net
Foreign Equities Purchased, net

Net Long-Term Flows (line 3 plus line 16)
Net foreign purchases of U.S. securities (+)
Includes International and Regional Organizations
Net U.S. acquisitions of foreign securities (-)

Page I of I

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April 17,2006
JS-4184
Statement by Treasury Secretary John W. Snow
On Tax Day 2006

"Americans have a healthy, traditional dislike of the day in April when taxes are
due, It's part of our national identity to dread the 'tax man' and to be wary of
government taking things away from us - be it our rights or our money,
"But there is some good news on Tax Day this year because
millions more Americans are working - and they're paying less in taxes thanks to
tax relief signed into law by President Bush, Over 5 million individuals and families
have seen their income tax liabilities completely eliminated, and tax relief for other
groups abound:
•
•
•

44 million families with children will receive an average tax cut of nearly
$2,500.
14 million elderly individuals will receive an average of $2,000.
25 million small business owners will save an average of $3,600.

"The benefits of lower taxes are not just felt on Tax Day. They are felt every day, in
the outstanding growth of the American economy. Since the Jobs & Growth Act of
2003 took effect, more than 5.1 million jobs have been created, with 211,000 new
jobs in the past month alone. America's unemployment rate is 4.7 percent - lower
than the average of the 1960s, 1970s, 1980s, and 1990s - more Americans own
their homes than ever before, family wealth is increasing at a faster rate than during
the previous business cycle, and tax revenues are surging to their highest level
ever.
"Tax Day will never be a day that we as a country look forward to, and that's all
right; it's part of our fiercely independent spirit as Americans. But there is a risk for
future tax days to be more painful, and I hope that Congress keeps the strong
American desire for lower taxes in mind when they return from their spring recess. I
commended Congress for making real progress before they left for break on a
package to extend the President's tax relief for capital gains and dividends for two
years and providing AMT relief, and I strongly urge them to complete work on this
package as soon as possible when they return from recess,"

REPORTS

•

Tax Day Relief Pack

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April 17,2006
JS-4185

Treasury Secretary John W. Snow to visit
Manchester, NH
to Discuss Taxes and the U.S. Economy
U.S. Treasury Secretary John W. Snow will be in Manchester, NH tomorrow - Tax
Day for the New England region - to discuss taxes and the American economy.
Secretary Snow will speak to local business owners to talk about the benefits of
lower tax rates for all Americans, especially small businesses, and illustrate how
President Bush's tax relief has helped the American economy grow and create jobs.
The following event is open to credentialed media:

Who
U.S. Treasury Secretary John W. Snow
What
Remarks to Greater Manchester Chamber of Commerce
When
Tuesday, April 18, 12:00 p.m. (EDT)
Where
The Derryfield Restaurant
625 Mammoth Road
Manchester, NH

http://www.trcas.goy/press/releases/.fs4185.htm

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April 17,2006
JS-4186
Treasurer to Meet with Hispanic Real Estate Professionals,
Discuss Financial Education Initiatives
U.S. Treasurer Anna Escobedo Cabral will speak before the National Association of
Hispanic Real Estate Professionals at the Capital Hilton in Washington, D.C. on
Wed., April 19. The Treasurer will discuss the Treasury's financial education
initiatives and new currency security features.
Who
Treasurer Anna Escobedo Cabral
What
Remarks on Financial Education and New Currency Security Features
Before the National Association of Hispanic Real Estate Professionals
When
Wednesday, April 19, 8:30 am (EDT)
Where
Capital Hilton
2nd Floor
1001 16th Street, NW
Washington, DC

http://www.tr~as.gov/press/reJeases/js4l86.htm

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April 18, 2006
js-4187

Remarks of Treasury Assistant Secretary for Financial Institutions
Emil Henry to the
Federal Reserve Bank of Atlanta
Thanks for that kind introduction, and I very much appreciate the chance to speak
at this important conference.
Before joining the Bush administration, I was Chairman and Co-Founder of an asset
management business. We invested in many so-called 'alternatives' including
hedge funds, private equity, private mezzanine debt, and venture capital. I would
like to speak with you today about a few trends I have observed in the hedge fund
space.

LIFE CYCLE OF ALTERNATIVE INVESTMENT CAPITAL
Since the coming of age of alternative investments in the latter half of the 20 th
century, for each of the major alternative segments--venture capital, real estate,
private equity and, most recently, hedge funds--there has been an identical pattern
of capital accumulation within each of these investment strategies. The progression
has been as follows:
The first investors to gravitate towards any alternative strategy--to show up to the
proverbial' party', if you will--are high net worth investors. Unlike institutional
investors, the wealthy investing class tend to make quicker investment decisions,
they lack institutional risk aversion, they are often comfortable making investment
decisions with little or no due diligence other than, say, the reference of a good
friend. For an individual, there is typically little consideration given to so-called
"headline" risk--the risk of embarrassment that can engulf an institution and lead to
job loss from investing with a fund that ends up on the front page due to fraud or
incompetence.
When the wealthy investment class arrive at the' party', the buffet is full, the bar is
well provisioned, and everyone is on their best behavior in eager anticipation of the
festivities to follow.
The second investor class is typically the endowment community. Endowments
tend to follow the wealthy investor class because endowments' trustees, as you
know, are the very same high net worth individuals who are already participating in
the festivities. These trustees often bring real-time experience and
recommendations to the investment process.
When endowments show up to the party, the buffet table is still well provisioned, the
host is still pouring champagne, and no one has yet to make a fool of themselves!
Next to the party are corporate pension funds. Because of their institutional risk
aversion and inertia, they require full validation of an investment space before
getting involved. The risk of being wrong (losing money) and the potential for that
headline risk simply eclipse the incentive to deliver excess return or alpha that
might present itself in an alternative asset.
Furthering my now strained and tedious party analogy, for corporate pension funds
to head to the dance floor, the festivities must be in full tilt (the room must be full),

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Page 2 of6

there must be a track record of fun by many party-goers for many years, and a
party advisor (otherwise known as "the consultant") must write the pension fund a
full and thorough report about what a great party it is indeed.
At this point, the party appears to be in full regalia, but, upon closer inspection,
some early participants are leaving. They will get home safely. The premier
offerings from the buffet are gone, but a hearty meal still remains. A few of the
remaining revelers--exuding confidence and appearing bulletproof--are, in reality,
no longer exercising their best judgment.
The next to arrive are public pension funds. These are the most conservative,
institutionally rigid investors. By the time these folks come to the party, most that
remains of the buffet have been passed on by others. Questionable judgments are
likely being made at this time.
Right now, hedge funds receive capital from all these sources. We are at the stage
where corporate pension funds are finding the space in droves. So, and I promise
this is my last party analogy, what brought the corporate pensions to the party?
Pensions were attracted to the space through the most unlikely of circumstances:
when the equity markets suffered an unprecedented 3-year decline--2000-2002-that decline was thought by many to be the event that would 'unclothe' the legions
of newly-minted hedge fund stars and lead to the demise of hedge funds, or at least
curtail their growth. One theory was that all the leverage in the system would
amplify returns negatively in the downdraft in mirror fashion to the updraft of the
ebullient equity markets of the latter 1990s.
Indeed the opposite happened.
It turned out that those institutions that were most heavily allocated to hedge funds
turned in the best risk-adjusted returns. Some of the most forward thinking
endowments, for example, had significant hedge fund exposure--on the order of 2025% of assets--and turned in terrific results. They did not shoot the lights out, but
just by posting positive performance in a time of such wrenching dislocation, they
made clear the possibilities of hedge funds. Their hedge fund managers generated
return by exploiting their natural ability to short stocks and, importantly, by moving
to cash thereby limiting exposure and mitigating loss.
Pension funds, by contrast, with traditional stock and bond exposures suffered
greatly.
The stark contrast of the endowment experience with the pension experience put a
white hot light on the protection ostensibly afforded by hedge funds. And pension
interest grew tremendously.
So, with a continuing wave of capital still expected from the pension community,
there are some questions now worth pondering:
1.
2.
3.

What risks are presented because of this development?
Are our pensions and pensioners well served by such flows of capital?
Do expected returns in the space warrant the attendant risks?

Regarding systemic risks, I am of the view that-- as we sit here today--broadly
speaking, there is less systemic risk in the hedge fund space than is generally
perceived, and that such risk is really isolated in a few specific areas--areas which I
will address in a moment. (One caveat: the pace of change is obviously so great
that it would be folly not to acknowledge that new systemic risks might present
themselves at any moment.)
And why do I feel this way? For several reasons, but mostly related to the evolving
institutionalization of the hedge funds business.

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INSTITUTIONALIZATION OF HEDGE FUNDS
One of the natural outgrowths of institutional capital pouring into an asset class is
the simultaneous institutionalization of the underlying investment businesses
operated by investment managers accepting such capital. Investment
organizations adjust their businesses in order to accommodate the demands of
their investors. Pension funds demand institutional quality oversight of their
capital. So, with increased investment from institutions, there is much to give us
comfort that the business of hedge funds has been institutionalizing in response.
And such institutionalization has served to mitigate risk on many levels.
In fact. the shock and dislocation associated with the notorious demise of LTCM
served as a catalyst for the institutionalization of the industry.
•
•

•

•
•

Following LTCM's implosion, counterparties became much more disciplined
about the extension of leverage and collateral requirements;
In the past few years, capital has become much more reluctant to seed the
proverbial "three guys in a garage" (You may remember that at the turn of
the century, it was not uncommon for a 30-year old with perhaps 4 or 5
years of real experience to open his doors for business and be flooded with
a billion dollars of capital on day one. Thankfully, this rarely happens
today.);
Investors now demand more transparency--so much so that debate among
institutional investors is not whether transparency is necessary, but instead
over the extent and value of such transparency. For example, some
investors are comfortable with regular risk reports (delivered monthly, for
example) while some argue that tick-by-tick, internet-enabled transparency
is more useful. You may recall that LTCM principals provided little, if any
transparency.
There is now a profound recognition among hedge fund professionals that
liquidity is indeed king and that in its absence all bets might be directional;
Lastly, investors now recognize the infrastructure requirements of many of
the arbitrage strategies and demand to see appropriate supporting
infrastructure before committing capital.

Such institutionalization has brought with it the broad recognition that the industry is
now widely segmented among different strategies employing different securities
across different markets. Thus, the industry is actually comprised of many subindustries, with separate and distinct pockets of risk. I have found that a number of
policymakers talk of the $1 trillion of unlevered hedge fund capital under
management as if such sheer size constitutes one clearly-defined pool of risk. This
is an oversimplification of the asset class. Risk is actually segregated across many
strategies, each with its own risk profile.
For example, long/short equity is a huge piece of the hedge fund space. It has
been reported that about half of all hedge fund capital is deployed in long/short
equity strategies. Such strategies have a natural risk manager premised in
Regulation T which, as you know, limits the amount of leverage that can be used.
The remaining hedge fund capital resides in silos across a number of separate and
distinct strategies including convertible arbitrage, distressed debt, macro, and fixedincome. Each strategy carries its own set of risks that cannot simply be compared
to the risks of other strategies. Each strategy can prudently withstand different
levels of leverage. Each strategy has a different time horizon for investment and
varying levels of volatility. And each strategy requires a different approach to make
money on the short side implying further distinct types of risk.
There are many multi-strategy hedge funds that traffic among many of these silos,
yet, like all businesses that mature and institutionalize, there is increasing
specialization of strategy, and such specialization further segments the industry of
hedge funds which further leads to a . siloing' of risk.

FUNDS OF FUNDS

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The growth of the private fund of funds industry has hastened the institutionalization
of the hedge fund industry in so many ways. Funds of funds, of course, pool
investor capital and invest in a number of hedge funds, often targeting a specific
return objective and risk profile.
Funds of funds are often the vehicle through which large pension funds make their
first hedge fund allocation. The fund of funds typically offers pensions:
•
•

•
•

diversification
a chance to 'get one's feet wet' in a complex industry (many pension
investors invest in a fund of funds in part to get up the hedge fund learning
curve with the view that, after such education, they might invest direct with
hedge funds rather than through a fund of funds);
access to individual hedge funds that are closed to the broader investment
community but where the Fund of Funds has negotiated capacity;
the avoidance of headline risk (it is a fund of funds' job to avoid bad
investments but, even when they do lose money via fraud or incompetence,
the effects of such implosions aren't felt so directly due to the inherent
diversification typically associated with a fund of funds);
a tailored strategy (long/short equity vs. arbitrage strategies, low volatility vs.
high volatility strategies, low leverage vs. high, etc), and most importantly:
Outsourced risk management.

On this last point--outsourced risk management--it is hard to overstate the impact
on institutionalization that the risk management function of fund of funds has had on
the industry. Consider the impact on risk mitigation of the following. These are
some typical demands that funds of funds place upon a typical underlying hedge
fund:
•

The hedge fund must subject itself to the highest level of scrutiny of its
business and of its principals: background checks, track record verification,
infrastructure analysis, review of prime broker relationships, comparison of
portfolio with custody accounts, etc.
• The hedge fund must exhibit a documented risk management strategy to
which it is expected to adhere or be fired: targeted gross and net exposures,
stop-loss guidelines, concentration and diversification limits, expected
sector exposures, etc.
• The hedge fund must provide to the fund of funds detailed monthly risk
reports including transparency on leverage, gross and net exposure,
performance attribution, industry exposures, top ten positions, adherence to
the risk management strategy, etc
• The hedge fund must agree to provide weekly telephonic estimates of NAV,
quarterly detailed conference calls on strategy, and annual face to face
visits.
• The hedge fund must agree to provide transparency to the portfolio level
upon demand.
Needless to say, these requirements define institutionalization and have the
positive effect of mitigating risk--individually and systemically.
There are many further examples of the institutionalization of hedge funds--most
notably in the growth of the prime brokerage function and the discipline it imposes
on its hedge fund counterparties through periodic credit analyses prerequisite for
the provisioning of leverage.
But, in general, I think it is safe to say that as pensions continue to invest in hedge
funds, the industry will further adjust and further impose upon itself an institutional
risk management regime which should--at some level--mitigate risk.

FUTURE HEDGE FUND RETURNS
Which leads, of course, to the great question of whether our country's pensions will
actually be well served by their investment in the hedge fund space and whether
going forward returns will justify such enormous investment of capital?

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Page 5 of6

Or stated more simply: will pension funds be better or worse off by virtue of their
exposure to hedge funds?
My answer will be unsatisfying to many but familiar to my friends at the Federal
Reserve "it depends".
Yet, on this subject, I do offer the following observations:
First, underscoring the notion that at this point no one truly can predict the ultimate
benefit from our pensions' exposure to hedge funds is the fact that there is a great
debate as to (i) what exactly a pension is buying when it invests in hedge funds,
and (ii) how pensions should classify their exposures to hedge funds. For example,
many believe hedge funds are not properly classified when labeled an . asset
class.' There is just too mush dispersion of strategy, leverage and exposure to
codify the group as such. Further, should pension exposure to a long/short equity
hedge fund be classified as . hedge fund exposure' or what it really is: more equity
exposure? Is exposure to a fixed income hedge fund 'hedge fund exposure' or
simply additional bond exposure?
Second, the elephant in the corner for marketers and managers of hedge fund
products today is that hedge fund returns of the last few years are demonstrably
lower than they were in the 1990s. The core question is whether this trend will
continue and whether returns of hedge funds over the long term will ever actually
exceed long term equity returns. (If they do not, I note that the sole legacy of the
hedge fund boom will have been a massive wealth transfer to a group of fortunate
entrepreneurial souls born of the late 20 th century.)
I think there is evidence to support different answers to this question:
One the one hand, it would seem logical that because the hedge fund practitioner
has a much more robust tool kit than his long-only competitor, he should be able to
drive higher long-term returns: For example, unlike his long-only mutual fund
brethren, the hedge fund manager enjoys the flexibility to short, to deploy varying
amounts of leverage, and he is not bound to invest in anyone industry or security in
the manner that a mutual fund's charter might impose. Importantly, he also has the
flexibility to disinvest and go completely to cash to mitigate loss. Many long-only
managers of course must stay close to 100% invested at all times.
On the other hand:
•

As risk is reduced through the institutionalization of hedge funds, returns
should, by definition, reduce as well;
• It would seem logical that the steady flow of more and more capital will
increasingly crowd out return;
• There is evidence that finding pure shorts--single stocks--is getting much
harder and that increasing levels of short exposure are being accomplished
through exchange traded funds and other pooled vehicles. Single stock
shorts tend to produce return while shorted pooled funds tend to hedge
exposure and mitigate risk;
• Many funds, finding an absence of public opportunities, are investing in
private equity and private debt securities and the jury is out as to whether
hedge fund practitioners have the skills necessary to create adequate
returns in the private space.
Third, regardless of where long-term returns ultimately settle in for hedge funds, our
pensions have the potential to receive many benefits from their exposure to hedge
funds. A properly structured hedge fund portfolio will provide pensions further
diversification via exposures they do not currently have. A properly structured
hedge fund portfolio will not correlate with anything else in a traditional pension's
portfolio, a further means of risk reduction. A properly structured hedge fund
portfolio may lower volatility of a pension's overall portfolio. Eexposures to hedge
funds should raise the sophistication level of our pension fiduciaries and that must
bring with it a modicum of societal good and further risk reduction.

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SYSTEMIC RISKS
Regarding systemic risks, I am on record suggesting that Treasury should stay
abreast of systemic concerns. I believe our time is best spent addressing the nexus
of hedge funds and the OTC derivatives markets, especially credit derivatives.
There has been much superb effort by policy makers outside the Treasury and
private groups to address this market segment. Many of these efforts are focused
on market infrastructure and operational risk. And there has been significant
progress.
But there is broader financial stability issues associated with credit derivatives,
particularly as it regards hedge funds. Many questions need to be explored:
•

•
•
•

•

Where are financial institutions in danger of getting their risk management
rubric wrong? Namely, are some credit derivative transactions becoming so
complex that internal risk models (such as VAR) are unreliable when it
comes to certain trades? I call this' Model risk'. Think of the summer of
2005 when most counterparties were caught flat-footed by the inexplicable
correlation of certain synthetic COO trades that were not expected to have
such correlation. Many risk management models were just plain wrong.
What are the unintended consequences of hedge fund growth on
competition for lending and the provision of private equity?
Do our largest financial institutions properly value and disclose their
derivative exposure?
Do large counterparties take false comfort in 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?
Is the settlement infrastructure--even with recent attention and modification-able to handle the current volume of activity?
Can the regulatory regime keep pace with the quickly evolving marketplace?
Will our oversight system devolve into tacit acceptance of the risk metrics
they are provided by large counterparties for the most complex
transactions?
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.

I would be pleased to discuss any or all of these issues and greater length and look
forward to your questions and our discussion.
- 30 -

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April 18, 2006
JS-4188
Under Secretary Adams to Hold Press Conference Wednesday
International Affairs Under Secretary Tim Adams will hold a press briefing tomorrow
in advance of this week's G7, IMF and World Bank meetings in Washington, DC.
Who
Under Secretary for International Affairs Tim Adams
What
Press Conference
When
Wednesday, April 19, 1 p.m. (EDT)
Where
Treasury Department
1500 Pennsylvania Avenue, NW
Room 4121
Washington, DC
NOTE
Media without Treasury press credentials planning to attend should contact Frances
Anderson in Treasury's Office of Public Affairs at (202) 622-2960 or (202) 528-9086
with the following information: name, Social Security number and date of birth. This
information may also be emailed to frances.anderson@c1o.treas.gov.

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April 18, 2006
JS-4189

Treasury Secretary John Snow Discusses the Benefits of Tax
Relief with Local Business Leaders in Manchester,
New Hampshire
Manchester, NH- Speaking to a group of local Manchester business owners on
New England's tax day, U.S. Treasury Secretary John Snow today relayed some of
the economic benefits of tax relief for the State of New Hampshire.
"While tax day is never a day that Americans look forward to, it's always nice when
a good plan comes together; and I am delighted to be here, almost three years
since the President signed the Jobs & Growth Act, to discuss the fact that because
of the tax relief, New Hampshire's economy is strong," stated Snow. "In fact, the
unemployment rate here in New Hampshire is at 3.5 percent, which is a significantly
lower rate than the state experienced in both the 80's and 90's. And it's also one of
lowest unemployment rates in the country.
In terms of specific tax relief, more than 530,000 New Hampshire taxpayers will be
able to live even more free today by enjoying a lighter tax burden from relief like the
new ten percent tax bracket and reduction in income tax rates. And businesses like
the ones I have been speaking with today are also enjoying tax relief, which is
encouraging them to invest more and create jobs, both of which are terrific for
economic strength."
Secretary Snow also made clear his position on the importance of Congress
making the President's tax relief permanent. "It is critical that Congress work to
pass legislation that extends tax relief when they return from recess. Americans
cannot afford to revert back to being overtaxed."

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April 19, 2006
JS-4190

Prepared Remarks of Anna Escobedo Cabral,
U.S. Treasurer
Before the National Association of Hispanic Real Estate
Professionals
Washington, DC- Thank you for that wonderful introduction Gary. Good morning
everyone!
I'm so thrilled to be with you today in our nation's capital on such a beautiful day,
and I want to thank you for inviting me to participate in this very important event the National Association of Hispanic Real Estate Professionals 2006 Legislative
Conference.
Congratulations Gary to you, and of course Frances Martinez Meyers and all the
NAHREP staff for putting together such a fantastic convention.
It is amazing to me that this organization was started in 1999, and yet it already has
over 14,000 members and 40 affiliate chapters nationwide. That is astounding l
I appreciate all the hundreds of NAHREP members present at this legislative
conference who have made the trip out to Washington, D.C. this week. WelcomeI hope your stay is enjoyable and very productive.
I am honored to join you here, and to do so with our very own distinguished U.S.
Secretary of Commerce, Carlos Gutierrez, who I believe exemplifies what every
Latino, every American, can achieve through a commitment to hard work, a
commitment to public service, and a commitment to just simply being a dedicated
professional and all-around good person. Mr. Secretary, you are truly an inspiration
for all Americans, and I know for certain you are to mel
As 42 nd Treasurer of the United States, I feel very privileged, but I also have a huge
responsibility knowing that I serve in this Administration along some of the brightest
Latinos in government, such as Secretary Gutierrez, U.S. Attorney General Alberto
Gonzalez, Small Business Administrator Hector Barreto, Chair of the US Equal
Employment Opportunity Commission Cari Dominguez, Department of Energy
Director of Economic Impact and Diversity Theresa Speake and many other
talents.
Pre.sident Bush understands that the Latino community in the United States is a
driving force in our growing economy, which is helping to propel it to new heights.
That is why, he has placed in his Cabinet and Administration highly qualified
individuals that also happen to possess a keen understanding and a heightened
awareness about the special needs of minority and traditionally underserved
individuals in the United States.
I am certain each of you have been blessed with those same or very similar gifts
and talents as well. I commend you for making use of them - for your on-theground work helping people become homeowners, one individual at a time. Thank
you for sharing in President Bush's vision, and in this organization's mission, of
making the dream of achieving an ownership society a reality.

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I have to say that groups like this, and individuals like you, have the potential of
really helping our government efforts achieve maximum impact.
There are a number of federal efforts specifically aimed at helping more Americans
- more Latinos - keep, save, invest, manage wisely, and grow their moneymoney and assets that can help individuals build strong credit histories, secure
reasonable and competitive interest rates, and ultimately purchase a first home.
And do you know what the key component is to make this strategy work? YOU.
The federal government needs the help of non-profit and private partnerships to
help disseminate much of this crucial information and education at the local level.
Many of our federal resources are free and come without a cost, but they must be
explained by known and trusted sources in the community. I look forward to telling
you more about our new national strategy for financial education later today.
One of the highlights of my role as U.S. Treasurer is meeting and speaking with
individuals like you, who are absolutely dedicated to enriching communities through
education. I am excited to share with you information and opportunities that are
available to the people you serve.
At Treasury, there are a variety of ways we are working to help ensure that all
people can benefit from the wonderful opportunities this country has to offer,
particularly first-time homebuyers.
THE ECONOMY

I talk with people across the country to teach them about financial, coin and
currency education. But I also have the great honor and responsibility of explaining
how President Bush's policies have and will continue to catapult our country to new
economic heights.
President Bush and Secretary Snow work hard to promote economic policies that
have a proven track record of helping people find work and stay employed. And I
am proud of their astounding success.
•

•

Just this month, the Department of reported that more Americans have jobs
than the experts even expected' President Bush's pro-growth policies
helped the U.S. economy add 211,000 jobs this month. That's 20,000 jobs
more jobs than analysts predicted.
In fact, since the President's Jobs and Growth Act took effect, we have seen
5.2 million new jobs. This really speaks to the strength of the U.S. economy
and the opportunities available to the Latino community as well.
Just consider our historic low rate of unemployment: the current rate of
unemployment is 4.7 percent - lower than the average of the 1960s, 1970s,
1980s and the 1990s. We have seen 31 consecutive months of
uninterrupted job growth.

But ensuring that people have the means to attain income is only part of the
equation. One of the ways the President has achieved our economy's success is
through well-timed and fair tax cuts.
And I'm sure, this week especially, we were all thinking about how much we can
use those tax cuts.
The truth is, lower tax rates, especially on investment, lie at the heart of this strong
expansion. That is why I am hopeful, and it is so important, that Congress extends
the President's tax relief.
The bottom line is: the President's economic plan is working. Americans have more
money in their pockets.

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•

Real disposable incomes have risen 2.2 percent over the last year, and real
median family income was up 1.6 percent for 2004 versus 2001 - according
to Federal Reserve Survey of Consumer Finance.

•

Additionally, household wealth reached $52.1 trillion in the fourth quarter of
2005 - that is an all time high. This presents a real opportunity for
consumers to save toward the purchase of a home.

Tax Revenues are Surging.
•
•

Federal revenues for Fiscal Year 2005 totaled $2.15 trillion - the highest
level ever.
The Treasury took in more than $61.4 billion in revenue December 15, the
due date for corporate estimated tax payments for the fourth quarter of this
year. This represents a fourth quarter record and a 33 percent increase
over last year's payments.

When I'm out and about doing my job, many people ask me, "How is this
possible?" Interestingly, it's economics at its simplest: with more money to invest,
there is more money available to expand, create new Jobs, and create new
businesses. The tax base expands. Tax cuts give the government more tax
payment gainsl
FINANCIAL LITERACY

Now, with all the money President Bush's economic plan and tax cuts put back into
our pockets, Americans are faced with innumerable options on what to do with this
money. This leads to a topic that is very important to me personally.
While the President's tax cuts allowed us Americans to keep more of what we
make, we need to know how to manage our finances well so we can make the most
of what we keep.
April is National Financial Literacy Month, and Secretary Snow joined me this
month to launch our national financial literacy campaign.
This is a priority for the Treasury and for my office. We want to educate Americans
about the resources that exist to help them make the most of what they earn.
And that not only includes outreach to our children in college, who are presented
with a mind-boggling number of seemingly "free" credit cards during their freshman
year. I'm also talking about people like us, and people like your clients in the Latino
community, who need to understand the importance of investor security and
homeownership in the language of their preference and in the venues they feel
most at home in.
And again, it's only with YOUR help that we can do this.
I encourage you to take some time to visit MyMoney.gov on the Internet to learn
more about the free resources and tools available in Spanish and in English.
And I please urge you to share it with your clients who are thinking about buying
their first home. I want to particularly call your attention to the federal resources in
Spanish on such topics as credit and homeownership provided at MyMoney.gov.
Again, I hope you will help make those available in your place of business and help
us get them out to local community centers in your area.
Homeownership Initiatives
I believe that with improved education and by working together we can achieve the
President's commitment to increasing the number of minority homeowners by 5.5
million families by the end of the decade.

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The President has called on the private sector to help in this effort. And I
understand about two dozen companies and organizations have made
commitments to increase minority homeownership - including pledges to provide
more than $1.1 trillion in mortgage purchases for minority homebuyers this decade.
I am also particularly excited about the non-profit's commitment to this goal. I
congratulate NAHREP on the launch of its new web-based university to provide real
estate professionals with the skills and tools to improve the services they offer to
Latinos in the United States.
President Bush is working hard to help Americans realize the dream of
homeownership. Some of his other initiatives include:
•

•

The $200 million-per-year American Dream Down Payment Act, which will
help approximately 40.000 families each year with their down payment and
closing costs.
The proposed Zero-Down Payment Initiative to allow the Federal Housing
Administration to insure mortgages for first-time homebuyers without a down
payment.
Additionally. the President proposed $2.7 billion in USDA home loan
guarantees to support rural homeownership and $1.1 billion in direct loans
for low-income borrowers unable to secure a mortgage through a
conventional lender. These loans are expected to provide 42.800
homeownership opportunities to rural families across America.

In closing. I hope the information I have shared with you today will be useful and
that you will share it with those you provide assistance to in your respective
communities on a day-to-day basis. I look forward to learning much from your work
here this week.
Thank you again for your invitation and attention, and please enjoy the rest of the
conference.

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April 19, 2006
JS-4191
Remarks of James Clouse,
Acting Deputy Assistant Secretary for Federal Finance
U.S. Department of the Treasury
Before the Information Management Network PAPERS
Forum
Harrisburg, Penn.- Thank you. I'm delighted to have the opportunity to speak with
you today. As AI mentioned, I am currently serving as the acting deputy assistant
secretary for federal finance while on leave from my permanent position at the
Federal Reserve. Much of my work at the Treasury focuses broadly on Treasury
debt management issues, so with your indulgence, I would like to devote my time
this morning to conveying a sense of the key policy and operational issues in this
important area.
Treasury Market Overview: For the purpose of my remarks today, I will define
Treasury debt management as encompassing the entire range of policy and
operational issues associated with financing U.S. government operations taking as
given the paths for expenditures and receipts. This definition thus excludes all the
complex and thorny economic and political judgments involved in tax and spending
policies, but includes the panoply of issues related to the range of securities
offered; the tactics, strategy and communications around debt issuance; and
matters related to the effiCiency, liquidity, and robustness of the primary and
secondary Treasury markets. Taking this definition on board, effective Treasury
debt management is certainly a critical function for the U.S. government, the U.S.
economy, and the U.S. taxpayer--though admittedly it is not one that often occupies
the front pages.
Some basic statistics testify to the importance of Treasury debt management. As of
December 2005, marketable U.S. Treasury debt held by the public totaled about $4
trillion or 30 percent of nominal GOP. Short-term Treasury bills comprise about a
quarter of all marketable Treasury debt outstanding. On average every week, the
Treasury rolls over roughly $50 billion in maturing bills. Another 65 percent or so of
outstanding securities is in the form of nominal coupon securities and about 8
percent is in the form of inflation-indexed securities or TIPS. As everyone in this
audience well knows, secondary market trading volume in Treasury securities is
enormous. The Fixed Income Clearing Corporation, which compares and nets
most trades in the Treasury market, reports daily trade volumes settled of roughly
$500 billion. Daily trading volumes in the corporate bond market and equity market
are much smaller by comparison. The extensive secondary market trading activity
in Treasury securities is accompanied by robust trading in repo markets and in
exchange-traded and over-the-counter Treasury derivatives markets as well. In
short, the Treasury market broadly-writ is a cornerstone for global fixed-income
markets. Treasury securities are highly valued as assets free of credit risk, and the
liquidity of Treasury cash and derivatives markets has made Treasury securities the
instrument of choice for many investors in managing interest rate risk. The
Treasury market thus affords the U.S. government unparalleled access to global
financial markets at the lowest possible cost over time. Everything we do as debt
managers is focused on financing government operations in ways that also foster
the continued growth and efficiency of Treasury markets.
The Financing Environment: The environment in which Treasury debt managers
operate is highly uncertain. And the focal point of that uncertainty is the balance of
the sources and uses of funds for the U.S. government. At the most basic level-leaving aside some complexities of government accounting--the principal sources of

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funds raised each day by the federal government including tax receipts and new
debt issues must cover the various uses of funds including government
expenditures and principal and interest payments on outstanding securities. Any
shortfall in the sources of funds relative to the uses of funds must be met by a
drawdown in cash assets. Conversely, any excess in the sources of funds relative
to the uses of funds implies an increase in cash assets. The Treasury maintains
cash assets in several forms including non-interest earning balances held at the
Federal Reserve and collateralized deposits at commercial banks; it is generally to
the Treasury's advantage to keep cash balances at low levels while at the same
time avoiding overdrafts at commercial banks or the Federal Reserve.
The sources and uses constraint is inescapable as are the attendant uncertainties,
some of which are most evident at high frequencies and while others are more
apparent over the longer-run. At high frequencies, debt managers face great
uncertainty about receipts of all sorts but particularly about business and individual
income tax payments. Of course, today is a perfect example of that high frequency
uncertainty we have some information about this year's tax season, but we really
won't have a firm handle on the April/May tax receipts picture until the end of this
month. Over the longer run, uncertainties about economic prospects and changes
in the fiscal outlook are something that debt managers must constantly confront.
The Administration, Congress, and a range of private sector forecasters produce
regular deficit projections. But these forecasts can change quite significantly over
time, even for the current year.
Goals and Objectives: At first blush, this sort of deciSion-making under
uncertainty doesn't seem to pose any special problems. A textbook analYSis might
simply say that debt managers should maximize the expected value of some
objective function given the sources and uses of funds constraint and the
uncertainty about the key fiscal variables. But what objective function should debt
managers maximize? The Treasury does not operate with an explicit statutory debt
management objective. And it may not surprise you to learn that economists
studying this problem have arrived at quite different conclusions over time about the
appropriate objectives for debt management. For example, in so-called Ricardianequivalence frameworks, households view any increase in the value of their existing
holdings of federal debt as perfectly offset by a rise in future tax obligations. In
such models, choices about the composition of federal debt are largely irrelevant
and by implication, debt managers are mostly irrelevant too. For obvious reasons,
my colleagues and I are not particularly fond of these models! Other models have
suggested that debt managers should concern themselves with structuring debt so
as to minimize the variability in tax rates. Still others suggest that Treasury debt
should be structured so as to assist in stabilizing the macroeconomy.
As a practical matter, debt managers in the United States and in many other
countries have adopted a more pragmatic approach. Broad macro objectives such
as stabilizing tax rates or the economy are viewed as the province of Congress and
the Administration. The pragmatic approach focuses largely on minimizing the cost
of debt financing over time while also giving some weight to other factors such as
variability in interest payments, the diversification of the investor base, operational
risks, and flexibility. To some extent, the pragmatic approach is amenable to
standard analysis of decision-making under uncertainty. For example, given the
presence of a term premium in longer-term Treasury yields, a strict cost
minimization criterion would probably favor--at the margin--shorter-term financing.
On the other hand, yields on longer-term securities are less variable over time than
short-term yields and longer-term securities can be employed to lessen rollover
risks. An optimal debt portfoliO might then involve some appropriate balanCing of
these considerations.
While a useful exercise, there is a fundamental difference between this standard
sort of analysis and Treasury debt management in practice: The textbook exercise
assumes that Treasury is a price-taker in financial markets, but in reality the
strategies and tactics employed by Treasury debt managers can affect the market
prices of Treasury securities. It is this interplay of market expectations and debt
management policy that makes Treasury debt management more subtle and
nuanced than a simple optimal cash management exercise. As I will discuss more
in a moment, transparency and adherence to regular and predictable issuance
polices are the principal components of the Treasury's strategy in managing the

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linkage between market expectations and debt management policy.

Regular and Predictable Issuance: As a general principle, longer-term debt is
issued primarily to address longer-term financing needs while short-term debt is
issued to address transitory financing requirements. In practice, this means that
issuance of longer-term securities tends to be smooth over short horizons. Such
"regular and predictable" issuance for longer-term securities allows investors to
better anticipate prospective supply over the near-term. That makes good sense
because the demand curve for longer-term securities is often assumed to be more
steeply downward sloping than that for short-term securities. As a result, the
reduction in uncertainty about supply afforded by regular and predictable issuance
of longer-term securities results in lower long-term interest rate volatility and a lower
interest rate risk premium for long-term Treasury securities. The Treasury's
sources and uses constraint, however, implies that not all debt issuance can be
regular and predictable--something must act as the shock absorber in contending
with irregular and unpredictable expenditures and receipts. Treasury bills (including
cash management bills) tend to fulfill this shock absorber role, responding to
seasonal and one-off funding needs. This again makes good sense because the
demand curves for shorter-term debt are viewed as fairly flat. As a result, the
uncertainty about the supply of bills has only a modest impact on the volatility of
short-term yields and the risk premium that Treasury must pay on short-term
securities.
These observations bear on an important topic that we face on an ongoing basis.
One of the most common types of comments that we receive from market
participants is "why don't you issue X" where "X" might be very long-term debt, or
floating-rate debt, or debt with certain embedded options, or foreign-currency
denominated debt.. .the list goes on and on. Usually these suggestions arrive at
times when the market pricing for security X is particularly rich, so that it may
appear that the Treasury is forgoing an opportunity to lock-in inexpensive funding.
However, this sort of reasoning overlooks several key points. First, the Treasury
aims to issue securities in a way that fosters liquidity in active secondary markets.
Active market trading, in turn, leads to strong auction demand for securities and
lowers Treasury's borrowing costs over time. As discussed above, these objectives
generally lead to stable and predictable issuance patterns over time. In effect, the
decision to issue a particular type of security is much like a capital investment
decision--one must consider the demand for that security over a long horizon, not
just at the moment. Second, opportunistic issuance of certain special securities to
meet a transitory demand could well entail significant costs. Funds raised in this
way WOUld, through the Treasury's sources and uses constraint, imply a cutback in
funds raised from other sources. The resulting increase in uncertainty in funds
raised from those sources that were trimmed could prove detrimental to Treasury's
overall funding cost. In addition, a policy of regular opportunistic issuance would no
doubt prompt a great deal of market speculation about whether the Treasury would
or would not be entering various markets. The resulting uncertainty and volatility
could hamper the development of these market segments over time.

Squaring Supply and Demand: So far, I've portrayed Treasury issuance
strategies as largely supply driven--that is determined by the federal government's
financing needs. Obviously, that's only half the story with the Treasury's
assessment of the demand side of the market naturally being the other half.
Assessing market demands is inherently difficult, and we rely on the counsel of
market participants and conversations with groups like this one in reaching those
judgments. Prior to each quarterly refunding auction, we visit with a number of
primary dealers to gain their perspective on current market conditions. In addition,
we regularly seek the advice of the members of the Treasury Borrowing Advisory
Committee (TBAC), which includes senior representatives from a range of financial
firms, on market conditions and the demand for Treasury securities across different
market segments.
We also rely on our visits with groups like this one that have special knowledge
about demands in particular market segments. Indeed, one of the reasons I wanted
to address this group today is to make an unabashed pitch for Treasury securities
as you contemplate your asset management decisions. According to the Federal
Reserve's Flow of Funds Accounts, pension funds as a group have not been large
holders of Treasury securities; private- and state and local government pension

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plans hold only about 2 percent and 4 percent, respectively, of their total assets in
Treasury securities. With the reintroduction of the thirty-year bond, and a full slate
of regular inflation-indexed securities, we feel that our range of offerings should be
attractive to pension funds and we hope to see those aggregate percentages edge
up over time. We would also welcome greater participation by pension funds at
Treasury auctions as part of that process.
Conducting Auctions: Up to this point, I have focused largely on basic conceptual
issues regarding supply and demand conditions, but ultimately debt managers must
go about the practicalities of selling their wares. As part of this process, Treasury
staff carefully review the incoming data on hundreds of expenditure and receipt
categories on a daily basis and update their near-term projections of financing
needs accordingly. Based on these projections, Treasury debt managers then
sketch out a path for issuance that meets the projected financing gap. At weekly
meetings, Treasury staff present recommendations for the quantities to be
auctioned during the subsequent week. The amounts offered are announced on
the public website of the Bureau of the Public Debt at about 11 a.m. Immediately
thereafter, trading in the so-called when-issued market begins in earnest. The
Treasury's Bureau of Public Debt (BPD) and the Federal Reserve Bank of New
York collect both competitive and non-competitive bids. On the day of the auction,
BPD and Fed New York staff accept competitive bids until the close of competitive
bidding at 1:00 p.m., with a large fraction of the total volume of bids for any auction
submitted in the last 15 minutes of the bidding period. After the auction close, the
BPD publishes auction results on its website including the auction stop out rate, bidcover ratio, and bids and awards for primary dealers, indirect bidders, and direct
bidders. As part of our ongoing commitment to efficiency in the auction process,
the Treasury has reduced the time it takes to release auction results to 2 minutes or
less following the auction close.

It is worth noting that the resilience of the Treasury auction system has been
dramatically improved in the years following the 9/11 attacks. Moreover, to further
modernize the auction system, the Treasury is currently in the initial stages of
designing a new auction system that will continue to enhance the efficiency and
flexibility of Treasury auctions.
The Secondary Market: The Job of Treasury debt managers does not end once a
security has been auctioned. Debt managers play an active role along with
colleagues in other agencies in monitoring developments in cash, repo, and
Treasury derivatives markets. We are particularly attuned to factors that could
threaten the efficient functioning of the Treasury market and thereby undermine the
special role of Treasury securities in fixed-income markets. For example, at times
in the past few years, the Treasury market has been beset by very large volumes of
delivery fails. Delivery fails occur on a regular basis in the Treasury and other
financial markets, but in the period after 9/11 and in the low interest rate
environment of 2003, delivery fails spiked to very high levels. Fails at these
elevated levels threaten the efficiency of the overall Treasury market and, at times
of stress, may exacerbate a sense of panic in the market. For these reasons, the
Treasury has been studying for some time the possibility of establishing a securities
lending facility. There are many pros and cons associated with such a facility and
the Treasury has not taken a position on whether a securities lending facility is
appropriate public policy. In an effort to facilitate public comment, the Treasury
plans to publish a discussion paper on this topic.

Another matter that officials must bear in mind when reviewing secondary market
conditions is the potential for a single firm to gain effective control over the supply of
an outstanding issue. Consolidation over recent years has implied that an
increasing number of financial firms have the wherewithal to assume very large
positions that may end up conferring effective control over particular Treasury
securities. The difficulty here comes in distinguishing these cases from those in
which scarcity value for a particular security arises from more benign market
forces. As always, it is important for senior management of all firms that are active
in the Treasury market along with their firm's compliance officers and risk managers
to ensure that any especially large positions in Treasury securities are consistent
with all applicable rules and regulations.

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Conclusion: To conclude. I hope that I have convinced you of the proposition
advanced at the outset of my remarks this morning--that effective Treasury debt
management is a critical function for the U.S. government. the U.S. economy. and
the U.S. taxpayer. It is also one that presents a great many challenges. both
intellectual and operational. We are committed to meeting these challenges. and
have been hard at work on many fronts to foster an even deeper. more liquid. and
more efficient Treasury market. The insights obtained in visiting with groups such
as this one are an integral part of that overall process. Thank you very much.

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April 19, 2006
JS-4192

Under Secretary Adams to Hold Pre-G7 Press Conference Today
REMINDER
Under Secretary Adams to Hold Pre-G7 Press Conference Today
International Affairs Under Secretary Tim Adams will hold a Pre-G7 press
briefing today in advance of this week's G7, IMF and World Bank meetings in
Washington, DC. The press conference will be webcast at: www.treasury.gov.
Who
Under Secretary for International Affairs Tim Adams
What
Press Conference
When
Wednesday, April19, 1 p.m. (EDT)
Where
Treasury Department
1500 Pennsylvania Avenue, NW
Room 4121
Washington, DC
NOTE
Media without Treasury press credentials planning to attend should contact Frances
Anderson in Treasury's Office of Public Affairs at (202) 622-2960 or (202) 528-9086
with the following information: name, Social Security number and date of birth. This
information may also be emailed to frances.anderson@do.treas.gov.

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April 19, 2006
JS-4193

Statement by Under Secretary for International Affairs
Timothy D. Adams
in Advance of Meetings of the G-7, IMF, and World Bank
Good afternoon. As you know, the next several days will be very busy with
meetings, and Secretary Snow and I look forward to the opportunity to sit down with
our colleagues from around the world. Although we address important matters at
these meetings every time they are held, this set of meetings will entail especially
significant items for our attention.
Secretary Snow and I will be happy to report to our colleagues that the U.S.
economy remains on a sustained upward growth track, with real GOP having risen
by an average annual rate of 3.2 percent over the last four years. The labor market
is showing particular strength, with the addition of 5.2 million new jobs since the
employment trough of August 2003.
We also are enjoying truly exceptional global growth. Global economic growth will
be above 4 percent this year for the fourth consecutive year. This performance is all
the more impressive given the serious disturbances in recent years and the sharp
increase in energy prices. Yet inflation is well contained and the financial
environment is supportive of continued growth and job creation.
But even in this strong economic climate, we remain vigilant. Disparities in global
growth performance are large. Japan continues its welcome recovery, and China
and emerging Asia are imparting dynamism to global growth. But continental
European growth, even if trending toward potential, remains modest. Oil prices
remain high and buffeted by geopolitical developments.
At this year's meetings, there will be a thorough discussion of global imbalances,
kicked off by IMF Managing Director De Rato's conference. Addressing global
imbalances is a shared responsibility and we will emphasize that the best approach
to adjustment is one that continues to support strong global demand. The United
States remains committed to cutting our fiscal deficit and meeting the President's
goal of cutting the deficit in half by 2009 when it is projected to be about 1.4 percent
of GOP. Even though the Euro-area's external position is in near balance, it is part
of the global current account equation and it is part of the solution. The U.S. is
doing its part and the other major economies must do theirs as well. Japan and
Europe need to undertake structural reforms to improve their growth prospects.
Emerging economies with current account surpluses need to playa more active
role in managing global imbalances by adopting policies that allow for greater
exchange rate flexibility, promote sustained increases in domestic consumption,
and accelerate the pace of financial sector reform. This is particularly true of China,
which is moving far too cautiously in making its currency regime more flexible. Its
reserve buildup remains excessive, and Chinese currency practices are
constraining other emerging Asian countries from pursuing greater flexibility.
Further, with countries beyond the G-7 playing an increasingly key global economic
role, we are continuing our outreach efforts. Secretary Snow has invited
representatives from Russia, China, Saudi Arabia, and the UAE. to join the G-7 at
an informal dinner. We also invited an Australian representative to brief the G-7 on
the recent G-20 Deputies' meeting - this is a first.
We have an opportunity this week to make significant progress on reforming the
IFls. There has been much discussion lately about strengthening IMF surveillance.

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Mervyn King and David Dodge have advanced some useful ideas, as has
Managing Director De Rato. Treasury especially has been seeking to strengthen
the IMF's exchange rate surveillance. The most basic purpose of the IMF is to
monitor the international system of exchange rates. We have been very heartened
to see Managing Director de Rato and many other colleagues support a stronger
emphasis on exchange rate surveillance.
We will also seek to advance fundamental reform of IMF governance.
Modernization at the IMF needs to reflect rapid growth in many emerging markets
and other key changes, such as the euro's advent. The IMF is a shareholder
institution; members' roles should reflect their relative global economic weight.
There is growing consensus on a two-step process. The first step would involve a
small ad hoc increase for the most underweight emerging market countries around
the time of the Singapore Annual Meetings. But this must be credibly linked to nearterm completion of broad second step reforms. Such reforms should include
revamping of IMF's quota formulas to make GDP the key variable, or developing an
alternative metric to this end; achieving a further increase in emerging market
countries' weights; and examining concrete actions to rationalize Executive Board
representation. Fundamental reform also needs to bear in mind the voice of poor
countries. We are confident that all countries - with a collective interest in an IMF
that is strong, legitimate, and relevant - will help to provide leadership and find a
consensus.
At the World Bank, the United States strongly supports President Wolfowitz's
leadership on the anti-corruption agenda. We need to improve governance and fight
corruption so that development assistance can be effective in promoting real growth
in poor countries. The recent agreement by the heads of all the Multilateral
Development Banks to collaborate on this agenda is encouraging. We will urge
them to be systematic in their approach, with clear and strict criteria consistent with
a zero-tolerance philosophy. We welcome the decision by the World Bank and
African Development Bank to implement 100 percent debt cancellation for
qualifying countries, and going forward we will emphasize the importance of
preventing free-riding by other creditors and ensuring that recipient countries incur
new debt in a prudent and sustainable manner. Specifically, we will be working with
other shareholders on ways to constrain both the level and pace of new lending
going forward, which will help to prevent a rapid re-accumulation of unsustainable
debt. In addition, we will continue our discussions on a pilot Advance Market
Commitment for vaccines, though there are significant scientific and implementation
issues that still must be worked out.
Finally, we are ever mindful of the urgency and importance of implementing our
commitments to fight terrorist and illicit finance. We will continue to urge our
colleagues to facilitate the development of financial information relevant to counterterrorism investigations and to develop and apply targeted financial sanctions
against terrorist organizations and their support networks. The IMF and the World
Bank's anti-money laundering and terrorist finance work is a priority in this fight, and
we will call for closer collaboration with the Financial Action Task Force in these
efforts.

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April 19, 2006
js-4194

Treasury Releases Schedule for Spring G7
Meeting
U.S. Treasury Secretary John W. Snow will host a meeting of the G7 finance
ministers and central bank governors this Friday, April 21, in Washington, D.C.
Following is a schedule of events:
2:30 p.m.
G7 Meeting
St. Regis Hotel
923 16th St., NW
Washington, DC
NOTE: Pool photo at top of meeting.

5:30 p.m.
G7 Family Photo
St. Regis Hotel
923 16th St., NW
Washington, DC
NOTE: Credentialed photographers may begin setting up at 3 p.m., equipment must
be in place for security sweep no later than 4:30 p.m.

7:30 p.m.
U.S. Treasury Secretary Snow Holds Press Conference
St. Regis Hotel - Crystal Ballroom - Lobby Level
923 16th St., NW
Washington, DC
NOTE: Media should arrive no later than 4:30 p.m. for security sweep. Treasury,
White House and IMF/World Bank Annual Meeting press credentials
accepted - no additional clearance is needed.

8:00 p.m.
G7 Outreach Dinner
St. Regis Hotel
923 16th St., NW
Washington, DC
NOTE: Pool photo at top of dinner.

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April 19, 2006
JS-4195

The Honorable John W. Snow
Prepared Remarks
The World Health Care Congress
Good afternoon; thanks so much for having me here today. This is an important
gathering and the subject matter is simply critical.
I appreciate very much the topic you've asked me to address, because the
economic impact of health care is absolutely central to the policy discussions that
surround the issue.

I often say that a strong, growing economy can handle any challenge. Health care
will prove to be the test of my assertion. The American economy is in excellent
shape today. We are growing faster than any other major industrialized nation. Jobs
are being created at a good pace - about 5.2 million new jobs since the President's
tax cuts took effect in 2003. The underlying fundamentals are strong, and we're at
the tipping point on wages. I expect to see continued job creation and wage growth
as well.
But even with more people working than ever before, with homeownership at record
levels and household wealth reaching an all-time high in the fourth quarter of last
year - even with all this good news and prosperity, we still struggle with the cost of
health care.
Health is one of the foundations, one of the necessities of our lives, but its cost is
making it more of a luxury every day. Health-care cost growth has been exceeding
GOP growth by two percentage points annually since 1940. Health-care spending
currently stands at 16 percent of GOP, and it is predicted to come to 18.7 percent of
GOP by 2014. This raises a lot of questions and a lot of concerns.
We all know that the cost of health insurance can put coverage out of reach for the
group caught in the middle - those who don't have employer-sponsored coverage
but aren't low-wage enough to qualify for government coverage.
To the uninsured, employer-provided health coverage seems ideal because it
seems "free." Of course it isn't, but it is a better bargain because of the tax
treatment of health insurance. I think it's unfortunate that the tax structure has led
us, as a society, to a reliance on employer-provided coverage. It has left the smallgroup and individual markets without the competition needed to keep costs low.
Those higher - and ever-rising - costs mean that self-employed and employees of
small-business are far less likely to have coverage. According to the Kaiser Family
Foundation's annual survey, nearly 100 percent of firms with 200 or more workers
offer health insurance to their employees, yet only 59 percent of firms with between
3 and 199 workers do, a drop of 9 percentage points from 2000.
So costs are extremely troublesome in terms of aggravating the problem of the
uninsured, and I want to get back to how we can help that targeted group in a
moment. But it's important to note, first, that benefit cost growth also hampers wage
growth for those who are insured because the price puts pressure on employers.
Benefit cost growth has exceeded wage and salary growth every year since 1999,
taking a progressively larger bite out of the overall compensation package and
leaving a smaller share for wages and salaries.

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In December of 2005 - the latest data available - wages and salaries accounted for
about 70 percent of labor compensation, compared with about 72.5 percent in
1999. This is not surprising, considering the fact that health care costs made up
about 5.8 percent of total compensation in 1999 but have jumped to 7.6 percent of
compensation in the latest data.
We - government, employers, workers, taxpayers - all face this cost-battle
together. It impacts us all, and I know that's really why this group meets. Yours is a
critical dialogue that I hope produces the next great ideas on how to tackle the
problem.
Let me quickly break out the perspectives on the health-care cost challenge.
Employers feel the pressure on their business. The cost structure of every company
that provides health insurance benefits is impacted by prices that seem to be
growing at an out-of-control rate. They aren't tempered by natural market forces - I
think they should be, and I'll get back to that in a moment.
Workers are pinched, as I said before, whether they are insured or not. Those who
work for businesses that don't offer coverage - traditionally the smallest employers
- struggle to afford something in the individual market or go without. And those who
are covered on their employer plan are feeling the cost pinch whether it's through
an increase in their own contribution or a weight on the growth of their own wages.
Finally, the government - and really I should say the taxpayers - faces
overwhelming current and future costs for employees and citizens covered by
Medicare and Medicaid. Over the next 75 years, the Medicare program is expected
to cost taxpayers $29.7 trillion more than the revenue dedicated to it; that's 4.7
percent of the GOP over that time period.
The challenge is daunting, no doubt. But bringing health care costs under control preferably tempered by market forces - is also an enormous opportunity. It carries
the promise of increased discretionary income for workers, a reduced downward
pressure on business profits and growth, and a brighter future for taxpayers than
we see in the current numbers.
Furthermore, I know we'd all like to see the growth of unproductive health care
spending reduced while preserving incentives for the health care sector to innovate
and provide people with longer and healthier lives. That, after all, is what the
business and the terrific science of health care is really all about.
You have an incredible line-up of speakers today who will cover a lot of ground, so I
want to focus in on a health-care solution that the Bush Administration is proud of
because it's shown a lot of success so far and we, in fact, are encouraging
Congress to expand the capabilities of this innovative product: Health Savings
Accounts, or HSAs.
Today, over 3 million Americans - a large portion of whom were previously
uninsured -are enjoying access to more affordable health care because of the tax
advantages and savings benefits of HSA-qualified plans.
I believe you all know how HSAs are structured, but just briefly - they are a savings
product paired with an insurance product - a high deductible health plan, or an
HDHP.
Individuals and/or their employers can contribute, tax free, to the accounts to save
for future medical expenses. Contributions can be made to them as long as the
account-holder has an HDHP, a comprehensive health insurance policy with
deductibles of at least $1,050 for self-only coverage and $2,100 for family
coverage. Annual out-of-pocket expenses associated with the HDHP are limited to
$5,250 for self-only coverage and $10,500 for family coverage. Annual contributions
can currently be made up to the amount of the deductible. Withdrawals from the
HSA can be made, tax free, at any time for qualified health expenses, which

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includes most out-of-pocket medical expenses. Thus, someone with an HDHP can
contribute, every year, an amount equal to the deductible to his HSA and use those
funds, which are exempt from income taxes, to meet the deductible. Any amount
remaining in his HSA at the end of the year is rolled over to future years, to be used
for future health care expenses.
Choosing an HSA over traditional insurance plans puts patients in charge of their
health-care purchasing decisions, and that's why their creation was so important.
Similar to retirement-saving tools like IRAs, HSAs were designed to help individuals
take more control over how their health care dollars are spent and save for future
medical and retiree health expenses on a tax-free basis.
The creation of HSAs was historic, really, because it embraces a philosophy that
favors the individual, versus an employer or the government. This is different from
the direction we've seen in health-care coverage for decades, and I believe it is an
improvement because it does inject some market force. Consumers of health care
with and HSA are going to compare costs and ask more questions about pricing.
Another benefit of HSAs that is often overlooked is their ability to protect individuals
from something that can be a financially catastrophic event: the loss of employerprovided health insurance when a job is lost.
The uninsurance rate is twice for the unemployed than it is for the employed, and
less than a quarter of the COBRA-eligible population takes up COBRA coverage.
It's no surprise, with average family insurance premiums now exceeding $10,000 a
year that someone without employment would forego health insurance. With health
care consuming 16 percent of the economy, public policy is finally recognizing and
addressing the shock of losing one's employer-sponsored health insurance subsidy
by giving people an incentive to save for that possibility, because HSA-accumulated
funds may be used to pay for COBRA premiums or for someone receiving
unemployment insurance to pay for health insurance premiums on the individual
market. Or, for that matter, to purchase long-term care insurance to insulate against
post-retirement health shocks.
For all these reasons, I'm pleased that more employers are choosing to offer HSAs
to their employees every day, and I encourage all employers and individuals to
consider them as an attractive alternative to traditional health insurance.
In a speech last week, President Bush talked about a small business owner in
Connecticut who runs a retirement community. One-third of his employees now
have HSAs, and he's told the President that the HSAs have given them good
coverage and saved the company $78,000 on health premiums. In other words,
they work. So we want to see more people, more individuals and small businesses
and big businesses use them. The next step is to improve upon the structure of
HSAs - make them even more useful and more likely to lower the number of
uninsured Americans.
The Administration is proposing:
•

That the limit on annual HSA contributions be raised from the deductible to
the policy's out-of-pocket maximum.
• Full income tax deductibility of premiums on all HSA-qualified policies,
whether the premiums are paid for by an employer or by an individual.
• An income tax credit equivalent to the payroll tax on premiums for HSAqualified plans and HSAs, whether the plan is purchased on the individual or
group market.
• A refundable tax credit to help low-income people purchase health
insurance on the individual market. As structured in this year's budget, lowincome families could get up to $3,000 in a refundable tax credit to
purchase HSA-qualified insurance.
Taken together, we expect these proposals to increase take-up of HDHP/HSA
plans from a projected 14 million to 21 million by 2010.

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The President has outlined a number of other ways to tackle this broad challenge of
rising health-care costs, and I know AI is going to get into more of those. So I want
to conclude by saying that the nature of health-care costs and the impact of those
costs on our economy is big enough that we can't play games. We really can't
waste time with partisan politics on this one. Innovation and technology are bringing
health-care blessings to the people of this country and to the world, and I will
continue to encourage everyone I work with on the government end of things to not
impede that kind of progress with the short-game of politics.
Thank you again for having me here; I wish you luck with your important work.

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April 20, 2006
2006-4-20-17 -52-49-22926
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 $64.956 million as of the end of that week, compared to $65,054 million as of the end of the prior week.
I. Official U.S. Reserve Assets (in US millions)

April 7, 2006

TOTAL

1. Foreign Currency Reserves 1
a. Securities

64,956

65,054
Euro

11,313

April 14, 2006

Yen
10,716

TOTAL

Euro

22,029

11,304

Of which, issuer headquanered in the US.

ihcffis

TOTAL

,::10::1

lb. Total deposits with:
1'-" .

",,,It;:1

11,14

central banks and BIS

1 n ::\,)8

5,216

5,201

I I, 1.. 5

<..1~

b.ii. Banks headquanered in the US.

b.ii. Of which, banks located abroad

b.iii. Banks headquanered outside the US.

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

7,400

12. IMF Reserve Position 2
2. StJ~cial Drawing Rights (SDRs) 2

8,223
11,044

4. Gold Stock 3

7;=;11

I
I

5. Other Reserve Assets

I
I
I

8,199
11,043
0

II. Predetermined Short-Term Drains on Foreign Currency Assets

April 7, 2006

Euro

TOTAL

Yen

April 14, 2006
Euro

Yen

1. Foreign currency loans and securities

TOTAL
0

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

I
I

2.a. Shon positions
12.b. Long positions

0
0

n
0

3. Other

III. Contingent Short-Term Net Drains on Foreign Currency Assets
April 7, 2006

Euro

I
I

http://www.tJ;eas.goy/pressireleaseSIL00642017524922926.htm

Yen

I
I

April 14, 2006

II
TOTAL

Euro

I
I

Yen

TOTAL

II
II

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Page 20[2

1. Contingent liabilities in foreign currency

1.a. Collateral guarantees on debt due within 1
year

1.b. Other contingent liabilities
2. Foreign currency securities with embedded
options

3. Undrawn, unconditional credit lines

II
0

I
I

3.a. With other central banks
3.b. With banks and other financial institutions

I
I

Headquartered in the U. S.

