Full text of Press Releases of the United States Department of the Treasury : Volume 433

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Department of the Treasury
Ubrary

JUL 2 C 2007

Treas.
HJ
10
.A13
P4
v.433

Department of the Treasury

PRESS RELEASES

Numbers not used are JS-4329 and HP-15.

Page 1 of 1

June 19, 2006
JS-4326
Statement of Deputy Treasury Secretary Robert Kimmitt
on International Compact for Iraq
Last Friday, the United Nations agreed to the request of the Government of Iraq to
work together on an International Compact for Iraq. We welcome and applaud the
UN's active participation in this important initiative.
We commend Iraq for its commitment, as part of this Compact, to take a series of
steps to achieve objectives in economic and reconstruction areas. In exchange, we
expect the international community will provide sustained political and economic
support to help them achieve these goals.
As President Bush pledged last week following meetings at Camp David, the United
States is prepared to support this endeavor by working closely with the Governmenf
of Iraq, the UN, the International Financial Institutions, and partners in Europe, Asia
and the Middle East, to help the Iraqis secure support for their new government.

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June 20, 2006
js-4327
Statement of Assistant Secretary for International Affairs Clay Lowery
Before the Senate Committee on Banking, Housing, and Urban Affairs
On Reauthorization of the Ex-1m Bank
Chairman Shelby, Ranking Member Sarbanes, and members of the committee,
thank you for the opportunity to discuss the reauthorization of the Export-Import
Bank of the United States (Ex-1m Bank). I am pleased to be here with Acting Ex-1m
Bank Chairman James Lambright because we are in total agreement on the
importance of a strong Ex-1m Bank.
This Administration believes that, given a level playing field, U.S. exporters can
compete with anyone in the world. As the lead U.S. Government agency on
international economic and financial policy, Treasury leads the U.S. delegation to
the OECD export credit negotiations, which are intended to establish that level
playing field. Working closely with Ex-1m Bank and other U.S. Government
financing agencies, we have successfully developed multilateral rules to reduce or
eliminate the use of foreign export financing subsidies. These rules help to protect
all U.S. exporters by ensuring that the competition for export sales is driven by
price, quality, and service -- and not by unfair government financing. Equally
important, these OECD rules protect U.S. taxpayers from having to pay for a
subsidy program that would be necessary to counter foreign subsidy programs in
the absence of these rules.
Export Financing and the Role of the OECD Arrangement
The OECD members that negotiate these multilateral financing rules are referred to
as the Participants to the Arrangement for Officially Supported Export Credits (the
Participants; the Arrangement). The Participants are those governments which
provide the vast bulk of export financing for capital goods to developing countries.
The Arrangement rules are critical to ensuring that the export financing provided by
governments promotes market principles, a level playing field, and transparency. As
these rules apply to all sources of official export financing, policy agencies such as
finance and economics ministries represent their governments among the
Participants. In addition to Treasury and Ex-1m Bank, the U.S. delegation includes
the Departments of Commerce and State, USTR, USAID, the Trade and
Development Agency, and any other agency whose programs or policy role might
be affected by negotiations.
Export subsidies are bad economic policy and very costly to taxpayers. They close
markets to competition and reduce global economic growth. By distorting trade
flows, subsidies also distort the global allocation of resources and reduce
international economic efficiency. Exporters who become dependent on tied aid
subsidies become less efficient and unable to compete on market terms.
Moreover, using subsidies for export promotion is ultimately self-defeating because
when one nation uses subsidy programs to gain a competitive advantage, others
naturally follow suit to protect their interests. This inevitably leads to an export
subsidy race which harms the international economic system and severely
undermines or reverses the gains from trade. This is why successive
Administrations have worked in the OECD to negotiate a trade finance environment
driven by market forces in which all U.S. exporters can compete.
The Arrangement complements the WTO anti-subsidy rules. The WTO does not
restrict the uS'e of aid subsidies -- tied or untied -- because resource transfers from

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Page 2 of 5

rich to poor countries are important for the latter's development. The U.S. uses the
Arrangement to ensure that aid-financed subsidies are really development aid and
not export promotion in disguise.
Aid, tied or untied, is normally in the form of official development assistance (ODA)
offered by a donor's development ministry and can be in the form of grants or
credits. However, tied aid also is a form of export subsidy in which financing is
formally linked to the purchase of goods and services from donor-country firms.
The U.S. offers tied aid through USAID, as part of the "Buy America" mandate.
However, U.S. tied aid is usually in the form of grants which, dollar-for-dollar, distort
trade far less than credits and provide greater assistance to developing country
recipients.
Many other OECD donors use tied and untied aid credits in order to leverage more
exports while reducing the budgetary cost of aid and thereby increase domestic
political support for their aid programs. Before the Arrangement, competitive
economic and political pressures resulted in many foreign tied aid credits being de
facto export promotion. Since tied aid credit terms are more favorable to the
borrower than standard export credit terms, tied aid distorts trade flows in favor of
the tied aid provider's firm when the two forms of financing compete.
Under the rules, tied aid is now focused on the poorer countries - those with per
capita incomes below $3,255 annually. Wealthier countries like Mexico, Korea and
Malaysia are no longer eligible for tied aid. Tied aid is now virtually non-existent in
major projects for power (thermal and hydro), oil and gas pipelines,
telecommunications, air traffic control equipment, industry and manufacturing. This
has enabled U.S. exporters to compete for contracts in these commercial sectors
without the concern of confronting tied aid. Instead, tied aid now is used primarily
for what are generally regarded as bona fide development projects in sectors such
as health, education, water, sanitation, and roads.
Recent Negotiating Successes
During Ex-1m Bank's 2002 reauthorization, Treasury reported on the success of
disciplining tied aid use and the remaining challenges associated with two other
foreign financing practices that distort trade and threaten the level playing field that
we seek - untied aid and market windows. Since that testimony, Treasury has
continued its work to address these issues in the OECD. (Efforts were highlighted in
two reports to Congress in June 2004.) I am pleased to report that significant
progress has been made on all fronts, and, as Ex-1m Bank's latest Competitiveness
Report shows, neither untied aid nor market windows pose the same challenge that
they did in 2002.
Untied aid is aid that may not be formally linked to donor country procurement.
Untied aid typically is used for non-commercial projects with a development impact.
However, without formal OECD rules on what procedures, practices, and
procurement results constitute untied aid for the purposes of exempting it from the
tied aid disciplines, donor governments can use untied aid to circumvent the tied aid
rules agreed to by the OECD members in 1992 and distort trade in favor of the
donor. Examples include requiring aid recipients to use donor-country firms for
design and engineering work or requiring a donor-country firm to run the bidding
process, thereby creating a de facto bias toward the firms of that country.
Over the last few years, Treasury negotiated an agreement in the OECD that
members would stop offering tied aid for design and engineering studies for
projects that will then be financed with untied aid. We firmly believe that this
practice provided an unfair technical advantage to donor country firms when bidding
for untied aid projects.
In addition, in January 2005, following intensive bilateral discussions with the EC
and Japan (the two largest untied aid donors) and a Treasury-led initiative in the G7, a ground-breaking OECD agreement was reached. This agreement requires that
untied aid donors notify the OECD of projects and bidding information 30 days in

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Page 3 of 5

advance of the start of the bidding process. We believe that this will provide
valuable information to U.S. exporters to help them compete effectively for untied
aid projects that have averaged $8 billion a year since 1993 and are currently rising.
Moreover, donor governments agreed to maintain a minimum bidding period of 45
days to further facilitate participation by U.S. and other exporters. The U.S. makes
this project and bidding information available on the Commerce Department's
website at web.ita.doc.gov/sif/untied.nsfl.
Furthermore, to ensure that donor governments treat foreign bidders fairly, donors
will report the outcome of untied aid bids to the OECD on an annual basis. We will
review carefully the results of the transparency agreement later this year to confirm
whether U.S. exporters are winning a fair share of these projects. If not, and this
new transparency shows that untied aid continues to distort trade, the data will
provide a credible foundation for the U.S. to request OECD negotiations for
comprehensive rules for untied aid.
We also have seen some progress on disciplining market windows since the Ex-1m
2002 reauthorization. Market windows are quasi-official institutions that support
national exports, but because they purport to operate as private sector actors, they
are not subject to any transparency or discipline concerning the terms and
conditions of their financing. Market windows have the ability to offer financing on
better terms than either the private markets or export credit agencies. The two
largest market windows are KfW of Germany and EDC of Canada.
Following extensive but inconclusive OECD and bilateral discussions on the issue,
EDC seems to be voluntarily shifting its activities toward non-export credit support.
KfW has been subjected to an EC-mandated separation of its official and
commercial business. We expect this action to result in far greater transparency
and market-like discipline on its export financing function. While the potential
certainly remains that either institution could offer terms that undercut the OECD
rules and the private market, current trends show that significant progress is being
made. Nevertheless, Treasury and Ex-1m Bank will continue to monitor the situation
closely.
Finally, our success in disciplining tied aid continues since our last testimony. The
benefits to the U.S. of negotiating and implementing international rules on the use
of tied aid continue to be dramatic. Prior to 1992 -- before the OECD tied aid rules
came into effect -- donors offered $10-$12 billion of tied aid annually and the
resulting U.S. export losses were estimated to be $2 billion or more per year. Since
1992, tied aid credits have averaged only $4 billion annually - a minimum reduction
of 60 percent - and therefore have been cumulatively reduced by about $80 billion.
Treasury estimates that U.S. exports of capital goods are higher by at least $1
billion a year as the result of tied aid rules that reduce trade distortions.
Furthermore if the U.S. had competed for these additional exports by using tied aid,
the War Chest would have required roughly $300 million annually in additional
appropriations - a cumulative savings of $4 billion for U.S. taxpayers since 1993.
The War Chest
Continued success in the OECD rules based approach to tied aid as well as untied
aid and market windows is dependent in large part on Treasury's ability to use the
War Chest as a policy tool. Removing that role would undermine U.S. credibility and
deter cooperation from our OECD partners. More importantly, this would seriously
weaken the U.S. position in any effort to negotiate new rules, such as those for
untied aid, and to enforce the existing rules. A weakened U.S. position in the export
financing disciplines arena will almost certainly raise the cost to the U.S. taxpayer of
protecting U.S. exporters against unfair foreign subsidies.
Congress created the tied aid War Chest in 1986 in order to provide the
Administration with leverage to negotiate economically and developmentally sound
tied aid rules in the OECD. The War Chest was also intended as a means to
enforce these rules and leverage additional market-opening negotiations, as
necessary. As a result of Treasury-led negotiations, the comprehensive set of tied

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Page 4 of 5

aid rules outlined earlier took effect in 1992, providing a better balance between the
development and commercial objectives of the OECD donor governments.
The selective use of War Chest funds to enforce tied aid rules has worked
exceedingly well in reducing trade distortions and leveling the playing field for U.S.
exporters at virtually no cost to the U.S. taxpayer. As a result of this success,
foreign tied aid programs have been pushed out of most areas of commercial
competition, and the demand by U.S. exporters for tied aid matching has declined
dramatically. Despite this decline in demand, the War Chest remains an important
tool in the U.S. policy arsenal. Treasury uses the War Chest as leverage not only to
enforce existing rules on tied aid and other trade-distorting activities but also to
negotiate new rules as needed -- as may be the case for untied aid.
While we refer to tied aid "rules," they are not legally binding. They are voluntary, as
are all the export credit rules under the Arrangement. Other donors have voluntarily
addressed U.S. concerns and agreed to stop or limit their financing for the types of
capital projects that the U.S. has argued should be ineligible for tied aid credits. The
tied aid projects that our OECD partners are now financing are specifically
permitted under the rules and are less distorting to trade.
Given the voluntary nature of the Arrangement, the U.S. must be careful how it
decides to implement its matching policy. An insufficiently judicious policy on use of
our tied aid would give our OECD partners an incentive to abandon the
Arrangement and expand the scope of their tied aid programs to include larger,
more commercial projects. This would create a vicious cycle of increasing tied aid
from all parties and generating a larger demand for the War Chest. The gains that
the successive Administrations have worked to achieve over the last fifteen years
would quickly unwind.
This is not to suggest that the U.S. should never match any tied aid offers. Some
tied aid projects pass the OECD eligibility test but can still create longer-term
advantages for foreign exporters by setting technical standards, providing brand
name recognition, allowing maintenance and repair capabilities to become
established, etc. Any of these elements can tilt the playing field for future
commercial sales. War Chest matching is a vital tool to ensure that tied aid is not
used, intentionally or unintentionally, to tilt longer-term competitive conditions
against U.S. exporters. Treasury fully supports using the War Chest in such
instances.
In addition, the tied aid rules have two systemic shortcomings. The first relates to
small projects below $3 million and the second relates to projects in the railway and
mass transit sectors. Small projects are exempt from the tied aid rules in order to
minimize the administrative burden of the rules. However, some OECD members
used this exemption aggreSSively to finance small commercial projects in violation
of the spirit of the rules. In response to this, Treasury has been clear that it
automatically supports using the War Chest to match small commercial projects.
Passenger railway and mass transit projects also meet the eligibility rules because
they are highly capital intenSive, meaning their costs are normally not recouped
from their own earnings over the term of an export credit agency (ECA) loan. In
addition, their revenues are limited because they are often unable to charge the full
economic value of their services. Therefore, Treasury has been clear that such
projects are frequently good candidates for War Chest matching, and just such a
matching offer was approved earlier this year.
In conclusion, this policy-based approach to matching foreign tied aid offers allows
us to protect U.S. exporters from unfair use of tied aid, while recognizing the
legitimate development objectives of foreign aid programs. It is in the interest of
U.S. exporters and taxpayers that the War Chest remain a tool to leverage the
broader, rules-based approach. The current Treasury/Ex-1m Bank tied aid principles
and procedures were put in place in close cooperation with Congress in 2002, are
working well, and have not produced a single disagreement between the two
agencies.

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Page 5 of 5

I appreciate the opportunity to appear before you today and look forward to your
questions. Thank you.
-30-

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June 20, 2006
2006-6-20-13-14-18-27254
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 $66,086 million as of the end of that week, compared to $66,281 million as of the end of the prior week.
I. Official U.S. Reserve Assets (in US millions)
June 9, 2006

Ju n e16,2006

66,281

66,086

TOTAL

1. Foreign Currency Reserves 1
a. Securities

Euro
I

I

11,805

Yen

II

TOTAL

I

22,941

11,136

Of which, issuer headquartered in the US.

EU~

11,7

V~TAL I

11,

812

0

0

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

11,731

17,151

5,420 :

b.ii. Banks headquartered in the US.

0

I

b.ii. Of which, banks located abroad

0

5,363

11,725

I
I

17,088

I

0
0

b.iii. Banks headquartered outside the US.

0

0

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

0

0

2. IMF Reserve Position 2

I

6,535

13. Special Drawing Rights (SDRs) 2

II

14. Gold Stock 3

I

I

II

5. Other Reserve Assets

8,613

I

I

6,533
8,612

11,041

11 ,_OLl1
..

0

0

II. Predetermined Short-Term Drains on Foreign Currency Assets

I

Yen

Euro
1

I

June,9, 2006
TOTAL

June J 6,2006
Euro

I

Yen

I

0

I=f'lro:gn currency loans and securities

TOTAL
0

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

0

0

2.b. Long positions

0

0

3. Other

0

0

III. Contingent Short-Term Net Drains on Foreign Currency Assets
June 9, 2006
I

Euro

I
I

http://www.treas.gov/press/relea:.~.s/200662013141827254.htm

Yen

I
I

June 16, 2006
TOTAL

Euro

Yen

TOTAL

I

I
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Page 2 of 2

1. Contingent liabilities in foreign currency

0

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

I
I

II

I

0

I

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

0

0

3. Undrawn, unconditional credit lines

0

0

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

IHeadquartered outside the U. S.

I

4. Aggregate short and long positions of options
in foreign

I

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

II

0

I

II

0

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

I
I

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

Notes:
1/ Includes holdings of the Treasury's Exchange Stabilization Fund (ESF) and the Federal Reserve's System Open Market Account
(SOMA), valued at current market exchange rates. Foreign currency holdings listed as securities reflect marked-to-market values, and
deposits reflect carrying values. Foreign Currency Reserves for the latest week may be subject to revision. Foreign Currency
Reserves for the prior week are final.

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

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June 20, 2006
JS-4328
Treasury to Sponsor First Pandemic Flu Response Exercise
Focused on Financial Sector
Florida Coalition to Host Program
The Treasury Department in cooperation with the FloridaFIRST regional financial
coalition will sponsor the first U.S. pandemic flu response exercise focused on the
financial sector Thursday, June 22 in Miami, FI.
Treasury Deputy Assistant Secretary for Critical Infrastructure Protection and
Compliance Policy Scott Parsons and will join 70 participants from Florida financial
services firms and health, police and fire officials from local, state and federal
agencies to test the local industry's preparedness for such a crisis.
FloridaFIRST is a regional coalition formed by financial institutions based in Miami
with the goal of enhancing the resilience of the financial sector in South Florida to
handle threats from terrorism and natural disasters. FloridaFIRST is a collective
effort to protect the homeland through public and private partnerships. Treasury
helped to facilitate the partnership's creation in October 2005. For more information
on the coalition, please visit: http://www.treas.gov/press/releases/ls2970.htm.
The emergency response exercise is not open to the media; however, Treasury
officials are available for interviews to discuss the program. To schedule an
interview, please contact Jennifer Zuccarelli at (202) 622-8657.
Who
Deputy Assistant Secretary Scott Parsons
What
FloridaFIRST pandemic flu response
Where
Miami-Dade Emergency Operations Center
9300 NW 41 Street
Miami, FL
When
Thursday, June 22

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June 20, 2006
JS-4330

US Treasurer to Visit Puerto Rico Chamber of Commerce
U.S. Treasurer Anna Escobedo Cabral will speak with the Puerto Rican Chamber of
Commerce in Fajardo, Puerto Rico on Friday, June 23. The event is open to the
press and the Treasurer is available for interviews on a range of topics including the
U.S. economy, financial education, currency and immigration.
The U.S. Treasurer serves as an adviser to the Secretary of the Treasury on
matters relating to currency production and security. The Treasurer also serves as
one of the Treasury Department's principal advisors and spokespersons in the area
of financial literacy and education. Before taking her office at the Treasury, she
served as director of the Smithsonian Institution's Center for Latino Initiatives and
as president and CEO of the Hispanic Association on Corporate Responsibility.
•
•
•
•

Who: U.S. Treasurer Anna Escobedo Cabral
What: Remarks before the Puerto Rico Chamber of Commerce
When: Friday, June 23 3:00 p.m. (AST)
Where: EI Conquistador Resort, Poinsettia Room
1000 Conquistador Ave.
Fajardo, Puerto Rico
- 30 -

REPORTS
•

Tesorera de Los Estados Unidos Visitara la Camara de Comercio de Puerto
Sico (PDF)

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u.s. TREASURY DEPARTMENT OFFICE OF PUBLIC AFFAIRS
AVISO DE PRENSA: 23 DE JUNIO DEL 2006
CONTACTO (en ingles por favor): Jennifer Zuccarelli

(202) 622-8657

TESORERA DE Los ESTADOS UNIDOS
VISIT AM LA CAMARA DE COMERCIO DE PUERTO RIco

La Tesorera de los Estados Unidos, Anna Escobedo Cabral, hablani con la Camara de
Comercio de Puerto Rico en Fajardo, Puerto Rico el viemes 23 de junio. Este evento
estara abierto a los medios de prensa, los cuales podran entrevistar a la Tesorera Cabral
sobre la economia estadounidense, la educaci6n financiera en los Estados Unidos, la
moneda estadounidense y el tema de inmigraci6n entre otros.
La Tesorera aconseja al Secretario del Departamento del Tesoro en asuntos relacionados
con la producci6n del dinero y la seguridad del mismo. La Tesorera tambien sirve como
una consejera principal del Departamento del Tesoro en asuntos relacionados con la
educaci6n financiera. Antes de asumir el puesto de Tesorera, tambien fue la directora del
Centro de Iniciativas Latinas para el Instituto Smithsonian y anteriormente la presidente
de una asociaci6n sin fines de lucro Hamada Hispanic Association on Corporate
Responsibility.
QUIEN:

ANNA ESCOBEDO CABRAL, TESORERA DE LOS ESTADOS UNIDOS

QUE:

AUDIENCIA ANTE LA CAMARA DE COMERCIO DE PUERTO RICO

CUANDO:

VIERNES

DONDE:

EL CONQUISTADOR RESORT, POINSETTIA ROOM
1000 CONQUISTADORAv.
FAJARDO, PUERTO RICO

23 DE JUNIO A LAS 3:00 PM (AST)

Page 1 of 4

June 22,2006
JS-4331
Testimony of Pat O'Brien, Assistant Secretary
Office of Terrorist Financing and Financial Crimes
U.S. Department of the Treasury
Before the Senate Committee on Banking, Housing, and
Urban Affairs
Washington, DC

Chairman Shelby, Ranking Member Sarbanes, thank you for the opportunity to
address you today on a very important issue that presents us with a tremendous
challenge.
Iran is a state sponsor of terrorism that has demonstrated a reckless intention to
support, facilitate, and direct global terrorist activity. In addition to its blatant
sponsorship of global terror, Iran intends to acquire weapons of mass destruction.
Exacerbating an already worrisome pattern of dangerous behavior was the election
of hardline Iranian PreSident Ahmadinejad in June 2005. His provocative
comments about wiping Israel off of the map and Iran's continued activities to
destabilize the region and pursue a nuclear weapons capability have heightened
the world's concern.
We have been working very closely with our interagency counterparts to consider
these threats and develop an appropriate strategy to confront them. Both terrorism
and WMD proliferation require vast support networks through which money and
material flow. The Treasury Department -- working with its interagency partners -has unique tools to address this potent mix of money, terror and WMD, and has
been devoting considerable time and attention to addressing this Iranian threat.
We are in now in a particularly crucial moment. The United States, the United
Kingdom, France, Germany, Russia, and China have presented a package of
incentives and disincentives to Iran to resolve the problem posed by the Iranian
nuclear weapons program. As the President and Secretary of State have said, we
are dedicated to resolving this issue diplomatically and will exhaust the diplomatic
channel accordingly. But if the diplomatic path is not successful, the international
community has a range of options to make clear that Iran's pursuit of nuclear
weapons will come at the cost of its own isolation.
I would like to provide an overview of the various threats posed by Iran and the
relevant authorities we have at Treasury, both with respect to proliferation and
terrorism, and with respect to Iran in general.
The Threat Posed by the Iranian Regime

The scope of Iran's perilous activity is enough to warrant significant concern. Iran's
sponsorship of these activities is even more troubling because of the vast resources
it has to facilitate this threatening conduct. Be it the spread of WMD, the funding of
terrorist and militant groups in Lebanon, the Palestinian territories, and Iraq, Iran
has the resources to invest substantially in violent projects. We are working
steadily with the interagency community, to target the networks that move these
funds and prevent them from abusing the integrity of the world's financial system.
Nuclear Weapons Development and Missile Technology
There is now widespread understanding that the Iranian regime is dedicated to

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acquiring a nuclear weapons capability, in addition to other kinds of weapons of
mass destruction capabilities and the means to deliver them.
As a complimentary measure to the international diplomatic process to press Iran to
end its pursuit of nuclear weapons, the Administration will continue to protect
ourselves and our financial system against companies engaged in WMD
proliferation, including those facilitating Iran's pursuit of WMD technologies. In June
2005, the President issued Executive Order 13382, aimed at undercutting firms
involved in proliferation of WMD and their support networks. Proliferators traffic in
expensive and sophisticated technologies, and depend heavily on international
trade. The President's Executive Order authorizes us to cut off proliferators and
their supporters from the U.S. financial system and to encumber their international
commerce.
E.O. 13382 authorizes the imposition of strong financial sanctions against not only
WMD proliferators, but also against entities and individuals providing support or
services to them. Designation under this Order prohibits all transactions between
the designated entities and any U.S. person and freezes any assets the entities
may have located under U.S. jurisdiction.
Since June 2005, the U.S. Department of the Treasury has designated six Iranian
entities for their support of the proliferation of WMD and their missile delivery
systems, including Iran's pursuit of nuclear weapons under the guise of a peaceful
nuclear energy program:
•

The Atomic Energy Organization of Iran (AEOI), which reports directly to
the Iranian President, is the main Iranian institute for research and
development activities in the field of nuclear technology, including Iran's
centrifuge enrichment program and experimental laser enrichment of
uranium program, and manages Iran's overall nuclear program.
• The Aerospace Industries Organization (AIO), a subsidiary of the Iranian
Ministry of Defense and Armed Forces Logistics, is the overall manager and
coordinator of Iran's missile program. AIO overseas all of Iran's missile
industries.
• The Shahid Hemmat Industrial Group (SHIG) is responsible for Iran's
ballistic missile programs, most notably the Shahab-3 medium range
ballistic missile which is based on the North Korean No Dong missile. The
Shahab-3 is capable of carrying chemical, nuclear, and biological warheads
and has a range of at least 1500 kilometers. SHIG has received help from
China and North Korea in the development of this missile.
• The Shahid Bakeri Industrial Group (SBIG) is an affiliate of Iran's AIO.
SBIG is also involved in Iran's missile programs. Among the weapons SBIG
produces are the Fateh-11 0 missile, with a range of 250 kilometers, and the
Fajr rocket systems, a series of North Korean-designed rockets produced
under license by SBIG with ranges of between 40 and 100 kilometers. Both
systems are capable of being armed with chemical and possibly other types
of warheads.
The Novin Energy Company has transferred millions of dollars on behalf the AEOI
to entities associated with Iran's nuclear program. Novin operates within the AEOI,
and shares the same address as the AEOI; and
•

The Mesbah Energy Company is a state-owned company subordinate to
the AEOI. Through its role as a front for the AEOI, Mesbah has been used
to procure products for Iran's heavy water project. Heavy water is essential
for Iran's heavy-water-moderated research reactor project, which when
completed, could provide Iran the capability to produce plutonium for
nuclear weapons.

Just this past week, we designated four Chinese companies and one U.S.
representative office, which supplied Iran's military and Iranian proliferators with
missile-related and dual-use components. No reputable company or institution
should be doing business with these entities.

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Support for Terrorism and Violence
Iran also actively sponsors terrorism and violence across the Middle East. The
Islamic Revolutionary Guard Corps (IRGC) and Ministry of Intelligence and Security
(MOIS) - both Iranian government bodies - are directly involved in the planning and
support of terrorist acts by non-state actors and continue to sponsor and train a
variety of violent groups that act as surrogates on Iran's behalf.[1]
The Administration is or will, as appropriate, draw on all instruments of national
power to combat the very real threat posed by Iran's sponsorship of terrorism. At
Treasury, we are focused on the support networks, trying to identify and sever the
lines of support that fuel terrorist activities. Stopping the money flows is particularly
challenging in this instance, as Iran draws upon a large network of state-owned
banks and parastatal companies, which is difficult to penetrate and thwart. We are
also hampered by the fact that many of our key allies have yet to recognize
Hizballah as a terrorist organization. Nevertheless, there remain opportunities for
disruption, and we continue to pursue them vigorously.

Broad Sanctions Against Iran
At the Treasury Department, we have also been enforcing a set of far-reaching
sanctions against Iran that have been in place since 1995. Pursuant to the Iranian
Transactions Regulations, 31 C.F.R. Part 560 (the "ITR"), Treasury's Office of
Foreign Assets Control (OFAC) administers commercial and financial sanctions
against Iran that prohibit U.S. persons from engaging in a wide variety of trade and
financial transactions with Iran or the Government of Iran. The term U.S. person
means any U.S. citizen, permanent resident alien, entity organized under the laws
of the United States (including foreign branches), or any person in the United
States.
The ITR prohibit most trade in goods and services between the United States and
Iran or the Government of Iran. U.S. persons are also prohibited from dealing in
Iranian-origin goods overseas or in goods for export to Iran from third countries.
Non-U.S. persons are prohibited by the ITR from re-exporting controlled U.S. origin
goods to Iran. However, the import and export of information and informational
materials to and from Iran is exempt by statute. In addition, the Trade Sanctions
Reform Act provides for specific licenses to be issued for the export of certain
agricultural products, medicine and medical devices to Iran.
Aside from the trade-related sanctions described above, the ITR prohibit any postMay 7,1995 investments by U.S. persons in Iran. U.S. persons are also prohibited
from facilitating transactions by third-country persons that could not be engaged in
by U.S. persons themselves. Finally, the ITR prohibit U.S. persons from evading or
attempting to violate any of the prohibitions contained in the ITR.
OFAC also maintains in effect the Iranian Assets Control Regulations, 31 C.F.R.
Part 535 (the "IACR"), which governed the freezing of Iranian assets at the time of
the hostage crisis. Pursuant to the 1981 Algiers Accords, most Iranian assets in the
United States were unblocked and transferred to various escrow accounts. The
IACR remain in effect to facilitate the resolution of claims before the Iran-U.S.
Claims Tribunal in The Hague. Certain assets related to claims before the IranUnited States Claims Tribunal remain blocked in the United States and consist
mainly of diplomatic and consular property.

Private Sector Reaction
Perhaps as important as governmental action is the response that we are seeing
from the international private sector to the Iranian regime's destabilizing activities.
As it witnesses firsthand the disturbing direction in which the Iranian regime seems
to be headed, the financial sector has begun to reassess whether it is appropriate
or prudent to do business with Iran. The words and signals coming out of Iran have
led observers to worry about Iran as an investment arena and have prompted
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Iran altogether.
•

•
•

In the international banking community, UBS ceased its activities with Iran.
Credit Suisse announced that it would no longer establish new business
relations with Iran. ABN Amro and HSBC have also curbed their dealings
with Iran.
Energy firms Baker Hughes, ConocoPhillips, and BP PLC have reportedly
suspended dealings with Iran.
In May, the Organization for Economic Cooperation and Development
(OECD) downgraded Iran's credit rating for official credits and now
assesses Iran at the same level of risk as countries with active insurgencies,
such as Colombia and Sri Lanka.

These are just the decisions that have been publicly reported. Reputable
institutions around the world are making quiet decisions to cut back or sever their
dealings with Iran, having decided that they do not want to do business with this
state sponsor of terror and proliferator. We in the government can inform this
process by identifying specific threats that private firms might otherwise be unable
to detect and protect against.
Conclusion
We are in a critical moment with Iran now. The Treasury Department along with all
members of the U.S. Government, is lending its full support to the State
Department's work to bring about a successful outcome to this recent round of
multilateral efforts. In the meantime, we will continue to use our tools and leverage
to dismantle networks that support terrorism and weapons proliferation, wherever
they may be. We can not afford to alleviate any pressure on sponsors of terrorism
and supporters of WMD proliferation, and we will continue to do everything in our
power to deny these networks access to the financial system.

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June 22, 2006
js-4332

Statement of Treasury Secretary John W. Snow on
Disclosure of the Terrorist Finance Tracking Program
"President Bush has made it clear that ensuring the safety of the American people
and citizens around the globe must be our number one priority.
"Consistent with this charge, one of the most important things we at Treasury do is
to follow the flow of terrorist monies. They don't lie. Skillfully followed, they lead us
to terrorists themselves, thereby protecting our citizens.
"Given our intimate knowledge of the global financial system and financial flows,
along with our close working relationships with financial institutions around the
world, Treasury is uniquely positioned to track these terrorist money flows both
internationally and domestically. This is part of an overall governmental effort to
map terrorist networks and apprehend terrorists around the world. By following the
money, the U.S. has been able to locate operatives and their financiers, chart
terrorist networks, help bring them to justice, and save lives.
"I am particularly proud of our Terrorist Finance Tracking Program which, based on
intelligence leads, carefully targets financial transactions of suspected foreign
terrorists. Let me be clear what this program is, and what it is not. It is an essential
tool in the war on terror, based on appropriate legal authorities with effective
oversight and safeguards. It is not "data mining", or trolling through the private
financial records of Americans. It is not a "fishing expedition", but rather a sharp
harpoon aimed at the heart of terrorist activity. That fact makes today's disclosure
so regrettable, because the public dissemination of our sources and methods of
fighting terrorists not only harms national security but also degrades the
government's efforts to prevent terrorist activity in the future.
"If there are people sending money to help al Qaeda, then we need to know about
it. We also need to take advantage of that knowledge to follow the money trail and
thwart them.
"It's hard to overstate the value of this information. That's why, during my tenure,
I've focused intently on this program. It is consistent with our democratic values and
legal traditions. I know that it works to make America and the world safer. I'm proud
of the fact that the 9-11 Commission gave its highest level of recognition to our
work. It would have been irresponsible not to have undertaken this program. As
President Bush said, we will not sit back and wait to be attacked again," said
Secretary Snow.
-30-

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June 23, 2006
JS-4333

Treasury Secretary John W. Snow and Under Secretary for
Terrorism and Financial Intelligence Stuart Levey to hold Press Conference
Treasury Secretary John W. Snow and Under Secretary for Terrorism and Financial
Intelligence Stuart Levey will hold a press conference today at 11 :30 a.m. to
discuss the Terrorist Finance Tracking Program.
The following event is open to credentialed media:

Who
U.S. Treasury Secretary John W. Snow and Under Secretary Stuart Levey
What
Press Conference on the Terrorist Finance Tracking Program
When
Friday, June 23, 11 :30 a.m. (EDT)
Where
U.S. Department of the Treasury
Media 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@<:Jo.treas.gQY with the following information
for clearance into the building: full name, Social Security number and date of birth.

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June 23, 2006
JS-4334
Statement of Under Secretary Stuart Levey on
the
Terrorist Finance Tracking Program
My job, as Under Secretary for the Office of Terrorism and Financial Intelligence, is
to track the movement of money of terrorists and other national security threats,
and do everything I can to disrupt those money flows. I take this job extremely
seriously, as do the hundreds of dedicated people at Treasury and our partner
agencies who focus on combating terrorist financing and protecting innocent people
around the world from vicious and senseless attack.
"Following the money" is one of the most valuable methods we have to identify and
find terrorists. If a terrorist operative that you're watching sends or receives money
from another person, you know that there's a link between the two. Money trails
don't lie. And, to wire money through a bank, a person needs to provide a name,
address, and account number - exactly the kind of concrete leads that that can
move an investigation forward and allow us to take action.
As a part of our efforts to track the funds of terrorists, we are confirming that we
have subpoenaed records on terrorist-related transactions from SWIFT.
SWIFT is the premier messaging service used by banks around the world to issue
international transfers, which makes its data exceptionally valuable. I would note
that SWIFT is predominantly used for overseas transfers. It does not contain
information on ordinary transactions that would be made by individuals in the United
States, such as deposits, withdrawals, checks, or electronic bill payments.
The legal basis for this subpoena is routine and absolutely clear. The International
Emergency Economic Powers Act, a statute passed in 1977, allows us to issue
administrative subpoenas for financial records. We issue such subpoenas regularly,
and our authority to do so has never been called into doubt. The SWIFT subpoena
is powerful but narrow, as it allows us to access only that information that is related
to terrorism investigations. We are not permitted to browse through the data, nor
can we search it for any non-terrorism investigation. In practice, this means that we
have accessed only a minute fraction of SWIFT's data.
Multiple layers of strict controls have been put in place to make sure that the
information is not misused. Before they can run a search against this data, analysts
must first explain how the target of the search is connected to a terrorism
investigation. If the link cannot be established, the data cannot be searched.
Pursuant to an agreement we reached with the company, SWIFT's auditors are
able to monitor those searches in real time and stop anyone of them if they have
any concerns about the link to terrorism. In addition, a record is kept of every
search that is done. These records are all reviewed either by an outside
independent auditor, the company's auditors, or both.
The SWIFT data has proven to be one of the most valuable sources of information
that we have on terrorist financing. It has enabled us and our colleagues to identify
terrorist suspects we didn't know, and to find addresses for those that we did. It has
provided key links in our investigations of al Qaida and other deadly terrorist
groups.
We have briefed appropriate members of Congress and their staffs on this program.

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We briefed the central bank governors of all the G-1 0 countries. We briefed key
members of the 9/11 Commission. The reaction from experts -- across the political
spectrum -- has been that this is exactly the kind of creative and vigorous approach
that is needed to combat the elusive terrorist threat that we face. Indeed, our use of
the SWIFT data was one of the principal reasons that the otherwise critical 9/11
Commission Public Discourse Project awarded its only "A-" to our counter-terrorist
financing efforts.
Until today, we have not discussed this program in public for an obvious reason: the
value of the program came from the fact that terrorists didn't know it existed. They
may have heard us talking about "following the money," but they didn't know that
we were obtaining terrorist-related data from SWIFT. Many may not have even
known what SWIFT was.
With today's revelations, this is unfortunately no longer true. This is a grave loss.
The terrorists we are pursuing are deadly serious and take every precaution to keep
their plans and methods to themselves. We cannot expect to continue disrupting
their activities if our most valuable programs are exposed on the front page of our
newspapers.
I can assure you, however, that we, along with our colleagues in the U.S.
Government and abroad, will continue to pursue terrorists aggressively and
responsibly, to map their networks and disrupt their lines of support. I believe that
this is exactly what the American people expect of us.
Thank you.

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June 23, 2006
js-4335
Remarks of Anna Escobedo Cabral
U.S. Treasurer
U.S. Department of the Treasury
Before the Puerto Rico Chamber of Commerce
Fajardo, Puerto Rico - Muy buenas tardes. Es un placer estar con todos ustedes
hoy dfa en la bella "Isla del Encanto" - Puerto Rico. Agradezco inmensamente
est a invitaci6n y oportunidad de compartir con ustedes un poco de informacion
sobre algunas medidas que la Administracion del Presidente Bush y el
Departamento del Tesoro han designado como prioridades para garantizar el
constante crecimiento econ6mico que hemos visto en los Estados Unidos en los
ultimos anos.
Estare compartiendo estos pensamientos con todos ustedes hoy dfa en ingles,
pero con mucho gusto tratare de responder a cualquier inquietud al concluir esta
porcion del programa en ambos idiomas - ingles yespano!.
Once again, thanks so much for your warm welcome. Thank you to the Puerto Rico
Chamber of Commerce and Miriam for inviting me here today.
As I was saying, I am thrilled to be back in beautiful Puerto Rico to speak to such a
distinguished group of business leaders, and particularly to all inspiring Puerto Rico
business-women present in this room today.
It is also an honor to join Governor Anibal Acevedo Vila, and Representative Jose
Aponte, President of the Puerto Rico House of Representatives, at this conference.
I really appreciate the hospitality demonstrated to me and I am truly touched by the
wonderful recognition given to me earlier today as an honored guest. And of
course, it is also a great honor to be joined by so many other distinguished guests
at this week's conference, particularly Dr. Antonia Coello Novello, who as many of
you know served as the 14th Surgeon General of the U.S. What an amazing
achievement!
As I look out into this room, I see an example of what is possible with a little bit of
planning, faith, hard work and some responsible risk-taking. I can honestly say I
feel so inspired by each and everyone of you.
You know, Latina entrepreneurs and business-women really are a force to be
reckoned with - and not just in the United States - but on a global scale.
•

•

•

More than one-third (34.9%) of all Hispanic owned firms are owned by
women. Hispanic women-owned firms employ 18.5% of the workers in all
Hispanic-owned firms and generate 16.3% of the sales. (Center for
Business Women's Business Research, November 2004)
Latinas control 39% of the 1.4 million companies owned by minority women
in the United States, which generate nearly $147 billion in sales. (Center for
Women's Business Research, November 2004)
Four in 10 minority women-owned firms are owned by Latinas. (U.S.
Hispanic Chamber of Commerce)

I want to thank you, not only on my behalf, but also on behalf of Secretary Snow
and President Bush for all you do to help build prosperity on a large scale.

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In the U.S. we've seen that our economy has surged over the past few years.
Although I only have a few minutes to spend with you today, I'll spend some time
sharing some facts about this amazing economic growth we're experiencing, and
also spend time sharing with you information about what helped get us to this
point. But I will also take a few minutes to raise some issues of rather pressing
importance for you to consider, and I will ask you to think about some critical areas,
which still merit our attention. For instance, we need to continue spending
increased time and effort on such areas as improving financial literacy and
education. Treasury is engaged in many efforts right now to promote increased
financial literacy of all people in the U.S. as well as abroad. I'll tell you about some
resources you can pass on to your employees - useful tools and resources to help
people manage their personal finances and create wealth.
For now, I'd like to begin by circling back to my first comment - businesses have
really contributed greatly to the U.S. economy in the past few years.
I'd like to share some recent facts and statistics with you, so that you can really
come to understand the power and influence you have on markets, and more
importantly, on individual lives.
Consider this. In the first quarter of 2006, the U.S. economy grew at an impressive
rate of 5.3 percent, following an already very impressive year for growth. In 2005,
our economy grew at 3.5 percent. We keep outdoing ourselves - and the pie keeps
growing.
The President always does a nice job of putting those figures into perspective and I
want to do the same today. To put it into context for you, think of this - in 2005, our
economy grew faster than Japan and more than twice as fast as France. It also
grew more than three-times as fast as Germany.
In fact, the U.S. economy is the fastest growing of any major industrialized nation in
the world. Productivity is growing at the highest rate in years, and much of that can
be attributed to businesses much like the ones you are responsible for running.
For 33 consecutive months, our economy has created an astounding number of
new jobs - 5.3 million new jobs - and many Latina business owners can take credit
for that high figure. You are creating jobs and improving people's lives. Right now,
the national unemployment rate has fallen to 4.6 percent - lower than the average
of any decade since the 1950's.
I'm really excited about that figure - more than most. You see, I have 4 grown
children and only one left in college. MIT is a good school, but let me tell you, I'll be
happy when my son Christopher graduates. I'm really actually quite thrilled,
because my children, your children, young professionals graduating from college
will have the benefit of taking advantage of a fantastic job market. The job market
for college graduates is the best it's been in five years.
Small businesses are flourishing and creating many of those jobs. We need to give
small business owners a lot of credit because it takes courage to start and manage
your own business. There is a great deal of new business investment out there and that is really fantastic news, since it serves as an indication of confidence that
we will continue to do well far ahead into the future. When business owners like
you invest and expand your operations, it is clear that great things are ahead of us,
that we foresee only more growth and success.
Did you know that the number of Hispanic-owned businesses is growing at three
times the national rate? Hispanic unemployment is at the lowest rate in years at
only 5 percent? Additionally, real after-tax income has grown by almost 9 percent.
Now that is the power of ownership! It stands to reason why this Administration
strongly advocates and promotes an ownership society.
Well, you have to stop and wonder how we achieved all this growth despite the
many challenges this Administration inherited just a few years ago - a recession,

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the stock market correction, corporate scandals, the 9/11 terrorist attacks, and the
Gulf Coast Hurricanes devastation of last year.
The key really is to encourage growth through sound fiscal and monetary policy.
Bottom line, the government cut taxes and yet generated more tax revenues this
past year. Surging tax revenues are a sign of a strong economy. Tax revenues
have well-exceeded forecasts for 2004 and 2005. Treasury is now reporting the
highest annual tax receipts ever. To date tax receipts are up almost 13% this year,
an added gain to last year's gain of 14.5%.
In fact, one of the most important explanations for this strong economy is low
taxes. We find repeatedly that when you allow people to keep more of their own
money, they have more money to invest, more of it to start or expand a business, or
to pay for other important things like a college education or to purchase a home.
In a pro-business environment, those additional dollars may be better spent by a
business in order to expand and increase the production of goods and provision of
services to clients at home and abroad. We do, after all, live in a global
marketplace.
We need to continue to encourage an environment in which the entrepreneurial
spirit remains strong, allowing people to keep more of the money they earn. With
more investment, this economy can only continue to grow. We can't expect the
government to do it all for us - we can't expect it to make money for us. We've got
to do it for ourselves - and we have to create our own opportunities. In order to do
so successfully however, government and the private, public and nonprofit sectors
need to acquire the skills to manage their money wisely, to invest it and make it
grow.
I earlier mentioned the importance of improving financial education. In my role as
Treasurer, I will continue working toward achieving this goal of improving financial
education for all people in the U.S. and abroad.
Although our economy continues to grow and there are more jobs available for
more Americans since the 1950's, somehow we continue to fall short in the area of
personal finance knowledge and good personal finance habits.
This could be attributed to a complex and burgeoning economy like ours that
creates more choices and sophisticated vehicles for saving and making one's
money grow. (This can be an especially daunting challenge for people who are
unfamiliar with this country's customs and primary language - English.)
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.
As I often say, 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 in 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 or planning for a secure
retirement.
That is why improving financial education levels for all Americans is a high priority
for Treasury and President Bush's Administration.
Additionally, it is important to promote financial education because we can see what
can happen to those that are disenfranchised from access to financial education or
a relationship with traditional financial service providers.

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We witnessed this first-hand 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, and often times could not do so by
traditional mail because they were displaced and difficult to track and reach.
At Treasury, we are engaged in several campaigns and mUlti-agency efforts to
improve financial education in the country.
First, Treasury leads the efforts of the Financial Literacy and Education
Commission created in 2003 when the President signed the Fair and Accurate
Credit Transactions Act, and the twenty agencies that form it were tasked with
developing a plan to improve the money management skills of people in the U.S.
Commonly referred to as the FLEC, it recently released a strategy for financial
education during Financial Literacy Month in April of 2006 titled - Taking Ownership
of the Future: The National Strategy for Financial Literacy.
The Commission was also tasked with developing a federal financial education web
site and toll-free hotline, which were launched in English and Spanish in October of
2004 - MyMoney.gov and 1-888-MyMoney. I urge you to visit and spread the word
about MyMoney.gov. It has been recently updated to include an interactive quiz
called the "Money Twenty" and the strategy that I mentioned earlier is also available
and can be downloaded at MyMoney.gov.
The Strategy looks at a variety of important topics, such as homeownership, credit
management, retirement savings, and "banking the unbanked" - an issue that my
office has currently been particularly focused on and is researching extensively.
It also describes the challenges and guideposts for possible solutions.
Sometimes the solutions come from the Federal government, but 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 Action
are highlighted. It is our hope that these calls to action will provide a springboard
for further open and inclusive discussion on a whole myriad of issues.
I also want to tell you about another very special campaign my office has been
involved in - Go Direct. 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. Its objective is to encourage seniors to receive their Social
Security benefits by direct deposit.
It not only communicates the importance of direct deposit - but 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.
The call center is only one of many ways we are helping beneficiaries sign up for
direct deposit. Our Web sites: www.GoDirect.org and www.DirectoASuCuenta.org,
allows beneficiaries to access a step-by-step online tool to sign up - either on their
own or through their bank or credit union.
It's a known fact that direct deposit is not only the most secure way for receiving
Social Security benefits; it is also the most convenient way for all beneficiaries to
have immediate access to their benefits. However, despite 95 percent of
Americans having heard or read about identity theft, a survey sponsored by the
U.S. Department of Treasury and the Federal Reserve Banks revealed that many
are unaware of the security benefits of direct deposit over paper checks.

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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 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.
I have had a chance to share some very good economic news with you. But
statistics cannot adequately capture the contributions of business leaders like
yourselves, individuals who have the potential of bringing about positive change
and improving people's lives. That is invaluable and that is why your work and
contributions are so important.
Thank you again - this has been a great opportunity for me to share with you just a
few of the efforts we're involved in here at Treasury and to highlight just some of the
President's priorities to keep our economy and businesses strong.
Please enjoy the rest of the conference!
-30-

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June 23, 2006
JS-4336
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 26 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 26, 11 :15 AM (EDT)
Where
Treasury Department
Media Room (Room 4121)
1500 Pennsylvania Ave., NW
Washington, DC
Note
Media without Treasury press credentials should contact Frances Anderson at
(202) 622-2960, or frances.anderson@do.treas.gov with the following information:
name, Social Security number, and date of birth.

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June 23, 2006
JS-4337
Treasury Asst. Secretary
to Discuss GSEs with Financial Services Roundtable

U.S. Treasury Assistant Secretary for Financial Institutions Emil W. Henry, Jr. will
give remarks before the Housing Policy Council of the Financial Services
Roundtable on Monday, June 26 at the Financial Services Roundtable. The
Assistant Secretary will discuss government sponsored enterprises (GSEs) and
systemic risk.
WHO
ASSISTANT SECRETARY FOR FINANCIAL INSTITUTIONS EMIL W. HENRY, JR.
WHAT
REMARKS ON GSES AND SYSTEMIC RISK
WHEN
MONDAY, JUNE 26 9:00 A.M. (EDT)
WHERE
FINANCIAL SERVICES ROUNDTABLE
1001 PENNSYLVANIA AVE., NW
WASHINGTON, D.C.

