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Department of the Treasury
PRESS RELEASES
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May 11,2006
jS-4252
Remarks by Deputy Assistant Secretary for International Monetary and
Financial Policy Mark Sobel on the Committee on Payment and Settlement
Systems of the Bank for International Settlements -World Bank
I am delighted to be here with such a distinguished group of experts in payments
and settlement system and remittance Issues. Unfortunately, I am an expert in
neither topic. But the U.S. Treasury and the Administration have played an active
part for many years in supporting international initiatives to promote the efficient
and secure flow of remittances to developing countries and the role these flows can
play in economic development. So perhaps I can offer some broader commentary
against this background, before making more specific observations on the narrower
topic before this conference.
Five years ago. remittance issues were hardly on any policy-maker's radar screen.
Given the large remittance flows between the United States and Mexico, however,
they had begun to appear on ours. In 2004, when the U.S. hosted the Sea Island
Summit, the Treasury made remittance issues a key component of the finance cone
of the Summit process. When we first broached this topic with our colleagues, we
received blank stares. But they quickly learned that their economies had close
connections to the global remittance business, and I am pleased to say that by the
time the Summit rolled around, not only were there no longer blank stares, but there
was enthusiasm around the table for pursuing remittance initiatives.
And well there should have been! Our work on remittances complements many key
U.S. international economiC objectives.
· First, promoting growth around the world, especially in developing countries, is a
critical driver of our work. Growth in turn is the key contributor to poverty reduction,
and growth is best led by the private sector.
· Second, and closely related, the U.S. is keenly interested in seeing stronger
financial systems emerge around the world.
· Third, we of course want the international financial system to be safe and sound,
and to bring flows into the formal financial system and have it comply with antimoney laundering and counter terrorist financing standards.
Remittances are extremely relevant to all of these policy objectives and they are a
large and growing source of capital and income for development.
· Reported remittance flows tolaled $167 billion in 2005. Unreported remittance
flows undoubtedly raise this figure substantially. Only a few years ago, reported
flows were under $100 billion.
· That is 1-1/2 times official development assistance.
· These are private sector flows. They are nearly equal to net private debt flows,
three times net portfolio flows and two-thirds of net foreign direct investment flows.
· For many countries, remittances often can exceed 10% of GOP. In Central
America. they can reach nearly 30% of GOP.
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. Remittances are a stable source of income for developing countries and this factor
is crucial given volatility in developing country financing and economies.
Let me expand on a few aspects of the importance of remittance flows from our
vantage pOint. First, financial access and literacy. Inadequate financial access and
financial literacy are issues for many countries, including the United States. An
estimated 10 million Americans do not have accounts at mainstream financial
institutions. Bringing un-banked residents into the financial mainstream and raising
financial literacy of U.S. residents are priorities for the U.S. government. In 2003,
President Bush signed into law legislation that created the Financial Literacy and
Education Commission. Last month, the Commission, headed by Treasury
Secretary Snow. launched a national strategy to improve financial education and
financial literacy of all U.S. residents. A federal financial education website
(mymoney.gov) and hotline were launched in English and Spanish in October
2004. The Commission is now working 011 developing a multimedia campaign to
address financial education needs in the United States.
Treasury has also promoted financial literacy work as a key component of our
bilateral and multilateral remittance initiatives. We have encouraged exchanges
between the U.S. FDIC anq their counterparts on the development of financial
education programs and the potential adaptation of the FDIC's MoneySmart
financial literacy training program. In recognition of the significant immigrant
population in the United States. MoneySmart is available in six languages (English,
Spanish, Chinese, Korean, Vietnamese, and Russian).
Second, development impact. Remittances are undoubtedly vital for basic survival
for the receivers. But studies have shown that remittance recipients are more likely
to send their children to school, have more access to health care, and more likely to
start small businesses.
Third, financial deepening. Often, households receiving remittances previously
never had sufficient liquidity to open a bank account. By banking the un-banked
and spurring greater private financial sector involvement in serving the
underserved, a country's banking system can deepen. A focus on remittances can
also provide governments with a compelling reason to review and change those
financial sector policies that have facilitated uncompetitive practices, impeded
competition, and inhibited innovation. Further, remittances can afford households
an opportunity to accumulate savings, access other financial products such as
loans and insurance and establish a credit history.
Fourth, financial soundness. Remittances can flow through many channels banking systems, money brokers, and cash couriers. Needless to say, personal
cash transfers can expose the senders and receivers to physical attack and theft,
and like all financial products can be vulnerable to abuse. As you know, the U.S.
has worked for years to make sure remittance channels are not abused by criminals
or terrorists, in particular through its work with the IMF, World Bank and FATF to
enhance compliance with international standards. It is in all of our interests to make
formal channels more efficient and attractive for users so thaI legitimate flows need
not go outSide of these formal channels.
But striking the right balance between faCilitating access to remittance services and
ensuring the integrity of the financial system is extremely difficult. ConSistent with
our risk-based approach to AMLlCFT regulation, we have adopted a relatively light
touch in the federal regulation of money service businesses (MSBs). Nevertheless,
in recent years, these businesses have faced significant difficulties opening and
maintaining banking accounts in the U.S. The banks, uncertain of the extent of
their responsibility for ensuring the compliance of their customers, have shied away
from this business. FinCEN, in concert with our federal banking regulators, has
responded by: producing clearer guidance for both the MSBs and the banks;
conducting training sessions for the bank examiners; and it is currently assessing
stakeholders' responses to a request for input to their assessment of the need for
further action.
To promote remittances. the United States has been involved in many initiatives.
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· Under the U.S.-Mexico Partnership for Prosperity initiative, launched in fall 2001,
Mexico and the U.S. have worked together to promote competition among private
providers, expand financial literacy, and improve payment systems. In many
respects. it was through this process that we learned about the remittance market
and its true importance. The cost of transmitting remittances in the U.S.-Mexico
corridor has plummeted by some 60%. Many attribute the cost reduction to a sharp
increase in competition. A centerpiece of this effort has been the development of
the Automated Clearing House (ACH) system by the Atlanta Fed and the Bank of
Mexico. which connected the retail inter-bank payment systems of the two
countries. This helped teach us at Treasury about the importance of payments
systems to remittances.
· Under the APEC Remittance Initiative launched in fall 2002, the APEC economies
have undertaken a regional effort to examine factors that contribute to the use of
informal remittance channels. APEC brought together the public and private sector
to work toward creating a more competitive environment for remittances. The
World Bank and the Asian Development Bank were significant contributors to this
effort.
· Under Summit of the Americas Initiative, launched in January 2004, our aim is to
create conditions to stimulate a drop in half in the cost of sending remittances by
2008 from 12% to 6% of a transaction. To this end, bilateral and multilateral efforts
are being launched. On the bilateral front, Treasury and other U.S. agencies are
working to identify pilot countries. Pilot projects in turn will focus upon
strengthening financial institutions, identifying and addressing impediments to
remittance flows, working with the international financial institutions (IFls) to target
assistance to promote financial sector development. and conducting civil society
outreach.
· The 2004 Sea Island Remittance Initiative was a U.S.-led Summit effort. In the
finance channel of the Summit process, the Treasury asked each G-8 country to
study the role remittances play in their economies, identify regulatory and other
barriers to efficient delivery of remittances, and select a remittance partner country
with which it would work. This effort put remittances on the map of the G-8
countries and quite quickly, the other G-8 countries recognized that while
remittances would never dominate the headlines, they represented an important
public policy issue in which finance officials could make a difference. Treasury also
conducted outreach with private sector participants on remittances with the other G8 finance ministries.
Since finance officials are custodians of the IFls, we thought about what gaps
existed and where the IFls could playa role. One area was in balance of payments
data. The collection and reporting of this data varied widely across countries. A G8 working group with the International Monetary Fund and World Bank was set up,
and it is producing good results. The definition of personal remittances has been
revised and clarified. Guidance for countries on how to collect and compile
remittance statistics will be developed by a statistical "city group" effort that is being
launched next month.
We also thought about the Fund and the Bank's outstanding work on standards and
codes. As I said earlier. the more we focused on remittance issues, the more we
realized payments issues were involved. For me, this question was well
encapsulated by a simple question - why could I send money virtually cost free to
New Mexico, but it would cost many dollars to send that same amount of money to
Mexico?
Payments systems across borders do not interface well, especially for small
payments. Furthermore, the payment systems of many recipient countries are not
automated and have limited reach beyond the urban centers. Technology can play
a key role in overcoming these problems. Some financial institutions have
extended the reach of their internal electronic proprietary payment systems to
overseas branches and coupled that with an account-to-account coliection and
delivery system. Existing proprietary cross-border payment system operators have
developed remittance specific products and services - debit cards, for example which member financial institutions can use to offer services. Other bodies have
developed new initiatives involving proprietary cross-border payments systems.
Here, I will mention again the U.S.-Mexico ACH.
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In the U.S., we have large computer systems and can move small and large
amounts of Illoney quickly and virtually - Fedwire, CHIPs, or the retail ACH. But
the cost of transmitting funds internationally can be $30 for a $150 transmission.
Obviously that cost is a function of much more than payments systems - the sender
has to go to a place to move funds and the receiver to another spot to collect
funds. Sometimes these funds are being moved to remote areas. This can involve
going through a range of correspondent accounts and hand-entering transactions.
Given tllis payments dimension, we began to speak to the IFls, the Fed, and the
CPSS about developing principles for international remittance services. As the
Marcil 2006 CPSS/World B,mk consultative paper and today's conference show,
outstanding progress is being made. The paper's general principles, focusing on
transparency, payments system infrastructure, the legal environment, market
competition, and risk management, strike the right themes. The paper is easily
readable and digestible. Our expectations have been exceeded. We would like to
urge all stakeholders to seriously consider these general principles and assess the
need to make adjustments in their own systems.
So let me conclude by thanking Cesare Calari of the World Bank and his team,
Tommaso Padoa-Schioppa, my former softball team member Tim Geithner, Marc
Hollanders and others of the CPSS for their excellent work, and all of those
contributors from national capitals who are here and not here today for their fine
work. In the final analysis, the focus on remittance issues by officials, such as
yourselves, is important because by drawing attention to the complexities of the
remittance market, putting in place the structures to reduce costs, and creating
conditions for sounder banking systems, policy-makers are making a tangible
difference in promoting global growth, improving the lives of poor people around the
world and making a good contribution to better public policy.
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May 11,2006
js-4253
Remarks of Emil W. Henry, Jr, Assistant Secretary for Financial Institutions
U.S. Department of the Treasury Before the Financial Services Information
Sharing and Analysis Center
St. Pete's Beach, Fl- Ladies and Gentlemen, I first want to thank you for this
opportunity to address you and your organization. This is my first opportunity to
address this group, having been in my current position as Assistant Secretary of the
Treasury for Financial Institutions for less than a year.
Let me first say that, on behalf of the Department of the Treasury, I recognize the
value of your efforts to gather and share with your members reliable and timely
information from financial services firms, commercial security firms, and federal,
slate and local government and law enforcement agencies. Your efforts to prepare
for a wide variety of potential challenges provide a critical service to this country.
One reason that I so strongly value your organization is that I myself come from
among your ranks and have spent the bulk of my career working on Wall Street.
know the value of what your organization works every day to protect - America's
financial services sector.
The individuals in this room - all of you - are serving the American people through
your commitment to ensuring the resilience of the financial institutions you
represent. Your efforts are vital to your customers, our fellow citizens, and our
trading partners around the globe. Your collective efforts help to make our financial
system the strongest and most reliable in the world. Your commitment, hard work,
and creative solutions to challenging problems is what makes the American
financial services sector resilient in the face of the challenges it encounters every
day - challenges ranging from computer viruses to potential international terrorist
attacks. America's financial system is the envy of the world, and that is due to the
work of you and the many other thousands of men and women who work in our
financial services sector.
I also want to take a moment to thank Suzanne Gorman, the chairman of this
organization, and the board of directors for your leadership of the FS-ISAC. You've
all done a tremendous job. I know that each of you has a day job with many
responsibilities, and I want you to know that we recognize and appreciate the
commitment of time and resources that you have made for the betterment of the
FS-ISAC, and ultimately, the betterment of our Nation.
And let me remind everyone that your efforts and those of your members are
paying off as the FS-ISAC has shown tremendous grow1h in the last four years.
Your membership has increased from 62 financial institutions to almost 2,000 direct
members. Indirectly. through agreements made with several important financial
associations, the ISAC reaches over 11.000 members. This is an outstanding
achievement.
As you know, your work is vital to our economic security because in many ways the
financial sector is one of the core engines of our economy. And let me emphasize
here that our economy is very strong. Our Nation's economy continues to grow
under the leadership of President Bush. More than 5.2 million jobs for our fellow
Americans have been created since August 2003. Our unemployment rate of 4.7 %
is lower than the average of the 1960s, 1970s, 1980s, and 19905. Our gross
domestic product grew at a strong 4.8 percent annual rate in the first quarter of this
year. This follows economic growth of 3.5 percent in 2005 - the fastest rate of any
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major industrialized nation. And the Conference Board Index of Consumer
Confidence increased In April to its highest level in almost four years.
We can attribute the success of our economy to good economic policy, combined
with strong responsible leadership and healthy public confidence, which IS a vital
part of any country's economic growth. By enacting the Jobs and Growth Tax
Relief Reconciliation Act of 2003 three years ago, our President displayed strong
leadership and wisdom and provided a catalyst for economic growth and vitality,
which has benefited all Amellcans.
A major component of public confidence is that people believe in the American
financial system. Americans trust this system and the fillancial services firms that
comprise it because this sector has proven to be extremely safe and sound - the
best financial system in the world. And that fact is a very positive reflection of you
and the firms that you all represent In this room today.
FS-ISAC Achievements in Preparedness
I am pleased to tell you that we in the Admillistration believe that the financial
services sector IS in an advanced state of readiness and preparation, and that you
have handled well the challenges the world has thrown at you in the post 9/11
environment. The FS-ISAC has been a key component along the way and we
believe that it has served its members well. The examples that come to my mind
are the August 2004 increase in the threat level for financial services firms in New
York City, Northern New Jersey and WaShington, as well as your efforts during
Hurricanes Katrina, Wilma and Rita to ensure that your members were informed,
and that recovery efforts could begin among financial IIlstitutions as rapidly as
possible.
Throughout its relatively short history. the FS-ISAC has been there when it was
needed the most. Shortly after former Homeland Security Secretary Ridge's
August 2004 press conference IIlcreasing the threat level for financial services
firms, the FS-ISAC leadership convened a conference call with over 250
representatives from your organizations and a few from mine. This type of quick
action and information sharing is one of the best values the FS-ISAC adds to the
sector. And again, thanks go to the FS-ISAC's board of directors and leadership for
heeding the call to action and for service to your fellow Americans.
Treasury's View of the FS-ISAC
Let me also share with you that, Within the Administration, the FS-ISAC has the
attention of the most senior economic officials of our Nation and we consider your
mission to be vital. In early 2003, we commissioned a study on the value and
sustainability of the FS-ISAC. ThiS study overwhelmlllgly showed that your
members desired a service that would provide the kind of information sharing to
which the FS-ISAC is dedicated. In addition, the study also produced a busilless
plan to transform the FS-ISAC and extend its reach to serve the entire sector.
As a result of this study, the Treasury invested $2 million dollars to support and
implement the business plan and we have all seen great progress. Our investment
improves the operating capability of the FS-ISAC so that its members can
immediately receive threat and vulnerability information, share vulnerabilities and
information anonymously, communicate within a secure portal, access new data
feeds of threat and vulnerability information, and access a wide range of user data
from which users can produce their own reports and metrlcs. All of these
consolidated metrics are accessible on the publiC portion of the FS-ISAC website
(/'/'.N /,'
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I viSit the metrics dashboard periodically just to see the progress being made. And I
have been very impressed with the most recent addition to the website: the current
financial services sector threat advisory level for physical and cyber threats. I was
very glad to see, based on expert technical advice, that two weeks ago the ISAC
indicated that the financial services sector is feeling even more confident in the
cyber area. At the Treasury, we have been working very hard to ensure that all
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parties are aware of both tile threat of malicious software and of appropriate
countermeasures to be taken to mitigate the effects of such malicious software.
Coupled wittl its support for your mission, the Treasury's greatest goal for the FSISAC is sustainability. The FS-ISAC needs to and will stand on Its own. It has
proven that it is a viable service and the private sector will support it
Treasury's Role in Critical Infrastructure Protection
In addition to your commendable efforts, we at the Treasury like to think we've also
had a role in financial sector resilience.
President Bush designated the Department of the Treasury as the lead agency to
protect critical infrastructure within the financial services sector. In that role of lead
agency, also known as the "sector specific agency," we continue to lead the federal
government in policymaking that protects the financial infrastructure. We work
closely with the Department of Homeland Security, local, and state officials and
agencies to coordinate our efforts to protect the financial services sector. We also
have completed Protective Response Planning Exercises with major financial
institutions, identifying vulnerabilities and developing solutions to address them. In
a similar vein, we have evaluated interdependencies between the financial services
sector and the telecommunications, energy and information technology sectors.
I would especially like to single out the very strong working relationship we have
forged with the Sector Coordinator - Donald Donahue - and the Financial Services
Sector Coordinating Council (FSSCC). Don Donahue has superbly represented the
financial services sector, and he and the FSSCC leadership have done a terrifiC job
in providing policy leadership from the private sector regarding Critical infrastructure
protection issues.
At the Treasury, we have drafted a robust research and development agenda for
the sector. The Treasury, working with the financial services sector, established a
new model of regional coalitions such as ChlcagoFirst, FloridaFIRST and a new
regional coalition In the San Francisco/Oakland region. We also understand that
more such coalitions are being developed around the country to serve the financial
services sector.
As someone new to government, I am already seeing the importance of our efforts
to break down barriers and increase the availability of accurate and timely
information about potential threats on a national and regional level and what those
efforts may mean for ensuring the resilience of the sector. As all of you know,
information IS critical in order to counter threats, whether man-made or naturallyoccurring.
Conclusion
I cannot say enough about the talent and dedication of the men and women of the
financial services sector. You all deserve the thanks of those of us who use your
services, and that includes Just about all of us.
5t
However, there are many challenges that lie before us. June 1 marks the
beginning of a new hUrricane season. Federal, state, and local officials are working
aggressively to prepare the Gulf Region in the event that another large storm
strikes this season.
I also want to remind you that there is a continued threat of terrorism, and that
attacking the US economy and the financial system are strategic goals of al-Oaeda
and other terrorist organizations. Eight years passed between the first attacks on
the World Trade Center in 1993 and the follow-on attacks of September 11,2001.
It is vital that we remain vigilant and continue to adapt our preparations to new and
emerging threats.
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The President's quote in the National Strategy for the Physical Protection of Critical
Infrastructure is an appropriate way to close today. The President said "[t]he
terrorist enemy that we face is highly determined, patient, and adaptive. In
cDnfronting this threat, protecting our critical infrastructures and key assets
represents an enormous challenge. We must remain united in our resolve,
tenaciolls in OLJr approach, and harmonious in our actions to overcome this
challenge and secure Ihe foundations of our Nation and way of life."
Thank
YOll
again and I know that you will have many productive meetings.
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May 11,2006
JS~4254
Statement of Treasury Secretary John W.
Snow on Departure of World Bank U.S.
Executive Director Robert Holland
I would like to express my deep gratitude to Robert Holland for his outstanding
service as US. Executive Director and Alternate Executive Director at the World
Bank over the last five years. Bob accomplished much during his tenure and he
leaves a Bank stronger and better positioned. As a result of his efforts, the Bank is
more focused than ever on achieving real results for the poorest citizens of the
world's poorest countries.
He has been a strong and able advocate for critical reform at the Bank, including
private sector development, the fight against corruption. institutional integrity and
accountability, increased grants and debt relief Very recently, Bob played an
instrumental role in securing Executive Board approval of the Multilateral Debt
Relief Initiative, which will provide over $37 billion in debt relief for the world's
poorest and most indebted countries.
He has been a widely recognized leader on the Bank's Audit Committee, fighting for
increased disclosure of the Bank's operations, best-practice internal control
mechanisms and sound financial management of the Bank's resources. I especially
appreciate Bob's efforts to aSSist PreSident Wolfowitz in his leadership transition at
the Bank. As he returns to the private sector, our very best wishes go out to Bob
and his family.
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May 11,2006
JS-4255
Statement by Treasury Secretary John W. Snow On Passage of the Tax
Increase Prevention and Reconciliation Act
Today's Senate action was essential to avoid a tax Increase on American families
and America's small businesses, and it was a victory for America's taxpayers
Today's vote, like yesterday's vote in the House, also told the American people who
suppolis lower taxes and who doesn't.
Ttlis success IS a tribute to Chairman Grassley and the Senate Finance Committee
for their hard, painstaking work in making this day possible. Senator Frist is also
due congratulations on thiS day for his leadership on this bill and on the issue of the
economy more broadly. In the House, whose vote on preventing tax increases
came first, Chairman Thomas and Speaker Hastert are to be commended for their
leadership.
This month will mark the third anniversary of the passage of the Jobs and Growth
Act. That legislation, by lowering taxes on American families, small businesses and
Investors. gave the American economy a much-needed lift and made possible the
strorlg and durable growth we enJoy today.
Since that legislatioll took effect. the American economy has been on a solid
upward path with strong GOP growth, 5.2 million additional jobs. rising real wages
and a big turn-around in business investment with equity markets nearing all time
highs.
Today, more Americans are working than at any time in our past, more Americans
own their own homes, and the unemployment rate at 4.7% is lower than the
average of the 1960s, 1970s, 1980s and 1990s. Labor markets are strong.
This good news is no accident It is the direct result of good poliCY - lower taxes on
work, risk-taking and investment - that the Congress put in place three years ago.
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May 12, 2006
JS-4256
The Honorable John W, Snow
Prepared Remarks
U.S. Chamber of Commerce, Small Business Summit
Good morning: it's great to be here. Thanks for that very kind introduction, Tom,
and thanks for your terrific leadership here at the Chamber of Commerce. I
appreciate very much what this group does on behalf of its members. Your staff is
always wonderful to work with - Bruce Josten, Suzanne Clark - these folks really
believe in what they're dOing, they are always helpful to the Treasury, and we
appreciate all you do to help us get the word out about the strong, growing
economy.
But most of all I appreciate what the Chamber members, here in this room today,
do to make the American economy the true envy of the world. Nothing is bigger In
the American economy than small business. Individually, you may not be
mentioned in the Wall Street Journal. You may not buy ad spots during the
Superbowl. But together, you are the very engine of growth and job creation for the
American economy. Your ability to create Jobs and make your communities a better
place to live and work is what I believe makes the American economy so strong and
so resilient. An economy that has lots of small firms, and those who have grown
into bigger ones, is like a diversified investment portfolio - it's more stable and
stronger over the long-term
You are also a group of people who knows first-hand how well the American
economy IS doing. I imagine that you, like me, are baffled by the perspective of
some in the national press or some prominent public officials who are openly calling
now for tax increases on families, entrepreneurs, and those who invest to make
America grow.
The American economy is seeing victory after victory, none more notable in recent
times than yesterday's histonc Congressional action to prevent such a tax increase,
and extend the President's pro-growth and pro-family tax relief program.
Chairman Thomas, Chairman Grassley, Speaker Hastert, and Leader Frist are to
be commended for their leadership in producing such good legislation And the
strong bipartisan votes in the House and the Senate speak to the growing
realization that tax relief produces growth, jobs, higher living standards--and yes--is
consistent with riSing government revenues. Rarely in public life do you ever see
government policy produce such a clear, unambiguous success.
I hear from small-business owners everywhere I go about the benefits of the
increased section 179 expensing. I've literally heard about it from small-business
owners from Alaska to Florida, from Portland, Washington, to Portland, Maine.
So it defies logic to understand why anyone would think that higher taxes on
business investment would help small business, or would produce 5.2 million new
jobs, record homeownership, higher real wages, or unemployment lower than the
average of the 60's, 70's, 80's, or 90's
Yet opponents of the Bush economic policies see and speak only dark clouds. halfempty glasses, and sour news It's the opposite of "see no evil. hear no eviL" They
cover their ears and eyes to the bounty of good news, and speak upside-down to
portray times worse than they are.
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Yes, of coul-se there are challenges. High gas prices are acting like a tax on
American families and businesses I know they're hurting you, families and other
small businesses allover the country. That's why the President has presented a
four-part plan that includes making sure consumers and taxpayers are treated fairly
at the pump, promotillg greater fuel effiCiency, boosting our all and gasoline
supplies, and Investing aggl-esslvely in alternatives to gasoline, so we can eliminate
the root cause of high gas prrces 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
I know that, as small-business owners, you are also worried about, and struggling
with, health-care costs I encourage you to look into the cost-savings offered by
Health Savings Accounts and I look forward to fighting with you to win
Congressional approval of Association Health Plans - health plans for small
business.
The economy IS thus far proving strong enough to push through headwinds like
high gas prices. That fact is clear when you look at the recent numbers economic
growth at 4.8 percent In the first quarter, the highest consumer confidence in nearly
four years, durable goods orders the largest in ten months - the list goes on and
on.
But those who seek higher taxes have their ears covered to these crystal-clear
indicators. To ignore this good news and to make tax relief the Villain, rather than
the hero, takes qUite a stretch from opponents of the President's economic policies.
Rather than their cry of "tax cuts for the wealthy," the benefits of these policies have
been broad-based Over five million new jobs points to a broad-based recovery.
Do they actually think all those people are millionaires? Plummeting unemployment
rates for HispaniC Amerrcans, youth, and African Americans is broad-based More
money In the pockets of everyone who pays income taxes--is broad-based And a
tax code that is more progressive--with higher income Americans bearing a higher
share of the tax load--is broad-based.
The disingenuous crres about deficits, from some the biggest spenders in
Washington DC, also makes you wonder. "Tax cuts deprive the government of
billions" they pant. As if the government owned and produced, or is at least entitled
to, your money.
But the pesky facts now show with lower tax rates and higher growth, the federal
government ran a monthly budget surplus of $118.85 billion last month, with tax
receipts at all-time highs. In fact. government receipts are now close to their
historic average of about 18% of GOP
So If there's a deficit problem, it's not because of the revenues--and it can only be
because of the spendillg. That's why it's so important that the President is holding
the line on the supplemental spending bill now before Congress, and that he is
pressing so hard to get the line-item veto.
My favorite line of the last week from one of our notable critiCS was the one that
said We were able to do all that in the 90's, and we had higher taxes.
If that doesn't make my point, I don't know what does l Who would argue that
prosperrty with high taxes is better than prosperity with low taxes?
One thing I can say With a fair amount of certainty about these crrtics: they haven't
started up or run a small bUSiness. They've never had to make payroll or find
money to invest in expanding 3 business so It can create more goods, services and
lobs.
How many small-business owners do you know who favor raiSing their taxes?
Ittp:llwww.tre!lS.govlpress/relcasc3/j34256.htm
3/512007
Page 3 of3
Economics, for small-business owners, is a way of life. You know how tax relief can
turn things around when times are slow for your business.
You also know that just because the business owner's income is filed on a personal
form (as so many small-business owners do), that doesn't mean you are "the rich."
Because it's your business income, not your personal take-home income, that
you're paying that high Income-tax rate bill on - so high individual rates are tough
on your business.
It isn't complicated math for you that when taxes are lower you get keep more of
your own money to invest in your business. And that investment leads to bUSiness
growth - which ultimately means you pay more in taxes. The more successful your
business, the more you send to Uncle Sam.
That's why lower taxes and high tax revenue are entirely consistent. You write the
checks to the government, and those checks get bigger when you have a good
year. And thanks to the President's tax policies, we've seen the return of good
years for small business.
Because I've met so many business owners, all over this country, who trace a
turnaround in their business to the enactment of the President's tax cuts, I'm
particularly honored to share this week's legislative tax victory lap with this group.
You are the heart and soul as well as the backbone of the American economy and
American society, and it is a privilege to work with and for you in the Bush
Administration. Thanks again for having me here today; have a great meeting.
http://www.trea5.gov/pr~s/releases/js4256.htm
3/5/2007
Page I of I
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May 12, 2006
JS-4257
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 15 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 15,11:15 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:1 II" I ' ,11,,(' 1< II!: I!,) 11.01'; i I ( I , with the following information:
name, Social Security number, and date of birth.
http://www.tr~o.s.gov/presslrclcZlsej/js4257.tm
3/512007
Page
1ofl
I-'f, L S S \{ (:'C' M
May 12,2006
IS-4258
Treasury Officials to Host Financial Education Commission Meeting
Treasury Assistant Secretary Emil W. Henry, Jr. and Treasurer Anna Escobedo
Cabral wrll host a meeting of the Financial Literacy and Education Commission In
the Treasury Department on Tuesday, May 16. The meeting is the organization's
first following the release of its national strategy.
Featured speakers rnclude Comptroller of the Currency John C. Dugan, Chairman
of the National Credit Union Admirlistratlon JoAnn Jollilson, Treasury Deputy
Assistant Secretary Dan lannicola and an official from the Department of Defense.
Participants will discuss Identity theft prevention, improving financial education for
Americans In uniform and the role of financial institutions in the national strategy.
The meeting IS open to the media Media without Treasury press credentials
stlOuld contact Frances Anderson at (202)622-2960, or
1',1 ( ,
""i,' ,(0(1: ~" [;,
With the following information: name, Social
Security number, and date of birth
Who
Assistant Secretary Emil W Henry, Jr
US Treasurer Anna Escobedo Cabral
Deputy Assistant Secretary Dan lannicola
What
Financial Literacy and Education Commission Meeting
When
Tuesday, May 16
Where
1030 a.m.
Treasury Department
Cash Room
1500 Pennsylvania Avenue
Washington, DC
-30-
ttp:llwww.treas.gov/press/rdease~/j~4258.htm
3/512007
:!
DEPARTMENT OF THE TREASURY
OFFICE OF PUBLIC AFFAIRS
May 15,2006
EMBARGOED UNTIL 9:00 AM
Contact: Brookly McLaughlin
202-622-1996
TREASURY INTERNATIONAL CAPITAL DATA FOR MARCH
Treasury International Capital (TIC) data for March are released today and posted on the U.S.
Treasury web site (www.treas.gov/tic).Thenextreleasedate.whichwillreportondataforApril.is
scheduled for June 15, 2006.
Net foreign purchases of long-tenn securities were $69.8 billion.
•
0:et foreign purchases oflong-tenn domestic securities were $89.2 billion, $1.6 billion of
which were net purchases by foreign official institutions and $87.6 billion of which were net
purchases by private foreign investors.
•
U.S. residents purchased a net $19.4 billion in foreign issued securities.
Foreigners' Transactions in Long-Term Securities with U.S. Residents
(Billions of dollars, not seasonally adjusted)
I Gross Purchases or Domestic Securities
2 Gross Sales of Domestic Securities
3 Domestic Securities Purchased, net (Ime I less line 2) II
12 Months Through
Mar-OS :vtar-06
2004
2005
15178.9
14262.4
916.5
16910.8
15867.8
1042.9
15645.1
14709.8
935.2
17287.0
16221.2
1065.8
1198.8
1124.3
74.5
1439.8
1360.0
79.8
1453.6
1351.0
102.5
1638.0
1548.8
89.2
Dec·05
Jan-Ob
feb-Ob
:\1ar-06
4
5
6
7
8
Private, net 12
Treasury Bonds & Notes. net
Gov't Agency Bonds. net
Corporate Bonds. Ilet
EqUities. net
680.9
150.9
205.7
298.0
26.2
931.6
304.6
191.9
356.8
78.3
771.4
214.2
206.9
312.2
38.2
936.5
2132
218.9
386.7
117.7
63.6
12.4
8.9
328
9.6
60.6
-3.2
19.4
24.1
20.3
86.5
10.8
28.7
29.9
171
87.6
93
15.2
45.S
17.5
9
10
II
12
13
Official, net
Treasury Ronds & Notes. net
Gov't Agency Bonds, net
Corporate Bonds. net
Equities, net
235.6
201.1
20.R
11.5
2.2
111.3
59.3
32.8
184
0.8
163.8
126.8
22.5
12.5
2.0
129.3
683
34.4
23.6
3.0
10.9
5.6
2.9
24
0.0
19.3
81
8.0
2.3
09
16.0
III
2.3
3.3
-0.7
1.6
-6.3
3.8
2.6
15
3123.1
3276.0
-152.8
3640.7
3796.0
-155.3
308R.1
32592
-171.2
4029.6
41859
-156.3
338.9
361.2
-22.3
3744
387.0
-12.6
402.9
414.9
-12_0
448.3
467.7
-19.4
-67.9
-85.0
-28.6
-1267
-65.1
-106.1
-30.4
-125 9
-5.6
-16.7
-2 3
·10.4
-0.1
-11.9
-7.5
-11.9
763.6
R87.6
764.1
909.6
52.2
67.2
90.5
69.8
14
15
16
17
18
Gross Purchases of Foreign Securities
Gross Sales of foreign Securities
Foreign Securities Purchased, net (line 14 less hne 15) 13
Foreign Bonds Purchased, net
Foreign Equities Purchased. net
19
Net Long-Term Flows (line 3 plus line 16)
/I
Nct foreign purchases of U.S. securities (+)
Includes International and Regional Organizations
Net U.S acquisitions of foreign securities (-)
12
!3
Page 1 of 1
May 16.2006
JS-4260
Statement of Treasury Secretary John W. Snow
On FMS Senior Executive Appointments
Treasury Secretary John W. Snow Issued the following statement today on his
appoilltments to Treasury's Financial Management Service (FMS)
"I am pleased to announce my decision to appoint Kenneth R. PapaJ to serve as
Commissioner of Treasury's FMS and Judith Tillman as the Deputy Commissioner
I am confident that Mr. PapaJ and Ms Tillman will sustain the direction and high
performance of the critically important operations of FMS in carrying out the day-today financial management of the federal government.
"Mr. Papaj has served FMS as Deputy Commissioner since 1998. and prior to that
he held senior executive positions at Treasury's Bureau of the Public Debt. He has
more than 32 years of Treasury experience, which began with a federal career at
the FMS predecessor organization, the Bureau of Government FinanCial
Operations
"Ms. Tillman has worked at Treasury for more than 32 years, splitting her career
between the Internal Revenue Service (IRS) and FMS. As FMS' Assistant
Commissioner for Regional Operations she was responsible for making almost 1
billion federal payments annually from four locations.
"Their appointments are effective May 30 upon the retirement of current
Commissioner Richard L. Gregg. Commissioner Gregg's decision will conclude 40
years of distinguished service to the federal government and nearly a decade as
FMS Commissioner. Treasury is proud that he chose to spend his entire civilian
federal service with our Department's Fiscal Service. He is widely recognized both
within and outside government as an outstanding leader.
"I am confident Mr. PapaJ and Ms. Tillman will continue the rich legacy of FMS
innovation and efficient operations Commissioner Gregg has created."
FMS is a bureau of the US. Department of the Treasury, primarily responsible for
the collection of government revenues, federal payments like social security,
veterans' benefits and tax refunds, debt collection and government-wide
accounting. In the past year. FMS issued approximately one billion federal
payments to more than 100 million people and collected more than $2.67 trillion of
federal revenues.
http://www.tre~.gov/p[ess/rclcMes/j54260.htm
3/5/2007
Page 1 of 1
May 16, 2006
JS-4261
Treasury Assistant Secretary to Discuss
Hedge Funds with Exchequer Club
U.S. Treasury Assistant Secretary for Financial Institutions Emil W. Henry, Jr. will
give the luncheon address to the Exchequer Club on Wednesday. May 17 at the SI.
Regis Hotel in Washington. DC. The Assistant Secretary will discuss hedge funds
and current issues at the Treasury Department.
Assistant Secretary Henry brings more than 20 years of experience on Wall Street
and In the financial community to the position. Before joining the Treasury, he
served as a senior partner at Gleacher Partners, where he had oversight
responsibility for the firm's core investment activities including private equity and
mezzanine debt investing and several pooled investment vehicles in the form of
hedge funds.
Who
Assistant Secretary for Financial Institutions Emil W. Henry, Jr.
What
Speech before the Exchequer Club
When
Wednesday. May 17 12:30 p.m. (EDT)
Where
SI. Regis Hotel
923 16th Street, NW
Washington, D.C.
3/5/2007
Page 1 of 5
May 16, 2006
JS-4262
Remarks of Anna Escobedo Cabral, U.S. Treasurer
U.S. Department of the Treasury
Before the Financial Literacy and Education Commission
Washington, DC- Thanks very much Emil for that wonderful introduction. And thank
you to you and your staff in Treasury's Office of Financial Education for doing an
absolutely phenomenal job of putting this meeting together - the 8th public meeting
of the Financial Literacy and Education Commission.
I also want to tell you how honored I feel to join you and the distinguished members
of tllis Commission today. I am very happy to join not only our very own fantastic
Emil Henry, but also of course by our very talented and passionate colleagues NCUA Chairwoman JoAnn Johnson and DCC Comptroller John Dugan.
Welcome to Treasury. All of us in this room today share a common mission - that
of improving financial literacy levels for all people across the country.
Before we continue with our morning's work I want to take just a brief moment to
share with you a little bit about the room in which we sit today.
We find ourselves in a very beautiful and historic room - the Cash Room. As some
of you may be aware, the Castl Room officially opened in June of 1869 for the
purpose of conducting transactions of the government's financial business. In
essence it functioned as a "banker's bank" - the need for a bank in the Treasury
Building arising indirectly from a reform of the country's monetary system in 1846
and from subsequent developments during the Civil War era. It supplied area
commercial banks with coins and currency from our vaults, but it is important to
note that services were also offered to the public. Those services included cashing
of government checks, exchanging new money for old, redeeming silver certificates
and gold certificates, as well as selling U.S. Treasury bonds.
Today we together continue to build on this room's rich history. Although we no
longer exchange currency in this room, in essence we exchange something much
more valuable - ideas - some ideas that are new, and some that have already
been put into practice and have been already rendering positive results.
Hopefully, all of us will take away some new piece of important information, which
may prove instructive and help in our own respective organization's work of making
it easier for more Americans to obtain the necessary skills to manage their money
wisely.
It is really important that the members of this Commission and all of those who
champion finanCial literacy be recognized for your efforts - your continued work in
this area is absolutely critical to helping individuals improve their lives
I can tell you this from my own personal experience.
I want to share with you a little bit about where I came from, and why the work you
are doing today, in so many ways, is so important. I am Mexican American from a
fourth generation, farm-worker family. What thaI means is that my family has for
generations worked in the fields - my parents have worked in the fields and for a
very little while, we children worked in the fields as well.
3/5/2007
Page 2 of 5
We grew LIP very poor for the most part, and most of the time we had to scrape by
because we had very little money.
Today, in great part because of the many doors education has opened up for me, I
find myself at quite the opposite end of the financial spectrum.
However, through my outreach and conversations with people across the country, I
continue to find that the feeling of barely getting by is common and a feeling shared
by many - no matter what income level people operate in. In fact, although our
economy continues to grow and there are more jobs available for more Americans
since the 1950s, somehow we continue to fall short in the area of personal finance
knowledge and good personal finance habits.
This is likely due in part to a lack of education. However, part of it is probably also
attributable to the fact that a complex burgeoning economy like ours also creates
more clloices and sophisticated vehicles for saving and making one's money grow.
So really. when we talk about financial education in today's terms, what we're really
talking about is improving people's quality of life. But achieving our common goals
will require us to go beyond creating additional nicely manicured brochures.
Education means not just presenting information in a nice neat package - it also
means delivering it through the right channels by people who are trusted in their
respective communities.
This sort of education in which we're all engaged is really about helping to create
new opportunities for people - opportunities like paying for a child's college
education, purchasing a home, starting a business and planning for a secure
retirement.
Currency Security and Financial Education
You know. as 42 nd Treasurer of the United States I take great pride in carrying out
some important responsibilities that come with this office.
I spend a significant amount of time working on matters related to improving
currency security - working with the Federal Reserve and Secret Service - to
ensure that our government stays ahead of efforts from would-be counterfeiters. I
advise the Secretary of the Treasury on these matters and work with the Bureau of
Engraving and Printing to educate the public about currency security features,
particularly the newly designed notes. Many of you are already familiar with the
new designs on the $50 and the $20, but I also hope you all have become familiar
with the new $10 which features our very own and first Secretary of the Treasury,
Alexander Hamilton. We'll continue to make changes every 7 to 10 years and
continue to educate the public so we may protect the strength of our American
currency.
Additionally. many of you are already aware that Emil's department and my office
spend a lot of time coordinating efforts on improving people's level of financial
literacy.
Improving financial education levels for all Americans ;s indeed a high
priority for all of us.
I think we can all agree that it is the right thing to do - as I mentioned earlier - it's
helping to create an environment where individuals can reach their full potential on
a variety of levels.
But we also acknowledge the bottom line - that it is necessary to do so for the good
and safety of individuals, as well as the overall health of businesses and our
growing economy.
3/5/2007
Page 3 of 5
Take for Instance how Individuals without bank accounts were Impacted in the Gulf
Coast states after the series of hUrricanes that slammed into that region.
Unfortunately, we witnessed what can happen to those with very little access to
financial education or financial services options mostly offered by traditional
finanCial institutions.
After last year's Gulf Coast Hurricanes many people without bank accounts In these
hard hit areas found It much more difficult to access benefits they were expecting to
receive in the mail, mostly because they were displaced and difficult to track or
reach.
Many of these people are what thiS financial education community commonly
referrs to as the "un banked " Current reports estimate there are about 10 million
IndiViduals Without access to basic banking services - other reports state that figure
as upwards of 20 million plus. This issue of "banking the unbanked" or improving
access to services for traditionally underserved individuals will be a top priority for
my office, particularly in the months and years ahead.
As Secretary Snow's adViser and a spokesperson working on matters related not
only to Improving currency security education, but also financial education in the
U.S., I am the first to acknowledge that the federal government can not undertake
this significant task on Its own.
One area where Treasury has been very successful in working with such partners is
the GoDirect campaign, of which I have been honored to be a part.
About a year and half ago, the Treasury and Federal Reserve Banks launched Go
Direct, In Spanish known as Directo A Su Cuenta, Its focus IS to motivate
seniors to receive their Social Security benefits by direct deposit.
It not only communicates the Importance of direct deposit - it also provides the
means by which seniors can make the switch from a paper check to direct deposit.
We have a dedicated call center staffed by bilingual personnel ready to assist all
benefiCiaries - and since July 2005, almost 400,000 beneficiaries have signed up
for direct deposit through the call center alone.
The call center is only one of many ways we are helping benefiCiaries sign up for
direct deposit Our Web sites: ',/,'. : ,I >1)11 ('1.: til:) and~,\'N, [)II ell r ':\:::li I [""Ill, 01 (I,
allows beneficiaries to access a step-by-step online tool to sign up - either on their
own or through their bank or credit union.
j
Direct deposit IS not only the most convenient way for all seniors to have Immediate
access to Social Security benefits, it is also tile most secure way for receiving
them. Unfortunately, despite 95 percent of Americans having heard or read about
identity theft, a Treasury and Federal Reserve Bank survey revealed that many are
unaware of the security benefits of direct deposit over paper checks
That IS why I urge you to help us spread the word about this great free service.
Keep In mind that direct deposit can also provide seniors receiving SSA payments
with a sense of control of their money. This is true even under the most difficult
circumstances Again, as you know HUrricane Katrina displaced tens of thousands
of federal beneficiaries Just days before their checks arrived in the mail. In uncertain
times like these, enrolling in direct deposit can offer a much needed peace of mind
to federal benefit recipients
We need significant help of partners, from the private and non-profit sectors, who
are trusted and have a longstanding presence in those communities we aim to
reach and serve. At the end of the day, our community partners are our best
spokespeople and our best teachers.
That is I continue to look forward to working together With those community-base
organizations that help make thiS task less insurmountable. And I look forward to
continuing to work with our team here at Treasury and CommiSSion partners.
3/5/2007
Page 40f5'
Suffice it to say you've already accomplished a lot in very short period of time.
Acknowledgement of the Commission's Work
I want to really commend you for the tremendous progress you've made in this area
in the last couple of years It wasn't easy. It required your great generosity of time,
your talents and expertise in a variety of financial and consumer education areas
that your agency deals with on a day-to-day basis. But you should be very satisfied
and encouraged by the results of your efforts because they are truly impressive.
It is really rather astounding that in Just a few years 20 federal departments and
agencies have been able to work together to launch a toll-free hotline, 1-888MyMoney, and to develop a coordinated federal web site on financial education,
MyMoney.gov.
Additionally, you've launched a very extensive report in this area. I had the
privilege in April this year to join Secretary Snow and other members of the
Commission in helping launch the first-ever national federal strategy for financial
education - Taking Ownership of the Future; The National Strategy for
Financial Literacy. I am proud to say that my office will be lending support in
carrying out many of the calls to action delineated in the strategy.
Allow me to just briefly share with those of you joining us today who may not yet be
familiar with this document a bnef overview of the content of the strategy.
The strategy looks at a variety of important topics, such as homeownership, credit
management, retirement savings, in addition to "banking the unbanked" - an issue
that as I mentioned earlier, my office is particularly focused on. This month, I also
had the opportunity to palticipate in oxecuting one of the first calls to action at the
Midwest Regional Conference on "Banking the Unbanked" in Chicago, Illinois along
with Chairwoman Johnson and Treasury's Dan lannicola.
The strategy also describes some challenges and provides a blueprint, or serves as
guidepost if you will, for possible solutions.
Sometimes the solutions come from the Federal government, but again, often
nonprofit organizations, businesses and other private sector players provide
important resources for those wishing to learn more about financial matters.
It also puts forward examples of financial education programs that community
leaders, business people, and volunteers can all look to as they design programs of
their own to enhance financial literacy.
And at the end of each chapter in the strategy, you will notice that Calls to Actions
are highlighted. It is our hope that these Calls to Actions will provide a springboard
for further open and inclusive discussion on a whole myriad of issues.
Please tell your colleagues about this new resource, which can be found on the
MyMoney.gov web site.
Closing
In closing, I do want to reiterate my thanks once again for your efforts and I want to
congratulate you for what you've already accomplished.
But now it's time to move forward and explore what our next steps might be. In
order to do that, we'll need to continue to maintain the lines of communication open
and to share methodologies and proven approaches.
I encourage those of you with new inSights to share on this topic to get a hold of
Treasury's financial education team, which as many of you know is overseen by
http;l/www.treas.gov/presslrelcnses/js4253.htm
3/512007
Page 5 of5
Dan lannicola, Deputy Assistant Secretary for financial education. I also want to
recognize the individuals that are really the engine behind all our efforts here at
Treasury: our Director of Outreach for Financial Education Luz Figueroa, our
Director of the Office of Financial Education Dubis Correal, CAIP Director Louisa
Quittman, Special Assistant Tom Kurek, and Jennifer Millikin who is temporarily
willl us from GSA and lending her expertise and support.
On behalf of Secretary Snow and his Treasury team - thank you again for your time
and attention, and welcome to the department of the Treasury.
http://www.treas.gov/press!relCll:ses/jB4253.htm
3/5/2007
Page 1 of 1
May 16,2006
JS-4263
Treasury Secretary Snow to Hold Economic Briefing
U.S. Treasury Secretary John Snow will hold a media briefing to discuss the stale
of the U.S. Economy and President Bush's agenda for continued strong growth and
job creation. The event is open to credentialed media:
WHO
U. S. Treasury Secretary John Snow
WHAT
Economic Media Briefing
WHEN
Tuesday, May 16, 2:00 p.m. (EDT)
WHERE
Media Room - Main Treasury Room 4121
1500 Pennsylvania Ave, NW
Washington, DC
NOTE
"Media without Treasury press credentials should contact Frances Anderson at
(202) 622-2960, or ,:.,' J;.' " . " :rI ... : .' :11,: .J" II':, IS 'I' h' with the following information:
name, Social Security number and date of birth.
3/5/2007
Page 1 of7
May 16, 2006
js-4264
Testimony of Randal K. Quarles, Under Secretary
for Domestic Finance
U.S. Department of the Treasury
Before the Senate Banking, Housing and Urban Affairs
Subcommittee on Securities and Investment
Chairman Hagel, Ranking Member Dodd, Members of the Subcommittee, good
afternoon, it is a pleasure to be here today. Let me first thank you for holding this
hearing and allowing the Treasury Department to present its views. I am
particularly pleased to be here because our discussion today is an effort to gain a
better understanding of a critical component of our financial markets.
Our charge today is to examine the role of hedge funds in our financial markets.
note at the outset that this topic is different from an issue about which there has
been considerable discussion in the past few years: the regulation of hedge funds.
I think your choice of topic for today's hearing is the right one - if government
addresses the question of regulation of any financial institution or activity without a
clear understanding of the place it plays in our financial system, the risk of
unnecessary, excessive, or inappropriate legislation is increased. While I am sure
we will touch on certain regulatory aspects, I intend to focus my remarks on what
hedge funds do for and in our financial markets.
As we consider this issue, we should also keep in mind that the role of hedge funds
in our financial markets is continuously evolving: and in recent years it has been
evolving rapidly. While change like this often brings about improvements and
efficiencies, it can also create insecurity or concern. The lens through which we
examine the evolution of hedge funds' role in the financial markets often shapes our
view of What, if anything, the government needs to do to react to the changes so we
should ensure that this lens is as clear and polished as possible.
Hedge funds are not a recent invention. Their history is typically tied to the fund
created by Alfred Winslow Jones in 1949. During this time period, these new
investment vehicles were created mainly as a reaction to significant regUlatory
restrictions on investment funds embodied in the Investment Company Act of 1940
(the '40 Act). Unlike mutual funds registered under the' 40 Act. an unregistered
fund could sell securities short. buy securities using leverage, and use diverse
financial instruments and strategies. The name "hedge fund" was used to identify
these new funds that were able to hedge or protect against loss of capital in down
markets.
Today, the term hedge fund is used to describe much more than a fund that
employs hedging techniques. There is. however, no universally accepted definition
of a hedge fund. In the late ·90s. for example, the President's Working Group on
Financial Markets (PWG) defined a hedge fund as "any pooled investment vehicle
that is privately organized, administered by professional investment managers. and
not widely available to the public." This is a useful working definition for some
purposes. but it does not distinguish hedge funds from other forms of unregistered
capital pools that generally are recognized to have distinctive features, such as
private equity funds and venture capital funds.
Perhaps the most useful approach is to identify a list of features that distinguish
hedge funds from other capital pools, recognizing that the list is evolving, that
various combinations of such features are possible, that some are shared with other
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2 Df7
investment vehicles, and that no single feature is a defining characteristic. Such
features would include legal structure (a private entity with unlimited life and with
pass-through tax benefits); investment objective (positive absolute return in all
market conditions. rather tllan measurement against an industry benchmark);
investment strategy (flexible, including tile ability to use sllort selling, leverage and
derivatives in a wide variety of markets); compensation structure (usually 1-2%
management fee and 15-25% performance fee, calculated annually on the basis of
accrued gain); investor base (high net worth individuals and institutional investors;
high minimum investment; not widely available to the public); investor capital
commitment (full commitment paid at time of subscription rather than drawn down
over time: withdrawals regularly available, usually monthly or quarterly); and
disclosure (generally restricted to that contractually agreed upon between the
manager and the investors, with limited public information).
Hedge funds have experienced phenomenal growth during their history especially
in recent years. They have grown from an estimated $50 billion in assets in 1988
to about $300 billion in 1998 to over $1 trillion in assets today III Current estimates
suggest that there are about 9,000 hedge funds.
Today, hedge funds employ a variety of investment strategies that vary
considerably depending on the goals and needs of the investors and the types of
instruments in which the fund invests. Much, if not all, of this growth has been
market driven, and. as a consequence. it has been subject to a significant amount
of market discipline. For example. as hedge funds have grown, their investor base
has evolved. The original hedge fund investors were wealthy individuals. Then,
university endowments began investing in hedge funds - most likely because the
individuals that typically sit on these boards were already exposed to these types of
investments. Later, institutional investors such as pension funds seeking greater
diversification wanted to participate. Through this growth process, each of these
investor groups imposed certain forms of discipline on hedge funds Thus. the
hedge fund market has become much more "institutionalized" as it has grown and
evolved.
Hedge fund growth and practices also have been tempered by significant market
events, most notably. the failure of Long Term Capital Management (L TeM) in
1998. As a result, hedge fund investors now demand more transparency of their
fund managers (you might recall that LTCM principals notoriously provided little
transparency). Post LTCM, investors also recognize the need for more discipline
regarding the use of leverage and collateral.
Therefore, while the hedge fund market has grown drastically in the past twenty
years, there is at least some reason to believe this growth has been subject to
private sector discipline.
What role this very large, trillion-dollar group of alternative investments plays in our
financial markets is a very important question. While hedge funds provide certain
benefits to the financial markets, they can also put stresses on it that need
attention.
Benefits to the Financial Marketplace
Liquidity Provision
One of the reasons that the U.S. financial markets are so attractive to investors is
because of their liquidity. In general, the U.S. financial markets are the deepest
and most liquid markets in the world. Hedge funds are significant liquidity providers
in many marketplaces.
Because of the varying strategies employed by hedge funds, they are often the
willing buyers or sellers that provide additional liquidity to financial markets. For
example, hedge funds' desire to seek arbitrage opportunities adds significantly to a
markets'liquidity. In fact, some reports suggest that hedge funds account for
between one-third or one-half of the daily volume on the New York and London
stock exchanges. Hedge funds contribute even more significantly to marketplace
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liquidity in less traditional markets. For example, hedge funds represent the
overwhelming majority of trading volume in the distressed debt markets, the
convertible bond markets, and the exchange-traded fund markets.
Price Efficiency
Many hedge funds seek to create returns by targeting price inefficiencies. Such
price inefficiencies might occur when there is discrepancy between two or more
markets. A sophisticated investment manager can enter both of these markets and
profit by taking advantage of this pricing anomaly. Former Federal Reserve
Chairman Alan Greenspan characterized the ability of hedge fund managers to
obtain profit from these inefficiencies as picking the "low-hanging fruit" in the
marketplace. While this activity certainly benefits the hedge funds that are profiting
from the trades, it has the salutary effect of creating more efficient markets.
Similarly. hedge funds also target wide bid/ask spreads as ways to generate
positive return, which generally has the effect of narrowing them. This private,
profit-making activity on the part of hedge funds produces the public good of beUer
price discovery and more efficient markets.
Risk Distribution
Concentration of market-wide risk is one of the greatest threats to a smoothlyfunctioning marketplace. Hedge funds can help mitigate this risk by helping to
transfer and distribute market risk. For example, when financial institutions seek to
layoff some of the very large risks inherent in their normal business activities by
buying or selling derivatives, hedge funds are often the counterparties to these
trades. Without market participants that are willing to trade these derivatives in
significant quantities, financial institutions would have to retain more riSk, which
could have a ripple effect throughout the financial markets.
There is no question that hedge funds are one of the dominant participants in the
re-distribution of market risk. Among the most common risk
distribution instruments used by hedge funds are credit default swaps. Most
simply, these are insurance-like products that provide protection against
default or bankruptcy, in that they pay bondholders some form of
compensation after a defined credit event. Use of these instruments has
grown substantially from about $631.5 billion in 2001 to about $17.3 trillion in
2005. The significant growth in these securities does raise some important
public policy issues, which I will address below.
Further Globalization
Because of the dynamic and evolving nature of hedge funds, I have tried to avoid
over-generalizing them. However, I am comfortable making the observation that. in
general, one attribute that is common across the entire hedge fund community is
that the managers are involved in a relentless search for the next profit opportunity.
In such a competitive marketplace, hedge funds often lead the way to identify new
and emerging markets. These markets often provide opportunities that no longer
exist in more mature marketplaces. This, in turn, leads to further globalization of
our marketplace which provides more choice for investors and greater efficiency of
markets globally.
Potential Investor Benefits
Hedge funds can have a direct positive impact on the investing community.
Speaking broadly, hedge funds can provide investors with opportunities for
diversification, "alpha" or excess returns, and capital protection in down markets.
Hedge funds provide more choices to the investing community. More choices allow
investors the ability to diversify their investment portfolios, which is a common goal
of many investors. A recent survey suggested that almost half of institutional
investors had more than 10 percent of their assets in hedge funds. Most of these
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allocations were made by reducing allocations to active and passive equity
strategies. All of the surveyed investors said that their diversification needs were
being met and over three-quarters of surveyed investors saw reductions in overall
portfolio volatility.
Historically, most non-professional investors were limited to investment vehicles
thaI employed traditional "go-long" strategies. These funds attempt to outperform a
particular index, such as the S&P 500. Notably, these funds typically profit only in
positive markets and try 10 mitigate losses in down markets. Some hedge funds try
to fill the obvious gap here wilh strategies that attempt to produce positive returns in
both bull and bear markets. The flexibility in the hedge fund structure can provide
many opportunities to outperform indexes, even in thriving years. This is often
referred to generating "alpha" or excess returns. A common technique employed
by many hedge funds attempting to generate excess returns is employing leverage,
which, of course, presents its own specific set of concerns.
Producing positive returns III a down market is also assisted by the nimble
structures of hedge funds. Indeed, many expected the high-flying hedge funds to
be crippled after the bursting of the internet bubble in the late nineties. Some funds
were punished. of course. However, many funds exploited their natural flexibility to
short stocks and, importantly, to move to cash during market dislocations limiting
exposure and mitigating loss.
Therefore, hedge funds have the potential to provide investors with opportunities for
excess returns or capital protection, but, of course, this is not always the case
It is worth noting that as the hedge fund industry grows and becomes more
institutionalized, excess returns have become harder to find. Indeed, as more
market-based demands are placed on hedge funds for added transparency,
investors will demand significant higher returns to justify the hedge fund manager's
fee. Armed with this added transparency, some observers suggest that there might
be a shake-out of sorts with underperforming hedge funds suffering the
consequences.
Marketplace Risks
While hedge funds can provide benefits to investors and the overall marketplace,
they present some risk as well. There are risks that hedge funds' aggregate
employment of large amounts of leverage or over-concentration of certain positions
could have negative consequences for the marketplace. Certain valuation risks
also are present in the hedge fund industry. Other risks involve operational
challenges associated with the over-the-counter (OTC) clearance and settlement
systems. Many of these risks, however, are not unique to hedge funds.
Large Use of Leverage
Leverage refers to the use of repurchase agreements, short positions, derivative
contracts, loans, margin. and other forms of credit extension to amplify returns.
With increased leverage. of course, comes increased risk. We learned much about
this topic after the LTCM failure.
As discussed by the PWG in its report after the LTCM failure, excessive leverage
can greatly magnify negative effects of market conditions. For example, the LTCM
failure demonstrated the risks of extraordinary leverage when adverse financial
market conditions occur. At the time of LTCM's downfall, it had an implied balancesheet leverage ratio of more than 25-to-1 (assets of $125+ billion over equity capital
of $4.8 billion). As market conditions worsened, L TCM's size and leverage,
combined with the sheer number of trades it had on its books, contributed to a
serious deterioration in the liquidity of many markets as LTCM and countless other
market participants sought simultaneously to unwind losing positions.
The magnitude of L TCM's leverage. and its dependence on numerous creditors and
counterparties, heightened the threat that its problems could spill over to these
other institutions and possibly lead to a general breakdown in the functioning of the
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markets, LTCM's excessive leverage posed very real systemic risks for our
financial markets. It is ilTlportant to note, 11Owever, that even though LTCM was a
hedge fund. this issue is not confined to hedge funds. Many other types of market
participants use leverage in tileir trading strategies, and some may be more highly
leveraged than hedge funds Moreover. it should be noted that Innovations in the
market are expanding the ways In which market participants can apply leverage,
Many of the complex derivatives and other structured products in which there have
been strong growth over the past few years have embedded leverage. which in
certain circumstances can amplify changes in portfolio valuations to a greater
degree than other forms of leverage.
In its report. the PWG cautioned that problems can arise when financial institutions
do not employ sufficient discipline in their credit practices with customers and
counterparties, To this end, the PWG made several recommendations designed to
help buttress the market-discipline approach to constraining leverage, Numerous
public and private sector groups, such as Counterparty Risk Management Group II
(also known as the Corrigan Group), also took up the cause of enhancing
counterparty credit risk management, and many have continued to focus on
emerging developments such as the growth of products containing embedded
leverage, These efforts and others have had the positive effects that I alluded to
earlier,
Concentration of Positions
Linked closely with the issue of leverage and the potential for impaired liquidity in a
period of market stress is the issue of concentration of market pOsitions or
"crowded trades." Sometimes referred to as "herding," crowded trades can arise to
the extent that hedge fund managers are inclined to pursue the same or similar
investment strategies, Talented hedge fund managers are constantly searching for
new opportunities and devising new strategies to exploit those opportunities, while
simultaneously trying to anticipate crowded trades. But as more hedge fund
managers open funds and more money flows in from new investors, crowded
trades may become more likely. If numerous market participants establish large
positions on the same side of a trade, especially in combination with a high degree
of leverage, this concentration can contribute to a liquidity crisis if market conditions
compel traders simultaneously to seek to unwind their positions, The risk, of
course. is market disruption and illiquidity, possibly exacerbating the risk of a
systemic financial market crisis.
Valuation Techniques and Models
As hedge funds become larger, their valuation policies and procedures become
more important to the marketplace as a whole. Valuation of many financial
instruments, particularly complex or illiquid instruments, can be difficult. Indeed,
valuation is often dependent on complex proprietary models. Because of their
proprietary nature, these models have not been subject to broad-based scrutiny
and there is a concern that there could be unanticipated changes that might only
present themselves in certain market conditions. Moreover, valuation concerns are
exacerbated in the hedge fund industry because hedge fund adviser compensation
is tied to period returns which, of course, requires periodic asset valuations.
Valuations and correlations can change rapidly in unexpected ways and these
changes can have a ripple effect in the marketplace, especially if the instruments
are concentrated and illiquid. There have been some reports on this topic, In July
2005. the Corrigan Group issued a number of "guiding principles" and
recommendations for all types of participants, It recommended that: 1) investment
in risk management systems should continue, with full model testing and validation
and independent verification: and 2) analytics should include stress testing,
scenario analysis, and expert judgment. with special attention to the inputs and
assumptions,
Treasury and the PWG can contribute Significantly to this debate in the first
instance by facilitating communication in the official sector and with industry
participants and academics regarding valuation techniques and models.
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Settlement and Clearance Systems
Hedge funds as a group do not pose a greater operational risk to the OTC
settlement and clearance systems than any other group of market partiCipants.
However, operational risks can be posed by certain market conditions and certain
technological conditions in certain prociucts, particularly /Jew products, where
technological and legal infrastructures lend to lag product development and volume
growth. TI1ese acute "growing pains" have developed most recently in the credit
derivatives market across a wide spectrum of participants.
Thus, hedge funds, or any other group of participants, potentially could have a
disruptive impact if there were concentrations of positions or attempted mass
liquidation in illiquid markets. As I noted earlier, hedge funds are major participants
in many of these markets such as distressed debt, collateralized debt obligations,
and credit derivatives.
The Federal Reserve Bank of New York, Counterparty Risk Management Group II,
Bank for International Settlements, International Swap and Derivatives Association,
The Bond Market ASSOCiation, and Depository Trust & Clearing Corporation all have
made recommendations and/or undertaken efforts to strengthen the technological
and legal aspects of the settlement and clearance systems for all market
participants. The International Monetary Fund has also raised issues generally
related to market concentrations and illiquidity and the potential for systemic risk in
its recent "Global Financial Stability Report," and member countries and regulators
continue to develop and coordinate policies and approaches to deal with these
issues globally. The PWG also continues to discuss these issues and formulate
and coordinate actions and plans. We are encouraged by these positive
developments.
Conclusion
Thank you again for allowing the Treasury Department to participate this afternoon.
As I have mentioned, hedge funds play an important role in our financial
marketplace. We are also aware that they can present certain risks as well.
As a consequence, as I have noted elsewhere, we at Treasury will be examining in
detail the issues I have discussed this morning, with a view to evaluating whether
the growth of hedge funds - as well as other phenomena such as derivatives and
additional alternative investments and investment pools - hold the potential to
change the overall level or nature of risk in our markets and financial institutions.
We will be engaging in a broad outreach to the financial community in the coming
months to help us examine Ihese questions. In addition, we plan, in concert with
the PWG, to bring key government officials together to discuss these financial
market issues. As I discussed, the PWG has already undertaken a detailed
analysis regarding the causes and consequences of LTCM's failure. The PWG can
and should build on this work to help develop a measured and market-based
approach to the impact hedge funds have on our financial markets.
Looking forward, we will be focused on seeking to understand in the most
comprehensive way possible whether and how changes in the structure of the
financial services industry - of which the rapid growth of new forms of capital
accumulation, such as hedge funds, is just one example - have materially affected
the efficiency with which markets intermediate risk, whether risk is pooled in
different ways or in different places than it has been in the past - and if so, what
appropriate policy responses might be. We will seek to be forward looking and to
think about these changes not in a fragmented fashion, but in a comprehensive
way. At the moment it is too soon to say what initiatives will result from this focus,
but this is the lens through which we will filter the various ideas and efforts with
which we will all be grappling over the next few years.
[ 1J The data about the hedge fund industry are not preCise. Therefore, many of the
figures noting the size and growth of the industry are estimates and Treasury has
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not independently verified them.
3/5/2007
Page 1 of 1
May 16, 2006
JS-4265
Statement of Secretary John W. Snow
Economic Press Briefing
I am pleased that you could join us this afternoon. We are coming up on the third
anniversary of the historic Jobs and Growth bill, which has propelled the American
economy forward for a long time now. It has put the American economy on a good
path - a sound path that clearly has us going in the right direction.
Tomorrow there will be a signing ceremony in the White House on important tax
legislation that extends the lower rates on dividends and capital gains, protects
millions of Americans from the AMT and provides small businesses with the
continuing advantage of expanded expensing. This is all good news for American
taxpayers and American families and American businesses and American
investors.
That legislation was essential to avoid a tax increase on American families and
America's small businesses, and it was a victory for America's taxpayers. The
legislative success is a tribute to Chairman Grassley and the Senate Finance
Committee for their hard. painstaking work in making this day possible. Senator
Frist is also due congratulations for his leadership on this bill and on the issue of the
economy more broadly. In the House. whose vote on preventing tax increases
came first. Chairman Thomas and Speaker Haster! are to be commended for their
leadership.
What the President's leadership of the economy has demonstrated is that low tax
rates create investment, create jobs. create growth; and now with the surge of
revenues we are seeing as a result we can also say that low taxes are consistent
with rising federal revenues which of course help bring the deficit down.
I am pleased to see the progress we are making on that count. April receipts were
very strong. just what you would expect with an economy that is growing,
expanding, creating jobs and with rising equity markets.
CBO recently released new estimates on the budget deficit for the year, bringing it
to the range of 5300 to $350 billion. Our own estimates will be out sometime soon
after we complete the mid-session review.
I am confident we will continue to see good progress on the deficit. It is clear now
that the President's objective of cutting the deficit in half will be met and exceeded
ahead of schedule.
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May 16, 2006
2006-5-16-17-45-54-27472
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 568,089 million as of the end of that week, compared to $67,293 million as of the ond of the prior week.
I. Official U,S, Reserve Assets (in US millions)
I
1. Foreign Currency Reserves
1
a. Securities
68,089
G
Euro
Y
TOTAL
11,846
11,2
23,131
b. Total deposits with:
11,792
5,488
Euro
I
0
b.ii. Of which. banks located abroad
0
b.iii. Banks headquartered outside tIle U.S.
0
b.iii. Of which. banks located in the U.S.
0
I
I
TOTAL
11,467
I
7,266
11,941
17,527
5,586
0
I
I
4. Gold Stock 3
I
I
0
I
0
I
I
I
I
0
7,366
I
8,692
8,573
113. Special Drawing Rights' (SDRs) 2
23,461
0
17,280
2. IMF Reserve Position 2
11,994
Yen
0
b.i;. Banks headquartered in the U.S.
5. Other Reserve Assets
May 12, 2006
67,293
Of which, issuer headquartered in the U. S.
b.i. Other central banks and BIS
I
May 5, 2006
I
TOTAL.
11'~~~
I
11,043
0
II. Predetermined Short-Term Drains on Foreign Currency Assets
May 5, 2006
May 12, 2006
Yen
Euro
Euro
TOTAL
I
Yen
0
1. Foreign currency loans and securities
II
TOTAL
II
0
I
0
I
2. Aggregate short and long positions in forwards and futures in foreign currencies vis-a-vis the U.S. dollar:
~-~
2.b. Long positions
Il3. Other
I
I
I
I
II
n
0
~
0
I
0
0
III. Contingent Short-Term Net Drains on Foreign Currency Assets
I
,
I
May 5, 2006
Euro
I
I
Yen
I
II
TOTAL
I
I
I
May 12, 2006
Euro
Itt"
TOTAL
I
3/5/2007
Page 2 of2
1. Contingent liabilities in foreign currency
0
1.a. Collateral guarantees on debt due within 1
year
I
1.b. Other contingent liabilities
2. Foreign currency securities with embedded
options
3. Undrawn, unconditional credit lines
I
II
I
CJ"
0
I
0
II
a
I
c=J
0
0
3.B. With other central banks
13. b With banks and ot/ler financial institutions
IHeadquartered in the US.
1
1
3.c. With banks and otller financial institutions
IHeadquartered outside the U.S.
1
4. Aggregate short and long positions of options
in foreign
ICurrencies vis-a-vis the U.S. dollar
~orl positions
0
1
.1. Bought puts
.2. Written calls
4.b. Long positIOns
4.b.l. Bought calls
14.b.2. Written puts
I
1
I
I
I
I
"I
II
I
II
I
I
I
Notes:
11 Includes holdings of the Treasury's Exchange Stabilization Fund (ESF) and the Federal Reserve's System Open Market Account
(SOMA), valued at current market exchange rates. Foreign currency holdings listed as securities reflect marked-to-market values, and
deposits reflect carrying values. Foreign Currency Reserves for the latest week may be subject to revision. Foreign Currency
Reserves for the prior week are final.
21 The items, "2. IMF Reserve Position" and "3. Special Drawing Rights (SDRs)," are based on data provided by the IMF and are
valued in dollar terms at the official SDRfdollar 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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May 17,2006
JS-4266
Reforms to U.S. Pension Funding and Accounting Rules:
Their Potential Effect on Equity Values and Interest Rates
European Institute's Sovereign Funds Roundtable
Assistant Secretary Mark J. Warshawsky
london, England
Thank you very much for that kind introduction. It is certainly a pleasure to be here.
My talk this morning will concern the potential effects on equity values and interest
rates of U.S. reforms to funding rules and accounting rules for private definedbenefit (DB) pensions. As some of you may be aware, each House of the U.S
Congress has recently passed its respective version of a pension reform bill, and it
is expected that the bills will be reconciled soon. It is difficult to say precisely what
form the final bill will take, but. relative to current pension funding rules, I expect
that reported pension funding shortfalls will more closely track mark-to-market
measures and minimum pension funding will make up reported funding shortfalls
more quickly. If this indeed occurs, year to year volatility in equity values and
interest rates will flow more directly to pension asset and liability valuation. and
therefore to minimum pension funding amounts. than is true under today's funding
rules. And if. as many expect, the Financial Accounting Standards Board's
(FASB's) ongoing project to re-evaluate the financial accounting treatment of postretirement benefits ultimately results in balance sheet measures of pension assets
and liabilities that more closely approximate mark-to-market valuations, the flowthrough of pensions to corporate earnings will also be more volatile.
Some analysts have concluded that a stronger contemporaneous correlation
between pension fund equity values and minimum pension funding and corporate
earnings would cause pension fund managers to invest pension funds less heavily
in equities and more heavily in fixed income securities that are similar in duration to
pension liabilities, thereby sacrificing some expected return for less volatility. While
this conclusion is probably correct in concept and direction, an open question that I
think would interest this group is how large the effect would be and whether it would
have a significant effect on equity values and interest rates. That is what I want to
discuss today.
But first let me give you a little background on the U.S. private DB Pension system
and the reforms being considered.
U.S. Reforms to Pension Funding and Accounting Rules
Funding rules for private DB pensions in the U.S. are seriously inadequate. While
policymakers found it easy to ignore this fact while the stock market was booming in
the 1990s, the sudden decline in stock market values in 2000 and the subsequent
declines in long-term interest rates used to discount pension fund liabilities made
the DB pension system's fragility apparent. In 2000, underfunded DB pension
plans reported total underfunding of $7 billion. As of 2005, that figure had risen to
$450 billion, a more than 60-fold increase. And there have been record claims on
the publicly-administered pension insurance fund. That insurance fund's actuarial
balance declined $33 billion between 2000 and 2005. from a $10 billion surplus to a
$23 billion deficit.
Serious pension underfunding is in large part due to funding targets are not based
on mark-la-market measures of pension assets and liabilities. Instead, reported
asset values are typically an average of past mark-to-market measures, and
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reported liabil.ities are computed using an average of the long-term interest rate
over tl1e prevIous four years. When long-term interest rates are declining, as they
have been since 2000 until recently, reported pension liabilities understate true
liabilities. In addition, plan liabilities are understated because they don't properly
account for early retirement and lump-sum payout options.
Not only do current funding rules allow funding targets to move slow!y toward their
correct values, tl1ey also allow measured funding shortfalls to be closed too slowly.
This is especially true for funding shortfalls arising from plan amendments that raise
pension benefit levels. Under current law, these shortfalls are amortized over
periods as long as 30 years. Not surprisingly, many plans have taken advantage of
this rule by specifying dollar pension benefit levels in the pension agreement and
making frequent amendments raising benefit levels. A large share of current
underfunding is attributable to such plans.
Being a pension specialist. I was eager to help address these problems when I
came to the U.S. Treasury in early 2002. After a great deal of hard work, the
Administration put forward a pension reform proposal in early 2005. I'm proud of
that proposal and the key role my office played in shaping it. The proposal has
many important proviSions, but I will only mention the three that are directly
pertillent to this talk:
1.
2.
3.
First, pension funding targets would be based on near mark-to-market
measures of pension assets and liabilities. For purposes of calculating
liabilities, discount rates would be gauged to duration in accordance with a
high grade corporate bond yield curve computed and published by the
Treasury Department.
Second, all sources of underfunding would be amortized over seven years.
And lastly, for purposes of determining maximum tax-deductible pension
contributions, a cushion level of over-funding would be allowed.
The Administration's pension reform proposal served as a starting point for bills
passed by both Houses of Congress late last year and that are currently being
reconciled. Unfortunately, both bills are weaker than the Administration proposal,
but we in the Administration are now working hard to influence the Congressional
deliberations so as to get a stronger bill. As I said in my introductory remarks, it is
hard to predict the precise outcome of those deliberations, but I think we will get a
bill that moves us closer to mark-to-market measures of penSion underfunding, as
well as shorter amortization periods for making up pension funding shortfalls.
I should back up a moment and mention that everything I've said so far primarily
concerns private DB pension plans sponsored by a single employer. At this time,
fundamental market based reform is not being considered for private plans jointly
sponsored by many employers in association with a trade union--so-called
multiemployer plans. Fundamental pension funding reform for those plans
introduces a host of other issues that must await another day. In addition, the bills
in Congress would not affect employee retirement plans sponsored by state and
local governments. Thus, any direct effect reform would have on the volatility of
pension funding would be for private single employer plans only, plans that at the
end of 2005 accounted for 35 percent of total DB pension fund assets in the United
States.
In addition to stricter pension funding rules for single-employer DB pensions,
sponsors of both single and multiemployer plans face the prospect of parallel
changes in DB pension accounting rules. In the U.S., the Securities and Exchange
Commission (SEC) has broad powers to prescribe the accounting practices and
standards used by companies listed on U.S. stock exchanges, and for the most part
it has delegated those powers to the Financial Accounting Standards Board
(FASB), a non-government entity. FASB identifies problem areas of accounting
practice, solicits public comment, and issues "statements of financial accounting
standards" that are the basis for "Generally Accepted Accounting PrinCiples."
Recently FASB undertook a two-phase project reviewing its accounting guidance
for pensions and post-retirement benefits. Phase 1 has resulted in a draft rule that
is now open for comment. That rule dictates that reported pension liabilities take
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account of projected benefits as opposed to already-accrued benefits, and that
pension assets and liabilities be reported on company balance sheets rather than
just in footnotes as is currently the case. A final rule is expected by year-end.
Phase two of the project, a joint initiative with the International Accounting
Standards Board, is more ambitious and is expected to last three years or longer.
That phase will consider advising that companies value pension assets and
liabilities at fair market value rather than allowing them smoothing mechanisms, and
that any changes in tile fair market value of net penSion obligations flow more
directly to earnings.
From a public policy point of view, the case for making these accounting rules
changes is unassailable. Accounting is valuable only if the numbers have meaning,
and the current pension funding numbers have little meaning. So, while it will likely
take a few years, I think FASB will ultimately make these rule changes.
With that background, let me return to my original question: What effect would
these changes in the pension funding and accounting rules have on: (1) DB
pension fund asset composition? and (2) equity values and interest rates?
Effects Pension Reform Might Have on Asset Values and Interest Rates
The changes in pension funding and accounting rules that I have discussed could
have effects on financial markets because the new rules could induce fund
managers to move pension fund investments away from equities and into fixed
income securities, especially bonds with long maturities and durations. The
purpose of such a redirection of assets toward higher duration would be to make
fund returns better match the stream of future pension benefits and reduce volatility.
Needless to say, it is unlikely that all or even most of fund investments in equities
would be converted to fixed income. This is because equities earn higher returns
than fixed income securities, and over long enough time spans, the risks associated
with equity returns are generally reduced. Plan sponsors would be willing to accept
some additional volatility in asset and liability values in the short run to get greater
equity returns in the long run. Therefore, very long-lived liabilities out several
decades or more would probably continue to be funded with a substantial
proportion of equities.
Moreover, projected future pension benefits arising from future wage levels,
mortality trends and so on are uncertain, and so they cannot be completely
matched by a selection of fixed income securities even if a very extensive fixed
income market is available. Some pension managers feel that the higher returns
from equities are one way of partially making up for this uncertainty.
Nevertheless, pension reform would probably induce some reallocation of pension
fund assets from equities to fixed income securities. An idea of the magnitude of
the reallocation can be gotten from survey data provided by the Committee on
Investment of Employee Benefit Assets (CIEBA). CIEBA surveys in 2003 and 2005
suggest that the upper limit to the proportion of DB pension assets that would be
redirected from equities to fixed income securities if there were pension funding and
accounting reform would be about 20 percent. At present private DB assets are a
bit less than $1.8 trillion, so 20 percent of assets would come to $360 billion.
However, the pension funding and accounting reforms currently under
consideration are aimed mainly at single-employer DB private pensions rather than
multiemployer. Single-employer private DB pension assets are around 85 percent
of the DB total, which brings the $360 figure down to about $300 billion.
The sum $300 billion is substantial, but in comparison with financial markets in the
U.S. overall it is small. As a fraction of equities outstanding in the U.S" it is about
1.6 percent. As a fraction of corporate and foreign bonds in the U.S., it is
3.7 percent, but as a fraction of the combined markets of U.S. Treasury securities,
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securities backed by U.S. agencies and government sponsored enterprises, and
corporate and foreign bonds. it is also around 1.6 percent.
And, of course, the rebalancing of pension funds from equities to fixed income
securities would not take place all at once. If it were to occur over, say. two years,
the reallocation would amount to a temporary shift of less than 1 percent per year
from the equity market to the fixed income market, and after a few years the
rebalancmg would be finished.
On its face, a 1 percent per year reallocation appears very small. For example, if
the price elasticity for equities is unity, the reallocation would imply an equity price
reduction of 1 percent each year, which is certainly an amount that markets should
be able to absorb with no lasting effects. Similarly, the reallocation should not have
any sustained effects on the average level of interest rates.
Nevertheless, there might be some short-term adjustment effects in fixed income
markets. This is especially true because the reallocation will probably be directed
toward bonds with long maturity and high duration, as pension fund managers
extend the duration of assets, and that could cause a flattening of the yield curve at
the high end.
One plausible way to get at the magnitude of the yield curve effect is to use
analytical work on the relationship of U.S. Federal deficits to Treasury interest
rates. Staff work at the Federal Reserve Board suggests a rule of thumb that a rise
of one percentage point in the ratio of the Federal deficit to GOP increases longterm Treasury interest rates by about 25 basis points.'
The $300 billion reallocation from equities to fixed income securities which was
calculated above is less than 2-1/2 percent of GOP. Distributed over two years, this
translates into an increase in fixed income demand of about 1-1/4 percent of GOP
per year, and multiplying by 25 basiS paints gives a decline in long-term interest
rates of around 31 basis points.
However, this is considerably too large because the demand shift toward fixed
income will be spread to other bonds besides Treasuries. Assuming that
Treasuries are less than a third of the fixed income market, the resulting temporary
effect would be a reduction of about 10 to 15 basis points in fixed income yields at
the long end for a few years, after which the effect would be absorbed by markets.
This estimate is very approXimate, and another estimate might be gotten from
information on Treasury buybacks. Over a period of about two years from
March 2000 through April 2002, the U.S. Treasury conducted a series of buybacks
of Treasury securities. There were 45 buyback operations, and the securities
chosen for buyback were in the medium to long maturity range. The total amount of
Treasury securities bought back came to $67-1/2 billion, which was around
2 percent of the Treasury market at that time.
The buybacks therefore represent an exogenous injection of demand into the long
end of the Treasury fixed income market of about 1 percent per year for a couple of
years, which is similar to the anticipated move from equities into fixed income
arising from pension reform.
Of course, it is difficult to disentangle the buyback effects from the many other
effects on Treasury yields over that period, which included a mild recession and
substantial monetary easing by the Federal Reserve. In addition, during that period
Treasury announced that the 30-year bond would not be offered anymore, and
many market analysts were expecting bigger buy backs than actually were done, so
there may have been some exaggeration in the buyback effect initially.
Nevertheless, a rough approximation of the effect of the buybacks can be gotten by
looking at the spread of the 30-year Treasury yield to the 10-year Treasury yield. At
least partly in anticipation of the buy backs. this spread fell near the end of 1999
from about 15 basis points to negative levels in 2000, dropping to almost -30 basis
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points around the time of tile first buyback. However, the spread recovered in the
next few months, and averaged -9 basis points during all of 2000 before moving up
to an average of almost 50 basis points in 2001. These figures are consistent with
a temporary yearly effect of about 10 to 15 basis pOints dUring the adjustment
period, the same as suggested by tile deficit analysis, but in the buyback case the
effect was bunched III tile first year. Once the buyback operations ceased, there
appears to have been no lasting effect on the Treasury market.
Tt1ese approximate calculations are consistent with the view that any movements in
financial markets brought about by pension reform are likely to be temporary, and
small enough that 1I1ey would not be disruptive or destabilizing. And after a
relatively brief adjustment period, the market movements would probably be mostly
absorbed with no Significant long-term consequences.
It st10uld also be noted that these calculations overstate the expected market
effects of pension reform because they ignore the fact that declines in long-term
interest rates would encourage an increased supply of long maturity bonds from
issuing corporations and other entities. And in general, if pension reform is done
right. it can be expected to increase the productivity and efficiency of allocation of
private capital and raise real asset returns and interest rates overall, which would
tend to offset the interest rate declines in fixed income markets.
The figures presented so far pertain to private single-employer DB plans, which are
the current focus of reform efforts. However, some observers think that state and
local pension funds might also move a share of their assets from equities to fixed
income securities because of future funding or accounting requirements. Assets in
state and local pension funds total about $27 trillion at present, the bulk of which
are for DB plans
A 20 percent reallocation of state and local pension assets from equities to fixed
income would amount to about $540 billion, which is about 3 percent of the equity
market and 2.9 percent of the combined fixed income market including Treasuries,
securities backed by U.S. agencies and government sponsored enterprises, and
corporate and foreign bonds.
At the present time, the pOSSibility of such a market move is highly speculative.
Nonetheless, if It were to occur, it could be expected to take place several years off,
probably after the effects of private pension reform have subsided. And spread
over several years, this reallocation would amount to only about a 1 percent move
per year for a relatively short time period, similar to the private pension
reallocation. Again, such small disturbances would probably be absorbed by
markets.
I would also note that other changes included in the pension legislation dealing with
defined contribution plans, in particular the auto-enrollment and auto-investment
provisions, conceivably could have the effect of moving plan partiCipants over time
away from fixed-income investments and toward equities.
In contrast to the implications of these estimates of the effects of pension reform on
markets, some analysts have compared potential U.S. pension reform to the U.K.
pension system, and have suggested that U.S. reform could result in a significantly
inverted U.S. Treasury yield curve, similar to the frequently inverted gilt yield curve.
However, this seems very unlikely because there are large differences between
proposed U.S. reform and the UK system. The single-standard U.K. pension
funding rules found in the Minimum Funding Requirement (MFR) in the Pensions
Act 1995 - which was eliminated by the Pensions Act 2004 - and the accounting
rules in FRS 17 have strongly encouraged pension funds to invest specifically in
gilts. And the funds chose longer-term gilts so as to lengthen duration in accord
with anticipated payments of pension benefits.
As a result of the tendency toward investment in gilts, at present over half of the
gilts outstanding are held by U.K. insurance companies and pension funds This is
very different from the U.S., where such funds hold less than 10 percent of
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Treasury securities. Such a big position in gilts by these funds, especially at high
durations, may contribute to the inversion frequently seen in the gilt yield curve.