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

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

I
0

4.a. Short positions
14.a.1. Bought puts

4.a.2. Written calls

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

I
I

"
Notes:
1/ 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.
3/ Gold stock is valued monthly at $42.2222 per fine troy ounce.

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April 21,2006
js-4196

Secretary Snow, Treasury Officials to Visit Schools Across U.S.
for 10th Annual Teach Children to Save Day
The U.S. Treasury Department and the American Bankers Association Education
Foundation once again are partnering for the 10th annual Teach Children to Save
Day on Tuesday, April 25. Treasury Secretary John W. Snow and nine department
officials and staff members will volunteer their time to teach America's elementary
and high school students the importance of saving.
"The national attention to financial education -highlighted for ten years now by
National Teach Children to Save Day - means we have an opportunity to start fresh
with a new generation, to ensure tomorrow's young adults understand how
important it is to save, and how to protect themselves from identity theft, in the
same way they understand the basics of physical health or road safety," Secretary
Snow said. "There is also a tremendous interest from high school students to learn
the financial facts of life: how to manage a credit card, how to save and invest, and
how important it is to save for retirement at the beginning of a career, not at the
end. Considering the average American's personal savings rate was negative .5
percent in 2005, it becomes clear we must work to satisfy the natural desire of
young people to learn now and reduce this problem for the next generation."
"I'm proud to be participating in National Teach Children to Save Day," he
continued. "And I'm proud of the members of the Treasury team who are getting out
of the office and into the classroom."
Secretary Snow, U.S. Treasurer Anna Escobedo Cabral and Edward L. Yingling,
President and CEO of the American Bankers Association, will host ninth-graders
from Woodrow Wilson High School in Washington, DC, as they kick off national
Teach Children to Save Day with a class at the Treasury Department taught by the
officials themselves. Ten Treasury officials and staff members will teach classes
around the country that day.
This is Treasury's third year participating in Teach Children to Save Day, when
thousands of bankers and Department officials connect with students in classrooms
and after-school programs to share "real life" lessons about money. The
Department is a national leader on youth financial education and recently led the
launch of the National Strategy for Financial Education, available at
www.mymoney.gov.
Members of the media are welcome into the classrooms and should contact the
Treasury Public Affairs office or Laura Fisher with the ABA at (202) 663-5466 to
attend one of the following classes:

Treasury Secretary John W. Snow and U.S. Treasurer Anna Escobedo Cabral
Class with ninth-graders from Woodrow Wilson High School
U.S. Treasury Department
Washington, D.C.
10:00 a.m.
Emil Henry, Assistant Secretary for Financial Education
Key Elementary School
5001 Dana Place, NW
Washington, D.C.

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1:30 p.m.
Hector Morales, Executive Director for the U.S. Inter-American Development
Bank
Craig Houghton Elementary School
1001 4th Street
Augusta, GA
12:45 p.m.
Jonathan Weinberger, Executive Secretary of the Treasury
Bowman Woods Elementary
151 Boyson Rd NE
Cedar Rapids, IA
9:40 a.m.
Cliff Northup, U.S. Mint Director of Legislative and Intergovernmental Affairs
Hellgate High School
900 South Higgins Avenue
Missoula, MT
9:35 a.m.
Jesse Villarreal, Office of Critical Infrastructure Protection and Compliance
Policy
Rozelle Elementary
993 Roland
Memphis, TN
10:00 a.m.
Mary Kertz, Special Assistant for Legislative Affairs
Virginia Avenue Elementary
550 Virginia Ave
Winchester, VA
10:00 a.m.
Kimberly Reed, Senior Advisor to the Secretary
Guiteras Elementary School
35 Washington Street
Bristol, RI
9:00 a.m.
Roger Kodat, Deputy Assistant Secretary, Government Financial Policy
Marty Indian High School
110 303RO Street
Marty, SO
8:20 a.m.

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April 21, 2006
JS-4199

Statement by G-7 Finance Ministers and Central Bank Governors
April 21, 2006
We, Ministers and Governors, met today and resolutely reaffirmed that openness
and globalization are beneficial in promoting economic prosperity and reducing
poverty. These benefits are most effectively realized with sound economic
management and supportive policies for those whose welfare is adversely affected.
We committed to: strengthen economic policies in our countries; work together to
remove distortions to the global adjustment process; resist protectionism and
promote liberalization of trade and investment including an ambitious outcome from
. the Doha Development Round; and modernize the international financial
institutions.
The strong global economic expansion continues into its fourth year and the outlook
remains favorable, supported by improved macroeconomic policies in many
countries as well as benign financial market conditions. Inflation remains contained
despite high oil prices and global trade growth is buoyant. Yet risks remain from oil
market developments, global imbalances, and growing protectionism. We
underscored that global economic adjustment is a shared responsibility.
We are strengthening the dialogue between oil producers and consumers to further
improve market transparency through the release of more complete and timely data
on production, consumption and inventories, and for clear reporting of oil reserves.
We urge investment in exploration, production, energy infrastructure, and refinery
capacity. Investment is crucial and oil producing countries should provide open and
secure investment environments to enable market participants to meet pressing
needs. We remain committed to greater energy efficiency, conservation, and
diversification, which will improve the balance between supply and demand.
We reaffirm that exchange rates should reflect economic fundamentals. Excess
volatility and disorderly movements in exchange rates are undesirable for economic
growth. We continue to monitor exchange markets closely and cooperate as
appropriate. Greater exchange rate flexibility is desirable in emerging economies
with large current account surpluses, especially China, for necessary adjustments
to occur.
We welcomed the IMF Managing Director's Strategic Review to equip the IMF to
help countries meet the macroeconomic and financial policy challenges of
globalization. We supported the strengthening of IMF surveillance, including
through increased emphasis on the consistency of eXChange rate policies with
domestic policies and a market-based international monetary system and on the
spillover effects of domestic policies on other countries. We support a new remit for
bilateral and multilateral surveillance by the IMF. An ad hoc quota increase would
help better to reflect members' international economic weight. We agreed on the
need for comprehensive reform of the IMF, and called on the Managing Director to
come forward with concrete proposals for the Annual Meetings in Singapore.
We reaffirmed the importance of implementing our commitments on development.
In that context, we welcomed the decision by the IMF, World Bank, and African
Development Bank to implement 100 percent debt cancellation for qualifying
countries. We emphasized the importance of avoiding a fresh accumulation of
unsustainable debt, of responsible lending by creditors, and of ensuring that
recipient countries incur new debt in accordance with the debt sustainability
framework. We stressed the need to bolster the fight against corruption so that

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development assistance effectively promotes growth, and call on the President of
the World Bank and other MDB Heads to continue their focus on this issue, bringing
forward a strategy in this critical area. Having endorsed the concept of a pilot
Advance Market Commitments for vaccines, we call for the additional work
necessary to make its launch possible in 2006.
We reiterated our commitments to combat money laundering and terrorist financing
and call on the IMF and the World Bank to collaborate closely with the Financial
Action Task Force.
Finally, we thank Roger Ferguson for his chairmanship of the Financial Stability
Forum, and we have asked Mario Draghi to be his successor.

xxx
ANNEX: GLOBAL IMBALANCES
April 21, 2006
We, Ministers and Governors, reviewed a strategy for addressing global
imbalances. We recognized that global imbalances are the product of a wide array
of macroeconomic and microeconomic forces throughout the world economy that
affect public and private sector saving and investment decisions. We reaffirmed our
view that the adjustment of global imbalances:
•

Is shared responsibility and requires participation by all regions in this global
process;

•

Will importantly entail the medium-term evolution of private saving and
investment across countries as well as counterpart shifts in global capital
flows; and

•

Is best accomplished in a way that maximizes sustained growth, which
requires strengthening policies and removing distortions to the adjustment
process.

In this light, we reaffirmed our commitment to take vigorous action to address
imbalances. We agreed that progress has been, and is being, made. The policies
listed below not only would be helpful in addressing imbalances, but are more
generally important to foster economic growth.
•

In the United States, further action is needed to boost national saving by
continuing fiscal consolidation, addressing entitlement spending, and raising
private saving.

•

In Europe, further action is needed to implement structural reforms for labor
market, product, and services market flexibility, and to encourage domestic
demand led growth.

•

In Japan, further action is needed to ensure the recovery with fiscal
soundness and long-term growth through structural reforms.

Others will playa critical role as part of the multilateral adjustment process.
•

In emerging Asia, particularly China, greater flexibility in eXChange rates is
critical to allow necessary appreciations, as is strengthening domestic
demand, lessening reliance on export-led growth strategies, and actions to
strengthen financial sectors.

•

In oil-producing countries, accelerated investment in capacity, increased
economic diversification, enhanced exchange rate flexibility in some cases.

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•

Other current account surplus countries should encourage domestic
consumption and investment, increase micro-economic flexibility and
improve investment climates.

We recognized the important contribution that the IMF can make to multilateral
surveillance.

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April 21, 2006
JS-4200
Statement by Treasury Secretary John W. Snow
Following the Meeting of G-7 Finance Ministers and
Central Bank Governors
As you know, I just finished hosting the G-7 Finance Ministers and Central Bank
Governors meeting. Today's agenda was quite substantive and weighty.
We opened with a good discussion of the global economy. I was pleased to discuss
the U.S. economy with my colleagues. It remains on a sustained upward growth
track, with real GOP having risen by an average annual rate of 3.2 percent over the
last four years. The labor market is notably stronger with the addition of 5.2 million
new jobs since the employment trough of August 2003. I stressed that the U.S. is
open for business. Foreign direct investment flows into the U.S. grew more than 20
percent last year and almost 60 percent in 2004. FDI generates a significant
number of jobs in the United States - more than 5 million in 2004, according to
latest estimates.
Global economic growth will likely be above 4 percent this year for the fourth
consecutive year. It has been more than 30 years since this last occurred. This
performance is all the more impressive given the bursting of the tech bubble, 9/11,
and the serious corporate governance scandals of only a few years ago, and then
the sharp increase in energy prices. Yet inflation is well contained and the financial
environment is supportive of continued robust growth. Still, the global economy
faces risks. Even in this strong economic climate, disparities in global growth
performance are large. Asia has been a growing and welcome engine of global
growth, while continental European growth remains modest. Oil prices remain high
and buffeted by geopolitical developments. Protectionist pressures are acute.
We also discussed global imbalances, following on the heels of Managing Director
De Rato's conference this morning on this topic. The counterpart to the large U.S.
current account deficit is large imbalances elsewhere throughout the world. Thus,
reducing global imbalances is a shared responsibility requiring complementary
actions by a large number of economies. I emphasized that the best strategy is one
that promotes orderly adjustment in the context of maximum sustained global
growth. To this end, market distortions and impediments to adjustment must be
removed. Greater economic flexibility will help resolve global imbalances, and it will
help economies maintain strong growth as new economic patterns develop when
imbalances shrink. I urged my counterparts to think more intensively about how
they can contribute to the maintenance of strong global demand at a time when
demand shifts will be needed to reduce deficits and surpluses. The United States
remains committed to cutting its fiscal deficit and meeting the President's goal of
cutting the deficit in half by 2009 when it is projected to be about 1.4 percent of
GOP.
Emerging economies, especially China, and oil exporters are increasingly relevant
to this discussion as well. Those with large current account surpluses need to play
a far more active role in managing global imbalances by adopting policies that allow
for greater exchange rate flexibility, promote sustained increases in domestic
consumption, and accelerate the pace of financial sector reform. Oil exporters
should enhance absorptive capacity for pro-growth investment and, for some,
exchange rate flexibility.
These expanding global linkages and shifting economic weights necessitate
continued outreach efforts by the G-? Later tonight, representatives from China,

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Russia, and Saudi Arabia and the UAE will join the G-7 at an informal dinner. Also,
during the IMF reform discussion, an Australian colleague joined the G-7 for the first
time, in Australia's capacity as this year's chair of the G20.
We dealt substantially with reforming the IFls, building on the good work of Rodrigo
De Rato in his medium term IMF reform strategy. Recently Treasury has been
seeking to strengthen the IMF's exchange rate surveillance, and I am pleased to
have heard solid support on this from the other Ministers and Governors, as well as
from Managing Director de Rato. The IMF has no responsibility more fundamental
to its central mandate.
On IMF quotas and governance, we agreed on the necessity of fundamental reform
of the IMF. The IMF's structure simply does not reflect the realities of today's world
economy. As a shareholder institution, the IMF needs to reflect the rapid growth in
many emerging markets and other key changes, such as the euro's advent. The
United States strongly supports the Managing Director's approach -- a two-step
process of reform is essential. The first step should address the most underweight
emerging market countries around the time of the Singapore Annual Meetings. We
believe that this must be credibly linked to a broad second step of near-term
reforms, putting fundamental issues on the table such as broadening the countries
benefiting from share increases, overhauling the IMF's outdated quota formulas to
reflect the predominance of GOP in gauging countries' weights, and addressing the
IMF Board's size and composition. I encouraged the G-7 Ministers to set aside
national interests and commit to create an IMF that is strong, legitimate and
relevant to all its members.
I expressed my strong support for World Bank President Wolfowitz's leadership on
the anti-corruption agenda, and I found similar support among my colleagues.
Improving governance and fighting corruption is necessary for development
assistance to be effective in promoting real growth in poor countries. We agreed
that all the Multilateral Development Banks should establish clear and strict criteria
consistent with a zero-tolerance philosophy. We welcomed the decision by the
World Bank and African Development Bank to implement 100 percent debt
cancellation for qualifying countries, but committed to vigilance against free-riding
by other creditors and determination that recipient countries incur new debt in a
prudent and sustainable manner. In addition, we continued our discussions on a
pilot Advance Market Commitment for vaccines, and worked on the significant
scientific and implementation issues remaining.
We also focused on bolstering our collaborative work to safeguard the global
financial system from terrorist and WMD proliferation financing and other illicit
activities. Finance ministries playa central role in this effort, as our expertise brings
insight into financial transactions, connections with the private sector, and tools to
apply pressure on a great range of targets.
My G-7 colleagues and I have a sustained duty to work with our allies around the
world - public and private sector alike - to collect, share, and analyze all available
information to track and disrupt the activities of terrorists. As financial intelligence is
among our most valuable sources of data, finance ministries must continue to
develop and utilize powerful financial tools to thwart the flow of support to terrorists,
as well as weapons proliferators and other illicit criminals
We call for a stronger commitment from the IMF and the World Bank to fight
terrorist finance and money laundering and cooperate more closely with the
Financial Action Task Force. Additionally, countries worldwide must implement the
obligations that we have agreed to under the auspices of the UN, the FATF, and
other international and regional organizations. The evils of terrorism are real, and
as finance ministries we must do everything we can to counter these profound
threats to national and economic security.

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April 22, 2006
JS-4201
U. S. Treasury Secretary John W. Snow
IMFC Statement

I welcome the opportunity to meet with colleagues over the weekend to review the
global economy, discuss potenttal risks, and consider fundamental reforms to IMF
operations in the context of the Managing Director's medium-term strategy.
The global economy contlflues to generate Impressive growth results. It grew well
above four percent in 2005 for the third straight year and IS anticipated to grow
almost five percent In 2006. This IS among the most Impressive growth
performances in the last 30 years I sometimes worry that these highly
commendable outcomes get lost in the steady drumbeat of more negative news.
And although growth has been unusually strong and energy prices have risen
substantially, inflation IS contained in most economies and inflationary expectations
are well anchored. In addition, financial conditions remain benign, supporting
growth and job creation Nonetheless, we need to be vigilant about risks from oil
market developments, the unwinding of global imbalances, protectionist pressures,
and balance sheet vulnerabilities.
Global imbalances are being manifested in disparate economic growth rates and
differences in the relative attractiveness of investment climates. Imbalances
inherently reflect multilateral conditions and thus their adjustment cannot be
anything other than a shared responsibility. The United States, by itself, cannot and
should not be expected to resolve the problem, but we, like other major participants
in the global economy have an important role to play. However, the United States
does not have a specific current account target in mind.
On the positive side, the distribution of growth across countries has improved
recently, with a broadening recovery in Japan. Europe is witnessing a cyclical
upswing, but the outlook for future growth is modest and reforms to strengthen
domestic demand-led growth and improve long-run growth potential are still
needed. Emerging economies with current account surpluses also need to playa
more active role in managing global imbalances by adopting policies that allow for
greater exchange rate flexibility, promote sustained increases in domestic
consumption, and accelerate the pace of financial sector reform. Greater growthenhancing spending by energy exporters, and, where appropriate, exchange rate
fleXibility, could also playa useful role.
The U.S. is prepared to do its part. The US economy remains on a sustained
upward growth track, with strong Job growth and contained inflation. Although a
small and temporary increase in the federal budget deficit is anticipated for 2006
due largely to spending in response to the hurricanes spending, significant progress
toward deficit reduction was made in 2005 and the Administration remains
committed to, and on track toward, halving the fiscal deficit by 2009. Still, the best
contribution the United States can make to its own citizens and to the world
economy IS to continue achieving strong and sustained growth with low inflation.
Buoyant trade growth has contributed to strength in the global economy. We remain
committed to opening markets and resisting protectionism The United States
places a high priority on an ambitious outcome from the Doha Development Round,
encompassing agriculture, manufactured goods, and services. To achieve the
growth and development potential of the round, both developed and developing
countries need to reduce their trade barriers and provide real, additional market
access in goods and services. We urge countries to re-double their efforts to make

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substantial progress in key areas, especially in the financial services sector.
Continued terrorist attacks remind us of the urgency and importance of
implementing our commitments to fight terrorist and illicit finance. We have been at
the forefront of a concerted effort with our allies around the world - public and
private sector alike - to collect, share, and analyze all available information to track
and disrupt the activities of terrorists. Finance ministries and central banks playa
key role in this effort, as financial intelligence is among our most valuable sources
of data for waging this fight. Thus, we must draw upon all available financial
information to detect and disrupt terrorist money flows.
Indeed, the IMF's and the World Bank's work on terrorist finance and money
laundering is a priority in this fight, and we call for closer collaboration with the
Financial Action Task Force in these efforts.
We have a duty to citizens around the globe to explore and utilize all avenues to
protect ourselves from terrorists driven by agendas of hate.
Strategic Directions

The international monetary system needs a strong IMF. The Managing Director has
set out a medium-term strategy that recognizes the need for fundamental reforms to
strengthen the institution and ensure its continued strength and relevance in a
global economy dramatically different from that which existed when the Fund was
created.
We applaud his efforts and the proposed strengthening of the IMF's surveillance
role. We strongly endorse greater attention to the Fund's core mandate of firm
surveillance of exchange rate policies and their consistency with domestic policies
and the international system. This is the most basic responsibility of the IMF. We
support proposed multilateral consultations on global imbalances, provided they are
small, informal and take place at senior management levels.
The Fund needs to retain the current clarity of its existing policies on Exceptional
Access. While further work will continue, we remain unconvinced that proposed
new instruments to support emerging markets are necessary and appropriate. On
low-income countries, the United States welcomes the Managing Director's
deliberately sharper focus on the IMF's core mandates and aversion to taking on
expansive unfunded mandates.
The United States strongly supports the effort to realign quotas and Board
representation at the IMF in order to reflect changes in the global economy.
Comprehensive, fundamental reform is needed if the IMF is to remain legitimate
and relevant to its membership. For this effort to succeed, members need to look
beyond their immediate narrow interests and support changes necessary to
preserve an effective multilateral institution for monetary policy cooperation and for
resolving payments imbalances.
We believe a two-step approach could be adopted to tackle the challenge. The first
step could consist of approval at the Annual Meetings in Singapore of a limited ad
hoc increase for the most under-represented members. But for this approach to
work, it must be credibly linked to a second step that delivers fundamental reform,
including revising the IMF's quota formulas with GDP as the predominant variable;
broadening the number of emerging market countries receiving increases in quota
shares; and taking concrete actions to rationalize Executive Board representation.
In effecting fundamental reform, members also should take into account the need to
give poor countries adequate voice in the Board. In this regard, the United States
could consider an increase in Basic Votes as part of the second step.
To be clear, an ad hoc quota increase by itself is inadequate to resolve the quota
and representation issues that are steadily eroding the IMF's legitimacy and
effectiveness. The United States can only support a limited ad hoc quota increase
in Singapore if it is credibly linked as a down payment on near-term fundamental

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reform.
A clear vision of the Fund's priorities will be essential to ensure budget discipline in
the context of declining IMF income. While recent income trends need to be taken
seriously, the Fund's strong reserve position means there is no need to rush to
judgment on potentially very important changes to the Fund's finances.

Debt Relief and Debt Sustainability in Low-Income Countries
Debt relief provided by the Multilateral Debt Relief Initiative (MDRI) and greater
flexibility in IMF support offered by the Policy Support Instrument and the
Exogenous Shocks Facility provide an opportunity for more constructive IMF
engagement with poor countries going forward. Debt sustainability needs to be a
central focus in programs and surveillance.
To ensure that hard-fought gains from HIPC and MDRI are not squandered, it is
essential that the Debt Sustainability Framework is robust enough to deter rapid reaccumulation of debt for post-MDRI countries. Limiting the pace of debt reaccumulation is necessary to provide a cushion against exogenous shocks and to
create time to establish credit cultures. We favor a rules-based approach, which
could ensure consistency while also permitting differentiation, just as countries' debt
distress thresholds are differentiated based on the Country Policy and Institutional
Assessment (CPIA).
Free-riding presents a major challenge to the benefits of MDRI. By supporting
MDRI, debtors and creditors alike agreed to a new framework designed to end the
lend-and-forgive cycle. The IMF and World Bank playa key role in reinforcing this
framework. For countries approaching or in the midst of debt relief, there should be
a presumption of zero non-concessional borrowing.

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April 23, 2006
JS-4202

U. S. Treasury Secretary John W. Snow
Development Committee Statement
We meet at a time of unprecedented economic prosperity. The IMF's World
Economic Outlook (WEO) states that despite higher oil prices and natural disasters,
global economic growth in the second half of 2005 was more robust than
anticipated. Similarly, the forecast for global growth for 2006 is 4.8 percent overall,
and 6.9 percent for emerging markets and developing countries. In sub-Saharan
Africa, the poorest region in the world, the WEO projects GOP growth in 2006 to be
5.8 percent, the highest level in over three decades.
These economic results, along with our concerted efforts to reduce poverty, can
only add to the positive outcomes we are witnessing in terms of increased living
standards. According to this year's Global Monitoring Report, between 2000 and
2005 over 100 million people are estimated to have moved above the $1 a day
poverty line. Not only has the number of countries that have achieved or are on
track to achieve universal primary school completion increased significantly since
2000 but more importantly the pace of progress has increased. Likewise, the rate of
progress in reducing child mortality is accelerating, particularly as childhood
immunization programs are scaled up. And, the first signs of decline in HIV/AIDS
infection rates are emerging in several high-prevalence countries.
Despite these positive results, we know we still have challenges in establishing a
firm foundation for long-run sustainable growth.

Governance and Anti-Corruption
These challenges begin with achieving good governance and ending corruption.
The new President of the World Bank has set out his vision and we are encouraged
by his leadership. First, good governance and fighting corruption - including sound
public financial management and the rule of law - are fundamental to the process of
achieving sustained economic growth. Our own strong belief in this principle is
reflected in "ruling justly" being one of the three categories of criteria we established
for countries' eligibility to access Millennium Challenge Account funds. Second, the
focus on governance highlights the need to give greater attention to the quality and
effectiveness of aid. And third, as the Global Monitoring Report points out, good
governance also plays a significant role in accelerating efforts within countries to
help us reach the global Millennium Development Goals.
We recognize that governance can be a complicated issue and that we have more
to learn about how different facets of governance interact and their precise impact
on development effectiveness. But this should not stand in the way of the Bank's
efforts to support countries' plans to improve their own management systems. This
effort should include the development of disaggregated, actionable indicators of
performance in governance. In particular, we urge the World Bank to commit to a
time-bound plan of systematizing and universalizing the coverage of its Public
Expenditure and Financial Accountability (PEFA) indicators so that they may
become as broadly useful as the Doing Business indicators have proven to be for
improving countries' investment climates.
Corruption is a critical issue for donors, but more importantly, it is vital to the
citizens of recipient countries. Fighting corruption begins with the multilateral
development institutions ensuring that their own in-house operations meet high
integrity standards and that their interventions in member countries promote good

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governance. We want to applaud the recent commitment of the Heads of the
International Financial Institutions and the European Investment Bank to establish a
task force to address both internal and external problems of corruption. We look
forward to an agreement on a uniform Framework for Preventing and Combating
Fraud and Corruption by the September annual meetings of the World Bank and
IMF.
Second, we believe strong fiduciary integrity and sound public financial
management systems are key to stemming corruption. This is why we look with
concern at efforts to rush to use country systems that do not meet the highest
international standards and to provide increasing amounts of budget support in
countries with weak systems. This is particularly troublesome with respect to
government procurement. We believe countries which receive assistance from the
multilateral development institutions should use the World Bank's procurement
standards - not only because they are the best in the business - but also because it
promotes fair and efficient competition, which saves these governments money.
Third, we need to build on measures to increase transparency and accountability. In
particular, we should pay greater attention to those countries that are heavily
dependent on natural resources.

Fiscal Space
Efficiency in government expenditure is at the heart of the fiscal space discussion.
The Bank's report emphasizes that it is the quality rather than the quantity of public
spending that determines its ultimate impact on growth. We could not agree more. It
is not only obvious as a matter of common sense, but well-documented by the
enormously uneven cross-country evidence on the relationship between levels of
public spending and growth.
More broadly, we feel that access to improved information about the composition of
public spending in many developing countries is critical for supporting donor and
developing country efforts to promote growth through mutual accountability. From
the Bank's perspective, this information should also help to improve the criteria
used to select among alternative aid modalities, including the choice to engage in
Development Policy Lending.

Debt Relief and Challenges Ahead
Our agreement on debt relief is historic. With the crushing debt burden lifted,
countries can focus their efforts on generating economic growth by investing in
infrastructure to help move goods from producers to purchasers, and by investing in
their people.
We must remember, however, that one of the core objectives has been to foster
long-term debt sustainability by conclusively ending the destabilizing lend-andforgive approach to engaging poor countries. The clearance of unsustainable debt
is a critical component of the broader solution. However, it also means we must
take care that we don't add to these burdens in the near term. The World Bank/iMF
debt sustainability framework needs to contain new mechanisms to constrain the
accumulation of concessional debt - including, and this is critical, the rate at which it
occurs. Clear country experience has proved that the rapid accumulation of
concessional debt quickly can lead to incidents of debt distress. In addition, donors
need to address the issue of "free-riders", i.e. creditors providing non-concessional
financing immediately following debt relief or in the context of MOB grants. We look
forward to advancing these important issues later this year.

Clean Energy and Development
In promoting clean energy, we believe it is important for the multilateral
development banks to maintain a development perspective and take action within
the context of their current mandates and comparative advantages. Energy is a
means to development, not an end in itself. Lack of access to affordable and

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reliable energy services impedes economic growth and investments that improve
standards of living, and thus perpetuates poverty. Moreover, many people have no
option but to use traditional fuels, which contributes to local environmental
degradation and sickness. Our ultimate challenge is to end energy poverty by
stimulating access to secure, affordable, and increasingly clean energy services
that are needed for development
With respect to investment in energy infrastructure, international concessional
finance is likely to be needed both to help meet developing country needs and to
shift such investment toward cleaner, more efficient technologies. The question is
how the multilateral development institutions can help achieve that goal through
more effective application of their existing instruments in the context of all the other
sources of financing, including the private sector, export credit agencies and
domestic finance. Going forward, any discussion by the multilateral institutions of
new instruments should evaluate their potential to: (1) shift overall investment
toward lower pollution and lower greenhouse gas-intensity in key countries; (2)
provide for both efficiency and additionality; and (3) leverage international and
domestic private financing, all in a manner that is consistent with the development
and poverty reduction mandates of these institutions. The analysis of financing
requirements should also consider the extent to which the need for external
financing could be reduced by strengthening governance in energy and banking
sector reforms, environmental regulation, contract enforcement, and intellectual
property rights protection.
The Doha Development Agenda and Aid for Trade
We share the sense of urgency about the need for developed and developing
countries alike to offer significant, broad trade liberalization if the growth and
development potential of the Doha Development Agenda is to be realized. We also
fully support the Aid for Trade agenda launched at the Hong Kong Ministerial.
Aid for trade will be an important complement to a successful Doha round, even
though it is no substitute for completing the Round in a timely and ambitious
fashion, and it should not itself become part of the negotiations. Like so many other
aspects of the development agenda, developing countries, developed countries and
IFls all have important responsibilities with respect to effective aid for trade. It is
essential that developing countries prioritize trade in Poverty Reduction Strategy
Papers (PRSPs) in keeping with the principle of country ownership as the key
element to successful trade capacity building; it should also be given priority in
Country Assistance Strategies (CASs) and other donor support programs.
The U.S. commitment to successful aid for trade is reflected in the announcement
at Hong Kong that the U.S. will more than double its grant contributions to Aid for
Trade from $1.3 billion in 2005 to $2.7 billion annually by 2010. These will be
carried out through bilateral programs administered by U.S. agencies.
The World Bank is making some strides to operationalize trade into its country
programs, in keeping with country demand, but we would like to see the whole
Bank focus much more energy on trade capacity building and easing supply-side
constraints so that developing countries will be better equipped to engage with the
global trading community and take advantage of new trading opportunities. It is
important to avoid the establishment of new funds or institutions.
Closing
The past few years have seen a new era of global economic growth and poverty
reduction based on free markets, expanded trade, financial stability, and the
integration of the global economy. We have promoted debt sustainability and are
hopefully turning the tide against AIDS and other infectious diseases. We are
providing more assistance on more appropriate financial terms to help the world's
poor, and we're starting to provide it more effectively. We are pushing for better
ways to unleash the power of the private sector, to broaden and deepen access to
financial services, to fight corruption and to promote greater transparency. With
billions of people still living in destitute conditions, however, we cannot rest - we

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must do more to make these ideas and programs even more productive, beneficial,
and effective.

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April 24, 2006
JS-4203
Prepared Remarks on Pension and Health Care Reforms
Assistant Secretary Mark J. Warshawsky
American Society of Pension Professionals & Actuaries
(ASPPA)
Washington, D.C.
Introduction

As you know, both the House and Senate passed their versions of pension reform
legislation at the end of 2005 and a House-Senate conference committee was
appointed earlier this year. As the conference committee reconvenes after the
Easter break, 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 in the House bill that we are following at the Treasury
Department. Finally, I will discuss the need for better financial provisions for health
care expenses, and how the Administration's Health Savings Accounts proposals
address that need.
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

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•

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 in conference. Nevertheless, the Administration is
concerned that the reforms currently being considered by Congress are inadequate
and that stronger action is needed. 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.
Rifle shot Provisions

Moreover, I would be remiss if I did not highlight a glaring weakness in both of
them. They are both laden with "rifle shot" provisions that provided targeted
benefits to one firm or class of firms and workers. Exceptions from the rules reduce
both the fairness and effectiveness of the system. These troubling proVisions
include:
•

•

•
•

•

Provisions in the Senate bill that would allow airlines and airline catering
companies a special lower measure of liability and a 20-year period to fund
that liability. The Administration opposes these proviSions because it is
obvious that allowing some underfunded plan sponsors to have a separate
regime of weaker funding rules will weaken the incentives for all plan
sponsors to fund their pension promises adequately.
Another provision in the Senate bill has an increase in PBGC guarantees for
benefits for airline pilots. This provision is likely to cost PBGC hundreds of
millions if not billions of dollars, and of course, will lead to calls to equal
treatments for other professions and industries. This will significantly
weaken PBGC finances and undermine the incentive to fund promised
benefits.
Yet another Senate provision that would delay the effective date until 2017
for rural electric cooperatives.
And still another Senate provision that would delay the effective date until
2014 for a certain employer that has "rescued" another terminated plan with
liability of $100-$150 million that was settled via assumption of the plan by
another employer before July 26, 2005. The New York Times describes the
rescuing plan as Smithfield Farms.
Both House and Senate include special provisions to allow smaller
contributions for interstate bus companies.
The Senate bill also has three different expansions of the ability to transfer
"surplus" penSion assets to be used to provide retiree health benefits. We
understand these provisions are designed to apply to three specific firms.
The Senate bill has an exemption from the new multiemployer funding rules
for a plan subject to PBGC agreement prior to June 30, 2005. This benefits
a dockworkers union plan.
The Senate bill has provision treating a defined benefit plan sponsored by a
certain nonprofit organization as a governmental plan. We have been told
this was designed for an individual hospital.

Put bluntly, these provisions have no place in a bill that should strengthen pension
protections.
Another issue is the appropriate deductible limits. The Administration proposed a
significant increase in the deductible limits to provide more than adequate
opportunity for firms to pre-fund pension obligations. The proposal was to increase
the limit to 130 percent of target liability plus normal cost and allow projection of
compensation increases for flat dollar plans. Both the House and Senate have
suggested even more generous limits. The limits proposed by the Administration
were well thought out and based on analysis that suggested they were more than
sufficient to allow adequate pre-funding. One natural compromise is to allow the
greater of the original Administration proposal, which includes the salary increase
and flat-benefit adjustments, and a higher percent of target liability, but without
those upticks and adjustments.

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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 reduce expected claims on the PBGC over the next ten years
compared to current law and should put the system on a significantly improved path
at the end of that period. We hope to work with the conference committee to
ensure that the final bill meets these goals.
Defined Contribution Pension Reform

The current legislative agenda is not solely about defined benefit (DB) pensions. It
is critical that we improve the regulatory structure around 401 (k)-type defined
contribution (DC) 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.[1] 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. 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).
[1] Buessing, Marric and Mauricio Soto, The State of Private Pensions: Current
5500 Data, The Center for Retirement Research, February 2006, Number 42.
Auto Enrollment (AE)

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

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harbor for AE default investments.
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 two 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 acted on some of these
reforms already as part of the Sarbanes-Oxley legislation. However, there are still
three reforms outstanding. The House and Senate have approached these
remaining items in different ways.
Increased Access to Investment Advice: Employers should be 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.
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

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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 allows. 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
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 an optional
distribution mechanism from qualified retirement plans; if there were sufficient
interest, the necessary changes to the minimum distribution requirements could be
made to allow this form of distribution.

Health Care Reform and HSAs
I would like to devote the rest of my talk today to discussing the long-term
challenges of health care cost growth and how the Administration is trying to
confront them. Health care cost growth has been exceeding GOP growth by two
percentage points annually since 1940. Health care spending currently stands at
16 percent of GOP, and it is predicted to come to 18.7 percent of GOP by 2014.
Thus, the strain of high and rising health care costs on the government, employers,
and on consumers is not projected to go away anytime soon. And if we do not
begin to face these challenges, the strain on our society will eventually become far
worse than anything we are seeing today. Over the next 75 years, the Medicare
program is expected to cost taxpayers $29.7 trillion more than the revenue
dedicated to it; that's 4.7 percent of the GOP over that time period. Thus, we have
to begin to find ways to reduce the growth of unproductive health care spending
while preserving the incentives for the health care sector to innovate to provide
people with longer and healthier lives.
We are already witnessing one important consequence of rapidly rising health
insurance costs in the continued erosion of the group health insurance market,
particularly in the small group market. According to the Kaiser Family Foundation's

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annual survey, nearly 100 percent of firms with 200 or more workers offer health
insurance to their employees, yet only 59 percent of firms with between 3 and 199
workers do, a drop of 9 percentage points from 2000. Rising health insurance costs
and concerns about access are a significant public policy challenge. The
experience of the early 1990s showed that the American public has little appetite for
a wholesale overhaul of the health system to fix the gaps in insurance coverage. In
addition, this Administration is very cognizant of the problems that ensue when the
government crowds out the private sector. Therefore, the Administration is
proposing a set of incremental reforms that will help restrain health care spending
and help people get and maintain insurance coverage despite income, health, or
employment shocks.
Many of the proposals are anchored in the expansion of health savings accounts,
and because HSAs are a relatively new product innovation, I would like to explain a
little about what these accounts are and why the Administration believes they hold
promise.
Health savings accounts are accounts that individuals can contribute tax free to
save for future medical expenses. Contributions can be made to them as long as
you have an HSA-qualified high-deductible health plan, what I'll call an HDHP, a
comprehensive health insurance policy with deductibles of at least $1 ,050 for selfonly coverage and $2,100 for family coverage. Annual out-of-pocket expenses
associated with the HDHP are limited to $5,250 for self-only coverage and $10,500
for family coverage. Annual contributions can currently be made up to the amount
of the deductible. Withdrawals from the HSA can be made, tax free, at any time for
qualified health expenses, which includes most out-of-pocket medical expenses.
Thus, someone with an HDHP can contribute, every year, an amount equal to the
deductible to his HSA and use those funds, which are exempt from income taxes, to
meet the deductible. Any amount remaining in his HSA at the end of the year is
rolled over to future years, to be used for future health care expenses.
The reason we believe these accounts should be encouraged is to correct the
distortions created by the tax code that incent an inefficiently large amount of
sometimes wasteful health care consumption, and to help people better plan for
future health care needs.
The tax code encourages health insurance take-up by allowing employer
contributions to insurance premiums to be excluded from taxable income. The
combined income and payroll tax deductibility leads to discounts for health
insurance of over 40 percent in some cases relative to other forms of consumption.
The effect of this is to encourage over-insurance among the working population, so
that people are encouraged to purchase insurance through their employers that has
generous coverage and little cost-sharing.
This trend wipes out any notion of a market for routine or non-emergency health
expenses. The "first-dollar" or close-to-it structure of employer provided coverage a structure induced by rational responses to tax incentives - leads to overconsumption of health care. Because of the coverage, people make health care
decisions without comparing the price of the good or service to the benefit they
receive from it.
HSAs reduce the incentive to purchase overly generous health insurance by
equalizing the tax treatment of out-of-pocket expenses and covered care. If routine
or non-emergency expenses purchased out-of-pocket are taxed the same way
routine expenses are under health insurance, then the demand for insurance
coverage for those goods and services falls, and people will consume those
services in a way that takes into account the price they pay and benefit they
receive. HSAs still encourage insurance take-up, but they also discourage overinsurance that effectively removes market signals from the health care sector and
inefficiently drives up the price of health care. Obviously, people may have
concerns about whether individuals will stop getting needed care once they are in
an HDHP. The famous RAND health experiment of the 1970s found that people in
high deductible plans had 40 percent lower expenditures than those who paid no
deductible, but there were no measurable differences in health status. This
evidence suggests that people can distinguish between low value care and high

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value care at relatively low levels of expenditures.
And because I have already spoken at length about the burdens associated with
the rising cost of health insurance, I would like to bring up another characteristic of
HSAs that often gets lost in discussions--that they actually encourage savings for
future health care needs. Obviously, the funds in an HSA can be used to pay for
health care consumed while enrolled in a health plan to meet the deductible or to
pay for coinsurance. But after accumulating, they can serve as savings that may
insulate an individual from the shock of losing employer-sponsored health
insurance.
The uninsurance rate is twice for the unemployed than it is for the employed, and
less than a quarter of the COBRA-eligible population takes up COBRA coverage.
It's no surprise, with average family insurance premiums now exceeding $10,000 a
year that someone without employment would forego health insurance. With health
care consuming 16 percent of the economy, public policy is finally recognizing and
addressing the shock of losing one's employer-sponsored health insurance subsidy
by giving people an incentive to save for that possibility, because HSA-accumulated
funds may be used to pay for COBRA premiums or for someone receiving
unemployment insurance to pay for health insurance premiums on the individual
market. Or, for that matter, to purchase long-term care insurance to insulate
against post-retirement health shocks.
With the benefits of HSAs in mind, the Administration has crafted a set of proposals
to further encourage HSA/HDHP partiCipation. The Administration is proposing that
the limit on annual HSA contributions be raised from the deductible to the policy's
out-of-pocket maximum. Next, the Administration proposes full income tax
deductibility of premiums on all HSA-qualified policies, whether the premiums are
paid for by an employer or by an individual. These proposals are designed to
encourage people to move into HSA-qualified plans, for the reasons I outlined
above, and to encourage health insurance take-up by people without group
insurance. This is important because millions of taxpayers have no access to
health insurance through their employer. Small business owners are also not on
equal footing with workers who get their insurance through the employer system.
A further expansion of deductibility being proposed by the Administration would
allow for an income tax credit equivalent to the payroll tax on premiums for HSAqualified plans and HSAs, whether the plan is purchased on the individual or group
market. This, we hope, will make health insurance more affordable to the lowincome populations -- groups that often have significant payroll tax liability but little
income tax liability. Another proposal to help the low-income population has been
in the President's budget for several years. It is a refundable tax credit to help lowincome people purchase health insurance on the individual market. As structured
in this year's budget, low-income families could get up to $3,000 in a refundable tax
credit to purchase HSA-qualified insurance. If enacted, we believe the tax credits
will be a significant help to low-income individuals who would otherwise be unable
to afford health insurance.
Taken together, we expect these proposals to increase take-up of HDHP/HSA
plans from a projected 14 million to 21 million by 2010. HDHPs can slow the
growth of low-value health care; they will then help all of us to be able to afford the
health care from which we benefit.

Conclusion
Obviously, we face short- and long-term challenges in financing retirement security
and health care. 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. And we look forward to working with Congress as a
whole in passing the Administration's health care agenda.

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April 24, 2006
js-4204
Media Advisory:
Assistant Secretary Henry to Discuss CDFI Role During Community
Development Advisory Meeting
Assistant Secretary for Financial Institutions Emil Henry will discuss the role of the
Community Development Financial Institutions (CDFI) Fund within the Treasury
Department on Wed., April 26 at the U.S. Mint. Assistant Secretary Henry will give
opening remarks at 9:20 a.m. with CDFI Director Art Garcia during the Community
Development Advisory Meeting.
The meeting agenda can be viewed
at: htlp/lwww.cdfifund.gov/who_we_are/advisory_board.asp

Media planning to attend should contact Bill Luecht at (202) 622-8042 or
luechtw@cdfi.treas.gov with the following information: name, Social Security
number and date of birth.
Who

Assistant Secretary for Financial Institutions Emil Henry

What

Opening Remarks on the Role of the CDFI Fund Within Treasury

When

Wednesday, April 26, 9:20 am (EDT)

Where

Community Development Advisory Meeting
U.S. Mint
2 nd Floor, Conference Room C
801 Ninth Street, NW
Washington, DC

-30-

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April 24, 2006
js-4205

Deputy Secretary Kimmitt to Hold Press Briefing Following Roundtable with
Iraqi Finance Officials
Deputy Secretary Robert M. Kimmitt will hold a press briefing tomorrow at 1:30 p.m.
(EDT) following a roundtable discussion with senior U.S. and Iraqi financial officials
including Iraqi Finance Minister Allawi and Central Bank Governor Shabibi.
Discussion topics for the roundtable will include Iraq's IMF program, monetary
policy, banking sector reform and efforts to strengthen anti money-laundering and
counter terrorist financing efforts. In addition to U.S. Treasury officials,
representatives from the Federal Reserve, State Department, USAID and the NSC
will participate. Joining Minister Allawi and Governor Shabibi will be representatives
from Iraq's Finance Ministry and Central Bank.

Who

Deputy Secretary Robert M. Kimmitt
Treasury's Outgoing Financial Attache in Iraq Kevin Taecker
Treasury's Incoming Financial Attache in Iraq Jeremiah Pam

What

Press Briefing

When

Tuesday, April 25, 1:30 p.m. EDT

Where Treasury Department - Gallatin Room, 2124
1500 Pennsylvania Avenue
Washington, DC
Note Media without Treasury press credentials planning to attend should contact
Frances Anderson in Treasury's Office of Public Affairs at (202) 622-2960 or (202)
528-9086 with the following information: name, Social Security number and date of
birth. This information may also be emailed to frances.anderson@do.treas.gov.

-30-

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April 24, 2006
js-4207

Secretary Snow, Treasurer Cabral Volunteer with 9th Grade Class on Teach
Kids to Save Day
Treasury Secretary John W. Snow and Treasurer Anna Escobedo Cabral will teach
a class on personal savings for ninth-graders from Woodrow Wilson High School to
kick off National Teach Children to Save Day on Tuesday, April 25 and to
participate in National Volunteer Week.
The Treasury Department and the American Bankers Association Education
Foundation once again are partnering for the 10th annual Teach Children to Save
Day. This is Treasury's third year participating in the day's events, when officials
and bankers connect with thousands of students in classrooms and after-school
programs to share "real life" lessons about money. Secretary Snow and ten
department officials and staff will volunteer their time with America's elementary
and high school students that day.
The class is open to the media. Media without Treasury press credentials should
contact Frances Anderson at (202)622-2960, or frallces ,mcjprsoll@cJo.tre<ls.gov
with the following information: name, Social Security number, and date of birth.

Who

Secretary John Snow
Treasurer Anna Escobedo Cabral

What

National Teach Children to Save Day
National Volunteer Week

When

Tuesday, April 25, 10:00 am (EDT)

Where

U.S. Treasury Department
Media Room A
1500 Pennsylvania Avenue
Washington, DC

-30-

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April 25, 2006
JS-4208

US Treasury To Visit San Francisco
for Youth Financial Education Session
U.S. Treasury Deputy Assistant Secretary for Financial Education Dan lannicola, Jr.
will visit San Francisco, California on Thursday, April 27 to discuss youth financial
education with local Girls Scouts and the Charles Schwab Foundation.
Recent studies from the Charles Schwab Foundation show that while most
American teens understand the basics of personal finance, they do not realize the
consequences of poor money management. For example, 61 percent of teens
surveyed say they know how to write a check, but only 41 percent know how to
balance a checkbook. And while about one-third of teens owe money, only half say
they are concerned about paying it back. Treasury Department officials are
reaching out to youth across the country this month to help prevent the growth of
problems like this in the next generation.
Earlier this month Treasury Secretary John W. Snow and other members of the
Financial Literacy and Education Commission released their strategy to improve
financial literacy in America. Their plan, titled Taking Ownership of the Future: The
National Strategy for Financial Literacy, is available at www.rnymoneygov.

Who:
Deputy Assistant Secretary for Financial Education Dan lannicola, Jr.
What:
Discussion on Youth Financial Education
When:
Thursday, April 2710:00 a.m. (PDT)
Where:
Federal Deposit Insurance Corporation
25 Jessie Street at Ecker Square
San Francisco, CA

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April 25, 2006
2006-4-25-14-40-9-16375
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 $65,792 million as of the end of that week, compared to $64,956 million as of the end of the prior week.
I. Official U.S. Reserve Assets (in US millions)

"',
II"

rUIt::I!::j

April 14, 2006

April 21, 2006

64,956

65,792

TOTAL

Currency Reserves

Euro

11,304

Ila. Securities

iMfe"

,685

I Of which, issuer headquartered in the US.

TOTAL

Euro

21,989

11,534

Yen

TOTAL

10,851

22,385
0

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

11,1

16,346

5,201

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

I
I
I

11,366

2. IMF Reserve Position 2

7,379

3. Special Drawing Rights (SDRs) 2

8,199

4. Gold Stock 3

11,043

5. Other Reserve Assets

16,645

5,279

I
I

7,446

j~1

II. Predetermined Short-Term Drains on Foreign Currency Assets
April 14,2006
TOTAL

Yen

Euro

1. Foreign currency loans and securities

April 21,2006

Euro

Yen

TOTAL

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

12.a. Short positions

2.b. Long positions

3. Other

III. Contingent Short-Term Net Drains on Foreign Currency Assets
April 14, 2006

Euro

http://wwwtreas.gov/press/leIEa3c::;t20064251440916375.htm

Yen

April 21, 2006
TOTAL

Euro

Yen

TOTAL

3/2/2001'

Page 2 of2

1. Contingent liabilities in foreign currency

I
I

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

2. Foreign currency securities with embedded
:options

I
I
I

3. Undrawn, unconditional credit lines
3.a. With other central banks
3.b. With banks and other financial institutions

I~rtemd;n the US .

I
0

I
I

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

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

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

I
I
I

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

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 SDRldollar 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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April 26, 2006
JS-4209

The Honorable John W. Snow
Prepared Remarks
Mortgage Bankers Association's National
Policy Conference
Thank you so much for inviting me here today; it's 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 communities, businesses and
families. You're doing great work. Loans for home and commercial mortgages
literally build economic opportunity. You also deal in other forms of investment, like
investing in financial education. You invest time and resources to work in
partnership with the government to fight the financial war on terror, and that
investment helps keep our financial system safe.
I deeply appreciate what you do. In recent years your industry played a key role in
some really terrific economic recovery and growth. While showing recent signs of
easing from record growth rates, the housing market remains strong, with more
than 1.2 million new homes and 7 million existing homes sold over the past year
alone.
You should be very proud of your success for two important reasons: first, housing
market activity is an important part of economic strength and growth, which has led
to steady job creation; and second that nearly 70 percent of Americans today own
their own homes.
The country is moving in the right direction now, economically, and you're part of
that success. With 5.2 million new jobs created in the past three years and
unemployment at a very low rate of 4.7 percent- that's lower than the average for
the 1960s, 1970s, 1980s or 1990s - there is much for you and your customers to
be proud of and optimistic about.
There are some headwinds to the economy. Gasoline prices are one area where
Americans could use some help. The President has presented a four-part plan that
includes making sure consumers and taxpayers are treated fairly, promoting greater
fuel efficiency, boosting our oil and gasoline supplies, and investing aggressively in
alternatives to gasoline, so we can eliminate the root cause of high gas prices by
diversifying away from oil in the longer term.
The first part of that four-part plan, fair treatment, has a tax component that I want
to touch on. The President called on Congress yesterday to repeal certain tax
breaks that are unnecessary for energy companies, and I think that's important.
With oil prices at record levels, energy companies have large cash flows - and they
should reinvest their profits into expanding refining capacity, researching alternative
energy sources, developing new technologies, and expanding production. Record
oil prices and large cash flows also mean that energy companies do not need
unnecessary tax breaks like the "geological and geophysical expenditure"
depreciation acceleration provision in the Energy Policy Act of 2005. This
unnecessary tax break allows energy companies to rapidly depreciate costs related
to oil exploration. The President has also called on Congress to repeal the Energy

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Policy Act provision subsidizing energy companies' research into deepwater
drilling. The President is looking forward to Congress taking about $2 billion of
these tax breaks out of the budget over a 1O-year period of time.
The President appreciates that high gas prices act like a tax on families and
businesses, and his plan seeks to ease the pain to the extent it is possible. But the
good news is that our strong economy can handle some headwinds at this pOint.
We really are firing on all cylinders when you look at GOP growth, job creation,
consumer confidence and a host of other indicators.
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 to this pOint of strength.
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 first quarter of this year, new claims for
unemployment insurance were lower than almost any time in the past three
decades, the only exceptions being the peaks of the booms in the 1980s and
1990s.
Good, steady job growth is no surprise, given that GOP growth was three and a half
percent last year, and signs point to very strong growth continuing this year.
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, and to act
on extending the President's tax relief as soon as possible. We must protect and
nurture our economic growth - not put it in jeopardy with tax increases.
I know that, in your business, you see the economic benefits of investment every
day. Money for business expansion or development improves the communities
where it's invested. 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
have seen a remarkable turn-around in the economy. After nine consecutive
declining quarters of real annual business investment, we have had 11 straight
quarters of rising business investment. This business expansion led to a substantial
increase in employment, as I just mentioned - 5.2 million new jobs. There can be
no question that we need to keep the tax rate on capital gains and dividends where
it is; a tax increase would be a terrible mistake. While many factors contributed to
the improved performance of the economy, the tax reductions on capital have been
at the heart of the progress we have seen.
Prior to Congress' Easter recess, much progress was made on completing a tax bill
that will extend for two years the investment tax cuts originally enacted in 2003.
While worrisome that this bill has been pending for over a year, it is heartening that
it is so close to completion. As I said before, we cannot afford to wait any longer.
The time for Congress to finish this business is now. Investors, risk-takers, jobcreators, and wealth builders make their decisions by placing bets on the future and any further delays will give the impression that tax rates on the rewards from
their risks are going up - and will cause immediate damage to the lifeblood of the
economy.
Why has the continuation of an unambiguous policy success taken so long? And I

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Page 3 of 4
don't use the phrase "unambiguous success" lightly - rarely in public policy do you
see a vindication of those pushing a positive change to the status quo, and a
refutation of the dire predictions of its opponents. The President and I always
believed, and said, that eliminating the double tax on dividend income would help
spur investment, economic growth and job creation. Our opponents said the tax
cuts were a "reckless plan ... that does not create jobs" or that it was "not a growth
package."
Vindication really is the only word to describe the good news that continues to pour
in. With the enactment of the Jobs and Growth Act of 2003, the U.S. economy
made a remarkable turn-around, and month after month of strong economic
indicators - all of the charts have lines that go up - are the proof of good policy.
All of which returns me to my original question: Why has continuation of the lower
rates taken so long to pass? I can only surmise what motivates those who want to
raise taxes. Perhaps they do not believe the results that we all see. Perhaps they
cling to their theory even though it does not appear to work in practice. Their theory
appears to be that economic growth is the result of low interest rates, which are the
result of government budget surpluses, which are the result of higher tax rates. But
this puts the cart before the horse - it is an economic perpetual motion machine,
with one result - higher taxes and a government that grows faster than the private
sector. They do not understand that growth (and low real interest rates) is the result
of low tax rates (especially on risk-taking), light regulation, and sound monetary
policy.
There is certainly more long-term work to be done - making these tax cuts
permanent, not mere extensions; further enabling individuals to own their health
care solutions through Health Savings Account expansion; and taking additional
steps to simply the tax code, which we at the Treasury Department are currently
studying. Once Congress passes and the President signs these tax cut extensions,
the tax code improvements achieved by the Bush Administration and the
Republican Congress over the past 5 plus years will be extensive: Lower income
tax rates for all taxpayers, lower taxes for investors and small businesses, tax cuts
for families rearing children, a lower (and hopefully repealed) death tax, and Health
Savings Accounts.
But for the short term, the private sector can't wait any longer for future plans - the
tax cut extensions must be enacted - the time is now. This is the most important
economic message I can deliver to you, and to the Congress, on this day.
There are other issues impacting your industry that both you and I are talking to
Congress about, of course. One of those is regulatory reform of GSE's. You know
where we stand on this, I think. The Administration continues to support meaningful
GSE reform, particularly reduction of portfolios to address potential systemic risk
concerns.
We liked the bill that passed the Senate Banking Committee last summer, which
would create a new regulator for the housing GSEs with powers and authorities like
that of other world-class financial institutions' regulators. I look forward to working
with your industry and with Congress to find the right path for the future for GSE
regulation.
Changing times bring new challenges, and we face, together, the very modern
challenge of data security. Technology has made banking wonderfully fast and
efficient, but it has also brought new security threats. As we at the Treasury
consider the issue of data security, we must ensure that we do two things: 1) we
must take all reasonable efforts to ensure that Americans are not made
unnecessarily vulnerable to identity theft and related frauds, and 2) we must ensure
that any potential steps required by government do not inhibit the inventiveness that
is so vital to our free enterprise system. In many ways, President Reagan
expressed this best, when he stated that "Government's first duty is to protect the
people, not run their lives'"
As we work together on these and other issues that will keep America economically

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Page 4 of 4

strong and resilient, I want to thank you for all that the nation's mortgage banks do
investing in America. I thank you for the work you do, and the chance to speak to
you today. I'd be happy to take your questions now.

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10 view or Print tne /-,UI- content on tn,s page, eJownloaeJ me tree AeJoOel!!J Acrooatl!!J KeaeJe(I!!J.

April 20, 2006
js-4210
Occasional Paper No.2:
The Limits of Fiscal Policy in Current Account Adjustment

Occasional Papers from the Treasury Department's Office of International Affairs
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 their authors.
REPORTS

•

Occasional Paper No.2: The Limits of Fiscal Policy in Current Account
Adjustment

http://www.treas.gov/pressl[elea~c~/j .. 4210.htm

3/2/2007

THE LIMITS OF FISCAL POLICY
IN

CURRENT ACCOUNT ADJUSTMENT
() C (' ,c\ SI() N t\ L Pt\ PER N (). 2
.\PRI!. 2006

~IAR\,IN

BARTH AND PATRICIA POLLARD

DEPARTMENT OF THE TREASURY· OFFICE OF INTERNATIONAL AFFAIRS

Department of the Treasury
Office of International Affairs
Occasional Paper No.2
April 2006

The Limits of Fiscal Policy in Current Account Adjustment
Marvin Barth and Patricia Pollard

DISCLAIMER

Occasional Papers from the Treasury Department's Office of International Affairs 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 their authors.

"To those who argue that it is up to others to act or to act first, I would say, 'Be careful what you wish
for.' A disorderly adjustment of global imbalances could be produced not only by inaction, but by
unbalanced actions. For example, substantial fiscal adjustment in the United States, in the absence
of measures to increase demand in other countries, could reduce global demand in the same way as
a fall in private cOllsumption in the U.S. would."
Rodrigo de Rato Figaredo
April 4, 2006

FISCAL POLICY AND CURRENT
ACCOUNT ADJUSTMENT
Fiscal expansion during the economic downturn
of 2001 aided accommodative monetary policy in
averting a downward deflationary spiral in output
and in returning economic growth and employment to trend. However, in an environment of full
employment and strong economic growth, large
fiscal deficits are an unwelcome drag on longterm US. growth prospects. For that reason, the
United States Government has committed to cut
the US. fiscal deficit in half, to levels that are below historical norms. Yet, the emergence of more
recent fiscal deficits against the backdrop of already large and persistently growing US. current
account deficits has reignited a debate over the
possible effects of fiscal policy on the current account balance.

Some notable economists and foreign policymakers have advocated that the United States pursue
fiscal consolidation as a means to rein in the US.
current account deficit. While the United States
Government does not have a target for the current account balance, informed economic policy
should include an understanding of the potential
effects of fiscal policy on US. external accounts.
This report reviews the current state of knowledge about the relationship between fiscal policy
and external balances, and examines the likely
consequences of a change in US. fiscal policy on
the US. current account balance and on economic growth.
The primary conclusions of this report are that,
while domestic economic policy considerations
favor cutting the budget deficit, fiscal policy is a
poor and potentially costly tool with which to cut
external deficits. There are still questions over

how large an effect fiscal policy has on the current
account balance. Even studies that have found a
strong link between fiscal policy and the external
balance suggest that an unrealistically large fiscal
shift would be necessary to reduce the u.s. current account deficit to what some have suggested
would be more sustainable levels. Yet, the cost
of fiscal consolidation on that order of magnitude would be high for both the U.S. and foreign
economies. Hence, while the U.S. government
remains committed to cutting the fiscal deficit
in half by 2009, it is important to emphasize that
reducing global imbalances is a shared responsibility of both current account surplus and deficit
countries.

FISCAL AND CURRENT
ACCOUNT BALANCES LINKED
BY ACCOUNTING
Fiscal policy and current account balances are
linked by an accounting identity that expresses
the latter as the difference between national savings and national investment. National savings
can be decomposed into private savings and government savings (or, in the case of a fiscal deficit,
dissavings). Thus, if private savings and national
investment do not change, an increase in the fiscal deficit necessarily implies an equal sized drop
in the current account balance. However, this is

an ex post accounting identity, not necessarily an
ex ante causal relationship. Private savings and
investment are unlikely to remain constant as fiscal policy adjusts. Even the assumption that fiscal
policy is exogenous is questionable.

CASUAL LINK IN QUESTION
An unresolved and lively academic debate continues over if and how shifts in fiscal policy interact
with changes in private savings and investment
behavior. If current fiscal deficits are expected to
be repaid at a later date with higher future taxes,
individuals may increase current savings to pay
for the anticipated future taxes, so called Ricardian Equivalence. 1 Or, if higher fiscal deficits raise
domestic interest rates, private savings may rise
as the opportunity cost of current consumption
in terms of future consumption increases, and
investment may decline due to higher borrowing costs. Conversely, some posit that the causal
link between increased deficit spending and a
larger current account deficit is the stimulus of
consumption and investment that raises domestic interest rates, consequently attracting greater
foreign savings. An independent central bank
further complicates the picture, as monetary
policy would likely act to offset any expansionary
or contractionary effects of changes in the fiscal
stance.

Figure 1: U.s. Current Account & Fiscal Balances

Figure 2: U.S. Savings (Private & Government) and Investment Ratios
6~

24%

:- 6%

22%

! 4%

2%
C>.

20%

\,!)

'0
'i:
-2'

'~"
'"

18%

C>.

-4'

r -2%

16%
," /\,

~:.,...