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June 26, 2006
JS-4338
Remarks of Emil W. Henry, Jr.
Assistant Secretary for Financial Institutions
U.S. Department of the Treasury
Before the Housing Policy Council of the
Financial Services Roundtable

Washington, DC- Thank you very much for that kind introduction. I am very happy
to be here. The Roundtable was one of, if not the first, place that I visited after
being sworn in at Treasury back in October. I still remember my pleasant
conversation with Steve Bartlett. In that conversation, he asked if Treasury planned
to get "more involved" in the GSE reform debate. I think it is safe to say that we
have and I think it is wonderful that I am back at the Roundtable to talk more about
why there needs to be strong GSE reform legislation.
There are times when certain words or phrases are used or overused to such an
extent that they verge on losing their meaning. As anyone in the room today with
teenage children understands, the impact of a parent's drumbeat of cautionary
words, on any topiC, can over time, diminish with repetition. As the public GSE
reform discussion crescendos, I fear we may be at such a point with the phrase
"systemic risk". If you have followed the arc of the GSE debate for the past few
years then you will note that the terms "systemic risk" and "GSEs" are inextricable.
However, such repetition could make the likelihood of a systemic event occurring
seem more the stuff of intellectual musing than hard reality.
There also appears to be significant misunderstanding about what it means and
why we need to be concerned about it. So, the purpose of my remarks today is to
clarify what is meant by "systemic risk" as it relates to the GSEs, why we think it
exists, what might transpire in a GSE-initiated systemic event, and why these are
unnecessary risks that can and should be easily avoided.
At the outset, let me be clear on the meaning of systemic risk: it is the potential for
the financial distress of a particular firm or group of firms to trigger broad spillover
effects in financial markets, further triggering wrenching dislocations that affect
broad economic performance. Perhaps a useful analogy is to think about systemic
risk as an illness that can become highly contagious.
It is important to note that these types of concerns are not simply theoretical. Like
the case of a single gunshot setting off an avalanche, there are times when even
seemingly modest or localized events in particular financial markets can trigger
adverse consequences of enormous proportions. One recent example of this type
of event is global financial turmoil in 1998.
In August of 1998, Russia's external debt amounted to roughly $100 billion--a tiny
fraction of global debt. And yet that event led to panic and volatility in financial
markets that ultimately triggered the Long Term Capital Management (L TCM)
implosion and a period of significant financial distress. LTCM pursued a
convergence trading strategy. It established very large positions across many
markets, many of which were essentially bets that liquidity, credit, and volatility
spreads would return to more normal levels. Instead, spreads widened sharply in
the financial turmoil following the Russian default and LTCM suffered losses greatly
exceeding that predicted by conventional risk models. The LTCM crisis laid bare
the dangers of excessive leverage and perhaps more importantly, put a white hot
light on creditors' and counterparties' over-confidence in the "hedged" nature of that

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fund's portfolio and strategy.
If the Russian default could have such wide-reaching ramifications, you can
understand why this Administration is so deeply concerned about the potential
market repercussions of a deterioration in the financial conditions of a GSE, which
collectively have more than $2 trillion of outstanding debt.
The hard lessons from LTCM include: i) the danger of investment decisions which
rely upon the presumption of liquidity, ii) the importance of transparency and
disclosure, iii) the extent of the interdependencies of our global markets, financial
firms, investors and businesses, iv) the fact that complexity is sometimes the
enemy of stability, v) the danger of complacency and false confidence in hedging
strategies which, by definition can never hedge out all risk and which can produce
the opposite of the desired effect in the absence of liquidity.
So, we at the Treasury are confident we are not simply "crying wolf". Before LTCM
few, if any, would have guessed that it could have imposed significant systemic
consequences for the financial markets. And sadly, some are not heeding the
important lessons from this experience in the GSE reform debate.
To address such a looming problem, the Administration has consistently argued for
meaningful reform of the regulatory structure of the GSEs. This reform must include
mechanisms to protect the broader financial markets and our financial firms and
counterparties from unnecessary risks. The core basis for our policy of reform is
the systemic risk presented by the size of the GSEs' mortgage investment portfolios
and the corresponding concentration of risk in these two federally-chartered
enterprises. Simply stated, our financial markets would be safer if these assets and
associated risks were broadly redistributed. And to add insult to this potential
injury, these huge investment portfolios are much larger than what is necessary to
accomplish the GSEs' mission.
The risks of the mortgage investment business are complex and far more difficult to
manage than the risks of the GSEs other major business - the credit guarantee
business.
There are numerous levels of risk presented by the mortgage investment portfolios,
but at a basic level the risk is created as follows: GSE portfoliOS are comprised
primarily of fixed-rate mortgages, either held as whole loans, mortgage-backed
securities (MBS), or other mortgage-related assets. While mortgages in the U.S.
typically allow borrowers the option to prepay at will, the aggregation of fixed-rate
mortgages requires that the investor develop strategies to mitigate risks presented
by these uncertain cash flows - both prepayments and extensions. Unless the
portfolios are hedged properly, in a period of significant interest rate movement,
there is the risk to the GSEs that their assets and liabilities will be quickly become
broadly mismatched which can lead to insolvency --much like the dynamics of the
S&L crisis.
To properly hedge against such a dislocation, the burden rests on the GSEs to
construct complex models of, among many things, borrower behavior, attempting to
divine how and when borrowers will adjust behavior as interest rates change. Once
models are created the GSEs must, in addition to other things, deploy highly
complex derivative-based strategies and other risk transfer mechanisms. However,
the risk, of course, never disappears.
We all know that there are many large companies investing in mortgages that are
exposed to similar risk. So what makes the GSEs different?
There are three primary ways that the GSEs uniquely impose systemic risk on our
financial system. Taken individually, each reason might not be a cause for dramatic
action. However, aggregating each of these attributes under a single entity that
also carries with it the broad misperception of a government backstop or guarantee
creates a perfect storm scenario.

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The first element is the sheer size of the GSEs' investment portfolio. Since 1990,
the mortgage investment business of both of the housing GSEs has grown rapidly.
From 1990 through 2003, Fannie Mae's mortgage investments increased from $114
billion to $902 billion. Freddie Mac's growth in mortgage investments was even
more dramatic. From 1990 through 2003, Freddie Mac's mortgage investments
increased from $22 billion to $660 billion. Today's combined GSEs' mortgage
investment portfolios still total almost $1.5 trillion. By any standard, these are huge
investment portfolios.
Secondly, the GSEs are not subject to the same degree of market discipline as
other large mortgage investors. That lack of market discipline is reflected in
preferential funding rates that result directly from the market's long-standing false
belief that the US government guarantees or stands behind GSE debt. Of course, it
is this funding advantage which drove the expansion of the portfolios in the first
place.
To underscore this lack of discipline, imagine for just a moment if some of our most
prominent complex financial institutions announced major accounting improprieties,
significant restatements and serial failings and shortcomings in risk management
and internal controls, and then further announced the cessation of annual reports
and other standard disclosure materials. Does anyone in this room doubt the
ferocity of "market discipline" that would sweep down upon these institutions in the
form of higher borrowing costs for market-based funding and heightened
counterparty scrutiny?
Further complicating the external discipline picture is that the GSEs operate with
less capital, meaning they are more leveraged than other financial institutions. A
non-GSE firm would have to have considerably more capital to access capital
markets at anything close to the rates the GSEs are granted. Greater leverage
provides less of a capital cushion to absorb losses and it enhances the ability of the
GSEs to grow.
None of these obvious market-based checks have reined in the GSEs' growth.
Simply put, traditional market discipline has not applied for the GSEs.
The third element is the level of interconnectivity between the GSEs' mortgage
investment activities and the other key players in our Nation's financial system. By
way of example, as of December 31,2005, commercial banks held $264 billion in
GSE debt obligations (while not specifically broken out on call reports, given the
relative size of the GSEs, the bulk of these obligations are likely those of Fannie
Mae, Freddie Mac, and the FHLBanks). In comparison to bank tier-1 capital, GSE
debt obligations exceeded 50 percent of capital for 54 percent of these commercial
banks, and GSE debt obligations exceeded 100 percent of capital for 34 percent of
these commercial banks. In addition, the GSEs' interest rate positions are highly
concentrated and pose significant risks to a number of large financial institutions.
What I just laid out forms the basic framework around how the GSEs pose systemic
risk: large size; lack of market discipline; high degree of connections throughout
our financial system. While the U.S. financial markets are highly efficient and
resilient, they are not infallible. Now let's look at this issue even more closely.
Systemic events can unfold by direct and/or indirect spillovers. Direct spillovers
arise when the failure of a particular firm creates substantial losses for those who
carry direct exposure with such firm, such as its creditors. Indirect spillovers
typically develop, not from direct exposures to the firm at the epicenter of the crisis,
but when this firm causes a lack of confidence leading to a sense of panic and
turbulence that results in action that generates substantial losses for firms that were
not directly exposed to the impaired firm. Such spillovers - not the initial event -typically take the greatest toll on economic activity and, in the case of the GSEs, the
potential for both direct and indirect spillover effects is nothing short of breathtaking.
How could such a systemic event begin? They are many possible sparks but an
unexpected sharp or volatile swing in interest rates, or in the parlance of risk
managers, an interest rate "shock" would certainly be a distinct possibility. Of

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course the GSEs claim to attempt to hedge their exposure for these types of
events, though I note the following:
•
•
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the OFHEO report suggests that the GSEs' focus on hedging such events
have been, at best, lacking--at worst dangerously irresponsible;
hedging is not an exact science and models are only as good as the
judgments and expectations reflected in their inputs -- they are often wrong.
the LTCM episode provides a case study for the elements of a financial
crisis; a number of these elements are present here:
highly leveraged entities
presumptions of liquidity
enormously complex derivatives portfolios
abundant publicly-stated confidence in being properly hedged fostering a
fundamental misperception as to the risks in the business
heavy reliance on risk-sensitivity models which, in the case of LTCM were,
of course, wrong.

If such an interest rate shock occurred in a way that was not captured by the
models, the results could be without precedent. The immediate implication would
be actual and mark-to-market losses.
The resulting actual or perceived inability of a GSE to meet its debt or MBS
obligations or a significant decline in the market value of the GSEs debt obligations
could be transmitted throughout the financial sector and the broader economy
through a couple of channels.
An obvious transmission mechanism is through direct losses to the commercial
banking system, derivative counterparties, or other creditors. If these key financial
intermediaries suffered losses related to their GSE exposures, this could lead to a
broader contraction of credit availability - for example fewer loans being made or
more restrictive loan terms - that could have adverse implications f or overall credit
availability and U.S. economic performance.
In addition to the direct impact on the GSEs' creditors, consider, for example just a
few of the other consequences. A sharp deterioration in a GSE's financial condition
would almost certainly increase risk premiums and boost yields on GSE debt and
MBS relative to swap and Treasury yields. Even if the rise in GSE yields might not
fully reflect the true financial condition of the GSEs, institutions that are particularly
exposed to GSE spreads to swaps and Treasuries in their ordinary course of
business would be at risk in this scenario. In particular, institutions such as large
banks, hedge funds, and securities broker dealers that might hedge the interest rate
risk in their MBS positions by establishing short positions in swaps and Treasuries
could suffer substantial losses.
To give you a sense of the potential scope of this one aspect of transmitting a
GSE's financial problems, consider the group of primary dealers. The Federal
Reserve's primary dealer report indicates that the 22 primary dealers--a group that
includes many of the dealer subsidiaries of the most important banks and
investment banks in the United States--in aggregate typically maintain net long
positions in GSE straight debt and MBS of about $130 billion and $30 billion,
respectively. These long positions are hedged in part by short positions in
Treasuries on the order of about $130 billion. Therefore any widening in GSE debt
and MBS spreads over Treasuries would likely result in dealer losses that could be
very substantial, especially relative to their capital. Such losses might cause
dealers to rein in their positions and market-making activities in the GSE debt and
MBS markets and in many other markets as well. Losses sustained by some
primary dealers could well be large enough to reduce capital below regulatory
minimums. Risk spreads for many private firms would likely widen substantially
and banks could choose to tighten credit availability. Financial markets across the
board would likely become very illiquid and volatile as firms with significant losses
attempted to unwind their positions.
Unfortunately, that might not be the end of the story. The GSEs make use of a
considerable amount of short-term funding, that is then hedged to some degree to
replicate long-term funding. For example, short-term instruments account for more

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than 20 percent of all outstanding debt for both Fannie Mae and Freddie Mac. In a
financial crisis, the GSEs might face difficulty in accessing debt markets. This
difficultly might force the GSEs liquidate some MBS holdings, putting excessive
downward pressure on prices in a market that the GSEs are supposed to be
stabilizing.
Those asset sales, in turn, would likely undermine confidence and exacerbate the
sense of panic in the market and add to the losses of the GSEs and other entities
that are major holders of GSE obligations.
I could elaborate further with various scenarios of how such a meltdown might play
out in various corners of our world's capital markets. I have not mentioned, for
example, the potential volatility and unraveling of emerging markets that might
ensue as they tend to do when a crisis results in a "flight to quality" mentality.
And of course, there are scenarios that could play out with foreign investors, a
group that might not appreciate fully the GSEs' relationship with the U.S.
Government and who own nearly $1 trillion of GSE debt and MBS. Indeed, GSE
obligations held on behalf of foreign official institutions at the Federal Reserve Bank
of New York have been increasingly rapidly over the last 18 months and now
exceed $500 billion.
So there are virtually limitless scenarios. But you get the point. We already know
the lessons here. There is no need to endure the test.
I assume that some might contend that, despite the GSEs' current accounting,
corporate governance, and risk management problems, what I have just laid out in
terms of GSE getting into serious financial trouble is unlikely. Past history reminds
us that serious financial problems in the GSEs are not only a possibility, but an
unfortunate reality. And, I feel compelled to remind you that the federal government
has taken steps to assist a troubled GSE in the past.
Do we really want to be faced with unwarranted and irresponsible calls for bailing
out another failed GSE?
In fact, has it been so long that we have forgotten Fannie Mae's significant financial
troubles in the late 1970s and early 1980s? During this time period, Fannie Mae's
balance sheet looked a lot like a savings & loan. As interest rates rose, Fannie
Mae's cost of funds rose above the interest rate it was earning on its long-term,
fixed-rate mortgages. Like many S&Ls, Fannie Mae became insolvent on a mark-tomarket basis. It lost hundreds of millions of dollars. Only a combination of
legislative tax relief, regulatory forbearance, and a decline in interest rates allowed
Fannie Mae to grow out of its problem.
In the mid-1980s, the Farm Credit System (FCS) fell victim to a sharp drop in land
prices, deterioration of agriculture market conditions, and increased interest rate
volatility. These economic factors coupled with poor interest rate risk management
resulted in $2.7 billion in losses in 1985 followed by a $1.9 billion loss in 1986. In
the end, the federal government provided $1.26 billion to the FCS in financial aide.
While I suppose those expectations were correct in the 1980s, as I noted recently,
past government bailouts or assistance should not be viewed as a good predictor of
future government actions.
What I hope you ask yourself after hearing this is "Why?" and "What can we do
about it?"
The answer to the first question is unsatisfying. Ignoring all the rhetoric and spin,
the simple truth is that there is no need for our financial markets to be exposed to
this risk. Passionate statements made by the GSEs to the contrary, the GSE
investment portfolios are not necessary for them to stay true to their mission.
The answer to the second question is much more satisfying - we can address this

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risk rather easily. As long as the portfolios of the GSEs are reduced gradually and
responsibly, the overall impact to the housing market should be trivial.
I would be pleased to answer any questions you might have on this important topic.
Thank you very much.

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June 26, 2006
4339
Letter to the Editors of The New York Times
by Treasury Secretary Snow
Mr. Bill Keller, Managing Editor
The New York Times
229 West 43rd Street
New York, NY 10036
Dear Mr. Keller:
The New York Times' decision to disclose the Terrorist Finance Tracking Program,
a robust and classified effort to map terrorist networks through the use of financial
data, was irresponsible and harmful to the security of Americans and freedomloving people worldwide. In choosing to expose this program, despite repeated
pleas from high-level officials on both sides of the aisle, including myself, the Times
undermined a highly successful counter-terrorism program and alerted terrorists to
the methods and sources used to track their money trails.
Your charge that our efforts to convince The New York Times not to publish were
"half-hearted" is incorrect and offensive. Nothing could be further from the truth.
Over the past two months, Treasury has engaged in a vigorous dialogue with the
Times - from the reporters writing the story to the D.C. Bureau Chief and all the way
up to you. It should also be noted that the co-chairmen of the bipartisan 9-11
Commission, Governor Tom Kean and Congressman Lee Hamilton, met in person
or placed calls to the very highest levels of the Times urging the paper not to
publish the story. Members of Congress, senior U.S. Government officials and wellrespected legal authorities from both sides of the aisle also asked the paper not to
publish or supported the legality and validity of the program.
Indeed, I invited you to my office for the explicit purpose of talking you out of
publishing this story. And there was nothing "half-hearted" about that effort. I told
you about the true value of the program in defeating terrorism and sought to
impress upon you the harm that would occur from its disclosure. I stressed that the
program is grounded on solid legal footing, had many built-in safeguards, and has
been extremely valuable in the war against terror. Additionally, Treasury Under
Secretary Stuart Levey met with the reporters and your senior editors to answer
countless questions, laying out the legal framework and diligently outlining the
multiple safeguards and protections that are in place.
You have defended your decision to compromise this program by asserting that
"terror financiers know" our methods for tracking their funds and have already
moved to other methods to send money. The fact that your editors believe
themselves to be qualified to assess how terrorists are moving money betrays a
breathtaking arrogance and a deep misunderstanding of this program and how it
works. While terrorists are relying more heavily than before on cumbersome
methods to move money, such as cash couriers, we have continued to see them
using the formal financial system, which has made this particular program incredibly
valuable.
Lastly, justifying this disclosure by citing the "public interest" in knowing information
about this program means the paper has given itself free license to expose any
covert activity that it happens to learn of - even those that are legally grounded,
responsibly administered, independently overseen, and highly effective. Indeed,
you have done so hem.

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What you've seemed to overlook is that it is also a matter of public interest that we
use all means available - lawfully and responsibly - to help protect the American
people from the deadly threats of terrorists. I am deeply disappointed in the New
York Times.
Sincerely,
[signed]
John W. Snow, Secretary
U.S. Department of the Treasury

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10 view or pnnt tne fJUt- content on tnlS page, download tne tree Adobe@ Acrobat@ Hea(JeN!;.

June 23, 2006
JS-4340
Terrorist Finance Tracking Program
Fact Sheet
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After the September 11 th terrorist attacks, President Bush declared that we
would use all elements of national power to fight a different kind of war
against terror. On September 23, 2001, the President launched a new
campaign against terrorist financing when he issued Executive Order
13224. This EO authorized the Treasury Department - in conjunction with
other Cabinet agencies -- to use all appropriate measures to identify, track,
and pursue not only those persons who commit terrorist acts here and
abroad, but also those who provide financial or other support for terrorist
activity.
Treasury developed the Terrorist Finance Tracking Program to identify,
track, and pursue suspected foreign terrorists, like al Qaida, Hamas, and
Hezbollah -- and their financial supporters. The Treasury Department is
uniquely positioned to track terrorist money flows and assist in broader US
Government efforts to uncover terrorist cells and map terrorist networks
here at home and around the world. These efforts have not only disrupted
terrorist networks, they have saved lives.
As part of its vital mission, Treasury issues subpoenas to SWIFT - a
Belgium-based company with U.S. offices that operates a worldwide
messaging system used to transmit bank transaction information - seeking
information on suspected international terrorists. Under the terms of the
subpoenas, the U.S. government may only review information as part of
specific terrorism investigations.
Based on intelligence that identifies an individual or entity, the US
Government is able to conduct targeted searches of the limited subset of
records provided by SWIFT in order to trace financial transactions of
suspected terrorist activity.
SWIFT information greatly enhances our ability to map out terrorist
networks, often filling in missing links in an investigative chain. The US
Government acts on this information to target and disrupt the activities of
terrorists and their supporters.
By following the money, the U.S. has been able to identify and locate
operatives and their financiers, chart terrorist networks, and help keep
money out of their hands.
The TFTP is firmly rooted in sound legal authority, based on statutory
mandates and Executive Orders -- including the International Emergency
Economic Powers Act of 1977 (IEEPA), and the United Nations Participation
Act (UNPA).
In no way does the TFTP involve data mining or trolling through the financial
records of Americans. In fact, most Americans would never have
information that would be included in the SWIFT data. We work to ensure
the appropriate and limited use of the information while maintaining respect
for individual privacy.
SWIFT is overseen by a committee drawn from major central banksincluding the U.S. Federal Reserve, the Bank of England, the European
Central Bank, the Bank of Japan, and the lead overseer, the National Bank
of Belgium. The overseers have been informed about SWIFT's participation
with the Treasury and the safeguards and assurances put in place.
The program has rigorous safeguards and protocols to protect privacy.
Searches of records must identify the terrorism-related basis, which is
systematically logged and auditable. Regular, independent audits of the
program have confirmed that the U.S. Government has conSistently

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observed the established safeguards and protocols.
Furthermore, appropriate Members of Congress, including the members of
the House and Senate intelligence committees, have been briefed on this
program.
The TFTP is separate and complementary to other US Government efforts
focused on terrorist financing. For example, the Treasury Department, as
mandated by Congress in the Bank Secrecy Act, requires financial
institutions to make available a range of similar information for law
enforcement and counterterrorism purposes. The Government relies on
financial data every day in pursuing criminal and terrorist activity.
This is exactly the kind of program that Americans want and expect from
their government to prevent further terrorist attacks. The 9/11 Commission
was critical of the government for its failure to have this kind of program one that uses all available information to connect the dots -- in place prior to
the September 11th attacks. In fact, in its final report card the 9/11
Commission's Public Discourse Project awarded the government-wide effort
to combat terrorist financing the highest grade, citing the government's
"significant strides in using terrorism finance as an intelligence tool."
Furthermore, noting the value of this kind of activity, Congress has directed
Treasury to explore the implementation of systems to review all crossborder financial transactions. Treasury's Financial Crimes Enforcement
Network (FinCEN) is studying the feasibility of developing such a program in
response to Congress.
There is no doubt that America and our allies in the war on terror are safer
today because of this program.
It is important to note that the Treasury Department is open and transparent
about its efforts to identify and track the financial transactions of foreign
terrorist suspects and their supporters. Whether in congressional testimony,
in public speeches, or communications with the news media, Treasury
officials have always highlighted the Department's efforts to track suspected
terrorist financing activity.
However, as with any national security program, the Administration is
appropriately protective of the methods and sources it employs to execute
its mission. The public dissemination of sources and methods degrades
national security and the government's efforts to prevent terrorist activity.

REPORTS

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Legal Authorities Underlying the Terrorist Finance Tracking Program
•

The SWIFT data is provided pursuant to subpoenas based on statutory mandates and
related Executive orders for combating terrorism.

•

The International Emergency Economic Powers Act of 1977 authorizes the President,
during a national emergency, to investigate bank transfers and other transactions in
which a foreign person has any interest. 50 U.S.C. § 1702. Similarly, the United
Nations Participation Act authorizes the President, when implementing United
Nations Security Council Resolutions, to investigate economic relations or means of
communication between any foreign person and the United States. See 22 U.S.C.
§ 287c; UNSCR 1333 (2000) and 1373 (2001).

•

In Executive Order 13224, relying in part on IEEPA and the UNPA, the President
declared a national emergency to deal with the 9111 terrorist attacks and the
continuing and immediate threat of further attacks, and blocked the property of, and
prohibited transactions with, persons who commit, threaten to commit, or support
terrorism. 66 Fed. Reg. 49079 (Sept. 25,2001). The President delegated his
authorities under the Executive Order to the Secretary of the Treasury. Treasury
issued the subpoenas to SWIFT pursuant to Executive Order 13224 and its
implementing regulations. See 31 C.F.R. Part 594; 31 C.F.R. § 501.602.

F or background:
•

The subpoenas fully comport with applicable Fourth Amendment standards (i.e., the
investigation of terrorism is properly authorized by the Congress; the data requested
are "reasonably relevant" to that investigation; and the subpoenas are not unduly
burdensome).

•

The Foreign Intelligence Surveillance Act, 50 U.S.c. §§ 1801-1863, is not applicable
to the Program. The SWIFT data is produced pursuant to a subpoena for financial
records. Treasury is not engaged in "electronic surveillance" - it is not acquiring any
radio or wire communication (see 50 U.S.C. § 1801(f)(1), (2), (3)) and there does not
exist a legitimate expectation of privacy with respect to financial records (see 50
U.S.C. § 1801(f)(4); United States v. Miller, 425 U.S. 435, at 442-43).

•

The Right to Financial Privacy Act of 1978 (RFPA), 12 U.S.C. §§ 3401-3422, is not
applicable to the Program. RFPA delineates procedural requirements for a
government agency to obtain from a bank financial records of its individual
customers, such as by administrative subpoena. RFPA does not apply, however, to a
company such as SWIFT that does not have individual persons as customers, but
rather acts as an intermediary for financial institutions.

•

Under the Bank Secrecy Act, Treasury mandates that financial institutions maintain
and provide transaction records for law enforcement purposes, including for counterterrorism investigations. See, e.g., 31 U.S.C. § 5318; and 12 U.S.C. § 1829b.

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June 27, 2006
JS-4341
Opening Statement of Henry M. Paulson, Jr.
before the Senate Finance Committee
Chairman Grassley, Ranking Member Baucus, and members of the Finance
Committee, thank you for inviting me to testify here today. I am honored that
President Bush has nominated me to serve as the 74th Secretary of the Treasury,
following the distinguished leadership of Secretary John Snow. And I appreciate the
time members of this Committee have taken to meet with me and consider my
nomination. Frequent communication between the Treasury Department and this
committee is of vital importance, and if confirmed I look forward to building on the
important dialogue that we have already begun.
I am also grateful to my family for supporting my decision to pursue this opportunity.
The Treasury Department has a critical role to play in helping to set the direction of
the U.S. and global economy - a role that reaches back to America's founding. If
confirmed, I will strive to carry forward the Treasury Department's rich legacy.
I have admired the work of the Treasury Department throughout my 32-year career
in finance - and particularly during the last eight years, when I have led a global
financial institution. As the steward of the U.S. economic and financial systems, the
Treasury has helped lay the groundwork for the American economy to become a
model of strength, flexibility, dynamism and resiliency.
This is a system that generates growth, creates jobs and wealth, rewards initiative,
and fosters innovation. It is also a system that offers considerable social and
economic mobility. We must never take this for granted, and we cannot allow
Americans to lose faith in the benefits our system offers. America is the land of
opportunity. We need to be vigilant in ensuring that each and every American has
the opportunity to acquire the skills to compete, and to see those skills rewarded in
the marketplace.
One way we can do this is to maintain a macroeconomic climate that enables
workers, families, businesses - both small and large - to thrive. That calls for
spending discipline and predictable taxation, combined with prudent regulation.
If confirmed, I will focus intensely on how the United States can maintain and
strengthen our competitive position. As a product of a mid-sized town in Illinois, I
will of course always remember Chairman Grassley's succinct description of the
Treasury secretary's role: "to understand how tax policy, capital markets,
international trade, and currency policy affect Main Street USA."
As we work to promote greater economic opportunity for the American people, we
must always remember that the American economy is deeply integrated with the
global economy. That brings challenges, but even greater opportunities. While
maintaining confidence in our ability to compete throughout the world, we must be
prepared to embrace the change that will contribute to our long-term prosperity.
Open markets help to boost productivity and drive America's economic growth,
which in turn creates new and better jobs for American families. It's also true that
the global integration of economies and markets holds the promise of a more
prosperous and secure world. In my extensive travels throughout the world, I've
seen countless examples of the benefits of economic reform.

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Page 2 of 2

If confirmed, I will be active in affirming America's leadership role in the global
economy, where we must continue to bea constructive and stabilizing force. I also
look forward to working alongside other colleagues in the Cabinet to advocate
policies and actions which provide open and level markets for U.S. investment and
for U.S. products.
To close, I will briefly outline some of the steps that could be taken to achieve a
stronger and more competitive U.S. economy:
•
•
•
•

•

Addressing the long-term unfunded obligations of Social Security and
Medicare that threaten to unfairly burden future generations.
Keeping taxes low and collecting them in a simpler and fairer manner that
does not distort economic decision-making.
Expanding opportunities for American workers, farmers, and businesses big and small - to compete on a level playing field with the rest of the world.
Maintaining and enhancing the flexibility of our capital and labor markets,
and preventing creeping regulatory expansion from driving jobs and capital
overseas.
Finally, the U.S. economy will be stronger if we can continue to foster an
entrepreneurial spirit and culture which generates innovation, risktaking, and productivity growth that raises living standards to keep America
the economic envy of the world.

If confirmed, I look forward to frequent consultation with members of this Committee
to advance these important ideas. And if confirmed, I also look forward to working
with the Treasury Department's select corps of professionals, who playa critical
role in the stability and vitality of the U.S. economy.
Thank you Mr. Chairman.

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June 27, 2006
2006-6-27 -13-0-2-21646

u.s. International Reserve Position
The Treasury Department today released U.S. reserve assets data for the latest week. As indicated in this table, U.S. reserve assets
totaled $65,624 million as of the end of that week, compared to $66,086 million as of the end of the prior week.
I. Official U.S. Reserve Assets (in US millions)
Jun~16,.2006

TOTAL
11. Foreign Cu rrency Reserves 1

June 23,2006

I

66,086

I

a. Securities

Eurtp"

11,79

I

65,624

E~:pr9= TOTAL

II TOTAL

1,015

22,812

Of which, issuer headquartered in the US.

11,684

10,89

11,637_L

5,318

22,~78

0

b. Total deposits with:

b.i. Other central banks and BIS

L

17,088

5,363

11,725

II

0

16,955
0

0

0

b.iii. Banks headquartered outside the US.

0

0

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

0

0

b.ii. Banks headquartered in the US.
IIb.iL Of which, banks located abroad

2. IMF Reserve Position 2
13. Special Drawing Rights (SDRs) 2

I

14. Gold Stock 3

II

II

15. Other Reserve Assets

I

I

~533

6,493

8,612

8,558

11,041

11,041

0

0

I
I

"

II. Predetermined Short-Term Drains on Foreign Currency Assets

1. Foreign currency loans and securities

II
II _ Euro
II

June J6, 2006
TOTAL

Yen

JunE! 23,2006

I
I

Yen

Euro

TOTAL

I
II

0

0

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

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

II
I
II

II
I
I

I
I
I

0

0

0

0

0

0

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

I Euro

JU".~:~2PP6

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TOTAL

Euro

June 23, 2006
Yen

TOT

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Page 2 of 2

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

0

I

II

II

I

I

I

0

I

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

0

0

3. Undrawn, unconditional credit lines

0

0

!3.a. With other central banks
3.b. With banks and other financial institutions
Headquartered in the U.S.

I

3.c. With banks and other financial institutions
Headquartered outside the U. S.

I

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

0

0

4.a. Short positions

14.a.1. Bought puts

I

14.a.2. Written calls

I
I

14.b. Long positions

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

Notes:

1/ Includes holdings of the Treasury's Exchange Stabilization Fund (ESF) and the Federal Reserve's System Open Market Account
(SOMA), valued at current market exchange rates. Foreign currency holdings listed as securities reflect marked-to-market values, and
deposits reflect carrying values. Foreign Currency Reserves for the latest week may be subject to revision. Foreign Currency
Reserves for the prior week are final.

21 The items, "2. IMF Reserve Position" and "3. Special Drawing Rights (SDRs)," are based on data provided by the IMF and are
valued in dollar terms at the official SDRIdoliar exchange rate for the reporting date. The entries for the latest week reflect any
necessary adjustments, including revaluation, by the U.S. Treasury to IMF data for the prior month end.
3/ Gold stock is valued monthly at $42.2222 per fine troy ounce.

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June 29, 2006
JS-4342
Testimony of D. Scott Parsons, Deputy Assistant Secretary
for Critical Infrastructure Protection and Compliance Policy
U.S. Department of the Treasury
Before the U.S. House of Representatives Committee on
Financial Services Subcommittee on Oversight and
Investigations

Thank you Chairwoman Kelly, Ranking Member Gutierrez, and Members of the
Subcommittee. I appreciate the opportunity to speak to you about the Treasury
Department's contribution to pandemic planning within the financial services
sector. Though the Treasury's efforts are just a small part of the enormous Federal
effort, we have been very active. President Bush stated, "Together we will confront
this emerging threat and together, as Americans, we will be prepared to protect our
families, our communities, this great Nation, and our world."
I would like to begin my remarks by telling you about the sector's general state of
preparedness and then tell you about the Treasury's leadership on pandemic
planning within the financial services sector.
Financial Services Sector Preparedness
I am pleased to report that the financial services sector has undertaken significant
steps toward ensuring its resilience to withstand both man-made and natural
disasters. President Bush has led the overall development and implementation of
an effective program to defend our country's critical infrastructure. The financial
services sector plays an indispensable role in the Nation's economic system,
providing individuals, businesses, and the government with credit and liquidity,
short and long-term investments, risk-transfer products, various payment systems,
and depository services. It enables people to save for their education and
retirement, to purchase their homes, and to invest in their dreams. The financial
services system is essential to America's overall economic well being.
I note that we have experienced a number of events in recent years that have
tested our resilience. The attacks of September 11, 2001, the power outage of
August 2003, and the elevation of the threat level for the financial sector in August
2004 all tested the preparedness and resolve of the sector. Most recently,
Hurricane Katrina caused unprecedented devastation in multiple States. Yet the
American financial system survived each of these events, and through hard work
and investment, became stronger and better able to contend with such disruptions.
On December 17, 2003, the President issued Homeland Security Presidential
Directive - Seven (HSPD-7), which established a national policy for Federal
departments and agencies to identify and prioritize United States critical
infrastructure and key resources and to protect them from terrorist attacks. HSPD-7
recognizes that various Departments and agencies have specific knowledge,
expertise, and experience in working with certain sectors. Therefore, this directive
provides for Sector Specific Agencies, or lead agencies, for given sectors. The
Department of the Treasury is designated as the Sector Specific Agency for the
banking and finance sector.
Under this designation, the Treasury collaborates with Federal, State, and local
governments and the appropriate private sector entities to encourage the
development of information sharing and analysis processes, and to support sector-

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coordinating mechanisms to: (1) identify, prioritize, and coordinate the protection of
critical infrastructure and key resources; and (2) facilitate sharing of information
about physical and cyber threats, vulnerabilities, incidents, potential protective
measures, and best practices.
We have developed a two-pillared structure within both the public and the private
sectors to support the Treasury's efforts to safeguard the financial services sector.
The first pillar is the Financial and Banking Information Infrastructure Committee
(FBIIC), which is chaired by the Treasury's Assistant Secretary for Financial
Institutions and is comprised of the Federal and State financial regulators. The
second pillar is the Financial Services Sector Coordinating Council (FSSCC) which
is comprised of the leading financial services institutions and trade organizations.
We also rely on the Financial Services Information Sharing and Analysis Center
(FS-ISAC) to communicate with the sector during a crisis.
The Treasury has a strong commitment to ensuring the financial system continues
to serve all Americans. The Secretary has tasked the Treasury Department's Office
of Critical Infrastructure Protection and Compliance Policy with the responsibility for
developing and executing policies affecting the resilience of the United States
financial system. The majority of these efforts require close cooperation and
partnership with the public and private sector. In carrying out these efforts, the
Treasury continues to:
•

Work with government agencies, private sector firms, and national and
regional organizations to establish a single point of contact for critical
financial infrastructure issues;
• Promote strong relationships between financial institutions and the State
and local governments where financial sector operations are located;
• Inform the private and public sectors about the available resources that
protect the financial infrastructure; and
• Support the availability of accurate and timely information about potential
threats on a national and regional level.
Treasury's Contribution to Pandemic Planning in the Financial Services Sector
Let me now turn specifically to today's topic. Pandemic influenza is a serious
threat. Moreover, although the narrow specifics of an influenza pandemic threat are
unique, elements contained within the planning for pandemic countermeasures are
relevant to preparedness for radiological, nuclear, biological and chemical threats.
The United States experienced three major pandemics in the twentieth century.
The influenza pandemic of 1918 killed tens of millions of people worldwide, and
estimates are that between 500,000 and 800,000 people in the United States lost
their lives. Milder outbreaks of influenza in 1957 and 1968 killed tens of thousands
of Americans, and perhaps millions more across the world.
Most disasters are confined to a limited geographic area, usually measured by the
number of cities and States that are impacted. Pandemic influenza is unique in that
it has the potential to affect our entire country very quickly, from Wall Street
securities firms to Midwestern credit unions, to back-office operations centers in the
Arizona desert that serve them both and many others.
This type of potential disruption forces us to think differently about how we prepare
for something as widespread as a pandemic. For example, we must change the
way businesses within the financial services sector think about business continuity.
A firm cannot simply move to out of region back-up facilities and restore operations
because it is likely those facilities are also experiencing challenges associated with
the pandemic. Without proper planning, a pandemic could disrupt the ability of a
financial institution to operate.
For example, contingency planning, in both the public and private sector, must now
take into consideration efforts to mitigate the spread of influenza within the firm or a
department. Among the key issues for consideration are the stockpiling of masks,
gloves and anti-viral agents, additional hand washing stations for employees, and
identifying and isolating employees who may be sick.

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There are many possible impacts of a pandemic on firms' abilities to operate. One
of the most likely is a sharp increase in employee absenteeism. It is important that
we begin to consider now how best to cope with high absenteeism rates. Here, too,
there are many considerations, including making provisions to provide parking for
employees who may not want to take public transportation, childcare for workers if
schools are closed, cross training so that workers can do multiple jobs, and
identifying work streams that can be performed at home, and ensuring that internal
information technology is prepared to support that work from home.
Finally, as we consider all of these issues, we must also recall that for unbanked
Americans, the ability to access financial services is generally based on person-toperson interactions, such as cashing a check or purchasing a money order, and we
must take into consideration the unbanked and consider whether there are unique
or specific concerns that affect them and the financial services firms that serve
them.
The financial sector uses many independent third parties to provide services that
range from cleaning, to the repair of computer systems, to security. Many financial
firms are now requiring their service providers and, at times, even their business
partners, to have business continuity plans in place as a condition of doing
business. We view this as beneficial as this produces a positive cascading effect in
the financial services supply chain which increases the overall preparedness for a
pandemic.
Interdependencies with other sectors must also be taken into consideration.
Financial sector regulators and institutions have been considering their
interdependencies with other sectors of the economy. For example, we are
considering whether the telecommunications infrastructure would be adequate to
support the internet traffic generated by a large number of people working at home,
especially the residential portion that connects an employee's residence to major
trunks of the internet, and the need for any additional data security measures
should employees be required to work from their homes. Similarly, the financial
sector is dependent upon transportation, especially public transportation for its
employees, and therefore it is vital to understand public transport planning for
coping with a pandemic. We have engaged with each of these sectors, as we have
during other threats, and we remain committed to working together with these
sectors to ensure the needs of the financial community are met.
The President is leading a massive Federal effort that respects and appreciates the
role of States and localities, as well as the private sector, in such an event. The
Homeland Security Council's Implementation Plan for the National Strategy for
Pandemic Influenza contains over 300 critical actions to address the threat of a
pandemic. At the end of last year, as part of this effort, the Congress appropriated
$3.8 billion dollars for pandemic planning. In addition, there was $2.3 billion
appropriated recently for pandemic flu, as part of the emergency supplemental
appropriations.
The Treasury has been very active within the financial services sector to provide
and share the most current thinking about what a 21 sl century pandemic could look
like, so that sector participants can use the latest information to build and improve
plans and scenarios to mitigate the potential risks. The principles that guide our
leadership role in the financial services sector are that our planning efforts will be
based on medical science, which is provided to us by experts outside of the
Treasury, and that planning efforts will emphasize the protection of the life and
safety of our fellow Americans, whether they be employees or customers of
financial firms, or others, the importance of business continuity within financial
firms, and the significant number of interdependencies needed to sustain
operations during an outbreak of a pandemic. Please allow me to spend a few
minutes describing key elements of our plan, which focuses on coordination,
education, outreach, and an effort to exercise and test the plans and procedures
that have been developed.
Last year, the FBIIC created a working group to focus on pandemic influenza. The
purpose of the group is to identify areas of concern and to identify and share best
practices as it relates to business continuity for the financial community. This group

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has been meeting regularly, and has also been in close communication with the
FSSCC.
One concern that we have been often asked about is banknotes and coinage. In
the immediate aftermath of any disaster, there may be some movement toward a
greater use of currency. This may be no different in the immediate aftermath of a
pandemic. In this vein, the Treasury's United States Mint and the Bureau of
Engraving and Printing are working with the Federal Reserve Banks to ensure that
banknote and coin inventories are adequate should financial institutions need
additional supplies. The Treasury and the relevant financial services sector
regulators are committed to working with sector participants to address these types
of issues before a pandemic, or any crisis, arrives.
An important mission for the FBIIC is to be in a position to centrally coordinate
policymaking and decision-making in the event of a situation that requires
emergency actions. The FBIIC has in place well-tested emergency protocols, that
were employed during Hurricanes Katrina, Rita and Wilma, and during the elevation
of the threat level in New York and Washington, DC. These protocols have explicit
provisions for reaching out to the private sector. In the event of any pandemic,
these collaboration, communication and coordination tools would be used to ensure
that those within financial regulatory agencies as well as the entities within the
financial services sector are in touch with the most up-to-date information and
instructions.
The FSSCC has recently formed an infectious disease working group. I know that
you will be hearing from a private sector panel next, but I would like to say that
these two working groups, the FBIIC group and the FSSCC group, are working well
together and representing public and private interests.
I mentioned previously that our strategies to protect the sector are grounded in
sound medical science. To that point, the Treasury has hosted two presentations
with leading Federal officials from the health and medical community. On
December 16, 2005 we invited a leading medical expert in the area of vaccine
science to speak to members of the FBIIC and the FSSCC. This physician
discussed several pertinent topics such as: the history and spread of pandemics in
the US; the composition of the H5N1 avian flu strain and the spread of the virus;
and a forecast of the possible infection rates should the disease mutate into a form
that is transmittable between humans. Meeting participants also discussed
vaccines and prophylaxis against the virus, including issues involving anti-viral
agents. This session helped the regulatory agencies and private sector
representatives share a common understanding of many aspects of the virus.
On June 6, 2006, the Treasury hosted a joint meeting of the FBIIC and FSSCC to
get an update on the H5N1 virus and an update on the latest thinking in the medical
community. At this meeting we invited a leading physician and health care
administrator to give an update on the President's National Strategy for Pandemic
Influenza. This physician spoke about community shielding strategies and also
gave an update on the H5N1 virus. His presentation was particularly relevant,
given the effect that community shielding strategies (such as school closures and
"snow days") would have on the financial services sector. The sector is particularly
interested in any actions the Federal government might take so that it can modify its
contingency planning to take into consideration those actions. Our plan is to
continue to hold joint medical briefings every six months, or as needed, to ensure
we are collectively aware of the latest medical science in this area.
We also believe it is vital to reach beyond Washington, DC and conduct an
outreach campaign to carry the message for pandemiC preparedness to all parts of
the country. The Treasury's outreach initiative, sponsored by the FBIIC and the
FSSCC, will take us to twenty-one cities across the country by the end of the year.
The objective of these meetings is educational - to promote financial services
sector preparedness to deal with man-made or natural disruptions, including
terrorism, hurricanes, and pandemics and encourage the formation of regional
financial coalitions, such as the very first one created in Chicago, and the others
that have been created or are under development. These events bring together
Federal, State, and local officials with financial institutions and provide a great

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opportunity to encourage financial services pandemic preparation at the community
level.
I now turn to one of our most important strategies, which is the use of exercises.
We learn many lessons from thinking through what actions will be taken during a
potential crisis. Last week the Treasury sponsored a pandemic flu tabletop
exercise with FloridaFIRST, a newly formed regional financial coalition based on
the highly successful ChicagoFIRST model. FloridaFIRST represents the second in
a Treasury Department supported private sector initiative to establish regional
financial coalitions around the country. The exercise brought together financial
services, public health, and law enforcement officials from local, State, and Federal
levels. Participants took home a long list of lessons learned, of which the key
insights include:
•
•

Development of contingency plans specific to a pandemic influenza is vital;
Private sector institutions will look to Federal, State and local health officials
for trigger pOints to enact certain parts of pandemic plans and for other
information related to the pandemic;
• Development of an all-inclusive plan for the safety of employees, their
families, and clients is important, and the plan must be communicated and
understood by employees before a pandemic hits; and
• Implementation of good personal hygiene plans, such as hand washing,
should begin now, not during a pandemic; and
• Infrastructure to support work at home programs must be strengthened
p~for~ a pandemic occurs.
The Treasury, together with its FBIIC partners, will be working with financial
institutions to assist them in working towards the development of measures to
implement or enhance their efforts in these areas.
Robert Otero, FloridaFIRST Chairman, said that the "exercise will be a catalyst for
a paradigm shift in the way institutions prepare for future disasters." We look
forward to continuing to work with the Florida financial institutions we met with last
week, and their appropriate regulators, to ensure that we all continue along the path
of preparedness.
The exercise was so successful that we are going to schedule a joint FBIIC and
FSSCC exercise on pandemic planning this summer. We would like to host similar
exercises with other regional financial coalitions established, with the Treasury's
support, based on the ChicagoFIRST model. Coalitions have been established in
Southern California and the San Francisco Bay Area and there is interest in Las
Vegas, Houston, Seattle, and Philadelphia as well as other cities
The Treasury Department has been actively involved with our counterparts abroad.
We have had enlightening conversations with financial regulators in Hong Kong.
They have a unique perspective, not only because recent cases of H5N1 in humans
are in their backyard, but because of the outbreak of the Severe Acute Respiratory
Syndrome virus a few years ago. We have also met with representatives from the
UK's Tripartite Standing Committee about how they interact with their own UK
financial services sector. We hope to take the any lessons learned from our
counterparts and apply them here in the United States.
In addition to these presentations, working groups, exercises, and meetings, the
Treasury represents the financial sector across Federal government, from the
Department of Homeland Security to the Department of Labor and to the Small
Business Administration. My staff and I spend countless hours promoting education
and preparedness for pandemic influenza.
One of the questions we are considering is what the economic impact of a
pandemic would be. This is a very difficult question to answer. We know the direct
effects are disease and mortality. Indirect effects include the reaction citizens have
to a pandemic: -- would people continue to show up at work, and would they isolate
themselves physically so as to avoid contagion? Some have suggested there
would be little or no economic impact, while others have forecast declines in GDP

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of 5% or more. Certainly economic impacts depend on the severity of the influenza,
and it is likely that an outbreak as severe as that of 1918 could have some
measurable effect on the economy.
It is important to remember that we have a strong economy that is highly resilient.
There is an effort currently underway across the government to build new economic
models to try and understand economics based on previous pandemics, but also
taking into account structural changes in our economy, which is much different than
that of the last major influenza outbreak in 1968. We anticipate that this work will
continue to develop through the rest of this year.

Pandemic preparedness requires the collective efforts of Federal, State, and local
authorities in close partnership with the private sector. The financial services sector
is active in its preparedness efforts and it is taking the threat of pandemic influenza
very seriously. We still have a lot of work to do -- it is often said that preparedness
is a race with no end - but working together we have made great strides. While it is
difficult to quantify or measure progress on pandemic preparedness, I can state
definitively that awareness about the threat of a pandemic has increased
dramatically in the financial services sector, and a significant number of firms are
now planning to deal with a pandemic as part of their business continuity strategies
I don't want to spend too much time talking about what I know you will hear from my
private sector colleagues but I do want to spend a few minutes talking about the
serious and productive work the sector is undertaking to prepare itself. The sector
is currently building robust plans to continue to operate during a pandemic and,
though some nonessential services may be temporarily halted, critical functions will
continue to operate.
The sector's professionals have concerns and they are actively working with health
professionals to address their unanswered questions. Overall, I believe that you
will hear that the number one priority from the financial services sector is the safety
of their fellow Americans - employees, their families, and customers.
Conclusion
Again, thank you for allowing me the opportunity to testify before you today. As I
said before, we are working very hard to prepare the financial services sector for a
pandemic outbreak, but the Treasury's efforts are only a single part of the overall
Federal response. We are committed to ensuring that payment systems, settlement
and clearing, retail banking networks, credit and debt, liquidity, insurance, and
derivative instruments remain available during a crisis, either man-made or natural,
including a pandemic. These are the operations that enable an efficient and orderly
financial system on which investors, businesses, and our global trading partners
rely. These financial functions are vital to providing our citizens the financial
services all Americans depend on every day. And, while I believe we have made
great progress toward preparedness for the financial services sector, it is clear that
all levels of the public and private sectors must work together to have an effective
plan to handle a pandemic.
Thank you for your attention to this important topic.