In contrast to the U.K., U.S. reforms stress the use of corporate bond interest rates
for discounting future pension benefits, rather than the gilt discount rates
emphasized in the UK - I have already mentioned the use of a corporate bond
yield curve for discounting future benefits. Consequently, U.S. pension funds
desiring to matcll liabilities with fixed income assets can be expected to include a
large measure of corporate bonds rather than Treasuries alone. Of course, funds
will also emphasize corporate bonds simply because they have higher returns than
Treasuries.
To summarize these calculations, the U.S. equity and fixed income markets
including corporate bonds are very large relative to DB pension funds, and
expected movements of pension fund investments from equities to fixed income
securities should have minimal effects on U.S. asset values or interest rates.
Are the Implications of Pension Reform for Asset Values and Interest Rates
Important For Policy Design?
Now I will put on my policy hat and consider what importance this discussion has
for what constitutes good public policy toward pensions. When we thought through
our proposed pension reforms, we understood there could be some implications for
asset prices, but our intuition told us they would be relatively small.
Our motivation for reforming DB pensions is first and foremost a moral one:
Pension sponsors should be made to make good on their pension promises. I'm
proud that the Administrations proposals would make plan defaults and losses to
participants less likely and hope that what will ultimately emerge from Congress will
move us to this important goal.
Implementing appropriate pension funding policies actually corrects current asset
price distortions. Specifically, the current lax pension funding and accounting rules
help pension sponsors shift pension fund investment risk to the publicly-sponsored
insurance fund and possibly taxpayers, and amount to a public subsidy for risktaking. As with many public subsidies, the result is distorted prices and a
misallocation of resources. By eliminating a price distortion, pension reform
enhances the economy's efficiency.
Concluding Comments
Let me sum up by saying that I am cautiously optimistic that Congress will send the
President a good pension reform bill for his Signature, and that FASB will ultimately
recommend economically meaningful pension accounting rules. If that does indeed
occur, we can look forward to steadily improving private DB pension funding,
brighter prospects for the publicly-sponsored DB pension insurance fund, and a
more secure future for American workers.
The Administration's pension reform proposals are not rocket science. They are
common sense. There is only one legitimate measure of pension asset and liability
values--what people are willing to pay in the market--and it does not serve the
public interest to pretend otherwise. And if correctly-measured pension
underfunding is amortized over a relatively short period of time, underfunding can
never get so big that make-up contributions can cause undue financial hardship for
employers. Workers' pensions can be made secure without jeopardizing the
viability of businesses.
I have argued that reforms to DB pension funding and accounting rules would not
cause a significant upheaval in financial markets. The amounts of the shifts in
demand across asset classes brought about by the reforms would be very small
relative to the overall sizes of equity and fixed income markets, probably less than 1
percent per year for a few years, and would likely be absorbed by markets after
some minor temporary effects.
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These modest asset value changes are not cause for concern. In fact, to the extent
that reform does cause asset value changes, those changes result from the
elimination of a public subsidy for risk-taking. It can be inferred, therefore, that
asset value changes caused by pension reform actually help direct the economy's
resources to their Iligllest valued uses.
-30See Thomas Laubach, "New Evidence on the Interest Rate Effects of Budget
Deficits and Debt," Board of Governors of the Federal Reserve System, May 2003.
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3/512007
Nl~W Evidellee on the IlltercHt Rate EffeetH
of I3ulippt DdidtH mlCl Debt
ThollUlH
Lnulnu:·h·
Bunni of GUVl'l'UOl'H of Ul(' }4'('d('rnl Resl'rve System
Afny 2003
Abst.ract
EKtiulIlt.ing t ht, l'ffl't·t.K of gnvI'fllllll'Ut. lil,llt nuclIMi"ibl 011 Th'I\.'mry yMdK hi ('olllpli-
mkd by t.h,' Ut'I'Cl t.n iKnlutl' tli" C'ffloctK of fiK('I,1 pnlic'Y fmlll ot.hl'r illHul'lIC,(!H. Th "bst.rlU.:t
frum t.h,' (,ffl't·tll of t hi' 11II.'Iim':I.'1 (ydl·. IUlCllL'1l1udat.cd wOIlt!tary puliry w::tiOlIH.
Oil
deht.,
dC'Iit'ihi. ami iUU'R'IIt. mt",!!. t.hit! papc'r Ktullic'!! tll(' rI'int.iouKhip hc,twc'Cl1I loug-hori?1I1l
1'X})I,(·tl'(l gOWrllUlC'llt d,'ht and d('fidt.K. 1ll('811111'(d by CBO ami OMB project.iolltl, awl
('XPI,(,t.('(1 fllt.nre'ioug-tl'rlll intc'n'St. rat.I'S. Thl' c'Ht.i1l1l1.tc'(i (·{fc,(·Ls of governlllent d(!bt and
dC'fit'its 1111 illl('n'lIt. l'a.h'S tm' Ktnt.iHtic·luly aUld (,(,(lllulIli(!ally lIiguifimllt.: U lillI' P('l'Ct'Utage' l)oillt
iUCTe'MC~
ill tilt' pl'Ujedl'Cl dc.'fic:it~tl,..GDP ratio be l'Stilllnud to railll.' )oDg-u'rm
iuk're;t. raWs by roughly 25 basi."! points. Und<'1' pJausihJe 8SStIIllJltious
are IIhO\\'l1 t.() b('
COll~t(!l1t
tJl~
estimate::;
with llr('(lictiollli of the llcoclnHsicni growth model.
JEL (·iRHllilkat.inll: EG, H6.
Ke!},wof(it;: Govt!nlllll'llt Il,'bt, gnvc'rlllllC'llt clllficitli. illU!n!Kt rat.t!
re~('llSimlK,
CBa pl'o-
j('Cf;iODS, Ol\1B projcctiollK.
• t1auba.ch·i"!frh.gov. I gra.ttfully ackllowlt'(lg<' hc!lllful C'OlIIllICllts from 11I1lIICroUK collellgllCH at tlll! Federal
ReK.'l'VC
Board,
ill
pllrtiruht.r Darn.·( GOhl'lI, Dougl8M Ehul'Iulorf, Clt'1II1 Fullette, David Reif&:lilleider, Johll
Roberts, aud David Wilcox, 8M well 11.'1 from Kt'll MILtheuy. Sarah AIVCII providt'C1 ('xcellcmt rnscarch 8IIIIistallce.
All remaining erroJ'K al'e mizl('. Thp vil!wl! exprcMltlll be'rcun are tllUtle of the author IUld do not ueeetlStLl'ily
reflect
thUHC
uf the Board uf GUV(!TIIUn; of the HUt!ral Rt'llI'l'Vf.! Systc'lIl ur its staff.
1
Introduction
l\luch ('ontrowl':;:\'
t.('1'I11
SnITOl\IHIS
n'nl iute1"('st. rat.('s.
the' qll<lnt.it,at.iw ('!!'I'cts of gOW1'IIIIWllt debt. alld deficits on long-
E(,()lIolllic
tlll'ory providc's c1iffc'wlll <Lllswers depcndillg
011 issue~
such as wlll'tlH'r dl'li.cits rdiPct changl's ill gOVPrIllllent. pxpC'll(lit1ll'es or shifts in the timing of
taxes, and on t.lll' planning horizon of hOllsdlOlds who hold government debt awl pay taxes.
One might, hopl' t.hat empirical ('vidence could
]w
hrought to hear on this question, hut here
the results are just a.-; amhiguous. Gne lIIajor ohstacle in ohtainillg empirical estimates is
the lleed to isolatl' tIll' dfi.'ds of fiscal policy from the lllallY other factors affectillg interest
rates. The most ohvious of the-il' factors is the state of the business cycle. If automatic
fiscal stabiliz('rs raise deficit.s dming fC'(:essions, whik at. the samp time long-term interest.
ratt's fall due to monetary casing, dl:'li.cits and illterest. rates lIlay be llegatively correlated
even if the part.ial effcct. of dcficit.s on int.erest rates
cont.rolling for all other influences -
is po::;itive.
This pappr proposes to
addre~s
this identification problcm by focusing on the relation!;;hip
bftwefll long-horizon fon'ca~ts of both int.erest. ratf'~ and fi~cal variabk~.
Deficit.M and
interest rat.e, (:'xpectl'd to prevail several years ill the future are presumably little affected
by t.he currpnt state of the busine::;s cycle, thus greatly reducing the reverse-causality effects
induced by countercyeiiealmonctary policy and automatic fiscal stabilizers. Of coursc, therc
are many conceivable fact.ors that jointly determine fiscal variable::; and intcre::;t rates, and it
is unlikely t.hat a reduced-form regression would ever completely overcome this endogencity
problem, hut focusing on long-horizon forecasts is an important step in the right direction.
Moreover, deficit.s projected several year::; into the future may be informative about the
longrr-rnn fiscal position, and may t.hrrefore approximat.c'
illvr~tors'
expl'ct.at.ions about the
eventual level of government debt relative to GDP. Such measures of expectations thus hold
011t. the
pro~prct.
of 1ll1covering any cR11sal rPlat.ionship from fiseal
variable~
t.o int.erest. rat.es.
Expectations of fut.ure fiscal policy are proxic(\ in this paper by projections published by
t.he Congre::;sional Budget Office (CRO) and the Office of Management ami Budget (OMB)
for the federal govcnullcllt's unified budget deficit, the stock of federal goverlllllcuL debt
held by the public, and ot.her fiscal variables, all ('xpressed as percentages of the respective
agpncy's own project.ioll of GNP or GDP. 'I'll(> forl'cast horizon is fivE' years in the future,
which is the longest horizoll for which a reasonably long time series of projections is availahle.
Consist-cnt. with the use of 5-year-ahead projectiolls of fiscal variables by the CBO and t.he
1
01\IB, t.hl'
alli\ly~i~ fO(,I\~(,s
011
('Xl>l'<tat.iom; of fl\tlln~ nominal iut.prest rates derived from
forward rates:> t.o 1-1 yt'ars aill'ali ('111\)('(111('1\ ill till' t('1"111 st.l'Ilct.ure of intcrest rates.
Thl' n'slIlt.s l'l'port.('d 11l'low show that. a p('rct'ut.age poiut. ill('l'('kl.<.;e ill the projected deficit-
to-CDr rat.io raisl'~ til(' lO-Yl'nr bom1 rat.e ('xpeded t.o p!'('vail five years into the future hy
20 to
-to
ba..-;is point.s;
It
typical ('stinmt.l' is ahout 25 basis points. The estimates are very
precis(' compared to most. of the lit.erature mentiolled below. Similarly, a percentage point
increase in tilt' Pl'Ojt'('i.t.'d dl'bt.-to-GDP ratio rai~(ls future interest rates by about 4 to 5 basis
poiut.s. and thpse pst.imat,('s are statist.ically significant, too. Importantly, these estimates
a.re showu to he robust along many dimensions. Moreover, nnder plausible a.<.;sumptiolls
about. t.he persisten('c of challg(lS in projectcd deficits, the estimat.ed 25 basis point effect on
int.erest. ratps of a pc:>r(,pnt.age point. ill('l'('f\.-;e in t.he projected deficit.-t.o-GDP mt.io is shown to
be consistent with the 4-to-5 basis point eHect of an increase in the projected debt-to-GDP
ratio.
This st.udy is by no mf'aUH tllf' first. to UHf' J)ublishf'd projections of fut.ure budget deficit.s.
Wachtel and. Young (1987) use CBO and OMB projections to analyze changes in long-term
interest rates on the day of the release of the respective projection. l Unlike those shown
here, their resulttl t.hercfor(l depend on correctly ident.ifying the unanticipated component of
the release. They find t.hat a $1 billion increase in the projected deficit (at that time roughly
0.025 percent of nominal GDP) mises interest rates by between 0.15 and 0.4 basis points,
depending on the maturity of the interest rate series and the source of the projections. Their
estimates therefore imply
CUl
increa..<;e in interest rntes on the order of 6 to 16 basis points
in response t.o a percentage point increase in the deficit.-to-GDP ratio. However, many of
their estimates are stath,;tically insignificant.
Cohen and Gamier (1991) and Elmcndorf (1993) present results concerning the effect of
deficit projections on the change in interest rate:s between release dates. Like the present one,
these :studies are based on the weaker assumption (in comparison to Wachtel and Young's)
that the deficit projections are good proxies of private agent's expectations of future fiscal
policy at the time of the relemie. The projections used in these studies, a.'l well as in Wachtel
and Young, are relat.ively short
lor the current. and next fiscal year in 'Wachtel and Young
and in Cohen and Garnier; for up t.o eight quarters ahead in Elmendorf. Forecasts at
this horizon are pl'f~sumably st.ill affected by t.he st.ate of t.he bllSiIlP~S cycle. Cohen and
IOther Htuliies uHillg siluiiar ('v('nt. ILllaiYl'is are Ehlll'luimf (I!.l!.l(i) and Kitchen (1096).
2
Garni('r iuidwss I his prnhll'lII h,\' I\sill~ Pl"lljl'(~t.i()lIS 1'01' I.h(· ('ydic'al\y adjust,eel f"ell'ral cle.fic:il.,
t.ims ill principII' l'lilllillat.ill~ 011' hllSilll'ss eYI'le· (lUI'ds. Using 011B pl"Oj(!dious: they find
~t.atistkally sigllitieallt. (11[('("\.1'1 of It p('rc('lIt.agp poiu\. inl'l"Pfls(! ill tlw project.ed deficit-to-GOP
rat.io on iut.l'n'st. rah-::;
011
t.he lIrc\(!r of 110 to
!j!j
hm;is points. Using ORI foreca..-;ts, Elmendorf
filld~ a st.atistically siguifimllt inen'<I.<.;(' in illt('l"('st rat(·s at maturities up to five ye.ars of
abou\. 50 basis poiu\.s, hUI, tIl(' ('1[1'(·1,1'1 on long-\.(!rm illt,~rest. rat.l1S am smalIllr and st.atist.ically
insignifkant. Callzoll(lri, Cumby, and Diba (2002) use 5-Y(lar-ahcad and lO-year-ahead CBO
projectiolls of cumulat.ive buelgpt. defidt.s aud study their effects on the 81)f'(~a(1 between 5year or lO-yem·. anci 3-mouth l'n'a.<.;ury yidds. Their Clitimates are of similar magnitude as
those rt'port,(.'d iii COhCll mid Gamier und iu Elmeudorf, but are considerably more precise.
ThE' pn'HE'ut study confirms t.hr illl]lOrt.anc(' of using m~a.·mrps of long-h()ri~on e.xpflCtatiOllS of dt'ti<.'its ami debt. for i<il'nt.ifying t.heir effects on interest rates. 2 It departs from the
previous studies in severa] l"l'sp<"cl.s. Unlike
Cal1~ollcri
et aL, this study uses the level of
interest rat<.'s expected to prevail 5 years ahead instead of the slope of the term structure.
As shown helow, omitting the near-term component from the long-term interest rate meaSllre.s furt.hpr h('ll>s t.o identify the ef[E'ets of t.he. fi:ical variablf':!. In comparison t.o previous
studies, I also include additional V"d.I"iables suggested by economic theory in the regressions;
doing so again helps to identify more precisely the effects of fiscal variables on interest rates.
lVIoreover, I present
}"(,SllltS
tOllc('l'llillg the llffects of both government deficits and govern-
ment debt on interest rates. Feldstein (1986) argues that the interest rate effects of deficits
depend on how
p~rsistcnt tlWS(I
d(lfidts are assumed t.o be. The rcIative magnit.udes of t.he
estimated effects of deficits and thE' e.stimaterl effects of debt reported below are consistent
with the assumption that increases in projected deficits are persistent, but noL permanent.
Finally, the fourth section discm;ses the pre.ciictiollS of the neoclassical growth model - the
simplest general equilibrium framework for this purpose
for the relationship between the
stock of debt and interest rates. Under plausible. assumptions, the empirical results are
consistent with the predictions from this model.
2This point i::; convincingly illustrated ill E1111C'udorf (l!)!}3). lIe examines thC' findings of studies that
proxy for expectat.ionll of fiscal variable:.; by Ilsing for',(,I,"~t.s from VARII (IW-C PlOll.'!C'r 1982, 1987, and Evans
W8i). Elmendorf IIhows that tlit.'Se VAR
f01't,'CIL':its
lIre poor (;ompllred to projectioI1!; available at the time,
and that the COIIChlHiolls of .hetiC studies arc overturned ollce hetter measures of cxpoctations are IIsed. For
a taxollolllY of IItucii(!s ill thi:.; llrea ll!'("orrlillg to their IIIC1Lo.;urt'llll:'llt I)f expcctatiolll;
(2002).
3
lit'e
Gale aud Orzsag
2
Specification and Data
The l'lIlpirical lIlet.hod u:-il'd in t.lli:-i \>(11)('1' is to J'('gn'ss expectcd future interest rates on
projl'dion:-i jluhli:-ilH'd hy the CDO and t.hl' Ol\lB for thl' deficit-to-GDP ratiu and Lhe dcbtto-CDP rat.io flv!'
)'I'HTS
ahmd, as
Wl'll
a." otlwr d('tPrJninHnts of long-term interest rates
snggestl'd hy l'(,OllOlllic t,lwOl'Y. As n'ganis tht' lattl~r, tlw fimw-icy Illode! of optilllal growth,
eombilll'd with a I"eprt'sl'ntat.iw housl'hold with CES ut.ility, implies that the lIet real return
011
capit.al. i.t'. till' real interl'st rail'. is determilled by
T
= (Jg
+ (}
wherl' !I denotc's the net. growth rate of technology, output, and consumption, a is the
coefficient. of rPiatiw ritik aversioll, and () is the household's rate of time preference. This
relationship therefore suggests that. both trend growth and risk aversion should play a
role ill determining yil'lds
011
risk-free Treasury instruments: an increase in trend growth
shoulel raise int.erest rates, whereas an increase in risk aversion shonld lower Treasury yields
because it raises the demand for safe asset.s. The regressiolls reported in the next section
are therefore variantl") of
(1)
where
I"t
is the real Trea::;ury yield expected to prevail at SOHle horizon,
It
is a fiscal variable,
e.g. the projected deficit-to-GDP ratio, 91 is a meal")ure of pot.ent.ial GDP growth, and
COt
is
a measure of the equity premiulll discus::ied below.
The following discuHsion of the dat.a ll::ied in this study is deliberately kept. short; more
det.ails can be found ill the appendix. :From the CBO, five-year-ahead projections for both
the Illlifif'd budg('(, dl'fkit and CDP (GNP until HID1) are available at an annual frequency
from 1976 to 1984, and at a semiannual ti·equency from 1085 until the most recent projection
in January 2003. For the early years, the CBO did not publish projection::; for federal debt
held by the public; those projectionl'i are therefore computed by adding the CBO's deficit
projections for the current and next. five fil")cal years to the stock of debt held by the public
at. t.he fmc! ofthf' prf'violls fisralypar. From t.he OMB, five-year-ahead projections of deficits,
debt held hy the puhlic, aud GNP or CDP are available at an annual frequency from 1983
on. I also collect. projectious for the net illtereHt. component of outlayt>, and for total outlays,
which I will use later
Oll.a
3The 5-year-ahead projection:; of debt. held by t.he public are of cour:;e affect.ed by projected near-term
4
Fignrl's 1 and :2 show t.IH' Hc't.Hai dl'licit.-t.o-(mp ratios and d('ht.-t.o-GDP rat.ios, expressed
as pl'l'('('nt. of Gnp. t.o),!;('\.ll('r wit.h CBO's a.nd OMlfs five-year-ahead projections. The
pl'Ojl'l't.ium; m'(' shown for tht' (fiscal) yl'i\l'
1'111'
whidl t.hey Wt!!'e maclC'. Clearly, both ageucies
1I11ull' larg(' flll't'l·ll....t l'n'ors. hilt. t.his is irl't'I('vllut. for uur p1ll'pose, The ouly relevant question
is wlll'tht'r t.ht'sl' agl'udt's' Pl'OjE'!'I.iolls HCTlII'al.I'ly r(>H(!c:t market expC'dat.iolis at. t.he time
thl' projl,('t.ions Wl'l'(' 1I11Ull'. Whil(~ it is impossibll~ to a.!,sess that issue directly, arguably
thctle agl'lIl'ics' pl'Oj('('t.iulls a1'(' using most of the information about future deficit!! and
debt. ava.ilable at. the t.imt' , although in differput. ways: Whereas the CBO's projections are
usually hasl'd
011
fisml polid('s that. have heen t'llItCteu at the time the projl.'Ctioll is made;
the Ol\ID'tI projl'ltions indude t.he aliminist.mt.ion's policy proposltls. If market participants
belil'\'e that t.he administmtion':,! policies are likely to pass as proposed, their expectations
may be duser to the OMB's projection:i; ill other instances, they may be closer to the
CBO's. It is wort.h noting that over the l:Iamplc for which both agcnciel:!' 5-year-ahead
projC'etions can b(' C'vahmt<'d (fiscal year:'! 1988 to 2002), the biases of the
cno projections
(1.2 percent for the deficit/GDP ratio, 5.1 percent for the debt/GDP ratio) arc larger in
absolute value than thOHe of the OMB projections (-0,7 perccnt and -1 percent respectively),
hut the standard deviations of the CBO's forecast errors (2.9 percent and 10.4 percent) are
slightly smallE'r than those of the OMB (3.1 percent and 12 percent), There is no obvious
reason why investors should prefer one agency's projections over the other, and below I will
pr<.'Sent results using both sets of projections.
For the regressions involving CBO projections, the iuterest rate data are sampled
OIl
the last trading day of the month of the CBO release, For the regressions involving OMB
projections, I use the value of interest rates as recorded
011
t.he last tnuling day of February,
rxcC'pt in those yrars in which a Ilrw administ.ration took offi('c, when I usc observations from
t.he last. trading day of March. Three different interest rate series are considered below: the
yield ('xp<ded 1.0 prevail five year:'! ahE-ad on a lO-,ypar Trra.·:mry not,e, thc yield expect.ed t.o
prev-ail five years ahead on a 5-year 'lh~aJo;lll'Y note, and the (conventional) lO-year constant
maturity Tremmry yield. 4 The first two are measured as simple averagcH of one-year forward
cyclical deficits; howcver, th(, effl..,(,ts of t.he delkit in
small.
4 Although this study fO(;UMCK
Oil
allY
onc giveu year
011
the l;tock of deht is generally
government. yields, it. tdlOllld he noted that the re!mltK arc likely to carry
over to ('orporatt! yil!lds. Bast'd Oil rt'gl't'siiioll aualysis, I find III) t'vidence thaL yield spreads beLwecn corporate
bonds and Treasuries, ruijm;tld fol' cydil'iLl varial.ioll, nfl' ::;ystl'lIIatirally rdat.ed tu projectl'd dl'ficit.-to-GDP
5
rates 5 to 9 ),l'at'S and 5 to 1·1
yield
rHrVl'. r;
Yl'aI'S
alll'acl, n'spcct.iveiy, cakulated from the r,ero-coupon
Nominal int.('t'('st. ra.tes al"l' eOllvl'rted into real interest rat.es m;ing a proxy for
lO-y('ar COllSUllH'r pric{' inflat.ion ('xp('("tations that. is ba..,>('d on survey dat.a for most of the
sampl('; det.ails ut'(' provid('d in the app('ndix. III some regressions the dependent variable
is t.lll' rl'al intl'l"l'st. rat.(',
WIH.'J'('I\.<;
ill otiH'rs it. is t.he nominal interest rate; in these latter
f('!?;r('ssions. inflation ('xI)('('\·at.ions are a\low('d \.0 ('n\.('r wit.h
It
c:o('ffidpnt. diff('rPont. from 1.
TIlt' seri('s of nominal int.('l"l'st ratc's a1l(i ('xpec(.('d inflation, sampled in the months of annual
CBO releasl's, arp shown in figure 3.
For trend grO\\lth, I lISl' CBO's 5-year-ahead projectiolls of the growth rate of real GNP
or GDP as a proxy for agents' views about the trend growth rate of the economy at a given
point. in t.ilU(,. It. is also t.hp growt.h rat,f' t.hat. is consistpnt wit.h CBO's deficit. projections
five years alH'ad. TIl(' equit.y pn'llliUIIl, used as a proxy for risk aversion, is calculated as
the dividend component of national income, expressed as percent of the market value of
corporate equity held (directly or indirectly) by households, minus the reallO-year Treasury
yield, plus the trend growth ra.te. I use the value of the equity premium in the quarter prior
to the rele&'>e of the respective budget projections, assuming that this is the best available
forecast of this variabl(' five years ahead. Because the equity premium is a function of the
real lO-year Treasury yield, the issue of simultaneit.y of the dependent variable and this
measure of the equity premium is addressed below. Both series are shown in figure 4.
3
Empirical Results
Table 1 presents some baseline results, using the real 5-year-ahead lO-year Treasury yield
as the dependent variable. It. reports th(' estimated coefficients on the deficit-to-GDP and
debt-to-GDP ratios, both expressed
1\.0;
percentages of GDP, trend growth, and the equity
premium; the intercept estimate is Olnitted from all tables. Also shown are the R2, the
standard error of the regression, the Durhin-Watson statistic, and the number of observaratios.
5It has oftI'll been notl:'d that forward rates are biaHed predictors of fut.ure interest rates, presumably
because t.hey inrlude tl:'fm and/or risk premia. For the 5-year-ahead H!-year int.erest rate useo here. for
example, the bias throughout the 19!JOs is about 2 pl'reent.. Beeausl:' forward rates are affecting cUT'I'Cnt
illterest rates and hence the current cost of capital relevant for business allu residential investlllent, however,
the fact that forward rates lIlay not be unbiased predietors of future interest rates is not a concern.
6
tions. Tht' t st.at.ist.ics an' has('d
OJI
st.aJldard ('!Tors IISillg HIP Newey- Wpst corrm:tioll for
Ill't.proskl'<ia.'it.icit.y allli s!'rial corrl'iat.ioll; t.1l!' lag t.rullcat.ioll, based
l'ritpria, is :l for t.h!'
cno dat.a.
Oil
automatic selection
alld :2 for t.1l(' OI\H3 dat.a. li
Till' first two rolm II m; show t.h(· J'('sllits fill' t.h(· largc:-;t. dat.a :-;d., t.11(~ CEO projectiolls
illdudinr; t II('
mid-~·('a.r
up<iat.!'s frOlll 1U~!j
011.
Th!' coefficient
0.29 and it.s t :-;t.at.ist.ic is Iarg('. '1'11<' codfici('lIt,
011
011
0)(' cldicit.-to-GDP ratio is
t.he dC'bl.-t.o-GDP rat.io is also highly sig-
nificant. and as argHl'd bdow, its sizto app<,a.rs to t)(' consistent wit.h the est.imated coefficient
Oil
tllP deficit-t.o-CDP ratio. Tn'JI(I growt.h and the equit.y premiulll ('Ilter with :;tatistically
significant allli ('l'Onoll1il'all~' lll('(lnillgful coeHicients. The Durbin-Watson :;tatistics indicate
SOllle degree of :;crial ('orrelatioll ill t.he l'('siduals of hoth regres:;ions. As shown in column:; 3
and --1, omit.t.ing t.lll' lllid-,Vpar updatl's C'limillat,(,s t.his problem wit,hout. significant.ly affect.ing
the other
re~mlts;
in t.he following I will only use the alUlUal CBO data. Columns 5 and 6
:;how that :;imilar re:mlts are obt.ained u:;ing O:ME's projection:;, except that t.he coefficient:;
011 t.he fiscal variable:; are
110
10llger (,'itimated a:; precisely as for the CEO projections.
To provide some idea of the int.erest. rat.e effect.:; predicted by these regres:;ion:;, consider
the CBO's annual projections. Between .January 2001 and .January 2003, the CBO's 5year-ahead projection of the :;lll'plus-to-GDP ratio declined from 3.8 percent to about 0.5
percent. The regression shown in column 3 implie:; that this :;wing rai:;ed the 5-year-ahead
real illterel'5t. rate by 92 basi:; points, everything el:;e equal. Similarly, the projected 5-yearahead debt-to-CDP ratio increased from about 9.5 percent to 28.5 percent; the regression
shown in column 4 implies that, all ebc equal, this :;wing rai:;ed the 5-year-ahead real interest
rate by 99 ba•..,is points.
Tables 2 and 3 examine the rohustness of these result:; along several dimensions. The
dependent variable in these tables cOlltinues to he the 5-year-ahead lO-year Treasury yield.
Despite the llse of long-horiwlI projections, it is possible that the re:;ults may not only
refirct. the effed:> of fiscal policy
OIl
iut-rre'st. rat.es, bll1. may also confound t.hose effect.s with
monetary policy. The early 19808 in particular arc all episode in which both projected
deficit.s and interest rate:; rose sharply, with the latter arguably driven at. lea:;t in part
by the Volcker di:;infiation. The fir:;t. t.wo columns of table 2 t.herefore pre:;cnt the :;amc
regressions shown in tablc 1, using aunua.!
Ii
cno
project.ions only from 1985 on - that is,
A caveat. ill illt(~rpf()tillg t.he t st.at.istics is t.Imt. angmented Dickey-Fuller tests do not reject the hypothe;i5
of a unit. root at. the
!j
percent lewl for (-it her t.he dependl'lIt variable or for the f(·gresHOrs. III view of the
slIIall nlllllher of observatiolls, howpwr, t\1esp
I,(~sts havl~
7
very low power.
aft,f'I" I.hc' mol'll. illt.('lIsc' plul.'1(' of
1, t.11l' (,()l'ffidl'lIt.
Oil
1.11(' disillllal.ioll hac!
\)('C'1l
c:oIllpl<'l.('cl. 7 As showu ill
sli~ht.ly 1/l.I'A(~l',
tIll' lll'lil'it.-to-G))P mt.io is
(:OIUlllU
Rwl it.s t st.at.ist,ic: very high.
Tht' l·l'SIlIt.s shuwn ill mhllllll 2 IIsing thl! d(lht-to-GDP ratio arc lIo.u·ly ideutic;al to tho!:!c
fm' t.hl' ful! SlUllpll'.
A dit£l'l'l'llt. approadl to aSI'lPS~ill~ t.lll' rolc' of t.he' c·arly UJ80li is t.o
1\,';
t hl' dc'pc'udc'ut. vlU'iahh" ami t.o iuc'hull-
C!XP(~c:t,c~d
iuflat.ion a"l
all
UtlC
nominal yield!:!
I\cldit.ioual rClgl'<'.I'ISor. As
shown in ('lllullUlI'I 3 1.0 ti, 1.hl' eo('tiidt'llt. on I'xped.ed iunation iH alwaYK llKlimatcd to be
Il\l'gl'T t.han 1. This fiuC\illg nuW l'C'ilcd.
OJ!
nomillal
1l..'1Sl'hi 1.0
It
c\cmulIlcl by investol's for ill(:reascci risk premia
l·ompl'nsat.l' fol' An'ltt,l'r lllll:l'ltnint,y uhuut futm'e! inflation whcn the
eurrl'ut. Il'vl'i of inflation is l'll'vntc!c1
(tI(!(I
('.g. Okun (1971) and Bnll and Cecchetti (1990)).
be(:nlls(~
In a.ddition, Felclst,l'ill (1976) point.s out tlmt,
tuxes are levied on Ilominal retum!i,
nomiual int.el'est rates haw t.o in(:l't'tI!ip. lIlore than one-fo1'-one with ('xl>ect(rl inflation. Contlequenl.Iy, ill t.het!l' l'l'gl'(lssiollS Uw implied eff(>ct of the ritling deficil.!i of the early 1980s on
real illterl'st
ratt~
is ntt.elluatc'(l. This iH het:au!ie, relntive to the earlier regreHtlionK in whic.h
nomiual yil"lds and E'xper.t.ed iuflat.ion move onc for one by astlurnption, a larger portion of
the high
h~v('l
iufint.ion.
of nominal illtCl'('tIt mt.~ during t.his period itlll0W attrilmted to high expected
COIlHist.l~Ut.
with this
l·t~wmuing,
the
estill1atl~d
cocfficicnts on the fiscal varia.bles
are 8lightly smaU('r than thotle prei:!Cnt.ed in table 1, but tltill highly tlignific:ant.. Returning
to the example above, the l'cHults Hhown in COhllllllH 3 and 4 imply that the revisions to the
CBO'!:! projection!:! h(!tWCCll .Jalluary 2001 amI January 2003 added about 75 basis points to
5-year-ahead long-tcrlll int.erest. ratt'H, all el'le equal. The improvement ill the regrcRRion R2
i!i ahnot.it ent.irely due to the c:lmllge in the dependent variahle,
il.'I
!ihOWll by the nearly un-
cbnnged regrcHtiion Kta.mlu.rd erl'OrH. BCl:UUtlC of the economic argument!:! mcntioned before,
howevcr, the following tubk!tI report l'<"tmltK for l'egrCIi.'iiOllH with nominal yield8 as dependent
variablc!!.
Two i8!iues relat<.'<i to iucluding trend growt.h and the cquity premiulll in the l'egression!i
arr. addre8!ied in table 3. The first. i!i how omitt.ing
011(>
or both of
th(,l:1~
variable!i affects
the estimated cocffic:ient.s on t.he fil:lC'al variablE'll. To be com:iliE', resultlS are !ihown only for
8.JlllUul COO da.ta. Tlw first. two eollllllllM Mhow l'l.lSultK when hot.h varinhlcli am omitted
from the regl'cllSioll, and the next. two colllIllnli lihow re!iuits whcn only the equity premium
7Rmmlt.t; liKing OMB Pl'OjtW,t.iUI\II f\'Om 1UM5 <Ill rU't' lit.t.le d\ltl\g(~cl from t.heJlle IIhoWIl ill ta.hle 1, I\!I ollly the
first tv.'U ubsl'rvllti<)JIz> ure umitt.eel.
8
iK olllittc.'(l. CUlll)lllring t.huKl' l'I.'KnltK t,u 1.Ill' um'K KhuWII ill t,ll(! mid,lll.! two (:ollllllmi of tahle
2,
Wl'
tiud thnt tilt' ('C)c'lfidc'ut.s UII hul.h fisc 'II I wtriah/c's m'(' quit,c' similur wJwtlwJ' ()fl(~ oj' both
of th(' llull-fiKl'llll'l'gl'c'KKUl'H m'c' ClllliU(1(1.
III1Wl'V('l',
I.hc! eXK!flicil'ut.K
011
growth arc csHClltially
Zl'ro \Vhl'll thl' ('qnity 1U't'milllll iK ClmiU,ed,
prcviuu!'l K('('tiou, I will
('olltillll(!
l<br the thtl()l'(!tie:al rllllHOllH disClUlSllCi in the
to illt'lude huth vnl'i~Lhk'li ill the! regressiolls. s
A diffcl'cnt rOll(:e'rll L"I tlmt t.ll(, (''lllity prl.'milllU (:olll.aius t.iu! rr.al IO-yr.ar Trmumry yield,
and
h;
thel'<.>(orc ('urreill.tt..'l..1 with tlw rt'Ki<iulll. In the 18."It two colullllls of table 3 I report
fl>:illlts from n·gn·H!!ioml in whidl I
tht' lagged cquity premiuIIl
ll1-1C
a.~
im:ltrument for the
(,llrrt'llt t'QlIit.y Pl'l'lIlilllll. COIllPIU'('cl to the n.'1mlt!! shown ill the Iniddlc two columIlH of
table 2, thl' only not.abll! dif((lrMlcr. is that the t Ktatitltics 011 the (.'quity premium fall to 1.7,
ThE' rPHUltoH rOllcf'l'lling till! fiH(:al variableti, howr.ver, are roblL'lt.
Table 4 asstllllt'ti
th~
l'fft'Cts of using eitlwr the cUn'ent 100year Treasury yield, or the
5-year Treasury yield expected to prevail five
ycan~
ahead, ilUitea.d of the 100year Treasury
yil'lel ('Xpcctcc.l to prevail five years ahead. For convcniencc, the last two colulllIls repeat
the remdts ShOWll ill t.he
middl~
two colulllns of table 2. The results using the conventional
100year Treasury yield show dearly that controlling for the cyclical variation embedded in
the short (Iud of thE' yield curve is important for identifying the effectti of fitica.l variables
011 interest rates. 9 Once the first. five years of the term structure are omitted, the point
estimates using the 5-ycar-ahp.acl
~year
yield are tiimiiar to those
UI~ing
the 5-year-ahead
100year yield, but 1l0t a.~ prccise. 10
Finally, tablc 5 ('.oIlKidnl"N thn rf(cdK of using two other combinations of fiscal variables.
The first column in table 5 addresses the concern of reversp. r.ausation from the interest rate
to projected deficits through higher outlaytl on debt
~icc.
Here the regrE',s,"Ior itl the raLio
of the primary dcfic:it, dl.'fiut'<i as the projected defidt lc.!KH projected lU!t intercst outlays,
to projected GDP. The coefficient on the primary dp.ficit is la.rger than the coefficient on
the deficit tlhown in tablc 2, R.lld itK t statistic about the same. The second column shows
8Qualitativc1y the
IIIUIIC
l'CIIults obtain when using OMB projl'CtiOllll, exrept that the coefficient on the
debt-to-GDP ratio in the regression including growth remains Il.igJlificant at the 5% Icvel, with a t statistic
of 2.28. It IIhould alllO be noted that. the coefficient on trend growth remainll llignificant in the regrel!SiulII!
lihnwn ill tahlet 3 through 5 when the dependt.'11t vMillblll ill the 1't'I1I 5-ycnr-RheHd 1'reRHury yield.
'Wben uKing the JY'.IJlllJ..ytlllr yield lUi depmldcnt vtLrilLblt', huwevl'r, the welficientli un tile fiscal variabll!ll
remain significant and of similal' lIIagnitud(ll1li thOllC f(!port(d ill the middle two rolurllllli of table I, although
their t IItatistics are IlJwer thlUI thaICl
111 AglLill,
the IHUIIC
COJl("hlKi()IIH
feJl(Jft.cd
obtain
uKing
UII!I'e.
OMB l)roj<octiuIiH.
9
t.hl' rpsnlt.s from im'huliu),!; till' prnj('('1 ions for t.hl' primary <MidI. amI t.ot.al ollt.lays, both
l'xpn'NHl'd a .'l p(!n~('lltag(' III' GDP. ill tlH' J'('gl'l'ssiolls. TIl(' qlll'st.ioll is wll('tiwl' the effectl:i of
deficit.s 011 illh'r('st
rat.l'S
dl'l)('uti on whl't.i1('r tlH' dl'fic:it.s aw ennsed by spcllding increases or
hy dmug(·s ill tIl(' timing of tn.X('s. A('('orcliug to Ili('urclian C!Cluivalcllc(', for example, changes
in Pl'Ojt,('t.l'd dl,fidt.s wit.hout. dlanp;l's ill gOVC'l'lllll('Ut. pllr<~has('H shoulclleavc expected interest
ra.t.t·s ull('hanp;('(l. If so. t.lH' ('(wllid('ut. on t.he
including projret('d
gOVl'l'll11 It'ut.
pl'O.ieet.(~d
dC'[kit.-t.()-GDP ratio iu a wgr<lsHion
purclul.I;('s should be zero. By (:ontrast, the coefficient on
thE' dC'ficit.-t.o-GDP rat.io showll ill t he second colullIn is even higher t.han before, whereas
that
011
projl'ct.l'd t.otal outlays b ncgat.ive, hut litatist.ieally insiguificant. The
SUIll
of the
cQ('ffki('uts Oll tht· t.wo fiscal variahks in colulllll 2 is dose to the coefficient ou the projected
dt>fidt.-t.o-GDP rat.io in colulIln 1. and it.s t st.atistic is 2.67. The cOlluterintuitive sign on
total out.lays lllay in pmt reflect. t.h() fad that total outlays include transfer payments as
well as government purchases. 11
Is thl' ["l'sult that the cstimated coefficients on the deficit.-to-GDP ratio are about sevcn
times as large
ru;
the ones on the debt-to-GDP ratio economically plausible? If increases in
df'firit.s were sE"rially ll11corr('lat.cd, so t.hat. the> e(fed of a project.ed incrca.-re in the dE"!ficit on
the stock of debt in suhsequC'nt yean; would be simply one for one. the coefficients on the
deficit-to-GDP rat.io and the debt-to-GDP ratio ought to be t.he same. But consider the
oPP()lo;itc t'xtrC'Illc, in which ev('ry increase in projected deficits is expected to he permanent.
The st.eady-st.at.e effect on the deht.-to-GDP ratio of a permanent one percentage point
incrcru;C' in t.hC' deficit-t.o-GDP rat.io is (1
+ y)/y percent, where 9 is the net growth rate of
nominal GDP. Over the sample 1976-2003, t.his growth rate averaged about 8 percent per
year, implying that the coefficient. on the dcfi<'it-to-GDP ratio ought t.o be 13.5 times as
large as the coeffieicut 011 tlw debt-to-GDP rati(). The fact that. the estimated coefficients 011
the deficit-t.o-GDP rat.io are about seven tim.,s as large as t.hose on the debt-to-GDP ratio is
consist.cnt. wit.h tlw vic>w t.hat. invest.ors perC'('ive increa.'lE"!s in project.po Oefidt.-to-GDP ratios
as highly persistcnt (a.<; they are ill the historical dat.a), hut not strictly permanent.
liThe rc:mlt.:! Ijhown in tablc!
!j
arC' lIl'arly ullaffl·('tc'li wht'n using ill~tcad the rt'c1.l five-Yt'ar-ahcacl lO-year
yield as dependent variable.
10
4
Are the Results Consistent with Economic Theory?
A IIkl,ltiml "'il'\\' of thl' t'viclt'IlI'(1 prc'K('nt.('C1 in till! pmvions sc!(:t.icm wuuld hold that the
idl'lltifil'ntiull pruhlc'lIls invulve'Cl in thc'S(1 kinels uf rc'grlos,ro;ilJlls IU'e tuu SC'\f(!re tu he! ever
('Olllplc,tc'ly uwn'UllIl'. Om' may t.h('I'('f()f(~ ask wlll!tilC!r the mllpiricul rcmlllt.s eRn h(~ f(!cuucilcd
with prionl hum'd
Ull
l'C'UllUlUic' t.lu'Clry. Onc )lutcntinl IUlswcr to thiN qlU!Stioll, bSl«!d all
thl' lIl'Ot'lIl.";lIic'IU growth mmItal, is sk"tdl(!ci hdowi t.lu! arg11l1U!llt
i..'4
cIOHely ukin to thc Ol1e
dl'wlupl'll in Elmcllliorf IUld Aluukiw (H)U!)).I 2 Dl,(~Ulllie in the lleoclaHliic.al growth IIlodel
thl' rl'nl intl'l'l'St rnh' is c\(,t.c'l'lllill(!(l hy tllE' ('apital-olltput ratio, tile diKCI1Hsioll helow focuses
on the liuk bl'tW«'1l thl' I:ItO(:k of debt mid the capital IJtock, and
8/:lIJCtiHetJ
the plaulJibility
of the result.-; fur the' ek'ht-t.o-GDP l'Iltio reported in the prcviomi Hectioll. AH Elmendorf
8nd AIankiw (1900) puint uut., how('V('r, wlmther it iH deficit!:! or debt that, matter for the
detl'nnination of interC'Ht rntCH
d(~pC!lldH
ultimately
011
wbidl model of colltmmer behavior
one i~l:Illllll~. Thl' iUliUysiH blllow thl'f(!fore illuHtrtl.tCH only one particulur argl.llllent by which
the cmpirical rClmltK can b(~ relnted to (.'Conomic theory.
Suppose that all illCrel:l.HC ill governlllcnt debt reduces the private capital stock by a
fruction c; that i::;, if D denot.(.'!> the Htock of government debt, and K the private capital
stock. OK/OD
= -t:o
The pal'luneter c denot(!K the dcgree of crowding out, with the
remaining fraction 1- (~ hciug tlu~ illcrel~ ill private Kaviugti or capital illflOWtl from abroad
ill respom;c to the increa.':iC in the illtcI'e:lL rate. ASi:lllIlling factors of production earn their
margintl.l product. the nhare of capital ill income, 8, is equal to the marginal product of
capital timl'S the capital-output ratio k
= K/Y.
Moreover, the marginal product is equal
to the 1111111 of the dcpmdation rate tl of the private cupital Htock and the real interest rate
r. Hen('e we call Holve for r
HJoi ,.
= s/k - d.
The effect. of It one p('rcent.age point. iU(,Iea.':ie in the debt-to-GDP ratio on
be computed by calculating the partial dcrivntive Or /OD
a Cobb-Douglas produ('tion nlJl(·ticm l'
= 1(11 L1-1i.
T
can now
= Or'/Ok . Ok/OJ( . (-c).
we find that. k
Using
= Kl- s L -(I-Ii), and
therefore akIaK = (1- s)/Y. Put.ting the pirecs together, an im:relUie AD = O.01Y raises
the interest rate by (1 - s)cs/k2 InlSis point.s.
The final Htep ill obt.aining llulllerical predictions of th(' intel'CHt rate effccts is to choose
values for
C,8,
and k. A::; an example. consider .~
= 0.33. consi<Jtent with a capital IJhare
12 A HilllillLr arglllllclllt iH IlHlld ill O.Jlmc:i1 uf F..cfJllumic Advi'KlI'll (2(X)3).
11
ill national im'ollu' IU'('Uunt.H dllta uf ILhullt
1/:1.
Fur t.he! IUU'IUIU!t.(!r k, C()llHidcr the BEA'H
l'1'Itimatl' uf prh·ILt.l' Iixl'd IIHHI't.!1 nl. till' l'ud of 2Ulli ($22.2 t.rilliun) dividl!d by uut)mt in
thl' nonfll.1'm hUHill('Htl l«,dOl" iu 2(X)2 (nPI)l'()xiuULte'ly $~.4 tl'illicm). This yicldH k = 2,5.
Thl' lllUlit tliHi('ult pnrmlll't.c"l' t.u 'l1Uultify is t.h(,
tUlt! hIullkiw (l900)
I'Illl'Vt'Y it
d('gl,('.(!
uf (:rowuiug out, (:. Elmendorf
lllllUhl'1' uf stmlil!tl whidl show that, uuder 8HslllnptiouH for
houHl'llOlds' intt'rtl'mpUl"lu l·lnl;t.i('it.y uf suhstitutiuu CCJllKiKtcnt with hOllliChold data, the
ill('rl'iUll' iu prhnt.l' Kil\'illgK ill r('HpouKt! t.o tim dUUlgt! in intlll'CHt rut(!K iN cl<»JC to zero,
Mun'O\'l'r. n'C'l'llt. Htmlic.'H in th(' win of Fl'leblt('ill
tUlcI
Horioka (1980) tl11ggClit thut roughly
two-tbinlo.; ()f l-iil\'ing in dt'\"('}op('(1 ('ountricK is retained for domestic iuvestment in the long
run. implying Hmt capitiLI inflowK from abroad OfflK't about one-third of thc illCreatlC in dcbt,
Supposc.', therefore. that (' = n.D. ThcIl n oue perccllti1b'l! point increase in the debt-to-GDP
rat.io raitit'tl t.hp real illt.('luit. l'ate by 2,1 ba.'1iti ]luiuUi, Thill u; uuly half of the effect reported ill
thl'
regrl~~iom;
using till' real iutl'l't'Kt ratl! a.'i depcndent variable, but ouly tllightly Icslf than
the eKtimat.pK n'portt'd in TnhleH 2 nud 3 llHing the nominal illt.ereHt rate as the dependent
variable.
It should hE' noted, hOWl!Vl'r, thut the Cl:Itilllat.c of 2.1
bw;iI~
pointll is conservative because
it takes into considerat.ion the l'ndogcnouH l'c.'1ponsc of output to the decline ill the capital
stock. but it omits the !>eronu-\,ouud E'..ffect tha.t the debt-to-GDP ratio ill effectively increasing by more than one percent.nge point., MOreOVL'l'. a.'i pointed out in the previous I*lCtion,
incre8SeH in projected dejicit.s tend to be highly persiNtcnt, and hcnce a given increase in
the 5-year-abead projL'Cted debt.-to-GDP ratio might he expected to he followed by larger
incrcaset; in the debt-to-GDP rat.io beyond five yeaJ'H into the future, If so, a percentage
point increase in the debt-t.o-GDP ratio projected five ycarll ahead. tlhOllld be asllOciatcd
with an incl'C8.'ie ill interest rates larger than the one implied by a per(,p.ntage point increase
ill the steady _.tate deht-to-GDP rn.tio predicted by thp lllodei.
5
Conclusions
ThiH IItudy hRli tihown that IItatiHLically significant. aud econOlllically plausible a;timates of
tht! t!ffrets of g()~rlllnrut c\r.fi(:it.o; fwd clrbt Oil int.r.l'A>t. ra.tA> C:fUl b(' obt.ainm by focuKing on
long-horizon forr.C'JUjt.s of future drficit.tI or debt, and future illtcl'Ctlt. rat.ct!, The projcctioDK of
defidtK and d~bt publishP.rl hy t.ht! CBO and UIP. OMB are arguably among the bptlt. publicly
12
ava-ilablt' fOf('('i\st.l'I for I.hl'l'Il' variahl"s, TIll' "'[(Ids of
t.iU'I'IP
proj(!C:t.iOllS manif('St. t.hemselves
nt t11t' !oug<'l' ('nd of t.llt' yil'l<l (,Ill'V(" a~ ('('UUOlllk n'Il.'.;()uing would pn·(liet. All chie (~clnal,
the n'~1I1t.s of this stndy SIlAAl'St. t.hat. illt.('I'l'St. rat.es rise hoY about 25 ha."iit> points in n!sponsc
to It }H'l'l'Pllt.app point. ill('I'P'I."i(' ill
POillt.1'I
HI{'
proj('d,(!d
ddkit.-t.()-GDP ratio, UlIU by about 4 ba..,h;
ill l't'SPOllSl' t.o a pPJ'('l'ntag(' poiut. in(,rease in t.lw projeded cleht-to-GDP ratio.
References
[1] Ball. LaUl't>U(:('. anc\ St.f'ph('ll G, Ct~cc:hett.i. "Inflation and Uncertainty at Long and
Short Horizoll!:!." B1'O()ktn!Js Papers on Economic ActitJity 1:1990, 215-245.
[2] CaJlzoneri, ?vlatthew
n.,
Roh<.'rt E. Cumby, alld Rehzad Diba. "Should the European
Cl'utral Bank anel t.ll(~ Fec\('ral Rescrve he Conccrned About Fiscal Policy'!" In
Re-
thinl..'1.:ng Stabilization Policy. Federal Reserve Bank of KallSal:i City 2002.
[3] COIlC'll, DilIrrl. and Olivirr Ca.rnirr. "The Impact. of Forecasts of Budget Drfidts on
Interest Rates ill the Unit.ed States and other G-7 Countrie!:!." Federal Reserve Board,
1991.
[4J
Council of Economic Advisers. Er:onoinic Repu1't of the Pr-es'ident. Washington,
D.C.,
February 2003.
[51 Elmendorf, Douglas W. "Actual Budgl't Deficit Expectations and Interest Rates." Harvard Illstit.ute of Economic R.esearch. May 1993.
16] Elmendorf, Douglas W. "The Effcct!:! of Deficit Reduct.ion Laws on Real Interest Rat.es.'·
Federal Reserve Board, Finance emd Economics Discussion Series 1996-44.
[71 Elmendorf, Douglas W., and N. Gregory l\-1ankiw. "Governmcnt Debt." Chapter 25 in
.John B. Taylor ancl Michael Woodford (eds.), HfLndbook of Macroeconomics, Vol. I,
Amsterdam: Elsevier Sdence 1999.
[8] Evans, Paul. "Int.erest. Rates ancl Expected Future Budget Deficits in the United
States." Journal
0/ Politiml EconmH1J 95
(1987), 34-58,
[9J Feldstein, Martin S. "InflatioB, Income Taxe!:!, and the Rate of Interest: A Theoretical
Analysis." American Economic Revie71166 (1976), 809-820.
13
[10] l<1>ldNt.f'in, l\:Inrt.in S. "Uuclgpl. UI'Jid1.s, Tax Hulf'.H, and Roal InfRr(llolt H.atp.s." NHEH.
Working Papt'l' No. HJ70, .Jllly l!)86.
[11] rl'ldst.l'iu. r..lartill S.• aucl ehal'll's 1l000ioka. "DOlllt'st,ic' Savings nnd InLcmatioual Capital
Flows." Em'ltowif' .1m,.,.,ud Ull
(l!)~()), :n4-:~2H.
[12] Galt" William C .• aucl Pnt.c'1' H.. Orszng. "Thf' E(~llomir. Effl'ctH of Long-Term Fisc:al
Di:;l"iplillt'." Tux Polky Cllut«.lr, Urhan Imltitllte and Brookings IUHtitutioll. December
2002.
[13] KitdlCll • .John. "DolIlC'sti(' mlCl Iut.('l'Imtiollal Fimulcial Market ReHpOl1~ to Federal
D£'ficit. AUUOUllCC'IllC'ut.s." Jounwl of intenuLtional M(}fu~1J and Finance 15 (1996). 23925·1.
[141 KO"t:irki, Sh~u·ol1. amI Pl'ter A. TiulSlcy. "Shifting EndpoilltH in the Term Structure of
Interest Rates," Jm£mal of Monetary Economics 47 (2001), 613-652.
[15] Okun, Arthur. "The Mirage of Steady Inflation." Brookings Papers on Economic Ac-
tivity 2:1971. 485-:198.
[16] Plos:;er, CharlCI:I I. "GovcfllIllellt Financing Dt.'cisioll.".l and Al:Il:Iet Returns." Journal of
Monetaf"g
[17}
PI08SCl',
Economics 9 (1982), 325-352.
Charles I. "Fiscal Policy and the Terlll Structure." Journal of Monetary Eco-
nomics 20 (19S7), 3-13-367.
[18] Wachtel, Paul, and John Young. "Deficit Announcements and Interest RatC!;." Amer-
ican Economic Ret1ietU 77 (1987). 1007-1012.
A
The Data
The OMB dnta arc taken from tIl(! Rml1ml relea.'i(~ of the administration's budget publislu..'d
in l-cbruary, or :;lightly later in year!! ill which a new administratioulook office. The months
of CBO releases wmd ill thiH study (releases omitted from tIm malUa! data. set are marked by
.) are 1/76. 12/76, 1/78, 1/79, 2/S0, 7/81, 2/82. 2/83, 2/84, 2/85. 8/85*. 2/86. 8/86*. 1/87,
8/87*, 2/88. 8/8S·, 1/89, 8/S9*, 1/90. 7/90*. 1/91, 8/91*, 1/92, 8/92". 1/93. 9/93*, 1/94,
8/94", 1/95, 8/95·, 12/95·, 5/96, 1/97, 9/97·, 1/98, 8/98*. 1/99. 7/99*, 1/00, 7/00*, 1/01.
14
8/01*, 1/02,8/02', 1/03. For t.hl' mrty ymrs of the smnpl(~ (1976-1982), constnl<:ting the
tl('rit'tl of both proj('d.l'd dl'ii<"it.s and (iI,ht. ('nt.ails a dlOicl' because the CBO reported different
projl'diolltl of fut.un' ddicit.tl dl'l)('ndin~ mainly
011
alt.ernative asslllupt.iollS rcgarding policy
retlpons('s to tIl(' infiatioll-iwitH'p!\ upt.n~nd ill t.ax re(:('ipts. To be eow;istellt across the
ent.in.' samplt" I
USt'l\
t.lll' pst.illlat.es ha.."iI'I\
011
tlw as:mmption of no policy change. The
.January 1991 proje('t.ions Itn~ BOt. t.IH' CBO haseline, hut arc based
tlis('n't.iomtr~· sl)(,Bdin~
caps, whi('h
W('I'(!
011
the already legislated
t.hl! CBO's ha."lc\inc for the remaindcr of the 1990."1.
Th(' DI'('t:'mlwr 1!)95 projt'ctions an' indllded despite the fact that they were based on a
budget. resolut.ion already wt.oed by t.ll(' Presidellt. By contrast., the August 1996 update is
omitted hec(lutl<.' of ill complete projections, given that the anllual projections had only been
published in l\Iay.
The series of infla.tion expectations, which is taken from the Federal Reserve Board's
FRB/US model. consists of thrC'(' c1iffen'nt pieces. Until 1981:Ql, the series is an estimated
step fuuctioll ba."ied on the dmngepuint model developed in Kozicki and Tinsley (2001).
From 1981:Q2 uutil 1991:Q2, t.he series is based on the Hoey survey of decision makers,
which was conductcd by Drexel-Burnham-La.mhcrt, and latcr hy Barclays De Zocte Wedd.
Participant.s ill this smvey were polled fur their expectation of CPI inflation ten years
ahead. Finally, since 1991:Q3 the series is based on the Survey of Professional Forecasters
conducted hy the Federal Reserve Bank of Phila.delphia, iu which pa.rticipants are asked
for their expcct.at.ion of CPI inflation over t.he next ten years. Thus, while the series is not
idpal for our purposes, it. should providp a good mea."iUfP of inflat.ion expectations over eit.her
of the horizons of the nominal yield series described above. The series is extrapolated to
monthly frequcncy, and is samplcd in the mouths corresponding to thc yield data.
15
Som('(' of Proj<'dioll,c;
(~B(), S('llliallll.
Proj. Odi('it/GDP
eno,
.:2 ~)
.2H
...to
(LllX{)
(l2.()7)
(4.4!) )
Proj. Opht/C:OP
.()G:1
Eq. Pn'lllitllli
.OS:)
.OG2
(r:.).~')2)
(r:,) ..r:)~'»)
Tn'wl Growth
01\113
Allllllid
(:~.:~2)
l.1 L
l.!):}
1.02
1...t!)
Ull
LSI
(4.10)
(:t 70)
(:3.:W)
(:3.10)
(2.()~J)
(2.77)
-. ·11
-AS
-.41
-.48
- .40
-.3G
UX3)
(:Ui!J)
(4.:~2)
(:3.?)8 )
(2.2~)
(2.0!) )
fl".!.
.()1
.44
.flS
.48
.!)8
.4D
S.E.
.G-1
.7G
.70
.8!)
.G4
.70
O\V
1.14
.97
2. Of)
2.07
2.20
2.W
]\'
4G
4G
28
28
21
21
Notes: N('w('y- \Vest t statistics ill parelltheses.
16
Tahh' 2: IkslIlt.s for Short.!'1' Sampl!' awl for NOll1inal Yields
eno,
CBO, UlX;)-:WO:I
Exp. iullat.ioll
NOIll.
1.l!J
(!'i.Ii:l)
.:m
Proj. Ddidt./GDP
Yipld
1.:\2
(!'i.!J(i)
.2:\
(4.17)
((i.:W)
Pl'Oj. D('ilt./GDP
.O5:l
(5.1)5)
1..';8
.GH
Tn'!l() Growt.h
1.11
(:1.4:1)
-.:\7
(:1.12)
(l,!j:\ )
E<1. Pn'lIliUIIl
-AI
(:3.58 )
(2.!JS)
-.40
(4.:1Il)
.O:Hi
(2.4G)
.72
(1.06)
-.45
(3.33)
R'2
.(i8
.!:i8
S.E.
OW
N
.56
I.8(j
.()4
2.16
.92
.69
2.0.)
.90
.79
2.04
19
H)
28
28
OI\H3,
NOlJl. Yi(~ld
1.12
(lO.RH)
.:l!i
(:3.29)
1. Hi
(lO.:n)
.04G
(2.(jS)
1.2G
(2.28)
.86
(2.28)
-.41
(2.41)
(2.19)
.91
.64
2.38
21
.90
.70
2.33
21
-.:17
Notcs: Ncwey-\Vcst t statistics ill parclltheses.
Table 3: The R.ole of Trend Growth and the Equity Premium
cno,
1976-2003
IV
OLS
Exp. Iufla t,jou
Proj. Ddi('it.jGDI'
Proj. Debt./GDP
1.23
(!J.62)
.21
(:UJ6)
-
1.35
(g.9()
1.20
(4.44)
.23
(2.60)
.o:m
(2.(i8 )
.10
(.18)
Trend Growt.h
1.37
(5.40)
.02!J
(1.54)
-.05
(.07)
1.19
(5.73)
.23
(3.96)
.57
(1.14)
-.:33
Eq. PremiulII
(1.72)
R2
.8g
S,E.
.80
1.!i7
DW
.8G
.90
1.55
.89
.81
1.59
Notes: NC'wey-W('st. t st.atistics ill parcnthcst's.
17
.86
.92
l.!i4
.g2
.71
UJ2
1.32
(6.29)
.036
(2.20)
.76
(.94)
-.47
(1.70)
.gO
.80
2.02
Tablt' ·1: TIl!' HoI" of Forward Hat.c·s and Maturiti<.!s
eno,
10-YI'llI" Yi ..I"
1.1;2
1.71
(7.1:Q (7.X5)
Exp. IlIlIat.illll
Proj. D.. iil"it./GDP
l!J7(j-200:i
:,- Y-Ah-5- Y YiC'Jd :,-Y-Ah-lO-Y Yield
1.11)
1.21
l.:n
1.:l2
(5.(j:l)
(5.!J.l)
«(j.71)
(5.!JG)
.O!)
.I!)
(UO)
(2.:iB)
Proj. D('ht.jGDP
.lJ07
(..J5)
Tl'('ud Growt.h
Eq. Pr(,lllinm
.7:J
(1.25)
-.72
.:'!)
.(j5
(.80)
-.72
(lAO)
-.50
(-1.93)
(4.13)
(3.00 )
R2
.!):J
.!)3
.90
S.E.
.76
.79
.79
DW
1.47
1.5:3
1.5U
, Notes: Nl·wl·y-West. t stat.isties ill pal'el1th~('s .
.2:1
(4.17)
.().13
(2.14)
.7(j
.O:~(j
(1.23)
-.54
(3.31)
.u8
(1.53)
-.40
(2.4u)
.72
(LOu)
-.45
(4.30)
(3.:!:i)
.89
.84
1.62
.92
.69
2.05
.90
.79
2.()4
.
Table 5: Other Combinations of FL'ical Variahles
Exp. llIfiat.icllI
Proj. Dl'fic:it./GDP
Out.lays/GDP
Trend Growth
Eq. Premiulll
R2
CllO, 1976-2003
PI'. D(·fic:it
Prima.ry
Ddic:it.
and Out.lays
1.28
1.22
(6.04)
((j.o:3)
.41
.32
(4.75)
(4.35)
-.13
(.97)
.58
(1.46)
-.41
(4.16)
J)3
S.E.
.48
(1.09)
-.41
(3.79)
.93
.68
2.13
JiB
2.00
Not.(!s: NCWl'y-Wcst t stnti:;t.ics ill par('uthl'sp.s.
DW
18
Fil!;lIrt, 1: Act 11<11 awl I'ro.il'd.C'd Ikficit.s
it." p('l'('('llj. of GDP
8.---------------------____________~
1980
1985
1990
1995
2000
2005
c:=:J 100 • Actual Deficit/GOP
c=J eso 5-Year-Ahead Deficit/GOP Projection
_
OMS 5-Year-Ahead Deficit/GOP Projection
Figure 2: Actual aud Project.ed Dcbt.
eli>
Perccnt of CDP
70.---------------------------------.
60
50
40
1980
1985
1990
1995
2000
2005
c=J 100· Actual Debt/GOP
c=J eso 5-Year-Ahead Debt/GDP Projection
I. _
OMS 5-Year-Ahead Debt/GOP Projection
19
Fi!!;Ul'(' :i: IIIt.Pn'si. Hnl.(lS and luHat.ioIl Exppd.at.iolls
16.-------------------______________~
1980
1985
1990
1995
2000
- - 1O-Year Treasury Yield
----. 5-Year-Ahead 10-Year Yield
------- 5-Year-Ahead 5-Year Yield - - - Expected Inflation
Figure 4: Projected GDP Growth and Equity Premiulll
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CBO 5-Year-Ahead Real GDP Growth
----- Equity Premium
20
Page 1 of7
May 17,2006
JS-4267
Testimony of Treasury Secretary John W. Snow
before the House Financial Services Committee
on the International Financial System and the
Global Economy
Chairman Oxley, Representative Frank and members of the Committee. thank you
for inviling me here today. I welcome the opportunity to discuss global economic
developments and the Administration's international economic policy priorities.
The Administration remains focused on achieving strong and durable economic
growth in the United States and in the global economy. Our efforts within the G-7.
the WTO, and the international financial institutions, as well as our bilateral and
multilateral engagement with key economies around the world. are centered on this
overarching obJective,
While the global growth outlook is strong. the Treasury Department is focused on a
number of priorities aimed at reducing risks and strengthening opportunities going
forward, These include:
•
•
•
•
•
•
•
Encouraging growth-enhancing reforms in key economies abroad to
maintain global demand as imbalances are unwound;
Promoting sustained economic reforms in emerging markets to reduce the
chances that less benign financial conditions could lead to financial crises;
Pressing for further opening of international trade and investment;
Strengthening and modernizing the IMF's core functions and governance to
maintain its relevance in the evolving international monetary system;
Strengthening the integrity of the international financial system by rooting
out money laundering. counterfeiting, and terrorist finance;
Urging the Multilateral Development Banks (MOBs) to focus on policies that
promote private sector-led growth. increase transparency, measure results
and fight corruption; and
Promoting long-term debt sustainability to end the decades-long lend-andforgive cycle that has so clearly undermined growth and reform in poor
countries,
U.S. Economy is Source of Strength and Stability for Global Economy
The United States has been a major driver of economic growth in the world
economy for some years now. and I am pleased to report that. with our economy's
outstanding health. we can likely expect the U,S. economy to continue to serve as a
source of global strength and stability in the future.
Real GOP rose an impressive 4,8 percent at an annual rate in the first quarter of
this year, reflecting a solid base of underlying strength in the economy. One
component of strength is consumer spending. The Conference Board measure of
consumer confidence rose smartly in April. reaching the highest level since May
2002, Solid consumer finances reinforce the stability of this spending; net worth is
563 percent of disposable personal income, the highest level since before the
recession (2000:Q4).
I want to stress how broadly the benefits of this strong growth impact Americans.
•
Average hourly earnings are picking up. We learned from this month's jobs
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•
•
report that average hourly earnings have risen 3.8 percent over the past 12
monttls- their larrJe~t Increase in nearly five years. Comparing this point in
the business cycle with the same point in the last business cycle, we're
doing better during this recovery on wages .
The unemployment rate is 4.7 percent -lower than the average for the
1960s, 1970s, 1980s or 1990s. The unemployment rate is dropping sharply
for youths, African Americans, and for the last quarter, hit an all time low for
Hispanic Americans .
The U.S. homeownership rate reached a record 692 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.
The strength of the economy is also visible at the Treasury, as we have seen strong
revenue due to economic growth and rising employment. The Administration
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. This will require determination, but revenue surprises are helpful. The budget
deficit in fiscal year 2006 is on track to come in well below the estimate of $423
billion as projected in the FY 2007 Budget.
Global Economic Developments and Risks
The global economy is also enjoying a period of exceptional growth. The IMF
projects global growth in 2006 of 4.8 percent overall and 6.9 percent for emerging
markets and developing countries. Inflation remains contained, despite high oil
prices, and the financial environment remains supportive of continued robust
growth. This will be the fourth consecutive year of global economic growth above 4
percent - the strongest, sustained growth performance in 30 years. Global growth
is particularly impressive in light of the bursting of the tech bubble, 9/11, the serious
corporate governance scandals of a few years ago. and the sharp Increase in
energy prices. It is especially gratifying that developing economies have averaged
growth of over 6 percent for the last six years.
But even in this strong growth climate we remain vigilant about potential risks.
These include disruptive oil market developments, uneven economic growth
amongst the advanced economies. the potential for rising protectionism, and
emerging market vulnerability to potentially less benign financial conditions.
The continued rise in global imbalances -larger current account balances than
were previously thought sustainable - is a development that particularly needs
attending to by economies with weak growth rates, less attractive investment
climates, or overly rigid exchange rate regimes. While there has been an intense
focus on the U.S. current account deficit, it needs to be understood that our
imbalance is a reflection of counterpart imbalances involving very high saving rates
and export dependency elsewhere in the world. We believe that there will most
likely be an orderly unwinding of these imbalances and we believe that the best
contribution that the United States can make to this process is to continue growing
at our full potential while continuing to reduce our fiscal deficit.
In discussions with key counterparts, I have emphasized that reducing global
imbalances while maintaining global growth is a shared responsibility that will
require contributions from Europe, Japan, developing Asia, particularly China, and
energy exporters. The United States will do its part as well and remains committed
to meeting the President's goal of cutting the fiscal deficit in half by 2009. But the
United States cannot resolve the problem by itself. While Japan's recovery is
broadening and Europe is in a cyclical upswing, the outlook for future growth
remains 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 growth-enhancing spending by energy exporters,
and, where appropriate, exchange rate flexibility, is also needed.
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Among emerging economies, China has a particularly important role to play in
addressing global Imbalances. Rapid growth in investment and exports has fueled
external imbalances and heiglltened risk of boom/bust cycles in the Chinese
economy. Tile Chinese authorities recognize the need to shift the sources of
Chinese growth away frol11 external demand and credit-fueled investment. In this
regard, China has placed strong emphasis on consumption and rural development
in its most recent Five-Year Plan. Increased exchange rate flexibility, which would
give the authorities greater scope to use more market-based policy tools such as
interest rates to manage the economy, is a necessary part of this internal and
external rebalancing, as are reforms in the financial system and a host of policies to
support reduced household and enterprise savings. We are intensively engaged
with China in an effort to bring about greater exchange rate flexibility, balanced
growth and financial sector modernization.
We are closely monitoring ongoing developments in emerging market economies,
especially those having weaker fiscal positions, higher debt burdens. and/or
dependence on commodity prices as they could be tested if financial conditions
become less benign. We have encouraged emerging market finance officials to
take advantage of present conditions to undertake fiscal consolidation and improve
their debt structures, and we have encouraged the IMF to press for structural fiscal
reforms in its emerging market surveillance. Low interest rates, favorable global
liquidity conditions, and improvements in macroeconomic fundamentals and debt
management capabilities have fueled capital inflows and reduced the borrowing
costs for emerging markets. Emerging market spreads are unusually low, having
fallen in recent weeks to record lows of around 170 basis pOints.
One of the Administration's international economic policy goals is to increase global
financial stability. With this in mind, I want to emphasize the importance of reducing
the vulnerability of the global financial system, including emerging economies, by
fostering compliance with international financial standards. Countries where the
institutional environment is well-regulated and transparent tend to demonstrate
better economic performance and greater financial stability. Treasury promotes
compliance with international standards in bilateral dialogues, in multilateral fora
such as the Financial Stability Forum, and in the IMF and World Bank through
support for financial sector assessment programs and integration of financial sector
reform priorities identified by these programs into broader surveillance and country
programs. Treasury is also actively engaged with the standard-setting bodies,
international organizations, and other national authorities in the process of creating
and revising the international financial standards themselves. The Treasury
Department and U.S. financial regulators conduct bilateral dialogues with our
counterparts from a number of key countries - Including China, Japan, India and
the EU - with the objective of encouraging movement toward more competitive,
better regulated financial regimes and mitigating actual or potential cross-border
frictions in the financial services realm, thereby contributing to a stronger economy.
Promoting International Trade and Investment
Free trade and the Free flow of capital are key pillars of global prosperity and
stability. The United States remains fully committed to achieving a very robust Doha
package, with emphasis on real, additional market access in the core areas of
negotiations - agriculture, manufactures, and services (including financial services)
- which would boost growth and provide new economic opportunities domestically
and globally. Given the Treasury Department's specific role in the financial services
talks, we actively draw attention to the benefits of financial services opening in our
bilateral discussions with governments around the world.
The potential benefits from these important trade reforms are enormous. The World
Bank estimates that the global gains from full liberalization of merchandise trade
would amount to $287 billion by 2015, including $142 billion in gains for developing
countries. This would lift an estimated 66 million people out of poverty by 2015.
Additional World Bank analysis also suggests that the benefits of services
liberalization in developing countries could provide income gains more than four
times greater than the gains from goods liberalization alone. Financial sector
openness, in particular, has been shown to increase growth rates by over one
percentage point in developing countries and to disproportionately help the poor,
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making commitments in the financial sector a win-win proposition. Of note, crosscountry analysis shows that greater involvement by private and foreign banks leads
to real benefits for consumers through more efficient lending and higher growth.
But the promise of Doha will not be realized unless we can break the current
negotiating logjam. We are putting the full force of our policy efforts into finding a
way forward The door to a successful Round is agriculture, and the key to that door
is a much more ambitiollS agriculture market access proposal from the EU. In
addition, major developing countries such as China, India, and Brazil have to be
willing to open up their markets in goods and services. We are very mindful that
time is running short, with Trade Promotion Authority scheduled to expire in mid2007.
In the meantime, we are continuing to press forward with an aggressive program of
free trade agreements. The latest countries to be added to our FT A agenda are
Korea and Malaysia. Overall, the Administration has completed FTA negotiations
covering 15 countries, and implemented FT As with eight countries thus far. The
FTAs concluded by this Administration since 2001, combined with the three earlier
accords, now cover roughly $925 billion in two-way trade - nearly 36 percent of
total U.S. trade with the world and 45 percent of our exports. Where we have a
FT A, our exports are growing a healthy 20 percent per year on average, more than
twice the rate of growth for our exports where we do not have a FTA.
Greater openness to foreign investment also provides significant benefits to
countries, whatever their level of development. The United States has concluded
close to 50 Bilateral Investment Treaties that promote open and transparent
investment climates abroad while ensuring that U.S. investors receive the same
non-discriminatory treatment given to foreign investors in the United States. Our
own country's openness to cross-border investment is one reason for the strong
performance of the U.S. economy. U.S. affiliates of foreign companies employ
about five million U.S. workers, account for about 20 percent of U.S. exports, and
spend some $30 billion annually on research and development. It is critical that as
we reform the process for reviewing foreign investment in the United States that we
not unnecessarily harm this critical source of our economic strength.
Modernizing the IMF
The world ecoriomy is changing dramatically, and with it the environment in which
the IMF operates. The global financial system is now dominated by private capital.
Large emerging market countries account for much of the impetus for global
growth. Payments imbalances unimaginable two decades ago now exist. A growing
number of countries are building up foreign reserves as a form of self-insurance,
and IMF credit outstanding is presently at a 25-year low, which represents a
welcome decline in dependence on IMF lending. Despite these changes, the IMF's
basic purposes - promoting growth, stability and monetary cooperation - are as
important today as ever. The international monetary system needs a strong and
centrallMF, but, to continue to playa vital role the IMF needs fundamental reformin its policies and its governance.
Partly in response to calls from the United States, the IMF Managing Director has
set out a medium-term strategy that recognizes the need for fundamental reform.
There is initial progress to report on several of the reforms we believe are of highest
priority.
We have emphasized the need for 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. The IMF has followed our lead on this issue,
and the Managing Director has stressed the need for the IMF to strengthen its focus
on exchange rates. The Managing Director has also proposed new multilateral
consultations, which can bring together the IMF, countries engaged in questionable
currency policies, and countries most affected by those policies.
Critical to maintaining the Fund's legitimacy in many parts of the world is reforming
its governance structure to reflect the growing importance of new economies. The
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United States strongly supports the effort to realign quotas and Board
representation at the .IMF in order to reflect changes in the global economy.
Fundamental reform IS needed If the IMF is to remain legitimate and relevant to its
membership. We have agreed that a first step could consist of a limited ad hoc
increase for the ~)ost under-represented members. But we have emphasized that
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. We are only willing to support a limited ad hoc quota increase at the
IMF Annual Meeting in Singapore if it is credibly linked to a second step that
delivers fundamental reform. This must Include revising the IMF's quota formulas
with GOP 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.
There has been much discussion about the fall in the IMF's outstanding lending, to
$35 billion from $107 billion at end-2003. The fall reflects early repayments by
Brazil and Argentina, as well as more generally better emerging market policies and
an exceptionally benign external environment. This is of course a welcome
development - the appropriate measure of IMF effectiveness is how well it helps
countries and the global system avert or recover from financial crises, not by the
volume of Fund lending.
We are optimistiC that a refocused IMF will strengthen market institutions and
market discipline over financial deCiSions, helping to promote a stable and
prosperous global economy. By dOing SQ, over time markets and the private sector
can supplant the need for the IMF to perform in its current role.
Supporting Economic Growth in Developing Countries
The private sector is the engine of growth in most countries and we continue to
press for the adoption of poliCies which unleash the power of the private sector.
This includes policies that improve the investment climate, increase access to
finance for entrepreneurs. and facilitate business development. Over 70 percent of
the population lacks access to financial services. Continued support for programs
that support micro and SME lending as well as other financial services for the poor
are critical to broadening and deepening economic growth.
Good governance and fighting corruption are fundamental to creating the
investment climate necessary to sustain private sector-driven growth. It is
imperative that development institutions attack corruption around the world that
helps keep nations poor. We support World Bank President Wolfowitz's leadership
on the anti-corruption agenda, and his commitment to develop a framework to
address corruption systematically. We think such a framework should embody clear
and strict criteria conSistent with a zero-tolerance approach to corruption.
All MOBs need to be equipped to attack corruption in borrowing nations, and to
demonstrate this leadership each MOB must have its own house in order. This
requires MOB agreement on a common definition of fraud and corruption, work
which is to be completed by the September World Bank Annual Meeting. It also
requires that the MOBs increase the transparency of their own operations.
strengthen procurement oversight, and implement appropriate incentive structures
for staff.
In borrowing countries, strengthening public financial management is essential to
improving governance and fighting corruption. We have encouraged the World
Bank to expand the coverage of its Public Expenditure and Financial Accountability
indicators so that they can provide a consistent benchmark of country strengths and
weaknesses. MOB procurement must also adhere to the highest standards - such
as those embodied in the World Bank's current policies - rather than rush to use
local systems that do not yet meet such standards. Finally, we have advocated for
increased transparency and accountability, including through the extractive
industries transparency initiative which sets standards for accounting for natural
resources revenues.
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Deep debt relief througll the enhanced Heavily Indebted Poor Countries initiative
and the Multilateral Debt Relief Initiative (MDRI), along with the introduction of a
non-borrowing policy support instrument at the IMF and the use of grants for poor,
debt-vulnerable borrowers in the MOBs, offer prospects for ending the dysfunctional
cycle of lend-and-forgive. But to makp. this happen, debt sustall1ability must become
a central focus of internatiollal financial institution engagement in low-income
countries. Otherwise, the push to Ilelp countries achieve HIe Millennium
Development Goals could lead to another round of over-borrowing, leaving
countries vulnerable once again to debt distress. To ensure that the hard-fought
gains from debt relief are not squandered, it is essential for the World Bank and the
IMF to remain vigilant on low-income country imprudent borrowing. We will continue
to press the Bank and the IMF to improve their joint Debt Sustainability Framework
for low-Income countries. Toward this end, we have developed a proposal for IDA
that would limit the pace of debt re-accumulation, and are discussing the proposal
with Ollr G-7 COllnterparts.
A particularly disturbing development is the emergence of new non-concessional
lending that seeks to take advantage of realized or anticipated debt relief. This type
of "free riding" behavior merits a firm international response. For example. the
Chinese government is vigorously pursuing lending in Sudan and Mozambique,
both of which are expecting eventual MDRI debt relief. In Sudan's case the lending
terms are non-concessional; in Mozambique the terms are still being worked out,
but based on the Sudan case we have serious concern. We have been working
with our G-7 partners and in the Boards of the Fund and the Bank to push for a
presumption of zero new non-concessional debt for countries which are candidates
for debt relief. We are also working through the Paris Club and the international
financial institutions and engaging directly with creditor countries to gain the
adoption of more responsible lending practices.
Fighting Terrorist Finance
Continued terrorist attacks overseas remind uS of the urgency of fighting terrorism
and its illicit finance. We have been at the forefront of a concerted effort to collect,
share. and analyze all available information to track and disrupt the financial
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. Our goal is to draw upon all available financial information to
detect and disrupt terronst money flows.
Comprehensive integration of the IMF and the other international financial
institutions as part of the global war on terrorism has been a consistent policy
priority for the United States. We have encouraged close collaboration between the
international financial institutions and the Financial Action Task Force (FATF) to
assess global compliance with the anti-money laundering and counter-terrorist
financing standards set by FATF.
As a result of U.S. leadership, in 2004 the IMF and World Bank Boards endorsed a
common assessment methodology drafted by the FATF that provides a consistent
framework for assessing compliance with FATF anti-money laundering and counter
terrorist finance recommendations. The Boards reaffirmed this decision this May
and have agreed that comprehensive anti-money laundering/combating the
financing of terrorism assessments will be included as a regular part of all financial
sector assessments and on-going surveillance By the end of 2005, the IMF and
World Bank conducted over 50 country assessments. The IMF and World Bank are
also a key source of technical assistance for countries seeking to strengthen their
counter-terrorist finance and anti-money laundering regimes, and the frequency of
technical assistance missions has increased in recent years, partly due to U.S.
leadership on this issue within the G-7 and the international financial institutions.
We will continue to emphasize that protecting the financial system from abuse is
integral to international financial stability and to call on the international financial
institutions to collaborate more closely with FATF toward this end.
Conclusion
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Page 7 of7
Mr. Chairman. you can see that. while we have accomplished a great deal with
respect 10 our international economic agenda. we remain cognizant of the risks and
opportunities ahead and are focusing our efforts 011 addressing them.
I look forward to workinq with your committee and would be happy to answer any
questions.
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May 17, 2006
JS-4268
Assistant Secretary Lowery to Travel to London to
Attend Annual Meeting of the EBRD
Assistant Secretary for International Affairs Clay Lowery will travel 10 London this
weekend to lead Ihe U.S. delegation at the Annual Meeting of the European Bank
for Reconstruction and Development. Lowery issued the following statement in
advance of this weekend's meetings on the adoption by the Bank's Board of
Directors of the five-year strategic plan, known as the Capital Resources Review,
covering 2006-2010:
"We welcome this commitment which reflects a fundamental strategic shift of Bank
operations to the countries south and east that have not yet completed the
transition process to open market-oriented economies. Importantly, the graduation
of all eight new EU countries from the EBRD over the next few years evidences the
completion of thiS transition for these countries, and allows the Bank to shift fully its
focus and resources to those countries where significant transition challenges
remain. These include some of the Balkan countries, Ukraine, Moldova, the
Caucasus, and Central Asia.
"This is a historic new beginning for the Bank, and I commend President Jean
Lemierre for his leadership on this issue. This keeps EBRD true to its mandate as
temporary development bank focused on helping former communist countries
develop market economies."
a
Lowery will hold a press conference at the annual meeting in London:
Who
Assistant Secretary for International Affairs Clay Lowery
What
Press Conference
When
Monday, May 22, 11 :30 arn. (Local Time)
Where
Hilton London Metropole
225 Edgware Road
London W2 1JU, UK
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May 17, 2006
JS-4269
Testimony of Assistant Secretary for International Affairs Clay Lowery
Before the House Financial Services Subcommittee on Domestic and
International
Monetary Policy, Trade and Technology
On Reform of CFIUS
Ms. Chairman, Ranking Member Maloney, and distinguished members of the
Financial Services Subcommittee on Domestic and tnternational Monetary Policy,
Trade and Tec~nology, I appreciate the opportunity to appear before you today. I
am here speaking on behalf of the Administration, the Department of the Treasury,
and the Committee on Foreign Investment in the United States ("CFIUS" or the
"Committee") to discuss ways to improve the CFIUS process.
Improving the CFIUS Process
We are reviewing the legislation introduced in the Financial Services Committee, as
well as other legislation that has been introduced to update the CFIUS process. We
do not have a formal Administration position at this time, but I would like to layout
the key principles that will guide us as we work with the Congress to integrate
further America's national and homeland security interests. Reforms should
address two broad principles: U.S. national security imperatives in the post-9/11
environment and the need to continue welcoming investment in the U.S. and
creating good jobs for American workers.
To advance those principles, the Administration supports improving
communications with Congress on CFIUS matters. The Administration also
welcomes other reforms to the CFIUS process, including those that enhance
accountability, preserve the attractiveness of the United States for foreign
investment, focus resources on transactions that present national security issues,
ensure due consideration of the nature of the acquirer and assets to be acquired,
strengthen the role of the intelligence community, and improve CFIUS monitoring of
mitigation agreements. The CFIUS process should first and foremost ensure U.S.
national security but should not unnecessarily discourage legitimate investment in
U.S. businesses that will provide income, innovation, and employment for
Americans. In today's testimony, I plan on addressing these reform principles. The
Administration looks forward to a dialogue with Congress regarding reforms to the
CFIUS process. Let me first provide a paragraph or two on the historical context.
As Deputy Secretary of the Treasury Kimmitt described during his testimony before
you on March 1, the Committee examines foreign acquisitions of U.S. companies
pursuant to section 721 of the Defense Production Act of 1950. Commonly known
as the Exon-Florio Amendment, section 721 gives the President the power to
investigate such acquisitions and to suspend or prohibit a transaction if credible
evidence leads him to believe that the acquirer might take action that threatens to
impair the national security and if, in his judgment, existing laws, other than the
International Emergency Economic Powers Act and the Exon-Florio Amendment,
do not provide adequate and appropriate authority for him to protect the national
security. After the enactment of the Exon-Florio Amendment, the President
delegated certain of his authorities to the Committee. Pursuant to an Executive
Order of the President and subsequent Treasury regulations, the Committee
receives notices of transactions subject to the Exon-Florio Amendment and
conducts thorough interagency reviews and investigations to identify potential
national security issues. The President retains the authority to suspend or prohibit
transactions.