Gross Government Saving
- - - Current Account Balance

-6% ;

-8%

I
I
I

1970

1975

1980

1985

1990

1995

2000

2005

-6'

14%

-8'

12%
1970

- - Gross Domestic Investment
_. _. Gross Private Saving
Gross Government Savings, Right Axis

"\. :~
."

I \

~:'t -4%

,I
1975

1980

1985

1990

1995

2000

-6%

2005

Source: Haver Analytics

1 Strict Ricardian Equivalence would imply a complete offset of government dissavings by increased private savings, but the
assumptions needed are unrealistic. See Barra (1974).

A cursory glance at the US. experience and at the
global pattern of fiscal and current account balances illustrates the difficulties in determ.ining the
effects of fiscal policy on external accounts. Figure
1 plots government savings alongside the current
account balance, each relative to GOp, since 1970.
There is no obvious correspondence between the
current account and fiscal balances, confirmed by
a correlation coefficient of -0.08. Figure 2 illustrates, as shares of GOp, the evolution of investment and private and government savings over
the same period. The offsetting movements of
the fonner two series against the last are clearly

deterioration of 11 % of GOP from mid 1991 to
mid 2003 occurred against the backdrop of a 1 %
of GOP improvement in Japan's external surplus.
Looking across 13 OEeD countries, Table 1 reveals that there is actually a negative relationship
between the five-year averages of fiscal and current account balances. A more systematic analysis of this group of countries' fiscal and current
account balances through time suggests no statistically significant relationship between the two
balances. 3

Figure 4: Japanese Fiscal and Current Account Balances

Figure 3: Australian Fiscal and Current Account Balances
4%

2%
~

+-'-rlHfbf--~-~-iIt-'t---~-III-----rlI'Jf--I-,-j

\!l

4%
"

-6%

1970

---

1980

,. , '
,
;'",;

1990

1995

-2%

-6%

-4%

. -8%
2005

-6%

1985

, '

Government Savings
Current Account

1975

..c:

~',

-8%

-2%

"
.'

0..

Cl
\!l

-2%

2000

apparent. The respective correlations of private
savings and investment with government savings
are -0.61 and +0.42.
Nor is the US. case unique. 2 Figures 3 and 4 plot
government savings and current account balance ratios for, respectively, Australia and Japan.
In Australia, large swings in the fiscal balance
from surplus to deficit and back have had little
to no discernable impact on the current account
balance. Strikingly, the 9.5 percentage point improvement in Australian government savings
from end 1992 to end 1999 was associated with,
if anything, a worsening of the current account
gap. Japan presents the mirror image. A fiscal

1970

-4%

Government Savings
- - - Current Account

1975

1980

1985

1990

1995

2000

2005

The recent experience of the US. economy well
illustrates the complex interplay between fiscal balances, private savings, investment and
the current account balance. Over the course of
the 1990s, the consolidated fiscal position of the
United States (government savings) improved
by 4.5% of GOp, while the US. current account
balance deteriorated by 5.1 % of GOP. An unexpected rise in productivity growth raised the returns to capital on investment and both realized
and expected household incomes. As a result,
consumption and investment surged, and private
savings plummeted. Rising incomes and firm
profits filled government coffers, raising government savings. However, the increase in govern-

2The OECD (2004) finds evidence that U.S. private savings is less negatively correlated with government savings than in
other OECD economies.
3 Measured as the unconditional covariance based on a panel regression of quarterly changes in the current account balances of the countries listed in Table 1 on changes in their respective fiscal balances from 1986 Q2 to 2005 Q3.

4 ---------------------~-----------------------

ment savings fell far short of the com.bined' fall in
private savings and rise in investment, widening
the current account gap.
Similarly, despite a large fiscal easing from end
2000 to late 2003, the current account deficit remained almost unchanged. A large decline in
household wealth as a result of the bursting of an
equity price bubble caused a rebound in private
savings and a resultant fall in consumption and
investment. Income and firm profits fell, leading
to a sizeable drop in tax revenues. Active fiscal
policy, in the form of tax cuts, to support growth
amid fears of a deflationary spiral in economic
activity contributed to a further reduction in government savings. However, the sharp drop in investment and rise in private savings almost fully
offset the fiscal deterioration. Since end 2003, the
1990s pattern has returned with gradual fiscal
consolidation more than fully offset by surging
investment and falling private savings, again due
in part to surging productivity growth.

Australia
Austria
Cananda
Finland
France
Germany
Ireland
Japan
Netherlands
New Zealand
Sweden
United Kingdom
United States
Correlation:
Source: OEeD

ESTIMATED EFFECTS OF
FISCAL POLICY ON CURRENT
ACCOUNTS ARE SMAll
While these examples help to illustrate the difficulties in extracting causality, a structured analytical framework is necessary to attempt to gauge
the effects of an exogenous shift in fiscal policy.
Recent studies have used advanced theoretical
models to assess causality and to quantify the effects of shifts in fiscal policy on savings, investment, output and the current account balance
(see Table 2).

An analysis by economists at the Federal Reserve
Board, Erceg et alia (2005), estimates that a 1 % of
CDP decrease in U.S. fiscal expenditure shaves, at
most 0.2% of CDP from the U.S. current account
deficit. The analysis suggests that a 1 % of CDP
tax hike induces a current account response of a
little more than 0.1 % of CDP. In both cases, the
increase in government savings lowers real interest rates, which depresses private savings and
(Table 1) Average Fiscal and
raises
investment. The
Current Account
model is able to generBalances, 2001-2005
ate larger effects - an
Current Account
increased
pass through
Fiscal Balance
Balance
to the current account
of 0.5 - but only with
-5.0%
1.2%
implausible
assump-0.5%
0.9%
tions about the reac1.9%
1.1%
tion of trade to changes
3.6%
5.5%
in prices. Otherwise,
the model's estimated
0.2%
-2.2%
effects
on the current
2.5%
-2.6%
account of shifts in fis-0.8%
3.3%
cal policy are remark3.0%
-4.5%
ably stable to a variety
3.4%
-0.4%
of robustness checks.
Importantly,
the fiscal
-5.4%
6.2%
contraction is not with6.5%
1.6%
out significant cost. In
-1.8%
-0.7%
the baseline model the
-5.1%
-2.4%
1 % of CDP decrease in
-0.15
government expenditure cuts domestic output by about 1.5% im-

mediately and by roughly 0.5 percent over two to
three years. A labor tax increase of 1 % of GDP
produces a smaller 0.8% drop in output initially,
but has equivalent costs over two-to-three years.

modest current account improvement shaves an
average of 0.2 of a percentage point per year off
economic growth over the five years. Growth in
the rest of the world actually increases as the rise
in US. savings lowers foreign real inter(Table 2) Effects of Fiscal Policy on Current
est rates, and under
Account, Selected Studies
an assumption of
Fiscal
Current Account
perfect capital moU.S. GOP
bility, spurs investAdjustment
Adjustment
Effect
ment and consumpErceg et alia*
-1 % (expenditures)
+0.2%
-1.5%
tion abroad.
The
Erceg et alia*
+ 1% (revenue)
+0.1%
-0.8%
IMF model, however, is not robust
Brook et alia t
+1%
+0.2%
-4.5%
to the relaxation of
IMF:j:
+1%
+0.44%
-0.2%
some questionable
assumptions in its
* Peak effect, which takes place within the first five years under both scenarios.
t Effects over six years. :j: Five-year annual average effect.
baseline form. For
instance, if the baseline assumption of
perfect
capital
mobility
is
removed,
the estimated
A study by researchers at the OECD, Brook et alia
on
the
current aceffect
of
fiscal
consolidation
(2004), finds a slightly stronger effect of a US. fiscal consolidation on the current account. A 1 % of count balance drops to just 0.14%, as private savGDP decrease in the US. fiscal deficit reduces the ings falls and investment rises by more than in
current account deficit byO.3% ofGDP. The OECD the baseline model due to lower US. domestic
study assumes that the fiscal balance improves by interest rates (exactly as occurs in the Erceg et alia
6% of GDP over a six-year period through both (2005) model).
tax increases and expenditure cuts, resulting in
a budget surplus and a 2% of GDP reduction in Available empirical evidence also displays a range
the current account deficit. Yet, again, the fiscal of estimates for the effects of fiscal policy on curcontraction imposes a significant cost. Relative to rent account balances, but tends to favor the lowthe baseline, output in the United States declines er-end estimates. Another Federal Reserve study,
by 4.5% over the period and personal disposable by Gruber and Kamin (2005), uses a panel of 61
income falls by 10%. The OECD study also ana- countries over a 21-year period. They find that,
lyzes the effects of US. fiscal contraction on other after controlling for other variables that affect
economies. The 6% of GDP fiscal adjustment in savings and investment, a 1 % of GDP increase
the United States lowers output in Japan by 2% in government savings yields about a 0.09% of
and in the euro area by 0.4%.
GDP improvement in the current account balance. Chinn and Prasad (2003), using similar
An International Monetary Fund (IMF) study methods but a data set including 18 industrial
suggests more positive effects from a rise in gov- and 71 developing countries spanning 25 years,
ernment savings.4 The IMF model predicts that report that a 1 % of GDP increase in government
a permanent, revenue-based 1 % of GDP increase savings raises the current account balance by as
in government savings improves the current ac- much as 0.38% when all countries are included,
count balance by 0.44% of GDp, on average, over but just 0.13% when only industrialized countries
the subsequent five years. In the IMF model, this are included in the sample.

International MonetaI)' Fund, 2005 U.S. Article N Report, Selected Issues, Chapter V.

~ ...

Applying the findings of these models to the current situation is illl1lninating. In 2005, the U.S.
current account deficit was almost 6.5% of GDP
and the nominal value of U.S. GDP was about
$12.5 trillion. Some analysts have suggested that
the United States could sustain a current account
deficit of 2% of GDP. Suppose that the U.S. government chose to use fiscal policy to target a 2 %
of GDP current account deficit. At one extreme,
the Federal Reserve's modeling would suggest
(roughly) spending cuts of 22.5% of GDP would
be necessary, at a one-year cost of $4.2 trillion in
lost output (34% of current GDP). Or, income
taxes would have to be raised by 37.5% of GDP at
an estimated one-year cost of $3.7 trillion in lost
output (30% of the current total). At the other
extreme, the IMF's model would suggest that tax
hikes of only 10.2% of GDP would be necessary,
and that the five-year output loss would be a lesssevere $1.3 trillion, or 10% of current GDp'5

CONCLUSIOr'JS
The relationship between fiscal policy and the
current account still stirs vigorous debate among
both policyrnakers and economists. The debate
reflects continued uncertainty over the causal
links between the two macroeconomic variables.
Despite that uncertainty, the debate has produced some meaningful insights for policymakers. First, even the most favorable models and
empirical evidence suggest that only unrealistically large adjustments in fiscal expenditure and!
or revenue polices would have a noticeable effect
on the U.S. current account deficit. Second, the
necessary fiscal adjustment would come at a high
economic cost to both the U.S. economy and the
world economy.
Fiscal policy is first and foremost a tool of domestic economic policy, and a powerful one at that.
The recent fiscal expansion, following a sharp
drop in net household wealth and during a pe-

riod when some worried about a potential deflationary output spiral, assisted accommodative
monetary policy in returning the U.S. economy to
potential growth with full employment. As the
U.S. economy has recovered, consolidation has
been gradually implemented. Further fiscal policy tightening represents prudent domestic economic policy in the context of a strong economy
at full employment. These policies have not only
supported the U.S. economy, but have helped to
raise economic growth in other economies with
weaker domestic demand.
The United States Government shares the concerns of its foreign counterparts over the increasing size of global external imbalances, but believes
that adjustment of global imbalances is a shared
responsibility of both current account surplus
and deficit economies. Available theoretical and
empirical evidence suggests that continued fiscal consolidation in the United States is likely to
have a positive, but marginal impact on the U.S.
current account balance. However, the evidence
also makes clear that fiscal policy is a poor tool to
address external imbalances, and a tool with high
economic costs. The present historically high current account deficit is likely to adjust in a benign
manner, as did the current account deficits of the
late 1980s, with domestic demand slowing relative
to output in the United States and rising relative
to output in foreign economies. That adjustment
would be aided by policies in other countries that
encourage greater investment and consumption.
Whatever the adjustment mechanism, flexible institutions and labor and capital markets will help
to minimize any economic and financial market
dislocations, and thus, social costs. Fortunately,
policies that improve labor and capital market
flexibility also are likely to facilitate more rapid
domestic demand growth and the eventual benign adjustment of current account imbalances.

5 These theoretical models involve log-linearized approximations of optimal reaction functions around equilibrium values,
and are thus not intended to analyze large policy shifts of the order considered in this thought experiment. However, the
clear implication of these models is that"normal" changes in fiscal policy will not generate significant changes in the current account balance. The large, and potentially destabilizing fiscal adjustments discussed here indeed may have greater
effectiveness in addressing current account balances than these models would imply, but they are also likely to come at far
greater economic costs than these models would suggest.

REFERENCES
Barro, Robert J. (1974), "Are Government Bonds Net Wealth?" Journal of Political ECOIlOmy, Vol. 82, pp.
1095-1117.
Brook, Anne-Marie, Franck Sedillot and Patrice Ollivaud (2004), "Channels for Narrowing the US
Current Account Deficit and Implications for Other Economies", OECD Economics Department Working Papers, No. 390.
Chinn, Menzie D. and Eshwar S. Prasad (2003),"Medium-Term Determinants of Current Accounts in
Industrial and Developing Countries: An Empirical Exploration,"Journal of International Economics, Vol.
59, pp. 47-76.
Erceg, Christopher J., Luca Guerrieri, and Christopher Gust (2005), "Expansionary Fiscal Shocks and
the U.S. Trade Deficit," International Finance, Vol. 8, Issue 3, pp. 363-398.
Gruber, Joseph W. and Steven B. Kamin (2005), "Explaining the Global Pattern of Current Account
Imbalances," International Finance Discussion Paper #846, Federal Reserve Board of Governors.
International Monetary Fund (2005),"Consequences of Fiscal Consolidation for the U.S. Current Account," IMF Country Report No. 051258 United States: Selected Issues, Chapter V, pp. 66-82.
Organization for Economic Cooperation and Development (2004), "Saving Behavior and the Effectiveness of Fiscal Policy," OECD Economic Outlook, No. 76, pp. 141-157.

Page I of I

April 26, 2006
JS-4211

Treasury Requests Public Comment
on Securities Lending Facility
The U.S. Treasury Department released a request for public comment today on the
establishment of a securities lender of last resort (SLLR). The Department is
considering if and how it should make the securities lending facility available.
An SLLR, or repo facility, is a mechanism for providing an additional, temporary
supply of Treasury securities used on rare occasions when market shortages
threaten to impair the Treasury and financial markets' functioning. Treasury has
discussed the concept of an SLLR in its Quarterly Refunding announcements since
August 2005.
The request for comment presents a model SLLR, with examples of terms,
conditions and other operational details. The Department is offering the model only
as a starting point to provoke substantive public comment.
Treasury has not taken a position regarding the establishment or the structure of an
SLLR, and this paper should not be considered a change in the Department's
opinion.
The paper and request for comment, submitted for publication in the Federal
Register, can also be found on the Treasury website at
http://www.treas.gov/offices/domestic-finance/debt-management!. Comments on
the notice, due August 11, 2006, should be sent to
debt.management@do.treas.gov.

http://www.treas.gov/pressirete2t~CJlj<;4211.htm

3/2/2007

Page 1 of2

April 26, 2006
JS-4212

Under Secretary Adams to Travel
to India Next Week
Under Secretary for International Affairs Tim Adams will travel to India to attend the
39th annual meeting of the Asian Development Bank in Hyderabad next week. The
trip is an opportunity to highlight the importance that the U.S. places on the role of
the Asia Development Bank in reducing poverty in the region as well as an
opportunity to build on the U.S.-India partnership in a number of areas including
continuing to work on ways to further capitalize on potential gains from expanded
trading opportunities and more open financial markets in India.
Before arriving in Hyderabad, Adams will travel to Mumbai and Kolkata to meet with
local financial and business leaders. Adams will also visit microfinance sites to
discuss innovative approaches for getting capital in the hands of local
entrepreneurs that may not have access to banks.
In Hyderabad, Adams will lead the U.S. delegation at the Asian Development Bank
annual meeting where he will discuss key elements of the Bush Administration's
development agenda, including the role of the private sector in reducing poverty in
Asia, measuring concrete results and fighting corruption.
The following events are open to media:

What
Tour of Bandhan Microfinance Group
When
Wednesday, May 3,2:15 p.m. (local time)
Where
CF - 173, Sector - 1, Salt Lake City
Kolkata, West Bengal
What
Tour of Chembiotek Research International
When
Wednesday, May 3,3:45 p.m. (local time)
Where
Block BN, Sector V, Salt Lake City
Kolkata, West Bengal
What
Governors' Seminar: A Shared Responsibility: Fixing Global Payments Imbalances
http·iiwww 'lcJb. orcJ/ Ann lIill M f;ctl n9!2()O()/s81ll111arsisenl-govS81ll1Ilcl r. asp
When
Thursday, May 4,9:45 a.m. (local time)
Where
Hyderabad International Convention Center
Seminar Room 2 (G.03-G.04)
Hyderabad
What
Press Briefing
When
Friday, May 5, 4 p.m. (local time)

http://www.treas.gov/presslrelcn3c~/j.)4212.htm

3/2/2007

Page 2 of2
Where
Hyderabad International Convention Center
Media Center
Hyderabad

http://wwwJreas.gov/pressfretcroeEJi}s4212.htm

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April 27, 2006
JS-4213
Treasury Officials To Speak at Chicago Fed
on Reaching 10 million Unbanked Americans

u.s. Treasurer Anna Escobedo Cabral and Deputy Assistant Secretary for
Financial Education Dan lannicola, Jr. will speak at the Federal Reserve Bank of
Chicago on Monday, May 1. The Treasury officials, U.S. Rep. Judy Biggert and
JoAnn Johnson, chairman of the National Credit Union Administration, will also
participate in a discussion at the Financial Literacy and Education Commission's
regional conference to address the problems faced by the unbanked.
More than 10 million unbanked Americans do not have accounts at mainstream
financial institutions, making them more likely to pay extraordinarily high fees for
basic services and less likely to save for the future. Bringing unbanked Americans
into the financial mainstream is a key part of the Commission's strategy for financial
literacy.
Treasury Secretary John Snow and the Treasury officials recently launched the
Commission's national strategy to improve America's financial literacy, available at
www.mymoney.gov.
Who:
U.S. Treasurer Anna Escobedo Cabral
Deputy Assistant Secretary for Financial Education Dan lannicola, Jr.
What:
Financial Literacy and Education Commission
Midwest Regional Conference on Reaching Unbanked People
When:
Monday, May 1 10:30 a.m. (CDT)
Where:
Federal Reserve Bank of Chicago
230 South LaSalle Street
Chicago,IL

http://wwwtreas.gov/pfesslrele2l3cJ/~;;4213.htm

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April 27, 2006
JS-4214
U.S.-Guernsey Tax Information Exchange Agreement
Enters Into Force
Washington, DC - An exchange of letters between the United States and the
States of Guernsey was completed on March 30, 2006, thus bringing into force an
agreement that allows for the exchange of information on tax matters between the
United States and the States of Guernsey.

http://www.t.eas.guv/prcss/releaEW~/js4214.htm

3/2/2001

Page 1 of 1 ~

April 28, 2006
js-4215

Statement of Treasury Secretary John W. Snow on First Quarter GDP
"With today's report showing economic growth at a strong 4.8 percent, the
American economy is clearly on the right path. Looking at the two past quarters
combined shows that even with the effects of Katrina, the U.S. economy is
amazingly resilient. Going forward, we expect continued solid growth returning to
trend.
"House and Senate tax relief legislation negotiators should view today's good news
as a sign to act immediately and extend the tax relief in order to sustain U.S.
Economic strength. Markets are watching and it is important to send the right
signal."
-30-

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April 28, 2006
JS-4216

Treasury Secretary Visits Ohio to Discuss Economy, Visit Community College
CINCINNATI, OHIO - United States Treasury Secretary John Snow is in Cincinnati,
Ohio today to talk with area business leaders about the local state and national
economies. He will also visit Mazak Corporation to discuss the machine-tool
manufacturers' partnership with a local community college, and he will meet with
students and administrators at Cincinnati State College.
"There is a lot of good economic news to discuss this week," Snow said. "With
today's report showing economic growth at a strong 4.8 percent, the American
economy is clearly on the right path. Looking at the two past quarters combined
shows that even with the effects of Katrina, the U.S. economy is amazingly resilient.
GOing forward, we expect continued solid growth returning to trend.
"There have also been recent signs of continuing strength in the housing market
and consumer confidence is at the highest it's been in nearly four years," Snow
said. "The economy has created 5.1 million new jobs since the President's tax cuts
were enacted, and the most important thing right now is to stay on this excellent
economic path and allow the economy to create more growth, more jobs and higher
pay for workers. The extension of the President's lower tax rates on income and
investment is absolutely necessary if we are to continue to grow, economically.
"There are some headwinds out there that are making it more difficult for American
families to fully appreciate all the benefits of the economy," Snow went on.
"Gasoline prices are one area where Americans could use some help. The
President has presented a four-part plan that includes making sure consumers and
taxpayers are treated fairly at the pump, promoting greater fuel efficiency, boosting
our oil and gasoline supplies, and investing aggressively in alternatives to gasoline.
And from a specific tax perspective the President has asked that Congress take
action by removing about $2 billion from the budget that would otherwise provide
tax breaks and write offs for energy companies, which of course are currently
experiencing large cash flows as a result of the record oil prices.
"In other words, the President appreciates that high gas prices act like a hidden tax
on hardworking Americans, and his plan seeks to ease the pain to the extent it is
possible. But the good news is that our strong economy can handle some
headwinds at this point. We really are firing on all cylinders," Snow said.
Secretary Snow will meet with representatives of Gateway Community and
Technical College (GCTC) and Mazak Corporation to learn about their workforce
training partnership. The Secretary will talk with employees who have completed or
are in the process of completing the training program at GCTC before touring the
facility.
"As Treasury Secretary, I'm dedicated to sustaining the strength of the U.S. ..
economy for future generations" Snow said. "Making Americans more competitive
in a global economy through increased education and worker training IS a critical
component of that ongoing effort."
At Cincinnati State Technical and Community College, Snow will meet with college
administrators, visit with students in a classroom setting a~,d participate In a
roundtable lunch with college staff, trustees and students. Community colleges are
I 'ng a critical role in American competitiveness because while the outstanding
~~~rican workforce drives our economy, workers will always need to adapt their

http://wwwtreas.gov/preSS/r~led~c3Iis4216.htm

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Page 2 of2

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. "Clearly
training and education so that Americans can adapt and make themselves more
marketable in the workforce are essential, but we also know that it is meaningless
unless it is for jobs that actually exist. That means the priority must be on-the-jobtraining programs that are flexible and work with local employers and community
leaders to meet the demands of both the local workplace and global economy.
That's precisely what Community Colleges offer, in an efficient and low-cost way.
"The President is a strong proponent of community colleges. In his State of the
Union Address he talked about the American Competitiveness Initiative and
mentioned the need to increase our support for America's fine community colleges,
so they can train workers for industries that are creating the most new jobs."
-30-

http://www.1.teas.govlpress/re1eases/js4216.htm

3/2/2007

Page 1 of 1

April 28, 2006
js-4217
Treasury Assistant Secretary Fratto to Hold Weekly Press Briefing
Treasury Assistant Secretary for Public Affairs Tony Fratto will hold the weekly
media briefing on Monday, May 1 in Main 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, May 1, 11: 15 AM (EDT)

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.gov with
the following information: name, Social Security number, and date of birth.

http://www.trtas.gov/presslreleases/j~4217.htm

3/2/2007

Page 1 of 1

April 28, 2006
js-4218

Media Advisory: Treasury Secretary John W. Snow to Host Press Briefing on
the Social Security and Medicare Trustees Reports
Secretary of the Treasury and Managing Trustee John Snow along with Secretary
of Labor and Trustee Elaine L. Chao, Secretary of Health and Human Services and
Trustee Michael Leavitt, Commissioner of Social Security and Trustee Jo Anne
Barnhart, Public Trustee John Palmer and Public Trustee Thomas Saving will hold
a press briefing on the Social Security and Medicare Trustees Reports on Monday,
May 1,2006.

Who

Secretary of Treasury and Managing Trustee John W. Snow,
Secretary of Labor and Trustee Elaine L. Chao,
Secretary of Health and Human Service and Trustee Michael

Leavitt,
Commissioner of Social Security and Trustee Jo Anne Barnhart,
Public Trustee John Palmer and Public Trustee Thomas Saving

What

Social Security and Medicare Trustees Report Press Conference

When

Monday, May 1, 3:00 p.m. (EDT)

Where

Main Treasury Building Media Room 4121
1500 Pennsylvania Ave., NW
Washington, DC

Note
Copies of the Social Security and Medicare Trustees Report will be
made available at the briefing.
An additional background briefing hosted by Assistant Secretary Mark Warshawsky
will take place in the same room following the press conference at 3:30 p.m.
Media without Treasury press credentials planning to attend should contact
Treasury's Office of Public Affairs at (202) 622-2960 or email frances.anderson@do.treas.gov with the following information: Full name,
Social Security number and date of birth.

- 30 -

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Page 1 of 1

10 view or print tne PUJ- content on tnlS page, aownloaa tne free

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April 28, 2006
JS-4219

Preliminary Report on Foreign Holdings of U.S. Securities At End-June 2005
Preliminary data from a survey of foreign portfolio holdings of U.S. securities at endJune 2005 are released today on the U.S. Treasury web site at
(http .www tlC:~lS cJuv.tlcipls.iltll1i). Final survey results, which will provide
additional detail as well as possibly revise the preliminary data, will be reported by
June 30, 2006. The survey was undertaken jointly by the U.S. Treasury, the
Federal Reserve Bank of New York, and the Board of Governors of the Federal
Reserve System. The next survey will be for foreign holdings of U.S. Securities at
end-June 2006.
Complementary surveys measuring U.S. holdings of foreign securities are also
carried out annually. Data from the most recent such survey, which reports on
securities held on year-end 2005, are currently being processed. Preliminary
results are expected to be reported by September 30, 2006.

Overall Preliminary Results
The survey measured foreign holdings as of June 30, 2005, of $6,863 billion, with
$2,143 billion held in U.S. equities, $4,118 billion in U.S. long-term debt securities
(of which $717 billion are holdings of asset-backed securities (ABS)), and $602
billion held in U.S. short-term debt securities. Foreign holdings as of June 30,
2004, were $1,930 billion in U.S. equities, $3,501 billion in U.S. long-term debt
securities, and $588 billion in short-term U.S. debt securities. (see PDF below).

REPORTS
•

Preliminary Report on Foreign Holdings of U.S. Securities At End-June
2005 (PDF)

http://www.t:eas.goY/pressireleaseS/js4219.htm

312/2007

•••• ......

_•

•

.J"'_~-'

_.--_ ....

u.s. TREASURY DEPARTMENT OFFICE OF PUBLIC AFFAIRS
EMBARGOED UNTIL FRIDAY, APRIL 28, 2006, 4 P.M. EDT
CONTACT Brookly McLaughlin (202) 622-2920

Preliminary Report on Foreign Holdings of U.S. Securities At End-June 2005
Preliminary data from a survey of foreign portfolio holdings of U.S. securities at end-June 2005
are released today on the U.S. Treasury web site at (http://www.treas.gov/tic/fpis.html). Final
survey results, which will provide additional detail as well as possibly revise the preliminary
data, will be reported by June 30, 2006. The survey was undertaken jointly by the U.S. Treasury,
the Federal Reserve Bank of New York, and the Board of Govemors of the Federal Reserve
System. The next survey will be for foreign holdings of U.S. Securities at end-June 2006.
Complementary surveys measuring U.S. holdings of foreign securities are also carried out
annually. Data from the most recent such survey, which reports on securities held on year-end
2005, are currently being processed. Preliminary results are expected to be reported by
September 30, 2006.
Overall Preliminary Results
The survey measured foreign holdings as of June 30, 2005, of $6,863 billion, with $2,143 billion
held in U.S. equities, $4,118 billion in U.S. long-term debt securities (of which $717 billion are
holdings of asset-backed securities (ABS)), and $602 billion held in U.S. short-term debt
securities.' Foreign holdings as of June 30, 2004, were $1,930 billion in U.S. equities, $3,501
billion in U.S. long-term debt securities, and $588 billion in short-term U.S. debt securities (see
Table 1).

I Long-term securities have an original term-to-maturity of over one year. Asset-backed securities are backed by
pools of assets, such as pools of residential home mortgages or credit card receivables, which give the security
owners claims against the cash flows generated by the underlying assets.

Table 1. Foreign holdings of U.S. securities, by type of security, as of recent survey dates
(Billions of dollars)
Type of Security

June 30, 2004

June 30, 2005

Long-term Securities
Equity
Long-term debt
Asset-backed
Other
Short-term debt securities

5,431 '
1,930'
3,501 '
453'
3,048 '
588

6,261
2,143
4,118
717
3,401
602

Total
Of which: Official
, revised.

6,019'
1,663 '

6,863
1,992

Table 2. Foreign holdings of U.S. securities, by country and type of security, for the major
investing countries into the U.S., as of June 30, 2005
(Billions of dollars)
Country or category

Total

Long-term debt

Equities

Short-term debt

Japan

1,091

178

814

United Kingdom

560

260

283

China, Mainland

527

485

100

Luxembourg

460

151

273

Cayman Islands

430

152

252

Belgium

335

312

Canada

308

221

Netherlands

262

161

Switzerland

238

129

15
20

Bermuda

202

123

Germany

200

110

Ireland

191

Middle East Oil-Exporters'

161

Singapore

144

Taiwan

126

117

France

121

Korea, South

118

106

Hong Kong

26
10

Australia

Sweden

Mexico

Russia

62
4

British Virgin Islands

Norway

Italy
Country Unknown

196

193

Rest of world

569

162

323

Total

6,863

2,143

4,118

602

Of which: Official

1,992

179

1,474

338

I. Includes Bahrain, Iran, Iraq, Kuwait, Oman, Qatar, Saudi Arabia, and United Arab Emirates (Trucial States)
Less than $500 million ..

Page 1 of 1

May 1,2006
JS-4220
Treasury Announces Market Financing Estimates
Treasury announced its current estimates of net marketable financing for the April June 2006 and July - September 2006 quarters:
•

•

Over the April - June 2006 quarter, the Treasury expects to pay down $51
billion of net marketable debt, assuming an end-of-June cash balance of
$25 billion. The current estimated paydown is $21 billion more than
announced in January 2006. Cash receipts are expected to exceed cash
outlays by $76 billion this quarter, resulting in a financing need that is $26
billion lower than our previous estimate and is the primary contributor to the
increased paydown in net marketable debt.
Over the July - September 2006 quarter, the Treasury expects to borrow
$89 billion of net marketable debt, assuming an end-of-September cash
balance of $30 billion.

During the January - March 2006 quarter, Treasury borrowed $158 billion of net
marketable debt, ending with a cash balance of $8 billion on March 31. In January
2006, Treasury announced estimated net marketable borrowing of $188 billion,
assuming an end-of-March cash balance of $15 billion. Cash outlays exceeded
cash receipts by $173 billion, resulting in a financing need that was $20 billion less
than previously assumed. The improvement in marketable borrowing was also
attributable to a decrease in the cash balance over the quarter combined with
higher cash from other sources. Borrowing during the January - March 2006
quarter was an all-time record, greater than the previous record of $146 billion in
January - March 2004.
Since 1997, the average absolute forecast error in net borrowing of marketable debt
for the current quarter is $9 billion and the average absolute forecast error for the
end-of-quarter cash balance is $9 billion. Similarly, the average absolute forecast
error for the following quarter is $31 billion and the average absolute forecast error
for the end-of-quarter cash balance is $11 billion.
Additional financing details relating to Treasury's Quarterly Refunding will be
released at 9:00 A.M. on Wednesday, May 3.
-30-

http://www.t~eas.gov/press/leleasc3/js4220.htm

3/5/2007

Page 1 of2

May 1,2006
js-4221
Treasury Secretary John W. Snow Statement on the 2006 Social Security and
Medicare Trust Fund Reports
Welcome to the Treasury Department. The Social Security and Medicare Board of
Trustees met here this afternoon to complete their annual financial review of the
programs and to transmit the Trustees' Reports to Congress. I welcome my
Cabinet colleagues and the Public Trustees, Tom Saving and John Palmer, two
well-respected and esteemed experts in their field, appointed by the previous
Administration and now recently reappointed. The nation is indeed fortunate to
have your continued service.
The two programs form the basis of a looming fiscal crisis as the baby boom
generation moves into retirement. If we do not take action soon to reform both
Social Security and Medicare, the coming demographic bulge will drive Federal
spending to unprecedented levels, consume nearly all projected federal revenues,
and threaten the Nation's future prosperity. Current trends are clearly not
sustainable. The President has shown his serious intent and foresight with his call
in this year's State of the Union address for a bi~partisan panel on entitlement
reform.
Let me first briefly highlight this year's Social Security report. It demonstrates, as
we've known for some time, that the Social Security program continues to be
seriously under-funded and financially unsustainable in the long run. Cash flows are
projected to peak in 2008 and turn negative in 2017 -- the same dates as in last
year's report. However, the Trust Funds are projected to be exhausted in 2040 this is one year earlier than last year's report, due to revised assumptions reflecting
the latest assessment of economic and demographic conditions.
The unfunded obligation, that is, the difference between the present values of
Social Security inflows and outflows less the existing trust fund, is $4.6 trillion over
the next 75 years and $13.4 trillion on a permanent basis. The actuarial imbalance
expressed as a percent of taxable payroll is -2.02 percent over 75 years and -3.7
percent over the indefinite future. This means that taxes would have to be raised
immediately about 1/3 above the present level (by 3.7 percentage points), or
benefits reduced immediately by 22 percent, to make the system whole on a
permanent basis.
This report confirms the wisdom of the President's call for action last year and his
consistent message that the sooner we take action to shore up Social Security's
finances, the less severe needed reforms will be. Each year that passes without
reform makes the ultimate resolution more difficult and more unfair. As he called
for in the State of the Union address, solutions that generate a permanently
sustainable Social Security system will require bipartisan efforts. The President has
put forward a number of well-considered ideas. Now we need serious and
thoughtful engagement from all sides to make sure Social Security is strengthened
and sustained for future generations.
Let me now offer a few words on the 2006 Medicare Trustees' Report, which
reveals even greater and far reaching fiscal challenges. While Medicare faces the
same demographic trends as Social Security, it is additionally burdened by steady
large increases in underlying health care costs.
Cash flow for the Hospital Insurance (HI) Trust Fund is projected to be negative this
year and for all subsequent years. The HI Trust Fund is projected to become

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Page 2 of2

insolvent in 2018, two years earlier than projected in last year's report, and the 75year estimated actuarial imbalance as a percent of payroll is -3.51, a 0.42
percentage point deterioration from last year's report. This deterioration is due
primarily to new evidence on program experience showing higher spending on
hospital and other provider care On a permanent basis, this imbalance is
unchanged at -5.8 percent of payroll.
The Supplementary Medical Insurance (SMI) Trust Fund, which includes Part B for
outpatient services and the new Part 0 prescription drug benefit, is financed in large
part by general revenues as well as beneficiary premiums. SMI expenditures are
projected to increase rapidly, resulting in growing pressures on future federal
budgets and, in turn, the U.S. economy. General revenue finanCing for SMI is
expected to increase from 1.0 percent of GOP in 2005 to nearly 5.0 percent in
2080.
For the first time we are dealing with a report in which the new prescription drug
benefit is in full effect. Giving seniors access to affordable prescription drug
coverage corrected a serious flaw in the structure of Medicare.
There is some good news we are pleased to report on the prescription drug
benefit. Premiums for Part 0 are sharply lower than projected. These lower
premiums indicate that competition has driven down costs and highlight the value of
the market-based structure of the program.
The new prescription drug benefit has been a success. Now, seniors allover
America have guaranteed access to affordable prescription drug coverage. The
deadline for enrollment in the program is May 15, and enrollment has so far
exceeded the expectations the Administration put forward earlier this year.
Moreover, the average cost of the premiums paid by seniors for 2006 is
considerably lower than what the Trustees originally anticipated. As the May 15
deadline approaches, I want to strongly encourage seniors who have not done so
already to enroll in this new program.
In recognizing the need to provide seniors with prescription drug benefits, Congress
also recognized the critical importance of doing so in a fiscally responsible manner.
With commendable foresight, Congress wisely included new cost containment
provisions that can trigger a Congressional review of Medicare's finances. This
year's report represents the first stage in that process -- when general revenues
begin to exceed 45% of Medicare's total outlays. If this trend continues as
expected, the Administration and Congress will need to consider ways to address
Medicare's finances.
In closing, while we are pleased with the modernizing reforms that brought us the
new prescription drug benefit, there is no escaping the reality that further reforms to
both Medicare and Social Security need to be made. The serious concerns raised
by the Trustees' Reports demand the attention of America's policymakers and the
public. Those who depend on Social Security and Medicare urgently need the best
efforts of those of us in public life and in the private sector to address the long-term
funding issues. Successful long-term reform of these programs should be seen as a
shared responsibility, and not as an opportunity to engage in short-term politics.

LINKS
•

SOCial Security Web Site and Trustees Report

http://www.tieas.gov/presslreka3c3/j54221.htm

3/5/2007

2006 OASDI Trustees RepOlt

.Social
.

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Actllarial l)llb1 tCatiollS
#~:~~,~ The 2006 OASDI Trustees Report
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Description of the OASDI The 2006 Annual Report of the Board of Trustees of the Federal Old-Age and
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Trustees Report
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of historical data. Reference should always be made to the published report for
context and explanation of terminology.
• Summary of the latest report for the Social Security and Medicare
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filling out our request form.

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The Medicare Program is the second-largest social insurance program in the
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Actuary in the Centers for Medicare & Medicaid Services (CMS) prepares the
report under the direction of the Boards.
The Boards of Trustees issued their most recent report on May 1, 2006.
The Trustees Report is a detailed, lengthy document, containing a substantial
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April 26, 2006
js-4309
Office of Terrorism and Financial Intelligence Marks Two-Year Anniversary
Secretary John W. Snow this week hailed the two year anniversary of the
Treasury's Office of Terrorism and Financial Intelligence (TFI), which was
established on April 28, 2004. TFI has played an important role in helping to protect
the economic and national security of the United States by harnessing its financial
information, expertise, and economic authorities and influence to attack the
financial underpinnings of terrorists, narcotics traffickers, weapons proliferators and
rogue regimes.
REPORTS
•

Office of Terrorism and Financial Intelligence (TFI) Fact Sheet

http://www.t!'eas.gov/presslreleaseS/j~4309.htrn

3/2/2007

'0
D

OFFICE OF TERRORISM AND FINANCIAL INTELLIGENCE

U.S. DEPARTMENT OF THE TREASURY

"We have been at the forefront of a concerted effort with our allies around the
world - public and private sector alike - to collect, share, and analyze all available
information to track and disrupt the activities of terrorists. Finance ministries and
central banks playa key role in this effort, as financial intelligence is among our
most valuable sources of data for waging this fight. "
--Treasury Secretary John W. Snow
April 22, 2006

Established: On April 28, 2004, Treasury Secretary John W. Snow signed the Treasury Order
establishing the Office of Terrorism and Financial Intelligence.

Mission:

The Office of Terrorism and Financial Intelligence (TFI) marshals the
department's intelligence and enforcement functions with the twin aims of
safeguarding the financial system against illicit use and combating rogue nations,
terrorist facilitators, WMD proliferators, money launderers, drug kingpins, and
other national security threats.

Comprises:

Office of the Under Secretary for Terrorism and Financial Intelligence (TFI)
Office ofIntelligence and Analysis (OIA)
Office of Terrorist Financing and Financial Crimes (TFFC)
Office of Foreign Assets Control (OFAC)
Financial Crimes Enforcement Network (FinCEN)
Executive Office of Asset Forfeiture (TEOAF)
Works in close cooperation with:
Internal Revenue Service - Criminal Investigation (lRS-CI)

Leadership:

Stuart Levey, Under Secretary for TFI
Janice Gardner, Assistant Secretary for OIA
Pat O'Brien, Assistant Secretary for TFFC
Barbara Hammerle, OFAC Acting Director
Robert Werner, FinCEN Director
Eric Hampl, TEOAF Director
Matthew Levitt, Deputy Assistant Secretary for OIA
Daniel Glaser, Deputy Assistant Secretary for TFFC
Nancy Jardini, Chief IRS-CI

THE OFFICE OF TERRORISM AND FINANCIAL INTELLIGENCE

Terrorism alld Fillallcial Imelligellce
The Office of Terrorism and Financial Intelligence (TFI) was established via Treasury Order on
April 28, 2004. The office brings a wide range of intelligence and authorities together under a
single umbrella, allowing us to strategically target a range of threats ~ whether terrorists,
narcotics traffickers, proliferators of WMD or rogue regimes, like Iran and North Korea.
TFI fills a unique and important role in our national security system. When the U.S. is
confronted with a threat that is unreceptive to diplomatic outreach and when military action is
not appropriate, TFI's tools offer a powerful means to exert pressure and achieve a tangible
impact. The innovation exercised by Congress in giving TFI these powerful tools has been
pivotal to the office's successes.

Office of Illtelligence alld Allalysis
The Office of Intelligence and Analysis (OIA) is a fully functional intelligence office, staffed by
expert analysts focused on the financial networks of terrorists and other threats to our national
security. OIA is responsible for the receipt, analysis, collation, and dissemination of foreign
intelligence and foreign counterintelligence information related to the operation and
responsibilities of the Department of the Treasury.
By producing expert analysis of intelligence on financial and other support networks for terrorist
groups, WMD proliferators, and other key national security threats, OIA supports the Treasury's
formulation of policy and execution of authorities. OIA also provides timely, accurate, and
focused intelligence on the full range of economic, political, and security issues.

Office of Terrorist Financillg and Fillancial Crimes
As the policy development and outreach office for TFI, the Office of Terrorist Financing and
Financial Crimes (TFFC) collaborates with the other elements of TFI to develop policy and
initiatives for combating money laundering, terrorist financing, WMD proliferation, and other
criminal activities both at home and abroad.
TFFC works across the law enforcement, regulatory and intelligence communities and with the
private sector and its counterparts abroad to identify and address the threats presented by all
forms of illicit finance to the international financial system. TFFC advances this mission by
promoting transparency in the financial system and the global implementation of targeted
financial authorities. A primary example of its leadership and successes is its role in
spearheading the U.S. Government delegation to the Financial Action Task Force (FA TF), which
has developed leading global standards for combating money laundering and terrorist financing.

Office of Foreign Assets COlltrol
The Office of Foreign Assets Control (OF AC) is charged with administering and enforcing U.S.
economic and trade sanctions based on foreign policy and national security goals. OF AC
currently administers roughly 30 programs that target terrorists, rogue countries and regimes,
narcotics traffickers, proliferators of weapons of mass destruction and other illicit economic and
national security threats.

The Treasury Department has a long history of dealing with sanctions. Dating back prior to the
War of 1812, Secretary of the Treasury Gallatin administered sanctions imposed against Great
Britain for the harassment of American sailors. During the Civil War, Congress approved a law
which prohibited such transactions with the Confederacy, called for the forfeiture of goods
involved in such trade, and provided a licensing regime under rules and regulations administered
by Treasury.
OF AC is the successor to the Office of Foreign Funds Control (FFC), which was established at
the advent of World War II following the German invasion of Norway in 1940. The FFC
program was administered by the Secretary of the Treasury throughout the war. The FFC's initial
purpose was to prevent Nazi use of the occupied countries' holdings of foreign exchange and
securities and to prevent forced repatriation of funds belonging to nationals of those countries.
These controls were later extended to protect assets of other invaded countries. After the United
States formally entered World War II, the FFC played a leading role in economic warfare against
the Axis powers by blocking enemy assets and prohibiting foreign trade and financial
transactions.
OF AC itself was formally created in December 1950, following the entry of China into the
Korean War, when President Truman declared a national emergency and blocked all Chinese and
North Korean assets subject to U.S. jurisdiction.
OF AC's expertise in administering sanctions has made it a model for countries throughout the
world. Although OFAC's programs differ in terms of their scope and application, they all
involve the exercise of the President's constitutional and statutory wartime and national
emergency powers to impose controls on transactions and trade, and to freeze foreign assets that
come within the jurisdiction of the United States.

Treasury Executive Office ofAsset Forfeiture
The Treasury's Executive Office of Asset Forfeiture (TEOAF) manages and directs the proceeds
from non-tax related asset forfeitures made by Treasury and Homeland Security to fund
programs and activities aimed at disrupting and dismantling criminal infrastructures. Forfeited
funds are used to help train law enforcement personnel and promote cooperation among federal,
state, and local law enforcement agencies through funding of expenses including equitable
sharing, as well as the development of targeted task forces.
Financial Crimes Enforcement Network
The mission of the Financial Crimes Enforcement Network (FinCEN) is to safeguard the
financial system from the abuses of financial crime, including terrorist financing, money
laundering, and other illicit activity. FinCEN, a bureau of the Treasury, administers the Bank
Secrecy Act of 1970, which authorizes the reporting and recordkeeping obligations with respect
to financial transactions for law enforcement purposes.
Since its creation in 1990, FinCEN has worked to maximize information sharing among law
enforcement agencies and its other partners in the regulatory and financial communities to
combat money laundering, terrorist financing, and other illicit finance.

As the United States' financial intelligence unit (FlU), FinCEN links to a network of over a
hundred similar FlUs around the world, sharing information to pursue money laundering,
terrorist, and other investigations.

IRS - Criminal Investigation Division
TFI also works closely with the Criminal Investigation division of the Internal Revenue Service
in its anti-money laundering, terrorist financing, and financial crimes cases. IRS-CI houses the
finest financial investigators in the world that investigate financial crimes and are central in
tracing assets looted by corrupt foreign officials.
TREASURY'S TOOLS AND AUTHORITIES

Combating Terrorist Financing
As President Bush declared on September 24,2001, "We will direct every resource at our
command to win the war against terrorists, every means of diplomacy, every tool of intelligence,
every instrument of law enforcement, every financial influence."
Our focus is on the pillars that support terrorism, and we draw upon all of the tools at our
disposal to erode and topple these pillars. This is a war fought not on the battlefield, but rather in
banks, along cash courier routes, and in the depths of shadowy financial networks.
Working shoulder-to-shoulder with dedicated public servants in the U.S. Government, our allies
abroad and our partners in the private sector, Treasury follows the terrorists' money trails
aggressively, exploits them for intelligence, and severs links where we can. Our collaborative
efforts have al Qaida and other terrorist groups feeling financial pressure and grasping for new
channels through which to move money.
While we may never shut off the spigot of terrorist money entirely, we and our partners around
the world have made it costlier, riskier and harder for terrorists to raise, move and store money.
A notable example is an intercepted letter from Ayman al-Zawahiri, al Qaida's number two, to
Abu Musab al-Zarqawi, the leader of al Qaida in Iraq. Dated July 9, 2005, Zawahiri pleaded for
Zarqawi to send more money, as their financing support lines had been cut off.

International Emergency Economic Powers Act
OF AC acts under Presidential emergency powers, as well as authority granted by specific
legislation, to impose controls on transactions and freeze foreign assets under U.S. jurisdiction.
The core authority for such sanctions is the International Emergency Economic Powers Act of
1977 (lEEPA).
IEEPA gives the President the authority to, in a time of national emergency, impose sanctions
against those threatening the U.S. economy, national security, or foreign policy, investigate,
regulate and prohibit certain financial transactions, and freeze assets of foreign adversaries,
including foreign governments, designated individuals and entities. The President has delegated

his IEEPA powers with respect to certain matters to the Secretary of the Treasury, who in tum
has delegated them to OFAC.
On September 23, 200 I, the President invoked IEEPA and issued Executive Order 13224, which
allows us to identify and designate terrorists and their facilitators. Designations deny terrorists
access to the financial system and shut down channels through which they raise, move and store
money. By designating terrorists, we place them in financial handcuffs by restricting where and
how they are able to get their hands on funding.
Designations also serve as a powerful deterrent. Unlike terrorist operatives willing to die for
their hateful cause, financiers often cling desperately to their social status and property.
Designations and prosecutions of terrorist supporters are public reminders that we treat those
who fund terror as the terrorists that they are.
Since E.O. 13224 was issued, OF AC has designated more than 420 entities as terrorists, their
financiers or facilitators. Additionally, under the United Nations Participation Act and United
Nations Security Council Resolution 1267, supporters ofal Qaida, Usama bin Laden and the
Taliban can be designated worldwide, imposing a global assets freeze and travel ban.

SUCCESSES AND ACCOMPLISHMENTS SINCE SEPTEMBER 11, 2001

Over 1600 terrorist-related accounts and transactions have been blocked around the world,
including over 150 in the United States .

Over 150 nations have endorsed global standards to combat terrorist financing, including
provisions governing charities, cash smuggling, and money service businesses .

The United States has designated more than 420 individuals and entities as terrorists or terrorist
supporters under Executive Order 13224 .

More than 80 countries have also introduced new terrorist-related legislation, and over 100 have
established Financial Intelligence Units .

Consistent with applicable UN Security Council Resolutions, more than 170 countries and
jurisdictions have issued freezing orders against terrorist supporters .

Over 40 charities that were funneling money to al Qaida, HAMAS and like-minded terrorist
organizations have been publicly designated and denied access to the U.S. financial system.

Combating Illicit Finance
All national security threats - from terrorists to narcotics traffickers to WMD proliferatorsdepend on a financial network to survive. Terrorists need to access the financial system to move
money in order to train and indoctrinate operatives, to bribe officials and procure false
documents, and of course, to carry out horrific attacks. Weapons proliferators need access to the
financial system to launder ill-gotten gains from illicit activities, such as smuggling. Drug cartels
funnel money through sham businesses and front companies to cloak their trafficking activities.
The Treasury Department harnesses its financial information, expertise, and economic authorities
and influence to attack the financial underpinnings of these groups, playing a unique part in
helping to safeguard the economic and national security of the United States.

Balik Secrecy Act
The Bank Secrecy Act (BSA), enacted in 1970, authorizes the Secretary of the Treasury to issue
regulations requiring that financial institutions keep records and file reports on certain financial
transactions for law enforcement purposes. The authority of the Secretary to administer these
authorities has been delegated to the Director of FinCEN.
Hundreds of financial institutions are currently subject to BSA reporting and recordkeeping
requirements, including depository institutions; brokers or dealers in securities; money services
businesses; and casinos and card clubs.
In implementing BSA requirements, financial institutions not only strengthen their defenses
against illicit transactions, but also provide critical information on certain financial flows by
reporting suspicious activity and transactions meeting a defined threshold. FinCEN is then able
to utilize this data and share it, as appropriate, with law enforcement, intelligence and regulatory
agencies to bolster government-wide efforts to combat illicit financial transactions.

USA PATRIOT Act
The Bank Secrecy Act was amended by the USA PATRIOT Act, which broadens and deepens
the anti-money laundering system to more segments of the financial community. The Act allows
FinCEN not only to regulate the financial services community more broadly, but also to share
information with our partners in the financial sector, to identify corrupt dollars flowing through
the system, and to prevent tainted capital that could support terrorist or other criminal activity
from entering the financial system.
Section 311 of the Patriot Act authorizes the Treasury to use financial force against foreign
jurisdictions, banks, or classes of transactions that are of "primary money laundering concern,"
to isolate the designated entity and protect the U.S. financial system from tainted capital running
through the entity. Section 311 authorizes the Secretary of the Treasury to require U.S. financial
institutions to take certain "special measures" against identified targets.
Section 311, a defensive regulatory measure, has a profound effect not only in insulating the U.S.
financial system from an identified illicit finance risk, but also in placing the global system on
notice of such a threat.

Case Study: Banco Delta Asia
The North Korean regime, a state sponsor of terrorism,
facilitates criminal activity to support its repressive
regime. North Korea is involved in a range of illicit
activities, including the proliferation of weapons of
mass destruction, narcotics trafficking and smuggling.
The North Korean government has also sponsored the
counterfeiting of U.S. currency through the creation
and distribution of "supernotes," high-quality bills that
are virtually indistinguishable from the genuine $100
bill except by the specially-trained eye.
North Korea is subject to a variety of economic
sanctions administered by OF AC and other government
agencies. FinCEN has also taken a leading role in
using its anti-money laundering authorities to help limit
the threat to legitimate financial systems posed by
North Korean activity.
In September 2005, the Treasury designated Banco
Delta Asia (BOA) in Macau pursuant to Section 311,
naming the institution a "willing pawn" of the North
Korean government. The Treasury found that BOA
had been facilitating North Korean front companies and
government agencies engaged in narcotics trafficking,
currency counterfeiting, production and distribution of
counterfeit cigarettes and pharmaceuticals, and
laundering the proceeds.

USA PA TRIOT ACT
SECTION

311

The Treasury has designated the
following financial institutions to be
of 'primary money laundering
concerns' under Section 311:
).>

September 15, 2005: Banco Delta
Asia of Macau

).>

April 21, 2005: VEF Bank and
Multibanka of Latvia

).>

August 24, 2004: First Merchant
Bank of the "Turkish Republic of
Northern Cyprus"

).>

August 24, 2004: Infobank of
Belarus

).>

May 11, 2004: Commercial Bank of
Syria (CBS) and its subsidiary Syrian
Lebanese Commercial Bank

).>

November 19, 2003: Myanmar
Mayflower Bank

).>

November 19, 2003: Asia Wealth
Bank of Burma

The Treasury has designated the
following jurisdictions to be of
'primary money laundering concerns'
under Section 311:
).>
).>

November 19, 2003: Burma
December 20, 2002: Nauru
December 20, 2002: Ukraine

In conjunction with Treasury's designation, FinCEN
).>
issued a "notice of proposed rulemaking," that, if
Note: On April 15, 2003, Treasury
finalized, will prohibit u.s. financial institutions from
rescinded the 311 designation against
holding correspondent accounts for BOA. FinCEN
the Ukraine in recognition of important
followed the proposed rule by issuing an advisory to
steps taken to improve its anti-money
financial institutions in December 2005 warning that
launderinq reqime.
North Korea, acting through government agencies and
associated front companies, was seeking banking services for their illicit financial activities
elsewhere. FinCEN warned financial institutions to take reasonable steps to guard against these
illicit financial activities.
These actions have 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.

INTERNATIONAL COOPERATION ON TERRORIST FINANCING

The terrorist attacks in Dahab, Egypt on April 24, 2006, provide painful confinnation that we are
still at risk. Indeed, from the railway bombings of Madrid and Moscow to the attacks in
Casablanca and London, we have seen that terrorism does not discriminate among race, religion
or national origin.
A robust international coalition is currently working to combat terrorist financing and to focus
the world's attention on previously unregulated, high-risk sectors like charities and hawalas. As
we continue to push terrorists out of the fonnal financial system, they will be forced to find new,
unfamiliar ways to raise and move money, which may be slow, cumbersome and expose them to
detection. As terrorists adapt to our vigorous efforts, we too must continue to broaden and
expand our focus to stay one step ahead.
The success of our efforts to combat terrorist financing depends in large part on the support of
our allies and the international community. The United States works with the international
community to develop and strengthen counter-terrorist financing initiatives and regimes, and to
enhance the transparency and accountability of global financial systems generally. We work
bilaterally, regionally and multilaterally to improve global capabilities to identify and freeze
terrorist-related assets. We are committed to establishing and bolstering international standards
to address identified vulnerabilities, and to ensure global compliance with these standards. We
also focus on financing mechanisms of particular concern, such as bulk cash smuggling, and
facilitating infonnation sharing to aggressively combat these emerging threats.
Internationally we have received support from countries and jurisdictions worldwide, including
blocking orders to freeze assets from over 170 countries and jurisdictions. Along with other
direct actions around the globe to deal with the common scourge of terrorism, more than 80
countries have also introduced new terrorist-related legislation, and over 100 are now members
of the Egmont Group, an international network of Financial Intelligence Units.
A great success for the international community was the passage of United Nations Security
Counsel Resolution 1617 last year, which strengthens the international regime for targeting the
support networks of al Qaida and the Taliban and enables vigorous action to cut off al Qaida's
support lines around the world. Resolution 1617 strengthens what might be the most powerful
tool for global action against those who provide money, anns, technology, or other support to al
Qaida and the Taliban: targeted sanctions. When an individual or entity is designated pursuant to
the resolution, states are required to freeze their assets, deny them access to the international
financial and commercial systems, and prevent them from traveling internationally or acquiring
anns. Any who choose to do business with these targets face the same consequences. The
message is clear: if you assist those seeking to destroy our society, you will be publicly
identified and cut off from society'S resources.
With this strengthened resolution, the international community is anned to take unified, decisive
action against al Qaida's support networks. By exercising and implementing these authorities
vigorously and globally, we have the power to deal al Qaida and other terrorist organizations a
significant blow.

We have also worked with our counterparts in the Financial Action Task Force (FATF) to revise
the 40 Recommendations on Money Laundering, thereby enhancing international standards of
transparency and accountability for effectively combating money laundering and other financial
crimes. In June 2003, the FA TF issued the revised 40 Recommendations to address, among
other things, shell banks, politically-exposed persons, correspondent banking, wire transfers,
bearer shares, trusts, and an expansion of the sectors in which AMLlCFT measures should be
adopted.
The FA TF has also adopted and issued the Nine Special Recommendations on Terrorist
Financing to carry out, among other objectives, criminalizing terrorist financing, protecting
charities and non-profit organizations from terrorist abuse, regUlating alternative value transfer
systems, such as hawalas, and strengthening information-sharing mechanisms.
The Ninth Special Recommendation on Terrorist Financing was issued in November 2004. It
requires countries to have measures in place to detect the physical cross-border transportation of
currency, including a declaration or disclosure system similar to our reporting requirements in
the United States.
We have forged bilateral partnerships with other nations and called upon multilateral
organizations to promote international standards and protocols for combating terrorist financing
and financial crime generally. Such standards and protocols are essential to developing the
financial transparency and accountability required to identify and attack elements of financial
crime, including terrorist financing networks.
We have targeted specific financing mechanisms that are particularly vulnerable or attractive to
terrorist financiers. Notably, these mechanisms include the abusive use of charities, NGOs,
hawalas and other alternative remittance or value transfer systems, wire transfers, and cash
couriers, as well as trade-based money laundering and cyber-terrorist financing.
To improve the global flow of financial information related to terrorist financing, we have also
worked to establish and expand formal and informal international information-sharing channels,
both bilaterally and multilaterally. Through the Financial Crimes Enforcement Network
(FinCEN), the U.S. Financial Intelligence Unit (FlU), we have persuaded the Egmont Group to
leverage its information-collection, analysis and sharing capabilities to support the global war on
terrorism. These ongoing efforts have greatly improved our ability to identify and unravel
terrorist financing networks by tracking and tracing terrorist money trails through multiple
jurisdictions.

Page 1 of 1

April 27, 2006
JS-4213

Treasury Officials To Speak at Chicago Fed
on Reaching 10 million Unbanked Americans
U.S. Treasurer Anna Escobedo Cabral and Deputy Assistant Secretary for
Financial Education Dan lannicola, Jr. will speak at the Federal Reserve Bank of
Chicago on Monday, May 1. The Treasury officials, U.S. Rep. Judy Biggert and
JoAnn Johnson, chairman of the National Credit Union Administration, will also
participate in a discussion at the Financial Literacy and Education Commission's
regional conference to address the problems faced by the unbanked.
More than 10 million unbanked Americans do not have accounts at mainstream
financial institutions, making them more likely to pay extraordinarily high fees for
basic services and less likely to save for the future. Bringing unbanked Americans
into the financial mainstream is a key part of the Commission's strategy for financial
literacy.
Treasury Secretary John Snow and the Treasury officials recently launched the
Commission's national strategy to improve America's financial literacy, available at
www.mymoney.gov.

Who:
U.S. Treasurer Anna Escobedo Cabral
Deputy Assistant Secretary for Financial Education Dan lannicola, Jr.
What:
Financial Literacy and Education Commission
Midwest Regional Conference on Reaching Unbanked People
When:
Monday, May 1 10:30 a.m. (COT)
Where:
Federal Reserve Bank of Chicago
230 South LaSalle Street
Chicago,IL

http://www.t:eas.gov/presslreleaseS/jg4213.htm

3/212007

Page 1 of7

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April 27, 2006
js-4233
Hearing on Healthcare and Small Business: Proposals that Will Help Lower
the Costs and
Cover the Uninsured
Testimony of Robert J. Carroll
Deputy Assistant Secretary (Tax Analysis)
United States Department of the Treasury
Before the Subcommittee on Workforce, Empowerment, and Government
Programs
House Small Business Committee
Ms. Chairwoman, Ranking Member Lipinski, and distinguished Members of the
Committee, I appreciate the opportunity to discuss with you today the health care
proposals included in the President's FY 2007 Budget. I will focus my remarks on
both the problems in health care and how the President's proposals help address
these problems.
The Broad Objectives of the President's Health Care Initiative
The President's initiative on health care is aimed at making health care more
accessible, affordable and portable, thus better enabling Americans to obtain health
care and to retain their health care when they change employment.
Individuals and families should have access to a variety of health plans so that they
can choose health care based on their individual needs and preferences.
Information about the range, price, and quality of available health care options
should be readily available and easy to use. Purchasing decisions should be made
more by consumers, rather than surrogates, such as employers, insurers, or the
government. A key focus of the President's health care initiative is to put the
consumer at the center of health care decisions.
When individuals are in more control of their health care decisions, we can expect
those decisions to be better ones. Another component of the President's health
care initiative is the recognition that the government has a responsibility to promote
access to quality affordable health care for the poor. Health care should be
affordable for all. Empowering consumers is essential to improving value and
affordability in American health care. Our government can also provide financial
assistance to low-income Americans and encourage the states and employers to
help the chronically ill obtain affordable health coverage.
Health insurance should be portable. Individuals should be able to take their health
insurance with them when they change jobs, move, become self-employed, or
leave the labor force. They should not have to worry about changing doctors,
learning a new insurance company bureaucracy, having their premiums go up or
losing their insurance tax advantage when they move between employment
opportunities.
Americans enjoy the best health care facilities and medical professionals in the
world, but Americans are concerned about the rising cost of health care, losing their
health insurance if they change jobs, and a lack of information about price and
quality. These concerns are based on real world observation and are valid. The
President's health care initiative attempts to address the root problems that underlie

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Page 2 of7
these concerns.
Problems in Health Care

Rising Costs
Health care costs continue to rise rapidly. Growth in health care costs have been
exceeding GOP growth by two percentage points annually since 1940. Chart 1
shows both actual and projected growth of national health expenditures as a
percentage of GOP from 1965 through 2015. Most recently, growth of national
health expenditures as a percentage of GOP rose from 13.8 percent in 2000 to 16
percent in 2004 and is expected to rise to nearly 20 percent by 2015. These rising
costs Impose a burden on the U.S. economy. Higher spending on public programs
like Medicare and Medicaid strains state and Federal budgets. Higher insurance
premiums pose a challenge for employers and burden workers with higher health
costs and lower wage increases. The burden of rising health care costs is
particularly problematic for small businesses, who often choose not to offer any
health insurance to employees.

The Uninsured
At the same time health care costs are rising, the number of uninsured also
continues to grow. As health care costs grow faster than incomes, an increasing
number of individuals are unable to purchase health insurance. Also, those higherand ever-rising - costs mean that the self-employed and employees of small
businesses are far less likely to have coverage. According to the Kaiser Family
Foundation's annual survey, nearly 100 percent of firms with 200 or more workers
offer health insurance to their employees. Yet only 59 percent of firms with between
3 and 199 workers offer insurance to their employees, a decline of 9 percentage
points from 2000. Regardless of how the number of uninsured is measured, millions
of Americans are currently uninsured.

Removal of Market Forces from Health Care Purchase Decisions
A substantial portion of rising health care costs is due to the effects of our insurance
system itself. Health insurance gives people valuable protection and peace of mind
that they will have help paying their medical bills should a major illness arise.
However, because third parties such as insurance companies, employers, and the
government finance the vast majority of health care spending, most insured do not
know or feel the full cost of the health care services they consume.
The direct expenditure for health care by an insured person may be only a small
portion of his or her total health care costs. This is characteristic of low deductible
and first dollar health insurance and the prevalence of this type of insurance is
rooted in the tax treatment of health care generally. The tax code reduces the cost
of health care when financed indirectly through employer-provided insurance rather
than when purchased directly by the consumer. The greater reliance on first dollar
coverage may lead the insured person to receive treatment that the person may
value at less than the true cost of the treatment, leading to the over-consumption of
medical care. This over-consumption is the rational response of consumers who do
not have to directly pay the entire cost of the medical services they use. A change
in the portion of the cost of medical services faced by the consumer so that he or
she faces something closer to the true market cost of medical services - the
marginal cost of health care - would encourage him to make better decisions and
examine information on lower-cost alternative treatments. This may slow the steady
increase in national health expenditures.

Health Insurance Is Not Directed Towards Today's Dynamic Labor Markets
In today's economy employees frequently change jobs. These changes are often
for the better. The dynamism of U.S. labor markets provides important economic

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Page 3 of7
benefits by allowing our economy to adapt more quickly to changing economic
circumstances. The fluidity and flexibility of our labor markets may generally lead to
a better matching of workers to Jobs and contribute to skill development and wage
growth. Workers might change jobs in pursuit of better pay, to gain more work
experience or broaden their skills, or possibly to attain more flexible work
arrangements.
According to the Bureau of Labor Statistics' Job Openings and Labor Turnover
Survey, in 2005, some 56.1 million employees were hired to fill jobs, while 53.1
million employees left their former positions, and this was a typical year for labor
turnover. As shown in Chart 2, the average American between the ages of 18 and
38 has held 10.2 jobs and the young are more apt to change jobs than those who
are older. About two-thirds of lifetime wage growth occurs within the first 10 years of
labor market experience. Seeking out and testing different jobs appears to be an
important aspect of our labor markets and an important component the economic
progress for younger workers.
The high degree of job mobility and its role in building labor market experience and
skills undoubtedly contributes to our economic vitality. As shown in Chart 3,
Americans tend to change jobs much more frequently than workers in other major
industrialized nations, in some cases nearly twice as often. The better matching of
workers to jobs associated with the high degree of labor force dynamics contributes
to economic growth and living standards by increasing the productivity of labor.
Tying employees' health insurance to their workplace, however, is an impediment to
a dynamic labor market. Approximately 73 percent of insured Americans obtain
their insurance in whole or in part through their employers. Employer-based health
insurance is usually not portable when employees change jobs or stop working.
People changing jobs usually must change insurance poliCies to receive any health
benefits from their new employer. Lack of portability results in "job lock" - if anyone
in the family is in poor or questionable health status, workers become hesitant to
leave their jobs to work for an employer who does not offer insurance, work for
themselves, or retire. Job lock has the effect of reducing the fluidity and flexibility of
our labor markets and is a drag on economic growth.
How Does The President's Health Care Initiative Address the Problems
Major Parts of the Initiative
With the appropriate reforms, the U.S. health care system can become more
efficient at supplying cost-effective health care to consumers while continuing to
lead in innovation and the development of cutting edge medicines. The President's
initiative would address the rising costs of health care spending through a series of
initiatives designed to improve the functioning of the healthcare market. At the core
of this initiative is a set of tax proposals that puts the health care consumer more in
control of his or her health care and places health care purchased directly by
individuals with high deductible health plans on an equal footing with employerprovided health insurance. When consumers have more at stake, they will make
better decisions. Greater reliance on competition and market forces, coupled with
less reliance on third parties, such as insurance companies, employers and the
government, in making health care decisions will lead to more efficient use of
resources and stem the excessive rise in health care costs.
Currently, health insurance purchased through an employer is subject to neither
income nor payroll taxes. While an individual purchasing health care on his or her
own might pay one dollar for a dollar's worth of health care, an individual who
obtains health care through an employer-provided insurance plan pays
considerably less. Consider, for example, a taxpayer who is in the 15 percent
income tax bracket and also pays 15.3 percent in Social Security and Medicare
taxes (including both the employee and employer shares). For the last dollar of
wages received, this taxpayer would pay 30.3 cents in income and payroll taxes.
Thus, for every dollar of wages received, this individual could purchase only 69.7
cents of most consumption items. In the case of health care financed through an
employer, however, the individual could purchase a dollar of health care benefits in
the form of a health insurance policy for every dollar of wages received. The health

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Page 4 of7

care benefits received in the form of an employer-paid health insurance premium is
subject to neither income nor payroll taxes. A dollar received in employer-provided
health insurance would finance a dollar of insurance-funded health care
consumption. Thus, the current tax system builds in a large tax subsidy for
purchasing health care through employer-provided health insurance.
Many small businesses cannot afford to offer insurance and their workers are often
among the uninsured. But those who work for larger companies currently receive a
significant tax advantage: They pay neither income taxes nor payroll taxes on their
health insurance premiums. In contrast, those who purchase insurance directly _
perhaps because they work for a small business that does not offer insurance - pay
for insurance after paying income and payroll taxes. The President's proposals
would eliminate this inequity and thus reduce the possibility of job lock. HSAs are
owned by individuals regardless of their employer. When workers change jobs, they
take their HSAs with them, reducing the possibility of job lock. An individual could
seek the best job possible regardless of the employer, or become self-employed
and still have the opportunity to take advantage of the tax benefits provided by the
President's proposals.
Moreover, as shown in Chart 4, lower income individuals are less likely to be
covered by employer-provided insurance. Policies that make health insurance more
accessible and affordable to all American's by extending the tax advantages
enjoyed by those receiving their insurance through their employers would be
particularly helpful to these lower income individuals.
There are several parts to the proposal. First, all taxpayers could either deduct or
exclude for income tax purposes health insurance premiums for high deductible
health care plans (HDHP). In addition, individuals would receive a refundable
income tax credit for payroll taxes paid on those premiums. These two provisions
effectively place insurance purchased directly by individuals on an equal footing
with that purchased through an employer, provided the insurance purchased is an
HDHP.
Next, all taxpayers that have an HDHP could deduct a higher level of out-of-pocket
expenses for income tax purposes through the use of a Health Savings Account
(HSA) than under current law. Also, taxpayers could claim a tax credit for payroll
taxes paid on out-of-pocket expenses through the use of that same HSA. The
amount of out-of-pocket expenses that could be deducted would be equal to the
amount of out-of pocket exposure allowed for a qualifying HDHP. These two
proposals have the effect of placing out-of-pocket expenses for those with an
HDHP on an equal footing with insurance.
Once a taxpayer decides to purchase an HDHP, he or she would effectively receive
the same tax advantages on his or her health care expenditures -- insurance and
out-of-pocket -- as those who finance all their health care through an employerprovided health plan.
The third major piece of the initiative is a refundable health insurance tax credit
(HITC) for lower-income individuals for the purchase of an HDHP. The credit would
be refundable and cover up to 90 percent of the cost of the health insurance up to
$1,000 for singles and up to $3,000 for families. This provision would make health
care more affordable to lower-income individuals and encourage those currently
uncovered to obtain health insurance.

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Page 5 of7
grown slower or, in some cases, even decreased. Markets such as the laser eye
surgery market and the in vitro fertilization markets, where there is significant
competition, have ~xperienced price decreases. Increased market forces resulting
from the President s initiative helps reduce the rate of growth in national health
expenditures.
What is the Cost of the President's Initiative?
Chart 5 shows the health care tax expenditures under current law and under the
President's health care initiatives for fiscal year 2010 for both income and payroll
taxes. As can be seen, the current tax subsidy for the employee exclusion for
employer-provided health insurance constitutes the major portion of the health care
tax expenditure, either currently or under the President's initiative. As a result of the
President's health care initiative, total health tax expenditures would increase by
about $21 billion or somewhat over 6 percent in 2010.
The Experience So Far with HSAs
The growth in HDHPs since their inception has been dramatic. Enrollment in HSAqualified HDHPs has grown to nearly 3.2 million individuals in January 2006,
according to the latest estimates from America's Health Insurance Plans (AHIP). As
shown in Chart 6, this is triple the number reported in 2005, which in turn was
double the number reported in 2004, the first full year in which HSAs were
available.
Importantly, preliminary indications suggest that HSAs as constituted under current
law appear to have helped the uninsured and are being used by many lower
income and older Americans. According to AHIP estimates, roughly one-third of
those who purchased HSA-eligible HDHPs in the non-group market were previously
uninsured, and about 50 percent are age 40 or over. Other research shows that
over 40 percent of those who purchased HAS-eligible plans in 2005 have incomes
below $50,000 HSAs provide an additional option to individuals, which helps reduce
the number of uninsured and helps lower income and older individuals.
Where Does the Presidents Health Care Initiative Take Us?
The President's health care initiative levels the playing field between employerprovided insurance and HDHP insurance purchased directly by an individual and
also levels the playing field between out-of pocket expenditures and insurance
premiums for those with an HDHP. A key benefit of the initiative is that it reduces
the tax bias towards lower deductible and first dollar health insurance. As discussed
above, first dollar insurance dulls the incentives for consumers to shop carefully for
cost-effective health care. Placing the consumer at the center of health care
decisions helps slow the growth in health care spending. Greater reliance on health
insurance purchased directly by individuals, and on HSAs generally, will also
increase portability and reduce the harmful effects of job lock.
The initiative also makes HSAs more progressive. Lower income Americans receive
a larger tax subsidy through the refundable health insurance tax credit targeted to
low income individuals and through the set of refundable tax credits for Social
Security and Medicare taxes. The latter set of credits is reduced once an individual
reaches the taxable wage cap for Social Security taxes. Chart 7 compares the tax
subsidy from the health care tax provisions under current law to those received
under President's health care initiative for a couple at age 35 with two children.
When the family's income exceeds roughly $45,000, the President's health care
initiative provides the same tax subsidy for a family purchasing health care directly
as it does for a family purchasing their insurance through their employer under
current law. Also, the tax subsidy under the President's health care initiative is
higher for lower income families than under current law. For those with the lowest
incomes, the President's initiative would provide a subsidy for more than half of a
family's insurance premiums.
As shown in Chart 7, there is a significant tax benefit from contributing the
maximum amount to an HSA under the President's initiative, with the tax subsidy

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Page6of7

initially increasing with income because of the graduated income tax rates. The tax
subsidy declines once the taxable wage cap for Social Security taxes is reached.
Thus, there is a limit on the tax benefit from the payroll tax credit for higher-income
earners.
The maximum tax benefit provided by the HITC targeted to lower income
individuals is available for single individuals with incomes below $15,000 and is
completely phased out when a single individual's income reaches $25,000. For
families, the maximum tax benefit provided by the HITC is available for incomes
below $25,000 and completely phased out when a family's income reaches
$60,000.
The President's initiative makes HSAs significantly more attractive to both the
uninsured and to lower-income individuals. Thus, the Treasury Department
estimates that the President's initiative would increase the number of HSAs by
some 50 percent by 2010. This initiative would also help control the growth in
national health expenditures by encouraging the use of HSAs and HDHPs.
The Larger Initiative
The tax provisions described above are part of a broader initiative outlined by the
President that includes: new national Portable HSA insurance plans; a proposal to
permit the purchase of health insurance policies across state lines; a proposal to
allow associations of small businesses to band together to purchase health
insurance; medical liability reform; and a series of health information technology
actions.
•

•

The Portable HSA proposal would allow employers to have the option to
offer workers a Portable HSA insurance policy. Employees would own and
control the insurance policy, just like they already own and control existing
HSAs. Employees enrolled in a Portable HSA insurance policy could take
the policy with them wherever they go, just like they currently can with their
HSAs. Their premiums would be tax-free, whether they change employers
or pay the premiums on their own. Their premiums would not go up based
on their health at the time they change jobs, leave the labor force, or move.
The proposal to allow the purchase of health insurance policies across state
lines would allow Americans to buy the best health insurance for them,
based on their own circumstances, instead of being limited to only the
policies available in their state. This proposal would allow competition
among health insurance plans from different states, which will ultimately
benefit consumers.
The President's Association Health Plans proposal would make it easier for
small businesses to provide health care for their employees by allowing
small businesses to join together through their trade and professional
associations to provide health coverage, giving them the same advantages
of economies of scale, administrative efficiencies, and negotiating strength
enjoyed by big businesses and labor unions. By providing coverage for
thousands of employees at a time, association members would pay lower
premiums for better coverage.
The President's strategy for addressing the cost of medical liability includes
common-sense reforms such as: (1) reserving punitive damages for
egregious cases where they are justified and limiting non-economic
damages to reasonable amounts; (2) ensuring that old cases based on old
claims cannot be brought to court many years later; and (3) providing that
defendants pay Judgments in proportion to their faul!. Although the House
has passed these reforms three times, the Senate has not followed House's
example.
The President's health information technology actions include: establishing
the position of the National Coordinator for Health Information Technology
within the U.S. Department of Health and Human Services (HHS); providing
support for several health IT projects to assess and develop solutions to key
implementation issues, and establishing the American Health Information
Community (AHIC), a committee of both public and private stakeholders
formed to make recommendations on how to accelerate the development
and adoption of health IT.

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Conclusion
I thank you for the opportunity to testify before the Committee today and look
forward to your questions.
REPORTS
•

Full Press Release with charts and graphs

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3/2/2007

·f

u.s. TREASURY DEPARTMENT
OFFICE OF PUBLIC AFFAIRS
EMBARGOED FOR RELEASE UNTIL lO:30AM: April 27, 2006
Contact: Sean Kevelighan (202) 622-2910

Hearing on Healthcare and Small Business: Proposals that Will Help Lower the Costs and
Cover the Uninsured

Testimony of Robert J. Carroll
Deputy Assistant Secretary (Tax Analysis)
United States Department of the Treasury
Before the Subcommittee on Workforce, Empowerment, and Government Programs
House Small Business Committee

April 27, 2006

Ms. Chairwoman, Ranking Member Lipinski, and distinguished Members of the Committee, I
appreciate the opportunity to discuss with you today the health care proposals included in the
President's FY 2007 Budget. I will focus my remarks on both the problems in health care and
how the President's proposals help address these problems.

The Broad Objectives of the President's Health Care Initiative

The President's initiative on health care is aimed at making health care more accessible,
affordable and portable, thus better enabling Americans to obtain health care and to retain their
health care when they change employment.

Individuals and families should have access to a variety of health plans so that they can choose
health care based on their individual needs and preferences. Information about the range, price,
and quality of available health care options should be readily available and easy to use.
Purchasing decisions should be made more by consumers, rather than surrogates, such as
employers, insurers, or the government. A key focus of the President's health care initiative is to
put the consumer at the center of health care decisions.

When individuals are in more control of their health care decisions, we can expect those
decisions to be better ones. Another component of the President's health care initiative is the
recognition that the government has a responsibility to promote access to quality affordable
health care for the poor. Health care should be affordable for all. Empowering consumers is
essential to improving value and affordability in American health care. Our government can also
provide financial assistance to low-income Americans and encourage the states and employers to
help the chronically ill obtain affordable health coverage.

Health insurance should be portable. Individuals should be able to take their health insurance
with them when they change jobs, move, become self-employed, or leave the labor force. They
should not have to worry about changing doctors, learning a new insurance company
bureaucracy, having their premiums go up or losing their insurance tax advantage when they
move between employment opportunities.

Americans enjoy the best health care facilities and medical professionals in the world, but
Americans are concerned about the rising cost of health care, losing their health insurance if they
change jobs, and a lack of infornlation about price and quality. These concerns are based on real
world observation and are valid. The President's health care initiative attempts to address the
root problems that underlie these concerns.

Problems in Health Care

Rising Costs
Health care costs continue to rise rapidly. Growth in health care costs have been exceeding GOP
growth by two percentage points annually since 1940. Chart I shows both actual and projected
growth of national health expenditures as a percentage of GOP from 1965 through 2015. Most
recently, growth of national health expenditures as a percentage of GOP rose from 13.8 percent
in 2000 to 16 percent in 2004 and is expected to rise to nearly 20 percent by 20 IS. These rising
costs impose a burden on the U.S. economy. Higher spending on public programs like Medicare
and Medicaid strains state and Federal budgets. Higher insurance premiums pose a challenge for
employers and burden workers with higher health costs and lower wage increases. The burden
of rising health care costs is particularly problematic for small businesses, who often choose not
to offer any health insurance to employees.

Chart 1: National health expenditures continue to rise as a share of GOP
25% ,---------------------------------------------------------,

National Health Expenditures as a Share of GOP
20%

-----~-

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

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

15% 4 - - - - - - - - - - - - - - ------

10%

5% - - - - - - -

0% +-----,-----,----,-----r-----,----,-----,-----.----.----~

1965

1970

1975

1980

1985

1990

1995

2000

2005

2010

2015

Source: Departrrent of Health and Human Services, Centers for Medicare and Medicaid Services.

purchase health insurance. Also, those higher - and ever-rising - costs mean that the selfemployed and employees of small businesses are far less likely to have coverage. According to
the Kaiser Family Foundation's annual survey, nearly 100 percent of firms with 200 or more
workers offer health insurance to their employees. Yet only 59 percent of firms with between 3
and 199 workers offer insurance to their employees, a decline of 9 percentage points from 2000.
Regardless of how the number of uninsured is measured, millions of Americans are currently
uninsured.

Removal of Market Forces from Health Care Purchase Decisions
A substantial portion of rising health care costs is due to the effects of our insurance system
itself. Health insurance gives people valuable protection and peace of mind that they will have
help paying their medical bills should a major illness arise. However, because third parties such
as insurance companies, employers, and the government finance the vast majority of health care
spending, most insured do not know or feel the full cost of the health care services they consume.
The direct expenditure for health care by an insured person may be only a small portion of his or
her total health care costs. This is characteristic of low deductible and first dollar health
insurance and the prevalence of this type of insurance is rooted in the tax treatment of health care
generally. The tax code reduces the cost of health care when financed indirectly through
employer-provided insurance rather than when purchased directly by the consumer. The greater
reliance on first dollar coverage may lead the insured person to receive treatment that the person
may value at less than the true cost of the treatment, leading to the over-consumption of medical
care. This over-consumption is the rational response of consumers who do not have to directly
pay the entire cost of the medical services they use. A change in the portion of the cost of
medical services faced by the consumer so that he or she faces something closer to the true
market cost of medical services - the marginal cost of health care - would encourage him to
make better decisions and examine information on lower-cost alternative treatments. This may
slow the steady increase in national health expenditures.

Health Insurance Is Not Directed Towards Today's Dynamic Labor Markets

In today's economy employees frequently change jobs. These changes are often for the better.
The dynamism of U.S. labor markets provides important economic benefits by allowing our
economy to adapt more quickly to changing economic circumstances. The fluidity and
flexibility of our labor markets may generally lead to a better matching of workers to jobs and
contribute to skill development and wage growth. Workers might change jobs in pursuit of
better pay, to gain more work experience or broaden their skills, or possibly to attain more
flexible work arrangements.
According to the Bureau of Labor Statistics' Job Openings and Labor Turnover Survey, in 2005,
some 56.1 million employees were hired to fill jobs, while 53.1 million employees left their
former positions, and this was a typical year for labor turnover. As shown in Chart 2, the
average American between the ages of 18 and 38 has held 10.2 jobs and the young are more apt
to change jobs than those who are older. About two-thirds of lifetime wage growth occurs
within the first 10 years of labor market experience. Seeking out and testing different jobs
appears to be an important aspect of our labor markets and an important component the
economic progress for younger workers.
The high degree of job mobility and its role in building labor market experience and skills
undoubtedly contributes to our economic vitality. As shown in Chart 3, Americans tend to
change jobs much more frequently than workers in other major industrialized nations, in some
cases nearly twice as often. The better matching of workers to jobs associated with the high
degree of labor force dynamics contributes to economic growth and living standards by
increasing the productivity of labor.
Chart 3: Labor markets In the U.S. are characterized by greater flexibility
than our major trading partners

16,-----------------------------------,
14

12.2

Italy

Japan

12
10
8
6
4

o
United
States

United
Kingdom

Gennany

France

Source: International Labor Organization, 'Wo~d Employment Report 2004-05,"
December2004.

Chart 2: Job turnover Is an Important part of dynamic labor markets In
the U.S.

Jobs Held by Age

6
4.4
4
2

18·22

23·27

28·32

33·38

Total
Age

Source: Bureau of Labor Statistics, "Number of Jobs Held, Labor Market Activity, and
Earnings Growth among Younger Baby Boomers: Recent Results from a
Longitudinal Survey." August 25, 2004.

Tying employees' health insurance to their workplace, however, is an impediment to a dynamic
labor market. Approximately 73 percent of insured Americans obtain their insurance in whole or
in part through their employers. Employer-based health insurance is usually not portable when
employees change jobs or stop working. People changing jobs usually must change insurance
policies to receive any health benefits from their new employer. Lack of portability results in
"job lock" - if anyone in the family is in poor or questionable health status, workers become
hesitant to leave their jobs to work for an employer who does not offer insurance, work for
themselves, or retire. Job lock has the effect of reducing the fluidity and flexibility of our labor
markets and is a drag on economic growth.
How Does The President's Health Care Initiative Address the Problems
Major Parts of the Initiative
With the appropriate reforms, the U.S. health care system can become more efficient at
supplying cost-effective health care to consumers while continuing to lead in innovation and the
development of cutting edge medicines. The President's initiative would address the rising costs
of health care spending through a series of initiatives designed to improve the functioning of the
healthcare market. At the core of this initiative is a set of tax proposals that puts the health care
consumer more in control of his or her health care and places health care purchased directly by
individuals with high deductible health plans on an equal footing with employer-provided health
insurance. When consumers have more at stake, they will make better decisions. Greater

reliance on competition and market forces, coupled with less reliance on third parties, such as
insurance companies, employers and the government, in making health care decisions will lead
to more efficient use of resources and stem the excessive rise in health care costs.
Currently, health insurance purchased through an employer is subject to neither income nor
payroll taxes. While an individual purchasing health care on his or her own might pay one dollar
for a dollar's worth of health care, an individual who obtains health care through an employerprovided insurance plan pays considerably less. Consider, for example, a taxpayer who is in the
15 percent income tax bracket and also pays 15.3 percent in Social Security and Medicare taxes
(including both the employee and employer shares). For the last dollar of wages received, this
taxpayer would pay 30.3 cents in income and payroll taxes. Thus, for every dollar of wages
received, this individual could purchase only 69.7 cents of most consumption items. In the case
of health care financed through an employer, however, the individual could purchase a dollar of
health care benefits in the form of a health insurance policy for every dollar of wages received.
The health care benefits received in the form of an employer-paid health insurance premium is
subject to neither income nor payroll taxes. A dollar received in employer-provided health
insurance would finance a dollar of insurance-funded health care consumption. Thus, the current
tax system builds in a large tax subsidy for purchasing health care through employer-provided
health insurance.
Many small businesses cannot afford to offer insurance and their workers are often among the
uninsured. But those who work for larger companies currently receive a significant tax
advantage: They pay neither income taxes nor payroll taxes on their health insurance premiums.

In contrast, those who purchase insurance directly - perhaps because they work for a small
business that does not offer insurance - pay for insurance after paying income and payroll taxes.
The President's proposals would eliminate this inequity and thus reduce the possibility of job
lock. HSAs are owned by individuals regardless of their employer. When workers change jobs,
they take their HSAs with them, reducing the possibility of job lock. An individual could seek
the best job possible regardless of the employer, or become self-employed and still have the
opportunity to take advantage of the tax benefits provided by the President's proposals.

~------------------------~.----------~-----------------

Chart 4: Low-income families often aren't covered by employer-provided
health insurance.
Percent of people with employer-provided health insurance by income

90%

81%

80%

72%

70%

.---

54%

60%
50%

.---

40%
30%

20%

23%

.-----

!
I

10%

Less than
$25,000

$25,000 to
$49,999

$50,000 to
$74,999

$75,000 or
more

Entire
Population

Source: u.S. Department of Com merce, Bureau of the Census, Current Population
Survey, March 2005

Moreover, as shown in Chart 4, lower income individuals are less likely to be covered by
employer-provided insurance. Policies that make health insurance more accessible and
affordable to all American's by extending the tax advantages enjoyed by those receiving their
insurance through their employers would be particularly helpful to these lower income
individuals.
There are several parts to the proposal. First, all taxpayers could either deduct or exclude for
income tax purposes health insurance premiums for high deductible health care plans (HDHP).
In addition, individuals would receive a refundable income tax credit for payroll taxes paid on
those premiums. These two provisions effectively place insurance purchased directly by
individuals on an equal footing with that purchased through an employer, provided the insurance
purchased is an HDHP.
Next, all taxpayers that have an HDHP could deduct a higher level of out-of-pocket expenses for
income tax purposes through the use of a Health Savings Account (HSA) than under current law.
Also, taxpayers could claim a tax credit for payroll taxes paid on out-of-pocket expenses through
the use of that same HSA. The amount of out-of-pocket expenses that could be deducted would

be equal to the amount of out-of pocket exposure allowed for a qualifying HDHP. These two
proposals have the effect of placing out-of-pocket expenses for those with an HDHP on an equal
footing with insurance.
Once a taxpayer decides to purchase an HDHP, he or she would effectively receive the same tax
advantages on his or her health care expenditures -- insurance and out-of-pocket -- as those who
finance all their health care through an employer-provided health plan.
The third major piece of the initiative is a refundable health insurance tax credit (HITC) for
lower-income individuals for the purchase of an HDHP. The credit would be refundable and
cover up to 90 percent of the cost of the health insurance up to $1,000 for singles and up to
$3,000 for families. This provision would make health care more affordable to lower-income
individuals and encourage those currently uncovered to obtain health insurance.

Giving Consumers a Greater Stake in Health Care Decisions - Slowing the Growth in Health
Care Costs
An HDHP gives consumers a greater stake in their health care decisions. With an HDHP, an
insured individual has responsibility for payment of at least the first $1,050 (with no more than a
total $5,250 out-of-pocket exposure) of medical costS.l This provides consumers with a much
larger role in health care by requiring that the consumer bear a larger share of the financial
responsibility for his or her health care decisions, thus bringing market forces to bear on the cost
of medical expenditures. In health care markets where market forces are prevalent, health care
costs have grown slower or, in some cases, even decreased. Markets such as the laser eye
surgery market and the in vitro fertilization markets, where there is significant competition, have
experienced price decreases. Increased market forces resulting from the President's initiative
helps reduce the rate of growth in national health expenditures.

What is the Cost o/the President's Initiative?

I These are the 2006 levels of the required deductible and total out-of-pocket exposure. These levels are indexed by
the CPI-U. The required deductible and total out-of-pocket exposure for family coverage are $2,100 and $10,500,
respectively.

Chart 5 shows the health care tax expenditures under current law and under the President's
health care initiatives for fiscal year 2010 for both income and payroll taxes. As can be seen, the
current tax subsidy for the employee exclusion for employer-provided health insurance
constitutes the major portion of the health care tax expenditure, either currently or under the
President's initiative. As a result of the President's health care initiative, total health tax
expenditures would increase by about $21 billion or somewhat over 6 percent in 2010.

Chart 5: President's Health Care Initiative complements already existing health care tax
expenditures
$ billions
400,-------------------------------------------~

Tax Expenditures in 2010
350

I-------=====------~~~~c:::::::---::::;::::::::-'_r---

President's Health
Care Initiative

300 +------1
250 +------1
• Low income refundable tax credit
(Initiatil.e )

200 +------1

o HDHP insurance premiums deduction/refundable credit (Initiatil.e)

150 +------1

o HSA contributions deduction/refundable credit (Initiatil.e)

100 +------1

• Itemized deduction for medical
expenses (current law)

50 +------1

o Exclusion for employer provided

0~----J-------~----~-----L-------L----~

Current Law

health insurance (current law)

Including President's Health Care
Initiatil.e

Note: The estimates include the taxexpenditure related to both income and payroll taxes. The estimates also include the effects on
outlays.
Source: U.S. Department of the Treasury. Office ofTax.Aslalysis.

The Experience So Far with HSAs
The growth in HDHPs since their inception has been dramatic. Enrollment in HSA-qualified
HDHPs has grown to nearly 3.2 million individuals in January 2006, according to the latest
estimates from America's Health Insurance Plans (AHIP). As shown in Chart 6, this is triple the
number reported in 2005, which in tum was double the number reported in 2004, the first full
year in which HSAs were available.

,------------------.--------------~~----------------------

Chart 6: The number of HDHP/HSA-type plans has grown rapidly
nillions
4.0

Number of Lil.€s COl.€red

3.2
3.0

2.0

1.0

I
i

0.4
0.0

I
,

Sep.2004

Mar. 2005

Jan. 2006

Source: Arrerica's Health Insurance Plans, Center for Policy Research

Importantly, preliminary indications suggest that HSAs as constituted under current law appear
to have helped the uninsured and are being used by many lower income and older Americans.
According to AHIP estimates, roughly one-third of those who purchased HSA-eligible HDHPs
in the non-group market were previously uninsured, and about 50 percent are age 40 or over. 2
Other research shows that over 40 percent of those who purchased HAS-eligible plans in 2005
have incomes below $50,000 3 HSAs provide an additional option to individuals, which helps
reduce the number of uninsured and helps lower income and older individuals.

America's Health Insurance Plans, Center for Policy Research, January 2006 Census ofHSAs.
From Health Savings Accounts: The First Six Months of2005," eHealthInsurance, July 27, 2005.
4 America's Health Insurance Plans, Center for Policy Research, January 2006 Census ofHSAs.
2

Where Does the Presidents Health Care Initiative Take Us?
The President's health care initiative levels the playing field between employer-provided
insurance and HDHP insurance purchased directly by an individual and also levels the playing
field between out-of pocket expenditures and insurance premiums for those with an HDHP. A
key benefit of the initiative is that it reduces the tax bias towards lower deductible and first dollar
health insurance. As discussed above, first dollar insurance dulls the incentives for consumers to
shop carefully for cost-effective health care. Placing the consumer at the center of health care
decisions helps slow the growth in health care spending. Greater reliance on health insurance
purchased directly by individuals, and on HSAs generally, will also increase portability and
reduce the harmful effects of job lock.
The initiative also makes HSAs more progressive. Lower income Americans receive a larger tax
subsidy through the refundable health insurance tax credit targeted to low income individuals
and through the set of refundable tax credits for Social Security and Medicare taxes. The latter
set of credits is reduced once an individual reaches the taxable wage cap for Social Security
taxes. Chart 7 compares the tax subsidy from the health care tax provisions under current law to
those received under President's health care initiative for a couple at age 35 with two children.
When the family's income exceeds roughly $45,000, the President's health care initiative
provides the same tax subsidy for a family purchasing health care directly as it does for a family
purchasing their insurance through their employer under current law. Also, the tax subsidy under
the President's health care initiative is higher for lower income families than under current law.
For those with the lowest incomes, the President's initiative would provide a subsidy for more
than half of a family's insurance premiums.

Chart 7: Health Care Tax Subsidy Under Current Law and the
President's Health Care Initiative
TaxSubsidy($)
Example for a Married Couple, Age 35, with Two Children in 2007
8,000 - - - - - - - - . - .. _.. --.. -.... -... - .. -.. ..--.. -... -- ...•....--. -•....•....... - .... ··-·._··~_· __

····_··._I

7,000

Health Care Initiative
(maximum $10,850 in

6,000

-I

HSAcontributions ) /

5,000

-" /...... .---

4,000
Health Care Initiative ($1,600 in
HSAcontributions)
. - -.....

3,000

1,000

2,000

Current Law Exclusion for EmployeeProvided Insurance ($1,600 in HSA
Contributions)

0
~~

....~~

<:s