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June 29, 2006
JS-4343
Treasury Names Three Deputy Assistant Secretaries

Treasury has named Robert Dohner Deputy Assistant Secretary for Asia,
International Affairs; Nova Daly Deputy Assistant Secretary for Investment Security,
International Affairs; and Mark Warren Deputy Assistant Secretary for Tax and
Budget, Legislative Affairs.
In his position Dohner is responsible for helping shape Treasury policy on regional
and country-specific economic issues in Asia. He was formerly the Director of the
East Asia Office, responsible for China, Japan, and other economies of East and
Southeast Asia. Prior Treasury positions include Tokyo Financial Attache and
Director of the Office of Central and Eastern Europe. Before joining Treasury,
Dohner was a Senior Economist at the President's Council of Economic Advisers, a
Principal Economist at the OECD, and Senior Economic Adviser to Under Secretary
of State for Economic and Agricultural Affairs Robert Zoellick during the first Bush
Administration. He also taught economics at the Fletcher School of Law and
Diplomacy at Tufts University, and he has worked at the GATT and the Monetary
Authority of Singapore. Dohner has a Ph.D. in economics from M.I.T.
As the Deputy Assistant Secretary for Investment Security, Daly will oversee the
staff office responsible for managing the Department's work as the chair of the
Committee on Foreign Investment in the United States. Most recently, Daly served
under the National Security Council as the Director for International Trade where he
handled multiple trade and investment policy issues - including investment security
and CFIUS matters. Prior to the NSC, Daly was the Senior Advisor for Trade Policy
for Commerce Secretary Donald Evans and had worked for the Senate Finance
Committee on trade and investment issues. He holds an undergraduate degree in
political science from the University of California, Irvine and a graduate degree in
international law and organizations from American University.
Warren is responsible for coordinating with Congress on tax, pension, Social
Security and budget issues. Warren started his career on Capitol Hill in 1995 with
the House Committee on Small Business and moved to the Senate in 1997 where
he served as the Senate Small Business Committee's Chief Tax and Finance
Counsel and later as the Staff Director and Chief Counsel. Most recently, he served
as the Chief Counsel of the Senate Republican Policy Committee from February
2004 through June 2006. He holds an undergraduate degree in finance and a law
degree from Georgetown University, and a Masters Degree in tax law from New
York University. Warren has also spent time in private practice working in New York
and Washington, DC.

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June 29, 2006
JS-4344
Statement of Treasury Secretary John W. Snow
On GOP the Tax Cut Package Reconciliation

"Today's final revision for first quarter 2006 real GOP reveals the U.S. economy
grew at a remarkable 5.6 percent rate - once again demonstrating that the
President's tax relief helped spawn strong economic growth over the last three
years, with 12 straight quarters of increased capital investment, more that 5.3
million jobs and higher standards of living for all Americans.
"With this my final official statement on economic growth as Treasury Secretary, I
would like to take this opportunity to convey my confidence in the President's
economic policies. There can be no doubt that the U.S. economy is in a better place
because of the President's leadership. I am particularly pleased by the clear
progress on the deficit -with strong federal receipts, it's clear we are ahead of
schedule to meet the President's goal. What's more, with an agenda focused on
improving the future of America's energy outlook and competitiveness, U.S.
economic strength will be sustained for future generations.
"I was also pleased to see the Senate's quick confirmation of my successor, Hank
Paulson. The President, the U.S. Treasury and America will be well-served by Mr.
Paulson's knowledge, ability and leadership."

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June 30, 2006
js-4345
Remarks of Anna Escobedo Cabral
U.S. Treasurer
U.S. Department of the Treasury
Before the League of United Latin American Citizens
(LULAC)
Milwaukee, Wisc.- Brent, thanks for your kind words and introduction. It is great to
be in Milwaukee, Wisconsin today for your 77th Annual League of United Latin
American Citizens' Convention and Expo. You and your staff have done a
phenomenal job in putting this event together - so congratulations.
I sincerely appreciate LULAC's invitation to participate in this year's Women's
Luncheon and this opportunity to speak to such a dynamic group of women - and
really - such a fantastic group of individuals and leaders. Many of you may know
that I had the great privilege to be with you a year ago, and I can't begin to tell you
how honored I am to have been invited to return to this conference this year.
There is so much good news I want to share with you on many fronts today - good
news about the economy, about government efforts to improve education,
particularly financial education in the U.S., and most importantly about current
policy reform issues, including immigration reform. The Administration is absolutely
concerned and working very diligently on all of this.
But first, I would like to take a few moments to recognize Hector Flores. As you all
know, Hector has served LULAC and its members for many years with honor and
distinction - almost three decades. His commitment is long-standing. Even before
becoming president of this organization in 2002, Hector served LULAC and this
community in a variety of positions. I truly consider Hector Flores a friend and a
dear colleague; he has truly advocated for the needs and concerns of the Latino
community. So Hector, again, on my part and on behalf of President Bush and
Secretary Snow, I want to thank you for your years of service to this community.
You know, this organization has a very rich history as one of the oldest and largest
civil rights organizations in the U.S. - and it should be commended for the
significant work it is invovled in, day-in and day-out. I would say that the work of
organizations like this one are of great importance, and often, also of great
consequence to the decisions our policymakers in Washington ultimately make on a
variety of topiCS.
Organizations like this serve as a bridge for individuals who not only want to better
understand issues of the day, but are also interested and quite frankly very
motivated about letting decisionmakers know where they stand on a various
issues. Remember that Washington is a very long way from where most of us
come, so we need people in key positions who are advocating for minority
communities in the U.S.
However, you should know that organizations like this also really do provide the
decisionmakers and policy advisors - those with a vested interest in presenting
their perspective on many public policy issues - an opportunity to do so directly with
the community.
LULAC is an important bridge to a number of Latinos who currently serve in high-

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Page 2 of 5

ranking government positions. Many government officials who have great interest
in reaching out to this community also comprise a number of highly-qualified
women who currently serve on President Bush's team - such as Secretary of State,
Dr. Condoleezza Rice, Secretary of Labor, Elaine Chao, Chair of the U.S. Equal
Employment Opportunity Commission, Cari Dominguez and the Department of
Energy's Director of the Office of Minority Economic Impact and Diversity, Theresa
Alvillar-Speake - just to name a few. Many more have been appointed to be judges
by President Bush.
It is a fact that women today play an increasingly important role in how public policy
decisions are shaped. We continue to move forward as professionals and
contribute to our society mainly because of the important work and often selfsacrifice of women who have come before us. Women in the U.S. have shaped this
country's history, and they have helped make it stronger and better. They have
used their talents and abilities to bring about profound improvements in their
communities across this great country. And they have played a vital role in helping
achieve justice and equal rights for all U.S. citizens.
The contributions of women in this country are many. Unfortunately, we do not
have enough time to mention them all, but just consider for a moment many of
those who have helped shape American history. Since its beginnings, our country
has been blessed by noteworthy women who played defining roles in our Nation.
Sakajawea, who today appears on the Golden Dollar coin, was a Native American
woman who befriended the explorers Meriwether Lewis and William Clark 150
years ago as they crossed the great Northwest. She helped Lewis and Clark's
expedition complete the first successful overland transcontinental journey. Other
significant female figures include Lucretia Mott, who courageously wrote and spoke
against slavery and the lack of equal rights for women, and Rosa Parks, who in
1955 refused to give up her seat on a city bus in Montgomery, Alabama, helping to
inspire a nationwide movement for equal justice under the law.
Additionally, many women have blazed a trail for those of us following in their steps
in the medical and legal professions. For instance, Elizabeth Blackwell was the first
woman in America awarded a medical degree, and she dedicated her pioneering
efforts as a physician to helping others. And Sandra Day O'Connor served as the
first female Associate Justice of the Supreme Court of the United States from 1981
to 2006 and became known for her case-by-case approach to jurisprudence.
Of course Dr. Antonia Novello, appointed to be the Surgeon General of the United
States in 1990, comes to mind as well. She was both the first woman and the first
Latin American to be appointed to this post. I have to mention that just last week, I
had the privilege of joining Dr. Novello at a Puerto Rico Chamber of Commerce
event where I spoke before another fantastic group of businesswomen and
entrepreneurs in Fajardo, Puerto Rico. Dr. Novello's accomplishments and those of
the many Latinas like the ones present in this room today really inspire me - I'm
sure they inspire all of us.
However, they also should keep us mindful that as today's businesswomen,
professionals, community leaders and political figures, we really do have a huge
responsibility to future generations of women - a responsibility to continue opening
paths to increased opportunity.
Today, there are about 149 million women in the U.S., according to recent findings
from the U.S. Census Bureau in 2004. We are indeed a force to be reckoned with
as consumers, but also as drivers of the market. More than one-third (34.9 %) of all
Hispanic owned firms are owned by women. Hispanic women-owned firms employ
18.5% of the workers in all Hispanic-owned firms and generate 16.3% of the sales
according to the Center for Women's Business Research. (November 2004)
Additionally, this same group has reported that Latinas control 39% of the 1.4
million companies owned by minority women in the United States, which generate
nearly $147 billion in sales. (Center for Women's Business Research, November
2004) And, four in 10 minority women-owned firms are owned by Latinas. (U.S.
Hispanic Chamber of Commerce)

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I think it is safe to credit many of those women-owned businesses for the significant
growth and amazing job creation we have seen in this country in the past few
years. And when we stop to consider this significant economic growth, we have to
acknowledge that there is much to be grateful for in this country, and a lot to be
optimistic about thanks to this Administration's sound monetary and fiscal public
policy approach over the past years.
Our economy is strong and it continues to grow. And we are seeing that
opportunity for the Latino community is increasing as well.
We've seen that just in the first quarter of 2006, our economy grew at an impressive
annual rate of 5.6 percent, and since August of 2003, the U.S. economy has added
more than 5.3 million new jobs - more than all 25 nations of the European Union
combined. In fact, the latest figures show that the national unemployment rate has
fallen to 4.6 percent - lower than the average of any decade since the 1950's. The
Latino community in particular has seen more job growth too. At 5 percent,
Hispanic unemployment is currently at the lowest rate in years!
Productivity is growing too, and we're seeing that wages are also rising. And
because taxes are low, workers and investors are keeping more of the money they
earn - giving many individuals the opportunity to make their hard-earned money
grow more and in some instances accomplish many life-long goals - such as
paying for a child's college education, purchasing a home, starting a business or
expanding an existing one.
In fact, many small businesses are expanding and creating many of those new
jobs. Currently, the number of Hispanic-owned businesses is growing at three
times the national rate. It's great to know that the Latino community forms a
significant part of the recent U.S. economic success story!
This recent economic growth we've experienced is truly astounding, especially
when you stop and consider the challenges we have faced as a nation in recent
years - the recession this Administration inherited, the stock market correction,
corporate scandals, terrorist attacks on our soil, and the 2005 Gulf Coast Hurricane
devastation.
Despite these significant challenges, our economy is surging, businesses have had
the ability and opportunity to expand, and new job opportunities are cropping up including for recent college graduates. The job market for college graduates is the
best it's been in five years!
However, one significant challenge remains before for us. Many of those who seek
opportunities in our country are still currently living in the shadows because they do
not currently have legalized status to remain and work in the country. This brings
me to another significant policy issue that President Bush and his Administration
are facing head on, and quite frankly, working very hard to address in the most
balanced and responsible way possible.
Immigration reform of course, is an issue that is most on our minds today. I can tell
you, it is a priority issue for the President as well. As you know ensuring that we
put into action a comprehensive plan on immigration reform will have a great
significance on the safety and economic stability of the country, and for individuals.
We can't say with full certainty what the number is, but we do know that about 11
million undocumented workers remain in the country illegally and are living in the
shadows. Many of those are Latinas who remain in the shadows of this economy
and lack basic protections. We need to bring those women and their families out of
the shadows.
The President understands the importance of creating reasonable and creative
approaches to ensure that we deal with the problem of people who have been in
this country for a long period of time and are only trying to make an honest living.

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The President is on the record as saying that it doesn't make any sense to
approach the problem by forcing these people to leave the United States. I agree.
You just can't just throw millions of people out of the country.
On the other hand, we cannot just give these individuals straight out amnesty.
Giving automatic citizenship doesn't make any sense either because it will likely
encourage others to come to the United States through illegal channels.
The President's comprehensive approach instead acknowledes that we ought to
consider alternative approaches to legalizing the status for people who have been
in the country for years, people who have passed an extensive criminal background
check, and who can prove they have worked by means of an honest living in this
country for quite a while. At the same time, those individuals would be required to
pay a penalty, but also be given the opportunity to apply for citizenship. Of course,
they would have to wait behind those who have applied for entry and citizenship
before them.
One thing is for sure, many good people certainly disagree on some particulars of
this controversial issue, and they all have very strong views on this matter of
immigration reform. These views are often shaped and fueled by concerns over
safety, family, national security, economics and even politics.
The good news however, is that there is some consensus among most people on
signficant fronts. All Americans want to be safe from terrorists, drug traffickers and
others who seek to harm all people living in this country. We also all want to
continue to see ongoing prosperity and economic growth for our country. I would
venture to say that most Americans want an immigration policy that protects our
national security interests and economic interests, but also encompasses our
attributes of being a generous and welcoming nation.
The President's comprehenisive plan could achieve all that. Additionally, the
President has been very clear that it is also very important to enforce our
immigration laws, and he plans to help on that front by enhancing resources to do
so effectively and safely.
By 2008, this Administration will have doubled the number of Border Patrol officers,
and the National Guard will serve a temporary supporting role as. State and local
authorities will be trained to better assist Federal officers. And there are plans to
end the futile catch-and-release program on the Southern border.
Additionally, new technologies will help monitor acitivity at the border. The
Administration has increased funding for interior immigration enforcement by 42
percent, and the President has signed legislation doubling federal resurces for
worksite enforcement. These are necessary steps in order to secure our borders
and protect all people currently living within our borders.
But we need to be realistic about confronting this problem head-on. Hungry and
needy people - people who desire to work at an honest job will inevitably continue
to find any way to feed their families. Economic disparity still exists between the
U.S. and its southern neighbors.
Again, a temporary work program which meets the needs of our growing economy
is necessary. Such a program would help establish realistic rules, which would no
longer be ignored. As U.S. Attorney General Alberto Gonzalez recently stated:
"The rising tide of immigration would be channeled and controlled, so that it
continues to energize our Nation in a constructive way. Lawful taxpayers and safe
workplaces would replace illegal workers and unsafe conditions. We would
introduce a culture of law and fairness into an area where the rules have long been
flouted."
With comprehensive reform, both employees and employers know that there are
rules that must be followed. Moreover, both legal and economic incentives would
exist to follow the rules. Immigrants who have broken the law would have to face

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Page 5 of 5

the consequences of not complying with the law. However, employers would also
be subject to fines for breaking the law. Employers must be held accountable for
the legality of the workers they hire.
At the end of the day the President's plan is about protecting people and drawing
illegal immigrants out of the shadows of society, which benefits everyone, except
perhaps the "coyotes", human traffickers and others that take advantage of this
population.
Once we bring this population out of the shadows, we need to ensure that we
encourage this community to learn how to navigate the system in which they will be
operating. Not only will we need to work together with community groups to teach
people the English language, but we will also need to encourage their training and
education.
One of the areas I work on of great importance to the Department of the Treasury is
financial education. We will also need to help this community acquire the
necessary skills to manage their finances and build a reserve of cash for
emergencies or to plan out for future goals and a secure retirement. In fact, this is
a skill that all women need to master.
I know I don't have much time left, but I want to tell you a little bit about some of the
resources that the federal government has already made available in both English
and Spanish - we've made the Spanish-language material because we know it
takes some time to learn the English-language well.
A federal commission - the Financial Literacy and Education Commission - along
with the Department of the Treasury developed a national financial education web
site and toll-free hotline launched in October 2004 - MyMoney.gov and 1-888MyMoney. 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."
You can find a whole world of information on budgeting, buying a home, paying for
an education, investing, planning for retirement and more. I hope LULAC will share
this with its members.
On that note, and in closing, I also want to note that LULAC has partnered with the
Treasury Department on the Go Direct Campaign. Go Direct focuses on
motivating federal benefit recipients to sign up for direct deposit.
Go Direct provides the means by which seniors and all federal benefit recipients
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. The call
center is only one of many ways we are helping beneficiaries sign up for direct
deposit. Our Web sites: www.GoDirect.org and www.DirectoASuCuenta.org, allows
beneficiaries to access a step-by-step online tool to sign up - either on their own or
through their bank or credit union. Again, thank you Brent and for your and
LULAC's support on this campaign.
And I truly want to thank you all for your time and attention. I really appreciate this
opportunity to visit with you and share some highlights about so many of the
priorities this Administration and the Treasury Department is working on. Enjoy the
rest of the week.

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June 30, 2006
js-4346
Treasury Announces Private Sector Initiative with Latin American
Counterparts
Initiative Will Focus on Strengthening Defenses Against Money Laundering,
Terrorist Financing
The U.S. Department of the Treasury Thursday helped launch a U.S.-Latin America
Private Sector Dialogue (US-LA PSD) focused on strengthening defenses against
money laundering and terrorist financing.
Fifty key U.S. and Latin American private and public sector representatives held a
roundtable at the Treasury where they began discussing ways to facilitate and
improve private sector information and best practices sharing on the
implementation of core anti-money laundering/counter-terrorist financing
(AMUCFT) controls. Through their discussion, roundtable participants agreed to
commence a long term private sector dialogue on AMUCFT through a series of
conferences, seminars and workshops that join U.S. and Latin America banks in a
direct exchange.
"The Treasury Department recognizes the importance of the longstanding ties
between the U.S. and Latin American financial sectors," said Pat O'Brien, Treasury
Assistant Secretary for Terrorist Financing. "With this in mind, the Treasury is eager
to help launch and facilitate this dialogue to help bolster our defenses against the
dual threats of terrorist financing and money laundering, and foster greater
understanding and cooperation between our regions."
Based on the recent success of a March 2006 conference in Cairo to launch the
US-Middle East/North Africa Private Sector Dialogue on AMUCFT (US-MENA
PSD), Treasury officials are confident that a similarly successful initiative with Latin
American counterparts can work.
"The most important role in this process is for banks to work with the government not only to assist to government in efforts to combat money laundering and terrorist
financing, but also to encourage the government to continue to improve its
systems," said Gustavo Rodrigues, President of GAFISUD (Financial Action Task
Force Style Regional Body for South America) and President of the Brazilian
Financial Intelligence Unit (FlU).
"This Roundtable was a special opportunity to facilitate the beginning of a
productive dialogue between US and Latin American banks about AMUCFT
implementation, with the support and participation of the regulatory authorities. The
Central Bank of Argentina is a true supporter of this initiative," said Zenon
Biagosch, Director and Vice Superintendent of the Central Bank of Argentina.
"With the strong support of the U.S. and Latin American banking communities,
leadership from key parties such as GAFISUD, and financial policy and supervisory
authorities from both regions, we look forward to seeing successes and taking key
strides with Latin America," O'Brien said.
The Treasury Department is dedicated to promoting prosperity and stability in the
U.S. and global financial systems. As part of this overarching objective, the
Treasury Department seeks to promote awareness and implementation of core
AMUCFT standards internationally to safeguard the financial system against rogue

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nations, terrorist facilitators, money launderers, drug kingpins, and other
international security threats. In addition to its bilateral and multilateral efforts, the
Treasury Department is working with committed partners worldwide to help promote
private sector AMUCFT implementation.
Today's Roundtable consisted of representatives from the Treasury, including its
Office of Foreign Assets Control (OFAC), the Financial Crimes Enforcement
Network (FinCEN), and the Office of the Comptroller of the Currency, the Federal
Reserve, and the U.S. Department of State. Zenon Biagosch and Gustavo
Rodrigues played leadership roles, and were joined by members of the Latin
American Bankers Association (FELABAN), the Florida International Bankers
Association (FIBA), the American Bankers Association (ABA), as well as
representatives of major U.S. banks and others.
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June 30, 2006
js-4347

Report On Foreign Holdings of U.S. Securities At End-June 2005
The final results from the annual survey of foreign portfolio holdings of U.S.
securities at end-June 2005 are released today and posted on the U.S. Treasury
web site at (http://www.treas.gov/tic/fpis.html).
The survey was undertaken jointly by the U.S. Treasury, the Federal Reserve Bank
of New York, and the Board of Governors of the Federal Reserve System. The
most recent report covered the survey for end-June 2005. Surveys are carried out
annually, and the next survey will be for end-June 2006.
Complementary surveys measuring U.S. portfolio holdings of foreign securities are
also carried out annually. Data from the most recent survey, which reports on
foreign securities held by U.S. residents at year-end 2005, are currently being
processed. Preliminary results are expected to be reported by September 30,
2006.
Overall Results
The survey measured foreign holdings as of June 30, 2005, of $6,864 billion; with
$2,144 billion held in U.S. equities, $4,118 billion in U.S. long-term debt securities
(of which $717 billion were
holdings of asset-backed securities (ABS)), and $602 billion in U.S. short-term debt
securities. The previous such survey, conducted as of June 30, 2004, measured
foreign holdings of $6,019 billion; with $1,930 billion in U.S. equities, $3,501 billion
in U.S. long-term debt securities, and $588 billion in U.S. short-term debt securities.

REPORTS
•

Foreign Holdings of U.S. Securities Tables

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3/6/2007

Table 1. Foreign holdings of U.S. securities, by type of security, as of recent survey dates
(BilIions of dollars)
June 30, 2004

T)lle of Security

June 30, 2005

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

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

6,262
2,144
4,118
717
3,401
602

Total
Of which: Official
, revised,

6,019'
1,663'

6,864
1,938

Table 2. Foreign holdings of U.S. securities, by country and type ofsecurity, for the major
investing countries into the U.S., as of June 30, 2005
(Billions of dollars)
Country or category
1
2
3
4
5
6
7
8
9
10
II
12
13
14
15
16
17
18
19
20
21
22
23
24
25

Total

Japan
United Kingdom
China, Mainland
Luxembourg
Cayman Islands
Belgium
Canada
Netherlands
Switzerland
Beonuda
Germany
Ireland
Middle East Oil-Exporters'
Singapore
Taiwan
France
Korea, South
Hong Kong
Australia
Sweden
Mexico
Russia
British Virgin Islands
Norway
Italy
Country Unknown
Rest of world
Total
Of which: Official

Equities
1,091
560
527
460
430
335
308
262
238
202
200
191
161
144
126
122
118
96
92
84
80
76
75

Long-reon debt

178
260
3
151
152
18
221
161
129
59
83
58

82
89
7
71
I
23
57
49
13
47
37
31
2
162
2,144
177

68
50
196
569
6,864
1,938

814
283
485
273
252
312
74
93
94
123
110
80
54
51
117
41
106
47
26
33
51
14
24
29
15
193
323
4,118
1,438

Short-teon debt
100
16
40
37
26
5
13
8
15
20
8
53
24
4
2
10
II
26
10
16
62
4
2
4
I
84
602
322

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

*

Greater than zero and less than $500 million.

2

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July 5, 2006
jS-4348
Treasury Calls for Large Position Reports
The Treasury is calling for Large Position Reports from those entities whose
reportable position in the 4-7/8% Treasury Notes of May 2008 equals or exceeds $2
billion as of close of business Wednesday, June 28, 2006. This call for Large
Position Reports is a test. Entities with reportable positions in this note equal to or
exceeding this $2 billion threshold must report these positions to the Federal
Reserve Bank of New York. Entities with positions in this note below $2 billion are
not required to file Large Position Reports. Reports must be received by the
Government Securities Dealer Statistical Unit of the Federal Reserve Bank of New
York before noon Eastern Time on Wednesday, July 12, 2006, and must include
the required position and administrative information. Large Position Reports may be
faxed to (212) 720-5030 or delivered to the Bank at 33 Liberty Street, 4th floor.

Details on Call for Large Position Reports
14-7/8% Treasury Notes of May 2008,

Security Description

Series V-200B
1912828 FG 0
1912820 NO 5

CUSIP Number
CUSIP Number of STRIPS Principal
!component
Maturity Date
Date for Which Information Must Be
Reported
Large Position Reporting Threshold
Date Report Is Due

!May 31, 200B
~une 28, 2006 as of COB
:p2 Billion (Par Value)
July 12, 2006, before noon Eastern
ime

This call for large position information is made under Treasury's large position
reporting rules (17 CFR Part 420). The notice calling for Large Position Reports is
also being published in the Federal Register. This press release and a copy of a
sample Large Position Report, which appears in Appendix B of the rules at 17 CFR
Part 420, are available at the Bureau of the Public Debt's Internet site at
'lVww. pu bl icdebt. treas.gov.
Questions about Treasury's large position reporting rules should be directed to
Treasury's Government Securities Regulations Staff at Public Debt on (202) 5043632. Questions regarding the method of submission of Large Position Reports
should be directed to the Government Securities Dealer Statistical Unit of the
Federal Reserve Bank of New York at (212) 720-7993.
•

Background on Calls for Large Positions Reports
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htto;//www.r;eas.gov/press/releases/isIlJ48.htm

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u.s. TREASURY DEPARTMENT OFFICE OF PUBLIC AFFAIRS
11:30 A.M. July 5, 2006
Jennifer Zuccarelli, (202) 622-8657

EMBARGOED UNTIL
CONTACT

BACKGROUND ON CALL FOR LARGE POSITION REpORTS

Treasury's large position reporting rules (17 CFR Part 420), which were issued in final form on
September 12, 1996 (61 FR 48338), established recordkeeping and reporting requirements for entities
that control large positions in certain Treasury securities. An amendment to the rules was issued on
December 18,2002, and was effective January 17, 2003. The rules put in place an on-demand reporting
system which, in response to a notice by Treasury requesting large position information, requires large
position reports to be filed by entities that control a position in a particular Treasury security or
securities equaling or exceeding the specified large position threshold. Holders will have three and onehalf days in which to respond to the request, unless otherwise noted on the press release.
The rules were first effective March 31, 1997. When the rules were announced, Treasury said that it
would issue a test call annually. Treasury has issued seven previous test calls, and one non-test call.
The purpose of the rules is to give Treasury the means to acquire information quickly on concentrations
of a security's holdings in the event of a market dislocation affecting that security. The rules are
intended to improve the information available to Treasury and other regulators regarding concentrations
of control and to ensure that regulators have the tools necessary to monitor the Treasury securities
market. Large positions, in and of themselves, are not inherently harmful, and there is no presumption
of manipulative or illegal intent on the part of a controlling entity merely because it is required to submit
a large position report in response to these rules. The Treasury does not expect to have to use such
authority for such purposes frequently, but it wants holders' reporting systems to be fully functional in
the event it needs to require large position information.
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Paoc
I or I
::0

June 29, 2006
js-4349

Treasury Secretary Snow Announces Resignation
Treasury Secretary John W. Snow has formally resigned as the 73rd Secretary of
the Treasury effective today. Treasury Deputy Secretary Robert M. Kimmitl will
serve as Acting Secretary until Henry M. Paulson is sworn in.
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July 6, 2006
2006-7 -6-12-37 -21-28776
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 $67,831 million as of the end of that week, compared to $65,624 million as of the end of the prior week.
I. Official U.S. Reserve Assets (in US millions)
June 23, 2006

June 30, 2006

65,624

67,831

TOTAL

1. Foreign Currency Reserves 1
a. Securities

Euro

Yen

TOTAL

Euro

11.684

10.894

22,578

11,927

Of which, issuer headquartered in the U. S.

I

Yen

TOTAL_

11,058

2,985

0

0

b. Total deposits with:

~othsr central bonks and BIS

~,318

anks headquartered in the U. S.

0
II

I

0

I

I
I

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

II

I

0

12. IMF Reserve Position 2

I

I

6,493

3. Special Drawing Rights (SDRs) 2

8,558

I

4. Gold· Stock 3

15. Other Reserve Assets

I
~

II

II

11,041

I

0

I

5,399

II

17,281

I

Em

0

b.ii. Of which, banks located abroad

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

11,882

16,955

I

II
II

I
B

I

II

0

I

II

0

I

7,906
8,618

I

11,041

I

0

I
I

II. Predetermined Short-Term Drains on Foreign Currency Assets

June 23, 2006

~

Yen

I

June 30, 2006
TOTAL

I

Euro

I

TOTAL

Yen

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:
II

0

I

0

2. b. Long positions

I

0

I

0

3. Other

I

0

I

0

2.a. Short positions

I

III. Contingent Short-Term Net Drains on Foreign Currency Assets
June 23, 2006
I

I

Euro

II

httpj/wwwseas.gov/press/rcleasesnf)067612372128T· "

II

I

Yen

II

I

June 30, 2006

II
TOTAL

II

I

Euro

II

II

Yen

II

I

I
TOTAL

I

I
3/6/2007

Page 2 01"2

1. Contingent liabilities in foreign currency

0

0

2. Foreign currency securities with embedded
options

0

0

3. Undrawn, unconditional credit lines

0

0

0

0

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

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

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

4.8.1. 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. IIIAF Reserve Position" and "3. Special Drawing Rights (SDRs)," are based on data provided by the IIIAF and are
valued in dollar terms at the official SDRIdoliar 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.ti'eas.gov/press/refeases/2D06761237212877· .

3/6/2007

Page I of I

July 6,2006
JS-4350
Quarles to Discuss
U.S. Corporate Governance Rules,
American Competitiveness

Under Secretary for Domestic Finance Randal K. Quarles will participate in a
roundtable discussion with Members of Congress at the Financial Services Forum
on Monday. The panel, which will be hosted by former Secretary of Commerce
Donald l. Evans, will discuss the effects of U.S. corporate governance rules on the
competitiveness of American businesses and financial markets.
Who
Under Secretary for Domestic Finance Randal K. Quarles
What
Remarks on U.S. Corporate Governance Rules
When
Monday, July 10 2:00 pm (EST)
Where
The Mandarin Oriental Hotel
Room Oriental C
1330 Maryland Ave, SW
Washington, DC

http'llwww Heas_QOv/oress/releases/is1350.htm

3/6/2007

Pa~c

I of I

July 6,2006
)s-4351

Media Advisory:
Treasury Assistant Secretary Warshawsky to Hold Economic Briefing
U.S. Treasury Assistant Secretary for Economic Policy Mark Warshawsky will hold
a media briefing to discuss the state of the U.S. Economy. The event is open to
credentialed media.

Who

U. S. Treasury Assistant Secretary Mark Warshawsky

What

Economic Media Briefing

When

Friday, July 7,10:30 a.m. (EDT)

Where

Media Room - Main Treasury
1500 Pennsylvania Ave, NW
Washington, DC

Note: Media without Treasury press credentials should contact Frances
Anderson at (202) 622-2960, or frances.anderson@do.treas.gov with the
following information: name, Social Security number and date of birth.
-30-

httn'llwww t·'eas.2Dv/vress/reieases/is4 )51.htlll

3/6/2007

Page I of 1

July 7,2006
JS4352
Statement of Acting Treasury Secretary Robert M. Kimmitt
on June Employment Report

"The employment report for this month showing 121,000 jobs being created in June
provides further evidence of the strength of the U.S. economy. Since the
President's tax relief program took effect in mid-2003, we have seen twelve straight
quarters of increased business investment, leading to more than 5.4 million jobs
being created and a remarkable 4.6 percent unemployment rate -lower than the
average rate in each of last four decades.
"Higher tax revenues are also an indication of a strong economy, and in fact, yearto-date tax receipts are now running 12.9 percent over the 14.6 percent increase of
last year. This is a clear indication that, with continued attention to spending
discipline, we are on the right path to meeting the President's deficit reduction goal
early.
"The President has laid the pro-growth foundation for sustained U.S. economic
strength, and his proposals like the American Competitiveness and Advanced
Energy initiatives will build upon that strength and will create even higher standards
of living for future generations of Americans."

http;//www.tr~as..uov/Dress/releases/is4352.htm

3/612007

Page I of I

/ a view or pnnt me put- content on tniS page, Clown/oaCi me tree

II(/C,I)""

/1 (;(oiJilt ',H()iiC/Cr"

July 7, 2006
JS-4353
The Evolution of the G-7 and Economic Policy Coordination
The growth of global economic imbalances has generated much talk about how the
situation can possibly be unwound gradually or in an orderly manner, Perceived
currency misalignments appear to be increasing protectionist pressures, In the face
of these challenges. some look back wistfully to the time of the Plaza Agreement.
Some analysts are even calling for a Plaza-like "coordination" agreement to
promote an orderly reduction in global imbalances.3 At the same time, the G-7
major economies that have traditionally participated in macroeconomic policy
coordination and thereby took on such challenges for the global system no longer
carry as much economic weight in the global economy as they once did, Indeed. as
key emerging market economies play a larger and growing role on the global
economic scene, they are now a more critical part of the global imbalance equation.

REPORTS
•

Occasional Parel' No 3 July 20D6

httn·/lww w.t..t:as.go Y /press/releases/ls4353.htm

3/6/2()07

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BY :\IARK SOBEl. Al'\O I.OllELLE?\

STED~IA;\

DF.PARTMFNT OF THF TREASURY· OFFICE OF INTERNATIONAL AFFAIRS

Department of the Treasury
Office of International Affairs
Occasional Paper No, 3
July 2006

The Evolution of the G-7 and Economic Policy Coordination
By Mark Sobel and Louellen Stedman'

DISCLAIMER

----

This is the third in a series of Occasional Papers from the Treasury Department's Office of International
Affairs. These papers examine international economic issues of current relevance in an effort to identify underlying trends and issues for policymakers. These papers are not statements of U.S. Government, Department of the Treasury, or Administration policy and reflect solely the views of the authors.2

The growth of global economic imbalances has
generated much talk about how the situation can
possibly be unwound gradually or in an orderly
manner, Perceived currency misalignments appear to be increasing protectionist pressures, In
the face of these challenges, some look back wistfully to the time of the Plaza Agreement. Some
analysts are even calling for a Plaza -like coordination" agreement to promote an orderly reduction in global imbalances,'
1/

At the same time, the G-7 major economics that
have traditionally participated in macroeconomic
policy coordination and thereby took on such
challenges for the global system no longer carry
as much economic weight in the global econOlTty
as they once did. Indeed, as key emerging market
economies playa larger and growing role on the
global economic scene, they are now a more critical part of the global imbalance equation,

These debates have put vexing questions on the
table. Can officials from G-7 and other key econ0mies coordinate" their policies effectively to
strengthen global stability and growth? Is the G7 still relevant, given that global economic weight
- and more importantly relative contributions to
recent global growth - is increasingly shifting to
other countries?
II

Clearly, the potential for coordination has shifted
over time. The Keynesian revolution and more
recent moves toward independent central banks
reinforced policy-makers' belief that they could
manage their own economic objectives and destinies on their own to a greater degree than in
the past. Policy-makers continue to debate who
should adjust and by how much, Larger countries in particular are less inclined to subordinate
domestic economic objectives to an external discipline or to allow domestic objectives to bear a
disproportionate burden of external adjustment.
Much research has been undertaken by econo-

'Mark Sobel has served as Deputy Assistant Secretary for International Monetary and Financial Policy since 2000 and
worked on international monetary policy issues at Treasury from lCJS5-1 YCJ2 and for much of the second half of the 1'NOs.
Louellen Stedman worked in Treasury's Office uf International Monetary Policy as Deputy Director and Director from
19CJ8-2002 and served as a Senior Policy Advisur un international monetary policy issLles through 2U05.
2The authors thank Ted Truman, Karen Johnson, Joe Gagnon, James Lister, Robert Kaproth, Michael Kaplan, Marvin Barth,
John Weeks, and Jon Burks, among others, for their helpful and thoughtful comments.
1 Sec, for instance, William R Clinc,"Thc Case' for a New Plaza Agreement," Policy Brief ill Inicmatiollrli ECOII01llics (No B054), Institute for International Economics, December 2005.

2

mists to analyze the results of coordination, with
varying conclusions about the value of the exercise. ~
Yet countries do not have the luxury of operating
independently. The exponential growth in global financial markets clearly has spillover effects,
which affect the conduct of macroeconomic policy. On balance, the interactions among key economies are increasing, and globalization has raised
a wide range of common and new economic and
financial challenges for policy-makers. Thus,
the international community needs processes
to bring officials together to make them aware
of developments in each other's economies and
their effects on others - and to consider if and
how they should act together in this light. It is in
this context that new mechanisms for economic
policy management among the major economies
emerged after the demise of Bretton Woods and
continue to evolve today.
This paper briefly examines macroeconomic policy coordination in the post-Bretton Woods era
and assesses the potential for a Plaza-like agreement in the current climate. It also reviews the
evolution of the G-7 over the last two decades
in order to engage on the debate about the G7's relevance. To be sure, there are many more
detailed analyses of this history and scholarly
assessments of the success of coordination. This
paper aims to offer a brief historical review and to
explore these questions from a perspective inside
one government in the G-7 process.

Managing global economic adjustment and the
interactions among countries is not a new ques-

tion. In principle, the gold standard provided
clear rules for adjustment. But it had important
weaknesses: it subjected countries to wide variations in output/inflation, and countries jumped
ship from time to time (for instance, the United
Kingdom following the first World War). Similarly, the Bretton Woods System provided for a
high degree of policy automaticity in principle,
but it too allowed the build up of huge systemic
asymmetries and stress. Policy-makers could not
agree on who should adjust and by how much,
and the system met its demise.
Without an automatic policy adjustment mechanism in place, the need emerged for other means
to address economic policy interactions across
borders. All countries would benefit from a system that balanced the needs and interests of
countries, constrained policies that undermined
the economic objectives of others, and achieved
a better outcome for all than could have been
reached by single countries acting independently.
In principle, economic policy coordination could
entail individual countries formulating and implementing policies jOintly with others, including
trading off policies if need be, in order to secure a
higher level of global economic welfare. On the
other hand, no system can objectively balance
the at times divergent self-interests and needs of
countries.

It was after the first oil price shock in December
1973 that the five major industrial countries (G5) made their first post-Bretton Woods attempt to
coordinate policies. But they failed on this occasion to agree on specific macroeconomic policies.
They tried again at the London Summit in 1977
when Leaders established growth targets, which
were not achieved.'
The next effort came at the Bonn Summit in 1978,
when Leaders agreed on a set of policies intend-

See, for instance, Laurence H. Meyer, Brian M. Doyle, Joseph E. Gagnun and Dale W. Henderson,"International Coordination of Macroeconomic Policies: Still Alive in the New Millennium?" Internatiollal Finallce DisCf/ssio/'l Paper Nff/l1bcr 723,
Board of Governors of the Federal Reserve System, April 2002, and Edwin M. Truman, "A Critical Review of Coordination
Efforts in the Past, " Macroeconomic Policies ill the World Eco11omy, ed. Horst Siebert. Heidelberg: Springer.
; Meyer, Doyle, Gagnon and Henderson, p. 18.
4

3

ed to fuel stronger global growth. Specific policy
commitments were made by each Leader, including fiscal expansion in Japan and Germany and
deregulation of oil prices in the United States, and
together all committed to bring the Tokyo Round
of trade negotiations to a successful conclusion."
Many see this as the pinnacle of economic policy
coordination. But these policies were just beginning to take effect when the second oil price shock
hit in 1979, and many blamed the Bonn Summit
for inflationary pressures that emerged thereafter.
Following the Bonn Summit, meaningful coordination of economic policies languished for some
years.7 Indeed, there was considerable discord
in major countries in this period about how and
to what extent to align their policies. The United
States believed that countries should set policy
independently and allow markets to determine
exchange rates without any official guidance.~
Others saw more promise in coordination, with
France advocating throughout the period a new
international monetary conference to agree on a
common approachY

expansive fiscal policy (notably tax cuts and increased defense spending), and tight monetary
policy to wring out inflation. Real interest rates
rose. The dollar appreciated. The U.S. current
account deficit expanded to a then-whopping 3112 percent of GDP. Unemployment was high,
peaking around 10 percent, the Midwest suffered,
shifting from manufacturing tol/rust belt". Global competitive pressure built up on U.S. farmers
and producers - and economic policymakers felt
the heat.

Despite differences in outlook among the major
economies in the early 1980s, newly challenging
economic circumstances in these countries and
their consequences helped create the context for
a new coordination push in the middle of the decade. The resulting period represents the most
sustained effort among Finance Ministers to coordinate policy in the post-Bretton Woods era.

By 1985, the new Secretary of the Treasury, James
A. Baker, faced tremendous protectionist pressure. The dollar had already peaked and started
to fall in February, but the political crescendo
had built sufficiently to motivate a major effort
to coordinate" policy - announced in September
1985 at the Plaza Hotel in New York City. The
communique detailed specific policy intentions
to lay the basis for continuing strong growth
and addresing imbalances, induding tax cuts in
Germany and fiscal expansion in Japan to help
promote growth. The official document further
asserted that exchange rates should more fully
reflect fundamentals, calling for appreciation
of non-dollar major currencies and indicating a
willingness by Ministers to cooperate to achieve
this end - which they did through extensive, coordinated intervention thereafter. The imperative
of addressing global imbalances was further underscored by the Baker-Miyazawa agreement in
October 1986, which made clear the commitment
to further policy measures, rather than merely relying on exchange rates. 11

In the United States, the early 1980s featured an

Whether the Plaza Agreement was a success is

JI

C. Fred Bergsten, "Should G7 Policy Coordination Be Revived?" The bllemationai Economy, Fall 2003.
Silvia Ostry, "Canada, Europe and the Economic Summits,"paper presented at All-European Canadian Studies Conference, The Hague, Netherlands, 24-27 October 1990.
~ Jeffrey A. Frankcl,"International Nominal Targeting: A Proposal for Coordination in the 19905," expanded April 1990 version of a paper published in the KiilYlI JOllrnal, March 1990.
"See discussion in intematioJllli MOllelllry Coopel"atioll Since Brettoll Woods, Harold James, (\tVashington, D.C.: International
Monetary Fund, 1996), pp. 409-435, highlighting the passion among some (particularly France) for a new international
monetary conference and the skepticism and resistance by others (notably u.s. Treasury Secretary Donald Regan).
II)The role accorded macroeconomic discussions in the annual Economic Summits has varied substantially over time, but
in general has lessened over time, especially in contrast with the 1970s. This paper focuses on macroeconomic discussions
among Finance Ministers and Central Bank Governors and only references Summitry in several instances.
11 SamY. Cross,"Notes for FOMC Meeting,"Deccmber 16, 1986.
f

7

4

still a matter of debate among analysts; the dollar had already started to fall, and it is not clear
to what extent the Plaza Agreement furthered
this trend. 12 In any case, the dollar remained in
decline until February 1987. At that time, the
major countries sought to halt the trend and announced a new more comprehensive agreement
at the Louvre, based on an assessment of fundamentals. Privately, understandings were reached
about appropriate ranges for exchange rates. Despite the Louvre Accord, the dol1ar continued to
decline. Truman attributes this at least in part to
the specification of clear policy actions that were
not implemented, lJ though it is not certain that
even full implementation of commitments would
have captured the attention of market participants and convinced them that the U.S. government truly wished to stop the dol1ar's slide. The
stock market crash in October 1987 followed, and
many analysts pOint to public debate between
the United States and Germany about monetary
policy as one contributing factor.
The G-7 tried once more to shore up market sentiment in December by issuing a communique
based on telephone consultations (the"telephone
communique"). Ministers reaffirmed their Louvre commitments, underscored the importance
of fundamentals and announced new measures
to help bring their economies into balance - in
particular through additional fiscal measures in
the United States and tax cuts in Germany. This
was accompanied by a coordinated intervention
that did indeed mark an upturn in the dollar, 14
though not a lasting one.
After 1987, current account deficits of the major
industrial countries 11 gradually but surely fell to
more sustainable levels." lS Indeed, the U.S. current account reached balance in 1991. A number of factors contributed to this adjustment,

including the effects of dollar decline over time
(as the dollar lost 30 percent of its value in real
trade-weighted terms between mid 1985 and
mid 1991) and the slowdown in U.S. growth at
Importantly for external
the decade's end. 16
adjustment, growth in Germany and Japan was
particularly strong in the latter part of the 1980s
and early 1990s, influenced by the initial impact
of German reunification and expansive Japanese
monetary policy, and outpaced u.s. growth for
several years.
During this period, policy-makers' ability to deliver fundamental reforms and sound policies,
which are the ultimate determinants of exchange
rate relationships, was uneven. To be sure, policymakers reached informal understandings about
exchange rate levels and were prepared to take
a public view as to when exchange rate changes
were in line, or not, with fundamentals and to
act on that view. Japan and Germany did look at
budgetary priorities in light of international economic interactions. Interest rates were adjusted at
concurrent times by major central banks on occasion. But many commitments were not new. Interest rate adjustments reflected economic needs
and self-interest in the individual countries, and
monetary policy was not geared solely to maintaining understandings about exchange rate
ranges. Despite its commitments to the G-7 and
the Gramm -Rudman -Hollings legislation aimed
at controlling spending, the United States did not
deliver in good time on the promise to reduce its
deficit. Despite commitments to the G-7 about
redUCing interest rates, the German government
could not deliver the Bundesbank, which slightly
increased a key interest rate in September 1987
just before the G-7 meetingY
Apart from the results of multilateral surveillance,
the process of economic policy coordination it-

12Truman.
'lIbid.
I~ James, p. 457.
'5Ibid.
10 Sebastian Edwards, "The End of Large Current Account Deficits, 1970-2005: Are there Lessons for the Untied States?"
National Bureau of ECOilOmic Research Wnrk;/IK PDper 11669 September 2005.
17James. p. 453.

5

self evolved substantially during this period. The
Group of Five (G-5) continued secretive discussions that had begun in the mid-1970s, culminating in the announcement of the Plaza Agreement in 1985. Indeed, whereas the G-5 had been
a secret group that did not issue communiques,
with the exception of the January 1985 meeting,
the process set off by the Plaza Agreement then
led to an expansion of the group into the G-7
and a pattern of public statements that has since
become relatively consistent, with the exception
of a brief period. The IMP developed a process
for examining objective indicators" and proViding papers to the G-7, which offered a common
set of data for the G-Ts multilateral surveillance
discussions. 1M

demonstrated both the usefulness and limitations of multilateral engagement on economic
policies. Policy-makers recognized the growing
interactions among their economies and the reality that these inter-linkages must factor into their
thinking about and formulation of domestic economic policy choices, although they were not willing to make the sacrifices necessary to maintain
the discipline of a fixed exchange rate and more
rules-based system. They all shared a strong interest in preserving stability, and were mindful of
maintaining a sense of order in the system and
working to resist protectionism. As creditors and
key players in the system, they represented a likeminded grouping for setting forth perspectives on
global economic issues beyond the G-7. Some
good results were obtained. Thus, they clearly did
not
want to throw international economic policy
The entire process was appealing and created a
to
the
wind. Yet the conviction behind macroecosense of order in other ways. The sequencing of
nomic
policy"coordination"was less clear and the
communiques, lists of policy commitments, and
aura of cooperation created a sense of progress. ensuing results at times fell short of the mark. In
In fact, however, commitments on the surveillance some cases, officials did not agree on announced
front were naturally limited, given the preemi- coordinated actions or did not have a shared unnence of domestic politics, such that agreement derstanding of what they would mean. Further,
and action on concrete new policy actions was the scope for changing domestic policies as a
not the rule. Thus, communiques often repeated result of international considerations was often
policy objectives already achieved, announced limited.
domestically and/or not within direct control of
Finance Ministers. And, as noted above, the actual results lagged behind the commitment to adjusting policies.
In the 1990s, two major dynamics shaped interacAlso, during this period, senior G- 7 officials often tions within the C-7. First, on the macroeconomtasked their technical experts to work together on ic policy front, policy-makers tended to be more
common problems in areas not rdated to mul- inwardly focused as domestic policy challenges
tilateral surveillance, for example on IMF opera- and political dynamics consumed much of their
tional and policy issues. The international debt attention. Shaping concerted macroeconomic
crisis provoked extensive discussion about the policies was not as prominent a theme as in the
nature of the problem and potential solutions, 1980s. Expectations about the ability to achieve
eventually leading to the Brady Plan in 1989. macroeconomic results through multilateral surThese taskings promoted increased cohesion and veillance were more tempered, and policy-makdeepened contacts at many levels among G-7 fi- ers emphasized that keeping one's own house
in order was perhaps the main contribution that
nance ministries and central banks.
could be made to a healthy global environment.
II

In sum, the Plaza Agreement and its aftermath
James M. Boughton, Silent Revolution - The International Monetary Fund 1979-1989. (Washington, D.C.: International
Monetary Fund, 2001), pp. 214-15.

l'

6

Second, shared interests in broader global policy
issues, such as the break-up of the Soviet Bloc,
the Asian financial crisis and the operation of the
international financial institutions, drew the attention of policymakers and consumed more of
their discussions as they mapped out common
approaches in these areas.
National economic developments posed considerable challenges for policymakers. In the United
States, the imperative of restoring fiscal balance
dominated the economic policy agenda in the
1990s. The U.S. fiscal deficit began to decline in
the early 1990s and swung to surplus by the end
of the decade, underpinned by good growth and
a stream of "revenue surprises" as the stock market surged. For its part, the Federal Reserve "opportunistically" continued to bring inflation down
and under control, building on the experience of
the 1980s in the wake of the challenges of the
late 1970s.14 Overall, after slowdown in the early
1990s, the U.S. economy gradually gained steam
through the decade.
While the United States was building momentum, Japan was experiencing the aftermath of the
bursting of the 1980s bubble economy. Despite
serious signs of trouble and recession, banking
sector reform was delayed. After substantially
easing fiscal policy to spur growth, premature fiscal consolidation in 1997 stalled recovery, contributing to a contraction in the economy that year
and the following. Monetary policy eventually
became increasingly and highly accommodative.
The challenges faced in Japan over this period
were entrenched, and opinions differed internally
and abroad about how to promote recovery.
In Europe, attention was heavily influenced by
domestic agendas and intra-European affairs.
German reunification in 1990 imposed high costs
on the German economy, which contracted in

1992 and achieved only moderate growth in subsequent years, weighed down also by deep structural rigidities. The crisis in the Exchange l~ate
Mechanism of the European Monetary System in
1992··1993 also consumed the attention of financialofficials. zlJ Later on in the decade, the advent
of European Monetary Union dominated the financial agenda, and European officials heavily
focused on establishing the framework for the
euro through the Maastricht Treaty and building
the European Central Bank (ECB). Performance
in some of the periphery countries of Europe improved markedly, as the lure of using the cum
from the start facilitated improved policies and
convergence of interest rates to German levels.
But despite this progress, persistent unemployment and structural rigidities took a heavy toll,
especially in the key continental countries. Overall, while the EU experienced some recovery in
the mid to late 19905, performance lagged significantly behind the United States.
Further, a shift in attitudes left policymakers even
more doubtful about the feasibility and potential contribution of coordinating macroeconomic
policy across borders.
• As monetary policy was able to bring inflation down, many central banks increasingly
built up their credibility and felt increasingly
accountable to get inflation down and keep
it low. With monetary aggregates offering
a less reliable policy anchor, inflation targeting regimes began to develop - in New
Zealand, Sweden, Canada, Australia, and
the United Kingdom. Obviously, exchange
rates remained part of central banks'monetary equation, but the emphasis was more
squarely placed on keeping low inflation. In
the United States, senior Fed officials maintained that external developments would be
taken into account to the extent that they

,. Athanasios Orphanides and David Wilcox, liThe Opportunistic Approach to Disinflation"; Federal Reserve Board Finance
and Economics Discussion Series; May lY9Ii,
20 Edwin M. Truman,"Economic Policy and Exchange Rate Regimes: What Have We Learned in the Ten Years Since Black
Wednesday?"; speech at the European Monetary Symposium, London School of Economics, September 10, 2UU2.