3/5/2007
Page 2 of4
Improving Communication with Congress
As Deputy Secretary Kimmitt emphasized in his March 1 testimony, it is clear that
improvements in the CFIUS process are still required, particularly with respect to
communication with Congress and political accountability. The Administration is
committed to improving communication with Congress concerning CFIUS matters
and shares the view that Congress should receive timely information to help meet
its oversight responsibilities. Treasury is now promptly notifying Congress of every
review upon its completion, and the Administration is working hard to be responsive
to Congressional inquiries. The Administration has also offered to conduct quarterly
briefings for Congress on CFIUS matters. These quarterly briefings were scheduled
to begin before the issues with respect to the DP World transaction became the
subject of Congressional and media attention. The Administration is also actively
preparing the 2006 quadrennial report on possible foreign efforts to conduct
economic espionage in the United States or acquire critical U.S. technologies. We
regret that a quadrennial report has not been prepared since 1994, and the
Administration will issue the 2006 report in a timely and thorough manner. I look
forward to your suggestions on how to foster better communication.
While reforms of the CFIUS process should advance our shared goal of improved
communication, they should also reflect the importance of protecting proprietary
information and the integrity of the executive branch's decision-making process.
First, reforms to the CFIUS process should encourage companies to file with the
Committee by ensuring that proprietary information they provide to the Committee
is protected from public disclosure and will not be used for competitive purposes.
Full disclosure of information by companies is critical to the Committee's ability to
analyze thoroughly Ihe national security risks associated with a transaction.
Second, it is important to protect the executive branch's deliberative process and
avoid exposure of classified methods and sources as well as possible politicization
of CFIUS reviews and investigations for partisan purposes or at the behest of
special interests. Third, reporting requirements should take into account the need
for CFIUS member agencies to focus their limited resources on examining
transactions notified to the Committee. I am confident that the Committee can
provide Congress with the information it requires to fulfill its oversight role while
respecting these important principles.
Enhancing Accountability
The Administration supports a high level of political accountability for CFIUS
decisions and is committed to ensuring that senior, Senate-confirmed officials play
an integral role in examining every transaction notified to the Committee.
Improvements to the CFIUS process should also ensure that senior U.S. officials
are focused on national security issues. I know that CFIUS agencies are now
briefing at the highest levels in their respective agencies. However, the President
and Cabinet-level officials should focus their attention on the cases that merit the
greatest scrutiny. The President should focus on transactions that at least one
member of the Committee recommends he suspend or prohibit. Requiring the
President to make a determination when all CFIUS members agree that a
transaction does not threaten to impair the national security would potentially divert
his attention from transactions that could pose security risks.
Similarly, requiring Cabinet-level certification of CFIUS decisions on transactions
that do not raise potential national security concerns would lengthen and delay the
process, presenting an unnecessary impediment to legitimate investment. Such a
requirement would also dilute the resources that the most senior U.S, officials could
devote to transactions that do pose national security risks. This would impede the
Committee's ability to protect the national security as effectively as possible. I am
confident that the Committee can carry out its obligations in a manner that
guarantees high-level political accountability while focusing senior officials on
transactions that raise possible national security threats.
Promoting Legitimate Investment in the United States
The Administration also emphasizes the importance of preserving the
attractiveness of the United States to overseas investors. The intent of the Exon-
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Page 3 of 4
Florio Amendment IS not to discourage foreign direct investment (FOI) generally,
but to provide a mechanism to review and, If the President finds necessary, to
restrict Investment that threatens the national security FOI is Critical to the U.S
economy. Majority-owned US affiliates of foreign companies employed 5.1 million
U.S workers In 2004 Capital expenditures In 2004 by these affiliates totaled $108
billion and tileir sales totaled $2,302 billion. In 2003, these affiliates spent $30
billion on R&D and accounted for 21 percent of total U.S exports Roughly 40
percent of those Jobs were III manufacturing, four times the national average. If
foreign companies were to reduce their spending in the U.S as a result of
perceptions that the United States was less welcoming of FOI, lower investment
would cost American workers good Jobs, reduce innovation. and lower the growth of
the US economy
Reforms to the CFIUS process should send a signal that the United States is
serious about national security and welcomes legitimate FOI. The Committee must
examine each transaction thoroughly, but the timeframes for examination should
not be unnecessarily long In addition, the process should not require investigation
of transactions that could not pOSSibly Impair the national security. Last year, the
Committee received 65 notices of transactions under the Exon-FIOrlo Amendment.
ThiS year, CFIUS filings are on a pace to total roughly 90. Improvements to the
CFIUS process should promote filing of notice with respect to appropriate
transactions but should not delay or deter FOI With no nexus to the national
security. The Committee can best serve U.S. interests through thorough
examinations that protect the national security while maintaining the credibility of
the US open investment poliCY for overseas Investors and the confidence of U.S
Investors abroad that they Will not be subject to retaliatory discrimination.
Focusing on Transactions that Raise National Security Issues
The Administration IS also committed to maintaining the Committee's appropriate
focus on national security. Many transactions notified to the Committee do not raise
national security issues, and requiring extended investigations of such transactions
would send the wrong message that the United States does not welcome foreign
Investment. Reforms to the CFIUS process should ensure that members of the
Committee focus their resources on transactions that could potentially Impair the
national security.
Focusing on the Nature of the Acquirer and the Assets to be Acquired
The Exon-Florio Amendment IS nearly two decades old, and the Administration
supports efforts to update It to reflect the post-9/11 security environment. The
Committee should continue to consider a broad range of national security issues
when reviewing transactions, and Its assessment of threats and vulnerabilities
should conllnue to change as conditions change. Two factors that should always be
taken into account In CFIUS assessments are the nature of the acquiring entity and
the nature of the assets to be acquired. These are essential In weighing the national
security implications of any acquisition. The Administration supports reqUiring the
Committee to consider the ultimate ownerShip of the acquirer and the possible
foreign acqUISition of critical Infrastructure or other sensItive assets when reViewing
any transaction under the Exon-Florio Amendment, both of which are factors the
Committee already conSiders when reviewing transactions.
Mandatory Investigations of acquisitions that do not present national security Issues
would divert Critical resources away from examination of acquiSitions that do pose
potential hazards, however. DUring the current Administration, there have been 281
notices filed With the Committee. Nine transactions have been subject to extended
45-day investigations, and two have reached the President for a final determination.
Requiring an Investigation of every transaction involVing a foreign governmentowned acquirer or the potenllal purchase of crltlcailnfrastructure assets would
result in scores of Investigations each year In which no national security concerns
are present ThiS would diminish the Committee's ability to protect the national
security
Strengthening the Role of the Intelligence Community
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The Administration also believes that the Committee can carry out its role more
effectively by strengthening the role of the intelligence community in the CFIUS
process, which is essential in a complex and changing national security
environment. The Director of National Intelligence (ONI) has begun to do 50 by
assigning an all-threat assessment responsibility to the National Intelligence
Council and ensuring that all relevant intelligence community agencies and
activities participate in the development of final intelligence assessments provided
to the Committee. The Committee recently formalized the role of the Office of the
ONI, which plays a key role in all CFIUS reviews and investigations by participating
in CFIUS meetings. examining every transaction notified to the Committee, and
providing broad and comprehensive threat assessments. The ONI already
contributed greatly to the CFIUS process through reports by the Intelligence
Community Acquisition Risk Center concerning transactions notified to the
Committee, but formalizing its place in the process-and strengthening the threat
assessments provided to the Committee-represent an enhancement of the
intelligence community's role. The ONI does not vote on CFIUS matters and should
not, because the role of the ONI is to provide intelligence support and not to make
policy judgments based upon that intelligence.
Improving the Monitoring of Mitigation Agreements
A further key to improving the CFIUS process is to strengthen the monitoring of
mitigation agreements entered into between entities filing notice under the ExonFlorio amendment and members of the Committee. Typically. the members of the
Committee with the greatest relevant expertise assume the lead role in examining
any national security issues related to a transaction and. when appropriate,
developing appropriate mechanisms to address those risks. Mitigation agreements
implement security measures that vary in scope and purpose according to the
particular national security concerns raised by a specific transaction. Monitoring
parties' adherence to mitigation agreements after the conclusion of the CFIUS
process is an important part of protecting the national security. The Administration
supports reforms that reinforce the authority and provide resources for agencies
that negotiate mitigation agreements to improve existing enforcement practices.
Conclusion
Madame Chair, the Administration already has taken a number of steps to improve
the CFIUS process and to address concerns raised by Congress. I would like to
reiterate in closing that the Administration supports reforms to the CFIUS process,
including those I have discussed, and will continue to work with Congress toward
that end. Sound legislation can ensure that the Committee reviews transactions
thoroughly, protects the national security, conducts its affairs in an accountable
manner, and avoids creating undue barriers to foreign investment in the United
States. All members of CFIUS are committed to working with Congress to improve
the process, understanding that their top priority is to protect our national security.
I thank you for your time today and am happy to answer to any questions.
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May 17. 2006
JS-4270
Remarks of Emil W. Henry, Jr.
Assistant Secretary for Financiallnstilutions
U.S. Department of the Treasury
Before the Exchequer Club
Thank you for inviting me to speak here today. It is a pleasure to be here with all of
you. Prior to coming to Treasury last year, I spent the last 20 years on Wall Street,
as an investment banker and also founder of investment organizations including a
hedge fund business. As you might imagine. I am honored to address a group of
professionals such as yourselves and to be included in such a distinguished list of
past speakers.
I thought I would do something slightly unconventional today.
Over the past few months, I have spoken on a few occasions on the subject of
hedge funds, with a focus on such matters as the risks presented by credit
derivatives, the extent of leverage in the system, the institutionalization of the
business and the implications for risk mitigation, the demise of LTeM and how it
served as a catalyst for institutionalization, opacity/lack of transparency in the
industry. issues for our pension funds and pensioners, and. of course, the potential
for financial system shocks.
After my remarks on these important hedge fund topics, I have noticed a curious
phenomenon - one that occurs with similar certainty to the sun rising in the east.
Namely. after my formal remarks. I typically receive questions from the audience
and press on matters relating to hedge funds that are also formal and revolve
around important issues such as systemic risk. regulation, and legislation - issues
that you would expect an administration official to field in a substantive public forum
such as the Exchequer Club.
When I return to my seat, to my lunch, or to my dinner partner, I receive questions still surrounding the hedge fund phenomenon. but they are of a completely different
tenor. The questions are typically the same, revolving around a couple of general
themes:
• I am repeatedly presented with a reference that hedge funds are a fad, that
they are troublesome for our markets, and that in the long run they will
disappoint.
• More generally, I receive questions such as: what societal good are these
hedge funds really providing? Underlying much of this line of questioning
lies a general dismay at the level of wealth being generated among the
young hedge fund professional community, a curiosity around how exactly
such wealth is actually being accumulated. and a suspicion as to whether it
is reany fair and a good thing for our society that such wealth is being
deposited into relatively few hands.
So. this morning I'd like to address these typically "offline" questions.
But first, allow me to ask a most basic question. just so we are al\ on the same
page: what exactly is a "hedge fund?" Such a simple question, yet there is much
uncertainty and confusion around what these vehicles do, what benefits they
provide. and why people invest in them.
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In short, a hedge fund is a priv<'lte pooled investment partnership that i) because of
its legal structure falls outside many of the rules and regulations governing mutual
funds and ii) has the intention to compensate its general partner (or the legal
equivalent) largely based upon performance.
So, the term "hedge fund" does not refer to hedging techniques or strategies
deployed - though shorting is the common thread - so much as it does to their
status as privately-offered vehicles with umque compensation structures.
Underscoring the notion that there is much confusion around hedge funds is the
fact that there is actually a great debate occurring in the investment-related
academic community as to what exactly an investor is buying when he or she
invests in hedge funds. For example, is a pension's exposure to, say. a long/short
equity hedge fund "hedge fund exposure" (or alternative investment exposure), or
what it really is: more equity exposure (where some of It just happens to be on the
short side)? Is exposure to a fixed income hedge fund "hedge fund exposure," or
simply additional bond exposure?
There is also a great debate about how investors should classify their exposures to
hedge funds. For example, many like me believe hedge funds are not properly
classified when labeled an "asset class." Hedge funds are not an asset class.
There is just too much disperSion of strategy, leverage, and exposure to codify the
group as such.
So with those thoughts as a base, let me read to you a recent Warren Buffet quote:
"Hedge funds are a huge fad. You can pick any ten hedge funds and I'll bet that on
average they will under perform the S&P over the next ten years ... so most of
these hedge funds will not be able to justify their outlandish fees over the long-term
and they will disappear."
Mr. Buffet hits on three concepts here: hedge funds as a fad, a prediction of
underperformance, and high fees. Let me address each of these:
Hedge Funds as a Fad?
A fad is:
'):1 fashion that
is takel1l1p with great enthusiasm for a brief period of time: a craze."
It seems to me the logical place to start to understand whether current interest in
hedge funds is a fad or craze (and by definition would disappear as quickly as it
came) is to understand tile history and context as to Ilow hedge funds came to be.
I think history can give us clues as to whether Iledge funds are filling a void in the
marketplace - addressing a market need - and perhaps illuminate the rationale for
this business's existence.
Hedge funds found their geneSis in entrepreneurs reacting to the Investment
Company Act of 1940's restrictions and limitations imposed on more traditional
forms of money management. For example, mutual funds typically invest only in
"long" positions, must be nearly 100 percent invested at all times, and might be
further limited by a fund's charter restrictions - for example, a health care mutual
fund may only invest in health care equities. Other traditional money managers
often place these very same restrictions upon themselves.
A hedge fund, by contrast, has virtually unlimited flexibility. All strategies are on the
table -long positions, short selling, leveraged holdings, equities, bonds, currencies,
derivatives, multiple industries, et cetera. All of these approaches are available and
widely utilized by the hedge fund community. Because capital tends to gravitate to
where it is least encumbered and restncted, and hence earns the highest riskadjusted return, it IS not surprising that capital migrated from traditional funds to
hedge funds. Of course, like most things in life, one thing's greatest strength can
be its greatest weakness. The great flexibility of the hedge fund structure also
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I~nds it~elf to conduct that ca.~ lead to trouble, the most common being outsized
risk-taking. concentrated positions. and over-leveraging.
Initially. hedge funds were solely the province of sophisticated high net-worth
investors comfortable with the risk profile of such funds and lacking the risk
aversion of the institutional investor class. During the 1990s. however. the growth
of hedge funds began in earnest both in the size of the strategy and the profile of
investor choosing to access it. Such growth now has an inexorable feel of
inevitability. It is now a legitimate investment strategy widely sought out by
institutions and validated by a vast community of pension consultants.
Why did this happen? For a number of reasons. all driven by the power of freemarket capitalism. As the rising equity tide of the 1990slifted all boats, traditional
investment vehicles obviously delivered handsome returns, but alternative asset
classes such as hedge funds did even better. It is, after all, not a tall order to beat
positive indexes merely by adding leverage. Also. because of different
compensation structures. skilled asset managers left traditional money
management shops in droves to open hedge funds - the so-called "brain drain."
These funds required little infrastructure and offered the potential for outsized
compensation.
With the bursting of the bubble. and the ensuing three year decline in equities
(2000-2002). many hedge fund watchers anticipated the "unclothing" of the legions
of newly-minted hedge fund stars - the theory being that all the leverage in the
system would amplify returns negatively in the downdraft in mirror fashion to the
updraft.
Indeed, the opposite happened for a number of reasons.
First, it turned out that those institutions that invested most heavily in hedge funds
during this period tumed in the best relative returns. For example. sophisticated
university endowments. with significant hedge fund exposure. were rewarded
handsomely. While they did not shoot the lights out. those endowments most
heavily allocated to hedge funds actually turned in positive returns amidst the
market meltdown. Their hedge fund managers, it turned out. exploited their natural
flexibility to short stocks and, importantly. moved to cash during market
dislocations, which limited exposure and mitigated loss.
Secondly. the endowment phenomenon did not go unnoticed by the broader
investment community that had experienced losses. Pension funds with traditional
exposures - say. 60 percent bonds, 40 percent equities - were devastated during
this period of strain. The stark contrast of performance between the sophisticated
endowment community and pension funds put a white hot light on the protection
ostensibly afforded by hedge funds in times of trouble.
Third. the underperformance of pension funds caught the attention of corporate
GEOs. The corner office, often oblivious to sleepy pension activities, suddenly
woke up to demonstrably negative returns that impacted that which GEOs hold
dear: their income statements and earnings per share figures.
When the smoke cleared and the dust settled, the wrenching dislocation of the early
millennium served. in a way. to define hedge funds. And many in the investment
community (rightly or wrongly) drew the following conclusion atrout hedge funds:
they will reward you in good markets and protect capital in bad markets - a recipe
for superior risk-adjusted returns. And based largely upon this premise. capital has
continued to flow liberally into the space.
So. that's the fact pattern - the history thus far. You can judge for yourself whether
that sequence will be shown in hindsight to have constituted the building blocks of a
fad.
For my part, I am comfortable saying that hedge funds aren't filling some ~assing .
fancy of a dilettante investor class -like hoola-hoops or pompadours or diSCO musIc
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- but, to the contrary, are a natural reaction of free markets responding to and
gravitating away from the restrictions of certain government-imposed rules and
regulations.
Recognize that much of tile core activity of the hedge fund community has been
imbedded in the proprietary trading desks of Wall Street's largest investment firms
for decades. Merger arbitrage. fixed income arbitrage, convertible arbitrage. paired
trading. distressed debt. leveraged investing - these are all strategies exploited by
Wall Street for years and years. Their main difference from hedge funds today is
that they didn't charge external fees, and that they weren't embedded in separate
legal vehicles. These activities - like water finding its level - have migrated to a
place where the profit motive is best realized and maximized. People respond to
incentives, and the economic incentives of hedge funds, today, are enormous.
So I would generally disagree that hedge funds are a fad. Lightly regulated pools of
capital, enhanced by imminent flexibility to address multiple markets and asset
classes with the ability to rapidly shift strategy and exploit inefficiencies based upon
the prevailing climate, steered by an able investment practitioner describes, in
totality, a recipe for an industry that should have a permanent home in our
investment lexicon.
Hedge Fund Performance
Some have questioned the long term return potential of hedge funds versus the
broader equity indexes.
I checked on hedge funds' performance versus the S&P 500 index. Here are some
interesting numbers:
For the period ending 4/30/2006:
500
CSFBlTremont/Hedge Fund Index
S&P
Past three years
41%
36%
Past five years
57%
4%
Past 10 years
192%
2000-2002
13%
96%
-37%
(One caveat to these numbers: Using Ihese hedge fund indices is fraught with
peril. They are inexact at best due to survivor bias and self-selection. But for
illustrative purposes they are useful. I am trying 10 make a point of directionality
here.)
The data suggests that hedge funds have been fine performers indeed - more
when you consider that they have done so with lower volatility and wilh only modest
correlation to the equity markets (though I note they correlate more closely today
than in the decade past). Indeed. when the equity markets declined for 3 years in a
row (2000-2002) - something unseen since the depression - hedge funds created
value.
However, Mr. Buffet is probably right because 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. In the past
12 months, with capital pouring into the space, hedge funds have returned about
16% compared to about 10% for the S&P 500. In 2005, hedge funds as a group
delivered only about 9%.
The core question is whether this trend will continue and whether returns of hedge
funds over the long term will actually exceed long term equity returns. Why would
investors pay such large fees charged by hedge fund managers simply to deliver
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what can be achieved via an equity index for mere basis points in fees? (If hedge
fund returns do not exceed broad equity benchmarks, I note that the sale legacy of
the hedge fund boom will have been a Illassive wealth transfer to a group of
fortunate entrepreneurial souls born of the late 20tl1 century.)
I think there is evidence to support different answers to this queslion:
On the one hand, it would seem logical that because the hedge fund practitioner
has Illany more investment opportunities and a more robust tool kit than his longonly competitor, he should be able to earn higher long-term returns. As I have
discussed, 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 Olanner 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, consider the follOWing:
•
As risk is reduced through the institutionalization of hedge funds, returns
should, by definition, be reduced 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 thaI increasing levels of short exposure are being accomplished
through exchange-traded funds and other pooled vehicles. Single stock
shorts lend to produce return while shorted pooled funds lend to hedge
exposure and mitigate risk; and
• 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.
So on balance, this prediction is correct. Returns will come down. They already
have started on such a path. Capital continues to crowd out return. The question is
how far down, but I don't think any of us is in a position now to make that
determination. I note that part of the reason returns are lower today is that spread
strategies key off a risk free rate and rates, of course, have been low. Low volatility
as well has had a dampening influence on return. Once rates and volatility rise, I
would expect returns to increase as well.
Outlandish Fees?
But what about these fees? Are they outlandish?
It would seem very logical that, to the extent returns to hedge funds come down and
approximate those of long-only equities, fees for hedge funds will come down as
well. I note, however, in the market today, hedge fund fees are actually rising.
Management fees used to be 1% system-wide, while today 1.5% is the average
and it is not unusual to see 2 to 3% management fees. For performance fces,
which used to be 20% system-wide, it is not unusual to see 25 to 30%.
But does that mean that fees today are outlandish? First, a little arithmetic might
help us make such a determination. Let's take a look at fees from a few angles - at
micro and macro levels, if you will.
First. micro: How do these fee scales actually translate into actual compensation for
a hedge fund manager? Here is a hypothetical example:
About 65% of all hedge funds have assets between $100 million and $1 billion. In
my experience, the average hedge fund in this category of, say, $500 million
charging a 1.5% management fee and a 20% profits' interest, may have typically a
fixed expense base of only a few million dollars that it must cover before distributing
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profits to the founder or other partners. Under these assumptions, annual profits
under various return scenarios are as follows:
0% Return:
10% Return:
20% Return:
annual profits of $4.5 million;
annual profits of $14.5 million:
annual profits of $24.5 million.
For clar.it~, this, of course, is ~II to say that a hedge fund practitioner managing a
$500 million portfolio who delivers what feels like a ho-hum result of 10% (i.e.,
approximating long-term equity returns) might pay himself about $15 million - just in
one year. And, by the way, I note that if the firm implodes in the following year, he
still keeps his $15 million.
Now, let's now look at hedge fund compensation on a macro basis.
The New York State Comptroller reported that total bonus compensation for all Wall
Street firms for 2005 was $21.5 billion. This does not include hedge funds - just
the securities firms. (By the way, this was a new record - exceeding the bonus
compensation of about $19 billion during the bubble in the 1990s - another
indicator of our superb economic enVironment). This total compensation was
distributed among nearly 175,000 financial services professionals, with the highest
going to the investment bankers.
But investment bankers look like paupers next to the hedge fund crowd.
To compare such statistics to the compensation within the hedge fund community in
2005, you need to do a back of the envelope estimate because of the private nature
of the data. This will be a very rough estimate, but, again, I am trying to make a
directional point.
First, assume there was roughly $1 trillion of hedge fund assets under management
at the beginning of 2005. Further assume a 10% return for the year. From such
calculations it is not a stretch to come up with a total of about $30 to 35 billion of
revenue for hedge fund practitioners with distributable profits of at least $20 billion
(especially if you include fees attributable to the fund-of-funds business), or,
roughly, an amount equal to the bonus compensation of the entire Wall Street
financial services community. This is even more astonishing if you consider that
such distributable profit accrued to a fraction of 175,000 professionals. There are
only 10,000 (or so) hedge funds. and one adviser often manages several funds.
(I note that it has been reported that roughly 50 to 60% of the revenues attributable
to those assets might be realized within a fifty-mile radius of New York City, i.e., the
area encompassing New York City and Greenwich, Connecticut, the region in which
most U.S.-based hedge funds are located).
So, back to the question: Is this all outlandish? I would say maybe - it depends and that it is too early to tell. According 10 lhe returns I have discussed - and I note
that those returns are net of all fees - hedge funds have been better performers
than equities. In that context, why should we care what fees are associated with
delivering a superior net result? Speaking hypothetically, imagine you invest with a
manager who delivers 50% returns net of his fees, year in and year out. Do you
really care what his fees are with such stellar performance making you wealthy in
the process? The market clearly doesn't think fees are exorbitant since they have
actually been rising in recent years even with the influx of capital (though of late,
anecdotally they appear to have leveled out).
But like most businesses with such intense new competition, fees must certainly
come down. This phenomenon is already occurring in businesses tangential to
hedge funds - such as the fund of funds business. Perhaps this means that fees
are outlandish, but isn't it a truism of modern day capitalism that the greatest
financial rewards tend to flow towards innovators, early entrants, idea generators,
and entrepreneurs? It is my belief that the promise of such rewards are exactly
what will spark the creative energies and entrepreneurial zeal for our future.
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PRESS ROOM
May 18, 2006
JS-4271
Statement of Treasury Secretary John W. Snow
before the Senate Committee on Banking, Housing, and
Urban Affairs
on International Economic and Exchange Rate Policies
Chairman Shelby and Senator Sarbanes, thank you for this opportunity to testify
before the committee on Treasury's latest Report on International Economic and
Exchange Rate Policies.
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 purposes of
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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 i.s 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 thro\:Jgh 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 Iynchpin 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 barrjers, 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 tradeweighted basis appreciated by over 9 percent last year. China has also taken steps
to craate 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 modemize 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 me 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 U.S.-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 Rata has
called for strengthening IMF exchange rate surveillance in his medium-term
strategy. Further, at the recent IMFlWorld 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.
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May 18, 2006
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Treasury Secretary to Travel to Egypt to Attend BMENA Conference
Treasury Secretary John W. Snow will travel to Egypt this weekend to attend the
Finance Ministerial of the Broader Middle East and North Africa (BMENA) initiative.
The meeting is an opportunity for finance ministers from the region and around the
world to review the concrete progress made by the initiative to build stronger
economies in the region.
In his discussions, Secretary Snow will focus on issues such as encouraging
financial institutions to provide credit to small and medium sized enterprises,
spreading best-practice financial sector regulation, and developing country-bycountry reform plans for improving investment climates.
"I look forward to continuing the beneficial discussions this forum has produced on
building economic freedom in the region through market-oriented reforms," said
Treasury Secretary Snow.
The following events are open to media:
What
Photo-Op at the top of Meeting with Egyptian Finance Minister Soutros-Ghali
When
Sunday, May 21, 9:45 a.m. (Local Time)
Where
Four Seasons Hotel - Sanafir Room
1 Four Seasons Boulevard
Sharm EI Sheikh
South Sinai, Egypt
What
Joint Press Conference with Egyptian Finance Minister Boutros-Ghali and Russian
Finance Minister Kudrin
When
Sunday, May 21, 2:45 p.m. (Local Time)
Where
Four Seasons Hotel - Nasrani Ballroom
1 Four Seasons Boulevard
Sharm EI Sheikh
South Sinai, Egypt
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May 18, 2006
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Statement by Secretary John W. Snow
on the Appointment of John Lipsky to be First Deputy
Managing Director of the International Monetary Fund
I welcome today's announcement that the IMF's Managing Director intends to
appoint John Lipsky as First Deputy Managing Director of the IMF. He is an
excellent choice and a worthy successor to Anne Krueger, who has served for the
last five years with distinction. John brings a first-rate intellect and a wealth of
relevant experience to the position - including a decade working at the IMF early in
his career. I look forward to working with him as he and Managing Director de Rato
move ahead to implement important reforms of the Fund. John Lipsky's
appointment comes at a critical time in the IMF's evolution, and I believe the
organization will be extremely well-served by his broad experience and sound
judgment.
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PRESSROOM
May 19, 2006
JS-4274
Statement of Under Secretary for Domestic Finance Randal K. Quarles
to Bond Market Association Annual Meeting
New York, NY-Thank you very much. Let me say first that we at the Treasury
greatly value our interaction with market participants and the Bond Market
Association and it is a great pleasure for me to be here today to address this
distinguished audience. I plan to focus most of my remarks today on Treasury
market issues, but I want to begin by again highlighting the Administration's views
on the risks posed by government sponsored enterprises (GSEs) and the urgent
need for reform.
Government Sponsored Enterprises
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 of supporting activity in the secondary mortgage market. To
be sure, the mortgage securitization activity conducted by Fannie Mae and Freddie
Mac does in fact provide a public benefit by increasing the amount of capital
available to support mortgage credit, and broadly enhancing liquidity in the
mortgage market. However, the retention of large investment portfolios does not
further this purpose beyond what can be achieved through securitization. Indeed,
these retained portfolios concentrate the prepayment and interest rate risks
associated with mortgages and mortgage-backed instruments in entities that-as a
result of the lower levels of capital they are required to hold-are substantially more
leveraged than other financial institutions. The concentration of risk inherent in
these portfoliOS along with the GSEs' thin capital structure is an important policy
concern and a high priority for the Treasury. The ongoing financial reporting
problems at the GSEs only heighten our concerns.
The Administration's reform proposals are intended to ensure greater regulatory
oversight, enhanced market diSCipline, and appropriate capital requirements for the
GSEs. In order to protect against the systemic risk posed by the housing GSEs'
mortgage investment business, the Administration strongly believes that limitations
should be placed on the size of the housing GSEs' retained mortgage investment
portfoliOS.
The Treasury continues to urge Congress to take action soon to address these
issues. We strongly support Senator Shelby's version of GSE reform and remain
hopeful that by the end of the year we'll have a stronger regulator for the housing
GSEs with the authority and direction to limit the size of their retained portfoliOS. All
Americans have a stake in the success of these efforts, and certainly everyone in
this audience. Fixed-income markets would no doubt be at the center of any crisis
involving the GSEs, and it is imperative that Congress take action now to reduce
this threat to our financial system and economy.
Environmental Factors Affecting Treasury Markets
Turning now to Treasury market issues, as we all know, the Treasury market is a
critical national asset. The market operates remarkably well virtually all of the time,
but there have been a few instances over the last twenty years that have been quite
disruptive including episodes of attempted manipulative or questionable trading
behavior, spikes in delivery fails during periods of very low short-term interest rates,
and periods of severe market distress during major crises such as the fall of 1998
and the aftermath of the 9/11 attacks.
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Unfortunately, there are reasons to believe that the risk of each of these types of
problems will not decline over time and may even edge higher. On the potential for
manipulative behavior, for example, expansion and consolidation in the financial
industry has increased the number of institutions that are capable of taking on very
large positions in Treasury markets, raising the risk that a single firm may gain
effective control over an issue. Similarly, we might expect that the incidence of very
low nominal interest rates and the associated potential for systemic fails episodes
could be somewhat higher in the years ahead. Average inflation rates are now quite
low in most industrialized countries. As a result, central banks that wish to establish
any given level of the real interbank rate will need to need to target a lower nominal
interbank rate than in the past when average inflation rates were much higher. In
short, we probably should not view the very low nominal short-term interest rates
that prevailed in 2003 as a historical aberration-similar economic circumstances in
the future may well lead again to very low nominal short-term interest rates. Finally,
the risk of terrorist attacks and other disasters is regrettably likely to remain a
significant concern for financial markets.
A natural question then is how the basic Treasury market architecture might evolve
over time in response to changing environmental factors.
Current Treasury Market Architecture and Recent Initiatives
First let me take a moment to review some of the key elements of the current
Treasury market architecture. As you know, the Treasury follows a "regular and
predictable" policy in issuing new securities with the goal of minimizing its funding
costs over time and enhancing market liquidity. This policy implies that the quantity
of securities provided at auction is set with a long-run view and does not respond
greatly to short-run movements in market conditions. In addition, the Treasury does
not opportunistically reopen securities that are highly sought after in the secondary
market. Dealers and others typically finance their positions in recently-auctioned
securities in the special collateral repo market. Securities that are in high demand
typically trade at specials rates well below the rate on general collateral, but current
contractual conventions in the repo market essentially establish a floor on repo
rates at zero percent.
One implication of this market structure is that the maximum degree of special ness
in the repo market-that is, the spread of the general collateral rate over the specials
repo rate-is a function of the level of the general collateral rate, which in turn is
largely determined by the stance of monetary policy. When the central bank wishes
to establish very low short-term rates, the maximum degree of special ness will be
quite small. During those periods, we might expect to see greater incidence of fails
episodes because the cost of failing is low. Conversely, when central banks wish to
establish a high short-term rate, the maximum degree of specialness in the repo
market can be quite substantial. During these periods, one might expect to see
somewhat greater incidence of questionable behavior in the repo market given that
the returns to gaining control over a security are higher.
Some recent initiatives by the Bond Market Association (BMA) to promote negative
repo rate trading are an important step toward allowing market forces to determine
the degree of specialness, even during periods when the general collateral rate is
very low. The BMA's recently-issued negative rate repo trading guidelines clarify
the treatment of fails on the opening leg of a negative rate repo agreement and are
an important milestone but much remains to be done. In particular, widespread
negative repo rate trading seems unlikely to develop in the absence of additional
changes in the treatment of repo fails along with changes in the treatment of cash
market fails. If such changes are implemented, the potential for repo rates to dip
into negative territory would be an important factor that could reduce the risk of
systemic fails episodes. Other potential market developments such as the BMA's
work on a margining system for fails could further enhance the functioning of the
repo market and limit credit exposures during systemic fails scenarios.
Negative Repo Rates and the Repo Market Architecture
The potential for negative repo rates also raises broader questions about the
possible evolution of the overall architecture for the repo market. To gain some
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insight into these issues, it seems useful to step back for a moment to consider the
market architecture that most central banks employ in the interbank market for
reserves. Central banks often operate by targeting a short-term interest rate.
Unexpected demands for reserves, however, can push the level of the i~ter?ank
rate above the target rate on any particular day. Many central banks ~alntaln ,a
standing lending facility to meet such unexpected demands. The lending rate IS
usually set at a fixed spread over the central bank target rate. The maximum
degree of upside "special ness" in the reserve market is generally capped by the
spread of the lending facility rate over the target interbank rate and thus is not a
function of the level of short-term interest rates. When reserves are in short supply,
this structure relies on market forces to efficiently distribute reserves up to the. point
at which the market interbank rate reaches or slightly exceeds the lending faCIlity
rate. At that paint, banks often choose to borrow from the lending facility, thus
creating additional supply of reserves to satisfy demand.
As you know, the Treasury recently released a strawman proposal for a securities
lending facility intended to stimulate public comment and discussion. As outlined in
that proposal, a securities lending facility might playa role in the repo market quite
similar to that of central bank lending facilities in the reserve market. Consistent
with current market conventions, the strawman proposal assumed a lending rate of
zero percent at the securities lending facility. In this structure, the specials market
would operate much as it does today; the rate for highly sought after securities
would fall below the general collateral rate. And when the specials rate dropped all
the way to zero percent, market participants might choose to borrow securities from
the securities lending facility.
Some early market commentary on the strawman proposal has viewed the BMA's
work on negative repo rates as a "market alternative" to the proposed Treasury
securities lending facility. As emphasized in our public comment document, the
Treasury has not taken any position at this point on the desirability of establishing a
securities lending facility. But I would note that the BMA's negative repo rate
initiatives and the proposed Treasury securities lending facility need not be viewed
as competing proposals and, indeed, could well be complementary. For example, in
the strawman proposal, market participants would not have a strong financial
incentive to borrow from the securities lending facility even when the specials rate
reaches zero percent because current market conventions allow market participants
to fail to deliver the securities at an effective rate of zero percent. However, if
market practices evolve so that market repo rates could be negative, then-just as in
the case of central bank lending facilities-the potential for the market rate to move
beyond the securities lending facility rate would provide an important financial
incentive for market participants to borrow at the securities lending facility.
If market participants took the steps necessary to foster active negative rate repo
trading, there might even be a rationale for reconsidering the structure of a
securities lending facility. For example, again following the example of central bank
lending facilities, it might be desirable to establish a securities lending facility rate
that was set at a fixed spread below the general collateral rate. In this framework,
the maximum degree of specialness in the repo market would then be independent
of the level of short-term interest rates.
Of course, we are a long way yet from active negative repo rate trading and a
Treasury securities lending facility has not even passed the proof-of-concept stage.
My point is simply that these potential structural changes and the associated market
implications are closely related and need to be considered in tandem.
Securities Lending Facility Proposal: Some Potential Risks
So far, I've described the possible directions for the evolution of the repo market
architecture with something of a 30,OOO-feet-up perspective. But such grand views
often obscure difficult terrain below and that is certainly the case with Treasury
securities lending facility. As I have noted, a securities lending facility could
potentially playa useful role in the Treasury market, but there are some important
caveats to note as well. ~ will not review all the detail~ of the Treasury's discussion
paper here, but I would like to touch on some of the Important issues that have
surfaced in the early discussions about the merits of such a facility.
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Moral Hazard and Market Risks
One contentious issue concerns the potential risk that a securities lending facility
could exacerbate moral hazard. Some have argued, for example, that the
establishment of a securities lender of last resort would represent a form of
insurance that, in effect, "bails out" investors with short positions and thereby
encourages risky trading behavior. Others have argued that the current contractual
arrangements in the Treasury market already limit the potential costs of shortsellers. Moreover, the potential for moral hazard already exists, in part because
during a systemic fails episode, market partiCipants have been able to obtain
regulatory forbearance on the rules applicable to aged fails. Still others have argued
that moral hazard concerns may be misplaced because a well-designed securities
lending facility would not really be an "insurance policy" that simply redistributes
mar1<et risks, but rather a mechanism for reducing overall market risks.
At this stage, the Treasury hasn't come to any firm conclusions on this point and we
hope that public comments on the strawman proposal will be helpful in sorting
through some of these issues.
Gaming
The potential for inappropriate use of a securities lending facility is also a concern.
The white paper discusses a number of parameters of a securities lending facility
such as forward delivery, prompt disclosure of the aggregate amounts borrowed
from the facility, and potential reporting requirements during the period of borrowing
that should help to mitigate the risk of gaming. These technical parameters may be
effective in limiting the scope for some types of inappropriate usage, but even these
safeguards are probably not air tight. The experience of other countries with
securities lending facilities in place suggests that gaming has not been a large
problem in practice-but we are cautious about drawing strong inferences for U.S.
markets from foreign experience.
Reopenings
Another key question regarding the securities lending facility concerns whether or
not the problems that it is intended to address could be resolved nearly as well by
other, less intrusive means. For example, some have noted that the Treasury could
simply reopen securities on those very rare occasions when systemic risks appear
to be particularly threatening. Of course, reopenings are a blunt instrument in that
they raise the supply of an outstanding security for a lengthy period and therefore
represent a Significant departure from the Treasury's regular and predictable
issuance policy. Moreover, discretionary reopenings would no doubt prompt a great
deal of speculation about the circumstances that would trigger a reopening. On the
other hand, some have also noted that a reopening to address only very rare
systemic crises could well be effective and would probably not entail the same
ongoing concerns about moral hazard and gaming associated with a securities
lending facility.
Market Surveillance
Finally, let me say that even in a world with negative repo rates and a securities
lending facility, there would likely still be considerable scope for manipulative
behavior in the market. As a result, the need for the type of market surveillance
program that is currently in place would remain.
As you may know, following violations of Treasury auction bidding rules in the early
1990s, policy makers formed an Interagency Working Group to perform Treasury
market surveillance. This group continues to monitor trading in wholesale cash,
derivative, and repo markets for Treasury securities. The Interagency Working
Group holds routine biweekly surveillance calls to coordinate effort and to share
observations and other materials among partiCipants.
The Interagency Working Group includes representatives from the Treasury, the
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SEC. the CFTC, the Federal Reserve Board, and the Federal Reserve Bank of New
York. Coordinated surveillance among official entities, each with existing interests in
Treasury market functioning and regulation was seen as the most appropriate
response to issues raised by Treasury auction rule violations. By detecting
anomalous price patterns, reviewing reported positions and trading volumes, and
considering commentary from market participants, the members of the Interagency
Working Group foster market transparency and efficiency without imposing undue
regulatory burdens on the market.
Since the end of 2004, questionable behavior in the financing and futures markets
has increased including cases involving concentrated positioning and increased
control of individual Treasury issues among a small subset of Treasury market
participants. Through this period, the Interagency Working Group has shared
information across markets and coordinated policy responses. When the
Interagency Working Group has identified cases that merit further review, it has
forwarded the information to the appropriate enforcement agency for investigation.
The increased frequency of situations raiSing surveillance concerns makes this an
opportune time to remind all Treasury market participants that questionable trading
behavior has consequences and can result in increased regulatory scrutiny and
referrals to enforcement authorities. So for the record, I would urge any traders that
establish especially large positions in any Treasury issues to tread very carefully.
We understand that very large positions in and of themselves may be benign, but
large positions coupled with very tight conditions in cash and financing markets can
lead to questions. So consult closely with your managers and compliance officers.
And I would also urge senior managers to make sure that you keep a watchful eye
out for any questionable activities across any of your trading operations. The
Treasury along with our colleagues at the other regulatory agencies certainly will
be.
Conclusion
To sum up, the basic architecture of the Treasury market is evolving in response to
changes in environmental factors. Indeed, the Bond Market Association's efforts to
facilitate negative rate repo trading is a very significant step in this process. And it
may be that a Treasury securities lending facility could also be an important
structural change that would enhance the resilience of the Treasury market. As I've
mentioned, however, the jury is still hearing evidence on the merits of such a
facility. We expect that market surveillance by the Interagency Working Group will
continue to be an important function as the market evolves. All Treasury market
participants have a responsibility to conduct business in a manner that supports
market efficiency, liquidity and transparency; the Treasury along with our
colleagues in the Interagency Working Group remain committed to fostering those
key objectives. Thank you very much.
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May 19, 2006
JS-4275
The Honorable John W. Snow
Prepared Remarks to:
The Bond Market Association
Thank you for having me here today. It's always good to visit with your group. Yours
is the largest fixed-income market in the world, with Treasuries at its center, so it is
good and fitting that we maintain open communication and a productive working
relationship. I hope you know that our goal at Treasury is to always ensure that the
bond market continues to be the largest and strongest in the world.
On the specific issue of Treasury bonds - some have asked why we chose this
year 10 reintroduce the 30-year. Well, this is the 30 th anniversary of your
organization, so it seems appropriate, if coincidental.
In all seriousness, congratulations on this milestone. Your 30 th year has been an
important one. During this year, you worked closely with Congress to help provide
critical relief for the areas of our country devastated by hurricane Katrina. Your
leadership on the issue helped Congress find innovative ways to help the Gulf
region - like using private activity bonds in the GO Zone Act - and you are to be
commended for your efforts.
On Capitol Hill recently, we all faced the threat of tax increases. With the
President's critical, pro-growth tax relief set to expire, and with more middle class
citizens teetering on the edge of AMT exposure, Congress needed to act.
Fortunately they did, and workers, investors, businesses and really the whole
economy achieved a real victory. I was proud to stand with Congressional leaders
this past Wednesday while the President signed the new tax bill into law which
avoided a tax increase on millions of Americans by extending low tax rates on
capital gains and dividends, extending increased expensing for small businesses,
and protecting taxpayers from the reach of the Alternative Minimum Tax.
The extension of low tax rates on investment capital is good news for workers
because it will provide certainty and growth opportunities for the employers who
create jobs. It was good news for America's investors, which today is increasingly
comprised of middle-income families, and people of all ages who are investing in
their own retirement.
Protecting taxpayers from the AMT was extremely important and part of the critical
element of continuity, certainty, that the Tax Relief Extension Reconciliation Act has
brought to taxpayers and markets alike. When it was created, the AMT was
designed to ensure that wealthy people paid their fair share of taxes. Instead, it is
ensnaring millions of unsuspecting taxpayers.
A long-term solution for the AMT, of course, will need to be addressed through
fundamental tax reform - and this is an issue on which the President and I
appreciate your support. The President's Panel on Tax Reform did outstanding
work, the kind of work necessary to start the national discussion on this truly
massive issue. Reform of the code is so important and the opportunity to really
improve it only comes around every twenty years or so, so we want to be sure that
we get it right. At this early stage we must consider all options carefully and be sure
that we are creating a tax system for all Americans that is simple and more fair.
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Addressing and solving the long-term unfunded liabilities of Social Security and
Medicare are similar in that solutions must be thoroughly examined, debated and
thoughtfully implemented. While saving those programs is an issue that I consider
quite pressing, it is also true that we have no choice but to get it done right.
When I visited your group last year, we talked mostly about the issue of Social
Security reform and I appreciate your support of reform - an important part of which
would be personal accounts. The President remains dedicated to this issue, for the
sake of our children and grandchildren, and I know he is pleased to have your
support on it. We understand that unfunded obligations are real obligations and we
have a shared interest in solving the problem of the government's long-term
unfunded liabilities.
As we celebrate the 30 th anniversary of your group, we are also marking the third
anniversary of the Jobs and Growth Act, another piece of good tax legislation which
propelled the economy on a good path.
In the three years since its enactment, job creation has been very strong - over 5.2
million workers have jobs today who didn't three years ago. The unemployment rate
is lower than the average of the 1960s, 1970s, 19805 and 19905 at 4.7 percent.
GDP growth has been excellent, around 3.5 percent last year and a very impressive
4.8 percent rate for the first quarter of this year. That was the fastest growth rate
since 2003 and the fastest of any major industrialized nation.
Consumer confidence is at its highest level in nearly four years, business
investment has seen 12 straight quarters of positive growth and given strong labor
markets, we should see compensation rise in the months ahead.
At an average of 2.41 million over the latest four weeks, the number of people
receiving unemployment insurance benefits is at the lowest level since January
2001. Overall growth is strong, and while it's true that headline inflation has picked
up, core inflation remains in check. I have full confidence that Chairman Bernanke
and the Fed are committed to price-stability and understand that this is their No.1
priority.
I mentioned business investment, and I want to point out that it is not only growing,
it's 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.
Rarely in public life do we get to see a real test of an economic policy theory. But
three years ago we put together a hypothesis: Are low tax rates consistent with
growth and increasing revenues? Our critics said "no," but the evidence is a
resounding "yes."
Of great importance to the country, and particular interest to this group, is the effect
of low tax rates and robust growth on our budget deficits. Again, the results are in
and they are clear: economic growth has led to a surge of tax revenues and
shrinking deficits. Despite the cries from our critics, it cannot be denied that low
taxes truly are consistent with rising federal revenues - which of course help bring
the deficit down.
The numbers don't lie: With lower tax rates and higher growth, the federal
government ran a monthly budget surplus of $118.85 billion last month, with tax
receipts at all-time highs. In fact, government receipts are now close to their historic
average of about 18% of GDP and are projected to rise above it. Lower tax rates
are, in fact, consistent with rising revenues as job growth returns to natural levels.
Those strong April receipts were really just what you would expect with an economy
that is growing, expanding, creating jobs and with rising equity markets.
The Congressional Budget Office, notably, recently released new estimates on the
budget deficit for the year, bringing it to the range of $300 to $350 billion. Our own
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estimates will be out sometime soon after we complete the mid-session review' I
am confident we will continue to see good progress on the deficit, and that the'
President's objective of-cutting the deficit in half will be met and exceeded ahead of
schedule.
Th~re is much obvious good news in deficit reduction: it increases long-term
savings, helps the U.S. do our part to address global imbalances (to which the
finance ministers of the G7 are intellectually and practically committed), and it
reduces market uncertainties.
The bad news for the bond market is, of course, that there will be less debt to issue.
But I think you'll agree that the good news is the clear winner on this issue.
I want to comment briefly on another pressing economic issue that I know this
group cares deeply about, and that's pension reform.
This Administration is 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
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.
Before taking your questions, the last issue I want to touch briefly on is that of the
Government Sponsored Entities, in particular the concern about the concentration
of risk inherent in their portfolios.
I know Under Secretary Quarles discussed it in his speech to you this morning, but I
simply want to echo that the Administration's reform proposals are intended to
ensure greater regulatory oversight, enhanced market discipline, and appropriate
capital requirements for the GSEs. We believe that limitations should be placed on
the size of the housing GSEs' retained mortgage investment portfolios, and that the
GSEs should have a "world class" regulator with the authority and direction to limit
the size of their retained portfolios. We continue to urge Congress to take action
soon to address these issues.
Thanks again for having me here today; I look forward to taking your questions
now.
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May 22,2006
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Statement by Clay Lowery
Assistant Secretary for International Affairs
Annual Meeting of the European Bank for Reconstruction
and Development
London, ENGLAND - I am pleased to be in London for the 15th Annual
Meeting of the EBRD. On behalf of President Bush and Secretary Snow, I would
like to thank our UK hosts, President Lemierre, and Bank staff for making this event
a success.
I also extend a special welcome to the incoming First Vice President of the EBRD,
Mr. Varel Freeman, who comes to the Bank at an important time of change. We
thank Steven Kaempfer for his extraordinary service to the EBRD both as Vice
President for Finance and as interim First Vice President during the past year. We
wish him well in his future endeavors.
The CRR period just ended was a time of great success for the EBRD. During this
period, eight countries of operation completed the kind of political and economic
transition envisioned in the Bank's charter. These countries, the EU-8, have
established:
•
strong rates of economic growth reflecting simplified tax regimes with low
rates of taxation;
• substantial inflows of foreign direct investment;
access to EIB funds and EU structural and cohesion funds as members of
the European Union for the last two years: and, most important from the
transition perspective; and
• strong financial sectors which can meet the needs of the marketplace.
As the EBRD enters its third Capital Resources Review period, it stands ready to
shift its focus fully to the countries to the East and Southeast. The Bank has
considerable strengths with which to meet its remaining transition challenges. It has
15 years of transition experience, a capable and knowledgeable staff, strong
profitability, ample reserves prudently calculated and no need for further capital
from its shareholders. Its expertise in financing local entrepreneurs, specifically
micro, small and medium-sized enterprises, will continue to be of particular
importance in the early transition countries. There are challenges to be sure, but the
Bank has the right mix of resources and the right mandate to finish its mission by
assisting the remaining countries of operations in their own transition processes.
Management of the Bank's own transition will be the center piece of the next CRR
period. To achieve this, the Bank has a strong CRR strategy that includes:
•
•
•
ending new operations in the EU-8;
closing and consolidating EU-8 resident offices to manage existing
investment portfolios; and most importantly; and
a clear commitment to reallocate resources to the early-intermediate
transition countries south and east, in support of the Bank's new strategy.
We are pleased that all shareholders approved this strategy, and we understand
that several EU-8 countries are already making plans to graduate - when this
happens, we should all celebrate this leadership.
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Of course, in implementing its transition mandate the Bank must adhere to sound
banking principles and financial additionality, as public monies should not compete
with the private sector. We also strongly support the decision to require much
greater specificity in annual business plans beginning with 2007. This is necessary
to enable shareholders to measure management's performance in implementing
each plan.
The new CRR marks a historic turning point for the Bank, and I commend President
Jean Lemierre for his leadership on this issue. This CRR keeps EBRO true to its
mandate as a transition, not a permanent, bank focused on helping the former
communist countries of Eurasia develop market economies.
For the same reason that the Bank is closing offices and consolidating its presence
in the EU-8, the Bank needs to expand its resident office network in Ukraine, the
poorer parts of Russia, and other countries to the East and Southeast. We will
support such an expansion whenever a solid business and transition case can be
made for it. This is particularly true in the early transition countries where the ETC
Initiative continues to provide the benefits of EBRD operations to the most critically
underserved clients. In this context we look forward to welcoming Mongolia as the
final addition to the list of countries of operation. We also strongly support continued
cooperation between the EBRD and our donor agencies on the ground particularly
in the Early Transition Countries. We especially welcome cooperation between the
EBRO and the Millennium Challenge Corporation in Georgia and Armenia.
A more intense focus South and East will allow the Bank to playa greater role in
key regional development challenges:
•
•
•
•
It can help promote stability in Kosovo by moving quickly, once final status
is determined, to support a private sector that provides jobs and growth.
In Central Asia, the EBRO can help spur regional investment and greater
trade, transport and energy links to South Asia.
It can be instrumental in promoting greater energy efficiency in places like
Ukraine and Moldova.
And It can continue to expand its micro and small business lending program,
one of the most successful of its kind in the world, to broaden access to
capital in these areas.
With respect to investment in energy infrastructure, we expect the EBRO to be
increasingly called upon to help companies adopt cleaner, more efficient
technologies. In providing such support, we believe it is important for the Bank to
limit its activities to projects which promote transition and exhibit sound economic
fundamentals. Any EBRD business line should be conducted within the context of
the Bank's transitional mandate and the portfotio shift required by the eRR.
To promote good governance in the region, the EBRO must make sure that its own
practices are best practices. We are pleased that the Bank is now implementing
improved grievance and appeals procedures as well as a new, modern code of
conduct which includes disclosure of financial interests. While we believe that the
new Public Information Policy fell short of what it could and should have achieved,
we recognize that it has improved the transparency of the EBRO's operations. We
also commend the Board and the Management for breaking new ground among the
multilateral development banks by agreeing to disclose the compensation provided
to members of the Board of Directors as well as senior management. We continue
to believe that reviewing the operations of the Board and determining whether it
provides good value for money should be part of the process of bringing the Bank in
line with best corporate practices.
We have worked closely with our U.S. Congress in strengthening anti-corruption
policies at the MOBs. Achieving this goal requires improved cooperation among the
MOBs. We commend the EBRO for its efforts to combat corruption and to prevent
money laundering and terrorist financing, but we recognize that there is still room
for improvement.
As the Bank discusses its annual business plans, it should, of course, be prudent in
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establishing and maintaining reserves and in approaching the risks that it will face
in the coming CRR period. The Bank's finances are strong, and its profits are large
and unprecedented. In this context, we support the proposal to include certain
donor-supported activities, such as the Legal Transition Program and the TAM and
BAS programs, in the operational budget. We should also consider the full range of
potential uses of the Bank's capital, including payment of dividends.
In conclusion, we are pleased that all of the shareholders came together in the CRR
to reaffirm the Bank's mandate as, ultimately, a financial institution with a specific
and finite transition mandate. We celebrate the coming graduation of all EU-8
countries in the CRR-3 period because it is a sign of their and the EBRO's great
success. First the EU-8 and eventually others will come to support the Bank with a
new maturity and confidence simply as shareholders rather than as shareholders
and countries of operations.
With the new CRR strategy, the Bank's management has the necessary policy
guidance and tools to complete the task assigned to it fifteen years ago. We wish
the Bank and all those associated with it well in the new eRR period.
We think today is a time to celebrate the EBRO's leadership. It led the way in
helping transition Eastern European countries to market-oriented economies. It led
the way in creating viable, professional financial institutions that frankly displace the
need for the EBRO. It led the way in being a focused, disciplined development
institution, instead of trying to be all things to all people. The result of this leadership
is the opportunity and obligation to show further leadership. It can lead the way in
showing countries can be successful and graduate. It can lead the way further into
countries in need of transitional assistance. And it can lead the way in showing that
development institutions can be transitional and can be successful.
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May 23,2006
js-4277
Press Briefing: Treasury Department Reaction to OFHEO Report
Treasury Under Secretary for Domestic Finance Randal K. Quarles will hold a
press briefing today at 2:30 p.m. in the Treasury media room to discuss the
Treasury Department's reaction to the Office of Federal Housing Oversight
(OFHEO) Report on the Special Examination of Fannie Mae.
Who
Under Secretary Randal K. Quarles
What
Treasury Reaction to OFHEO Report
When
Where
Tuesday, May 23, 2:30 pm (EDT)
Treasury Department
Media Room 4121
Media without Treasury press credentials (including media with White House
credentials) planning to attend should contact Anita Hunt in Treasury's Office of
Public Affairs at (202) 622-2920 or anita.hunt@do.treas.gov. Please be prepared
security number, citizenship
to provide the following information: full nrand date of birth.
ttp.WWW
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PRESS ROOM
May 23,2006
js-4278
Under Secretary Randal K. Quarles Statement On Treasury Reaction to
OFHEO Report
Treasury Under Secretary for Domestic Finance Randal K. Quarles issued the
following statement today on the Treasury Department's reaction to the Office of
Federal Housing Enterprise Oversight report on Fannie Mae.
"The OFHEO report released today substantially amplifies previous findings of
misconduct and mismanagement at Fannie Mae over many years. Significantly,
the OFHEO report shows that Fannie Mae's faults were not limited to violating
accounting and corporate governance standards, but included excessive risk-taking
and poor risk management as well. The report demonstrates that Fannie Mae
mismanaged the interest rate risk of its ballooning investment portfolios, leading to
billions of dollars in economic loss. Its leadership manipulated earnings to reach
compensation targets and to mislead investors as to the real condition of the
company. The report reveals that Fannie Mae's carefully crafted image of being
low-risk and well-managed was an illusion.
"OFHEO's findings are a clear warning about the very real risk the improperly
managed investment portfolios of the GSEs pose to the greater financial system.
The report demonstrates that a legislative mandate limiting these portfolios, as
proposed in legislation pending before the Senate, is crucial to reducing systemic
risk and refocusing the GSEs on their fundamental mission. Treasury remains
committed to working with Congress to pass reform that establishes a GSE
regulator of the highest standards with both the authority and the mandate to
address these critical issues."
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.:.
..
"
"
May 23, 2006
is-4279
Testimony of Secretary John W. Snow
Submitted for the Record
U.S. Department of the Treasury
Before the Senate Committee on Banking, Housing and Urban Affairs
Introduction
I would like to thank the Committee for the opportunity to address the important
topic of financial literacy and what the Treasury Department is doing to help
improve financial literacy levels. I would also like to thank Chairman Shelby and
Ranking Member Sarbanes for their leadership of this Committee on this important
topic. The Committee's work created the Financial Literacy and Education
Commission as part of the Fair and Accurate Credit Transactions (FACT) Act of
2003. This Commission has been a real driver of innovation in financial literacy .
Because of the President's pro-growth policies, Americans are keeping more of
what they make. millions of jobs have been created. and homeowners hip is at an all
time high. Productivity in the first quarter of the year grew at a rate of 3.2 percent
and real compensation per hour increased at a 3.6 percent rate. Just last month,
138,000 jobs were- created. Just last week. the President extended tax relief for
American taxpayers. With good economic times come an increased level of
economic independence, and every day more Americans know the pride of
ownerShip.
The power of ownership brings an even greater need for financial knowledge. The
two are inextricably linked. Americans can only manage their money and other
assets if they understand what they own. People are better able to improve their
own economic situations if they understand the basics of personal finance. Our
robust marketplace for financial services provides the American consumer with a
multitude of choices. We all face more financial decisions than the generations that
preceded us, but making the right choices requires a certain level of financial
literacy. That is why financial education is one of the pillars supporting the
President's vision of an ownership society; and it is why the Administration has
made it a priority.
First, I will describe what we at the Treasury Department are doing to support
financial education in our own right. Then I would like to explain the Treasury
Department's role in organizing the efforts on financial literacy across the Federal
government. Finally, I will explore a few of the specific problems we are facing in
financial literacy today and how we propose to address them.
Treasury's Office of Financial Education
In 2002, the Treasury Department established the Office of Financial Education.
Since that time, the Treasury Department's efforts have developed rapidly, and we
now stand as a policy leader in the field of financial education in the United States
and around the world. Our Office of Financial Education has five key functions.
First. it promotes and delivers financial education across the country through
ambitious outreach efforts. Since the inception of this office, Treasury officials have
traveled to 76 cities in 36 states, and held 231 financial education sessions
reaching over 13,000 people. The Treasury Department has performed the work of
financial education wherever needed ranging from classrooms to community
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centers to military bases, and to the Gulf Coast region to counsel hurricane
evacuees. T~easury officials have reached out to students of all ages, teachers,
lenders, credIt counselors, accountants, community activists the media
policymakers and the public at large. The message to each group vari~d according
to Its specific needs, but our theme has been the same: financial knowledge is an
empowering force that can help people improve their lives.
The second function is to set standards for quality financial education. The
Treasury Department has done this through the development and dissemination of
the Eight Elements for Effective Financial Education Programs. Financial educators
across the country have been using these qualitative standards to evaluate and
enhance financial education programs.
Third, the Treasury Department operates a Technical Assistance Center for those
seeking advice on establishing or improving financial education programs in their
communities. Assistance is available in English and Spanish.
Fourth, the Treasury Department uses its unique position within the financial
education community to broker partnerships between the supply and demand sides
of financial education. Some organizations have financial education resources to
offer while other organizations are in need of such resources. We work with groups
nationwide to help the right people get connected with the resources to advance
financial education.
The fifth and final role of the Treasury Department is to coordinate financial
education efforts across the Federal government. We perform this task by
managing the activities of the Financial Literacy and Education Commission.
Financial Literacy and Education Commission
In my role as the Secretary of the Treasury, I have the privilege to serve the
American people in a number of ways. In 2003, your Committee, along with the
rest of Congress. and the President gave me the opportunity to serve Americans in
an important and rewarding role. Under the FACT Act, I was charged with forming
and leading a commission of 20 Federal agencies to improve financial literacy in the
United States. In that role, I am proud to report that the Commission has had a
number of early successes and is well positioned to advanCe financial literacy in the
. years ahead.
The FACT Act set out three major mandates for the Commission.
First, the Commission is required to hold regular public meetings where it brings
together the 20 Federal agencies named in the FACT Act. At these public
meetings, the Commission members learn about the latest Federal finanCial
education developments while coordinating their efforts. The Commission
members also hear from practitioners outside the Federal govemment. National
and local experts from non-profits, for.profits and state governments have come to
share best practices. Members of Congress have also addressed the Commission
at these meetings. In total, the Commission has held eight of these meetings and
heard from 32 presenters.
.
The second major requirement of the FACT Act was for the Commission to create a
central website and hotline where Americans could easily access financial
education materials from the Federal government. In October 2004, the
Commission accomplished this task by launching the My Money website and
hot/ine. Now Americans can visit MyMoney.gov or call1-888-My Money (1-888·
696.6639), and get access to unbiased, free informatio~ in English and Spanish ~o
help them manage their money. To date we have rece!ve~ more than 651,000 hIts
on the website and distributed more than 846,000 publIcatIons.
The third requirement was for the Commission to complete a national strategy. Just
last month the other Commission members and I unveiled the Commission's plan,
entitled Taking Ownership of the Future: The National Strategy for FinanCial
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ulBracy. The National Strategy is a comprehensive blueprint for Improving financial
literacy In America, covering 13 areas of financial education and containing 26
specific calls to action. Everyone has a role to play-the Federal govemment, forprofit and non-profit enterprises, and Individual households. The National Strategy
calls each of us into action to improve financial literacy in this country. To help
readers eastly navigate the National Strategy, the Treasury Department produced a
Quick Reference Guide, which is being submitted to your Committee along with the
National Strategy and this testimony.
The work to Implement the National Strategy has already begun.
• Call to Action 2.1 (Homeownership). On June 6th, the Departments of
Housing and Urban Development and the Treasury will begin to implement
Call to Action 2.1, by hosting the first of a series of meetings highlighting the
work of successful partnerships that have advanced homeownership.
•
Call,tq Actkln 3.~ (Retirement $aving). Call to Action 3.2 has been
implemented, with the provision on MyMoney.gov of an interactive website
from the Small Business Administration designed to help small business
owners understand roles, responsibilities and resources for retirement
plans. Disseminating this information is a key step in providing outreach to
small businesses on available retirement options for their employees.
• CaN to Action 4.1 (Credit). Recently. the Treasury Department entered into
an agreement with the Ad Council to develop and execute a multimedia
public service announcement campaign to increase credit literacy. This
campaign is included in Call to Action 4.1 of the National Strategy.
•
Call to A¢on 5.2, (ConSUm~( prpt~iOtJ). As described in Call to Action
5.2, the Treasury Department has made the DVD entitled Icfentfty Theft:
Outsmarting the Crooks available to the public through the Commission's
website, MyMoney.gov, and toll·free hotline, 1.888-MyMoney. The DVD
features experts from the govemment and the private sector talking about
the scope of the identity theft problem and how a few simple steps can
significantly increase protection. Experts also cover topiCS such as online
safety, access to credit reports, taxpayer vulnerabilities to identity theft, and
dealing with debt collectors if you are a victim of identity theft.
• Gall. tQ Action, ~.~ (Taxpayer: R;gIJt~). The Go Direct public education
campaign (www.godirect.org, 1-800-333-1795), described in Call to Action
6.2, was created by the Treasury Department and the Federal Reserve to
motivate Americans to use direct deposit for Social Security, Supplemental
Security Income, and other Federal benefit payments. This spring, Go
Direct has partnered With tfnancial institutions and convnunity organizations
on approximately 60 financial literacy and education workshops to raise
awareness about steps benefit recipients can take to gain better control
over their finances. Go Direct has also wor1<ed with the Federal Deposit
Insurance Corporation (FDIC) to incorporate direct deposit messages in the
FDIC Money Smart program's financial literacy efforts nationwide.
• C!P.' to Action 6.~ (T.a~i1Y~( 8;gllt$). As indicated in Call to Action 6.3, the
Department of Health and Human Services continued with its public
awareness campaign on the new Medicare drug benefit, encouraging
seniors to enroll in the program to save money on health care expenses.
The campaign provided eligible taxpayers with easy access to information
regarding enrollment so they could make their choices in advance of the
deadline.
• Call tg A.ct.ipr), fJ.1 (TPe I)nball/ced). On May 1, Treasury. the Federal
Deposit Insurance Corporation, the Office of the Comptroller of the
Currency, the National Credit Union Administration, along with the Federal
Reserve Bank of Chicago began implementation of Call to Action 8.1,
holding the first of four regional conferences on banking the unbanked.
APproximately 170 representatives of financial institutions, community
organizations, government agencies, and others participated in the event to
build partnerships and discuss innovative and effective strategies to bring
more people into the financial mainstream.
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While the Commission members will be working jointly on the Commission's
objectives, we will also continue with our own agency-based initiatives. For
instance, at the Treasury Department, the Office of the Treasurer will coordinate a
department-wide effort to identify cost-effective ways that the Treasury Department
can help bank the unbanked. U.S. Treasurer Anna Escobedo Cabral serves as a
spokesperson for financial education and advisor to me on financial education
issues.
We are happy to report that the National Strategy has been well received by the
private sector, with many organizations issuing statements of support for the
National Strategy and its goals. As we work to implement the National Strategy, we
will continue to extend the reach of this document to all Americans. In fact, just
yesterday the Commission made the National Strategy available in Spanish on
MyMoney.gov.
Some of the Problems
To better understand the challenges we face in financial education, it is useful to
look at a few of the specific problems in greater detail. I will describe three
problems in particular. Those problems are the plight of unbanked Americans, the
threat of identity theft and the financial literacy challenges facing our young people.
The Unbanked
While the opportunities for consumers to participate in our country's banking' system
are growing, too many Americans are still without a relationship with a traditional
financial institution. These people are commonly referred to as the "unbanked" and
represent a disturbingly large percentage of U.S. households. According to a 2004
Federal Reserve Board study, nearly 10 percent of American households are
unbanked. Because these families live outside of the financial mainstream, they
frequently patronize alternative, often higher cost, financial service providers.
There are a variety of reasons people do not use financial institutions, which include
language barriers, lack of trust of financial institutions, lack of knowledge of the
products and services offered, or greater convenience of some alternative service
providers. The unbanked pay more for financial transactions and completely miss
out on opportunities most of us take for granted, such as the. ability to receive
payments electronically for things like Federal benefits. After Hurricane Katrina, we
saw numerous instances of unbanked evacuees unable to receive FEMA payments
electronically. Instead, many of them had to wait for a paper check to find them.
Our National Strategy takes this challenge seriously and is bringing the private
sector, including lenders and community groups, together with the Federal
government to come up with ways to bring these Americans into the financial
mainstream. As mentioned, we have already begun this process earlier this month
in Chicago with our first regional conference on the unbanked.
Identity Theft
As you are well aware, identity theft is a serious problem that threatens the good
name and good credit of all Americans. In fact, the Federal Trade Commission
(FTC) reports that nearly 10 million people a year are victims of identity theft. This
translates into nearly $48 billion in losses to businesses and nearly $5 billion in
losses to individual victims. In 2004, identity theft was the top consumer fraud
complaint to the FTC; accounting for 39 percent of all consumer fraud complaints
filed that year.
President Bush and Secretary Snow have been active in combating identity theft on
several fronts. In March 2006, the Treasury Department announced the creation of
an interagency forum that focuses exclusively on consumer financial abuses. The
name of this group is the Consumer Financial Protection Forum. The Forum will
provide a mechanism for sharing information about patterns of abuses, including
emerging trends and on-going problems at financial institutions that are subject to
Federal or state supervision. It will encourage discussion about consumer
protection issues affecting financial institutions. The Forum will review how
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consumer complaints are handled by the participating agencies, including how the
process currently operates, and develop suggestions as to how it can be improved.
It will also support public education efforts to help consumers recognize and avoid
abusive practices in the financial institutions arena. The Forum's first meeting will
take place at the Treasury Department next month.
Earlier this month, the President signed an executive order that creates the nation's
first ever Identity Theft Task Force. The 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 equip Americans with the tools they need to fight this crime
and protect their assets. In just the past few months, we have distributed more than
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 someol1e is stealing their information. Additionally, the National Strategy
describes resources from the FTC and others that can help consumers learn what
they need to know.
Youth Financial Education
American young people are in great need of financial education. In a recent
personal finance test high school seniors answered only 52.4 percent of the
questions correctly. As these young people become adults, they will be faced with
a number of financial decisions ranging from how to finance an education, whether
to get a credit card, and how to start their working life by saving early for a first
home or even for retirement. Both pitfalls and opportunities await them, and the
only way we can be sure they will naVigate this terrain successfully is if they have
financial knowledge.
SChools can playa key role in this by bringing financial education into the
classroom. Personal finance can be offered as a stand alone class or it can be
integrated into existing curricula. Either way, exposing stUdents to these topics will
equip them for their futures. The private sector can also playa role by providing
teacher training, quality materials for use in the classroom or after-school
programs. Postsecondary institutions can reach out to their students by including
personal finance topics in student orientations or in curricula.
The Treasury Department has worked with teachers, administrators and policy
makers to encourage teaching of financial topics in schools. Additionally, Treasury
officials have gone In to classrooms across the country to teach young Americans
important money lessons and to raise awareness of the importance of youth
financial literacy. Finally, as detailed in the National Strategy, later this year
Treasury will partner with the Department of Education to bring together educators
and policy makers to discuss how we can make our young people more financially
literate.
Working Together Towards a Solution
The solution to all of the problems discussed requires cooperation among key
players. As described in the National Strategy, the infrastructure of financial
education in America can only be erected with the cooperation of three "builders":
the government, the private sector and the individual. Each of these builders has
its role. The government can regulate the financial marketplace and provide
information for consumers. The private sector, including for-profit and non-profit
organizations, can use its expertise, resources and pOSitioning to provide financial
literacy programs. Individuals can take an interest in managing their finances and
use the information and programs provided by the government and the private
sector to improve their lives and those of their loved ones.
No one of these groups can succeed in assembling a financial education system
alone. Yet mere cooperation without coordination is not enough. Therefore all
three of these players must work together to assemble a national infrastructure for
financial education under a common blueprint. As mentioned above, the National
Strategy provides such a blueprint. The Strategy's blueprint is firm enough to give
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general direction, but flexible enough to allow different players to chose their own
roles in enhancing financial education. The Strategy is a blueprint that is intended
for the private sector, individuals, and government. The private sector can use the
Strategy's definition of the challenges and the best practices as tools to focus and
design future efforts. Individuals can use many of the resources listed to better
manage their financial affairs. Government policy makers can use the National
Strategy to frame and inform their analyses on financial literacy matters. By
continuing to work together, government, the private sector and individuals can
bring about the improvement in financial literacy this nation needs.
Conclusion
Once again, I would like to thank your Committee for drawing attention to the critical
topiC of financial education. Through the efforts of the Treasury Depa~ment and
the Commission, we will continue to advance the cause of financial literacy. We
hope to work closely with you as we help all Americans take ownership of their
futures.
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May 23,2006
2006-5-23-13-0-12-10325
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 $67,548 million as of the end of that week, compared to $68,089 million as of the end of the prior week.
I. Official U.S. Reserve Assets (in US millions)
I
11. Foreign Currency Reserves 1
II
I
la. Securities
I
May 1;1:, 2006
I
TOTAL,
May 19, 2006
68,089
Euro
II
Yen
11,994
"
11,467
67,548
1 TOTAL
23,461
Of which, issuer headquartered in the U. S.
II
EU~0
TOTAL
23,233
,v.
0
0
b. Total deposits with:
.i. Other central banks and BIS
11,941
5,586
17,527
11,819
"
5,523
17 ':l.A?
).ii. Banks headquartered in the U.S.
0
0
b.ii. Of which, banks located abroad
0
0
b.iii. Banks headquartered outside the U.S.
a
0
b.iii. Of which, banks located in the U.S.
0
a
7,366
7,309
2. IMF Reserve Position 2
13. Special Drawing Rights (SDRs) 2
1
II
1
4. Gold Stock 3
5. Other Reserve Assets
8,692
8,624
II
11,043
11,041
a
0
II. Predetermined Short-Term Drains on Foreign Currency Assets
M_~y 1~,_2JlQ6
M~yt2, ~(l0_6
VO,.,
Euro
TOTAL
Euro
Yen
TOTAL
0
1. Foreign currency loans and securities
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
[3. Other
I
I
I
I
I
I
0
0
0
I
I
I
0
0
0
III. Contingent Short-Term Net Drains on Foreign Currency Assets
[
I
~II
May 19, 2006
May 12, 2006,
Euro
I
I
http;www.treas.!!ov/press/releasesI10()65231301210325.htm
Yen
TOTAL
I
I
Euro
I
I
Yen
II
II
TOTAL
3/5/2007
Page 2 of 2
1. Contingent liabilities in foreign currency
0
I
0
I
1.a. Collateral guarantees on debt due within 1
year
1.b. Other contingent liabilities
~
a
2. Foreign currency securities with embedded
options
3. Undrawn, unconditional credit lines
I
I
II
I
3.a. With other central banks
3.b. With banks and other financial institutions
II Headquartered in the U.S.
.c. With banks and other financial institutions
0
II
II
I
I
II
I
I
I
0
I
I
I
"
.leadquartered outside the U.S.
ggregate short and long positions of options
reign
a
Currencies vis-a-vis the U.S. dollar
0
4.a. Short positions
4.a.1. Bought puts
4.a.2. Written calls
4.b. Long positions
4.b.1. Bought calls
4.b.2. Written puts
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.
http://www.treas.g0v/pres~lrelca3e3f20065231301210325.htm
3/512007
Page I 01'2
PRESS ROOM
10 vIew or prmt the !Jut- content on
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May 23,2006
js-4280
Commission launches Spanish Version of Financial Education Strategy
Washington, D.C.,-The Financial literacy and Education Commission, headed by
the Treasury Department and comprised of 20 Federal agencies, released the
Spanish version of its plan to improve the nation's financial literacy this week. The
strategy, Taking Ownership of the Future: The National Strategy for Financial
literacy, seeks to develop the financial literacy of all Americans, including members
of the Hispanic community, who playa growing role in the U.S. economy.
From 2004 to 2009, the Hispanic buying power is projected to increase by 45
percent. But Hispanic immigrants especially face barriers when trying to take
control of their finances. This population is less likely to use mainstream financial
services than Hispanics born in the United States. More than half of the emigrants
from Mexico do not hold transaction accounts, while and additional 37 percent of
other Latin American immigrants are without accounts.
"President Bush understands that the Hispanic community in the United States is a
driving force in our expanding economy, which is helping to propel it to new heights.
But for those who speak English as a second language, even the basic act of
opening a bank account can be very intimidating," said U.S. Treasurer Anna
Escobedo Cabral.
Deputy Assistant Secretary for Financial Education Dan lannicola, Jr. added, "The
Presidenfs vision of an ownership society is an inclusive one-everyone has a
chance at ownership, regardless of background. The National Strategy supports
this idea by seeking to empower all Americans with financial knowledge. By
releasing the National Strategy in Spanish today, we are Increasing access to
greater financial literacy and the power that comes with it."
The Commission's strategy. available in Spanish at MyMoney.gov. is a blueprint for
improving the understanding of issues like homeownership, credit management,
and retirement savings. Chapter 9 focuses specifically on multicultural and
multilingual populations.
Last month, U.S. Treasury Secretary John Snow joined Cabral and lannicola to
introduce the national strategy. Treasury officials visited more than 15 cities in
April to promote financial literacy.
The 19 other federal agencies in the Commission include: tile Office of the
Comptroller of the Currency; the Office of Thrift Supervision; the Federal Reserve;
the Federal Deposit Insurance Corporation; the National Credit Union
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.
-30-
http://www.treas.gOv/preSS!leleasc3ij34280.htm
3/5/2007
Page 2 of2
REPORTS
•
En Espano!: Comisi6n Federal Publica Version En Espanol de Estrategia
para Mejorar Educacion Financiera En Los EE.UU.
• Aduenandonos del futuro - La estrategia nacional para la educaci6n
financiera 2006
•. treas. R0V/oressir eleasc:5fj34 281) .htm
3/5/2007
DEPARTMENT OF THE TREASURY
OFFICE OF PUBLIC AFFAIRS
PARA DISEMINACION INMEDIATA
May 23,2006
Contact:
Jennifer Zuccarelli
(202) 622-8657
COMISI6N FEDERAL PUBLICA VERSI6N EN EspANOL DE
ESTRATEGIA
PARA MEJORAR EDUCACION FINANCIERA EN LOS EE.UU.
Washington, DC- La Comision Federal de Educacion Financiera, dirigida por el
Departamento del Tesoro de los Estados Unidos y compuesta por 20 agencias federales,
publico hoy la version en espafiol de su plan para mejorar la educacion financiera en el
pais. Adueiiandonos del futuro: La estrategia nacional para la educacion financiera
busca promover el conocimiento de asuntos financieros, tratando asi las necesidades de
todas las comunidades incluyendo la hispana, cuyas contribuciones forman una parte
integral de la economia en los Estados Unidos.
Se proyecta que el poder adquisitivo de los hispanos aumentara un 45 por ciento entre los
afios 2004 y 2009. Sin embargo, los hispanos sue len usar mucho menos servicios
financieros que las personas nacidas en los Estados Unidos. Mas de la mitad de los
inmigrantes mexicanos yel 37 por cierto de otros latinoamericanos no tienen una cuenta
bancaria.
"El Presidente Bush reconoce que la comunidad hispana en los Estados Unidos es un
grupo importante en el crecimiento de nuestra economia y el cual esta ayudando a que
lleguemos a nuevos niveles. Sin embargo, para aquellos que hablan ingles como su
segundo idioma, el simple hecho de abrir una cuenta bancaria puede ser intimidante",
explicola Tesorera de los Estados Unidos Anna Escobedo Cabral.
El subsecretario asistente de educacion financiera Dan Iannicola, Jr. afiadio, "La vision
del Presidente de una sociedad auto-independiente es aquella que incluye a todas las
comunidades - donde todos tienen una oportunidad sin importar su lugar de origen. La
Estrategia nacional apoya esta idea al proveer informacion y herramientas para mejorar
el manejo de las finanzas personales. Al publicar la Estrategia nacional en espanol,
brindamos acceso a informacion sobre la educacion financiera y al poder que esta
facilita".
La Estrategia nacional de la Comision es una guia para ayudar a entender temas como la
compra de vivienda, el manejo del credito y los ahorros para lajubilacion. El capitulo 9,
por ejemplo, se enfoca en las comunidades multiculturales y multilingiies
especificamente. La Estrategia nacional esta disponible en la pagina de Internet,
MyMoney.gov.
El mes pasado, el Secretario del Tesoro John W. Show, junto ala Tesorera de los Estados
Unidos Cabral y el subsecretario asistente Iannicola, presentaron Adueiiimdonos del
futuro y participaron en una gira sobre este tema visitando mas de 15 ciudades alrededor
del pais.
Las otras 19 agencias federales en la Comision inc1uyen: Office of the Comptroller of the
Currency; Office of Thrift Supervision; Federal Reserve; Federal Deposit Insurance
Corporation; National Credit Union Administration; Securities and Exchange
Commission; Departments of Education, Agriculture, Defense, Health and Human
Services, Housing and Urban Development, Labor, and Veterans Affairs; Federal Trade
Commission; General Services Administration; Small Business Administration; Social
Security Administration; Commodity Futures Trading Commission; y Office of
Personnel Management.
#
#
#
Adueiiandonos
del futuro
La estrategio nociono-I pora 10 educoci6n financiera
2006
Department of Agriculture
Department of Defense
Department of Education
Deparwent of Health and Human Services
Department of Housing and Urban Development
Department of Labor
Department of the 'freasury
Department of Veterans Affairs
Commodity Fu~ Trading Commission
Federal Deposit Insurance Corporation
Federal Reserve Board
Federal Trade Commission
General Services Administration
National Credit Union Administration
Office of the Comptroller of the Currency
Office of Personnel Management
Office of 'Thrift Supervision
Securities and Exchange Commission
Small Business Administration
Social Security Administration
La estrategia nacic)nal para la educa,ci<:)n
financiera
indice
Prefacio - Parte I ... , ............................................................. v
Prefacio - Parte II: Programas ilustrativos............................................ xv
Capitulo 1: Ahorros ............................................ '" .......... '" ... 1
1.
Como cambiar el eje de la discusion publica del consumo a1 ahorro por medio
de campaiias de concientizacion publica ................................ 2
2.
COmo utilizar los incentivos impositivos existentes para lograr un ahorro mas
conveniente yasequible ..... '......................................... 5
3.
COmo adaptar las comunicaciones para que el ahorro pueda ser de interes para
todos los individuos.................................................. 7
Capitulo 2: Compra de vivienda.................................................... 11
1.
Como utilizar enfoques de organizaciones comunitarias para transmitir
programas de asesoria y capacitacion .................................. 13
2.
Como destacar el exito por medio de la educacion de calidad y la
concientizacion publica ............................................. 16
3.
La colaboracion comunitaria puede ser un elemento muy valioso para el
desarrollo y distribucion de programas................................. 19
Capitulo 3: Como ahorrar para lajubilacion ......................................... 23
1.
Como educar a los trabaJadores sobre todas las oportunidades de ahorro
disponibles para la jubilacion......................................... 26
2.
Como motivar el ahorro para lajubilacion para empleados de empresas
grandes ........................................................... 29
3.
Opciones de ahorro para la jubilacion para empleados de
pequefias empresas ................................................. 32
4.
Como beneficiarse de los productos de ahorro individuales para la jubilacion
preferidos por los impuestos ......................................... 33
La estrategio IlociollOi para 10 educoci6n finonciero
Capitulo 4: Credito .............................................................. 37
1.
Como incrementar la comprension del publico ace rca del cn~dito,
los informes de credito y los puntajes de credito ......................... 39
2.
Como utilizar los servicios de asesoria de cn~dito confiables ............... 42
Capitulo 5: Proteccion del consumidor ............................................. 49
1.
Como brindar educacion a los consumidores sobre las formas
de reducir el riesgo del robo de identidad .............................. 50
2.
Como protegerse contra las oportunidades de negocio fraudulentas ........ 55
3.
Como proteger a las personas de edad avanzada de las amenazas dirigidas
contra los consumidores ............................................. 56
Capitulo 6: Derechos de los contribuyentes ......................................... 59
1.
Como ayudar a los individuos para identificar y utilizar los programas y
servicios disponibles ................................................ 61
2.
Como educar y concientizar a individuos y empleadores .................. 64
3.
Como reducir los riesgos y costas de los contribuyentes fomentando
el deposito directo ................................................. 67
4.
Como aprovechar nuevos e importantes beneficios para ahorrar ........... 68
Capitulo 7: Como proteger al inversionista .......................................... 71
1.
Como equipar a los consumidores can informacion imparcial y neutra sobre
inversiones ........................................................ 72
2.
Como estimular un mayor entendimiento de las caracteristicas
de inversion, en especial los cargos .................................... 76
3.
C6mo proteger a los inversionistas contra el fraude por medio
del aumento de iniciativas de educacion ............................... 77
Capitulo 8: Personas sin cuenta bancaria ............................................ 81
l.
C6mo utilizar los productos y servicios impulsados por el sector
bancario para incrementar su comprension yuso .................. '" ... 83
2.
C6mo estimular la colaboraci6n y utilizaci6n de las relaciones
existentes para incrementar la familiaridad con el sistema fmanciero ....... 85
Capitulo 9: Poblaciones multilingiies y/o multiculturales .............................. 91
l.
Como promover la participacion en el proceso de servicios financieros
por media de una mayor comprension del sistema ...................... 92
2.
Como cambiar las percepciones sabre la accesibilidad ala
compra de viviendas ................................................ 95
3.
Como mejorar el acceso a los servicios financieros ....................... 96
TIII!I!'
iii Con {ell/s
La estralegia nacional para 10 educaci6n financiera
Capitulo 10: Educacion financiera desde eljardfn infandl
hasta.la eta.pa postsecundaria ............•.......
I
••
,
,
•••••••
,
,
••••••••
99
1.
COmo integrar la educacion financiera dentro de los
2.
programas de est11dio'l:-12 ............................ , •.••••....•••• 101
COmo propordonar capacitation y apoyo a los maestros para enseiiar
efectivamente los temas de educacion finandera ....................... 105
3.
COmo proporcionar materiales, planes de estudio y recursos efecdvos a los
maestros para enseiiar educacion financiera .......................... 106
4.
COmo aumentar la educaci6n financiera comunicindose con los j6venes en
lugaa-es no tradidonales ............................................... 108
5.
C6mo incrementar ]as habilidades y conocimientos finanderos de los
esrudiantes postsecundari.os .••••••••••••.••
III
........................