~~~

<:s

b<~'

<:s

,:>~'

<:s

ro~'

<:s

"\~'

'b~'

<:s

Oj~'

~~
....<:s

........~'

<::l~

....~'

<::l~

....OJ

<::l~

b<~'

'" Income ($)

Note: The farTily is assumed to pay a health insurance prerrium of $6,200 and rrake an HSA contribution of $1,600, except as
noted above. The rraxirnum HSA contribution under the proposal is $10,850 (in 2007). The taxpayer is assurred to receive all
incorre fromw ages.
Source: U.S. Departrrent of the Treasury, Office of Tax Analysis.

As shown in Chart 7, there is a significant tax benefit from contributing the maximum amount to
an RSA under the President's initiative, with the tax subsidy initially increasing with income
because of the graduated income tax rates. The tax subsidy declines once the taxable wage cap
for Social Security taxes is reached. Thus, there is a limit on the tax benefit from the payroll tax
credit for higher-income earners.
The maximum tax benefit provided by the RITC targeted to lower income individuals is
available for single individuals with incomes below $15,000 and is completely phased out when
a single individual's income reaches $25,000. For families, the maximum tax benefit provided
by the RITC is available for incomes below $25,000 and completely phased out when a family's
income reaches $60,000.

The President's initiative makes HSAs significantly more attractive to both the uninsured and to
lower-income individuals. Thus, the Treasury Department estimates that the President's
initiative would increase the number of HSAs by some 50 percent by 20 I O. This initiative would
also help control the growth in national health expenditures by encouraging the use of HSAs and
HDHPs.
The Larger Initiative
The tax provisions described above are part of a broader initiative outlined by the President that
includes: new national Portable HSA insurance plans; a proposal to permit the purchase of health
insurance policies across state lines; a proposal to allow associations of small businesses to band
together to purchase health insurance; medical liability reform; and a series of health information
technology actions.
•

•

The proposal to allow the purchase of health insurance policies across state lines would
allow Americans to buy the best health insurance for them, based on their own
circumstances, instead of being limited to only the policies available in their state. This
proposal would allow competition among health insurance plans from different states,
which will ultimately benefit consumers.

•

The President's Association Health Plans proposal would make it easier for small
businesses to provide health care for their employees by allowing small businesses to join
together through their trade and professional associations to provide health coverage,
giving them the same advantages of economies of scale, administrative efficiencies, and
negotiating strength enjoyed by big businesses and labor unions. By providing coverage
for thousands of employees at a time, association members would pay lower premiums
for better coverage.

•

The President's strategy for addressing the cost of medical liability includes commonsense reforms such as: (I) reserving punitive damages for egregious cases where they are
justified and limiting non-economic damages to reasonable amounts; (2) ensuring that old
cases based on old claims cannot be brought to court many years later; and (3) providing
that defendants pay judgments in proportion to their fault. Although the House has
passed these reforms three times, the Senate has not followed House's example.

•

The President's health information technology actions include: establishing the position
of the National Coordinator for Health Information Technology within the U.S.
Department of Health and Human Services (HHS); providing support for several health
IT projects to assess and develop solutions to key implementation issues, and
establishing the American Health Information Community (AHIC), a committee of both
public and private stakeholders formed to make recommendations on how to accelerate
the development and adoption of health IT.

Conclusion
I thank you for the opportunity to testify before the Committee today and look forward to your
questions.

Page 1 of 5

April 28, 2006
js-4222
Remarks by Robert Carroll
Deputy Assistant Secretary for Tax Analysis
U.S. Department of the Treasury
Before a Conference at
The James A. Baker III Institute for Public Policy
Is it Time for Fundamental Tax Reform? The Known, the Unknown,
and the Unknowable
Tax Policy and the Dynamic Analysis of Tax Changes

Thank you very much for the opportunity to speak before you today.
Before I begin my remarks I especially want to thank the organizers of this
conference at the Baker Institute. The subject of tax reform is a very important
subject and the Baker Institute should be congratulated for bringing together such a
fine group of individuals to discuss this issue. I also want to personally thank
George Zodrow and John Diamond for the fine work they have been doing for the
Treasury Department on tax reform. As some of you know, the Treasury
Department provided a dynamic analysis of the options the President's Tax Reform
Panel presented to the Secretary back in November. George and John were
essential for getting that work done and we continue to work with them as we
embark on creating a new Dynamic Analysis Division at the Treasury Department.
Often when I attend these types of conferences, I listen to folks from academia
provide their perspective on how the latest research informs, or, in some cases,
should inform, the analyses that government economists provide to policy makers
in Washington, DC. In this instance, the roles are a little reversed. I have the
opportunity to describe what we are working on in Washington, DC, specifically at
the Treasury Department, and tell you about some of the things we have done to
continue to integrate the latest research and thinking in academia more directly in
our work.
In the decade and a half that I have been in Washington, primarily with the Treasury
Department, in a variety of roles, there has been a substantial evolution in the
thinking underlying and the framework used to analyze tax policy changes - both
the revenue effects of tax changes and other types of analyses. This evolution has
been a reflection of the research that has been presented at conferences, published
in the academic journals, and used in PhD. programs, and the contributions that
some at the Treasury Department have made to this literature.
When folks were working on the Tax Reform Act of 1986 a shift had already begun
in the academic literature suggesting that households and businesses responded to
tax rates in important ways. The rate reductions and capital cost recovery
provisions in the 1981 reflected this view.
Prior to this period, however, saving was generally thought by many to be
unresponsive to changes in its after tax return and business investment
unresponsive to changes in the cost of capital. Labor supply decisions were not
thought to be responsive to changes in marginal tax rates until the work of Jim
Heckman in the early 1980s. Many other dimensions of labor supply were still
largely unexplored. The research finding large responses for capital gains and

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charitable giving dates back a bit earlier. But, I think it fair to say that prior to the
early 1980s, many, Including those in government providing analysis to policy
makers, had the view that a variety of economic decisions were not particularly
sensitive to changes In marginal tax rates and certainly did not view saving and
Investment as particularly responsive to changes in its tax treatment.
The 1986 Act probably came as close as we ever have to the economists ideal of
taxing comprehensive or Haig-Simons income. The tax base was broadened
made more encompassing, and focused on taxing income. Tax rates on indi~iduals
came down, tax rates on capital income went up. Income generally was more
comprehensively and uniformly taxed. The goal was to tax the return to investment
more uniformly to improve the intersectoral allocation of capital, with little focus on
intertemporal dimension.
Through the 1980s and into the 1990s, the research continued to move in the
direction of finding that individual and business decisions were more responsive to
changes in tax treatment than previously thought.
What was the catalyst at work here. Research began to use large micro data files first cross-sectional data, then longitudinal data - to more carefully examine and
quantify how tax rates affect various individual and business decisions.
Econometric techniques became much more sophisticated. I already mentioned
the early literature on the responsiveness of capital gains and charitable giving
using, incidentally, primarily tax return data residing at the Treasury Department.
The labor supply literature was finding greater responsiveness for secondary
earners. The earlier literature on the responsiveness of savings relied on time
series data and generally found that savings was relatively unresponsive to
changes its after-tax return. Detailed analysis of IRAs and 401 (k)s, although still
hotly debated, revealed considerable responsiveness. Importantly, investment has
also been found to be more responsive than initially thought.
This research has been followed be a growing literature on the taxable income
response, a more reduced form approach encapsulating a variety of taxpayer
responses. There is also an emerging literature on entrepreneurship that finds
lower tax rates increase the probability of becoming an entrepreneur, and increase
the likelihood that they hire workers, invest, and grow. Of course, this is not to say
that all elasticities tend to one or that there still does not remain considerable
uncertainty over the results reported in many of these areas. And, in some areas,
more recent research has shifted in the other direction, and found smaller
responses.
This growing empirically based literature on the responses to tax rates has
coincided with the development of complex numerically-based general equilibrium
models of the economy that emphasize the intertemporal aspects of consumption,
investment, and labor supply decisions. The research using these models has
shown that the tax system influences key intertemporal decisions and can have
profound effects on longer term economic growth and impose substantial economic
costs. A series of papers has also focused on the intertemporal aspects of taxing
capital income and found that under certain assumptions the optimal tax on capital
may be zero or even negative.
Almost as soon as the 1986 Act was enacted, it began to unravel. Over a period
spanning more than a decade we have seen the tax base become more narrow as
various tax preferences have been added back to the tax code and others
expanded. But, this research has served as a basis for some of the shifts in policy.
Tax rates on labor first rose, but more recently, in 2001 and 2003, were reduced.
We have seen the tax on key aspects of capital income fall - first the maximum 20
percent rate on capital gains enacted in 1997 and more recently the 15 percent tax
rate on both capital gains and dividends enacted in 2003. We have seen increasing
consideration of faster write-off of investment - an expansion of section 179
expensing for investment in equipment for small businesses enacted in 2001. The
enactment of bonus depreciation, albeit temporary and now sunset. These
provisions helped to encourage investment and had as their intellectual.
underpinnings the notion that investment could be encouraged by redUCing the cost
of capital. There are continuing murmurs over corporate tax rates that are too high

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Page 3 of5
relative to our major trading partners.
The Office of Tax Policy at the Treasury Department and other policy shops in
Washington. DC, have integrated a great deal of this research and thinking into the
analyses they provide to inform policy discussions. The taxable income elasiticity is
used when estimating the revenue effect of changes in tax rates. The charitable
giving elasiticities reported in the literature are used to analyze the effect of
proposed changes in the charitable deduction. The capital gains elasticities are
used in the work product of the office. Changes in the estate tax are assumed to
affect the level of charitable giving as it influences how much individuals who are
likely to be subject to the estate tax give away prior to death. And so it goes.
Behavior is at least contemplated for virtually all the proposals that the Treasury
Department analyzes and incorporated where thought to be relevant and supported
by empirical evidence from the literature. From the excise tax on bows and arrows
and fishing tackle boxes to changes in the tax treatment of health care to changes
in the tax rate schedule.
Incorporating these responses is important because the failure to do so gives an
inaccurate depiction of the effects of policy changes. This is a somewhat obvious
point, but is worth highlighting. Consider a proposal to increase tax rates. Without
incorporating the associated reduction in reported taxable income associated with
the higher tax rates, the revenue gain from the higher tax rates would be over
stated. Policy makers would be left with the mistaken impression that the policy
would raise more revenue than would actually come into the Treasury. The deficit
would be higher than they would have anticipated.
Equally important, policy makers would not have the information to properly
compare and consider the tradeoffs between different policies. Not all tax cuts or
tax increases are created equal. Some impose higher costs or lower gains to the
economy than others. Failure to fully include the behavioral responses introduces
biases in policy decisions. Policy makers might be less willing, for example, to
accept tax rate increases if they raised less revenue than they initially thought.
But just factoring in behavioral responses, as we do now, still tells a story that is
incomplete. As this audience knows well, the welfare cost of taxes is related to the
square of the tax rate. Incorporating behavioral responses might provide a better
estimate of the revenue cost, but it leaves out an important component of the cost
of higher tax rates.
Now let me say a few words about the Treasury Department's initiative to expand
its capability for dynamic analysis. Since this initiative was announced with the
release of the President's FY 2007 Budget in early February, I have grown to better
appreciate the different perspectives brought to this issue. There are some who
have a long-standing interest in this subject, but who are very concerned that we at
Treasury may not do this the right way. Then there are others who are concerned
that dynamic analysis may politicize the work we do at Treasury. We at Treasury
are well aware of the sensitivity of this issue and we take these concerns very
seriously.
The real test for this endeavor - how it is received, whether it is a success or
failure, and its longevity - depends crucially on its execution. So, I would like to
outline some guiding principles that help inform our thinking and we are applying to
this work.
First, we are starting with dynamiC analysis - estimating how major changes in tax
policy can affect the major macro-economic variables. We are not starting with
dynamic scoring, although our work make evolve in that direction. Conventional
revenue estimates will continue to be one of our bread and butter products.
Second, we plan to be as forthcoming and transparent with our approach as
possible. The models used for this type of work are sensitive to key assumptions,
so we need to clearly divulge those assumptions and release enough information
regarding the models we are using and the results so that those outside of Treasury
can understand and evaluate the work we are doing. This level of transparency

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Page 4 of 5

might well be viewed as a departure from how we have proceeded with other types
of analyses, such as revenue estimates, for example
Third, we are very interested in long-run effects, as well as the effects along the
transition path. One of the major benefits and motivations for dynamic analysis is
focusing the attention of policy makers on the long-run benefits or costs of policy
changes and the tradeoffs between different policies. This is In contrast to the five
and ten year budget windows routinely used for evaluating the revenue effect of
proposals today.
Fourtll, sensitivity analysis is critically Important and will be a central part of our
work. As I mentioned, the models used for this type of analysis are sensitive to key
assumptions, especially how a tax change is financed, so we need to carefully
consider those assumptions and report how the results vary With different sets of
assumptions. The Congressional Budget Office (CBO) and the Joint Committee on
Taxation (JCT), In some respects, have dealt with sensitivity by using a portfolio of
models that each emphaSize different dimensions of the analysis. Treasury is very
much playing catch up and will, at least initially, focus on a more narrow set of
policies, so we are unlikely, at least Initially, to use a broad set of models, but we
will consider the senSitiVity of the results to key assumptions.
Fifth, we very much want to have an open and continuing public dialogue on our
work. This is simply an extension of transparency. PartiCipation in conferences like
this and those that Jim Poterba and Martin Feldstein have organized through the
NBER over the past several years provide a very constructive environment from
which we can openly discuss our work outside of the confines of WaShington, DC.
This initiative should be viewed very much as building on the continuing evolution of
the manner In which we have integrated the behavioral aspects of taxation on
economic decision making in all our work at Treasury. And, it should be
remembered that we already exercise considerable judgment, and I would say good
Judgment, in the work we do on conventional revenue estimates and a variety of
other analyses.
The new dynamiC analysis division is a very natural extension of the work we are
already doing. The JCT and the CBO have already been doing this type of work for
some time. In the case of CBO, they have been doing this work, in some manner,
for many years In many respects, we are playing catCh-up to these other
organizations.
ThiS work IS also very Important to the next subject to which I would like to turn: tax
reform. To be clear, tax reform IS alive and well at the Treasury Department. As
you know, the President's Tax Reform Panel delivered its final recommendations to
Secretary Snow on November first of last year and Treasury is evaluating those
options. They serve as a very firm foundation, a solid starting point for our work on
tax reform.
But tax reform IS a very difficult issue and it is an issue that comes along
infrequently, perhaps every twenty years or so. Secretary Snow has directed us to
proceed slowly and carefully, to thoroughly consider all options and avenues to
reform the tax code with an eye for coming up with a plan that is practical and
politically viable. We are not working under any specific public timetable. We very
much want to get this nght and will take the time we need to do so.
It is important to note that the reasons for reform remain. As you know all too well,
the tax system is extremely complex imposing a compliance burden on taxpayers of
$140 billion per year. Just reducing this compliance burden by one third would
produce an annuity to the economy of nearly $50 billion each year, forever.
The AMT problem still looms on the horizon, capturing some 56 million or one-half
of all taxpayers by 2016.
The benefit of reducing the compliance burden is small in relation to the benefit of

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reducing the economic costs of the tax system Some estimates suggest that
reform could ultimately increase output by 5 to 10 percent In a 12 trillion economy,
that would ultimately translate Into an increase in output of $600 billion to $1.2
trillion.
To be clear, these estimates are for very fundamental reforms of our tax code.
There are many issues that would need to be addressed in a legitimate and realistic
proposal. How progressive would the rate structure need to be to address fairness
and what is the extent of transition relief that will need to be provided are just two.
But, Just as an observation, In some of the options the tax panel put forward, they
were able to provide substantial simplification, increase growth - increasing output
by as mush as 6 percent -- while acllieving the same or slightly more progressive
distribution of the tax burden than we have today and providing at least some
transition relief.
So long as the tax system continues to fall under its own weight and there are real,
tangible benefits from reform, tax reform Will remain viable both within Washington,
DC. and beyond.
Again. I thank you very much for the opportunity to share some of these thoughts
with you. I am happy to take your questions.

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May 2.2006
JS-4223

US Treasury Assistant Secretary
To Visit Indiana Industrial Manufacturer
U.S. Treasury Assistant Secretary for Financial Institutions Emil Henry will tour the
Toyota Industrial Equipment Manufacturing facilities in Columbus, Ind. on Friday,
May 5. Assistant Secretary Henry will also visit employees and deliver remarks
about President Bush's economic plan and the role of U.S. investment from abroad.
The Assistant Secretary for Financial Institutions serves as a top advisor to the
Secretary of Treasury on financial institutions and securities markets legislation and
regulation, legislation affecting the federal agencies that regulate or insure financial
institutions and the promotion of consumer access and protection in financial
services. Assistant Secretary Henry brings more than 20 years of experience on
Wall Street and in the financial community to the position.

Who:
Assistant Secretary for Financial Institutions Emil Henry
What:
Site Tour and Remarks
When:
Friday. May 5 800 a.m. (EDT)
Where:
Toyota Industrial Equipment Manufacturing Facilities
5555 Inwood Drive
Columbus. Indiana

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May 2,2006
2006-5-2-12-27 -4 7 -1064
U.S. International Reserve Position
The Treasury Department today released US reserve assets data for the latest week. As indicated in this table, U.S. reserve assets
totaled $66,937 million as of the end of that week, compared to $65,792 million as of the end of the prior week.
I. Official U.S. Reserve Assets (in US millions)
April 21, 2006

I
TOTAL

65,792

11. Foreign Currency Reserves 1

Euro

la. Securities
I Of which. issuer headquartered in the US

11,534

Yen

TOTAL

10,851

22,385

II
II
II
II

16,645

April 28, 2006

66,937

Euro

11,738

I
I

Yen

TOTAL

11,149

I
I

~~,887

17,109

I b. Total deposits with:
Ibi. Other central banks and BIS

I b ii. Banks headquartered in the US.
Ibii Of which, banks located abroad
I b IIi Banks headquartered outSide the US.

11,366

5,279

II
II

Iblii Of which, banks located in the U.S.

0
0

13 Special Drawing Rights (SDRs) 2

8,273

Other Reserve Assets

7,446

5,424

12. IMF Reserve Position 2

14 Gold Stock 3

11,685

11,043

I
I
I

7,530

I
I
I
I

8,368

11,043
0

II. Predetermined Short-Term Drains on Foreign Currency Assets
April 21, 2006
II
I

Euro

1. Foreign currency loans and securities

II
II

Yen

April 28, 2006

II
II

TOTAL

II
II

Euro

Yen

II
II
2. Aggregate short and long positions in forwards and futures in foreign currencies vis-a-vis the U.S. dollar
12.a. Short positIOns

12.b. Long posiflons
13 Other

II
II
II

0
0

TOTAL

II
II

I
I

III. Contingent Short-Term Net Drains on Foreign Currency Assets
April 28, 2006

April 21, 2006
I

II
I

Euro

Yen

TOTAL

Euro

Yen

TOTAL

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1 Contingent liabilities in foreign currency
1.a. Collateral guarantees on debt due within 1
year
11.b. Other contingent liabilities

2. Foreign currency securities with embedded
options

3. Undrawn, unconditional credit lines

13. a. With other central banks
3.b. With banks and other finanCial institutions

I Headquartered in the US

II
II

3.G. With banks and other fmancial instltulions
Headquat1ered outside the US

4. Aggregate short and long positions of options
in foreign
.
ICurrencies vis-a-vis the U.S. dollar
14 a Short positions
14a.1. Bought puts

II
II

I
II

14.a2 Written calls
14.b. Long positions
14b 1. Bought calls
4b2 Written puts
1

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 SDRldollar exchange rate for the reporting date. The entries for the latest week reflect any
necessary adjustments, including revaluation, by the US 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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May 3, 2006
JS-4224
Assistant Secretary for Financial Institutions Emil W. Henry, Jr. May 2006
Quarterly Refunding Statement

We are offering $34.0 billion of Treasury securities to refund approximately $59.9
billion of privately held securities maturing or called on May 15 and to pay down
approximately $25.9 billion. The securities are:
•
•

A new 3-year note in the amount of $21.0 billion, maturing May 15, 2009;
A new 10-year note in the amount of $13.0 billion, maturing May 15, 2016;

These securities will be auctioned on a yield basis at 1:00 PM EDT on Tuesday,
May 9 and Thursday, May 11, respectively. Both notes will settle on Monday, May
15. The balance of our financing requirements will be met with weekly bills, monthly
2-year and 5-year notes, the June 1O-year note reopening, and the July 10-year
TIPS and 20-year TIPS reopening. Treasury also is likely to issue cash
management bills in early June.
Treasury Securities Lender of Last Resort (SLLR) Facility White Paper

Since last summer, Treasury has been studying the idea of creating a securities
lending facility. On April 26, we released a white paper that identifies some
important policy considerations and outlines one of many possible structures for
such a facility. The paper, "Consideration of a Proposed Securities Lending
Facility," is available on the Treasury website at
http,' 'www t rco s. gov 10 fflcc s·(J 0 I1lCS tl C- fillO [1 cel d (; lJ t-l1liJ 11a CJc III CIll! secli 1"1 tl es-I CIl din g-

faCility _0420200(:3 pejf. We hope the publication of the white paper will stimulate
more detailed discussion and feedback on the basic question of whether a
Securities Lender of Last Resort facility should be established and, if so, the precise
manner in which it should be structured.
Thirty-Year Bond
Treasury is continuing to examine how our calendar can best accommodate both
the February-August and May-November coupon cycles. We expect to announce
any change to the issuance calendar for the 30-year bond on August 2, 2006. No
calendar change would occur before calendar year 2007.

The 30-year bond auction in August will be a reopening regardless of price
movements in the bond. The IRS original issue discount (010) rules provide that
additional Treasury securities have the same terms as the original Treasury
securities if they are issued not more than one year after the original Treasury
securities were first issued to the public.
Other Policy Matters Under Consideration
As part of our efforts to increase participation in Treasury securities auctions and to
achieve the lowest possible borrowing costs, we are considering the following
potential changes to the auction process.
Changes to Restrictions and Reporting on Bidding Procedures
We are considering whether changes to the Treasury auction enVIronment,
including the adoption of uniform-price auctions for all marketable Treasury
securities in November 1998, has diminished the need for the following rules that

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Page 2 of2

now may impose unnecessary burdens on some auction participants.