7

had feedback effects on the C.S. economy
and that monetary policy responses should
be aimed at the optimal performance of the
U.S. economy.21
• Questions about fiscal policy as a flexible tool
for macroeconomic management remained
as acute as ever. As always, the conduct of
fiscal policies required extensive compromises with legislatures and delved into fundamental domestic political choices. Lags
between the announcement of fiscal intentions and implementation remained long.
Policy-makers increasingly felt fiscal policy
should follow a medium-term course and
was not an appropriate instrument for macroeconomic fine-tuning.
• Attitudes toward foreign exchange market
intervention grew increasingly skeptical in
major countries. After frequent coordinated
intervention during the Plaza and Louvre
period and through the end of the 19805 and
early 1990s, with the United States an active participant, officials-particularly in the
United StateS-increasingly doubted the efficacy of intervention. In short, this growing
skepticism reflected a return to that of the
early 19805, but it also took into account the
realities of the modern global economy and
markets.
Authorities increasingly felt that the amounts
they could mobilize for intervention paled in
comparison with huge and growing daily foreign exchange market turnover. They recognized
that intervention operations would be sterilized,
neutralizing the monetary policy impact of such
operations. The exchange rate was increasingly
thought of by most as an outcome of policies and
not an object of policy. Current account targeting
was eschewed, especially as current account positions were inextricably linked to global capital
flows and the world of financial market participants. There was also concern that official actions
21

8

and statements to the market could themselves
create volatility, distracting markets from intermediating forces of supply and demand.
In the United States in particular, the prevailing
view became that intervention should be used
velY sparingly and for signaling purposes when
exchange rates were markedly out of line with
perceived underlying fundamentals. That said,
the G-7 cooperated closely to intervene on exchange rates when such action was perceived as
warranted, for instance to address yen strength
in 1995, yen weakness in 1998, and euro weakness in September 2000. These concerted operations demonstrated anew the ability of G-7 officials to work closely together, even against the
background of greater constraints and limitations
on their ability to"coordinate"policies. They also
showed that even if officials were skeptical about
foreign exchange market intervention, policymakers did not preclude that serious misalignments might arise and that when it came to intervention, they had "never said never".
While the limits of macroeconomic policy coordination"increasingly became evident during the
1990s, the decade witnessed new and intense G7 cooperation on other fronts. The first half of the
1990s saw the collapse of the Soviet Union, the
emergence of many newly independent states,
and the Mexican crisis of 1994, which was a harbinger of capital account crises to come.
II

The second half of the 1990s was also dominated
by the Asian financial crisis, and crises in Brazil and
Russia. The G-7 extensively discussed the challenges posed by these crises and their views on
the appropriate international response. Intensive
efforts were made to improve the" architecture"
(some would say "plumbing") of the international monetary system, particularly modernization
of the IMF. Transparency and data dissemination were introduced into the Fund's lexicon; the
Fund delved into the world of strengthening financial sectors and supervision and regulation;

Alan Greenspan, The Federal Reserve's Semi -Annual Monetary Policy Report; July 21, 1'1'18.

standards and codes of good policy practicc were
promoted; national baJance she~t analysis took
root; and IMF facilities were revised, with some
streamlined and the Supplemental ResetVe Facility and the Contingent Credit Line added.

As they confronted the events of the 19905, G-7
governments deepened their dialogue and cooperation, with more frequent interactions facilitated by improved communication technology.
The emerging market crises of the mid and late
1990s led to extensive conference calls, consultations and actions together to help restore stability - further reinforcing the tight dynamics of the
C-7 Finance Deputies in particular. Interestingly,
the efforts to achieve shared goals in the international financial institutions (IFIs), where as major
creditors they could cany sway, underscored the
importance of the G-7 process even as the perceived utility of heavy engagement on multilateral sUIVeillance waned.

critica] to broader stability, the United States
sought to bring the G-7 together with key Asian
and other emerging market countries to share
information and discuss ways to change policy
approaches. The "Group of 22" sprang from a
discussion between President Clinton and Singaporean Prime Minister Goh in the height of
the Asia crisis and produced three reports on issues central to the crisis reflecting the input and
views of major industrial and emerging market
countries alike. Thereafter, the G-71aunched the
Group of Twenty (G-20) as a pennanent forum.
These groups hclped change the dynamiCS of the
international dialogue and began the more recent
wave of modernization that continues today.
Also in the wake of the Asia aisis, the G-7 created the Financial Stability Forum (FSF), bringing together regulators, central bank and finance
ministIy officials from their countries, along with
standard setters and officials from other key financial centers and institutions. Creating the FSF
was a critical effort to make sure that financial officials stayed vigilant in working together on the
promotion of financial stability in the face of everrapid changes in global financial markets.

On the whoJe, di'iCUSSjons within the G-7 involved good give and take on an increasing range
of issues in the face of globalization. Multilateral
surveillance exercises continued. but more as a
means of keeping abreast of others'situation than
an exercise in exerting peer pressure. To be sure,
though, the United States often heavily engaged
and exerted peer pressure, especially with Japan,
in a bilateraJ context.
Since the new' millennium, G-'1 engagement
has been characterized by both continuity and
The G- '1 process also evolved in other ways. With change.
the advent of the euro, the question of participation in G-7 discussions needed reexamination.
• Continuity in the sense that multilateral sur1b adapt, the G-7 put in place new procedures,
veillance exercises remain a key part of G-7
whereby the European Central Bank President
deliberations - though with modest expecand the Finance Minister from the country holdtations regardingUcOOIdinationu given coning the ED Presidency (and a member of the Euro
straints on domestic macroeconomic policy
group) replaced national central banks during
fonnulation and skepticism among most
surveillance and exchange rate discussions, while
about foreign exchange market i11tervention
Buro-area national central banks remained the
-end that engagement has focused on a
interlocutors on broader policy issues. Driven by
wide range of issues.
SummitIy in the early 19908, the G-7 also invited
Russian officials to meet with the G-7 on Russian • Change in the sense that the forces of gloreform.
balization and the power of private finandal markets have accelerated, global imbalWhen emerging market country policies became
ances far larger than those in the 1980s have

9

emerged, there is a rising imperative to reach
beyond the G-7 countries to tackle challenges in the world economy, and cooperation
continues to expand into new policy areas.

marking") proposed reforms and reviewing their
results. The ability of G-7 members to deliver on
promises was limited, however, and many of the
needed structural reforms were outside the control of Finance Ministers and Central Bank Governors.

On the multilateral surveillance front, discussions
were initially influenced by the US. downturn in
the wake of the perfect storm of the bursting of Despite agreement on the three-part strategy and
the tech bubble, the 9/11 telTorist attacks, and the launch of the Agenda for Growth, basic questhe aftermath of corporate scandals. Japan began tions about who should adjust, how, and by how
to clean up its financial sector, put itself on a re- much have remained.
covery track and end deflation. Europe most recently shows signs of somewhat stronger growth,
• US. fiscal consolidation is clearly in the US.
though there has been only limited progress on
national interest. Some foreign voices seemstructural reforms and unemployment remains
ingly suggest, though, that if only the United
high.
States would rein in its fiscal deficit, US.
external deficits would be quickly reduced
Subsequently, as conditions strengthened, two
with the global economy benignly more baldominant issues have taken center stage in G-7
anced. At the very same time, many foreign
surveillance discussions.
officials-and often the same officials-also
stress how important solid U.S. growth and
demand for imports are to their economies.
First, the emergence of large global imbalances
Criticisms
of the U.S."twin deficits" continue,
appropriately features prominently on the agennotwithstanding
the lack of a good correlada. The G-7 relatively quickly came to a consention between US. fiscal and current account
sus that that adjustment of global imbalances
deficits in past decades.
was a shared responsibility and that a three-part
strategy for orderly adjustment was needed in the
context of sustained and strong global growth.
The three components widely agreed were: fiscal consolidation and raising private saving in the
United States, structural reforms to raise potential growth in Europe and Japan, and greater flexibility in exchange rates, especially where such
flexibility is lacking - with a particular focus on
emerging Asia and China.
The G-7 effort to tackle the challenges of global
imbalances also yielded the Agenda for Growth,
launched by Ministers and Governors in September 2003 and aimed to address supply-side
issues to increase flexibility and raise productivity growth. Each country committed to pursue
additional pro-growth policies, and together they
agreed to engage in regular"supply-side surveillance,"which would include assessing (or"bench-

• The Euro-area's current account position is
near balance. Thus, some European officials
argue that the Euro-zone is not really part
of the global adjustment equation, though
it surely needs to improve economic performance for its own good. Others, including
US. officials, do not support this view. They
believe there arc important gains to be made
in the European non-tradeable services sector and investment climate, which could
boost European potential growth, stimulate
demand for imports, attract greater flows of
global capital, and lead to a sustainable current account deficit. From this perspective,
Europe is part of the global adjustment picture and part of the solution. 22
• Japan has clearly felt that external demand

22Trcasury Department,"Report to Congress on International Economic and Exchange Rate Policie~"; May 2006; pp. 6-7.

10

is an important support for Japanese growth
in overcoming deflation and getting back on
a solid recovery track in the wake of its doldrums. Some Japanese officials psychologically may be less inclined than their U.S. or
European counterparts to view the exchange
rate as a simple by-product of other policies.
Others outside of Japan emphasize that it is
critical for Japan to wean itself from export'led growth.

sistent not only with domestic policies, but global
adjstment with the international monetary system.

• The G-7 has called for countries beyond its
confines to increase currency flexibility, particularly China, to assist in the global adjustment process; in turn, greater currency
flexibility in China is seen as a means of faCilitating greater flexibility throughout Asia,
given other Asian countries' concerns about
maintaining competitiveness vis-a.-vis China. Asian officials recognize the need for
greater currency flexibility. But they have
also pointed to underlying saving-investment relationships in their countries as key
to understanding their current account positions and argued that currency tlexibility will
not contribute significantly to solving global
imbalances.

A second key issue framing G-7 surveillance discussions this decade has been the declining collective weight of G-7 economies in the world
economy - and the resulting limits on their ability to influence the world economy through their
own policy actions. The world economy is now
in its fourth consecutive year of growth exceeding four percent annually (on a purchasing power
parity basis). This is a phenomenal and welcome
development. But growth performance is quite
disparate. The United States continues to outpace
other G-7 countries and has been the main engine of global growth for some time. Meanwhile,
fast-growing emerging market countries, particularly in emerging Asia, are imparting a source
of dynamism to the global economy. In 1985, the
G-7 countries accounted for 48.9 percent of global GDP (using PPP weights); in 2005, they only
constituted 41.9 percent.~3 As G-7 growth is lagging behind that in emerging markets, the weight
of the G -7 in the global economy is declining, and
the G-7 is no longer providing the same degree of
marginal impetus to global growth.

On balance, then, while there is agreement about
the broad strategy, beneath the surface there are
some key, nuanced differences about relative
contributions to global adjustment.

The challenges posed by global imbalances,
world financial markets, and shifting weight in
the global economy have affected the G-7 process itself.

The IMF's latest proposals on a process for multilateral consultations may represent an important
effort to reinforce the role of shared responsibility, understanding, and peer pressure in the international monetary system. These proposals
underscore the multilateral dimension of global
imbalances and the need for a broader discussion of imbalances than can be afforded within
the confines of the G-7. The process should also
help promote exchange rate policies that are con-

The constraints on macroeconomic policy coordination that prevailed in the 1990s - notably the
simple realities of the domestic political conduct of
fiscal policy, the increasing focus of central banks
on inflation and to a lesser degree exchange rates,
skepticism about the wisdom of current account
targeting, and doubts regarding the efficacy of intervention - remain well-entrenched. The role of
peer pressure has further softened. In addition,
the United States in particular has in general fur-

~.' International Monetary Fund, World Economic Outlook Database, September 2005. The changes in PPP weights for
developing countries and emerging markets reflect both countries gaining and losing Weight. Fast-growing emerging
markets have seen their PPP weight in the world economy increase far more than the decline in G-7 weight. China, India,
and South Korea saw their combined PPP share of the global economy rise over 13 percentage points in this period.

11

ther stepped back from cfforts to promotc specific their special meeting in early October 2001. That
policy change in G-7 partner countries, preferring cooperation launched strenuous day-to-day G-7
a more collegial approach.
cfforts at collectively designating terrorists, freezing their assets, incorporating FATF standards
into
the daily activities of the Fund and Bank, and
As stated by then-Assistant SecretaI)' for Internacleaning
up unsafe financial practices. These eftional Affairs Randal Quarles: "A continual process of informal discussion and contact provides forts built on and were facilitated by earlier work
the best means for understanding the interaction within the G-7 and other international groupings
of national policies around the globe and greater on offshore financial centers and the abuse of the
sensitivity to each country's concerns ... .I think international financial system.
ollr current informal processes are working as
well as they can in a world of diverse perspectives. Further, while G-7 debates on IMF reform could
The most important contribution any country can be seen as a hardy perennial, the Medium Tenn
make is to improve its own economy's perfor- Strategic Review - against the background of the
mance. The better an economy functions indi- recent decline in IMF credit outstanding and the
vidually, the more positive a contribution it can desire to tackle the governance structure of the
make to the global economy."24
Fund - in some respects is a qualitatively different and more sweeping exercise than witnessed
Thus, while G-7 policy-makers have valued inter- in the past few years.
actions with each other, G-7 multilateral surveillance discussions have focused more on reviewing Just as the substantive discussions have changed,
developments than a back and forth examination the process of G-7 engagement has also evolved.
of prospects and policy changes.
G-7 Finance Deputies remain at the heart of the
process, meeting often, holding conference calls,
and
frequently speaking or emailing daily. They
At the same time, G-7 cooperation on issues beorganize
Ministerial sessions and engage intenyond the macroeconomic realm has continued
sively
if
an
emerging market begins to face proband deepened. There was close and continuing
engagement in addressing country cases such as lems. The members of this group get to know each
Brazil, Argentina, Uruguay and Turkey. The initial other well. and the group is sufficiently small to
HIPC debt reduction initiative and the more re- get business done.
cent Multilateral Debt Relief Initiative were clear
products of G-7 cooperation. The G-7 as always G-7 Ministers and Governors continue to meet
has continued its work on IF! reform, for instance three times a year, and the Finance Ministers
achieving greater harmony on the balance be- meet alone with their Russian counterpart (as
tween flexibility and limits on exceptional ac- the G-B) to discuss finance issues ahead of the
cess to IMF financing. And G-7 cooperation also Leaders' annual summits. The choreography" of
helped achieve incorporation of Collective Action the G-7 meetings has grown complicated, and
debates swirl about who has domain for a given
Clauses in sovereign external bond contracts.
issue and who should be at the table. In recent
Cooperation also entered new terrain - the G-7's meetings, the ECB President and the President
unity in tackling the challenge of combating ter- of thc European Economic and Finance Counrorist financing was a new and resolute chapter in cil have attended the G-7's multilateral surveillance session; European national central bankcooperation, symbolized so strikingly by the joint
ers
then join the discussions; then Russian and
press conference of G-7 Finance Ministers at
II

2~ Randal Quarles, remarks in TIle curo (It Fitle: Ready for Q Global Role, (Washington, D.C., Institute for International Economics, Adam Posen, editor; April 2005), p. 42.

12

European Commission officials attend a portion
of the meeting. The heads of the IMP and World
Bank also attend parts of the meeting. As a result, many people are in the room, which tends
to lead to more scripting and less candor among
top officials. European efforts to coordinate positions in the G-7 with other EU states can further
complicate informal exchanges.
More pronounced and likely significant for the
long term are the shifts in G-7 interactions with
those outside its membership and an existential
soul-searching now underway about how the
G-7 fits into today's global architecture. This dynamic is linked to the changing pattern of global
economic weight discussed above and is also mirrored in the current intense debates about changing IFI governance, particularly at the IMP.
The issue of who should be included in exclusive,
heavyweight discussions on the world economy
and international financial system is a thorny
one.
• The G-7 still accounts for over 40% of global GDP on a PPP basis and far more than
half using market prices, plus nearly half the
voting power of the IFIs. The G-7 countries
tend to be like-minded creditors of the system. But many others are becoming creditors too.
• The G-20 has taken root as a key forum for
broader dialogue on key international economic and financial policy issues. It has
usefully brought emerging market officials
together with those of the G-7, providing
an opportunity for mutual education and increasing buy-in from emerging markets for
many of the initiatives pursued in the IFIs and
elsewhere such as the broader adoption and
implementation of standards and codes. The
G-20 has helped G-7 officials deepen contacts with em~rging market colleagues and
this has facilitated interaction, particularly at
urgent times. The G-20 is a highly valuable
and new piece of the global architecture. Yet,
the G-20 ~s large, and some participate far

more actively than others.
• And then there are the changing dynamics
and evolving roles of countries within the
system ("variable geometry"). China's impact on the global economic system is huge,
undeniable, and must be taken into account.
India and Brazil as well, large countries in
their own right, are beginning to show the
fruits of reforms as liberalization and sound
policies take hold, growth is quickening, and
their impact on the world economy is evident. Amid sustained high petroleum prices,
oil producers are accumulating sizeable reserves and petro-dollar recycling is back on
the international agenda. Even if the G-7
accounts for a large part of global GOp, outside the G-7, and the United States in particular, other key emerging markets are providing significant impulse to global growth
and are having a pronounced and growing
impact on the global economy. Addressing
global imbalances requires engaging heavily
with new actors outside the G-7.
Against this background, the G-7 countries have
been conducting"outreach"- often inviting others to meet with the group on the sidelines of
meetings. For instance, G-7 Deputies met with
their Chinese counterparts in 2003 and have repeated this practice several times since. Ministers
and Governors first invited the Chinese in September 2004 to discuss China's current economic
situation and outlook and its importance for the
global economy. More broadly, China, India,
Brazil, and South Africa have joined G-7 meetings on an ad hoc basis, as have others, to discuss
global economic developments. At their most
recent meeting, G-7 Ministers heard a presentation from the Chairman of the G20 Deputies and
held an informal dinner with officials from China,
Russia, Saudi Arabia, and UAE to discuss issues
concerning petrodollars and their recycling.
Through these sessions, a table that is already
quite large is potentially becoming even bigger.
This raises the question about how big the table
should be and who should be there in order to fa-

13

cilitate useful discussions and to allow the group
to achieve something meaningful. Outreach to
important economies beyond the G-7 is here to
stay and one can easily foresee a future in which
outreach moves beyond ad hoc arrangements
toward greater institutionalization. How that is
done is another question, one that increasingly
and more urgently needs to shape the agenda of
G-7 and other policy-makers.

Large global imbalances and the growing weight
of emerging market economies have spawned
debates - why not a Plaza 2? Why not declare
the G-7 dead?
TIle Plaza Agreement and Louvre Accord demonstrated the strong level of cooperation and political will among financial officials in the major
countries at the time. StilL the limits and constraints on sovereign actors in coordinating policies were evident in the 19805, and the extent
of coordination" that prevailed even then is at
times overstated. Economic policy thinking in
the 1990s reinforced these limits and constraints.
Fiscal fine-tuning was increasingly eschewed.
Monetary policy focussed more forcefully on
achieving low inflation and promoting central
bank independence and credibility. Exchange
rates played less of a role as a policy target in most
major countries, and there was far less conviction about the efficacy of foreign exchange market intervention, except in limited circumstances.
These trends from the 1990s have generally been
reinforced since 2000, especially as the power of
private markets has grown.
II

mains a useful process, and policy-makers benefit from discussing economic performance and
sharing and debating policy approaches. Further,
one should not underestimate the strong ties that
exist among participants in the G-7 process, nor
discount their ability to muster a collective political will to take action to address challenges,
macroeconomic, exchange market, or otherwise,
espeCially in response to a clear common threat.
In addition, cooperation has been extended to
other critical areas. The G-7 process built up in
the 1980s, 19905 and this decade, and the fluid
interactions facilitated thereby have allowed the
G-7 to tackle international economic and financial challenges of key geo-strategic significance
- the transformation of the ex-Soviet states, the
Asian financial crisis and its wake, and debt relief
for the poorest. The world economy has strongly
benefited as a result. And the creation of the G20 and other mechanisms for broader consultation, policy debate, and mutual education have
helped deepen discussions, build consensus, and
enhance policy-making well beyond the G-7.

The ongoing value of extensive informal consultations among key policymakers points not to
preservation of the status quo, but to the need for
evolution in this process in order to increase the
potential for cooperation to strengthen the global
economy going forward. The changes achieved
thus far to extend consultations to those playing
a greater role in the world economy are critical
and beginning steps forward. But the world is
changing faster than the existing process for consultation and cooperation. Evolution thus needs
to accelerate in order to reflect shifting global
economic weight, impetus, and financial power,
Against this background, economic policy dis- as well as globalization and the dominance of
cussions in the G-7 have evolved over time to private capital markets. Change simply must be
focus to a greater extent on informal exchanges faced soon by the G-7 and IFI Boards in particuof views. The role of peer pressure has softened. lar, for the international community to retain tools
Policy-makers focus for all intents and purposes for cooperation that remain central and relevant
on keeping their own economic houses in order. in the modern global economy.
But even if the potential for explicit macroeconomic coordination has diminished, policy-makers are acutely aware of the interactions among
their economies. Multilateral surveillance re--

14

Page I of I

July 7. 2006
JS-4354
Quarles to Discuss
U.S. Corporate Governance Rules,
American Competitiveness
Under Secretary for Domestic Finance Randal K Quarles will participate in a
roundtable discussion with Members of Congress at the Financial Services Forum
on Monday. The panel, which will be hosted by former Secretary of Commerce
Donald L. Evans, will discuss the effects of U.S. corporate governance rules on the
competitiveness of American businesses and financial markets.
Who
Under Secretary for Domestic Finance Randal K. Quarles
What
Remarks on U.S. Corporate Governance Rules
When
Monday, July 10 4:00 pm (EDT)
Where
The Mandarin Oriental Hotel
Room Oriental C
1330 Maryland Ave, SW
Washington, DC

1p:llwww.treas.gov/presslreleasesljS4354.htm

3!6i2007

Page I or 2

July 10, 2006
HP-01

REMARKS PREPARED FOR DELIVERY BY
U.S. TREASURY SECRETARY HENRY M. PAULSON
AT SWEARING-IN CEREMONY
Mr. President, thank you for those kind remarks and for giving me this opportunity
to serve as America's 74th Treasury secretary. I appreciate the trust you have
placed in me to lead the Treasury Department at a time when we must ensure that
our economy remains strong, Our markets remain competitive, and our workers
have the opportunity to realize their full economic potential.
To my family, and especially Wendy, my wife and best friend of 37 years - thank
you for your support as I return to public service, after 32 years in the private
sector. Wendy and I are very pleased to have on stage with us today - my mother,
Marianna, our son Merritt, and our daughter Amanda. Also here are a number of
close friends and family members, including my brother Dick and my sister Kay.
We all fondly remember our late father, Merritt, who was an amateur historian and
an Alexander Hamilton fan.
Thank you Chief Justice Roberts for administering the oath of office.
And thank you to all of my Cabinet colleagues, my friends and colleagues from
Goldman Sachs, members of Congress, and other distinguished guests, for
attending this ceremony.
As I begin my first day at the Treasury Department, I remember those who have
preceded me in this post. Throughout our nation's history, my predecessors here
have helped to build an economy and a financial system that are the envy of the
modern world.
Mr. President, I am 100 percent committed to building on these past achievements
and to doing my best to ensure that our economy remains a model of strength,
flexibility, and openness. I look forward to working with you in collaboration with
your other economic advisers, my Cabinet colleagues, members of both parties of
Congress, and the great professionals at Treasury. One of my first priorities will be
forging a close working relationship with Treasury's career professionals.
Under your leadership, Mr. President, our economy has achieved steady growth
and has created millions of jobs. This growth has been achieved despite the stiff
challenges of terrorist attacks, an economic downturn, corporate scandals, and
devastating natural disasters. And as you have pointed out, there are still a number
of challenges ahead of us and important goals to be met.
The American economic system and our workers have always been winners and
they will continue to win. Our job is to help them do just that. We need to pursue
economic and regulatory policies that are responsive to today's world and to the
challenges and goals you have set forward.
And, of course, as we pursue these goals, we must always remember that the
strength of the U.S. economy is linked to the strength of the global economy. It is
critical for the United States to remain actively engaged with our economic partners.
And it's in our interest to advance those policies that will help to build a more
prosperous world. Doing so contributes to our economic progress, as well as our
national security.

http://www.t=eas.gov/presslreleases/hp.?J.htm

1/6/2007

Page 2 of 2

If we retreat from the global stage, the void is likely to be filled by those who do not
share our commitment to economic reform. Instead, we must work to expand trade
and investment, work to reform and modernize international financial markets and
be vigilant in identifying and managing potential financial vulnerability.
Mr. President, thank you again for the nomination, and thank you for coming today.
I look forward to getting to work.

http://www.trcas.gov/press/releases/hpOI.htm

1/612007

Page I or:2

July 10, 2006
2006-7 -10-13-36-31-5083
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 $68,026 million as of the end of that week, compared to $67,831 million as of the end of the prior week.

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

June 30, 2006

July 7, 2006

I

67,831

68,026

I

TOTAL
1. Foreign Currency Reserves 1
a. Securities

Euro

Yen

11,927

11,058

Of which, issuer headquartered in the US

I

I
I
II

TOTAL

Euro

Yen

TOTAL

22,985

11,972

11,103

23,075
0

0

b. Total depOSits with

b.l. Other central banks and BIS

11,882

5,399

11,928

17,281

I

5,425

17,353

0

0

0

0

0

0

0

0

7,906

7,922

3. Special Drawing Rights (SDRs) 2

8,618

8,635

4. Gold Stock 3

11,041

11,041

0

0

b.ii. Banks headquartered in the U.S.
Ib.ii. Of which, banks located abroad
I b.iii. Banks headquartered outside the U. S.

I
I

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

.c D"C''''rve Position 2

I

I

5. Other Reserve Assets

I

I

I

II

II. Predetermined Short-Term Drains on Foreign Currency Assets
July 7, 2006

June 30, 2006
TOTAL

Yen

Euro

I

1. Foreign currency loans and securities

I

Euro

Yen

II

0

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

12.8. Short positions
12.b. Long positions
13. Other

I

II

II

II

I

II

I

II

II

0

I

0

I

0

II
II

0

II

0

1\

I

TOTAL

II

I

I

0

I

0

I

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

[

I

I

II

June 30, 2006
en

Euro

http://www.t[cas,gov/pressireleases/LtTfl671 013363150X:

I

July 7, 2006

I
TOTAL

Euro

I

I

Yen

I
II

II

TOTAL

I

I
l!6!20()7

Page 2 01'2

1. Contingent liabilities in foreign currency

I

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

CJCJCJCJ

1.b. Other contingent liabWties

II

II

2. Foreign currency securities with embedded
options

0

o
o

3. Undrawn, unconditional credit lines

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

II

~

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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 montr, end.
31 Gold stock is valued monthly at $42.2222 per fine troy ounce.

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July 10, 2006
HP-02

Treasury Secretary Paulson Places Calls to Capitol Hill, Others

WASHINGTON - Newly sworn-in Secretary of the U.S. Treasury, Henry M.
Paulson, spent the morning and afternoon placing calls to Capitol Hill, fellow
Cabinet members, and his global counterparts.
High resolution photo available at www.trcas.gov.SecretaryPaulson·sbio available
at http://www.treas.gov/organizationfbios/paulson-e.html
All media queries should be directed to
The Press Office at (202) 622-2960.
Only call this number if you are a member of the media.
- 30 -

http://www.tr~as.gov/press/releases/l1Jil2.htm

3/6/2007

PClgC I of I

PHESS HOOM

July 10, 2006
HP-03
Treasury Secretary Paulson Meets with Department Staff

WASHINGTON - Newly sworn-in Secretary of the U.S. Treasury, Henry M.
Paulson, today met with Treasury staff to discuss his vision for the Department.
High resolution photo available at www.treas.govSecretaryPaulson·sbio is
available at http//treas gov/organization/blos/paulson-e.html.
All media queries should be directed to
The Press Office at (202) 622-2960.
Only call this number if you are a member of the media.
-30-

High Resolution Image

http://www.t:eas.gov/presslreleases/hp03.htm

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July 10. 2006

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Paulson Sworn into Office as the 74th Secretary of the Treasury

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http://www.reas.gov/press/reieaseslhp04.htm

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Pagt: .2 of .2

Secretary of the United States Treasury. President George W. Bush joined Paulson
for the ceremony in the Treasury Department's historic Cash Room. Chief Justice
John Roberts administered the oath of office.
High resolution photo available at.\"\',':. ~"eclS go':. Secretary Paulson's bio available
at http: treas.90\ organzc1tloi' t.'iO:; ;':,u,sr'ii-e'lt!l".
All media queries should be directed to
The Press Office at (202) 622-2960.
Only call this number if you are a member of the media.

-30-

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3 62007

Page I of 4

July 11, 2006
HP-05
Testimony of Stuart Levey, Under Secretary
Terrorism and Financial Intelligence
U,S, Department of the Treasury
Before the House Financial Services Subcommittee on Oversight and
Investigations
Chairwoman Kelly, Ranking Member Gutierrez, and distinguished Committee
members. This is my fifth time appearing before your Committee in the past two
years in what has been an ongoing and fruitful discussion of our government's
efforts to track and cornbat terrorist financing. These sessions have advanced our
shared mission to undermine terrorist networks and disrupt their vicious objectives.
It is always a privilege to be here.
As this Committee knows well, tracking and combating terrorist financing are critical
facets of our overall efforts to protect our citizens and other innocents around the
world from terrorist attacks. This is true for two main reasons. First, when we block
the assets of a terrorist front company, arrest a donor, or shut down a corrupt
charity, we deter other donors, restrict the flow of funds to terrorist groups and shift
their focus from planning attacks to worrying about their own needs. While any
single terrorist attack may be relatively inexpensive to carry out, terrorist groups
continue to need real money. They depend on a regular cash flow to pay operatives
and their families, arrange for travel, train new members, forge documents, pay
bribes, acquire weapons, and stage attacks. Disrupting money flows stresses
terrorist networks and undermines their operations. In recent months, we have seen
at least one instance of what we look for most - a terrorist organization indicating
that it cannot pursue sophisticated attacks because it lacks adequate funding.
Second, "following the money" is one of the most valuable sources of information
that we have to identify and locate the networks of terrorists and their supporters. If
a terrorist associate whom we are watching sends or receives money from another
person, we know that there's a link between the two individuals. And, while terrorist
supporters may use code names on the phone, when they send or receive money
through the banking system, they often provide information that yields the kind of
concrete leads that can advance an investigation. For these reasons, counterterrorism officials place a heavy premium on financial intelligence. As the 9/11
Commission staff pointed out - and as Chairman Hamilton testified before this
Committee - "following the money to identify terrorist operatives and sympathizers
provides a particularly powerful tool in the fight against terrorist groups. Use of this
tool almost always remains invisible to the general public, but it is a critical part of
the overall campaign against al Oaeda." The Terrorist Finance Tracking Program
was just such an invisible tool. Its exposure represents a grave loss to our overall
efforts to combat al Oaida and other terrorist groups.
We are facing a clever and adaptive enemy that takes extensive precautions to
cover its tracks. If we are to explOit the vulnerability that financial transactions
represent, we need to marshal all of our resources and ingenuity. We need to
cooperate seamlessly within our government, drawing on our different strengths
and talents and appropriately sharing our information without hesitation. We need to
work closely with the private sector, which is sometimes best positioned to detect
suspicious behavior. And we need to proceed hand-in-hand with our foreign
partners, both in sharing information and taking action to identify terrorist financiers,
disrupt their operations, and hold them accountable.
My colleagues in the Treasury Department and across the U.S. government have
been working with dedication and ingenuity to meet this demanding challenge. Our

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theater of engagement literally spans the world, from the money changing tables of
Kabul to the jungles of South America's Tri-Border Area, from finance ministries to
the compliance offices of the world's most sophisticated banks. Thanks to their
tireless efforts, we have achieved real successes. The 9/11 Commission's Public
Discourse Project awarded its highest grade, an A-, to the U.S. Government's
efforts to combat terrorist financing. I would be happy to discuss these efforts in
greater detail in a subsequent hearing, and reference some recent highlights in the
margin.
The Terrorist Finance Tracking Program has been a key part of these overall
efforts. I had no hand in initiating this program, so I can say without any conceit that
Secretary Snow was right in saying that the Terrorist Finance Tracking Program
exemplifies government at its best. The SOCiety for Worldwide Interbank Financial
Telecommunication (SWIFT) is the premier messaging service used by banks
around the world to issue international transfers, which makes its data exceptionally
valuable. I would note that SWIFT is predominantly used for overseas transfers. It
does not contain information on most ordinary domestic transactions made by
individuals in the United States, such as deposits, withdrawals, ATM use, checks,
or electronic bill payments. The SWIFT data consists of records of completed
financial transactions; it does not provide access to individual bank account
information. This program is consistent with privacy laws as well as Treasury's
longstanding commitment to protect sensitive financial data.
In response to a subpoena, SWIFT makes available to us a subset of its records
that it maintains in the United States in the normal course of its business. The legal
basis for this subpoena is the International Emergency Economic Powers Act
(IEEPA), a statute passed in 1977, which allows the government to compel the
production of information pursuant to Presidential declarations of national
emergency. We issue such administrative subpoenas regularly, and our authority to
do so is clear. In this case, our subpoena is issued pursuant to President Bush's
declaration of an emergency with respect to terrorism after September 11th in
Executive Order 13224. That declaration has been renewed yearly in light of the
continuing threat posed by al Qaida and other deadly terrorist groups.
The SWIFT subpoena is powerful but narrow. We cannot simply browse through
the records that SWIFT turns over - we are only able to see that information which
is responsive to targeted searches in the context of a specific terrorism
investigation. The data cannot be searched unless the analyst first articulates the
specific link between the target of the search and a terrorism investigation. I want to
emphasize that we cannot search this data for evidence of non-terrorist-related
crime, such as tax evasion, economic espionage, money laundering, or other
criminal activity. As a result, we have accessed only a minute fraction of the data
that SWIFT has provided.
The program contains multiple, overlapping layers of governmental and
independent controls to assure that the data is only searched for terrorism purposes
and that all data is properly handled. Pursuant to an agreement that we reached
with the company, SWIFT representatives are able to monitor these searches in
real time and stop anyone of them if they have any concerns about the link to
terrorism. In addition, a record is kept of every search that is done. These records
are reviewed both by SWIFT's representatives and an outside independent auditor.
Members of the Congressional intelligence committees were briefed about this
program, and our colleagues in the central banks of the G-10 countries were
likewise informed.
The benefits of the Terrorist Finance Tracking Program have been incalculable.
This program provides a unique and powerful tool that has enhanced our efforts to
track terrorist networks and disrupt them. That is the opinion of experts familiar with
this program, both in and out of the government, irrespective of political orientation.
It is also the view of those closest to the data, who are in the best position to know.
I have on my staff a group of intelligence analysts who spend their days in a secure
room poring over information to unmask the key funders and facilitators of terrorist
groups. If you spoke with them. they would point to this program as one of the most
important and powerful tools they have to follow the money.

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They value this program because it leads to results. The details remain classified,
but the program has been instrumental in identifying and capturing terrorists and
financiers and in rolling up a terrorist-supporting charity. The program played an
important role in the investigation that eventually culminated in the capture of
Hambali, Jemaah Islamiyya's Operations Chief, who masterminded the 2002 Bali
bombings. The program supplied a key piece of evidence that confirmed the identity
of a major Iraqi terrorist facilitator and financier. Because we were able to make this
data available to an ally, this facilitator remains in custody. But the program has
also proven its worth in many less dramatic, but equally significant ways. Anyone
who has tried to piece together a complex terrorism investigation over months or
years of sweat and dead-ends knows how important it can be to uncover a
previously unknown link or fact. This program generates just such connections and
leads nearly every day, which are then disseminated to counter-terrorism experts in
intelligence and law enforcement agencies.
In short, the Terrorist Finance Tracking Program has been powerful and successful,
grounded in law and bounded by safeguards. It represents exactly what I believe
our citizens expect and hope we are doing to prosecute the war on terror.
Much has been said and written about the newspapers' decision to publish
information about this program. As a government official, I must first point out that
the newspapers almost certainly would not have known about this program if
someone had not violated his or her duty to protect this secret.
At the same time, I do very much regret the newspapers' decision to publish what
they knew. Secretary Snow and I, as well as others both inside and outside the
government, made repeated, painstaking efforts to convince them otherwise. We
urged that the story be held for one reason only: revealing it would undermine one
of our most valuable tools for tracking terrorists' money trails. We were authorized
to set these arguments out for the relevant reporters and editors in an effort to
convince them not to publish. In a series of sober and detailed meetings over
several weeks, we carefully explained the program's importance as well as its legal
basis and controls. We strongly urged them not to reveal the source of our
information and explained that disclosure would unavoidably compromise this vital
program.
These were not attempts to keep an embarrassing secret from emerging. As should
be clear from my testimony above, I am extremely proud of this program. I am
proud of the officials and lawyers in our government whose labors ensured that the
program was constructed and maintained in the most careful way possible. And I
am proud of the intelligence analysts across our government who have used this
information responsibly to advance investigations of terrorist groups and to make
our country safer. I asked the press to withhold the story because I believed - and
continue to believe - that the public interest would have been best served had this
program remained secret and therefore effective.
Some observers have argued that the disclosure of the program did little damage
because terrorist facilitators are smart and already knew to avoid the banking
system. They correctly point out that there has been an overall trend among
terrorists towards cash couriers and other informal mechanisms of money transfer a trend that I have testified about. They also hold up as publiC warnings the
repeated assertions by government officials that we are actively following the
terrorists' money.
What we had not spoken about publicly, however, is this particular source. And,
unfortunately, this revelation is very damaging. Since being asked to oversee this
program by then-Secretary Snow and then-Deputy Secretary Bodman almost two
years ago, I have received the written output from this program as part of my daily
intelligence briefing. For two years, I have been reviewing that output every
morning. I cannot remember a day when that briefing did not include at least one
terrorism lead from this program. Despite attempts at secrecy, terrorist facilitators
have continued to use the international banking system to send money to one
another, even after September 11 tho This disclosure compromised one of our most
valuable programs and will only make our efforts to track terrorist financing - and to
prevent terrorist attacks - harder. Tracking terrorist money trails is difficult enough

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without having our sources and methods reported on the front page of newspapers.
I can assure you, however, that our efforts will not wane. With our interagency
colleagues and our partners abroad, we will continue to draw on every resource at
our disposal to uncover and disrupt these terrorist networks.
Thank you.
A few selected examples of our interagency work on terrorist financing follow:
• We have made dramatic progress in combating terrorist abuse of charities through
a combination of law enforcement and regulatory actions against corrupt NGOs,
both at home and abroad. In tandem with these enforcement efforts, active
engagement with the legitimate charitable sector has succeeded in raising
transparency and accountability across the board.
Thanks to our work in cooperation with the private sector to enhance anti-money
laundering/counter-terrorist financing procedures in the financial system, many
terrorists have been forced to resort to alternative means of moving money - such
as cash couriers - that are more cumbersome or risky. Couriers offer concealment,
but some get caught and some get greedy, and a terrorist is likely to think twice
before entrusting a large sum to anyone courier. We are working bilaterally and
through International organizations like the Financial Action Task Force to ensure
that countries around the world both pass and implement laws to regulate the
movement of cash across their borders. Our law enforcement colleagues, notably
those in DHS's Immigration and Customs Enforcement, are training border agents
around the world to make sure these programs work.
*

We have encouraged countries around the world to make increased use of the U.N.
Security Council to seek the designation of terrorist supporters. This global
designation program, overseen by the UN's 1267 Committee, might be the most
powerful tool for global action against supporters of al Qaida. It envisions 192 U.N.
Member States acting as one to isolate al Qaida's supporters, both physically and
financially. Increasingly, countries have begun to look to this committee, and
administrative measures in general, as an effective complement to law enforcement
action. In 2005, 18 Member States submitted names for the Committee's
consideration, many for the first time.

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.

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July 11, 2006
HP-06
Under Secretary Randal K. Quarles
Statement On Mid-Session Budget Review

Treasury Under Secretary for Domestic Finance Randal K. Quarles issued the
following statement today regarding the Office of Management and Budget's midyear review of the FY06 budget projections:
"The results of the mid-session review of the federal budget released this morning,
which show a dramatic reduction in the deficit forecast, demonstrate the strength of
the U.S. economy and the benefits of the Administration's economic and tax
policies. Those policies have promoted strong U.S. growth, and as the economy
grew, so did our tax revenues.
"Every month this fiscal year, Treasury has seen some of the highest levels of tax
revenue in history, with year-to-date receipts now running 13 percent higher than
last year's. This is particularly notable given that last year's receipts were
themselves 14.6 percent higher than the year before. This revenue growth has
accounted for 90 percent of the improvement in the deficit forecast. and with this
improvement it is clear we are on a path to meet the President's deficit reduction
goal early.
"While our strong revenue growth is encouraging, it is also important to emphasize
that spending restraint makes a difference, as lower than expected outlays have
also contributed to the reduction in the budget deficit. There is no doubt that a line
item veto for the President can help further restrain spending, and exercising fiscal
responsibility is essential if we are to maintain the encouraging trend demonstrated
today."

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July 12,2006
HP-07
Statement of Edmund C. Moy
Director-Designate
U.S. Mint, U.S. Department of the Treasury
Before the Senate Banking, Housing
and Urban Affairs Committee

Chairman Shelby, Ranking Member Sarbanes and Members of the Committee on
Banking, Housing and Urban Affairs, thank you for this honor and opportunity to
appear before you today to discuss my nomination to become the 38 th Director of
the United States Mint.
Joining me today is my wife, Karen.
To many Americans and me, the United States Mint represents the best of
America .. I respect its place in our history. I appreciate the beauty and artistry of its
coins. I value its role in facilitating commerce, and I have learned about our
collective culture through its designs on the Nation's coinage. I am pleased and
honored by the trust President Bush has placed in me by asking me to serve in this
important position, joining the ranks of those privileged to serve as Directors since
President Washington asked David Rittenhouse to serve as the first Director of the
Mint in 1792. If confirmed, I look forward to working closely with this Committee
and Congress on all the policy and legislative issues that will determine the course
for American coinage now and in the future.
The United States Mint applies world-class business practices in making, selling,
and protecting our Nation's coinage and assets.
I am committed to this Mission Statement and the 1900 men and women of the
United States Mint who work to implement the practices that fulfill the requirements
of Congress and the country to produce approximately 15 billion coins annually.
These coins are distributed to the Federal Reserve banks and branches for
commerce and trade; The United States Mint also maintains the physical custody
and security of the Nation's more than $100 billion in gold and silver assets. And
finally, it produces numismatic coins, medals, gold, silver and platinum bullion coins
for the general public to collect.
I value public service and, if confirmed, I will bring to bear all the experience I have
earned through my career in management, marketing and human resources both in
the private sector and government. These are essential areas for the United States
Mint which also shares characteristics of both a business and governmental
organization, operated for the benefit of the public, with revenues approaching $2
billion.
I have spent 10 years as a sales and marketing executive, 8 years working with
venture capital firms and entrepreneurs, and 4 years overseeing $7 billion in annual
Federal Government expenditures for managed health care programs with the
Department of Health and Human Services. I am familiar with the demands of being
an officer and director, having served in those capacities at several companies and
nonprofits.
Most recently, I have been honored to serve the President of the United States in a
human resources capacity as a member of the Office of Presidential Personnel. I
have worked closely with many members of the cabinet and independent agencies

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to understand the results they desire, recruiting the nation's best and brightest to
attain those results, and then making recommendations to the President for those
who may serve as appointees. I understand the responsibility appointees have to
the President, and their accountability to Congress and the American people to be
good stewards of the public's trust and resources.
I am confident that my experience and qualifications will contribute to the continuing
success of the United States Mint.
If confirmed, I see some immediate responsibilities and challenges before me.
Implementing the "Presidential $1 Dollar Coin Act of 2005," which this Committee
approved, is a major operational focus for the United States Mint that is well under
way. As directed by that legislation, the United States Mint has, and will continue,
to work with those who can influence and encourage the greater use and
acceptance of dollar coins in American commerce.
The rising cost of metals used in coin production is prompting some needed
analysis and consideration of the impact of that trend on all denominations of coins,
especially the penny and nickel. Public preferences and priorities on this subject
will loom large, and the United States Mint will need to provide technical and
manufacturing considerations to Congress, the Administration and others who are
evaluating the future course of coinage.
Reviewing, refining if necessary, and implementing the United States Mint's
business, management, operational and strategic plans, executing the President's
Management Agenda, and providing effective leadership, are priorities for me
should I be confirmed.
Thank you for the honor and privilege to appear before you today.

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July 12, 2006
HP-08

Treasury Identifies Money Laundering Cell of the Arellano Felix Organization
The U.S. Department of the Treasury's Office of Foreign Assets Control (OFAC)
today identified 34 companies and individuals associated with two Mexican drug
cartels, the Arellano Felix Organization and the Arriola Marquez Organization,
pursuant to the Foreign Narcotics Kingpin Designation Act (Kingpin Act). Both the
Arellano Felix Organization (AFO) and Arriola Marquez Organization (AMO) were
previously named by the President as Mexican drug kingpins under the Kingpin Act.
"Our action designates a key financial cell of Mexico's notorious Arellano Felix
Organization," said Barbara Hammerle, Acting Director of OFAC. "This financial
network, headed by Mexican national Lorenzo Arce Flores, utilizes money service
businesses and other front companies in Mexico to launder the AFO's monies. Our
designation process exposes the financial nerve center of Mexican drug cartels,
thereby encumbering efforts to bankroll illicit proceeds."
"Taking down multinational drug organizations such as the AFO and AMO requires
a two-pronged approach - arresting the traffickers and seizing their financial assets.
DEA and its OFAC partners are committed to bringing traffickers from the kingpin to
the runner to justice while at the same time stripping them of the money and assets
they need to carry on their illicit operations," said Donald Semesky, Chief of
Financial Operations for the Drug Enforcement Administration (DEA),
The first OFAC action targets an Arellano Felix Organization money laundering cell,
run by key individual Lorenzo Arce Flores, comprised of 14 companies and 15
individuals located in Tijuana, Baja California, Mexico. The second OFAC action
identifies five individuals who are financial operatives of the Arriola Marquez
Organization in the state of Chihuahua, Mexico.
"Whenever money and drugs intertwine for illicit profit, our finanCial expertise will be
utilized to unravel the most complex and sophisticated money laundering
schemes", said Special Agent in Charge Kenneth Hines, IRS Criminal Investigation,
San Diego Field Office
Lorenzo Arce Flores is a key AFO money launderer who is also tied to AFO
lieutenant. Jesus Abraham Labra Aviles. The AFO was designated as a drug
kingpin by the President in June 2004 and Jesus Abraham Labra Aviles was
designated by OFAC in November 2004. Lorenzo Arce Flores directs an extensive
and diversified operation which facilitates money laundering and bulk smuggling of
cash across the border. OFAC has identified several Mexican money service
businesses that are part of the Arce Flores network, including CAJA AMIGO
EXPRESS SA DE C.v., OPERADORA DE CAJA Y SERVICIOS SA DE C.v.,
MULTICAJA DE TIJUANA SA DE C.v. and PROFINSA, all located in Tijuana,
Baja California, Mexico. In addition, a Mexican armored car company, STRONG
LINK DE MEXICO SA DE C.v., is named as part of this money laundering
operation.
Lorenzo Arce Flores' principal money laundering method is the smuggling of U.S.
currency into Mexico. It is then converted into Mexican Pesos through a number of
money service businesses (commonly referred to as "casas de cambio" or "centros
cambiarios") that he or AFO lieutenant Jesus Abraham Labra Aviles own or control.
Two key Aree Flores operatives, Frederico Carlos Torres Ramirez and Nancy

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Karina Rocha Lopez, were also designated today. The 29 companies and
individuals designated by OFAC are all key components in this money laundering
cell's operations.
Today's OFAC action also targets 5 individuals, previously blocked pending
investigation, that are part of the Arriola Marquez Organization's financial network.
These individuals include key family members of Mexican drug kingpin Oscar
Arturo Arriola Marquez and other key individuals who control CORRALES SAN
IGNACIO S.P.R. DE R.L. DE C.V., a large cattle breeding company in Chihuahua,
Mexico previously named by OFAC in August 2005.
Oscar Arturo Arriola Marquez, Miguel Angel Arriola Marquez and the Arriola
Marquez Organization were all identified by President Bush as drug kingpins on
June 1, 2005. Oscar and Miguel Arriola Marquez were indicted in the District of
Colorado for federal drug trafficking and money laundering violations. Both are
currently incarcerated in Mexico awaiting extradition to the U.S.
OFAC attributes close coordination with the Drug Enforcement Administration
(DEA) as a key factor in today's enforcement action. Notably, the San Diego and EI
Paso/Juarez Field Divisions, as well as Immigration and Customs Enforcement in
San Diego, the IRS-CI San Diego and the Imperial County Narcotics Information
Network (NIN) in San Diego.
The entities and individuals designated today are subject to the economic sanctions
imposed against narcotics traffickers under the Kingpin Act. Today's action by
OFAC freezes any assets found in the United States and prohibits all financial and
commercial transactions between the designees and any U.S. person.
The action taken today brings the total number designated under the Kingpin Act to
270: 62 drug kingpins worldwide and 79 companies and 129 other individuals in
Mexico, Colombia, Jamaica, Peru, Thailand and St. Kitts.
A complete list of the individuals and entities designated today may be accessed
here: h ttp .//www.treastlry.rJov/offlces/enforCfJment/ofac/aclions/mdex.shlml

REPORTS
•

Chart of Today's Desiynaliorl.