112
Capftulo Once: Investigacion academica y evaluacion de programas ..............•..... 117
1.
COmo estimular la investigation acadCmic:a ....••••••••.••.••.•.••.•... 118
2.
C6mo evaluar programas utilizando un anatisis cuantitativo demostrado ... 121
3.
COmo evaluar programas utilizando m«odos cualitativos ................ 123
CAlf»itulo Doce: Esfilerzos de coordinacion ..••..•...............•••.• " ............... 127
1.
La coordinacion de la informacion federal sobre educacion financiera
esm. disponible por medio de iniciativas de colaboradon tales como
www.myI11oney-.p .................. . "....................."
2.
It
•
•
..
•
..
..
•
COmo evaluar los recursos federales / C6mo evital' la duplicacion y la
red.undancia. ................. , • , •• , ..................... , .............
c.a.prtulo ~: Penpectiw. intemadonal ..............................................
..
•
.128
•
•
II
••••
41 . . . . . . . 41
129
.133
1.
Enfoques aplicados dentto de ottas naciones yesfuerzos transfronterizos ... 134
2.
C6mo estimular]as coaliciones mundiales .......•...•................. 138
Siglas .......................................................... "........................................ 141
Apendice A: Resumenes de las reuniones........••......•.......•.................. 147
Apendice B: Aviso en el Registro F~ ............••............................. 167
Table l!i Call.tetlt.~
La estrategia nacional para 10 educaci6n financiera
La estrategia nacional pma
10
educaci6n financiero
Aduenandonos del ftrturc)
La estrategia nacional para ia educaci6n financiera
EI mercado de servicios financieros actual,
que es cada vez mas complejo, ofrece a
los consumidores una amplia variedad
de productos, servicios y proveedores
entre los cuales elegir para responder
a sus necesidades financieras. Aunque
esta variedad de opciones ofrece muchas
alternativas, tambien requiere que los
consumidores posean la informacion, el
conocimiento y las habilidades para evaluar
las opdones e identificar las que mejor se
adapten a sus necesidades y circunstancias.
Esto se apliea especificamente a las
poblaciones que tradicionalmente no
han recibido los servicios adecuados
de nuestro sistema financiero.
La educacion financiera es tambien
esencial para ayudar a los consumidores a
eomprender como evitar involucrarse en
transacciones que son destructivas desde
el punto de vista financiero, como evitar
ser victimas del fraude y como ejercer sus
derechos de proteccion del consumidor.
Por otro lado, la educacion financiera
puede lograr que los consumidores sean
mejores compradores, permitiendoles
obtener bienes y servicios a un costo
inferior. Esto optimiza sus presupuestos
familiares, dandoles mas oportunidades
de eonsumir, invertir y ahorrar. Ademas,
una mayor educacion puede ayudar a que
las personas adquieran los conocimientos
financieros necesarios para crear
presupuestos familiares, iniciar planes de
ahorros, administrar sus deudas y tomar
decisiones estrategicas de inversion para
su jubilacion 0 para la educacion de sus
hijos. El contar con estas habilidades
basicas de planifieacion financiera puede
ayudar a las famiIias a cumplir con sus
obligaciones de corto plazo y a maximizar
su bienestar financiero de largo plazo.
En el ano 2003, el Congreso de los Estados
Unidos establecio la Comision Federal
de Educacion Financiera por medio
de la sandon de la Ley de Mejora de la
Educacion Financiera en virtud del Titulo
V de la Ley de Igualdad y Transacciones
de Credito Correctas del ano 2003 (Fair
and Accurate Credit Transactions 0 FACT
Act, por sus siglas en Ingles) (P.L. 108159). El Congreso designo a la Oficina de
Educacion Financiera del Departamento
del Tesoro de los Estados Unidos (OFE,
por sus siglas en Ingles) para facilitarle su
experiencia y proporcionar apoyo primario
ala Comision, la cual esti presidida
por el Secretario del Departamento del
Tesoro de los Estados Unidos. Ademas del
Departamento del Tesoro, las siguientes
agendas federales estin representadas
en la Comision: las agendas bancarias
federales (segun 10 definido en la
Secdon 3 de la Ley Federal de Seguros
de Deposito) - la Oficina del Contralor
de la Moneda, laJunta de Gobernadores
del Sistema de la Reserva Federal, la
Corporacion Federal de Seguros de
Deposito, la Oficina de Supervision de
Entidades de Ahorro, la Administracion
Nacional de Cooperativas de Credito, la
Securities and Exchange Commission, cada
Prrfario - Parle 1: Adw'11rindonos df'l/1Iillro
La eslrategia nacional para
uno de los Departamentos de Educaci6n,
Agricultura, Defensa, Salud y Servicios
Humanos, VlVienda y Desarrollo Urbano,
Trabajo y de Asuntos de Veteranos de los
Estados Unidos,la Comisi6n Federal de
Comercio, la Administracion de Servicios
Generales, la Agenda Federal para el
Desarrollo de la Pequeiia Empresa, la
Administracion del Seguro Social, la
Comision del Comercio en Futuros sobre
Mercancia de los Estados Unidos y la
Oficina de Administracion de Personal.
El Congreso encargo a la Comisi6n la tarea
de "mejorar la educacion financiera de las
personas en los Estados U nidos por medio
del desarrollo de una estrategia nacional
para estimular la educacion financiera". El
reglamento estatutario tambien estipula
la reevaluacion anual del progreso de esa
estrategia. Este documento representa el
primer paso en el proceso de evolucion
de la creacion y ajuste de un marco de
trab~o para una estrategia nacional de
mejora de la educacion financiera de los
estadounidenses. En virtud de los rerminos
del reglamento elltatutario, la Comision
revisara anualmente la estrategia nacional
y hani los cambios y recomendaciones
que considere necesarios.
La Secci6n 114 del Tftulo V de la ley
FACT del ano 2003 establece que para
Ia creaci6n e implementacion de esta
estrategia lise debeni incluir y proveer la
participaci6n de los gobiemos estatales
y locales y de instituciones privadas,
publicas y sin fines de lucro". Por 10 tanto,
la participacion del sector privado como
la del sector publico son esenciales para
mejorar la educacion financiera en los
Estados Unidos. En cumplimiento de
este mandato, la Comisi6n solicito la
opinion de proveedores de educacion
financiera y examino los recursos del
gobierno federal, de los gobiernos
estatales y/0 locales, organizaciones
10
educaci6n financiera
sin fines de lucro, instituciones
academicas y del sector privado.
Desde su creadon en enero del ano 2004,
la Cornisi6n se reune cada cuatro rneses
e invita a sus reuniones a representantes
de varias fuentes de educacion financiera
para que presenten informacion sobre
programas especificos con el fin de
informar a los miembros de la Comisi6n.
EI 26 de agosto del ano 2004, la Comisi6n
tambien solicit6 la presentaci6n de
comentarios del publico y en respuesta a
esta convocatoria, mas de 150 personas y
organizaciones ofrecieron su opinion. En
un esfuerzo por obtener mas informacion y
detalles sobre los comentarios presentados,
la Comision organiz6 seis reuniones
publicas espedficas por sectores, invitando
a aquellas personas que enviaron sus
comentarios por escrito. Muchos de los
invitados costearon sus propios viajes
a Washington, D.C. para asistir a estas
reuniones y otros pudieron participar por
via telefonica. La Comision agradecio a
todas estas personas y organizaciones por
sus interesantes comentarios y su deseo de
compartir sus conocimientos y opiniones.
Muchos de los elementos mencionados
en esta estrategia fueron sugeridas por los
participantes de las citadas reuniones.
Es evidente que existe una gran cantidad
de iniciativas de educacion financiera en
desarrollo en los Estados Unidos que estin
dirigidas a una amplia variedad de temas
y audiencias, las cuales poseen diversas
estrategias para proporcionar educacion
financiera. Algunas de las iniciativas
identificadas por la Comision se resumen
en el apendice adjunto y representan
una investigacion que fue un elemento
crucial para crear un marco de trabajo
para esta estrategia nacional. Estos y otros
programas, patrocinados par el gobiemo
federal, estatal y local, varias entidades
privadas, organizaciones sin fines de lucro
PTlj,u:io - Parle I: Adul'iiri1!rionos drill/illro
La estrategia nacional para
y por instituciones de enseiianza superior,
responden a las necesidades de educaci6n
financiera ofreciendo infonnacion a
varios segmentos de nuestra poblaci6n.
Ademas, un reto fundamental para
mejorar la educacion financiera es e1 poder
llegar a las personas que desconocen la
disponibilidad de tales recursos, personas
que no tienen tiempo para mejorar su
nivel de educaci6n financiera. 0 para
quienes no son adecuados los recursos
existentes. Por 10 tanto, es posible que los
estadounidenses no puedan beneficiarse
de los recursos existentes por diversas
razones. incluyendo la falta de acceso al
Internet, barreras idiomaticas 0 porque
no han recibido la informacion debido
a que no pertenecen a audiencias
alcanzadas por los metodos de divulgacion
tradicionales. Uno de los principales
objetivos de la estrategia nacional debe
ser el facilitar el acceso y utilizacion
de esta informacion para la educacion
financiera en el momento apropiado y en
el fonnato mas util para sus destinatarios.
Adem:is. otro reto que representa
una oportunidad para el desarrollo
de Ia Comision es el poder ayudar a
los estadounidenses a distinguir entre
la diferencia de educacion financiera
y mercadeo. En algunas ocasiones
alguna empresa puede tratar de ofrecer
educacion financiera en el contexte de
una venta de un producto financiero.
&to puede dificultar la distincion entre
la informacion de ventas y los puntos
importantes de educacion financiera.
&ta confusion puede obstaculizar a los
consumidores la seleccion de productos
yel detenninar Ia exactitud e integridad
de la informacion recibida, 0 si e1
proveedor es imparcial y si la informacion
que brinda a los consumidores no esta
interferida por su interes ganancioso.
10 educacion
financiera
Esto no es una tarea sencilIa. La
administracion de las finanzas personales
es un asunto extremadamente complejo
que requiere recursos significativos y
un compromiso sustancial por parte del
consumidor para comprender y eva1uar la
variedad de productos disponibles en el
Mercado de servicios financieros. Ademas,
este Mercado cambia constantemente
con fa aparicion de nuevos productos.
servicios y proveedores que surgen para
satisfacer la demanda de los consumidores.
Como resultado, la variedad de temas
que los consumidores deben evaluar
es ampIia y se eneuentra en continuo
crecimiento. Ademas, los esfuerzos
de educacion financiera deben estar
dirigidos a ayudar a los consumidores a
comprender y seleccionar los productos
y servidos que mejor se adaptan a sus
necesidades, objetivos y circunstancias.
Para esto, hay que proveer una educacion
financiera efeetiva, 10 eual presenta
gran des retos, no solamente debido a
la complejidad de los temas que rodean
este asunto, sino tambien a la naturaleza
individuaIizada del enfoque necesario
para responder a estas situaciones. Por
]0 tanto, otto objetivo de la estrategia
nadonal es ayudar a los consumidores
a identificar fuentes de informacion
confiables e imparciales, y equiparlos con
las habilidades necesarias para seleccionar
los productos y servicios que mejor se
adaptan a sus necesidades y circunstancias.
AI reeonocer el importante papel que
desempeiia la educacion financiera en
Ia promocion del bienestar financiero,
se destaca que existe un compromiso
duradero con Ia educacion financiera de
organizaciones del gobierno. la industria
privada y organizaciones sin fines de lucr~.
La supervision de este compromiso y fa
organizacion de iniciativas para producir
Pn'./tuio - Parte I: Arltf.efialldonoJ dflfwnfO
La estrategia nacional para
el mejor resultado posible, es el mayor
de los retos, y este puede responderse
por medio de una estrategia nadonal.
La Comisi6n ha determinado que una
estrategia nadonal efectiva debe abarcar
cuatro areas cruciales explicadas a
continuaci6n. Las posteriores evaluaciones
de esta estrategia se centramn en revisar
el progreso y en re~ustar la articulaci6n
de estas principales areas estrategicas.
I. Como crear concientizacion publica
sobre los recursos disponibles
La mejora de la educacion financiera entre
los estadounidenses requiere un aumento
de la concientizacion publica sobre
estos temas, asl como el conocimiento
de muchos recursos estatales, locales y
nadonales que estin disponibles para
la educacion financiera. Uno de los
aspectos surgidos en las reuniones de
sectores espedficos celebradas por la
Comision, fue tomar conciencia de que
el gobiemo federal debe lograr que sus
recursos de educacion financiera sean
de mas facil disponibilidad. Este es un
aspecto importante para utilizar mejor
los recursos de educacion financiera y
evitar la superpoSicion 0 duplicacion.
La Comision establed6 una infraestructura
de distribuci6n de la informaci6n que
ayudara a aumentar la concientizacion
publica de los recursos disponibles
en el gobiemo federal establedendo
MyMoney.gov (Mi Dinero), un centro de
aprobacion y compilacion de materiales
de educacion financiera. Este sitio Web
contiene enlaces con materiales de
educaci6n financiera gratuitos producidos
por miembros de la Comisi6n y tambien
tendrci enlaces con ciertos sitios .edu
mantenidos por centros universitarios y
universidades con financiacion publica
afiliados con el Servicio de Investigacion
10
educaci6n financiera
Cooperativa Estatal, Educacion y Extensi6n
del Departamento de Agricultura de
los Estados Unidos (CSREES, por sus
siglas en ingles). Asimismo, MyMoney.
gOY proveera enlaces con sitios .org
afiliados con agendas gubernamentales
tales como los Bancos de la Reserva
Federal que contienen informacion
financiera y herramientas de aprendi~e
valiosas ademas de las que ya estan
disponibles directamente a traves de las
agendas gubernamentales federales.
EI objetivo del sitio Web MyMoney.gov es
proporcionar una fuente conveniente y
accesible de recursos gratuitos y contiables.
Este sitio Web contiene informaci6n
util para personas que se enfrentan a
varias expectativas financieras, como por
ejemplo conciliar el balance de una cuenta
corriente bancaria, comprar una hipoteca
o tomar un prestamo para un vehicu1o,
buscar fonnas·de pagar los estudios
universitarios, revisar estados de cuenta
de taIjetas de crooito, ahorrar para la
juhilacion, entender un informe de credito
o simplemente decidir si pagar una compra
en efectivo 0 con taIjeta de crooito. Este
sitio Web contiene informacion sobre
como entender, evaluar y comparar
productos, servicios y oportunidades
financieras y tambien para ayudar a los
inversionistas a comprender que hacer
cuando se encuentran con dificultades con
los intermediarios del mercado. Aunque
el sitio Web esta organizado de manera
accesible y util para los consumidores,
tambien facilitara la tarea a los educadores
comunitarios y organizaciones sin
tines de lucro que necesiten encontrar
y utilizar estos mismos recursos,
reduciendo asl los costos innecesarios
de reproduccion en la imprenta.
Una de las consecuencias derivadas del
establecimiento del sitio MyMoney.gov ha
side el poder identificar de manera mas
Pnlru;io - Parle i: A.dw!fidnrlonos delfutu/"{)
La estl-ategia noeionol pmo 10 edueoeion finoneiero
clara los recursos de educacion financiera
disponibles actualmente de parte de
los miembros de la Comision. Este paso
importante facilitani el amilisis de cada uno
de los miembros de la Comision, para asi
reconocer si existen areas de superposicion
y duplicacion innecesarias en este conjunto
de materiales de educacion financiera.
La composkion del sitio Web ha sido
organizada por tema en lugar de por
miembro de la Comision, esto facilitara en
gran medida la coordinacion de esfuerzos
para promover la educacion financiera.
La creacion de la Comision Federal
de Educacion Financiera ha atraido la
atencion sobre el tema de la educacion
financiera, la cual conlleva varios temas
que deben ser tratados. En las reuniones
de la Comision y en las reuniones
espedficas para los distintos sectores, los
comentarios del publico han resaltado la
magnitud de diversos temas pertinentes
que necesitan atencion. Cada uno de los
miembros de la Comision abarca areas
espedficas de su especialidad y por 10 tanto
estos estimularcin las diversas facetas de la
educacion financiera comprendidas por
la experiencia de cada agencia. A medida
que se elaboran materiales adicionales
y se enlazan con el sitio MyMoney.gov,
cada uno de los miembros de la Comision
podni enterarse de los temas que
surgen y asi seguir trabajando sobre sus
experiencias ace rca del tema para poder
compartir su opinion con los demas.
La Comision tambit~n ha establecido un
numero telefonico gratuito,
888-My-Money, para ofrecer materiales
educativos localizados en el sitio Web
a aquellas personas que no pueden
o no desean utilizar el Internet. AI
establecer una fuente central de todos
estos materiales de educacion financiera,
el gobierno federal puede garantizar
PTI~/tl('io - Portl:
que los consumidores y educadores
tengan acceso nipido a informacion
actualizada, facil de encontrar y correcta
sobre circunstancias financieras.
El Congreso Ie ha encargado al
Secretario del Tesoro la tarea de elaborar,
implementar y dirigir una campana piloto
nacional de multimedios de comunkacion
para mejorar el estado de la educacion
financiera en los Estados Unidos. Esta
campana de multimedios, puede conllevar
la creacion de estrategias tales como
anuncios de servicio publico de radio
y television, pancartas publicitarias y
anuncios impresos y esta sera una parte
crucial de la estrategia para concientizar
al publico sobre la importancia del
tema, asi como para comunkar a los
estadounidenses adonde pueden recurrir
para obtener informacion oportuna
y de alta calidad sobre varios temas
financieros. Las campanas de servicio
seran herramientas efectivas para divulgar
activamente el sitio web MyMoney.gov
y el numero gratuito 1-888-My-Money.
Asimismo, al utilizar mensajes directos
y creativos, se producira una campana
efectiva en los medios de comunicacion
que puede ayudar a difundir y consoli dar
el sitio MyMoney.gov y el mimero
gratuito como los portales principales
a los que recurriran los consumidores
cuando necesiten encontrar facilmente
materiales de educacion financiera
sobre una variedad de temas financieros
importantes. Por medio de la utilizacion
de esta estrategia integral que incluya a los
multimedios de comunicacion, podremos
comenzar a crear concientizacion
en toda la nacion sobre la totalidad
de los valiosos recursos disponibles
gratuitamente para todos los ciudadanos.
I: AdllI'11(]ntionos df'l[1I11lTO
La estraleg io nocionol pOlO
2. Como elaborar materiales y estrategias
de divulgacion especificas e
individualizadas
Afortunadamente, existe una gran variedad
de materiales finanderos excelentes. EI
sitio Web MyMoney.gov ha catalogado
una gran variedad de informacion
neutral e imparcial destinada a educar
a los consumidores para brindarles la
oportunidad de obtener materiales para
ayudarlos a tomar decisiones financieras
con el conocimiento necesario. En lugar de
crear nuevos materiales para la enseiianza,
estos materiales pueden adaptarse para
diferentes propositos, los recursos dirigidos
a audiencias espedficas podnin ser
distribuidos por estas organizaciones y por
los canales de divulgacion que sean los mis
confiables dentro de las comunidades. Un
sitio Web centralizado como MyMoney.gov,
puede ayudar a los educadores a maximizar
ta utilizacion de recursos gratuitos para
proveer educacion financiera y asi eliminar
ta duplicacion innecesaria de materiates.
Ellograr una mejor educaci6n financiera
de los estadounidenses no es una accion
fadl y unica, ya que riene que dirigirse
a diversos gropos, culturas y tipos de
personas. Las personas aprenden de
modos muy diferentes, pero muchos de
nosotros nos beneficiamos por medio
de la informacion oral y visual educativa
que se repite en diferentes ocasiones yen
varias formas. Las iniciativas efectivas de
educacion financiera requieren materiales
que lleguen al publico y que sean
entendidos claramente por la audiencia
destinataria. Los recursos individualizados
y espedficos son importantes para
alcanzar a los sectores demognificos
clave, entre los que se incluyen los grupos
de personas que no posen relaciones
establecidas con instituciones bancarias,
las comunidades multiculturales y
10
educoci6n financiero
multilingiles, las comunidades remotas
geograficamente y los consumidores con
necesidades especiales. Por 10 tanto, es
importante apreciar que los canales de
divulgacion publica se distingan en gran
medida seglin el mensaje a transmitir y el
destinatario al cual va dirigido y considerar
que 10 que puede parecer una iniciativa
duplicada, con frecuencia sera utilizada
necesariamente para llegar a diferentes
audiencias. El duplicar documentos
innecesarios ocurre solamente cuando los
educadores y otras personas no conocen
que existe informacion aprovechable.
El colaborar en conjunto Con varios
canales de comunicacion efectivos
para la divulgacion de la informacion
sera una faceta importante en el reto
de prom over la educaci6n financiera.
La informacion puede compartirse en
muchos tipos de ambientes, como por
ejemplo ellugar de trabajo, las escue1as,
los medios de comunicacion ya traves
de organizaciones comunitarias. Cada
uno de ellos ofrece valiosos medias para
llegar a diferentes sectores demograficos
de la poblacion de nuestra nacion.
Uno de los retos que enfrentan las
iniciativas de educacion financiera es
poder comprender que el acceso a la
informacion y a los program as educativos
no siempre tiene como resultado una
conducta positiva de parte del consumidor.
Por ejemplo, ellugar de trabajo puede
ser un canal importante para promover
la divulgacion de informacion financiera
necesaria. Ademas, el acceso a un plan de
jubilacion a traves del empleador ofrece
un mecanismo esencial para facilitar
el ahorro estructurado. Sin embargo,
la disponibilidad de tal plan no estci
relacionada con la alta participacion de
personas en dichos planes. En el ano
2004, solamente el53.4% de todos los
PnJruw - [>11 rle f. A rinriidndonos d('i /ul 11 to
Lo estrategio nocional pom
empleados de tiempo completo participaba
en un plan de jubilaci6n patrocinado
por el empleador. En reconocimiento
de esto, en el ano 2006 el Departamento
del Tesoro de los Estados Unidos y el
Departamento de Trabajo de los Estados
Unidos organizanin conjuntamente una
mesa redonda con grandes empleadores
para discutir el tema de los ahorros para la
jubilaci6n. Los temas que se presentar.in
incluirin ejemplos de las estrategias
exitosas sobre la integraci6n de la entrega
de educaci6n financiera en ellugar de
trabajo y otras opciones para aQmentar la
participaci6n y las contribuciones a planes
privados de jubilacion. como por ejemplo
la inscripd6n automatica. Ademas, la
Agenda Federal para el Desarrollo de la
Pequeiia Empresa (SSA. por sus siglas en
ingles), el Departamento de Tramyo de
los Estados Unidos (DOL, por sus siglas
en ingles) yet Departamento del Tesoro
de los Estados Unidos se comprometen a
realizar campaiias de alcance a pequeiias
empresas y continuanin ofreciendo valiosos
recursos sobre opciones de jubilacion
para pequeiias empresas. SBA pondni
a disposici6n de las pequeiias empresas
informacion especifica sobre asuntos
referentes ala jubilaci6n ofreciendo
adiestramiento via Internet acerca de
como educar a sus empleados sobre el
ahorro para la jubilaci6n en MyMoney.
goven el segundo cuatreiio del ailo 2006.
Otto componente clave de la educaci6n
financiera es el reto de integrarla a los
programas de estudios establecidos
para elemental y secundaria y para las
instituciones academicas de enseiianza
postsecundaria. La identificaci6n de estas
oportunidades para pQder incorporar
1a educacion financiera en los planes de
estudio escolares puede ser la clave para
ayudar a los j6venes estadounidenses a
crecer convirtiendose en adultos con
10 educaci6n financiera
educacion financiera y asl convertirse
en consumidores astutos que, a su vez,
transmitan estos conocimientos a sus
hijos. Este tipo de educacion financiera
puede resultar en la mejora de la
elaboracion de presupuestos familiares
y otras habilidades cruciales para la vida.
Ademas, para ayudar a los educadores
a combinar los conceptos de educaci6n
financiera con las asignaturas de ensenanza
obligatoria, como la matematica y la
lectura, el Departamento del Tesoro de
los Estados Unidos y el Departamento
de Educacion de los Estados Unidos se
asociar3n para organizar una reunion
cumbre enfocada en la integracion de la
educacion financiera. la capacitacion de
los maestros y demas temas relacionados.
Los temas financieros y la educad.on
varian entre las diferentes culturas,
por este motivo, para entender estas
diferencias, es crucial conocer los
distintos tipos de necesidades y asl
logrw un aumento de la participacion
de los mercados de las poblaciones
de las minonas en areas financieras
como las cuentas de transacciones y la
propiedad de vivienda. Sin embargo,
algunas personas experimentan
desconfianza hacia los bancos y las
agendas gubernamentales. Otras
personas tienen diversas actitudes acerca
del gasto y el ahorro, y muchos utilizan
mecanismos financieros interculturales.
como prestamos entre pares y gropos
de inversi6n conformados dentro sus
comunidades. Adicionalmente, otros
deben adherirse a restricciones religiosas,
como la prohibicion isbimica del pago
de intereses. En algunas comunidades,
como las reservas de poblaciones
inrugenas nativas y los vecindarios con
alta concentracion etnica, quizas no
existan muchas instituciones financieras.
Estas comunidades buscan estrategias
PTejflcio • Parte J: Adul'fi.a.nrionos ael futllro
La estrategia nacional para la educoci6n finonciero
clave para garantizar de mejor manera
los recursos de servicios financieros que
poseen. al mismo tiempo que adquieren
productos, seguros y mecanismos de
entrega que sean compatibles para todos
desde un punto de vista cultural.
Las organizaciones comunitarias pueden
desempeiiar un papel importante en las
iniciativas destinadas a mejorar la entrega
de infonnacion de educacion financiera.
Por ejemplo. el uso de la tecnologfa y la
innovacion han resultado en la creacion
de una amplia variedad de productos
de prestamos hipotecarios que son
complejos y poseen caracterfsticas que
pueden ser inadecuadas. muy riesgosas
y peIjudiciales financieramente para
algunos consumidores. como por ejemplo
las hipotecas de interes ;yustable y los
prestamos en los que se pagan solamente
los intereses cuyos niveles de pago pueden
cambiar drasticamente durante el termino
del prestamo. Ademas. a medida que el
Mercado de prestamos hipotecarios se
ha vuelto mas competitivo y prolifico, la
aparicion de prestamistas inescrupulosos
ha aeado preocupaciones relativas a las
pr.icticas abusivas de prestamo. Aunque
se han puesto en pnictica algunas
medidas reguladoras y legislativas para
prevenir y/0 combatir los prestamos
abusivos, Ia educacion financiera es 'Un
componente crucial para la protecci6n
del patrimonio de los propietarios de
viviendas. Los programas comunitarios
pueden ser efectivos tanto para promover
como para conservar la propiedad de la
vivienda. Ademas, las iniciativas locales
de p~piedad de vivienda pueden
aumentar la concientizacion y muchas
veces atraen a individuos y a familias
que desean hacer realidad su sueiio de
Ia vivienda propia. Del mismo modo,la
intervencion a nivel comunitario hacia los
propietarios de viviendas que atraviesan
dificultades financieras, puede ayudar a
atenuar eI efecto de las pr.icticas abusivas
de prestamo sobre los consumidores
y las comunidades en general.
3. Como crear coaliciones del sector
pUblico y/0 privado Ydel sector
privado entre si
El mejoramiento de la educacion
financiera de la nacion no es una
tarea solamente del gobiemo federal.
AI contrario, actualmente, la mayona
de las actividades de educacion y de
desarrollo personal de habiIidades
financieras son llevadas acabo por
organizaciones del sector privado.
La participacion comunitaria puede
mejorar en gran medida la efectividad
de la elaboracion conjunta de recursos e
iniciativas de divulgaci6n. Las coaliciones
de organizaciones publicas y privadas
Ylas asociaciones de organizaciones
privadas entre sf desempeiian un papel
importante en la labor de equipar a
los consumidores con las habilidades
financieras necesarias. Las uniones exitosas
de estas organizaciones pueden lograr
transmitir la informacion de manera
efectiva a audiencias clave con calidad
e imparcialidad en su mens.ye. Estas
coaliciones pueden resaltar el6dto local
de las iniciativas de educaci6n financiera,
como el estimular la participacion local y
el acceso a programas de educacion. Las
coaliciones son componentes valiosos de
cualquier iniciativa de concientizacion
publica iniciada por la Comision y son
una parte clave de la estrategia nacional
para mejorar la educaclon financiera.
El tema de la propiedad de vivienda es
solamente una de las muchas areas en las
que pueden funcionar las coaliciones entre
el sector publico y e1 privado. Ademas,
entre el primer trimestre del aiio 2006 y el
Prl'/acin • Parle I: Adttp.n(lfUJ()n()S dl'ljllluro
La estrategia nacional para la educaci6n financiera
primer trimestre de 2007, el Departamento
de Vivienda y Desarrollo Urbano de los
Estados Unidos (HUD, por sus siglas en
ingles) se unini al Departamento del
Tesoro de los Estados Unidos (DOT,
por sus siglas en ingles) para organizar
una serle de reuniones que resalten el
trabcYo de coaliciones exitosas que han
fomentado la propiedad de la vivienda.
Las coaliciones entre las comunidades
tambien pueden ser efectivas en el
tratamiento de los temas que afectan a
muchos individuos en este pais que no
mantienen cuentas bancarlas, de credito,
deahorro 0 de inversion. EI Departamento
del Tesoro de los &tados Unidos,junto
con la Corporacion Federal de Seguros
de DepOsito (FDIC, por sus siglas en
ingIes),laAdministracion Nacional de
Cooperativas de Credito y la Oficina del
Contralor de la Moneda celebranin una
serle de cuatro conferendas regionales
para compartir las m~ores pcicticas
sobre banca para las personas sin cuenta
bancaria.La5conferenc~tendninlugar
entre el primer trimestre del ano 2006 y
el segundo trimestre de 2007 y reuninin a
organizaciones comunitarias, proveedores
de servicios financieros y reguladores
federales, estataIes y locales con el fin de
fOJ:jar coaliciones y tratar sobre las Ultimas
novedades y estrategias para acercar a las
personas al sistema financiero principal.
Las coaliciones tambien han side efectivas
para estimular la creacion de rlqueza.
Varios de los miembros de 1a Comision son
integrantes de multiples organizaciones sin
fines de lucro, empleadores, instituciones
financieras yagendas gubernamentales
que trabajan con coaliciones cooperativas a
nivellocal, estatal 0 nacional para estimular
el ahorro entre las personas de ingresos
bajos 0 modicos. Entre los participantes del
gobiemo se destacan la Junta de la Reserva
Federal, la Oficina del Contralor de la
Moneda, la U.S. Securities and Exchange
Commission, el Departamento de Trab~o
de los Estados Unidos (DOL, por sus siglas
en ingles) y CSREES, que es el socio federal
en el Sistema de Extension Cooperativa.
4. Como investigar y evaluar los
programas de educacion financiera
Aunque existen muchas iniciativas
excelentes de educacion financiera en
toda la nacion, hay un tema que se repitio
en las cartas recibidas con comentarios
del publico y durante las reuniones de
sectores especificos organizadas por la
Comision. Estos comentarios se basan en
que no existe una evaluacion sistematica
para medir los programas de educacion
financiera. Ademas, hay pocos estudios
actualmente efectuados sobre metodos
exitosos de educacion financiera. Por
10 tanto, una base amplia y profunda
de investigacion sobre la educacion
financiera ayudani a los encargados
de elaborar politicas, asl como a los
proveedores de educacion financiera en
los sectores publicos y prlvados, a mejorar
la efectividad de su trabajo educativo
sobre finanzas. Ademas, aunque se han
reaIizado algunas buenas investigaciones,
se sobreentiende que pueden hacerse aun
mas. En el desarrollo de la investigacion
se produce un co~unto de conocimientos
compartidos sobre como informar y
educar mejor a los diversos gropos
sobre temas de educacion financiera.
Esta investigacion es esencial para crear
y replicar programas cuyos resultados
hayan sido demostrados y para garantizar
la utilizacion efectiva de los recursos.
Idealmente, los programas de educacion
financiera deberfan esforzarse por
incorporar resultados de investigacioneS
academicas que utilicen medidas
cuantitativas y cualitativas para evaluar
!i'rJ'l'ewo-rd Part II: IUustratl:tI(' Progmllls
La estralegia nacionol para
la efectividad de los programas. Estos
datos podrian ofrecer confianza a los
consumidores sobre los programas
que funcionan efectivamente, podri'an
brindar a los educadores modelos para
desarrollar materiales de calidad basados
en pruebas y ademas podrian servir para
garantizar la optimizacion de los reeursos
de aquellos que propordonan fondos
para desarrollar educacion financiera.
Para aumentar la concientizacion de la
investigacion academica existente y para
definir 10 que at1n sigue necesitando un
estudio mas profundo, e1 Departamento
del Tesoro de los Estados Unidos,junto con
CSREES y el Departamento de Agricultura
de los Estados Unidos, organizaran un
simposio de investigadores especializados
en educacion finandera. El simposio
tendni como resultado un documento que
analizani la investigacion de la educacion
financiera actual y tambien identificara
areas de posible investigacion futura.
Conclusion
Los Estados Unidos no son el tinieo
pais del mundo que esta realizando
un ancilisis serio de las necesidades de
educacion financiera de sus ciudadanos.
Pr.icticamente todas las naciones se
enfrentan a los mismos retos para
10 educaci6n
finonciera
aumentar el conocimiento financiero
y las habilidades necesarias que deben
poseer sus ciudadanos a fin de poder
tomar mejores decisiones financieras y
evitar fraudes. A medida que continua el
proceso de desarrollo de nuestra estrategia
nacional, sera importante continuar
el diatogo con otras naciones en un
esfuerzo por aprender de sus iniciativas.
EI cumplimiento del objetivo de desarrollar
una poblacion educada financieramente
tomara tiempo, pero la Comision esti
motivada por los numerosos y excelentes
programas en practica actualmente y
por las organizaciones que los operan
para mejorar los niveles de educacion
financiera de los estadounidenses. La Parte
II del prefacio contiene descripciones
de programas representativos que se
eneuentran actualmente en marcha
por toda la nadOn. Forzosamente, esta
segunda parte eontiene so~ente una
pequeIia poreion de la gran cantidad de
programas excelentes existentes en la
actuaIidad. Cada uno de los programas
detallados ilustra la multitud de pequefias
iniciativas que representan oportunidades
de aprendizaje y colaboraci6n para
contribuir a la confonnaci6n del
panorama nacional general que
inc1uye la iniciativa de educaci6n
finaneiera de los estadounidenses.
La estrategia nacional para la educaci6n financiera
Programas ilustratij\/(')S
ComisiOn Federal de EducaciOn Financiera
La Comwon Federal de Educaci6n
Financiera (1a Comision), fue establecida
para mc:jorar Ia educacion financiera
entre lOdos los estadounidenses y se
creo el 4 de diciembre del aDo 2003
cuando el presidente George W. Bush
sanciono la Ley de Mejora de la Educacion
Fmanciera en virtud del Titulo V de
la Ley de 19ualdad y Transacciones de
Credito Correctas del aDo 2003 (Fair and
Accurate Credit Transactions 0 FAcr Act,
por sus siglas en ingles) (P.L. 108-159).
El Congreso encarg6 a 1a Comisi6n la tarea
de "mejorar la education financiera de las
personas en los Estados Unidos por medio
del desarrollo de una estrategia nacional
para estimular la educacion financiera".1
Las principales tareas de la
Comisi6n son las siguientes:
1. Estimular las iniciativas
gubernamentales y del sector
privado para promover la
educaci6n financiera.
2. Coordinar las iniciativas
de educacion financiera
del gobierno federal.
3. Elaborar una estrategia
nacional para promover Ia
educacion financiera entre
todos los estadounidenses.
4.. Establecer un sitio Web a nivel
nacional sobre la educacion
financiera y por medio del mismo
proporcionar un punto de
acceso para proveer informacion
JfOt"eUlntd PlITt
sobre la educaci6n financiera,
programas educativos y subsidios.
5. Establecer una linea telefonica
gratuita para atender solicitudes
del publico que necesite materiales
sobre temas pertinentes a
1a educacion financiera.
Programas tratados en este informe
En cada uno de los 18 capftulos tematicos
incluidos en Ia estrategia, Ia Comision trat6
sobre varios tentaS, la mayona de los cuales
habian sido identificados por el Congreso
y que son pertinentes a la educacion
financiera. En cada capitulo se describen
los diversos programas de educaci6n
financiera elaborados y operados por
organ.izaciones sin fines de luero,
instituciones academicas, el gobierno
federal, estatal y/o locales y por el sector
privado. Estos programas se explican
con mas profundidad en cada capitulo
segUn como han sido identificados, y
las "Iniciativas de accion" identificadas
al final de carla ·capftulo representan
oportunidades de mc:jorar los esfuerzos la
educacion y conocimientos financieros en
cada
en particular. Parte II representa
algunos de los esfuerzos de investigacion
de los antecedentes rea1izad.os por la
Comision para obtener la informaci6n
sobre oportunidades y retos referidos a
la educacion financiera necesarios para
el desarrollo de la Estrategia Nacional.
area
La Comisi6n se esforzO arduamente
por incluir todos los puntos de vista
11: lll-uslmtiTJI' Progm.1lH
La estrategia l1acional para 10 educaci6n financiera
en el proceso de deliberacion,
incluyendo 10 siguiente:
•
Primero, el 26 de agosto del
ano 2004, la Comisi6n publico
un aviso en el Registro Federal
solicitando comentarios del publico
sobre la Estrategia Nacional.
En respuesta a este aviso, se
recibieron mas de 150 eomentarios
de ciudadanos particulares,
organizaciones sin fines de luero,
instituciones academicas, agencias
federales y/0 estatales y otras.
•
Segundo, la Comision organiz6
seis reuniones especifieas de
sector para reunir informacion
mas detallada de parte de aquellos
que respondieron al aviso del
Registro Federal puhlicado en el
mes de agosto. Estas reuniones se
celebraron en diversos lugares en
Washington, D.C. entre el 25 de
febrero y el17 de Marzo del ano
2005. Tanto el aviso publicado
en el Registro Federal como
los resumenes de las reuniones
espedfieas de sector estin induidos
en los apendices de esta Estrategia.
•
Finalmente, la Comision reunio
a un gropo de 13 agendas
integrantes de la Comisi6n para
proveer una gran cantidad de
informacion para la Estrategia
elaborada por el Departamento
del Tesoro de los Estados Unidos.
Entre junio del ano 2004 y junio
de 2005 los representantes de
distintos grupos de trabajo se
reunieron en once ocasiones
distintas en el Departamento del
Tesoro de los Estados Unidos
para debatir los plazos de tiempo
necesarios, contenido y la
estructura general del documento.
La Seccion 114 del Titulo V de la ley
FACT del ano 2003 establece que la
Estrategia, "debeni incluir la participacion
de los gobiemos estatales y/0 locales y
de instituciones del sector privado, sin
fines de lucro y publicas en la creacion
e implementacion de la estrategia". Este
mandato reconoce que tanto el sector
privado como el publico son esenciales
para mejorar la educacion financiera en
los Estados Unidos. En cumplimiento
de este mandato, la Estrategia examina y
trata los recursos de educacion financiera
del gobierno federal, los gobiernos
estatales y10 locales y proveedores
subcontratados del sector privado.
EI Departamento del Tesoro de los
Estados Unidos considero una variedad
de programas que no son del gobierno
federal sobre los que obtuvo informacion
de alguno de estos dos modos:
a. Los programas fueron citados por
un individuo que respondi6 a1 aviso
publicado en el Registro Federal
el 26 de agosto del ano 2004 por
medio del cual se solicitaban
comentarios del publico sobre
recursos de educacion financiera
para la Estrategia Nacional. El
periodo de comentarios se cerro
e131 de octubre del ano 2004.
b. Estos programas fueron
recomendados por empresas
en respuesta a la tarea
del Departamento del
Tesoro de promover una
variedad de programas.
El Departamento del Tesoro de los Estados
Unidos determino que los programas no
federales gubemamentales tratados en el
informe estin compuestos por 10 menos
por seis de los siguientes ocho elementos
que fueron elaborados por la Oficina de
Educacion Financiera del Departamento
Prn'f!'lJIrn"d Pflrl II: IlluslmtilJl' Pm~mllls
La eslrategio nocional para 10 educaci6n financiera
del Tesoro de los Estados Unidos en el
legislativo 0 la integra.ci6n en un
curso de instruccion establecido.
ano 2005, en los cuales eI programa:
a. El contenido del programa se
centra en el ahorro bisico, la
administraci6n del credito, Ja
propiedad de vivienda y/0 la
planificaci6ri para la jubilacion.
b. EI contenido del programa esta
adaptado para su audiencia
especifica, teniendo en cuenta su
idioma, cultura, edad y experiencia.
c. El programa se ofrece por medio
de un canal de distribucion local
que haee un uso efectivo de los
recursos y contactos comunitarios.
d. El programa realiza tareas
de seguimiento con los
participantes para reforzar el
me~e y garantizar que los
participantes puedan aplicar
las habilidades enseiiadas.
e. EI programa establece
o~etivos especificos y uti1iza
medidas de rendimiento para
seguir el progreso hacia el
lagro de esos objetivos.
f.
El programa demuestra un impacto
en las actitudes de los
participantes. conocimientos 0
comportamiento por medio
de las pruebas, encuestas u
otras evaluaciones objetivas.
positiv~
g. EI programa puede ser replicado
£icilmente con car:icter local,
regional 0 nacional para tener un
amplio impacto y sustentabilidad
h. EI programa estci creado para
perdurar segUn 10 evidenciado
por factores tales como el apoyo
financiero continuo, el respaldo
Ji(If"(!iJ.lfltyJ
Pfwt
La finalidad de incluir esws programas
no gubemamentales fue Ia de brindar
ejemplos especificos y concretos de
iniciativas de educacion financiera que
ilustren especfficamente los temas tratados
en cada capitulo. EI gobiemo de los
Estados Unidos, inc1uyendo la Comisi6n
Federal de Educacion Financiera y las
agendas que la integran no endosan
alasenudadesgubenruunentalesno
federales mencionadas en este infonne. ni
garantizan de modo alguno los servicios,
consejos 0 productos proporcionados
por las entidades ajenas al gobiemo
federal mencionados en este infonne. La
referencia en este infonne a cualquier
institudon financiera. producto, proceso
o servicio especi'fico no constituye endoso,
aprobaci6n 0 recomendacion por parte
del gobiemo de los Estados Unidos,
incIuyendo la Comisi6n Federal de
Educacion Financiera 0 cualquiera de sus
agencias integtantes, ni certifican 0 indican
que las entidades ajenas a1 gobiemo
federal mencionadas en este infonne - 0
rualquiera de sus servicios. consejos 0
productos - esren de confonnidad con 0
satisfagan los requisitos de la legislaci6n
o reglamentos aplicables. En relacion
con las direcciones de los sitios Web
que aparecen en este infonne creadas
y mantenidos por entidades i!ienas a1
gobiemo federal, el gobiemo de los
Estados Unidos, inc1uyendo 1a Comision
,Federal de Educacion Financiera y
sus agendas integrantes, no endosan,
aprueban, certifican, ni controlan estos
sitios extemos y no garantizan 1a exactitud,
integridad, efectividad u oportunidad
de la infonnaci6n contenida en eUos.
/l: IIlU.flrttlivf Progm.ms
La estrategia nacional para
Ademas. los programas descritos en esta
Estrategia no son de ninglin modo una lista
exhaustiva de los programas que tienen un
impacto positivo en la educacion financiera
y han sido incluidos con fines ilustrativos
dentro de sus respectivos capitulos.
10
educaci6n financiera
Tanto el aviso en el Registro Federal
como los rest1menes de estas
reuniones estin inc1uidos como
apendices de esta Estrategia.
Notas
Titulo V, Sec. 513
Ji'Ot'tlUlO1Yi
P"',-l II: llIu.ff.mtivt' Progmms
Ahorros
Vision general
El ahorrar brinda la oportunidad de
adquirir los objetivos importantes de
la vida de cada individuo, tales como
el financiar una vivienda propia, el
poseer una educaci6n universitaria,
el tener los recursos neeesarios para
enfrentar acontecimientos inesperados
y el prepararse para la jubilaci6n. Esto
se puede lograr con una pequena
cantidad de ahorros que puede creeer
y acumularse con el paso del tiempo
contribuyendo a la seguridad econ6mica
que todos procuramos lograr.
Como naci6n, hemos presenciado un
declive en la tasa del ahorro personal. Hace
35 anos, el 9.4 por ciento del ingreso neto
era separado para ahorro. 1 En el ano 2004,
la cifra comparable fue de 1.3 por ciento.2
Alan Greenspan, el antiguo presidente de
laJunta de Gobemadores del Sistema de la
Reserva Federal, indic6 10 siguiente ace rca
de la importancia del ahorro personal:
"Un componente clave del ahorro intemo
en los Estados Unidos durante las decadas
futuras sera el eurso que siga la tasa de
ahorro personal. Dicha tasa de ahorro
dependera de una cantidad de factores,
especialmente del comportamiento que
tenga la generaci6n de las personas nacidas
en la epoca de la posguerra (1946-1960)
durante el periodo de lajubilaci6n."g
Retos
Ademas, existen varias razones que
explican la actual situaci6n del ahorro
La estl"ategia nacional para 10 educaci6n financiera
en los Estados Unidos, resulta que
para muchos estadounidenses este es
un tema complejo que requiere una
comprension de las situaciones y la
toma de decisiones personales. Para
algunos, el reto es aprender el valor del
ahorro personal desde temprana edad.
Para otros, sera necesario hacer una
planificacion cuidadosa. Y
aun para otros, requerira
una mejor comprension
de los mecanismos
necesarios para ahorrar.
moderna. Mensualmente, la familia
estadounidense promedio gira cheques
para pagar el alquiler 0 la hipoteca, la
atencion de los ninos, y los servicios de
mantenimiento. AI combinar estos gastos
mensuales con los egresos por transporte,
alimentacion, vestimenta, matriculas
de estudios para los hijos, pagos de
prestamos estudiantiles y gastos
incurridos por la atencion de
los padres de edad avanzada
a las familias les queda un
limitado ingreso discrecional.
Asimismo, es importante
que los estadounidenses
posean la informacion,
el conocimiento y las
habilidades para identificar
sus objetivos de ahorro (Ej.:
el ahorrar para los gastos de
educacion que se presenten
en un futuro, para el pago
inicial de la compra de una vivienda
y para la jubilacion); y tambien para
seleccionar los instrumentos y productos
que pueden ser utiles para facilitar ellogro
de sus objetivos. AI contar con una mayor
educacion sobre los beneficios del ahorro,
los estadounidenses pueden lograr una
mejor comprension de la importancia y
los beneficios que este proporciona, al
igual que un mejor entendimiento de
las estrategias que sustentan el ahorro
sistematico y la acumulacion de riqueza.
AI momenta de decidir la
manera de asignar estos
ingresos discrecionales, las
familias se enfrentan con
mensajes persuasivos que los
aIientan a gastar su dinero.
Comparativamente, las familias
sue len recibir poca informacion
y estimulo sobre el ahorro.
Conocer el como y el por que del ahorro
puede otorgarles a los estadounidenses
las herramientas necesarias para tomar
decisiones inteligentes al momento
de asignar los recurs os discrecionales
que a menudo son limitados.
,
Temas relacionados con el
ahorro
1. Como cambiar el eje de la discusi6n
publica del consumo aI ahorro por
medio de campaiias de concientizaci6n
publica
En el mercado existe una gran
competencia por los ingresos de la familia
l
Uno de los elementos que forma parte
de la construccion del ahorro es la
proteccion de dichos ahorros por medio
del uso del las polizas de seguro. AI
momenta de planificar sus ahorros y
demas temas financieros, las personas
deben presupuestar fondos para contratar
seguros de salud, vivienda, automovil y
vida. De esta manera, los estadounidenses
pueden reducir las probabilidades de
que un evento catastrofico eli mine
los ahorros de toda una vida.
Por medio de esfuerzos de concientizacion
publica difundidos a traves de los medios
de comunicacion, los estadounidenses
pueden aprender mas sobre los beneficios
Ca/)iI1l/0 1: Ahorms
La estrategia nacional para
adquiridos al ahorrar. EI ahorro es un tema
crucial para todos los estadounidenses y las
campaiias de anuncios de servicio publico
pueden ayudar a que mochas personas
comprendan la importancia del ahorro.
Las campaiias de anuncios de servicio
publico pueden educar a la nacion sobre
los beneficios del ahorro personal y los
pasos espedficos a considerar por cada
individuo y familias estableciendo una
comunicacion directa con la poblacion
utilizando los canales de comunicacion que
se han ganado la confianza del publico y
con los cuales las personas se encuentran
familiarizadas, por medio del desarrollo de
me~es con un estilo, fonnato y fundon
que los haga &entir comodos. Este tipo de
anundos de servieia publico, podni. emprender Ia difusion de breves segmentos en
radio y television, la distnl>ueion de material por medio del Internet y en localizaciones comunitarias, 0 a traves del patrocinio
de actividades educativas. Estas campaiias
deben ser continuas proporcionando 1a
inforinacion al publico y haciendo un
seguimiento con el transcurso del tiempo.
En toda la nacion existen Prograrnas
individuales, tanto privados como
publicos. que emplean campaiias
de anuncios de servicio publico
enfocadas en el tema del ahorro.
10 educaci6n
financiera
diseiiada para enfocar 1a atencion del
publico con toda 1a informacion necesaria
para lograr la seguridad economica y
promover la idea de que el ahorro es un
elemento vital para Uegar a conseguir 1a
seguridad economica del manana. Desde
el ano 1997,la eampana ha obtenido el
aporte de mas de 20 millones de d61ares
de tiempo "en el aire" para emitir sus
menSC!ies de servicio publico a traves
de los medios de comunicacion.
Este programa es solamente una parte de
los esfuerzos de esta organization para
incrementar la concientizacion publica
respecto a las aceiones necesarias que
debe tomar cada individuo para facilitar su
independencia financiera personal a largo
plazo. Esta organizacion nacional sin fines
de luero, formada por institueiones del
sector publico y privado, trahga a !raves de
sus asociados para brindar educacion a los
estadounidenses sobre todos los aspectos
de las finanzas personales y desarrollo
de 1a riqueza, incluyendo temas tales
como administracion del credito, ahorro
para estudios universitarios, compra de
vivienda y planificacion para Ia jubilacion.
Cam.pmla naciorwl/lowl ele (tnuncios de .~ervir.io
Ca'tnpmw 1uuibn.a1 de anuncios d~ sf.tvici.o
jntbfico de multimedios de mmttnicaci6n
Para transmitir el men~e de 1a
importancia del ahorro, existe una
campaiia nacional de anuncios de
servicio publico que utiliza 1a gama
completa de medios de comunicacion
disponible en tod~ el pals. incluyendo Ia
television, 1a radio, materiales impresos,
el Internet, anuncios en autobuses. trenes
y subtemmeos. conferencias y de:mas
canales de difusion. La campana esrn
Jnwlico:v /»rJgramfl dB uRonu
Las campaiias de anuncios de servicio
publico brindan informacion para el
publico; a1gunas campaiias de este
tipo estimulan a los individuos a tomar
acci6n y comprometerse. Por ejemplo,
en el ano 2001. se lanz6 una campana
de infonnacion a niveIlocal destinada a
los ciudadanos de una ciudad de Ohio
que inicialmente tema como prop6sito
motivar y ayudar a los estadounidenses de
recursos rnyos a ahorrar y crear riqueza.
Actualmente, la campana de promoci6n
del ahorro tiene alcance nacional e incluye
mu de 50 iniciativas locales y nacionales
Capitulo 1; A.horms
La estrategia nOC101101 para
de organizaciones sin fines de lucro y
gubernamentales que dirigen su funcion
hacia grupos especificos, tales como 1a
poblacion afro-americana, estadounidenses
de origen hispano, personal militar,
grupos religiosos yjovenes. La campana
no solamente emite anuncios de
servicio publico sino que tambien
provee informacion y brinda servicios
para motivar a las personas a inscribirse
como ahorradores. Cada persona debe
comprometerse a trabcyar para a1canzar
una meta de ahorro por medio de un
plan espedfico que incluye depositos
mensuales en una cuenta especffica.
Estas personas que ahorran reciben
informacion gratuita sobre estrategias y
cuentas de ahorro, un boletin informativo
trim estral y acceso a los servicios de
asesorfa de parte de profesionales
certificados en planificacion financiera.
Estos programas de informacion publica
sobre el ahorro son ofrecidos y apoyados
por mas de 1,000 organizaciones, entre
las cuales se incluyen a mas de 100
instituciones financieras que ofrecen a
las personas inscritas cuentas de ahorro
sin requisito de balance minima 0 con
balances mfnimos de bajas cantidades de
dinero. Como resultado de los esfuerzos
de estos programas, mas de 30,000
estadounidenses se han inscrito como
ahorradores, y cientos de miles de personas
han solicitado informacion sobre el ahorro.
Senwna de cuncieJlliwrion /Ribtica subm /(1
importaru:ia de las polizas de segwo
El contar con un nivel mayor de
informacion y conocimiento sobre la
importancia de estar asegurado puede
reducir la probabilidad de que un
acontecimiento catastrofico elimine los
ahorros de toda una vida. Esta asociacion
nacional promueve su semana anual de
concientizacion publica, cuyo mensaje se
(;(I/JlI1110
io educoci6n financiera
centraliza en ayudar a los con sumi do res a
evitar el fraude en la compra de seguros,
revisar los niveles de cobertura de seguro,
utilizar los servicios de los departamentos
estatales de seguro y consultar con
sus proveedores de seguro acerca de
la posibilidad de obtener descuentos.
Ademas, el ano pasado participaron de
esta campana 45 estados y e1 Distrito de
Columbia. Esta campana fue emitida
por radio y television al igual que lfneas
telefonicas disponibles para que los
consumidores dirigieran sus preguntas
y expresaran sus preocupaciones.
En una encuesta realizada recientemente,
el 72 por dento de los estadounidenses
indico que tenian la cantidad de
cobertura de seguro correcto, pero
solamente el 32% indico haber entendido
"muy bien" los detalles de las polizas. 4
En consecuencia, la campana de
concientizacion publica se enfoca en cubrir
la insuficiencia de conocimientos sobre
el tema brindando a los consumidores
informacion importante sobre el seguro.
Resumen
Las campanas de anuncios de servicio
publico representan un mecanismo
para incrementar la concientizacion del
publiCO ayudando a los estadounidenses
a mantener una predisposicion orientada
hacia el ahorro. A traves de la realizacion
de campanas de anuncios de servicio
publico los estadounidenses pueden
adquirir una mejor comprension del
valor del ahorro, los pasos especfficos a
seguir para cumplir con los objetivos del
ahorro personal y los beneficios provistos
por un proceso perdurable del ahorro.
Las campanas de concientizacion publica
tambien pueden reunir a una variedad de
organizaciones que se dirigen a grupos
especfficos y que ofrecen oportunidades
1: AhOlJ'os
La estrategia nacionol para la educaci6n financiera
concretas para que los individuos
logren convertirse en ahorradores.
la nacion, el ahorro puede resultar una
actividad conveniente y asequible.
2. Como uti1izar los incentivos de
impuestos para lograr un ahorro mas
conveniente y asequible
Durante las pasadas decadas, las libretas
de ahorro y las ti'picas alcancias con forma
de cerdito representaban los planes de
ahorro. El ahorrar dinero es una actividad
que requiere prevision, planificacion,
actividades espedficas y responsabilidad y a
menudo es una actividad que se emprende
sin saber cmil sera el beneficio especifico
que sera alcanzado. AI contrario, el gastar
es una actividad percibida como algo facil,
pero el ahorro es un ejercicio de paciencia
y tenacidad con una vision que les permita
a los individuos lograr 0 prepararse para
un futuro mejor 0 para pavimentar el
camino en caso de que deban enfrentarse
a emergencias 0 a crisis inesperadas.
Para crear riqueza, es importante
transmitir unas lecciones simples sobre
el ahorro. Una cantidad muy baja de
ahorro guardado en el presente puede
acumularse llegando a crear los recursos
necesarios para el futuro. Este tipo
de recursos puede proporcionar 1a
seguridad economica y la flexibilidad
necesarias para enfrentar acontecimientos
inesperados, ofreciendo simultineamente
los medios para afrontar las necesidades
financieras y la planificacion.
En su esfuerzo por ahorrar mas, los
estadounidenses deberian utilizar la gama
completa de productos y herramientas de
ahorro que se encuentran disponibles. Las
herramientas para el ahorro incluyen un
rango mas amplio que el que ofrecen las
libretas de ahorro y las alcandas. A medida
que el sector publico y privado conti?ua
introduciendo innovaciones para sattsfacer
las crecientes y diversas necesidades de
Tal innovacion abarca todos los aspectos
de nuestra vida cotidiana. Por ~emplo,
las cuentas de ahorro para gastos
medicos (HSA, por sus siglas en ingles)
y las cuentas de ahorro Coverdell para
gastos de educacion brindan a las
familias las herramientas que posibilitan
planificar y administrar sus ahorros
para afrontar los gastos medicos y
educativos previstos para el futuro.
CumIns de ah01TO /Jara gastos medicos (HSA)
Para algunos consumidores, las cuentas
HSA forman parte de un programa
innovador cuyo objetivo es el de impulsar
el ahorro y 1a planificacion personal
para afrontar los gastos medicos que
se presenten en el futuro. Basadas en
el modelo de las cuentas de ahorro
llamadas Archer Medical, las HSA son
esencialmente planes de ahorro para
pagar los costos de los servicios medicos.
Estas cuentas permiten pagar los gastos
medicos actuales sin impuestos, al mismo
tiempo que posibilitan que las personas
que se inscriban en este plan ahorren
para afrontar los gastos medicos futuros
durante los aiios de lajubilacion. AI
igual, que 10 que sucede con una Cuenta
Personal de Jubilaci6n (IRA, por sus siglas
en ingles) que promueve el ahorro para
la jubilacion, las cuentas HSA ayudan
el ahorro para los gastos medicos.
Todo adulto que esre cubierto por un plan
de salud con una c1ausula de deducible alto
(y que no tenga ninguna otra cobertura
ni posea ninguna otra cobertura .desde el
primer d6lar) puede establecer una cuenta
HSA 5 Con el fin de motivar el ahorro
para afrontar aquellos gastos medicos
que se presenten durante la jubilacion,
Jas personas mayores de 55 aiios pueden
Ca/Jilu/o 1: Aho11"OS
La estrategia Ilaciollal para 10 educocioll financiera
hacer contribuciones
adicionales para nivelar su
cuenta HSA hasta tanto se
inscriban en Medicare.
como tambien a los gastos
educativos de ensefianza
primaria y secundaria.
EI dinero ahorrado en una
cuenta HSA es la propiedad
y esta bajo control de cada
individuo, y las decisiones
relacionadas con el gasto de
estos fondos no requieren
de la participacion de un
asegurador de salud ni de
ningUn tercero. Los titulares
de cuentas HSA deciden
que tipos de inversiones
desean hacer con su dinero,
controlando de esta manera el crecimiento
de sus cuentas HSA Si bien es cierto
que algunas empresas pueden establecer
cuentas HSA para sus empleados, los
individuos pueden obtener este tipo
de cuenta en instituciones financieras,
cooperativas de credito, compaiifas de
seguro y otras compafifas aprobadas.
Cu.enlas d,' altarlV CovPrdell /)(/m gast[!.~ de
rducaci6n
Una cuenta de ahoITO para gastos de
educacion (ESA, por sus siglas en ingles) es
otro de los ejemplos de un producto de
ahoITO innovador que fue creado como
un incentivo para ayudar a los padres
y a los estudiantes a ahorrar para los
gastos de educacion. Los padres de los
estudiantes menores de 18 arios pueden
aportar anualmente a la cuenta hasta una
cantidad de $2,000 por hijo. El estudiante
no debera pagar impuestos sobre estas
contribuciones si la cantidad de los aportes
efectuados no supera la cantidad de los
gastos de educacion en una instituci6n
educativa elegible. Este beneficio se
aplica a los gastos de educacion superior
Generalmente, cualquier
individuo (incluyendo el
beneficiario) puede hacer
aportes a una cuenta ESA
si el ingreso bruto ajustado
modificado del individuo
es menor a $110,000
($220,000 en caso de que
el individuo presente una
declaraci6n de impuestos
conjunta). La cantidad de
la contribucion maxima de
$2,000 por beneficiario se
reduce gradualmente si el ingreso bruto
ajustado modificado del contribuyente es
mas alto. Los aportes a estas cuentas son
libres de impuestos si son aplicados para
gastos de educaci6n, como par ejemplo el
costo de la matricula, libros, cargos, etc.,
cobrados por una institucion educativa
elegible. La definicion de institucion
educativa elegible incluye a toda escuela
publica, privada 0 religiosa que provee
educaci6n primaria 0 secundaria tal
como se determina bajo ley estatal.
Resumen
Estos son solamente dos ejemplos
incluidos en e1 c6digo fiscal de la
variedad de mecanismos existentes
que brindan incentivos de ahOITO para
afrontar los gastos de necesidades
futuras. Los estadounidenses deben
evaluar cuidadosamente estos ejemplos
y la multitud de oportunidades de
ahorro existentes para determinar la
manera de satisfacer sus necesidades
financieras actuales y [uturas.
CalJi/lIto 1: A hon-os
La estralegia nacional para
3. Como adaptar las comunicaciones para
que el ahorro pueda ser de interes
general
Ademas de los amplios esfuerzos
impulsados por las campafias masivas
de servicio publico, existen otras
oportunidades para utilizar los
programas dirigidos a individuos 0
gropos de personas. Los organizadores
pueden impulsar la efectividad de
los programas concentr.indose en la
elaboracion de mensajes que sean 10 mas
relevantes posible para cada sector.
Para lograr este objetivo, los disenadores
de los programas deben primero
detenninar los intereses financieros y las
expectativas de la audiencia por medio de
la investigacion de mercado. Contando
con estos datos, los organizadores de
los programas pueden comenzar por
identificar las elases, materiales y expertos
apropiados para el tema (Ej.: planificadores
financieros) para difundir la informacion
sabre ahorro a 1a audiencia espedfica. Los
diseftadores de los programas tambien
deberian usar este proceso para garantizar
que los programas traten las necesidades
y exigencias financieras particulares
de la audiencia, teniendo en cuenta
temas tales como el idioma materno,
acceso al Internet de los destinatarios
y otros retos de comunicacion.
EI ahorro tiene significados diferentes
para diferentes personas. Los esfuerzos
educativos adaptados a gropos especfficos,
como por ejemplo los realizados por el
Departamento de Agricultura (USDA, por
sus siglas en ingles) y por e1 Departamento
de Defensa de los Estados Unidos (000,
por sus siglas en ingles), pueden maximizar
el alcance y la efectividad de las actividades
generales re1acionadas al ahorro.
10
educoci6n financiera
Seroirio de hmpsligm:ion CO"/lmlli1ltl E\'lalal,
EduC(u;ion y EXlen.si6n rifl Dpjmrlamm,(o de
Aglicull'uJ'a dp los &lados Unit/os
Los estadounidenses de las zonas rurales
enfrentan muchos de los mismos retos
que las personas que residen en regiones
urbanas, como por ejemplo un excesivo
endeudamiento con taIjetas de credito,
una planificacion financiera deficiente,
falta de ahorro para la jubilacion y
carencia de capacitacion para explorar
un mercado financiero complejo.
Lamentablemente, debido a las distancias
y a la falta de servicios (entre los que se
induyen la ausencia de oportunidades
educativas), es posible que los residentes
de las areas rurales no tengan los mismos
recursos que aquellos que viven en
zonas urbanas. Es por este motivo que
organizaciones tales como el Servicio
de Investigacion Cooperativa Estatal,
Educacion y Extension (CSREES, por sus
siglas en ingles) del USDA, llega con sus
esfuerzos hasta los estadounidenses que
residen en areas rurales - ademas de
las areas mas pobladas - a traves de la
realizacion de talleres, cursos de estudio
domiciliario, programas de estudio en
el Internet y otros metodos educativos.
Por ejemplo, para ayudar a los individuos
a centrar su atencion en sus situaciones
economicas de largo plazo, el CSREES
establecio su iniciativa Financial Security in
Later Life (Seguridad para la vida futura).
A traves de un conjunto de programas
disponibles por medio del Internet y otros
dictados personalmente, esta iniciativa
impulsa a los participantes a planificar
su jubilacion y estar preparados para los
costos potenciales de la atencion de la
salud de largo plazo y a eva1uar su propia
conducta financiera para garantizar que
Capitulo J: A.honm
La estrategia nacional para la educaci6n financiera
sus acciones esten bien encaminadas para
cwnplir con sus objetivos financieros.
Desde el24 de enero de I 2005, 24 estados
reportaron 36,563 iridividuos inscritos en
uno 0 mas de los planes de estudios de los
ocho programas educativos de Financial
Stcurity in Later Lift's.6 Como resultado
de esta participacion, el 90 por dento de
los inscritos aumento su conocimiento
finandero, el 62 por dento de las personas
piensa utilizar las practicas de planificaci6n
financiera recomendadas, y el 48 por
clento planifico manejar el uso del credito,
reducir la deuda 0 reducir los gastos
del gropo familiat.' Un gropo de 7,574
individuos que complet6 los programas
reporto un total de $6,307,708 de impacto
financlero anual (en conceptos tales
como dolares ahorrados, deuda reducida
o dinero para nuevas inversiones).8
Military Saves
Para aquellas personas que desempenan
tareas en las fuerzas armadas de los
Estados Unidos, el ahorro representa un
reto, particularmente para los individuos
enlistados en las categorias inferiores de
18 y 21 mos de edad. Aproximadamente
un cuarto de los hombres y mujeres
unifonnados de la nacion no ahorra nada
y casi la mitad solamente ahorra 10 que Ie
resta luego de pagar sus gastos mensuales,
10 que significa que el personal de las
fuerzas armadas no tiene establecido
ninglin plan sistematico de aborro. Es por
este motivo que el DoD ha desarrollado
programas de ahorro especfficamente
adaptados a las necesidades y caracteristicas
del personal de las fuerzas armadas
que necesita comenzar a ahorrar
para prepararse para el futuro.
Sobre la base del modelo provisto por
la campana llamada America Saves de la
Federacion de Consumidores de America
(CFA, por sus siglas en ingles), las pruebas
piloto de este esfuerzo de mercadeo social
han demostrado el mismo nivel de exito en
rerrninos de motivacion de los miembros
del servicio acerca de reducir el nivel
de endeudamiento y establecer ahoITos
para el futuro. Ademas, algunas de los
lugares en d6nde se estin desarrollando
los programas piloto han demostrado que
la campana Saves puede motivar a que los
miembros de las fuerzas annadas tomen
accion. En una locacion, el 50 por ciento
de la audiencia se inscribio acordando en
ahorrar $93,000 durante el primer aDo.
Resumen
El motivar a las personas a implementar
en sus vidas el habito del ahorro resulta
efectivo solamente si llega a aquellos a
quienes tiene la intencion de ayudar.
Consecuentemente, para ocuparse de
los intereses de un amplio rango de
edades, comunidades geognificas y
niveles econ6micos, resulta de crucial
importancia que los esfuerzos de
concientizaci6n y educacion garanticen
que los materiales y actividades se
ofrezcan en los idiomas necesarios. AI
adaptar los menSC!i.es Yactividades a la
medida de aquellos que los necesitan, las
organizaciones pueden estar seguras de
que los mens3;jes no solamente lleguen
sino que tambien tengan resonancia
dentro de las audiencias destinatarias.
Se debe enfatizar que los mensajes
y programas educativos se adopten
teniendo en cuenta espedficamente a los
grupos por edad y sectores demogr:ificos.
La meta es utilizar una multitud de
mensajes y enfoques metodologicos
con el fin de que cada mensaje tenga
la re1evancia necesaria para impactar
a diversos gropos e individuos.
Callilufo 1: A.ho1"1m
La estrategia nacional para
10 educacion
financiero
Tactica empleada: Informacion publica, focalizacion
1-1
En el primer uimestre del aiio 2006, el Departamento del Tesoro se asociara con
una organizacion sin fines de lucro para desarrollar e implemcntar un anuncio
de sClvicio publico acerca de los beneficios de ahorrar durante d uanscurso de la
vida y para difundir los rccursos para el ahorro disponib1es en cl sitio Web de 1a
Comisi6n Federal de Education Financicra, MyMoney.gov.
1-2
Las organizaciones que abogan por un aumento del nivel de ahorro deben ampliar
sus enfoques metodol6gicos de coll1unicadon general con mensajcs adaptados para
ocuparsc de los intereses de. los miembros de los grupos por cdad, comunidades
geograficas y nivelcs economicos especfficos.
Now
Documento del Departamento de Comercio de 10& Estad06 Unidos. National Income and
Product Accounts Table. (n.d.). Extraido eJ 26 de julio de 2005 de http://www.bea.doc.gov/
bea/dn/nipaweb/TableView.asp#Mid.
Ibid.
s
Greenspan, A. ('l7 de agosto de 2004). Comentu"ios ante el Simposio del ano 2004 del Banco
de la Reserva Federal, Kansas City.
4
Encuesta del ana 2003 de Ia National Association of Insurance Commissioners. Extraida de
http://www.naic.org/consumerJIome.htm.
·5
Para el alio 2005, un plan de salud con cJausula de deducible alto (HDHP. por sus siglas
en ingles) es un plan de seguro de salud con un deducible mInimo de $1,000 (cobertura
individual) 0 $2,000 (cobertura familiar). Para el ano 2005, los gastos anuales pagados en
efectivo (incluyenda los deducibles y los co-pagos) no pueden exceder $5,100 (cobernlra
individual) 0 $10,200 (cobertUra familiar). Los planes HDHP pueden tener una cobertura de
primer dOlar para atenci6n preventiva.
6
Departamento de Agricultura de los Estados Unidos. (n.d.). CSREES. Extrafdo e126 de Julio de
2005 de http://www.csrees.usda.gov/index.html.
7
Ibid.
8
Ibid.
Capitulo 1: A.hon"Os
La estrategia nacional para 10 educaci6n financiera
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Vision general
En el ano 2001, el presidente George
W. Bush dijo: "La vivienda propia esti
en el corazon del sueno americano. Es
un elemento clave para la movilidad
economica ascendente de los
estadounidenses que perciben niveles
de ingresos financieros bajos 0 rnodicos.
Es un eIemento de consolidacion para
las familias y una fuente de estabilidad
para las comunidades. La vivienda
propia actlia como el cimiento de
la seguridad financiera de muchas
personas. Y es una fuente de orgullo
para las personas que han trabajado con
esmero para sustentar a sus familias".
Para los hogares, las comunidades y para
la naci6n en conjunto, la compra de
la vivienda pro pia transmite beneficios
economicos y sociales significantes.
Por consecuencia, hace mas de 70
anos, la compra de vivienda ha sido un
objetivo primordial de los proyectos
de ley promovidos por el gobierno
Federal y el foco principal de los
programas y politic as importantes.
En eI ano 2004, el 69 por dento de los
estadounidenses eran propietarios de
su vivienda -la tasa mas alta de todos
los tiempos. La compra de Ia vivienda
La estrategia nacional para
es un tema importante para todos los
estadounidenses porque representa un
activo considerable para el patrimonio
hogareno. En el aiio 2001, el97 por ciento
de todos los propietarios de viviendas
mantenla al menos una parte del valor
neto sobre sus viviendas (con un promedio
nacional de capital acumulado sobre la
hipoteca de $70,000). EI capital acumulado
sobre 1a hipoteca de vivienda represent6 el
42 por ciento del valor neto patrimonial.'
La compra de vivienda puede ser tambien
uno de los medios mas efectivos de
creacion de riqueza para las familias
de ingresos bajos y modicos. Para los
propietarios de viviendas de ingresos
mOdicos, el capital acumulado sobre la
hipoteca representa el 60 por ciento del
total del valor neto patrimonial; y para los
propietarios de viviendas de bajos ingresos,
es el 80 por ciento del mismo concepto.
De hecho, mientras que el valor neto
patrimonial de un ti'pico grupo familiar de
~os ingresos es de $7,900, se multiplica
mas de seis veces, $50,000, para los
propietarios de vivienda de bajos ingresos.
Retos
Pese a los beneficios que pueden derivarse
del hecho de ser propietario de la vivienda,
es posible que por multiples razones la
compra de vivienda no este en el centro
del interc~s financiero de algunas familias.
Sin embargo, para aquellos que estin a
favor de la compra de la vivienda propia,
esto representa un hito financiero de gran
importancia y deberi'a ser accesible a los
consumidores para los cuales la compra
de su vivienda resulte financieramente
provechosa. Algunos estadounidenses
pueden percibir la posibilidad de la
compra de la vivienda como un reto,
esto puede deberse a varias razones,
10
educaci6n financiera
entre las que se incluyen: historias de
credito negativas, cantidades intimidantes
requeridas en re1aci6n con el pago inicial,
costos de cierre y tambien a las complejas
transacciones de prestamo. Para ayudarlos
a hacer realidad la compra de una vivienda,
algunas personas solamente necesitar.in
una educacion basica para compradores de
vivienda 0 la promocion de los productos
de prestamo especializados. Otros pueden
necesitar una asesori'a intensiva de largo
plazo y servicios de reparacion de credito.
La tecnologia y la innovacion han dado
como resultado la creacion de una
abundancia de productos de prestamo
hipotecario que son complejos y que
poseen caracteristicas que pueden
ser inapropiadas, muy riesgosas y
financieramente peIjudiciales para algunos
consumidores. Entre estos productos
hipotecarios pueden citarse a titulo de
ejemplo las hipotecas con tasas aJustables,
prestamos en los que solamente se pagan
los intereses, y en los cuales pueden
producirse cambios drasticos en el nivel de
las cuotas de pago durante el transcurso
del rermino del pn!stamo. Por otro lado,
en el Mercado hipotecario actual que es
a1tamente tecnico y complicado, el mayor
reto para los consumidores es el de estar
capacitados para evaluar el vasto surtido de
productos e identificar aquellos que sean
mas beneficiosos para las circunstancias
individuales y su bienestar financiero.
Ademas, como el mercado de prestamos
hipotecarios se ha convertido en un
ambito mas competitivo y proli'fico, la
aparicion de prestamistas inescrupulosos
ha creado preocupacion respecto a las
pr:icticas abusivas de prestamo. Por medio
de la utilizacion de practicas agresivas
de comercializacion, declaraciones
equivocas y mediante el fraude, este
tipo de acreedor despoja a los duefios
de propiedades de los capitales que han
CaIJIIIl.Co 2: Com/)f(! de lIi'uil'lIda
La estrategia nacional para
acumulado complicandolos con hipotecas
que tenninan siendo desven~osas para
eUos. En aigunas comunidades, este
tipo de prestamo ha resultado en altos
i'ndicC3 de ejecuciones hipotecarias y
ha producido 1a ruina financiera de los
propietarios que fueron damnificados
por los prestamistas abusivos. Ademis,
se han llevado a cabo intervenciones
normativas y legislativas para combatir las
pr3.cticas abusivas de prestamo. Por todo
este, 1a educaci6n financiera es percibida
como un componente crucial para 1a
proteccion del capital acumulado de la
hipoteca de los dueiios de vivienda.
Las programas comunitarios pueden ser
efectivos tanto para promover como para
preseIVclr la propiedad de la vivienda.
Uls iniciativas locales para estimular la
compra de la vivienda pueden aumentar
la concientizaci6n de los individuos y
lograr que mochas personas y famiIias
logren el sueiio de la vivienda propia.
Similarmente, Ia intervenci6n realizada
a nive1 comunitario a favor de aqueUos
dueiios de vivienda que atraviesan
dificultades financieras puede ayudar
a mitigar el decto que tienen las
pricticas abusivas de prestamo sabre
los conmmidores y las comunidades.
Temas relacionados con la
compra de vivienda
1. C6mo utiIizar enfoques de
organizaclones comUDitarias para
traDsmitir programas de asesoria Y
capadtadOn
Actualmente, 1a asesaria y los programas
de capacitacion en temas de propiedad
de vivienda tratan las etapas espedficas
de la compra de una vivienda - pre-
10 educoci6n
financiera
compra, post-compra, extracci6n del
capital acumulado sobre la hipoteca y
mitigation de las ejecuciones hipotecarias.
Para educar satisfactoriamente a los
consumidores sabre estos temas, los
planes de los programas deberian
superar este modele y asi contemplar
las circunstancias financieras de los
prestatarios y propietarios en todas las
etapas. Tambien es necesario que los
programas exitosos se ocupcn de una
variedad de retos adicionales, entre los
que se incluyen los temas idiom3.ticos y
culturales y los impedimentos geognificos
que se presentan en las comunidades
rurales. Para explicar la manera de
alcanzar y mantener ]a propiedad de
vivienda no existe una soluci6n Unica
que se adapte a todos los casas.
Debido a su fami1iaridad con el mercado
local. muchas organizaciones locales 0
comunitarias estan bien posicionadas
para brindar informacion y asesoria
sabre la compra de viviendas. Las
organizaciones nacionales sin fines
de lucro. Jas instituciones financieras,
incluyendo las cooperativas de
crCdito y las aSociaciones de vivienda
ofrecen una variedad de informacion
y asesoIia personal a los potencialC3
compradores de viviendas. Ademas.
los esfuerzos realizados en el ambito
traves de los centros llamados
Local H~ip Cmtm (Centres
de compra de vivienda) establecidos
por el Departamento de VlVienda y
Desarrollo Urbano de los Estados Unidos
. (HUD, pur sus siglas en inglis), tambien
colaboran para que las familias tomen
en cuenta los beneficios potenciales
de 1a compra de la vivienda propia y
las asisten en el proceso hipotecario.
federal a
La estl"Otegio nociollol para 10 educacioll fillollciero
La mganizacirin NfighborH'tnhs Anu>ri(((.@ usa
una red rtf' o'l'ganiz{((:iOlU:S l)(Im tm!,I{({r snvirins
df (lsesmia
Para recibir asesorfa y capacitacion
sobre compra de vivienda muchos
estadounidenses recurren a organizaciones
sin fines de lucro que se
dedican especialmente a
sus comunidades locales.
NeighborWorks America® es
una organizacion nacional
sin fines de lucro formada
por mas de 230 grupos
liderados por residen tes que
operan dentro de una gran
coalicion de asociaciones
locales de residentes
ejecutivos y funcionarios
publicos de todo el pais.
proveer prestamos accesibles a posible
compradores de viviendas y tambien
ha establecido un centro nacional de
prevencion de ejecuciones hipotecarias
para tratar temas relacionados con las
practicas inescrupulosas y abusivas de
prestamo y para colaborar
con la identificacion y
prevencion de ejecuciones
hipotecarias de los actuales
propietarios de vivienda.
A traves de una iniciativa de
preservacion de la vivienda
propia, NeighborWorks
America® ha colaborado con
el trab.yo de funcionarios
publicos. Y mas de 20
instituciones de prestamo
para reducir las ejecuciones
hipotecarias en sectores
Esta organizacion sin fines
geognificos.
Mediante
de lucro, instituida por
l;~~,actividades de asistencia
el Congreso y financiada
~_/~ ,:-~-~j"l'-_.
~ comunitarias innovadoras,
con fondos federales, usa
'" - ', .' .... .-.~/ I _ camp arias de informacion
una variedad de metodos
_publica y un trabajo de
para incrementar el apoyo brindado a
asesorfa, esta organizacion previno 650
faroilias de b.yos'ingresos para que estas
ejecuciones hipotecarias en un perfodo de
puedan tener una vivienda propia, entre
18 meses. Actualmente, NeighborWorks
los que se inc1uyen servicios de asesoria
America® esti emprendiendo esfuerzos
personal, centros de compra de vivienda
para repetir esta iniciativa en Ohio y en
y asociaciones con organizaciones de
otras comunidades que estin asediadas por
prestamo. Esta organizacion ha establecido
tasas altas de ejecuciones hipotecarias.
el grupo de asesores certificados en
educacion de compra de vivienda mas
Una cooperativa de (ridito local ojrf(;e un
grande del pais, y ha prestado servicios
programa pam comjJwdores de su- jJ1'imera
de asesorfa a mas de 471,000 individuos.
vivienda
ASimismo, ha apoyado el establecimiento
de 78 centros de compra de vivienda
Por decadas, las cooperativas de credito
alrededor del pais. Estos centros, creados
de todo el pais han ofrecido a sus
en el ario 1997, son lugares que mantienen
miembros asesoria y capacitacion de
su informacion sobre una amplia gama de
manera satisfactoria, cumpliendo con las
servicios de compra de vivienda que estin
necesidades financieras de los individuos y
disponibles para las familias de ingresos
las comunidades a las que prestan servicio.
bajos 0 modicos. Neighborhood Works
A cambio de esto, los compradores de
tambien procura cultivar asociaciones con
vivienda han recurrido a las cooperativas
el gobierno y con el sector privado para
',,"
La estrategia nacional para
de credito para que los ayuden a explorar
el proceso de compra de vivienda y
para que les proporcionen los servicios
necesarios para que la compra sea efectiva.
Por ejemplo, una de estas cooperativas de
credito establecida en Maryland ofrece
a sus miembros un programa
10
educaci6n financiera
a sus miembros herramientas en linea,
folletos y un boletfn informativo trim estral
que cubre temas tales como administracion
de dinero, puntaJe de credito y los factores
que contribuyen a dichos puntajes.
First-Time Homtbuyer Program
(programa para compradores
de su primera vivienda) que
brinda asistencia en cada
etapa a 10 largo del proceso
de compra de vivienda. Para
complementar este programa,
la cooperativa de credito ofrece
unas clases de autoayuda en
lineas llamadas Fundamentals
ofPersonal Finance: Making
InJUf'fMd Choices (conceptos
basicos de finanzas personales
para aprender a tomar
opciones informadas) ,ta1leres y seminarios
continuos, como por ejemplo: Renting
versus Buying (Alquilar versus Comprar).
La cooperati1J((. de cridilo de lasfu.eTzas arnwd.flJ
brinda .sPlvicio a las f(1milia~ militaTeS
Un segundo ejemplo de este tipo se
presenta en una cooperativa de credito
de las fuerzas armadas que se centra en
brindar servicios financieros a su base
de cIientes de caractensticas unicas
compuesta por mas de 2.5 millones de
miembros de la Marina y e] Cuerpo de
Marina y sus familias que se encuentran
por todo el mundo. EI personal de la
cooperativa de prestamo visita a sus
clientes en embarcaciones de la Marina y
realiza mas de 200 presentaciones anuales
sobre la importancia de poseer un buen
credito, transacciones, informes de cft!dito,
mantenimiento de un buen credito,
asesona en elaboracion de presupuestos,
robo de identidad y otros temas. La
cooperativa de credito tambien brinda
Una asociaci6n de vi·vi.enda para. poblariones
indigenas ofrece asi5tencia en las resc17.Iaciones 0
en sus cen:anias
Organizaciones del sector p6.blico y
privado dedicadas a temas de vivienda
reunen a entidades con y sin fines de
lucro, y al gobiemo en una comunidad
local particular para ocuparse de
temas tales como vivienda accesible,
financiaci6n y las barreras que limitan la
compra de vivienda. Las organizaciones
destinadas a prestar servicios en las
reservaciones de poblaciones indigenas
estin particularmente situadas para
brindar informacion y asistencia en areas
frecuentemente remotas procurando
veneer las diferencias culturales. Una
de estas organizaciones de vivienda
Heva programas y materiales espedficos
directamente a la comunidad ya sea en
la reservacion como en los lugares de
trabajo. Estos programas procuran mejorar
la comprension de temas relacionados
con la compra de vivienda y el acceso a
CfJ./)!tlllo 2: Compm rif'vivil'1lria
La estrategia nacional para
1a vMenda propia, y 1ambien incluyen
senidos de mediaci.6n para el comprador
con las autoridades de las tribus y
demas autoridades gubernamentales e
insrancias de aprobadones ambientales.
Estas organizadones fueron creadas
para proporcionar oportunidades de
financiaci6n de vivienda innowdoras
y flexibles en 1a resenacion 0 en zonas
cercanas.l.a organizaci6n de vivienda Ie
confiere a las familias de las pob1aciones
indigenas los nuevas conocimientos,
habilidades y comprension necesarios
para poder 1es permilaD construir,
comprar 0 renO'93J'SUS casas. A traves de
esre programa. los individuos participan
en cIases edw:ativas sobre finanzB
Ycompra de vivienda Yaprenden
]a manera de establecer menta!
.
individuales de desarrollo (IDAs, par
sus sigJas en Ingles). Las familias de las
poblaciones indigenas tambien recurren
ala organizacion de vivienda para que
1a primera financiaci6n hipotecaria
les resulte mas accesible ypara rea"bir
asislencia para conseguir financiaci6n
secundaria por medio de la reducci6n
de Ia cantidad del pago inicial, costas de
cierre y monto principal del prestamo.
Cmtros lor.nIP...'i de (Qlll.frr(J. tIP. vi7Jiendn. de HClD
Las organizacion~ comuniwias tambien
son apoyadas a ttav& de los esfuerzos
federales Uevados a cabo en cuatro centros
regionales de compra de vivienda de HUD
localimdos en Pennsylvania, Georgia.