Proposed Change 1: Current rules prohibit a bidder from submitting bids both
noncompetitively and competitively in the same Treasury auction. From time to
time, noncompetitive awards have been rejected because participants were
unaware of an affiliate's auction activities. While this rule was necessary in a
multiple-price auction environment, it does not serve the same purpose in a singleprice environment. Rejecting these bids causes Treasury's borrowing costs to rise
at the margin. We are considering allowing entities to bid both competitively and
noncompetitively in Treasury marketable securities auctions while maintaining the
$5 million limit on noncompetitive bids.
Proposed Change 2: Treasury is also contemplating changes to the regulation
requiring any customer awarded a par amount of $500 million or more in an auction
to send Treasury a written confirmation of its bid, and a statement indicating
whether it had a reportable net long position. Put in place in 1993, the reporting
threshold has never been changed despite changes in average auction sizes and
transactions volumes. Given that auction sizes vary by security and have risen over
time, we are considering raising the customer confirmation reporting requirement
threshold amount.
Early Announcement of Non-Competitive Awards
As part of our efforts to improve transparency and auction performance, we are
considering public reporting of noncompetitive awards in Treasury auctions prior to
the close of competitive bidding.
Please send comments and suggestions on these subjects or others relating to
Treasury debt management to del)! ITl;III;l(Jernen!@do.treasgov.
The next quarterly refunding announcement will take place on Wednesday, August
2,2006.
-30-

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May 3,2006
JS-4225
Report to Th: Secretary <?f The Treasury From The Treasury Borrowing
Advisory Committee Of The Bond Market Association
May 2,2006
Dear Mr, Secretary:
Since the Committee's last meeting in February, the economic expansion has
displayed continued resilience in the face of persistently high energy costs. Real
GOP expanded at a solid 4.8% annual rate in the first quarter, partly reflecting the
rebound from last year's hurricanes and a relatively mild winter. Recent readings
reveal healthy improvements in employment and new orders for capital goods in
March. Rising interest rates have begun to cool housing markets, but the financial
backdrop remains reasonably supportive of trend-like economic expansion over the
balance of 2006.
Energy markets are an ongoing concern for the economy. Crude oil prices have
surged past $70/bbl for West Texas Intermediate as refiners and others continue to
hedge against the risk of supply disruptions. Gasoline markets remain stretched
with prices in April nearing post-Katrina highs, up 20% in the past month.
Consumer anxieties about gasoline prices have been offset in part by continued
good news from labor markets where monthly payroll gains averaged 197,000 in
the first quarter and the jobless rate eased to an expansion low of 4.7%. Similarly,
corporate profits continue to rise at a double-digit pace. As of April 28, with more
than two-thirds of S&P 500 companies reporting, 85% had met or exceeded
expectations for the first quarter.
Headline inflation has remained elevated in recent months, primarily reflecting the
jolt from higher energy costs. Core measures have held near 2%, as the passthrough from higher energy and material prices has been limited. Despite
tightening labor markets, compensation gains have been moderate and solid
productivity appears to be buffering potential cost pressures. Risks of greater price
pressures still exist because the cumulative rise in energy costs remains a broader
threat, while declining economic slack could raise costs for labor and other
resources.
Against this backdrop, yields on U.S. Treasury securities have risen about a half
percentage point to new cyclical highs across the maturity spectrum. While forward
rates have firmed in anticipation that additional Fed tightening could carry overnight
rates to 5 %%, the selloff also suggests that the unusual decline in term premiums
of recent years may be reversing amid new uncertainties about the path of global
interest rates. Longer-dated yields have topped 5% for the first time in four years
and the curve has shifted from a slight inversion to a positive slope from two- to tenyears' maturities.
Just past the halfway point, the 2006 Federal budget deficit is running along a path
comparable to the previous fiscal year, or about 2 %% to 2 '%% as a percent of
GOP. Tax receipts are climbing at a solid clip but public spending, especially on
health care, also is rising rapidly.
Against this economic and financial backdrop, the Committee considered its

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charge. In the first section, Treasury presented a framework for evaluating its
portfolio. composition. Treasury asked the Committee for its views with respect to
the applicability of this framework in contemplating future debt management policy
choices and for suggestions on how to further develop associated guidelines on
portfolio composition.
Charts were presented listing the goals of optimization including
minimization
of expected costs over time, variability of interest cost over
time, operational
risks and the maximization of primary and secondary
market liquidity. Treasury described its three stage project outline and its goal of
creating an optimizer that could be used for future liability management policy in a
cost minimizing fashion.
Members commented on the proposal's perceived benefits such as the added
value this approach would bring to bear on risk management scenario analysis as
well as greater transparency.
A member asked if constraints were being considered for inclusion in the model,
such as targets for the average maturity of the debt portfolio. Another
recommended a constrained optimization approach as the preferred course. One
member suggested that it might be difficult to measure the cost of factors such as
rollover risk and liquidity. Members agreed that sensitivity around many needed
assumptions or inputs would be a limiting factor. Others suggested that the asset
side of the balance sheet should be taken into consideration for duration purposes.
Treasury stated a desire to present its framework more substantially in August.
In the second part of the charge, Treasury asked for the Committee's views on the
establishment of a securities lending facility. Treasury asked the Committee to
discuss aspects of a white paper outlining the construct of a Securities Lender of
Last Resort (SLLR) facility which they have recently authored and distributed. In
particular, Treasury asked for comment on the potential costs and benefits as well
as the proposed structure envisioned in the paper. Treasury officials took pains to
inform the Committee that the establishment of the facility would most likely require
a change in statute and that implementation was not a forgone conclusion.
Additionally, Treasury reported that mixed opinions are prevalent among a broad
group of market participants they have polled on the subject. The Committee's
views were similar in their diversity and consensus opinions were not evident post
discussion. Several members felt that the market has moved to address chronic fail
potential and that further official influence would not be welcome. These members
felt that additional expenses associated with implementation would be additive to an
already high cost base associated with maintaining fully compliant Treasury
Dealerships. Additionally they articulated views suggesting that auction taps, large
position reporting and suasion were ample deterrents against chronic fails, and as
such, saw little need to add another protective measure. A member felt that
Treasury borrowing costs would clearly rise with implementation due to
a perception of less scarcity value associated with predictably higher repo
rates. Other members felt that establishment of the proposed facility would allow for
unwanted administrative intrusion which could lead to a deterioration in market
efficiency. Another member suggested that the facility be readied in advance of a
time when it could be more obviously needed. A member, argued that in nearly all
instances the proposed facility would not be needed. As such, the member
suggested that a fairly rigid set of implementation guidelines be included in any
proposed legislation that Treasury might draft, so to limit by design, the potential for
interference. Other members acknowledged perceived benefits from the proposed
SLLR but were quick to voice concerns about any facility which might advance
arbitrary administrative decisions. In sum, views as to the proposed facility's worth
and construct differed but were roughly in balance.
In the third part of the charge, Treasury asked for the Committee's views on the
bond auction cycle and whether or not it should be changed in order to assure a
liquid STRIPS curve and meet expected demand from a variety of sources.
Treasury specifically asked for comment on whether or not the Committee felt a
May-November bond auction cycle should be added to the current schedule ..
Members expressed support for the introduction of a May-November cycle citing
expected secular demand increases from pension managers for long duration fixed

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Page 3 of3

income products over the coming years. They stated that a high demand profile for
long Treasuries will likely remain a feature from this type of buyer for the
foreseeable future and that ensuring a steady supply will attract more buyers and
lower borrowing costs over time. While they felt that Treasury had no need to
change its auction cycle in the near term, most members felt that moving to
a quarterly cycle would be the best choice at some point Given Treasury's stated
desire to not increase bond supply dramatically in the near term, one member
cautioned against a quarterly cycle where auction sizes would be too small to
ensure liquidity and normal borrowing costs for short sellers. Members also
discussed additional long duration issuance as an option for Treasury, namely
floating rate and 50-year bonds, but cautioned Treasury to not pursue any near
term changes in products offerings.
In the final section of the charge, the Committee considered the composition of
marketable financing for the April-June quarter to refund $59.9 billion of privately
held notes and bonds maturing or called on May 15, 2006 as well as the
composition of Treasury marketable financing for the remainder of the April-June
quarter, including cash management bills, as well as the composition of Treasury
marketable financing for the July-September quarter. To refund $59.9 billion of
privately held notes and bonds maturing May15, 2006, the Committee
recommended a $21 billion 3-year note due 5/15/09 and a $13 billion dollar 10-year
note due 5/15/16. For the remainder of the quarter, the Committee recommended a
$22 billion 2-year note in May and June, a $15 billion 5-year note in May and June,
and a $9 billion reopening of the 1O-year note in June. The Committee also
recommended a $15 billion 13-day cash management bill issued June 2, 2006 and
maturing June 15, 2006 as well as an 8-day cash management bill issued June 7,
2006 and maturing June 15, 2006. For the July-September quarter, The Committee
recommended financing as found in the attached table. Relevant features include
three 2-year note issuances monthly, three 5-year note issuances monthly, one 3year note issuance in August, a 1O-year note issuance in August with a reopening
in September, a reopening of the 30-year bond in August, as well as a 10-year
TIPS issuance in July and a 20-year TIPS reopening in July.
Respectfully submitted,
Ian G. Banwell
Chairman
Thomas G. Maheras
Vice Chairman
Attachments (2)

REPORTS
•
•

02 Tables
03 Tables

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315/2007

US TREASURY FINANCING SCHEDULE FOR 2nd QUARTER 2006
BILLIONS OF DOLLARS

ISSUE

ANNOUNCEMENT
DATE

AUCTION SETTLEMENT
DATE
DATE
4-WK

4-WEEK AND
3&6 MONTH BILLS

3/30
4/6
4/13
4/20
4/27
5/4
5/11
5/18
5/25
6/1
6/8
6/15
6/22

CASH MANAGEMENT BILLS
3/28
14-DAY BILL
Matures 4/17

4/3
4/10
4/17
4/24
5/1
5/8
5/15
5/22
5/30
6/5
6/12
6/19
6/26

4/6
4/13
4/20
4/27
5/4
5/11
5/18
5/25
6/1
6/8
6/15
6/22
6/29

10.00
8.00
8.00
8.00
8.00
8.00
16.00
2000
20.00
14.00
8.00
800

1000

OFFERED
AMOUNT
3-MO
15.00
14.00
14.00
14.00
15.00
15.00
16.00
1700
18.00
18.00
18.00
18.00
1800

MATURING
AMOUNT

NEW
MONEY

50.00
52.00

-11.00
-17.00
-27.00
-22.00
-10.00

6-MO
14.00
13.00
13.00
13.00
14.00
14.00
14.00

62.00
57.00
47.00
45.00
44.00

15.00
15.00
1500
15.00
15.00
15.00

44.00
45.00
45.00
53.00
56.00
52.00

8.00
800
2.00
-12.00
-15.00

541.00

652.00

-111.00

-8.00
2.00

-9.00

3/30

4/3

20.00

0.00

11-DAY BILL

4/3
Matures 4/17

4/6

4/7

13.00

0.00

10-DAY BILL

4/3
Matures 4/17
4/10
Matures 4/17

4/6

4/7

8.00

0.00

4/12

4/13

17.00

0.00

4-DAY BILL

13-DAY BILL

5/30
Matures 6/15

6/1

6/2

15.00

0.00

8-DAY BILL

6/5
Matures 6/15

6/6

6/7

10.00

0.00
0.00

COUPONS

CHANGE
IN SIZE
10-Year TIPS (R)
5-YearTIPS

4/10
4/20

4/12
4/25

4/17
4/28

8.00
11.00

2-Year Note
5-Year Note

4/24
4/24

4/26
4/27

5/1
5/1

22.00
14.00

26.02

9.98

3-Year Note
10-Year Note

5/3
5/3

5/9
5/11

5/15
5/15

21.00
1300

59.95

-25.95

2-Year Note
5-year Note

5/22
5/22

5/24
5/25

5/31
5/31

22.00
15.00

1.00

24.25

12.75

10-Year Note (R)

6/5

6/8

6/15

9.00

1.00

2-Year Note
5-Year Note

6/22
6/22

6/26
6/27

6/30
6/30

22.00
15.00

24.57

12.43

172.00

134.78

37.21

8.00
11.00

2.00

9.00

Estimates are italicized

NET CASH RAISED THIS QUARTER:

R " Reopening

-73.79

US TREASURY FINANCING SCHEDULE FOR 3rd QUARTER 2006
BILLIONS OF DOLLARS

ISSUE

ANNOUNCEMENT AUCTION SETTLEMENT
DATE
DATE
DATE

4-WEEKAND
3&6 MONTH BILLS

6/29
7/6
7/13
7/20
7/27
8/3
8/10
8/17
8/24
8/31
9/7
9/14
9/21

CASH MANAGEMENT BILLS
8/29
14-DAY BILL

7/3
7/10
7/17
7/24
7/31
8/7
8/14
8/21
8/28
9/5
9/11
9/18
9/25

7/6
7/13
7/20
7/27
8/3
8/10
8/17
8/24
8/31
9/7
9/14
9/21
9/28

4-WK

OFFERED
AMOUNT
3-MO

6-MO

12.00
15.00
15.00
15.00
15.00
15.00
15.00
15.00
15.00
15.00
15.00
8.00
8.00

18.00
18.00
18.00
18.00
18.00
18.00
18.00
18.00
18.00
17.00
17.00
17.00
17.00

16.00
16.00
16.00
16.00
16.00
16.00
16.00
16.00
16.00
15.00
15.00
15.00
15.00

MATURING
AMOUNT

NEW
MONEY

44.00
38.00
39.00
41.00
44.00
47.00
48.00
50.00
52.00
52.00
52.00
50.00
48.00

2.00
11.00
10.00
8.00
5.00
2.00
1.00
-1.00
-3.00
-5.00
-5.00
-10.00
-8.00

612.00

605.00

7.00

8/31

9/1

22.00

0.00

9/6

9/7

15.00

0.00

Matures 9/15
8-DAY BILL

9/5
Matures 9/15

0.00
COUPONS

CHANGE
IN SIZE
10-Year TIPS

7/10

7/13

7/17

10.00

1.00

20-Year TIPS (R)
2-Year Note
5-Year Note

7/20
7/24
7/24

7/25
7/26
7/27

7/31
7/31
7/31

8.00
23.00
15.00

2.00
1.00

3-Year Note
10-Year Note
30-Year Bond (R)

8/2
8/2
8/2

8/7
8/9
8/10

8/15
8/15
8/15

22.00
14.00
14.00

1.00
1.00

2-Year Note
5-year Note

8/24
8/24

8/28
8/29

8/31
8/31

24.00
15.00

1.00

10-Year Note (R)

9/5

9/7

9/15

9.00

9/25
9/25

9/27
9/28

10/2
10/2

24.00
16.00

2-Year Note
5-year Note

194.00

17.25

-7.25

22.55

23.45

22.57

27.43

23.82

15.18
9.00

1.00

23.77

16.23

109.95

84.04

Estimates are italicized
NET CASH RAISED THIS QUARTER:

R = Reopening

91.04

Page 1 of 4

May 3, 2006
JS-4226
Minutes Of The Meeting Of The Treasury Borrowing Advisory Committee Of
The Bond Market Association
May 2,2006
The Committee convened in closed session at the Hay-Adams Hotel at
1 ~ :40 a.m. All Committee members were present except Gary Cohn and Rick
Rle~er. Under Secretary Randy Quarles, Assistant Secretary Emil Henry, Deputy
Assistant Secretary James Clouse and Office of Debt Management Director Jeff
Huther welcomed the Committee and gave them the charge.
The Committee addressed the first question in the Committee charge
(attached) regarding development of a framework for evaluating Treasury's liability
portfolio. Deputy Assistant Secretary Clouse presented a series of slides regarding
Treasury efforts to develop an analytical framework for evaluating Treasury's
portfolio choices on issues such as maturity composition, the appropriate mix of
nominal versus inflation-protected securities, and other aspects of debt
management. He indicated that Treasury expects to have preliminary materials for
the Committee to review at the August Quarterly Refunding.
In their discussion of the proposed framework, one Committee member asked
whether Treasury would share the framework with the market or keep this material
in-house. Mr. Clouse indicated that Treasury would need to review this matter and
would welcome the advice of the Committee on this score. There was some
concern public release of a framework might give a false sense of confidence about
what Treasury would do in terms of future issuance. Others noted that public
release of aspects of an analytical framework would enhance Treasury market
transparency. Several Committee members noted that they felt that the portfolio
analysis project that Treasury was undertaking was better described as a
"framework" than a "model." A framework was viewed as a tool that could inform
Treasury's decision making process rather than a rigid model that would generate
explicit prescriptions for debt management decisions.
The Committee then discussed the integration of average maturity into a modelling
framework. Mr. Clouse noted that while the framework would imply an average
maturity, it would not be a framework constraint. One Committee member noted
that the model, as described by Mr. Clouse, would implicitly address average
maturity through expected interest costs and variance of interest costs - i.e., that
big changes in average maturity would show up through these variables.
One Committee member asked whether Treasury should think about an assetliability management (ALM) framework as opposed to a framework that was purely
focused on liabilities. Under Secretary Quarles noted that the U.S. government's
primary asset was its ability to tax and that an asset of this type was difficult to
evaluate. A different Committee member noted that France had undertaken an
ALM review and noted that this review had served, in part, to inform France's
decision to issue inflation linked debt.
Finally, one Committee member stated that the inputs required for this
framework would be difficult to estimate and suggested that it would be useful to
conduct sensitivity tests of the outputs to user defined assumptions. Another
member suggested that, to ensure consist~ncy. of units of measure, it mi~ht. be
useful to separate the interest cost and vanability components from the .lIqUldlty and
rollover costs and view the liquidity and rollover components as constraints.

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The Comm,ittee then addressed the second question in the charge regarding the
Colllmittee s views on the establishment of a backstop Treasury securities lending
facility. Director Huther presented the Committee with several slides and asked
whether the Committee could discuss the pros and cons of such a facility and if
they had any specific comments on the structure as described in the recentlyreleased public discussion paper. Assistant Secretary Henry followed up, noting
that to date Treasury had received mixed feedback from the market on the facility
and that the Committee should not conclude that Treasury was set on this path
merely because Treasury had raised the question.
In their discussion of the securities lending facility proposal, Committee members
noted that the market was working on solutions to resolving fails and thus it was not
clear that a Treasury facility was needed. One member observed that the cost to
dealers of implementing such a facility had not been quantified. Another member
agreed that it might make sense for Treasury to wait and see whether the new
mechanisms that the market was working on (particularly the potential for greater
activity in repo at negative interest rates) would solve the problem. A different
member questioned how a securities lending facility would solve a structural
imbalance in supply and demand for a security. Finally, another member observed
that in crisis circumstances Treasury could always reopen a security to alleviate
fails and stated that this was probably an adequate tool in extreme situations.
By contrast, a different Committee member observed that the reopening Treasury
undertaken five years ago in the aftermath of September 11 th had only brought
forward planned supply as opposed to fundamentally changing its auction
calendar. He noted that it could be useful for Treasury to have authority to engage
in securities lending. Another Committee member argued that unscheduled
reopenings could change investor perceptions of Treasury - i.e., run counter to
Treasury's regular and predictable approach to debt management and result in a
risk premium. A different member disagreed stating that an unscheduled reopening
once every five or ten years in response to a severe market dislocation was unlikely
to affect the market's perception of Treasury debt management.
One Committee member questioned whether creation of a securities' lending facility
might increase Treasury's borrowing cost by reducing the scarcity value of Treasury
securities. He also said that he believed that such a facility could reduce the
potential costs to market partiCipants of being short Treasuries.
A different Committee member stated that while 99 percent of the time it was better
for the government to not interfere in markets, the creation of a securities lending
facility as a potential tool to address extreme fails situations was beneficial and
worth the effort. This member noted that such a facility could reduce concerns
about tail risk which would be of benefit to market participants. However, the
member stated that Treasury needed to reflect more on how and when the facility
would be used. Another member stated that he thought such a facility would have
been appropriate for Treasury to have used after September 11, 2001, but that it
would have been inappropriate for Treasury to have used it in 2003. He stated that
he didn't see any harm in Treasury having another tool at its disposal.
Under Secretary Quarles asked whether additional supply provided by a securities
lending facility after September 11th would have been preferable to the Treasury's
decision to reopen a security. A Committee member stated that the biggest
problem after September 11th was accounting and that once the accounting issues
were cleared up, fails remained in only a few securities. A different member
reminded others that following September 11th, the TBAC had recommended that
Treasury establish a securities lending facility as a means of addressing crises
rather than relying upon unscheduled reopenlngs. Another member observed that
the next crisis was unlikely to be similar to September 11 th - hence It probably
wasn't useful to overly focus the discussion of the pros and cons of a securities
lending facility on the specifics of that event. A member asked others on the
Committee if a securities lending facility wasn't a more moderate response to a
situation of extreme fails than an unscheduled reopening. Another member
responded that it was but only if such a securities lending facility was used very
selectively. In closing, the Chairman noted that Committee members had varied
views and opinions on this topic which he would try to represent as best as pOSSible

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Page 3 of 4

in the Committee's summary.
Finally, the Committee was asked about options for Treasury bond issuance going
forward. Director Huther presented a slide describing several options and asked
the Committee whether Treasury should seek to reinvigorate the May/November
strip. One Committee member said that Treasury should move to quarterly bond
issuance. He also noted that he believed quarterly auctions would imply issuance
at the upper end of the range Treasury had given the market as initial guidance on
supply. Another member asked if Treasury moved to quarterly auctions if the issue
sizes might be too small and cause them to trade special. The first member replied
that they were saying the same thing - i.e., that if Treasury were to move to
quarterly auctions it would need to increase the size of annual bond issuance. This
member also noted the gap in maturities between 2031 and 2036, and suggested
that having May/November STRIPS, in addition to February/August STRIPS, would
make a more complete curve. This member stated that he thought there was
sufficient demand to move to quarterly auctions. However, another member
cautioned that the pension demand for long-dated bonds was not ubiquitous and
that while some companies are moving towards immunization strategies; other
pension funds are moving in the opposite direction. Finally, one Committee
member asked whether Treasury should consider issuing 50-year bonds.
Committee members discussed this briefly and concluded that Treasury should first
meet any additional long-dated demand through the expansion of 30-year
issuance.

The meeting adjourned at 1 p.m.
The Committee reconvened at the Hay-Adams Hotel at 6:00 p.m. All the
Committee members were present. The Chairman presented the Committee report
to Assistant Secretary Henry. A brief discussion followed the Chairman's
presentation but did not raise significant questions regarding the report's content.
The meeting adjourned at 6:20 p.m.

Jeff Huther
Director
Office of Debt Management
May 2,2006
Certified by:

Ian Banwell, Chairman
Treasury Borrowing Advisory Committee
Of The Bond Market Association
May 2,2006

Attachments:
Link to the Treasury Borrowing Advisory Committee discussion charts
US TreClsury - Office of [JOlllcstlC FIIli111Ce

Treasury Borrowing Advisory Committee Quarterly Meeting
Committee Charge - May 2, 2006

http://www .•.reas.gov/press/relcasc~jjs4226.htm

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Page 4 of 4

Portfolio Composition
In developing a framework for evaluating our portfolio, we have modeled
characteristics of a steady state portfolio that could be used to address basic
questions of optimal portfolio composition. Recognizing the limitations inherent in
models of this sort. we would like the Committee's views on this framework in
contemplating future debt management policy choices and Committee suggestions
on how to further develop guidelines on portfolio composition.
Securities Lending Facility
In August and November 2005, we sought the Committee's views on the
establishment of a backstop Treasury securities lending facility. The Committee
expressed the view that in addition to not inadvertently disrupting a well functioning
market, the benefits of such a facility must outweigh the costs. Treasury recently
distributed to the public a white paper outlining a prototype of a Securities Lender of
Last Resort (SLLR) facility. We would like the Committee's views on the potential
costs and benefits associated with a SLLR as described in the paper. In addition,
we would like the Committee's views on the proposed structure including various
terms and conditions.
Thirty-Year Coupon Cycle
We seek the Committee's views on developments in the bond market, including the
demand for long duration and the need to maintain a liquid STRIPS curve. In the
context of overall bond market conditions and the Committee's assessment of
Treasury financing needs in FY 2007, does the Committee see a need to add a
May-November coupon cycle to Treasury's 30-year bond issuance? If the
Committee sees a need to add a May-November coupon cycle in 2007, what are
the Committee's recommendations for implementation?
FinanCing this Quarter
We would like the Committee's advice on the following:
•
•
•

The composition of Treasury notes to refund approximately $59.9 billion of
privately held notes and bonds maturing or called on May 15, 2006.
The composition of Treasury marketable financing for the remainder of the
April- June quarter, including cash management bills.
The composition of Treasury marketable financing for the July-September
quarter.

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Page 1 of 1

May 2, 2006
js-4229
TREASURY SECRETARY JOHN W. SNOW TO JOIN CONGRESSMAN ERIC
CANTOR IN INTRODUCING
U.S. Treasury Secretary John W. Snow will join Congressman Eric Cantor in
introducing the Tax-Free Health Savings Act tomorrow on Capitol Hill. The
legislation aims to build on the success of Health Savings Accounts, which are
giving more Americans access to quality, affordable health care as well as control
over their health care costs and decisions.
The following event is open to credentialed media:

WHO

U.S. Treasury Secretary John W. Snow and
Congressman
Eric Cantor

WHAT

Introduction of the Tax-Free Health Savings Act

WHEN

Wednesday, May 3,12:00 p.m. (EDT)

WHERE

Cannon House Office Building
Cannon Terrace
Washington, DC

- 30 -

http://www.treas.guv/prcss/reieus8s/js4229.htm

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Page 1 of 1

May 2, 2006
js-4230
Treasury Secretary John W, Snow To Visit The Financial Crimes Enforcement
Network
U.S. Treasury Secretary John W. Snow will visit the Financial Crimes Enforcement
Network (FinCEN) on Thursday to discuss Treasury's continued efforts to protect
the financial system abuse by terrorists, money launderers and other illicit
criminals. FinCEN is part of the Treasury's Office of Terrorism and Financial
Intelligence (TFI), which marked the two-year anniversary of its authorization this
past week.
The following event is open to credentialed media:
WHO

U.S. Treasury Secretary John W. Snow

WHAT

Remarks on Combating Terrorist Financing and Financial Crimes

WHEN

Thursday, May 4, 11 :00 a.m. (EDT)

WHERE

Tycon Conference Center - Ground Floor
2070 Chain Bridge Rd.
Vienna, VA

NOTE Press must RSVP to Steve Hudak at steve.hudak@fincen.gov.
- 30 -

http://www.tleas.gov/prc33/rcleu~es!js4230.htm

3/5/2007

/0 view or pnnt the /-,UI- content on tnls page, Clown/oaCi the tree A(/Ol)e'"j Aero/Jan") J-<eaCfeNv.

May 3, 2006
JS-4231
United States and Denmark Sign Protocol to
Income Tax Treaty
Washington - Today the Treasury Department announced that U.S. Ambassador
James P. Cain and Danish Tax Minister Kristian Jensen signed a new Protocol to
amend the existing bilateral income tax treaty, concluded in 1999, between the two
countries. The Protocol was signed Tuesday.
The agreement significantly reduces tax-related barriers to trade and investment
flows between the United States and Denmark. It also modernizes the treaty to
take account of changes in the laws and policies of both countries since the current
treaty was signed. The Protocol brings the tax treaty relationship with Denmark into
closer conformity with U.S. treaty policy.
The most important aspect of the Protocol deals with the taxation of cross-border
dividend payments. The Protocol is one of a few recent U.S. tax agreements to
provide for the elimination of the source-country withholding tax on dividends
arising from certain direct investments and on dividends paid to pension funds. The
Protocol also strengthens the treaty's provisions preventing so-called treaty
shopping, which is the inappropriate use of a tax treaty by third-country residents.

REPORTS
•
•

Denmark Notes
Denmark Protocol

http://www.treas.gov/prcss/rclcu~letJ/js4231.htm

3/5/2007

EMBASSY OF THE
UNITED STATES OF AMERICA

Copenhagen, May 2, 2006

L:xccllcllcy:
1 have the honor to refer to the Protocol signed today between the Government

or the United States of America and the Government of the Kingdom of Denmark

f\mending the Convention for the Avoidance of Double Taxation and the Prevention
of Fiscal Evasion with Respect to Taxes on Income, and to confirm, on behalf of the
Clovcrnmcnt of the United States of America, the following understandings reached
between our two Governments.

1n reference to clause a) (iV) of paragraph 3 of Article 10 (Dividends) of the
COI1VcntlOn, as amended by the Protocol, it is understood that the U.S. competent
authority generally will exercise its discretion to grant benefits under such paragraph
lo a company that is a resident of Denmark if:
I) the company meets the requirements of paragraph 4 of Article 22

(Limitation of Benefits) regarding the active conduct of a trade or business in
Denmark;
2) the company meets the base erosion' test of clause f) (ii) of paragraph 2 of
Article 22; and
J) more than 80 percent of the voting power and the value of the shares in the
company is owned by one or more taxable nonstock corporations that meet the
requirements of subparagraph h) of paragraph 2 of Alticle 22.

However, the competent authority may choose not to grant benefits pursuant
to this paragraph if he determines that a significant percentage or amount of the
income qualifying for benefits under such paragraph will inure to the benefit of a
pri vale person who is not a resident of Denmark.

i iis h.'\ccliency
Pcr Stig M011er,
Minister of Foreign Affairs,
The Kingdom ofDeumark.

··2-

III reference to paragraph 4 of Article 10 (Dividends) of the Convention, as
amended by the Protocol, it is understood that a Danish undertaking for collective
investment in transferable securities that is required to currently distribute its income
\\'111 be treated as a company that is similar to a U.S. regulated investment company
Illi" purposes of this paragraph, while such an undertaking that is permitted to'
acclIlllulate its income will not be so treated.

If this is in accordance with your understanding, I would appreciate an
acknowledgment from you to that effect.
Accept, Excellency, the renewed assurances of my highest consideration.

Copenhagen, 21\d May, 2006

1.\ce1lency:
I have the honor to acknowledge receipt of your note of 2 nd May, 2006,
willch reads as follows:
"j have the honor to refer to the Protocol signed today between the Government of
the United States of America and the Government of the Kingdom of Denmark
Amending the Convention for the Avoidance of Double Taxation and the Prevention of
Fiscal Evasion \\lith Respect to Taxes on Income, and to confirm, on behalf of the
(~overnment of the United States of America, the following understandings reached
hd ween our two Governments,

In reference to clause a) (iv) of paragraph 3 of Article 10 (Dividends) of the
as amended by the Protocol, it is understood that the U,S. competent
authority generally will exercise its discretion to grant benefits under such paragraph to a
company that is a resident of Denmark if:
(',ll1\ClltIOn,

I) the company meets the requirements of paragraph 4 of Article 22 (Limitation
of Benefits) regarding the active conduct of a trade or business in Denmark;
2) the company meets the base erosion test of clause f) (ii) of paragraph 2 of
AI1icle 22; and

1) more than 80 percent of the voting power and the value of the shares in the
company is owned by one or more taxable nonstock corporations that meet the
I'equirements of subparagraph h) of paragraph 2 of Article 22.
!!owever, the competent authority may choose not to grant benefits pursuant to
this paragraph ifhe detelmines that a significant percentage or amount of the income
qualifying for benefits under such paragraph will inure to the benefit of a private person
who i~ not a resident of Denmark.
III rekrence to paragraph 4 of Article 10 (Dividends) of the Convention, as
amenliecl by the Protocol, it is understood that a Danish undertaking for collective
Invcstment ill transferable securities that is required to currently distribute its income will

b-: In;aicd as a company that is similar to a ll,S, regulated investment company for
purposes of this paragraph, while slIch an undel1aking that is pel111itted to accumulate its
income will not be so treated.

Ir this is in accordance with your understanding, 1 would appreciate an
from you to that effect.

cll,;knllwlcdgm~nt

:\ccepl. Excellency, the renewed assurances of my highest consideration."

j have the honor to confirm that the foregoing understandings are also shared by
the Government of the Kingdom of Denmark.

Accept Excellency, the renewed assurances of my highest consideration.

1'0 Ambassador James P. Cain
Fmhassy of the United States

PROTOCOL
AMENDING THE CONVENTION BETWEEN
THE GOVERNMENT OF THE UNITED STATES OF AMERICA
AND THE GOVERNMENT OF THE KINGDOM OF DENMARK
FOR THE A VOIDANCE OF DOUBLE TAXATION
AND THE PREVENTION OF FISCAL EVASION
WITH RESPECT TO TAXES ON INCOME
The Government of the United States of America and the Government of the
Kingdom of Denmark, desiring to amend the Convention Between the Government of
the United States of America and the Government of the Kingdom of Denmark for the
A voidance of Double Taxation and the Prevention of Fiscal Evasion with respect to
Taxes on Income, signed at Washington on August 19, 1999 (hereinafter referred to as
"the Convention"),

Have agreed as follows:

ARTICLE I
Paragraph 4 of Article I (General Scope) of the Convention is omitted and the
following paragraph is substituted:
"4.

Except to the extent provided in paragraph 5, this Convention shall not

affect the taxation by a Contracting State of its residents (as determined under
Article 4 (Residence» and its citizens. Notwithstanding the other provisions of
this Convention, a former citizen or long-term resident of a Contracting State may,
for the period of ten years following the loss of such status, be taxed in accordance
with the laws of that Contracting State."

ARTICLE II
I.

Article 10 (Dividends) of the Convention shall be omitted and the

following shall be substituted:
"ARTICLE 10
Dividends
1.

Dividends paid by a resident of a Contracting State to a resident of the

other Contracting State may be taxed in that other State.
2.

However, such dividends may also be taxed in the Contracting State of

which the company paying the dividends is a resident, and according to the laws of
that State, but if the beneficial owner of the dividends is a resident of the other
Contracting State, the tax so charged shall not exceed:
a)

5 percent of the gross amount of the dividends if the beneficial owner is

a company which holds directly at least 10 percent of the share capital of the
company paying the dividends;
b)

15 percent of the gross amount of the dividends in all other cases.

This paragraph shall not atTect the taxation of the company in respect of the profits out
of which the dividends are paid.
3.

Notwithstanding the provisions of paragraph 2, such dividends shall not

be taxed in the Contracting State of which the company paying the dividends is a
resident if the beneficial owner is:
a)

a company that is a resident of the other Contracting State that has

owned, directly or indirectly through one or more residents of either
Contracting State, shares representing 80 percent or more of the voting
power in the company paying the dividends for a l2-month period ending
on the date on which entitlement to the dividends is determined and:
(i)

satisfies the conditions of clause (i),(ii) or (iii) of subparagraph

c) of paragraph 2 of Article 22 (Limitation of Benefits);
(ii)

satisfies the conditions of clauses (i) and (ii) of

subparagraph f) of paragraph 2 of Article 22, provided that the
company satisfies the conditions described in paragraph 4 of that
Article with respect to the dividends;
(iii)

is entitled to benefits with respect to the dividends under

paragraph 3 of Article 22; or
(iv)

has received a determination pursuant to paragraph 7 of

Article 22 with respect to this paragraph; or
b)

a qualified governmental entity that is a resident of the other

Contracting State and that does not control the payor of the dividend; or
c)

a pension fund, which is described in subparagraph e) of paragraph 2 of

Article 22 (Limitation of Benefits), that is a resident of the other Contracting
State, provided that such dividends are not derived from the carrying on of a
business by the pension fund or through an associated enterprise.
4. a)

Subparagraph a) of paragraph 2 and subparagraph a) of paragraph 3

shall not apply in the case of dividends paid by a U.S. Regulated Investment
Company (RIC) or a U.S. Real Estate Investment Trust (REIT). In the case of

dividends paid by a RIC, subparagraph b) of paragraph 2 and subparagraphs
b) and c) of paragraph 3 shall apply. In the case of dividends paid by a REIT,
subparagraph b) of paragraph 2 and subparagraphs b) and c) of paragraph 3
shall apply only if:
(i)

the beneficial owner of the dividends is an individual or pension

fund, in either case holding an interest of not more than 10 percent in
the REIT;
(ii)

the dividends are paid with respect to a class of stock that is

publicly traded and the beneficial owner of the dividends is a person
holding an interest of not more than 5 percent of any class of the
REIT's stock; or
(iii)

the beneficial owner of the dividends is a person holding an

interest of not more than 10 percent in the REIT and the REIT is
"diversified."
The rules of this paragraph shall also apply to dividends paid by companies resident in
Denmark that are similar to the United States companies referred to in this paragraph.
Whether companies that are residents of Denmark are similar to the United States
companies referred to in this paragraph will be determined by mutual agreement of the
competent authorities.
b)

For purposes of this paragraph, a REIT shall be diversified if the value

of no single interest in real property exceeds 10 percent of its total interests in
real property. For the purposes of this rule, foreclosure property shall not be
considered an interest in real property. Where a REIT holds an interest in a
partnership, it shall be treated as owning directly a proportion of the
partnership's interests in real property corresponding to its interest in the
partnership.
5.

The term "dividends" as used in this Article means income from

shares or other rights, not being debt-claims, participating in profits, as well as

income that is subject to the same taxation treatment as income from shares by the
laws of the State of which the payor is a resident.
6.

The provisions of paragraphs 2 and 3 shall not apply if the

beneficial owner of the dividends, being a resident ofa Contracting State, carries
on business in the other Contracting State, of which the company paying the
dividends is a resident, through a permanent establishment situated therein, or
performs in that other State independent personal services from a fixed base
situated therein, and the dividends are attributable to such permanent
establishment or fixed base. In such case, the provisions of Article 7 (Business
Profits) or Article 14 (Independent Personal Services), as the case may be, shall
apply.

A Contracting State may not impose any tax on dividends paid by a

company which is not a resident of that State, except insofar as the dividends are paid
to a resident of that Contracting State or the dividends are attributable to a permanent
establishment or a fixed base situated in that State, nor may it impose tax on a
corporation's undistributed profits, except as provided in paragraph 8, even if the
dividends paid or the undistributed profits consist wholly or partly of profits or income
arising in that State.
8.

A company that is a resident of a Contracting State and that has a

permanent establishment in the other Contracting State, or that is subject to tax in that
other Contracting State on a net basis on its income that may be taxed in that other
State under Article 6 (Income from Real Property) or under paragraph 1 of Article 13
(Capital Gains) may be subject in that other Contracting State to a tax in addition to
the tax allowable under the other provisions of this Convention. Such tax, however,
may be imposed on only the portion of the business profits of the corporation
attributable to the permanent establishment, and the portion of the income referred to
in the preceding sentence that is subject to tax under Article 6 (Income from Real
Property) or under paragraph 1 of Article 13 (Capital Gains) that, in the case of the
United States, represents the dividend equivalent amount of such profits or income

and, in the case of Denmark, is an amount that is analogous to the dividend equivalent
amount.
9.

The tax referred to in paragraph 8 shall not be imposed at a rate

exceeding the rate specified in subparagraph a) of paragraph 2. In any case, it shall
not be imposed on a company that:
a)

satisfies the conditions of clause (i), (ii) or(iii) of subparagraph c) of

paragraph 2 of Article 22 (Limitation of Benefits);
b)

satisfies the conditions of clauses i) and ii) of subparagraph f) of

paragraph 2 of Article 22, provided that the company satisfies the
conditions described in paragraph 4 of that Article with respect to an item
of income, profit or gain described in paragraph 8 of this Article;
c)

is entitled under paragraph 3 of Article 22 to benefits with respect

to an item of income, profit or gain described in paragraph 8 of this
Article; or
d)

has received a determination pursuant to paragraph 7 of Article 22

with respect to this paragraph."

ARTICLE III
Subparagraph b) of paragraph 2 of Article 19 (Government Service) of the
Convention is amended by omitting the words "a resident or a national" and
substituting "a resident and a national".

ARTICLE IV
Article 22 (Limitation of Benefits) of the Convention shall be omitted and the
following Article substituted:
"ARTICLE 22
Limitation of Benefits
1.

A resident of a Contracting State shall be entitled to benefits otherwise

accorded to residents of a Contracting State by this Convention only to the extent
provided in this Article.
2.

A resident of a Contracting State shall be entitled to all the benefits of

this Convention only if such resident is:
a)

an individual;

a Contracting State, a political subdivision, or local authority thereof, or

an agency of instrumentality of that State, subdivision, or authority;
c)

a company, if:
(i)

its principal class of shares (and any disproportionate class of

shares) is regularly traded on one or more recognized stock exchanges,
and either:
A)

its principal class of shares is primarily traded on a

recognized stock exchange located in the Contracting State of
which the company is a resident (or, in the case of a company
resident in Denmark, on a recognized stock exchange located
within the European Union or in any other European Economic
Area state or, in the case ofa company resident in the United
States, on a recognized stock exchange located in another state
that is a party to the North American Free Trade Agreement); or
B)

the company's primary place of management and

control is in the Contracting State of which it is a resident;
(ii)

in the case of a company that is a resident of Denmark, one or

more taxable nonstock corporations entitled to benefits under

subparagraph g) own shares representing more than 50 percent of the
voting power of the company and all other shares are listed on a
recognized stock exchange and are primarily traded on a recognized
stock exchange located within the European Union or in any other
European Economic Area state; or
(iii)

at least 50 percent of the aggregate voting power and value of

the shares (and at least 50 percent of any disproportionate class of
shares) in the company are owned directly or indirectly by five or fewer
companies entitled to benefits under clause (i) or (ii), or any
combination thereof, provided that, in the case of indirect ownership,
each intermediate owner is a resident of either Contracting State;
d)

a charitable organization or other legal person described in

subparagraph b)(i) of paragraph 1 of Article 4 (Residence) of this Convention,
e)

a legal person, whether or not exempt from tax, organized under the

laws of a Contracting State to provide a pension or other similar benefits to
employees, including self-employed individuals, pursuant to a plan, provided
that more than 50 percent of the person's beneficiaries, members or participants
are individuals resident in either Contracting State; or
f)

a person other than an individual, if:
(i)

on at least half the days of the taxable year at least 50 percent of

each class of shares or other beneficial interests in the person is owned,
directly or indirectly, by residents of the Contracting State of which
that person is a resident that are entitled to the benefits of this
Convention under subparagraph a), subparagraph b), clause i) of
subparagraph c), or subparagraphs d) or e) of this paragraph, provided
that, in the case of indirect ownership, each intermediate owner is a
resident of that Contracting State; and
(ii)

less than 50 percent of the person's gross income for the taxable

year, as determined in the person's State of residence, is paid or

accrued, directly or indirectly, to persons who are not residents of either
Contracting State entitled to the benefits of this Convention under
subparagraph a), subparagraph b), clause i) of subparagraph c), or
subparagraphs d) or e) of this paragraph in the form of payments that
are deductible for purposes of the taxes covered by this Convention in
the person's State of residence (but not including arm's length
payments in the ordinary course of business for services or tangible
property and payments in respect of financial obligations to a bank that
is not related to the payor);
g)

in the case of Denmark, a taxable nonstock corporation if:
(i)

the amount paid or accrued in the form of deductible payments

(but not including arms length payments in the ordinary course of its
activities of a charitable nature and authorized by the Danish laws on
taxable non-stock companies (lov om erhvervsmressige fonde and lov
om fonde og vi sse foreninger) for services or tangible property) in the
taxable year and in each of the preceding three taxable years, directly or
indirectly, to persons who are not entitled to benefits under
subparagraphs a) or b), clause (i) of subparagraph c), or subparagraphs
d) or e), does not exceed 50 percent of its gross income, as determined
under Danish law (excluding its tax-exempt income); and
(ii)

the amount paid or accrued, in the form of both deductible

payments (but not including arms length payments in the ordinary
course of its activities of a charitable nature and authorized by the
Danish laws on taxable non-stock companies (lov om erhvervsmressige
fonde and lov om fonde og visse foreninger) for services or tangible
property) and non-deductible distributions, in the taxable year and in
each of the preceding three taxable years, directly or indirectly, to
persons who are not entitled to benefits under subparagraphs a) or b),
clause (i) of subparagraph c), or subparagraphs d) or e), does not

exceed 50 percent of the amount of its total income (including its taxexempt income).
3.

A company that is a resident of a Contracting State shall also be

entitled to the benefits of the Convention if:
a)

at least 95 percent of the aggregate voting power and value of its shares

(and at least 50 percent of any disproportionate class of shares) is owned,
directly or indirectly, by seven or fewer persons that are equivalent
beneficiaries; and
b)

less than 50 percent of the company's gross income, as determined in

the company's State of residence, for the taxable year is paid or accrued,
directly or indirectly, to persons who are not equivalent beneficiaries, in the
form of payments (but not including arm's length payments in the ordinary
course of business for services or tangible property and payments in respect of
financial obligations to a bank that is not related to the payor), that are
deductible for the purposes of the taxes covered by this Convention in the
company's State of residence.
4.a)

A resident of a Contracting State will be entitled to benefits of the

Convention with respect to an item of income derived from the other State,
regardless of whether the resident is entitled to benefits under paragraph 2 or 3
of this Article, if the resident is engaged in the active conduct ofa trade or
business in the first-mentioned State (other than the business of making or
managing investments for the resident's own account, unless these activities
are banking, insurance or securities activities carried on by a bank, insurance
company or registered securities dealer), and the income derived from the
other Contracting State is derived in connection with, or is incidental to, that
trade or business.
b)

Ifa resident ofa Contracting State derives an item of income from a

trade or business activity in the other Contracting State, or derives an item of
income arising in the other Contracting State from an associated enterprise,

subparagraph a) of this paragraph shall apply to such item only if the trade or
business activity in the first-mentioned State is substantial in relation to the
trade or business activity in the other State. Whether a trade or business
activity is substantial for purposes of this paragraph will be determined based
on all the facts and circumstances.
c)

In determining whether a person is "engaged in the active conduct ofa

trade or business" in a Contracting State under subparagraph a) of this
paragraph, activities conducted by persons connected to such person shall be
deemed to be conducted by such person. A person shall be connected to
another if one possesses at least 50 percent of the beneficial interest in the
other (or, in the case ofa company, at least 50 percent of the aggregate vote
and at least 50 percent of the aggregate value of the shares in the company or
of the beneficial equity interest in the company) or another person possesses,
directly or indirectly, at least 50 percent of the beneficial interest (or, in the
case ofa company, at least 50 percent of the aggregate vote and at least 50
percent of the aggregate value of the shares in the company or of the beneficial
equity interest in the company) in each person. In any case, a person shall be
considered to be connected to another if, based on all the relevant facts and
circumstances, one has control of the other or both are under the control of the
same person or persons.
5.

A resident of one of the Contracting States that derives from the other

Contracting State income mentioned in Article 8 (Shipping and Air Transport) and
that is not entitled to the benefits of this Convention because of the foregoing
paragraphs, shall nevertheless be entitled to the benefits of this Convention with
respect to such income if at least 50 percent of the beneficial interest in such person
(or, in the case ofa company, at least 50 percent of the aggregate vote and value of the
stock of such company) is owned directly or indirectly:
a)

by persons described in subparagraphs a) or b), or clause (i) of

subparagraph c), or subparagraphs d) or e) of paragraph 2, or citizens of

the United States, or individuals who are residents of a third state; or
b)

by a company or combination of companies the stock of which is

primarily and regularly traded on an established securities market in a
third state;
provided that such third state grants an exemption under similar terms for profits as
mentioned in Article 8 (Shipping and Air Transport) of this Convention to citizens and
corporations of the other Contracting State either under its national law or in common
agreement with that other Contracting State or under a convention between that third
state and the other Contracting State.
6.

Notwithstanding the preceding provisions of this Article, where an

enterprise of Denmark derives interest or royalties from the United States, and the
income consisting of such interest or royalties is exempt from taxation in Denmark
because it is attributable to a permanent establishment which that enterprise has in a
third state, the tax benefits that would otherwise apply under the other provisions of
the Convention will not apply to such income if the tax that is actually paid with
respect to such income in the third state is less than 60 percent of the tax that would
have been payable in Denmark if the income were earned in Denmark by the
enterprise and were not attributable to the permanent establishment in the third state.
Any interest or royalties to which the provisions of this paragraph apply may be taxed
in the United States at a rate that shall not exceed 15 percent of the gross amount
thereof. The provisions of this paragraph shall not apply if:
a)

in the case of interest, the income derived from the United States is

derived in connection with, or is incidental to, the active conduct of a trade or
business carried on by the permanent establishment in the third state (other
than the business of making, managing or simply holding investments for the
person's own account, unless these activities are banking or securities activities
carried on by a bank or registered securities dealer); or

in the case of royalties, the royalties are received as compensation for

the use of, or the right to use, intangible property produced or developed by the
permanent establishment itself.
7.

A resident of a Contracting State that is not entitled to benefits pursuant

to the preceding paragraphs of this Article shall, nevertheless, be granted benefits of
the Convention if the competent authority of the other Contracting State determines
that the establishment, acquisition or maintenance of such person and the conduct of
its operations did not have as one of its principal purposes the obtaining of benefits
under the Convention. The competent authority of the other Contracting State shall
consult with the competent authority of the first-mentioned State before denying the
benefits of the Convention under this paragraph.
8.

For the purposes of this Article,

the term "principal class of shares" means the ordinary or common

shares of the company, provided that such class of shares represents the
majority of the voting power and value of the company. Ifno single class of
ordinary or common shares represents the majority of the aggregate voting
power and value of the company, the "principal class of shares" is that class or
those classes that in the aggregate represent a majority of the aggregate voting
power and value of the company.
b)

the term "disproportionate class of shares" means any class of shares of

a company resident in one of the States that entitles the shareholder to
disproportionately higher participation, through dividends, redemption
payments or otherwise, in the earnings generated in the other State by
particular assets or activities of the company;
c)

the term "shares" shall include depository receipts thereof;

the term "recognized stock exchange" means:
(i)

the NASDAQ System owned by the National Association of

Securities Dealers, Inc. and any stock exchange registered with the U.S.

Securities and Exchange Commission as a national securities exchange
under the U.S. Securities Exchange Act of 1934;
(ii)

the Copenhagen Stock Exchange;

(iii)

the stock exchanges of Amsterdam, Brussels, Frankfurt,

Hamburg, Helsinki, London, Oslo, Paris, Stockholm, Sydney, Tokyo
and Toronto; and
(iv)

any other stock exchanges agreed upon by the competent

authorities of the Contracting States.
e)

the term "taxable nonstock corporation" as used in paragraph 2 means

a foundation that is taxable in accordance with paragraph I of Article I of the
Danish Act on Taxable Nonstock Corporatia'ns (fonde der beskattes efter
fondsbeskatningsloven);
f)

(i)

for the purposes of paragraph 2, the shares in a class of shares

are considered to be regularly traded on one or more recognized stock
exchanges in a taxable year if:
(A)

trades in such class are effected on one or more of
such stock exchanges other than in de minimis quantities
during every quarter; and

(B)

the aggregate number of shares or units of that class
traded on such stock exchange or exchanges during the
previous taxable year is at least 6 percent of the average
number of shares or units outstanding in that class
(including shares held by taxable nonstock corporations)
during that taxable year; and

(ii)

for purposes of determining whether a company satisfies the

requirements of clause c) (ii) of paragraph 2, clause (i) of this
paragraph shall be applied as if all the shares issued by the company
were one class of shares and shares held by taxable nonstock
corporations will be considered outstanding for

purposes of determining whether 6 percent of the outstanding
shares have been traded during a taxable year.
g)

a company's primary place of management and control will be in the

State of which it is a resident only if executive officers and senior management
employees exercise day-to-day responsibility for more of the strategic, financial
and operational policy decision making for the company (including its direct and
indirect subsidiaries) in that State than in any other state, and the staffs conduct
more of the day-to-day activities necessary for preparing and making those
decisions in that State than in any other state;
h)

the term "equivalent beneficiary" means a resident of a member state

of the European Union or of any other European Economic Area state or of a party
to the North American Free Trade Agreement, or of Switzerland, but only if that
resident:
(i)

would be entitled to all the benefits of a comprehensive

convention for the avoidance of double taxation between any
member state of the European Union or any other European
Economic Area state or any party to the North American Free
Trade Agreement, or Switzerland, and the State from which the
benefits of this Convention are claimed under provisions
analogous to subparagraphs a), b), clause i) of subparagraph c)
or subparagraphs d) or e) of paragraph 2 of this Article,
provided that if such convention does not contain a
comprehensive limitation on benefits article, the person would
be entitled to the benefits of this Convention by reason of
subparagraph a), b), clause i) of subparagraph c) or
subparagraphs d) or e) of paragraph 2 of this Article if such
person were a resident of one of the States under Article 4
(Residence) of this Convention; and

with respect to income referred to in Article 10

(Dividends), II (Interest) or 12 (Royalties) of this Convention,
would be entitled under such convention to a rate of tax with
respect to the particular class of income for which benefits are
being claimed under this Convention that is at least as low as
the rate applicable under this Convention; or
(ii)

is a resident of a Contracting State that is entitled to the benefits

of this Convention by reason of subparagraph a), b), clause i) of
subparagraph c) or subparagraphs d) or e) of paragraph 2 of this
Article.
For the purposes of applying paragraph 3 of Article 10 (Dividends) in order to
determine whether a person, owning shares, directly or indirectly, in the
company claiming the benefits of this Convention, is an equivalent beneficiary,
such person shall be deemed to hold the same voting power in the company
paying the dividend as the company claiming the benefits holds in such
company;
i)

with respect to dividends, interest or royalties arising in Denmark and

beneficially owned by a company that is a resident of the United States, a company
that is a resident of a member state of the European Union will be treated as satisfying
the requirements of subparagraph h)(i) B) for purposes of determining whether such
United States resident is entitled to benefits under this paragraph if a payment of
dividends, interest or royalties arising in Denmark and paid directly to such resident of
a member state of the European Union would have been exempt from tax pursuant to
any directive of the European Union, notwithstanding that the income tax convention
between Denmark and that other member state of the European Union would provide
for a higher rate of tax with respect to such payment than the rate of tax applicable to
such United States company under Article 10 (Dividends), II (Interest), or 12
(Royalties) of this Convention."

ARTICLE V
1.

The Contracting States shall notify each other when the requirements

for the entry into force of this Protocol have been complied with.
2.

This Protocol shall enter into force upon the date of the receipt of the

later of such notifications, and its provisions shall have effect:
a)

in respect of taxes withheld at source, on income derived on or
after the first day of the second month next following the date on which
the Protocol enters into force; and

b)
first

in respect of other taxes, for taxable periods beginning on or after the

day of January next following the date on which the Protocol enters into force.
3.

This Protocol shall remain in force for so long as the Convention shall

remain in force.

IN WITNESS WHEREOF the undersigned, duly authorized thereto by their respective
Governments, have signed this Protocol.

DONE in duplicate at Copenhagen on the second day of May, 2006, in the English
language.

FOR THE GOVERNMENT OF THE

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Page 1 of 1

May 3, 2006
JS-4232
Statement by Secretary John W. Snow
HSAs Press Event with Representative Eric Cantor
Washington, DC - Treasury Secretary John W. Snow participated in a press event
today with Representative Eric Cantor on the introduction of Cantor's bill, the Tax
Free Health Savings Act of 2006.
"HSAs are a key component to making health care more affordable and accessible,
while at the same putting the consumer in charge of his or her own health care
decisions," Snow said. With the help of new legislation like Mr. Cantor's even more
Americans will be able to take advantage of these revolutionary health-cost and
savings vehicles.
"The creation of HSAs was historic because it embraces a philosophy that favors
the individual, versus an employer or the government. This is different from the
direction we've seen in health-care coverage for decades, and I believe it is an
improvement because it does inject some market force. Consumers of health care
with and HSA are going to compare costs and ask more questions about pricing.
"Today, over 3 million Americans - a large portion of whom were previously
uninsured -are enjoying access to more affordable health care because of the tax
advantages and savings benefits of Health Savings Account (HSA)-qualified plans.
"I'm pleased that more employers are choosing to offer HSAs to their employees
every day, and I'm delighted to see Representative Cantor introduce this bill to
expand the opportunities offered by HSAs. This bill would improve upon their
structure, making HSAs even more useful and more likely to lower the number of
uninsured Americans."

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May 3,2006
js-4234

The Honorable John W. Snow
Prepared Remarks
The Investment Company Institute's 2006 Mutual Fund Leadership Dinner
Good evening. It's great to be with you in this beautiful space.
This historic and splendid setting, along with the distinguished list of attendees
tonight. reminds me of the essential genius of our founders who created a
government representative of the people. It's important to remember that all of the
people are represented here on Capitol Hill--not just Republicans, not just
Democrats. On the great issues of the day, the people expect us to work together
for the good of the nation. The diverse group assembled here tonight reminds us of
that aspiration.
Likewise, one of the essential roles for government is to create the conditions for
prosperity in the land. And we are now blessed with an economy that is the envy of
the world. There should be a bipartisan consensus that we want our economy to do
well for the sake of all Americans. And the economic record represents much
progress that has been made in the last several years.
In the past three years the US economy has grown at a 3.9 percent annual rate.
GDP growth for the first quarter of this year, we learned on Friday, was a very
strong 4.8 percent, making up for the fourth quarter's hurricane-related slowdown.
Business investment is growing at a rate last seen at the peak of the high-tech
boom in 2000, but fortunately without the market excesses we saw then. No one is
talking about 'irrational exuberance' today. This is a well-grounded, durable
expansion.
With 5.2 million new jobs created in the past three two and half years and
unemployment at a very low rate of 4.7 percent- that's lower than the average for
the 1960s, 1970s, 1980s or 1990s - there is much for you and your customers to
be proud of and optimistic about.
We really are firing on all cylinders when you look at homeownership, real
disposable income, consumer confidence and a host of other indicators. And of
course it has not escaped my attention, or the attention of this group, that, propelled
by the economy, the Dow is approaching its all-time high closing. The economy is
clearly moving in the right direction now, and your industry is part of that success in
that you both create growth, household wealth and jobs and provide the vehicles by
which all types and nearly all income-levels of Americans are becoming savers and
investors.
I want to note that the savings vehicles of your industry are at the forefront of one of
the most important economic goals of any economy - a higher rate of savings. And
we want to help you and your customers with that. We think the tax code shouldn't
penalize savings, rather it should encourage it. Lower taxes on savings,
permanence of those lower tax rates, and savings vehicles like HSAs, LSAs and
RSAs are all part of that effort. In this country, we need to put in place a framework
to encourage savings so that we won't have to rely on savings from the rest of the
world. We also need stronger economic growth among our trading partners, and
more flexible currencies by those who don't have them to address global
imbalances, but we do need an increase in savings to complement our terrific

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economic growth here at home.
Of course there are some headwinds to the economy. Gasoline prices are one area
that is a concern. The President has presented a four-part plan that includes
making sure consumers and taxpayers are treated fairly, promoting greater fuel
efficiency, boosting our oil and gasoline supplies, and investing aggressively in
alternatives to gasoline, so we can eliminate the root cause of high gas prices by
diversifying away from oil in the longer term.
Everyone appreciates that high gas prices act like a tax on families and businesses,
and we need to ease the pain to the extent it is possible. But the good news is that
our strong economy has proven so resilient in handling these headwinds to this
point.
Looking back, there can be
with responsible leadership
environment in which small
could bring our economy to

no question today that well-timed tax relief, combined
from the Federal Reserve Board, created an
businesses, investors, entrepreneurs, and workers
this point of strength.

Clearly, tax relief encouraged investment and investment has led to high growth
rates. Anything you tax, you get less of. And anything you tax less, you get more of.
We're all encouraged by the recent news on the economy, which is unmistakably in
a trend of expansion. All the economic data are positive - it's difficult to find an
indicator that isn't good news. The trend lines can clearly be traced to the
enactment of pro-growth tax relief.
This month marks the three-year anniversary of the Jobs and Growth Act that
helped the economy pivot from nine consecutive declining quarters of real annual
business investment, to 12 straight quarters of rising business investment. Rarely
has there ever been a piece of public policy so effective, with the effects so
tangible.
Since the Jobs and Growth Act, we've seen a great strengthening in labor markets.
The economy has generated slightly less than 170,000 jobs per month, and that
includes the two-month slowdown in job growth in the aftermath of Hurricanes
Katrina and Rita. The news on unemployment insurance, with new claims so low in
the first quarter of this year, is also heartening.
The American economy proves to be on solid footing. The question we face now is:
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 has now reached an
agreement on extending this essential relief, and I urge swift action to get it to the
President's desk. The markets need certainty, and this will certainly send the right
signal.
I know that, in your business, you see the economic benefits of investment every
day. You see money invested grow like seeds. Some grows faster than others, but
over time the benefits are almost always worth the wait. You see both investors and
businesses - which, in turn, create success for workers in the form of new jobs profiting from the investment. So I know I'm preaching to the choir when I say that
there can be no question that we need to keep the tax rate on capital gains and
dividends where it is; a tax increase would be a terrible mistake. While many factors
contributed to the improved performance of the economy, the tax reductions on
capital have been at the heart of the progress we have seen.
And by the way, as I discuss specifics of your industry's activity I want to take a
moment aside, to note how important it is, and how admirable it is, that the first
thing ICI states in your core mission is: "encouraging adherence to high ethical
standards by all industry participants."