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u.s.

Foreign Narcotics Kingpin Designation Act
Arellano Felix Organization (AFO)
July 2006

Department of the Treasury
Office of Foreign Assets Control
All individuals and businesses
displayed on this chart are Mexican,

Lorenzo Arce Flores Money Laundering Cell
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POB Mexicali, Baja California, Mexico
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July 12, 2006
HP-09

Testimony of Assistant Secretary Clay Lowery
before the Senate Foreign Relations Committee
on Promoting Infrastructure Through
the Multilateral Development Banks
International Affairs Assistant Secretary Clay Lowery testified before the Senate
Foreign Relations Committee on promoting infrastructure through multilateral
development banks,

REPORTS
•

Lowery Testifies before Se'late Foreign Relat'olls on MDBs

http://www.tr-.:as.gov/press/releases/tlpOl).htm

Ji6!20()7

U.S. TREASURY DEPARTMENT OFFICE OF PUBLIC AFFAIRS
EMBARGOED UNTIL 9:30 A.M.

(EDT) JULY 12,2006
622-2920

CONTACT Brookly McLaughlin (202)

TESTIMONY OF ASSISTANT SECRETARY CLAY LOWERY
BEFORE THE SENATE FOREIGN RELATIONS COMMITTEE
ON PROMOTING INFRASTRUCTURE THROUGH THE MULTILATERAL DEVELOPMENT BANKS

Chairman Lugar, Ranking Member Biden, Members of the Committee, I am pleased to have the
opportunity to discuss the importance of infrastructure to achieving our shared goal of promoting
economic development and reducing poverty. The multilateral development banks (MDBs) have an
important role to play in helping developing countries meet this vital need. Theirs is a broad
engagement that encompasses direct funding to catalyze other financial flows; creating the enabling
environment to stimulate private investment flows, both domestic and foreign; supporting innovative
approaches that can be scaled up if successful; putting in place safeguards to address and mitigate
adverse social and environmental impacts; and taking steps to reduce corruption.
Importance of Infrastructure
Infrastructure is essential to economic growth and productivity - it is the fundamental investment
backbone for the private sector, essential for delivery of social services, improves regional integration,
and is a fundamental jump-start for countries coming out of conflict. As many studies have shown, the
economic returns to infrastructure are high. The returns depend on the region and the quality of the
infrastructure, but research by the World Bank suggests, for example, that a 10 percent increase in Latin
America's infrastructure assets could result in an extra 1.5 percentage points of growth per year.
Another World Bank model indicates that if the growth of investment in Africa's infrastructure had
equaled that of East Asia during the 1980s and 1990s, the average African would be roughly 30%
wealthier today. This is a conservative estimate as one specific small scale example demonstrates - an
ADB study showed how the establishment of a new road in a Vietnamese village raised the per capita
income of the local households by 30 percent between 1993 and 1998.
Infrastructure - whether related to transportation, water supply and sanitation, energy, or communication
- is a vital input into private sector development, including small and medium enterprises. This is not
unique to the developing world; the dynamism of the U.S. economy is due in large measure to the
foresight of investments in such infrastructure basics as the interstate highway system - which is now
celebrating its 50th anniversary- and efficient local and regional electric power grids. We often take
these for granted, but they are not taken for granted by the poor in countries where clean water and
reliable energy are luxuries, if they exist at all.

Infrastructure also is essential to the delivery of social services and human capital development, such as
by providing power to health care clinics or to light and heat rural classrooms. hnproving access to
·Glcaa W-atGf ad -sanitation sGrViGes also·affectseGonomic· growth and poverty l'eduetion direetly by
improving health and labor productivity through reductions in water-borne diseases and reducing the
amount of time people spend fetching water. According to the World Health Organization, each year
roughly 1.7 million lives are lost to unsafe water and inadequate sanitation.
Infrastructure can play an important role in promoting regional integration and entry into the global
economy, which is a particularly important development challenge in countries with small labor markets
and limited natural resources. Singapore is one example of an economy that has flourished because it
put in place the infrastructure needed to become an international trading center, which helped it
graduate, long ago, from official development assistance.
Countries emerging from conflict or natural disasters need fast responses to rebuild infrastructure
facilities as a starting point for reconstruction of the economy and restoration of basic services. The
current government of Mghanistan, for example. recognized that civil war and a legacy of neglect had
left the country facing a serious infrastructure shortfall. The MDBs have helped the government to
prioritize, design. finance, and implement projects and regulatory systems to overcome this legacy.
Despite the substantial challenges, we are already seeing results. Financing from the Asian
Development Bank (AsDB) for a private sector cellular phone provider, for example, has led to rapid
distribution of telecommunications services that are so reliable that even the U.S. officials based in
Afghanistan use them. Reconstruction of the country's highway network is proceeding steadily, with the
AsDB completing a vital road betWeen Kandahar and Spin Boldak, at the Pakistani border, and the
World Bank: completing roads that are helping to connect Kabul to Tajikistan. Moreover, travel time to
go end-to-end on the Kabul-to-Kandahar Highway, which was also financed by USAID, has fallen
significantly from 16 hours down to 5 or 6 due to recent improvements in road conditions. These roads
are help get goods to market and provide the basic infrastructure that will allow Afghanistan to achieve
its vision of becoming a land bridge connecting Central and South Asia.
Infrastructure Needs
Infrastructure needs in both low~income and emerging market economies are vast. While calculations
vary, even the lower-end estimates by the World Bank suggest that developing countries need to devote
around 5.5 percent ofGDP to infrastructure investment, which is well above the average level of
investment in the sector, currently around 3.5 percent ofGDP. The under-investment reflects not only
declining official assistance flows (recently reversed by most of the MOBs), but more importantly
investment climates considered inhospitable by many private sector investors.
The U.S. has encouraged increased attention to infrastructure by the multilateral development banks
(MDBs) recognizing that developing countries' needs were not being met and that investment flows
from the private sector were declining, particularly in the wake of the Asian financial crisis. In 2003,
the World Bank adopted an Infrastructure Action Plan that has scaled up infrastructure investmenis.
expanded the range of instruments and funding sources, and catalyzed private resources. Other MDBs,
with U.S. urging, are creating special funding facilities, such as the Infrastructure Facility of the
Americas at the Inter-American Development Bank and the Infrastructure Consortium for Africa
established at the African Development Bank. The Asian Development Bank has expanded its
infrastructure lending in the last few years, primarily in energy, water supply and management, rural
transport, and telecommunications. The EBRD has important initiatives in power and energy, municipal
and environmental infrastructure, transport and telecoms.
In addition to providing direct financing (loans, grants, equity and guarantees to mitigate risk), the
MDBs support infrastructure development by strengthening the policy and regulatory framework, giving
analytical and diagnostic support - such as investment climate assessments and country infrastructure

studies - and building institutional capacity to manage infrastructure investments. It is also critical that
the MOBs do more - directly and indirectly - to attract both foreign and domestic private-sector
investment in eritie-at infrastrueture~
Successful Projects and Innovative Approaches
Much is known about the controversial projects which the MDBs have helped ftnance and which have
commanded a great deal ofD.S. officials' time and resources. However, to focus exclusively on these
operations is to overlook a substantially greater portion ofprojects that are likewise having a positive
impact on economic activity and social well being. Let me use this opportunity to highlight examples
where MDBs have supported innovative infrastructure proposals and projects that meet pressing public
needs.
• The AIDB is helping the countries of Senegal and Mali to complete the missing road links
between Bamako and Dakar and thereby reduce transport costs and promote further economic
integration between the two countries and their neighbors. The project aims, by 2010, to reduce
the amoUnt of time for goods removal at the Dakar port from seven to two days; to reduce
border crossing time from one day to two hours; and to reduce the distance to fetch water from 5
km to less than 1 km. The project will also be partially financed by private transport sector
operators in Senegal and Mali.

the

• The World Bank has helped to complete a network of water and sanitation services in
Ahmedabad, India. that has increased the daily profits from vegetable farming by women living
and working in local slums and has sharply reduced the incidence of disease. A World Bank
water supply and sanitation project in Uttar Pradesh empowers local communities to make
design choices and procure goods and services.

• The IFC has made a number of investments in locally owned firms, such as Celtel, a cellular
telephone company operating in Africa that subsequently witnessed remarkable success. Within
seven years of starting up operations, Celte1 grew to operating in 14 countries and serving around
nine million subscribers.
• In the Kyrgyz Republic, the EBRD is working with a state-owned joint-stock power company to

improve the efficiency and reliability of electric power transmission and distribution in the Talas
region, as well as to support private involvement in power and improve collection and reduce
commercial losses. It is an important step towards private management of power distribution for
the first time in the Central Asian region.
This is just a sampling; there are many other infrastructure projects that I could cite.
The way forward

I will not sit here and tell you that everything has gone well in this sector. I am well aware that many
infrastructure projects - thOSe funded by the MDBs as well as by other sources - have been affected by
mismanagement, cost overruns, and outright c0111lption. The World Bank recently produced a lessons
learned paper in which it identified a number of common issues that prevented it from achieving better
results on its intrastructure engagements. The main culprits included inappropriate project design,
delays in addressing access for the poor, insufficient management of expectations of private sector
participation, late recognition of the importance of environmental and social sustainability, a lag in
addressing corruption issues, and weaknesses in communications with stakeholders. When these things
happen, infrastructure investments become enduring reminders of these inefficiencies, and send a
negative signal to both donors and the private sector. These are important lessons and as the largest

shareholder in the MOBs, we will continue to work to see that these lessons are reflected in the Bank's
operations going. forward.
First, we will work to enhance the application of proper safeguards, to offset or reverse the problems
through regular scrutiny and oversight ofMDB projects and policies - including, where we can afford it,
to conduct site specific scrutiny.
Second, we strive to set the highest standards across the MDBs, in tenns of fiduciary controls,
procurement practices and environmental and social safeguards. As I said in my remarks on anticorruption to this Conunittee in March of this year, Treasury is advancing a comprehensive reform
agenda at the MDBs to attack corruption around the world and to root out corruption within the MOBs.
Particularly gennane to the infrastructure sector is sound revenue management. Through our
interventions, we have secured key policy and proj ect-related reforms, such as the transparent
accounting and reporting of project related revenue flows to make sure that these projects are
accountable. For example, following strong U.S. leadership, the International Development Association
(IDA) agreed to require that financial assistance for any project with a significant impact on revenues
should be predicated upon the government having in place a functioning system for accounting for
revenues and expenditures. We will continue to work to ensure that public disclosure by MDBs is the
norm.
Third, we must continue to raise the bar on securing results-oriented approaches that build in
monitorable targets and benchmarks to measure and track results in MDB-financed projects. We have
seen progress in this regard: now all of the MDBs are producing results measurement frameworks for
their on-the-ground investments. We will closely monitor anew pilot project by the World Bank to
strengthen the risk profile of infrastructure projects during the design phase and develop benchmarks
and indicators that will trigger needed remedial action during project implementation.

Fourth, one of the lessons from experience is that access for the poor raises a distinct set of issues for
proj~t preparation and implementation. This requires dialogue with shareholders that goes beyond the
local elites and government to include the poor. Access for the poor also requires new approaches for
structuring projects. One potential approach that is being used is output-based aid. This model uses
targeted subsidies for reducing service costs for the poor while allowing private infrastructure providers
to pursue cost recovery. In Cambodia, for example, private service providers were selected on a
competitive basis to roll out water and sanitation services to villages. To make sure that this did not
exclude the poorest inhabitants, who otherwise might not have enough money to pay the up-front costs
of getting hooked up to the system, an incentive payment was provided directly to the service provider
for each eligible poor family that was connected to the network.
Finally but no less importantly, the MDBs will need to do a better job in engaging private capital and
promoting the market's role in delivering services. Because official development assistance provides
only around five to ten percent of current spending on infrastructure, the MDBs' engagement will need
to demonstrate both selectivity and "additionality." By "additionality," I mean that the :MDBs have to
bring something to the table that the host country or private sources cannot or will not. And where the
Banks do engage, they should demonstrate that they are picking high-impact projects. Until 1997, there
was a steadily increasing appetite by the private sector for investing in developing country infrastructure
sectors. The Asian financial crisis and several high-profile project failures have cut those private flows
in half, but this trend can be reversed with the right policy and regulatory framework and with assistance
to help countries develop bankable projects.
Given the vast infrastruCture needs and the shortage of public and official fmance, the international
financial institutions need to find effective ways of unlocking private investment flows by addressing
specific market failures. We finnlybelieve that iImovative proposals can employ small amounts of
official finance to catalyze orders of magnitude more in private investment. That's the kind of

leveraging of public money we like to see. As one example, we lmow that private investors often have a
hard time obtaining infonnation on which infrastructure proposals make economic sense and which are
largelydri-ven by politics; We- have developed -an innovative initiative- in the- IDB; targeting official
money to reduce investors' search costs for good projects that gets at precisely this problem.

lithe MDBs are to catalyze increased volumes of private capital, they will need to: (1) address the
regulatory regime obstacles so that investors have a degree of certainty and a clear path for costrecovery; (2) promote realistic expectations about the benefits of private capital; and (3) seek new
mechanisms such as output-based aid and pUblic-private partnerships that address the sustainability of
private infrastructure services. We are committed to working with the banks to help countries put in
place this framework.
In closing, I welcome your interest in this very important aspect of the work of the multilateral
development banks and I look forward to your questions.
-30-

Page 1 of 2

July 13, 2006
HP-10

Prepared Statement of Eric Solomon
Nominee for Treasury Assistant Secretary for Tax Policy
July 13, 2006

Mr. Chairman, Senator Baucus, and Members of the Senate Finance Committee, I
am honored to appear before the Committee as President Bush's nominee to serve
as Assistant Secretary of the Treasury for Tax Policy. It is truly an honor for me to
have the opportunity to serve our country in this role.
The collegial and cooperative manner in which the Chairman, Senator Baucus, and
the other Members of the Committee work is well known. If confirmed, I hope to
work with the Committee and your staff in the same way on the important and
difficult issues that face our tax system.
I am pleased to come before this Committee at a time of sustained economic
growth. The President's tax relief, including lower tax rates on individual income
and lower tax rates on capital gains and dividends, among other provisions, has
contributed to the strong performance of our Nation's economy.
Nevertheless, as we all know, there are great challenges before us. The foremost
challenge is our tax code itself. It is complex, hard to understand and difficult to
administer. It imposes enormous compliance costs on taxpayers and on the
government. Its numerous intricate provisions often distort economic decisions.
The tax code contains many provisions that were enacted decades ago and have
not been updated to reflect changes in our dynamic and increasingly global
economy. Its complexity breeds perceptions of unfairness and creates
opportunities for avoidance.
A primary example of the difficulties caused by our tax code is the alternative
minimum tax (AMT). The AMT is a parallel tax system that, for many taxpayers,
requires a second computation of tax liability. It was enacted in 1969 to ensure that
a small group of high-income individuals who paid no income tax would pay at least
some tax. The reach of the AMT has expanded far beyond its original purpose.
We need a tax system that is simple, fair, and promotes economic growth. The
Report of the President's Advisory Panel on Federal Tax Reform has provided a
strong foundation for consideration of ways to ensure that our tax system better
meets the needs of our society and economy. If confirmed, I look forward to
working together with Secretary Paulson, the Administration, this Committee and
the Congress to address the challenging issue of tax reform.
Another critical challenge before us is tax compliance. We are fortunate that the
vast majority of Americans fulfill their tax obligations. However, some do not, either
because they do not understand their obligations or because they choose to
disregard their obligations. A critical role of the Office of Tax Policy at the Treasury
Department is to work together with the IRS to provide timely and appropriate
guidance so that taxpayers trying to satisfy their tax obligations know how to do so.
For these taxpayers, published guidance reduces uncertainty and prevents the
burden on taxpayers and the IRS caused by audits and litigation.
In the years that I have served at the Treasury Department, I have spent an
enormous amount of time participating in the effort to combat tax shelters. In my
view, we have made significant progress. The combination of IRS enforcement

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Page 2 of 2

efforts against taxpayers and promoters, listing notices, disclosure regulations,
enactment of the Sarbanes-Oxley Act, press disclosures, and other events have
contributed to the decline in improper mass-marketed tax products. In this regard, I
particularly want to express my appreciation for the actions of Chairman Grassley,
Senator Baucus and other members of this Committee, both in your public
statements and in the leadership you have provided in Congress to give the
Treasury Department and the IRS additional tools needed to address this problem
An area in which we need to make more progress is the tax gap. The tax gap
undermines confidence in the fairness of our tax system and fosters
noncompliance. The tax gap also results in a de facto tax increase for compliant
taxpayers who pay more because others fail to pay their share.
The IRS has made headway in its efforts to improve compliance. However, we
need to do more to increase the level of compliance. At the same time, we need to
maintain the proper balance between enforcement efforts, on the one hand, and
compliance burdens and protection of taxpayer rights on the other hand.
The President's 2007 Budget includes several proposals to reduce the tax gap.
These proposals are an important first step in the right direction. If confirmed, I look
forward to working with the Secretary Paulson, the IRS, this Committee and the
Congress to consider regulatory, administrative and legislative methods to reduce
the tax gap.
In closing, I would like to thank a number of people. First, I want to recognize all
the economists and lawyers on the staff of the Office of Tax Policy. I have never
worked with such a talented group of people who give so much as part of a team
dedicated to public service. I would also like to recognize Bob Carroll, our Deputy
Assistant Secretary for Tax Analysis, with whom I have worked as a partner in
heading the Office of Tax Policy for the last year and a half.
Finally, I want to recognize my parents, Bob and Elaine Solomon, and my brothers,
Neal and Mark, to whom lowe so much. Most importantly, I want to thank my wife
Amy and my daughter Sarah, for their support, patience and love during all these
years that I have committed myself to public service.
Thank you again for the opportunity to appear before the Committee this morning.
would be pleased to answer any questions.

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Pag~

I of I

July 14, 2006
HP-11
Treasury Under Secretary to Speak on GSE Panel in NY
Treasury Under Secretary for Domestic Finance Randal K. Quarles will participate
in a panel discussion regarding government sponsored enterprises (GSEs) such as
Fannie Mae and Freddie Mac in New York City, NY on Wednesday. Office of
Federal Housing Enterprise Oversight (OFHEO) Director James Lockhart will also
speak on the panel.
The event is open to the media. Members of the press wishing to attend must
RSVP with Jennifer Zuccarelli at the Treasury Department.
Who
Under Secretary for Domestic Finance Randal K. Quarles
What
Panel Discussion on GSEs
When
Wednesday, July 196:00 pm (EDT)
Where
The New York Yacht Club
37 W. 44th Street
New York City, NY

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July 14, 2006

HP-12
Secretary Henry Paulson Provides his Signature for use on U.S. Paper
Currency

Newly sworn-in Secretary of the Treasury, Henry M. Paulson, Jr., provides his
signature to the Bureau of Engraving and Printing Director Larry Felix for use on
U.S. paper currency.
All media queries should be directed to
The Press Office at (202) 622-2960.
Only call this number if you are a member of the media.
High Resolution Image

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Page I of I

July 14, 2006
hp-13

U.S.-Brazil Group for Growth Meets
Washington, D.C. - The United States and Brazil held the fifth meeting of the Group
for Growth today in Washington, D.C. President Bush and President Lula launched
the Group in June 2003 with the aim of advancing the shared goals of strong
economic growth, job creation and poverty reduction. The last meeting of the
Group was held in August 2005 in Rio de Janeiro, Brazil.
Today's meeting was co·chaired by Timothy D. Adams, Under Secretary for
International Affairs at the U.S. Department of Treasury, and Luiz A. Pereira da
Silva, Secretary for Intemational Affairs at Brazil's Ministry of Finance. U,S.
Treasury Assistant Secretary for International Affairs Clay Lowery also participated.
The Brazilian and U.S. delegations discussed the need for fundamental reform of
the IMF's governance structure to better reflect global economic weight. The Group
supported a two-step process. The first step, at the Singapore Annual Meetings,
would be a limited quota increase for a small number of unequivocally
underrepresented countries. The second step, to be completed by 2008. would
deliver far-reaching reforms including a revised quota formula with GOP as the
predominant variable, a broader recipient list for emerging market quota increases.
and an increase in basic votes. The Brazilian and U.S. delegations agreed to work
together to advance these reforms ahead of the Annual Meetings. The Group also
discussed options for debt relief and reform at the Inter-American Development
Bank.
The other focus of the discussion today was the urgent challenge of reducing
poverty and inequality in this hemisphere. Participants agreed on the critical need
to provide the poor with the opportunities and tools they need to benefit from
growth: access to capital, education, infrastructure and markets at home and
abroad. Under Secretary Adams and Secretary Pereira reiterated their support for
an ambitious outcome from the WTO Doha Round negotiations and agreed on the
benefits of trade for growth and poverty reduction.
Secretary Pereira described Brazil's successful efforts to increase formal job
creation and reduce poverty and inequality while fostering macroeconomic stability
and sustainable economic growth: "The Brazilian poor have been the main
benefiCiary of low inflation and increased efficiency of the economy," Under
Secretary Adams stressed: ·Spreading opportunity to those left out and left behind
is the highest U.S. economic priority in the hemisphere. I am impressed by how
much we and our Brazilian colleagues agree on what needs to be done."
The Group agreed to reconvene in Brazil in the first quarter of 2007.
-30-

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Page I of I

PHCSS HOOM

July 17, 2006
HP-14

US Treasury to Help Alabama Teachers Bring Financial Education to Schools
U.S. Treasury Deputy Assistant Secretary for Financial Education Dan lannicola, Jr.
will speak with approximately 400 teachers in Mobile, Ala. on Tuesday, July 18 to
help bring financial literacy into Alabama classrooms.
America's high school seniors are not making the grade on personal money
matters, scoring an average of 52 percent on a nationwide financial literacy test
administered by the Jump$tart Coalition. lannicola will help teachers integrate
financial education into their curricula as part of a one-day conference hosted by
the coalition's Alabama chapter.
The Treasury Department and other agencies and departments in the Financial
Literacy and Education Commission released a strategy to improve financial literacy
in America earlier this year. The plan, titled Taking Ownership of the Future: The
National Strategy for Financial Literacy, is available in English and Spanish at
MyMoney.gov.
Who: Deputy Assistant Secretary for Financial Education, Dan lannicola, Jr.
What: Remarks to 400 Ala. Teachers on Financial Education in the Classroom
When: Tuesday, July 18,12:30 p.m. (COT)
Where: Arthur R. Outlaw Convention Center
One South Water Street - Second Floor
Mobile, Alabama

-30-

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July 17, 2006
2006-7 -17 -16-28-27 -5302
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 $67,330 million as of the end of that week, compared to $68,026 million as of the end of the prior week.

I. Official U.S. Reserve Assets (in US millions)
July 7,2006

II
TOTAL.i

I
1. Foreign Currency Reserves 1

~uc;t;es

I

68,026
Euro

Yen

11,972

11,103

I

"

f which, issuer headquartered in the U.S.

July 14, 2006

II
II

I
I

67,330

TOTAL

Euro

Yen

TOTAL

23,075

11,827

10,890

22,717

0

0

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

11,928

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

Ib.ii. Of which,

banks located abroad

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

II
I
I
II

5,425

I

,r

0

I

r.>~Mn e Position 2

113 Special Drawing Rights (SDRs) 2
4. Gold Stock 3

15. Other Reserve Assets

11,766

0

Ib.1I1. Ut which, banks located in the U.S.
I"

17,353

0

I
I
I
I

5,315

II

17,081

0

II

0

I

0

0

J~~

7,891

8,635

I

I

I

11,041

I

II

II

0

I

0

I

I

8,601
11,041

I

0

I

"
II. Predetermined Short·Term Drains on Foreign Currency Assets
July 7, 2006

I

I

July 14, 2006
TOTAL

Yen

Euro

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:

12.a

Short positions

I

I

0

2.b. Long positions

0

3. Other

0

II

II
I
I

I
I
II

0
0

I
I

0

III. Contingent Short·Term Net Drains on Foreign Currency Assets
July 14, 2006

July 7, 2006
Euro

I
I

httpjlwww.tr~as.gov/press/releases!2(Y)67171628275302.htm

Yen

I

I

TOTAL

Euro

I
I

Yen

I
I

TOTAL

II
11

3!()/2()07

Page 201'2

1. Contingent liabilities in foreign currency

I

II

0

I

0

CJ
I
I
I
CJ
I
I

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

I

I

2. Foreign currency securities with embedded
options
3. Undrawn, unconditional credit lines

I

I

0

0

0

0

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

IHeadquartered in the U.S.

I

I
I

3.c. With banks and other financial institutions

IHeadquartered outside the U.S.
4. Aggregate short and long positions of options
in foreign
ICurrencies vis-a-vis the U.S. dollar

14.a. Short positions

I

CJI

I

I
I

I~IIS
1.1
h

f nnn

I

CJ

I

I
I

II

I

0

II

4.a.1. Bought puts

II
II

I
I

0

I
I

'1nsitions

~ghtca"s
ten puts

I

I

I

II

I

Notes:

1f 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.
2f 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.
3f Gold stock is valued monthly at $42.2222 per fine troy ounce.

http://www. trcas.goy/press/releascs!2(}f)6 7l7162~27530

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"

DEPARTMENT OF THE TREASURY
OFFICE OF PUBLIC AFFAIRS
9 A.M. (EDT) JULY 18,2006
Brookly McLaughlin (202) 622-2920

EMBARGOED UNTIL
CONTACT

TREASURY INTERNATIONAL CAPITAL DATA FOR MAY
Treasury International Capital (TIC) data for May are released today and posted on the U.s.
Treasury web site (www.treas.gov/tic).Thenextreleasedate.whichwillreportondataforJune.is
scheduled for August 15, 2006.
Net foreign purchases of long-term securities were $69.6 billion.
•

Net foreign purchases of long-term domestic securities were $88.8 billion. Of this, net
purchases by foreign official institutions were minus $1.4 billion and net purchases by
private foreign investors were 90.2 billion.

•

U,S. residents purchased a net $19,2 billion in foreign issued securities.

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

1
2
3

8
9
10

11
12
13
14
15
16

19
11

12
13

Hi

15178.9
14262.4
916.5

17175.0
16164.3
1010.7

158808
15005.9
874.9

18085.5
17002.8
1082.7

1497.2
1394.6
102.6

1688.6
1602.2
86.4

1380.8
1J 19.6
61.3

1941.5
1852.7
88.8

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

6KO.9
150.9
205.7
298.0
26.2

1\89.5
2700
187R
353.1

n.7

718.4
1737
1871
306.4
513

945.6
186.8
225.1
417.7
116.0

85.0
8.3
28.4
31.1
17.2

84.1
9.1
15.1
42.5
17.5

39.2
·7.9
9.6
34.3
3.2

90.2
27.5
27.1
34.1
1.5

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

235.6
201 1
20.8
2.2

121.1
69.2
32.0
19.0
1.0

156.5
119.0
24.1
13.3
00

137.2
54.4
47.7
26.5
8.6

17.6
12.5
2.4
3.4
-0.7

2.3
-5.9
3.9
2.6
1.6

22.1
11.3
5.7
1.7
3.4

·1.4
·14.3
9.3
2,4
1.2

3123.1
3276.0
·152.8

3681.4
3854.0
·172.6

3152.1
3337.7
-185.6

4446.0
46230
·177.0

408.6
420.6
-12.0

455.1
474.2
-19.1

3987
408.8
·10.1

536.9
556.1
·19.2

-()7Q

-45.1
·127.5

-88.0
·97.6

-45.1
-131.9

-0.2
·11.9

·7 I
-12.0

-2.0

-85.0

-g.1

-14.3
·4.9

763.6

831\.1

61\9.3

905.8

90.6

67.3

51.1

69.6

Gro~~ Purchases of Foreign SeCUrities
Gross Sales of Foreign Secuntles
Foreign Securities Purchased, net (llnc 14 less 1inC 15) 13

ForeIgn Bonds Purchased, net
Foreign EqUities Purchased. net

17
18

Net Long-Term Flows (lme 3 plus 1111e 16)
Net foreign purchases of U.S. securities (+)
Includes InternatIOnal and RegIOnal Organlzalions
Net U.S. acquiSitions of fOreign sccurlties (-)

'O~

~06

2005

Gross Purchases of Domestic Secunt;es
Gross Sales of Domestic Securities
[)omestic Securities Purchased, net (line 1 less line 2) II

4
5
6
7

M~05

2004

,/

I~

11.5

Feb·06

Mar·06

Apr·06

May·06

Page 1 of2

July 18. 2006
HP-17

Treasury Adds Two Entities to the List of Iranian
Weapons Proliferators
The Department of the Treasury today designated two additional Iranian
companies. Sanam Industrial Group and Ya Mahdl Industries Group. for their ties to
missile proliferation
"As long as II'an's nuclear ambitions continue to threaten the international
comlllLlIllty. the United States will use ItS authorities to target Iran's efforts to sell
and acquire Items used to develop weapons of mass destruction and the missiles
capable of carrying them." said Stuart Levey, Treasury's Under Secretary for
Terrorism and Financial Intelligence (TFI), "We have now taken steps to financially
Isolate tilirteen entities tied to Iranian proliferation. and will continue to act
aggressively against this grave threat."
This action was taken pursuant to Executive Order 13382. an authority aimed at
financially Isolating prollferators of weapons of mass destruction. their supporters.
and those contributing to the development of missiles capable of delivering WMD,
Designations under E.O. 13382, which is administered and enforced by the
Treasury's Office of Foreign Assets Control (OFAC), prohibits all transactions
between the designees and any US person and freezes any assets the designees
may have under US Jurisdiction
Sanam Industrial Group and Ya Mahdi Industries Group are being designated by
OFAC because they are owned or controlled by, or act or purport to act for or on
behalf of. directly or IIldlrectly. the Aerospace Industries Organization (AIO), which
the United States Government designated In the annex to E.O. Order 13382, AIO
is a subsidiary of the Iranian Ministry of Defense and Armed Forces Logistics. and
manages and coordinates Iran's misSile program and oversees all of Iran's missile
Industries.
The Sanam Industrial Group. a subordinate to the AIO. has purchased millions of
dollars worth of equipment on behalf of the AIO from entities associated with miSSile
proliferation
Ya Mahdl Industries Group is also subordinate to the AIO and has been involved in
International purchases of missile-related technology and goods on behalf of the
AIO

Background on E.O. 13382
Today's action bUilds on PreSident Bush's issuance of E.O. 13382 on June 29.
2005. Recognizing tile need for additional tools to combat the proliferation of
WMD. the PreSident Signed the E 0 authoriZing the Imposition of strong financial
sanctions agalilst not only WMD prollferators. but also entities and individuals
providing support or services to tl1em
In the annex to E.O, 13382. the PreSident identified eight entities operating in North
Korea. Iran. and Syria for their suppmt 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 m services to the entities Identified in the annex to
the Order.

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Page 2 of2

In addition to the eight entitles named In the annex of E.O. 13382 and the two
named today, the Treasury Department has designated sixteen entities and one
individual as plOllferators of WMD, specifically
•
•
•
•

Eight North Korean entities on October 21,2005:
Two Ir<'lIllan entities 011 Jamlary 4, 2006:
One SWISS IIldlvldual and one SWISS entity tied to North Korean proliferation
activity on March 30, 2006 and
Four Chinese entities alld 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 plOllferatlon actiVities and tileir support
Iletworks.

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Page 1 of 1

July 18, 2006
HP-18
Statement by Treasury Under Secretary Levey Upon Departure from Seoul
SEOUL, KOREA ~ Stualt Levey, the US Treasury Department's Under Secretary
for Telrmism and Flnancialinteiligellce (TFI), made the following statement today
upon his departure from Seoul
"Today, I concluded the first leg of a long-planned trip to Asia to meet with my
counterparts to discuss ollgolng issues of concern to the region and the greater
international comlllunity. Willie In Seoul, I met with officials at the Ministry of
Fmelgn Affairs and Trade. the Ministry of Flllance and Economy, the Korean
Fillallcial Illtelligence Unit, alld the National Security Council to discuss issues of
common interest. including tile new Uilited Nations Security Council Resolution that
requires all member states to prevent the transfer of any finanCial resources in
relation to DPRK's Illlssile or WMD programs.
"My colleagues and I shared views on ways to safeguard the global financial sector
from Illicit conduct, including the proliferation of weapons of mass destruction,
money laundering, and terrorist fillancing. Our discussions were productive and
educational, and I look forward to continuing the dialogue between the United
States and our partners III the Republic of Korea.
"As the week progresses, I look fOlward to meeting With my counterparts in
Vietnam, Japan, and Singapore to also discuss ways to strengthen the international
finanCial system from abuse by prollferators, terrorists, narcotics traffickers, and
other illicit actors," said Levey.
- 30 -

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July 18, 2006
ilp-19
Testimony of Randal K. Quarles,
Under Secretary for Domestic Finance
U.S. Department of the Treasury
Before the Senate Banking, Housing and Urban Affairs
Good afternoon Cilalrman Shelby, Ranking Member Sarbanes and Members of tile
Committee. Thank you for tile OPPOrtUlllty to appear before you today to discuss
tile role of insurance 1/1 our economy and the need to modernize the regulation of
Insurance. This is an Important topic, one that affects not only the efficiency and
competitiveness of a significant US Industry and a central function of the US.
fmanclal system, but one that lias broad consequences as well for the ability of our
economy as a wilole to Innovate and to grow.
INTRODUCTION

In the first instance, the issues surrounding insurance regulation are significant
because the US finanCial services industry IS one of our country's most Important
areas of economic activity, and the Insurance Industry IS a large part of the U.S.
financial sector. According to tile Federal Reserve, at the end of 2005, total assets
held by US Insurance companies totaled $5.6 trillion, as compared with $11.82
trillion for the bankmg sector, and $10.5 trillion for tile seCUrities sector.
In addition to tile size and Importance of tile Insurance industry considered solely in
Itself, however, insurance - like other finanCial services - ilas substantial ripple
effects through tile economy as a whole. Insurance performs an essential function
In our overall economy by providmg a mecilanism for businesses and the general
population to safeguard their assets from a wide variety of risks The ability of
businesses to msure agalilst risk adds a degree of certainty to their planning and
thus contributes to greater economic actiVity and enhanced economic growth The
general population also benefits from being able to purchase protection for various
types of losses that would be difficult for individuals to absorb on their own.
Insurance companies are In the business of managing these risks. They specialize
m evaluating the potential for losses and perform an important function by
spreading that risk Widely across various segments of our economy and
population
Insurance is also like other finanCial services In that its cost, safety and ability to
IIlnovate and compete are heaVily affected by both the substance and the structure
of Its system of regulation. As a result, then, both of the industry's importance
considered Simply as a separate line of economic activity as well as Its
consequences for commerce and economic growth more broadly. we should seek
to ensure that the regulatory system for the insurance industry is consistent With the
efficient and cost-effective prOVision of its services and with continuing evolution
and innovation in the design and distribution of its products.
In that regard, there appears to be virtually no disagreement that the current statebased Insurance regulatory system could benefit from further modernization. There
have been a variety of approaches that have been considered state driven efforts
at reform, total federal preemption of the state-based system, the setting of federal
standards for states to administer, and the creation of a dual chartering structure
that would allow insurers to opt for either state or federal regulation
Unlike the banking and securities sectors, insurance is solely regulated at the state-

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Page 2 of8
level, and while this lllultlpllCity of re~lulators can provide cenalll benefits in the form
of local expertise and contlol, It does raise a number of issues that deserve further
consideration In our View, those Issues fall into three main categories
•

Potential lIlefflciency, resultlllg both from the substance of regulation
(especially price and form cOlltrol) but also frorn Its structure (the lIlevitable
duplication and cost assocldted With multiple non-uniforrn regulatory
I'eglmes ):

•

InternatlOllal Impediments, botll questions of comity (faCilitating international
firms' operations In tile U S, wrllch benefits US consumers) and
competitiveness (faCilitating US firms' operations abroad, which prOVides
growth 0ppoliunitles for US Industry and helps diverSify their risk
exposures ):

•

Systernic "blind spots", the Inability of the official sector to understand and
respond to the Insurance sector's evolvlllg contribution to risks affecting the
financial system as a whole.

At the most fundamental level, the question posed in each of these areas is
whether the our current system of Insurance regulation IS up to the task of meeting
the challenges of insurance regulation in today's evolving and increasingly global
insurance market. More broadly, we should evaluate whether the benefits of
regulatory competition (Whlctl are fostered by our existing structure or other
multiple-regulator structures) are outweighed by the costs of regulatory
fragmentation (which are Significant In a 50-state system).

BACKGROUND
The current structure of insurance regulation In the United States IS the result of a
long history. In 1868, the US Supreme Court conctuded that the issuance of an
Insurance policy was not interstate commerce, and therefore outside the
constitutionally permitted scope of federal government's legislative and regUlatory
authOrity (Paul v. Virgmla) In 1944, some 76 years later, the Court reversed itself
holdlllg that insurance was IIldeed subject to federal regulation and federal antitrust
law (United States v. South-Eastern Underwriters ASSOCiation). In 1945, before any
assumption of federal regulatory authority over insurance, Congress passed the
McCarran-Ferguson Act, which "returned" the regulatory Jurisdiction over the
business of IIlsurance back to the states, and generally exempted the business of
insurance from most federal laws prOVided such actiVities were regulated by state
law.
Under the current state-based regulatory system, each state has a chief IIlsurance
regulator, generally referred to as "commissioner," who is charged with
administering state Insurance laws, promulgating regulations, and other duties
pertainlllg to the superviSion of the busilless of insurance. In most states the
insurance commissioner IS appointed by the governor In 11 states, including
California, the commiSSioner is elected Each state commissioner is a member of
the National Association of Insurance CommiSSioners (NAIC) that was founded in
1871 The NAIC is the primary vehicle through which state insurance regulators
exchange IIlformatlon and coordinate activities to enhance the effectiveness of
insurance regulation
State IIlsurance regulation can be divided into two broad categories
•

solvency or finanCial regulation aimed at preventing insurer insolvencies and
mitigating consumer losses should InsolvenCies occur: and

•

consumer protection and market regulation focused on potential anticonsumer practices.

Each state enacts state-speCifiC Insurance laws. The NAIC has developed model
laws and regulations covering various aspects of the insurance business in an effort
to achieve greater uniformity. In the solvency and financial regulation area these

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Page 3 of8

range from accounting and Investments to solvency/market examinations, holding
companies, insider tradln~J and proxies, and reinsurance. In the consumer
protection al'ea these Illodel rules cover matters ranglllg from privacy protection,
deceptive advel·tislng, ullfalr poliCy terms, and discrilllillatory or unfair treatment of
pollcyllolders. MallY model laws mllst be approved by state legislatures before they
can be Implementecl, willie some states Illay Ilave the authorrty to adopt model
regulations In certain areas without legislative actloll The adoption of model laws
and regulations has been spotty at best. It is a cumbersome process that, In many
cases, can take a number of years It also allows for variation In implementation
across states
The state-based Insurance regulatory system was subject to significant criticism In
the 1980's after several major insurance companies became financially Impaired.
At that time, there were calls for I'egulatory reform, including a proposal for a
preemptive federal regulator State insurance regulators, sensing that the statebased system was in jeopardy, made some Impressive strrdes in undertaking
Initiatives to reform state solvency regulation They established an NAIC
Accreditation Program requiring the adoption of designated model laws and
I'egulations, and a review of the Insurance regulatory agency of each state by an
independent review team to assess compliance With the reqUired standards. As a
result, today there is a relatively uniform solvency regime that has been
implemented across the states. However, in other areas of regulation, the states
appear to be much more reluctant to adopt uniform standards.
Another important aspect of the state-based insurance regulatory system is its
system of guaranty funds. Unlike the system that IS in place for federally-insured
depository institutions, there is not a federal guarantee ensuring that policyholder
claims are paid Each state operates its own guaranty fund, and typically separate
funds are maintained for property/casualty insurance (mostly personal lines) and
life/health IIlsurance. If an insurer becomes insolvent, the state insurance regulator
tYPically is appointed as the liquidator. As liqUidator, the regulator appoints a
receiver to manage the liquidation. The guaranty fund then works With the receiver
and assumes responsibility for the payment of a specified portion of the claims that
would otherwise have been paid by the insurer. The state-based guarantee system
is funded primarily on a post-assessment basis, with all insurers that write particular
types of bUSiness being subject to an assessment to fund losses.

KEY ISSUES IN CONSIDERING INSURANCE REGULATORY MODERNIZATION
An Important part of this debate IS what should be the role, if any, of the federal
government In IIlsurance regulation. While the state-based system has a number of
potential merrts - such as local knowledge of Insurance market conditions and
preserving local deCision making over key aspects of activity Within a particular
state - it does raise a number of Issues that need to be considered as financial
markets evolve In this country and abroad. The key issues I Will focus on today
are: potential inefficiencies associated with the state-based system - most
prominently undue regulatory burden and prrce controls: international implications
for free markets and competitiveness: and fully understanding the impact of the
Insurance sector on financial sector soundness.
Potential Inefficiencies of the State-based System
As I indicated, there IS Virtually no dispute over the fact that there is a general need
for modernization of the current state-based system One aspect of modernization
has been a focus on the lack of uniformity in state regulation. Even though the
NAIC has achieved some success over the past 135 years in fostering more
uniformity among the states, many of ItS model laws and regulations have not been
enacted by the states. States interpret these model laws differently, and craft
indiVidualized exceptions to them. ThiS should not be a surprise given that the
general nature of state legislatures and regulators to preserve authorrty in areas
where It is perceived to be warranted
Nonetheless, dlfferrng state IIlsurance regulatory treatment can lead to
ineffiCiencies and undue regulatory burden. ThiS can directly limit the ability of
insurers to compete across state boundaries. Reduced competition can diminish

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Page 4 0[8

the quality of services, COl)SUmel clwlce, and ultimately lead to higher prices.
At the most bClSIC level, stzertes h;we IIlcllvlcJLlal requil'ements tilat insurers and
producers (I.e., agents ;mcl brokers) mList meet to operClte In eLlch state For
example, all Insurers must recPlve ,-I license from each state in which they plan to
do bUSiness. While the NAIC has tried to Simplify tillS procedure, the filing
requll-ements for licenses cal) vZ1ry Slgl1lflCCll1tly from state to state and companies
must stili ascertain and comply Wlti) those requirements
All states also require a license from those who Wish to sell insurance, and the
licenSing process also varies flom state to state The multi-state licensing of
Insurance producers has beell somewllat streamlined In recent years thanks to the
proviSions of tile Gramm Leach Birley Act, WhlCll provided for a federal preemptive
producer licenSing system (the National Association of Registered Agents and
Brokel-s ) that served as a threat to the states to develop a more unified system.
The states responded and established a system that established the reqUired
reCiprocity arrangements ReciprOCity arrangements have somewhat streamlined
tile process; however. agents must stili obtain a license In each state in which they
do bUSiness.
Another area of potential IneffiCiency is form approval regulation Form approval is
the system or process by which state Insurance regulators review and approve (or
disapprove) policy forms IIlsurers Wish to use in a state. There are at least seven
categories of state policy form approval systems, including the use of state reqUired
forms, strict prror approval of forms, "file and use," "use and file" - to no form filing
reqUired State form approvals can be based on any number of factors. For
example, some states require certain disclosures and descriptions of coverage,
some even speCify the proper typeface sizes and the color of ink, as well as
speCifying that the disclosure has to be on the first page of the policy - a
requirement that can make an Insurer have to have state speCifiC cover pages for
their poliCies. Some states also require speCial disclosures for particular products
such as small face amount life insurance policies, or special "buyer's gUides" or
policy endorsements for certain products Requirements for descriptions of
coverage can also vary from state to state, with some states reqUiring the language
text itself to be based on speCifiC readability standards, such as a minimum score of
40 on the Flesch readlllg ease test or compliance With some other test approved by
the commissioner.
The NAIC made efforts to achieve a higher degree of uniformity in product
approvals by launchlllg such programs as CARFRA (Coordinated AdvertiSing, Rate
and Form ReView Authorrty) and SERFF (System for Electronic Rate and Form
Filing). In addition, Just last month some 27 states entered Into an Interstate
Insurance Product Regulation Compact that would provide for uniform national
product standards for the products sold by life Insurers (life Insurance, annUities,
disability Income Insurance, and long-term cal'e insurance). While these efforts
may lead to some degree of greater uniformity, It is still up to each state to interpret
and enforce such standards.
States Justify form approval as a necessary tool for consumer protection. However,
there should be a careful analYSIS of the cost and benefits of these requirements at
the individual state level In addition, haVing multiple technical state requirements
makes it very difficult, and very costly, for an insurer to roll-out a new product on a
nation-wide basis.
Perhaps the greatest potential for IneffiCiency In the current state-based system is
with price controls. Insurance is perhaps the last major market in the United States
with direct price controls. The term "price controls" is frequently used to describe
state regulation of rates used by property/casualty Insurers licensed or admitted in a
state (referred to as the "licensed/admitted market"). ThiS market Includes such
personal lines of Iflsurance as automobile and homeowners, as well as a
substantial portion of the commercial lines of insurance such as fire, burglary, theft,
workers compensation, and commercial automobile. The basic legal standard for
rates in all states is that they not be "inadequate, excessive, or unfairly
discriminatory'" In the early years of state insurance regulation, the emphasis was
more on whether rates were adequate, and thus would prevent solvency problems.