Colorado y California. Corguntament.e,
estos cuatro centros Began a todas panes
del pais Ybrindan a los propietarios
de vivienda actuales y potenciaIes
informacion no solamente sobre la
Administraci6n Federal de VIVienda
(FHA, por.sus sigIas en ingles) y sobre
SUS programas de seguro bipotecario
individual y famiJiar, sino tambien acera
10 educaci6n
financiero
de los programas de compra de vmenda
no operados por 1a FHA, asesoria,
servicios hipotecarios y otros temas
re1adonados con la compra de vivienda.
Las instituciones financieras y las
organizaciones comunitarias pueden
pfO\'eer a todos los estadounidenses
las herramientas necesarias para hacer
reaUdad el meno de Ia casa propia
utiIizando enfoques comunitari08
espedficos para estimular 1a compra
de una vivienda. Los programas con
arraigo comunitario pueden ayudar
a las famiIias a lograr, manr.ener y
SClItener Ia compra y propiedad de Ja
vivienda a ttaves de asesoria personal
y programas educativos especificos.
2. C6mo destamr eI &ito pormedio
de Ia educaci.6n de ca1iclad YIa
eoneieotizaci6n pUb1ica
Los programas de educaci6n y
concient:i2acion pUblica exitosos son
s6Iidos en Ja medida que tambien 10 sean
los mensajes que difunden, los planes
educativos utilimdos y los instructores que
los ofrezcan. Los programas de educaci6n e
infonnacion para compradores de vivienda
deben ser de la mas alta calidad Ydeben
ser ofrecidos por instructores c:alificados
que cmnprendan 1a informacion y sepan
de que manera se relacionan con los
compradores. de vivienda potenciales.
Los mejores programas de educacion y
concientizaci6n de compra de vivienda
y temas hipoteearios buscan suministrar
a los posible compradores de vivienda
los conocimientos necesarios para tomar
decisiones inteligentes. sin centrarse
simplemente en vender un producto
en particular. Estos programas resaltan
La estrategio nacional para
historias exitosas de compra de vivienda
y motivan a los individuos a relacionar la
complCl de vivienda con la inversion y el
ahorro. Los esfuenos de concientizaci6n
publica, como por ejemplo los que han
sido creados por una asociacion de vivienda
de Ohio. dan menscyes daros sobre los
benefici05 de ser dueiio de la vivienda (en
vez de alquilar). Ademas.los esfuerzos
educativos, como aquellos llevados a cabo
por HUD, los asesores certificados en
temas de vivienda y por el Mes Nacional de
la Compra de VIVienda ayudan a promover
el &ito del ahorro y la compra de vivienda.
AsociacifJ1Z de viviendn l'1l Ohio
En una ciudad de Ohio, los residentes
est3.n aprendiendo a convertirse en
exitosos dueiios de vivienda y a adquirir
las habilidades financielClS necesarlas de
parte de una asociacion local de vivienda.
&sando sus esfuerzos en programas
que han demostrado su eficacia y a
~ de actividades de educacion
publica, esta asociacion de vivienda ha
establecido una campaiia de compra de
.vivienda llamada Despida a su amndador
ahura. Usando anuncios coloridos y de
diseiio contemponineo colocados en
los autobuses del sistema de transporte
de Ohio con textos tales como IJespida
a S'I.l arrentloJlor aIwra, ComJm una casa
grande am poem; dOlares, la asociacion de
vivienda pudo atraer la atencion de los
potenciales compradores de viviendas
que perciben ingresos bajos y modicos
para que se beneficien de los recursos
ofrecidos. La cantidad de llamadas
telef6nicas y consultas sobre compra de
vivienda recibidas por la asodacion de
vivienda ha aumentado drasticamente.
10
educaci6n financiera
Dpj)(l}"la-menlo dP Villienda 'Y Desmrolln Urixnw
tiP las Est(lff.(J.~ Ullillo.s
.
Como agenda federal primaria en
temas de compra de vivienda, HUD esti
posicionado exdusivamente para ayudar a
los actuales y potenciales propietarlos de
vivienda a brindar el acceso a programas
educativos de calidad efectivos para
compradores de vivienda. Con este
proptSsito, HUD provee infonnacion
de contacto con servicios de asesoria
en compra de vivienda sobre una base
estado por estado y distrito por distrito
a traves de un extenso recurso en el
Internet, www.hud.gov/local/index.
cfm. (La informacion de contacto de las
agendas de asesoria en vivienda de HUD
pueden encontrarse en: http://www.hud.
gov/ offices/hsg/stb/hcc/hccprofl4.
cfm.) Los estados listados en este sitio
Web induyen sus estrategias y eventos
locales sobre complCl de vivienda. HUn
tambien opera una linea telef6nica de
acceso gratuito para que los consumidores
puedan localizar una agenda de asesoria
dentro de Sll comunidad. Tanto el
sitio Web como el n-umero telef6nico
gratuito son incluidos en todos los
folletos y publicaciones de HUD.
En 1995, HUD creo el programa
llamado NeigIrboihood NeIuJo1is (redes
de comunicacion en los vecindarios)
con el objetivo de estimular a los
propietarios de vivienda a establecer
centros comunitarios con tecnologia en
las propiedades aseguradas y asistidas por
HUD. Actualmente, mas de 1,100 centros
Neighburhood Networks ayudan a mejorar
1a calidad de vida de los residentes: (1)
brindando capacitacion, (2) creando
oportunidades educativas y de empleo, (3)
La estrategia noeional para
optimizando los programas de educacion
y ensenanza de idiomas y (4) brindando
acceso a infonnacion sobre atencion
de la salud y otros servicios sociales. Las
sesiones del programa Neighborhood Networks
llamadas Train-the-Trainer (capacitacion
para insuuctores) permiten que los
directores de los centros Neighborhood
Networks hagan llegar los recursos a los
residentes de viviendas multifamiliares
ya Jas comunidades circundantes. Estos
individuos redben capacitacion en temas
basados en las necesidades de los residentes
las cuales son identificadas a traves de
las encuestas realizadas entre los clientes
de los centros Neighborhood Networks.
Estdndar nacional jJarrI eliumr:icill de jJm~om/im df> vivil'nr/a )' r:r:rliji('((cir;n
/iOTa {fS(!SOrl'S
e inslrllctofl'S
La campana de Propiedad de Vivienda de
NeighborWorks America® ha establecido
un estandar nacional para la educaci6n de
pre-compra 0 preadquisicion de vivienda,
y dispuso un curso de capadtacion y
certificadon, de cinco dias para asesores
e instructores. Las personas capadtadas
a traves del programa de instruccion
de NeighborWorks Arnerica® se
adhieren a Jos siguientes estandares:
•
Todos los potenciales compradores
de vivienda redben un minima de
ocho horas de educaci6n grupal sobre
compra de vivienda con sesiones
individuales de seguimiento.
•
Los asesores en temas de vivienda
redben su certificacion luego de
completar y aprobar el curso de cinco
dias de clases Hamado Metodos de
educaci6n para compradores de vivienda:
CapacitaciOn para instructorcs.
•
El contenido, difusion y formato de
la capacitacion para compradores
10
edueoei6n financiera
de vivienda esta adaptado para
satisfacer las necesidades de los
participantes (como concepto opuesto
a un enfoque tinico para todos).
•
Preferiblemente, la capacitaci6n y
asesoria se lleva a cabo antes de que
se firme el contrato de compra.
•
Las encuestas de satisfaccion de los
clientes se utilizan para evaluar la
efectividad de la capacitacion.
•
Todos los instructores voluntarios
deben adherirse a un codigo de etica.
iVIes Nacional de COYlljna dp Vivienda
Los consumidores estadounidenses estin
aprendiendo el valor que representa la
vivienda propia de parte de los lideres de
mas alto nive!, inc1uido el Presidente de
los Estados Unidos de America. Desde el
ano 2002, el presidente George W. Bush ha
proclamado el mes de junio como el Mes
Nacional de Compra de Vivienda (National
Homeownership Month), convocando
al pueblo de los Estados Unidos a
acompanarlo en el reconocimiento de
la importancia de brindarles a todos
los ciudadanos la oportunidad de
cumplir can el sueno americano.
Durante el Mes Nacional de Compra
de Vivienda, los estadounidenses son
motivados a aprender mas sobre la
administraci6n fmanciera y como
aprovechar las oportunidades de
compra de vivienda disponibles en sus
comunidades. Durante el Mes Nacional
de Compra de Vivienda del ano 2005 se
enfatizo e1 mensaje de que en el camino
que Heva hacia la compra de vivienda
existen otros temas aparte de encontrar
un agente inmobiliario y obtener una
hipoteca. El Mes Nacional deCompra
de Vivienda incluyo una visita por cinco
La estrategia nacional para
ciudades, esta gira fue una colaboracion de
doce agendas federales y durante la misma
se destaco la gran variedad de programas
disponibles para todas las personas.
Durante el mes de junio, tambien se
llevaron a cabo simultineamente en todo
el pals otros eventos relacionados con
la compra de vivienda. Estos programas
tienen como meta enseftarles a las familias
los procedimientos para comprar su
primera vivienda. A traves de este esfuerzo
educativo, los individuos y las familias
descubrieron como convertirse en dueftos
de su viviendas,lo cual constituye un paso
importante para salvaguardar sus futuro
economico que tambien contribuye a la
fortaleza general de nuestra nacion.
Resumen
Una mayor concientizacion publica
sobre las mejores pnkticas y logros.
particularmente a nivellocal, puede dar
como resultado una mayor comprension
y aceptacion de la compra de la vivienda
propia como una base de la seguridad
financiera. Enlazando la educacion
financiera y la compra de vivienda,
los esfuerzos de concientizacion
pueden promover estrategias efectivas
a mayor escala. A traves de amplios
esfuerzos de educacion publica y de
una campana integrada a los medios
de comunicacion, las organizaciones
pueden expandir el acceso al rango de
recursos educativos disponibles para los
consumidores mediante la divulgacion
y promocion de historias exitosas.
3. La colaboracion comunitaria puede
ser un e1emento muy valioso para el
desarrollo y distribucion de programas
Los programas de educacion y capacitacion
trascendentales solamente tienen valor
10
educaci6n financiera
si los destinatarios de los mismos tienen
conocimiento de su disponibilidad y a su
vez, se benefician completamente de 10 que
se les ofrece. Por ejemplo, es posible que
muchas personas que alquilan su vivienda
no sepan donde obtener informacion
sobre la compra de vivienda 0 sobre como
obtener asistencia para establecer sus
objetivos para comprar una casa: Por 10
tanto, es necesario que estas personas esten
expuestas a mensajes que los orienten
hacia los programas correspondientes.
Ademas, 1a tarea de conectar a las
personas con los mensajes financieros
apopiados puede ser un reto muy grande
para que una organizacion sola pueda
cumplirla por sf sola. A titulo de ejemplo,
se puede dar el caso de un programa
que tenga la experiencia pero que
no tenga la presencia necesarla en el
terreno. AI asociarse y crear coaliciones,
las organizaciones pueden juntar sus
recursos para alcanzar objetivos comunes.
Las iniciativas de informacion de compra
de vivienda verdaderamente exitosas
requieren de la colaboracion de todos los
sectores que tienen llegada a los grupos
especificos con mas necesidad de recibir
informacion. Trabajando conjuntamente,
las organizaciones del sector publico y
privado pueden desmitificar el proceso
de compra de vivienda y brindar a los
consumidores las herramientas necesarias
para convertirse en dueiios de su casa.
Organizaciones tales como una red de
compra de vivienda de Montana, una
asociacion de vivienda de California y una
agencia de vivienda de base religiosa de
Michigan, demuestran la manera en que
los programas de compra de vivienda que
estin dirigidos a grupos especificos pueden
ser herramientas educativas exitosas.
En Montana existe una coalition de tntidarles
CatJilUlo 2: ClJm/J/'{l riP Villi/!1/{ifl
Page 1 of4
May 24,2006
jS-4281
Remarks of Emil Henry,
Assistant Secretary for Financial Institutions
U.S. Department of the Treasury
Before the Real Return III Conference
Paris, France- Thank you. It is a great pleasure for me to be here today. I would
like to take this opportunity to review recent U.S. economic performance and to
touch on some areas that have frequently been cited as potential risk factors for the
U.S. economy going forward.
TIPS
But before I address that topic, because this conference is dedicated to inflationlinked products, let me first say a few words about Treasury Inflation-Protected
Securities, or TIPS. TIPS offer investors a unique asset class - dollardenominated, inflation-protected, and full faith and credit of the United States - that
improves portfolio diversification. TIPS are an asset for investors focused on the
future real purchasing power of their savings, they offer low volatility and attractive
returns, have a higher long-run correlation with inflation than real estate,
commodities, or other real assets, and are a deflation floor (i.e., investors don't
receive back less than nominal principal value at maturity).
A natural demand base for TIPS has emerged as evidenced by the big and growing
market for TIPS. Currently, there are over $300 billion of TIPS outstanding and
about $800 billion of inflation-indexed securities outstanding worldwide. We do not
announce future issuance ahead of time, but projections of issuance based on
current auction sizes and frequencies would lead to TIPS as a share of the portfolio
reaching 13% in 2011 (from B% now). In addition, liquidity in the TIPS market is
improving. Daily turnover in TIPS has more than doubled in the past three years
(2002-2005).
Because of this strong demand, Treasury now offers maturities from one to ten
years. And issuance at the 5-year, 1O-year and 20-year points demonstrates
Treasury's commitment to the product as an integral part of its funding strategy.
Recent Economic Performance
Let me now move on to the U.S economy and start with the good news. I am
pleased to report that U.S. economic performance is robust on so many levels. The
facts speak for themselves:
•
The U.S. economy expanded at over 3.5 percent pace last year and
registered 4.8 percent growth over the first quarter of this year. Moreover,
most forecasts anticipate further solid growth over the remainder of this year
despite the headwinds we face from factors such as elevated energy prices
and the devastation wrought by last year's hurricanes.
• The robust economic expansion has been accompanied by impressive job
creation. More than 5.1 million new jobs have been created since May of
2003; two million of them in the last year alone.
• Unemployment is running at 4.7 percent - lower than the average for any
decade since the 1950s - payrolls are rising, and household wealth is at an
all-time high.
• Productivity growth remains strong. Output per hour in the non-farm
httP:;;wwwtreas.g0v/press/releases/js42H r.~tm
3/5/2007
Page 2 01'4
•
•
•
•
•
•
business sector has risen at an average annual rate of 3.4 percent since
2001, faster than any five-year period in the 1970s, 1980s or 1990s.
That productivity growth is feeding through to wages. Inflation-adjusted
hourly wages are in fact rising, growing 1.6 percent between September and
December.
More Americans t~an ever now own their own homes. As expected, we
have seen some signs of slowing in the housing sector lately. But we
expect that activity in the housing sector will remain quite strDng, buoyed by
moderate long-term interest rates and rising incomes.
And our home values reflect underlying growth, liquidity and low interest
rates.
The strength in the U.S. economy has boosted federal lax revenues'
indeed, as Secretary Snow noted recently, it now appears that we a~e well
ahead of schedule in moving toward President Bush's goal of cutting the
federal deficit in half.
All of this has been achieved in an environment of low inflation despite rising
energy prices.
As a result, judging from a range of financial indicators including stock
prices and credit spreads, investors are quite optimistic about the future.
Debt and Deficits
As is often the case in a politically-charged environment, some observers have
looked hard for cracks in our economic edifice. In many cases, the critics have
focused on the federal government's finances, specifically the nominal value of the
federal debt.
Of course, Simply focusing on nominal magnitudes is highly misleading. Most
economists, for example, tend to focus on the ratio of debt to GOP as a more
appropriate indicator of a country's debt burdens. For the United States, debt held
by the public amounted to 37 percent of GOP at the end of FY 2005. This ratio is
significantly lower than the average of 47 percent for the 1990s and has remained
fairly stable since the Bush administration took office, ranging from 33 percent to 37
percent.
Moreover, interest costs on federal debt as a percentage of GOP represented just
1.5 percent of GDP in FY 2005, well below the 3 percent 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.
In short, federal debt and deficits relative to GDP for the United States are both in
quite manageable ranges and are in no way a fundamental threat to the U.S.
economy. Moreover, the budget outlook is quite promising.
In 2004, the administration articulated a program of shrinking the deficit in half as a
percentage Df GOP over the following five years. The deficit as a percentage of
GOP was projected to be 4.2 percent in the year this objective was set out, and
thus the aim was to reduce the deficit to 2.1 percent of GOP by 2009. In fact, the
administration is ahead of schedule in meeting this objective: The 2004 deficit,
which had been projected at over $477 billion in fact came in at only 3.6 percent of
GOP and last year's deficit at only 2.6 percent We currently project that the deficit
will be 1.4 percent of GOP in 2009, substantially lower than the 2.1 percent goal.
Borrowing From Abroad
Another commonly expressed concern is the view that the United States - not
merely the government but the country as a whole - is relying too heavily on foreign
capital 10 finance its spending. The reliance on foreign capital is counterpart of the
U.S. current account deficit, which has grown steadily over the last 9 years to reach
over 7 percent of GOP. There are a number of reasons 10 believe, howe~er, Ihat
the United States is capable of maintaining a sizable current account defiCit for a
much longer period than most other countries. The net externa.'li.abilities of the US
were quite low relative to the size of the economy when th.e eXisting period of
current account deficits began in 1995, rose markedly dUring the next 5 years to
http:;;www.treas.gov/press/releases/is4281.?tm
3/5/2007
Page 3 of4
between 20 percent and 25 percent of GDP, then stabilized at roughly that level
since 2002. A net ext~rnalliability position of 20 to 25 percent of GDP 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, beca~s~ ~S citi~~ns have a I~rge store of foreign assets, changes in
our net external liabIlity posItion are not SImply a function of the current account"
deficit, but can be affected - for both good and ill - by changes in the valuation of
those assets. This is why the US net external position has remained fairly stable
over the last few years even in the face of a large and growing current account
deficit. The dollar value of our foreign assets has increased in a way that has
substantially reduced the effect of the additions to foreign holdings of US assets
implied by the current account deficit. We cannot expect such sizable valuation
effects in perpetuity of course - perhaps not even for very much longer - 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.
Fundamentally though, the U.S. current account deficit is part of a larger global
pattern in which countries running surpluses have - until recently - had relatively
few attractive investment opportunities other than those in the United States. As a
result, the United States has attracted savings from around the world. Now,
however, there are encouraging signs of stronger growth prospects around the
globe. That changing picture should over time work to restore balance in global
trade and capital flows by stimulating U.S. exports and providing new outlets for
global savings.
Hedge Funds and Derivatives
Finally, some point to purported vulnerabilities in the U.S. financial system, often
focusing on the potential systemic risks posed by hedge funds and derivatives.
As you know, in the last few years, hedge funds have garnered much attention in
Washington. largely the result of the Securities and Exchange Commission's
rulemaking to bring hedge fund advisers further within the SEC's regulatory reach.
Hedge funds have registered explosive growth in recent years and now represent
about a trillion dollars of capital. In contrast to traditional investment vehicles, which
are subject to various regulatory restrictions, hedge funds enjoy almost complete
flexibility in implementing their investment strategy.
All strategies are on the table - long positions, short selling, leveraged holdings,
equities, bonds, currencies, derivatives, multiple industries, etc. All of these
approaches are available and widely utilized by the hedge fund community. Of
course, the experience of LTCM in 1998 has given investor and regulators pause
about the rapid growth of hedge funds. But the hedge fund industry has matured
over time--investors have become much more focused on risk management,
creating a strong element of market discipline. For example,
• Counterparties are more disciplined about extension of leverage and
collateral requirements;
• Capital is now much more reluctant to seed a new hedge fund comprised of
the proverbial "Three guys in a garage";
• Investors now demand transparency (you may recall that LreM prinCipals
notoriously provided little, if any, transparency):
• There is now a more profound recognition among hedge fund professionals
that liquidity is, indeed, king and that in its absence, all bets might be
directional:
• Investors recognize the infrastructure requirements of many arbitrage
strategists (who seek Street treatment) and demand to see such
infrastructure before committing their capital.
These are important and welcome developments. And yet we do need to remain
abreast of new developments in the industry and any potential developing risks. To
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that end, I will be heading up a Treasury initiative to reach out to the hedge fund
industry in an effort to identify developing issues with a special focus on the risks
presented by credit derivatives. As part of that effort, we will be seeking answers t,
a range of questions including:
• What are the unintended consequences of hedge fund growth on
competition for lending and the provision of private equity?
• Is leverage properly disclosed for transactions such as credit default swaps
in which no money is actually borrowed but where there can be high impliec
leverage?
• Do our largest financial institutions properly value and disclose their
derivative exposure?
• Is the settlement infrastructure - even with recent attention and modificatior
-- capable of handling the volume of activity in a manner that does not
.create undue risk - especially in a meltdown environment?
• Do counterparties such as banks and prime brokers take a false comfort in
their myopic views of their individual exposure to and collateral with an
individual hedge fund when there is little transparency on the broader
financial community's aggregate exposure to that very same fund?
• Can the regulatory regime keep pace with the quickly evolving marketplace'
Even so, will our oversight system devolve into tacit acceptance of the risk
metrics they are provided.
• Are investment managers using derivatives to create near-term return in
"hail Mary" fashion at the potential expense of their entire franchise?
• As prime brokerage grows to meet the needs of the hedge fund community,
will such providers increase leverage and relax collateral requirements as
these are their principal means of competition?
• Should U.S. regulators avail themselves of hedge fund and portfolio risk
data readily available through the prime brokerage business of their
regulated broker-dealers?
To sum up, our sense is that hedge funds are fundamentally serving a positive role
in the U.S. and global economy by providing market liquidity, facilitating price
discovery, and distributing risk. As always, there are risks in the financial sector,
but we are working hard to stay ahead of the curve on any developing issues.
Conclusion
Let me close today by simply noting that President Bush's economic program has
been a resounding success. The U.S. economy and financial system are in
excellent shape today and we expect continued solid economic performance going
forward. As always, we are mindful of the risks to the outlook, but we are
fundamentally optimistic about U.S. and global economic prospects. Thank you
very much.
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PRESS ROOM
May 24,2006
js-4282
Remarks of Anna Escobedo Cabral
U.S. Treasurer
U.S. Department of the Treasury
Before White House Initiative on Educational Excellence for Hispanic
Americans' First Regional Conference
Thank you Adam! I want to tell you how happy I am that I get to spend this time
with all of you today as part of this conference - the White House Initiative on
Educational Excellence for Hispanic Americans' First Regional Conference:
Partnership for Hispanic Family Learning - here in Albuquerque, New Mexico.
And, I want to thank Adam and his staff for doing an absolutely phenomenal job of
putting this event together. I say that because most everything that happens in
Washington requires someone who is delivering, pursing or negotiating. Adam is
absolutely fabulous at all those things.
We have to remember that Washington is a very long way from where most of us
come from. We need people in key positions who are advocating for the Latino
community. You have no better advocate than Adam Chavarria. He and his team
really drive much of the work behind the White House's Initiative on Education
Excellence for Hispanic Americans - work I know that President Bush is deeply
committed to advancing and is so important to him personally.
The President understands that education can open opportunity for all people who
have the desire, work hard and have the dream of achieving greater things in life.
Also very important, high quality education is what continues to maintain our
country's high level of competitiveness in a global marketplace.
Although there is still much work to be done in terms of improving quality of
education in the U.S. and producing a highly skilled work force, we luckily do live in
a great country - a country of great opportunity, and a country with an economy,
which continues to grow.
Our economy is indeed strong. Tested in recent years by a bubble burst in the
stock market, September 11, and the largest natural disasters to ever hit this
country - the Gulf Coast Hurricanes of 2005 - it nonetheless continues to grow.
That growth is largely as a result of the free market economy we have built, which
was buttressed by well-timed tax cuts proposed by the President and recently
extended by Congress, as well as sound monetary policy executed by the Federal
Reserve. Just stop and consider the latest economic reports:
•
Last year, the U.S. economy grew faster than any other major industrialized
nation - we've seen it grow 3.5 percent last year.
•
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
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that our c~ildren 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 ar~ 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.
This is great news! However, we now find ourselves today in a place where we
need to prepare our children from a very early age to acquire those skills they will
need to effectively compete in today's global marketplace, and equip them to take
full advantage of tremendous opportunities. This Administration continues making
significant strides in this area.
I am really pleased and also very proud that this Administration truly understands
the importance of working directly through families in the Latino community to
further improve the education our children receive.
I think that gatherings and activities like these will prove significant steps toward
improving access and quality of education for our children. The concept of the
family is so important in the Latino community - that is what makes today's
activities so significant.
I hope that all of us here today, whether we are parents, teachers or community
leaders take something away from this conference. We have a fantastic
opportunity before us to learn much about the wealth of educational information,
options and opportunities that today exist to help people become strong advocates
for youngsters' education - particularly within the framework of the needed reform
that has resulted from No Child Left Behind legislation.
Today, I want to start by telling you a little bit about where I came from, and why the
work you are doing today is so important, in so many ways, critical. And I also want
to share later with you a little bit about the work I am engaged today as Treasurer of
the United States, as well as share with you other opportunities for improving
education - particularly in the area of financial education.
About my background - I am a Californian. I am a Mexican American from a fourthgeneration, farm-worker family. What that means is that my great grandparents
worked in the fields, my grandparents worked in the fields, my parents worked in
the fields and for a very little while, we worked in the fields. To this day, I have
cousins who still work in the fields.
Now, my father and mother ended up leaving school early. They did not graduate.
They dropped out of high school fairly early in their lives to go out and get jobs and
make a way for their family. My father decided at about that time that he should
move out of the fields and into more traditional work. But, because he lacked an
education, it forced him to travel to wherever job opportunities existed.
I once tried to count the number of times I changed elementary schools. It may be
very common for a migrant farm worker's children to change schools very often. In
my case, it was simply that my father moved to follow the jobs. I counted 20
(elementary) schools that I attended and decided it wasn't worth keeping !rack of
them any more. I went to three junior high schools and, fortunately, one high
school.
My father had to deliver sustenance through the use of his hands but, we found
very early on that although he was a man with a very large heart, he was very small
in terms of physical stature. The kind of work he did required a great deal of
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physical labor. He was injured many times over the course of his lifetime. He
ruptured several disks in his spine.
In that period of time we did not have the advances we have today in terms of
modern medicine. When you ruptured a disk, doctors would literally fuse disks
before and after it to hold it in place to protect the spinal cord. By the time I was13
he had had three such surgeries where they fused his spine from the top of his
neck to the very bottom of his spine. He had no mobility whatsoever. They told him
that he would not walk again. For a year he lay in bed. But, he never gave up.
Eventually he made it out of bed and figured out a way to support the family. He
could not secure any work with that kind of disability rating. And, he was too proud
to try and get disability.
So, what he ended up doing is using a $100 and buying an old used pick-up truck
and going out and becoming a "junker." That's the only term I can think of to
describe it. What we would do is go out and pick up people's metal trash off the
corner - a washing machine, a refrigerator, empty aluminum cans, etc. We would
take those pieces into our yard, pull them apart, and us children would pull the
plastic off the copper wire, to create a pile of copper, a pile of steel, a pile of iron, a
pile of aluminum, and we would sell it back to the scrap metal yard.
We were losing our home, so we moved to a tiny little home in Banning, CA. It was
on the wrong side of the railroad tracks, immediately backing up to the tracks. If the
train fell off we were going to get hit. It was a two-room adobe house.
So how does this story related to why education is so important? Well, I'm about to
explain.
At that point in time, I decided that in addition to working after school and on
weekends, it was probably time for me as the oldest of the children to go out and
get a job.
I was in my junior year of high school. I was dOing exceedingly well because I loved
school. It was something that I truly, truly enjoyed. So that I could graduate early I
started thinking about working at a fast-food restaurant, which in many ways could
be a very good career option.
But, my high-school algebra teacher, Philip Lamm, heard I was leaving early and
hauled me into his office one day and said, "Have you ever thought about going to
college?" And I said, "Of course, not. We don't have the money. I have never
even thought about it." And, of course I never had those conversations with my
parents about the possibility of going to college.
My parents dream was that their kids graduate high school because they had not
done so themselves. That was the limitation of their exposure. That in some ways
was imposed on us .. ,. And my teacher, Mr. Lamm helped me fill out the college
entrance application and visited my parents to explain why going to college was a
better and more profitable plan. He also said that he would help me find the dollars
to help pay for school.
He did exactly as promised. He literally hand wrote with a pencil my college
application. I dictated the answers. He came to visit my father. For those of you who
are from traditional Mexican families, you know how hard a sell that was.
Now picture this - I was 16 years old and he was telling my father that I should be
sent 500 miles away to a college or university when he really needed me at home. I
was in fact the oldest, and my mother had not been able to work for a couple of
years because of illness. It was a tough sale. But Mr. Lamm did it He came up with
the scholarship dollars so I could go to college and before I knew It, I was headed
off to the University of California at Santa Cruz.
Now what I found out, and probably what every person in this room has discovered,
is that when you get to attend college suddenly the world opens up to you. You
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have so much to choose from. I often reflect back about the neighborhoods I grew
up in, and how many of the people I knew back then are still there.
Nobody had spent time with them. Mr. lamm was not there for them, although he
was there for me. What had happened almost fortuitously, almost by accident for
me, wasn't happening for them.
Since then I have thought that perhaps the real purpose of this education I received
must be to go out and help the rest in our community to understand all of the
wonderful options that are available. That is why I believe that each of us here
have a great responsibility to use that opportunity to create greater understanding
and awareness among parents, teachers, counselors and young students about the
world that is opening up to them and the opportunities they will have if they will just
stay in school and continue furthering their education.
Today, I try to do that as I carry out my responsibilities as U.S. Treasurer. I have a
second little story to tell you in this regard.
For the last year and a half, I have spent a significant amount of time traveling
across the country speaking to students of all ages - kindergartners, first graders,
second graders, third graders, sixth graders, 10th graders, even college students.
Much of my outreach today focuses on highlighting the importance of education in
general, but also on teaching financial education lessons - teaching students about
managing money wisely and starting a solid savings plan early on.
However, what's amazing to me is that if I walk into a classroom full of
kindergartners through fifth graders and I interact with them, I cannot believe how
much joy and energy - regardless of circumstances, regardless of what is
happening in their home - I see on their faces. They are eager to learn, they are
hungry and they believe that they can do anything.
When you ask them, "How many of you would like to go to college?" There isn't a
single hand that doesn't go up even though they might not understand what college
is. Something happens between kindergarten, first grade, second grade, and high
school. We know that. That's why you are here.
You are trying to find an answer to that problem. We are losing way too many
young people before they have had an opportunity to really understand what
opportunities are out there for them, what's awaiting them.
So you see, what you are doing today is absolutely critical. We have to continue our
efforts to try and weave together the efforts of federal government, community, and
corporate entities as well as parents. This is true whether we are talking about
improving education generally, or whether we are focused, as in the case of the
Treasury Department, on improving family financial literacy levels across the
country.
We must do so in order that every single one of those children achieve their
absolute potential and so that each understands they can dream and make their
dreams come true. I have had the opportunity to see those kinds of collaborations
really provide tremendous success.
After graduating college, I experienced how it opened opportunities from preparing
me a fantastic graduate education, a career on Capitol Hill to becoming a Senate
confirmed Presidential appointee.
Coming to Washington was for me in many ways another sort o~ accident. I went to
college at 16, dropped out during my junior year to have four children. I went back
after four children to finish my senior year. I decided to apply to graduate to
school.
La and behold, beyond my imagination, I got accepted to Harvard University. Can
you imagine that? I took those four children with me. My husband sold his law
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practIce and they attended classes along side me. /n the end. we ended up with a
$100.000 in debt. As you can ~~b!y appreciate, I knew I needed to find a way to
repay those loans. But I was opttmlstlc that that education would be pay me greater
retums than what I had originally invested.
My husband got a job offer at the U.S. Department of Justice. I came to
Washington too with our four children, and I immediately started interviewing.
Before I knew it, I had several job offers from various law firms because I had
managed my husband's law firm too.
But then a colleague, Luben Montoya, suggested that I apply for a position in
Senator Orrin Hatch's office. I gave it a shot and I found that I had a common vision
with my boss on where I hoped my community could go. I remember that during
our interview he asked me only one thing. We spent an hour together, but he
asked me iust one thing: "As long as I promise to absolutely take every bit of advice
you give me very seriously and always listen will you promise to remember that I
was the one elected." And I said, "Absolutely."
What he did was that he opened for me, for the first time ever. an opportunity to
serve the Latino community in very significant ways. I learned in Washington very
quickly that the very best product comes from both sides working together. It
comes from people of all walks of life understanding and putting their best foot
forward and offering a little and sacrificing a little. but ultimately seeing and sharing
that same vision so that we can actually achieve it. I think that's exactly what you
are doing today.
I am very lucky because this continues to happen throughout my career. That is
what President Bush Is also doing today on many fronts today. He has placed an
impressive group of profeSSionals who happen to be of Latino descent in the
positions of highest influence. And he is listening to them. Consider for a moment
the courageous and independent thinking he demonstrates in issues as important
as improving financial literacy and Issues as potentially controversial as developing
a comprehensive immigration reform plan. Thankfully. through hard work, we've
made much progress in a variety of areas.
What I want to emphasize here today is that the federal government can create the
conditions that promote opportunity. but we need to work together - groups outside
the federal government - to ensure there is access to opportunity for all, particularly
through quality education.
To do this, I think we have to be fairly innovative in our approach. We can no
longer say, "Well. this is the way it has always been done. We'll accept it."
What we need to do is to make sure we think out of the box. We have to hold
people accountable - those who are interacting with our children. But, we must
also hold ourselves accountable.
At the end of the day It's about whether parents have the tools they need to make
sure they understand the challenges their children are facing and their children
make good choices about class selection. You can't get into college unless you
take algebra, geometry. calculus. etc. And you can't proceed further than that
unless you are very serious about your studies. Parents have to re-emphasize how
important it is for kids to do their homework and tum it in every Single day. There is
no exception. Teachers have to be ready to give them what they need - to teach
them what they need to do well on entrance exams, to pursue their careers, to
understand those options, to have strong analytical skills that will serve them the
rest of their lives.
Companies, I think, are an important part of this process. They live and work in
communities that we do. And they have been, many of them, Important partners in
proceeding forward with this kind of agenda. But, we need to bring more to the
table. We certainly we need to make sure our government officials understand the
needs of a particular community and in fact are working hard very closely with us to
hold people accountable.·
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The work that you are doing really is tremendously important. What you are doing
is making a difference in the lives of many, many other people. And you can do
that one person at a time. You can do it a room full at a time.
Whatever you do, at the end, you will improve somebody's life. I can tell you that
as a result of Mr. Lamm's intervention, I have had, and now my children have many
more opportunities. The good news is that as a result of the very good teaching I
received at home from my parents, they too understand how important it is to use
their own gifts to serve the greater good including, very much, being proud of being
Latino and giving back to that community. So, the work you do today counts. It
matters. I thank you from the bottom of my heart for absolutely everything you do.
Thank you for letting me take part in today's celebration, and keep up the fantastic
work!
Thank you for your time.
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PRESS ROOM
May 24,2006
jS-4283
Statement of Treasury Secretary John W. Snow on Secretary Lloyd Bentsen
The Treasury Department family joins me in mourning the death of Secretary Lloyd
Bentsen. In a long and distinguished career in Washington, he served America as
an accomplished representative of the people of Texas in both the House and
Senate and as a wise steward of taxpayer dollars while Secretary of the Treasury.
With Secretary Bentsen's passing the nation has lost a wise and thoughtful leader.
Our thoughts and prayers are with his family.
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May 24,2006
js-4284
Remarks of Anna Escobedo Cabral U.S. Treasurer, U.S. Department of the
Treasury, Before the United States Mint at Denver Colorado Quarter Strike
Thank you, Tim. I am delighted to be here at the United States Mint at Denver on
this special day for the Mint, the state of Colorado and the United States of
America. Thank you, Governor Owens and First Lady Owens, for inviting me to
participate in this wonderful celebration and ceremonial strike of the new Colorado
Quarter.
For Colorado, 2006 is a very full year of commemoration and celebration. As we
strike the Colorado quarter, the 38 th quarter in the enormously popular 50 State
Quarter program, Colorado and the nation also celebrate the 1DOth anniversary of
the United States Mint at Denver. I find it simply remarkable that this facility
produces 35 million coins in a single day.
This year, the nation also celebrates the 130th anniversary of Colorado statehood,
the centennial of Mesa Verde National Park, the Bicentennial of Zebulon Pike's
expedition to the peak now named for him, and the 125th anniversary of the
Durango and Silverton railroad.
More than 140 million people collect the 50 State quarters, and are eagerly looking
forward to the official launch of the Colorado quarter on June 14th. The 50 State
Quarter program is an educational tool for millions of American children who learn
more about the history, geography and values of a state through the designs of
their quarters. They also have fun learning about each new quarter through
lessons and games on the United States Mint web site: www.usminLgov.
The citizens of Colorado and the Colorado Commemorative Quarter Advisory
Committee, led by First Lady Frances Owens, have adeptly chosen "colorful
Colorado" for the inscription on this coin. Blue skies, purple mountains majesty,
evergreens, red rocks, whitewater rafting, sand dunes, rainbow trout ... the list
goes on, but anyone who has traveled in Colorado already knows these colors by
heart.
When they see the Colorado quarter In their change, Americans will be reminded of
the natural abundance, geological and cultural diversity and proud history of
Colorado. On behalf of the U.S. Department of the Treasury and the United States
Mint, I congratulate all Coloradans on their beautiful 50 State quarter, a coin that
perfectly reflects its beautiful, colorful state.
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PRESS ROOM
May 24,2006
js-4285
Testimony of Assistant Secretary for International Affairs Clay Lowery U.S.
Department of the Treasury Before the House Homeland Security Committee
Mr. Chairman, Ranking Member Thompson, and distinguished members of the
Homeland Security Committee, I appreciate the opportunity to appear before you
today. I am here speaking on behalf of the Administration. the Department of the
Treasury, and the Committee on Foreign Investment in the United States ("CFIUS"
or the "Committee") to discuss our work and ways to improve the CFIUS process.
Improving the CFIUS Process
The Homeland Security Committee and CFIUS share the common objective to
protect our national and homeland security. In my recent testimony before the
House Financial Services Committee's Subcommittee on Domestic and
International Monetary Policy, Trade and Technology, I laid out the key principles
that will guide CFIUS as we work with the Congress to integrate further America's
national and homeland security interests. Reforms should address two broad
principles: U.S. national security imperatives in the post-9/11 environment and the
need to continue welcoming investment in the U.S. and creating good jobs for
American workers.
To advance those principles, the Administration supports improving
communications with Congress on CFIUS matters. The Administration also
welcomes other reforms to the CFIUS process, including those that ensure due
consideration of the nature of the acquirer and assets to be acquired, focus
resources on transactions that present national security issues, strengthen the role
of the intelligence community, improve CFIUS monitoring of mitigation agreements,
preserve the attractiveness of the United States for foreign investment, and
enhance accountability. The CFIUS process should first and foremost ensure U.S.
national security but should not unnecessarily discourage legitimate investment in
U.S. businesses that will provide income, innovation, and employment for
Americans. In today's testimony, I plan on addressing these reform principles. Of
particular interest to the Homeland Security Committee will be our focus on those
transactions that raise national and homeland security issues. The Administration
looks forward to a dialogue with Congress regarding reforms to the CFIUS
process. Let me first provide a paragraph or two on the historical context.
The Committee examines foreign acquisitions of U.S. companies pursuant to
section 721 of the Defense Production Act of 1950. Commonly known as the Exon~
Florio Amendment, section 721 gives the President the authority to investigate such
acquisitions and to suspend or prohibit a transaction if credible evidence leads him
to believe that the acquirer might take action that threatens to impair the national
security and if, in his judgment, existing laws, other than the International
Emergency Economic Powers Act and the Exon-Florio Amendment, do not provide
adequate and appropriate authority for him to protect the national security. After
the enactment of the Exon-Florio Amendment, the President delegated certain of
his authorities to the Committee. Pursuant to an Executive Order of the President
and subsequent Treasury regulations, the Committee receives notices of
transactions subject to the Exon-Florio Amendment and conducts thorough
interagency reviews and investigations to identify potential national security issues.
The President retains the authority to suspend or prohibit transactions.
Focusing on the Nature of the Acquirer and the Assets to be Acquired
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The Exon~Florio Amendment is nearly two decades old, and the Administration
supports efforts to Update it to reflect the post-9/11 security environment. The
Commit~ee consid.ers a broad range of national security issues when reviewing
transactions, snd Its assessment of threats and vulnerabilities should remain
flexible in order to meet changing circumstances and conditions that relate to
national security. Two factors that should always be taken into account in CFIUS
assessments are the nature of the acquiring entity and the nature of the assets to
be acquired. These are essential in weighing the national security implications of
any acquisition. The Administration does and will continue to support the
Committee's consideration of the ultimate ownership and control of the acquirer and
the possible foreign acquisition of sensitive assets when reviewing any transaction
under the Exon-Florio Amendment, both of which are factors the Committee already
considers when reviewing transactions.
Focusing on Transactions that Raise National Security Issues
CFIUS's appropriate focus is and will remain national security. One of the focuses
of the Exon-Florio amendment is, indeed, on transactions that could impact the U.S.
defense industrial base. There is a wide range of agencies involved in CFIUS,
including DHS, each bringing its own unique perspective and its own definition of
national security. This enaoles us to consider all aspects of transactions ranging
from energy and transportation to information technology and telecommunications.
The intelligence community also provides thorough threat assessments as part of
its analysis.
This process allows us to focus the most resources and highest level of oversight
on those cases that pose the greatest potential threat to national security. Many
transactions notified to the Committee do not raise national security issues. In
other cases, the national security issues are mitigated by the end of the 30-day
review so do not require an extended investigation. Requiring an investigation of
every transaction involving a foreign government-controlled acquirer would result in
scores of investigations each year in which no national security concerns are
present. This would diminish the Committee's ability to protect the national security
and send the wrong message that the United States does not welcome foreign
investment.
Strengthening the Role of the Intelligence Community
The Administration also believes that the Committee can carry out its role more
effectively by strengthening the role of the intelligence community in the CFIUS
process, which is essential in a complex and changing national security
environment. The Director of National Intelligence (ON!) has begun to do so by
assigning an all-threat assessment responsibility to the National Intelligence
Council and ensuring that all relevant intelligence community agencies and
activities participate in the development of final intelligence assessments provided
to the Committee. The Committee recently formalized the role of the Office of the
ONI, which plays a key role in all CFIUS reviews and investigations by participating
in CFIUS meetings, examining every transaction notified to the Committee, and
providing broad and comprehensive threat assessments. The DNI already
contributed greatly to the CFIUS process through reports by the Intelligence
Community Acquisition Risk Center concerning transactions notified to the
Committee, but formalizing its place in the process-and strengthening the threat
assessments provided to the Committee-represent an enhancement of the
inteJligence community's role. The DNI does ~ot v.ole on CFIUS matters and should
not because the role of the DNI is to prOVide intelligence support and not to make
pol{CY judgments based upon that intelligence.
Improving the Monitoring of Mitigation Agreements
A further key to improving the CFIUS process is.t~ str~ngthe~ the monitoring of
mitigation agreements entered into between entities flllOg notice under the ExonFlorio amendment and members of the Committee. Typically, the members of ,the
Committee with the greatest relevant expertise a.ssume the lead role In .examlnlng
any national security issues related to a transaction and, when .appr?pnate,
developing appropriate mechanisms to address those nsks. Mltlgallon agreements
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impl.ement s~curity mea~ures that vary. in scope and purpose according to the
particular national security concerns raised by a specific transaction. Monitoring
parties' adherence to mitigation agreements afterthe conclusion of the CFIUS
process is an important part of protecting the national security. The Administration
supports r~form~ .tha~ reinforce the auth?rity and provide resources for agencies
that negotiate mitigation agreements to Improve existing enforcement practices.
Promoting Legitimate Investment in the United States
The Administration also emphasizes the importance of preserving the
attractiveness of the United States to overseas investors. The intent of the ExonFlorio Amendment is not to discourage foreign direct investment (FDI) generally,
but to provide a mechanism to review and, if the President finds necessary. to
restrict investment that thr!,!atens the national security. FDI is critical to the U.S.
economy. Majority-owned U.S. affiliates of foreign companies employed 5.1 million
U.S. workers in 2004, Capital expenditures in 2004 by these affiliates totaled $108
billion and their sales totaled $2,302 billion. In 2003, these affiliates spent $30
billion on R&D and accounted for 21 percent of total U.S. exports. Roughly 40
percent of those jobs were in manufacturing, four times the national average. If
foreign companies were to reduce their spending in the U.S. as a result of
perceptions that the United States was less welcoming of FDI, lower investment
would cost American workers good jobs, reduce innovation, and lower the growth of
the U.S. economy.
Reforms to the CFIUS process should send a signal that the United States is
serious about national security and welcomes legitimate FDI. The Committee must
examine each transaction thoroughly, but the timeframes for examination should
not be unnecessarily long. In addition, the process should not require investigation
of transactions that could not possibly impair the national security. Last year, the
Committee received 65 notices of transactions under the Exon-Florio Amendment.
This year, CFIUS filings are on a pace to total roughly 90. Improvements to the
CFIUS process should promote filing of notice with respect to appropriate
transactions but should not delay or deter FDI with no nexus to the national
security. The Committee can best serve U.S. interests through thorough
examinations that protect the national security while maintaining the credibility of
the U.S. open investment policy for overseas investors and the confidence of U.S.
investors abroad that they will not be subject to retaliatory discrimination.
Improving Communication with Congress
It is clear that improvements in the CFIUS process are still required, particularly
with respect to communication with Congress and political accountability. The
Administration is committed to improving communication with Congress concerning
CFIUS matters and shares the view that Congress should receive timely
information to help meet its oversight responsibilities. Treasury is now promptly .
notifying Congress of every review upon its completion, and the Administration is
working hard to be responsive to Congressional inquiries. The Administration has
committed to conducting quarterly briefings for Congress on CFIUS matters. These
quarterly briefings were scheduled to begin before the issues with respect to the DP
World transaction became the subject of Congressional and media attention. The
Administration is also actively preparing the 2006 quadrennial report on possible
foreign efforts to conduct economic espionage in the United States or acquire
critical U.S, technologies. We regret that a quadrennial report has not been
prepared since 1994. and the Administration will issue the 2006 report in a timely
and thorough manner. I look forward to your suggestions on how to foster better
communication.
While reforms of the CFIUS process should advance our shared goal of improved
communication they should also reflect the importance of protecting proprietary
information and the integrity of the executive branch's decision-making process.
First reforms to the CFIUS process should encourage companies to file with the
Com'mittee by ensuring that proprietary information they provide to. ~he Committee
is protected from public disclosure and ~iII n.ot b~. used for competl.tlve ,purp?ses.
Full disclosure of information by companies IS cntlcal to the Committee s ability to
analyze thoroughly the national security risks associated with a transaction.
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Second, it is important to protect both the executive branch's deliberative process
and classified methods and sources, and avoid possible politicization of CFIUS
reviews and investigations for partisan purposes or at the behest of special
interests. Third, reporting requirements should take into account the need for
CFIUS member agencies to focus their limited resources on examining transactions
notified to the Committee. I am confident that the Committee can provide
Congress with the information it requires to fulfill its oversight role while respecting
these important principles.
Enhancing Accountability
The Administration supports a high level of political accountability for CFIUS
decisions and is committed to ensuring that senior, Senate-confirmed officials play
an integral role in examining every transaction notified to the Committee.
Improvements to the CFIUS process should also ensure that senior U.S. officials
are focused on national security issues. I know that CFIUS agencies are now
briefing at the highest levels in their respective agencies. However, the President
and Cabinet-level officials should focus their attention on the cases that merit the
greatest scrutiny. The President should focus on transactions that at least one
member of the Committee recommends he suspend or prohibil. Requiring the
President to make a determination when all CFIUS members agree that a
transaction does not threaten to impair the national security would potentially divert
his attention from transactions that could pose security risks.
Similarly, requiring Cabinet-level certification of CFIUS decisions on transactions
that do not raise potential national security concerns would lengthen and delay the
process, presenting an unnecessary impediment to legitimate investment. Such a
requirement would also dilute the resources that the most senior U.S. officials could
devote to transactions that do pose national security risks. This would impede the
Committee's ability to protect the national security as effectively as possible. I am
confident that the Committee can carry out its obligations in a manner that
guarantees high-level political accountability while focusing senior officials on
transactions that raise possible national security threats.
Conclusion
Mr. Chairman, the Administration appreciates your leadership and attention to the
protection of America's national and homeland security both in terms of the CFIUS
role and more broadly. To reiterate, the Administration does and will continue to
support CFIUS considering the ultimate ownership of the acquirer and the possible
foreign acquisition of sensitive assets when reviewing any transaction, both of
which are factors the Committee already considers when reviewing transactions.
The Administration has taken a number of steps to improve the CFIUS process and
to address concerns raised by Congress, and supports continued reforms to the
CFIUS process. Sound legislation can ensure that the Committee reviews
transactions thoroughly, protects the national security, conducts its affairs in an
accountable manner, and avoids creating undue barriers to foreign investment in
the United States. All members of CFIUS are committed to working with Congress
to improve the process, understanding that their top priority is to protect our national
security.
I thank you for your time today and am happy to answer to any questions.
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May 24,2006
JS-4286
Treasury and IRS Issue Regulations
On Domestic Production Activities Deduction
WASHINGTON, DC - The U.S. Treasury Department and Internal Revenue
Service (IRS) today issued final regulations under Code section 199 on the
deduction relating to domestic production activities. In addition, the Treasury
Department and IRS simultaneously issued proposed and temporary regulations
regarding the application of section 199 to certain transactions involving computer
software, as well as a Revenue Procedure that provides methods for calculating W2 wages for purposes of section 199.
The section 199 deduction relating to domestic production activities was enacted in
October 2004 as part of the American Jobs Creation Act, and was recently modified
by the Tax Increase Prevention and Reconciliation Act of 2005. The deduction
generally equals three percent of income from domestic production activities for
2005 and, by 2010, nine percent of such income. The activities eligible for the
deduction include not only the manufacture of personal property such as clothing,
goods, and food, but also the development of computer software, film and music
production, the production of electricity, natural gas, or water, and construction,
engineering, and architectural services.
The final regulations include many of the rules contained in proposed regulations.
issued in October 2005, and the initial guidance, Notice 2005-14, issued in January
2005. In addition, in response to more than eighty comment letters received
regarding the proposed regulations, the final regulations provide many additional
comprehensive rules, definitions, simplifying conventions, and examples to ease
the administrative burden on taxpayers.
The final regulations are generally effective for taxable years beginning on or after
the date the final regulations are published in the Federal Register. For taxable
years beginning prior to the effective date of the final regulations, a taxpayer
generally may apply either (i) the final regUlations, provided the taxpayer applies all
provIsions in the final regulatiOns; or (ii) subject to certain limitations, the rules
provided in the Notice as well as the proposed regulations.
The final regulations do not address the changes to section 199 made by the Tax
Increase Prevention and Reconciliation Act of 2005. The Treasury Department and
IRS intend on issuing regulations to address these changes, which are effective
only for taxable years beginning after May 17, 2006.
- 30REPORTS
•
•
•
•
Final regulations under section 199 (TO 9263)
Proposed and temporary regulations under section 199
Revenue Procedure 2006-22
Regulations (TO 9262)
http://www.treas.g0v/press/releases/js42Ur .httn
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DEPARTMENT OF THE TREASURY
Internal Revenue Service
26 CFR Part 1
[REG-111578-06]
RIN 1545-BF56
Computer Software Under Section 199(c)(5){B)
AGENCY: Internal Revenue Service (IRS), Treasury.
ACTION: Notice of proposed rulemaking by cross-reference to temporary regulations
and notice of public hearing.
SUMMARY: In the Rules and Regulations section of this issue of the Federal Register,
the IRS is issuing temporary regulations concerning the application of section 199 of the
Internal Revenue Code, which provides a deduction for income attributable to domestic
production activities, to certain transactions involving computer software. The text of
those regulations also serves as the text of these proposed regulations. This document
also provides notice of a public hearing on these proposed regulations.
DATES: Written or electronic comments must be received by August 30, 2006.
Outlines of topics to be discussed at the pubic hearing scheduled for Tuesday,
August 29, 2006, must be received by August 8, 2006.
ADDRESSES: Send submissions to: CC:PA:LPD:PR (REG-111578-06), room 5203,
Internal Revenue Service, POB 7604, Ben Franklin Station, Washington, DC 20044.
Submissions may be hand delivered Monday through Friday between the hours of
8 a.m. and 4 p.m. to: CC:PA:LPD:PR (REG-111578-06), Courier:s Desk, Internal
-2Revenue Service, 1111 Constitution Avenue, NW., Washington, DC, or sent
electronically, via the IRS Internet site atwww.irs.gov/regs or via the Federal
eRulemaking Portal atwww.regulations.gov(IRS - REG-111578-06). The public
hearing will be held in the IRS Auditorium, Internal Revenue Building, 1111 Constitution
Avenue, NW., Washington, DC.
FOR FURTHER INFORMATION CONTACT: Concerning the regulations, Paul
Handleman or Lauren Ross Taylor, (202) 622-3040; concerning submission of
comments, the hearing, and/or to be placed on the building access list to attend the
hearing, Richard A. Hurst, (202) 622-7180 (not toll-free numbers).
SUPPLEMENTARY INFORMATION:
Background
Temporary regulations in the Rules and Regulations section of this issue of the
Federal Register amend the Income Tax Regulations (26 CFR Part 1) relating to
section 199. The temporary regulations provide guidance under section 199for
taxpayers providing computer software to customers for the customers' direct use while
connected to the Internet. The text of those regulations also serves as the text of these
proposed regulations. The preamble to the temporary regulations explains the
amendments.
Special Analyses
It has been determined that this notice of proposed rulemaking is not a significant
regulatory action as defined in Executive Order 12866. Therefore. a regulatory
assessment is not required. It also has been determined that section 553(b) of the
Administrative Procedure Act (5 U.S.C. chapter 5) does not apply to these regulations,
-3and because the regulations do not impose a collection of information on small entities,
the Regulatory Flexibility Act (5 U.S.C. chapter 6) does not apply. Pursuant to
section 7805(f) of the Internal Revenue Code, this notice of proposed rulemaking will be
submitted to the Chief Counsel for Advocacy of the Small Business Administration for
comment on their impact on small business.
Comments and Public Hearing
Before these proposed regulations are adopted as final regulations,
consideration will be given to any written comments (a signed original and eight (8)
copies) or electronic comments that are submitted timely to the IRS. Comments are
requested on all aspects of the proposed regulations. In addition, the IRS and Treasury
Department specifically request comments on the clarity of the proposed rules and how
they can be made easier to understand. All comments will be available for public
inspection and copying.
A public hearing has been scheduled for Tuesday, August 29, 2006, at 10 a.m. in
the IRS Auditorium, Internal Revenue Building, 1111 Constitution Avenue, NW.,
Washington DC. Due to building security procedures, visitors must enter at the
Constitution Avenue entrance. In addition, all visitors must present photo identification
to enter the building. Because of access restrictions, visitors will not be admitted
beyoro the immediate entrance area more than 30 minutes before the hearing starts.
For information about having your name placed on the building access list to attend the
hearing, see the AFOR FURTHER INFORMATION CONTACT@ section of this preamble.
The rules of26 CFR 601.601 (a)(3) apply to the hearing.
-4Persons who wish to present oral comments at the hearing must submit
electronic or written comments and an outline of the topics to be discussed and the time
to be devoted to each topic (a signed original and eight (8) copies) by August 8,2006.
A period of 10 minutes will be allotted to each person for making comments. An agenda
showing the scheduling of the speakers will be prepared after the deadline for receiving
outlines has passed. Copies of the agenda wi II be available free of charge at the
hearing.
Drafting Information
The principal authors of these regulations are Paul Handleman and Lauren Ross
Taylor, Office of Associate Chief Counsel (Passthroughs and Special Industries), IRS.
However, other personnel from the IRS and Treasury Department participated in their
development.
List of Subjects in 26 CFR Part 1
Income taxes, Reporting and recordkeeping requirements.
Proposed Amendments to the Regulations
Accordingly, 26 CFR part 1 is proposed to be amended as follows:
PART 1--INCOME TAXES
Paragraph 1. The authority citation for part 1 continues to read, in part as
follows:
Authority: 26 U.S.C. 7805 * * *
Section 1.199-3 also issued under 26 U.S.C.199(d). * * *
Section 1.199-8 also issued under 26 U.S.C.199(d). * * *
Par. 2. Section 1.199-3 is amended to read as follows:
-5I
1.199-3 Domestic production gross receipts.
[The text of the amendments to this proposed section is the same as the text of
I
1.199-3T published elsewhere in this issue of the Federal Register.]
Par. 3. Section 1.199-8 is amended to read as follows:
§ 1.199-8 Other rules.
[The text of the amendments to this proposed section is the same as the text of
I
1.199-8T published elsewhere in this issue of the Federal Register.]
Mark E. Mathews,
Deputy Commissioner for Services and Enforcement.
RP-121272-06
Part III
Administrative, Procedural, and Miscellaneous
26 CFR 1.199-2: Wage Limitation
Methods of Determining W-2 Wages for purposes of the §199(b)( 1) Limitation on the §199
Deduction for Income Attributable to Domestic Production Activities
Rev. Proc. 2006-22
SECTION 1. PURPOSE
This revenue procedure provides methods for calculating W-2 wages for purposes
of § 199(b)( 1) of the Internal Revenue Code, which limits the amount of the § 199 deduction
for income attributable to domestic production activities to 50 percent of the W-2 wages of
the taxpayer for the taxable year.
Section 1.199-2(e)(3) ofthe Income Tax Regulations provides the Internal Revenue
Service with authority to issue guidance providing the methods that may be used to
calculate W-2 wages. Section 1.199-2(e)(3) is only effective for taxable years beginning
on or after June 1,2006. However, pursuant to §1.199-8(i){1), a taxpayer may apply
§1.199-2(e)(3) to a taxable year beginning before June 1,2006, provided that the taxpayer
applies all the provisions of §§ 1.199-1 through 1.199-9 to the taxable year (or all the
provisions of §§1.199-1 through 1.199-8 for a taxable year beginning after May 17, 2006,
the enactment date of the Tax Increase Prevention and Reconciliation Act of 2005 (Public
Law 109-222) (TIPRA), and before June 1,2006). This revenue procedure provides such
guidance for taxpayers who choose to apply the final regulations to taxable years beginning
before June 1, 2006, but only for taxable years beginning on or after January 1, 2005, and
on or before May 17, 2006.
SECTION 2. BACKGROUND
Section 199(a) provides a deduction for an amount equal to a percentage of the
lesser of (A) the qualified production activities income of the taxpayer for the taxable year,
or (8) taxable income (determined without regard to §199) for the taxable year (or, in the
case of an individual, adjusted gross income).
Section 199(b)( 1) provides that the amount of the deduction allowable under
§199(a) for any taxable year shall not exceed 50 percent of the W-2 wages ofthe taxpayer
for the taxable year.
Section 199(b)(2) provides that, for purposes of §199, the term "W-2 wages"
means, with respect to any person for any taxable year of such person, the sum of the
amounts described in §6051 (a)(3) and (8) paid by such person with respect to employment
of employees by such person during the calendar year ending during such taxable year.
Such term shall not include any amount that is not properly included in a return filed with the
2
Social Security Administration (SSA) on or before the 60th day after the due date
(including extensions) for such return.
This revenue procedure provides three methods for calculating W-2 wages for
purposes of §199(b)(1). These methods are generally the same as were set forth in both
§1.199-2 of the proposed regulations that were published in the Federal Register on
November 4,2005 (70 FR 67220), and in section 4.02 of Notice 2005-14, 2005-1 C.B.
498,514. The first method (the unmodified Box method) allows for a simplified calculation
while the second and third methods (the modified Box 1 method and the tracking wages
method) provide greater accuracy.
Section 514(a) of TIPRA amended section 199(b)(2) by excluding from the term W2 wages any amount that is not properly allocable to domestic production gross receipts
for purposes of section 199(c)( 1). This amendment made by TIPRA is effective with
respect to taxable years beginning after the date of enactment, May 17, 2006. The IRS
and Treasury Department plan on issuing regulations and a new revenue procedure
reflecting the amendment made to section 199(b)(2) by TIPRA. It is expected that any new
revenue procedure will contain methods for calculating W-2 wages similar to the three
methods in this revenue procedure, but will reflect the additional limitation on W-2 wages
imposed by TIPRA. Because of the amendment by TIPRA, the guidance provided by this
revenue procedure does not apply to taxable years beginning after the date of enactment
ofTIPRA.
3
SECTION 3. RULES OF APPLICATION
.01 In general. Section 1.199-2( a)( 1) of the regulations provides that, except as
provided in §1.199-2(a)(3) and §1.199-2(b), the Forms W-2, "Wage and Tax Statement,"
used in determining the amount of W-2 wages are those issued for the calendar year
ending during the taxpayer's taxable year for wages paid to employees (or former
employees) of the taxpayer for employment by the taxpayer. For purposes of §1.199-2,
§1.199-2{a)( 1) provides that employees of the taxpayer are limited to employees of the
taxpayer as defined in §3121 (d)(1) and (2) (that is, officers of a corporate taxpayer and
employees of the taxpayer under common law rules) .
.02 Wages paid by entity other than common law employer. Section 1.199-2(a)(2)
of the regulations provides that, in determining W-2 wages, a taxpayer may take into
account any wages paid by another entity and reported by the other entity on Forms W-2
with the other entity as the employer listed in Box c ofthe Forms W-2, provided that the
wages were paid to employees of the taxpayer for employment by the taxpayer. If the
taxpayer is treated as an employer described in §3401 (d)(1) because of control of the
payment of wages (that is, the taxpayer is not the common law employer of the payee of the
wages), the payment of wages may not be included in determining W-2 wages of the
taxpayer. If the taxpayer is paying wages as an agent of another entity to individuals who
are not employees of the taxpayer, the wages may not be included in determining the W-2
wages of the taxpayer.
4
.03 Requirement that wages must be reported on return filed with Social Security
Administration. Section 1.199-2(a)(3) of the regulations provides that the term "W-2
wages" shall not include any amount that is not properly included in a return filed with SSA
on or before the 60th day after the due date (including extensions) for such return. For this
purpose, if a Form W-2c (or corrected return) is filed to correct a Form W-2 that was not
filed with SSA on or before the 60th day after the due date (including extensions) of the
Form W-2 (or to correct a Form W-2c relating to a Form W-2 that had not been filed with
SSA on or before the 60th day after the due date (including extensions) of the Form W-2),
then such Form W-2c (or corrected return) shall not be considered to have been filed with
SSA on or before the 60th day after the due date (including extensions) for such Form W2c (or corrected return), regardless of when such Form W-2c (or corrected return) is filed.
See §1.199-2(a)(3) of the regulations for further guidance related to this requirement.
.04 No application in determining whether amounts are wages for employment tax
purposes. The discussions of "wages" in this revenue procedure and in the regulations
under § 199 are for purposes of §199 only and have no application in determining whether
amounts are wages under §3121 (a) for purposes of the Federallnsurance Contributions
Act, under §3306(b) for purposes of the Federal Unemployment Tax Act, and under
§3401 (a) for purposes of the Collection of Income Tax at Source on Wages (federal
income tax withholding), or any other wage-related determination. See § 1.199-2(a)( 1) of
the regulations.
5
.05 Application for a taxpayer with a short taxable year. Subject to the other rules
of application of the regulations and of this revenue procedure, the W-2 wages of the
taxpayer for a short taxable year shall include those wages paid during the short taxable
year to employees of the taxpayer as determined under the tracking wages method
described in section 5.03 of this revenue procedure. See section 6 of this revenue
procedure .
.06 Acquisition or disposition of a trade or business (or major portion). Section
1.199-2(c) of the regulations provides that if a taxpayer (a successor) acquires a trade or
business, the major portion of a trade or business, or the major portion of a separate unit of
a trade or business from another taxpayer (a predecessor), then, for purposes of
computing the respective section 199 deduction of the successor and of the predecessor,
the W-2 wages paid for that calendar year shall be allocated between the successor and
the predecessor based on whether the wages are for employment by the successor or for
employment by the predecessor. Thus, in this situation, the W-2 wages are allocated
based on whether the wages are for employment for a period during which the employee
was employed by the predecessor or for employment for a period during which the
employee was employed by the successor, regardless of which permissible method for
Form W-2 reporting is used .
.07 Non-duplication rule. Section 1.199-2(d) of the regulations provides that
amounts that are treated as W-2 wages for a taxable year under any method of calculating
W-2 wages shall not be treated as W-2 wages for any other taxable year. Thus, for
6
example, an amount of nonqualified deferred compensation that is treated as W-2 wages
under the Unmodified Box Method described in section 5.01 of this revenue procedure
shall not be treated as W-2 wages in any other taxable year. Section 1.199-2(d) of the
regulations also provides that an amount shall not be treated as W-2 wages by more than
one taxpayer.
.08 Trade or business requirement. Pursuant to §1.199-8(c)(1), the term W-2
wages only includes those wages paid to employees of the taxpayer that are attributable to
the actual conduct of a trade or business of the taxpayer. For example, remuneration paid
to an employee for domestic service performed in the private home of the taxpayer is not
included in W-2 wages of the taxpayer.
SECTION 4. DEFINITION OF W-2 WAGES AND CORRELATION WITH BOXES ON
FORMW-2
01 Definition of W-2 wages. Section 199(b)(2) and §1.199-2(e) of the regulations
provides that, for purposes of § 199(b)( 1), the te rm "W-2 wages" means, with respect to any
person for any taxable year of such person, the sum of the amounts described in
§6051 (a}(3) and (8) paid by such person with respect to employment of employees by such
person during the calendar year ending during such taxable year. Thus, the regulations
provide that the term W-2 wages includes: (i) the total amount of wages as defined in
§3401(a); (ii) the total amount of elective deferrals (within the meaning of §402(g)(3)); (iii)
the compensation deferred under §457; and (iv) for tax years beginning after December
31,2005, the amount of designated Roth contributions (as defined in §402A).
7
.02 Correlation with Form W-2. Under the 2005 and 2006 Forms W-2, the elective
deferrals under §402(g)(3) and the amounts deferred under §457 directly correlate to
coded items reported in Box 12 on Form W-2. Box 12, Code D is for elective deferrals to
a §401 (k) cash or deferred arrangement (plan); Box 12, Code E is for elective deferrals
under a §403(b) salary reduction agreement; Box 12, Code F is for elective deferrals under
a §408(k)(6) salary reduction Simplified Employee Pension (SEP); Box 12, Code G is for
elective deferrals and employer contributions (including nonelective deferrals) to any
governmental or nongovernmental §457(b) deferred compensation plan; and Box 12, Code
S is for employee salary reduction contributions under a §408(p) SIMPLE (simple
retirement account). Under the 2006 Form W-2, the amount of designated Roth
contributions (as defined in section 402A) directly correlates to Box 12, Code M for
designated Roth contributions to a section 401 (k) plan and Box 12, Code BB for
designated Roth contributions under a section 403(b) salary reduction agreement.
However, designated Roth contributions are also reported in Box 1, Wages, tips, other
compensation, and Box 5, Medicare wages and tips, and are subject to income tax
withholding.
SECTION 5. METHODS FOR CALCULATING W-2 WAGES
For any taxable year, a taxpayer generally must calculate W-2 wages for purposes
of §199(b)(1) using one ofthe three methods described in section 5.01, 5.02, and 5.03 of
this revenue procedure. These three methods are subject to the non-duplication rule
provided in §1.199-2(d). Fora taxpayer with a short taxable year, see Section 6 of this
8
revenue procedure. In calculating W-2 wages for a taxable year under the methods below,
the taxpayer includes only Forms W-2 that are for the calendar year ending with or within
the taxable year of the taxpayer and that meet the rules of application described in section
3 of this revenue procedure .
.01 Unmodified box method. Under the unmodified box method, W-2 wages are
calculated by taking, without modification, the lesser of(A) The total entries in Box 1 of all Forms W-2 filed with SSA by the taxpayer
with respect to employees of the taxpayer for employment by the taxpayer; or
(B) The total entries in Box 5 of all Forms W-2 filed with SSA by the taxpayer
with respect to employees of the taxpayer for employment by the taxpayer.
.02 Modified Box 1 method. Under the Modified Box 1 method, the taxpayer
makes modifications to the total entries in Box 1 of Forms W-2 filed with respect to
employees of the taxpayer. W-2 wages under this method are calculated as follows(A) Total the amounts in Box 1 of all Forms W-2 filed with SSA by the taxpayer
with respect to employees of the taxpayer for employment by the taxpayer;
(B) Subtract from the total in paragraph .02(A) of this section amounts included
in Box 1 of Forms W-2 that are not wages for Federal income tax withholding
purposes and amounts included in Box 1 of Forms W-2 that are treated as
wages for purposes of income tax withholding under §3402(0) (for example,
supplemental unemployment compensation benefits); and
9
(C) Add to the amount obtained after paragraph .02(8) of this section the total
of the amounts that are reported in Box 12 of Forms W-2 with respect to
employees of the taxpayer for employment by the taxpayer and that are properly
coded 0, E, F, G, and S .
.03 Tracking wages method. Under the tracking wages method, the taxpayer
actually tracks total wages subject to Federal income tax withholding and makes
appropriate modifications. W-2 wages under this method are calculated as follows(A) Total the amounts of wages subject to Federal income tax withholding that
are paid to employees of the taxpayer for employment by the taxpayer and that
are reported on Forms W-2 filed with SSA by the taxpayer for the calendar year;
(8) Subtract from the total in paragraph .03(A) of this section the supplemental
unemployment compensation benefits (as defined in §3402(0)(2)(A)) that were
included in the total in paragraph .03(A) of this section; and
(C) Add to the amount obtained after paragraph .03(8) of this section the total of
the amounts that are reported in Box 12 of Forms W-2 with respect to
employees of the taxpayer for employment by the taxpayer and that are properly
coded 0, E, F, G, and S.
SECTION 6. APPLICATION IN CASE OF SHORT TAXABLE YEAR
.01 Special rule for taxpayers with a short taxable year. Section 1.199-2(b) of the
regulations provides that, in the case of a taxpayer with a short taxable year, subject to the
rules of §1.199-2(a), the W-2 wages of the taxpayer for the short taxable year shall include
10
only those wages paid during the short taxable year to employees of the taxpayer, only
those elective deferrals (within the meaning of §402(g)(3)) made during the short taxable
year by employees of the taxpayer, and only compensation actually deferred under §457
during the short taxable year with respect to employees of the taxpayer.
.02 Method required for a short taxable year and modifications required in
application of method. The W-2 wages of a taxpayer with a short taxable year shall be
determined under the tracking wages method described in section 5.03 of this revenue
procedure. In applying the tracking wages method in the case of a short taxable year, the
taxpayer must apply the method as follows(A) For purposes of section S.03(A), the total amount of wages subject to Federal
income tax withholding and reported on Form W-2 must include only those wages
subject to Federal income tax withholding that are actually paid to employees during
the short taxable year and reported on Form W-2 for the calendar year ending with
or within that short taxable year;
(B) For purposes of section 5.0 3(B), only the supplemental unemployment
compensation benefits paid during the short taxable year that were included in the
total in section 5.03(A) as modified by section 6.02(A) are required to be deducted;
and
(C) For purposes of section S.03(C), only the portion of the total amounts reported in
Box 12, Codes D, E, F, G, and S on Forms W-2, that are actually deferred or
11
contributed during the short taxable year are included in W-2 wages.
SECTION 7. EFFECTIVE DATE
A taxpayer must apply this revenue procedure to a taxable year beginning on or
before May 17, 2006, if the taxpayer applies §§ 1.199-1 through 1.199-9 to the taxable
year. For a taxpayer who chooses not to rely on §§ 1.199-1 through 1.199-9 and this
revenue procedure for a taxable year beginning on or before May 17, 2006, the guidance
on W-2 wages under section 199 that applies to such taxable year is contained in Notice
2005-14 or § 1.199-2 of the proposed regulations. If Notice 2005-14 and § 1.199-2 of the
proposed regulations include different rules for the same particular issue, then a taxpayer
may rely on either the rule set forth in Notice 2005-14 or the rule set forth in § 1.199-2 of the
proposed regulations. However, if § 1.199-2 of the proposed regulations includes a rule
that was not included in Notice 2005-14, then a taxpayer is not permitted to rely on the
absence of a rule to apply a rule contrary to § 1.199-2 of the proposed regulations. For
taxable years beginning after May 17, 2006, and before June 1, 2006, a taxpayer may not
apply Notice 2005-14, the proposed regulations, or any other guidance under section 199
in a manner inconsistent with amendments made to section 199 by section 514 of TIPRA.
SECTION 8. DRAFTING INFORMATION
The principal author of this revenue procedure is A. G. Kelley of the Office of
Associate Chief Counsel (Tax Exempt & Government Entities). For further information
regarding this revenue procedure contact Mr. Kelley at (202) 622-6040 (not a toll free call).
12
[4830-01-p]
DEPARTMENT OF THE TREASURY
Internal Revenue Service
26 CFR Part 1
TD 9262
RIN 1545- BF57
Computer Software Under Section 199(c)(5}(B}
AGENCY: Internal Revenue Service (IRS), Treasury.
ACTION: Temporary regulations.
SUMMARY: This document contains temporary regulations concerning the application
of section 199 of the Internal Revenue Code, which provides a deduction for income
attributable to domestic production activities, to certain transactions involving computer
software. The regulations will affect taxpayers engaged in certain domestic production
activities involving computer software. The text of these temporary regulations also
serves as the text of the proposed regulations set forth in the notice of proposed
rulemaking on this subject in the Proposed Rules section in this issue of the Federal
Register.
OATES: Effective Date: These regulations are effective June 1,2006.
Applicability Date: For date of applicability, see §1.199-8T(i)(4).
FOR FURTHER INFORMATION CONTACT: Paul Handleman or Lauren Ross Taylor,
(202) 622-3040 (not a toll-free number).
SUPPLEMENTARY INFORMATION:
- 2Background
This document amends 26 CFR part 1 to provide rules relating to the deduction
for income attributable to domestic production activities under section 199 of the Internal
Revenue Code (Code). Section 199 was added to the Code by section 102 of the
American Jobs Creation Act of 2004 (Public Law 108-357,118 Stat. 1418), and
amended by section 403(a) of the Gulf Opportunity Zone Act of 2005 (Public Law 109135,119 Stat. 25) and section 514 of the Tax Increase Prevention and Reconciliation
Act of 2005 (Public Law 109-222, 120 Stat. 345). On January 19, 2005, the IRS and
Treasury Department issued Notice 2005-14 (2005-7 I.R.B. 498) providing interim
guidance on section 199. On November 4, 2005, the IRS and Treasury Department
published in the Federal Register proposed regulations under section 199 (70 FR
67220). On January 11, 2006, the IRS and Treasury Department held a public hearing
on the proposed regulations. Written and electronic comments responding to the
proposed regulations were received. Contemporaneous with the publication of these
temporary regulations, final regulations have been published under section 199.
General Overview
Section 199(a)(1) allows a deduction equal to 9 percent (3 percent in the case of
taxable years beginning in 2005 or 2006, and 6 percent in the case of taxable years
beginning in 2007, 2008, or 2009) of the lesser of (A) the qualified production activities
income (QPAQ of the taxpayer for the taxable year, or (8) taxable income (determined
without regard to section 199) for the taxable year (or, in the case of an individual,
adjusted gross income (AGI»).
- 3Qualified Production Activities Income
Section 199(c)(1) defines OPAl for any taxable year as an amount equal to the
excess (if any) of (A) the taxpayer's domestic production gross receipts (DPGR) for
such taxable year, over (8) the sum of (i) the cost of goods sold (CGS) that are
allocable to such receipts; and (ii) other expenses, losses, or deductions (other than the
deduction under section 199) thatare properly allocable to such receipts.
Section 199(c)(4)(A)(i) defines DPGR, in part, to mean the taxpayer's gross
receipts that are derived from any lease, rental, license, sale, exchange, or other
disposition of qualifying production property (QPP) that was manufactured, produced,
grown, or extracted (MPGE) by the taxpayer in whole or in significant part within the
United States. Section 199(c)(5) defines QPP to mean: (A) tangible personal property;
(8) any computer software; and (C) any property described in section 168(f)(4) (certain
sound recordings).
Computer Software
Section 4.04(7)(d) of Notice 2005-14 provides that gross receipts derived from
computer software do not include gross receipts derived from Internet access services,
online services, customer support, telephone services, games played through a
website, provider-controlled software online access services, and other services that do
not constitute the lease, rental, license, sale, exchange, or other disposition of computer
software that was developed by the taxpayer. Consistent with Notice 2005-14, the
proposed regulations in §1.199-3(h)(6)(i) state that the provision of online computer
software does not rise to the level of a lease, rental, license, sale, exchange, or other
-4-
disposition as required under section 199, but is instead a service.
Congressional Letter
On July 21, 2005, the Chairman and Ranking Member of the Senate Finance
Committee and the Chairman of the House Ways and Means Committee sent a letter to
the Treasury Department suggesting that the Treasury Department consider further the
treatment of online access to computer software and, in particular, whether such
treatment should be similar to the treatment of computer software distributed by other
means, such as by physical delivery or delivery via Internet download. The letter notes
that gross receipts from the provision of services are not treated as DPGR, regardless
of the fact that computer software may be used to facilitate such service transactions.
Summary of Comments
Numerous commentators have suggested that the provision of computer
software for online use should qualify under section 199. Some commentators
proposed that gross receipts derived from providing online access to computer software
should qualify under section 199 if the substa nce of the transaction that gives rise to the
gross receipts is the distribution of the computer software's functionality to end users.
These commentators suggested that factors to be considered in determining the
substance of the transaction should include: (1) whether an agreement exists,
regardless of its form, between the computer software producer and the customer that
gives the customer permission to use the computer software; (2) whether the use of
computer software is merely incidental to the provision of a separate service or
transaction; (3) whether the end user has made a payment to the computer software
-5producer directly for the right to access and use the computer software's functionality,
as opposed to a payment for a separate service or good in which the use of the
underlying computer software is only incidental to the separate service or transaction;
(4) whether the computer software producer holds itself out to the public as being in the
computer software business; (5) whether the computer software producer uses
alternate channels for distributing its computer software product or functionality other
than through online access; and (6) whether a competitive marketplace exists for the
same or similar computer software functionality that provides customers with alternative
distribution choices in addition to online access. The commentators explained that this
proposed list of factors is not exhaustive and there may be other relevant factors. The
commentators suggested that no single factor should control and that failure to satisfy
one or more factors should not necessarily result in gross receipts derived from online
access to computer software being non-DPGR.
Other commentators suggested that a customer's use of computer software is
tantamount to a license of the computer software. In addition, several commentators
asserted that the phrase "other disposition" in section 199(c)(4)(A) is broad enough to
include the provision of computer software for online use.
Explanation of Provisions
The temporary regulations do not adopt these comments. However, as a matter
of administrative convenience, the temporary regulations provide two exceptions under
which gross receipts derived by a taxpayer from providing computer software to
customers for the customers' direct use while connected to the Internet will be treated
-6as being derived from the lease, rental, license, sale, exchange, or other disposition of
such computer software. Such gross receipts will be treated as DPGR if all the other
requirements of section 199 are met (for example, the taxpayer MPGE computer
software in whole or in significant part within the United States).
The first exception applies to a taxpayer that derives gross receipts from
providing computer software to customers for the customers' direct use while connected
to the Internet (online software) and also derives gross receipts from the lease, rental,
license, sale, exchange, or other disposition to customers that are unrelated persons of
computer software that has been provided to such customers affixed to a tangible
medium or by allowing them to download the computer software from the Internet. The
second exception applies if a taxpayer that derives gross receipts from providing online
software and an unrelated person derives on a regular and ongoing basis in the
unrelated person's business gross receipts from the lease, rental, license, sale,
exchange, or other disposition of substantially identical software to its customers affixed
to a tangible medium or by allowing its customers to download the substantially identical
computer software from the Internet.
The temporary regulations define substantially identical software as computer
software that, from a customer's perspective, has the same functional resut as the
online software and has a significant overlap of features or purpose with the online
software. To avoid controversy between taxpayers and the IRS, the temporary
regulations provide a safe harbor under which all computer software games are deemed
to be substantially identical software.
-7If a taxpayer's provision of computer software for online use meets the
requirements set forth in the temporary regulations, then an allocation of gross receipts
between DPGR and non-DPGR will be necessary if, as part of the same transaction, the
taxpayer derives gross receipts other than from providing computer software to a
customer for the customer's direct use while connected to the Internet. For example, if
in connection with providing computer software to a customer for the customer's direct
use while connected to the Internet, a taxpayer also provides a service such as storing
its customers' data or providing telephone support, then the taxpayer must allocate its
gross receipts between DPGR and non-DPGR using any reasonable method.
These rules are specifically limited to the deduction under section 199 and no
inference can be drawn with respect to any other provision of the Code (such as the tax
treatment of these transactions under those provisions regarding character, timing, or
source).
Effective Date
Section 199 applies to taxable years beginning after December 31,2004. These
temporary regulations are applicable for taxable years beginning on or after June 1,
2006. A taxpayer may apply these temporary regulations to taxable years beginning
after December 31,2004, and before June 1,2006. The applicability of these
temporary regulations expires on or before May 22, 2009. Section 1.199-8(i)( 1) of the
final regulations issued contemporaneous with these temporary regulations provides
that, in certain circumstances, a taxpayer may rely on the guidance in Notice 2005-14
(2005-7 I.R.B. 498), the proposed regulations under section 199 that were published in
-8the Federal Register on November 4, 2005 (70 FR 67220), or the final regulations.
Regardless of which guidance a taxpayer applies, the taxpayer may apply these
temporary regulations.
Special Analyses
It has been determined that this Treasury decision is not a significant regulatory
action as defined in Executive Order 12866. Therefore, a regulatory assessment is not
required. It also has been determined that section 553(b) of the Administrative
Procedure Act (5 U.S.C. chapter 5) does not apply to these regulations. For
applicability of the Regulatory Flexibility Act (5 U.S.C. 601 et seq.), refer to the crossreference notice of proposed rulemaking published elsewhere in this issue of the
Federal Register. Pursuant to section 7805(f) of the Code, these temporary regulations
will be submitted to the Chief Counsel for Advocacy of the Small Business
Administration for comment on their impact on small business.
Drafting Information
The principal authors of these regulations are Paul Handleman and Lauren Ross
Taylor, Office of the Associate Chief Counsel (Passthroughs and Special Industries),
IRS. However, other personnel from the IRS and Treasury Department participated in
their development.
List of Subjects in 26 CFR Part 1
Income taxes, Reporting and recordkeeping requirements.
Amendments to the Regulations
Accordingly, 26 CFR part 1 is amended as follows:
-9PART 1--INCOME TAXES
Paragraph 1. The authority citation for part 1 is amended by adding entries in
numerical order to read, in part, as follows:
Authority: 26 U.S.C. 7805 * * *
Section 1.199-3T also issued under 26 U.S.C. 199(d). "" *
Section 1.199-8T also issued under 26 U.S.C. 199(d). * * *
Par. 2. Section 1.199-3 T is added to read as follows:
'1.199-3T Domestic production gross receipts (temporary).
(a) through (h) [Reserved]. For further guidance, see §1.199-3(a) through (h).
(i) Derived from the lease, rental, license, sale, exchange, or other disposition.
(1) through (5) For further guidance, see §1.199-3(i)(1) through (5). [Reserved].
(6) Computer software--(i) [Reserved]. For further guidance, see §1.1993(i)(6)(i).
(ii) Gross receipts derived from services. Gross receipts (as defined in §1.1993(c» derived from customer and technical support, telephone and other
telecommunication services, online services (such as Internet access services, online
banking services, providing access to online electronic books, newspapers, and
journals), and other similar services do not constitute gross receipts derived from a
lease, rental, license, sale, exchange, or other disposition of computer software (as
defined in § 1.199-3(j)(3».
(iii) Exceptions. Notwithstanding paragraph (i)(6)(ii) of this section, if a taxpayer
derives gross receipts from providing to customers computer software MPGE in whole
or in significant by the taxpayer within the United States for the customers' direct use
- 10while connected to the Internet (online software), then such gross receipts will be
treated as being derived from the lease, rental, license, sale, exchange, or other
disposition of computer software only if-(A) The taxpayer also derives, on a regular and ongoing basis in the taxpayer's
business, gross receipts from the lease, rental, license, sale, exchange, or other
disposition to customers that are unrelated persons (as defined in §1.199-3(b)(1» of
computer software tha t--
(1) Has only minor or immaterial differences from the online software;
(~) Has been MPGE (as defined in §1.199-3(e» by the taxpayer (as defined in
§1.199-3(f)) in whole or in significant part (as defined in §1.199-3(g)) within the United
States (as defined in § 1.199-3(h»; and
(~) Has been provided to such customers either affixed to a tangible medium (for
example, a disk or OVO) or by allowing them to download the computer software from
the Internet; or
(8) An unrelated person derives, on a regular and ongoing basis in the unrelated
person's business, gross receipts from the lease, rental, license, sale, exchange, or
other disposition of substantially identical software (as described in paragraph
(i)(6)(iv)(A) of this section) (as compared to the taxpayer's online software) to its
customers pursuant to an activity described in paragraph (i)(6)(iii)(A)(~) of this section.