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Because while we all see the benefits to society of investment, growth and
prosperity the truth is that we've also seen corporate scandals weaken trust in
markets.
At that point, we faced a crisis of confidence in those who were charged with the
responsibility to oversee the corporate sector. Trust had been broken and trust is a
precious thing. Trust under-girds our capital markets. It is perhaps the one single
element without which an impersonal capital market cannot operate. If we can't
trust the numbers how can capital markets function, how do you know where to
invest?
The response we got to that question, at that time, of course was the SarbanesOxley legislation. Considering the context in which it came about, Sarbanes-Oxley
actually was in most respects quite a measured response. Despite its celebrated
status as the most far-reaching capital market legislation since the creation of the
SEC in the thirties, the fact is it essentially reaffirms established norms and codes
of corporate governance, albeit with criminal penalties.
Sarbanes-Oxley was an absolute necessity, no doubt. It played the crucial rule of
giving the public confidence that somebody was in charge, somebody was looking
out for their interests, and somebody would hold corporations and the auditing
profession accountable. But the subtlety of Sarbanes-Oxley is that it did all of this
by reaffirming the basic rules of corporate governance, not by transforming them.
And I know that Chairman Cox is working hard to apply the rules in a commonsense way.
The dedication of the private sector to corporate governance - seen in your mission
statement - is such an important part of keeping investor confidence strong.
Sarbanes-Oxley was necessary, but your own vigilance is what will keep markets
truly strong for centuries to come. New ideas and advancement for transparency
and enhanced communications will ultimately come from your industry and other
private-sector sources. Paul Schott Steven's call for mutual fund disclosure over the
Internet is a great example of the forward-thinking that I believe the private sector
provides best.
There is certainly more long-term work to be done on the economy - making these
tax cuts permanent, not mere extensions; encouraging the expansion of Health
Savings Accounts as part of a plan to rein in health care cost growth; and taking
additional steps to simplify the tax code, which we at the Treasury Department are
currently studying. Once Congress passes and the President signs these tax cut
extensions, the tax code improvements achieved by the Bush Administration and
the Republican Congress over the past 5 plus years will be extensive: Lower
income tax rates for all taxpayers, lower taxes for investors and small businesses,
tax cuts for families rearing children, a repealed death tax, and Health Savings
Accounts.
Pension reform is another economic issue that is extremely pressing. President
Bush and his Administration are dedicated to ensuring that pension promises made
are pension promises kept. To that end, our plan for fundamental reform 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. 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 system, and to avert the need for a taxpayer

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bailout.
The current pension legislative agenda is not solely about defined benefit pensions.
It is critical that we continue to improve the regulatory structure around 401 (k)-type
plans as they continue to increase in popularity. We need to encourage, in a
prudent and balanced manner, more employers to adopt automatic enrollment to
boost 401 (k) participation among their employees. Also, the increased contribution
limits and catch-up provisions that were enacted as part of the 2001 tax cuts should
be made permanent
As we work together on these and other issues that will keep America economically
strong and resilient, I want to thank you for all that your industry does to enable this
country to become, more and more each day, a nation of investors. I thank you for
the work you do, and the chance to speak to you tonight. I'd be happy to take your
questions now.
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May 4,2006
js-4235
The Honorable John W. Snow
Prepared Remarks
Before the Employees of the Financial Crimes Enforcment Network
Good morning; it's wonderful to have this chance to spend some time with the
FinCEN team. Like so many dedicated civil servants who perform high-intensity
jobs, dealing in issues of national and economic security, your acts go unheralded
and unnoticed too often. Your work is often sensitive by necessity, but the
importance and success of that work deserves the highest praise and is
appreciated at the highest levels of our government. I come here today to
underscore the critical importance of the work that you do.
I also want to discuss today the role the Treasury plays in protecting both our
economic and national security. Many people think of the economy, global growth,
and, of course, money when they think of the Treasury. And while that historically·
has been our better known role, it should not be overlooked that the Treasury
shares the critical duty of protecting our homeland and the international community
by working hand-in-hand with our law-enforcement, intelligence and national
security colleagues both at home and abroad. We are an essential component of
national security.
After 9/11 we knew that our top priority was fighting the war on terror to keep
America safe. For Treasury, that meant a critical new role - leading the effort to
disrupt terrorist finance and deny terrorists the funds they need to carryon their
activities. In pursuing this new mission, we are using the tools and lessons-learned
in our efforts over many years to combat money laundering, narcotics trafficking
and other rogue threats to our financial system.
Recognizing the key role of finance in the war on terror, the Office of Terrorism and
Financial Intelligence, or TFI, was created within the Treasury to help bolster our
efforts to combat terrorist financing. TFI marked last week its two-year anniversary
since its authorization in April 2004 - two years marked by great accomplishments.
As you well know, TFI brings a wide range of intelligence and authorities together
under a single umbrella, allowing us to strategically target a range of threats whether terrorists, narcotics traffickers, proliferators of WMD or rogue regimes, like
Iran and North Korea. President Bush also recognizes the important role the
Treasury plays in both global financial issues and security by making us a regular
participant on the National Security Council. Even in the short amount of time since
its authorization, TFI's efforts have already succeeded in making it harder for
terrorists and criminals to raise and move money. And FinCEN is to be truly
commended for the vital role it has played in helping to achieve these successes.
I'm pleased to be sharing the stage today with a colleague and friend, Bob Werner.
Bob has been a true asset to the Treasury. He's served in the General Counsel's
office and most-recently as Director of OFAC, with great distinction. This is his
second tour of duty with the Financial Crimes Enforcement Network. Some of you
probably remember Bob from his days as chief of staff of FinCEN, and now he's
back as Director. I'm proud of Bob's dedication to the Treasury and the leadership
he is showing here at FinCEN. We're all fortunate to have him here.
And I'm proud of the staff here at FinCEN and the role you play in making American
more secure. There is, however, another important milestone to recognize today.
The Financial Crimes Enforcement Network celebrated its 16th anniversary just this

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week.
I sat down with Bob and several of your colleagues this morning who updated me
on the truly critical work you are focused on. Your hard work to safeguard the
financial system from abuse is preventing terrorists, money launderers, and other
illicit criminals from using the U.S. financial system to bankroll their agendas. As a
result, we are making the U.S. and the world safer and more secure.
The skillful use of the financial information at your disposal is a critical asset in
going after terrorists, disrupting their funding networks and frustrating their
objectives.
Terrorists are motivated by hatred but to carryon their wretched plans they need
access to money - and that's exactly where you come in because by denying them
access to funds you cut off their lifeline. Little that goes on in government today is
more important or more central to defeating this modern scourge of mankind and
your work here at FinCEN is a critical component of those noble efforts.
It's clear we are making progress on this mission. Your efforts have greatly
improved information sharing among law enforcement agencies and our partners in
the regulatory and financial communities to combat illicit finance. You have raised
the bar here.
The Bureau's administration of the Bank Secrecy Act has helped to create
transparency in the financial system, thus strengthening our defenses against
criminals that endeavor to launder ill-gotten gains in the United States. And as the
United States' financial intelligence unit (FlU), FinCEN plays a critical role in our
global efforts by linking to a vast network of FlUs sharing information to pursue
money laundering, terrorist, and other investigations.
Your role was recognized by the 9-11 Commission, which awarded these efforts the
highest grade on its report card issued last December reviewing government-wide
programs to protect America from terrorists. Cracking down on terrorist finance may
not often make the front page, but we know that it is making a difference - and
that's what the American people are counting on all of us for.
As you know best, all rogue threats depend on a financial network to exist and
propagate. Terrorists need money to train and indoctrinate operatives, bribe
officials, procure false documents, and to carry out horrific attacks. Weapons
proliferators need access to the financial system to launder ill-gotten gains from
illicit activities, such as smuggling. Drug cartels need money to run sham
businesses and front companies to shadow their trafficking activities.
You think about this every day so the American people don't have to.
I am pleased to be here today to underscore the vital role that Treasury plays in our
national security system. When the U.S. is confronted with a threat that is
unreceptive to diplomatic outreach and when military action is not an option, TFI's
tools are often the best authorities available to exert pressure and to wield a
tangible impact. It is heartening to know that these tools exist and are being put to
use well and wisely, day in and day out.
While our success stories can't always be shared with the public, I want you to
know that your work is valued and deeply appreciated at the highest levels of our
government.
By attacking the financial underpinnings of these groups, we are deteriorating their
structures and operations. Our use of powerful tools, such as the Bank Secrecy Act
and the USA PATRIOT Act, is helping to accomplish our dual mission of protecting
the financial system from abuse and combating threats to our national security. It is
essential we have these tools to do our job of protecting the American people.
With your continued dedication, considerable talents and intellect, and the

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continuing full support of both myself and the President, I know that America is
safer and more secure and that your efforts are a critical part of our campaign to
defeat the terrorists.
Thank you again for the outstanding work that you do, and thank you for having me
here today.
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May 4,2006
JS-4236
US Treasurer to Visit Richmond Manufacturing Center
U.S. Treasurer Anna Escobedo Cabral will visit the Pohlig Brothers manufacturing
facilities in Richmond, Va. on Friday, May 5. The Treasurer will tour the site and
give remarks on the U.S. economy, financial literacy and the new security features
of the $10 note.
• Who: U.S. Treasurer Anna Escobedo Cabral
• What: Remarks on the Economy, Financial Literacy and the New $10 Note
• When: Friday, May 5 1:30 p.m. (EDT)
• Where: Pohlig Brothers
8001 Greenpine Road
Richmond, VA 23237
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May 4.2006
js-4237
Statement by Secretary John W. Snow
On Productivity and Real Compensation
"There is yet more good economic news this morning. with two pieces of data that
point to higher standards of living for Americans and also show that we're clearly at
the point in the business cycle where we can expect to see wage gains for
American workers.
"Productivity in the first quarter of the year at grew at a rate of 3.2 percent and real
compensation per hour increased at a 3.6 percent rate - that's 8.5 percent higher
than the peak of the business cycle in early 2001. At the same point in the previous
cycle. real compensation per hour was up only two percent.
"We're all encouraged to see so much good economic data. Each new number
reminds us of the benefits that good economic policy has for American workers and
families."
-30-

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May 5,2006
js-4238
Statement of Treasury Secretary John W. Snow On the April Employment
Report
"This month's report, showing more jobs, more hours worked and higher wages
tells a positive story. There is a lot of momentum for more good jobs and for rising
wages. The outlook for the future is very strong.
"We've had 32 straight months of job growth, totaling more than 5.2 million new
jobs since the President's tax relief took effect. More people are working than ever
before and they are earning more money. Today's report shows average hourly
earnings have risen 3.8 percent over the past 12 months - their largest increase in
nearly five years.
"It's encouraging to see so much good economic news. Clearly we are on the right
path. Making tax relief permanent will sustain U.S. economic strength. Congress
needs to act."
-30-

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May 5, 2006
JS-4239
The Honorable Anna Escobedo Cabral
Treasurer of the United States
Prepared Remarks: Visit to Pohlig Brothers in Richmond, VA
Good afternoon. It is such a pleasure to be in Richmond, Virginia today. My most
sincere thanks go to Pohlig Brothers owner Jim Petit, his partner Mike Gaffney and
their great team for welcoming me today. I am thrilled to be with all of you this
afternoon.
I really want to thank you for showing me around your company today and for
allowing me the opportunity to share with you some background about much of the
work the Treasury department is involved in, and also how the President's
economic team is working so very hard to help ensure the ability of businesses like
yours continue to grow and succeed.
We have indeed experienced remarkable economic growth in this country in the
past several years. I'll today share with you some impressive recent economic
indicators, which I think you all will really be able to relate to, especially given this
company's continued growth.
You know, I like to get out of Washington, D.C. once in a while and meet first-hand
with business leaders and workers like you - the people that are living proof of the
economic growth our country has been experiencing in that past few years. You are
an example of all that is possible with hard work, a living example of the American
Dream.
The President's philosophy is that it is the government's responsibility to help create
an environment in which businesses and individuals can flourish - where they can
reach their full potential.
The federal government should not be in the business of creating unnecessary
burdens or barriers to stability and growth.
I found it astounding to learn that more than 20% of this company's 70 workers
have remained with here for 20 years plus. That is a mark of true economic stability.
Not only that - your business has experienced significant growth. You've got a
significant retention rate, but the company has also hired more people over the past
year and worked to improve technology because it was necessary to strengthen
your sales force and keep up with increasing demand from your customers - small
and big businesses - many of which have also seen their companies grow.
Businesses like these are truly the economic engine of this country, and investors
and workers are helping to drive our growing economy.
Just stop and consider the latest economic reports:
•

We found out this morning that the economy created 138,000 jobs in April. It
was the 32 nd straight month of job growth, and we've seen 5.2 million new
jobs since the President's tax relief took effect less than three years ago.
• Last year, the U.S. economy grew faster than any other major industrialized
nation - we've seen it grow 3.5 percent last year.

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•
•

For the first quarter of this year, growth was 4.8 percent.
The rate of productivity is the highest it has been in decades and we have
added jobs to this economy for 31 months in a row - a total of 5.1 million
new jobs since 2003.
• More people are working than ever before. Our national unemployment rate
has fallen to 4.7 percent. That is just an incredible number' That number is
lower than the average for any decade since the 1950s. This also means
that our children graduating from college will likely find it easier to finds jobs
too. The job market for college graduates is the best it has been in five
years.
• Businesses are not only hiring more people - they are also expanding their
reach and services. Consider that construction spending is at an all-time
high and small businesses are flourishing.
• We also see that individuals and their families are benefiting from these
good economic times. Real after-tax income has grown by almost 9 percent
per person since the President took office, despite the many challenges he
inherited, and more Americans have realized the dream of homeownership.
Additionally, consumer confidence is at its highest point in nearly four years.
That's a lot of good news' So now the question that remains is: what have we done
right? What have we done to deserve this? And how do we ensure we can continue
on this right path?
Tax Relief and a Pro-Growth Agenda
Well, you would think it's pretty easy to arrive at the answer - almost intuitive - but
it is really just all about simple economics. You let people keep more of the money
that they work so hard to earn, so that they can invest it and make it grow. It's really
that simple' But in reality, the President needs Congress' help and collaboration will
be absolutely necessary to ensure we remain on this course - specifically by
keeping tax rates lower.
We've seen the benefits and positive results of reducing income taxes for more
than 110 million people who pay taxes. The President did this when he doubled the
child tax credit, reduced the marriage penalty, cut taxes on capital gains and
dividends, created incentives for small businesses to purchase new equipment and
hire new workers, and worked toward ridding us of the death tax.
As businesses like yours have grown and created more jobs in response to the
reduced tax burden, the federal government has actually collected more tax
revenue. Revenues have surged. That's because the tax base has expanded.
Americans are paying lower tax rates, but there are more working Americans at
work contributing to the pot.
I hope that Congress will not let this important opportunity slip by. It would be
irresponsible to do so and would stymie our current rate of growth. Right now, the
House and Senate are close to completing a bill that would extend cuts on
dividends and capital gains for two years - through 2010. I am hopeful that House
and Senate members will work together in passing legislation that ensures our
economic well-being for years to come.
But extending tax relief is only one part of the answer to sustaining a growing
American economy. This Administration is also working hard to address other
important issue of concern, such as rising gas prices, cutting the deficit in half by
2008 and reigning in discretionary spending while at the same time honing in on
national priorities such as fighting the war on terror, strengthening education, and
improving access to affordable health care.
Health Care
Let's look more closely at just one of these important issues: improving access to
health care.

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One way we can address improved access to health care is through the creation of
Association Health Plans to help small businesses get the same insurance
discounts that bigger companies get.
You know, this country has the best health care system in the world but, but health
care costs are rising and 60 percent of the 44 million uninsured Americans are
small business owners, their employees or their families.
We need to seize the opportunity to improve this scenario.
Fortunately, for now, there is an important instrument already in existence that is
helping more Americans obtain access to health care - Health Savings Account,
otherwise known as HSAs.
HSAs are helping make health insurance more affordable and putting patients back
in control of their health care.
HSAs need to be expanded to allow employers to put money into tax-free accounts
to be used for out-of-pocket medical expenses. A bill introduced this week by
Representative Eric Cantor, the Tax Free Health Savings Act of 2006, would help
ensure that even more Americans will be able to take advantage of these
revolutionary health-cost and savings vehicles.
The key to HSAs is what's called a high-deductible health care plan. A highdeductible health-care plan is offered at premiums that are dramatically lower than
plans with lower-deductibles making them much more affordable.
This is the way it works: by using money in your tax-free Health Savings Account to
help pay the higher deductible or any other health expenses, you reduce the cost of
your health care.
Additionally, instead of sending more money off to insurance companies in the form
of higher premiums, through HSAs families are in a position to keep their savings in
an account that belongs to them, not to their employer or to an insurance company.
In short, HSAs bring the cost of purchasing quality health insurance within reach.
The good news is that currently, over 3 million Americans, many of who had been
previously uninsured, have gained much peace of mind and are now enjoying more
affordable health care because of the tax advantages and savings benefits of HAS
qualified plans.
Financial Education
The creation of more jobs, more savings options, as well as affordable health care
options is fantastic news.
However, in order to maximize these choices, we also need to ensure that people
have the skills to wisely manage the additional dollars they are earning and
hopefully continue to keep in the years to come.
Improving financial education is also a top priority for the President, the Department
of the Treasury and for my office.
That is why in 2003, the President signed into law legislation that created the
Financial Literacy and Education Commission, otherwise referred to as the
Commission. This federal commission is lead by Secretary Snow and is also
comprised of 19 other federal agencies.
The Commission is tasked with developing a plan to improve the money
management skills of people in the U.S. We recently launched a national strategy to

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improve financial education and financial literacy levels of all Americans. The
Commission was also tasked with developing a federal financial education web site
and toll-free hotline, which were launched in English and Spanish in October of
2004 - MyMoney.gov and 1-888-MyMoney. And very soon, the Commission will
turn its attention to developing a multimedia campaign addressing financial
education needs in the U.S.
Since the strategy addressing the campaign has just been completed, the work on
this campaign is just in its earliest phase.
I encourage you to visit MyMoney.gov. MyMoney.gov 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. The web site is an effective tool and great resource you can tap.
You can also order a sample of some of the publications that are available on the
web - what we call the My Money Tool Kit. It has information to help you choose
and use credit cards, get out of debt, protect your credit record, understand your
Social Security benefits, insure your bank deposits, and start a savings and
investing plan. The web site was recently updated and now also includes an
interactive quiz know as the "Money 20."
I hope you take some time to check it out. I'd like to say it's free, but your tax dollars
have really already paid for these great resources, so don't throwaway this
opportunity.
Office of the U.S. Treasurer
Before I close, I'd like to take this opportunity to share with you a brief overview of
my responsibilities as 42nd Treasurer of the United States.
As Treasurer, I assist the Secretary in informing the public about the President's
economic priorities.
I also work in an advisory capacity on issues of coin and currency design, as well
as improving public education in the area of currency security and new design
features - in addition to helping improve financial literacy and education.
I spend a considerable amount of my time working on issues of coin and currency
because it is important that we continue to ensure that the integrity of our currency
remains uncompromised.
For example, in March of this year, the new $10 note was launched and began to
circulate. I happen to think it's gorgeous. In addition to including all of the latest
security features - the security thread, watermark, and color shifting ink on the
number ten found on lower right corner on the face of the note - the new design
has incorporated color. Tones of yellow, orange and red compliment the enhanced
portrait of Alexander Hamilton.
There is one other important change to the $10 note. We have added the words
"We the People" from the Constitution to the right of his portrait, in bold red letters.
I hope you will take a few moments to study the new note and tell others about the
new features we've incorporated into this new beautiful note. Also, we've brought a
few new notes today if you're interested in exchanging one old for a new.
In the years to come, we plan to make changes to the $100 and $5 bill as well. We
will continue to make changes to our currency every 7 to 10 years to stay ahead of
would-be counterfeiters.
In closing, I want to thank you once again for your interest and attentiveness. It has
been a real pleasure and a privilege to share this time with you and have the

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opportunity to tell you a little bit about our priorities and the work we're engaged in
at Treasury, particularly in my office.
I have really enjoyed my visit to Richmond - thanks for making me feel so welcome.
I look forward to returning very soon.

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May 5,2006
JS-4240
Treasury Assistant Secretary Fratto to Hold Weekly Press Briefing
Treasury Assistant Secretary for Public Affairs Tony Fratto will hold the weekly
media briefing on Monday, May 8 in Main 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, May8, 11:15AM (EDT)
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.gov with the following information:
name, Social Security number, and date of birth.

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May 5, 2006
JS-4241
Statement of U.S. Treasurer Anna Escobedo Cabral
On the April Employment Report
"Today's economic data notes that during the past three months the Hispanic
unemployment rate has hit a record low. This great news lends further credit to the
President's pro-growth policies that have created millions of jobs and greatly
increased the level of economic independence and homeownership for all
Americans.
"Since the President's tax relief took effect we've had 32 straight months of job
growth, totaling more than 5.2 million new jobs. The Conference Board Index of
Consumer Confidence increased to its highest level in almost four years. With GOP
growing at a strong 4.8 percent annual rate in the first quarter of this year, there is
no doubt that the combination of the President's leadership and good fiscal policies
have rendered the American economy the most adaptive and resilient in the world."

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May 5, 2006
JS-4242
U,S, Treasury Department Announces Interim
Final Rule Implementing Terrorism Risk
Insurance Extension Act
The Treasury Department today announced an interim final rule as part of its
implementation of the Terrorism Risk Insurance Extension Act of 2005. The
Extension Act, signed into law by President Bush on December 22, 2005, extended
the Terrorism Risk Insurance Act of 2002 (TRIA) to December 31,2007 and made
other changes implemented by this rule.
Today's interim final rule generally incorporates interim guidance issued by
Treasury in January 2006, to assist insurers, policyholders, and other interested
parties in complying with immediately applicable requirements of TRIA as modified
by the Extension Act. The rule addresses changes to the types of commercial
property and casualty insurance covered by TRIA, clarifies requirements for
insurers in satisfying the mandatory insurance availability provisions, and
implements a new Program Trigger loss threshold that must be met before the
Federal government potentially shares in insured losses. Although Treasury is
issuing these requirements as an interim final rule, comments are being solicited
from all interested parties through a Federal Register Notice.
Regulations, interim guidance notices and other information related to the Terrorism
Risk Insurance Program can be found at wwwtreasurY·~lov/trlp

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May 8, 2006
JS-4243
Treasury Under Secretary to Discuss
Risks to Financial System with NYU Money Marketeers

U.S. Treasury Under Secretary for Domestic Finance Randal K. Quarles will speak
with the Money Marketeers of New York University on Tuesday, May 9 in New York
City, NY. Under Secretary Quarles will discuss risks to the financial system.
Under Secretary Quarles is the Treasury Secretary's principal adviser on matters of
domestic finance and leads the Department's activities with respect to the domestic
financial system, fiscal policy and operations, governmental assets and liabilities,
and related economic and financial matters.
Who
Under Secretary for Domestic Finance Randal K. Quarles
What
Remarks on Risks to the Financial System
When
Tuesday, May 9 7:30 p.m. (EDT)
Where
60 Pine Street
New York City, NY

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-~-

c~~~'~~~:~~o~i!,':SlO}Mj':

May 8.2006
2006-5-8-15-1 8-6-17438
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 $67.293 million as of the end of that week, compared to $66,937 million as of the end of the prior week.
I. Official U.S. Reserve Assets (in US millions)
April 28, 2006

II
TOTAL.

May 5, 2006

66,937

67,293

11 Foreign Currency Reserves 1

Euro

Yen

TOTAL

Euro

la. Securities

11,738

11,149

22,887

11,846

Of which, issuer headquartered in the US.

17,109

TOTAL
23,131

11,285

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

11,685

5,424

11,792

17,280

b.ii. Banks headquartered in the US.

b.ii. Of which, banks located abroad

b.iii. Banks headquartered outside the US.

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

7,530

7,266

8,368

8,573

Position 2

3. Special Drawing Rights (SDRs) 2
4. Gold Stock 3
5. Other Reserve Assets

·11,U4.j

I'}

II
0

II. Predetermined Short-Term Drains on Foreign Currency Assets
May 5, 2006

April 28, 2006
Yen

Euro

TOTAL

Yen

Foreign currency loans and securities

TOTAL
0

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

a. Short positions

2.b. Long positions

3. Other

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

I
I

April 28, 2006
Euro

http://www.trea~•. gov/pre66/r\}l~a~s/2006581518617438.htm

Yen

TOTAL

I
I

May 5, 2006
Euro

Yen

I
I

TOTAL

I
3/5/2007

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11. Contingent liabilities in foreign currency

11.a. Collateral guarantees on debt due within 1
Iyear
1.b. Other contingent liabilities
112. Foreign currency securities with embedded
loptions
3. Undrawn, unconditional credit lines
13.a. With other central banks
13.b. With banks and other financial institutions

IHeadquartered in the U. S.

I
I
I

I
I

3.c. With banks and other financial institutions
Headquartered outside the U. S.

14. Aggregate short and long positions of options
in foreign
rrencies vis-a-vis the U.S. dollar

I
0

4.a. Short positions

4.a.1. Bought puts

I
I
I

4.a.2. Written calls
4.b. Long positions

I
I

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

Notes:

31 Gold stock is valued monthly at $42.2222 per fine troy ounce.

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May 8,2006
js-4244

Air Transportation Stabilization Board
The U.S. Department of the Treasury on behalf of the Air Transportation
Stabilization Board has engaged Merrill Lynch & Co. as advisor in connection with
the sale of their warrant position in Frontier Airlines Holdings, Inc. The Air
Transportation Stabilization Board owns 3,450,551 warrants exercisable into an
equal number of common shares of Frontier Airlines Holdings, Inc. (FRNT:
NASDAQ).
If you have any questions regarding this sale, please contact Marguerite Owen,
Legal Counsel of the Air Transportation Stabilization Board at 202-622-3808.
-30-

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May 9, 2006
JS-4245
Statement by Secretary John W. Snow
on the Nomination of Eric Solomon
to be Treasury's Assistant Secretary for Tax Policy
"The President's nomination of Eric Solomon to be Assistant Secretary for Tax
Policy is indeed welcome news for taxpayers everywhere, For over 5 years, Eric
has played a crucial role in the design and implementation of the President's progrowth tax relief policies for workers, families, and businesses, That good work has
directly contributed to a thriving, robust economy.
"In his current role as Deputy Assistant Secretary, Eric has proven himself to have
a sharp mind for all aspects of tax policy, As evidenced by the pro-taxpayer
approach taken to such key initiatives as Jobs and Growth Tax Relief Reconciliation
Act of 2003, Eric has shown a keen ability to relate those policies to the modern
economic environment in which we live,
"Eric would bring extensive private-sector experience to this post, as well as
insights garnered at the Internal Revenue Service. Eric's significant and varied
experience, combined with his passion for protecting the rights of taxpayers makes
him uniquely qualified for this important position.
"I look forward to the Senate's confirmation of a man I'm honored to have as a
colleague,"

REPORTS
•

Fact

S~leet

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FACT SHEET:
ERIC SOLOMON
NOMINEE FOR ASSISTANT SECRETARY OF TAX POLICY
U.S. DEPARTMENT OF TREASURY

Eric Solomon has been an instrumental part of the Bush Administration's pro-growth tax
policies.
•

Played key role in designing and implementing tax relief legislation in 2001, 2002, 2003
and 2004.

•
•

Believes that these tax-rate cuts are a key element of sustaining U.S. economic strength.
Concerned with the complexities of the tax code and the burdens it poses on taxpayers
and administrators.

Eric Solomon brings more than 20 years of tax policy experience in both the public and
private sector.
•
•
•
•

Served at the Department of Treasury since 1999.
Currently serves as Deputy Assistant Secretary (Regulatory Affairs), Office of Tax Policy.
Partner at Ernst & Young LLP; member of the Mergers & Acquisitions Group of the
National Tax Department in Washington, D.C. (1996-1999).
Assistant Chief Counsel (Corporate), Internal Revenue Service (headed the IRS legal
division with responsibility for all corporate tax issues) (1990-1996).

Additional Background on Eric Solomon
•
•
•
•

Education: A.B. degree from Princeton University; J.D. degree from the University of
Virginia; LL.M. in taxation from New York University.
Partner at Drinker Biddle & Reath in Philadelphia (1986-1990).
Former Member of the Executive Committee of the Tax Section of the New York State
Bar Association.
Adjunct professor of law at Georgetown University, where he teaches a course in
corporate taxation (1996-Present).

Background on the Position of Assistant Secretary for Tax Policy:
The Assistant Secretary (Tax Policy) is the senior advisor to the Secretary of the Treasury for
analyzing, developing, and implementing Federal tax policies and programs. In addition to the
Assistant Secretary, the Immediate Office of the Assistant Secretary includes the Deputy
Assistant Secretaries for Tax Policy, for Tax Analysis, for Regulatory Affairs, and for Tax, Trade
and Tariff Policy; a personal staff of assistants, advisors, and support personnel; and the
Management Services Division which provides administrative and management support for the
Office.

Page 1 of 5

May 9,2006
JS-4246

The Honorable John W. Snow
Prepared Remarks
To The National Association of Home Builders
Executive Meeting
Good afternoon, and thanks for having me here today. I'm really pleased to have
the chance to visit with this group because you represent such a key piece of the
American economy- both practically and symbolically. You are literally building the
American Dream, while also creating lots of good jobs.
In fact, a good portion of economic activity can be attributed to your industry. And a
strong, thriving economy is an important foundation for your industry. So the
relationship between the American economy and the housing industry is an
indispensable one.
That relationship is illustrated by three issues that I want to discuss with all of you
today, with the health and direction of the housing market being the first. Next I
want to make a couple of points about taxes and the effect they have on individuals,
investment and the overall economy. Finally, housing markets are interested in the
path of the federal deficit, which of course depends greatly on federal revenue
streams. In sum, there are three good stories to tell.
The Housing Market
The President has shown a strong commitment to housing - because there is no
other place in the world where homeownership means so much as it does in
America - and housing has been booming. Let's review the record. The US
homeownership rate reached a record 69.2 percent in 2005. The number of
homeowners in the United States reached 73.4 million, the most ever. And for the
first time, the majority of minority Americans own their own homes.
But I watch the current housing market closely, and although it is cooling off from
record highs, it's still a good strong market. Sales of new single-family homes
jumped 13.8 percent in March, and that was welcome news.
At this stage of a strong economic recovery, it is natural and expected to see rising
market interest rates at the long end of the curve. So there has been some concern
expressed about mortgage resets, that is, the effect of higher rates on adjustable
and non-traditional mortgages. It is first important to note that millions of Americans
have been able to move into homeownership because of these products. To put
this further into perspective, only about five percent of mortgage debt is subject to
reset over the next year, and total annual payments on these reset mortgages
should go up by about $10 billion, which is roughly 0.1 percent of annual private
consumption. Overall, rates remain relatively low, and it is our view that the effect of
resets on the macroeconomy will be relatively small in the foreseeable future.
While Treasury does not directly oversee the bank and housing regulators, I make it
a point to meet with them regularly. Treasury has followed closely the work on
revising lending guidelines, and we will continue to monitor the new guidance.
Tax Relief: Helping Families and Spurring Investment
In 2004, I visited a homebuilder in a subdivision construction a site in Charleston

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WV. He recalled the story of driving out to that same site on September 12, 2001.
He had just put his livelillood on the line to start the project, and in the wake of the
vicious attacks, said to himself: "Will I ever be able to sell any of these houses?" Do
you know what he said to me next? "Thank God the President acted. To restore
confidence. To get the country moving again."
The President led and Congress responded in '01 and again in '02, by cutting taxes
on paychecks and tax returns as an essential first step toward economic recovery.
It provided stimulus and oxygen.
During the President's first term, Congress enacted three tax acts containing tax
relief for America's families, and the tax burden was reduced on all families who
pay taxes, including the working poor and middle class. Low and middle-income
families have especially benefited from the creation of a new 10-percent-rate
bracket and the expansion of the child tax credit to $1,000. These tax cuts reduce
the amount of taxes paid both throughout the year through withholding and at the
end of the year when taxpayers file returns.
Over five million taxpayers, including four million taxpayers with children, will have
their income tax liability completely eliminated in 2006 due to the tax acts enacted
during the President's first term. Most of these taxpayers have income under
$50,000
Also, it is important to note that our current tax system is already quite progressive
with those with more income paying a higher fraction of individual income taxes. In
fact, the bottom half of Americans ranked by income pay four percent of individual
income taxes, while the top 50 percent pay the remaining 96 percent. The top five
percent pay over 50 percent of the individual income taxes.
Some truths are as old as taxation itself: Anything you tax, you get less of. And
anything you tax less, you get more of. Lower tax rates on individual income - with
everyone who pays income taxes getting relief from the President's program- mean
more money in the pockets of every American taxpayer. That importantly included
small-business owners, who tend to file their business income on individual forms.
This is important to note because of their critical role in economic growth and job
creation.
But it wasn't enough. The recovery was still anemic. It needed more life. And it
needed to be made sustainable.
The second step then was lowering tax rates on savings and investment, and that
has proven to be a powerful catalyst indeed. The Jobs and Growth Act of 2003
lowered taxes on capital, and that has helped the economy pivot from nine
consecutive quarters of declining real annual business investment to 12 straight
quarters of rising business investment. It was as if a light switch has been thrown
on.
Rarely has a piece of public policy been so effective, with the effects so evident and
immediate.
Tax Relief: Creating Jobs and Growing the Economy
Relieved of some of their economic burden, the behavior of businesses, individuals
and investors acted like yeast; our economy has risen quite naturally and steadily
for three years.
All the major economic data are now positive - it's difficult to find an indicator that
isn't good news-- and the trend lines can clearly be traced to the enactment of progrowth tax relief.
In the past three years the US economy has grown at a 3.9 percent annual rate.
GOP growth for the first quarter of this year, we learned recently, was a very strong
4.8 percent, making up for the fourth quarter's hurricane-related slowdown.

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Construction spending reached an all-time high in March.
Business investment is growing at a rate last seen at the peak of the high-tech
boom in 2000, but fortunately without the market excesses we saw then. No one is
talking about· irrational exuberance' today. This is a well-grounded, durable
expansion.
With 5.2 million new jobs created in the past three years and unemployment at a
very low rate of 4.7 percent- that's lower than the average for the 1960s, 1970s,
1980s or 1990s - there is much for you and your customers to be proud of and
optimistic about. And it's broad-based across society, with unemployment dropping
sharply for youths, African Americans, and for the last quarter, to an all time low for
Hispanic Americans.
We really are firing on all cylinders when you look at homeownership, real
disposable income, durable goods, consumer confidence and a host of other
indicators. Propelled by the economy, the Dow is approaching its all-time high
closing.
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.
We learned from last Friday's jobs report that average hourly earnings have risen
3.8 percent over the past 12 months - their largest increase in nearly five years.
In the past, I have said we were at the tipping pOint on returns to labor. Let me be
clear: we are there now. This is the point 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.
Fortunately, productivity remains strong, so we are able to maintain both higher
wages, higher standards of living and low per-unit labor costs.
Now, I know one thing that has to be true--a strong economy is good for housing.
And it is important that we keep the economy strong.
Of course there are some headwinds to the economy. Gasoline prices are one area
that is a real concern. They are making things tougher for hard-working families all
over America. The President has presented a four-part plan that includes making
sure consumers and taxpayers are treated fairly at the pump, promoting greater fuel
efficiency, boosting our oil and gasoline supplies, and investing aggressively in
alternatives to gasoline, so we can eliminate the root cause of high gas prices by
diversifying away from oil in the longer term.
As part of this, we need to take advantage of our own abundant natural resources,
like clean coal, the resources of ANWR and wind power.
Everyone appreciates that high gas prices act like a tax on families and businesses,
and we need to ease the pain to the extent it is possible. But the good news is that
our strong economy has proven so resilient in handling these headwinds to this
point.

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Looking back, there can be
with responsible leadership
environment in which small
could bring our economy to

no question today that well-timed tax relief, combined
from the Federal Reserve Board, created an
businesses, investors, entrepreneurs, and workers
this pOint of strength.

Clearly, tax relief encouraged business investment and created jobs. The resulting
economic growth - with more people working, more profits and strong markets leads to higher tax revenue.
Tax Relief: Raising Federal Revenues and Lowering the Deficit
Those who were skeptical of the President's economic policies didn't anticipate the
depth and breadth of good economic news I've just shared with you. They said that
it wouldn't help at all, that it was counter-productive and "reckless." But of course
they were wrong.
Some said--and continue to say - that the tax relief would blow a hole in the federal
budget. According to their view of economics, tax cuts would shrivel up revenue
streams.
But they're wrong yet again. Lower tax rates and rising federal revenues are entirely
consistent, because economic growth leads to increased tax receipts.
Every new job creates new tax revenue. And we've had 5.2 million reasons why this
is true. Every investment that grows a company or builds wealth for an individual or
family ... creates tax revenue. Rising equity markets also help.
And this is why tax revenues are at an all-time high today--with lower tax rates.
Do we have a perfect financial picture? No, of course not. We've had unwelcome
budget deficits, but tax cuts were not the culprit. The deficits are actually
understandable considering challenges our nation has faced in recent years - from
a previous downturn in the economy to fighting a ruthless enemy, a global terrorist
threat unlike any threat we have faced before. We also have a responsibility to help
the victims of hurricanes to recover. According to data from the nonpartisan CBO,
over three-quarters of the deficits over the last 5 years are attributable to higher
government spending, and the effects of the earlier recession.
There are two sides to the federal budget: one is spending, and one is revenues.
First, let's talk about revenues. In 2004, tax revenues grew about 5.5 percent. Last
year those revenues increased by almost 15 percent, or 274 billion dollars, and they
continue to grow by double digits again this year.
With this increasing stream of revenues, the deficit is shrinking. In fact, it is on track
to be cut in half by 2009 in spite of those fiscal demands I mentioned earlier. Last
week a Congressional Budget Office report said that the 2006 deficit is expected to
be significantly less than originally anticipated due to a surge in federal tax receipts,
which would put the deficit around 2.5 percent of GOP.
We've seen that tax cuts are an effective way to grow the economy. And a growing
economy reduces the budget deficit.
Taxes and Spending: Higher or Lower?
There's a fault line now coming into full view in public discourse. Some now boldly
advocate raising taxes. They have waited over a decade for their opportunity and
they feel the time has come.
But I wonder: how would raising taxes increase the chances of people realizing the
American dream through homeownership? How would raising taxes help you hire
more people to build those houses?

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The call for tax increases comes under the pretense of deficit reduction and the
mistaken belief that the only way to close the deficit gap is to raise taxes. I've also
heard skeptics point, for example, to last week's Social Security and Medicare
Trustees' report as a reason to raise taxes. This attempt at criticizing the
President's highly successful economic policies is perhaps the most misguided of
all. Social Security and Medicare are financially unsustainable the way they are
currently structured. To suggest that the American people pay additional taxes
today in order to shore up these programs for the future is irresponsible and
advances nothing but denial of the real structural problems of the programs rooted
in the changing demographics of our nation. Reform of these programs is incredibly
important - but the underlying drivers of their growth must be dealt with.
There is one truth which all sides of economic and tax debates should be able to
agree on at this point, so I'd like to close on that one: controlling spending is critical
to deficit reduction. The President and I believe that it is part two of a two-pronged
strategy: grow the economy and control spending. That is why the President is
holding the line on the emergency supplemental spending bill now pending in
Congress, and that is why he is pushing so hard for the Line Item Veto. Just
imagine what those who now seek to raise taxes would do to federal spending if
they had their way.
Conclusion
I want to commend this group for its continued hard work and service to its
customers--the homeowners of America. The value of homeownership extends
well beyond bricks and mortar, to what it means to the very hopes and aspirations
of the people of this country. We cannot underestimate its importance in our
national identity.
It is inextricably tied to the course of the economy. The President's strong
leadership to help revive the economy is now paying dividends to all sectors of the
economy. I'm sure you'll agree that it only makes sense to continue those good
policies, and that the markets would not view kindly a retreat from them. Now is
simply not the time for a tax increase.
Thanks so much for having me here today - I'd be happy to take your questions
now.

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May 9,2006
JS-4247

Secretary John W. Snow To Hold Press Conference
Following Treasury's Release Of The Semiannual Report On International
Economic And Exchange Rate Policies
Treasury Secretary John W. Snow will hold a press conference tomorrow at 4:30
p.m. (EDT) following the release of Treasury's Semiannual Report on International
Economic and Exchange Rate Policies. The report reviews developments in
international economic policy, including exchange rate policy. It is required under
the Omnibus Trade and Competitiveness Act of 1988. The report will be posted on
Treasury's homepage (11Itp.iwWI"J.tll':l;'CjClV) tomorrow at 4 p.m. EDT.

Who:
Secretary of Treasury John W. Snow
What:
Press conference on the semiannual report on international economic and
exchange rate policies
When:
Wednesday, May 10,4:30 p.m. (EDT)
Where
Main Treasury Building Media Room 4121
1500 Pennsylvania Ave., NW
WaShington, DC
Note:
Media without Treasury press credentials planning to attend should contact
Treasury's Office of Public Affairs at (202) 622-2960 or e-mail
frallces andelson@cio.treas cJCJv with the following information: Full name, Social
Security number and date of birth. The press conference will also be webcast at
www.treas.gov.
- 30 -

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May 10, 2006
JS-4248
Remarks of Treasury Under Secretary for
Domestic Finance Randal Quarles to the
Money Marketeers
New York, NY
Thank you. It is a great pleasure to have this opportunity to speak before the
Money Marketeers. I'd like to use my time this evening to comment on the very
positive economic developments over recent quarters and to offer some
perspectives on risks in the financial sector that have garnered a great deal of
media attention of late.
Economic Performance
First let me review the good news about the economy. Recent economic
performance by all accounts has been very strong and the economy appears
poised to continue along a solid track of expansion. After the lull in motor vehicle
spending in the fourth quarter of last year associated with the expiration of special
sales incentives in the fall, consumer spending rebounded in the first quarter of this
year. Moreover, indicators of household financial conditions are quite positive on
net: Delinquency rates on credit cards, mortgages and other consumer debt remain
at quite low levels; household bankruptcies have dropped following the
implementation of new bankruptcy legislation last fall; and household net worth
relative to personal disposable income reached the highest point in several years
near the end of last year and likely has climbed still further over the course of this
year. These developments coupled with strong employment gains, falling
unemployment rates, and a more optimistic outlook for wage growth have buoyed
consumer confidence despite elevated energy prices.
Developments in the business sector also point to continued solid economic
expansion. Spending on equipment and software accelerated last quarter,
suggesting growing confidence among business executives about the underlying
strength of the economy. New orders for nondefense capital goods continue to
exceed shipments. And strong corporate profits, healthy balance sheets, and
ample credit availability should continue to support business investment over
coming quarters. Moreover, businesses continue to discover new ways to
streamline operations and create efficiencies. Headline productivity in the nonfarm
business sector advanced at a 3% percent pace last quarter. Perhaps even more
notably, productivity growth in the nonfinancial corporate sector averaged 5 percent
last year--up a full percentage point from the prior year. Those productivity
increases have helped to keep cost pressures in check. Indeed, unit costs in the
nonfinancial corporate sector actually edged lower over the course of last year. On
balance, these results suggest that overall inflation pressures remain contained.
The most recent data on PCE prices point to core price inflation over the first
quarter at about 2 percent. The rise in the market-based core PCE index--which
many view as a more accurate reading of underlying inflation as it excludes various
imputed prices--has been even more modest, running at about a 13/ . percent pace
over the first quarter.
Strong U.S. economic performance over the past year has lifted all boats including
a few that are docked at the U.S. Treasury. In particular, tax receipts were very
strong last month, far exceeding initial estimates. At last count, individual
nonwithheld tax receipts over this April/May period were the second highest on
record and well above the level anticipated in the President's budget. Corporate
taxes have also exceeded initial estimates. As a result, we remain on track to meet
the President's goal of cutting the deficit in half by 2009.

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In short, the hard work and dedication of the American workforce coupled with the
President's economic program are paying off in superior economic performance.
Most economic forecasts are upbeat about economic prospects with inflation
expected to remain low and output and employment projected to expand at a pace
close to long-run trends.

Risks to the Outlook
Perhaps this would be an excellent note to end on, but I grew up on a ranch--which
is surprisingly good training for thinking about markets--and learned at an early age
that today's weather is not necessarily tomorrow's and that shocks can dramatically
affect the outlook. In that spirit, I would like to turn now to some of the factors that
may present risks to the economic outlook. We live in an uncertain world and there
is certainly no shortage of potential risks that we face.
One very significant risk that I have addressed previously is the question of the
housing GSEs, Fannie Mae and Freddie Mac. It is now widely recognized that the
GSEs have relied upon their funding advantage to expand the size of their retained
portfolios far beyond levels necessary to achieve their mission. The concentration
of risk inherent in these portfolios along with the GSEs' thin capital structure are an
important policy concern and a high priority for the Treasury, and we are continuing
to urge Congress to take action soon to address these issues.
Today, however, I would like to focus on three other risks that have been widely
noted--unusually low volatility and risk premiums in financial markets, elevated
home prices and mortgage market developments, and foreign demands for U.S.
Treasury securities.
•

The Low Volatility and Low Risk Premiums

Low volatility and low risk premiums are the rule across financial markets in the
current environment. Realized volatilities in interest rate, credit, and equity markets
have been near historical lows. And forward-looking measures of uncertainty in
these markets derived from options prices suggest that investors expect volatility to
remain low for the foreseeable future. At the same time, investors do not appear to
be requiring much compensation for risk in many of these markets. Compensation
for default risk in the form of credit spreads for both high- and low-tier credits is
quite low. And compensation for interest rate risk as captured by term premiums in
the Treasury and interest rate swap markets is similarly quite modest. I would note
that this pattern of low volatility and low risk premiums is a global phenomenon:
Fixed-income and equity markets in other industrialized countries exhibit many of
the same features.
So what should we make of this? Is this Just a transitory quiescent period or are
there longer-run forces at work? To some extent, low volatility and low risk
premiums may be a function of longer-run trends. At the outset of my remarks, I
noted the reasons for optimism in the most recent U.S. economic data. But taking a
much longer view, macro economic performance has been steadily improving in the
United States and elsewhere since the early 1980s in what economists have
dubbed the "great moderation." That is, the variability in output and inflation seems
to be falling over time. There have been many hypotheses offered as explanation
for this trend including, among others, better monetary and fiscal policy, increased
integration in world markets, technological change, and changes in the composition
of production. But whatever the root causes, it seems reasonable to conclude that
greater stability in the underlying macroeconomy is a factor contributing to low
volatility and risk premiums in financial markets.
As plausible as this explanation may be though, I suspect it is not the entire story.
While there have been genuine and far reaching advances in market practices,
institutions, and regulatory infrastructure that have contributed to the stability of
financial markets over the years, I'm afraid that human nature and psychology
remain just as unpredictable as ever. We know that financial markets are prone to
sudden bouts of turbulence--witness the stock market crash in 1987, the "capital
crunch" in the banking sector in the early 1990s, the steep rise in long-term interest

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rates in 1994, the global turmoil in the fall of 1998, the speculative bubble in tech
stocks and its aftermath in 1999-2000, and the sharp withdrawal from risk-taking in
2002 amid corporate accounting scandals. As much as one might hope that the
current low volatility environment is permanent, it seems a fair bet to say that it will
be interrupted from time to time by further financial crises large and small.
Accepting this fact, as policymakers we are constantly endeavoring to foster
measures that can reduce the incidence of crises and improve our readiness to
manage crises and to mitigate their effects when and if they occur.
What might such a crisis look like? Every situation is unique of course, but recent
history points to some common elements. During these episodes, investors'
perception of risk and their aversion to it seem to increase substantially. Stock
prices fall on major exchanges as investors mark down their expectations for
earnings growth and require larger premiums for risk. Safe-haven demands for
Treasuries and other very high-grade instruments drive yields down in these
markets, while interest rates on lower-tier credits increase markedly. Realized and
implied volatilities in fixed-income and equity markets rise. Market-makers pare
their risk positions and bid-ask spreads widen while market depth deteriorates.
Correlations among financial variables may depart substantially from historical
relationships. Banks and other lenders may tighten credit availability. And
reductions in wealth and a fall in business and household confidence may threaten
to impair spending.
How would our current financial system stand up to this sort of canonical crisis? On
the whole, I would say that the U.S. economy is well positioned to weather such a
retrenchment in risk-taking. If anything, there may be some elements of business
credit markets that might be a question mark. Credit spreads have narrowed very
substantially over recent years and banks have eased their standards and terms on
business loans significantly as well. Of course, the banking sector as a whole is
well capitalized, but losses on outstanding business loans and a significant
tightening in the availability of new business credit could well develop in a crisis.
Given the rapid expansion in credit default swaps and in cash and synthetic
collateralized debt obligations (COOs) and some of the problems observed in these
markets over recent quarters, one might speculate that these markets could be
tested in an environment with significant numbers of defaults. Moreover, there could
well be some fallout in the hedge fund sector as these institutions have been
significant players in credit derivatives markets, often relying on leverage in
implementing their strategies.
Of course, hedge funds have received enormous attention over the last few years
and I will be testifying before Congress on hedge funds next week. Let me just say
here as an aside that I do not subscribe to a view apparently held by some that
hedge funds represent an imminent threat to financial stability. To the contrary,
hedge funds play an important role in price discovery and in supporting market
liquidity. As a general principle, I see the growth of hedge funds alongside other
developments such as increasing cross-border holdings of securities as part of the
larger evolution in financial markets toward the textbook ideal of "complete financial
markets." In that ideal world, investors enjoy ready access to a full range of
securities that allow them to price and hedge risks in every conceivable state of the
world. Of course, we're a long way yet from that ideal--among other things, in the
world of complete financial markets, all investors have full information about the
range of investments at their disposal and the risks that they entail--but the flexibility
that hedge funds enjoy in implementing their investment strategies is a step in that
direction. I think it is important that we have a clear understanding of the evolving
role of hedge funds in our financial system, and I have asked Assistant Secretary
Henry to undertake an initiative to learn more about developments and potential
public policy issues in this important sector. We will be hosting a series of informal
discussions with market participants and other industry experts as part of that effort.
Finally, I would like to note that the Treasury Department along with other agencies
has devoted considerable resources to both crisis prevention and crisis
management. Under the general heading of crisis prevention, we have been
working with other agencies at home and abroad to foster sound risk management
policies and practices throughout the financial system. In the area of crisis
management, we are again working in coordination with others in improving the
resilience of the financial system. We have conducted periodic crisis management

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exercises with other U.S. authorities and we have also been working closely with
colleagues in international forums to improve communications and coordination in
the event of a crisis. You might also know that we recently published a white paper
for public comment outlining a possible structure for a Treasury securities lending
facility, which might be a useful additional tool for the Treasury in managing
financial crises.
•

Housing Prices and Potential Mortgage Payment Shocks

I'd like to turn now to a risk factor that is particularly close to home. Open the local
real estate section of many newspapers these days and one finds a mixture of
giddiness and angst--giddiness over the escalation of home prices over recent
years and angst that the boom in home prices may soon come to an end. Some
analysts have suggested that house prices in some markets could be substantially
"overvalued." However, considerable uncertainty surrounds such estimates. In
particular, analysts have debated whether biases in some standard house price
series might account for a significant portion of the notable rise in price-to-rent
ratios over recent quarters.
Regardless of where one falls out in this debate, a broad-based decline in house
prices would almost certainly exert a noticeable drag on economic activity. Based
on standard estimates relating wealth to spending, every 1 percent drop in house
prices might translate to something on the order of a 0.1 percent drop in household
spending over time. Of course, these spending effects might be more pronounced
if a fall in house prices were especially marked and occurred over a short time
period. Such a sharp decline in house prices would be very unusual and could well
shake business and household confidence about economic prospects. The decline
in confidence, in turn, could depress spending by more than suggested by simple
wealth effect calculations. I have to say that I do not think this is a likely scenario.
Of course, it would not be at all surprising to see a moderation in the escalation of
home prices, but I would not expect to see a substantial drop in housing prices as
long as income is rising and interest rates remain moderate.
Another worry in housing markets centers on the rapid expansion of variable
payment mortgages, which include standard ARMs and so-called non-traditional
mortgages that may incorporate "interest-only" periods and other special features.
Regulatory agencies have expressed concerns that banks have been aggressively
marketing such mortgages to a broad audience without taking full account of the
risks involved. To address these issues, the regulatory agencies issued draft
guidance on non-traditional mortgages last December. The guidance focused on
three broad areas--underwriting standards, risk management practices, and
consumer protection. While I won't venture into all the details here, the draft
guidance suggested that banks need to ensure that their underwriting standards
take account of the borrower's ability to repay over the life of the loan, that their
capital and loan loss provisions recognize that the performance of these loans has
not been tested in a stressed environment, and that information provided to
borrowers regarding the terms of non-traditional mortgages is understandable,
timely, and accurately conveys the full range of risks associated with any particular
mortgage product.
At the macro level, some reports have suggested that increases in mortgage
payments under non-traditional mortgages may represent a substantial hit to
household disposable income. However, many households that have taken out
interest-only mortgages, for example, appear to have opted for five- to ten-year
interest-only payment periods. As a result, only a relatively small portion of
outstanding interest-only mortgages is expected to reprice over the next few years.
Market estimates suggest that the potential increase in mortgage payments in 2006
and 2007 from such repricing effects might total as much as $20 billion. While that
is certainly a large number, it represents only a small hit to aggregate personal
income. Moreover, market reports indicate that borrowers using such nontraditional mortgages tend to be upper income individuals that can manage a
sizable increase in their monthly mortgage payment.
•

Foreign Holdings of Treasuries

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I would like to turn now to another perceived risk that has received a fair amount of
attention of late--the potential for large foreign investors to aggressively diversify
away from U.S. Treasury securities.
I have to say upfront that I find this scenario fairly implausible. Foreign investors
hold Treasuries because they are a safe and highly liquid instrument. Still, foreign
holdings of U.S. Treasuries are very substantial and foreign demands for
Treasuries could certainly evolve over time.
Taking this concern at face value, a broad-based shift in foreign portfolio demands
away from Treasuries and toward other private securities should push Treasury
yields higher and drive the yield on private securities lower.
The key question is by how much? Recalling basic supply and demand analysis,
the answer to this question depends in part of the slope of the demand curve for
Treasury securities. If the demand curve is fairly steep, a leftward shift in the
demand curve in conjunction with relatively unchanged supply could drive Treasury
prices down substantially and push Treasury yields sharply higher. On the other
hand, if the demand curve for Treasuries is very flat, then the same leftward shift in
the demand curve would have little or no impact on Treasury prices and yields. It is
difficult to identify the slope of the demand curve for Treasury securities with any
great precision, but I would observe that the rapid increases in foreign holding of
Treasury securities during 2003 and 2004 was accompanied by only a modest
widening in spreads between swap or agency rates and Treasury yields.
This evidence suggests to me that the demand curve for Treasuries is rather flat.
Consistent with this view, the reported dropoff in foreign demands for Treasuries of
late has not resulted in any notable narrowing of these spreads. On balance, I
would not rule out the possibility that a very substantial portfolio shift away from
Treasuries by foreign investors could put some upward pressure on yields, but I
believe the effects would most likely be modest and temporary.
I draw some confidence on this point from many conversations with market
participants that have underscored the so-called "search for alpha" in fixed-income
markets. With a flat yield curve and the compression in risk spreads that I noted
previously, these market participants have noted that it has become more difficult to
generate the elevated risk-adjusted returns--the alpha-- that attracts investors. In
this sort of environment, I suspect that even a small drop in Treasury prices
occasioned by a hypothetical falloff in foreign demands would be enough to spur
legions alpha-hunters eager to acquire Treasuries at only slightly higher yields.
Conclusion
I would like to close by just noting that the potential tail risks I've talked about today
are just that--possibilities but not likely outcomes. Fundamentally, the economy is
strong, the financial sector is healthy, and our future looks bright. We will surely
face challenges in the future, but we can take comfort in the knowledge that our
economy and financial system have proven remarkably resilient to all manner of
adverse shocks in the past. And I can assure you that my colleagues and I at the
Treasury are doing everything in our power to make our financial system even more
resilient in the future. Thank you.

Page 1 of 1

May 10, 2006
JS-4249
Statement of Treasury Secretary John W. Snow
On Protecting Americans from Identity Theft
"Perhaps the most serious threat to financial consumers today is identity theft.
Identity thieves are clever, adaptable, and heartless. Indeed, many identity thieves
specifically target the most vulnerable members of society - families of the recently
deceased, seniors, hospital patients, and men and women serving our nation
overseas. The effects don't stop with a few unauthorized charges. A ruined credit
history can be an unbearable burden that lasts for years. They are a threat to
individual Americans and a threat to our progressive and open economy.
"President Bush recognized from the beginning the need for his Administration to
act quickly to address this problem. Today, the President signed an executive order
that creates the Nation's first ever Identity Theft Task Force. This task force will
marshal the resources of the federal government to crack down on the criminals
who traffic in stolen identities, and protect American families from this devastating
crime.
"Treasury has been working hard to fulfill the President's call to action and protect
Americans' financial assets. In just the past few months we have distributed
approximately 200,000 free educational DVDs across the country to help
Americans learn about identity theft, how they can protect themselves, and what
they should do if they think someone is attacking their information.
"The Fair and Accurate Credit Act, signed by President Bush in 2003, has helped
teach Americans how to protect their assets by giving them easier access to spot
unauthorized activity on their credit information and by allowing businesses to move
quickly to identify the criminals at work. President Bush's leadership on this issue
has provided Americans the needed tools to keep informed and to protect their
financial information. His efforts today remind us that no matter where or when, we
must remain constantly alert and work together to prevent this crime from ruining
more lives."
For more information check out Treasury's Identity Theft Resource page at:
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May 10, 2006
JS-4250
Statement of Treasury Secretary John W. Snow on the Report on International
Economic and Exchange Rate Policies
I am pleased to release today Treasury's latest Report on International Economic
and Exchange Rate Policies and to share our thinking on the main highlights and
conclusions.
Let me state at the outset: A strong dollar is in our nation's interest, and currency
values should be determined in open and competitive markets in response to
underlying economic fundamentals.
The international economy is performing exceptionally well. Global growth this year
will exceed 4 percent for the fourth consecutive year. Inflation remains low and
global financial conditions are benign. This is the best global performance in three
decades. It is all the more impressive considering the serious disturbances faced
only several years ago and the sharp run-up in oil prices.
The robust U.S. economy is strongly contributing to the favorable performance.
First quarter growth this year was 4.8 percent at a seasonally adjusted annual rate,
bouncing back strongly from the lower fourth quarter result last year. Growth over
the last four quarters was 3.5 percent, the best of any major industrialized
economy, The labor market has strengthened with 32 straight months of job
growth, totaling more than 5.2 million new jobs since the President's tax relief took
effect in May 2003. Inflationary pressures remain well contained -- consumer price
inflation is running at 3.4 percent, but stripping out energy and food costs, core
consumer price growth is only 2.1 percent over the past twelve months,
Key to the economic success of the United States is its openness, The United
States must resist the forces of protectionism and isolationism, Foreign direct
investment flows into the United States grew almost 60 percent in 2004 and more
than 20 percent last year. Foreign direct investment generates a significant number
of jobs - more than 5 million as of 2004.
Global imbalances are a key issue on the international economic agenda, They
arise because of large growth disparities in major countries, differences in the
relative attractiveness of investment in their economies, and divergent patterns of
saving and investment. The U.S. current account deficit and corresponding
surpluses elsewhere reflect these disparities. Reducing global imbalances, in an
orderly manner that sustains and maximizes global growth, is a shared
responsibility requiring complementary actions by a large number of countries. In
this context, I have repeatedly emphasized that the international economy performs
best when large economies embrace free trade, the free flow of capital and flexible
currencies.
The international community has an agreed strategy to reduce global imbalances.
The United States is working to raise national saving by cutting the fiscal deficit and
increasing private saving. Our policies to do so are working. To help boost
personal saving, the President has proposed expanding tax-free savings
opportunities and simplifying our current confusing system. He has proposed
replacing current-law IRAs with Lifetime Savings Accounts and Retirement Savings
Accounts, consolidating employer-based retirement savings accounts, and
establishing Individual Retirement Accounts for lower-income households for the

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purposes of education, home purchase, and business start-ups. And the 2005
deficit was within the 40-year historical norm as a percentage of GOP. The
Administration remains committed to cutting the fiscal deficit and meeting the
President's goal of halving the deficit by 2009, when it is projected to be well below
that goal at about 1.4 percent of GOP. Last year tax revenues increased by almost
15 percent and they continue to grow by double digit percentages again this year.
In fact, last week a Congressional Budget Office report said that the 2006 deficit is
expected to be significantly less than originally anticipated due to the surge in
federal tax receipts. It is in the U.S. national interest to continue pursuing the path
of fiscal consolidation, but one should not overestimate the impact fiscal
consolidation will have in reducing global imbalances. Let me also underscore that
the United States does not have a current account target. Our aim is to achieve
continued good, low-inflationary growth.
Europe and Japan need to promote structural reforms to strengthen potential
growth. Growth in the Euro-area is witnessing a modest cyclical pick-up this year,
but there is much more to be done. The Euro-area's overall external position is in
near balance, but I reject the view that Europe thus has little role to play in the
global adjustment process. After struggling for many years, Japan's economy
appears to have turned the corner. Corporate and banking sector restructuring
have been largely completed, leading to rising full-time employment, investment
and bank lending. As Japan emerges from deflation, a broad structural reform
agenda is needed to raise productivity growth, promote sustained domestic
demand-led growth, and lessen the economy's reliance on export-led growth.
Rising oil prices are also affecting global imbalances. In the last three years, oil
revenues for the largest oil exporters have grown by $410 billion. These countries
can contribute to the adjustment process through accelerated investment in
capacity and increased diversification.
Let me turn to emerging Asia, and China specifically. Strong growth in China and
the region have helped propel the global economy. But greater exchange rate
flexibility in emerging Asia is an irreplaceable component of the adjustment of
global imbalances, and Chinese exchange rate flexibility is the lynch pin of currency
flexibility in emerging Asia.
China's international economic and exchange rate policies are deeply concerning.
The United States has been joined by the international community, including the G7, the IMF, and Asian Development Bank, in vigorously encouraging China to
implement greater exchange rate flexibility. In the final analysis, though, the
Treasury Department is unable to conclude that China's intent has been to manage
its exchange rate regime for the purposes of preventing effective balance of
payments adjustment or gaining unfair competitive advantage in international
trade. Thus, we have not designated China pursuant to the 1988 Trade Act. Let me
share with you our reasons.
China is engaged in an historic transformation to a market system. To achieve the
requisite economic rebalancing, China must make its currency regime more flexible,
strengthen consumption and modernize its financial system - the three pillars of our
policy engagement.
China's leadership has publicly committed to take these steps. President Hu, in a
meeting with President Bush on April 20, stated that China does not want a large
current account surplus and will act to reduce it. Premier Wen made this same
commitment in his speech to the National People's Congress and also committed to
allow more exchange rate flexibility. China's recent five-year plan places strong
emphasis on consumption and rural development in order to spur domestic
demand. China's Central Bank Governor laid out a five-point plan to reduce the
surplus, including efforts to boost domestic demand, reduce China's high saving
rate, accelerate removal of trade barriers, allow foreign firms greater access and
achieve greater exchange rate flexibility.
Of course, words must be backed by action, and China is taking some action. On
the exchange rate front, China abandoned its eight-year peg against the dollar last
July, and the renminbi (RMB) has moved slightly higher against the dollar since that

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time. But given the close relationship between the RMB and the dollar and
because the dollar appreciated last year across the board, China's currency on a
trade-weighted basis appreciated by over 9 percent last year. China has also taken
steps to create a deeper and more liquid foreign exchange market, allowing
interbank foreign currency trading for the first time this year.
China is also acting to boost consumption, dampen its high saving rate, and
promote domestic demand. Recently, China has put in place steps to cut taxes,
develop rural areas, and raise minimum wages.
China's efforts to modernize its weak financial sector are part of the strategy to spur
consumption and more efficient investment. In the last year and a half, China has
acted to tighten its risk classification system for bank loans, deregulate and raise
bank lending rates, and bring in foreign expertise and know-how to improve the
soundness and market-orientation of the banking system. We strongly urge China
to allow foreign firms greater access to China's financial system and to lift the
ownership caps facing foreign entities.
Let us be clear: we are extremely dissatisfied with the slow and disappointing pace
of reform of the Chinese eXChange rate regime. The RMB's appreciation has done
little to curb China's large current account surplus or cool its fast-growing economy,
which last quarter was at an over 10 percent annual rate. Further exchange rate
flexibility is a key tool for tightening financial conditions amid ample liquidity,
reinforcing the effect of recent monetary policy actions aimed at cooling economic
activity. Thus, this slow pace is neither in China's self-interest nor in the interest of
the world economy. With a still rigid exchange rate, China lacks effective monetary
policy tools to avoid the boom-bust cycles it has experienced in the past. This is
particularly important now that investment in China appears to be reaccelerating,
increasing the risk of a hard landing.
For the last three years, the Treasury Department has made engagement with
China one of its top priorities. This intensive engagement has first and foremost
concentrated on exchange rate flexibility, but also on the other steps necessary to
shift the sources of growth toward domestic demand and consumption, reform the
financial sector and to build the foreign exchange market infrastructure. While the
economic face of China changes rapidly each day, we are not satisfied with the
progress made on China's exchange rate regime and we will monitor closely
China's progress every step of the way.
It is important for China to understand that its exchange rate regime is not simply a
bilateral US-China issue, but a multilateral issue. Chinese exchange rate practices
affect the entire world. The IMF is the world's only multilateral institution with a
mandate to consider exchange rates. Managing Director Rodrigo De Rato has
called for strengthening IMF exchange rate surveillance in his medium-term
strategy. Further, at the recent IMF/World Bank spring meetings, he developed a
new mechanism for multilateral consultations to broaden the global discussion of
imbalances. The IMF must take this mandate for leadership by encouraging real
reform in the Chinese currency regime.
In conclusion, the entire international community must work together cooperatively
to address global imbalances, but it is a matter of extreme urgency that China act
immediately to increase the flexibility of its exchange rate regime before real harm
is done to its own economy, to its Asian neighbors, and to the global financial
system.
•
•
•
•
•

ReDan D
Appelldlx I Patterns of Illdlcators D
Appelldlx II Flxecl vs FleXible Exchallge Rates D
Fact Sheet. Commitmellts by Chillese OffiCials D
Fact Sheet. Chlll8se ACtlOIlS on Exchange Rate FleXibility, Financial Reform
alld BCllanced Growth D

-30-

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Report to Congress on
International Economic and Exchange Rate Policies
May 2006
Summary
This report reviews developments in international economic and exchange rate policies, focusing
on the second half of2005, I and is required under the Omnibus Trade and Competitiveness Act
of 1988 (the "Act,,).2 This report also updates the special Appendix to the November 2005
Report on International Economic and Exchange Rate Policies and includes a second Appendix
highlighting the key issues in countries' choice of exchange rate regimes.
The global economy is strong, but global imbalances have grown, the result of disparate
economic growth rates, saving rates, and investment climates of larger economies. Rising
petroleum prices have rapidly increased the current account surpluses of major oil exporters,
enlarging global imbalances. Addressing global imbalances is a shared responsibility and should
occur in an orderly manner that maximizes sustained global growth. Members of the
international community need to implement sound economic policies and remove distortions
impeding an orderly adjustment of imbalances. They must resist protectionism and maintain
open trade and investment regimes. The United States cannot be expected to resolve these
imbalances by itself.
This report expresses particular concern about the international economic and exchange rate
policies of China and reaches the central conclusion that far too little progress has been made in
introducing exchange rate flexibility for the renminbi. In the final analysis, however, the
Treasury Department is unable to determine, from the evidence at hand, that China's foreign
exchange system was operated during the last half of 2005 for the purpose (i.e., with the intent)
of preventing adjustments in China's balance of payments or gaining China an unfair
competitive advantage in international trade. Thus, the technical requirements for China to be
designated under the terms of the Act have not been met. In reaching this conclusion, the
Treasury Department took into account a number of factors:
•

On July 21,2005, China abandoned its eight-year peg to the dollar and moved to a managed
floating exchange rate regime. Since that time, the renminbi has further appreciated, though
slightly, against the dollar. The examination period for this Report, the second half of 2005,
is the first that includes the Chinese exchange rate policy change.