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However, more recently It seems ZlS though most of the controversy over price
controls has concerned efforts of state regulators to hold down prices for IIlelr
constituents by denYlIlg rate III creases on grounds that they are excessive.
States address I'ate regulation III il nUlllbel of different ways. For example, as to
rates on most lines of comrllprclZlI propel'ty/casualty Insurance: 5 states have no
filing requirements (No File): 2 require IrlforlTlatlonall'ate filings only (Information
Only): 9 allow rates to be used Without pre-filing, but they must be subsequently
filed (Use and File): 13 requllT! fillrlg before they are used (File and Use): 19 require
rates to be filed and approved before they are used (Prior Approval). Of the 43
states With some degree of rate cOlltrol, many also prOVide for the exemption of rate
approval requlremellts on celialll large cOlllmercial property/casualty poliCies based
on the amount of the pl'efniUm charge or size of the policyholder.
One of the fundamental prinCiples of economics is that price controls result In
IneffiCient outcomes. If the mandated price IS set above the market clearing price,
the result Will be surpluses: If the mandated price is set below the market clearing
price, the result Will be shortages. Tile latter outcome IS what we generally observe
In Insurance markets with strict price controls. When IIlsurers are unable to charge
what they feel IS an adequate rate for their product, they generally tighten their
underwriting standards In order to limit lI18ir writlllgs to "preferred" risks that are less
likely to suffer an insured loss. Not being able to charge an adequate rate also
limits IIlsurers' abilities to price on the baSIS of measurable differences. To the
extent that prices do not accurately reflect differences In risk, low-risk consumers
are effectively forced to subSidize Illgh-rlsk consumers. ThiS obViously leads to
shortages In the voluntary market, or a "tightening market," and Increases demand
on what IS referred to as the residual markets. Residual markets, known also as
"shared" or "Involuntary" markets or "markets of last resort," are state-sponsored
mechanisms that provide consumers with another way to obtain automobile,
property, or workers compensation insurance coverage
For example, where a driver With a history of multiple accidents applies for
Insurance, an insurer might be willing to write the coverage if it could charge a rate
commensurate with the risk. However, if that rate was more than the state
regulator allowed it to charge, then the insurer would likely refuse to write the poliCy.
If no oliler IIlsurer In the voluntary market were willing to issue coverage at an
approved rate, then the driver could apply to the state's reSidual market (sometimes
referred to as the "aSSigned risk pool ")
All licensed IIlsurers III a state are generally reqUired to participate in that state's
reSidual markets, typically by assuming a fair share of the residual market's
operating results, ReSidual market programs are rarely self-sufficient, and where
the premiums received are IIlsufflclent to support the program's operation, insurers
are generally assessed to cover the resulting deficits
The residual market mecllanlsm IS the way that states address the shortages that
are caused by price controls. While it IS theoretically possible for the price
control/residual market mechanism structure to duplicate the result that would occur
in the absence of price controls, that outcome seems highly unlikely. At the most
baSIC level, given that the reSidual mal'ket mechanism structure requires all insurers
to share in the fOliunes of the residual market mechanism, as the size of the
residual market grows, It would be likely that fewer and fewer insurers would be
willing to do business in that line of IIlsurance. As insurers pull back from that line
of insurance, further pressure is placed upon the residual market mechanism, So in
a broad sense, one potential outcome of the price control/reSidual market
mechanism structure is that it artifiCially restricts the number of insurance suppliers
in a particular market. States typically respond to this outcome by adjusting prices
to preserve the viability of that particular market.
Most eVidence IIldlcates that there is a strong correlation between the size of
reSidual markets and pnce controls the larger the reSidual market you find in a
state, you Will also generally find a tighter market and a higher degree of rate
inadequacy - often the result of price controls. In other words, price controls
generally result in elevated residual market populations when the permitted rates
are lower than indicated by market forces.

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Automobile insurance IS often cited as an example of problems with state price
controls. In 2004, the average nationwide percentage of private passenger cars
insured tllrough residual market mechanisms was 1.5 percent However, In states
with more restrictive price controls, such as North Carolina and Massachusetts, the
percentage of private passen~Jer cars IIlsured through the residual market was,
I'espectlvely, 24.2 percellt zlilci rJ.S percent In general, states with a less restrictive
regulatory ellVlrorllllellt (e Cl ' IllinOIS and South Carolllla) are generally
chal'acterized by lower ami less volatile loss ratiOS, smaller reSidual markets, and
Insurance expenditures below tile national average
Another example is workers' compensation Insurance, WhlC!l IS often pointed to as
the line of insurance with the greatest degree of rate regulation. In the last few
years, the percentage of workers' compensation premiums in residual markets has
been on the increase Among those states that report through the National Council
on Compensation Insurance (25) the reSidual markets' share has increased from
3.2 percent In 1999 to 11.5 percent In 2005, and was even as high as 12.7 percent
In 2004. There IS also Wide variation among Individual states, with 2005 market
shares ranging from 1 1 percent In Idaho to highs of 22.7 percent III New Jersey
and 20.5 percent III Massachusetts.
International Issues

u.s. firms and firms from abroad in insurance, banking, and securities compete
across the globe and around the clock. Clearly foreign sources of insurance capital
are important for a robust US insurance market.
As noted above, the lack of uniformity rn our state-based insurance system has the
potential to lead to Inefficiency and undue regulatory burden. While all insurance
companies that are licensed to operate rn the U.S are subject to same regulatory
standards, foreign firms likely find adapting to such standards more difficult. From
the International perspective, Issues that have been raised rn bilateral finanCial
regulatory diSCUSSions With foreign offiCials are that our insurance market has at
least 50 different regulators, and they or their Insurance companies have no single
regulator to coordinate With on insurance matters. Navigating the state-based
insurance regulatory structure is likely a challenge for a new foreign company
seeking to do busrness in the U.S, and has likely impeded the flow of capital into
the US to some degree. Issues that have been brought to our attention include
rate and form approvals: capital adequacy standards: and guarantee fund
membership.
The US insurance market, in particular the global nature of insurance, IS vastly
different than it was SIX decades ago when McCarran-Ferguson was enacted. To
give an example of the sort of efforts underway internationally, the European Union
(EU) IS continuing ItS work on its Solvency II project focused on Insolvency risk for
insurers In preparation for ItS scheduled introduction on an EU-wlde basis In 2010.
Solvency II is an important undertaking for it encompasses quantitative capital
requirements, a supervIsory review process expected to harmonize the procedure
in Europe, and It will conform to disclosure requirements with those of the
international accounting standard-setters. This is all part of the effort to forge one
insurance market for the twenty-five member states in the EU.
Reflecting the growing rnternatlonal nature of the markets, the NAIC IS working
closely With international regulators on a number of proJects, such as Solvency II In
the EU, on International accounting standards, and others. The NAIC itself is not a
regulator but facilitates communications among the states on international
regulatory issues. To that the end, it engages In regulatory cooperation with
international insurance regulators and through Memoranda of Understanding
(MOUs), and supports IndiVidual members by prOViding technical assistance to
regulatory agencies The NAIC also coordinates closely with Office of the US
Trade Representative In rnternatlonal financial services negotiations, and it
partiCipates in Treasury's finanCial markets regulatory dialogues with various
countries, Including China, Japan, and the EU.
To sum up, there IS significant work underway in rnternatlonal Insurance regulation
to reflect the changes taking place in tile US and global insurance markets. In

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evaluating proposals to modernize our system of Insurance regulation, we, too,
need to consider what will best serve us III m;lintainlng an IIlsurance marketplace
tllat attracts capital allCi does not set up artifiCial and costly barriers. A number of
countries are pusillrl~l forw;mi wllil rec}ulatory systems seeking more uniform,
efflclellt and stronger InSUr,HlCe sectors, In order to underpin more and better
products for their corlSllmers With less risk to the finanCial system
Lack of Feder;ll Urlderstamilll(j of Risk III the Insurance Market
As previously Iloted, the Irlsmance sector IS a critical part of the broader US
economy and In terms of size alorle a key partiCipant In US financial sector. In
comparison to other finanCial Instltlltlons, It could be argued that financial problems
at an Insurer' or reinsurer pose less potential to generate broad economic problems
or pose systemic risk In the finanCial system The Immediate finanCial problems
from tile failure of a large Insur'er or reinsurer could be limited given the nature of
insurance contracts (e.g., delayed payments, dispersed risks, and timing of In force
coverage) and the general funding strategies of many insurers (e.g, a focus on
meeting potential near term liqUidity needs to pay claims). Nonetheless, there
remains some potential for dlsruptlorls in the Insurance market to Impact economic
activity and finanCial markets. And Importantly, these potential risks may not be
well understood at either the state or federal level.
At the most basic level, the failure of a large insurer or reinsurer could place stress
on state guarantee funds and to policyholders that do not have guarantee fund
protection (mostly large commerCial organizations). This could in turn have a
negative Impact on the broader economy, which could also Impact other financial
institutions. While market participants should perform their own due diligence when
they enter Into Insurance contracts, given the magnitude of potential consequences
of a large insurer Insolvency the federal government should have a better
understanding of the nature arld potential for such an event.
Given that the Insurance sector IS also a direct partiCipant in a number of finanCial
markets, either tilrough direct credit exposures or through derivative counterparty
relationships, finanCial problems at IIlsurers could be transmitted throughout the
broader economy. For example, there has been a conSiderable amount of attention
paid to the expanding credit derivatives market. While there are a number of issues
that might warrant attention, as With many other derivative contracts, a credit
derivative is very Similar to an insurance policy that pays off wilen certain credit
events occur. Given the close correlation to IIlsurance, Insurance companies
appear to be taking a more active role In thiS market. From an overall perspective
of market stability, do we fully understand what risks Insurance companies are
undertaking, or how their activity could Impact the credit derivatives and other
finanCial mar'kets?
In addition to broad areas of finanCial sector stability, there has been a convergence
across some product lines that are offered by banking, securities, and insurance
firms. ThiS is particularly true In regard to wealth management products. Many
wealth management products serve a Similar purpose (e.g., variable rate annuities
and mutual funds), but are offered by firms with different charters and underlying
regulatory structures. Any underlying economic reason for treating like products
differently for regulatory purposes has blurred over time. Much like the state-based
IIlsurance system, differing regulatory treatment for like products adds complexity
and creates potential problems for the free flow of capital. Given the general
efficiency of capital markets, differences In regulation (whether through capital
standards, product approval starldards, or otherwise) and differences in tax
treatment can direct capital flows away from their most effiCient uses. These are all
areas where the federal goverllment should Ilave a better understanding of
potential Implications.
What should be apparent IS that the Insurance industry IS extremely complex. While
the state-based system has made improvements In solvency and holding company
regulation, under a structure With over 50 different regulators it may even be
somewhat difficult for IndiVidual state regulators to get a firm handle on the risks
that large complex insurance companies pose to our Nation's insurance system
Add into that mix that the federal government has little to no role in the state-based

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insurance regulatory system. and we al'e left with what could be a large blind spot In
evaluating risks tilat dre posed to the general economy and financial markets.
CONCLUSION
To sum up. It IS cleell' to us - as we thlilk It IS to most observers - that our current
system of insulclilce regulation lequlres modernization to meet the challenges
facing ttle Insurance Industry. allCl financial services generally. in the 21st century.
Our eXisting system of regulation has the potential to lead to inefficient economic
outcomes (ralslllg tile cost and redUCing tile supply of many insurance products).
deters IIlternatlonal participation in our domestic markets (again ralslllg costs and
limiting consumer chOice). creates obstacles to our own Insurance firms'
IIlternatlonal expansion. and limits the ability of anyone regulator to have an
ovel'vlew of risk In the Insurance sector and its contrrbution to risk in the financial
system more broadly. Tilese are Issues of Importance not Just to tile Insurance
IIldustry. or even the larger financial sel'vlces industry. but to the economy as a
whole. because of the essential role that the mitigation of risk through IIlsurance
has in promoting commercial actiVity and enhancing economic growth.
Treasury has been closely monitoring the developments of the varrous approaches
to modernizing insurance I'egulation - ranging from the seif-lilitiated approaches of
the state regulators. and establishing federal standards for the harmonization of
state IIlsurance rules. to the concept of an optional federal charter now being
conSidered by this Comlllittee. While we are still evaluating what approach we
believe to be the most appropriate. what is clear IS that each of them should be
evaluated III light of the fundamental issues we have discussed today. Again. thank
you for addreSSing the Issue of Insurance regulatory modernization and for giving
me the opportunity to express the Treasury's views. We look forward to continuing
thiS dialogue
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July 19, 2006
11p-20
Assistant Secretary Warshawsky to Leave Treasury for Private Sector

WASHINGTON. DC - On July G. 2006 Asslstallt Secretary for Economic Policy
Malk Warshawsky submitted his letter of resignation to Ille President. Warshawsky
made the deCISion to leave Treasury fm the private sector over the last several
weeks. HIS resignation will be effective July 28, after which he will begin working
With Watson Wyatt Worldwide. a global human capital consulting firm. The content
of Warshawsky's letter of resignation is Included herein.

July 6. 2006

The Honorable George W Bush
The PreSident of the United States
White House
Washington. DC 20500
Dear Mr. President
It has been an honor and a privilege to serve In your Administration at the Treasury
Department for four and a half years, Including the last two years as Assistant
Secretary for Economic PoliCY. At thiS time of tranSition for the Department. and
after achieVing many accomplishments for your program of government, I feel it IS
now an appropriate time for me to leave to return to the private sector. I therefore
resign from the office of ASSistant Secretary of the Treasury fm Economic POliCY,
effective after July 28, 2006
Working under your leadership and the leadership of Secretary Snow. often in
partnership with others In the Department and your Administration. I am proud of
the many successes that I and my office have had in the last years. In particular,
the Trustees' Reports were enhanced and all assumptions were reviewed carefully
and updated so that precise. transparent and comprehensive measurement would
serve as the basis for the essential diSCUSSions that citizens and pollcymakers have
had, and In which they stili need to frUitfully engage, to refmm the SOCial Security
and Medicare programs. Our office put forward a fair and complete assessment of
the Terror Risk Insurance Program that served as the baSIS fm the Secretary's
recommendation to Congress that thiS program, appropriate in ItS time. be
successively scaled back to allow the private sector to resume a steadily growing
role. We played a major part In the design of the Administration's legislative
proposal to put the private defined benefit pension system and ItS governmentsponsored insurer on a stable and sustainable baSIS and to encourage future
growth, so that current and future workers can look forward to getting a secure
source of retirement Income. I encourage the Congress to complete this Important
legislation soon We prOVided accurate evaluations and forecasts of the
performance of the economy. as the baSIS for the preparation of your annual
budgets and as a testament to the need for. and the success of, your tax and
regulatory policies.
In these efforts, as well as In the many other analyses and pieces of poliCy adVice in
various macroeconomic and I1lICrOeConomlC areas IIlcludlng SOCial Security.

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FEHBP and flood insurance reform that I provided to the Secretary and other senior
offiCials in the DepClrtlllent and tile Adllllnistratioll, I was fortunate to work with the
extraordinarily dedicated ami creZltlve Cilr(Jer and political staffs of the Office of
Econolllic PoliCY. As Henry Paliisoll embarks 011 hiS term of office, I know that he
will wClnt to call lIpon thiS rem<HkZlbly tZllented woup of professionals for IIlslghtful,
unbiased and reasonecililforlllZltlon, analysIs, ami sU~.1gestions

I wisil Mr Paulsoll well III hiS stewarcishlp of the Department arld tile economy and
I wish you well III your COlltlllLwd strolltj leadership of the Federal Government and
our great NCltlon
Sillcel'ely yours,
MClrk J WClrsllawsky
ASSistant SecretClry for ECOI10illiC PoliCY

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July 19,2006
HP-21

Remarks of Randal K, Quarles
Under Secretary for Domestic Finance
U.S. Department of the Treasury
At the Reuters Panel Discussion on Government Sponsored Enterprises

New York City. NY - Thallk you for Inviting me here today to discuss Issues related
to government sponsored enterprises and GSE reform
As many of you know we appear to be at a critical point In the GSE reform debate
We at the Treasury are on record supportlllg legislative efforts to improve the
regulation of tile housing GSEs and, Importantly, legislation that provides a clear
statutory IIlstruction to the new GSE regulator regarding the size of the GSE's
retaliled investment portfolios.
We have spoken many times on why It is important to limit the size of the GSEs'
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 decreaslllg ItS cost
and IIlcreasing ItS supply - tileir retention of large IIlvestment portfolios does not
further this purpose. These retained portfolios do, however, concentrate rather than
distribute the prepayment and IIlterest rate risks associated with mortgages and
mortgage-backed instruments held by them, and concentrate them in entities that as a result of the lower levels of capital they are required to hold - are substantially
more leveraged than other financial Institutions. Because of the funding advantage
enjoyed by the GSEs, they are able to grow these portfolios to a much greater
degree than a purely private sector entity could, and as they continue to grow In
size it becomes IIlcreaslllgly risky for counterpartles to hedge them, particularly
given the complicated hedging strategies run by the GSEs.
That has led us to the conclUSion, which remains our position today, that it IS critical
that both of these POliltS - both a strengthened regulator and a mandate to address
portfolio size - be IIlcluded in any final legislation from Congress.
I think what appears to have gotten lost In the debate IS actually what IS meant by a
mandate to address portfolio size or what has often been phrased as "portfolio
limits." To address thiS, let me start With what IS not Implied by portfolio limits In
the legislative context.
First, neither Treasury, nor anyone else for that matter, IS suggesting that a hard
portfolio cap be put in place By "hard" cap I mean a fixed dollar amount for the
size of the GSEs' retaliled portfoliO that is specified III legislation. There IS wide
agreement--an agreement shared by Treasury and the Adminlstration--that a "hard"
cap would not proVide the needed flexibility for the GSEs to accomplish their
housing mission.
Second, a portfolio cap does not Imply that there would have to be an immediate
sell-off of the GSEs' existing retained mortgage portfolios. As Treasury has
maliltaliled all along, any portfolio cap would have to have an appropriate transition
period to aVOid the potential for market disruption
Finally, a portfoliO cap should not limit the ability of the GSEs' to conduct their
guarantee bUSiness or react to emergency situations Agalll, as we have

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consistently noted, the GSEs' uedlt gUaiantee business should not be affected by a
pOlifolio cap, and the new I-egulator should have the ability to lift these requirements
to address material disruptions 111 the rnortgage market.
So what would be accornpllslled with c1 portfolio cap?
A properly constructed portfoliO cap would addl-ess the Aclrnlnlstration's
fundamental concerns regarding systelllic risk. And a key element of such a cap
would be cieal- direction to ttle new reglilator on what should be Included In the
GSEs' retained mOltgage portfolios There are two reasons thiS statutory direction
IS Important. First, without that direction, it would be very difficult for the new
I-egulator, given ItS focus 011 only the GSEs, to evaluate fully the potential for
systemic risk. Slnlllal'ly, without direction, even a stronger regulator With the full
range of necessary auttlorlties can find It difficult to make the tough deciSions that
are necessary
A properly constl-ucted portfolio cap would also tie the GSEs' activities rnore closely
to their mission. I remain somewhat puzzled as to why there is not more support for
thiS concept. The GSEs were provided a set of public benefits to accomplish a
particular public mission. We should continually evaluate whether or not the GSEs
are uSing their publiC benefits to accomplish that mission The portfolio cap
supported by the Administration does exactly that it does not expressly reduce the
size of the retained portfolios: It slrnply directs that the retained investments be tied
to the specific missions of the enterprises It is instructive In itself that all sides
agree thiS focus on mission could result in a substantial reduction of those
portfolios
As you all know, the Admlnistratloll has strongly supported provIsions in the GSE
reform bill passed by the Senate Banking Cornmittee S 190 that address the GSEs'
retained portfolios by providing the new regulator clear direction on what assets are
permiSSible for the GSEs to hold Even though clear direction IS provided to the
new regulator, It IS Important to note that wtlatever specific limitations the new
regulator Imposes would be done through regulation_ Thus, any limits would be
reviewed and evaluated in an open and transparent process, and all Interested
parties would have the ability to comment.
The speCific list of pemllsslble assets in S 190 IS directly linked to the GSEs'
miSSion ami to redUCing systemic risk by focuslllg ttle GSEs on their securitization
activities. For example, the GSEs would be permitted to hold rnortgages and
mortgage-backed securities for the purposes of securitization, and mortgages
acquired to meet the affordable housing goals if such assets are not readily
securitized. Other categories of assets In S 190 relate to the GSEs' basic business
operations, including the need to maintain liquidity, which IS covered by holding
Treasury securlties_ S 190 recognizes the fact that holding hundreds of billions of
mortgages and MBS does not, however, help maintain Illortgage market liqUidity If
the GSEs needed to act as a liqUidity provider in a particular situation, they would
not be selllllg assets from their portfolios to purchase new mortgages or MBS, as
these actions would have a destabilizing rather than stabiliZing Impact.
Furthermore, as I noted preViously, we fully support provldlllg authority for the
regulator to lift the cap to address temporary disruptions III the market.
S 190 also has another Important provISion that is often overlooked The new
regulator has the ability, by order, to make temporary adjustments to the regulations
regarding the permissible asset holdings for the GSEs. This would seem to give
the new regulator clear authority to respond to temporary disruptions In the
mortgage market. We would certainly be open to greater clarification of thiS
fleXibility if this remains a sticking pomt.
Let rne close by saying that we stili believe that a legislative solution is achievable
and is the best way to address our concems. Given the Importance of the issue,
however, we have to conSider all the tools at our disposal. As we have noted
recently, Treasury is in the process of evaluating our GSE debt approval process
We are undertaking ttllS evaluation to ensure that our process is rnore
standardized, and so that our process can rneet any potential eventuality that might
be necessary, including lilllltlllg the GSEs' debt issuance.

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Secretary Paulson has made It clear to me that he believes there IS systemic risk
associated willl the GSE's retaliled portfolios While he shares the view that a
legislative outcome IS preferable, he has Insll'ucted us to ensure that the mechaniCS
of our debt approval process are robust enough to give Treasury the practical
option of lirnitlllg the GSEs' debt Issuance III accordance with our statutory authority
should that l)ecome Ilecessary If a legislation solution IS not achieved, Treasury
will ilelVe 110 chOice but to conslcier adcJltlollal actloll
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July 20, 2006
HP-22
Treasury Designates Canadian and Sudanese National for Support to al Qaida
The US Depaltment of the Treasury today designated Abu Suflan AI-Salamabl
Mullaillmed Ahilled Abd AI-Razzlq, a Canadian and Sudanese Citizen, for his hlghlevel ties to and support for the al Oalda network. Today's action was taken
pursuant to Executive Order 13224, which IS aimed at prohibiting transactions with
terrorrsts and !twlr supporters and freeZing their assets.
"Treasury contlllLles to take action against al Oaida and ItS support network," said
Deputy ASSistant Secretary of the Treasury Daniel Glaser. "Abd al-Razziq has been
closely tied to senior al Oalda leadership We are taking steps to Inhibit hiS ability to
harlll the United States and our allies."
Abd AI-Razziq has prOVided administrative and logistical support to al Oaida, and
has been identified as being close to Abu Zubayda, a former lieutenant of Usama
bin Ladin, Involved In al Oalda recruitment and training.
Today's designation of 'Abd AI-Razzlq, camed out by the Treasury's Office of
Foreign Assets Control (OFAC), was executed under Executive Order 13224, an
authority that targets the assets of terrorists and their financiers. AI Oaida was
deSignated a SpeCially DeSignated Global Terrorrst (SDGT) pursuant to Executive
Order 13224 on September 23,2001.
IDENTIFIER INFORMATION
Abu Sufian AI-Salamabi Muhammed Ahmed 'Abd AI-Razziq
AKA

Abousoflan Abdelrazlk

AKA

Abousofian Abdelrazek

AKA

Sofian Abdelrazik

AKA

Abousofiane Abdelrazlk

AKA

Abousflan Salman Abdelrazlk

AKA

Abu Sufian Abd AI Razeq

AKA

Abu Suflan

AKA

Abu Juirrah

AKA

Abou EI Layth

AKA

Aboulall

AKA

Abulall

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Page 2 of2

AKA

Jolalba

AKA

DJolaih,l the SuclzlIlese

AKA

OLild EI

DOB

f3 AU(]lIst 1~)f32

POB

AI-B<lwcJ<lh. SudzlIl

AL T POB

SilY(~ICJI1

Albaouga. Sudan

Nationality 1

Sudanese

Nationality 2

Canadian

Passpol1

Canada BC 1f36787

Accordlflg to Iflformation available to the United States Government .. Abd AI-Razziq
Ilas provided administrative alld logistical supp0l1 to al Qaida He has been
identified as belllg close to Abu Zubayda, a former hlgh-ranklflg member of the al
Qaida Iletwork. Involved In recruitment and tralfllflg. Abd AI-Razziq IS known to
have been a member of an extremist ceilifl Montreal, Canada He was also closely
assoCiated with Ahmed Ressam, who attempted to attack the Los Angeles
International Airport In COIlJunctlon with the Millennium celebrations In Jalluary

2000

- 30 -

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July 25, 2006
HP-23

Treasury Assistant Secretary Fratto to Hold Weekly Press Briefing
Treasury Assistant Secretal'y for Public Affairs Tony Fratto will hold the weekly
media briefing today In Malll Treasur'y's Media Room The event IS open to all
credentialed media.

Who
Assistant Secretary for Public Affairs Tony Fratto
What
Weekly Brreflllg to the Press
When
Tuesday, July 25, 11.15 AM (EDT)
Where
Treasury Department
Media Room (Room 4121)
1500 Pennsylvania Ave, NW
Washington, DC
Note
Media without Treasury press credentials should contact Frances Anderson at
(202) 622-2960, or frances.anderson@do.treas.gov with the following information
name, Social Security number, and date of birth.

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Page I of 5

July 25, 2006
HP-24
Testimony of Randal K. Quarles, Under Secretary
for Domestic Finance
U.S. Department of the Treasury
Before the Senate Committee on Banking,
Housing and Urban Affairs
Chairman Shelby, Ranking Member Sarbanes, Members of the Committee, good
morning, It IS a pleasure to be Ilere today I would like to thank you for holding this
hearing and allowlllg the Treasury Department to present Its views. I am pleased to
be here today to contnbute to a discussion of a tOPIC that is of critical importance to
our financial markets, namely tile regulation of hedge funds.
In May, before a subcommittee of this panel, I presented testimony regarding the
role 1I1at hedge funds play: that is, what hedge funds do for and in our fillancial
markets. As I said then, If government addresses the quesllon of regulation of any
finanCial institution or activity Without a clear understandlllg of the place it plays in
our financial system, we run the risk of imposing unnecessary, exceSSive, or
inappropriate legislation
As we consider the regulation of hedge funds, we should keep In mind that the role
they fulfill In our financial markets is continuously evolvlllg: and In recent years it
has been evolving rapidly. Therefore, before I turn to the subject of today's hearing,
I would like to reiterate some of the key POliltS from the testimony I gave III May
2006, III which I discussed some of the characteristics of hedge funds and some of
the potential benefits and risks that they can present.
Background
Despite the fact that hedge funds are today the subject of everyday diSCUSSion in
the financial press and among pollcymakers, there IS no universally accepted
definition of a hedge fund A recent report by the International Organization of
Securities Commissions (IOSCO) on the results of a survey of the regulatory
approaches toward hedge funds of 20 IOSCO members revealed that none of the
survey respondents had a formal definition of "hedge fund" In the late '90s, 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" Though
thiS was a useful working definition for the PWG's purposes, it is limited in how
widely it can be applied, In large part because it does not distingUish hedge funds
from other forms of unregistered capital pools that are genel·ally recognized to have
distinctive features, such as private equity funds and venture capital funds. In my
May testimony I suggested that there are a number of features that can help to
distingUish fledge funds from other capital pools, Including. legal structure:
IIlvestment objective and strategy: compensation scheme: Investor base and capital
commitment: and disclosure.
As I testified In May, hedge funds have experienced dramatic growth, 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.
Current estimates
suggest that there are about 9,000 hedge funds.
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

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which the fund invests Mur:h, If 110t ZlII, of ttllS growth has been market driven, and,
as a consequence, it has upell subwct to a slC)nlflcant amount of market discipline
As hedge funds h<lve ~JrOWI1, their IllVestOi base has evolved, bllnglng IIlcreaslng
levels of professlollal ,1IlZlIYSIS to ttlP Investor side of the I'elationsilip. Each new
group of Investors has lillposeo certain forms of discipline on hedge funds, resultlllg
In ttle hedge fund m31ket becollllllC) illuch Illore "Illstitutionalizecl" as It has
developed In addltloll, slnr:e the falllJre of LOllg Term Capital Management (L TCM)
in 1998 hed~Je funo IllVestors - ClncJ ueoltors - have recognized the need for more
discipline l'egardln~J ttle IJse of leverilge and collateral, and hedge fund Investors
now demand Illore trclllsp,lrency of tllelr fund managers Therefore, while the
hedge fund market 1l,1S gl'Own dramatically in the past twenty years, there IS at least
some reason to believe tillS growtll has been subject to reasonable pllvate sector
discipline.
Hedge funds cleal'ly prOVide certalll benefits to the financial markets At the same
time, they can also put stresses on It that need attention. In my May testimony, I
discussed at length mally of the t)elleflts and potential risks that can arise from the
activities of hedge funds Hedge funds impall potential benefits both to the finarlClal
marketplace, In gener'al, as well as to Investors.
In the fillancial marketplace, hedge funds provide liquidity, price effiCiency, and risk
distribution, and contribute to tile further global integration of markets Because of
the varying strategies employed by hedge funds, they are often the Willing buyers or
sellers that prOVide additional liqUidity to finanCial markets. Hedge funds contribute
even more Significantly to marketplace liqUidity In less traditional markets. Many
hedge funds seek to create retums by targeting price inefficienCies, including wide
bid/ask spreads While thiS activity cellalilly benefits the hedge funds that are
profiting from the trades, It has the salutary effect of creating narl'Ower spreads and
more effiCient markets. Hedge funds can help rnltlgate market-Wide concentrations
of risk by transferring and distributing market risk through their willingness to be
counterpartles III derivatives trades. Today, there IS no question that hedge funds
are among the dominant participants in the re-dlstribution of market risk. In their
search for the next profit oppollunlty, hedge funds often lead the way to identifYlllg
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 pl'Ovides more chOice for investors and
greater efficiency of markets globally.
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 Investors With more choices of both Instruments and
Investment strategies. More choices allow investors the ability to diversify their
Investment portfolios, which IS a common goal of many investors. In contrast to
conventional investment vehicles employing traditional "go-long" strategies, the
fleXibility In the hedge fund structure enables strategies that attempt to produce
pOSitive retums in both bull and bear markets: that IS, pl'Ovlding opportunities for
generatlllg "alpha" or excess returns, even in thriving years, and for capital
protection (or better) In decllnlllg markets. It IS WOrtil notlllg that as the hedge fund
Industry grows and becomes more mature and IIlstitutionalized, excess retums
have become harder to find. In addition, a common technique employed by many
hedge funds attempting to generate excess retums is employing leverage, which, of
course, presents its own speCifiC set of concems.
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.
Leverage refers to the use of repurchase agreements, short positions, derivative
contracts, loans, marglll, and other forms of credit extension to amplify returns
With Increased leverage, of course, comes increased risk. As discussed by the

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PWG In its report after the L TCM fill lure, excessive leverage can greatly magnify
negative effects of market C011dlt1011S. Llilked closely with the issue of leverage and
the potential for impcllrecJ liquidity in a period of mal'ket stress is the Issue of
concentration of market positions or "crowded trades." Sometnnes referred to as
"herding," crowded trades can drlse to the extent that hedge fund managers are
Inclined to pursue the s,lIne or SIIlll131 IllVestment strategies. If numerous market
participants establish li1rge positions on the sallle Side of a trade, especially in
combillation Wltl, a higll de~lme of lever3ge, tillS concentration can contribute to a
liquidity crisIs If mal'ket condltlollS compel traders simultaneously to seek to unWind
til en' positions The risk, of course, IS market disruption and Illiquidity, possibly
exacerbating the risk of a systemic financial market crisis.
As hedge funds become larger, their valuation poliCies and procedures become
more Important to the marketplace as a wilole. Valuation IS often dependent on
complex proprietary models, but because of their proprietary nature, these models
have not been subject to broad-based scrutlllY 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 Irldustry because heclge fund adviser compensation IS tied to period returns
which. of course. requires periodiC asset valuations. With respect to OTC
settlement and clearance systems, Iledge funds as a group do not pose a greater
operational risk than any other group of market participants. However, operational
risks can be posed by certain market conditions and certain technological
conditions In certain products, particularly new products, where technological and
legal Infrastructures tend to lag product development and volume growth. These
acute "growing pallls" have developed most recently in the credit derivatives market
across a Wide spectrum of participants.
Thus, hedge funds, or any otller group of partiCipants, potentially could have a
disruptive Impact If there were concentrations of positions or attempted mass
liquidation In illiqUid markets. However, many of these issues and concerns have
been or are actively being addressed - outSide of a formal scheme of direct
regulation of hedge funds - both by pollcymakers and by private sector groups.
In ItS report 011 L TCM, the PWG cautioned that problems can arise when financial
institutions do not employ sufficient disCipline In their credit practices with
customers and counterpartles. 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.
Valuations and correlations also 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. In July 2005, the COrrigan Group issued a number of
"guidlllg prinCiples" and recommendations for all types of participants. It
recommended that 1) Investment in risk management systems should continue,
With full model testlllg and validation and Independent verification; and 2) analytlcs
should include stress testing, scenario analYSIS, and expert Judgment, With special
attention to the inputs and assumptions
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 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 alld tile potential for systemic risk In its recent "Global
Financial Stability Reporl," and member countries and regulators continue to
develop and coordinate poliCies and approaches to deal With these Issues globally.
Treasury and the PWG can contribute Significantly to these policy debates In the

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Page 4 of 5

first instance by facilitating cOlmnllnlcation In the official sector and with industry
participants and academics regal(jln~l credit risk management, concentration of
risks, valuation techniques and models, and clearance and settlement systems.
While the PWG contlllLles to cilSCUSS these Issues and formulate and coordillate
actions and plans, we are encoura~Je(1 I)y tlwse POSitive developments noted
above.
Regu/atloll of He(lue Funcls
The PWG',s POSltloll

Oil

(limet wuu/allon of hoclgo fUllc/s

In Its 1999 report on L TCM, the PWG was Illainly concerned about the systemic
risks posed by hedge fUllds alld other highly leveraged Institutions. Specifically, the
PWG was concerned that excessive and unconstrained leverage COUld, In an
episode of unusual Illarket stress, lead to a general breakdown In the functioning of
the finanCial Illarkets. Accordingly, the PWG made a series of recoillmendations
deSigned to encourage hedge funds, Iledge funds' counterpartles, and regulators to
focus on enhanCing Illarket-wide practices for counterparty risk management. A
number of the private sector IIlltlatlves I have already mentioned were initiated in
direct response to the PWG's recommendations.
One recommendation the PWG did not make, however, was for the direct
regulation of hedge funds The PWG stated that, "if further evidence emerges that
Indirect regulation of currently unregulated market participants is not working
effectively to constrain leverage," then direct regulation of hedge funds, among
other measures, "could be given further consideration to address concerns about
leverage." Even with that caveat, the PWG took care to emphasize that it believed
its recommendations "would best address concerns related to systemic risk without
the potential attendant costs of direct regulation of hedge funds." To date, the
PWG has not observed eVidence that "Indirect" methods of constraining leverage
are not working effectively.
SEC Hedge FUlld AdViser Reglstratloll Ru/e

In late 2004, the Securrtles and Exchange Commission (SEC) Issued a final rule
that reqUired hedge fund adVisers to register With the Commission, mainly out of a
perceived need to address increaSing instances of hedge fund fraud and a concern
that less sophisticated Investors were becoming Increasingly exposed to hedge
fund investments, either directly or indirectly through their pension plans. The rule
went Into effect on February 1, 2006, prompting more than 1,100 previously
unregistered hedge fund adVisers to register with the SEC.
Neither Treasury nor the PWG ever took a formal pOSition on the rule. We did work
With the SEC, however, both bilaterally and through the PWG, to make sure we
understood the SEC's rationale for their rule, and what their goals and expectations
were regarding ItS Implementation. Although we did not formally comment on the
SEC's proposed rule, we did ask the SEC to work with the Commodity Futures
Trading CommiSSion (CFTC) to aVOid potential duplicative registration requirements
for CFTC-reglstered commodity pool operators and commodity trading adVisers.
This past June, the US Court of Appeals for the D.C. Circuit ruled that the SEC's
hedge fund adViser registration rule was arbitrary in the way it redefilled the terril
"client" so as to bring hedge fund adVisers under tile registration requirements of
the Investment Advisers Act, and the court therefore vacated the rule SEC
Chairman Cox, In hiS statement on the Court's decision, expressed a very
pragmatic approach to dealing With thiS deciSion. He Iloted that the SEC will
contillue to work With the PWG as It reevaluates ItS approach to hedge fund activity
and as the SEC considers alternative courses of action. We look forward to
working with Chairman Cox and the SEC staff on tllese Issues.
Conc/uslon

Thank you again for allowing the Treasury Department to partiCipate this afternoon

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As I have mentioned, the question of the regulation of hedge funds must be
carefully consldeleci In Ilqht of the Illlport,mt lole they play in our financial markets
It IS for that reason that Treasury is eXclllllnlng In detail the Issues I have discussed
this moming, with Cl view to eVClluatlng whether the growth of hedge funds - as well
as other pllenomen3 slich ClS derlVrltlves ,md addltlol1iJ1 alternative Investments and
IllVestment pools - 110Id tile potential to change tile overall level or nature of risk In
ollr markets and flncHlclcll InstltutlOllS ThiS exarnillation Will Involve bringing key
government offiCials together to review tlleir approaches to tllese financial market
Issues. The first such Illeetlng was held last week, chaired by Assistant Secretary
of the Tl'easury Emil Henry, and Will be followed by further diSCUSSions In the
future. We are also beglniling Cl broad outreach to the financial community to help
us examine ttlese questions. As part of thiS comprehensive review chaired by the
Treasury, we will be working with the SEC - both bilaterally and through the PWG as Chairman Cox and tile Commission conSider alternative courses of aellon
followmg the D.C CIrCUit COLJI't'S recent deCision
Looking forward, we Will be focusecl on seeking to understand In the most
comprehenSive way pOSSible whether and how changes in the structure of the
fmanCial 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
dlffel'ent 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
thmk 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 tllrough Wilich we will filter the various ideas and efforts with
which we will all be grappling over the next few years,

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Page 1 of2

I" view or plllli (/1l' /-'Ut" (;(11l(,'1lI

(lI) 1171~

{Jd(/e. u()wnlr )dU Ill!' lIee Actobe0'.! Acrobat0'.! Keaaer1f<).

July 25. 2006
HP-25
A Dynamic Analysis of Permanent
Extension of the President's Tax Relief
Executive Summary
This Report presents a detailed description of Treasury's dynamic analysis of the
President's proposal to permanently extend the tax relief provisions enacted in
2001 and 2003 that are cUITently set to expire at the end of 2010. These enacted
provisions Include:
•
•
•
•
•

Lower tax rates on ordinary Income:
Lower tax rates on dividends and capital gains:
A ten-percent individual Income tax rate bracket:
Doubling of the child tax credit: and
Reducing marriage tax penalties

The purpose of the report IS to provide a more in-depth. transparent understanding
of dynamiC analYSIS. while also illustrating the pOSitive contributions the tax relief.
together With spending reductions. can be expected to continue to make to the U.S.
economy. In addition. the analYSIS shows the importance of making the tax
provIsions permanent for the US economy's long-term economic growth
Dynamic Analysis
DynamiC analysis goes beyond traditional analysis of tax policy by focusing on the
broad
economic effects in both the short and long term Simply. dynamic analysis
provides a more comprehensive and complete approach to analyzing tax policy by
including its effects on the overall size of the economy and other major
macroeconomic variables. The PreSident's FY 2007 Budget proposes to create a
diVision of dynamic analYSIS wltllin the Department of Treasury's Office of Tax
Analysis.
The Economic Benefits of Tax Relief
As eVidenced by key economic Indicators such as IIlcreased capital Investment and
Gross
Domestic Product (GOP). and strong Job growth. the PreSident's tax relief played an
important role in strengthenlllg the US economy as It was coming out of the recent
receSSion, and in the longer-term by increasing the after-tax rewards to work and
saving. Lower tax rates enable workers to keep more of their earnings. which
increases work effort and labor force partiCipation The lower tax rates also enable
innovative and risk-taking entrepreneurs to keep more of what they earn. which
further encourages their entrepreneurial activity. The lower tax rates on diVidends
and capital gains lower the cost of equity capital and reduce the tax biases against
diVidend payment. equity finance. and Investment In the corporate sector. All of
these poliCies Increase Incentives to work. save. and Invest by reducing the
distorting effects of taxes. Capital Investment and labor productivity will thus be

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Page 2 of2

Ilighel', which means IlI~lllt"r OlltPLIt ,mci living standards III the long run,
Treasul'y has concillcted lis dYI1ZllTliC analYSIS lISlllg a model that accounts for the
effects of tillS gl'eClter wOlk effolt, IIlClease In savings and investment, alld lin proved
allocation of resollrces Oil tlw size of tile ecollomy Wllile thiS model captures many
aspects of il mocjel'll eC(JIlOlllY ,Hid eCOllomlC behavior, othel's are not reflected in
tile model For eXclillple, tile Iliodel clSSlIllIes IIlat resources are fully employed In
the economy and that CClPltLlI IS OIlly sOflwwllclt mobile IIItematlonally These are
areas for futlJl'e development

REPORTS

•

Treasury Report on Dynamic AnalysiS of Permanent Tax Relief

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3/6/2007

I

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Office of Tax Analysis
U.S. Department of the Treasury

A Dynamic Analysis of Permanent Extension
of the President's Tax Relief

July 25, 2006

Executive Summary
This Report presents a detailed description of Treasury's dynamic analysis of the President's
proposal to permanently extend the tax relief provisions enacted in 200 I and 2003 that are
currently set to expire at the end of 20 I O. These enacted provisions include:
•
•
•
•
•

Lower tax rates on ordinary income;
Lower tax rates on dividends and capital gains;
A ten-percent individual income tax rate bracket;
Doubling of the child tax credit; and
Reducing marriage tax penalties.

The purpose of the report is to provide a more in-depth, transparent understanding of dynamic
analysis, while also illustrating the positive contributions the tax relief, together with spending
reductions, can be expected to continue to make to the U.S. economy. In addition, the analysis
shows the importance of making the tax provisions permanent for the U.S. economy's long-term
economic growth.

Dynamic Analvsis
Dynamic analysis goes beyond traditional analysis of tax policy by focusing on the broad
economic effects in both the short and long term. Simply, dynamic analysis provides a more
comprehensive and complete approach to analyzing tax policy by including its effects on the
overall size of the economy and other major macroeconomic variables. The President's FY 2007
Budget proposes to create a division of dynamic analysis within the Department of Treasury's
Office of Tax Analysis.

The Economic Benefits of Tax Relief
As evidenced by key economic indicators such as increased capital investment and Gross
Domestic Product (GOP), and strong job growth, the President's tax reliefplayed an important
role in strengthening the U.S. economy as it was coming out of the recent recession, and in the
longer-ternl by increasing the after-tax rewards to work and saving. Lower tax rates enable
workers to keep more of their earnings, which increases work effort and labor force
participation. The lower tax rates also enable innovative and risk-taking entrepreneurs to keep
more of what they earn, which further encourages their entrepreneurial activity. The lower tax
rates on dividends and capital gains lower the cost of equity capital and reduce the tax biases
against dividend payment, equity finance, and investment in the corporate sector. All of these
pol icies increase incentives to work, save, and invest by reducing the distorting effects of taxes.
Capital investment and labor productivity will thus be higher, which means higher output and
living standards in the long run.
Treasury has conducted its dynamic analysis using a model that accounts for the effects of this
greater work effort, increase in savings and investment, and improved allocation of resources on
the size of the economy. While this model captures many aspects of a modern economy and
economic behavior, others are not reflected in the model. For example, the model assumes that
resources are fully employed in the economy and that capital is only somewhat mobile
internationaIIy. These are areas for future development.

Different Components of Tax Relief Have Different Effects on the Economy
Treasury's dynamic analysis of the President's tax relief indicates that making the tax relief
permanent can be expected to increase the level of annual output (i.e., national income)
ultimately by about 0.7 percent. The analysis also shows separately the effects of the President's
tax relief in three parts reflecting: I) the lower tax rates on dividends and capital gains; 2) the
lower tax rates on ordinary income (i.e., the top four rate brackets); and 3) the I O-percent tax rate
bracket, higher child tax credit, and marriage penalty relief. This decomposition reveals that
these tax relief components are likely to have very different effects on future economic activity.
For example, extending just the lower tax rates on dividends and capital gains increases output in
the long run by 0.4 percent, but when the lower tax rates for the four top income tax brackets are
extended as well, output increases by a total of 1.1 percent in the long run.

Financing Tax Relief - Government Spending Reductions over Increased Tax Rates
The analysis reveals that the long-run effects of these policies depend crucially on whether they
are financed by lower spending or higher taxes in the future and are sensitive to assumptions on
underlying parameters. The issue of how, or even if, these policies need to be financed remains a
source of discussion among economists. The analysis presented here suggests these policies will
result in substantially more economic activity if they are financed by a future reduction in
government spending than if they are financed by future tax increases. If the tax reliefis
financed by future tax increases - that is, if the aggregate amount of tax relief is temporary then it may result in lower output in the long run. For that reason, the Administration has
emphasized permanence for the tax relief and spending restraint in its Budgets.

II

A Dynamic Analysis of Permanent Extension of the President's Tax Relief

1. Introduction
This Report presents a detailed description of Treasury's dynamic analysis of the President's
proposal to permanently extend the tax relief provisions enacted in 200 I and 2003 that are
currently set to expire at the end of 20 1O. These provisions include the lower tax rates on
ordinary income, the lower tax rates on dividends and capital gains, the 10-percent individual
income tax rate bracket, a doubling of the child tax credit, and a reduction in marriage tax
penalties.
Tax relief can be important when the economy is performing below its full potential, and can
increase its potential in the longer tenn. In 2003, real GOP was below its potential level and the
unemployment rate was elevated. The tax relief enacted in 200 I and 2003, together with
reductions in short-ternl interest rates by the Federal Reserve, helped stimulate economic growth
and move the economy out of the 200 I recession more quickly. Previous Treasury analysis
using the Macroeconomic Advisers macro-econometric model estimated that without the tax
relief passed in 200 I, 2002, and 2003, as many as 3 million fewer jobs would have been created
by the end of2004 and real GOP would have been as much as 3.5 to 4.0 percent lower.
Beyond this short-term economic stimulus, the President's tax relief also helps encourage
economic growth in the longer term by increasing the after-tax reward from work, saving, and
investment. The lower tax rates enable workers to keep more of their earnings, which increases
work effort and labor force participation. The lower tax rates also enable innovative and risktaking entrepreneurs to keep more of what they earn, which further encourages their
entrepreneurial activity. The lower tax rates on dividends and capital gains lower the cost of
equity capital and reduce the tax biases against dividend payment, equity finance, and investment
in the corporate sector. All of these policies improve incentives for work, saving, and investment
by reducing the distorting effects of taxes. Capital investment and labor productivity will thus be
higher, which means higher output and living standards in the long run.
The Treasury Department's dynamic analysis relies on a model that takes into account the effects
of work effort, increase in savings and investment, and improved allocation of resources on the
size of the economy. The overlapping generations (OLG) general equilibrium model used for
this analysis (described in detail in the appendix to this report) is structured to account for the
effects of changes in the effective tax rate on capital and labor income and the consequent effects
on economic growth. Representative consumers and firnls incorporate future prices into their
current period decisions of how much to save, work, and produce. Output is generated by four
production sectors, and individual level decisions of representative consumers deternline the
aggregate level of labor supply and savings in each year.
While this model captures many aspects of the economy and economic behavior, other aspects
are not reflected in the model. For example, the model ignores cyclical disruptions in the
employment of capital and labor, assuming instead that all resources in the economy are always
fully employed. The model includes a relatively simple representation of international capital
flows in which capital is only somewhat mobile internationally. There is no uncertainty in the

model and households and firms exhibit perfect foresight regarding future prices and tax rates.
These are areas for future development.
This analysis shows the likely economic effects of making the tax relief permanent. The results
indicate that the level of annual output (i.e., national income) may ultimately be higher by 0.7
percent because of the combined effects of the President's tax relief.
The analysis also shows separately the effects of the President's tax reliefin three parts
reflecting: I) the lower tax rates on dividends and capital gains; 2) the lower tax rates on
ordinary income (i.e., the top four rate brackets); and 3) the I O-percent tax rate bracket, higher
child tax credit, and marriage penalty relief. This decomposition reveals that the tax relief
components are likely to have very different effects on future economic activity. For example,
extending just the lower tax rates on dividends and capital gains increases output in the long run
by 0.4 percent, but when the lower tax rates for the four top income tax brackets are extended as
well, output increases by a total of 1.1 percent in the long run. Extending the remainder of the
tax relief - the 10 percent rate, the expansion of the child tax credit, and the reduction in
marriage penalties - stimulated economic activity during and immediately after the recession and
served other purposes, such as making the tax code more progressive. However, these elements
of the tax relief do not have positive growth effects in the longer term in ways that this type of
model can measure.
The analysis reveals that the long-run effects of these policies depend crucially on how they are
eventually financed and are sensitive to assumptions on underlying parameters. The issue of
how, or even if, these policies need to be financed remains a source of discussion among
economists. The analysis presented here suggests these policies will result in substantially more
economic activity if they are financed by a future reduction in government spending than if they
are financed by future tax increases. If the tax relief is financed by future tax increases - that is,
if the tax relief is temporary - it may well result in lower output in the long run. In effect, the
temporary tax relief must be paid back with interest through future tax increases, which implies
that future tax rates increase compared to current law. For that reason, the Administration has
emphasized permanence for the tax relief and spending restraint in its Budgets. The sensitivity
of the results to financing and parameter assumptions is described in detail below.
The remainder of this report is organized as follows. The next section describes previous work
done by Treasury that estimated the short-run economic effects of the President's tax relief.
Section 3 describes the model used in the permanence analysis in greater detail. Section 4
outlines the methodology employed in simulating the economic effects of extending the 2001
and 2003 tax relief and discusses some of the limitations of the model. Section 5 describes and
explains the results and the last section concludes.