(iv) Definitions and special rules--(A) Substantially identical software. For
purposes of paragraph (i)(6)(iii)(8) of this section, substantially identical software is
computer software that--
- 11 -
(1) From a customer's perspective, has the same functional result as the online
software described in paragraph (i)(6)(iii) of this section; and
(~) Has a significant overlap of features or purpose with the online software
described in paragraph (i)(6)(iii) of this section.
(B) Safe harbor for computer software games. For purposes of paragraph
(i}(6)(iv}(A) of this section, all computer software games are deemed to be substantially
identical software. For example, computer software sports games are deemed to be
substantially identical to computer software card games.
(C) Regular and ongoing basis. For purposes of paragraph (i)(6)(iii) of this
section, in the case of a newly-formed trade or business or a taxpayer in its first taxable
year, the taxpayer is considered to be engaged in a n activity described in paragraph
(i)(6)(iii) of this section on a regular and ongoing basis if the taxpayer reasonably
expects that it will engage in the activity on a regular and ongoing basis.
(0) Attribution. For purposes of paragraph (i)(6)(iii)(A) of this section-(1) All members of an expanded affiliated group (as defined in §1.199-7(a)(1))
are treated as a single taxpayer; and
~) In the case of an EAG partnership (as defined in §1.199-9(j)), the EAG
partnership and all members of the EAG to which the EAG partnership's partners
belong are treated as a single taxpayer.
(E) Qualified computer software maintenance agreements. Section 1.1993(i)(4)(i)(B)@) does not apply if the computer software is online software under
paragraph (i)(6)(ii) of this section.
-12(v) Examples. The following examples illustrate the application of this paragraph
(i)(6):
Example 1. L is a bank and produces computer software within the United
States that enables its customers to receive online banking services for a fee. Under
paragraph (i)(6}(ii) of this section, gross receipts derived from online banking services
are attributable to a service and do not constitute a lease, rental, license, sale,
exchange, or other disposition of computer software. Therefore, L's gross receipts
derived from the online banking services are non-DPGR.
Example 2. M is an Internet auction company that produces computer software
within the United States that enables its customers to partiCipate in Internet auctions for
a fee. Under paragraph (i)(6)(ii) of this section, gross receipts derived from online
services are attributable to a service and do not constitute a lease, rental, license, sale,
exchange, or other disposition of computer software. M's activities constitute the
provision of online services. Therefore, M's gross receipts derived from the Internet
auction services are non-DPGR.
Example 3. N provides telephone services, voicemail services, and e-mail
services. N produces computer software within the United States that runs all of these
services. Under paragraph (i)(6)(ii) of this section, gross receipts derived from
telephone and related telecommunication services are attributable to a service and do
not constitute a lease, rental, license, sale, exchange, o(other disposition of computer
software. Therefore, N's gross receipts derived from the telephone and other
telecommunication services are non-DPGR.
Example 4. 0 produces tax preparation computer software within the United
States. 0 derives, on a regular and ongoing basis in its business, gross receipts from
both the sale to customers that are unrelated persons of O's computer software that has
been affixed to a compact disc as well as from the sale to customers of O's computer
software that customers have downloaded from the Internet. 0 also derives gross
receipts from customers from providing the computer software to its customers for the
customers' direct use while connected to the Internet. Assume that the computer
software sold on compact disc or by download has only minor or immaterial differences
from the computer software provided over the Interne~ and 0 does not provide any
services in connection with the computer software provided over the Internet. Under
paragraph (i)(6)(iii)(A) of this section, O's gross receipts derived from providing its
computer software to customers over the Internet will be treated as derived from the
lease, rental, license, sale, exchange, or other disposition of computer software and are
domestic production gross receipts (DPGR) (as defined in §1.199-3) (assuming all the
other requirements of §1.199-3 are met).
-13Example 5. The facts are the same as in Example 4, except that a does not sell
the tax preparation computer software to customers affixed to a compact disc and a's
only method of providing the tax preparation computer software to customers is over the
Internet. P, an unrelated person, derives, on a regular and ongoing basis in its
business, gross receipts from the sale to customers of P's substantially identical tax
preparation computer software that has been affixed to a compact disc as well as from
the sale to customers of P's substantially identical tax preparation computer software
that customers have downloaded from the Internet. Under paragraph (i)(6)(iii)(8) of this
section, a's gross receipts derived from providing its tax preparation computer software
to customers over the Internet will be treated as derived from the lease, rental, license,
sale, exchange, or other disposition of computer software and are DPGR (assuming all
the other requirements of § 1.199-3 are met).
Example 6. P produces payroll management computer software within the
United States. For a fee, P provides the payroll management computer software to
customers for the customers' direct use while connected to the Internet. This is P's sole
method of providing its payroll management computer software to customers. In
conjunction with the payroll management computer software, P provides storage of
customers' data and telephone support. Q, an unrelated person, derives, on a regular
and ongoing basis in its business, gross receipts from the sale to customers of Q's
substantially identical payroll management software that has been affixed to a compact
disc as well as from the saleto customers of Q's substantially identical payroll
management software that customers have downloaded from the Internet. Under
paragraph (i)(6)(iii)(8) of this section, p's gross receipts derived from providing its
payroll management computer software to customers over the Internet will be treated as
derived from the lease, rental, license, sale, exchange, or other disposition of computer
software and are DPGR (assuming all the other requirements of § 1.199-3 are met).
However, P's gross receipts derived from the fees it receives that are properly allocable
to the storage of customers' data and telephone support are noc}.QPGR.
-14Par. 3. Section 1.199-8T is added to read as follows:
§1.199-8T Other rules (temporary).
(a) through (h) For further guidance, see §1.199-8(a) through (h).
(i) Effective dates. (1) through (3) Forfurtherguidance, see§1.199-8(i)(1)
through (3). [Reserved].
(4) Computer software. Section 1.199-3T(i)(6)(ii) through (v) are applicable for
taxable years beginning on or after June 1, 2006. A taxpayer may apply these
temporary regulations to taxable years beginning after December 31,2004, and before
June 1, 2006. The applicability of § 1.199-3T(i)(6)(ii) through (v) expires on or before
June 22,2009.
Mark E. Mathews,
Deputy Commissioner for Services and Enforcement.
Approved: May 2,2006.
Eric Solomon,
Acting Deputy Assistant Secretary of the Treasury.
Page 1 of I
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May 25,2006
js-4287
Treasury Announces End to Long-Distance Telephone Excise Tax
WASHINGTON, DC - The U.S. Treasury Department today announced it is
conceding the legal dispute over the federal excise tax on long-distance telephone
service. The Department of Justice will no longer pursue litigation and the Internal
Revenue Service (IRS) will issue refunds of tax on long-distance service for the
past three years. Taxpayers will be able to apply for refunds on their 2006 tax
forms, to be filed in 2007.
Treasury Secretary John Snow states, "Today is a good day for American
taxpayers; it marks the beginning of the end of an outdated, antiquated tax that has
survived a century beyond its original purpose, and by now should have been
ancient history.
"The Federal Appeals courts have spoken across the board. It's time to
'disconnect' this tax and put it on the permanent 'do not call' list.
"In addition to ending the litigation, I would like to call on Congress to terminate the
remainder of this antique tax by repealing the excise tax on local service as well,"
Key Facts Regarding Tax Refunds:
•
•
•
No immediate action is required by taxpayers.
Refunds will be a part of 2006 tax returns filed in 2007.
Refund claims will cover all excise tax paid on long-distance service over
the last three years (time allowed given statute of limitations). Interest will be
paid on refunds.
• The IRS is working on a simplified method for individuals to use to claim a
refund on their 2006 tax returns.
• Refunds will not include tax paid on local telephone service, which was not
involved in the litigation.
• Originally established in 1898 as a "Iuxury" tax on wealthy Americans who
owned telephones, the federal excise tax on telephone calls is no!
compatible with today's modern information-age society,
- 30-
http://www.trfJ.s.gov/press/reJeases/js4127.htm
3/5/2007
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May 26, 2006
js-4289
Treasury Assistant Secretary Fratto to Hold Weekly Press Briefing
Treasury Assistant Secretary for Public Affairs Tony Fratto will hold the weekly
media briefing on Tuesday, May 30 in Main Treasury's Media Room. The event is
open to ali credentialed media.
Who
Assistant Secretary for Public Affairs Tony Fratto
What
Weekly Briefing to the Press
When
Tuesday, May 30, 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
<mailto:frances.anderson@do.treas.gov> with the following information:
name, Social Security number, and date of birth.
-30-
http://www.treas.goy/press/releases/js42gJ.htm
3/5/2007
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May 26, 2006
JS-4290
Deputy Secretary Kimmitt to Deliver Remarks in Berlin
Deputy Secretary Robert M. Kimmitt will address Germany's CDU Business Council
next week in Berlin. Also speaking in the program are German Chancellor Angela
Merkel and Professor Klaus Schwab of the World Economic Forum.
Deputy Secretary Kimmitt's address will focus on the German-American role in the
transatlantic economic partnership, including making each economy more dynamic,
addressing globalization and changing demographics, and promoting the free flow
of capital across borders. Kimmitt also will address U.S-German cooperation in the
fight to stop the flow of terrorist financing as well as the geo-political environment in
Europe and the Middle East.
Who
Treasury Deputy Secretary Robert M. Kimmitt
What
Remarks: For Stability and Security - A Transformed Transatlantic Partnership
When
Thursday, June 1.2:45 p.m. (Local Time)
Where
Hotel InterContinental
Budapester Stra~e 2
10787 Berlin
http://www.tre?~.gov/press/releases/js429f).htm
3/5/200~
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May 26, 2006
JS-4291
Assistant Secretary Henry
Statement On Senate Regulatory Relief Bill
Treasury Assistant Secretary for Financial Institutions Emil W. Henry, Jr. issued the
following statement today on the Treasury Department's reaction to Senate
passage of the Financial Services Regulatory Relief Act of 2006
"Last night the Senate approved the Financial Services Regulatory Relief Act of
2006, a bill to eliminate archaic, burdensome regulations on financial institutions.
Evaluating the structure of our financial institutions' regulatory oversight is integral
for their efficient operations, and I applaud the Senate's effort.
"Senators Crapo, Shelby, and Sarbanes worked tirelessly to craft a balanced,
bipartisan measure. It is no small feat to weigh all of the perspectives and opinions
and develop a comprehensive product everyone can support.
"It is my hope that the House and the Senate finalize the details of this legislation
expeditiously, so we may move America's financial services sector forward and
leave unnecessary regulatory burdens in the past."
http://www.treas.gov/presslreleases!Js4:29!.htm
3/5/2007
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May 26,2006
JS-4292
Statement of Treasury Secretary John W. Snow on Congressman Robert
Giaimo
In his long career in the House of Representatives, Connecticut Congressman
Robert Giaimo served well the people of his district. Through efforts such as his
support to create the National Endowment for the Arts, his contribution to DC's
Metro system and as a champion of fiscal restraint while chairing the House Budget
Committee he also made significant and lasting contributions to Americans
nationwide. He was a good friend and my thoughts and prayers are with his family.
-30-
http://www.trea~.gov/press/releases/js421:/}.htm
3/5/2007
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I 0 view or pont me I-'Ur content on thiS page, aOwn/oaa the tree AC/OIJell'j Acrol)al"') Hea(/er.").
May 30,2006
JS-4293
Statement of Treasury Secretary
John W. Snow on Resignation
Thank you for those gracious words.
It has been a great honor to serve as the 73rd Secretary of the Treasury and I will
always be grateful to you for the opportunity you gave me. But as you know I have
looked forward for some time to returning to private life. I do so with a great sense
of satisfaction in what has been accomplished over the last 3-112 years.
Your economic policies have put the American economy on a strong upward path, I
have been pleased to have had a part in working with you to advance those
policies.
The American economy today is growing and expanding at a rate well above the
rest of the industrialized world. Businesses are investing, productivity growth is
strong and millions of new jobs have been created. The foundations for continued
prosperity are well in place.
At a critical time in our country's economic history you recognized the need for tax
relief to lower the marginal tax rates on work and on savings and investment Those
policies lie at the heart of the recovery we are now enjoying, a recovery which has
also seen a dramatic increase in federal revenues.
With this increase in government receipts and the strict control on spending that
you have advocated it is clear now that we are On a path to meet your target of
cutting the deficit in half ahead of schedule.
The real deficit issue as you have said often is the unfunded obligations that loom
ahead. Because of your leadership we are on a stronger footing to address these
challenges.
Thanks to your leadership the Treasury Department today is in the forefront of the
war on terror, using the authorities at our disposal to identify and disrupt terrorists
and their funding networks and following the financial trail they leave. Terrorists are
motivated by hatred but they need money to carryon their evil activities. By going
after the money, Treasury is playing a key role in the war on terror.
It has been a great honor indeed to work with the extraordinarily able and dedicated
people of the Treasury Department They reflect the best traditions of public service
and I will forever be grateful to them for all their support.
Hank Paulson is a superb choice to lead the Treasury Department He is an old
friend, somebody I admire and respect deeply. He is a proven executive with wide
ranging business and finance experience combined with a keen sense of public
service. Hank will be a great addition to your Administration.
Thank you again, Mr. President, for your support. As I prepare to take my leave I
wish you all the best in the years to come as you lead this great country. As always,
you will have my full support.
http://www.trea~.gov/press/releases/js42Y3.htm
3/5/2007
Page 2 of2
REPORTS
•
Secretary Snow's Letter to the President
http'.llwww,treas ~ov/press/releases/js429: htm
3/512007
DEPARTMENT OF THE TREASURY
WASHINGTON, D.C.
May 30, 2006
The Honorable George W. Bush
President of the United States
Washington, D.C.
Dear Mr. President:
As you know, I have been anxious for some time to return to private life. Now
with the economy so clearly on a good path, it is time for me to step down as the
Secretary of the Treasury. Therefore, I hereby resign as Secretary of the Treasury
effective after an orderly transition period for my successor.
Mr. President, it has been an honor and a privilege to have served the American
people as part of your Administration for the past three years. While the important work
of government is never completed, I leave with a great sense of satisfaction in knowing
that so much has been accomplished in the last three years in advancing your agenda at
home and abroad. In particular, I note the remarkable progress we have seen in our
nation's economy since you signed the Jobs and Growth Act in May of2003. In the
period that has followed, we have seen a sharp pick-up in employment, increased
investment, low core inflation and record government receipts that are helping to achieve
your goal of cutting the deficit in half ahead of schedule.
At the same time, the global economy is performing better than it has in decades.
This is a great tribute to your leadership and I have been pleased working with my fellow
finance ministers around the globe to move forward your agenda for stronger global
growth, market-based exchange rates and debt relief for the poorest countries.
Thanks to your leadership the Treasury Department today is in the forefront of the
war on terror, lIsing the authorities at our disposal to prevent access to the financial
system and breaking up funding networks oftcrrorists. Terrorists are motivated by hatred
but they need money to carryon their evil activities. By going after the money, Treasury
is playing a key role in the war on terror.
I thank you for the opportunity to have played a role in working with you and so
many others in the Administration to develop and advance your policies to lift the burden
of poverty from 111i1Jions in the developing world, to promote freedom, prosperity and
stability across the globe and to protect our country and the world from terrorist threats.
These arc the great and defining goals of modern civilization and you are their true
champion.
The Honorable George W. Bush
Page Two
May 30,2006
Working with the outstanding men and women of the Treasury Department has
been a singular privilege. They serve the people of our country with great distinction and
represent the highest tradition of public service.
As your Administration presses forward in pursuit of the cause of freedom,
prosperity and stability, you will continue to have my strong support.
Let me thank you and Laura for your friendship and confidence. As you lead our
nation, may you enjoy continued great success and the blessings you so richly deserve.
Sincerely,
~~
John W. Snow
Page 1 of2
- -
--
,:-
':::- ..
~- -~
.-.-.
- - .---
\--'HLSS f·W0M
May 3D, 2006
2006-5-30-14-23-4-17126
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 $67,437 million as of the end of that week. compared to $67,548 million as of the end of the prior week.
I. Official U.S. Reserve Assets (in US millions)
~
I
11
May 19,2006
TOTAL.
Foreign Currency Reserves 1
I
a Securities
67,548
Euro ..
11
11,893
IOf which. issuer headquartered in the US.
May 26,2006
I
Yen
11,340
I
I
67,437
I
I
TOTAL
I
Euro
II
23,233
II
11,900
I
v. n
I
11,251
TOTAL
23,151
0
0
b. Total deposits with:
Ibi Othercentrai banks and BIS
Ibii Banks headquartered in the US.
Ibli Of which, banks located abroad
Ibiii. Banks headquartered outside the US.
jbill Of which, banks located in the U.S.
[2. IMF Reserve Position 2
13 Special Drawing Rights (SDRs) 2
14
Gold Stock 3
[5 Other Reserve Assets
II
II
II
I
II
11,819
II
II
II
5,523
17,342
0
0
0
II
I
I
I
II
II
II
II
11,815
5,483
I
II
17,298
II
0
0
II
0
I
7,309
7,315
8,624
8,632
II
1\
0
I
I
0
II
II
I
11,041
I
II
I
II
0
I
II
11,041
I
II
0
I
II. Predetermined Short-Term Drains on Foreign Currency Assets
[
May 26, 2006
May 19, 2006
I
I
1. Foreign currency loans and securities
Euro
TOTAL
Ven
Euro
0
Yen
TOTAL
I
0
2. Aggregate short and long positions in forwards and futures in foreign currencies vis-a-vis the U.S. dollar:
0
2.a. Short positions
I
2.b Long positions
3. Other
I
I
I
0
0
0
I
I
II
II
II
0
I
0
I
TOTAL
I
III. Contingent Short-Term Net Drains on Foreign Currency Assets
[
r
May 26,2006
May 19, 2006
II
I
1/
Euro
!I
II
http://www.treas.gov/presslreleases/20065JOI423417126.htm
Yen
!I
II
Euro
TOTAL
II
II
II
Ven
II
II
I
3/5/2007
Page 2 of2
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
@a
With other central banks
I
I
I
0
I
CJCJCJ
I
I
I
CJ
I
0
I
II
3.b With banks and other financial institutions
I
I
0
0
I
I
Headquartered in the US.
/I
I
I
0
1/
I
I
3.c Witl7 banks and other financial institutions
Headquartered outside the US.
I
I
4. Aggregate short and long positions of options
in foreign
I
II
I
II
II
ICurrenCies vis-a-vis the U.S. dollar
14a Short positions
14a 1. Bought puts
II
II
I
II
I
I
I
II
I
0
I
I
I
I
0
I
I
14a2 Written calls
I
10 Long positions
I
\4b 1. Bought calls
I
14b2. Written puts
I
II
I
I
II
I
II
I
Notes:
11 Includes holdings of the Treasury's Exchange Stabilization Fund (ESF) and the Federal Reserve's System Open Market Account
(SOMA), valued at current market exchange rates. Foreign currency holdings listed as securities reflect marked-to-market values, and
deposits reflect carrying values. Foreign Currency Reserves for the latest week may be subject to revision. Foreign Currency
Reserves for the prior week are final.
21 The items, "2. IMF Reserve Position" and "3. Special Drawing Rights (SDRs)," are based on data provided by the IMF and are
valued in dollar terms at the official SDR/doliar exchange rate for the reporting date. The entries for the latest week reflect any
necessary adjustments, including revaluation, by the U.S. Treasury to IMF data for the prior month end.
31 Gold stock is valued monthly at $42.2222 per fine troy ounce.
http://www.treas cS oy/press/releases/2006).301423417126.htm
3/5/2007
Page I of I
,
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PRESS
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ROOM
May 31, 2006
js-4294
Treasury Secretary to Announce $306 million in PA Community Development
Awards
U.S. Treasury Secretary John W. Snow will join U.S. Senator Rick Santorum and
Community Development Financial Institutions (CDFI) Fund Director Arthur A.
Garcia in Philadelphia, Penn. on Thursday, June 1 to announce $306 million in tax
credits awarded to Pennsylvania organizations under the 2006 round of the New
Markets Tax Credits (NMTC).
The NMTC Program attracts private-sector capital investment into the nation's
urban and rural low-income areas to help finance community development projects,
stimulate economic growth and create jobs. Secretary Snow and Treasury officials
will announce $4,1 billion in tax credits awards across the country that day,
including $600 million allocated specifically for the redevelopment of the Hurricane
Katrina Gulf Opportunity Zone (GO Zone).
Who:
Treasury Secretary John W. Snow
What:
$306 million Tax Credit Award to PA Organizations
When:
Thursday, June 1 4:00 p.m,
Where:
The Enterprise Center
4548 Market Street
Philadelphia, PA
About the New Markets Tax Credit Program
The NMTC Program, established by Congress in December 2000, provides
individual and corporate taxpayers with a credit against federal income taxes for
making qualified equity investments in investment vehicles known as Community
Development Entities (COEs). Substantially all of the taxpayer's investment must be
used by the CDE to make qualified investments supporting certain business
activities in low-income communities. More information on the NMTC program can
be found at wwwcdfifund,gov.
- 30 -
http://www.treas.$oY/press/releases/js42()4 ..htl11
3/5/2007
Page I of 2
,
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PRESS
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May 31, 2006
is-4295
Snow, Treasury Officials to Announce $4.1 Billion in Community
Development Awards Across U.S.
U.S. Treasury Secretary John W. Snow and Treasury officials will announce $4.1
billion in tax credits to be awarded to organizations investing in rural and urban lowincome communities across the United States starting Thursday, June 1. Treasury
officials will visit eight communities around the country to highlight awards under the
2006 round of the New Markets Tax Credit Program (NMTC), including $600 million
allocated specifically for the redevelopment of the Hurricane Katrina Gulf
Opportunity Zone (GO Zone).
Treasury's NMTC visit schedule includes:
• Treasury Secretary John W. Snow
Thursday, June 1 4:00 PM (EDT)
The Enterprise Center
4548 Market Street
Philadelphia, PA
Also attending: Community Development Financial Institutions (CDFI) Fund
Director Art Garcia, U.S. Senator Rick Santorum
•
Under Secretary for Domestic Finance Randal K. Quarles
Thursday, June 1 9:00 AM (EDT)
SI. Paul AME Wellness Center
639 East Long Street
Columbus, OH
Also attending: House Republican Conference Chairwoman,
Congresswoman Deborah Pryce
•
Deputy Assistant Secretary for Critical Infrastructure and Compliance
Scott Parsons
Thursday, June 1 1:30 PM (EDT)
Merrill Lynch
North Tower, 4 World Financial Center
250 Vesey Street
New York, NY
•
Deputy Assistant Secretary for Financial Education Dan lannicola
Thursday, June 1 3:00 PM (COT)
Renaissance Place at Grand
1001 Compton Ave.
St. Louis, MO
•
U.S. Treasurer Anna Escobedo Cabral
Friday, June 2 2:30 PM (PDT)
Market Creek Plaza Commercial and Cultural Center
302 Euclid Ave.
San Diego, CA
•
CDFI Fund Director Art Garcia
Monday, June 510:30 AM (COT)
The Empowerment Center
327 North Boulevard
Baton Rogue, LA
http://www.treas.sov/press/reJeases/js42i1) .11tlll
3/5/2007
Page 2 of2
• CDFI Fund Director Garcia
Tuesday, June 6 11 :00 AM (COT)
The Magnolia
1800 Magnolia Street
New Orleans, LA
• CDFI Fund Director Garcia
Monday, June 6 1:30 (COT)
Coastal Family Health Center
739 Division Street
Biloxi, MS
About the New Markets Tax Credit Program
The NMTC Program, established by Congress in December 2000, provides
individual and corporate taxpayers with a credit against federal income taxes for
making qualified equity investments in investment vehicles known as Community
Development Entities (CDEs). Substantially ali of the taxpayer's investment must be
used by the CDE to make qualified investments supporting certain business
activities in low-income communities. More information on the NMTC program can
be found at www.cdfifund.gov.
- 30-
http://www.treas.goy/press/releases/js4295 .'ltm
3/512007
Page 1 of 1
:
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PRESS ROOM
May 31,2006
JS-4296
US Treasurer, HUD Secretary
to Address Economic Growth in California
U.S. Treasurer Anna Escobedo Cabral and the Department of Housing and Urban
Development (HUD) Secretary Alphonso Jackson will give remarks at the recently
opened Village at Century shopping center in Inglewood, Cali. to highlight the
state's economic growth and job creation. Mayor Roosevelt T. Darn will also speak
at the event.
Who
U.S. Treasurer Anna Escobedo Cabral
HUD Secretary Alphonso Jackson
What
Remarks on the Economy and Financial Literacy
When
Friday, June 2 9:45 a.m. (PDT)
Where
The Village at Century Shopping Center
3360 Century Boulevard
Inglewood, CA
http://www.treas.gov/press/releases/js42lJ6.!:ltm
3/5/2007
Page I of I
May 31,2006
JS-4297
Air Transportation Stabilization Board Announces sale of Frontier Warrants
The Air Transportation Stabilization Board today announced the sale of the
3,450,551 warrants that it received in connection with the issuance of a loan
guarantee to Frontier Airlines. The warrants were purchased in an auction by seven
institutional investors at a price of $2.03 per warrant. Total net proceeds to the
government were $6,608,604.
The ATSB still holds warrants in World Airways. The ATSB currently has no
outstanding loan guarantees, but the Board has a direct loan of $86 million to AT A
Airlines as a result of the airline's bankruptcy.
- 30-
http://www,treas,gov/press/releases/js42Y / .~~tm
3/512007
Page I of I
:
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PRESS ROOM
I 0 view or pnnt the put- content on tnls page. OownloaO the tree ACiO/)(WJ AcroOAt1n) keaClef1V.
May 31,2006
js-4298
United States and Finland Sign Protocol to Income Tax Treaty
WASHINGTON, DC - The Treasury Department today announced that U.S.
Ambassador Marilyn Ware and Finland Coordinate Minister of Finance Ulla-Maj
Wideroos signed a new Protocol to amend the existing bilateral income tax treaty,
concluded in 1989, between the two countries. The Protocol was signed
Wednesday in Helsinki.
The agreement Significantly reduces tax-related barriers to trade and investment
flows between the United States and Finland. 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 Finland 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. In
addition, the Protocol eliminates the withholding tax on cross-border royalty
payments. The Protocol also strengthens the treaty's provisions preventing socalled treaty shopping, which is the inappropriate use of a tax treaty by third-country
residents.
- 30 -
REPORTS
•
Protocol (PDF)
http://www.treas.!!ov/presslreJeases/js429~
r:tm
3/5/2007
PROTOCOL
AMENDING THE CONVENTION BETWEEN
THE GOVERNMENT OF THE UNITED STATES OF AMERICA AND
THE GOVERNMENT OF THE REPUBLIC OF FINLAND
FOR THE AVOIDANCE OF DOUBLE TAXATION
AND THE PREVENTION OF FISCAL EVASION
WITH RESPECT TO TAXES ON INCOME AND ON CAPITAL
The Govenunent ofthe United States of America and the Government of the
Republic of Finland, desiring to amend the Convention Between the Government of
the United States of America and the Government ofthe Republic of Finland for the
Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to
Taxes on lncom: and on Capita~ signed at Helsinki on September 21, 1989
(hereinafter referred to as "the Convention"),
Have agreed as follows:
ARTICLE I
Article 1 (Personal Scope) of the Convention is omitted and the following
Article is substituted:
"ARTICLE I
Personal Scope
I.
This Convention shall apply to persons who are residents of one or both of the
Contracting States, except as otherwise provided in the Convention.
2.
This Convention shall not restrict in any manner any exclusion, exemption,
deduction, credit or other allowance now or hereafter accorded:
3.
a)
by the laws of either Contracting State; or
b)
by any other agreement between the Contracting States.
a)
Notwithstanding the provisions of subparagraph b) of paragraph 2 of
this Article:
(i)
for purposes of paragraph 3 of Article XXII (Consultation) of
the General Agreement on Trade in Services, the Contracting States
agree that any question arising as to the interpretation or application of
this Convention and, in particular, whether a taxation measure is within
the scope ofthis Convention, shall be determined exclusively in
accordance with the provisions of Article 25 (Mutual Agreement
Procedure) of this Convention; and
(ii)
the provisions of Article XVII of the General Agreement on
Trade in Services shall not apply to a taxation measure unless the
competent authorities agree that the measure is not within the scope of
Article 24 (Non-discrimination) of this Convention.
b)
For the purposes of this paragraph, a "measure" is a law, regulation,
rule, procedure, decision, administrative action, or any similar provision or
action.
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
3
(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.
5.
The provisions of paragraph 4 shall not affect:
a)
the benefits conferred by a Contracting State under paragraph 2 of
Article 9 (Associated Enterprises), under subparagraph b) of paragraph 1 and
paragraph 4 of ArtrIe 18 (Pensions, Annuities, Alimony, and Child Support),
and under Articles 23 (Elimination of Double Taxation), 24
(Non-discrimination), and 25 (Mutual Agreement Procedure); and
b)
the benefits conferred by a Contracting State under Articles 19
(Government Service), 20 (Students and Trainees), and 27 (Members of
Diplomatic Missions and Consular Posts), upon individuals who are neither
citizens of, nor have been admitted for permanent residence in, that State.
6.
An item of income derived through an ertity that is fiscally transparent under
the laws of either Contracting State shall be considered to be derived by a resident of a
Contracting State to the extent that the item is treated for purposes of the taxation law
of such Contracting State as the income of a resident."
ARTICLE II
Article 4 (Residence) of the Convention is amended by:
a)
omitting paragraph I and substituting the following:
"1.
a)
For the purposes of this Convention, the term "resident of a Contracting
State" means any person who, under the laws of that State, is liable to tax
therein by reason of his domicile. residence, place of management, place of
incorporation, or any other criterion of a similar nature, and also includes that
State and any political subdivision, statutory body or local authority thereof.
This term, however, does not include any person who is liable to tax in that
4
State in respect only of income from sources in that State or of profits
attributable to a permanent establishment in that State or capital situated
therein.
b)
A United States citizen or an alien lawfully admitted for permanent
residence (a "green card" holder) in the United States is a resident of the
United States, but only if such person has a substantial presence, pennanent
home, or habitual abode in the United States.
c)
The term "resident of a Contracting State" includes a legal person
organized under the laws of a Contracting State and that is generally exempt
from tax in that State and is established and maintained in that State either:
(i)
exclusively for religious, charitable, scientific, artistic, cultural,
or educational purposes; or
(ii)
to provide pensions or other retirement benefits pursuant to a
plan."; and
b)
omitting paragraph 3 and substituting the following;
"3.
Where by reason of the provisions of paragraph 1 of this Article a person other
than an individual is a resident of both Contracting States, the competent authorities of
the Contracting States shall by mutual agreement endeavor to determine the mode of
application ofthis Convention to that person. In the absence of a mutual agreement by
the competent authorities oflhe Contracting States, the person shall not be considered
a resident of either Contracting State for the purposes of claiming any benefits
provided by the Convention."
5
ARTICLE III
1.
Article 10 (Dividends) of the Convention shall be omitted and the following
shall be substituted:
"ARTICLE 10
Dividends
1.
Dividends paid by a company that is 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 fu: 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 that owns directly at least 10 percent of the voting stock of the
company paying the dividends;
b)
15 percent of the gross amount of the dividends in all other cases.
This paragraph shall not affect 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 12-month period ending on the date
on which entitlement to the dividends is determined and:
(i)
satisfies the conditions of clause (i) or (ii) of subparagraph c) of
paragraph 2 of Article 16 (Limitation on Benefits);
(ii)
satisfies the conditions of clauses (i) and (ii) of
subparagraph f) of paragraph 2 of Article 16, provided that the
6
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 16; or
(iv)
has received a determination pursuant to paragraph 6 of
Article 16 with respect to this paragraph; or
b) a pension fund (as defined in subparagraphj) of paragraph 7 of Article 16) 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.
Subparagraph a) of paragraph 2 and subparagraph a) of paragraph
a)
3 shall not apply in the case of dividends paid by a U.S. Regulated Investment
Company (RIC) or a Real Estate Investment Trust (REIT). In the case of dividends
paid by a RIC, subparagraph b) of paragraph 2 and subparagraph b) of paragraph 3
shall apply. In the case of dividends paid by a REIT, subparagraph b) of paragraph 2
and subparagraph b) 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
ofthe 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.
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
7
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:
a) income from shares or other rights, not being debt-claims,
participating in profits;
b) income from other corporate rights that is subjected to the same
taxation treatmert as income from shares by the laws of the State of which
the company making the distribution is a resident; and
c) income from arrangements, including debt obligations, carrying the
right to participate in profits, to the extent so characterized under the law
of the Contracting State in which the income arises.
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.
7.
A Contracting State may not impose any tax on dividends paid by a company
which E not a resident of that State, except insofar as:
a) the dividends are paid to a resident of that State; or
b) the dividends are attributable to a permanent establishment or a fixed base
situated 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
8
Contracting State on items of income that may be taxed in that other State under
Article 6 (Income from Immovable (Real) Property) or under paragraph I of Article
13 (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 only on:
a)
in the case of the United States,
(i)
the portion of the business profits of the company attributable to
the permanent estabIislunent, and
(ii)
the portion of the income referred to in the preceding sentence
that is subject to tax under Article 6 or Article 13,
that represents the "dividend equivalent amount" as that tenn is defined under
the laws of the United States as it may be amended from time to time without
changing the general principle thereof; and
b)
in the case of Finland,
(i)
the portion of the business profits of the company attributable to
the permanent establislunent, and
(ii)
the portion of the income referred to in the preceding sentence
that is subject to tax W1der Article 6 or paragraph 1 of Article 13,
that in both cases represent an amount, as defmed W1der the laws of
Finland, that if the operation was carried on by a subsidiary
incorporated in Finland would be distributed as a dividend.
9.
The tax referred to in subparagraphs a) and b) of 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) or (ii) of subparagraph c) of
paragraph 2 of Article 16 (Limitation on Benefits);
b)
satisfies the conditions of clauses (i) and (ii) of subparagraph f) of
paragraph 2 of Article 16, provided that the company satisfies the
9
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 16 to benefits with respect
to an item of income, profit or gain described in paragraph 8 of this
Article; or
d)
has received a detennination pursuant to paragraph 6 of Article 16
with respect to this paragraph."
2.
Paragraph 5 of Article 24 (Non-discrimination) shall be omitted and the
following paragraph shall be substituted:
"5,
Nothing in this Article shall be construed as preventing either Contracting State
from imposing the tax described in paragraph 8 of Article 10 (Dividends)."
ARTICLE IV
The following new paragraph shall be added to Article 11 (Interest) of the Convention:
"6.
Notwithstanding the provisions of paragraph 1:
a)
interest paid by a resident of a Contracting State and that is detennined
with reference to receipts, sales, income, profits or other cash flow of the debtor or a
related person, to any change in the value of any property of the debtor or a related
person or to any dividend, partnership distribution or similar payment made by the
debtor to a related person, and paid to a resident ofthe other Contracting State also
may be taxed in the Contracting State in which it arises, and according to the laws of
that State, but if the beneficial owner is a resident ofthe other Contracting State, the
gross amount of the interest may be taxed at a rate not exceeding the rate prescribed in
subparagraph b) of paragraph 2 of Article 10 (Dividends); and
b)
interest that is an excess inclusion with respect to a residual interest in a
real estate mortgage investment conduit may be taxed by each State in accordance
with its domestic law."
10
ARTICLE V
Paragraph 2 of Article 12 (Royalties) shall be omitted and paragraphs 3, 4,
5, and 6 shall be renumbered accordingly.
ARTICIE VI
Article 16 (Limitation on Benefits) ofthe Convention shall be omitted and
the following Article substituted:
"ARTICLE 16
Limitation on 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 if the resident is:
a)
an individual;
b)
a Contracting State or any political subdivision, statutory body
or local authority thereof;
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 Finland, on a recognized stock
exchange located within the European Union or in any
other European Economic Area state or, in the case of a
company resident in the United States, on a recognized
11
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; or
(ii)
at least 50 percent of the aggregate voting power and
value (and at least 50 percent of any disproportionate class of
shares) of the shares in the company are owned directly or
indirectly by five or fewer companies entitled to benefits under
clause (i) of this subparagraph, provided that, in the case of
indirect ownership, each intermediate owner is a resident of
either Contracting State;
d)
a person described in clause (i) of subparagraph c) ofparagraph
I of Article 4 (Residence) of this Convention,
e)
a pension fund, 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
pwposes 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).
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 pwposes 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 of a trade or
business in the first- mentioned State (other than the business of making or
13
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)
If a resident of a 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 of a
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 of a company, at least SO percent of the aggregate vote
and at least 50 percent of the aggregate value of the shares in the company or
of the beneficia 1 equity interest in the company) or another person possesses,
directly or indirectly, at least 50 percent of the beneficial interest (or, in the
case of a 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.
Notwithstanding the preceding provisions of this Article, where an enterprise
of Finland derives insurance premiums, interest or royalties from the United States,
and, pW'suant to a tax convention between Finland and a third state, the income
consisting of such premiums, interest or royalties is exempt from taxation in Finland
because it is attributable to a permanent establishment which that enterprise has in that
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 Finland ifthe income were earned in Finland 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.
Any insurance premiums to which the provisions of this paragraph apply will be
subject to tax under the provisions of the domestic law of the United States,
notwithstanding any other provision of the Convention. 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
b)
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.
6.
A resident of a Contracting State that is not entited 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 dctermines that
the establislunent, acquisition or maintenance of such person and the conduct of its
15
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.
7.
For the purposes of this Article,
a)
the tenn "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. If no 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 tenn "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 tenn "shares" shall include depository receipts thereof;
d)
the tenn "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 Helsinki Stock Exchange;
(iii)
the Irish Stock Exchange and the stock exchanges of
Amsterdam, Brussels, Copenhagen, Frankfurt, London, Oslo, Paris,
Reykjavik, Riga, Stockholm, Tallinn, Vilnius, Vienna, and Zurich; and
(iv) any other stock exchanges agreed upon by the competent
authorities of the Contracting States.
16
e)
a class of shares is considered to be regularly traded on one or more
recognized stock exchanges in a taxable year if the aggregate number of shares
of that class traded on such stock exchange or exchanges during the preceding
taxable year is at least 6 per cent of the average number of shares outstanding
in that class during that preceding taxable year;
f)
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.
g)
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)
A) would be entitled to all the benefits of a comprehensive
convention for the avoidance of double taxation between any member
state of the European Unioll 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 subparagraph a),
subparagraph b), clause (i) of subparagraph c), subparagraph d) or
subparagraph e) of paragraph 2 of this Article, provided that if such
convention does not contain a comprehensive limitation OIl benefits
article, the person would be entitled to the benefits of this Convention
by reason of subparagraph a), subparagraph b), clause (i) of
subparagraph c), subparagraph d) or subparagraph e) of paragraph 2 of
17
this Article if such person were a resident of one of the States under
Article 4 (Residence) of this Convention; and
B) with respect to insurance premiums and to income referred to in
Article 10 (Dividends), 11 (Interest) or 12 (Royalties) of this
Convention, would be entited 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 ofa Contracting State that is entitled to the benefits
ofthis Convention by reason of subparagraph a), subparagraph b),
clause (i) of subparagraph c), subparagraph d) or subparagraph 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;
h)
with respect to dividends, interest or royalties arising in Finland 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 g)(i)B) of paragraph 7 of this Article for purposes of
determining whether such United States rcsident is entitled to benefits under this
paragraph if a payment of dividends, interest or royalties arising in Finland and paid
directly to such resident ofa 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 Finland 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), 11 (Interest), or 12 (Royalties) of this Convention."
18
i)
the tem1 "statutory body" means any legal entity of a public character
created by the laws of a Contracting State in which no person other than the State
itself, or a pOlitical subdivision or a local authority thereo~ has an interest.
j)
The term "pension fund" as used in this Article means any person that:
(i)
is organized under the laws of a Contracting State;
(ii)
is established and maintained in that Contracting State primarily
to administer or provide pensions or other similar remuneration,
including social security payments, or to earn income for the benefit of
one or more such arrangements; and
(iii)
is either,
A) in the case of Finland, a pension institution, but if such an
institution is organized as a company only a mutual pension
insurance company, or
B) in the case of the United States, exempt from tax in the United
States with respect to the activities described in clause (ii) of this
subparagraph."
ARTICLE VII
Article 23 (Elimination of Double Ta~tion) of the Convention shall be amended by:
a) deleting subparagraph c) of paragraph I) of Article 23;
b) adding the words "or former citizen or long-term resident" after the words
"citizen of the United States" where they appear in paragraph 3; and
c) deleting the words "and subject to such source rules in the domestic laVvS of the
Contracting States as apply for the purpose of limiting the foreign tax credit"
where they appear in paragraph 4.
19
ARTICLE VIII
Article 26 (Exchange of Information) is omitted and the following is substituted:
"ARTICLE 26
Exchange of Information
1.
The competent authorities ofthe Contracting States shall exchange such
information as may be relevant for carrying out the provisions of this Convention or of
the domestic laws of the Contracting States concerning taxes of every kind imposed by
a Contracting State in so far as the taxation thereunder is not contrary to the Convention, including information relating to the assessment or collection of, the enforcement
or prosecution in respect of, or the determination of appeals in relation to, such taxes.
The exchange of information is not restricted by Article 1 (Personal Scope) or Article
2 (Taxes Covered).
2.
If specifically requested by the competent authority of a Contracting Slate, the
competent authority of the other Contracting State shall provide information under this
Article in the form of depositions of witnesses and authenticated copies of unedited
original documents (induding books, papers, statements, records, accounts, and
writings).
3.
Any information received under this Article by a Contracting State shall be
treated as secret in the same manner as information obtained under the domestic laws
of that State and shall be disclosed only to persons or authorities (including courts and
administrative bodies) involved in the assessment, collection, or administration of, the
enforcement or prosecution in respect of, or the determination of appeals in relation to,
the taxes referred to above, or the oversight of such activities. Such persons or
authorities shall use the information only for such purposes. They may disclose the
information in public court proceedings or in judicial decisions.
4.
In no case shall the provisions of the preceding paragraphs be construed so as
to impose on a Contracting State the obligation:
a)
to carry out administrative measures at variance with the laws and
administrative practice of that or of the other Contracting State;
20
b)
to supply infonnation that is not obtainable under the laws or in the
normal course of the administration of that or of the other Contracting State;
c)
to supply information that would disclose any trade, business,
industrial, commercial, or professional secret or trade process, or information
the disclosure of which would he contrary to public policy (ordre public).
5.
If information is requested by a Contracting State in accordance with this
Article, the other Contracting State shall use its infonnation gathering measures to
obtain the requested infonnation, eve n though that other State may not need such
infonnation for its own purposes. The obligation contained in the preceding sentence
is subject to the limitations of paragraph 4 but in no case shall such limitation he
construed to permit a Contracting State to decline to supply information solely
because it has no domestic interest in such information.
6.
Notwithstanding paragraph 4, the competent authority of the requested State
shall obtain and provide information held by financial institutions, nominees or
persons acting in an agency or fiduciary capacity (not including information that
would reveal confidential communications between a client and an attorney, solicitor
or other legal representative, where the client seeks legal advice), or respecting
interests in a person, including bt:arer shart:s, regardless of any laws or practices of the
requested State that might otherwise preclude the obtaining of such information.
7.
Each of the Contracting States shall endeavor to collect on behalf of the other
Contracting State such amounts as may he necessary to ensure that relief granted by
the Convention from taxation imposed by that other State does not inure to the benefit
of persons not entitled thereto. This paragraph shall not impose upon either of the
Contracting States the obligation to carry out administrative measures that would be
contrary to its sovereignty, security, or public policy.
21
ARTICLE IX
1.
This Protocol shall be subject to ratification and instruments of ratification
shall be exchanged as soon as possible.
2.
This Protocol shall enter into force upon the exchange of instruments of
ratification and its provisions shall have effect:
a)
in the case of Fi11and,
(i)
in respect of taxes withheld at source, for income derived on or
after the first day of the second month next following the date on which
the Protocol enters into force; and
(ii)
in respect of other taxes, for taxable years beginning on or after
the first day of January next following the date on which the Protocol
enters into nrce; and
b)
in the case of the United States:
(i)
in respect of taxes withheld at source, for amounts paid or
credited on or after the tlrst day of the second month next following the
date on which the Protocol enters into force; and
(ii)
in respect of other taxes, for taxable years beginning on or after
the first day of January next following the date on which the Protocol
enters into force;
c)
in both Contracting States in respect of the axes withheld at source
covered by paragraph 3 of Article 10 (Dividends), on income derived on or
after the first day of January 2007, provided that this Protocol enters into force
before December 31,2007.
22
3.
This Protocol shall remain in force for so long as the Convention shall remain
in force.
IN \\01TNESS WHEREOF the undersigned, duly authorized thereto by their respective
Governments, have signed this Protocol.
DONE in duplicate at Helsinki on the thirty first day of May, 2006, in the English and
Finnish languages, both texts being equally authentic.
Ytt+UJ~
FOR THE GOVERNMENT OF THE
UNITED STATES OF AMERICA:
11
~.
. .i.u (,[ If c,' illF'l'~q/V'"t'
l
'
s
FOR THE GOVERNMENT OF
THE REPUBLIC OF FINLAND:
Page 1 of 1
June 1, 2006
js·4299
Statement of Treasury Secretary John W. Snow on Departure of IMF
United States Executive Director Nancy Jacklin
I would like to express my deep gratitude to Nancy Jacklin for her exemplary
service as United States Executive Director for the International Monetary Fund for
the past three years. Nancy's expertise, leadership and personal diplomacy were
invaluable assets at the Fund and she leaves the institution in a strengthened
position.
Some of Nancy's most notable accomplishments inetude her role in pushing for
enhanced Article IV surveillance by the IMF of its members' economies, her role in
creating the Policy Support Instrument, her efforts to advance Collective Action
Clauses, and working to advance the Multilateral Debt Relief Initiative through the
IMF Executive Board.
Nancy was extremely dedicated to working with her IMF colleagues on important
reforms to IMF institutional policies. She will be remembered as part of a special
team of leaders at a critical time who helped ensure that the IMF remains an
institution that is strong, legitimate and relevant to all its members.
Nancy will be missed, and I wish her the best of luck in all of her future endeavors.
-30-
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June 1,2006
JS-4300
Remarks by Deputy Secretary of the Treasury
Robert M. Kimmitt Before the CDU Business Council
For Stability and Security - A Transformed Transatlantic Partnership
Berlin, Germany-- Thank you, Kurt Lauk, for the kind introduction and for your
years of support for stronger transatlantic relations, especially in business and
finance.
Before coming to Germany as Ambassador in 1991, my predecessor, Vernon
Walters, gave me only one bit of advice: never forget that speeches are very
important to Germans. They like to give them, listen to them, and analyze them far
more than is the case in the United States. He had once spoken to a distinguished
group like this for 40 minutes. When he sat down, rather pleased with his
performance, he was surprised to hear his host say, "Mr. Ambassador, thank you
for your remarks. If you ever have time for a real speech, please come see us
again!" Well, if 40 minutes is where a "real speech" starts, you will receive from me
today only "remarks," since Kurt Lauk asked me to limit my presentation to 35
minutes. A longer version of my presentation is available with the conference
materials.
I am honored to be on this distinguished program, and especially to speak between
my friends Chancellor Angela Merkel and Professor Klaus Schwab. The Chancellor
and I met fifteen years ago, when I was a young American Ambassador and she
was a younger Federal Minister. In the intervening years, in Berlin and Washington,
as well as in her constituency on Rugen and on long walks in the countryside north
of Berlin, we have exchanged views on how our two countries can work even more
closely together to advance peace and prosperity in the transatlantic community
and beyond.
Making globalization work for our citizens
Over the last five months, a new energy in the German-American relationship has
been palpable. Our two leaders and their key ministers are speaking more often
and more candidly on key issues. This stronger German-American partnership,
standing at the center of a strong European-American partnership, is critical to face
global threats and seize global opportunities to enhance our prosperity and security.
Global challenges require a level of leadership that only a true European-American
partnership can provide. The new German government has taken important steps
to bring back the tradition and spirit of German-American and transatlantic
cooperation.
Global leadership, including a strong transatlantic relationship, must be grounded
on a strong economic base. Indeed, the title of my presentation -- "For Stability and
Security - A Transformed Transatlantic Partnership" - makes clear that while
stability and security continue to have an important political-military dimension, the
true transformation in the transatlantic relationship must have at its core an
economic relationship that also makes an integral contribution to stability and
security.
Today, domestic strength is increaSingly a function of whether an economy can
adapt to the challenges and exploit the opportunities of globalization. 80th Germany
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Page 2 of 8
and the United States benefit enormously from globalization. Germany is the
world's largest goods exporter; its exports to China and India alone, for example,
have more than doubled since the year 2000. As the worlds number one
destination for foreign investment, the United States depends on global investors to
provide the capital beyond what our own domestic savings can provide. Last year,
private inflows to the United States exceeded $1 trillion.
For the U.S. economy, globalization has been a source of economic dynamism and
a huge job creator. The U.S. economy has created on average 1.6 million new jobs
per year since 1995. But these job figures are net - the difference between jobs
eliminated and jobs created. They hide a huge amount of "creative destruction," to
use Joseph Schumpeter's term. For example, last year, the net number of payroll
jobs in the United States rose by about 2 million. A separate survey estimates that
this solid increase resulted from about 57 million new hires and about 55 million
separations during that period. That is a job turnover rate of a little more than 40%,
and roughly one-third more than the size of the entire German labor force.
Another way to look at this trend is job tenure. In the United States, the average
worker holds a job for 6.6 years; in Germany the number is 10.6 years. And tenure
is trending downward in the United States: studies show that, on average, a U.S.
worker works for 10 different employers between the ages of 18 and 38. This
mobility is generally productive, both for the individual and the economy, because
each move to a new employer can involve greater responsibility, greater pay, or
both. These multiple opportunities highlight a fundamental reality of globalization:
there tends to be much less individual job security but there is ample employment
security because of the constant supply of new opportunities generated by the
global marketplace.
Unfortunately, what usually gets the headlines in the United States is when a big
company lays off workers. What gets less coverage are the 32 consecutive months
of jobs growth we have recently enjoyed, historically low unemployment of 4.7%,
and record tax revenues.
U.S. productivity numbers also highlight how flexible job and product markets
increase both the number of jobs and the productivity of those holding jobs.
Productivity in the United States has steadily accelerated over the last three
decades, originally driven by information technology, but more recently also by
more effective adoption of new technology in the service sector. What makes that
acceleration possible is a dynamic job market and a flexible regulatory structure
that readily accommodate the new market opportunities technology creates.
"Creative destruction" thus clears the way for people, ideas, and capital to flow to
better investment and better jobs. It allows innovation and human capital to be
turned into higher opportunities and rising incomes.
Still, what is dynamic in economic terms can cause stress in personal terms.
Americans, like Europeans, worry about the effects of globalization on their jobs
and families. Even with many opportunities, changing jobs is not painless, and often
requires retraining and relocation by workers. But the answer to dealing with the
stress of job dislocation is not to slam on the brakes of the growth engine of the
economy by restricting labor flexibility. Just the opposite: the answer is to make our
economic and social infrastructure supportive of dynamism.
The case for reform
The impact on growth and jobs from increasing labor and product market flexibility
is clear. OECO research shows that countries' adopting best practices in product
market regulation could increase Europe's per capita GOP by 3.2% - an additional
850 euros per year for every man, woman, and child in the EU. For labor market
reform, Europe's adopting flexible labor market poliCies would increase employment
rates by six to nine percentage pOints - an increase of 22 million jobs in the EU.
Importantly, this applies regardless of the level of social benefits, meaning flexibility
need not come at the expense of a generous social contract. I often find in Europe
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Page 3 of 8
that the response to U.S. arguments for more economic flexibility is: "Well, the
United States .can tOler~,te more income. disparity, but this is incompatible with the
European socIal model. But a country Irke Denmark shows this to be a false tradeoff. In a program sometimes called "flexsecurity," it combines generous
unemployment benefits with flexible labor rules and active policies to help workers
find new jobs. Denmark's 5% unemployment rate is roughly the same as in the
U.nited Stat~s. Its average job tenure is the same as Britain's and only marginally
hIgher than In the U.S. Every country must choose its own model according to its
own set of social preferences, but there is no reason that Germany cannot increase
its economic flexibility while preserving the basic nature of its social contract.
Indeed, I believe Germany can playa vital role in leading Europe toward a realistic
approach to its economic future. America would like to see Germany return to its
historic role as the engine of European growth, and Germany is poised to make real
strides in leading the way toward ambitious, pro-growth reforms. German firms
have returned to competitiveness and now are in a position to respond to an
improved environment by investing and hiring in Germany as well as abroad. The
effects of the reforms under the prior government, which so far have not been
apparent, also may begin to be felt, and the new coalition has solidified its position
with voters and extended its mandate in recent regional elections. The
government's initial focus on deficit reduction, helped by improved growth, has put
the deficit on a downward path. This provides some fiscal space in the future to
ease transition costs.
An accelerated reform process in Germany would have repercussions throughout
Europe. The Lisbon Agenda was designed to use peer pressure to motivate difficult
but necessary reforms. What it has been lacking is real leadership by example. If
Germany becomes that leader, the rest of the continent will follow.
This does not mean reform will be easy - transitions rarely are. But Chancellor
Merkel led a CDU campaign that sought to be honest about the economic
challenges Germany faces and proposed real, if not always popular, solutions. Her
vision of German economic resurgence based on a "creative imperative" that she
laid out in her speech to this year's World Economic Forum, which compliments
President Horst Kohler's call for Germany to be a "nation of ideas," is compelling
and captures the breadth of the challenge from globalization. This vision takes the
idea of innovation beyond simply looking at R&D and education to examine the
basic economic factors that give individuals the freedom and opportunity to be
productive and creative in a knowledge economy. The Chancellor takes inspiration
from LudWig Erhard, who said in a 1957 book, "Prosperity for All", "I want to prove
myself on my own initiative. I want to bear life's risks myself, be responsible for my
own fate. You, Country, should ensure that I am able to do so." She then asks the
question in more practical terms, "What regulatory framework does our changed
world need ... to allow every individual to enjoy the fruits and benefit from the
progress provided by our society and our world?" The Chancellor's answers to that
question are beginning to emerge in her calls for reforms of Germany's collective
bargaining, "co-determination," and health systems.
The framework must provide the incentives and flexibility for companies and
jobseekers to match skills and needs in the labor marketplace efficiently. Nothing
degrades creativity more, from an economic perspective, than unemployment. The
answer also must recognize that we must look ahead at what the global economy is
becoming, not just what it is now. It is the equivalent of running to open space in
football (soccer), antiCipating where the ball will be rather than where it is.
I do not need to go through the German reform agenda with this audience. You
know it far better than I. But I will mention a few principles:
1. First, in many cases reforms need only formalize actions that are already
happening informally in the German economy. The improved competitiveness of
German companies is at least partly the result of informal labor agreements that
allow for more flexible work rules and longer hours in spite of labor regulations. The
magnitude of the informal sector is also a symptom of a job market finding a way
around an overly rigid regulatory system. Formalizing these arrangements will make
the economy more efficient and potentially improve revenue performance as the
http://www.treasgov/press/reJeases/js4300.frlm
3/5/2007
Page 4 of 8
grey economy shrinks.
2. A second principle is that Germany must find ways to lower the labor tax wedge
which, at 52% of total labor costs for an average worker, remains one of the highest
in Europe. This appJies to other taxes as well. There has been considerable debate
recently about the scheduled 3% VAT increase. With consumption and employment
still the weak links of the German recovery, it is important that deficit reduction
measures not stifle growth in these areas.
3. Third, there should be a particular focus on women. Germany has untapped
productive potential from women who may want to work - or to work more - but
lack the infrastructure to be able to do so. Female labor force participation in
Germany is 66% vs. 69% in the U.S., and 76% in countries like Denmark, where
there is more active support for working women. Changes like extending school
hours and providing after-school programs and school lunches can have a real
impact. A German girl born in 2006 has a life expectancy of 90 years. She must be
given the chance to maximize her economic potential both for her and her family's
own well-being and to help meet pension demands of an aging society.
4. Which brings me to a fourth principle, which appJies equally to the United States,
that changing demographics - an aging population and declining birthrates - must
be at the center of the policy debate. These changing demographics require us to
re-think the nature of retirement and how we provide for a population living thankfully - far longer than we ever envisioned when we created our pension
systems. It means thinking creatively about how to extend productive working lives
of older people - and even what "older" will mean in the future - and also about
immigration, which can create a larger workforce to finance pension obligations.
5. Finally, consistent with successful models in Europe, unemployment support
programs should create incentives to find another job and concentrate resources on
retraining and job information that facilitate that process. The Hartz reforms were a
good start in that direction, and more should be done.
Foreign investment
Ladies and gentlemen, it is not just German companies that are poised to respond
to reforms with more investment. U.S. and other foreign investors are also anxious
to bring capital, jobs, and management resources to Germany as the investment
environment improves.
The benefits that cross-border investment brings to both of our economies are
enormous. Foreign direct investment flows into the United States reached $129
billion in 2005, double the average from the mid-90's. We estimate that foreign firms
provide 5.1 million jobs, with German firms accounting for over 15% or 800,000
jobs. Forty percent of these are in manufacturing, as compared to 10% in the
overall U.S. workforce. In Germany, U.S. cumulative fixed investment is worth
about $80 billion, and U.S. firms account for 500,000 jobs. Foreign investment in all
its forms - including foreign direct investment, like AMD in Dresden; private equity;
and portfolio investment - is a growth engine that must run smoothly for our
countries to continue to prosper.
The last few months have seen headlines on both sides of the Atlantic about
restrictions on foreign investment. In the United States, the Dubai Ports case raised
important security issues and sparked a debate in Washington about the paradigm
for foreign investment in the United States. In Europe, some countries have
attempted to thwart takeovers of perceived "national champions," while other
countries have continued to raise concerns about the free movement of labor and
capital within the European Union.
These developments have raised questions in the minds of global investors about
whether the doors to foreign investment truly remain open both in Europe and in the
United States. Together we must make clear that the answer to that question on
both sides of the Atlantic is a resounding 'Yes." As our governments debate how to
deal with the legitimate national security concerns raised by globalization, we must
http://wwwtreastSov/press/re\eases/js4300.r.. tm
3/5/2007
Page 5 of 8
make sure that.c~eeping protectionism is kept fully at bay. If we do not, a
fundamental drlvrng force of both our economies will be put at risk.
For o~r part, we are keenly focused on addressing national security concerns while
ensunng that proposed changes to the process for reviewing foreign investments
do not create unnecessary and counterproductive barriers to partiCipation in the
U.S. market. I want to make clear that the vast majority of foreign investments _
over 90% - are processed expeditiously and without controversy.
In this regard, it would be helpful to add another voice to the debate, that of foreign
investors who are responsible for those 5 million jobs I mentioned earlier. I would
urge CEOs of German firms with major investments in the United States to meet in
Washington with members of the Administration and also with Congressmen and
Senators from the states where they have operations, and to have Administration
officials and legislators visit your U.S. plant operations to see Americans at work
based on investment decisions made abroad. This personal contact will help drive
home the important economic - and pQlitical - point that foreign investment creates
American jobs.
For Europe's part, it is particularly important that Member States support the effort
of the European Commission to enforce European takeover rules and resist
protectionist trends aggressively. This is one of the first big tests of deeper market
integration. Failure to enforce the new rules would be a major blow to one major
founding prinCiple of modern Europe: free movement of capital among EU Member
States. State-owned firms in Europe complicate progress in this area. As we saw in
the recent Enel bid for Suez in France, the state-owned firm Gas de France was
used as a tool for blocking a foreign investment bid. Germany so far has resisted
such temptations. For example, the recent investment by the Blackstone private
equity group in Deutsche Telekom sent a positive signal about Germany's
investment environment.
Another important Signal to investors is our two countries' agreement to modernize
our tax treaty relationship. German government officials and I will sign a protocol to
our existing treaty later this afternoon to eliminate source-country withholding taxes
on most dividends paid from a subsidiary to its parent company. We believe this will
increase returns on cross-border investments and ensure that U.S. investment is
not diverted to Germany's neighbors that already have such agreements with the
United States.
The protocol also eliminates a long-standing problem regarding our pension funds,
by eliminating source-country withholding taxes on dividends paid to such funds.
This provision will put U.S. pension funds on an equal footing with German pension
funds and should increase U.S. portfolio investment in Germany. I hope that both
countries work together to bring this new agreement into force this year.
Leading global economic change
Our combined weight in the global economy and our convergent interests make the
United States and Germany natural partners in leading global economic
development based on three fundamental principles: free flow of capital, free trade,
and flexible exchange rates. We must also work together to adjust global
imbalances to sustain the remarkable rate of global growth we are now
experiencing. This is a shared responsibility that requires greater exchange rate
flexibility in Asia, particularly China; faster growth in Europe and Japan; and higher
U.S. national savings, both public and private. This approach was recently
reiterated by the G-7 finance ministers and also in direct conversations between
President Bush and Chancellor Merkel, as well as in their separate conversations
with Chinese President Hu.
It is vital that we speak with one voice on these issues and vigorously tackle our
respective policy challenges. The United States is committed to tackling its deficit. It
was $318 billion last year, 2.6% of GOP, and is on a downward trajectory based on
rising revenues and spending discipline. But no part of the global economy,
including the United States, can be effective acting alone. In fact. history and
oa. ~ t m
http://www. trea~ .go v/pre ss/re Ieases/j s4 3
3/5/2007
Page 6 of 8
empi~ical.research show that cutting the U.S. fiscal deficit is likely to have only a
marginal Impact on our current account deficit, especially if others do not do their
part. For example, between 1996 and 2000, the U.S. federal fiscal balance moved
from a deficit to a surplus, yet the current account deficit increased from 1.6% to
4.2% of GOP.
The Federal R~serve and the IMF conclude that, at a maximum, bringing the U.S.
federal budget mto balance would only reduce the U.S. current account deficit from
the present 7.0 percent of GOP to 5.9 percent. Yet this adjustment would probably
come at significant cost. The IMF study suggests a five-year loss of more than $300
billion in U.S. output and thousands of jobs, while the Fed study suggests much
higher costs. These studies make clear that any unilateral attempt by the United
States to eliminate the current account deficit by increasing national savings - in
other words reducing demand - in the absence of more dynamic domestic demand
in Europe and Asia to take up the slack, would be disastrous for the world
economy.
What is critically needed is an orderly rebalancing of global savings and demand.
As the United States increases its savings and reduces its deficit, Germany, for its
part, must reverse the decline in domestic demand growth of the last decade.
These have seen both German investment and private consumption decline as a
percentage of GOP. We share a compelling common interest in growth and an
orderly adjustment in imbalances, and this should remain at the center of our
economic partnership. We both need to act.
Creating an open trading system should also be at the core of our global economic
cooperation. As I noted, Germany is the world's largest goods exporter, and I stand
before you today as an example of German export prowess. My parents met and
married in 1947 in Berlin, and I was born exactly nine months later in the United
States. So, like PreSident Kennedy, I am proud to say "Ich bin ein Berliner," and, in
my case, "Made in Germany!"
Germany benefits enormously from trade liberalization and thus has a responsibility
and an interest in leading EU trade policy. A successful Doha round that achieves
progress on tariffs and market access for agricultural and industrial goods and
services is in both of our countries' vital interests but risks being sidetracked by
Europe's farm sector interests. I have heard it said that, for historical and other
reasons, Germany's interests on trade must take a back seat to the interests of
other EU members or Europe as a whole. In my view, that is a false dilemma. As
was the case with the recent negotiations over a new EU budget, Europe as a
whole would benefit if Germany actively leads it toward a new consensus on trade.
With U.S. Trade Promotion Authority - often called "Fast Track" authority - set to
expire in mid-2007, there is very little time left for a breakthrough. Germany should
exert its maximum influence to help steer the EU toward a position that can break
the deadlock in agriculture market access. If it does so, we can work as partners in
pressing for ambitious results and thereby bring these talks to a successful end.
With energy prices now a major risk factor for the global economy, energy
cooperation is also being elevated to the top of our bilateral agenda. Our
cooperation must embrace both supply and demand:
• We must develop the technologies for new cleaner fuels, including
conSidering next- generation nuclear technology.
• We must look for ways to expand sources of, and transportation routes for,
traditional fossil fuels so as to reduce our dependency on potentially
unreliable suppliers.
• On the demand side, we must work on environmental technologies that
reduce fuel use. Here, the United States has much to learn from Germany.
It is time to find more areas where we can share knowledge and work
together on innovative energy solutions.
Combating Terrorism and WMD Proliferation
http://www.treassov/press/releases/js4300.l:Jtm
3/5/2007
Page 7 of 8
Ladies and gentlemen, I also want to highlight the important role that finance
minis~ries aroun~ the ~orld hav~ to play in combating our most pressing national
security threats, Including terrorism and the proliferation of weapons of mass
destruction. In the post-9/11 world - as terrorists, proliferators, and other criminal
actors seek to use banks to store and move their money - these ministries carry a
n~~ b~rden. As U.K. Chancellor Gordon Brown noted in February, finance
mlnl.s,tnes have ~ow ~~co~e departments for security, working closely with the
traditional security mlnlstnes to meet any government's first responsibility: ensuring
the safety of its citizens.
In the U.S. Treasury Department, we have created a new office and re-focused
resources to meet this challenge. The financial tools we have at our disposal not
only help protect the financial system from abuse, but can also help to identify,
track, and combat illicit actors operating within the financial system. Indeed,
targeted financial sanctions and other financial authorities can be incredibly
effective - offering a powerful tool to support diplomatic efforts. When we are
confronted with a threat that is not susceptible to diplomatic pressure, financial
authorities are among the rare measures short of military force that we can use to
exert leverage.
In the terrorism context, the international community has made great progress, and
Germany has been a key ally in this fight. As Chancellor Merkel said recently in
Washington: "No country on its own can fight the threat of international terrorism.
Europe and America must stand together." Together, we have designated and
frozen the assets of al-Qa'ida financiers through U.N. Security Council Resolution
1267. Through the Financial Action Task Force, we have strengthened international
standards to prevent money laundering and terrorist financing. Since 9/11,
Germany has revised its laws and its regulatory regime to enable faster and more
complete scrutiny of financial accounts.
The financial tools we use to fight terrorist financing can also be used to combat
nuclear proliferation. 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. There is no doubt that terrorists would like to
acquire weapons of mass destruction. This is perhaps the gravest threat we face
today. That is why the U.N. Security Council and the G-8 have called on all of us to
develop laws aimed at stemming the flow of financial and other support for
proliferation activities.
For its part, the United States has a new Executive Order - signed by President
Bush in June 2005 - that authorizes freezing assets of nuclear proliferators and
forbids U.S. persons from engaging in commercial transactions with them. Under
this order, eight entities from North Korea, Iran, and Syria were initially deSignated,
and we have continued to pursue additional designations. We have discussed
these designations with the German government, as well as others in Europe, Asia,
and the Middle East. We want to work with you to ensure that these proliferators
are given no quarter anywhere in the international financial system. This
necessarily involves not only government-level cooperation, but also partnership
between governments and the private sector. Our mutual national security and
long-term economic health are dependent on safeguarding our financial systems
from abuse.
Pursuing shared strategiC interests
Our cooperation on anti-terrorism is only one facet of our broad cooperation in
areas vital to our common strategiC interests. Other key areas are:
SQreading Democracy in Eastern Europe: Events in Georgia and Ukraine have
inspired us in the last two years, but consolidating democracy and prosperity, and
extending them to places like Belarus, will take close cooperation - especially in the
economic area - among the United States, Germany, and the rest of Europe. The
EU and U.S. decision to apply financial sanctions on Belarus' leadership following
that country's fraudulent election and repression of the opposition is agood .
example of how our combined efforts can keep pressure on authorltanan regimes.
http://www.treas.gov/press/releases/js4JOG htm
3/5/2007
Page 8 of 8
~9~9Y9: With the negotiations on Kosovo's final status entering a critical stage, the
United States and Europe, including Germany, are cooperating closely to ensure
that the process leads to a lasting, peaceful solution. A stable Kosovo is the last
piece of the puzzle of a Balkans that is moving confidently toward a European
future.
Afghanistan: The U.S. is grateful for the strong leadership role Germany has played
in the reconstruction of Afghanistan, including hosting the landmark Bonn
Conference in 2002. The international conference on Afghanistan in London in
February laid out an ambitious set of policy commitments by Afghanistan, backed
by pledges from the international community, including Germany. A strong German
role, including through NATO, is key to enhancing domestic security and promoting
economic development in Afghanistan.
Iraq: We look forward to cooperating with Germany as we engage with the new
Iraqi government to help them realize their vision of a vibrant, market-based
economy. Iraq's leaders warrant our strong support in their efforts to develop
sound, credible institutions and construct the infrastructure necessary to ensure the
realization of their enormous economic potential - especially to bring into the
international oil market the second largest proven reserves in the world.
Iran: As Chancellor Merkel and President Bush made clear recently, the United
States and Europe agree that Iran must be prevented from obtaining nuclear
weapons. We are committed to working with our European partners to resolve this
issue. As Secretary of State Rice said yesterday, the United States is prepared to
join our European partners in direct talks with the Iranians, as Soon as Iran fully and
verifiably suspends its enrichment and reprocessing activities. Iran has been
presented with a clear choice; the time has come for the Iranian regime to benefit
from behaving like a responsible member of the international community or face
increasing isolation.
Conclusion
Ladies and gentlemen, the years ahead will be difficult in many respects, but I am
confident they will not be difficult years for U.S.-German relations. On the contrary, I
see this relationship blossoming to the benefit of both our countries and the world.
As you in the CDU, the Grand Coalition, and the German business community
continue your work to enhance economic opportunities for your citizens and pursue
Germany's global interests, you will find a steady partner in the United States.
Germany's success is, after all, in our own vital national interest.
I am honored to have been invited to speak to you today, and thank you for your
kind attention.
http://www.treas.gov/press/releases/js4300.htm
3/512007
Page 1 of 1
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United States and Germany Sign Protocol to Income Tax Treaty
WASHINGTON, DC - The Treasury Department today announced that Deputy
Secretary Robert M. Kimmitt and Barbara Hendricks, Parliamentary Secretary of
State, Ministry of Finance, signed a new Protocol to amend the existing bilateral
income tax treaty, concluded in 1989, between the two countries. The Protocol was
signed Thursday in Berlin.
The agreement significantly reduces tax-related barriers to trade and investment
flows between the United States and Germany. 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 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 provides for mandatory arbitration of certain cases that cannot be
resolved by the competent authorities within a specified period of time. This
provision is the first of its kind in a U.S. tax treaty. In addition, 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. The Protocol also
modernizes our treaty relationship in several ways and brings it into closer
conformity with current U.S. tax treaty policy.
Welcoming the Convention, Deputy Secretary Kimmitt said "The signing of the
Protocol today reflects the cooperation and close economic ties between the United
States and Germany. The Convention is also an important signal to investors that
the doors to foreign investment remain open both in Germany and the United
States."
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PROTOCOL AMENDING THE CONVENTION BETWEEN
THE UNITED STATES OF AMERICA AND
THE FEDERAL REPUBLIC OF GERMANY
FOR THE AVOIDANCE OF DOUBLE TAXATION
AND TIlE PREVENTION OF FISCAL EVASION
WITH RESPECT TO TAXES ON INCOME AND CAPITAL AND TO CERTAIN
OTHER TAXES,
SIGNED ON 29 th AUGUST 1989
The United States of America and the Federal Republic of Germany, desiring to
amend the Convention Between the United States of America and the Federal Republic
of Gennany for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion
with Respect to Taxes on Income and Capital and to Certain Other Taxes, and the related
Protocol signed at Bonn on August 29, 1989 (hereinafter referred to as "the Convention"
and "Protocol to the Convention", respectively).
Have agreed as follows:
2
ARTICLE I
Article 1 (personal Scope) of the Convention is deleted and the following Article
substituted:
"Article I
General Scope
1. This Convention shall apply to persons who are residents of one or both of the
Contracting States, except as otherwise provided in this Convention.
2. This Convention shall not restrict in any manner any exclusion, exemption, deduction,
credit, or other allowance now or hereafter accorded:
a) by the laws of either Contracting State; or
b) by any other agreement to which the Contracting States are party.
3.
a) Notwithstanding the provisions of subparagraph b) of paragraph 2:
aa) the Contracting States agree that any question arising as to the interpretation or
application of the Convention and, in particular, whether a taxation measure is
within the scope of the Convention, shall be determined exclusively in accordance
with the provisions of Article 25 (Mutual Agreement Procedure) of the
Convention; and
bb) the provisions of any other agreement shail not apply to a taxation measure unless
the competent authorities agree that the measure is not within the scope of Article 24
(Nondiscrimination) of this Convention.
b) For the purposes ofthis paragraph, a "measure" is a law, regulation, rule, procedure,
decision, administrative action, or any similar provision or action.
4.
a) Except to the extent provided in paragraph 5, this Convention shall not affect the
taxation by the United States of its residents (as determined unler Article 4
(Residence») and its citizens.
b) Notwithstanding the other provisions of this Convention, a former citizen or long- term
resident of the United States may, for the period of ten years following the loss of such
status, be taxed in accordance with the laws of the United States.
3
5. The provisions of paragraph 4 shall not affect the benefits conferred by the United
States:
a) under paragraph 2 of Article 9 (Associated Enterprises), paragraph 6 of Article J3
(Gains), paragraphs 3,4 and 5 of Article 18 (pensions, Annuities, Alimony, Child
Support, and Social Security), paragraph I and 5 of Article l8A (pension Plans),
paragraph 3 of Article 19 (Government Service), and under Articles 23 (Relief from
Double Taxation), 24 (Nondiscrimination), and 25 (Mutual Agreement Procedure);
and
b) under paragraph 2 of Article I 8A (Pension Plans), subparagraph b) of paragraph 1 of
Article 19 (Government Service), and under Articles 20 (Visiting Professors and
Teachers; Students and Trainees) and 30 (Members ofDplomatic Missions and
Consular Posts), upon individuals who are neither citizens of, nor have immigrant
status in, the United States.
6. Nothing in the Convention shall be construed to prevent the Federal Republic of
Germany from imposing its taxes on amOlmts included in the income of a resident of the
Federal Republic ofGennany according to part 4,5, and 7 of the Gennan
"AuBensteuergesetz". Where such imposition of tax gives rise to double taxation, the
competent authorities shall consult for the elimination of such double taxation according
to paragraph 3 of Article 25 (Mutual Agreement Procedure).
7. In the case of an item of income, profit or gain derived by or through a person that is
fiscally transparent under the laws of either Contracting State, such item shall be
considered to be derived by a resident of a State to the extent that the item is treated for
the purposes of the taxation law of such State as the income, profit or gain of a resident."
ARTICLE II
Article 4 (Residence) of the Convention is amended by deleting paragraph 1 and
substituting the following paragraph:
"1. For the purposes of this Convention, the term "resident of a Contracting State"
means any person who, under the laws of that State, is liable to tax therein by
reason of his domicile, residence, place of management, place of incorporation, or
any other criterion of a similar nature, and also includes that State and any political
,'i
4
subdivision or local authority thereof. The tenn, however, does not include any
person who is liable to tax in that State in respect only of income from sources in
that State or of profits altributable to a permanent establishment in that State or
capital situated therein. "
ARTICLE III
Article 7 (Business Profits) of the Convention is modified by:
a) deleting paragraph 3 and substituting the following paragraph:
"3. In detennining the business profits of a permanent establishment, there shall be
allowed as deductions expenses that are incurred for the purposes of the pennanent
establishment, including executive and general administrative expenses so incurred,
whether in the State in which the permanent establishment is situated or elsewhere.'; and
b) in paragraph 7, adding the words "and income from the performance of professional
services and of other activities of an independent character':
ARTTCLEIV
Article 10 (Dividends) of the Convention is deleted and the following Article substituted:
"Article 10
Dividends
1. Dividends paid by a company that is 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 dividends are derived and beneficially owned by 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
that owns directly at least 10 percent of the voting stock ofthe company paying the
dividends;
b) 15 percent of the gross amount of the dividends in all other cases.
This paragraph shall not affect the taxation of the company in respect of the profits out of
which the dividends are paid.
5
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Contracting State of which the company paying the dividends is a resident if the
II
beneficial owner is:
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a) a company that is a resident of the other Contracting State that has owned directly
shares representing 80 percent or more of the voting power in the company paying
the dividends for a 12-month period ending on the date entitlement to the dividend
is determined and:
aa) satisfies the conditions of clause aa) or bb) of subparagraph c) of paragraph 2 of
Article 28 (Limitation on Benefits);
bb) satisfies the conditions of clauses aa) and bb) of subparagraph f) of paragraph 2
of Article 28, provided that the company satisfies the conditions described in
paragraph 4 of Article 28 with respect to the dividends;
cc) is entitled to benefits with respect to the dividends under paragraph 3 of Article
28; or
dd) has received a determination pursuant to paragraph 7 of Article 28 with respect
to this paragraph; or
b) a pension fund that is a resnent of the other Contracting State, provided that such
dividends are not derived from the carrying on of a business, directly or indirectly,
by such pension fund.
4. Subparagraph a) of paragraph 2 and subparagraph a) of paragraph 3 shall not apply in
the case of dividends paid by a United States person that is a U.S. Regulated Investment
Company (RIC), a United States person that is a U.S. Real Estate Investment Trust
(REIn or a German Investment Fund or a German Investmentaktiengesellschqft
(co\lectively referred to as Investmentvermogen). In the case of dividends paid by a RIC
or an InvestmentvermogeI\ subparagraph b) of paragraph 2 and subparagraph b) of
paragraph 3 shall apply. In the case of dividends paid by a REIT subparagraph b) of
paragraph 2 shall apply only if:
a) the beneficial owner of the dividends is an individual holding an interest of not
more than 10 percent in the REIT;
6
b) 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 ho Iding an interest of not more than 5
percent of any class of the REIT's stock; or
c) 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.
For purposes of this paragraph a REIT shall be diversified if no single interest in real
property exceeds lO percent of its total interests in real property. For the purposes of
this paragraph foreclosure property shall not be an interest in real property. Where a
REIT holds an interest in a partnership, it shall be treated as owning directly a
proportion ofthe partnership's interests in real property corresponding to its interest in
the partnership.
,~
"
;
5. The tenn "dividends" as used in this Article means incorre from shares, "jouissance"
shares or "jouissance" rights, founders' shares, or other rights (not being debt-claims)
participating in profits, as well as other income from other rights that is subjected to the
same taxation treatment as income from shares by the laws of the Contracting State of
which the company making the distribution is a resident. The term "dividends" also
\\
includes in the Federal Republic of Germany income under a sleeping partnership (Stille
Gesellschaft), a participating loan (partiarsches Darlehen), or "Gewinnobligation", as
well as distributions on certificates of a German Investmentvermogen.
6. Notwithstanding the first sentence of paragraph 2 of this Article, paragraph 3 of this
Article and paragraph 1 of Article 11 (Interest), iocome from arrangements carrying the
right to participate in profits (including in the Federal Republic of Germany income
under a sleeping partnership (Stille Gesellschaft), a participating loan (partiarisches
Darlehen), or "Gewinnobligation", or "jouissance" shares or "jouissance" rights and in
the United States contingent interest of a type that would not qualify as portfolio interest)
that is deductible in determining the profits of the payor may be taxed in the Contracting
State in which it arises according to the laws of that State.
"
,
7. The provisions of paragraphs 2 and 3 shall not apply if the beneficial owner of the
dividends, being a resident of a 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, and the holding in respect of which the
7
dividends are paid form; part of the business property of such permanent establishment.
In such case, the provisions of Article 7 (Business Profits) shall apply.
8. A Contracting State may not impose any tax on dividends paid by a company which is
a resident of the other Contracting State, except insofar as such dividends are paid to a
resident of the first- mentioned State or insofar as the holding in respect of which the
dividends are paid forms part of the business property of a permanent establishment
situated in that State, nor may it impose tax on a company's undistributed profits except
as provided in paragraph 9 of this Article, even if the dividends paid or the undistributed
profits consist wholly or partly of profits or income arising in that State.
9. A company that is a resident of a Contracting State and that has a permanent establish-
ment in the other Contracting State, or that s subject to tax on a net basis in that other
Contracting State on items of income that may be taxed in that other State under Article 6
(Income from Immovable (Real) Property) or under paragraph I of Article 13 (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 only
on:
a) the portion of the business profits of the company attributable to the permanent
establishment, and
b) the portion of the income referred to in the preceding sentence that is subject to tax
under Article 6 or paragraph 1 of Article l3,
that represents the "dividend equivalent amount" of those profits and income; the term
"
"dividend equivalent amount" shall, for the purposes of this subparagraph,
aa) in the case of the United States, have the meaning that it has under the law of the
United States as it may be amended from time to time without changing the general
principle thereof; and
bb) in the case of the Federal Republic of Germany, be that portion of the income
described in subparagraph a) that is comparable to the amount that would be distributed
as a dividend by a locally incorporated subsidiary.
10. The tax referred to in subparagraphs a) and b) of paragraph 9 ofthis Article 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:
8
a) satisfies the conditions of clause aa) or bb) of subparagraph c) of paragraph 2 of
Article 28 (Limitation on Benefits);
b) satisfies the conditions of clauses aa) and bb) of subparagraph
Dof paragraph 2 of
Article 28, 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 9 of this Article;
c) is entitled under paragraph 3 of Article 28 to benefits with respect to an item of
income, profit or gain described in paragraph 9 of this Article; or
d) has received a determination pursuant to paragraph 7 of Article 28 with respect to
this paragraph.
II. The term "pension fund" as used in this Article means any person that:
.,
a) is established under the laws of a Contracting State;
b) is established and maintained in that Contracting State primarily to administer or
provide pensions or other similar remuneration, including social security payments,
disability pensions and widow's pensions or to earn income for the benefit of one
or more of such persons; and
c) is either,
aa) in tre case of the United States, exempt from tax in the United States with
,
;
;
respect to the activities described in subparagraph b) of this paragraph, or
bb) in the case of the Federal Republic of Germany, a plan the contributions to
which are eligible for prehential treatment under the Income Tax Act."
ARTICLE V
Article 11 (Interest) ofthe Convention is modified by:
a) inserting the following new paragraph 6:
"6. Notwithstanding the provisions of paragraph 1, interest that is an excess inclusion
with respect to a residual interest in a U.S. real estate mortgage investment conduit may
be taxed by the United States in accordance with its domestic law."; and
b) in paragraph 5, deleting the words "paragraph 8 (a)(bb)" where they appear and
substituting the words "subparagraph b) of paragraph 9".
9
ARTICLE VI
Article 13 (Gains) of the Convention is modified by deleting paragraph 6 and substituting
the following new paragraph:
"6. \\'here an individual who, upon ceasing to be a resident of one of the Contracting
States, is treated under the taxation law of that State as having alienated property and is
taxed in that State by reason thereof, the individual may elect to be treated for purposes
of taxation in the other Contracting State as if the individual had, immediately before
ceasing to be a resident of th~ first-mentioned State, alienated and reacquired the property
for an amount equal to its fair market value at that time."
ARTICLE VII
I. Article 14 (Independent Personal Services) of the Convention shall be deleted and the
Articles following Article 14 shall not be re-numbered.
2. Paragraph 3 of Article 11 (Interest) of the Convention shall be modified by deleting
the words ", or performs in that other State independent personal services from a fixed
base situated therein,", "or fixed base", and "or Article 14 (Independent Personal
Services), as the case may be," where they appear.
3. Paragraph 5 of Article 11 of the Convention shall be modified by deleting the words
"or a fixed base" where they appear.
4. Paragraph 3 of Article 12 (Royalties) of the Convention shall be modified by deleting
the words ", or performs in that other State independent personal services from a fixed
base situated therein," and "or Article 14 (Independent Personal Services), as the case
may be," where they appear.
5. Paragraph 3 of Article 13 (Gains) ofthe Convention shall be modified by deleting the
words "or of movable property pertaining to a fixed base available to a resident of a
Contracting State in the other Contracting State for the purpose of performing
independent personal services" and "or of such fixed base" where they appear.
6. Subparagraph c) of paragraph 2 of Article 15 (Dependent Personal Services) of the
Convention shall be modified by deleting the words "or a fixed base" where they appear.
10
Paragraph I of Article 17 (Artistes and Athletes) of the Convention shall be modified
by deleting the words ", 14 (Independent Personal SelVices)" where they appear.
8. Paragraph 2 of Article 17 of the Convention shall be modified by deleting the words
"and 14 (Irdependent Personal Services),"where they appear.
9. Paragraph 2 of Article 21 (Other Income) of the Convention shall be modified by
deleting the words "; or the recipient performs in that other State independent personal
services from a fixed base situated therein, and the income is attributable to the fixed
base" where they appear.
10. Paragraph 2 of Article 22 (Capital) of the Convention shall be modified by deleting
the words ", or by movable property pertaining to a fixed base available to a resident of a
Contracting State in the other Contracting State for the purpose of performing
independent personal services," where they appear.
ARTICLE VIII
Article 18 (Pensions, Annuities, Alimony, and Child Support) of the Convention is
modified by:
a) deleting the title "Article 18 (pensions, Annuities, Alimony, and Child Support)" and
replacing it with the title "Article 18 (Pensions, Annuities, Alimony, Child Support, and
Social Security)";
b) by adding a new paragraph 5 as follows:
"5. Social security benefits paid under the social security legislation of a Contracting
State and other public pensions (not dealt with in Article 19 (Government Service» paid
by a Contracting State to a resident of the other Contracting State shall be taxable only in
that other Contracting State. 1n applying the preceding sentence, that other Contracting
State shall treat such benefit or pension as though it were a social security benefit paid
under the social security legislation of that other Contracting State."