•

The renminbi has risen to a significant degree on average against China's trading partners.
While strengthening by 2.6 percent against the dollar in the last half of2005, against the

I The Treasury Department has consulted with the IMF in preparing this report. This report focuses on the period
July 1,2005, through December 31,2005.
2 The Act states, among other things, that: "The Secretary of the Treasury shall analyze on an annual basis the
exchange rate policies of foreign countries, in consultation with the International Monetary Fund, and consider
whether countries manipulate the rate of exchange between their currency and the United States dollar for purposes
of preventing effective balance of payments adjustments or gaining unfair competitive advantage in international
trade."

currencies of all of China's trading partners (JP Morgan index) the renminbi appreciated by
4.9 percent in the second half and more than nine percent during 2005 as a whole.
•

China continues to take steps to create market infrastructure and financial instruments for a
floating currency. China introduced interbank foreign currency trading and allowed banks to
act as market-makers in foreign currency in early January. China reached agreement with the
Chicago Mercantile Exchange to develop and trade currency futures to allow renminbi
hedging. And China has further reduced restrictions on capital flows to create a deeper, more
liquid foreign exchange market.

•

China's commitment to move to a flexible exchange rate is clear, and has been repeated at
the highest levels of the Chinese leadership. President Hu Jintao, when he came to the
United States in April, said that China will continue to develop the foreign exchange market
and increase the flexibility of the exchange rate. Premier Wen Jiabao, in his policy speech to
the National People's Congress on March 14,2006, stated that China will expand the foreign
exchange market and allow more flexibility and fluctuation of the Chinese currency.

•

China's leaders have also begun a fundamental realignment of the Chinese economy to
reduce its balance of payments surplus, boost domestic consumption, and reduce domestic
inequality. China's most recent five-year plan places strong emphasis on consumption and
rural development to spur domestic demand.

•

The Governor of China's central bank, Zhou Xiaochuan, announced a five-point plan on
March 20,2006, to reduce China's current account surplus and raise domestic consumption.
This plan involves actions to boost domestic demand, reduce Chinese saving, accelerate
removal of trade barriers, grant greater market access for foreign firms, and achieve greater
exchange rate flexibility.

•

China's leadership has made a clear commitment to rebalance the sources of growth in the
Chinese economy. President Hu Jintao, in his meeting with President Bush on April 20,
2006, stated that China does not want a large current account surplus and would take steps to
reduce it, relying on domestic demand to boost growth.

•

China is acting to implement this strategy. A flexible exchange rate is an essential
component of this rebalancing program, and China's leaders recognize that flexibility is
essential.

•

China's ongoing efforts to modernize its financial sector are also part of a commitment to
spur consumption and achieve long-term reversals in recent trade and current account trends.
Progress on this front increased during the reporting period, but massive challenges remain.

While these developments suggest that progress is being made, China's advances are far too
slow and hesitant given China's own needs, and its responsibilities to the international financial
community. The delay in introducing additional exchange rate flexibility is unjustified given the
strength of the Chinese economy and the progress in China's transition. China needs to move
quickly to introduce exchange rate flexibility at a far faster pace than it has done to date. With a
still rigid exchange rate, China lacks effective monetary policy tools to avoid the boom-bust

cycles it has experienced in the past. Given our strong disappointment and the importance of
China to the world economy, the Treasury Department will closely monitor China's progress in
implementing its economic rebalancing strategy, remain fully engaged at every opportunity with
China, and continue actively and frankly to press China to quicken the pace of renminbi
flexibility.

It is also important that reforming China's exchange rate regime be part of an international effort.
China's exchange rate policies affect the entire world. Increased renminbi flexibility would
greatly facilitate increased flexibility in other Asian currencies. In this regard, the G-7, IMF, and
Asian Development Bank have all called for greater flexibility in China's exchange rate. The
Treasury Department is supportive of the IMF Managing Director's commitment to strengthen
IMF exchange rate surveillance, both bilaterally and multilaterally, as a means to assist
materially this process.

Domestic Macroeconomic Conditions
The U.S. economy remained on a sustained upward growth track in 2005, with real GDP
increasing by a solid 3.2 percent over the four quarters of2005, despite modest growth in the
fourth quarter. Growth rebounded at a strong 4.8 percent annual rate in the first quarter of 2006
- the largest quarterly increase in two and a half years.
The outlook for consumption growth remains sound. The fourth quarter slowdown in consumer
spending was importantly influenced by reduced purchases of motor vehicles following strong
increases in prior quarters when generous sales incentives were in play. However, consumer
balance sheets are sound, with net worth up $2.3 trillion during the second half of 2005 - the
highest in nearly five years in relation to disposable personal income.
Improved labor markets (with one million new payroll jobs added during July-December and a
decline in the unemployment rate to an average of 5.0 percent in those six months compared to
5.2 percent in the first half of 2005), as well as the rise in household net worth, also continue to
provide support to consumer spending.
Business fixed investment grew at a 4.5 percent annual rate in the fourth quarter, with equipment
and software investment up at a 5.0 percent pace. That was lower than the 10.6 percent gain at
an annualized rate in the third quarter, as spending on selected transportation and equipment
goods declined. Growth in equipment and software investment performed well over the entire
year, increasing by 8.7 percent Q4/Q4.
The advances in the economy in the second half of 2005 occurred even as energy prices
continued to rise. From June 2005 to December 2005, the overall consumer price index
increased by 4.0 percent at an annual rate. Energy prices rose at a 23.7 percent pace over that six
month span. Food prices and the core CPI (excluding food and energy) both grew at a benign
2.2 percent annual rate in the second half of 2005. The CPI increased 3.4 percent in December
2005 from a year earlier, while the core CPI increased 2.2 percent.
The Federal Open Market Committee (FOMC) - the Federal Reserve's monetary policy-making
body - raised the Federal funds target rate by 25 basis points at each of its four meetings in the
second half of 2005. That brought the federal funds target (the rate that banks and other financial
institutions charge each other for overnight loans) to 4.25 percent at its December 13,2005,
meeting. The target rate has since been raised twice in 2006 and at the end of March 2006 stood
at 4.75 percent.
The lO-year Treasury yield rose to about 4.7 percent in May 2004 in anticipation of faster
growth and monetary tightening, then trended lower through much of the rest of the year and into
2005. After dipping slightly below four percent in June 2005, the rate fluctuated in a slightly
higher range of about 4.5 percent through the rest of 2005 and into the first two months of 2006.
Mortgage interest rates have generally followed changes in the 10-year Treasury rate and have
fluctuated in a fairly narrow band around a low level for more than two years. Low mortgage
rates have contributed to record home sales, but also to mortgage refinancings, which have
helped to free additional cash for consumption. Mortgage rates started trending upwards in the

second half of 2005, with the rate for a thirty-year, fixed-rate mortgage reaching an average of
6.22 percent in the final quarter of 2005, its highest level since the third quarter of 2002.
The Administration's FY2007 Budget contains policies that promote economic growth (low
taxes, investment in research and development, and education incentives) and restrain federal
spending (eliminating unnecessary programs and operating others more efficiently). In
February, the Administration projected the FY2006 deficit to rise to $423 billion, or 3.2 percent
of GDP from 2.6 percent last year reflecting higher costs for reconstruction in the aftermath of
hurricanes and funding to prosecute the war on terror. More recently, a Congressional Budget
Office report estimates that the deficit will be significantly less than originally anticipated due to
a surge in federal tax receipts, which will hold the deficit to around 2.5 percent ofGDP.
The FY2007 Budget projects that the deficit will trend down further after 2006 and meet the
President's goal of cutting the deficit in half by 2009, when it is projected to fall to $208 billion,
or 1.4 percent of GDP. The deficit is reduced because of continued economic growth, which
supports revenues, and because of tight controls on non-security, discretionary spending.
World Economic Conditions
The world economy expanded an estimated 4.8 percent in 2005, the third consecutive year of
better than four percent growth and well above the most recent eight-year average growth rate of
3.9 percent. Most forecasts for 2006 indicate strong growth momentum will carry forward into
the current year. Solid growth is more widely distributed than has been the case in decades, but
there are significant differences among economies. As noted above, U.S. growth remains robust.
Developing Asia had by far the strongest performance in 2005 with growth of nearly nine
percent. Growth amongst oil exporters also picked up, averaging better than six percent. The
Japanese recovery remains on track, although the potential growth rate remains low. However,
growth in the Euro-zone was only 1.3 percent. Among economically advanced countries, which
comprise 52 percent of total world output (PPP-based), growth was 2.7 percent in 2005.
Developing and emerging market economies, which account for the other 48 percent of global
output, had growth of 7.1 percent.
This excellent overall global performance was underpinned by favorable financial conditions.
Notwithstanding the rise in energy prices, with oil averaging $55 bbl in 2005 (average ofWTI
and Brent), core rates of inflation remained generally low in most economies. Long-term real
interest rates also remained unusually low for this stage of the business cycle, and spreads
between corporate and government bonds and between emerging market external fixed-income
issues and U.S. Treasuries were low and even declining (the EMBI+ spread fell to a historical
low of 173 basis points on May 1, 2006). Above-average economic growth has, in general,
enabled business balance sheets to strengthen. Balance sheet improvements mean businesses
and economies are in better position to withstand and adapt to economic shocks.
Because of financial conditions, some concerns have arisen that investors may be increasing their
risk exposure in search of higher returns. At the same time, however, many emerging market
economies used 2005 to improve their fiscal and external payments positions and boost reserves
- both absolutely and relative to short-term foreign currency debt obligations. Gross new
issuance of sovereign and corporate emerging market bonds (debt issuance of $182 billion in

2005) rose steeply in 2004 and 2005, reflecting in part the low-interest rate environment. 3 New
borrowing and gross issuance of bonds and equities by emerging markets and developing
countries rose to $406 billion in 2005, more than twice the level of2003.
Some analysts believe that valuations, however, may be compressed and the favorable financial
conditions that have supported declining spreads and increased investor positioning could
change, especially if short-term policy interest rates continue to increase in certain markets.
Current conditions may thus reflect exceptional financial circumstances.
Higher oil prices resulted in the oil export revenues of the 10 largest oil exporters increasing to
more than $600 billion in 2005, up from $256 billion in 2002. 4 The cumulative current account
surpluses of oil exporters (Middle East, Russia, and Norway) rose 68 percent to $331 billion. By
comparison, the cumulative external surpluses of Asian economies (developing, emerging
market, and Japan) rose 13 percent to $399 billion. 5 Non-oil commodity prices rose 10 percent,
led by a 26 percent increase in metals. In general, the volume of global trade expanded seven
percent in 2005, faster than the five percent average gain for 2001-04 but below 2004's trade
volume expansion of nearly 11 percent. The external debt positions of developing countries and
emerging markets, relative to their exports of goods and services, also continued to narrow and
are now half their relative levels of 1998/99. IMF balance of payments data indicate that
emerging market and developing country economies added reserves of $535 billion in 2005, with
6
developing Asia and the oil exporters accounting for 80 percent of the total increase.
An important challenge to sustaining global economic momentum in 2006 and beyond is in
getting better balanced growth of the global economy. There have been too few engines of
growth and too few centers of economic dynamism over the last several years. For the period
2001-05, for example, average yearly growth of domestic demand of the U.S. economy was 3.1
percent. China also contributed importantly to robust global growth. But G7 partners had a
considerably smaller economic expansion with domestic demand expanding a weighted-average
of only 1.7 percent per year. A key feature of adjusting global imbalances will be expanding
demand relative to output in Europe, Japan, and many parts of developing Asia.
The Euro currency zone is the world's second largest economic area. Over the last ten years,
domestic demand in the Euro-area has expanded annually a full 1.8 percentage points more
slowly than that of the United States. This gap in relative domestic demand growth rates turns
out to be substantial, the equivalent to the U.S. adding an economy the size of France or the
7
United Kingdom in just a little over 10 years.
Table 1, page 51, of Annex on Emerging Market Financing Flows, of Global Financial Stability Report, April
2006.
4 McCown, T. Ashby, Plantier, L. Christopher, Weeks, John, Petrodollars and Global Imbalances, Department of the
Treasury/Office ofIntemational Affairs Occasional Paper No.1, February 2006.
5 Derived from Tables 26 and 28, World Economic Outlook, Statistical Annex, April 2006
6 Table 1.2 of World Economic Outlook, April 2006
7 The rate of real domestic demand growth for the United States over the period 1996-2005 was 3.8 percent and for
the countries that comprise the current Euro-area it was 2.0 percent. Applying the 1.8 percent differential to 1995
real U.S. GDP (2000 U.S.$) over 10 years yields an increase of$1,578 billion. Real GDP of the French economy in
2005 (in 2000 dollars at the 2000 exchange rate) is calculated at $1,438 billion. For the United Kingdom, the
calculation is $1,622 billion.
3

Although the Euro-area's current account position is in near balance, this is in part due to
suppressed demand reflecting underemployment of existing resources. It has been argued that
structural reforms to reduce this underemployment of resources would not only increase real
income and imports but would also, by raising productivity in the tradeable goods sector, lower
unit costs in the external sector and spur exports. There is some merit in this analysis, but there
are additional factors that influence the current account position.
In the Euro-area, in particular, the services sector - which is largely a non-tradeable sector plays a strong and significant role in economic activity. Structural reforms that boost the
efficiency of the large services sector would undoubtedly raise European incomes and in tum,
imports. In addition, investment growth in Europe has been weak, notwithstanding a period of
low - if not negative - real interest rates in the Euro-area as a whole. This weakness in
investment growth is associated with a range of country-specific economic factors, but has
important implications for the pattern of global capital flows. Raising European productivity and
strengthening European capital markets are critical steps for boosting growth and investment in
Europe. Doing so would clearly affect Europe's external position and contribute to global
adjustment. Europe is not only a part of the global current account equation, improved European
economic performance is a part of the solution.

The United States International Accounts 8
•

U.S. Balance of Payments Data
U.S. Balance of Payments and Trade
($ billions, SA, unless otherwise indicated)
2004 2005

2005

U4
03
Current Account:
Balance on Goods (SA, Balance of Payments Basis)
-665.4 -781.6 -185.7 -186.3 -197.3 -212.4
Balance on Services
47.8
13.5
13.6
15.9
58.0
15.1
Balance on Income 11
30.4
1.6
.6
-1.6
4.9
-2.4
Net Unilateral Current Transfers
-8.9 -25.1
-80.9 -82.9 -26.3 -22.6
Balance on Current Account
-668.1 -804.9 -197.7 -196.9 -185.4 -224.9
~6A
Current Account as % of GDP
~5.9
-7.0
-5.7
-6.5
-6.4
fMaJorCapital Flow\;omponents \TlnanClalInTiOW +}
Net Bank Flows
;J2.J
-34.3
12.3 -28.4
36.8 -18.1
Net Direct Investment Flows
7.6
73.7
32.7
-145.2 107.1
-6.9
Net Securities Sales
698.3 727.3 159.0 130.2 209.0 229.2
Net Liabilities to Unaffiliated Foreigners by Non Banking Concerns -24.6 -56.3
19.0
10.1 -11.8 -73.6
1Memoranda:
Statistical Discrepancy
85.1
9.6
40.7
46.6 -68.0
-9.7
74.6
Change in Foreign Official Assets in the United States
394.7 220.7
25.3
82.6
38.2
ITrade In Goods (SA)
Balance
-665.4 -781.6 -185.7 -186.3 -197.3 -212.4
IT otaf Exports
807.5 892.6 213.4 223.1 ~.8 231.3
of which:
16.6
16.0
Agricultural Products
15.3
16.9
62.9
64.8
Industrial Supplies 21
204.0 231.8
55.7
58.8
58.9
58.4
Capital Goods Ex Autos
90.2
90.9
95.3
331.5 361.8
85.5
23.6
23.4
24.6
26.1
97.8
Automotive Products
89.3
29.0
29.9
28.5
Consumer Goods Ex Autos and Food
28.2
103.1 115.5
1472.9 11674.3 399:f 4U9A 422.1 443.7
lotal Imports
of which
57.4
67.5
73.7
180.5 251.6
53.0
Petroleum and Products
343.5 379.5
90.6
95.7
95.9
97.2
Capital Goods Ex Autos
58.0
60.5
63.3
58.1
228.2 240.0
Automotive Products
373.1 407.1 101.7 101.7 100.7 103.0
Consumer Goods Ex Autos and Food
1/1ncluding com pensatlon of em pllOyees
21 Including Petroleum and Petroleum Products
Source: BEA, Bureau of Census
01

The U.S. current account deficit was $821 billion (at a seasonally adjusted annual rate, or
"saar"), or 6.5 percent of GDP, in the second half of 2005. Viewed over a longer period, the
U.S. current account balance declined, as a percent ofGDP, from a one percent surplus in the
first quarter of 1991 to a four percent deficit in the fourth quarter of2000. Then, after a
cyclically induced narrowing in 2001, it resumed its decline to reach a seven percent deficit in
the fourth quarter of2005.
In the second half of2005, the United States exported $912 billion in goods (saar) and imported
9
$1,732 billion, with a resulting $819 billion deficit on trade in goods. Exports of goods
8 The IMF annually reviews U.S. economic performance and policies through the so-called IMF Article IV
surveillance process. The last Article IV surveillance review took place in July 200S. The IMF Article IV Staff
Report and the results of the IMF Executive Board's discussion of the U.S. Article IV review can be found at
http://www.imf.org/extemal/pubs/ft/scr/200S/crOS2S7.pdf. In addition, the IMF discusses U.S. economic policies
and performance in the context of its twice yearly World Economic Outlook reports. These can be found at
http://www.imf.org/extemaUpubs/ft/weoI2006/0l/index.htm.

increased 10.3 percent in the first half of 2005 compared to the first half of 2005, while imports
increased 13.4 percent.
The challenge of external adjustment for the United States is highlighted by two characteristics
of the U.S. trade accounts. First, as noted, the level of US. imports is twice that of US. exports.
Even if U.S. exports and imports grew at the same pace, due to this base effect the trade gap
would continue to widen. Second, statistical studies suggest that for every percentage point that
U.S. GDP grows, imports grow somewhat less than twice as fast, while for every percentage
point that foreign economies grow, US. exports grow only a little more than a percentage point.
Non-automotive capital goods constituted 40.8 percent of merchandise exports in the second half
of2005. Consumer goods constituted 23.5 percent and non-automotive capital goods constituted
22.3 percent of merchandise imports. Petroleum and petroleum product imports accounted for
16.3 percent of merchandise imports. The value of petroleum imports as a percent of total
imports of goods has risen from 10 percent in the second half of 2003. The rise in the US. oil
bill is an important factor in the growth in the US. trade and current account deficits.
Canada, Mexico, China, Japan, and Germany remain the largest trading partners of the United
States. Canada purchased 23.4 percent of US. exports, Mexico 13.3 percent, Japan 6.1 percent,
China 4.6 percent, and the UK. 4.3 percent in 2005. Canada accounted for 17.2 percent of US.
imports, China 14.6 percent, Mexico 10.2 percent, Japan 8.3 percent, and Germany 5.1 percent in
2005.
Country
Total, All Countries ($SiI)

Exports
200511

Country
Total, All Countries ($SiI)

904.3

Percent of
Total
IIJanaaa
I MeXICO
l..Iapan
I "'nina
I unltea K.lngaom
It-eaeral KepUDIiC OT (;;ermany
I::soum K.orea
INemenanas
't-rance
lalwan
;:'Ingapore
11 tsureau OT me IJensus

<1~.4
1~.~

0.1
4.0

4.3
3.6
3.1
<1.l:I
<1.0

£.4
2.3

Imports
200511
1671.1

Percent of
Total
I",anaaa
I",nina
IMeXICO
l..Iapan
It-eaeral KepuDlic or \,:jermany
lunltea I\lngaom
I"oum I\orea
lalwan
I venezuela
Irrance
IMalaysia

~
14.0

lU.£
6.3
0.1
~.]

~
£.1
£.0
2.0
~

Prices of imported goods (nsa) increased 11.5 percent (q4/q4) in 2005. Non-petroleum import
prices rose 4.2 percent, while petroleum import prices increased 60.0 percent. Export prices rose
4.0 percent over the year. The most recent trough in import and export prices occurred roughly
at the beginning of 2002. Since then non-petroleum import prices have risen 8.2 percent and
export prices 10.7 percent.
Foreign demand for US. financial assets remains strong. A major item financing the US.
current account deficit has been net private foreign purchases of US. securities, which reached
$914 billion in 2005. (Included in these were net private foreign purchases of US. Treasury
9

Sums may not be exact due to rounding.

securities amounting to $289 billion.) In addition, foreign official institutions increased their
holdings of U.S. assets by $112 billion.
Foreigners owned $2.2 trillion in Treasury securities at the end of December 2005, or 55 percent
of the public debt not held in Federal Reserve and u.s. Government accounts. This compares
with $2.0 trillion, at the end of June 2005. Foreign official institutions held $1.3 trillion in
Treasury securities at the end of December 2005, compared to $1.2 trillion at the end of June
2005.
Net International Investment Position
The net international investment position of the United States (with direct investment valued at
the current stock market value of owners' equity) was a negative $2.5 trillion as of December 31,
2004, the latest date for which data are available. This was only $170 billion wider than the
negative $2.4 trillion position at the end of 2003, as a $272 billion valuation adjustment due to
exchange rate changes and a $147 billion valuation adjustment due to other price changes offset
much of the financial outflow associated with the 2004 current account deficit of $665 billion. 1o
Despite the large negative net investment position, U.S. residents earned $36 billion more on
their investments abroad than they paid out on foreign investments in the United States in 2004
and $7 billion more in 2005. Net earnings on direct investment in those years were slightly
larger than net payments on other investment. Net investment earnings continued to decline,
however, and were marginally negative in the second and fourth quarters of 2005
•

Perspectives on the Financial Account

The autumn 2005 Report to Congress on International Economic and Exchange Rate Policies
described different perspectives on the current account and showed that the characteristics of
each perspective affect the interpretation of the factors influencing the current account and the
implications of current account deficits. This section extends the analysis to the capital and
financial accounts.
A surplus on the capital and financial accounts is, by balance of payments accounting definition,
the counterpart to a current account deficit. These net inflows finance the excess of net domestic
capital formation over net domestic saving. To the extent foreign investors acquire U.S.
financial assets, it represents the foreign investors' assessment of the relative appeal of investing
in U.S. assets versus investing in alternative assets, including assets in the home economy of the
foreign investor as well as third countries. This perspective leads to a focus on broad economic
and financial factors - such as prospective relative growth rates of output and productivity, the
relative attractiveness and openness of investment environments, prospective inflation, the
flexibility of factor markets, and exchange rates.
According to this perspective, the growth of the U.S. current account deficit over more than a
decade has been linked to high levels of domestic U.S. capital formation compared to domestic
U.S. saving. Perceived high rates of return on U.S. assets, based on sustained strong productivity

10 In principle the net financial and capital account flows should equal the current account balance, but in fact there
was a statistical discrepancy of $1 0 billion in 2005.

growth, especially relative to the rest of the world; sound U.S. economic performance; a
welcoming U.S. investment climate; and the deepest and most liquid capital markets in the world
have all combined to attract foreign investment. Portfolios worldwide are also becoming
increasingly internationalized, and some studies point to the conclusion that the home bias of
foreign investors is eroding and that they are underweight in U.S. dollar holdings. I I In tum,
sustained external demand for United States' assets has allowed the United States to achieve
levels of capital formation and future growth potential that would have not been possible in the
absence of net financial inflows into the United States. The robust growth in fixed investment
has been critical to the non-inflationary growth of production and employment in the United
States.
Some analysts have raised concerns about different features of international financial flows,
suggesting that the financing of the U.S. current account deficit rests on precarious grounds.
Below, these concerns are addressed.
•

While the large negative international investment position of the United States will
probably generate outflows on investment income in the near future, these outflows are
not likely to be massive.

For 2005 as a whole, U.S. residents continued to receive slightly more income on their foreign
investments than foreigners receive on their U.S. investments. This is surprising on its face,
given that the value of foreign investment in the United States exceeds U.S. investment abroad
by $2Y2 trillion. As noted earlier this positive net inflow has, however, been declining.
Balance of payments data indicate the positive flow to the United States from net investment
income is the result of relatively high earnings on U.S. direct investments abroad compared to
foreigners' income from foreign direct investment in the United States. Net inflows of direct
investment income have been sufficient to offset outflows of other investment income. These
other investment income flows have also recently been affected by temporary factors, such as
relatively low interest rates in the United States, which have risen in the last year. Most analysts
generally believe that U.S. net income payments will become a net outflow as the negative U.S.
net investment position widens. Direct investment income will probably, however, continue to
cushion the growing outflow of portfolio investment income, in part because U.S. investment
abroad is large and appears to be maintaining a relatively superior rate of return.
This has led some observers to argue that the U.S. net international investment position is in
considerably better shape than the available data suggest - that there is some kind of "dark
matter" in U.S. direct investment abroad. They use this argument to throw doubt on common
inferences about the future sustainability of U.S. current account deficits. This analysis is based
on an assumption that, if every country earned the same underlying rate of return on its assets
and then using this rate of return to capitalize the value of assets, it would be "as if' the U.S. net
international investment position is positive rather than the negative $2.5 trillion that the official
data record. 12 There is some suggestion that this makes the U.S. current account deficit
II Bertaut, Carol C. and Griever, William L., "Recent Developments in Cross-Border Investment in Securities",
Federal Reserve Bulletin, Winter 2004.
12 Hausmann, Ricardo and Sturzenegger, Federico, 'Dark matter' makes the US deficit disappear. The Financial
Times, Thursday December 8, 2005.

disappear and that there are no serious global imbalances. While this view of the U.S.
international investment position is interesting, it has not gained acceptance with most analysts
of the U.S. balance of payments. This line of thinking would require that national income
accounting definitions of saving be revised since U.S. spending does exceed U.S. income, under
current definitions, and this difference is equal to the current account balance. Moreover, even if
unidentified assets had existed in the past, that would not mean that they could be counted on to
keep the international investment income balance positive in the future, since the relatively high
rates of return on U.S. foreign direct investment could ease in time.
•

The current account deficit is being financed predominantly by private sources, and not
by official sources or by Asian reserve accumulation.

Much of the information in the financial account of the U.S. balance of payments is from data
collected by the Treasury International Capital Reporting System (the "TIC"). The TIC reports
that net purchases of long-term U.S. securities by foreign official institutions declined to $111.5
billion in 2005 from $235.6 billion in 2004. The decline coincided with the cessation of
Japanese intervention in the foreign exchange markets in the first quarter of 2004. The TIC data,
albeit imperfect (see below), indicate that nearly 90 percent of the long-term securities that
foreigners purchased in 2005 came from non-official foreign investors. Net private purchases of
long-term securities in 2005 totaled $914 billion. These percentages should be read with some
perspective on the accuracy of the data. As described below, there are well known qualifications
that need to be made in assessing the relative size of foreign official and private net purchases of
long-term securities. The percentage for private purchases might well be lower, but the
description of trends continues to be valid.
Foreigners' Net Purchases by Domestic Long-term Securities
1990-2005, quarterly data

The current account deficit is financed by many items other than purchases of long-term
securities. Sources of financial inflows include, among other things, net foreign purchases of
short-term U.S. securities, increased liabilities to foreigners of banking and non-banking
enterprises, and increased foreign direct investment in the United States. Financial outflows in
the form of such items as U.S. acquisition of foreign securities, increased claims on foreign
12

banking and non-banking enterprises and increased U.S. direct investment abroad offset some of
the inflows.
The Department of Commerce's Bureau of Economic Analysis (BEA) makes some adjustments
to the TIC data on official purchases of long-term securities and combines these adjustments
with other information (e.g., on short-term securities and U.S. banking liabilities) before
publishing the data in the U.S. balance of payments accounts. However, taking these
adjustments and additions into account, the balance of payments accounts indicate that the
increase in foreign official assets in the United States, of all kinds, was only slightly more than a
quarter of the U.S. current account deficit in 2005, down from over half in 2004.

•

While the TIC data face limitations, they provide a good picture of U.S. portfolio
capital flows.

It has been asserted, from an examination of a limited set of gublished data, that the TIC only
presents data on foreign transactions in long-term securities. 3 The monthly press notice issued
by Treasury announcing the release of TIC data only discusses transactions in long-term
securities. A much more complete data set is, however, posted on the TIC web site concurrent
with the press notice. These data include, among other things, statistics on international banking
assets, holdings of short-term Treasury securities, estimates of unrecorded prepayments of
principal on asset-backed securities, and estimates of foreign holdings of Treasury securities.
These statistics do not include information on direct investment since the BEA is responsible for
collecting those data. As the BEA presentation of official capital flows cited above
demonstrates, the qualitative conclusions derived from an analysis of transactions in long-term
securities are the same when account is taken of all of these other factors.
14

There are documented limitations to the Treasury data. TIC reports on transactions in longterm securities can, in particular, misclassify the country of residence of a foreign purchaser and
mistakenly identify official transactions in long-term securities as private transactions.
Misclassification of a foreign investor's residence, often called a "geographical bias", typically
arise when transactions take place in foreign financial centers, and the TIC attributes the
transaction to the country where the financial center is located instead of the country where the
investor resides. However, the TIC system carries out annual surveys of custodians of securities
that correct for many of these misclassification errors and help verify the accuracy of the data.
Recently released preliminary results of the survey of foreign holdings of U.S. securities as of
June 2005 15 illustrate the geographical bias in transactions data as well as some corrections.
Before the new survey results were available, estimates of foreign holdings of Treasury securities
were calculated by adding accumulated net transactions in Treasury securities to data derived
from the June 2004 survey. Using the results of the June 2005 survey means that net
transactions, with their geographical bias, are accumulated only since June 2005 instead of since
June 2004. There is only a modest difference between using the two benchmarks in calculating
13 For example Martin Feldstein, "Why Uncle Sam's bonanza might not be all that it seems", The Financial Times,
January 10, 2006. This was a small part of the article.
14 A more complete discussion can be found in FAQ numbers 4 and 7 on the TIC web site.
15 Preliminary data from an annual survey of foreign portfolio holdings of U.S. securities at end-June 2005 were
released April 28, 2006. They are posted on the U.S. Treasury web site at (http://www.treas.goy/tic/fpis.html).

total foreign holdings of Treasury securities. The old estimate indicated that foreign investors
held $2.2 trillion in Treasuries, compared with the new estimate of $2.1 trillion. As the
following table illustrates, individual countries show greater differences. 16
Select Foreign Holdings of Treasury Securities
(end-February 2006, $ billions)
Old Estimates New Estimates
All Countries
2,232.3
2,081.7
U.K
250.8
162.7
Japan
673.1
658.3
China
265.2
319.8
Caribbean Banking Centers
94.1
54.4
Foreign Official Institutions

1,282.0

1,326.4

There are, of course, gaps in the survey data as well that arise from the ability of investors both
to carry out transactions and to place securities in custody overseas, beyond the reach of the TIC
data collection system. These gaps will affect estimates of individual country holdings rather
than overall foreign holdings of U.S. securities. Although there are limitations to TIC data,
particularly in their ability to identify the precise geographic origin and destination of portfolio
flows, the overall picture that private investors, rather than official foreign investors, dominate
net purchases of U.S. securities remains valid.

•

There is little evidence of significant foreign central bank reserve diversification out of
dollars.

The best available information indicates that significant aggregate diversification is not
happening. The IMF publishes data on the currency composition of official reserves on a
quarterly basis. These data were just released through the end of2005. The data are affected to
some degree by valuation adjustments in translating foreign currencies into dollars. Nonetheless,
according to official IMF data the share of the U.S. dollar in official foreign exchange reserves
has remained constant for the last few years at around two thirds, a figure similar to that in the
mid-1990s.1 7

•

There is also little evidence to support the argument that foreign central banks might
sell off their stock of dollar holdings, that such sales would result in substantial upward
pressure on U.S. interest rates, or that foreign official purchases of dollars are
substantially holding down the U.S. yield curve.

The record is not supportive of either a sell off or substantial upward pressure on U.S. interest
rates. In the first instance, to give some perspective on flows, total net official purchases of longand short-term Treasury securities averaged around $1 liz billion per month in 2005.
Further, in considering this issue, it is worthwhile to distinguish between the existing stock of
foreign official holdings, and newly accumulated dollars and the earnings on the stock. Many of
16 There are, of course, other reasons to revise estimated geographical allocation of foreign holdings besides
correcting for the geographical bias.
17 The data cover reserves for which the currency of denomination is known. See

http://www.imf.org/external/np/sta/cofer/eng/index.htm.

the largest official holders of U.S. dollar portfolios (China, Korea, and Japan) have repeatedly
emphasized that they do not intend to sell the stock oftheir U.S. dollar portfolios.
Notwithstanding much discussion over past years about the potential for diversification, as well
as a rising current account deficit, the U.S. dollar has remained well bid in foreign exchange
markets.
Some analysts have suggested that foreign central banks, even if they do not sell their stock of
dollar assets, may pare back at the margin the percentage of newly acquired reserves allocated to
dollars. But assume that foreign official holders hypothetically accumulated $500 billion next
year, and decided to hold 50 percent rather than 65 percent of these accumulations in dollars.
This would imply that, over a year's time, $75 billion less in foreign official holdings would be
placed into dollar assets and instead into non-dollar assets. Although there would be marginally
less demand for dollars in the foreign exchange market, this would be a very small amount
compared to the market's $2 trillion a day turnover. Similarly, although the demand for
Treasuries, or other U.S. securities, might ease, the decline would be small compared to the $11
trillion monthly trading volume in the Treasuries market. Moreover, demand for Treasuries is
only a part of the total credit demand in the U.S. financial market.
•

There is little evidence suggesting that oil-producing countries are less willing to hold
their assets in US dollars.

A review of TIC data and investment patterns shows no anomalies in the pattern of investment
activity in U. S. assets on the part of oil exporters. Although the Bank of International
Settlements (BIS) is only able to identify thirty percent of the investable funds of OPEC, the data
that are available show that oil exporter deposits with BIS reporting banks continue to be
predominantly in dollars.
The U.S. Dollar
In the second half of 2005, the dollar traded in a moderate range against the euro and appreciated
against the yen. In terms of the euro, the dollar moved from $1.20898 to $1.1842 over the
second half. That is, there was a euro depreciation of 2.1 percent. During that period, the
dollar/yen rate moved from ¥111.7 to ¥ 117.9, a yen depreciation of 5.3 percent. Although the
direction of euro and yen movements diverged after mid-summer 2005, the two currencies have,
on balance, moved in a broadly similar manner since the dollar's most recent peak in February
2002.

Euro/dollar (inverted) and Dollar/yen Since End-2001
11/31/2001 -1/14/2006 (GMT)

Iny
USD
1.14
1.12
1.1
128

1.08
1.06

126

1.04
1.02
12l,

120
118
116

112
110
lOB

Euros per dollar (right axis)

106

0.78

104

0.76
0.74

102

";:Jan=Mar::-;;;May;:::-~JU:;-'-;:Sep~"";;:Y::-;:Jan~Mar:;::--::-May--J:::;U'---'Sep::---::",,'-y-""""'-=Mar---:CMay:--=-'u:-'-=-Sep-.-=-y--"',an-Ma:-r-May:-:---:'''''''U'-Sep--''''-Y-=Jan--Mar--...1
...
2002

2003

2004

2005

2006

Dollar movements in the second half of 2005 were influenced by a range of factors:
•

Market participants were particularly focused on the rise in short-term U.S. interest rates and
widening global interest rate differentials, and expressed little day-to-day concern about the
financing ofthe large U.S. current account deficit, although the deficit tempered overall dollar
demand. Changing market perceptions of U.S. economic growth prospects in light of Hurricanes
Katrina and Rita and fluctuations in energy prices, and their implications for the outlook for U.S.
monetary policy, also impacted trading. In particular, in the wake of the hurricanes, perceptions
that underlying U.S. growth remained strong, notwithstanding the fourth quarter slowdown,
added to expectations that the FOMC would raise the Fed Funds rate more than previously
thought and supported dollar demand.

•

The yen's depreciation reflected in part the so-called "global carry trade." Given Japan's very
low interest rates, global investors increasingly borrowed yen to fund investments in higheryielding assets. Also, even though foreign inflows, especially into Japanese stocks, have
increased as the Japanese recovery has taken hold, Japanese investors have stepped up their
overseas investment in light of increased global risk appetite. The yen was subject to upward
pressure at times when market participants anticipated further Chinese renminbi appreciation, but
this factor diminished in the latter months of the year. Yen trading, more generally, was affected
by the Japanese monetary policy outlook, as the Bank of Japan began to end its quantitative
easing policy and consider the future of its zero-interest rate policy.

•

After depreciating substantially in the first half of 2005, the euro generally fluctuated within 3-4
cents of $1.20 for the remainder of the year. Toward the end of the year, the euro received some
support from increased market expectation that the European Central Bank would raise Eurozone interest rates by up to 50 basis points during the first half of 2006, around a time when
participants also felt the cycle ofFOMC rate hikes may reach an end.

The Federal Reserve's broad nominal trade-weighted dollar index was little changed in the
second half of the year - the dollar appreciated by 0.9 percent vs. the major currencies and

depreciated by 1.3 percent against the currencies of other important trading partners of the
United States. The major currencies portion of the index accounts for 53 percent of the broad
index. The other important trading partner (OITP) portion of the index accounts for the
remaini~g 47 percent; roughly two thirds of this portion is accounted for by emerging Asian
economles.
Between its peak in early 2002 and the beginning of 2004, the dollar fell 25 percent against
major currencies measured by the Federal Reserve Board's nominal trade-weighted index. Since
then, the dollar has risen less than three percent against the major currencies. The economies
comprising this portion of the index grew over the last four years by a weighted-average of only
1.6 percent. The dollar appreciated against the OITP index by four percent from early 2002 to
the beginning of 2004 and has since declined by a similar amount. Though the exchange rate
movement against the currencies of these economies was much less than that against the major
currencies, the countries comprising the OITP index grew a weighted average of 6.6 percent over
the last four years. These developments underscore the importance of the call for greater
flexibility in exchange rates, particularly in emerging Asian economies.
Nominal Trade Weighted Dollar
Feb 27, 2002 100

110,----------------------------------------------------,
105

-------.....=~

100
-Broad
-Major
-OITP

-~-------------------~------""-~~-

85~----~----~----~----~------~----~----~----~--

211102

811102

211/03

811/03

211/04

811/04

211/05

811105

211/06

Movements in the foreign exchange value of the dollar reflect a wide range of factors in
extremely large and deep international financial markets. The latest BIS-coordinated central
bank survey of activity in the global foreign exchange market, undertaken in April 2004,
estimated that average total daily turnover in the market was nearly $2 trillion dollars equivalent
per day. A large majority of these trades involve the dollar, either as one of the two currencies in
the underlying transaction or as the vehicle currency in a trade between two foreign currencies.
Although current account transactions are an important factor affecting currency markets, these
transactions are often small by comparison to global capital flows.
The United States has not intervened in foreign exchange markets since September 2000.

Country Analyses
Brazil
Brazil has a flexible exchange rate regime and relies on inflation targeting to guide monetary
policy. The real appreciated 1.0 percent during the second half of2005 from BRL 2.36/US$ to
BRL 2.33/US$. Brazil's sovereign debt traded at 305 basis points over u.s. Treasuries at end2005 versus 411 basis points at the end of June. Year-on-year inflation stood at 5.7 percent in
December, above the center of the central bank's 5.1 percent target for 2005 but within the target
band of two percent to seven percent. Brazil had a seasonally adjusted $7.3 billion current
account surplus in the second half of 2005 compared to $6.9 billion in the first half. The United
States had a trade deficit with Brazil of $4.4 billion in the second half of 2005 compared to a
$4.7 billion deficit in the first half. Foreign direct investment fell to $6.6 billion in the second
half of2005 compared with $8.6 billion in the first half. The Central Bank increased net
international reserves to $53.7 billion by December 2005 compared to $40.5 billion in June, in
part due to central bank purchases of foreign exchange for reserve accumulation in November
and December. In December, Brazil announced that it would pre-pay its entire remaining
obligations to the IMF totaling $15.5 billion. Real GDP decreased 3.4 percent at a seasonally
adjusted annualized rate and increased 3.4 percent at a seasonally adjusted annualized rate in the
third and fourth quarters, respectively. For the full-year 2005, GDP posted a 2.3 percent increase
over the previous year.
Mexico
Mexico has a flexible exchange rate regime. Its central bank targets an inflation rate of three
percent with a +/-1 percent band. The Bank of Mexico also follows a transparent rule for selling
foreign exchange accumulated by state enterprises. During the second half of 2005 the Mexican
peso appreciated by 1.4 percent, from 10.8 pesos/dollar to 10.6 pesos/dollar. The J.P. Morgan
trade-weighted effective exchange rate index for the peso appreciated by 1.7 percent. Mexico's
seasonally adjusted current account deficit was 0.4 percent of GDP during the second half of
2005. Mexico's merchandise trade surplus with the U.S. from July through December 2005 was
$25.7 billion. Foreign direct investment in the second half of2005 was $9.0 billion, versus $8.8
billion in the first half of the year. International reserves grew by $6.9 billion during the second
half of the year, reaching $68.7 billion by the end of December. Year-on-year headline inflation
was 3.3 percent in December, compared to 4.4 percent in June. Real GDP increased at
seasonally adjusted annual rates of8.7 percent and 2.4 percent during the third and fourth
quarters of2005, respectively. For the full-year 2005, GDP posted a 2.7 percent increase over
the previous year.
Argentina
Argentina intervenes frequently in the foreign exchange market to manage the value of the peso
and build international reserves. The peso depreciated five percent during the second half of
2005 from ARS2.89/US$ to ARS3.03/US$. Over the full 2005 the peso depreciated two percent
from, ARS2.97IUS$ to ARS3.03IUS$. The stock of Central Bank international reserves
increased to $28.1 billion by end-December compared to $23.0 billion at end-June and $19.6

billion at end-2004. In December, Argentina announced that it would tap Central Bank reserves
to pre-pay its entire remaining obligations to the IMF totaling $9.9 billion. Annual inflation
reached 12.3 percent at end-2005 compared to 6.1 percent at end-2004. The Central Bank's
monetary policy response remained accommodative in the face of the rise in inflation; while
nominal interest rates on Central Bank repo transactions rose by 200-300 basis points in 2005 to
5-6 percent, the increase was outpaced by the acceleration in inflation, producing a decline in the
real interest rate. Argentina's sovereign debt traded 498 basis points over U.S. Treasuries at endDecember versus 464 basis points at end-June. Argentina had a $3.5 billion current account
surplus in the second halfof2005, equivalent to 3.7 percent of GOP, versus 2.1 percent of GOP
in the first half of 2005. Argentina's current account surplus for the full 2005 was $5.4 billion,
equivalent to 3.0 percent of GOP. For the full 2005 the U.S. trade deficit with Argentina
increased to $472.2 million, compared to $357.4 million the year prior. During the second half
of2005 the U.S. trade deficit with Argentina was $374.3 million compared to $97.8 million in
the first half of the year. Real GOP increased at seasonally adjusted annual rates of 10.7 percent
and 8.8 percent during the third and fourth quarters of2005, respectively. For the full-year 2005,
GOP posted a 9.2 percent increase over the previous year.

The Euro-zone
The euro depreciated 2.1 percent against the dollar in the second half of 2005. The European
Central Bank's broad index of the euro's real effective exchange value declined 1.1 percent over
the period. The Bank did not intervene in foreign exchange markets during the second half of
2005. The harmonized consumer price index rose 2.2 percent year-on-year as of December 2005
while the index excluding energy, food, alcohol, and tobacco rose 1.4 percent. Broad money
(M3) grew 8.0 percent annualized in the second half of 2005.
The countries in the Euro-zone taken together had a current account deficit during the second
halfof2005 equal to $39.5 billion (sa) or 0.8 percent of GOP, down from a surplus of$6.2
billion and $19.6 billion in the first half of 2005 and second half of 2004, respectively. Goods
exports increased 10.6 percent while goods imports increased 15.6 percent in the second half of
2005 over the same period in 2004. The trade surplus of the Euro-zone vis-a-vis the United
States was $48.6 billion in the second half of 2005, which is about $4.9 billion higher than in the
same period of 2004.
Euro-zone growth was an estimated 2.0 percent (annualized) in the second half of 2005. Final
consumption expenditure rose 1. 5 percent (annualized) in the second half of 2005 while gross
fixed capital formation increased 2.6 percent (annualized).
Germany
Germany had a current account surplus during the second half of 2005 equal to $50.3 billion (sa),
or 3.4 percent of GOP. Goods exports increased 9.8 percent while goods imports increased 10.4
percent in the second half of 2005 over the same period in 2004. The trade surplus of Germany
vis-a-vis the U.S. was $26.2 billion, which is $2.0 billion higher than the same period of2004.
German growth was 1.6 percent (annualized) in the second half of 2005. Consumption and
investment grew 0.2 percent and 9.3 percent (annualized), respectively, in the second half.

Germany's fiscal deficit is expected to exceed the three percent ofGDP Stability and Growth
Pact limit for the fourth straight year in 2005. German inflation was 2.2 percent yr/yr in
December 2005 while core inflation was 1.1 percent.
Netherlands
The Netherlands had a current account surplus during the second half of 2005 equal to $19.0
billion (sa), or 6.2 percent ofGDP. The current account surplus for 2004 was 8.9 percent of
GDP (with a five percentage point upward revision late in the year), with a substantial
contribution from increased earnings of foreign subsidiaries of Netherlands companies. Goods
exports increased 9.6 percent while goods imports increased lOA percent in the second half of
2005 over the same period in 2004. The trade deficit of the Netherlands vis-a-vis the U.S. was
$5.0 billion, which is $717 million lower than the same period of2004.
Dutch growth was an estimated 3.6 percent (annualized) in the second half of2005, driven by
domestic demand. Consumption and investment grew 2.9 percent and 6.7 percent (annualized),
respectively, in the second half of 2005. Dutch CPI inflation was 2.1 percent yr/yr in December
2005 while core inflation was 0.9 percent.
Spain
Spain's current account deficit was $43.3 billion, or 7.8 percent ofGDP, in the second half of
2005. Goods exports increased 5.9 percent while goods imports increased 11.1 percent in the
second half of 2005 over the same period in 2004. The trade surplus of Spain vis-a-vis the U.S.
in the second half was $940 million, which is $615.7 million higher than in the same period of
2004.
Spanish growth was an estimated 3.6 percent (annualized) in the second half of2005, driven
entirely by domestic demand. Consumption and investment increased 4.9 percent and 5.7
percent (annualized), respectively, in the second half. Spanish CPI inflation was 3.7 percent
yr/yr in December 2005 while core inflation was 2.8 percent.
Switzerland

Switzerland's current account surplus in the third quarter of2005 was $10.9 billion or 12.1
percent ofGDP. Goods exports increased 8.1 percent while goods imports increased 10.0
percent in the second half of 2005 over the same period in 2004. The trade surplus of
Switzerland vis-a-vis the U.S. in the second half of 2005 was $1.1 billion, which is $24.3 million
lower than in the same period of 2004.
Swiss growth was an estimated 3.1 percent (annualized) in the second half of 2005.
Consumption and investment increased 1.8 percent and 2.3 percent (annualized) respectively in
the second half while net exports increased by 12.0 percent (annualized). The Swiss franc
depreciated 2.5 percent against the dollar in the second half and declined 0.8 percent against the
currencies of Switzerland's trading partners. IP Morgan's index of the real effective exchange
rate of the Swiss Franc declined 2.3 percent over the second half. Broad money (M3) increased

1.8 percent over the second half. Inflation remained low at 1.0 percent yr/yr as of December
2005. Core inflation was 0.3 percent.
Norway
Norway's current account surplus in the second half of 2005 was $27.4 billion or 18.3 percent of
GDP. Goods exports increased 22.9 percent while goods imports increased 9.4 percent in the
second half of 2005 over the same period in 2004. The trade surplus of Norway vis-a-vis the
U.S. was $2.3 billion, which is $438.7 million lower than in the same period of2004.
After 3.0 percent growth in the first half of 2005, Norway's GDP grew 3.1 percent (annualized)
in the second half of 2005. Consumption grew 3.9 percent (annualized) while investment
increased 24.6 percent. The Norwegian Kroner depreciated 3.2 percent against the dollar in the
second half. The trade-weighted exchange rate increased 0.5 percent. Broad money (M2)
increased 2.3 percent over the second half. Inflation was 2.0 percent yr/yr as of December 2005.
Core inflation was 1.3 percent.
Russia
High oil prices continued to contribute to strong growth as well as large external and fiscal
surpluses. Russia's current account surplus in the second halfof2005 was an estimated $42.7
billion, or 10.7 percent ofGDP, compared to $25.9 billion, or 9.9 percent ofGDP, in the second
half of2004. The bilateral trade surplus with the U.S. was $5.4 billion in the second half of2005
compared with $5.4 billion in the second half of 2004.
The fiscal surplus for 2005 was a record 7.5 percent ofGDP which helped raise the balance of
the oil stabilization fund to $43 billion at end-2005. Foreign exchange market intervention by
the Central Bank resulted in a slight easing of the ruble vis-a-vis the dollar in the second half (0.4
percent). Official reserve assets increased 20.2 percent from $151.6 billion at end-June 2005 to
$182.2 billion at end-December 2005. Russia's current account surpluses and foreign exchange
reserve accumulation have been very large over recent years. The ruble's bilateral exchange rate
with the dollar has, however, not varied greatly. From the end of 1999 to the end of2005, the
ruble depreciated on net 4.1 percent against the dollar. On the other hand, the real value of the
ruble, measured by the JP Morgan broad index of the real effective exchange rate, appreciated 75
percent consonant with the high levels of Russian inflation over most of this period.
Inflation decelerated marginally with consumer prices rising 11.3 percent yr/yr at end-December
2005 compared to 11.7 percent at end-December 2004. Inflation has been running in the low
teens for over three years. M2 grew 38.6 percent over the twelve months through December
2005 compared to 35.8 percent in the comparable period through December 2004. A more
flexible exchange rate would allow better control over monetary conditions and assist materially
in controlling inflation.

Ukraine
The hryvnia depreciated by 0.7 percent against the dollar during the second half of 2005. This
followed an appreciation of 5.9 percent during the first half of the year, resulting in a cumulative
appreciation of 5.2 percent for the year as a whole.
Downward pressure on the exchange rate during July-December reflected a sharp slowdown in
export growth that shifted the current account to a deficit of $0.4 billion in the second half of
2005 from a surplus of$2.9 billion in the same period of2004. For the year as a whole, the
surplus narrowed to $1.4 billion (two percent ofGDP) in 2005 from $6.8 billion (10.5 percent of
GDP) in 2004.
Foreign exchange reserves rose from $12.9 billion at the end of June to $19.1 billion at the end
of December. This reflected in large part receipts from the privatization of a major steel mill
(Kryvorizhstal, sold to Mittal) for $4.8 billion. In addition, after allowing the exchange rate to
appreciate in the first half of the year, the central bank resumed intervention to maintain an
informal exchange rate peg ofUAH5/$ during July-December. Most of this intervention was
unsterilized, contributing to acceleration in broad money growth to 54 percent in December
(yr/yr) from 37 percent in June.
Real GDP growth continued to slow in the second half of 2005, falling to 1.1 percent yr/yr from
four percent yr/yr in January-June. For the year as a whole, real GDP growth fell to 2.4 percent
in 2005 from 12.1 percent in 2004, as weaker steel demand contributed to a marked decline in
exports.
.
Sub-Saharan Africa
Overall, Sub-Saharan Africa's current account deficit narrowed to 0.7 percent ofGDP in 2005
from 1.8 percent in 2004. An improvement of more than six percentage points ofGDP, on
average, in the current account balances of the regions main oil exporters drove the overall
change. The U.S. merchandise trade deficit with Sub-Saharan Africa continued to widen in 2005
to $40 billion, from $27 billion in 2004, due to a large increase in the value of crude oil imports.
Roughly half of Sub-Saharan African countries officially peg their currencies to other currencies,
primarily the euro. The currencies of the United States' two largest trading partners in subSaharan Africa, Nigeria and South Africa, both appreciated about five percent in nominal terms
against the U.S. dollar in the second half of 2005. The IMF classifies Nigeria's foreign exchange
rate regime as a managed float. The South African Rand floats relatively freely.
Higher oil prices buoyed the Nigerian Naira and drove a significant increase in the country's
current account surplus to 14 percent ofGDP in 2005 from four percent in 2004. Primarily due
to the large current account surplus, Nigeria's foreign exchange reserves increased from $24.4
billion at the end of June 2005 to $28.3 billion at the end of December. Capital inflows benefited
the South African Rand and financed a widening of South Africa's current account deficit to 4.2
percent ofGDP in 2005 from 3.4 percent in 2004. Capital inflows also boosted South Africa's
foreign exchange reserves from $16.6 billion at the end of June 2005 to $18.3 billion at the end
of December.