2. Effect of the President's Tax Relief in the Near Term
The focus of this Report is on the future economic effects of permanently extending the
President's tax relief. As described in the introduction, the model used for this analysis assumes
that the economy is always performing at its potential. This assumption simplifies the model and
allows for a more detailed representation of household labor supply and savings behavior in both

2

the near term and the long run. Yet this simplification implies the model used for this report is
not able to capture the short-run stimulus that tax relief may provide when the economy is
operating below potential. Such a situation existed when the President's tax relief was passed in
2001 and 2003; real GDP was below its potential level and the unemployment rate was elevated.
The Treasury Department previously compared how the economy would have performed if there
had been no tax relief using a di fferent type of model that is designed to capture the interactions
of economic sectors as the economy fluctuates around its potential growth path. These models
attempt to account for changes in the level and growth of GDP, employment, inflation, and
interest rates. Short-run changes in monetary and fiscal policies are important determinants of
accelerations and deceleration of employment and output in these models. In this earlier
analysis, the Treasury Department used the Macroeconomic Advisers macroeconometric model
to estimate how the economy would have performed had there been no legislated fiscal stimulus
from 2001 through 2004. This analysis found that the tax relief increased employment and
output substantially above what would have occurred otherwise.
Specifically, Treasury found that, without enactment of the Economic Growth and Tax Relief
Reconciliation Act of 200 1, the Job Creation and Worker Assistance Act of 2002, and the Jobs
and Growth Tax Relief Reconciliation Act of 2003: (I) by the second quarter of 2003, the
economy would have created as many as 1.5 million fewer jobs and GDP would have been as
much as 2 percent lower, and (2) by the end of 2004, the economy would have created as many
as 3 million fewer jobs and real GDP would be as much as 3.5 to 4.0 percent lower.
Note that the analysis described in this section estimates the economic effects that the President's
tax relief has already had on the economy, assuming that interest rates followed the same path as
they did historically from 2001 forward. The remainder of the paper discusses the likely future
economic effects of making the President's tax relief permanent.

3. Model description
For the remainder of the analysis in this Report, the Treasury Department used a conventional
neoclassical growth model with overlapping generations of taxpayers developed by Tax Policy
Advisers, LLC.' In this life-cycle model, tax policy affects the incentives to work, to save and
invest, and to allocate capital among competing uses. Representative consumers and firms
incorporate future prices into their current period decisions of how much to save, work, and
produce. Output is generated by four production sectors, and individual level decisions of
representative consumers determine the aggregate level of labor supply and savings in each year.
An overview of the model follows, with important equations and further explanation provided in
the appendix.
Firm Behavior
Firm behavior is modeled for each of the four production sectors - corporate, noncorporate,
owner-occupied housing, and rental housing. In the owner-occupied housing sector, home
owners are treated as "firms" who produce housing and rent it to themselves, taking into account
I

See http://www.taxpoiicyadvisers.com.

3

the tax advantages of home ownership. Each production function takes the standard CobbDouglas form.
Firm managers choose the optimal levels of labor demand and investment to maximize the value
of the firm, or profits, in each period. Investment in each sector is determined according to the
"q" theory of investment modified to include adjustment costs. This implies that firms will
continue to invest as long as the increase in the value of the firm is greater than the after-tax cost
of investment. Firm managers explicitly calculate the time path of investment in response to a
change in the tax structure as a function of the tax-induced change in "q", which denotes the ratio
of the market value of capital assets to their replacement costs, taking into account convex costs
of adjusting the level of investment from its steady state level. Differences in the level of
depreciation allowances for tax purposes and economic depreciation are modeled explicitly, as is
the value of the existing tax basis at any point in time. The debt-to-capital ratio is assumed to be
fixed in each industry, and dividends in the corporate sector are assumed to be a fixed fraction of
after-tax corporate earnings. The model assumes the traditional view of dividend taxes, which
implies dividend taxes increase the cost of capital to firms.
Individual Behavior
The model has a conventional overlapping generations structure. All individuals in a given
2
cohort are identical, with each living for 55 years, the last 10 of which are spent in retirement.
Each individual has perfect foresight and chooses consumption (and thus saving) to maximize
lifetime utility - an aggregation of utility in each of the 55 periods of the lifecycle, discounted at
a fixed rate of time preference that is common to all individuals - subject to a lifetime budget
constraint that takes into account a hump-shaped age-wage profile, inheritances and a target
bequest. Utility in each period is a CES function of leisure and an aggregate consumption good
which is in turn an aggregation of four goods - a composite good produced by the corporate
sector, a composite good produced by the non-corporate sector, owner-occupied housing, and
rental housing. The intertemporal elasticity of substitution is assumed to be 0.35 and the
3
intratemporal substitution elasticity between goods and leisure is assumed to be 0.8. Sensitivity
to these and other parameters is considered in more detail below.
Government Behavior
The model includes a simple characterization of the Social Security program. Government
services are separable in the individual utility function and government debt is a constant fraction
of Gross National Product (GNP) in the initial steady state.

This formulation, in effect, excludes an individual's life prior to joining the labor force, but does include both
individuals' working years plus their retirement. An alternative approach to modeling the retirement decision would
be to allow the retirement age to be endogenous so that individuals could come out of retirement and rejoin the work
force in response to reform-induced changes in the after-tax wage. This potential labor supply response is precluded
by assuming a fixed retirement age.
3 See Elmendorf (1996), Engen, Gravelle, and Smetters (1997) and Altig et at. (200 I) for discussion on the plausible
range of values for these parameters. These parameter values yield a Frisch elasticity oflabor supply, which
measures the labor supply elasticity holding the marginal utility constant, equal to OA. This value is consistent with
the range of estimates reported in Browning, Hansen, and Heckman (1999).
2

4

The government finances government expenditures by collecting taxes, and issuing government
debt. The tax instruments available to the government in the initial equilibrium include the
following: (I) a corporate income tax; (2) an individual income tax with a progressive wage
income tax structure and a tax base that is adjusted for various exclusions, exemptions,
deductions and credits; and (3) constant rate capital income taxes applied at different average
rates to non-corporate business income, interest income, dividends and capital gains.
An important feature of this type of model is that a permanent reduction in taxes, as compared to
the baseline, would lead to an unsustainable accumulation of government debt relative to GNP
and the model will not converge without an offsetting change to stabilize the debt-to-GNP ratio.
In this type of mode I, the tax relief is typicall y financed by an offsetting change in taxes or
spending, that can occur in the future or contemporaneously with the initial policy change and
can take a multitude of forms. In this analysis it is assumed that the government's financing
requirement is satisfied by either cutting future government spending or raising future taxes, in
part to illustrate the sensitivity of the results to the financing assumption.
International Capital Flows
Although the focus of the model is on the U.S. domestic economy, it includes a simple
representation of international capital flows, which are assumed to respond to differences in
after-tax rates of return in the U.S. and the "rest of the world" through a constant elasticity
4
expression. This approach represents a compromise between the standard closed economy
approach and the alternative of a completely open economy in which capital is perfectly mobile
and the international return to capital is fixed. A more sophisticated modeling of the
international flows of goods and capital would be a marked improvement over the current
version of the model.

4. Methodology
In the steady state, per-capita growth in the model is equal to a constant rate of technological
change. In the initial steady state, the model's tax parameters are calibrated to match current law
average marginal effective tax rates by income source over the budget window. Simplifying
assumptions were made in order to meld the data into the stylized model. First, given the
requirement of constant tax rates in the steady state, the initial tax rates were set equal to the
average of current law rates over the period 2011-2016, when statutory rates are unchanging.
Second, the initial steady state assumes that current law polices are fiscally sustainable. That is,
tax revenues in each period are just large enough to pay for government spending and transfer
payments, including interest on the government debt, so that the government debt-to-GNP ratio
is constant. 5 The initial share of tax revenues as a percentage of GNP is set to match current law
averaged over the years 2011-2016.

This elasticity is set equal to 0.2 in the base case, which implies that international capital flows are not very
sensitive to differences in the after-tax rate of return in the U.S. compared to the rest of the world.
S Note that this approach ignores the structural fiscal imbalance of the Social Security and Medicare systems, but
this assumption seems appropriate in generating the likely independent effect of a tax change and is commonly used
in this type of analysis. For example, see Auerbach (2002).

4

5

The tax relief is decomposed into three parts to show the economic effects of each:
I. Extend the lower rates on dividends and capital gains. (Dividends and capital gains are
taxed at a top rate of 15 percent, as compared to a top rate on dividends of 39.6 percent
and for long-term gains of 20 percent in the absence of tax relief);
2. Extend the reduction in the top four ordinary individual rates. (These rates are
maintained at 25, 28, 33 and 35 percent, as compared to the rates of 28, 31, 36 and 39.6
percent that would apply beginning in 20 II under current law. The repeal of the phaseout of personal exemptions and itemized deductions [PEP and Pease provisions] is also
extended); and,
3. Extend the higher child tax credit ($1,000 per child), reduction in marriage tax penalties
(by increasing the standard deduction and increasing the size of the IS percent bracket for
joint filers), and the I O-percent tax rate bracket. 6
The percentage decline in average marginal tax rates by income source compared to current law
for the years 2011-2016 is shown in Table 1.7 Extending the lower tax rates on dividends leads
to more than a 50 percent decline in the average marginal dividend tax rate compared to current
law for the years 2011 through 2016. Extending the relief on capital gains leads to more than a
20 percent decline in the average marginal tax rate on capital gains for the same period.
Lowering ordinary rates leads to a decline in the average marginal tax rate on labor income of
5.6 percent, while the average marginal rate on small business income (income from sole
proprietorships, partnerships, and S-corporations) falls by 11.4 percent. Extending the reminder
of the tax relief has only small effects on the change in marginal tax rates. 8
Financing the Tax Relief
As discussed above, an important feature of this type of model is that tax relief must be financed
by an offsetting change in government revenues or spending to stabilize the ratio of government
debt to GNP. There are numerous possibilities for satisfying the government's intertemporal
budget constraint and two are examined in this analysis: (I) the tax relief is permanent and
future government spending is reduced, and (2) future taxes are increased. Specifically, in this
analysis, the tax relief is assumed to remain in place through the end of the I O-year budget
window (i.e., 2016), holding government spending equal to the baseline amount during this
period, and issuing additional government debt relative to the baseline to account for the decline
in tax revenues over the budget window. The tax relief is then financed by either: (1) adjusting
government consumption spending in each year after the I O-year budget window to hold the
ratio of government debt-to-GNP at the ratio that exists in the first year after the budget window
(2017), or (2) adjusting all income tax rates proportionally in each period after the budget
window to hold the government debt-to-GNP ratio equal to the value it takes in the first year

() The economic effects of the repeal of the estate tax are not included in this analysis. There is considerable
uncertainty regarding the likely behavioral responses to repealing the estate tax, and the target bequest motive used
in this model is not very flexible in capturing the range of likely responses.
7 The average marginal rates are weighted by income from that source.
8 The decline in the marginal tax rate on wages actually becomes smaller (5.1 percent decrease) when the full tax
relief is extended. This appears to be the result of more taxpayers being affected by the AMT and the longer phaseout of the child tax credit.

6

after the IO-year budget window (2017).') The first financing option is consistent with the
Administration's policy of spending restraint. The second financing option, in effect, models the
tax relief as temporary, which requires that future taxes increase enough to pay for the temporary
decline in taxes with interest.
Sensitivity to Underlying Parameter Assumptions
The results also depend on how responsive households and firnls are to changes in after-tax
prices, such as the wage rate and the interest rate. The behavioral parameters used for the base
case simulations are shown in Table 2. There are three primary parameters that affect the
responsiveness of household labor supply and savings to tax changes: the intertemporal
elasticity of substitution, the intratemporal elasticity of substitution between the composite
consumption good and leisure, and the initial share of leisure in the time endowment. The base
case simulations use values for these parameters that approximate "central tendency" estimates.
However, there is uncertainty about the exact value of these parameters and results are also
presented that consider "low" and "high" values for these parameters. 10 In addition, the degree
to which housing and non-housing goods are substitutable is adjusted. The approach taken for
this Report is to adjust the parameters as a group, rather than individually, mostly to facilitate
ease in presentation. I I This approach provides only limited information on the importance that
any given parameter would have on the results, but it provides an overall sense of the robustness
of the results and highlights the uncertainty that remains in the economics literature on the likely
responsiveness of taxpayers to changes in tax rates.
Limitations of the Model
The model used for this analysis captures many of the likely economic effects that would result
from extending the President's tax relief, including incentive effects on household labor supply
and savings, the intersectoral reallocation of capital that would result from reducing the double
taxation of corporate profits, and the crowding out of private investment that would occur by
financing the tax relief through issuing government debt. Like all economic models, this model
employs important simplifying assumptions, and other economic models, which employ different
simplifying assumptions, could yield different economic results from extending the President's
tax relief. The model used in this analysis departs from economic reality in the following ways.

Auerbach (2002) and Auerbach and Kotlikoff (1987) employ a similar approach when examining the effects of a
temporary tax decrease financed with future tax increases. The Congressional Budget Office (2004, 2006) also
makes similar financing assumptions, but the reduction in government spending (or the increase in income taxes) is
phased in over a 10-year period after the end of the I O-year budget window which allows the debt-to-GNP ratio to
rise somewhat more in the long-run.
10 The Frisch labor supply elasticity equals 0.18 under the low response parameters and 0.75 under the high response
parameters. This is consistent with the results surveyed by Browning, Hansen and Heckman (1999), and recent
papers by Ziliak and Kniesner (1999,2005) and Lee (200 I), which estimate the Frisch labor supply elasticity for
men ranges between 0.0 and 0.5. The econometric literature has generally found larger labor supply responses for
women compared to men, but there are few studies that measure the Frisch labor supply elasticity for women.
Aaronson and French (2002) suggest this value is believed to be around I. This Report assumes the Frisch labor
supply elasticity for women ranges between 0.55 and 1.25, and that women account for one-third of labor earnings.
II A similar approach is taken by Rogers (1997). For each simulation, this Report also adjusts the rate of time
preference in order to maintain the initial capital-output ratio.
<)

7

First, this model does not account for short-term deviations in output from potential GNP. This
implies that the model does not capture some of the short-run benefits of tax relief when it occurs
at a time when the economy is below its potential, which occurred with the 200 I and 2003 tax
relief. Section 2 of this Report describes a separate Treasury analysis of the effect of the
President's tax relief that includes these cyclical effects.
Second, the treatment of international capital flows is quite simple. A broader model would
employ a more sophisticated representation of these flows and would also include international
trade in goods. The limited role of international capital flows allowed in this model has only a
minor impact on the economic results in this analysis. It is unclear whether a broader model of
international trade and capital flows would lead to results that are smaller or larger in magnitude
than the results presented in this paper.
Third, as mentioned above, the model assumes that the "traditional" view of dividend taxation
holds, which implies that taxes on dividends increase the cost of investing in the corporate
sector. An alternative approach that is termed the "new" view of dividend taxation suggests that
dividend taxes are capitalized into the value of the firm, but do not affect marginal investment
12
decisions. The degree to which each view represents an accurate portrayal of the economy
remains an unsettled issue. Recent research suggests a segmented market, with some firms
behaving in a manner consistent with the traditional view and other firms behaving in a manner
consistent with the new view. 13
To the extent that the new view holds, the output gains resulting from extending the lower tax
rates on dividends found in this analysis are likely to be overstated. However, this model also
does not include a measure of other efficiency gains that would likely result from lowering the
tax rate on dividends due to reducing the distortions between debt and equity financing.
Moreover, the model assumes that the level of dividends and corporate payout decisions are held
fixed. 14 It is not clear whether a fuller model that accounts for both new view firms and these
other financial distortions would show larger or smaller effects overall.
Fourth, this model assumes perfect certainty and perfect competition. Of course, as suggested by
empirical research, some individuals save as a precaution against unforeseen events and at least a
portion of savings is not very sensitive to changes in the interest rate. Thus, the implied
elasticity of savings with respect to the after-tax interest rate in the certainty model is likely to be
higher than in a model that incorporates risk. To partially offset the lack of risk in the model,
households have a simple target bequest motive that tends to mitigate the savings response. IS On
the other hand, some models with imperfect competition find that the distortionary effects of
capital income taxation are larger than models that assume perfect competition. 16

For an excellent overview of these issues, see Zodrow (1991).
For example, see Auerbach and Hasset (2003).
14 The importance of these distortions is also diminished to the extent the new view holds.
15 It is worth noting, however, that Hurst, et al., (2005) recently estimated that precautionary savings account for less
than 10 percent of total wealth.
16 For example, see Judd (2002).
12

13

8

Fifth, this model likely overstates the economic cost of deficit finance of temporary tax relief as
the rate of return to government bonds in the model is greater than the rate of growth in GNP.'7
Historically, the average return on government debt is below the average growth rate of the
economy, which implies it might not be necessary to increase taxes in the future in order to
stabilize the government debt ratio. Some research suggests that the need to raise future tax rates
to pay for temporary tax relief only occurs with a small probability.'B
Finally, the financing assumptions used in this model are conventional for this type of analysis
and are not meant to be predictions of what policies actually would be set by this Administration
or by a future Administration or Congress. Numerous other policy prescriptions also could be
employed. If the revenue cost of the tax reliefis financed through reductions in government
spending, then the sooner those reductions begin, the smaller would be the crowding out effect
on private investment and the larger would be the increase in long-run output. If the revenue
cost of the tax relief is financed through future tax increases, then the way future taxes are
increased would greatly affect the long-run results; the more the future tax increases affect
marginal rates, the more future economic output will suffer as a consequence.

5. Description of results
As described above, results are presented assuming that the tax relief is financed either through a
future decrease in government spending or a future increase in taxes. The first year in the model
is set to be 2007. Households and firms in the tax relief simulations anticipate the future
continuation of lower tax rates after 2010 and the offsetting fiscal policy of reducing government
consumption or increasing tax rates beyond the budget window. However, the macroeconomic
effects for the first four years of the budget window (2007 -2010) are generally small as tax rates
do not change between the different simulations for those years. Results are presented in Tables
3 and 4, and discussed below for only the last six years of the budget window (2011-2016) and
for the long run.
Tax Relief Financed with Future Decrease in Government Spending
For this set of results, the model assumes that government consumption purchases (i.e.,
government spending) adjust after 10 years to stabilize the government debt-to-GNP ratio. In the
model, government consumption purchases do not enter household utility functions and only
indirectly affect household decisions through market prices.'9 Prior to 2017, the debt-to-GNP
ratio is allowed to rise, but, beginning in 2017, government purchases decline in each year to
hold the government debt ratio fixed.
Most of the economic effects of the tax relief can be explained by examining households'
budgets and prices. The tax relief leads to offsetting substitution and income effects for both
17 The model assumes that the after-tax rates of return to government bonds, pri vate bonds and corporate equity are
equal.
18 See Ball, Elmendorf, and Mankiw (1998).
19 That is, government spending is not valued by households. An alternative assumption is that valued government
spending decreases, such as government transfer payments to individuals. This would mostly eliminate the income
effects of the tax relief and lead to larger output effects. A more detailed modeling of the government sector would
also be an improvement in the model.

9

household leisure and consumption choices. The reduction in the marginal tax rates on labor and
capital income increases the price of current leisure and consumption, and households respond
by supplying more labor and savings through the substitution effect. 20 The reduction in tax
liabilities increases household after-tax wealth, and households' desire to consume more leisure
and consumption through an income effect. There is an additional income effect (termed the
human wealth effect) which supports an initial increase in labor supply and savings. This effect
arises from the increase in the after-tax interest rate that results from the lower tax on capital, but
this effect becomes less important over time as the interest rate declines as capital accumulates.
However, other effects also are at work. The lower tax rate on dividends lowers the effective tax
rate on investment in the corporate sector relative to the other sectors. The reduction in the
double tax on corporate profits results in a more even taxation of investments across production
sectors, a more efficient allocation of capital, and an increase in output.
In addition, when lower taxes on capital income are financed initially by issuing government
debt, private investment is crowded out by an increase in government bOITowing. Private saving
may increase as a result of the tax relief (and may be augmented by capital inflows from abroad),
but private investment will generally not increase by the same amount because a portion of the
increase in private saving funds the increase in government debt. When the majority of the tax
relief is on labor income, the crowding-out effect is even larger and private investment could
even decline in the short run. When government purchases decline after the budget window to
stabilize the government debt ratio, more private saving is released to fund private investment,
although some crowding out of private investment does persist in the long run.
The short-run and long-run effects for all three steps of the permanence proposals under the base
case parameters are shown in Table 3 for the two financing assumptions. The results from
lowering the dividends and capital gains rates are shown in column (1). Substitution effects
dominate when capital gains and dividends rates fall in 2011, and private savings and investment
increase in both the short run and long run. The capital stock increases by an average of 0.2
percent from 2011-2016 compared to the baseline and GNP increases by 0.1 percent. 21 The
increase in output is helped by a more efficient allocation of capital that comes from reducing the
double taxation of corporate investment. In the long run, the capital stock increases by 1.2
percent, and output increases by 0.4 percent, with a small decline in labor supply of 0.1 percent.
When reductions to the top four ordinary income tax rates are extended as well, crowding out
during the budget window is more pronounced and the average increase in the capital stock is
just 0.1 percent for the years 20 I 1 through 2016. Domestically funded investment actually
declines during this period, but capital inflows from abroad lead to an overall increase in the

The reduction in the wage tax rate leads to a shifting from leisure towards labor within a period, while the
reduction in the effective capital tax rate leads households to shift leisure and consumption into the future.
21 Real gross national product (GNP) is used as the measure of national output. Investment in the domestic economy
financed by foreigners would lead to an increase in gross domestic product (GOP), but some of this increase must be
returned to the foreign owners of the capital. GNP, which nets out the return to foreign-owned capital more
accurately reflects the resources available to U.S. citizens.
20

10

22

capital stock. Column (2) of Table 3 also indicates that labor supply increases by 0.7 percent
on average from 2011-16 leading to an increase in output of 0.7 percent during the same time
period. Domestically funded private investment increases after the budget window as the
government debt ratio is stabilized over time by reducing government spending, and in the long
run the capital stock increases by 2.3 percent, labor supply increases by 0.2 percent, and output
increases by I. I percent. 2J
In contrast, column (3) shows that when adding the remaining tax relief that increases the deficit
with only a small variation in marginal tax rates, then financing government debt more than
offsets for the increase in private savings and capital inflows from abroad so that the capital
stock declines on average by 0.3 percent from 2011-2016 compared to the initial steady-state,
and GNP is only 0.5 percent larger (due to the increase in labor supply of 0.5 percent). Once
government spending is reduced to stabilize the government debt ratio, private investment
increases so that in the long-run, the capital stock increases by 2.3 percent and output increases
by 0.7 percent.
Extending the increase in the child tax credit, the 10-percent marginal tax bracket, and the
reduction in marriage tax penalties primarily increase individual after-tax income, but result in
very little change in marginal tax rates. Households respond to this rise in income by increasing
their consumption of goods and services. Households also consume more leisure, which leads to
24
a long-run decline in labor supply of 0.3 percent through the income effect. This decline in
labor supply is the primary reason why the long-run increase in GNP is smaller than in the
previous simulation. To a lesser extent, the greater crowding out of private investment that
results from a higher government debt burden also contributes to this relative decline, as
indicated by the decline in domestically financed investment from 2.6 to 2.3 percent. The overall
capital stock shows no change between the two simulations due to an offsetting increase in
foreign capital flows.
Tax Relief Financed with Future Increase in Taxes
Under this financing assumption, all average and marginal tax rates on labor and capital income
are changed by the same proportion in each year after the I O-year budget window in order to
maintain the baseline amount of government services and to maintain the government debt-toGNP ratio at the value it takes at the end of the budget window. In effect, the tax reliefis
modeled as temporary, as it is more than reversed in the future by across-the-board, proportional
tax increases .

The rows labeled "Investment" in Table 3 and Table 4 reflect domestically funded gross investment, while the
rows labeled "Capital Stock" in Table 3 and Table 4 represent changes in the domestic capital stock regardless of
whether the new investment is funded by domestic savings or foreigners.
23 The long-run change in labor supply for the simulations in this section is small as the substitution effect resulting
from higher after-tax wages is offset by an income effect from the household's increase in lifetime wealth due to the
decline in tax payments.
24 As indicated in Table I, the decline in the average marginal tax rate on labor income is also slightly smaller under
the full extension of the tax cuts, compared to when just the top four ordinary rates are decreased. This also
contributes to the relative decline in labor supply through the substitution effect.

• 22

11

Again, much of the results can be explained in terms of income and substitution effects. But in
this case, as tax rates increase after the budget window, the substitution and income effects
discussed above work in opposite directions. Households are forward looking and many of the
transitional generations make choices that are influenced by both the tax decreases and the
following tax increases. This implies that income effects are less important determinants of
behavior during the budget window, and households respond by supplying more labor and
savings during this period relative to the simulations discussed above in which future
government consumption decreases.
The second set of results reported under column (I) in Table 3 shows the effects of financing the
lower dividends and capital gains tax rates with future increases in all income taxes. On net, in
the long run this combination of tax relief and tax increases reduces the burden of taxation on
corporate investment in favor of greater taxation of labor income and, to a lesser extent, capital
income in other sectors. This implies some increase in output resulting from a more efficient
allocation of capital across production sectors. These gains are offset to a certain extent in the
long run by the crowding out of investment due to a higher government debt ratio and the higher
tax rates needed to pay for higher interest payments on the government debt. In the long run, the
capital stock increases by 0.7 percent and GNP increases by 0.3 percent (compared to increases
of 1.2 percent and 0.4 percent, respectively, when government consumption declines).
The results in column (2) show a similar pattern. Over the budget window, households work
more and save more compared to the same tax relief with a government spending offset. Labor
supply increases on average by 0.9 percent during 2011-16, rather than 0.7 percent; the capital
stock increases by 0.6 percent, rather than 0.1 percent; and GNP increases by 0.9 percent, rather
than 0.7 percent. In the long run, the increase in tax rates needed to stabilize the government
debt ratio leads to no change in labor supply compared to an increase of 0.2 percent when
government spending declines, and the capital stock increases by 0.3 percent compared to 2.3
percent when government spending declines. GNP increases in the long-run by only 0.3 percent,
compared to the 1.1 percent increase described above.
Extending all of the tax relief and then financing with an increase in taxes after the budget
window leads to short-run effects that are again slightly larger than if a reduction in government
consumption is used to finance the revenue cost of the tax decrease. The capital stock increases
by 0.6 percent during 2011-16 and GNP increases by 0.8 percent. However, in the long run, the
combined effects of increasing marginal tax rates and crowding out lead to a decline in labor
supply (0.8 percent), capital (1.8 percent) and GNP (0.9 percent).
Sensitivity Analysis
This section reports the macroeconomic results of the same tax changes and financing
assumptions described above with different values for certain parameters that represent "low"
and "high" levels of responsiveness.
Lowering the intertemporal elasticity of substitution reduces the degree to which households are
willing to substitute consumption and leisure across time, which leads to a lower savings supply
response to a decrease in capital taxes. If only dividends and capital gains tax rates are lowered

12

and financed by future reductions in government spending, the capital stock increases by 0.9
percent in the long-run using the lower parameter values, compared to a 1.2 percent increase
using the base case parameters. In the long run, iflower tax rates on dividends and capital gains
are extended and financed by reductions in future government spending, GNP increases by 0.3
percent using low parameter values, and by 0.5 percent using the high parameter values.
The choice of parameter values has little influence on the long-run increase in GNP when using
future income tax increases to finance extensions of the lower rates on dividends and capital
gains. For the low parameter values, GN P increases by 0.2 percent in the long run and for the
high parameter values, GNP increases by 0.3 percent, as seen in column (\) of Table 4. The
small difference is primarily the result of the parameters having offsetting effects. Lowering the
intertemporal elasticity of substitution lowers the savings response, but lowering the
intratemporal elasticity of substitution and the initial leisure share of the time endowment
dampens the labor supply response and labor supply does not decline as much when future tax
rates are increased.
The choice of parameter values has a greater influence when extensions of the lower ordinary tax
rates for the top four individual brackets are added to the lower tax rates on dividends and capital
gains. The long-run increase in GNP when the tax relief is financed by reducing future
government spending ranges from 0.4 percent using the low responsiveness parameters to 1.6
percent using the high responsiveness parameters. When the tax relief is financed by increases in
future tax rates, then GNP in the long-run falls by 0.1 percent under the low response parameters
and increases by 0.6 percent under the high response parameters.
Similarly, when all of the tax relief is extended and financed by the reduction in future
government spending, then long-run GNP increases by only 0.1 percent in the low response case
and by 1.2 percent in the high response case. However, when using future income tax increases
to pay for the tax relief, then, in both the low response and the high response case, GNP falls by
0.9 percent in the long run. Again, this is the result of lower behavioral response parameters
working in offsetting ways when income taxes are raised. Lower intertemporal and
intratemporal elasticity of substitutions imply a smaller labor supply response during the budget
window and a higher debt-to-GNP ratio at the end of the window which results in larger
crowding out effects. This leads to a large decrease in the capital stock (3.6 percent) in the long
run. However, the lower labor supply response results in a reduction in labor supply of only 0.4
percent in the long run as future income taxes are increased. In contrast, under the higher
response parameter values, the capital stock falls by only 1.3 percent, but labor supply falls by
1.1 percent as labor supply is more sensitive to the long-run increase in marginal tax rates on
labor.

6. Conclusion
The analysis presented in the paper suggests that permanently extending the President's tax relief
enacted in 2001 and 2003 likely would lead to a long-run increase in the capital stock and an
increase in national output in both the short run and the long run. If the revenue cost of that tax
relief is offset by reducing future government spending, the increase in output is likely be about
0.7 percent under plausible assumptions. If, instead, the tax relief is extended only through the

13

end of the budget window (i.e., it is temporary), the tax relief would increase national output in
the short run, but long-run output would decline as future tax rates increase.
The analysis also suggests that if only the portions of the President's tax relief that primarily
reduce marginal tax rates are extended (i.e., the lower rates on dividends, capital gains and the
top four ordinary income brackets), it is likely that output would increase regardless of whether
the revenue cost of the relief is financed through a future reduction in government spending or a
future increase in tax rates, although the increase would be considerably larger if government
consumption is reduced.

14

References
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when Hours and Wages are Jointly Determined." Federal Reserve Bank o.lChicago WP
2002-22.
Altig, David, Alan Auerbach, Laurence Kotlikoff, Kent Smetters and Jan Walliser. 200\.
"Simulating Fundamental Tax Reform in the United States." American Economic Review
91 :574-595.
Auerbach, Alan. 2002. "The Bush Tax Cut and National Saving." National Tax Journal 55:387407.
Auerbach, Alan. 1996. "Tax Reform, Capital Allocation, Efficiency, and Growth," in Economic
EfFects o.lFundamental Tax Reform edited by Henry J. Aaron and William Gale
(Brookings Institution Press: Washington, DC): 29-73.
Auerbach, Alan and Kevin A. Hasset. 2003. "On the Marginal Source of Investment Funds."
Journal of Public Economics 87:205-232.
Auerbach, Alan J. and Laurence J. Kotlikoff. 1987. Dynamic Fiscal Policy (Cambridge
University Press: Cambridge).
Ball, Laurence, Douglas W. Elmendorf and N. Gregory Mankiw. 1998. "The Deficit Gamble."
Journal of Money, Credit and Banking 30(4):699-720.
Bernheim, B. Douglas. 2002. "Taxation and Saving." in Handbook o.l Public Economics, Volume
3 edited by Alan Auerbach and Martin Feldstein (Elsevier Science Publishers:
Amsterdam).
Browning, Martin, Lars Peter Hansen, and James J. Heckman. 1999. "Micro Data and General
Equilibrium Models." in Handbook of Macroeconomics, Volume IA edited by John
Taylor and Michael Woodford (Elsevier: New York).
Congressional Budget Office. 2004. "Macroeconomic Analysis of a 10 Percent Cut in Income
Tax Rates," Congressional Budget Office Technical Paper Series 2004-07.
Congressional Budget Office. 2006. An Analysis of the Presidellt 's BudgetGlY Proposals for
Fiscal Year 2007.
Cummins, Jason G., Kevin A. Hasset and R. Glenn Hubbard. 1994. "A Reconsideration of
Investment Behavior Using Tax Reforms as Natural Experiments." Brookings Papers on
Economic Activity 2: 1-74.
Diamond, John and George R. Zodrow, 2005. "Description of the Tax Policy Advisers General
Equilibrium Model," manuscript, Rice University.

15

Elmendorf, Douglas W. 1996. "The Effect of Interest-Rate Changes on Household Saving and
Consumption: A Survey." Finance and Economics Discussion Series No. 1996-27 Board
of Governors of the Federal Reserve System.
Engen, Eric, Jane Gravelle and Kent Smetters. 1997. "Dynamic Tax Models: Why they do the
things they do." National Tax Joumal 50:657-6R2.
Fullerton, Don and Diane Lim Rogers. 1993. rVho Bears the Li/etime Tax Burden? (Washington,
D.C.: The Brookings Institution).
Goulder, Lawrence H. 1989. "Tax Policy, Housing Prices and Housing Investment." Regional
Science and Urban Ecol1omics 19:28 1-304.
Goulder, Lawrence H. and Lawrence H. Summers. 1989. "Tax Policy, Asset Prices and Growth:
A General Equilibrium Approach." Journal o/Public Economics 38:265-296.
Goulder, Lawrence H., John Shoven and John Whalley. 1983. "Domestic Tax Policy and the
Foreign Sector: The Importance of Alternative Foreign Sector Forn1Ulations to Results
from a General Equilibrium Tax Analysis Model." in Simulation Methods in Tax Policy
Ana~vsis, edited by Martin Feldstein (Chicago: University of Chicago Press).
Hayashi, Fumio. 1982. "Tobin's Marginal q and Average q: A neoclassical Interpretation."
Econometrica 50:213-224.
Hurst, Erik, Annamaria Lusardi, Arthur Kennickell, and Francisco Torralba. 2005.
"Precautionary Savings and the Importance of Business Owners." National Bureau
Economic Research Working Paper 11731.

0/

Judd, Kenneth L. 2002. "Capital Income Taxation with Imperfect Competition." American
Economic Review 92:417-421.
Keuschnigg, Christian. 1990. "Corporate Taxation and Growth: A Dynamic General
Equilibrium Simulation Study," in Johann K. Brunner and Hans-Georg Petersen, eds.
Simulation Models in Tax and Transfer Policy (Campus Verlag) 245-78.
Lee, Chul-In. 2001. "Finite Sample Bias in IV Estimation of Intertemporal Supply Models: Is
the Intertemporal Substitution Elasticity Really Small?" Revie,v o/Economics and
Statistics 83(4):638-646.
Muthitacharoen, Athiphat and George R. Zodrow, forthcoming. "State and Local Taxation of
Business Property: A Small Open Economy Perspective," Proceedings 0/ the NinetyEighth Annual C01!ference on TaxatiplI, National Tax Association.
Rogers, Diane Lim. 1997. "Assessing the Effects of Fundamental Tax Reform With the
Fullerton-Rogers General Equilibrium Model," in Joint COJllmittee on Taxation Tax
Modeling Project and 1997 Tax Symposium Papers (JCS-21-97), pp. 49-82.

16

Ziliak, James P. and Thomas J. Kniesncr. 1999. "Estimating Life-Cycle Labor-Supply Tax
Effects." Journal a/Political ECOIlOIIIY 107(2):326-359.
Ziliak, James P. and Thomas J. Kniesner. 2005. "The Effect of Income Taxation on
Consumption and Labor Supply." Journal a/Labor Ecollomics 23(4):769-796.
Zodrow, George R. 1991. "On the 'Traditional' and 'New' Views of Dividend Taxation."
National Tax Journal 44(4):497-509.

17

Table 1
Average Percentage Change in Average Marginal Tax Rates by Income Source Compared to Current
Law for Years 2011-2016
(1 )
Lower Dividends and
Capital Gains Tax Rates

0.0%
Wages
-52.8%
Dividends
-21.0%
Capital Gains
0.0%
Interest
0.0%
Business IncomeDepartment of the Treasury
Office of Tax Analysis

(2)
(1) Plus Lower Top 4
Ordinary Rates
-5.6%
-52.9%
-23.3%
-7.1%
-11.4%

(3)
(2) Plus Remaining Tax
Cut Extensions

-5.1%
-54.1%
-23.7%
-8.2%
-12.1%

• Includes income from IRS Form 1040 Schedules C. E and F

18

Table 2
Model Parameters
Baseline

Low

High

Intertemporal sUbstitution elasticity

0.35

0.20

0.50

Intratemporal substitution elasticity (between leisure and goods)

0.80

0.50

1.00

Leisure share of time endowment

0.40

0.30

0.50

0.001

-0.055

0.024

Elasticity of substitution between housing and non-housing good

1.00

0.50

1.50

International capital flow elasticity

0.20

0.20

0.20

Population growth rate

0.01

0.01

0.01

Technological growth rate

0.01

0.01

0.01

Adjustment cost parameter

5.00

5.00

5.00

Capital income share

0.34

0.34

0.34

Capital/output ratio

2.29

2.29

2.29

Rate of time preference*

Department of the Treasury
Office of Tax Analysis
*The rate of time preference was adjusted to maintain the initial capital-output ratio

19

Table 3
Macroeconomic Effects of Extending The 2001 and 2003 Tax Cuts with Base Case Parameter Values:
Percentage Change from Initial Steady-State Values
(1 )
Lower Dividends and
Capital Gains Tax
Rates
2011-2016

Long-run

(2)

(3)

(1) Plus Lower Top 4
Ordinary Rates

(2) Plus Remaining
Tax Cut Extensions

2011-2016

Long-run

2011-2016

Long-run

0.7%

Base Simulation'
Financed by Decreasing Future Government Consumption
Real GNP

0.1%

0.4%

0.7%

1.1%

0.5%

Capital Stock

0.2%

12%

0.1%

2.3%

-0.3%

2.3%

Labor Supply

00%

-0.1%

0.7%

0.2%

0.5%

-0.3%

Consumption

0.1%

0.6%

1.1%

2.5%

1.3%

3.5%

Investment

0.5%

1.6%

-0.5%

2.6%

-3.0%

2.3%

Financed by Increasing Future Income Taxes
Real GNP

0.2%

0.3%

0.9%

0.3%

0.8%

-0.9%

Capital Stock

0.3%

0.7%

0.6%

0.3%

0.6%

-1.8%

Labor Supply

0.1%

-0.1%

0.9%

0.0%

0.7%

-0.8%

Consumption

0.0%

0.1%

0.7%

0.4%

0.5%

-0.7%

11%

2.1%

0.5%

1.8%

-2.0%

Investment

1.1%

Department of the Treasury
Office of Tax Analysis
• Assumes the U.S is a large open economy with a simple representation of limited international capital flows

20

Table 4
Macroeconomic Effects of Extending The 2001 and 2003 Tax Cuts with Low and High Degree of
Responsiveness: Percentage Change from Initial Steady-State Values*
(1 )
Lower Dividends and
Capital Gains Tax
Rates
2011-2016

Long-run

(2)

(3)

(1) Plus Lower Top 4
Ordinari Rates

(2) Plus Remaining
Tax Cut Extensions

2011-2016

Long-run

2011-2016

Long-run

0.1%

Low Responsiveness
Financed by Decreasing Future Government Consumption
Real GNP

0.1%

0.3%

0.3%

0.4%

0.1%

Capital Stock

0.0%

0.9%

-0.4%

0.8%

-1.1%

0.6%

Labor Supply

0.0%

-0.1%

0.1%

-0.3%

-0.1%

-0.7%

0.3%

0.7%

1.5%

2.9%

1.9%

4.0%

-0.3%

11%

-4.4%

0.2%

-7.8%

-0.5%

-0.9%

Consumption
Investment

Financed by Increasing Future Income Taxes
Real GNP

0.1%

0.2%

0.5%

-0.1%

0.4%

Capital Stock

0.2%

0.4%

0.3%

-1.6%

0.3%

-3.6%

Labor Supply

0.0%

-0.1%

0.4%

-0.1%

0.2%

-0.4%

Consumption

0.0%

0.2%

0.6%

0.5%

0.5%

0.0%

Investment

0.7%

0.6%

0.4%

-2.4%

0.0%

-5.3%

High Responsiveness
Financed by Decreasing Future Government Consumption
Real GNP

0.2%

0.5%

1.1%

1.6%

0.9%

1.2%

Capital Stock

0.2%

1.3%

0.5%

3.1%

0.2%

3.1%

Labor Supply

0.1%

0.0%

1.3%

0.7%

1.1%

0.1%

Consumption

0.0%

0.6%

1.2%

2.7%

1.3%

3.4%

Investment

1.0%

1.8%

1.4%

3.6%

-0.2%

3.4%

Financed by Increasing Future Income Taxes
Real GNP

0.2%

0.3%

1.3%

0.6%

1.1%

-0.9%

Capital Stock

0.3%

0.8%

0.8%

0.9%

0.8%

-1.3%

Labor Supply

0.1%

-0.1%

1.4%

0.2%

11%

-1.1%

Consumption

0.0%

0.1%

0.9%

0.5%

0.7%

-11%

Investment

1.3%

1.3%

3.1%

1.4%

2.9%

-1.1%

Department of the Treasury
Office of Tax Analysis
* Assumes the US. is a large open economy with a simple representation of limited international capital fiows

21

Appendix: Description of the Tax Policy Advisers OLG Model
The model has four production sectors - owner-occupied housing, rental housing, non-corporate
non-housing goods and services, and a corporate non-housing goods and services sector. The
time path of investment demands in all three sectors is modeled explicitly, taking into account
capital stock adjustment costs. On the consumption side, the current tax advantage of owneroccupied housing relative to other assets is taken into account in modeling the demands for the
four goods. This section outlines the basic structure of the model, which combines various
features from similar and well-known models constructed by Auerbach and Kotlikoff (1987),
Goulder and Summers (1989), Goulder ( 1n9), Keuschnigg (1990) and Fullerton and Rogers
(1993), with the time path of investment in each production sector calculated to maximize firm
value in the presence of convex (quadratic) adjustment costs, following Hayashi (1982). The full
details of the model are provided in Diamond and Zodrow (2005).

The Corporate and Non-Corporate Non-Housing Production Sector

In each period s, firms in the corporate and non-corporate production sectors produce output
( X, ), which includes all non-housing goods and services, using capital K;\ and labor (' using
a CES production function with an elasticity of substitution in production

(Jx

and a capital share

parameter a\. Firms are assumed to choose the time path of investment to maximize the present
value of firm profits or, equivalently, maximize firm value Vx ' net of all taxes. Total taxes in
the corporate and non-corporate production sectors in period s, are

where T,,:' is the tax rate on business income in sector X,
W,

p;'

is the price of the good in sector X,

is the wage rate, 1;\ is gross investment, cP~\' are (deductible) adjustment costs per unit of

investment, i, is the before-tax interest rate, B;I( is total indebtedness,
purposes,

K;: is the remaining tax basis of the capital stock,

r;;:

0;:' is depreciation for tax

is the property tax rate in sector

X, with property taxes assumed to be fully deductible against the business income tax, and
(1FT) is one under the income tax (consumption tax) and zero otherwise.

25

lIT

Following Goulder

and Summers (1989) and Cummins, Hassett and Hubbard (1994), the adjustment cost function
per unit of investment is assumed to be a quadratic function of gross investment per unit of
capital

25 That is, depreciation and interest expense are deductible under an income tax, while expensing is allowed under a
consumption tax with no interest deductions, The property tax on businesses is treated as a lax on capital rather than
a benefit tax (Muthitacharoen and Zodrow, forthcoming),

22

where /3\ is the parameter that determines the level of adjustment costs and p\ is set so that
adjustment costs are zero in the steady state.
Assuming firms do not make any financial investments, total net cash receipts, including net new
bonds issued, BN,' , and net new shares issued (new equity investment in the non-corporate
sector) /IN,\ , must either be used to finance new investments (including adjustment costs) or
distributed to shareholders

where DIV,\ is the dividend payout in sector X. Each firm is assumed to maintain a fixed
debt/asset ratio b ' and payout a constant fraction of earnings after taxes and depreciation (the
non-corporate fiml distributes all net income) in each period. This implies that new investments
in the corporate sector are financed with debt and new share issues ifretained earnings do not
supply enough equity to finance the desired level of investment. New investments in the noncorporate sector are financed with debt and new equity investments since there are no retained
earnings in this sector.
The model assumes individual level arbitrage, which implies that the after-tax return to bonds
must equal the after-tax return received by the owners of the firm, or

(1 - f X).
I

e

he'

+(I-fg' )(VX
_V x -VNX)
( l-f<is )DIVX
_
e'
HI
s
.
,
S

e'

V.\
s

where

fis

is the average marginal personal income tax rate on interest income,

marginal tax rate on dividends,
gains

(V,':I - v,x - VN~\" ).

fg,

f<is

is the average

is the average effective annual accrual tax rate on capital

Solving this expression for V,X, subject to the transversality condition

requiring a finite value of the firm, yields

V;'i"

=I

X'

ll=S

[(1- f )/(1- T
II

<iu

n[ +
I

)]

x

DIV - VN\

gil

(1- Tiu )ill / (I -

II

II

,

T gil) ]

That is, the value of the firm in the composite good sector equals the present value of all future
net distributions to the owners of the firm. The time path of investment that maximizes this
expression in the presence of adjustment costs is

23

where q:~1 is shadow price of additional capital (commonly referred to as 'marginal q' which
equals the ratio of the market value of a marginal unit of capital to its replacement cost), n~1 is a
weighted average of the dividend and capital gains tax rates divided by one minus the capital
gains tax rate, and Z'~I is the tax savings from accelerated depreciation allowances on future
investments.
The relationship between 'marginal q' and 'average q' (denoted as
VI - Xl
I'
,I '
q" = ' KI ' =Q,
.\

Q:\ ) is

X,X
KI
.\

where X,x is the value of future depreciation deductions on the existing stock of capital
used in the production of thee good in sector X.

The Owner-Occupied and Rental Housing Production Sectors
Housing is produced in the owner-occupied and rental housing production sectors where,
following Goulder and Summers (1989) and Goulder (1989), rental housing is produced by noncorporate landlords and owner-occupied housing is produced by the owners. The technology
used in the production of rental housing ( R, ) and owner-occupied housing ( 0, ) is assumed to be
identical - capital and labor combined in a CES production function with an elasticity of
substitution in production of O'if and a capital share parameter of alf .26 Landlords and owneroccupiers are also are assumed to choose time paths of investment to maximize the equivalent of
firm value, net of total taxes.
In the case of the rental housing sector, the firm is modeled as a non-corporate firm. This
implies that landlords are taxed at the individual level, so total taxes paid are

where r: is the average marginal tax rate applied to rental housing income,27

IJl

is annual

maintenance expenditures per unit of rental housing capital, and the definitions of all other
variables are analogous to those in the composite good production sector. Solving the cash flow
equation in the rental housing sector for after-tax rents received by landlords S,R yields

2(, Thus, the producer prices of rental and owner-occupied housing services are identical. However, rental and
owner-occupied housing services are not perfect substitutes, so that the mix of rental and owner-occupied housing
services changes along the transition path to a new equilibrium.
27 The tax rate on rental housing income is a weighted average of the non-corporate tax rate on landlord profits and
the corporate tax rate. The weight is determined by the share of rental housing produced in the corporate sector,
which is equal to 10 percent.

24

where E,II is net new equity invested by landlords in the rental housing sector. Individual
arbitrage in this case implies

( I-r)i
IS

SII+(I-r

= .,

g'

)(VII -VII-Ell)

.\

HI"

VR
S

which can be solved for the value of the rental housing firm

VII

.,

= I"

[I/(I-r

)JSII-E I

gil'

"~sn" [I+(I-r

,

)i/(I-rgil )]

111.\

The time path of investment that maximizes this expression in the presence of adjustment costs is

The expression for relationship between 'marginal q' and 'average q' in the rental housing sector
is analogous to that in the composite good sector.
By comparison, in the owner-occupied housing sector, since imputed rents are untaxed and
maintenance expenditures are not deductible while mortgage interest and property taxes are
deductible, total taxes are

where z s is the fraction of individuals who are itemizers. The flow of (untaxed) imputed rents to
owner-occupIers IS

The expressions for individual level arbitrage and firm value are analogous to those in the rental
housing sector, and investment in the owner-occupied sector is

The expression for relationship between 'marginal q' and 'average q' in the owner-occupied
housing sector is analogous to that in the composite good sector.