ARTICLE IX
The following new Article 18A (pension Plaffi) shall be added to the Convention:
11
"Article 18A
Pension Plans
Where an individual who is a resident of a Contracting State is a member or
beneficiary of, or participant in, a pension plan established in the other Contracting State,
income earned by the pension plan may be taxed as income of that individual only when,
and, to the extent that, it is paid to, or for the benefit of, that individual from the pension
plan (and not transferred to another pension plan in that other Contracting State).
2. Where an individual who is a beneficiary of, or participant in, a pension plan
established in a Contracting State exercises an employment or self-employment in the
other Contracting State:
a) contributions paid by or on behalf of that individual to the pension plan during the
period or attributable to the period that he exercises an employment or selfemployment in the other State shall be deductible (or excludable) in computing
his taxable income in that other State; and
b) any benefits accrued under the pension plan, or contributions made to the pension
plan by or on behalf of the individual's employer, during that period shall not be
treated as part of the employee's taxable income; any such contributions shall be
allowed as a deduction in computing the business profits of his employer in that
other State.
The relief available under this paragraph shall not exceed the relief that would be allowed
by the other State to residents of that State for contributions to, or benefits accrued under,
a pension plan or plans established in that State. The competent authorities ofthe
Contracting States shall determine the relief available under this paragraph pursuant to
the preceding sentence.
3. The provisions of paragraph 2 shall not apply unless:
a) contributions by or on behalf of the individual, or by or on behalf of the
individual's employer were made before the individual began to exercise an
t:
employment or self-employment in the other State; and
b) the pension plan is accepted by the competent authority of that State as generally
corresponding to a pension plan recognized as such for tax pUIposes by that State.
"'
12
4. The term '\Jension plan" means an arrangement established in a Contracting State
which is operated principally to administer or provide pension or retirement benefits or to
earn income for the benefit of one or more such arrangements.
5. a) Where a citizen of the United States who is a resident of the Federal Republic of
Germany exercises an employment in the Federal Republic of Germany the income from
which is taxable in the Federal Republic of Germany and is borne by an employer who is
a resident of the Federal Republic of Gennany or by a penn anent establishment situated
in the Federal Republic of Germany, and the individual is a beneficiary of, or participant
in, a pension plan established in the Federal Republic of Germany,
aa) contributions paid by or on behalf of that individual to the pension plan during the
period or attributable to the period that he exercises the employment in the Federal
Republic of Germany, and that are attributable to the employment, shall be deductible (or
excludable) in computing his taxable income in the United States; and
bb) any benefits accrued under the pension plan, or contributions made to the pension
plan by or on behalf of the individuafs employer, during that period or attributable to that
period, and that are attributable to the employment, sha1l not be treated as part of the
employee's taxable income in computing his taxable income in the United States.
This paragraph shall apply only to the extent that the contributions or benefits qualify for
tax relief in the Federal Republic of Germany.
b) The relief available under this paragraph shall not exceed the relief that would be
allowed by the United States to its residents for contributions to, or benefits accrued
under, a generally corresponding pension plan established in the United States.
c) For purposes of determining an individual's eligibility to participate in and receive tax
benefits with respect to a pension plan established in the United States, contributions
made to, or benefits accrued under, a pension plan established in the Federal Republic of
Germany shall be treated as contributions or benefits under a generally corresponding
pension plan established in the United States to the extent relief is available to the
individual under this paragraph.
d) This paragraph shall not apply unless the competent authority of the United States has
agreed that the pension plangeneraJJy corresponds to a pension plan established in the
United States."
13
ARTICLE X
Article 19 (Government Service; Social Security) ofthe Convention is deleted and the
following Article substituted:
f:
"Article 19
Government Service
"
1. Notwithstanding the provisions of Articles 15 (Dependent Personal Services), 16
(Directors' Fees), and 17 (Artistes and Athletes):
a) salaries, wages and other similar remuneration, other than a pension, paid by a
Contracting State or a political subdivision, local authority or an instrumentality
thereof to an individual in respect of services rendered to that Contracting State or a
political subdivision, local authority or an instrumentality thereof shall, subject to
the provisions of subparagraph b), be taxable only in that State;
b) such remwleralion, however, shall be taxable only in the other Contracting State if
the services are rendered in that State and the individual is a resident of that State
who:
aa) is a national of that State; or
bb) did not become a resident of that State solely for the purpose of rendering the
services.
2.
a) Notwithstanding the provisions of paragraph 1, pensions and other similar
remuneration paid by, or out offunds created by, a Contracting State or a political
subdivision, local authority or an instrumentality thereof to an individual in respect
of services rendered to that State or subdivision, authority or instrumentality shall
be taxable only in that State.
b) However, such pensions and other remuneration shall be taxable only in the
other Contracting State if the individual is a
aa) resident of, and a national of, that State; or
bb) the pension is not subject to tax in the Contracting State for which the services
were performed because the services were performed entirely in the other
Contracting State.
14
3. Pensions, annuities, and other amounts paid by one of the Contracting States or by a
juridical person organized under the public laws of that State as compensation for an
injury or damage sustained as a result of hostilities or political persewtion shall be
exempt from tax. by the other State.
4. The provisions of Articles 15 (Dependent Personal Services), 16 (Directors' Fees), 17
(Artistes and Athletes), and 18 (Pensions, Annuities, Alimony, Child Support, and Social
Security) shall apply to salaries, wages and other similar remuneration, and to pensions,
in respect of services rendered in connection with a business carried on by a Contracting
State or by a political subdivision, local authority or an instrumentality thereof.
5. In this Article, the term "instrumentality" means any agent or entity created or
organized by a Contracting State, one of its states or a political subdivision or local
authority thereof in order to carry out functions of a governmental nature which is
specified and agreed to in letters exchanged between the competent authorities of the
Contracting States."
ARTICLE XI
Article 20 (Visiting Professors and Teachers; Students and Trainees) of the Convention is
modified by:
a) deleting paragraph I and substituting the following paragraph:
"I. Remuneration that a professor or teacher who is a resident of a Contracting State and
who is temporarily present in the other Contracting State for the primary purpose of
carrying out advanced study or research or for teaching at an accredited university or
other recognized educational institution, or an institution engaged in research for the
public benefit, receives for such work shall be taxable only in the first-mentioned
Contracting State for a period not exceeding two years from the date of his arrival. This
Article shall not apply to income from research if such research is undertaken not in the
public interest but primarily for the private benefit of a specific person or persons. The
~ I
benefits provided in this paragraph shall not be granted to an individual who, during the
immediately preceding period, enjoyed the benefits of paragraph 2,3, or 4."; and
b) in paragraph 4, deleting the words "$5,000 (five thousand United States dollars)" and
substituting the words "$9,000 (nine thousand United States dollars)".
15
ARTICLE XII
)l
Article 23 (Relief from Double Taxation) of the Convention is deleted and the following
Article substituted:
"Article 23
Relief from Double Taxation
\\
1. In accordance with the provisions and subject to the limitations of the law of the
United States (as it may be amended from time to time without .changing the general
principle hereof), the United States shall allow to a resident or citizen of the United States
as a credit against the United States tax on income:
a) the income tax paid or accrued to the Federal Republic of Germany by or on behalf of
such resident or citizen; and
b) in the case of a United States company owning at least 10 percent of the voting stock
of a company that is a resident of the Federal Republic of Germany and from which the
United States company receives dividends, the income tax paid or accrued to the Federal
Republic of Germany by or on behalf of the payer with respect to the profits out of which
the dividends are paid.
For the purposes of this paragraph, the taxes referred to in subparagraph b) of paragraph 1
of Article 2 (Taxes Covered) and paragraph 2 of Article 2 , other than the capital tax
~'
(Vermogensteuer), shall be considered income taxes.
2. For the purposes of applying paragraph 1 of this Article, an item of gross income, as
determined under the laws of the United States, derived by a resident of the United States
•;
that, under this Convention, may be taxed in the Federal Republic of Germany shall be
deemed to be income from sources in the Federal Republic ofGerrnany.
3. Where a resident of the Federal Republic of Germany derives income or owns capital
which, in accordance with the provisions of this Convention, may be taxed il the United
States or is exempt from United States tax under paragraph 3 of Article 10 (Dividends),
tax shall be determined as follows:
a) Except as provided in subparagraph b), the income or capital shall be excluded from
the basis upon which German tax is imposed. The Federal Republic of Germany,
however, retains the right to take into account in the determination of its rate of tax
items of income and capital excluded under the provisions of this Convention In
the case of income from dividends the foregoing provisions shall apply only to such
<I
16
income from distributions of profits on corporate rights subject to corporate income
tax. under United States law as are paid to a company (not including partnerships)
being a resident of the Federal Republic of Germany by a company being a resident
of the United States at least 10 percent of the voting shares of which is owned
directly by the German company. The exclusion provided by the first sentence of
this subparagraph shall not apply to dividends paid by a U.S. Regulated Investment
Company (RIC) or a U.S. Real Estate Investment Trust (REIT) and distributions
that are deductible for United States tax purposes by the company distributing
them. For the purposes of taxes on capital there shall also be excluded from the
basis upon which German tax is imposed any shareholding the dividends of which,
if paid, would be excluded, according to the two immediately foregoing sentences,
from the basis upon which German tax is imposed.
b) There shall be allowed as a credit aga inst German tax on income, subject to the
provisions of German tax law regarding credit for foreign tax, the United States tax
paid in accordance with the law of the United States and with the provisions oftrus
Convention on the following items of income:
aa) income from dividends within the meaning of Article 10 (Dividends) to which
subparagraph a) does not apply;
bb) gains to which Article 13 (Gains) applies provided such gains are taxable in the
United States by reason only of subparagraph b) of paragraph 2 of Article 13;
cc) income to which Article 16 (Directors' Fees) applies;
dd) income to which Article 17 (Artistes and Athletes) applies;
ee) income which would, but for Article 28 (Limitation on Benefits), remain
exempt from United States tax under this Convention.
For the purposes of this paragraph, income, profit or gain derived by a resident of
the Federal Republic of Germany that, under this Convention, may be taxed in the
United States shall be deemed to be income from sources within the United States.
4. a) Notwithstanding subparagraph a) of paragraph 3, double taxation shall be avoided
by a credit as provided for in subparagraph b) of paragraph 3, if income or capital
would be subject to double taxation due to the placement of such income or capital
~
:
17
under different provisions of the Convention and this conflict cannot be settled by a
procedure pursuant to Article 25 (Mutual Agreement Procedure).
b) The provisions of subparagraph a) of paragraph 3 shall not apply to income or
capital where the United States applies the provisions of the Convention to exempt
such income or capital from tax, or applies paragraphs 2 or 3 of Article 10
(Dividends) to such income, or may under the provisions of the Convention tax
such income or capital but is prevented from doing so under its laws.
c) The provisions of subparagraph b) and not the provisions of subparagraph a) of
paragraph 3 shall apply to items of income or capital of which the Federal Republic
of Germany has, after due consultation, notified the United States through
diplomatic channels. In such a case, the provisions of subparagraph b) shall apply
for any taxable year following the year of such notification.
5. Where a United States citizen is a resident of the Federal Republic of Germany:
a) With respect to items of income not excluded from the basis of German tax under
paragraph 3 that are exempt from United States tax or that are subject to a reduced
rate of United States tax when derived by a resident of the Federal Republic of
Germany who is not a United States citizen, the Federal Republic of Germany shall
allow as a credit against German tax, subject to the provisions of German tax law
regarding credit for foreign tax, only the tax paid, if any, that the United States may
impose under the provisions of this Convention, other than taxes that may be
imposed solely by reason of citizenship under paragraph 4 of Article 1 (General
Scope);
b) Fur purposes of computing United States tax, the United States shall allow as a
credit against United States tax the income tax paid to the Federal Republic of
Germany after the credit referred to in subparagraph a); the credit so allowed shall
,,
not reduce that portion of the "Cnited States tax that is creditable against the German
tax in accordance with subparagraph a); and
c) For the exclusive purpose of relieving double taxation in the United States under
subparagraph b), items of income referred to in subparagraph a) shall be deemed
to arise in the Federal Republic of Germany to the extent necessary to avoid
double taxation of such income under subparagraph b)."
18
ARTICLE XIII
Paragraph 5 of Article 25 (Mutual Agreement Procedure) of the Convention shall be
deleted and replaced with the following paragraph:
"5.
Where, pursuant to a mutual agreement procedure under this Article, the
competent authorities have endeavored but are unable to reach a complete agreement in a
case, the case shall be resolved through arbitration conducted in the manner prescribed
by, and subject to, the requirements of paragraph 6 and any rules or procedures agreed
upon by the Contracting States, if:
a)
tax returns have been filed with at least one of the Contracting States with respect
to the taxable years at issue in the case;
b)
the case
aa)
is a case that
A)
involves the application of one or more Articles that the Contracting States have
agreed shall be the subject of arbitration, and
B)
is not a particular case that the competent authorities agree, before the date on
which arbitration proceedings would otherwise have begun, is not suitable for
determination by arbitration, or
bb)
is a particular case that the competent authorities agree is suitable for
determination by arbitration; and
e)
all concerned persons agree according to the provisions of subparagraph d) of
paragraph 6.
6.
For the purposes of paragraph 5 and this paragraph, the following rules and
definitions shall apply:
a)
The term ''concerned person" means the presenter of a case to a competent
authority for consideration under this Article and all other persons, if any, whose tax
liability to either Contracting State may be directly affected by a mutual agreement
arising from that consideration;
b)
The ''commencement date" for a case is the earliest date on which the information
necessary to undertake substantive consideration for a mutual agreement has been
received by both competent authorities;
c)
Arbitration proceedings in a case shall begin on the later of:
19
aa)
Two years after the commencement date of that case, unless both competent
authorities have previously agreed to a different date, and
bb)
The earliest date upon which the agreement required by subparagraph d) has been
received by both competent authorities;
d)
The concerned person(s), and their authorized representatives or agents, must
agree prior to the beginning of arbitration proceedings not to disclose to any other person
any infonnation received during the course of the arbitration proceeding from either
Contracting State or the arbitration board, other than the detennination of such board;
e)
Unless any concerned person does not accept the detennination of an arbitration
board, the determination shall constitute a resolution by mutual agreement under this
Article and shall be binding on both Contracting States with respect to that case; and
t)
For purposes of an arbitration proceeding under paragraph 5 and this paragraph,
the members of the arbitration board and their staffs shall be considered "persons or
authorities" to whom infonnation may be disclosed under Article 26 (Exchange of
1;
Information and Administrative Assistance) of the Convention."
ARTICLEXN
Article 28 (Limitation on Benefits) of the Convention is deleted and the following Article
substituted:
"Article 28
Limitation on Benefits
1. Except as otherwise provided in this Article, a resident of one ofthe Contracting States
that derives income from the other Contracting State shall be entitled, in that other
Contracting State, to all the benefits ofthis Convention otherwise accorded to residents of
a Contracting State only if such resident is a "qualified person" as defined in paragraph 2
of this Article and satisfies any other conditions specified in the Convention for the
obtaining of such benefits.
2. A resident of one of the Contracting States is a qualified person for a taxable year only
if such resident is either:
a) an individual;
b) a Contracting State, political subdivision or local authority thereof;
20
c) a company, if
aa) its principal class of shares (and any disproportionate class of shares) is
regularly traded on one or more recognized slock 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
B) the company's primary place of management and control is in the
;,
Contracting State of which it is a resident; or
bb) shares representing at least 50 percent of the aggregate voting power and value
(and at least 50 percent of any disproportionate class of shares) of the company
are owned directly or indirectly by five or fewer companies entitled to benefits
under clause aa) of this subparagraph, provided that, in the case of indirect
ownership, each intermediate owner is a resident of either Contracting State;
d) an entity organized under the laws of one of the Contracting States and established
and maintained in that Contracting State exclusively for a religious, charitable,
educational, scientific, or other similar purpose;
e) an entity organized under the laws of one of the Contracting States and established
and maintained in that Contracting State to provide, pursuant to a plan, pensions or
other similar benefits to employed and self-employed persons, provided that:
aa) more than 50 percent ofthe entity's beneficiaries, members or participants are
individuals resident in either Contracting State; or
bb) the organization sponsoring such person is entitled to the benefits of the
Convention pursuant to this paragraph;
f) a person other than an individual, if:
aa) on at least half the days of the taxable year at least SO percent of each class of
shares or other beneficial interests in the person is owned, directly or indirectly,
b.y residents of that Contracting State that are entitled to the benefits of this
Convention under subparagraph a), subparagraph b), clause aa) ofsubparagraph
c), subparagraph d) or subparagraph e) of this paragraph, provided that, in the
case of indirect ownership, each intermediate owner is a resident of that
Contracting State; and
21
,.'.
.
bb) less than 50 percent of the person's gross income for the tamble year 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 aa) of subparagraph c), subparagraph d) or
subparagraph e) of this paragraph in the fonn of payments that are deductible for
purposes of the taxes covered by this Convention in the person's State of
residence.
3. Notwithstanding that a company that is a resident of a Contracting State may not be a
qualified person, it shall be entitled to all the benefits of this Convention otherwise
accorded to residents of a Contracting State with respect to an item of income if it
satisfies any other specified conditions for the obtaining of such benefits and:
a) shares representing at least 95 percent of the aggregate voting power and value (and
at least 50 percent of any disproportionate class of shares) of the company are
owned, directly or indirectly, by seven or fewer persons who are equivalent
beneficiaries; and
b) less than 50 percent ofthe company's gross income for the taxable year in which
the item of income arises is paid or accrued, directly or indirectly, to persons who
are not equivalent beneficiaries, in the fonn of payments that are deductible for the
purposes ofthe taxes covered by this Convention in the Contracting State of which
the company is a resident.
4.
a) Kotwithstanding that a resident of a Contracting State may not be a qualified
person, it shall be entitled to all the benefits ofthis Convention otherwise accorded
to residents of a Contracting State with respect to an item of income derived from
the other Contracting State, if the resident is engaged in the active conduct of a
trade or business in the first-mentioned Contracting State (other than the activities
of making or managing investments for the resident's own account, unless these
activities are banking, insurance or securities dealing carried on by a bank,
insurance company or registered securities dealer), the income derived from the
other Contracting State is derived in connection With, or is incidental to, that trade
,
,
22
or business and that resident satisfies any other specified conditions for the
obtaining of such benefits.
b) If a resident of one of the Contracting States or any of its associated enterprises
carries on a trade or business activity in the other Contracting State which gives rise
to an item of income, subparagraph a) of this paragraph shall apply to such item
only if the trade or business activity in the first-mentioned Contracting State is
substantial in relation to the trade or business activity in the other Contracting State.
c) In determining whether a person is engaged in the active conduct of a 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 of a company, shares
representing at least 50 percent of the aggregate voting power and value of 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 of a company, shares representing at least 50 percent of the aggregate
voting power and value of 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, on the basis of all the facts and circumstances, one has control of the
other or both are under the control of the same person or persons.
5. Notwithstanding the preceding provisions of this Article, where an enterprise ofa
Contracting State derives income from the other Contracting State, and that income is
attributable to a permanent establishment which that enterprise has in a third jurisdiction,
the tax benefits that would otherwise apply under the other provisions of the Convention
will not apply to that income ifthe combined tax that is actually paid with respect to such
income in the first-mentioned Contracting State and in the third jurisdiction is less than
60 percent of the tax that would have been payable in the first-mentioned State if the
income were earned in that Contracting State by the enterprise and were not attributable
to the permanent establishment in the third jurisdiction. Any dividends, interest or
royalties to which the provisions of this paragraph apply shall be subject to tax at a rate
that shall not exceed 15 percent of the gross amount thereof. Any other income to which
23
the provisions of this paragraph apply will be subject to tax under the provisions of the
domestic law of the other Contracting State, notwithstanding any other provision of the
Convention. The provisions of this paragraph shall not apply if:
a) 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; or
b) in the case of any other income, the income derived from the other Contracting
State 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 jurisdiction
(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).
6. Notwithstanding the preceding provisions ofthis Article, a German Investment Fund
or Germanlnvestmentaktiengesellschajt (collectively referred to as Investmentverm6gen)
may only be granted the benefits of this Convention if at least 90 percent of the shares or
other beneficial interests in the Germanlnvestmentvermogen are owned, directly or
indirectly, by residents of the Federal Republic of Germany that are entitled to the
benefits of this Convention under subparagraph a), subparagraph b), clause aa) of
subparagraph c), subparagraph d) or subparagraph e) of paragraph 2 of this Article or by
persons that are equivalent beneficiaries with respect to the income derived by the
German Investmentvermogen for which benefits are being claimed For the purposes of
this paragraph, beneficiaries of entities that are subject to numbers 3 and 5 of paragraph 1
of section I of the German Corporate Tax Act shall be treated as indirectly owning shares
of a German Investrnentverm6gen. Foundations referred to in number 5 of paragraph 1
,,
of section 1 of the German Corporate Tax Act, other than those referred to in
subparagraph d) of paragraph 2 of this Article, shall not be taken into account in
determining whether a German Investmentvermogen meets the 90 percent minimum
ownership threshold.
7. A person resident of one of the Contracting States, who is not entitled to some or all of
the benefits of this Convention because of the foregoing paragraphs, may, nevertheless,
be granted benefits of this Convention if the competent authority of the Contracting State
24
in which the income in question arises so detennines. In making such detennination, the
competent authority shall take into account as its guidelines whether the establishment,
acquisition or maintenance of such person or the conduct of its operations has or had as
one of its principal purposes the obtaining of benefits under this Convention. The
competent authority of the Contracting State in which the income arises will consult with
the competent authority of the other Contracting State before denying the benefits ofthe
Convention under this paragraph.
8. For the purposes of this Article the following rules and definitions shall apply:
a) the tenn "recognized stock exchange" means:
aa) the NASDAQ System 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;
bb) any German stock exchange on which registered dealings in shares take place;
cc) any other stock exchange which the competent authorities agree to recognize
for the purposes of this Article;
b)
aa) the term "principal class of shares" means the ordinary or common shares ofthe
company, provided that such class of shares represents the majority of the voting
power and value of the company. If no 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;
bb) the term "shares" shall include depository receipts thereof or trust certificates
thereof;
c) the term "disproportionate class of shares" means any class of shares of a company
resident in one of the Contracting States that entitles the shareholder to
disproportionately higher participation, through dividends, redemption payments or
otherwise, in the earnings generated in the other Contracting State by particular
assets or activities of the company;
25
d) the company's primary place of management and control will be in the Contracting
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 Contracting 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 Contracting State than in any other state.
e) an equivalent beneficiary is a resident of a member state of the European Union or
of a European Economic Area state or of a party to the North American Free Trade
Agreement but only if that resident:
aa)
A) would be entitled to all the benefits ofa comprehensive convention for the
avoidance of double taxation between any member state of the European
Union or a European Economic Area state or any party to the North
American Free Trade Agreement and the State from which the benefits ofthis
Convention are claimed under provisions analogous to subparagraph a),
subparagraph b), clause aa) of subparagraph c), subparagraph d) or
subparagraph 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 a qualified person under subparagraph a), subparagraph
b), clause aa) of subparagraph c), subparagraph d) or subparagraph e) of
paragraph 2 of this Article if such person were a resident of one of the States
under Article 4 (Resident) of this Convention; and
B) with respect to insurance premiums and to income referred to in Article 10
(Dividends), II (Interest) or 12 (Royalties) of this Convention, would be
entitled ooder 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
bb) is a resident of a Contracting State that is a qualified person by reason of
subparagraph a), subparagraph b), clause aa) of subparagraph c), subparagraph
d) or subparagraph e) of paragraph 2 of this Article.
26
For the purposes of applying paragraph 3 of Article 10 (Dividends) in orderto
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;
f) with respect to dividends, interest or royalties arising in the Federal Republic of
Germany and beneficially owned by a company that is a resident of the United States, a
company that is a resident ofa member state of the European Union will be treated as
satisfying the requirements of clause aa) B) of subparagraph e) 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 the Federal Republic
of Germany and paid directly to such resident of a member state ofthe European Union
would have been exempt from tax pursuant to any directive of the European Gnion,
notwithstanding that the income tax convention between the Federal Republic of
Germany 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), 11 (Interest), or 12 (Royalties) ofthis
Convention."
ARTICLE XV
Paragraph 1 of Article 17 (Artistes and Athletes) of the Convention and paragraph 4 and
5 of Article 20 (Visiting Professors and Teachers; Students and Trainees) ofthe
Convention are modified by deletillg the words "Deutsche Mark" where they appear and
replacing them with the word "Euro".
ARTICLE XVI
The Protocol to the Convention is amended by deleting paragraphs I through 28 and
replacing them with the following paragraphs:
"1. WITH REFERENCE TO SUBPARAGRAPH b) OF PARAGRAPH 4 OF ARTICLE 1
(GENERAL SCOPE)
The term "long-teon resident" shall mean any individual who is a lawful permanent
resident of the United States in eight or more taxable years during the preceding 15
27
taxable years. In determining whether the threshold in the preceding sentence is met, an
individual shall not be treated as a lawful permanent resident of the United States for any
taxable year in which such individual is treated as a resident of a country other than the
United States under the provisions of a tax treaty of the United States and the individual
does not waive the benefits of such treaty provided by the United States to a resident of
the other country. Consequently, if during each of the 15 taxable years preceding the loss
of his status as a lawful permanent resident an individual was a resident of the Federal
Republic of Germany (as determined under Article 4 (Residence» and claimed the
benefits provided by the United States to a resident of the Federal Republic of Germany,
the individual shall not be considered a long-term resident.
2. WITH REFERENCE TO PARAGRAPH 1 OF ARTICLE 4 (RESIDENCE)
a) The Federal Republic of Germany shall treat a United States citizen or an alien
lawfully admitted for pennanent resnence (a "green card" holder) as a resident of the
United States only if such person has a substantial presence, permanent home, or habitual
,.
abode in the United States.
b) It is understood that a German Investment Fund and a German
Investmentalrtiengesellschcift (collectively referred to as Investmentvermogen) to which
the provisions of the Investment Act (Investmentgesetz) apply are residents of the
Federal Republic of Germany and that a U.S. Regulated Investment Company (RIC) and
11
a U.S. Real Estate Investmmt Trust (REIT) are residents ofthe United States.
3. WITH REFERENCE TO ARTICLE 5 (PERMANENT ESTABLISHMENT) A resident of
a Contracting State that perfonns in the other Contracting State concerts, theatrical or
artistic perfonnances, or similar shows and revues and that may not be taxed in that other
State under the provisions of Article 17 (Artistes and Athletes) shall not be deemed to
have a permanent establishment in that State if its presence does not exceed in the
aggregate 183 days in the calendar year concerned.
4. WITH REFERENCE TO ARTICLE 7 (BUSINESS PROFITS)
It is understood that the business profits to be attributed to a permanent establishment
shall include only the profits derived from the assets used, risks assumed, and activities
performed by the permanent establishment. The principles of the OECD Transfer
Pricing Guidelines will apply for purposes of determining the profits attributable to a
~
I'~ .~
. . : , .,"":'
.::~::::.:
28
~...
pennanent establishment, taking into account the different economic and legal
circumstances of a single entity. Accordingly, any of the methods described therein as
acceptable methods for determining an arm's-length result may be used to determine the
income of a penmanent establishment so long as those methods are applied in accordance
with the Guidelines. In particular, in determining the amount of attributable profits, the
permanent establishment shall be treated as having the same amount of capital that it
would need to support its activities if it were a distinct and separate enterprise engaged in
the same or similar activities. With respect to financial institutions other than insurance
companies, a Contracting State may detennine the amount of capital to be attributed to a
permanent establishment by allocating the institution's total equity between its various
'i
offices on the basis of the proportion of the financial institution's risk-weighted assets
attributable to each of them. A financial institution may determine the amount of the
capital attributed to its permanent establishment using its risk weighted assets only jf it
risk weights its assets in the ordinary course of its business.
5. WITH REFERENCE TO PARAGRAPHS 1 AND 2 OF ARTICLE 7 (BUSINESS
PROFITS) AND PARA GRAPH 3 OF ARTICLE J3 (GAINS)
For the implementation of paragraphs 1 and 2 of Article 7 and paragraph 3 of Article 13
any income, gain, or expense attributable to a permanent establishment is taxable or
deductible in the Contracting State where such permanent establishment is situated even
ifthe payments are deferred until such permanent establislunent ceases to exist. Nothing
,;
in the preceding sentence shall prevent the application to such deferred payments ofmles
regarding the accrual of income and expenses according to the domestic law of a
Contracting State.
6. WITH REFERENCE TO ARTICLE 7 (BUSINESS PROFITS) AND ARTlCLE 13
(GAINS)
Gains from the alienation of movable property that at any time formed part of the
business property of a permanent establishment that a resident of one Contracting State
has or had in the other Contracting State may be taxed by that other State only to the
extent of the gain that accrued during that time. Notwithstanding any provision of Article
7 or Article 13, such tax may be imposed on such gains at the time when realized and
recognized mder the laws of that other State, if it is within ten years of the date on which
29
the property ceases to be part of the business property of the permanent establishment (or
; ,
such shorter period provided by the laws of either Contracting State).
7. WITH REFERENCE TO ARTICLE 9 (ASSOCIATED ENTERPRISES)
Either State may apply the rules of its national law that permit the distribution,
apportionment, or allocation of income, deductions, credits, or allowances between
related persons with a view to apportioning or allocating such deductions, credits, or
allowances in accordance with the general principles of paragraph 1 of Article 9. Article
9 shall not be construed to limit either Contracting State in allocating income between
persons that are related other than by direct or indirect participation within the meaning
of paragraph 1, such as by commercial or contractual relationships resulting in
controlling influence, so long as such allocation is otherwise in accordance with the
general principles of paragraph I of Article 9.
8. WITH REFERENCE TO PARAGRAPH 3 OF ARTICLE 10 (DiVIDENDS)
a) If the Federal Republic of Germany introduces a taxation regime that exempts from
taxation Real Estate Investment Companies, subparagraph b) of paragraph 3 of Article 10
shall not apply.
b) It is understood that in the case of the Federal Republic of Germany, subparagraph b of
paragraph 3 of Article 10 applies to the person treated as the owner of the assets of the
pension fund under section 39 ofthe Fiscal Code, provided the dividends may only be used
for providing retirement benefits through such ftmd.
9. WITH REFERENCE TO PARAGRAPH 9 OF ARTICLE 10 (DIVIDENDS)
The general principle of the "dividend equivalent amount': as used in the United States
law, is to approximate that portion of the income mentioned in paragraph 9 that is
comparable to the amount that would be distributed as a dividend if such income were
earned by a locally incorporated subsidiary.
10. WITH REFERENCE TO ARTICLE 11 (INTEREST)
The excess of the amount of interest deductible by a United States permanent
establishment of a German company over the interest actually paid by such permanent
establishment shall be treated as interest derived and beneficially owned by a resident of
the Federal Republic of Germany.
i
<
30
11. WITH REFERENCE TO ARTICLE 12 (ROYALTIES)
Where an artiste resident in one Contracting State records a performance in the other
Contracting State, has a copyrightable interest in the recording, and receives
consideration for the right to use the recording based on the sale or public playing of such
recording, then such consideration shall be governed by this Article.
12. WITH REFERENCE TOPARAGRAPH2 OF ARTICLE 13 (GAINS)
The term "immovable property situated in the other Contracting State", as described in
this paragraph, when the United States is that other Contracting State includes a United
States real property interest.
13. WITH REFERENCE TO PARAGRAPH 3 OF ARTICLE 13 (GAINS)
Nothing in this Article shall prevent gains from the alienation by a resilent of a
Contracting State of an interest in a partnership, trust, or estate that has a permanent
.• i
establisrunent situated in the other Contracting State from being treated as gain under
paragraph 3.
14. WITH REFERENCE TO PARAGRAPH 1 OF ARTICLE 17(ARTISTESAND
ATHLETES)
If an artiste or athlete is not subject to tax in the Federal Republic of Gennany under the
provisions of paragraph 1 of Article 17, tax may be withheld at source in the Federal
Republic of Germany, and shall be refunded to the taxpayer only upon application at the
end ofthe calendar year concerned. Paragraph 6 of Article 29 (Refund of Withholding
Tax) shall remain unaffected.
15. WITH REFERENCE TO PARAGRAPH 3 OF ARTICLE 18 (PENSIONS,
ANNUITIES, ALIMONY, CHILD SUPPORT, AND SOCIAL SECURiTY)
In detennining the taxable income of an individual who is a resident of the Federal
Republic of Germany there shall be allowed as a deduction in respect of alimony or
similar aIlowances paid to an individual who is a resident of the United States the amount
that would be allowed as a deduction if that last-mentioned individual were subject to
unlimited tax liability in the Federal Republic of Germany.
16. WITH REFERENCE TO PARAGRAPH 4 OF ARTICLE 18A (PENSION PLANS)
a) For purposes of paragraph 4 of Article 18A, the term "pension plan" shall include the
folIowing and any identical or substantially similar plans established pursuant to
legislation enacted after the date of signature of this Protocol:
'~ f.
31
rr::::::=~:::-::::.::.:"'::::::~~~"':"
, ''',;
"", "
....., ' , ' , ' : , ' ':,"
I!
!!
Revenue Code, individual retirement plans (including individual retirement plans that are
Il! l
part 0 fa 'sImpI'fi
I led employee pension plan that satisfies section 408(k), individual
'!
I'
!l
aa) In the case of the Dmted States, qualified plans under section 401(a) of the Internal
retirement accounts, individual retirement annuities, and section 408(P) accounts, and
IIi I
Roth IRAs under Section 408A), section 403(a) qualified annuity plans, section 403(b)
II
!I
I
' 457(b) governmental plans.
pans,
and
sectIOn
H
,; ,
~~
I!
bb) rn the case of the Federal Republic of Gennany, arrangements under section 1 of the
H
,'I
\l
Gennan law on employment-related pensions (Betriebsrentengesetz).
b) For pmposes of subparagraph b) of paragraph 3 and subparagraph d) of paragraph 5 of
Article 18A, it is understood that:
aa) The Federal Republic of Gennany recognizes qualified plalll specifically listed in
clause aa) of subparagraph a), other than Roth !RAs, as arrangements that correspond to
pension plans referred to under section 1 of the Gennan law on employment-related
pensions (Betriebsrentengesetz), The Federal Republic of Germany shall provide the
corresponding relief under section 3 No. 63 of the Income Tax Act; and
bb) The United States recognizes arrangements under section I of the German law on
employment-related pensions (Betriebsrentengesetz) as arrangements that correspond to
pension plans referred to in clause aa) of subparagraph a) above.
17. WITH REFERENCE TO PARAGRAPH 2 OF ARTICLE 20 (VISITING PROFESSORS
AND TEACHERS; STUDENTS AND TRAINEES),
Payments that are made out of public funds of a Contracting State or by a scholarship
organization endowed with such funds shaH be considered to arise in full from sources
outside the other Contracting State. The preceding sentence shall also apply when such
payments are made under programs funded jointly by organizations of both Contracting
States if more than 50 percent of these funds are provided out of public funds of the firstmentioned State or by a scholarship organization endowed with such funds. The
competent authorities shall consult with each other to identify those scholarship programs
whose payments shall be treated as arising from sources outside a Contracting State
under the foregoing rules.
18. WITH REFERENCE TO PAR4GRAPH 2 OF ARTICLE 21 (OTHER INCOME)
Where the recipient and the payor of a dividend are both residents of the Federal
Republic ofGennany and the dividend is attributed to a pennanent establishment that the
32
recipient of the dividend has in the United States, the Federal Republic of Germany may
tax such a dividend at the rates provided for in paragraphs 2 and 3 of Article 10
(Dividends). The United States shall give a credit for such tax according to the provisions
of Article 23 (Relief from Double Taxation).
19. WITH REFERENCE TO PARAGRAPH I OF ARTICLE 23 (RELIEF FROM
DOUBLE TAXATION)
For purposes of paragraph I of Article 23, the "general principle hereof' means the
avoidance of double taxation by allowing a credit for taxes imposed on items of income
arising in the Federal Republic of Gennany, as detennined under the applicable United
States source rules, as modified by the Convention. While the details and limitations of
the credit pursuant to this paragraph may change as provisions of United States law
change, any such changes must preserve a credit for German taxes imposed with respect
to items of income that the Federal Republic of Germany may tax pursuant to the
Convention.
20. WITH REFERENCE TO PARAGRAPH 1 OF ARTICLE 24 (NONDISCRIMINATION)
Paragraph I of Article 24 does not obligate the United States to subject an individual who
is a Gennan national not resident in the United States to the same taxing regime as that
applied to a citizen of the United States not resident in the United States.
21. WITH REFERENCE TO PARAGRAPH 4 OF ARTICLE 24 (NONDISCRIMINATION)
'\
It is understood that paragraph 4 of Article 24 shall not be construed as obligating a
Contracting State to permit cross-border consolidation of income or similar benefits
between enterprises.
22. WITH REFERENCE TO PARAGRAPHS 5 AND 6 OF ARTICLE 25 (MUTUAL
AGREEMENT PROCEDURE)
In respect of any case where the competent authorities have endeavored but are unable to
reach an agreement under Article 25 regarding the application of one or more of the
following Articles of the Convention: 4 (Residence) (but only insofar as it relates to the
residence of a natural person), 5 (Permanent Establishment), 7 (Business Profits), 9
(Associated Enterprises), 12 (Royalties), binding arbitration shall be used to detennine
such application, unless the competent authorities agree that the particular case is rot
suitable for determination by arbitration. In addition, the competent authorities may, on
an ad hoc basis, agree that binding arbitration shall be used in respect of any other matter
33
to which Article 25 applies. If an arbitration proceeding (the Proceeding) Wlder paragraph
5 of Article 25 commences, the foJlowing rules and procedures will apply:
a)
The Proceeding will be conducted in the manner prescribed by, and subject to the
requirements of, paragraphs 5 and 6 of Article 25 and these rules and procedures, as
modified or supplemented by any other rules and procedures agreed upon by the
competent authorities pursuant to subparagraph q) below.
b)
The determination reached by an arbitration board in the Proceeding shall be
limited to a determination regarding the amount of income, expense or tax reportable to
the Contracting States.
c)
Notwithstanding the initiation of the Proceeding, the competent authorities may
reach a mutual agreement to resolve a case and terminate the Proceeding.
Correspondingly, a concerned person may withdraw a request for the competent
authorities to engage in the Mutual Agreement Procedure (and thereby terminate the
Proceeding) at any time.
d)
The requirements of subparagraph d) of paragraph 6 of Article 25 will be met
when the competent authorities have each received from each concerned person a
statement agreeing that the concerned person and each person acting on the concerned
person's behalf will not disclose to any other person any information received during the
course of the Proceeding from either Contracting State or the Arbitration Board, other
than the determination of the Proceeding. A concerned person that has the legal authority
to bind any other concerned person(s) on this matter may do so in a comprehensive
statement.
e)
Each Contracting State will have 60 days from the date on which the Proceeding
begins to send a written communication to the other Contracting State appointing one
member ofthe arbitration board. Within 60 days of the date on which the second such
communication is sent, the two members appointed by the Contracting States will appoint
a third member, who will selVe as Chair of the board. If either Contracting State fails to
appoint a member, or if the members appointed by the Contracting States fail to agree
upon the third member in the manner prescribed by this paragraph, the remaining
member(s) will be appointed by the highest-ranking member of the Secretariat at the
Centre for Tax Policy and Administration ofthe Organisation for Economic Co-operation
34
and Development (OECD) who is not a citizen of either Contracting State, by written
notice to both Contracting States within 60 days of the date of such failure. The
competent authorities will develop a non-exclusive list of individuals with familiarity in
international tax matters who may potentially serve as the Chair of the board. In any case,
the Chair shall not be a citizen of either Contracting State.
t)
The arbitration board may adopt any procedures necessary for the conduct of its
business, provided that the procedures are not inconsistent with any provision of Article
25 or the Protocol to the Convention
g)
Each of the Contracting States will be permitted to submit, within 90 days of the
appointment of the Chair of the arbitration board, a Proposed Resolution describing the
proposed disposition of the specific monetary amounts of income, expense or taxation at
issue in the case, and a supporting Position Paper, for consideration by the arbitration
board. Copies of the Proposed Resolution and supporting Position Paper shall be
provided by the board to the other Contracting State on the date on which the later of the
submissions is submitted to the board. In the event that only one Contracting State
\'
submits a Proposed Resolution within the allotted time, then that Proposed Resolution
shall be deemed to be the determination of the board in that case and the Proceeding shall
be terminated Each of the Contracting States may, ifit so desires, submit a Reply
Submission to the board within 180 days of the appointment of its Chair, to address any
points raised by the Proposed Resolution or Position Paper submitted by the other
.,
Contracting State. Additional information may be submitted to the arbitration board only
at its request, and copies oftre board's request and the Contracting State's response shall
be provided to the other Contracting State on the date on which the request or the
;;
response is submitted. Except for logistical matters such as those identified in
subparagraphs I), n) and 0) below, all communications from the Contracting States to the
arbitration board, and vice versa, shall take place only through written communications
between the designated competent authorities and the Chair of the board.
h)
The arbitration board will deliver a determination in writing to the Contracting
States within six months of the appointment of its Chair. The board will adopt as its
determination one of the Proposed Resolutions submitted by the Contracting States.
: %
35
rr::;":::::~:"-'''''~-~::':::::''~'
I
11
II
!
i)
he:
In making its detennination, the arbitration board will apply, as necessary and in
descending order of priority:
IiI
~
!~
IIn
aa)
the provisions ofthe Convention;
bb)
any agreed commentaries or ex.planations of the Contracting States
concerning the Convention;
H
cc)
H
11
the laws of the Contracting States to the extent they are not inconsistent
it
with each other; and
!
dd)
any OECD Commentary, Guidelines or Reports regarding relevant
analogous portions of the OECD Model Tax Convention.
j)
The determination of the arbitration board in a particular case shall be binding on
the Contracting States. The detennination of the board will not state a rationale. It will
have no precedential value.
k)
As provided in subparagraph e) of paragraph 6 of Article 25, the determination of
an arbitration board shall constitute a resolution by mutual agreement under Article 25.
Each concerned person must, within 30 days of receiving the detennination of the board
from the competent authority to which the case was first presented, advise that competent
authority whether that concerned person accepts the detennination of the board. Ifany
concerned person fails to so advise the relevant competent authority within this time
frame, the determination of the board will be considered not to have been accepted in that
case. Where the detennination of the board is not accepted, the case may not
subsequently be the subject of a Proceeding.
1)
Any meeting(s) of the arbitration board shall be in facilities provided by the
Contracting State whose competent authority initiated the mutual agreement proceedings
j;
in the case.
m)
The treatment of any associated interest or penalties will be detennined by
applicable domestic law of the Contracting State(s) concerned.
n)
No information relating to the Proceeding (including the board's detennination)
may be disclosed by the members of the arbitration board or their staffs or by either
competent authority, except as pennitted by the Convention and the domestic laws of the
Contracting States. In addilion, all material prepared in the course of, or relating to, the
Proceeding shall be considered to be infonnation exchanged between the Contracting
36
States. All members of the arbitration board and their staffs must agree in statements sent
to each of the Contracting States in confirmation of their appointment to the arbitration
board to abide by and be subject to the confidentiality and nondisclosure provisions of
Article 26 (Exchange of Information and Administrative Assistance) of the Convention
and the applicable domestic laws of the Contracting Slates. In the event those provisions
conflict, the most restrictive condition shaH apply.
0)
The fees and expenses will be borne equally by the Contracting States. In
general, the fees of members of the arbitration board will be set at the fixed amount of
$2,000 (two thousand United States dollars) per day or the equivalent amount in euro,
subject to modification by the competent authorities. In general, the expenses of
, '
members of the arbitration board will be set in accordance with the International Centre
for Settlement ofInvestment Disputes (ICSID) Schedule of Fees for arbitrators (as in
effect on the date on which the arbitration proceedings begin), subject to modification by
the competent authorities. Any fees for language translation will also be borne equally
by the Contracting States. Meeting facilities, related resources, financial management,
,
i
'
other logistical support, and general administrative coordination of the Proceeding will be
provided, at its own cost, by the Contracting State whose competent authority initiated
the mutual agreement proceedings in the case. Any other costs shall be borne by the
Contracting State that incurs them.
p)
For purposes of paragraphs 5 and 6 of Article 25 and this paragraph, each
competent authority will confrrm in writing to the other competent authority and to the
concerned person(s) the date of its receipt of the information necessary to undertake
substantive consideration for a mutual agreement. Such information will be:
aa)
in the United States, the information required to be submitted to the
United States competent authority under Revenue Procedure 2002-52, section
4.05 (or any applicable successor provisions) and, for cases initially submitted as
a request for an Advance Pricing Agreement, the information required to be
submitted to the Internal Revenue Service under Revenue Procedure 2006-9,
,,
section 4 (or any applicable successor provisions), and
bb)
in the Federal Republic of Germany, the information required to be
submitted to the competent authority in the Federal Republic of Germany Wlder
;;
37
the circular of July I, 1997, - IV C 5 - S 1300 - 189/96 -, published by the
Ministry of Finance (or any applicable successor circular).
However, this infonnation shall not be considered received until both competent
authorities have received copies of all materials submitted to either Contracting State by
the concerned person(s) in connection with the mutual agreement procedure.
q)
The competent authorities of the Contracting States may modify or supplement
the above rules and procedures as necessary to more effectively implement the intent of
paragraph 5 of Article 25 to eliminate double taxation.
23. WITH REFERENCE TO ARTICLE 26 (EXCHANGE OF INFORMATION AND
ADMINISTRATIVE ASSISTANCE)
a)
It is understood that the powers of each Contracting State's competent authorities
to obtain infonnation include powers to obtain infonnation held by financial institutions,
nominees, or persons acting in an agency or fiduciary capacity, and information relating
to the ownership of legal persons, and that each Contracting State's competent authority
is able to exchange such infonnation in accordance with Article 26.
b)
The Federal Republic of Germany shall under this Article exchange information
with or without request to the extent provided for in the law of 19 December 1985 (EG-
AmtshilJe-Gesetz) as amended from time to time without changing the general principles
thereof
24. WITH REFERENCE TO PARAGRAPH 6 OF ARTICLE 28 (LIMITATION ON
BENEFITS)
The competent authorities of the Contracting States shall establish procedures for
determining indirect ownership for purposes of determining whether the 90 percent
ownership threshold contained in paragraph 6 of Article 28 is satisfied. It is anticipated
that these procedures may include the use of statistically valid sampling techniques."
ARTICLE XVII
l. This Protocol shall be subject to ratification and the instruments of ratification shall be
exchanged as soon as possible.
2. This Protocol shall enter into force on the date on which the instruments of ratification
are exchanged and shall have effect in both Contracting States:
a) in respect of taxes withheld at source, for amounts paid or credited on or after the
first day of January of the year in which this Protocol enters into force;
b) in respect of other taxes on income for any taxable year beginning on or after the
j1
first day of January next following the date this Protocol enters into force; and
c) in respect of taxes on capital for the taxes levied on items of capital owned on or
after the first day of January next following the date this Protocol enters into force.
3.
Notwithstanding the provisions of paragraph 2,
a) the provisions of paragraphs 2 and 3 of Article 1 (General Scope) shall have
effect after the entry into fJrce ofthis Protocol and shall apply in respect of any
tax claim irrespective of whether such tax claim pre-dates the entry into force of
this Protocol or the effective date of any of its provisions; and
b) the amendments made by Article X of this Protocol shall not have effect with
respect to individuals who, at the time of the signing of the Convention, were
employed by the United States, a political subdivision or local authority thereof
4.
Article XIII of this Protocol sha Jl have effect with respect to
a)
cases that are under consideration by the competent authorities as ofthe date on
which this Protocol enters into force, and
b)
cases that come under such consideration after that time,
and the commencement date for a case described in subparagraph a) of this paragraph
shall be the date on which this Protocol enters into force.
5. Notwithstanding paragraph 2, where any person entitled to benefits under the
Convention as unmodified by this Protocol would have been entitled to greater benefits
thereunder than under the Convention as modified by this Protocol, the Convention as
unmodified shall, at the election of such person, continue to have effect in its entirety
with respect to such person for a twelve-month period from the date on which the
provisnns of this Protocol would have effect under paragraph 2 of this Article.
6. The Notes exchanged on 29 August 1989 and referring to paragraph 5 of Article 25
(Mutual Agreement Procedure) and Article 28 (Limitation on Benefits) as well as the
German Note aD November 1989 referring to paragraph 21 of the Protocol to the
Convention shall cease to have effect when the provisions of this Protocol take effect in
accordance with this Article.
39
Done in duplicate at Berlin on the first day of June, 2006, in the English and German
languages, both texts being equally authentic
FOR THE
UNITED STATES OF AMERICA
FOR THE
FEDERAL REPUBLIC OF GERMANY:
Joint Declaration
by the United States of America and the Federal Republic of Germany
on the Occasion
of the Signing on 1 June 2006
of the Protocol Amending the Convention
Between the United States of America andthe Federal Republic of Germany for
the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with
Respect to Taxes on Income and Capital and to Certain Other Taxes
th
Signedon 29 August 1989
The United States of America and the Federal Republic of Gennany on the occasion of the
signing on 1 June 2006 of the Protocol Amending the Convention Between the United States
of America and the Federal Republic of Gennany for the Avoidance of Double Taxation and
the Prevention of Fiscal Evasion with Respect to Taxes on Income and Capital ani to Certain
Other Taxes signed on 2~h August 1989 (hereafter '1lrotocol of 1 June 2006'), and with
regard to Article 18 (Pensions, Annuities, Alimony, Child Support, and Social Security) of the
Convention as amended by the Protocol of 1 June 2006, in which it is agreed that pensions
and other similar remuneration paid in consideration of past employment as well as benefits
paid under the social security legislation of a Contracting State shall be taxable only in the
Contracting State of which the recipient of that pension or benefits on the basis of the social
security legislation is a resident,
Have reached the following understanding:
1.
1. The Federal Republic of Gennany draws attention to the fact
a) that, effective as of 1 January 2005, legisla tion introduced on 5 July 2004 (Federal
Law Gazette part I page 1427) has fundamentally changed in the Federal Republic of
Germany the taxation of retirement income,
b) that these changes combine full taxation of retirement income with extended tax
exemption of contributions to pension plans.
2. The Federal Republic of Germany therefore expresses its conviction
a) that, as a result of these legislative changes, Article 18 of the Convention as amended
by the Protocol of 1 June 2006 should be further arrx:!nded to such effect as to also
provide for the taxation of retirement income in the Contracting State in which the
income arises or in which the contributions to the pension plan were exempt from
taxation;
b) that taking into account the successive impementation in the Federal Republic of
Germany of the taxation of retirement income, as amended by legislation of 5 July
2004, any further amendment to Article 18 of the Convention of29 August 1989 as
amended by the Protocol of 1 June 2006 should not enter into force before 1 January
2015.
II.
The Federal Republic of Germany and the United States of America therefore reaffirm their
intentiors declared during negotiations on the Protocol of 1 June 2006 to enter into
consultations at the appropriate time, but not before 1 January 2013, with a view to further
amending Article 18 of the Convention as amended by the Protocol of 1 June 2006 to allow
for the taxation of retirement income in the Contracting State in which the income arises
based on the following principles:
1. Benefits paid under the social security legislation of a Contracting State may also be taxed
by that Contracting State; the tax may not however exceed 15 percent of the gross amount of
such payments;
2. Pensions and other similar remuneration paid in consideration of past employment may
also be taxed in the Contracting State in which the employment had been exercised for a
substantial period of time; the tax may not however exceed 15 percent of the gross amount of
such payments.
This Joint Declaration is signed in duplicate, in the English and German languages.
Berlin, 1 June 2006
FOR THE
FOR THE
UNITED STATES OF AMERICA:
FEDERAL REPUBLIC OF GERMANY:
Page 1 of 1
June 2, 2006
JS-4302
Statement of Treasury Secretary John W. Snow
On the May Employment Report
"With unemployment at a remarkable 4.6 percent, this month's employment report
shows continued strength in the U.S. labor market and an economy moving in the
right direction. These gains are broad-based, with Hispanic unemployment at a new
record low and African American unemployment reaching historic lows, lower than
the average of the 1990s.
"We have now seen thirty-three straight months of job growth and more than 5.3
million new jobs created since the President's 2003 tax cuts took effect.
"Today's report is good news for American families. It shows that our economy is on
solid footing and that we are heading in the right direction, giving Americans a
renewed sense of optimism.
"With more people working, more good jobs, and more businesses hiring, it is not
surprising that federal government revenues are up smartly. The surge in tax
receipts is bringing down the government deficit ahead of the President's goal.
Clearly this demonstrates that Americans can enjoy the benefits of rising prosperity
and low tax rates with a declining federal deficit.
"My recent announcement that I will leave Treasury marks this as my last official
jobs day statement. J am pleased to note that virtually everywhere one looks there
is good economic news. I take great satisfaction in the strong expansion the country
is enjoying."
http://www.tre£ls.gov/press/reJeases/js4302 htm
3/5/2007
Page 1 of 1
pRESS ROOM
10 view or pant the fJUf- content on thiS page, downlOad the tree
A(1QI:)f~.{f!JAc(Qtgt(,W Hea@r(B).
June 2,2006
js-4303
Statement of U.S. Treasurer
Anna Escobedo Cabral
On the May Employment Report
"Today's employment report is good news for American families, showing that the
American economy is expanding steadily, with 33 straight months of job growth and
unemployment now at a very low rate of 4.6 percent.
"I was particularly pleased to see that the unemployment rate for Hispanic
Americans is now at a record low of five percent. This news should reaffirm
Hispanic Americans' sense of optimism about the economic and employment
opportunities available to all Americans. Thanks to the President's sound economic
policies, the promise of the American dream is alive and well."
REPORTS
•
Tesorera De Los Estados Unidos Anna Escobedo Cabral Habla Sobre EI
IrifOrme Acerca De Las Estadisticas De Empleo
http'.llwww.tre(,l~.gov/press/releases/is430~).l!tm
3/5/2007
..~,I
u.s. TREASURY DEPARTMENT OFFICE OF PUBLIC
AFFAIRS
PARA DISEMINACION INMEDIAT A 2 de Junio 2006
CONTACT Jennifer Zuccarelli (202) 622-8657
TESORERA DE Los EST ADOS UNIDOS ANNA ESCOBEDO CABRAL
HABLA SOBRE EL INFORME ACERCA DE LAS ESTADisTICAS DE EMPLEO
"El informe difundido hoy sobre las estadisticas de empleo son buenas noticias para
todos los hogares en los EE.UU. Estas demuestran que nuestra economia ha estado
creciendo por casi tres afios consecutivos; y ahora el indice de desempleo es de un 4,6 por
ciento.
"En particular, es alentador ver que el desempleo entre los hispanos ha bajado a un 5 por
ciento, 10 cual es un nuevo record. Estas noticias deb en estimular el optimismo de los
hispanos sobre las posibilidades econ6micas y de empleo disponibles en nuestra naci6n.
Gracias a la politica econ6mica del Presidente Bush, la promesa del suefio americano estci
viva y muy bien".
-30-
Page 1 of 1
· ... PRESSROOM>
June 5, 2006
15-4304
Media Advisory:
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, June 5 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, June 5, 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.
-30-
httpj/wwwtre£ls.gov/press/reIeases/js4304J1tm
3/5/2007
Page 1 of 4
PRESS ROO.M
June 5, 2006
js-4305
Prepared Remarks by Deputy Assistant Secretary Daniel Glaser
Terrorist Financing and Financial Crimes
-- Before the Financial Crimes Forum for Asia/Pacific -HONG KONG - I am pleased to be here speaking today at the Financial Crime
Forum on behalf of the Treasury Department of the United States. I want to
commend the organizers of this event for assembling professionals from multiple
sectors, as this parallels the strategy we take at Treasury to engage all
stakeholders: financial sector regulators, policy makers, financial crimes
investigators, financial sector specialists, bankers, compliance officers, and others.
It is only through our collaborative efforts that we can create highly effective AntiMoney Laundering/Counter-Financing of Terrorism (AMUCFT) regimes, and all
efforts that enhance our communication across these sectors help us achieve our
collective goals.
At the U.S. Treasury Department, we recognize the importance of healthy global
financial systems. Our engagement in that system is founded on three main
principles: the promotion of free trade, the free movement of capital, and flexible
exchange rates. The free movement of capital is critical in that equation, and
depends on our collective ability to foster open investment and liberal financial
markets. None of this is possible without mechanisms to protect the international
financial system from abuse.
The international financial system is constantly evolving and becoming increasingly
complex, and over time we have seen the creation of innovative financial products
that better allow us to conduct international commerce. In that same time, we have
seen that these same products and services provide an opportunity for criminals,
terrorists and other bad actors to exploit the international financial system to
facilitate their nefarious agendas. For example, online and remote banking, stored
value cards, electronic payment systems, and other mechanisms can be of
immense value to the public, but they also pose a regulatory and enforcement
challenge for us.
We have also seen another evolution taking place in the international financial
system - one that has come more into focus since the tragic events of September
11, 2001, but underscored by terrorist attacks and other illicit activities taking place
since then on all continents. That evolution is one that has brought financial policy
makers into the discussion of our national and international security.
The Treasury Department, like many Finance Ministries throughout the world, has
at its disposal powerful tools that can accomplish the dual mission of fostering
healthy and vibrant environments for international finance and commerce, as well
as protecting that system from abuse. In fact, we are seeing a shift where Finance
Ministries not only react to threats to the international financial system through
defensive and protective measures, but also identify threats to the international
financial system, and take proactive steps to combat those threats.
Together, we have made significant progress since 9/11, creating and deploying
financial tools to identify, disrupt and dismantle the financial networks that facilitate
and support terrorism. We must continue this work to ensure that the international
financial system is a hostile working environment for those who support terrorist
networks.
But the same lessons we have learned and the same tools we have applied in this
http://www:reas.gov/press/releases/js4~05.htm
3/5/2007
Page 2 of 4
area can and should be used to disrupt and dismantle the financial networks that
support threats of all kinds, including the proliferation weapons of mass destruction,
rogue and kleptocratic regimes, narcotics traffickers and organized criminals - by
attacking the financial underpinnings of those threats. Finance ministries are well
positioned to contribute to this effort - taking an active role in discussions regarding
international security, and leveraging these tools, their relationships with the
financial sector itself, and the power of the financial market to address these
threats.
Treasury has shown that these types of financial authorities can be quite effective,
in part because they unleash market forces by highlighting risks and encouraging
prudent and responsible financial institutions to exercise discretion to manage risk
and make the right decisions about the business in which they are engaged. As we
have seen in the terrorism context, they give us a concrete way in which to target
directly those individuals and entities we know are bad actors and to strike at the
heart of their operations.
Within the U.S. government, Treasury plays a unique role - a role only finance
ministries can play. We bring to national security policy-making discussions our
insights into financial transactions, connections with the private sector, and tools to
apply pressure on a great range of targets.
The U.S. is not alone in looking at how financial tools can playa key role in
combating international security threats. International organizations such as the
Financial Action Task Force, the United Nations, and others have all recognized
that financial measures have an important role to play in the maintenance of global
security. Multiple UN Security Council resolutions make reference to financial
measures in the context of a variety of specific threats: UNSCR 1267 on al Qaida,
Usama bin Ladin and the Taliban; UNSCR 1373 on global terrorism; UNSCR 1540
on WMD Proliferation; UNSCR 1483 on the former Hussein regime in Iraq; and
UNSCR 1636 on the assassination of former Lebanese Prime Minister Hariri; and
UNSCR 1532 related to Liberia. Meeting this new responsibility will require finance
ministries both to strengthen our existing tools and to creatively apply new tools.
The United States continues to look to innovative ways to meet this goal. One such
tool we have used to protect our financial sector is an authority given to us under
Section 311 of the USA PATRIOT Act (Patriot Act). As many of you may know,
Section 311 authorizes the Secretary of the Treasury to designate a foreign
jurisdiction, financial institution, or type of transaction as a "primary money
laundering concern." Once designated as such, the Treasury Department may take
a range of regulatory actions to protect the U.S. financial system, up to and
including requiring U.S. financial institutions to terminate correspondent
relationships with a deSignated entity. Such a measure effectively cuts the
designated entity off from the U.S. financial system. This 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 putting the global system on notice of
such a threat as well.
We have used Section 311 in a number of instances since its inception in late 2001.
We have deSignated three jurisdictions of being of primary money laundering
concern - all of which were in support of FATF calls to apply multilateral
countermeasures against specific jurisdictions with significant deficiencies and
systemic weaknesses in their AMUCFT regimes.
We have also used Section 311 to deSignate a handful of financial institutions for
their connection to a number of criminal activities including organized crime,
terrorist financing, money laundering, narcotics trafficking, the corrupt use of the UN
Oil for Food program, the laundering of counterfeit currency and other activities.
These institutions are:
• Burma Mayflower Bank (Burma) - November 18, 2003
• Asia Wealth Bank (Burma) - November 18, 2003
• Commercial Bank of Syria (Syria) - May 11, 2004
• Syrian Lebanese Commercial Bank (Syria) - May 11, 2004
• Infobank (Belarus) - August 24, 2004
http://www.trf.ds.gov/press/releases/js430.S.htm
3/5/2007
Page 3 of 4
•
First Merchant Bank ("Turkish Republic of Northern Cyprus") - August 24
2004
•
•
•
'
Multibanka (Latvia) - April 25, 2005
VEF Bank (Latvia) - April 25, 2005
Banco Delta ASia (Macau SAR) - September 15, 2005
You all are likely familiar with our most recent application of this authority - our
September 2005 designation of Banco Delta Asia (BOA) in Macau, in which the
United States identified the institution for facilitating variety of illicit financial
activities, particularly on behalf of North Korea.
Our designation of BDA has produced encouraging results. Macanese authorities
themselves have expedited needed legislation in the areas of anti-money
laundering and counter-financing of terrorism. They have also placed BDA under
new management and have compelled the bank to institute an internal AML
compliance program. Moreover, jurisdictions in the region have begun taking
necessary steps to identify and cut off illicit North Korean business. Responsible
financial institutions have taken, and continue to take a closer look at their own
operations, declining to provide tolerant environments for illicit North Korean
financial activities. These are welcome steps -- but our continued and constant
vigilance will be needed to ensure these results do not wane, and North Korean
entities engaged in illicit activities are denied financial services worldwide.
We sometimes hear that this type of vigilance may be bad for business. The reality
is that a healthy financial sector cannot exist without authorities to protect it from
abuse. In fact, healthy financial sectors, effectively protected from such abuse,
bring increased investment and business.
Section 311 is not the only financial tool we have at our disposal. We have also
refined Our use of targeted financial sanctions to address emerging threats,
particularly the proliferation of weapons of mass destruction. As we have seen with
terrorists, weapons proliferators require a substantial support network. By attacking
that system, we can isolate individual proliferators, paint a clearer picture of how,
and with whom, they operate and erode the infrastructure that supports them.
The international community has also recognized the need to combat this threat
through financial measures, as reflected in UN Security Council Resolution 1540.
This resolution calls on all states to develop and implement authorities to combat
proliferation, including by denying proliferators and their supporters access to the
financial system. The U.S. has taken a first step by applying targeted financial
sanctions to proliferation networks just as we have to terrorist networks.
Last June, President Bush issued Executive Order 13382, which authorizes the
freezing of assets of WMD proliferators and their supporters, and forbids U.S.
persons from engaging in commercial transactions with them. Under that Executive
Order, we have designated a number of North Korean, Iranian and Syrian entities
engaged in proliferation activity. We have used this tool to designate both entities
and individuals that contribute to the global proliferation trade. No longer should
these designated entities be able to claim legitimacy, and no longer should they be
able to reap the benefits of access to the international financial system.
The U.S. will continue to refine its authorities to combat such threats, particularly by
looking at how the international financial system can be leveraged to isolate such
activities. In so doing, we will continue to work with all our partners throughout the
world on ways we can collectively strengthen our efforts to take action against
criminals such as WMD proliferators. We urge financial authorities worldwide to
streamline information sharing on designated entities, develop and implement
authorities that allow financial institutions to close or freeze any accounts illicit
actors hold at institutions in their jurisdictions, and take steps to ensure that the
private sector ceases any dealings with these entities.
I would like to close by saying that we are becoming increasingly sophisticated in
how we apply financial measures to combat international security threats. This new
era requires that finance ministries, financial regulators, and financial institutions
http://www.tre.J.s.gov/press/reJeases/js430.5.htm
3/5/2007
Page 4 of 4
themselves seek out threats to the international financial system, and ensure such
threats are effectively isolated. Through our collaboration, we can continue to build
strong financial markets and an international financial system that works
transparently and is accountable to all its stakeholders. I look forward to our
continued collaboration.
-30-
http://www.tr(;as.gov/press/reJeases/js430.5.htm
3/5/2007
Page 1 of 2
June 5, 2006
2006-6-5-13-41-59-22514
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 S67, 196 million as of the end of that week, compared to $67,437 million as of the end of the prior week.
I. Official U.S. Reserve Assets (in US millions)
I
l\IIaY..2_6 •. 200_6
Jlme.2, . .2o..o.6
67,437
67,196
TOTAL
11. Foreign Currency Reserves 1
Euro
la. Securities
11,900
II
I
Yen
I
11,251
I
Of which, issuer headquartered in the U. S.
TOTAL
Euro
23,151
12,441
I
Yen
TOTAL
11,339
23,780
0
"
0
I
17,122
I
b. Total deposits with:
lb.;. Other central banks and BIS
I
11,815
5,483
17,298
b.ii. Banks headquartered in the U.S.
b.ii. Of which, banks located abroad
5,529
11,593
I
I
0
I
I
I
0
I
0
0
b.iii. Banks headquartered outside the U.S.
0
0
b.iii. Of which, banks located in the U.S.
0
0
~IMF Reserve Position 2
7,315
3. Special Drawing Rights (SDRs) 2
8,632
8,673
11,041
11,041
0
0
I
14. Gold Stock 3
15. Other Reserve Assets
I
I
II
I
I
I
6,580
II. Predetermined Short-Term Drains on Foreign Currency Assets
J uJ1e_2.•. 2..QQ6
M_ay 26. 20Q_6
Euro
TOTAL
Yen
Euro
Yen
TOTAL
a
1. Foreign currency loans and securities
a
2. Aggregate short and long positions in forwards and futures in foreign currencies vis-a-vis the U.S. dollar:
[2.8. Short positions
@.b. Long positions
[3. Other
I
I
I
0
I
I
0
0
0
I
0
I
0
III. Contingent Short·Term Net Drains on Foreign Currency Assets
[
I
I
I
II
Jyne_2... _2006
MaY. 26,2006
Euro
I
II
http://www.tf.::as.gov/press/releases/2006~513415922514.htm
Yen
I
TOTAL
Euro
_.
Yen
I
TOTAL
I
3/5/2007
Page 2 of 2
1. Contingent liabilities in foreign currency
1.a. Collateral guarantees on debt due within 1
year
I
I
0
0
2. Foreign currency securities with embedded
options
0
3. Undrawn, unconditional credit lines
0
[3.a. With other central banks
@.b. With banks and other financial institutions
I
I
1.b. Other contingent liabilities
I
I
0
0
I
I
Headquartered in the U.S.
3.c. With banks and other financial institutions
Headquartered outside the U.S.
4. Aggregate short and long positions of options
II
in foreign
Currencies vis-a-vis the U.S. dollar
0
4.a. Short positions
I
II
I
I
4.3.1. Bought puts
I
4.3.2. Written calls
I
I
0
I
I
I
4. b. Long positions
4.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.
2J The items, "2. IMF Reserve Position" and "3. Special Drawing Rights (SDRs)," are based on data provided by the IMF and are
valued In dollar terms at the official SDR/dollar exchange rate for the reporting date. The entries for the latest week reflect any
necessary adjustments, including revaluation, by the U.S. Treasury to IMF data for the prior month end.
31 Gold stock is valued monthly at $42.2222 per fine troy ounce.
http://www.tr-=as.gov/presslreleasesI200())S13415922514.htm
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Page 1 of 2
June 1,2006
JS-4306
$4.1 Billion in Community Development
Investment To receive Tax Credits
Tax Credit Program Helps Low-Income
Communities Across US
Awards Announced Under 4th
Round of New Markets Tax Credit Program
U.S. Treasury Secretary John W. Snow announced today in Philadelphia, Penn. the
63 organizations selected to receive tax credits for $4.1 billion in investments under
the New Markets Tax Credit (NMTC) Program for their investment in low income
communities. Snow included in his announcement 13 organizations set to receive
tax credits for $600 million in investment for specific use in the redevelopment of
the Hurricane Katrina Gulf Opportunity Zone (GO Zone).
"Job creation and investment in our economy are the cornerstone of President
Bush's pro-growth policies. Today's announcement encourages even more jobs
and progress in some of the neediest communities across the country," Secretary
Snow said.
The NMTC Program attracts private-sector capital investment into the nation's
urban and rural low-income areas to help finance community development projects,
stimulate economic growth and create jobs.
The NMTC Program, established by Congress in December 2000, permits
individual and corporate taxpayers to receive a credit against federal income taxes
for making qualified equity investments in investment vehicles known as
Community Development Entities (CDEs). The credit provided to the investor totals
39 percent of the cost of the investment and is claimed over a seven-year period.
Substantially all of the taxpayer's investment must in turn be used by the CDE to
make qualified investments in low-income communities. The Sixty-three
organizations were selected through a competitive application and rigorous review
process.
The NMTC program is administered by Treasury's Community Development
Financial Institutions (CDFI) Fund. Throughout the life of the NMTC Program, the
CDFI Fund is authorized to allocate to CDEs the authority to issue to their investors
up to the aggregate amount of $16 billion in equity as to which NMTCs can be
claimed, including $1 billion for use in the GO Zone. In four rounds to date, the
CDFI Fund has made 233 awards totaling $12.1 billion in tax credit authority.
"The New Markets Program is not only achjeving its goal of attracting sources of
private capital to our nation's low-income communities, it is exceeding all
expectations - with awardees committing to provide extremely innovative and
flexible financing tools for projects located in more severely distressed communities
than minimally required by program rules," said CDFI Fund Director Garcia.
"From manufacturing plants in Iowa to health centers on the Gulf Coast, the
previous award recipients are raising equity from investors and closing investments
quickly," Garcia continued. "Of the 170 organizations awarded prior to this
announcement, 82 percent have reported raising investor capital totaling $4.45
billion. This represents more than one-half of the $8 billion in allocation authority
issued to these allocatees - a remarkable pace considering that the first NMTC
awards were made just three years ago."
http://www.trf.us.gov/press/re\eases/js43(1).htm
3/512007
Page 2 of 2
A complete list of the 63 organizations selected and additional information on the
NMTC Program can be found on the CDFI Fund's web site at: 1J\IWW,QqfifYncl.gQY.
http://www.tn·as.gov/presslreleases/js43G.).htm
3/512007
Page 1 of 2
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PRESSROOM
June 6, 2006
JS-4307
Snow Designates New Private Sector
Coordinator
for Critical Financial Infrastructure
Protection
Treasury Secretary John W. Snow today designated George S. Hender as Sector
Coordinator and Chairman -of the Financial Services Sector Coordinating Council
for Critical Infrastructure Protection and Homeland Security (FSSCC).
The FSSCC works closely with the Treasury and other federal financial regulators
to coordinate the private sector's preparation for events including natural disasters
and terrorist attacks, which could disrupt the normal business of the financial
services industry. Hender, Management Vice Chairman of The Options Clearing
Corporation, served as FSSCC Vice Chairman since September 2004.
"A resilient financial system is critical to ensure the health of our economy and our
national security. As FSSCC Chair, Mr. Hender will take the helm coordinating the
government's efforts with the private sector as we work toward this common goal,"
said Assistant Secretary for Financial Institutions Emil W. Henry, Jr. "I am confident
he will discharge this responsibility with the same professionalism, leadership, and
commitment to excellence he has shown in his hard work with FSSCC to date."
Building upon the organization's accomplishments during the past four years,
Hender will lead the FSSCC as it begins preparing best practices for firms to deal
with avian flu and a disaster response protocol to guide the public-private
partnership in the event of a disaster with potential for systemic impact, such as a
major hurricane.
Hender succeeds Donald F. Donahue of the Depository Trust and Clearing
Corporation, who has served in the position since 2004. Donahue's leadership
helped steer the financial services industry through difficult events, including the
elevation of the terrorism threat level in August 2004, the July 2005 London
bombings and recovery from Hurricane Katrina. During his tenure, the sector
supported initiatives to restore financial services in the communities devastated by
last year's hurricanes, promoted local infrastructure protection and recovery through
regional coalitions and demonstrated its continuity of operations in a number of
testing and simulation exercises.
Assistant Secretary Henry recognized Donahue's excellent tenure as Sector
Coordinator during a ceremony today. "I want to thank Mr. Donahue for his
dedicated, superb service. The Treasury recognizes his many outstanding
contributions to FSSCC, most notably his role in driving the growth and visibility of
this critical organization. He inherited FSSCC in its infancy and expanded its
membership to include entities upon which the financial services sector greatly
depends. We are grateful for his leadership and efforts," Henry said.
http://www.tn:as.gov/press/releases/js4307 .htm
3/5/2007
Page 1 of 2
PRESS ROOM
June 6, 2006
js-4308
Treasury Announces Awards for
More than $850 Million
in Gulf Coast Community Development
Awards Announced Under 4th Round of New Markets Tax Credit Program
U.S. Treasury Community Development Financial Institutions Fund Director Art
Garcia highlighted tax credit awards to 17 organizations serving the Gulf Coast
region with more than $850 million in investment in low-income communities under
the 2006 round of the New Markets Tax Credit (NMTC) Program in New Orleans,
La. and Biloxi, Miss. today.
Today's events at The Magnolia in New Orleans and the Coastal Family Health
Center in Biloxi were part of a series of Treasury announcement this week in the
Gulf Coast region. Last week, Treasury Secretary John W. Snow announced the
63 organizations selected nationally to receive tax credits for $4.1 billion in
investment under the fourth round of the NMTC Program.
"The economic investment and jobs the New Markets program encourages are
exactly what the Gulf Coast region needs to get back on its feet and running,"
Secretary Snow said. "I was pleased to announce last week's awards for the
neediest communities across the country, but I am especially proud of the hope this
program offers to Gulf."
The NMTC Program attracts private-sector capital investment into the nation's
urban and rural low-income areas to help finance community development projects,
stimulate economic growth and create jobs.
Thirteen organizations in the Gulf region and across the nation received tax credit
awards from the additional $600 million in NMTC allocation authority made possible
by GO Zone legislation following Hurricane Katrina. Four other organizations
headquartered in the Gulf area received allocations from the $3.5 billion in NMTC
allocations initially available this round.
The NMTC Program, established by Congress in December 2000, permits
individual and corporate taxpayers to receive a credit against federal income taxes
for making qualified equity investments in investment vehicles known as
Community Development Entities (CDEs). The credit provided to the investor totals
39 percent of the cost of the investment and is claimed over a seven-year period.
Substantially all of the taxpayer's investment must in turn be used by the CDE to
make qualified investments in low-income communities. The 63 organizations were
selected through a competitive application and rigorous review process.
The NMTC program is administered by Treasury's Community Development
Financial Institutions (CDFI) Fund. Throughout the life of the NMTC Program, the
CDFI Fund is authorized to allocate to CDEs the authority to issue to their investors
up to the aggregate amount of $16 billion in equity as to which NMTCs can be
claimed, including $1 billion for use in the GO Zone. In four rounds to date, the
CDFI Fund has made 233 awards totaling $12.1 billion in tax credit authority.
"The New Markets Program brings much-needed sources of private capital to the
Gulf region," said CDFI Fund Director Garcia. "We know from past experience, this
incredibly successful program and the investment it brings will help heal the Gulf
Coast. The additional funds made available by GO Zone legislation guarantee that
http://www.tH·.tl.S.gov/press/releases/js43U3.htm
3/512007
Page 2 of 2
over $600 million in investment authority will be directed specifically to the
distressed areas of the Gulf."
"The New Markets program is achieving its goal of attracting sources of private
capital to our nation's low-income communities," Garcia continued. "It is exceeding
all expectations - with awardees committing to provide extremely innovative and
flexible finanCing tools for projects located in more severely distressed communities
than minimally required by program rules."
Organizations receiving awards for their investment in the Gulf region include:
Hibernia Community Renewal Fund LLC, National Cities Fund LLC, Liberty Bank
and Trust Company, Urban Development Fund LLC, Chase New Markets
Corporation, Chevron NMTC Fund LLC, CCG Community Partners LLC, American
Community Renewable Energy Fund LLC
, Greystone CDE LLC ,National Tribal
Development Association, National New Markets Fund LLC, Capital Link, Inc.,
Enterprise Corporation of the Delta, MK La Charitable Health Care Facilities Funds,
Advantage Capital Community Development, Enhanced Delta Community
Development LLC, and Stonehenge Community Development LLC of Baton Rouge.
A complete list of the 63 organizations selected nationally and additional
information on the NMTC Program can be found on the CDFI Funds web site at:
www.cdfifund.gov.
http://www.tn·as.goy/press/releases/js4302.htm
3/5/2007
Page 1 of 1
PRESSROOM
June 7, 2006
js-4310
Debt For Nature Agreement to Conserve Paraguay's Forests
The Governments of the United States of America and the Republic of Paraguay
today concluded agreements to reduce Paraguay's debt payments to the United
States by nearly $7.4 million. In return, the Government of Paraguay has committed
these funds over the next 12 years to support grants to conserve and restore
important tropical forest resources in the southern corridor of the Atlantic Forest of
Alto Parana. Special attention will be given to consolidating and enhancing
protected areas within the San Rafael National Park Reserve, which contains the
richest diversity of native plants and animals in Paraguay.
The agreements were signed by U.S. Ambassador to Paraguay James Cason and
Paraguayan Minister of Finance Ernst Bergen, Minister of Foreign Relations Leila
Rachid and Minister of Environment Alfredo Molinas. President of Paraguay
Nicanor Duarte Frutos signed the agreements as guest of honor. These debt-fornature agreements were made possible through a contribution of nearly $4.8 million
by the U.S. Government under the Tropical Forest Conservation Act (TFCA) of
1998.
The TFCA provides opportunities for eligible developing countries to reduce
concessional debts owed the United States while generating funds to conserve their
forests. The agreement with Paraguay marks the ninth TFCA deal concluded under
the Bush Administration, following agreements with Belize, Colombia, EI Salvador,
Jamaica, Panama, Peru and the Philippines. These agreements, together with an
agreement concluded with Bangladesh in 2001, will generate over $100 million to
protect tropical forests over 10 to 26 years.
-30-
http://www.trt!J.s.gov/press/releases/js43{.l.htm
3/5/2007
Page 1 of 1
PRESS ROOM
10 VIew or pont me PUr content on m/s page, download the tree A dP/:)elf!!Ap[QI,JaM)He?,(jer(f!).
June 7, 2006
js-4311
International Monetary Fund 2006 Concluding Statement of the Fund Mission
The Treasury Department today released the concluding statement by the staff of
the International Monetary Fund (IMF) following this year's Article IV consultation
with the United States. This statement represents IMF staff's independent judgment
and assessment of U.S. economic performance and policies.
Release of this statement is consistent with the United States' longstanding, strong
support for enhanced transparency of the IMF. The United States also plans to
release the IMF staff report and Public Information Notice on the U.S. Article IV
review following the Executive Board's discussion of the mission later this summer.
REPORTS
•
2006 Article IV Consultation with the United States of America
http://wwwtre:ts.goy/press/releases/js43il.htm
3/5/2007
INTERNATIONAL MONETARY FUND
2006 Article IV Consultation with the United States of America
Concluding Statement of the Fund Mission
(May 31, 2006)
I.
Over the past year, the U.S. economy remained a key engine ofglobal growth, and
many of the risks that we and other forecasters had cautioned about have not materialized.
Activity has remained robust, supported by strong productivity growth, strengthening
investment, and employment gains. On the fiscal front, revenues continued to surge and
spending pressures have been contained, likely keeping the FY 2006 federal deficit at
212 percent ofGDP, well below initial budget estimates. This performance is particUlarly
impressive given significant economic headwinds over the past year, including rising oil
prices, the hurricanes that devastated the Gulf coast, and higher interest rates.
2.
Against this background, we broadly share the Administration's and the Federal
Reserve's generally favorable macroeconomic outlookfor 2006 and 2007. GDP growth is
projected to ease to a more sustainable rate as the effects of a cooling housing market, as well
as higher fuel prices and interest rates on household spending, is partially offset by strength
in business investment. We also anticipate that solid productivity growth and well-anchored
expectations will keep price pressures contained.
3.
We also share a common understanding of the critical challenges that still need to
be faced to support the goals laid out by the IMFC communique in April. These goals
included achieving economic prosperity through strengthened economic policies, addressing
global imbalances, and resisting protectionism. Achieving these goals is a shared
responsibility, but U.S. leadership in three areas will be critical:
•
Sustaining growth with low inflation. Although the outlook is positive, the challenge is
to steer a course between the downside risks to activity stemming from a cooling housing
market with possible inflationary pressures from low unemployment and high oil prices.
•
Addressing external imbalances. There is broad agreement that the large U.S. current
account deficit, and its counterparts abroad, cannot be sustained indefinitely. Although a
gradual adjustment is the most likely outcome, delaying progress increases the risk of
fanning protectionist sentiment or disorderly foreign exchange market conditions.
•
Ensuring fiscal sustain ability. The Administration has taken the welcome step of
acknowledging the need for reforms to address the long-term sustainability of entitlement
programs, and has also made encouraging progress toward deficit reduction. However,
entitlement reform seems to have stalled and there remains a case for setting a more
ambitious medium-term deficit objective.
-2-
Monetary Policy and Sustaining the Expansion with Low Inflation
4.
The Federal Reserve has thus far been highly successful in maintaining price
stability as the expansion has matured. As activity has recovered, the Fed has appropriately
withdrawn monetary stimulus in a gradual manner that has avoided disrupting financial
markets and the expansion. At the same time, the Fed has been remarkably effective in
maintaining the credibility of its commitment to price stability, keeping inflation expectations
and core inflation anchored in the face of the large shock to energy prices.
5.
Looking forward, however, interest rate decisions will become more finely
balanced. With the economy now roughly at full employment and the federal funds rate in a
more neutral range, the challenge will be to steer a course that manages competing risks. On
the one side, an unwinding of the housing boom, low household savings, and higher energy
prices could weigh on the expansion. At the same time, however, there are signs that labor
markets are tightening, oil prices remain high, and productivity could surprise on the
downside, so inflation risks may be tilted to the upside. Especially reflecting the recent pick
up in core inflation, and given the importance of keeping inflation expectations in check, the
Federal Open Market Committee has appropriately cautioned that some further policy
firming may yet be needed.
6.
The Fed's communications strategy in recent years has been highly effective. This
has been illustrated by the success in forestalling deflation pressures and subsequently
engineering an orderly withdrawal of unprecedented monetary stimulus. Looking forward,
we continue to believe that quantifying an inflation objective could help further anchor
inflation expectations and would be fully consistent with the Fed's broader mandate.
Providing more frequent Monetary Policy Reports with a greater focus on future
developments could also further increase the Fed's high level of transparency.
Reducing External Imbalances
7.
The ease with which the United States hasfinanced its record current account
deficit has been remarkable, but is unlikely to be sustained indefinitely. A number of
(possibly temporary) factors, such as short-term interest rate differentials and increasing
demand for long-term bonds, have helped support the U.S. current account deficit and dollar
over the past year. However, most forecasters project that the current account deficit will rise
further in coming years, which may begin to strain the global appetite for U.S. assets.
Delaying the inevitable multilateral adjustment will mean continued increases in U.S.
external indebtedness, magnifying the potential for disruption to exchange rates, financial
markets, and growth, both domestically and abroad.
8.
Firm and vigorous implementation of the cooperative strategy laid out by the IMFC
last April would support an orderly resolution to global imbalances, and the Fund will use
its new remitfor multilateral consultations toward this goal. The United States has a major
role to play in addressing this shared responsibility, and its main task remains to boost
national saving, including by more ambitious fiscal consolidation.
-3-
9.
Leadership by the United States remains key to global trade liberalization. With
progress slowing in the Doha Round negotiations, continuing U.S. commitment and initiative
are essential to generate new momentum for a timely and ambitious conclusion. It also
remains imperative to resist protectionist responses to global imbalances, particularly as
restrictions on trade risk creating significant harm to the global economy. As we have long
cautioned, the growing number of bilateral trade initiatives by the United States and others
could undermine the multilateral trade system, and there would be merit in seeking
agreement on common disciplines.
Putting Fiscal Policy on a Sustainable Path
10.
As highlighted in the Budget, demographic and other pressures threaten both fiscal
sustainability and the nation's future prosperity. Spending on Social Security, Medicare,
and Medicaid currently account for over two-fifths of federal spending and is rising at an
unsustainable rate. While there is no doubt that entitlement reform is essential for achieving a
sustainable fiscal position, recent CBO analysis illustrates that even significant entitlement
reforms and cuts in other spending may not be sufficient to accommodate the increased
demands from an aging popUlation, particularly on public health systems.
11.