Saudi Arabia
Saudi Arabia is one of the most oil-dependent economies in the world, with oil accounting for 45
percent of GOP, almost 90 percent of export revenue, and 85 percent of the government's
revenue. With the price of West Texas Intermediate oil averaging $56 a barrel in 2005, real
GOP growth exceeded six percent, and nominal GOP grew by 25 percent. Despite this strong
growth, 2005 CPI inflation remained contained at 1.2 percent year over year due to minor price
changes of imported goods and the large share of administered prices in the CPI basket.
Oil export revenues continued to increase on the back of high oil prices, rising to $153 billion in
2005 from $110 billion in 2004. The surge in oil export revenue led to an increase in the current
account surplus from 20.5 percent of GOP in 2004 to 30 percent of GOP in 2005. Finally, the
bilateral trade surplus with the United States reached $20.4 billion in 2005, compared with $15.7
billion in 2004.
The government's financial position improved as revenue from oil rose by $43 billion to $131
billion in 2005. The budget surplus was approximately $57 billion in 2005 (18 percent of GOP),
and the government used much of that surplus to reduce government debt to 41 percent of GOP.
Based on historical experience, these surpluses are likely to diminish over time as the
government increases spending; the government projects domestic spending to rise by 20 percent
in 2006.
The Riyal has been unofficially pegged to the dollar since 1986 (officially since 2003), so
interest rates largely followed recent increases in the United States. The Gulf Cooperation
Council 18 has set a goal of establishing a formal monetary union by 2010.
Due to its large current account surplus and fixed exchange rate, the net foreign assets of the
Saudi Arabian Monetary Agency rose to $150.3 billion from $108.6 billion during the last six
months of2005, providing approximately 30 months of import cover. Gross liquid reserves rose
by a much smaller amount over the same period, rising to $23.7 billion from $22 billion.
Singapore
Since 1988, Singapore has had a large and growing current account surplus, which reached about
31 percent of GOP in the second half of 2005. Primarily due to the large current account surplus,
official foreign reserves increased $1.4 billion to $116.6 billion in the second half of 2005, equal
to seven months of imports. Singapore was the 16th largest trading partner of the United States
in 2005. It had a deficit of $2.5 billion on trade in goods with the United States in the second
half of 2005, compared to a $1.8 billion deficit a year earlier.
The current account surplus has risen because investment has fallen while both public saving and
private saving have remained high. Factors accounting for the decline in investment include the
slowdown in the technology sector in 2001-02, the 2003 outbreak of Severe Acute Respiratory
Syndrome (SARS) and Singapore's declining productivity growth relative to that of other less

Gee member countries are Kuwait, Qatar, Oman, Saudi Arabia, Bahrain, and the United Arab Emirates.
23

developed Asian economies. Gross national saving was 47 percent in 2005, among the highest
in the world. Despite income tax cuts last year, the government continues to register large fiscal
surpluses, which it argues are a necessary safeguard against external shocks and to help prepare
for the costs of an ageing population.
Private saving makes up about two-thirds of total saving and is dominated by saving of private
corporations and government-linked corporations, which pay limited dividends. Household
saving has been boosted by demographic and income changes (an ageing, but not yet old,
population; declining birth rates; high and volatile GDP growth). The government's mandatory
saving program through the Central Provident Fund has also supported household saving,
although to a lesser extent since the government allows residents to borrow against the fund for
housing.
Singapore is a small, open economy, with imports and exports three and a halftimes GDP. As a
result, inflation and inflationary expectations are heavily influenced by movements in the
exchange rate. Singapore uses its exchange rate as the operational policy tool for monetary
policy by maintaining a heavily managed exchange rate linked to an undisclosed basket of
currencies of its major trading partners. Since April 2004, the Monetary Authority of Singapore
(MAS) has had a stated policy of a modest and gradual nominal appreciation against this basket.
The Singapore dollar appreciated 1.4 percent against the U.S. dollar in the second half of2005,
while JP Morgan's nominal and real trade-weighted indexes of the exchange rate appreciated 2.8
percent and 2.3 percent, respectively. 19 In recent years, MAS has been reluctant to allow for a
faster appreciation out of concern that this could increase the risks of a deflationary spiral.
However, in 2005, the strengthening economy and rising oil prices caused consumer prices to
increase 1.3 percent in December compared to a year earlier and wholesale prices to rise 11.4
percent.
In the first quarter of2006, the Singapore dollar appreciated 2.8 percent against the U.S. dollar
and its NEER and REER rose 2.3 percent and 7.0 percent, respectively. CPI rose 1.8 percent
year on year in January 2006 and 1.2 percent in February 2006. Wholesale prices have been
little changed so far in 2006.
Under Secretary for International Affairs Tim Adams traveled to Singapore in February 2006 to
discuss economic issues with officials from MAS and the Finance Ministry. Treasury staff
continue to discuss economic developments and their implications for the exchange rate regime
with officials from Singapore.
India
India's current account deficit widened to $20 billion, or 2.5 percent ofGDP in 2005, from 0.6
percent of GDP in 2004, mainly due to stronger domestic demand and deteriorating terms of
trade due to higher oil prices. The economy grew about eight percent yr/yr in the second half of
the year. Private investment continued on an upswing dating back to 2004, driven by lower real
interest rates and ample liquidity in the banking system (credit growth of 30 percent yr/yr and

19 The JP Morgan index of the real value of the Singapore dollar is calculated using the price of manufactured goods
in Singapore. Indexes for the Singapore dollar that use CPI indexes can give significantly different results.

robust capital expenditures). Saving rose slightly, due mainly to corporate saving from higher
profits. Public dissaving remained large despite some progress in reducing the public sector
deficit currently about eight percent of GOP. Capital inflows continued to increase, particularly
as foreign institutional investors' assessment ofIndia's economic prospects improved, and they
put more funds into stock and bond markets. The U.S. bilateral merchandise trade deficit with
India climbed to $5.9 billion in the second half of 2005, $1 billion more than the first half.
The monetary policy of the Reserve Bank ofIndia (RBI) relies on targeting short-term interest
rates to achieve price stability while monitoring the trade-weighted exchange rates over the
medium term. The Indian rupee depreciated by about 3.5 percent against the dollar in the second
half of 2005 and by about two percent in real terms against a basket of the currencies ofIndia' s
major trading partners, driven largely by a growing current account deficit. Despite this, on a
real, trade-weighted basis, the rupee is about six percent over its average for the last 15 years.
Overall, the accumulation of foreign exchange reserves by the RBI slowed considerably from
previous periods with foreign exchange reserves for the six months almost unchanged at $131
billion (which, at about seven times external debt on a residual maturity basis, is high). To date
foreign exchange purchases have risen again in 2006.
The government in March 2006 announced its intention to move India gradually toward full
capital account convertibility, which would reduce capital controls significantly, particularly on
outflows. It could also lead to the liberalization of the financial services sector to allow
additional foreign participation, providing additional capital and expertise to the Indian financial
system. Such moves would bolster Indian efforts to extend the yield curve on domestic financial
assets and attract financing for infrastructure investment.
Japan

Japan's economy appears to finally be exiting its long post-bubble slump after several false starts
over the past few years. Following disappointing growth during the last three quarters of2004,
the Japanese economy grew at 2.7 percent in 2005, with domestic demand contributing 2.5
percentage points. The financial health of Japan's major banks has greatly improved, corporate
restructuring has mostly eliminated large excesses of capacity and workers, and employment of
permanent fulltime workers has begun rising. Business investment and private consumption
drove 2005 growth, though net exports picked up in the fourth quarter of2005. A continued
economic recovery based on domestic demand should allow Japan to make a greater contribution
to global growth and the orderly adjustment of global imbalances.
Japan has struggled with low but stubborn deflation since 1998. Core consumer prices (the
measure that the Bank of Japan uses as its gauge of underlying inflation) fell by 0.1 percent
during 2005 as a whole, but increased by 0.1 percent in the last half of 2005 over the previous
year, raising hopes for an end to deflation. Following three months of positive year-over-year
growth in core CPI, the Bank of Japan announced on March 9, 2006 that it would change its
monetary policy from providing substantial excess liquidity ("quantitative easing") to a policy of
targeting interest rates. Even with the new policy, interest rates are expected to remain very low
for some time. The BOJ also announced a non-binding medium-term 0-2 percent CPI inflation
definition of its target of price stability.

Japan has had a persistent current account surplus and corresponding capital outflows to the rest
of the world, a consequence of a surplus of Japanese saving over domestic investment. Rates of
return on domestic investment have been generally low, although the recent acceleration of
corporate restructuring and mergers and acquisition activity holds out the prospect of higher
returns. Since the early 1990s, a decline in Japan's household saving rate and a widening fiscal
deficit have been offset by rising corporate net saving as firms paid off debt in order to
strengthen their balance sheets following the collapse of the late-1980s asset "bubble." The net
result of these offsetting factors is that Japan's current account surplus has fluctuated in the three
percent range in recent years.

In 2005, Japan's global current account surplus fell slightly to $166 billion (3.6 percent ofGDP),
from $172 billion (3.8 percent of GDP) in 2004. Japan's overall trade surplus declined $31
billion to $79 billion in 2005 as imports grew by 15.7 percent, due primarily to higher prices for
oil and other commodities, while exports grew by 7.3 percent. Japan's bilateral merchandise
trade surplus with the United States totaled $83 billion in 2005, up slightly from $76 billion in
2004. Increased outward direct investment by Japanese firms and larger portfolio investment
outflows by Japanese residents seeking higher returns abroad, particularly as interest rates in the
U.S. and other major economies rose relative to Japanese rates, contributed to a shift in Japan's
private net capital flows to net outflows of$123 billion in 2005 from net inflows of$21 billion in
2004.
Japanese authorities did not intervene in the foreign exchange market in the second half of 2005,
and have not intervened in the foreign exchange market since March 16,2004. 20 Japanese
foreign exchange reserves rose by $5 billion in the second half of 2005 to $829 billion, primarily
due to interest earnings. This contrasts with an increase in Japanese foreign exchange reserves of
$146 billion in the first half of 2004.
During the July 1 to December 31, 2005 reporting period, the yen depreciated 6.3 percent against
the dollar, reaching a level of 117.88 at year-end. Nominal depreciation ofthe yen versus the
dollar was 14.8 percent for the year as a whole. Rising capital outflows from Japan contributed
to a relatively weaker yen. Since the beginning of 2006, the yen has fluctuated within a 4.3
percent range, and as of April 25 had appreciated 2.5 percent since end-2005.
South Korea

South Korea shares many characteristics with other major Asian emerging markets, a large share
of trade in GDP, strong links to the global technology market, and a high degree of integration in
the Asian manufacturing system. Yet South Korea maintains substantial exchange rate
flexibility, with average daily fluctuations of the won of roughly the same size as the yen and the
euro. Despite a nine percent nominal effective appreciation of the won over the course of 2005
and the slowing of Chinese import demand, Korea still managed GDP growth of 4.0 percent for
the year. Growth for 2006 is expected to be in the five percent range. In addition, the exchange

20 The Japanese Ministry of Finance announces its total foreign exchange intervention at the end of each month, and
publishes the dates and amounts of intervention at the end of each quarter. See
http://www.mof.go.jp/english/elc021.htm.

rate flexibility allowed Korea to direct monetary policy towards stimulating domestic demand,
while still keeping inflation within its target range.
South Korea's current account surplus declined substantially during 2005 to $16.6 billion (2.1
percent ofGDP), from $28.2 billion in 2004. The fall in the current account surplus was due in
part to a sharp deceleration in export growth (12 percent growth in 2005 compared to 31 percent
in 2004) as a result of decelerating export growth to China. Korean imports also increased
significantly, due both to higher prices of oil and other raw materials as well as rising domestic
demand (particularly household consumption and corporate investment) as the effects of a
household credit boom/bust dissipated. The U.S. bilateral trade deficit with Korea narrowed to
$7.6 billion for the second half of 2005, down almost 30 percent from the same period a year
earlier, as U.S. imports from South Korea decreased and exports to South Korea rose by five
percent.
Along with other Asian emerging markets, South Korea experienced a reversal of portfolio
investment flows during the reporting period, due in part to rising U.S. interest rates. Capital and
financial account outflows, net of increases in official reserves, totaled $4.5 billion in the second
half of 2005, almost canceling the net inflow of $5 billion in the first half. While officials from
the Ministry of Finance and the Economy made public statements expressing concern about won
appreciation, the Bank of Korea reduced its foreign exchange intervention significantly during
2005. For the year, reserve assets increased by only $20 billion, compared to an increase of
almost $40 billion in 2004. By end-2005 reserves stood at $210 billion, equivalent to 110
percent of the gross external debt of Korea.
South Korea maintains a managed floating exchange rate in the context of an inflation targeting
monetary policy framework. Finance Minister Han (who is also South Korea's Deputy Prime
Minster) has stated that the exchange rate should not be used as a policy tool, and has
emphasized that exchange rates should be determined in the market. At the same time, he said
that the South Korean Government may intervene "if abnormal factors such as foreign exchange
speculation are in action." Despite the rise in oil prices, the won's rise of 9.1 percent on a
nominal trade weighted basis during 2005 enabled the Bank of Korea to lag behind the Federal
Reserve in raising interest rates, while keeping core inflation within the 2.5 to 3.5 percent target
band. The won appreciated 2.3 percent versus the dollar over the course of 2005 (1.3 percent
within the second half of the year), and during 2005 the won/dollar exchange rate varied over a
range of 6.4 percent. In the three years through end-2005, the won has appreciated about 15
percent against the U.S. dollar and 12 percent on a nominal effective basis.
South Korea also implemented a liberalized system for capital transfers starting January 1,2006.
The system replaced a permit requirement with a reporting requirement for a number of capital
transactions. In addition, regulations on cross boarder borrowing were eased, and asset
management companies are now allowed to issue certain foreign currency-denominated
investment securities.
China

Rapid Chinese economic growth continued during 2005, despite a series of administrative and
market-based measures imposed by the Chinese authorities in late 2004 to reduce the growth of

investment in order to reduce the risk of overheating and a hard landing. This tightening cycle
was followed by steps to ease monetary policy following the July 21, 2005 exchange rate
adjustment. Growth for the year was 9.9 percent, down only slightly from the 10.1 percent
21
growth in 2004. Investment growth did fall from 2004's torrid pace, but fixed asset investment
still grew by 26 percent, well in excess of overall GDP growth. China recorded larger-thanexpected growth in the first quarter of 2006 of 10.2 percent, and the Chinese leadership has once
more expressed concerns about excessive investment and credit extension, and raised domestic
lending rates on April 28.
Macroeconomic imbalances increased significantly. The growth of net exports in the latter half
of 2005 brought China's global trade surplus to $102 billion (5 percent of GDP) for the year,
three times the $32 billion surplus in 2004. 22 The widening of the surplus came from slower
import growth. After expanding by 36 percent in 2004, imports of goods grew by only 14
percent year-over-year in the first half, before picking up to 21 percent year-over-year growth in
the last half of 2005. Chinese imports decelerated due to lower investment growth and the
displacement of imports by domestic supply in some sectors. In the first quarter of 2006,
China's trade surplus widened further by $23 billion (nsa). The U.S. bilateral trade deficit with
China rose 25 percent to $202 billion in 2005 from $162 billion in 2004. The increase in China's
trade surplus drove a sharp increase in China's current account surplus, which rose to $161
billion (seven percent of GDP), a more than doubling of the $67 billion surplus in 2004. 23
Net foreign direct investment was lower in 2005 than in the previous year, and net portfolio
capital inflows slowed sharply during the second half of 2005. After a period of strong net
portfolio capital inflows, the falloff in the second half of 2005 was likely the result of the change
in the Chinese exchange rate regime that occurred on July 21, tax measures to discourage
speculative holdings of property, and wider interest rate differentials favoring U.S. dollardenominated financial assets. The sharp increase in the current account surplus accounted for
most of the increase in reserves in the balance of payments. The stock of China's foreign
exchange reserves rose $209 billion during 2005, a slight increase from 2004. 24 As of March 31,
2006, Chinese foreign exchange reserves totaled $875 billion, about three times its external debt,
and far in excess of amounts needed to cushion against adverse shocks.
After maintaining a pegged exchange rate for eight years, the movement to a new exchange rate
mechanism on July 21, 2005, was a significant event. But the Chinese authorities have been
very slow in introducing exchange rate flexibility and in allowing the renminbi to adjust to
21 The Chinese government revised upward its official estimates of production-based GDP for the years 1993 to
2005 in December of2005 to account more accurately for output attributable to the growing services sector. The
authorities did not release revised expenditure-based GDP. As a result, we do not yet know by how much it will
change the investment, consumption, or net exports figures, leading to revisions in the contributions of these GDP
components to real growth rates. A better counting of the services sector, which tends to be less capital intensive,
should contribute to a larger estimated consumption share in the economy.
22 These trade figures are on FOB-CIF basis. If China's imports were measured on the same basis as its exports
(fob), China's adjusted global merchandise trade balance in 2005 would be $134 billion. (This calculation assumes
a 4.8 percent c-i-f(cost, insurance, and freight) adjustment factor.)
23 Current account statistics for all of 2005 in China were published by SAFE on May I, 2006.
24 The PBOC used $6 billion to execute a swap transaction with local banks - both to establish the swap instrument
and to soak up renminbi liquidity. The PBOC must mop up ("sterilize") domestic liquidity created by accumulating
foreign exchange reserves. The FX swap provides an alternative way to absorb renminbi funds from the market.

market forces. Since July 2005 and through the end of last year, the renminbi appreciated
gradually against the dollar, closing at 8.0 II yuan per dollar as of May 1, an additional
appreciation of only 1.2 percent since the initial change on July 21, 2005. While appreciating
only modestly against the U.S. dollar, the renminbi strengthened (along with the dollar) against
other currencies since last July, rising by about 2.4 percent on a nominal trade-weighted basis as
of April 30, 2006. Daily fluctuations since the new mechanism was introduced have averaged
only 0.025 percent, with a maximum one-day change of 0.13 percent, far less that the allowable
daily movements of 0.3 percent. So far, the role of the reference basket of currencies has been
extremely limited, as monetary authorities have maintained effectively a tightly managed
crawling peg against the U.S. dollar.
Chinese leaders' statements of their commitment to move to a flexible exchange rate have been
clear, and repeated at the highest level, most recently by President Hu in Seattle in April 2006,
when he said China would "continue to develop the foreign exchange market and increase the
flexibility of the renminbi exchange rate." But Chinese leaders have consistently expressed a
strong preference for a gradual adjustment in their exchange rate. This view may reflect the
caution of the Chinese leadership in adopting fundamental policy changes in an economy
undergoing rapid transformation and the shedding of millions of workers annually from
agriculture and state-owned enterprises. 25 It may also reflect the diversity of advice that Chinese
leaders receive. 26
The Chinese authorities continued taking steps to enhance the market infrastructure to support a
more flexible exchange rate regime. They introduced an interbank foreign currency trading
system in early January; previously, the State Administration for Foreign Exchange (SAFE) had
been the counterparty on all foreign exchange transactions. The authorities have also introduced
new financial products to hedge against currency risk, such as forwards. But the barriers to
greater foreign exchange rate flexibility are no longer technical. China has the means to
introduce a much greater degree of exchange rate flexibility. Loosening management of the
exchange rate will in fact spur the development of the market for hedging instruments when
participants have greater incentive to hedge their exposure to exchange rate risk, and it will
facilitate China's transition to a more market-oriented economy.
China has taken steps to liberalize controls on capital movements to increase the depth and
liquidity of foreign exchange markets. Chinese authorities have continued to expand the
program that allows foreign institutional investors to buy shares in locally listed companies. In
mid-April, the central bank announced a series of measures to liberalize foreign exchange
regulations that will allow Chinese residents and institutional investors to acquire more overseas
assets. These capital account liberalization steps will offer opportunities for higher returns and
portfolio diversification to Chinese households and thus should contribute to reduced saving.
Despite this recent liberalization, China still maintains more extensive controls over flows of
capital out of China than it does on inflows of foreign capital.

25 This fundamental caution is also evidenced by the fact that China maintained a fixed exchange rate throughout the
Asian Financial Crisis in 1997-98, despite the fact that many Asian currencies depreciated sharply against the U.S.
dollar, and thus against the renminbi.
26 At least one prominent economist has argued that China should maintain its fixed exchange rate and risks falling
into deflation similar to what Japan experienced should its currency appreciate.

China's leaders have also recognized that the country's growth cannot be maintained through
continued reliance on net exports. They have expressed their clear intent and commitment to
reduce China's current account surplus and shift the sources of Chinese growth away from
foreign demand and investment, in particular to increased consumption expenditure. When
President Hu came to Washington in April, he outlined China's intent to boost domestic demand
and reduce China's trade surplus. 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.
The counterpart to China's high investment and its current account surplus is a saving rate of
roughly 50 percent of GDP, which may be the highest in the world. Household saving reflects a
weak social safety net and limited access to financing and insurance; households need high
saving 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 has disappeared and a modem social safety net has
not yet been erected. Chinese state and private firms also save heavily - and re-invest the profits
they earn rather than paying out dividends.
There are a number of additional steps that China could take to lower saving and boost domestic
demand. Policies to encourage China's state-owned enterprises to distribute some of their
earnings as dividends to the government would reduce their saving 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.
Financial sector modernization is a critical element of improving the efficiency of investment
and facilitating increased consumption. Increasing the range of financial products available to
households could reduce household precautionary saving for disability and catastrophic illness,
reduce the need to save in advance to finance education and other major expenses, and make
higher return investments available to households. All of these would allow households to save
less and spend more, boosting Chinese domestic demand.
China has been working to modernize its financial system, tightening its risk classification
system for bank loans, deregulating bank lending rates, and developing financial-sector
infrastructure. Foreign entry and expertise is an important part of China's strategy for
modernizing the financial system. Foreign strategic investors have invested more than $17
billion in Chinese banks in the last 18 months. In addition, international institutional investors
have invested around $11 billion in the public listings of two of China's five largest banks.
These investors will subject the management of these institutions to tighter surveillance and
market forces. In the capital markets, China has made progress converting all shares to tradable
shares, expanding access to locally listed shares for foreign institutional and strategic investors.
Despite this progress, much needs to be done to improve China's financial markets. Deeper
bond markets would reduce corporate reliance on state-controlled lenders and more active
derivatives trading would allow firms to manage risk better. On the banking side, the stateowned banks still account for most credit. China needs to increase competition including by

raising foreign ownership caps on securities firms and purchases of existing state-owned
companies, which would increase competition as well as provide capital, risk management, and
new products. The more flexible interest rates that would result from a more market-based
exchange rate would also improve the financial sector's ability to allocate credit through market
forces to investment with the highest return.
Rebalancing the sources of Chinese growth and improving the efficiency of Chinese financial
markets will be requirements for sustaining future Chinese growth. But greater exchange rate
flexibility, through changing internal prices of domestic and internationally traded goods will be
a fundamental part of that rebalancing. While the hesitancy of the Chinese leadership to
introduce greater exchange rate flexibility may be real; its concerns about the effects of an
accelerated introduction of flexibility and market determination of the renminbi exchange rate
are unfounded. Chinese export growth accelerated in the final quarter of 2005 and into 2006,
despite the strengthening of the exchange rate. In fact, first quarter 2006 GDP growth at over 10
percent has again raised questions of overheating. The experience of South Korea, described
above, illustrates that a substantial degree of exchange rate flexibility and an exchange rate
appreciation far greater than China has experienced can be incorporated in a growing economy.
Chinese leaders have also expressed concerns about the effects of a fully floating exchange rate
on the Chinese banking system. However, we are not asking China for an immediate full float of
the currency with full liberalization of controls on capital movements. China can introduce a
much greater degree of exchange rate flexibility without risk to its financial system. In fact, the
current slow pace of moving towards flexibility carries its own risks to the financial system, as
People's Bank of China Governor Zhou has noted. It has led to large capital inflows that have
fueled rapid credit growth and property market speculation. Low real interest rates and rapid
loan growth in tum weaken bank lending discipline, risking the creation of a new generation of
non-performing loans.
China's tightly managed exchange rate regime has become an increasingly significant systemic
risk, both in China's domestic economy and the global economy. Its peg constrains monetary
authorities' ability to adjust interest rates and the growth of monetary aggregates and credit at a
time when credit growth is fueling a re-acceleration of investment. The expanded scope to vary
interest rates with a more flexible currency regime would promote more efficient and prudent
financial intermediation, and help avoid credit-fueled investment booms and resulting buildups
of excess productive capacity and non-performing loans in the banking system. Moreover, as
China proceeds in its transition toward a market economy, command-and-control tools are losing
their effectiveness, and exchange rates, interest rates, and other price mechanisms will become
more important to achieve and maintain macroeconomic stability. The price signals that come
from a more flexible exchange rate would be a critical part of readjusting China's economy to
produce more balanced and sustainable growth and contributing to an orderly reduction of global
imbalances. Greater exchange rate flexibility in China would make other Asian governments'
authorities, concerned about their relative external competitiveness vis-a-vis China, less reluctant
to allow their exchange rates to adjust.
Treasury will continue to intensify its bilateral and multilateral efforts to encourage China to
move more rapidly to a market-based, flexible exchange rate. In what have now become regular
meetings with the leaders of the People's Bank of China, the Chinese Ministry of Finance, and

the National Development and Reform Commission, Treasury officials consistently emphasize
the necessity of more rapid introduction of exchange rate flexibility under China's new exchange
rate mechanism. The G7, the IMF, the Asian Development Bank, and the OECD have all called
on China to introduce greater exchange rate flexibility. Discussions begun under the Technical
Cooperation Program on foreign exchange market issues have developed into a broader
discussion of strengthening China's financial and foreign exchange markets to support greater
exchange rate flexibility. U.S. and Chinese financial regulators conducted their second Financial
Sector Working Group talks on April 24. Also in April, Treasury's Financial Attache assumed
full-time pemlanent residence in Beijing. Treasury will continue to encourage Chinese
economic leaders to interact with leaders of the major economies that share systemic
responsibility, with the clear understanding that the role China now plays in global trade carries
responsibilities for contributing to an orderly reduction of external imbalances and global
conditions conducive to continued support for open trade and investment.

Taiwan
Robust global high-tech demand and an increase in Taiwan's exports led to stronger growth in
the second halfof2005. Taiwan's current account surplus in the second halfof2005 was $10.7
billion (6.3 percent of GOP), up from a surplus of $5.5 billion in the first half. Even with the
second half increase, the current account surplus for 2005 as a whole was the lowest annual
figure since 2000. Taiwan's bilateral trade surplus with the United States was $7.0 billion in the
second half of 2005, down very slightly from the same period a year earlier. The U.S. bilateral
deficit with Taiwan peaked at $16.1 billion in 2000, and has declined since then, to reach $12.8
billion in 2005. The decline in the U.S. bilateral deficit with Taiwan, in a period in which the
U.S. global trade deficit rose substantially, reflects increasing Taiwanese investment in China
and the use of China as a final assembly point for exports destined for the United States and
other third country markets.
Portfolio capital outflows in the second half of 2005 offset most of the inflows from the first half
of 2005, resulting in a very small net inflow with regard to the capital and financial accounts for
the year. Taiwan residents' investment in foreign securities in 2005, $36 billion, was a recordhigh, spurred by the gap between the interest rates for New Taiwan Dollar (NTD) deposits and
U.S. dollar deposits.
Taiwan maintains a heavily managed exchange rate. However, in the second half of 2005, the
central bank's foreign exchange intervention declined significantly. Taiwan's foreign exchange
reserves at end-2005 were $253 billion, unchanged from their end-June level. In the first
quarater of 2006 reserves have risen slightly, to $257 billion at the end of March. Nevertheless,
by end 2005, Taiwan's ratio of foreign exchange reserves to GOP (78.2 percent) was the second
largest in the world and the ratio of reserves to short-term external debt was over four.
After appreciating by 6.6 percent against the dollar over the course of 2004, the NTD remained
virtually flat in the first half of 2005, and then depreciated by 3.5 percent by year-end. In the
first three months of this year, the NTD has appreciated by 2.4 percent against the dollar.

Malaysia
Malaysia's cunent account surplus increased to 15.3 percent of GOP ($19.9 billion), from 12.6
percent of GOP in 2004. Large current account surpluses have been a striking feature of the
Malaysian economy in the last few years, even before higher oil prices (Malaysia is a net oil
exporter) expanded the surplus. Malaysia's cunent account surplus is driven in large part by the
low level of domestic investment, which dropped off sharply after the Asian financial crisis and
continues to decline (20.0 percent of GOP in 2005). Part of this decline was expected after the
investment boom just prior to the 1997 Asian financial crisis, but Malaysia's investment rate is
almost 15 percentage points below its level in the early 1990s, and there have been sharp
declines in both domestic private and foreign direct investment. The reasons for the sharp fall in
investment are not clear; reasons that have been suggested include declining competitiveness of
Malaysia vis-a-vis other Asian economies, shortages of complementary inputs (particularly
skilled labor), policy efforts to shift towards a more service-oriented economy, and the effect of
excessive government regulation.
Despite the rise in the annual cunent account surplus in 2005, the surplus for the second half of
2005 was $9.7 billion, or 14.1 percent of GOP, down from the 16.5 percent in the first half of
2005. This drop in the surplus was due entirely to a fall in investment income; the goods and
services trade balance rose slightly in the second half of the year (not seasonally adjusted).
Malaysia's bilateral trade surplus with the United States totaled $12.8 billion in the second half
of2005, compared with $9.7 billion in the second halfof2004.
Within hours of China's revaluation on July 21, Malaysia abandoned its peg of3.8 ringgit per
dollar and adopted a managed float that is "determined by economic fundamentals." Over the
next few days of trading the ringgit appreciated by 1.3 percent. Through the rest of 2005 the
ringgit exchange rate gradually depreciated slightly, ending the year at 3.78, an appreciation of
0.5 percent from its previous pegged rate. Since the end of2005, however, the ringgit has
appreciated steadily, reaching 3.59 per dollar by May 8, a cumulative appreciation of over 5.4
percent. The pace of appreciation has accelerated markedly since April 18, with over one third
of total appreciation occuning since that time. The magnitude of average daily fluctuations,
around 0.1 percent, is still small, but a marked increase over 2005.
Speculation leading up to the change in exchange rate policy and a gradual reversal of some of
the initial appreciation during the remainder of the year strongly influenced Malaysian capital
flows. After strong net capital inflows prior to the change in exchange rate regime, Malaysia's
financial account saw surging outflows in the fourth quarter of 2005. The financial account
deficit for the second half of 2005 spiked to $10 billion (compared to a surplus of $1 billion in
the first half of the year). This is due in large part to the unwinding of speculative positions on
ringgit appreciation. Bank Negara Malaysia intervened to slow the ringgit's depreciation, and
foreign exchange reserves declined by about $5.6 billion in the fourth quarter.
Inflation, while still moderate, rose measurably in 2005 to three percent from 1.4 percent the year
before. This was due in large part to high global oil prices, cuts in domestic fuel subsidies, and
increased communications costs. Inflation spiked in March 2006 to 4.8 percent, on the heels of
another government increase in fuel prices. Bank Negara Malaysia has raised the overnight
policy rate three times since November, 80 bps to 3.5 percent in an effort to curb rising inflation.

Malaysia had already relaxed most of its controls on capital flows imposed when the ringgit was
pegged in 1998. There are a few remaining controls: offshore trading of the ringgit remains
prohibited, and foreign portfolio investment by residents continues to be limited.
Malaysia's move to a managed floating exchange rate regime was an important step to address
the external and domestic imbalances suggested by the large and rising current account surplus.
Malaysia could benefit from a greater degree of exchange rate flexibility, to better manage
domestic demand and inflation and to allow changes in internal prices and resource reallocation
to support growth. Since the last report, Under Secretary Adams and other Treasury officials
initiated consultations with the Malaysian authorities on exchange rate policy in the context of
overall Malaysian macroeconomic policy. The additional ringgit flexibility introduced since the
beginning of 2006, in particular the increased flexibility that has been observed during the past
month, is welcome.

Appendix I: Patterns of Indicators

Appendix I of the autumn 2005 Report to the Congress on International Economic and Exchange
Rate Policies, Analysis of Exchange Rates Pursuant to the Act, discussed the use of indicators in
considering the question of whether "countries manipulate the rate of exchange between their
currency and the United States dollar for purposes of preventing effective balance of payments
adjustments or gaining unfair competitive advantage in international trade". I That Appendix
stressed that in considering the question of designating countries pursuant to the terms of the Act,
a range of indicators need to be assessed. While individual indicators - such as a reserve or a
current account position - yield important information, they do not in and of themselves provide
a comprehensive picture of a country's economic situation or external position. 2 ,3 Also, the
pattern of change in indicators typically provides the most useful information. For example, a
country with a large current account surplus would be viewed one way if the country also had a
large reserve increase and a depreciating exchange rate, and viewed another way if its reserves
were not increasing and the exchange rate were appreciating. In addition, patterns of movements
of indicators must be examined in terms of the specific country and the global economic
environment.
The current analysis is an extension of that presented in the autumn 2005 report, but incorporates
full-year 2005 data. This analysis provides a useful framework for understanding the wide array
of factors that can underpin economies' external positions, even economies with sizeable current
account surpluses. Also, as previously noted, at a time when the United States - the world's
largest economy - runs a large current account deficit, the counterpart to that deficit is inevitably
going to be large surpluses in some other countries of the world. Table 1 updates the limited set
of numerical indicators constructed for a cross section of significant economies that was
described in the autumn 2005 Report.

I The Omnibus Trade and Competitiveness Act of 1988 states, among other things, that: "The Secretary of the
Treasury shall analyze on an annual basis the exchange rate policies of foreign countries, in consultation with the
International Monetary Fund, and consider whether countries manipUlate the rate of exchange between their
currency and the United States dollar for purposes of preventing effective balance of payments adjustments or
gaining unfair competitive advantage in international trade."
2 The autumn 2005 Appendix also included a discussion of various indicators and their relevance. That work was
derived from Treasury's March II, 2006, Report to the Committees on Appropriation on Clarification of Statutory
Provisions Addressing Currency Manipulation. The report can be found at
http://www.treas.gov/press/releases/js2308.htm.
.
.
3 The General Accounting Office (GAO) report, "Treasury Assessments Have Not Found Currency MampulatlOn,
but Concerns about Exchange Rates Continue", discussed Treasury's assessments. The GAO report can be found at
http//www.gao.gov/cgi-bin/getrpt?GAO-05-351.

Table 14

Singapore
Saudi Arabia
Norway
Malaysia
Venezuela
SWitzerland
Russia
China
Sweden
Netherlands
Taiwan
Germany
Japan
Korea
Canada
MexIco
Euro Area
United Kingdom
Thailand
India
Australia
Turkey
United States
Spain
Portugal

Current Account Balance
Level
Change
over penod
(%GoP)
(%GoP)
2005
2002-2005
285
283
220
167
39
153
69
181
99
137
52
114
30
7 1
44
66
13
63
38
47
-40
42
2 1
37
08
07
04
22
03
-08
13
-03
-11
-26
-11
-20
-76
-1 8
-34
-60
-2 1
-65
-57
-64
-19
-74
-4 1
-93
-14

Foreign Exchange Reserves
Real Effective
Ratio to
Rallo to short-term
Change
Exchange Rate
2005 GOP
external debl
In reserves
(% appreciation)
(%)
(%)
(%)
Dec 2005
September 2005
Oec04 to DeeOS
Feb02 - Feb06
988
j4
124
16·
78
151 4
34
-194
156
456
71
140
551
371 1
101
-11 3
164
717 4
287
35
96
74
-34 2
-51
229
4135
454
286
369
11108
343
-40
60
114
36
-03
na
na
na
na
731
6183
48
-64
na
na
na
na
181
2113
06
-11 5
267
2944
60
233
27
21 3
17
201
95
3003
163
-10
17
50
-74
175
19
19
36
-33
372.1
4.2
286
65
181
4472
47
09
58
222
209
386
141
1209
421
148
-11 4
28
-192
03
na
na
na
na
na
na
na
na

External Sector
Contribution to
Growth Rate
(Average %)
2003-2005

5
07
-14
-06
01
01
-02
10
10
06
10
05
06
25
-16
03
-01
-06
02
02
-19
-30
-05
-18
-03

Relative Dependence
of GOP Growth
on External Sector
(Average %)
2003-2005
52
-51
-49
-71
-57
-09
-73
-80
-08
03
-23
01
-1 2
11
-58
-23
-16
-37
-5.4
-77
-69
-129
-45
-67
-06

The same methodology used in the November 2005 report is used below to examine more
closely the patterns of indicators by assigning qualitative values of low, medium, or high
(numerically 0, 1, or 2) to the indicators and constructing indices based on alternative weighting
schemes which give different emphasis to the various indicators. The three schemes are:
•
•

•

A focus on changes in the current account balances, in foreign exchange reserves and in real
effective exchange rates, assigning each a 113 weight.
A focus on current account balances, changes in current account balances, changes in foreign
exchange reserves, changes in real effective exchange rates, and relative dependence of GOP
growth on the external sector, assigning each a 115 weight.
A focus on current account balances, changes in current account balances, and relative
dependence of GOP growth on the external sector, assigning each a 113 weight.

The "Contribution to Growth of the External Sector" is calculated as the annual change in real net exports (in the
National Income and Product Accounts) as a percent of real gross domestic product. The "Relative Oependence of
GOP Growth on the External Sector" is measured as the external sector's contribution to GOP growth minus the
contribution of the growth in domestic demand. This dependency measure reflects the view that a country will be
generally more concerned about the contribution of the external sector to GOP growth if the contribution of the
domestic sector to GOP growth is relatively small. For example, Singapore's export sector contributed 5.6 percent
to GOP growth during 2003-2005 while domestic demand contributed only 0.4 percent. China's export sector, on
the other hand, contributed only 1.0 percent to GOP growth during 2003-2005 while domestic demand contributed
9.0 percent. Turkey's external sector subtracted 3.0 percent from GOP growth during this period while domestic
demand contributed 9.9 percent. The "Real Effective Exchange Rate" is JP Morgan's Broad Real Effective
Exchange Rate Index.
4

Results
The three weighting schemes yielded the following rankings:
Scheme I
Saudi Arabia
Malaysia
Venezuela
Switzerland
China
Japan
Singapore
Russia
Sweden
Taiwan
Mexico
Norway
Korea
Canada
United Kingdom
India
Turkey
Netherlands
Germany
Thailand
Australia
Euro Area
Spain
Portugal

•

1.7
1.7
1.3
1.3
1.3
1.3
1.0
1.0
1.0
1.0
1.0
0.7
0.7
0.7
0.7
0.7
0.7
0.3
0.3
0.3
0.3
0.0
0.0
0.0

Scheme II
Singapore
Saudi Arabia
Malaysia
Switzerland
Venezuela
China
Sweden
Japan
Norway
Russia
Netherlands
Taiwan
Korea
Germany
Mexico
Canada
United Kingdom
India
Turkey
Euro Area
Thailand
Australia
Portugal
Spain

1.4
1.4
1.4
1.4
1.2
1.2
1.2
1.2
1.0
1.0
1.0
1.0
1.0
0.8
.0.8
0.6
0.6
0.4
0.4
0.2
0.2
0.2
0.2
0.0

Scheme III
Singapore
Switzerland
Netherlands
Saudi Arabia
Norway
Malaysia
Venezuela
Sweden
Germany
Korea
Russia
China
Japan
Taiwan
Canada
Mexico
Euro Area
United Kingdom
Portugal
Thailand
India
Australia
Turkey
Spain

2.0
1.7
1.7
1.3
1.3
1.3
1.3
1.3
1.3
1.3
1.0
1.0
1.0
0.7
0.7
0.7
0.3
0.3
0.3
0.0
0.0
0.0
0.0
0.0

As in the appendix to the autumn 2005 Report, oil-exporting economies score high
whichever weighting scheme is chosen. This primarily reflects the impact of recently
increasing oil prices that have resulted in recent large current account surpluses and reserve
accumulations. These countries also maintain relatively fixed exchange rates. Saudi Arabia,
for example, ran a current account surplus of around $85 billion in 2005, or 28 percent of
GDP. Russia also ran a current account surplus of$85 billion, or greater than 10 percent of
GDP, while reserves rose 45 percent. Norway ran a current account surplus of $50 billion, or
17 percent of GDP.

In past periods of sharp run-ups in oil prices, some oil-exporting countries quickly spent
increased proceeds, often on projects with low rates of return, and then ran large fiscal
deficits and built up debt burdens during periods of low oil prices. There are reasons to
believe that the rise in oil prices in the current cycle will prove to be a more lasting and
durable phenomenon. This factor, coupled with the limited short-term absorptive capacity of
a number of oil exporters, raises the question of their appropriate policy response.
The appropriate response will entail a mix of increased saving, increased spending, and
perhaps exchange rate appreciation. It is understandable that countries would wish to
maintain sound fiscal positions, build up stabilization funds, and reduce debt burdens. It is
also important to ensure that spending achieves high social rates of return. Moreover,
spending plans cannot be implemented overnight. Accordingly, increasing saving is an
understandable response. As fiscal positions strengthen, spending should increase,
promoting the recycling of petrodollars. Some exchange rate adjustment could also facilitate

the global adjustment process, translating oil producers' higher oil revenue stream into higher
real incomes and imports.

•

Germany appears in the middle the weighting schemes. Germany has a large current account
surplus, roughly $130 billion and equal to 4.2 percent of GOP. Yet, Germany is part of the
Euro-zone and thus cannot conduct an independent monetary policy. Further, the euro is a
freely floating currency, and the Euro-zone in aggregate has a small external deficit. German
growth in 2005 rested almost entirely on the contribution of external demand. On balance,
Germany's current account surplus is fundamentally associated with persistently weak
investment and domestic demand.

•

Japan can be found in the upper half. Japan's current account surplus as a share of GOP in
2005 was 3.6%, and in dollar terms over $170 billion. Japan has intervened heavily in
foreign exchange markets in the past but has not done so since March 2004. Though
Japanese private saving has declined in past years and the public sector has run fiscal deficits,
corporate saving has been strong. But investment and domestic demand have been weak. In
2005, Japan gained economic momentum, and the economy became less reliant on external
demand for stimulus. However, low Japanese interest rates - a product of Japan's
appropriately and highly accommodative monetary policy aimed at overcoming deflationstimulated large capital outflows from Japan in 2005. Japan has moved down the list since
the November report in two of the three schemes.

•

Switzerland again remains toward the top of the weighting schemes. It has a large current
account surplus reflecting not its merchandise trade balance, but rather significant surpluses
in trade in financial services and investment income. The Swiss franc is an independently
floating currency, and Swiss authorities have not intervened in the exchange market.

•

As in last autumn's report, China is toward the upper end of the first weighting scheme, in
the middle of the second, and in the middle of the third. China's current account surplus as a
share of GOP rose sharply in 2005, reaching 7.1 percent of GOP. China's reserve
accumulation was large and excessive last year, and reserves are continuing to rise rapidly
this year. The currency remains rigidly managed. These factors account for the high ranking
using the first weighting scheme, which underscores the need for continued fundamental
reform in Chinese exchange rate policy. Still, the real effective exchange rate has
strengthened, especially over the last year. The contribution of China's external sector to
growth is positive,S but growth in domestic demand is so strong that the overall external
contribution appears to be modest. Indeed, China's strong growth is an important source of
demand for the global economy. These considerations impact China's ranking in the second
and third weighting schemes.

•

Malaysia tends to have a high ranking, on the whole, in the weighting schemes. It has a
tightly managed exchange rate. It ran a 14 percent of GOP current account surplus last year,
in part due to higher oil export earnings, and its reserves rose rapidly.

5 As noted above this measure is of the change in net exports relative to the size of GOP. Given the size of China's
economy, the level of the current account surplus is large by international standards.

•

Singapore also has a relatively high ranking in each of the three schemes. Singapore's
current account surplus, at a very large 29% of GOP, is due to demographically-related high
saving. The monetary authorities pursue a managed currency in terms of a currency basket
(the composition of the basket is not published), and Singapore uses its heavily managed
foreign exchange rate as its monetary policy anchor.

•

Russia is running a large current account surplus and for several years has had one of highest
rates of reserve accumulation in the world. Its real trade-weighted exchange rate has
appreciated over the last year due to its continuing double digit inflation. Although its large
and growing current account surplus and rapidly growing reserves have pushed Russia up in
two of the weighting schemes, real ruble appreciation has constrained its movement toward
the top of the weighting schemes. The Russian economy is, in fact, partially adjusting to
increases in the value of its oil exports without nominal exchange rate adjustment through
inflation and the reduction in competitiveness of its non-oil sector.

Conclusions
This Appendix has updated the three weighting schemes used in the November report to include
full year 2005 data. The picture largely remains the same.
•

Some oil-exporting countries remain atop the various schemes, highlighting ongoing high oil
prices. The analysis, though, highlights the need to give greater attention to the policy
choices facing oil-producing countries, especially those with low absorptive capacity and
high debt burdens, in a period of sustained high oil prices.

•

Some major developed countries also remain atop some of the weighting schemes. This
pattern is in fundamental respects associated with economic performance that has been
persistently weak in the past but that, hopefully, will improve.

•

Another effect of adding full-year 2005 data to the analysis is to move China and Malaysia,
two countries featured prominently in the autumn report, slightly higher. Interestingly,
Malaysia scores higher than China in each weighting scheme. China's strong contribution to
the global economy is welcome. But the weighting schemes, particularly after the relevant
indicators are further scrutinized in-depth, underscore the very real and difficult
considerations raised for the global economy by Chinese and Malaysian external
performance and the continuing need for fundamental policy reforms, including in exchange
rate management.

Appendix II: Fixed vs Flexible Exchange Rates
There have been discussions about the optimal exchange rate regime for a very long time,
reflecting the evolution of the world economy and the conduct of monetary policy. The gold
standard, as well as systems tied to other commodities, provided a monetary anchor, as well as a
standard for financing international transactions, for many different countries over the centuries.
Histories of gold standards recount many periods of financial turmoil and very sharp variations
in output and prices.
The Bretton Woods system was established, with the U.S. dollar as the centerpiece, as a system
of fixed, but variable, exchange rates. 1 When this system came under stress in the 1960s, older
debates of the relative merits of fixed versus flexible exchange rates developed new life and the
original Bretton Woods system was replaced by a system of floating exchange rates among the
major currencies. The question of the appropriate exchange rate regime for other currencies
remained open to debate. In the early 1990s, influential economic arguments supported fixed
exchange rate regimes as an anchor to break hyper- and high inflation in many emerging
markets. The emerging market financial crises later in that decade, however, prompted a
reassessment of these arguments and an emphasis on the virtues of flexible exchange rate
regimes for large emerging markets, increasingly integrated into the global financial system. It
became clear that economies operating in the framework of a flexible exchange rate system were
better able to absorb shocks from open capital markets than economies with a pegged rate.
A few points merit emphasis in any debate about exchange rate regime choices.
•

In a pure fixed exchange rate regime, economic activity adjusts to the exchange rate. In a
purely floating regime, the exchange rate is a reflection of economic activity. In either case,
the economy's "fundamentals" are the chief determinant of whether economic stability and
prosperity are achieved, not the exchange regime per se.

•

There is probably no universally "optimal" regime. Regime choices should reflect the
individual properties and characteristics of an economy.

Both "fixed" and "flexible" regimes have strengths and weaknesses. A fixed exchange rate is
generally seen as being transparent and a simple anchor for monetary policy. Countries with
weak institutions can "import" monetary credibility by anchoring to a currency with a credible
central bank. A conventional view is that a fixed exchange rate has the advantage of reducing
transaction costs and exchange rate risk. In countries with less developed financial sectors,
economic agents may not have the financial tools to hedge long-term currency risks.
But adjustments under fixed exchange rates can be very gradual and require significant
flexibility in prices in the domestic economy, especially in the face of changing capital flows.
The inflexibility of fixed exchange rates can place an enormous constraint on monetary policy
and create pressures in a downturn for pro-cyclical fiscal policies. Fixed exchange rate regimes
in economies where interest rates are higher than rates denominated in the anchor currency can
also give debtors an incentive to borrow unhedged in the anchor currency, leaving national
I The dollar was convertible into gold under the Bretton Woods system. Other currencies were defined in terms of
the dollar. The U.S. gold window was closed in August 1971.

balance sheets vulnerable to exchange rate changes. To withstand currency pressures under
fixed exchange rate regimes, authorities have an incentive to put in place harmful capital controls
(to be sure, such pressures can exist under flexible regimes as well).
A country cannot maintain a fixed exchange rate, open capital market, and monetary policy
independence at the same time. In recent years more large emerging market countries,
increasingly integrated into the global financial system, have begun to adopt policies that target
low inflation and establish central bank independence. Flexible exchange rates have the
advantage that they allow a country to pursue an independent monetary policy, rather than have
its own monetary policy set by an anchor currency country. Experience shows that flexible
exchange rates are more resilient in the face of shocks, and are better able to distribute the
burden of adjustment between the external sector and the domestic economy. Also, fixed
exchange rates have the effect of sharply reducing or eliminating exchange rate volatility.
Protection from volatility dampens the incentives for financial markets to develop hedging
products and financial instruments, so risk is more likely to be transferred to the public sector
effectively.
Against this background, exchange regime choices will vary.
Major Currencies
It is broadly agreed that the major currencies - the dollar, the euro and the yen - should, and do,
float against one another. The economies represented by these currencies account for 42% of
global economic activity. Nearly all global trade and capital flow transactions are denominated
in one of these three currencies, as are nearly 95% of official foreign exchange reserves. Other
large economies with well developed financial sectors, such the U.K., Canada, or Australia
should, and do, float as well.
Emerging Market Economies
Larger emerging market economies should adopt more flexible exchange rate regimes. "Larger"
is meant to apply to economies such as, though not exclusively, Mexico, Brazil, South Korea,
and China. This is all the more true as these economies become integrated into the global
financial system and have increasingly developed financial sectors. Where flexible exchange
rates are in operation, economies have proven to be more robust and resilient. Brazil
demonstrated this quite well in 2002 when the markets put substantial downward pressure on the
Real ahead of the Presidential elections. In the case of downward currency pressure, greater
flexibility limits the one-way betting that results in rapid depletion of reserves and allows the
external sector to bear a portion of the needed adjustment, rather than imposing an undue burden
on domestic demand.
Flexible regimes for "larger" economies cannot solve all problems. In particular, there is no
substitute for sound fiscal and monetary policies and resilient institutions. Economies with a
flexible exchange rate need an alternative anchor for monetary policy, such as central bank
independence and inflation targeting, and they should take steps to put in place a sound system
of bank regulation.

China is a clear case where increased trade and financial integration have shifted the balance
strongly towards the need for a more flexible exchange rate:

•

Large capital inflows have fueled credit growth, leading to huge increases in investment in
2003 and 2004 and an overheating economy.

•

Chinese authorities cannot effectively use monetary policy to control inflation, but instead,
monetary policy is inexorably linked to that of the anchor currency, regardless of domestic
developments in China itself. This creates pressure to use administrative controls.

•

Financial sector development and openness have reduced the effectiveness of administrative
controls for adjusting monetary conditions and smoothing investment cycles. But the peg
precludes the ability of monetary authorities to adjust interest rates.

•

The U.S. and China economic cycles are not synchronized so that monetary conditions in the
U.S. may not be appropriate for the Chinese economy.

•

China's transition to a more market-based economy where private agents adjust to price
signals is hampered by constraints on the movements of interest rates and exchange rates.

•

In addition to being in China's own interest, greater flexibility of the yuan would allow other
Asian economies that are concerned about their relative competitiveness vis-a.-vis China, to
have more flexible exchange rates. This would help facilitate orderly adjustments of global
imbalances and lessen protectionist pressures.

Lower-Income Economies
Lower-income economies with less developed monetary and financial sectors, and less credible
institutions, on the other hand, can face special problems. For some of these economies, a very
hard peg to a major currency can improve monetary stability and improve the efficiency of
commercial transactions. Typically, these economies, where credibility in existing institutions is
not yet strong, still have underdeveloped financial sectors and supervisory systems, suffer from
higher rates of inflation, and are in need of anchors for monetary policy.
The IMF and Exchange Rates
The IMF's Articles of Agreement allow members to adopt the exchange rate regime of their
choice. However, the IMF - taken to mean both management and shareholders - has a
responsibility rigorously and candidly to assess the consistency of that regime with both country
circumstances and the international system. The Fund is not only a trusted advisor to each of its
members but the protector of the system as a whole.
The IMF Articles of Agreement recognize the danger of not permitting balance of payments
adjustments to take place, and this danger motivated the IMF to establish procedures for
surveillance of exchange rate policies. The implementation of these procedures needs to be
significantly improved. In general terms, the international financial system would benefit from a
multilateral approach to greater exchange rate flexibility. It is in the collective interest of all

economies for the IMF - the world's central institution for global monetary cooperation - to
assume this responsibility.
More specifically, the U.S. Treasury has made four proposals to strengthen IMF surveillance. 2
First, the membership of the IMF should clarify the principles of surveillance over exchange rate
policies. Guidelines like "protracted large-scale intervention" and "excessive" reserve
accumulation have been undefined for too long. Second, Article IV reports must include more
substantial and pointed discussions of exchange rate issues - on a consistent basis, but especially
in systemically important countries. The IMF - with its wealth of expertise and experience
across the globe - is well positioned to discuss exchange rate policies with authorities and
advocate change. Third, such engagement is more effective with credible consequences, and that
is the "Special Consultation" mechanism. Consultations would be a more useful tool if designed
to enable more regular use. Finally, the IMF should develop its techniques for assessing
exchange rate behavior and extend this work more to emerging markets. Although the IMF
should not be placed in the position of determining what the "right" exchange rate level is,
quantitative efforts at exchange rate determination can be helpful in developing a qualitative
assessment of a country's exchange rate policies.
The IMF Managing Director has since committed to strengthen IMF exchange rate surveillance,
both bilaterally and multilaterally, in the context of his Medium-Term Strategy. Further, by
bringing together the IMF, countries engaged in questionable currency policies, and countries
most affected by those policies, the multilateral consultation process should help promote
exchange rate policies that are consistent not only with domestic policies but also with the
international monetary system.

Remarks by Treasury Under Secretary for International Affairs Timothy D. Adams at the Am~,rican Enterprise
F e b ruary,
2 2006 . "Workl·ng with the IMF to Strengthen Exchange Rate SurveIllance.
·
Instltute,
2

http://www.treas.gov/press/releases/js4002.htm

Chinese Official Commitments on Exchange Rate Policy, Increasing Domestic
Demand, and Improving Market Access
~

President Hu Jintao - trip to United States (April 19-20,2006)
o

"China will continue to develop the foreign exchange market (and) increase the flexibility
of the exchange rate."

"We will continue to advance the reform of the RMB exchange rate regime, and take
positive steps in such areas as expanding market access, increasing imports, and
strengthening the protection of intellectual property rights"

"China pursues a policy of boosting domestic demand, meaning we'll mainly rely upon
domestic demand expansion to further promote" growth.

o
o

"We'll continue to expand market access and increase imports of U.S. products."
"China does not seek a large [trade] surplus, and will further open its markets to
American goods and services."

Premier Wen Jiabao
o

China "will expand the FX market and allow more flexibility and fluctuation of the
Chinese currency." (March 14, 2006)

"We must [expand] domestic demand, a long-term strategic policy that we must stick to."
(October 8, 2005)

People's Bank of China Governor Zhou Xiaochuan
o China' 'is adopting further measures to expand domestic demand, encourage
consumption, open its markets, improve its exchange-rate regime, and restructure trade."
(April 22, 2006, repeating the 5-Point Plan to reduce the trade surplus that Zhou outlined
before the China Development Forum on March 20,2006)
o "We are moving into more [foreign exchange] flexibility ... all these things are moving
forward to lay the foundation for further market-oriented reforms." (April 20, 2006)
o "Six months after the reform (of the exchange rate on July 21), most Chinese enterprises
have adapted smoothly ... market forces could be allowed gradually to playa greater role
in the floating exchange rate." (March 20, 2006)

Finance Minister Jin Renqing
o "The Chinese government will ... make the yuan exchange rate more flexible. China has
never deliberately pursued a trade surplus or an increase in foreign exchange
reserves." (May 4, 2006)

U.S.-China Joint Economic Committee (JEC) Joint Statement
o The Chinese "affirmed their intention to enhance the flexibility and strengthen the role of
market forces in their managed floating exchange rate regime." (Oct. 17, 2005)

Fact Sheet: Chinese Actions on Exchange Rate Flexibility. Financial Sector Reform and Balanced Growth

Foreign Exchange Policy and FX Market and Financial Product Development: Foreign exchange trading systems and
critical elements of a market-based flexible exchange rate~ime.
- May: Banks allowed to trade
- January: Introduced OTC
non-RMB spot currency pairs in
interbank trading in RMB current
China on Reuters system;
(spot) delivery; allow banks to act
Chinese banks can act as market
as FX market makers.
makers.
- February: First RMB interest rate
- July: China abandons RMB peg, swap.
adopts managed float.
- March: China and CME agree to
allow electronic trading of CME FX
- August: China introduces interbank forward FX market.
and interest rate products to
- August: New measures expand
Chinese financial institutions and
ability of institutions to trade and
investors.
hedge FX risk. 1
- September: daily band for RMB
spot against non-USD currencies
widened to 3%.
- November: Central bank does
FX swap with local banks.
Liberalization of Capital Flows: An important part of China's strategy to prepare for a market-based exchange rate is to expand capital
flow transactions in order to increase the depth and liquidity of foreign eXChange markets, making them more efficient at transmitting price Signals.
- Chinese authorities introduce
- July-August: Select Chinese
- February: Eliminated surrender
- April: Liberalized FX regulations
measures that promote FDI and
domestic institutional investors
requirements on certain
allowing Chinese firms/residents
other capital flows.
(0011) authorized to invest in
commercial firms' FX receipts.
to buy more foreign assets.3
- Oualified Foreign Institutional
overseas assets.
- June: Raised quota for OFlls
- April: 54 foreign and domestic
2
Investor (OFII) program launched
from $4 billion to $10 billion.
banks operating in China allowed
- NovlDec: limits raised on
amounts emigrants, travelers, and
to trade FX swaps.
students can take out of China.

financial instruments for managing and hedging foreign exchange risk are
- June: Regulators allow foreign
banks to offer foreign exchange
(FX) products
- June: Chinese begin work with
the Chicago Mercantile Exchange
to offer FX futures in China.
- October: Chinese announce plan
to introduce Reuters-based
onshore non-renminbi FX trading
platform.
- October: Central bank lifts ceiling
on bank lending rates.

I Aug-200S: Expanded participants in FX forwards market and allowable transaction coverage, reduced maturity restrictions, and allowed banks more discretion
to quote prices; launched onshore RMB-foreign currency swaps in interbank market; allowed qualified non-bank entities to access FX spot market.
2 QFII: Qualified Foreign Institutional Investor - a foreign entity allowed to invest up to a certain quota amount in China's domestic capital markets.
3 April-2006: Individuals can convert more RMB to take out of China, commercial banks can buy foreign bonds; securities firms can buy foreign assets

Fact Sheet: Chinese Actions on Exchange Rate Flexibility. Financial Sector Reform and Balanced Growth

Financial Sector Reform: a well-supervised, well-capitalized, well-managed banking system will help ensure that removing controls on
capital flows and interest rates is done in a manner that safeguards financial stability. Letting market forces playa greater role in determining
interest rates is a crucial component of a more market-based exchange rate regime. Liberalizing equity markets can also energize market forces.
- December: $45 billion
- 1Q: Bank regulator imposes
- April: $15 billion recapitalization
- January: Central bank launches
recapitalization of two of the four
tighter capital adequacy
of ICBC (3'd of 4 large statenationwide consumer credit
large state-owned banks, after
requirements and stricter loan
owned banks).
bureau.
their sell-off of non-performing
classification.
- April: regulators launch program
- April/May: Expansion of QFII
loans to state-owned asset
- September: lowered restrictions
to convert non-tradable listed
program.
management companies.
on foreign bank entry and
company shares to tradable
- December: Foreign banks
branching.
shares.
allowed greater renminbi business - October: Ceiling on bank lending - October: Regulators approve
and larger stakes in joint ventures. lifted giving banks greater scope
RMB-denominated bond issue by
- 2003: Foreign investment in
to price loan risk.
Asian Development Bank and IFC.
4
Chinese banks accelerates.
- November: Limited foreign
strategic investments in listed
domestic companies allowed.
- 2005:2 of five largest state banks
conduct successful overseas IPOs
2006 - Boosting Domestic Demand: China's growth strategy as laid out in the recent 11th Five-Year Plan emphasizes domestic demand,
particularly consumption, with a strong focus on rural economic development and expanding social services such as education and health care.
Measures taken since 2003 to expand domestic demand:
~
Reduce Taxes: Doubled threshold income level for personal income tax (2005); Abolished agricultural tax (2006)
~
Increase Household Income: established minimum wage system to raise wages and increase income of lower income urban households.
~ Develop Rural Areas: Increased central government funding to support lower taxes and fees in rural China and to finance infrastructure to
supply drinking water, conventional electricity and hydropower, and roads in rural areas.
~ Encourage Consumer Credit: Encourage financial institutions to lend to households; increase residential mortgage and automobile loans. 5

Examples of Foreign Investment in China's Financial Sector: Citibank acquires stake in Shanghai Pudong Development Bank (Jan-2003); Newbridge Capital
acquired small stake in China Minsheng Bank (March-2004) and 18% stake in Shenzhen Development Bank (May-2004); Goldman Sachs approved to control a
JV securities firm (Sept-2004); Bank of America acquires 9% stake in China Construction Bank (Oct-2005); Merrill Lynch and others acquire stake in Bank of
China (Aug-2005); Goldman Sachs, American Express and others acquire stake in ICBC (Jan-2006).
5 Both GM and Ford have established auto finance companies in China (in addition to several foreign auto companies).
4

Page 1 of 1

May 10, 2006
JS-4251
Statement of Treasury Secretary John W. Snow on Monthly Treasury
Statement & Increased Tax RevenueOn the Tax Cut Package Reconciliation

"I commend the House and Senate tax negotiators for finalizing this package that
will help to ensure continued economic prosperity for the American people. Lower
tax rates on investment are at the heart of America's economic recovery and
expansion, and I'm pleased to see that investors can now plan on those lower rates
for the coming years. A continuation of strong investment will lead to ongoing
economic expansion, job creation and higher standards of living for all Americans.
Today's final agreement in the Congress is good news, indeed.
"Federal revenues surged in April with corporate tax receipts a record $46 billion,
reflecting the strong economy. To date total tax receipts for FY 2006The Treasury
Department reported today that to date total tax receipts for FY 2006 are at an all
time high. What this all his means is we remain on track to meet the President's
goal of cutting the deficit in half by 2009.
"Today's monthly treasury statement confirms what the President and this
administration have been saying all along; tax relief will spur business investment,
job growth and higher wages, all of which will lead to increased tax revenues for
reducing the deficit."

- 30 -

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