With the Administration indicating that it will achieve its objective of halving the
deficit earlier than anticipated, the time is opportune to establish a more ambitious
medium-term fiscal anchor. There will soon be the need to define a new objective consistent
with the Administration's longstanding commitment to deficit reduction. With revenues
continuing to be buoyant, we would again propose a target of balancing the budget excluding
the Social Security surplus over the next five years. Such an objective would place the
U.S. federal debt-to-GDP ratio on a clear downward path and reduce the burden on future
generations, while providing the room needed to develop and phase in reforms of health and
retirement systems. This would require consolidation at a rate of around % percentage point
ofGDP a year, which would ease the burden on the Fed for keeping economy close to
capacity while raising national saving and reducing global imbalances.
12.
We agree that expenditure discipline should remain central to deficit reduction, but
revenue measures cannot be ruled out. To be sure, there has been some success in slowing
the growth of outlays, but the Budget projects that the federal deficit will remain around
2 Y:z percent in FY 2007, roughly unchanged in three years despite the strong economic
expansion. This suggests some risk that the deficit reduction that is projected in subsequent
years may be difficult to attain, especially since it does not take account of ongoing
operations in Iraq and other fiscal pressures on revenues and outlays. Thus, action on both
sides of the ledger may be required:
•
On the expenditure side, entitlements and defense commitments limit the room for
cuts, and the Budget already assumes that the ratio of discretionary spending to GDP
will be reduced to unprecedented lows over the next five years. Indeed, recent
Congressional debate over emergency appropriations underscores how difficult it will
be to contain discretionary spending. Although budget rules cannot substitute for an
-4-
underlying commitment to fiscal discipline, this suggests that there would be merit in
re-introducing caps on discretionary outlays and pay-as-you-go (PA YGO)
requirements, which had been successful during the fiscal consolidation in the 1990s.
However, it would also seem prudent to extend the PAYGO rules to include the
impact of tax measures, as was the case under the 1990 Budget Enforcement Act.
•
13.
On the revenue side, the significant reductions in marginal tax rates in recent years
have supported economic efficiency. Although it may be difficult to sustain these tax
cuts while meeting the fiscal burden from population aging, the priority should be on
reforms to broaden the revenue base. The President's Advisory Panel offered useful
suggestions along these lines, but consideration could also be given to consumptionbased indirect taxes-such as a national sales tax, a VAT, or energy taxation-that
would maintain revenue buoyancy as workers retire.
The momentum for entitlement reform needs to he re-invigorated:
•
In the case of Social Security, relatively modest changes in the system could be
introduced in a phased manner to put it back on a sustainable basis. The
Administration's support for "progressive price indexation" has been helpful, as have
other suggestions for increasing the retirement age and the caps on the Social Security
payroll tax. Unfortunately, these do not appear to have gained political traction, and
the challenge now is to form the necessary consensus to carry reforms forward.
•
The financial shortfall of the Medicare system dwarfs that of Social Security,
especially with the recent addition of a drug benefit. Administration efforts to
promote high-deductible health plans and other measures could help promote greater
price consciousness among some consumers. However, given the size of the
uninsured and elderly populations as well as total health care outlays that are already
twice the DEeD average as a share ofGDP, more fundamental reform may still be
needed.
Preserving Financial Stability
14.
The U.S. financial sector has proven resilient and innovative in recent years, and
appears well-positioned as the credit cycle turns. While the banking sector is well placed to
cope with vulnerabilities stemming from household and corporate borrowing, the decision to
issue draft guidance on nontraditional mortgages was appropriate. Conditions in markets for
credit derivatives-which have yet to experience a full credit cycle-will also need to be
monitored closely.
- 5-
15.
There remain, however, important areas where further reform could help enhance
the financial system's resilience and efficiency:
•
Action is still needed to carry forward the Administration's proposals to strengthen
the supervision of the housing government sponsored enterprises (GSEs) and limit the
size of their balance sheets so as to contain systemic risk in mortgage markets.
•
Given the growing liabilities of the Pension Benefit Guarantee Corporation, action is
needed on proposals to improve its funding and establish risk-based premiums.
Welcome steps appear to be in train to avoid discouraging "opt in" provisions in
defined contribution plans, which would help encourage retirement saving.
•
Supervision and regulation of insurance companies is fragmented and steps to
establish a more uniform approach would be welcome.
•
Helpful proposals have been made to streamline bank regulation, but important
questions have been raised about the appropriateness of relaxing restrictions on the
ability of industrial loan companies to accept retail deposits and branch nationwide.
•
Publishing a regular Financial Stability Report and undertaking a Fund Financial
Sector Assessment Program could provide further insights on these challenges.
Page 1 of 2
PRESS ROOM
10 vIew or prmt the fJUf- content on thIS page, download the free AaoQe(ffJ AC(QI)J!t(ffJHefJ,(jerrtY.
June 8, 2006
JS-4312
Joint Press Release of the Council of Economic Advisers, The Department of
the Treasury, and the Office of Management and Budget
The Administration today released an updated economic forecast that shows
continued robust economic growth and a strong labor market.
"The forecast is a conservative analysis by three Federal agencies, and it shows
the economy is strong," said Edward P. Lazear, Chairman of the Council of
Economic Advisers.
The Administration releases an economic forecast twice a year. This update which will be used for the preparation of the Mid-Session Review of the Budget forecasts similar economic numbers as the consensus of professional economic
forecasters and the Administration's previous forecast in December of 2005.
The updated forecast reflects faster than expected economic growth in the
beginning ·of 2006, with growth projected to moderate somewhat in the future and
then remain at a robust pace. Specifically, early indicators of activity suggest that
growth of real gross domestic product (GOP) during the four quarters of 2006 will
be about 3.6 percent, revised up 0.2 percentage point from the last forecast. Real
GOP growth is forecasted to be about 3 percent or higher in each of the next five
years - similar to the historical average over the last 20 years.
"The President's successful pro-growth policies have helped to produce the
sustained economic growth that has created almost 1.9 million jobs during the past
12 months and over 5.3 million since August 2003. That economic growth is also
producing additional revenue that is essential to deficit reduction, and together with
spending restraint it will allow us to stay on track to meet our goal of cutting the
deficit in half by 2009," said Rob Portman, Director of the Office of Management
and Budget.
The unemployment rate has fallen 0.3 percentage point so far this year and the
labor market is expected to remain strong in 2006. The updated forecast shows an
average of 156,000 payroll jobs added each month, faster than the average of the
last 20 years. It forecasts a 4.7 percent unemployment rate for the year, which is
lower than the averages of the 1970s, 1980s, and 1990s.
"We continue to see signs that the U.S. economy is strong and on the right path to
sustaining this trend. There can also be no question that well-timed tax relief,
combined with responsible leadership from the Federal Reserve Board, has been a
key reason for our current economic strength," said Treasury Secretary John W.
Snow.
Overall inflation as measured by the consumer price index (CPI) has increased thus
far in 2006 more than forecasted by the Administration in December of 2005. Core
inflation, excluding volatile and food prices, has remained lower than overall
inflation. Therefore, the updated forecast for overall CPI has been revised up from
2.4 percent to 3.0 percent during the four quarters of 2006, but it remains
unchanged at 2.4 percent for the next several years.
The Administration's forecast of interest rates is consistent with market
http://www.trei.$.gov/press/reieasesijs431l hlm
3/5/2007
Page 2 of 2
expectations and the consensus of professional economic forecasters. The updated
forecast of short-term interest rates has been revised up slightly while the forecast
of long-term interest rates has remained largely unchanged.
The long-run moderation of recent economic and job growth reflects solid economic
growth coupled with underlying demographic trends, such as slower growth in the
working-age population and the retirement of the baby-boom generation.
The forecast was developed by a team from the Council of Economic Advisers, the
Department of the Treasury, and the Office of Management and Budget, with
assistance from other agencies.
-30REPORTS
• Administration's Updated Forecast Confirms Strong EconolTIY
• Economic Forecast
http://www.tn·as.gov/press/re\eases/js43I~.htm
3/5/200,
Administration's Updated Forecast Confirms Strong Economy
6/8/06
4.0,.--------·l
Real GOP Growth Forecasted To Be Faster Than Historical Average
Q4-04 percent change in real GDP
3.S%
3.1%
3.0
I
2.0
1.0
0.0
20·Year Historical Average
2006 Forecast
Sources: Administration Forecast, Bureau of Economic Analysis
Monthly Payroll Growth Forecasted To Be About The Historical Average
Thousands of payroll jobs per month
200
149
150
156
100
50
20·Year Historical Average
200S Forecast
Sources: Administration Forecast, Bureau of Labor Statistics.
Unemployment Rate Forecasted To Be Lower Than Historical Average
Percent
B.O
6.0
r-------------------------~
5.6%
4.7%
20
0.0
20-Year Historical Average
Sources: Administration Forecast. Bureau of Labor Statistics.
2006 Forecast
Table 1-1. ---Administration Forecast <1>
Nominal
GOP
Real GOP GOP price Consumer
(chainindex
price
type)
(chainindex
type)
(CPI·U)
Percent change, 04-to-04
3.1
3.2
2005 (actual)
6.4
2006
2007
2008
6.6
5.7
5.4
3.6
3.3
3.2
2009
2010
2011
5.3
5.3
5.3
3.1
3.1
3.0
Unemploy- Interest
ment
rate,
rate
91-day
(percent) Treasury
bills <2>
(percent)
Interest
rate,
10-year
Treasury
notes
(percent)
Nonfarm
payroll
employment
(millions)
Nonfarm
payroll
employment
(average
monthly
change,
04-to-04
thousands)
3.7
5.1
Level, calendar year
133.5
3.1
4.3
160
2.9
2.3
2.1
3.0
2.4
2.4
4.7
4.8
4.9
4.7
4.6
4.4
5.0
5.2
5.4
135.3
137.1
138.7
156
140
139
2.1
2.1
2.2
2.4
2.5
2.5
4.9
4.9
4.9
4.4
4.3
4.3
5.5
5.5
5.5
140.4
141.9
143.4
132
126
125
<1> Based on data available as of June 6,2006.
<2> Discount basis.
Sources: Council of Economic Advisers, Department of Commerce (Bureau of Economic Analysis),
Department of Labor (Bureau of Labor Statistics), Department of the Treasury, and Office of Management
and Budget.
Page 1 of 1
June 9,2006
jS-4313
Media Advisory: Treasury Under Secretary Quarles to Discuss GSEs with
Women in Housing and Finance
U.S. Treasury Under Secretary for Domestic Finance Randal K. Ouarles will give
remarks at a breakfast with Women in. Housing and Finance on Tuesday, June 13
at the Hotel Washington. The Under Secretary will discuss government sponsored
enterprises (GSEs) and current policy initiatives at the Treasury.
Who
Under Secretary for Domestic Finance Randal K. Ouarles
What
Remarks on GSEs, Current Policy Initiatives at Treasury
When
Tuesday, June 13, 9:00 a.m. (EDT)
Where
Hotel Washington
Parkview Room
515 15th Street, NW
Washington, DC
-30-
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3/51200,
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PRESS RdoM
June 10, 2006
JS-4314
Statement of Secretary Snow at the G8
Good afternoon. We had a very good meeting with G-a Finance Ministers today,
hosted by Minister Kudrin. The primary purpose of the meeting was to finalize the
financial agenda for the G-a Leaders Summit. With the extensive efforts of Minister
Kudrin and his staff, I think the leaders of the G-a countries should have a very
productive meeting in July.
As I reflect on the last 3 Y2 years I've represented the United States in the G-a, the
global economy has enjoyed remarkable success - with high levels of global
growth, historically low levels of inflation and interest rates and no major financial
crises or recessions. It is especially significant that we are seeing more rapid levels
of growth in the developing economies. There is no better time for our economies
to put in place policies that will sustain growth and improve living standards for all
people.
The U.S. economy is a major driver of the global economy, posting 3.6 percent
growth over the last four quarters, with continued solid growth forecast through this
year and into next. I was able to report that the U.S. unemployment rate fell to 4.6
percent - lower than the averages of the decades from the 1960's through the
1990's. Inflation remains contained despite continued pressure from high energy
prices, and the U.S. budget deficit has improved substantially, buoyed by sharply
improved receipts, and it is clear we will meet the President's fiscal target ahead of
schedule.
Global economic growth remains impressively strong overall. Although relative
performance continues to be uneven, we are pleased to see that recoveries are
strengthening in Japan and in Europe. More progress is needed to implement
reform policies that will raise growth potentia! so these improvements can be
sustained. I continue to emphasize to my colleagues the importance of the shared
responsibility for assuring that global adjustment takes place in a way that sustains
healthy global growth. All countries, including the United States, the countries of
Europe, Japan, China and the rest of emerging Asia, as well as oil exporters, bear
their part of this responsibility.
We also discussed other risks to global growth, particularly the rise of protectionist
sentiment and high energy prices. I explained that the United States remains
committed to keeping our markets open to foreign investment and to pursuing an
ambitious outcome for the Doha Development Round by the end of 2006. As the
G-B has said consistently, substantial liberalization in financial services as we!! as
product markets will provide more opportunities to entrepreneurs, businessmen,
and farmers throughout the world. Over the past few years, the global economysupported by sound policies - has been able to expand in spite of higher energy
prices but it is important that oil producers increase production and consumers
intenSify their efforts to economize on the use of oil.
A number of issues were on the agenda involving low income countries, including
promoting initiatives that can assist poor people in achieving greater access to
energy services, continuing work on Advanced Market Commitments for vaccines,
and strengthening best practice guidelines on public finance. I also had a chance
to emphasize that the G-a should raise the profile of encouraging broader financial
service access in low income countries. We believe that working together to help
countries improve their regulatory environments could increase competition and
have a positive effect on economic growth and poverty reduction.
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We were also joined by China, India, Brazil, and Korea to discuss the role of
emerging lenders to low income countries. After last year's historic debt reduction
agreement, it is essential that we all work on making sure that low income countries
do not take on unsustainable debt and therefore recreate the lend and forgive cycle
we have worked so hard to end. While much more work needs to be done, we
outlined several steps that we could take - including working together on the
IMFlWorld Bank's debt sustainability framework and collaborating in a more
effective way in such areas as data provision and the establishment of disciplines
on export credit lending.
I was grateful that Minister Kudrin asked me to be the lead speaker on anti-money
laundering and terrorist finance. The United States has been at the forefront of a
concerted effort to track and disrupt the financial activities of terrorists and money
launderers in cooperation with our G-8 partners. We have made enormous
progress over the last three years. We worked with the Financial Action Task Force
to revise and strengthen the Standards on money laundering and terrorist finance.
Largely as a result of our leadership, the IMF and World Bank Executive Boards
adopted a consistent framework for assessing countries' compliance with FATF
Recommendations and comprehensive AMUCFT assessments are a regular part of
all financial sector assessments and on-going sUNeillance. We issued an Action
Plan and have taken steps to strengthen our asset freezing systems and actions,
enhance information sharing, and develop multilateral financial tools to disrupt
criminal and illicit activity.
To be sure, there is unfinished business and continued terrorist attacks remind us
of the need to meet these challenges. Our Ministries must continue with the
development of financial information relevant to counter-terrorism investigations
and to develop and apply targeted financial sanctions against terrorist networks.
Countries must develop strong AMUCFT programs and apply new tools to disrupt
illicit financial networks. As called upon by our leaders at Gleneagles, we must take
decisive multilateral action against WMD proliferation networks and supporters. But
the record of progress is unmistakable and the international financial system is a
safer place because of it.
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June 10, 2006
JS-4315
Pre-Summit Statement by G8 Finance Ministers
st. Petersburg, June 9-10,2006
We met and discussed today a number of global economic issues in preparation for
the annual Summit of G8 Heads of State and Government in 81. Petersburg. We
also had productive discussions with colleagues from Australia, Brazil, the People's
Republic of China, India, the Republic of Korea and Nigeria.
1. Global growth remains strong and is gradually becoming more broadly based.
However, downside risks from high and volatile energy prices and widening global
imbalances remain. We underline that global economic adjustment is a shared
responsibility and re-iterate our commitment to address global imbalances. We are
committed to fighting protectionism and to promoting liberalization of trade in
agriculture, industrial goods and services, as well as of investment. We agreed on
the importance for global growth of an ambitious outcome from the Doha
Development Round and recognize that urgent progress is needed for its
achievement. Many developing countries also need substantial aid for trade to help
them take advantage of general trade liberalization.
2. We discussed the current situation in the energy markets and the risks that high
oil prices pose for the global economy going forward. We call for comprehensive
action by both energy-producing and energy-consuming countries to facilitate
investment in the energy sector, improve energy efficiency, including through
national initiatives, and promote greater transparency and reliability in energy
market data, including through development of a global common standard for
reporting oil reserves. We recognize the importance of the principles of the Energy
Charter, of diversification of energy markets and supply sources, and of
strengthened emergency response cooperation in ensuring energy security. We
encourage the IMF and the World Bank to work with both energy-producing and
energy-consuming countries to develop guidelines on appropriate policies to
mitigate the adverse impact of high and volatile energy prices.
3. We discussed the importance of delivering the commitments made in 2005 to
help developing countries achieve the Millennium Development Goals. In this
regard,we reaffirm the importance of energy for development and are issuing a
separate statement on this issue. We noted the particular importance of making
further progress to achieve the goals of Education for All. We re-iterate the
Gleneagles commitment to help FTI-endorsed countries to develop sustainable
capacity and identify the resources necessary to pursue their sustainable education
strategies. We look forward to a progress report on the FTI by the World Bank at
the Annual Meetings.
4. We welcome the increasing role of new donor countries in financing development
in low-income countries. We call for enhanced coordination among all members of
the growing donor community, and alignment of aid programs with partner
countries' development priorities. We deem it essential to prevent the build up of
unsustainable debt in low-income countries, particularly in those that receive debt
relief under the HIPC Initiative and the MDRI. We urge all donors to take account of
debt sustainability issues in all their lending practices and share fully information on
their lending to low-income countries. We congratulate the Paris Club on the
occasion of its 50-year anniversary and underscore its key role in promoting
coordination for resolving international debt problems.
5. We re-iterate that the risk of an avian flu pandemic requires preparation through
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facilitating cooperation across countries in drafting contingency plans, including for
the financial sector. We appreciate the work undertaken by the IMF in promoting
the common elements of business continuity planning and encourage further efforts
in helping countries elaborate their own plans. We take note of the progress on
innovative financing mechanisms. We thank the World Bank and GAYI for their
technical work on Advance Market Commitments for vaccines and look forward to a
successful launch of the AMC pilot project by the end of this year. We also calf for
mobilization of additional support to close the financing gap for polio eradication
activities.
6. We acknowledge the importance of better financial education and literacy for
improving the ability of people to use financial services and to make effective
decisions with respect to their present and future welfare. We welcome the ongoing
work in the OECD on the Financial Education Project and call for further
development of financial literacy guidelines based on best practices. We support
the proposal by Russia and the OECD to organize an international conference in
Moscow on financial literacy in coordination with other relevant international bodies.
We emphasize that improved access to financial services is a powerful tool of
economic development. We call on the IFls and other donors to support best
practices in financial access programs and to improve coverage, accuracy and
comparability of data on financial access and financial sector performance. We
encourage efforts at the country level to remove obstacles preventing access to
financial services, including lowering the costs of remittances.
7. Following on earlier G8 Summit declarations in support of the OEeD's high
standards of transparency and effective exchange of information in all tax matters,
we welcome the report by the OEeD's Global Forum on Taxation on progress
made world-wide towards meeting these standards. We urge their full
implementation everywhere they do not fully apply and look forward to the
conclusion of tax information exchange agreements between OEeD countries and
financial centers.
8. We confirm our resolve to fight money laundering and terrorism financing and are
committed to strengthening our systems for freezing assets and sharing
information, and development of multilateral financial tools to disrupt criminal and
illicit activities. We call for continued actions by all countries to strengthen their
adherence to the FATF Recommendations. We support the regular comprehensive
assessments of countries' compliance through the mutual evaluation process of
FATF and the FATF-style regional bodies and the financial sector assessment
program of the IMF and the World Bank. We call for closer cooperation among
these institutions in order to deliver consistent and high quality assessment reports,
share experience on assessment programs, provide additional training resources
and analyze new trends and techniques. We also encourage all countries to publish
their full evaluations.
9. We agree that responsible and effective management of public finances is of
fundamental importance for achieving macroeconomic stability and sustainable
growth, and provides the essential foundation for good governance. To this end, we
support national and international initiatives to promote fiscal transparency, stable
and sustainable public finances, integrated approaches to budget formulation and
execution, performance-based budgeting at each level of government, mediumterm financial planning, and effective financial control, accounting and monitoring.
We call on relevant international and regional institutions to strengthen the
coordinatIon of their initiatives fostering the application of existIng international
standards and best practices in the fiscal area, and agree to continue dialogue on
further measures required to strengthen good governance in public finance.
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Page 1 of 5
PRESS ROOM
June 13, 2006
JS-4316
Remarks of Randal K. Quarles
Under Secretary for Domestic Finance
U.S. Department of the Treasury
Before the Women in Housing and Finance
Washington, DC- It is a great pleasure to have this opportunity to speak before
Women in Housing and Finance. For over a quarter of a century, this has been
one of the prinCipal forums in Washington for the discussion of the central issues of
the day in financial regulation, and it is an especially appropriate venue to discuss
two topics that are the focus of much attention right now: the housing market
generally, and our housing finance system in particular. This morning, I would like
to provide my impressions of current developments in the housing market and their
implications for economic activity more broadly, and then turn to the
Administration's government sponsored enterprise (GSE) reform effort. As we all
know, housing plays an important role in our economy, both as a generator of
economic activity and as a store of wealth for the nation's homeowners. An
efficient housing finance system is essential for the market in housing to operate
properly, and Fannie Mae and Freddie Mac have a part to play in our housing
finance system. The Administration's GSE reform effort has been carefully crafted
to ensure that they continue to perform that function successfully.
The Housing Market and Mortgage Payment Shocks
So let me begin this morning with a topic with which most of us are not only
professionally but also - certainly here in Washington - personally much involved.
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." There is not, however, universal agreement either on
what factors determine "overvaluation" or on whether our measures of those factors
are reliable. In particular, analysts have debated whether biases in some standard
house price series might account for a significant portion of the notable rise in priceto-rent ratios over recent quarters.
Regardless of where one falls out in this debate, there is concern that a broadbased 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.
But 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. Indeed,
the Office of Federal Housing Enterprise Oversight (OFHEO) house price index
released recently this month did suggest that house price appreciation had slowed
over the first quarter of this year. I would not, however, expect to see a substantial
drop in broad house price indexes as long as income is rising and interest rates
remain moderate.
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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.
Regula.t0ry 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 will not 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, which totaled as of last quarter totaled over $9 trillion a year.
Given all the attention that has been given to the housing market and its relation to
the broader economy, however, and given the substantial discussion surrounding
developments in house prices and the increased use of non-traditional mortgages, I
have been struck that the role of Fannie Mae and Freddie Mac does not seem to
enter into the calculations of most observers about the expected path of the
housing sector in the near term. The reason appears clear: even with the
slowdown or reduction in the housing GSEs' mortgage investment activity in recent
years, the housing finance market has remained robust and liquid. For example,
since October 2004, Fannie Mae's mortgage investment portfolio has decreased
from $913 billion to $730 billion. Over that same time period, Freddie Mac's
mortgage investment portfolio grew much more slowly than in the past, increasing
from $660 billion to $723 billion. And yet there is no indication that this has affected
the availability of mortgage credit, or activity in the housing sector more generally.
Which is a good transition to the next issue that I would like to discuss - the
Administration's GSE reform efforts.
GSE Reform
The most significant domestic finance policy issue that Treasury will address in the
near term is GSE reform. While issues of improving the regulation of the housing
GSEs have been debated for a number of years, the accounting and corporate
governance scandals at first Freddie Mac then Fannie Mae have brought this issue
to the forefront. We at the Treasury are on record supporting legislative efforts to
improve the regulation of the housing GSEs and, importantly, legislation thai
provides a clear statutorily-based instruction to the new GSE regulator to reduce
the size of the GSE's retained investment portfolios.
I think most people in this room are familiar with the reasons we believe it is
important to limit the size of these retained portfolios. While the mortgage
securitization activity conducted by Fannie Mae and Freddie Mac does in fact
provide a public benefit by increasing the amount of capital available to support
mortgage credit - thus decreasing its cost and i~creasing its supply - t~eir retention
of large investment portfoliOS does not further thiS purpose. These retained
portfolios do, however, concentrate rather than distribute the prepay~ent and
interest rate risks associated with mortgages and mortgage-backed Instruments
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Page 3 of 5
held by them, and concentrate them in entities that - as a result of the lower levels
of capital they are required to hold - are substantially more leveraged than other
financial institutions. Because of the funding advantage enjoyed by the GSEs, they
are able to grow these portfolios to a much greater degree than a purely private
~ector entity could, ':lnd as they continue to grow in size it becomes increasingly
risky for counterpartles to hedge them, particularly given the complicated hedging
strategies run by the GSEs.
As a consequence, it is critical that both of these pOints - both a strengthened
regulator, and a mandate to address portfolio size -- be included in any final
legislation from Congress. While legislation has thus far has been stalled, it
appears that change is in the air.
Troubling news continues to emerge about the GSE's operations. We have now
learned that these institutions - far from being the world leaders in financial
innovation and the management of risk that they had always portrayed themselves
as - were seriously defiCient in some of the most basic responsibilities of financial
institutions: corporate governance, financial reporting, internal controls, and risk
management. These critical areas were starved of necessary funding and seniorexecutive attention. Perhaps most alarming is that a number of these issues
remain unresolved in the post-Sarbanes-Oxley era where these matters are
subjected to heightened attention and scrutiny.
In February of this year, the "Rudman Report" outlined weaknesses in Fannie
Mae's accounting standards, internal controls, and corporate governance. Funds
that could have been used to bolster these critical areas were used to fund
undeserved executive compensation packages. This report documented clearly
that Fannie Mae's corporate culture was driven to meet earnings targets at all costs
and with disregard for its mission.
In early May, Fannie Mae disclosed more errors in its past accounting practices that
will force a restatement of results costing it $800 million this year.
Later that same month, OFHEO released a report that was particularly damning.
OFHEO's report amplifies previous findings that the Fannie Mae's carefully crafted
image of being low-risk and well-managed was an illusion. Fannie Mae was not
able to manage properly its investment portfolio. Its mismanagement cost it billions
of dollars in economic losses. Moreover, Fannie Mae intentionally misapplied
accounting guidance to obscure the true economic picture of its investment portfolio
business.
On the same day that OFHEO issued its report, Fannie Mae also into a settlement
agreement with OFHEO and the Securities and Exchange Commission (SEC)
agreeing to pay one of the largest fines ever imposed on a financial institution and
certainly the largest on an enterprise created for a public purpose. Equally
important, as a central condition of the agreement with OFHEO, Fannie Mae
agreed to cap its investment portfolio at essentially current levels. This
groundbreaking settlement clearly shows that Fannie Mae not only did not but does
not have adequate control over the growth and risks of its investment portfolio
business.
I have heard it argued that the portfolio cap in OFHEO's settlement agreement with
Fannie Mae shows that statutory guidance limiting the GSEs' investment portfolios
is not necessary in the GSE reform legislation. In fact, it shows exactly the
opposite. A settlement agreement is exactly that: an agreement, and without
Fannie Mae's agreement - obtainable only temporarily and under unusual
circumstances - this cap would not have been put in place. Given these facts,
OFHEO's action does not address the fundamental long-term concerns the
Administration has raised regarding the systemic risk presented by the GSEs'
investment portfolio.
Moreover, this agreed cap does not apply to Freddie Mac. While the recent
regulatory attention has been focused on Fannie Mae, the issues surrounding
Freddie Mac remain equally important. For example, Freddie Mac recently
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announced the "goal" of returning to quarterly reporting and filing timely GAAPcompliant capital reports with OFHEO when it releases full-year 2006 results. It
then plans to begin the process of registering with the SEC. The Administration first
recommended that the GSEs voluntarily register with the SEC in 2002, so Freddie
M~c's comp.lianc~ with this recommendation mighttake place over five years later.
It IS hard to Imagme any non-GSE company being able to maintain preferential
access to the capital markets under similar circumstances.
In addition, Freddie Mac recently announced that in order to devote the resources
needed to complete its internal controls review effectively and return to timely
reporting, it has decided to limit the number of internal controls initiatives it plans to
undertake in 2006 as well as defer lower priority internal controls systems efforts.
This is particularly troubling in light of recent comments made by OFHEO's
leadership that Freddie is still at least two years away from having acceptable
internal controls systems. OFHEO has made a similar assessment regarding the
timing of Fannie Mae having acceptable internal controls systems.
Over the course of the past three years, it has been revealed that Fannie Mae and
Freddie Mac managed their earnings to hit specific targets while misleading the
public as to their financial health. They have documented failings in accounting,
corporate governance, risk management, and internal controls. Members of
Congress have referred to Fannie Mae as the "Enron of the financial services
industry." To put it mildly, this is not a pretty picture, especially at a time where
these enterprises' non-GSE counterparts and competitors are experiencing
increased regulatory oversight of their risk taking and internal controls
environments.
The Administration's reform proposals are intended to ensure greater regulatory
oversight, appropriate capital requirements, and alleviate systemic risk, and we
continue to urge Congress to take action soon to address these issues. We
strongly support GSE reform legislation thaI addresses each of these points, and in
particular provides direction to limit the size of the GSEs' investment portfolios. We
remain hopeful that by the end of the year we will have a stronger regulator for the
housing GSEs with the authority and direction to limit the size of their investment
portfolios.
Even as we work toward an expected legislative outcome this Congressional
session, however, we at Treasury also have to consider how what we now know
about the operation of the GSEs - the weakness of their risk management
practices. their governance and accounting failures, the changing financial
environment in which they operate, the implications of their continued unchecked
growth - should affect our own ongoing responsibilities.
As you know, these enterprises are unlike other publicly traded companies in that
they were chartered by Congress for a specific public purpose. The charters that
Fannie Mae and Freddie Mac operate under are nearly identical, and included in
these charters is the requirement that these entities may only issue debt with the
approval of the Secretary of the Treasury. The requirement for this approval is
long-standing, and the GSEs seek and obtain the approval of the Treasury for all of
their debt issuances, as they must under their charters.
The nature of the current business plans of Fannie Mae and Freddie Mac requires
that they issue debt on a regular basis to fund their mortgage investment business.
Historically, it has been much more difficult to grow earnings in the GSEs' other
main business line - the credit guarantee business. It has been much easier for
Fannie Mae and Freddie Mac to grow earnings in the mortgage investment
business because the GSEs have the ability to issue debt at rates lower than their
peers that do not have GSE status and use those funds to invest in mortgages or
mortgage-backed securities. This is essentially the arbitrage strategy that has
allowed the GSEs virtually unconstrained balance sheet growth without any
significant additional contribution to the housing market. As I noted earlier, the best
example of how unrelated the GSEs' mortgage investment business is to the
broader availability of mortgage credit are the events of the last few years. As they
have retrenched to address their serious reporting and control problems, Fannie
Mae's mortgage investment business has shrunk dramatically in recent years, and
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the growth in Freddie Mac's mortgage business has slowed considerably. The
consequences for the availability of mortgage credit have been negligible. The
mortgage-backed securities (MBS) market is broad and deep, with investors other
than Fannie Mae and Freddie Mac holding about $5 trillion in MBS: $2.6 trillion of
Fannie Mae and Freddie Mac MBS, $2.1 trillion of private-label MBS, and $400
billion of Ginnie Mae MBS. It appears to us that as long as Fannie Mae and
Freddie Mac can perform their credit guarantee function, there would be little impact
in the housing market from further shrinkage in their roles as mortgage investors.
Of course, as I noted above, in order for Fannie and Freddie to enter the public debt
market to fund either of their lines of business, they seek and obtain the approval of
the Treasury. The process by which Treasury has evaluated and responded to
these requests has obviously evolved from time to time depending on the factors
we have deemed important in light of then current conditions in the economy and
the financial markets. Given the accumulation of information on developments in
the operation of the GSEs, culminating in the release of the Rudman and OFHEO
reports, the time is right for Treasury to review its debt approval process to ensure
that we continue to act as appropriate custodians of the power that Congress gave
us when the charters of Fannie Mae and Freddie Mac were created. We need to
ensure that our process corresponds adequately to the importance of our
responsibility, especially in a changing environment. As a consequence, I have
asked the Treasury staff to undertake such a review to ensure that the process by
which we exercise this responsibility is appropriate in light of all the circumstances.
Let me be clear about a few points. First, this process review does not of itself
presuppose any conclusion about outcomes. Rather, we are aiming first to ensure
that all the appropriate considerations are taken into account in exercising a regular
and long-standing responsibility. As the review proceeds, we will provide more
detail about our current thinking on Treasury's review of its debt approval process.
Second, obviously, one of the important factors that any process must consider in
evaluating requests for Treasury debt issuance approval is the expected effect on
markets - not merely the housing market, but financial markets generally, in many
of which the GSEs are active and important partiCipants. It goes without saying, but
Treasury will carefully consider the market impact of any future action.
I should make one last point. The fact that we at the Treasury are reviewing our
debt approval process should not be misconstrued. It should not in any way be
interpreted as changing our longstanding position that a legislative solution is the
best approach to addressing the systemic risks created by Fannie Mae's and
Freddie Mac's outsized portfolio. The legislative approach supported by the
Administration gets to the heart of our central concern in a direct and clear manner.
While the Treasury does have tools that can indirectly slow the growth of the GSEs'
portfolios, we cannot directly control their risk taking activities or refocus them back
to their core mission. In that way, the legislation addresses our concerns with
precision.
Thank you very much and I would be happy to take your questions.
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Page 1 of 2
PRESS HOOM>
June 13, 2006
2006·6·13-11-1-42-2619
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 $66,281 million as of the end of that week, compared to $67,196 million as of the end of the prior week.
I. Official U.S. Reserve Assets (in US millions)
Juoe2.,2.QQ6..
,Jyoe..9•...2..QQ6.
67, 196
66,281
TOTAL
1. Foreign Currency Reserves 1
3.
Euro
Securities
II
12,441
>I.
"
11,339
Of which, issuer headquartered in the U. S.
I
TOTAL
Euro
23,780
11,805
I
Yen
II
11,136
TOTAL
I
22,941
0
0
b. Total deposits with:
b.t. Other central banks and BIS
11,593
II
5,529
I
I
b.ii. Banks headquartered in the U.S.
Ibli. Of which, banks located abroad
Ib.iil. Banks headquartered outside the U.S.
II
II
Ib.iii. Of which, banks located in the U.S.
11,731
I
0
0
0
0
0
II
II
6,580
3. Special Drawing Rights (SDRs) 2
8,673
4. Gold Stock 3
11,041
II
I
0
6,535
I
8,613
"
-
11,041
I
0
5. Other Reserve Assets
17,151
5,420
0
0
I
2. IMF Reserve Position 2
17,122
I
0
I
TOTAL
I
I
I
II. Predetermined Short-Term Drains on Foreign Currency Assets
I
Jymt2.,. .21J06
"
Euro
Yen
TOTAL
Jyn~.9,.2.QQ6
Euro
0
1. Foreign currency loans and securities
I
I
Yen
II
I
0
I
I
0
0
I
II
0
I
TOTAL
I
2. Aggregate short and long positions in forwards and futures in foreign currencies vis·a.-vis the U.S. dollar:
2.a. Short positions
0
2.b. Long positions
0
@' Other
I
0
I
II
I
III. Contingent Short-Term Net Drains on Foreign Currency Assets
J.Y.ue.9.,21J06
,Jyoe.2.,2.QQ6
Euro
I
I
nttp://www.tre~:;.gov/press/releases/2006613111422619.htm
Yen
TOTAL
I
Euro
I
I
Yen
II
II
I
3/6/2007
Page 2 of 2
11. Contingent liabilities in foreign currency
1.a. Collateral guarantees on debt due within 1
year
1.b. Other contingent liabilities
2. Foreign currency securities with embedded
options
3. Undrawn. unconditional credit lines
\3. a.
I
II
ICJII
I
I
I
0
I
II
I
I
I
3.b. With banks and other financial institutions
Headquartered in the U.S.
"
I
I
I
I
With other central banks
3.e. With banks and other financial institutions·
II
I
I
0
0
0
0
)
I
I
Headquartered outside the U.S.
4. Aggregate short and long positions of options
in foreign
ICurrencies vis-a-vis the U.S. dollar
0
II
II
II
II
II
II
I
0
4.a. Short positions
I
I
I
I
I
0
4.3.1. Bought puts
4.a.2. Written calls
I
4.b. Long positions
II
14h 1 Bought calls
II
II
4.b.2. Written puts
I
I
Notes:
11 Includes holdings of the Treasury's Exchange Stabilization Fund (ESF) and the Federal Reserve's System Open Market Account
(SOMA). valued at current market exchange rates. Foreign currency holdings listed as securities reflect marked-to-market values, and
deposits reflect carrying values. Foreign Currency Reserves for the latest week may be subject to revision. Foreign Currency
Reserves for the prior week are final.
21 The items, "2. IMF Reserve Position" and "3. Special Drawing Rights (SDRs)," are based on data provided by the IMF and are
valued in dollar terms at the official 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.
3/ Gold stock is valued monthly at $42.2222 per fine troy ounce.
http://www.tre?.~.gov/press/releases/2006613111422619.htm
3/6/2007
Page 1 of 2
P~ESSROOM
June 13, 2006
JS-4317
Treasury Designates U.S. and Chinese
Companies
Supporting Iranian Missile Proliferation
The Department of the Treasury today designated four Chinese companies and one
U.S. company pursuant to Executive Order 13382, an authority aimed at financially
isolating proliferators of weapons of mass destruction, their supporters, and those
contributing to the development of missiles capable of delivering WMD.
"The companies targeted today have supplied Iran's military and Iranian
proliferators with missile-related and dual-use components," said Stuart Levey,
Under Secretary for Terrorism and Financial Intelligence (TFI). "Governments
worldwide are urged to take appropriate measures to ensure that their companies
and financial institutions are not facilitating Iran's proliferation activities."
Designations under E.O. 13382, which are administered by the Treasury's Office of
Foreign Assets Control (OFAC), prohibit all transactions between the designees
and any U.S. person and freeze any assets the designees may have under U.S.
jurisdiction.
The Chinese companies designated today are Beijing Alite Technologies Company,
Ltd. (ALCO), LlMMT Economic and Trade Company, Ltd., China Great Wall
Industry Corporation (CGWIC), and China National Precision Machinery
Import/Export Corporation (CPMIEC). The U.S. representative office of CGWIC is
G.W. Aerospace, Inc., which is located in Torrance, California.
The Chinese firms have provided, or attempted to provide, financial, material,
technological or other support for, or goods or services in support of, the Aerospace
Industries Organization (AIO), the Shahid Bakeri Industrial Group (SBIG) and/or the
Shahid Hemmat Industrial Group (SHIG), all of which were designated by President
George W. Bush in the annex to E.O. 13382.
AIO, a subsidiary of the Iranian Ministry of Defense and Armed Forces Logistics, is
the overall manager and coordinator of Iran's missile program, overseeing all of
Iran's missile industries. SBIG, an affiliate of AIO, is also involved in Iran's missile
programs. Among the weapons SBIG produces are the Fateh-110 missile, with a
range of 200 kilometers, and the Fajr rocket systems, a series of North Koreandesigned rockets produced under license by SBIG with ranges of between 40 and
100 kilometers. Both systems are capable of being armed with at least chemical
warheads.
SHIG is responsible for Iran's liquid-fuelled ballistic missile programs, most notably
the Shahab-III medium range ballistic missile, which is based on the North-Koreandesigned No Dong missile and has a range of at least 1300 kilometers.
The U.S. Government has applied various sanctions against the four Chinese
companies in the past. In 2004, the State Department imposed sanctions against all
four pursuant to the Iran Nonproliferation Act of 2000 for transferring equipment and
technology to Iran that was either controlled under multilateral export control lists or
which had the potential to make a material contribution to WMD. Since 2003,
CPMIEC has also been subject to an import ban under E.O. 12938, as amended.
Over the past year, LlMMT has continued to supply or attempt to supply Iran's
http://www.tre?..s.gov/presslreleases/js43[7.htm
3/612007
Page 2 of 2
military and missile organizations with controlled items, and ALCO has continued
efforts to provide Iranian missile organizations with missile-related and dual-use
components. CGWIC has also continued to provide goods to Iran's missile
program. Within the last two years, CPMIEC has sold the Shahid Bakeri Industrial
Group goods which are controlled under the Missile Technology Control Regime.
Background on E.O. 13382
loday's action builds on President Bush's issuance of E.O. 13382 on June 29,
2005. Recognizing the need for additional tools to combat the proliferation of WMD,
the President signed the E.O. authorizing the imposition of strong financial
sanctions against not only WMD proliferators, but also entities and individuals
providing support or services to them.
In the Annex to E.O. 13382, the President identified eight entities operating in North
Korea, Iran, and Syria for their support of WMD proliferation. E.O. 13382 authorizes
the Secretary of the Treasury, in consultation with the Secretary of State, the
Attorney General, and other relevant agencies, to designate additional entities and
individuals providing support or services to the entities identified in the Annex to the
Order.
In addition to the eight entities named in the annex of E.O. 13382, the Treasury
Department has designated sixteen entities and one individual as proliferators of
WMD, specifically:
• Eight North Korean entities on October 21 , 2005;
• Two Iranian entities on January 4, 2006;
• One Swiss individual and one Swiss entity tied to North Korean proliferation
activity on March 30, 2006; and
• Four Chinese entities and one U.S. entity tied to Iranian proliferation activity
on June 13, 2006.
The designations announced today are part of the ongoing interagency effort by the
United States Government to combat WMD trafficking by blocking the property of
entities and individuals that engage in proliferation activities and their support
networks. The support and cooperation of the Federal Bureau of Investigation,
particularly the Los Angeles Field Office, was instrumental in today's action.
http://www.t;eas.gov/press/releases/js4317.htm
3/6/20(
Page 1 of 2
PRESS ROOM
10 view or pnnt tne /-'Ur content on thiS page, dOwnload the tree AciQi)eCfPA9rQi)JJM) Hef'!de!f!tj.
June 13, 2006
JS-4318
Treasury Identifies International Financial Network of
Colombia's Notorious North Valle Drug Cartel
The U.S. Department of the Treasury's Office of Foreign Assets Control (OFAC)
today added five individuals and twenty companies tied to Colombia's North Valle
drug cartel to its list of Specially Designated Narcotics Traffickers (SDNTs). The
five individuals act as front persons for North Valle cartel leaders Raul Alberto
Grajales Lemos (Raul Grajales) and Carlos Alberto Renteria Mantilla (Beto
Renteria). Both Raul Grajales and Beta Renteria have been indicted in the U.S. on
charges relating to narcotics trafficking.
"Today's action exposes a key financial network of the North Valle cartel," said
Barbara Hammerle, Acting Director of OFAC. "This network utilizes front companies
in Colombia, the United States, Panama, and the British Virgin Islands to move its
illicit proceeds. By exposing the financial backbone of Colombian drug cartels
through our designation process, we thwart their ability to launder illicit proceeds."
The four newly named Colombian individuals, Francisco Javier Duque Correa,
Ricardo Jaar Jacir, Moises Abdal Saieh Muvdi, and Carlos Ernesto Saieh Jamis,
represent the interests of Raul Grajales and Beto Renteria in the operation of Casa
Estrella and associated companies. Casa Estrella is a department store chain
located in Colombia that was previously named as an SDNT by OFAC in May 2005.
This activity is carried out in attempts to hide the North Valle cartel's control of the
department store chain.
Francisco Javier Duque Correa is the general manager of Casa Estrella and has
been an associate of Raul Grajales for the past 16 years. Ricardo Jaar Jacir, a
share holder in Casa Estrella, is the half brother of Armando Jaar Jacir, a key front
person for Raul Grajales and Beto Renteria who was previously designated by
OFAC in November 2005. Moises Abdal Saieh Muvdi and Carlos Ernesto Saieh
Jamis have been business associates of Raul Grajales and Beto Renteria for the
past 15 years and are also shareholders in Casa Estrella.
The fifth individual designated today, Salvadoran national Carmen Elena Siman De
Jaar, was named for her involvement in the SDNT entity, Armando Jaar y Cia.
S.C.S., as well as her involvement in Cipe Investments Corporation, a Panamanian
shell company. Carmen Elena Siman is the wife of Armando Jaar Jacir.
Also named today are 20 companies which comprise an international financial
network for Colombia's North Valle cartel. These companies are located in
Colombia (8), Panama (5), the British Virgin Islands (1) and the United States (6).
The 20 companies encompass a wide range of services including real estate,
investment, construction, property management and manufacturing. The U.S. and
Panamanian companies are owned or controlled by Moises Abdal Saieh Muvdi and
Carlos Ernesto Saieh Jamis. These entities are shell companies used to facilitate
financial transactions. Gimber Investing Corporation is located in the British Virgin
Islands and is the majority shareholder of Confecciones Lord S.A., a Colombian
company also named today, which is affiliated with Casa Estrella.
SDNTs are subject to the economic sanctions imposed against Colombian drug
cartels in Executive Order 12978. T oday's action freezes any assets found in the
United States and prohibits all financial and commercial transactions between the
http://www.tre~s.gov/press/releases/js43rS.htm
3/6/2007
Page 2 of 2
designees and any U.S. person.
The assets of a total of 1,260 business and individuals in Aruba, Colombia, Costa
Rica, Ecuador, Mexico, Panama, Peru, Spain, Vanuatu, Venezuela, the Bahamas,
the British Virgin Islands, the Cayman Islands, and the United States have been
designated by OFAC pursuant E.O. 12978. The 487 SDNT businesses include
agricultural, aviation, consulting, construction, distribution, financial, horse breeding,
investment, manufacturing, maritime, mining, offshore, industrial paper,
pharmaceutical, real estate and service firms. The SDNT list includes 19 kingpins
from the Cali, North Valle and North Coast drug cartels in Colombia.
For a complete list of the individuals and entities designated today, please visit:
http.!/www.trea~QV!9lfjQ(}S/fill(Q[((]m()J]J!QfacL£ctiol)s/iodeA~l]trn1
REPORTS
lttP://www.trC<is.gov/presslreleases/js4.i~8.htm
3/6/2007
u.s.
North Valle Cartel
Financial Network
~
?, +-P.rt",,---+~~,;
June 2006
(II -
I~~ -
Raul Alberto GRAlALES LEMOS
CC 6356044 (Colombia)
-Captured May 2005-
~
'1
FlNANZAS DEL NORTE LUIS SAlEH Y CIA. S.c.A.
BalTilnquilla, Colombia
Barranquilla, Colombia
NIT 800180437-8
NIT 890108715-2
Shareholders
)
'1
4':
GRAlALES
.. - .... ,J ... • '
If,;",
~
Francisco Javier DUQUE CORft,poa
D084Apr 1948
CC 8292581 (Colombia)
RICARDO JAAR Y CIA. S.c.A.
Barranquilla, Colombia
NIT 890114338-3
Barranquilla, Colombia
GRAJALES I RENTERIA Associates
~-r
NIT 890114336-9
s.c.s. ••
I-
NIT 890114337-6
lj,
.
•
~I
lJ
,·~·:~...........or
Ricardo lAAR JASSIR
OOB 29 Sep 1940
CC 3714973 (Colombia)
"
j
NIT 802019866-4
/']
(
.!
_
--".
.!
~~
Moises Abeta. SAlEH MUVDl
carlos Emesto SAlEH JAMIS
DOs 61un 1945
CC 7427466 (Colombia)
DOB 24 Feb 1964
CC 8739066 (Colombia)
";
.
J.
"
. ..'.0 .!-~ i
...
-
. '
/"''i
,
Spouse~n
ca ....... Elena SIMA
CC16
DQBOIN0"" 1953
N DEJAAR
CIPE INVESTMENTS CORPORATION
Panama City, Panama
Rue 2209651197910
29942 (EI Salvada.>
.. " " ',"
~
•
•
J
• r
.
ELlZA8EJH OVERSEAS, INC.
Armando Jacob 0
;'
CC 7432263 (J AAR JACIRu
eo Iombia}
Panama City, PaJWIma
RUC 2172202194798
1
¥
-j
Miami, Florida
British Virgin Islands
KAREN OVERSEAS, INC.
Panama City, Panama
RUC 2172211194799
URBANIZADORA ALTAVlSTA INTERNACIONAL SA
'1
GIMBER INVESTlNG CORPORATION
Barranquilla, Colombia
British Virgin Islands
NIT 802014697-3
~,?
"..
,--:--
CONSTRUCTORA ALTAVISTA INTERNAOONAL SA
Sarranquilla, Colombia
Maria Sair PB.lSSIER OSPINA'"
CC 51561790 (Colomb..)
Panama
MolSES SAlEH Y aA. S.c.A.
Barranquilla, Colombia
~
.. ~
CASA ESTRELLA
ARMANDO JAAR Y CIA.
--
¥. "-",,
Colombl,n Dep'rent §tom ChaIn
-'1
RENTERIA Associates
1
I
Barranquilla, Colombia
Nn 890108452-0
-'1
I
(" ~)
Management - - - - I
INVERSIONfS DEL PRADO OCAlA SAlEH Y CIA. s.c.A.
'1
on November 301 2005
Carlos Alberto RENTERIA MANTILLA
("Beto RENTERIA")
CC 6494208 (Colombia)
-Fugitive-
Ie"Q/Q Cflrelld (
l
**SDNTs Designated
, ~-
(x
Barranquilla, Colombia
CARLOS SAlEH Y OA. S.c.s.
Department of the Treasu
Office of Foreign Assets Controll
Specially Designate
Narcotics Trafficker;
SDNT Principal Individuals
'1
ALM INVESTMENT A.ORlDA, INC.
Miami, FL United States
US FEIN 65-9336852
'1
J
GRANADA ASSOCIATES, INC.
Miami, FL United States
US FEIN 65-9336843
/'1
Miami, FL United States
KAREN OVERSEAS R.ORIOA, INC.
Miami, FL United States
US FEIN 592827636
/'1
/'1
/'1
CONFECCIONES LORD S.A..
SUNSET. 97TH HOLDINGS, LLC.
VILl.AROSA INVESTMENTS FLORIDA, INC.
Miami, FL United States
US FEIN 650439600
MARCLLC
BarraRquUla, Colombia
Miami, FL United States
NIT 890101890-1
US FEIN 260064117
U.S. Properties
and Accounts
~
~
KATTUS
n
~'l
CORPORATION
Panama City, Panam_
RUC 1724681390286
.§:..........
,W,!
f
'1
RIXFORD INVESTMENT CORPORAnON
Panama City, Pa".. ma
RUC 1963801394709
Page 1 of 1
PRESS ROOM
December 13, 2005
JS-4319
Statement of Treasury Secretary John W. Snow on Brazil's
IMF Repayment Announcement
I welcome Brazil's decision to prepay its remaining debt to the IMF. This decision
confirms Brazil's greatly improved external position and the benefits of its strong
macroeconomic and debt management policies. It also marks an important
milestone in Brazil's successful and cooperative engagement with the IMF. This
reflects well on the economic policies put in place by President Lula and Finance
Minister Palocci.
oUP://www.tre?$.gov/presslreleases/Js41~.9.htm
3/6/2007
Page 1 of 1
PRESS ROOM
June 14, 2006
JS-4320
Treasury Asst. Secretary
to Discuss GSEs with Real Estate Roundtable
U.S. Treasury Assistant Secretary for Financial Institutions Emil W. Henry, Jr. will
give remarks before the Real Estate Roundtable on Thursday, June 15 at the
Mandarin Oriental. The Assistant Secretary will discuss government sponsored
enterprises (GSEs) and Treasury's process for approving GSE debt issuance.
Who
Assistant Secretary for Financial Institutions Emil W. Henry, Jr.
What
Remarks on GSEs
When
Thursday, June 159:30 a.m. (EDT)
Where
Mandarin Oriental
Grand Ballroom C
1330 Maryland Ave., SW
Washington, DC
http://www.t;eas.gov/press/releases/js4~20.htm
3/61200
u.s. TREASURY DEPARTMENT OFFICE OF PUBLIC AFFAIRS
EMBARGOED UNTIL 9 A.M. (EDT) JUNE 15,2006
CONTACT Brookly McLaughlin (202) 622-2920
TREASURY INTERNATIONAL CAPITAL DATA FOR APRIL
Treasury International Capital (TIC) data for April are released today and posted on the U.S.
Treasury web site (www.treas.gov/tic).Thenextreleasedate.whichwillreportondataforMay.is
scheduled for July 18, 2006.
Net foreign purchases oflong-term securities were $46.7 billion.
•
Net foreign purchases of long-term domestic securities were $58.5 billion, $21.3 billion of
which were net purchases by foreign official institutions and $37.2 billion of which were net
purchases by private foreign investors.
• u.s. residents purchased a net $11.9 billion in foreign issued securities.
Foreigners' Transactions in Long-Term Securities with U.S. Residents
(Billions of dollars, not seasonally adjusted)
12 Months Thro~h
I
Gross Purchases of Domestic Securities
2 Gross Sales of Domestic Securities
3 Domestic Securities Purchased, net (line I less line 2) 11
~-05
~-06
2004
2005
Jan-06
Feb-06
15178.9
14262.4
916.5
16911.2
15885.2
1026.0
15662.0
14768.5
893.6
17235.5
16185.0
1050.5
1439.9
1361.1
78.8
1454.3
1353.5
100.7
1638.2
1548.8
89.5
1339.5
1281.0
58.5
Mar-06
Apr-06
4
5
6
7
g
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
914.6
297.5
189.6
349.3
78.3
744.5
200.8
189.9
310.1
43.7
911.3
182.9
218.4
394.0
116.0
59.5
-3.6
19.2
23.6
20.3
84.7
9.7
28.4
29.5
17.1
87.9
9.3
15.2
45.8
17.5
37.2
-7.4
9.7
31.7
3.2
9
10
Official, net
Treasury Bonds & Notes, net
Gov'! Agency Bonds, net
Corporate Bonds, net
Equities, net
235.6
201.1
20.8
11.5
2.2
111.3
59.3
32.8
18.4
0.8
149.1
118.0
\9.\
11.8
0.2
139.2
65.1
41.7
25.4
7.0
19.3
8.1
8.0
2.3
0.9
16.0
11.1
2.3
3.3
-0.7
1.6
-6.3
3.8
2.6
1.5
21.3
10.7
5.6
1.7
3.3
3123.1
3276.0
-152.8
3640.9
3799.3
-158.4
3109.3
3286.8
-J77.5
4140.9
4302.1
-161.1
374.4
387.5
·13.1
403.0
415.0
-12.1
448.3
467.4
-19.1
392.9
404.7
·11.9
-67.9
-85.0
-31.6
-78.6
-99.0
-28.2
-132.9
-2.7
-IDA
-0.2
-I \.9
-7.2
-11.9
-2. I
-126.8
763.6
867.6
716.0
889.4
65.7
88.6
70.4
46.7
11
12
13
14
15
16
17
Ig
19
II
12
13
Gross Purchases of Foreign Securities
Gross Sales of Foreign Securities
Foreign Securities Purchased, net (line 14 less line 15) 13
Foreign Bonds Purchased, net
Foreign Equities Purchased, net
Net Lonl!-Term Flows (line 3 plus line 16)
Net foreign purchascs of U.S. securities (+)
Includes International and Regional Organizations
Nct U.S. acquisitions of foreign securities (-)
-9.8
Page 1 of 5
June 15, 2006
js-4322
Remarks of Emil W. Henry, Jr.
Assistant Secretary for Financial Institutions
U.S. Department of the Treasury
Before the Real Estate Roundtable
Washington. DC - Thank you for inviting me to address your conference today.
have spoken to the Real Estate Roundtable in the past and I am happy that my
performance was adequate enough to earn me another invitation. As a relative
newcomer to Washington, D.C., that is very comforting.
I know from my past experience with your group that the Real Estate Roundtable is
very interested in a great number of the issues that concern us at the Treasury.
There are a few items I would like to discuss today. First, I feel compelled to
discuss some factors about our robust economy with you. Second, I would like to
build on recent comments on the Treasury's latest thinking in and around the
Government Sponsored Enterprise (GSE) reform debate. Third, I will discuss very
briefly the status of the TRIA report due on September 30 of this year.
United States Economic Performance
It is a good time for a Treasury official to discuss our economy. First, and most
obviously, economic indicators are so strong that it is a delightful task to elaborate
upon them in some detail. It is like bringing home a great report card to your
parents. Secondly, the timing is fortuitous. We recently celebrated the third
anniversary of the signing of the Jobs and Growth Tax Relief Reconciliation Act -legislation that proved to be essential in creating an economic environment that
fostered economic growth and permitted individuals and businesses to thrive.
As many of you know, this legislation provided a number of pro-growth tools. Chief
among them were lower tax rates. These lower tax rates have led to more
investing, job development and historically low unemployment This Administration,
with the able assistance of Congress, reduced tax rates on dividends and capital
gains, accelerated increases in the child tax credit, accelerated the scheduled
reduction in income tax rates, increased expensing provisions for new investment
by small businesses, and accelerated the reduction in the so-called marriage
penalty.
Just recently, the Treasury along with Council of Economic Advisors and Office of
Management and Budget released an updated U.S. economic forecast that bears
out the statistical evidence of our robust economy. Here are some of the
highpoints:
Let's begin with GOP and business investing. Since mid-2003, the economy has
grown at a 4 percent annual rate, and in the first quarter of 2006 alone, real GDP
grew at a 5.3 percent annual rate, well above the average of about 3 percent over
the last 15 years. Similarly, business equipment and software spending has
expanded at an annual rate of nearly 11 percent since mid-2003 compared with a
15-year average growth rate of about 7 percent.
Such growth has driven robust job creation. After the 2003 tax relief took effect and
business investment picked up, job growth accelerated as well. Since the Jobs and
~ttP:/Iwww.tre:is.gov/press/releases/Js4J22.htm
3/612007
Page 2 of 5
Growth Act passed in 2003, more than 5.3 million new jobs have been created.
Similarly, the unemployment rate has fallen to historically low levels. The current
unemployme~t rate of 4.6 percent is lower than the average unemployment rate of
~n~ decade since the 1950s. In addition, we have seen a number of other positive
Indicators of a strong economy. Household net worth has been trending higher as
have average hourly earnjn~s. The federal deficit as a percent of GDP last year
was about 2.6 percent--a fairly moderate level by historical standards. The deficit
as ~ percent of GDP in the current fiscal year will move lower still and projected
?eflclts are on track ~o meet the President's goal to cut the deficit in half early. And,
Importantly, tax receipts have been higher than expected in both 2004 and 2005.
Individual non-withheld tax receipts this year were the second highest on record
and corporate tax receipts continue to run very strong. Let me restate this
important point - the Treasury is seeing record revenues after significant tax cuts
were enacted. This fact, and it is undisputable, conflicts directly with the arguments
made by those who opposed the Administration's tax cut proposals.
So, that is some good news. The news that we are learning about the GSEs,
however, is less welcome.
GSEs
The most significant domestic finance policy issue in the coming months is the GSE
reform effort. While issues of improving the regulation of the housing GSEs have
been debated for a number of years, the accounting and corporate governance
scandals at both Freddie Mac and Fannie Mae have brought this issue to the
forefront in recent years.
Most recently, two major reports have been released, the "Rudman Report"
prepared at the request of the Fannie Mae board by former Senator Warren
Rudman, and the Office of Federal Housing Enterprise Oversight (OFHEO) report.
Both reports calf into question Fannie Mae's corporate governance, internal
controls, and risk management. From Treasury's perspective, perhaps the most
disturbing conclusion from the OFHEO report is that Fannie Mae was not able to
manage the risks inherent in its outsized portfolio and that Fannie Mae was more
focused on creating an image of being low-risk instead of focusing on sound risk
management practices.
As if these reports were not enough, on the same day that OFHEO released its
report, Fannie Mae entered into a settlement agreement with OFHEO and the
Securities and Exchange Commission (SEC). In this settlement, Fannie Mae
agreed to pay one of the largest fines ever imposed on a financial institution and
certainly the largest on an enterprise created for a public purpose. Equally
important, as a central condition of the agreement with OFHEO, Fannie Mae
agreed to cap its investment portfolio at essentially current levels. This
groundbreaking settlement demonstrates that Fannie Mae did not have adequate
controls in place in the past, but also that the current state of Fannie Mae's
business operations and risk management regime is not adequate to allow for the
growth of its investment portfoliO business.
I should emphasize here that the fact that OFHEO was able to extract a
commitment from its regulatee does not in any way suggest that statutory guidance
to limit the GSEs outsized investment portfolios is not needed. By its terms, this
cap is temporary. So it seems very clear to us that this recent action is not a
substitute for statutory guidance to limit the GSEs' investment portfolios. And,
importantly, these actions do not address the Administration's fundamental longterm concerns regarding the systemic risk presented by the GSEs' investment
portfolios.
At the same time, we are seeing new and troubling revelations that Freddie Mac's
accounting and internal controls continue to be in disarray. They have recently
reported that they can "begin" the registration process wit~ the SEC only a~er it
releases full-year 2006 results. Is it reasonable for Freddie Mac to begm thiS
process over five years after announcing that they would register with the SEC?
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Just as troubling is Freddie Mac's recent announcement that it needs to limit the
number of internal controls initiatives and defer "lower priority" internal control
efforts. While it is not clear exactly what actions will be limited or deferred, given
the scope of Freddie Mac's ongoing problems any lack of full attention on internal
control efforts has to raise questions of the appropriate allocation of resources.
Over the course of the past three years, it has been revealed that Fannie Mae and
Freddie Mac managed their earnings to hit specific targets while misleading the
public as to their financial health. They have documented failings in accounting,
corporate governance, risk management, and internal controls. The desire to
provide large compensation packages trumped the desire to behave ethically.
Despite some admirable efforts to make things better, some of these failings
continue even in the post-Sarbanes-Oxley world in which every single public
company is undergoing enhanced scrutiny and oversight of these critical areas.
After Freddie Mac's problems were brought to light in 2003, Fannie Mae executives
continued to insist that Fannie Mae would not have the same problems. Knowing
what we know now clearly shows that management at Fannie Mae must have
somehow thought that Fannie Mae should not or would not be held to the same
standard as other public companies and that their significant internal abuses would
never come to light. I suppose one aspect of their thinking was correct - financial
markets continue to react with indifference to the GSEs' accounting problems and
lack of financial reporting. As a former Wall Street banker, I can tell you that I
cannot imagine any non-GSE company being able to maintain its status in the
capital markets with such an unremedied speckled past. Indeed, one sad irony of
this situation is that the two entities that impose some of the most systemic risk to
our system are held to some of the lowest standards of accountability.
Thus far, legislative reform efforts have not been successful. You might be asking
yourself, what other shoe needs to drop? Throughout my career, I have relied on
the markets to react accordingly to these types of facts. But, it seems clear that the
markets do not treat these enterprises in the same way as other public companies.
First, they continue to enjoy a significant funding advantage over similarly-situated
non-GSE competitors. This continues to be the case despite the fact that the
Treasury Department and other government officials have made it abundantly clear
that the federal government does NOT guarantee the housing GSE debt. Indeed,
the GSEs are required to place such disclosures on the securities that they issue.
So it is somewhat difficult to understand fully why the market's perception of some
sort of federal backstop for the GSEs continues to persist and why these
enterprises can tap the capital markets at preferential levels.
I suppose one aspect that continues to foster this incorrect belief is Fannie Mae's
and Freddie Mac's line of credit with the Treasury Department. But a $2.25 billion
line of credit is insignificant and virtually meaningless in the context of outstanding
debt obligations of $766 billion for Fannie Mae and $749 billion for Freddie Mac, not
to mention the additional $2.6 trillion of mortgage-backed securities that they
guarantee. Moreover, at least in the context of GSE reform legislation, the Treasury
Department is on record suggesting that this line of credit will only be utilized under
very limited circumstances such as a GSE emerging from receivership.
I suppose another aspect that fosters this incorrect belief is that the federal
government has provided assistance to the GSEs in the past. In particular, in the
late 1980s the federal government created a mechanism to provide financial
assistance to troubled Farm Credit System institutions. However, as we all know,
past actions, especially in the case of government bailouts, are not a good predictor
of future actions. And, do we really want to continue down a path that could lead to
irresponsible calls for an unnecessary and preventable GSE bailout? We are, of
course, not going to solve this riddle today, but it seems clear that the GSEs
present us with a unique set of circumstances that requires a carefully crafted
response.
Because of the myriad of concerns noted above, it is critically important that
appropriate GSE reform legislation pass. Our principal focus continues to be
finding a legislative solution. However, considering what we now know about the
operation of the GSEs - the weaknesses of their risk management systems and
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practices, their governance and accounting failures, the level to which they are
interconnected with our financial system as a whole, and the extent to which the
retained investment portfolio concentrates the various risks associated with
mortgages and mortgage-backed instruments, we also must consider how this
should affect our ongoing responsibilities.
Th~ref?re,. as Under Secretary Quarles noted on Tuesday, Treasury is currently
reviewing Its GSE debt approval process. I want to reiterate that we have no
dou.bts about our aut~ori.ty regarding approving GSE debt, which we do on a regular
basIs, but we are rethinking the process by which Treasury uses that authority.
As you know, the Treasury Department's debt approval authorily is contained in
Fannie Mae's and Freddie Mac's charter acts. The requirement for this approval is
long-standing, and the GSEs seek and obtain the approval of the Treasury for their
debt issuances, as they must under their charters. In that regard, it seems clear
that the GSEs themselves acknowledge that Treasury has this authority, as they
come to US for approval for their debt issuances.
The process whereby Treasury has administered this authority has changed over
time and should be continually evaluated to ensure that we are acting as
appropriate custodians of this authority. As we undergo our debt approval process
review, I thought it would be helpful to provide you with some context about our
current process and how it has changed over time. In the mid-1990s, Treasury was
actively involved in the scheduling of GSE debt issuances, and every GSE
individual debt issuance was submitted to Treasury for prior approval. This process
was cumbersome, caused considerable strain on Treasury staff's resources, and
provided questionable return for this investment of time and staff. Because of these
concerns, Treasury announced a new process that eliminated the need for
Treasury to schedule each of the GSEs' securities offerings. This new process was
characterized as a voluntary, cooperative process that would provide the GSEs
more flexibility to time and size their borrowing transactions. Treasury also made
other process changes during this time period. ATIHAIIIME., these changes
were viewed as an appropriate response to a process that had become outmoded,
especially as the scope of the GSEs' operations was increasing and certain
issuances were becoming more routine and regularized.
Since these changes, the debt approval process has continued to evolve. While
Treasury continues to administer this authority responSibly, the process we use
differs for each of the GSEs and has become less standardized. Depending on the
particular GSE, we have developed different procedures as to how their debt
issuances are approved. The procedures vary from weekly notices to quarterly
notices. Some of these procedures involve notice of expected versus actual debt
issuances. The manner in which Treasury conveys its approval also varies among
the GSEs.
So, at this point, as we digest all of the information that we have learned about the
GSEs in the past few years, we believe it is important to reconsider how our debt
approval authority is administered. Similar to the evaluation that took place in the
mid 1990s, this is a healthy exercise to ensure that the Treasury Department's
process corresponds adequately to the importance of our responsibility, in light of
the current condition of our economy and our financial markets.
Make no mistake, this is no small task, but it is one of the highest priorities of the
Domestic Finance team because, as the process has evolved over time, the
individual borrowing practices of the GSEs have become increasingly complex. A
more standardized process will help Treasury better manage its responsibilities.
We are currently evaluating how the process could change. In addition, as part of
this review, we will evaluate a number of specific issues. We will consider what
should be the appropriate timing of the GSEs approval requests. Consistent with
our debt approval authorities, we will consider whether we would want additional
information, such as: the amount of tolal debt outstanding; the estimated rate that
the debt will be offered; and the maturity of the debt obligations. This is, of course,
not an exhaustive list of what we will consider as our review goes forward. We
have made no conclusions at this time about whether or not a process change is
necessary, but in some sense, everything is on the table.
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This is a project that we plan to complete as quickly as possible. This action in no
way should be viewed as distracting or interfering with our primary objective of
supporting the legislative GSE reform effort.
Terrorism Risk Insurance
Let me now turn to another issue of great importance to the Roundtable - the
Terrorism Risk Insurance Act (TRIA). As you all know, in December of last year,
TRIA was extended for an additional two years until December 31 ,2007. The TRIA
Extension Act met a number of the Administration's key priorities, such as
maintaining the program as temporary, increasing insurer retentions, and limiting
the scope of the program.
The TRIA extension also included a provision that requires the President's Working
Group on Financial Markets, known as the PWG, to analyze the long-term
availability and affordability of terrorism insurance, including group life coverage
and coverage for chemical, nuclear, biological, and radiological events. This report
by the PWG is due to Congress by September 30,2006.
As you might imagine, given this short time frame, Treasury and other members of
the PWG have been moving quickly to meet this mandate. Treasury, as chair of the
PWG, published a Notice in the Federal Register seeking comments concerning the
long-term availability and affordability of terrorism risk insurance. The comment
period closed at the end of April and approximately 40 comments were received.
We have been evaluating those comments and moving forward on producing our
report. We look forward to the completion of this task and ongoing dialogue on the
appropriate role of the federal government in the terrorism risk insurance market.
-30-
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PRESSROOM
June 15, 2006
JS-4323
Remarks by
Under Secretary for International Affairs
Timothy D. Adams
at the World Economic Forum- East Asia
Panel on Asia's Financial Integration:
A Miracle in the Making?
Tokyo, Japan-- ~hank you for this opportunity to speak on this panel. East Asia
has made incredible progress since the Asian financial crisis. The East Asian
region is of critical importance to the global economy and to the U.S. Treasury. The
last few years have seen an intense discussion of financial sector reform and
regional financial initiatives in Asia. It is clear that what comes out of this
discussion will be important both for the region, and for the global economy and
financial system.
I wish to organize my remarks today around four topics:
I. The U.S. view of Asian regional financial initiatives
II. Where we see real value in regional financial initiatives
III. Those initiatives that raise questions for us
IV. Our efforts to reform the governance of the international financial institutions which would increase the representation of Asian countries.
To begin, I want to emphasize that growth and stability in the region are of great
importance to the U.S. and global economies. Five of the America's largest trading
partners are from East Asia, while three of the world's four largest economies (on a
purchasing power parity basis) are in the region. Regional economic integration is
an important factor contributing to this regional dynamism. Intra-regional trade
reached over 40 percent of total trade in 2005, up from 30 percent in 1990, a level
comparable to that reached in the NAFTA.
Second, we are convinced that financial sector reform and opening are critical to
sustaining East Asian growth. The Asian Financial CrisiS in 1997 underlined the
importance of strong, developed, and well supervised financial markets. And a
variety of studies have clearly shown that countries with open, well-developed
financial markets grow faster than countries that do not. Regional financial
initiatives that encourage economies to reform and strengthen domestic financial
systems - and particularly those that encourage development of domestic bond
markets - are extremely valuable. We also see merit in sustaining and
strengthening the international financial architecture, and we therefore support
regional cooperation that is consistent with multilateral frameworks.
Where do we see regional financial initiatives that contribute to domestic financial
sector reform? The Asian Bond Markets Initiative (ABMI) is one example. The
ABMI has encouraged the development of securitization and credit ratings
agencies, as well as improvements in listing and disclosure requirements. I
applaud efforts by the region's finance ministers and central bankers to develop
domestic markets for local currency bonds. As we know from emerging market
crises, well-developed local currency bonds reduce the risks from currency
mismatches and shield economies against balance sheet vulnerabilities.
Establishing the Asian Bond Fund 2 and working on ABMI have encouraged
structural improvements such as the loosening of restrictions on nonresident bond
issuance and investment and also the liberalization of foreign exchange
administration rules.
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But, some developments do give me pause. Specifically, we see room for further
clarity on the Chiang Mai Initi~tive (CMI). Too little is known by the markets or by
borro.,,:,ers ~bout amounts a.vallable absent IMF adjustment programs, and the
c?ndltlons, If any, CMI creditors would impose. More clarity on these issues would
aid an assessment of the CMI's compatibility with the international system.
With respect to an Asian Currency Unit (ACU), there has been some confusion
about the U.S. position on this topic. The ACU is an index of currencies, a way to
gauge movements of currencies in the region vis-a-vis each other. We do not see
the ACU as a competitor to the dollar, any more than we see the JP Morgan
exchange rate indices as a competitor to the dollar. We believe that greater
exchange rate flexibility is desirable for the region, but are open-minded as to
whether that involves currency cooperation within the region. We view proposals
for Asian currency cooperation with interest, although wide differences across Asian
economies suggest that a common currency may be difficult to achieve for some
time.
But I do want to underscore our strongly-held belief that greater exchange rate
flexibility is in the interest of large economies of the region and beneficial for the
region as a whole. Since they abandoned pegged exchange rates during the Asian
crisis, several Asian economies have been able to achieve sustained growth and
price stability with inflation-targeting monetary policy regimes and flexible exchange
rates. South Korea stands out as an example. We encourage other large Asian
economies to continue their efforts to move to greater exchange rate flexibility.
I also wish to emphasize our position that Asia, along with other regions
contemplating integration initiatives, must not tear down intra-regional walls only to
erect new ones that exclude the rest of the world. Closed regionalism would have
negative implications for the region, given the continued importance of the extraregional economies - particularly the United States - to trade and capital flows in
the region. Open regionalism can - and is clearly more likely to - benefit regional
and extra-regional actors alike.
Finally, I want to emphasize that we are also working to make international financial
institutions more reflective of the current state of the global economy and thereby
more responsive to their members. In particular, the IMF's governance structure
should ensure that every member has a voice, with each country's vote scaled to
reflect its weight in the world economy. The world economy has evolved
considerably in the past decades, and the IMF structure should reflect these
changes. An IMF that better reflects its members would be more effective in its
operations, in part because its legitimacy would be enhanced.
To this end, we have been urging a fundamental overhaul of the IMF's governance
structure to increase the Board representation and quota shares of fast growing
emerging markets, many of which are in Asia. This process will take time and
cooperation from other members, particularly in Europe, but we hope to achieve the
first step at the meetings in Singapore in September.
In closing, allow me to summarize my points. First, we support outward-oriented
Asian regional economic integration. Second, we think that financial sector reform
and opening is critical to sustaining Asian growth. The emphasis that Asian
regional financial initiatives have put on domestic financial market development particularly domestic bond market developme~t - is ~articu~arly v:'el?~~e. and
valuable. Third, we think it's important that ASian regional financial Initiatives
complement and strengthen the multilateral framework. And finally, we believe that
the governance of the international financial institutions Shoul? chang~ to reflect the
realities of the current global economy. We are actively working to bnng these
reforms about, and they would result in greater representation and voice for Asian
countries overall.
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,
'
P~ESS ROOM
June 16, 2006
JS-4324
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, June 19 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, June 19, 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 fmn9Q$,qJ]ctersQo@QQ,Jre?s.gQv with the following information:
name, Social Security number, and date of birth.
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PRESS ROOM
June 15, 2006
jS-4325
Remarks of Anna Escobedo Cabral
U.S. Treasurer
U.S. Department of the Treasury
Before West Virginia Teachers Finance Academy
Charleston, WV- Thank you so very much for your invitation and for that kind
introductiO~. I truly appreciate your welcome to West Virginia. I am really thrilled
to be here In your State's largest city and capital of Charleston today. It is also of
course an honor to represent President Bush's Administration and to stand before
you in my capacity as the 42 nd U.S. Treasurer.
I have to say - it is really great to be back in the State. I was actually here just a
couple of weeks ago visiting Treasury's Bureau of Public Debt in Parkersburg,
Virginia. I can honestly say that I'm most pleased 10 witness first-hand that not only
the federal government continues engaged in the important work of improving
financial literacy, but also that State governments, the private and non-profit
sectors, as well as the education community understand the value of developing
strong personal money management skills.
That is why I want to begin today by expressing my heartfelt thanks to Auditor Glen
Gainer III and his staff, particularly Justin Southern, as well as West Virginia's
Jump$tart for working so diligently to put this fantastic event and learning
opportunity together.
I personally think that this Finance University for teachers is an absolutely fantastic
idea! The coursework which focuses on economic and financial education helps
each and every one of you in your important profession as educators to strengthen
your own personal finance skills, not to mention, your ability to teach and inculcate
some good habits in your students. What a formidable opportunity and
responsibility you have before you! And how timely and important your work is!
You as educators know best that our young people are going to be confronted with
some pretty difficult issues as adults. They will be particularly challenged and have
important choices to make with regards to budgeting and credit management as
soon as they enter college or graduate from high school and pursue a trade. So I
appreciate the time you've dedicated over the past few days to hone in on these
important skills. Thank you for caring enough and understanding the importance of
using the classroom as a venue to improve financial literacy.
Today, I wanl to share with you how the value of an education and how one caring
teacher can change lives for the better. I will also share with you some of the
federal resources available to you for free, which can help you in your efforts to
integrate financial education lessons into the classroom. And finally, I will highlight
how a growing and burgeoning economy can help improve lives, especially when
that growth is coupled with job creation and the proper know-how about how to best
manage one's hard-earned money.
First, let me ask: Who better than you - teachers, educators - is there to impart not
only smart money skills to our future leaders, but also inspire them to build good
personal finance habits? I can tell you from personal experience that I believe it is
professionals like you who can make a significant and positive difference in a young
person's life.
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To illustrate t~is point, I want to share with you just a little bit about my background,
and why I beheve that the work you are doing today is so important.
I am originally from California and my great grandparents came to the United States
f.rom Mexico. Althou~h my siblings and I grew up rich in love, for most of my young
life I also gre~ up being very poor. Most of the time, we had to scrape by because
we had very little money. That was our reality and we learned to deal with it - we
learned to manage and survive. In fact, my great grandparents worked in the fields
my grandparents worked in the fields, my parents worked in the fields and for a verY
little while, we kids worked in the fields.
Now, my father and mother ended up leaving school early and so they did not
graduate. They dropped out of high school fairly early in their lives to go out and get
jobs and make a way for their family. Eventually, my father decided that he should
move out of the fields and into more traditional work. But, because he lacked an
education, it forced him to travel to wherever job opportunities existed. I remember
switching schools more times that I can or care to remember.
By my junior year of high school I was doing exceedingly well. And right before I
was getting ready to graduate from high school, I decided I could graduate early, so
I started thinking about working at a fast-food restaurant, which in many ways could
be a very good career option.
But, my high-school algebra teacher, Philip Lamm, heard I was leaving early and
asked me if I had ever given some thought to attending college. Well, of course I
had not. We just simply didn't have the money. And, of course I never had those
conversations with my parents about the possibility of going to college. My parents
dream was that their kids graduate high school because they had not done so
themselves. Unfortunately, that was the limitation of their exposure.
But here is the important part of the story - because one caring teacher paid a little
extra attention - well; I can tell you that it opened a whole new world of astounding
opportunities for me. That teacher helped me understand the power of an
education - his name was Phillip Lamm.
Mr. Lamm did so much as to help me fill out the college entrance application and
visited my parents to explain why going to college was a better and more profitable
option - not just for me but also for the whole family. He also helped me find the
dollars to help pay for school.
In effect, Mr. Lamm not only taught me mathematics and algebra, more importantly
he also inspired me to think bigger - to think about what was possible if only I would
take the chance and step out of my comfort zone.
I want to urge you to continue to do that throughout your careers - to inspire your
students and push them a little out of their own comfort zones - particularly as you
teach your students how to plan for the future and better manage their future
finances and lives.
You are tremendously qualified and uniquely positioned to teach them the skills it
takes to be successful. But more importantly, you can inspire them to think big inspire them to think about what is possible if they set goals and create a plan to
attain those goals.
You have the power to convert an abstract concept into reality for many of your
students so that they one day can experience the sense of pride of paying their way
through college successfully, purchasing their first home, or setting enough money
aside to maybe even start a small business or retire with security and in comfort.
Programs like the one you have participated !n the~e last couple of days provi~e
you with a solid base to do just that. But yo~ re caring ~eart and your unwavering
commitment to education is what really prOVIdes you WIth the drive and Impetus to
succeed in touching your students' lives in deep and meaningful ways.
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To help you in. that task, t~e f~deral government too is engaged in a variety of
~fforts. to provld~ the public with the tools and resources necessary to help improve
financial edu~atlon. of all pe~ple across the country. I'd like to now share with you
some of the financial education efforts Treasury is engaged in.
Some of you may already be aware that the Treasury Department takes a lead role
in the efforts of a federal commission created by legislation which was signed into
law by President Bush in 2003 - Title V of the Fair and Accurate Credit
Transactions Act. This federal commission is commonly known as the Financial
Literacy and Education Commission or referred to as the Commission.
Treasury and 19 other federal member agencies have played a significant role in
developing a financial education web site, toll-free hotline and the first ever national
strategy for financial education.
In October 2004 the Commission launched the MyMoney Web site and MyMoney
hotline. The public can now visit MyMoney.gov or call 1-888-MyMoney and access
free information in English or Spanish to help them better manage their money. I
urge you to visit and spread the work about MyMoney.gov. It has been recently
updated to include an interactive quiz called the "Money Twenty."
The strategy, Taking Ownership of the Future: The National Strategy for Financial
Literacy, which was recently unveiled in April of this year, is also now available at
MyMoney .gov. I encourage you to share this information with your community
partners and tell them it is available and downloadable at MyMoney.gov.
I think this is a good time to very quickly highlight a few examples of how the
Strategy will be implemented through various Calls to Action listed at the end of
each chapter of this document.
The strategy focuses on a variety of important topics, such as banking the
unbanked, homeownership, credit management, and retirement savings - to name
a few. It also describes the challenges and guideposts for possible solutions to
challenges associated with these topiCS.
Sometimes the solutions come from the Federal government. However, often
nonprofit organizations, businesses and other private sector players provide
important resources for those wishing to learn more about financial matters. These
strategies can be very helpful to community organizations that are committed and
working to improve delivery of financial education resources and tools.
In effect, the document puts forth examples of financial education programs that
community leaders, business people, and volunteers can all look to as they design
programs of their own to enhance financial literacy. It will not only be important to
provide encouragement - it will also be important to facilitate easier and more
convenient access to tools that can help people improve personal finance
management skills, and as I mentioned earlier hopefully influence the adoption of
good personal finance habits by the general population - including young adults.
Again, that is why we are counting on all of you to help us spread the word.
We've already begun the important work of implementing this strategy. In May of
2006, work began on a Call to Action focused on the topic of banking the
unbanked. The Treasury Department partnered with the Federal Deposit Insurance
Corporation, Office of the Comptroller of the Currency, National Credit Union
Administration and the Federal Reserve Bank of Chicago to host a regional summit
on this topiC. And in another Call to Action the Treasury Department and the
Commission will also work to launch a multimedia public service announcement
campaign focused on improving credit literacy.
In addition to these efforts, I want to take this opportunity to share with you some
information about another very special campaign my office has been involved in Go Direct.
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About a year and half ago, the Treasury and Federal Reserve Banks launched a
campaign called Go Direct, in Spanish known as Directo A Su Cuenta. The
focus of this campaign is to motivate seniors to receive their Social Security
benefits by direct deposit.
It has been a real privilege to be part of Go Direct and to teach eligible citizens
a~out it. Go. Direct focuses on motivating federal benefit recipients to sign up for
direct deposIt. It not only communicates the importance of direct deposit - it also
provides the means by which seniors can make the switch from a paper check to
direct deposit. We have a dedicated call center staffed by bilingual personnel ready
to assist all beneficiaries - and since July 2005, about 400,000 beneficiaries have
signed up for direct deposit through the call center alone.
The call center is only one of many ways we are helping beneficiaries sign up for
direct deposit. Our Web sites: '!ILVII'w~GoQir~ct.919 and ,!,!wwj)irectoASuCuenta.olf),
allows beneficiaries to access a step-by-step online tool to sign up - either on their
own or through their bank or credit union.
I hope you take advantage and make use of these resources - I certainly
appreciate you sharing and passing this information along to your students,
colleagues, community partners and friends and family.
BeFore closing, I would like to add one additional comment: I am very confident that
if we continue to harness improvements in education and amazing talent like yours,
and if we continue to take steps to create the conditions the President has made a
priority over the last few years to spur continued economic growth - well, we can
truly remain optimistic about the future of this country - of our children's future.
If we could achieve this growth in recent years despite the significant challenges
our President and our nation faced - a declining economy, the aftermath of the 9/11
terror attacks, devastating natural disasters, as wells as corporate scandals - I am
confident we can do so in today's resilient and growing economic environment.
Consider how just in a few short years our economy is back and stronger than ever
thanks to the extension of tax cuts and sound monetary policy - factors which have
also helped generate new jobs.
The most recent employment report is good news for American families, showing
that the American economy is expanding steadily, with 33 straight months of job
growth and unemployment now at a very low rate of 4.6 percent. When Americans
have jobs and keep more of the hard-earned money to invest and have the skills to
do so wisely, this scenariO provides a further catalyst for growth.
Minority communities are also benefiting and experiencing the positive effects of
this economic surge. For instance, the unemployment rate for Hispanic Americans
is now at a record low of five percent.
Again, thanks to the President's sound economic policies, and his concern for
improving education at all levels, the promise of the American dream is alive and
well.
In closing, I want to again thank every teacher here today and congratulate you on
your achievements thus far. You are doing wonderful work and you ought to be
.
recognized for taking your skills and tal~nts to the next level -: for ~ot only
educating, but also inspiring - challengmg - your students to Imagme all that IS
possible.
Again - congratulations to all and thank you for your time and attention.
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