25

Individual Behavior
On the individual side, the model has a dynamic overlapping generations framework with fiftyfive generations alive at each point in time. There is a representative individual for each
generation, who has an economic life span (which begins upon entry into the work force) of
fifty-five years, with the first forty-five of those years spent working, and the last ten spent in
retirement. Individual tastes are identical so that differences in behavior across generations are
due solely to differences in lifetime budget constraints. An individual accumulates assets from
the time of "economic birth" that are used to finance both consumption over the life cycle,
especially during the retirement period, and the making of bequests. The model follows
Fullerton and Rogers (1993) in including a relatively primitive "target model" of bequests, with
the real values of bequests assumed to be fixed and thus unaffected by changes in economic
conditions, including changes in income.
At any point in time s, the consumer maximizes rest-of-life utility LU, subject to a lifetime
budget constraint that requires the present value of lifetime wealth including inheritances to
equal the present value of lifetime consumption including bequests. In particular, an individual
of age a at time s = t chooses the time path of consumption of an aggregate consumption good
and leisure in each period s to maximize rest-of-life utility
(J

LU = S

(J -

I+S4-lI U (a)(l-~)

L

I s~1

---,,--s- (

1+ p ),-1

'

where (J is the intertemporal elasticity of substitution, p is the pure rate of time preference, and
U ,(a) is assumed to be a CES function of consumption of the aggregate consumption good and
leisure in period s with an intratemporal elasticity of [; and a leisure share parameter of aE • The
aggregate consumption good is modeled as a CES function of the composite good and aggregate
housing services (including a minimum purchase requirement for both goods), with aggregate
housing services in tum modeled as CES function of owner-occupied and rental housing
services. In addition, as described in detail in Diamond and Zodrow (2005), the model includes
a simple social security system, government purchases of the composite good, transfer payments,
a hump-backed wage profile over the life cycle, a progressive tax on wage income, and constant
average marginal tax rates applied to interest income, dividends, and capital gains. The
progressive labor tax uses a quadratic approximation to average and marginal tax rates similar to
the method used by Auerbach and Kotlikoff (1987).

International capital flows
Although the focus of the model is on the U.S. domestic economy, it includes a simple
representation of international capital flows, which are assumed to respond to differences in
after-tax rates of return in the US and the "rest of the world." This approach represents a
compromise between the standard closed economy approach and the alternative of a completely
open economy in which international capital is perfectly mobile and the international return to

26

capital is fixed. Following Goulder, Shoven and Whalley (1983), capital imports (or exports) in
period s are governed by the constant elasticity expression

K:' = ( ,;(,.1 )':'

K" -

Kdl'

r '"

where K" is the fixed rest-of-the-world capital stock,2X ,." is the fixed rest-of-the-world return
to capital,

K:-

,;LS is the return after taxes to capital in the

US (given the fixed debt-asset ratio of b ),

is foreign exports of capital to the US in period s, and

EX

is a constant (positive) elasticity

that determines the extent of international capital flows in the model. Thus, foreign exports of
capital to the US are

" )Eh']
KFs = K"' 1- -','[ ( us
r

For example, if

l;uS

\

> ,." as a result of the reform, then the US has positive capital imports in

period s (K; > 0).
Capital imports are treated as perfect substitutes for domestic capital. Given the level of capital
imports in each period, the model is closed simply by assuming that the returns, after US taxes,
to foreign capital are included in the aggregate demand for the corporate good and non-corporate
goods, in fixed proportions equal to the rate of these two goods in the initial equilibrium. This
approach effectively implies that the US is renting capital services from abroad in each period,
with foreign capital owners spending an amount equal to their after-tax rents on the two US
composite goods so that aggregate demand for the goods equal aggregate supplies for those
goods. There is no additional international trade in goods or services in the current version of the
model.

Market Equilibrium
All markets are assumed to be perfectly competitive. Market equilibrium in the model requires
that total consumer demand, obtained by aggregating the demands of each of the 55 generations
alive at any point in time, must equal aggregate supply in each of the four production sectors. In
addition, factor demands must equal factor supplies in the labor and capital markets, the total
amounts of debt and equity held as individual wealth must equal firm stocks of debt and equity,
the government is allowed to finance government spending with tax revenues and government
bonds as long as the debt to GNP ratio is constant in the long run, and both individual and firm
expectations regarding the time paths of future prices must be satisfied in equilibrium.

W

Note that K is fixed within a period, but must increase between each period at a rate equal to the growth rate of
the US economy so that a long run equilibrium can be attained.

28

27

Page I of I

July 25, 2006
HP-26

Treasury, HUD Hold Conference to Advance Homeownership
US Treasury Deputy Assistant Secretary for Fillancial Education Dan lannicola, Jr,
will give remarks 011 IIlcreaslng tlOmeownershlp tomorrow at a roundtable
discussion hosted by the Department of Housing and Urban Development. Tilis IS
the first of a series of Illeetlllgs highlighting successful partnerships which
encourage fillancial education to advance homeownership, as described In the
Financial Literacy and Educatlorl Commission's national strategy
The Treasury Department and twenty other agencies and departments In the
Financial Literacy and Educatloll Commission released a strategy to Improve
financial literacy in America earlier this year, The plan, titled Taking Ownership of
the Future The National Strategy for Financial literacy, is available In English and
Spanish at MyMoney,gov

Who
Deputy Assistant Secretary for Financial Education
Dan lannicola, Jr,
What
Remarks on the Financial Literacy and Education Commission's Role
In AdvanCing Homeownershlp
When
Wednesday, July 26,10:00 a,m, (EDT)
Where
US Department of Housing and Urban Development
Departmental Conference Room
451 Seventh Street, SW
Washington, DC

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Page I of2

July 25, 2006
2006-7 -25-17 -32-56-8655
U.S. International Reserve Position
The Treasury Department toda y released US reserve asset s data for the latest week . As indicated in this table, U.S res erve assets
totaled $67,451 Illillion as of til e end of ttlat week, compared to $67,330 million as of the end of the prior week.
I. Official U.S. Reserve Assets (m US milliolls)
July 14, 2006
[I
TOTAL.I

I

G Foreign Cu rrency Reserves 1

laSecurities

1/

II

67 ,330
Euro
11.827

I

Of which . issuer IJeadquallereci in the US

I

Yen

II
II

10,890

July 21, 2006

II
II

I
I
I

I

I

67,451

TOTAL

Euro

[

Yen

22,7 17

11 ,877

I

10,894

I

0

II

TOTAL

II
II

22 ,771

I

I

0

Ib Total deposits with
11,766

Ibi Ot/ler central banks and BIS

5,315

II

17,081

11.813

II

5,316

17,129

Ib ii. Banks headquartered in th e US .

II

0

II

0

Ib ii Of WhiCh, banks located abroad

II

0

II

0

Ib.lli Banks headquartered o utside the US.

Ibiii Of WhiCh , banks located in the U.S.

[2

IMF Reserve Position 2

13 Special

Drawlllg Rights (SDRs) 2

14 Gold Stock 3
15. Oth er Reserve Asset s

I

0

I

0

I

0

I
I
I

7,891

7,900

8,601

8,61 1

I
I

II

II

[

0

11,041

I

11 ,041

0

II

0

"
II. Predetermined Short-Term Drains on Foreign Currency Assets
July 14, 2006

II

I

I

1, Foreig n currency loan s and securities

Euro

[I

II
II

Yen

July 21, 2006

II

II

TOTAL

II

II

0

II

Euro

II

Yen

I[

I

II

TOTAL

I[

0

I

2, Aggregate short and long positions in forwards and future s in foreign currencie s vis-a-vis th e US dollar:

[2a. Short positIOns
12.b. Long pOSitions
13. Other

II
II
II

I[r---------,

II

I

0

II
II

II
II

0
0

II

II

II

0

II

II

II

0

II

II

II

0

I

I
I

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

II

"
http://www.tr~as.gov/presslreleasesI20067251732568655 .h tm

Yen

"

"

July 21, 2006
TOTAL

Euro

"
"

Yen

"

TOTAL

II

3/6/2007

Page 2 of2

1 Contingent liabilities in fOI'eign currency
1a Collateral guarantees on debt due wltllll1 1
year
11.b .

Other contingent liabilities

2. Fmelgn currency securities with embedded
options
3. Undrawn. unconditional credit lines
1

I

II

I

I

I Heaciquartered

If)

the US

3.c. With banks anti other (rnClnClallllstitu/lolls
I Headquartered outsrde the US
4 Aggregate shmt and long positions of options
in fmelgn

Short positrons

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

14 b

Long posrtlOns

II

II

II

II

II

I

0

I
I

I

I
I

1

0

"
1

I

II

I

"II

II"

0

I
"
II"

"
II"

I

"

"II

"
"
"II

Icurrencles vis-a-vis the US dollar

I.) a

II

II

3a With ol/ler central ban/<s
3.b. Wltll banks anci other (milnelal mstilutlons

II

"

"I

II"

"

I
II

0

I

0

I

"
"
"
II
"

I
I

I

II"
0

0

4b1 Bought calls

II"

II"

I
I

II

II

I

II

1

"

4b2 Written puts

1

0

"
"

"

I
II

"

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. Fmelgn Currency Reserves for the latest week may be subject to revISion. Foreign Currency
Reserves for the prior week are final
21 The items. "2. IMF Reserve Position" and "3 Special DraWing Rights (SDRs)." are based on data provided by the IMF and are
valued In dollar terms at the official SDRldollar exchange rate for the reporting date. The entries for the latest week reflect any
necessary adjustments. including revaluation. by the U.S. Treasury to IMF data for the prior month end.

31 Gold stock is valued monthly at $422222 per fine troy ounce.

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Page 1 of 1

July 26, 2006
HP-27
Treasury Secretary Paulson to Deliver First Speech in NYC
Washington. D.C. --Treasury Secretary Henry M. Paulson will deliver his first
speech as Secl'etary in New York next week, on Tuesday, August 1, at the
Columbia Business School The speech will focus on the outlook and challenges for
the US and global economies
While in New York, the Secretal'y will also VISit the New York Stock Exchange and
NASDAQ's Stock Market. He'll meet with business leaders at both stops to discuss
current econOllllC cOlldltlons.
What
NYSE Floor Tour
When
Tuesday, August 1, 10 a.m (EDT)
Where
11 Wall Street, New York, NY
Contact
Allison Circle, 212-656-5717 or 646-938-6533, acircle@nyse.com
What
Remarks at the Columbia Business School
When
Tuesday, August 1, 1130 a.m. (EDT)
Where
116th and Broadway, New York, NY(Bullding and roolll number TBA.)
Contact
Jane Trombley or Keshla Mark at (212) 854-2747
Note
Space is limited - media should RSVP by July 28.
What
NASDAQ Closing Bell Ceremony
When
Tuesday, August 1, 4 p.m (EDT)
Where
43rd Street and Broadway, Times Square, New York, NY
Contact
Silvia Davl, 646-441-5014, silvia.davi@nasdaq.com
Note
Media should RSVP.

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Page I of I

July 27, 2006
HP-28

US Treasurer to Visit
TX Mexican-American Chambers of Commerce

us. Treasurer Anna Escobedo Cabral will speak before the Texas Association of
Mexican-American Chambers of Commerce on Friday at the organization's 31st
annual Convention and Business Expo in EI Paso, Texas. The Treasurer will
discuss Issues faclflg t~le Hispanic comlllunity Includlflg economic growtll, financial
education and 1Illllligration leforill.
Who
U.S Treasurer Anna Escobedo Cabral
What
Remarks on the Economy, Financial Literacy and Immigration Reform
When
Friday, July 28 1200 p.m. (COT)
Where
101 South EI Paso Street
EI Paso, TX

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3/6/2007

Page I of 5

July 27, 2006
HP-29
Remarks by Robert Carroll,
Deputy Assistant Secretary for Tax Analysis
U.S. Department of the Treasury
Before the National Economists Club
Thank you for tile opportunity to diSCUSS with you the Treasury Department's efforts
on dynamiC analysIs.
Before I begin, let me first acknowleclge several individuals who have contnbuted to
the work on dynamiC allalysls at the Treasury Department Two mdivlduals within
the Office of Tax Allalysis have contributed Significantly to this effort Jay Mackie
has made contnbutlons over many years and Craig Johnson has been at the heart
of thiS work over the past year We have also benefited enormously from a
collaborative effort with John Diamond and George Zodrow, both with Rice
University and affiliated with the James Baker III Institute on Public Policy. Many will
remember John from hiS time With the Joint Committee on Taxation ThiS work
could not have proceeded Without the Significant contributions of all of these
individuals.
Earlier this week the Treasury Department released a report that details its dynamiC
analYSIS of permanent extension of the President's tax relief. This analysis was
summarized In a box included In the Administration's Mid-Session Review released
earlier thiS month
ThiS report represents a continuation of our work on dynamic analYSIS. As you may
know, the Treasury Department also released a report on May 25th that
summanzed the dynamiC analYSIS of the tax reform options prepared on behalf of
the PreSident's AdVisory Panel on Federal Tax Reform last fall.
In many presentations on dynamiC modelmg, the presenter provides a detailed
deSCription of the model, fOCUSing on the speCifiC characteristics or embellishments
that differentiate the model from prevIous work. For thiS audience, I thmk a more
produclive approach IS to prOVide you With a brief overview of our approach, then
focus on the key results - the main lessons, If you will - from our analysis, and then
diSCUSS what our next steps are at Treasury.
Modeling Approach
Back in February when descnbmg our Initiative to create a new dynamic analYSIS
diVision at Treasury, we Indicated that dynamic analYSIS would have the benefit of
focusing attention on the broad economic effects of changes in tax poliCy. We also
indicated that the effort would focus on tile long-run effects of tax policy and
acknowledged the results were dependent on fmancing and underlying
assumptions. In this report, we Ilave attempted to focus on these aspects of
dynamic analysiS
It is also Important to pOint out at the outset what our analysis does not do It does
not prOVide a dynamiC score or estnnates of the revenue feedback associated With
the President's tax relief. ThiS would Involve translating the estimated changes in
output mto the associated change In revenues. We enviSion that dynalllic analYSIS
at the Treasury Department Illay ultimately evolve In that direction, Just as It has to
varying degrees at the Jomt Committee on Taxation and the COllgressional Budget
Office, but we are still very much at the beginning of this effort.

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Page 2 of 5

The model we Llsed is a cOllVentlOllillneoclasslcal groWtil model with overlapping
generations of taxpayers - dn OLG mouel In tillS life-cycle model, tax policy affects
the incentives to work, to Silve clild Illvest, and to allocate capital among competing
uses It captures the IIltersectordl reZlllocatlon of capital tilat results from reducing
the double tax on cOlporate profits, ilnd ttw uowdlng out of private IllVestment from
financlllg the tax relief throu~lh ISSUlll~J 90vemment debt. Representative consumers
and firms Illcorporate future prices II1to tllelr currerlt perrod declslollS of how much
to save, wor". ane1 produce Output IS Cjenerated by four production sectors, and
Individual level decIsions of representative consumers determine tile aggregate
level of labor supply and SilVlr1gS III each year We Iliclue1ed a Simple representation
of rntematlonal capital flows We also conSidered different assumptions for
finanCing the tax cuts ancJ COllslderecJ how the results cilange with different values
for underlyrng parameters
WIllie we used three different models to analyze the broad tax reform proposals put
forward by the tax panel last fall, IT1 the dynamiC analYSIS of the President's tax relief
we chose to use Just one model, the overlapping generations model This chOice
was made In large part because the verSion of tile model we are working With IS
more detailed tilan the verSions of tile other models we used in the analYSIS
conducted on behalf of tile tax panel, and thus better SUited for analyzing the
speCific features of the PreSident's tax relief.
Five Lessons
The report prOVides five baSIC lessons:
1. Many claim tllat tax relief can Increase economic growth, and thiS report supports
tillS claim.
According to tillS analysis, the PreSident's tax relief would inuease real GNP by 0.7
percent In tile long-run. In a $13 trrllion economy, thiS amounts to an additional $90
billion, In today's dollars, each year, forever.
2. All tax changes are not created equal.
Some tax changes, such as the lower tax rates on capital gains and diVidends,
reduce the tax rates on capital, Inueaslng the Incentive to Inves!. and Increasing
incomes and livrng standardS In the long run by making labor more productive.
Other tax changes, sucll as tile lower tax rates on ordinary rncome, reduce tax
rates on labor, which Increase the after-tax reward to work, labor supply, and real
GNP.
Yet other tax changes, such as the expanded child tax credl!' marriage penalty
relief and Ilew 10 percent rate bracket, can provide other types of benefits. They
may not encourage long-run growth by lowering tax rates on capital or labor, but
they can prOVide important and timely stimulus to the economy rn the near-term
ThiS can be particularly Important during a perrod of economic weakness, such as
the US economy faced several years ago. And, this IS espeCially important when
the monetary poliCy has already been used aggressively, as it was in 2001 and
2002.
Of course, tax changes can also be used to maintain or Increase tile progresslvity
of the income tax. and help families with their own economic challenges.
The Treasury analysis decomposed and separately conSidered the effects of three
different portions of the PreSident's proposal to permanently extend the tax relief
1. Lower tax rates on diVidends and capital gains;
2. Reduction

In

the top four ordinary tax rates; and

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Page 3 of 5

3. Expansion of the child tax cleeJlt, the marriage penalty relief. and the new 10
pel'cent rate bracket.
The Treasury analysis finns ttlilt more ttliln half of the 0 7 percent Increase In longrun GNP IS assoclaten With ttle lower tilX riltes on nividends and capital gains, even
though this policy chanC]e ilccollnted for less the1l1 20 percent of the static revelllie
loss. The IIlcrease III 1011~I-rLlI1 GNP rises to 1.1 percellt when the lower tax rates
are added,
The rise In GNP IS smaller when the rel11<'lInlng tax changes - the child tax credit,
marriage penalty and new 10 percent rate bracket - al'e Included ThiS result, at first
glance, may seem counter-Intuitive. but In thiS model these poliCies have - what
economists call - InCOllle effects Because these poliCies - the child tax credit.
marriage penalty relief, and ttle new 10 percent tax rate - Increase after-tax
Incomes, and have little effect on Incentives, some taxpayers may respond by
Increasing their leisure and working less, which IS the primary reason GNP IS not as
high in the long-run - 07 pel'cent I'ather than 1 1 percent.
But again, In looking back at the 2001 and 2003 tax relief, it IS crucial to remember
that the broad poliCy objectives wel'e two-fold 1) to shore up and strengthen an
economy that faced significant risks - a double dip recession, disinflation; and, 2) to
promote long-run growth
The package of poliCies accomplished those tWin goals by accelerating the rate at
which the economy returned to full capacity and, as this report suggests, promoting
long-term growth
3. In doing thiS work, It IS very mucll our goal to be as transparent as pOSSible In the
underlying assumption and results. One key assumption In analYZing the long-run
effects of the tax relief IS how it is ultimately financed.
A key feature of the model used for thiS analysis is the recognition that the
government faces what econOllllsts call an intertermporal budget constraint. This
means that the present value of taxes is tied to the present value of government
spending. In Simpler terms, when taxes are reduced, other offsetting changes are
needed.
In thiS report, we conSidered two finanCing options 1) lower future government
spending; and 2) higher future taxes. Under the first finanCing assumption - lower
future government spending - we report the base results - an Increase in long-run
GNP of 0.7 percent. But under the alternative finanCing assumption - higher future
taxes, long-run GNP would actually be lower by 0.9 percent.
What IS the intuition behind thiS result? It IS really qUite Simple. In a model where
consumers are forward looking, higher future taxes discourage econOllllC growth.
But these results are suggestive of another basic point Permanent extension of the
tax relief, financed by spending restraint, Will encourage economic growth.
Alternatively, if the tax relief IS, In effect, temporary and, in the aggregate, offset
with higher future taxes, real long-term GNP can be expected to fall
4 Also, in the Interest of being as transparent as pOSSible we also conSidered the
sensitivity of the results to underlYing assulllPtion,
The parameters of the Treasury model are taken from the consensus of the
professional literature, but they are not pinned down With certainty, The GNP
estimate of 07 percent is the result from our base case simulation, but the report
also shows that this estimate can range from 0 1 to 1.2 percent by changing the
model's parameters Within plaUSible ranges,
5, Finally, in contrasting the different policies, it is worth noting that the lower tax
rates on dividends and capital gains Increase GNP in the long-run, even when
financed by higher future taxes. This policy change lowers some of the highest
marginal tax rates that taxpayers face through the double tax on corporate profits.

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Page 4 of 5
The futul'e tax Incleases Linder tillS flllClllclnCJ ZlssLimptlon Clre broad-based and,
essentially, marglnClI tclX riltes ciecllllP on ilvera~Je, which lowers the efficiency cost
of raising tax revenue. Or, put sll~Jhtly cJlfferelltly, the higher future tax revenue
needed to fillance ttle teillporary t~lX relief actually results In an overall lower tax
burden as compared to current law ilecause the Illgh tClxes on corporate proflls are,
In effect, replaced With broad-bilsecl tilxes
Future Improvements
While we view thiS report as il slgnlflcallt step forward, future work will continue to
improve and refine the Illodelillg There ,He lllallY aspects of the economy that are
not captured In thiS alli:-llysls. Like eli I economic Illodels, thiS model employs
Important Sllllpllfylllg assumptlollS, and otiler economic models, Wilich make
different assumptions, could Yield cllfferent results. The model used ITl thiS analYSIS
departs from economic reality In a number of Important ways
First, thiS model does not account for short-term deviations ITl output from potential
GNP TillS Implies IIlat the model does not capture some of the short-run benefits of
tax relief when the economy IS below Its potential, such as With the 2001 and 2003
tax relief. As discussed in the report, a different model was preViously used by
Treasury to analyze the demand-Side or stimulative effects of the tax relief In the
near term
Second, the treatment of International capital flows is qUite simple A broader model
would employ a more sophisticated representation of these flows and would also
Include ITlternational tl'ade In goods, To the extent the economy IS more open to
International capital flows, the effects of crowding out associated with higher
government debt could be dampened
Third, thiS model assumes perfect certalTlty and perfect compelltion Of course, we
live in a world with uncertainty. Also, some models with Imperfect competition find
that capital income taxes have larger distortion effects because they are, In effect,
layered on top of the preeXisting distortion associated With Imperfect competition,
Finally, the financing assumptions used In the Simulations are conventional for this
type of analYSIS and are not meant to be predictions of what poliCies might actually
occur. Numerous other poliCy prescriptions could also occur, For example, if the tax
relief IS financed through reductions In government spending that occur sooner than
assumed In the Simulations In the Treasury analYSIS, government borrOWing would
be less, the crowding of private Investment would be smaller, and the Increase in
long-run output would be larger.
Nevertheless, we think It IS a very good start.
Next Steps
What are the next steps? As I mentioned above, the Treasury Department is
working to expand ItS capability for dynamiC analYSIS by standing up a new DIVISion
of DynamiC Analysis Within the Office of Tax Analysis, The additional resources
associated with creating this new diviSion Will help us enhance and expand our
existing capabilities to address some of the limitations listed above. The addiltonal
resources are also Important to conduct thiS analysiS on a more systematic and
regular basis for broad poliCY changes. ThiS is of Immediate relevance to the
Department's current effort to evaluate different approaches for reforming the tax
system.
Since this initiative was announced in early February, I have grown to better
appreciate the dlffel'ent perspectives brought to tillS Issue. There are some who
have a long-standing Interest Irl thiS subject, but who are very concerned that we at
Treasury may not do thiS the nght way. Then there are others who are concerned
that dynamic analysis may politiCize the work we do at Treasury. To be clear, we at
Treasury are well aware of the senSitivities that anse In disCLIssions of dynamiC
analYSIS and we take these concems very senously.

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Page 5 of 5
Again, being as transparent ClS possible IS very important to this endeavor. It allows
the professional and policy Wllllllllllity to understand and evaluClte key assumptions
and results So we need to COlltlllll(; to clearly divulge those assumptions and
release enougll mforillation reljclldlllq tile Illodels alld Ille results so Ihat those
outside of TI-eClsLlry call Lllldersl"ml and evaluCltc tile work we are dOing. Reports,
sllch as tile one releClsccJ 8"rlier lills week. holp prowle Ihls IranspClrency
Sensitivity ililillySIS IS also critically Irllj)()I·t'llll elml Will contllHle to be a central part
of our work As IS clo,lI frolll ttliS repolt ami Ihe work In tillS area I)y CBO and tile
JCT, thiS type of ;)Ilalysls IS sensitive to key assumptions, espeCially how a tax
cilange IS fillanced, so we need to continue 10 carefully cOllslder those assumptions
and report how the results vary Wltll different sets of assumptions
Continuing an opell and contlnuinu publiC dialogue on our work IS also Important It
would be clearly too much to expect that all wrll agree With every chOice or
assumption we have made [Tile nLimber of phone calls and emalls I have gotten In
the last day and a half can attest to this] But the 0PP0l1unity to dlSCLISS the work rn
forums like thiS and elsewhere IS very helpful
TtllS work should be vlewecl very much as bUilding on the contrnulng evolution of
the manner in which we have Integrated the behavioral aspects of taxation on
economic deCISion making In all our work at Treasury. And, it should be
remembered that we already exercise considerable Judgment, and I would say good
Judgment. III the work we do on conventional revenue estimates and a varrety of
oliler analyses.
Finally, I think it IS illlportant to reflect that this type of analysis clearly places
attention on the economic effects of tax POliCY, both In the long-run and over the
tranSition patll to thiS long-run. It helps frame the discourse on tax policy around
these economic benefits, rathel- than the five or ten year budgetary effects of
proposals. It also helps Inform tile discussion of tax poliCY by fOCUSing attention on
the key deCISions that drrve the results produced by thiS model To what extent
does a poliCY affect the incentives to Invest or supply more labor, or work primarily
through changes in the after-tax incomes of consumers? Over the longer-term, the
success of dynamiC analYSIS Will largely be determined by how well it IS
communicated to the policy comlllunlty, how open the process reillains, and to
what extent thiS type of analySIS cOlllplements mor-e conventional analYSIS of tax
poliCY·
Again, I thank you very much for the opportunity to share some of these thoughts
with you I am happy to take your questions

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Page 1 of 1

July 27,2006
HP-30
Statement of Deputy Treasury Secretary Robert Kimmitt
on International Compact for Iraq
I welcome the announcement today by the Iraqi government and UN on the
International Compact for Iraq We strongly support thiS Important initiative, and
look forward to worklllg Wlttl Iraqi leadership, the United Nations alld other
Illembers of the preparatory \JIOUp to help Iraq realize its vision of a united, stable
and prosperous nation unc1erplnned by a self-sustaining economy We endorse the
priorities that have been Identified to achieve these goals, and especially welcome
the attention to good governance, the rule of law, a solid budgetary framework, the
development of a tl'ansparent and effiCient oil sector and strong, credible
institutions
At President Bush's request, I recently traveled to Europe, Iraq and the Gulf With
State Department Counselor Philip Zelikow In order to discuss the Compact. In
Baghdad, I had the opportunity to meet With the Prime Minister and other senior
Iraqi offiCials. They are already undertaking the hard work necessary to bring this
Initiative to a successful conclUSion by the end of tillS year We look forward to
reviewing their progress at the UN General Assembly and World Bank and IMF
meetings In September.

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Page I of I

July 28. 2006
HP-31
Treasury Assistant Secretary Fratto to Hold Weekly Press Briefing
Treasury Assistant Secretary for PubliC Affairs Tony Fratto will hold the weekly
Illedia brleflllg on Monday, July 31 In Main Treasury's Media Room. The event IS
open to all credentialed Illedla.
•

Who: Assistant Secretal'y for PubliC Affarrs Tony Fratto

•

What: Weekly Briefrng to tile Press

•

When: Monday. July 31. 11 15 AM (EDT)

•

Where: Treasury Department
Media Room (Room 4121)
1500 Pennsylvania Ave. NW
Washrngton. DC

Note: Media Without Treasury press credentials should contact Frances Anderson
at (202) 622-2960. or francesanderson@do.treas.gov With the follOWing
inforillation name. Social Security number. and date of birth.

-30-

http://www.treas.gov/press/releases/ht>31.htm

3/6/2007

Page I of I

Il)

view or 1'"1111/)1' put-

ulilluill WI 1/)1,' l!dC/L' ClOWIl/( JiW

(/)(' IIUi!

July 28, 2006
HP-32
Treasury and IRS Issue Final Regulations on Employer HSA Contributions
Treaslll'y and the IRS today Issued fill a I regulations concerning Health Savings
Account (HSA) compal'ability rules, Comparability rules provide that an employer
contrrbuting to one employee's HSA must contrrbute compal'able amounts to all
employees who have HSAs.
The final regulations expand the flexibility of the proposed rules issued in August
2005, In particulal', the fillal regulations include the followlIlg features
•
•
•

All exception from the comparability requirement for groups of collectively
bargained employees:
The ability to make different comparable contributions based on different
varratlons of family coverage:
Further clarrflcation of the exclusion from the comparability requirement for
employer contrrbutions made through a cafeterra plan Generally, under the
fill a I rules If employees are allowed to contribute to an HSA by salary
reduction through a cafeterra plan, all employer contributions to the
employee's HSA will be treated as belllg made through a cafeteria plan (and
thus excluded from the comparability rules).

These provIsions are designed to accommodate the needs of employers for
additional fleXibility In designing plans to provide health benefits for employees
while preserving the protections of the comparability rules, HSAs and HSAcompatible health Insurance have enabled many employers - especially smaller
employers - to prOVide meanlllgful, affordable health coverage to their employees,

REPORTS
•

Final Regulations -- Employer Comparable Contributions to Health Savings
Accounts under Section 4980G

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[4830-01-p]
DEPARTMENT OF THE TREASURY
Internal Revenue Service
26 CFR Part 54
[TD _ _ _----'
RIN 1545-BE30
Employer Comparable Contributions to Health Savings Accounts under Section
4980G
AGENCY: Internal Revenue Service (IRS), Treasury.
ACTION: Final regulations.
SUMMARY: This document contains final regulations that provide guidance
regarding employer comparable contributions to Health Savings Accounts
(HSAs) under section 4980G. In general, these final regulations affect employers
that contribute to employees' HSAs.
DATES: Effective Date: These regulations are effective on [INSERT DATE OF
PUBLICATION OF THIS DOCUMENT IN THE FEDERAL REGISTER].

Applicability Date: These regulations apply to employer contributions to
HSAs made on or after January 1,2007.
FOR FURTHER INFORMATION CONTACT: Mireille T. Khoury (202) 622-6080
(not a toll-free number).
SUPPLEMENTARY INFORMATION
Background

This document contains final Pension Excise Tax Regulations (26 CFR
part 54) under section 4980G of the Internal Revenue Code (Code). Under

2
section 4980G of the Code, an excise tax is imposed on an employer that fails to
make comparable contributions to the HSAs of its employees.
Section 1201 of the Medicare Prescription Drug, Improvement, and
Modernization Act of 2003 (Act), Public Law 108-173, (117 Stat. 2066, 2003)
added section 223 to the Code to permit eligible individuals to establish HSAs for
taxable years beginning after December 31, 2003. Section 4980G was also
added to the Code by the Act. Section 4980G(a) imposes an excise tax on the
failure of an employer to make comparable contributions to the HSAs of its
employees for a calendar year. Section 4980G(b) provides that rules and
requirements similar to section 4980E (the comparability rules for Archer Medical
Savings Accounts (Archer MSAs)) apply for purposes of section 4980G. Section
4980E(b) imposes an excise tax equal to 35% of the aggregate amount
contributed by the employer to the Archer MSAs of employees during the
calendar year if an employer fails to make comparable contributions to the Archer
MSAs of its employees in a calendar year. Therefore, if an employer fails to
make comparable contributions to the HSAs of its employees during a calendar
year, an excise tax equal to 35% of the aggregate amount contributed by the
employer to the HSAs of its employees during that calendar year is imposed on
the employer. See Sections 4980G(a) and (b) and 4980E(b). See also Notice
2004-2 (2004-2 IRS 269), Q & A-32. See §601.601 (d)(2).
On August 26,2005, proposed regulations (REG-138647-04) were
published in the Federal Register (70 FR 50233). The proposed regulations
clarified and expanded upon the guidance regarding the comparability rules

3
published in Notice 2004-2 and in Notice 2004-50 (2004-33 IRS 196), Q & A-46
through Q & A-54. See §601.601 (d)(2) of this chapter. Written public comments
on the proposed regulations were received and a public hearing was requested.
The hearing was held on February 23, 2006. After consideration of all the
comments, these final regulations adopt the provisions of the proposed
regulations with certain modifications, the most significant of which are
highlighted in this preamble.
Explanation of Provisions and Summary of Comments

Several commentators requested that the effective date should be at least
one year from the date the regulations are finalized to give employers sufficient
time to implement changes required to comply with the final regulations. The
final regulations will apply to employer contributions to HSAs made on or after
January 1,2007.
An employer is not required to contribute to the HSAs of its employees.
In general, however, if an employer makes contributions to any employee's HSA,
the employer must make comparable contributions to the HSAs of all comparable
participating employees. Comparable participating employees are eligible
individuals (as defined in section 223(c)(1)) who are in the same category of
employees and who have the same category of high deductible health plan
(HDHP) coverage. Under the proposed regulations, the categories of coverage
were self-only HDHP coverage and family HDHP coverage. Several
commentators recommended that the final regulations should recognize
additional categories of coverage other than self-only and family HDHP. The

4
final regulations adopt this recommendation and allow family HDHP coverage to
be subdivided into the following additional categories of HDHP coverage: self
plus one, self plus two and self plus three or more. In addition, the final
regulations provide that an employer's contribution with respect to the self plus
two category may not be less than the employer's contribution with respect to the
self plus one category and the employer's contribution with respect to the self
plus three or more category may not be less than the employer's contribution
with respect to the self plus two category.
In addition, several commentators requested separate treatment for
groups of collectively bargained employees, such that employers' HSA
contributions to collectively bargained employees would not be subject to the
comparability rules. In response to these comments, the final regulations provide
that employees who are included in a unit of employees covered by a bona fide
collective bargaining agreement between employee representatives and one or
more employers are not comparable participating employees, if health benefits
were the subject of good faith bargaining between such employee
representatives and such employer or employers. Collectively bargained
employees are, therefore, disregarded for purposes of section 4980G.
Numerous commentators requested guidance on the exception to the
comparability rules for employer contributions made through a section 125
cafeteria plan. In response to these comments, the final regulations provide
additional guidance on how employer HSA contributions are made through a
cafeteria plan. Specifically, the final regulations provide that employer

5
contributions to employees' HSAs are made through the cafeteria plan if under
the written cafeteria plan, the employees have the right to elect to receive cash or
other taxable benefits in lieu of all or a portion of an HSA contribution (i.e., all or a
portion of the HSA contributions are available as pre-tax salary reduction
amounts), regardless of whether an employee actually elects to contribute any
amount to the HSA by salary reduction. The final regulations also provide several
examples that illustrate the application of the cafeteria plan exception to the
comparability rules.
One commentator requested guidance on what actions an employer must
take to locate any missing comparable participating former employees for
purposes of contributions to eligible former employees. The final regulations
provide guidance on this issue and explain that an employer making comparable
contributions to former employees must take reasonable actions to locate any
missing comparable participating former employees. In general, such
reasonable actions include the use of certified mail, the Internal Revenue Service
Letter Forwarding Program, see Rev. Proc. 94-22 (1994-1 CB 608), or the Social
Security Administration's Letter Forwarding Service. See §601.601 (d)(2).
Several commentators requested that testing for comparability purposes
be permitted on a plan year, rather than calendar year, basis. Section 4980G
mandates the use of a calendar year for testing purposes. Accordingly, the final
regulations do not adopt the suggestion for plan year testing. Also, the final
regulations have removed and reserved the provision dealing with instances
where an employee has not established an HSA by the end of the calendar year.

6
Finally, one commentator requested clarification on what would constitute
"reasonable interest" for purposes of section 4980G. In response to this
comment, the final regulations provide that the determination of whether a rate of
interest used by an employer is reasonable will be based on all of the facts and
circumstances. However, if an employer calculates interest using the Federal
short-term rate as determined by the Secretary in accordance with Code section
1274(d), the employer is deemed to use a reasonable interest rate.
Special Analyses
It has been determined that these regulations are 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. These regulations do not impose a collection of information on small
entities, thus the Regulatory Flexibility Act (5 U.S.C. chapter 6) does not apply.
Pursuant to section 7805(f) of the Code, the proposed regulations preceding
these regulations were submitted to the Chief Counsel for Advocacy of the Small
Business Administration for comment on its impact on small business.
Drafting Information
The principal authors of these regulations are Barbara E. Pie and Mireille
T. Khoury, Office of Division Counsel/Associate Chief Counsel (Tax Exempt and
Government Entities).
List of Subjects in 26 CFR Part 54
Excise taxes, Pensions, Reporting and recordkeeping requirements.

7
Adoption of Amendments to the Regulations
Accordingly, 26 CFR part 54 is amended as follows:
PART 54--PENSION EXCISE TAXES
Paragraph 1. The authority citation for part 54 is amended by adding
entries in numerical order to read in part as follows:
Authority: 26 U.S.C. 7805 * * *
Section 54.4980G-0 also issued under 26 U.S.C. 4980G, Section
54.4980G-1 also issued under 26 U.S.C. 4980G, Section 54.4980G-2 also
issued under 26 U.S.C. 4980G, Section 54.4980G-3 also issued under 26 U.S.C.
4980G, Section 54.4980G-4 also issued under 26 U.S.C. 4980G, and Section
54.4980G-5 also issued under 26 U.S.C. 4980G. * * *
Par. 2. Sections 54.4980G-0, 54.4980G-1, 54.4980G-2,
54.4980G-3, 54.4980G-4, and 54.4980G-5 are added to read as follows:
'54.4980G-0 Table of contents.
This section contains the questions for §§ 54.4980G-1, 54.4980G-2,
54.4980G-3, 54.4980G-4, and 54.4980G-5.
'54.4980G-1 Failure of employer to make comparable health savings account
contributions.
0-1: What are the comparability rules that apply to employer contributions to
Health Savings Accounts (HSAs)?
0-2: What are the categories of HDHP coverage for purposes of applying the
comparability rules?
0-3: What is the testing period for making comparable contributions to
employees' HSAs?
0-4: How is the excise tax computed if employer contributions do not satisfy the
comparability rules for a calendar year?

8
'54.4980G-2 Employer contribution defined.
0-1: Do the comparability rules apply to amounts rolled over from an employee's
HSA or Archer Medical Savings Account (Archer MSA)?
0-2: If an employee requests that his or her employer deduct after-tax amounts
from the employee's compensation and forward these amounts as employee
contributions to the employee's HSA, do the comparability rules apply to these
amounts?
, 54.4980G-3 Employee for comparability testing.
0-1: Do the comparability rules apply to contributions that an employer makes to
the HSAs of independent contractors or self-employed individuals?
0-2: Maya sole proprietor who is an eligible individual contribute to his or her
own HSA without contributing to the HSAs of his or her employees who are
eligible individuals?
0-3: Do the comparability rules apply to contributions by a partnership to a
partner's HSA?
0-4: How are members of controlled groups treated when applying the
comparability rules?
0-5: What are the categories of employees for comparability testing?
0-6: Are employees who are included in a unit of employees covered by a
collective bargaining agreement comparable participating employees?
0-7: Is an employer permitted to make comparable contributions only to the
HSAs of comparable participating employees who have coverage under the
employer's HDHP?
0-8: If an employee and his or her spouse are eligible individuals who work for
the same employer and one employee-spouse has family coverage for both
employees under the employer's HDHP, must the employer make comparable
contributions to the HSAs of both employees?
0-9: Does an employer that makes HSA contributions only for one class of noncollectively bargained employees who are eligible individuals, but not for another
class of non-collectively bargained employees who are eligible individuals (for
example, management v. non-management) satisfy the requirement that the
employer make comparable contributions?
0-10: If an employer contributes to the HSAs of former employees who are
eligible individuals, do the comparability rules apply to these contributions?
0-11: Is an employer permitted to make comparable contributions only to the
HSAs of comparable participating former employees who have coverage under
the employer's HDHP?
0-12: If an employer contributes only to the HSAs of former employees who are
eligible individuals with coverage under the employer's HDHP, must the
employer make comparable contributions to the HSAs of former employees who
are eligible individuals with coverage under the employer's HDHP because of an
election under a COBRA continuation provision (as defined in section
9832(d)(1 ))?

9
Q-13: How do the comparability rules apply if some employees have HSAs and
other employees have Archer MSAs?
, 54.4980G-4 Calculating comparable contributions.
Q-1: What are comparable contributions?
Q-2: How does an employer comply with the comparability rules when some
non-collectively bargained employees who are eligible individuals do not work for
the employer during the entire calendar year?
Q-3: How do the comparability rules apply to employer contributions to
employees' HSAs if some non-collectively bargained employees work full-time
during the entire calendar year, and other non-collectively bargained employees
work full-time for less than the entire calendar year?
0-4: Mayan employer make contributions for the entire year to the HSAs of its
employees who are eligible individuals at the beginning of the calendar year (i.e.,
on a pre-funded basis) instead of contributing on a pay-as-you-go or on a lookback basis?
0-5: Must an employer use the same contribution method as described in
Q & A-3 and 0 & A-4 of this section for all employees who were comparable
participating employees for any month during the calendar year?
Q-6: How does an employer comply with the comparability rules if an employee
has not established an HSA at the time the employer contributes to its
employees' HSAs?
0-7: If an employer bases its contributions on a percentage of the HDHP
deductible, how is the correct percentage or dollar amount computed?
Q-8: Does an employer that contributes to the HSA of each comparable
participating employee in an amount equal to the employee's HSA contribution or
a percentage of the employee's HSA contribution (matching contributions) satisfy
the rule that all comparable participating employees receive comparable
contributions?
Q-9: If an employer conditions contributions by the employer to an employee's
HSA on an employee's participation in health assessments, disease
management programs or wellness programs and makes the same contributions
available to all employees who participate in the programs, do the contributions
satisfy the comparability rules?
0-10: If an employer makes additional contributions to the HSAs of all
comparable participating employees who have attained a specified age or who
have worked for the employer for a specified number of years, do the
contributions satisfy the comparability rules?
Q-11: If an employer makes additional contributions to the HSAs of all
comparable participating employees are eligible to make the additional
contributions (HSA catch-up contributions) under section 223(b)(3), do the
contributions satisfy the comparability rules?
Q-12: If an employer's contributions to an employee's HSA result in noncomparable contributions, may the employer recoup the excess amount from the
employee's HSA?

10
Q-13: What constitutes a reasonable interest rate for purposes of making
comparable contributions?
, 54.4980G-5 HSA comparability rules and cafeteria plans and waiver of excise
tax.
Q-1: If an employer makes contributions through a section 125 cafeteria plan to
the HSA of each employee who is an eligible individual, are the contributions
subject to the comparability rules?
Q-2: If an employer makes contributions through a cafeteria plan to the HSA of
each employee who is an eligible individual in an amount equal to the amount of
the employee's HSA contribution or a percentage of the amount of the
employee's HSA contribution (i.e., matching contributions), are the contributions
subject to the section 4980G comparability rules?
Q-3: If under the employer's cafeteria plan, employees who are eligible
individuals and who participate in health assessments, disease management
programs or wellness programs receive an employer contribution to an HSA,
unless the employees elect cash, are the contributions subject to the
comparability rules?
Q-4: Mayall or part of the excise tax imposed under section 4980G be waived?

'54.4980G-1 Failure of employer to make comparable health savings account
contributions.
Q-1: What are the comparability rules that apply to employer contributions
to Health Savings Accounts (HSAs)?
A-1: If an employer makes contributions to any employee's HSA, the
employer must make comparable contributions to the HSAs of all comparable
participating employees. See Q & A-1 in '54.4980G-4 for the definition of
comparable contributions. Comparable participating employees are eligible
individuals (as defined in section 223(c)(1)) who are in the same category of
employees and who have the same category of high deductible health plan
(HDHP) coverage. See sections 4980G(b) and 4980E(d)(3). See section
223(c)(2) and (g) for the definition of an HDHP. See also Q & A-5 in '54.4980G-

11
3 for the categories of employees and Q & A-2 of this section for the categories
of HDHP coverage. But see 0 & A-6 in §54.4980G-3 for treatment of collectively
bargained employees.

0-2: What are the categories of HDHP coverage for purposes of applying
the comparability rules?
A-2: (a) In general. Generally, the categories of coverage are self-only
HDHP coverage and family HDHP coverage. Family HDHP coverage means
any coverage other than self-only HDHP coverage. The comparability rules
apply separately to self-only HDHP coverage and family HDHP coverage. In
addition, if an HDHP has family coverage options meeting the descriptions listed
in paragraph (b) of this 0 &A-2, each such coverage option may be treated as a
separate category of coverage and the comparability rules may be applied
separately to each category. However, if the HDHP has more than one category
that provides coverage for the same number of individuals, all such categories
are treated as a single category for purposes of the comparability rules. Thus,
the categories of "employee plus spouse" and "employee plus dependent," each
providing coverage for two individuals, are treated as the single category "self
plus one" for comparability purposes. See, however, the final sentence of
paragraph (a) of 0 & A-1 of '54.4980G-4 for a special rule that applies if different
amounts are contributed for different categories of family coverage.
(b) HDHP Family coverage categories. The coverage categories are -(1) Self plus one;
(2) Self plus two; and

12
(3) Self plus three or more.
(c) Examples. The rules of this Q & A-2 are illustrated by the following
examples:
Example 1. Employer A maintains an HDHP and contributes to the HSAs
of eligible employees who elect coverage under the HDHP. The HDHP has selfonly coverage and family coverage. Thus, the categories of coverage are selfonly and family coverage. Employer A contributes $750 to the HSA of each
eligible employee with self-only HDHP coverage and $1,000 to the HSA of each
eligible employee with family HDHP coverage. Employer A's contributions satisfy
the comparability rules.
Example 2. (i) Employer B maintains an HDHP and contributes to the
HSAs of eligible employees who elect coverage under the HDHP. The HDHP
has the following coverage options:
(A) Self-only;
(B) Self plus spouse;
(C) Self plus dependent;
(D) Self plus spouse plus one dependent;
(E) Self plus two dependents; and
(F) Self plus spouse and two or more dependents.
(ii) The self plus spouse category and the self plus dependent category
constitute the same category of HDHP coverage (self plus one) and Employer B
must make the same comparable contributions to the HSAs of all eligible
individuals who are in either the self plus spouse category of HDHP coverage or
the self plus dependent category of HDHP coverage. Likewise, the self plus
spouse plus one dependent category and the self plus two dependents category
constitute the same category of HDHP coverage (self plus two) and Employer B
must make the same comparable contributions to the HSAs of all eligible
individuals who are in either the self plus spouse plus one dependent category of
HDHP coverage or the self plus two dependents category of HDHP coverage.
Example 3. (i) Employer C maintains an HDHP and contributes to the
HSAs of eligible employees who elect coverage under the HDHP. The HDHP
has the following coverage options:
(1) Self-only;

13

(2) Self plus one;
(3) Self plus two; and
(4) Self plus three or more.
(ii) Employer C contributes $500 to the HSA of each eligible employee
with self-only HDHP coverage, $750 to the HSA of each eligible employee with
self plus one HDHP coverage, $900 to the HSA of each eligible employee with
self plus two HDHP coverage and $1,000 to the HSA of each eligible employee
with self plus three or more HDHP coverage. Employer C's contributions satisfy
the comparability rules.
Q-3: What is the testing period for making comparable contributions to
employees' HSAs?
A-3: To satisfy the comparability rules, an employer must make
comparable contributions for the calendar year to the HSAs of employees who
are comparable participating employees. See section 4980G(a). See Q & A-3
and Q & A-4 in '54.4980G-4 for a discussion of HSA contribution methods.
Q-4: How is the excise tax computed if employer contributions do not
satisfy the comparability rules for a calendar year?
A-4: (a) Computation of tax. If employer contributions do not satisfy the
comparability rules for a calendar year, the employer is subject to an excise tax
equal to 35% of the aggregate amount contributed by the employer to HSAs for
that period.
(b) Example. The following example illustrates the rules in paragraph (a)
of this Q & A-4:
Example. During the 2007 calendar year, Employer D has 8 employees
who are eligible individuals with self-only coverage under an HDHP provided by
Employer D. The deductible for the HDHP is $2,000. For the 2007 calendar
year, Employer D contributes $2,000 each to the HSAs of two employees and

14
$1,000 each to the HSAs of the other six employees, for total HSA contributions
of $10,000. Employer D's contributions do not satisfy the comparability rules.
Therefore, Employer 0 is subject to an excise tax of $3,500 (35% of $10,000) for
its failure to make comparable contributions to its employees' HSAs.
'54.4980G-2 Employer contribution defined.
0-1: Do the comparability rules apply to amounts rolled over from an
employee's HSA or Archer Medical Savings Account (Archer MSA)?
A-1: No. The comparability rules do not apply to amounts rolled over
from an employee's HSA or Archer MSA.
0-2: If an employee requests that his or her employer deduct after-tax
amounts from the employee's compensation and forward these amounts as
employee contributions to the employee's HSA, do the comparability rules apply
to these amounts?
A-2: No. Section 106(d) provides that amounts contributed by an
employer to an eligible employee's HSA shall be treated as employer-provided
coverage for medical expenses and are excludible from the employee's gross
income up to the limit in section 223(b). After-tax employee contributions to an
HSA are not subject to the comparability rules because they are not employer
contributions under section 106(d).
1

54.4980G-3 Employee for comparability testing.
0-1: Do the comparability rules apply to contributions that an employer

makes to the HSAs of independent contractors or self-employed individuals?
A-1: No. The comparability rules apply only to contributions that an
employer makes to the HSAs of employees.

15
0-2: Maya sole proprietor who is an eligible individual contribute to his or
her own HSA without contributing to the HSAs of his or her employees who are
eligible individuals?
A-2: (a) Sole proprietor not an employee. Yes. The comparability rules
apply only to contributions made by an employer to the HSAs of employees.
Because a sole proprietor is not an employee, the comparability rules do not
apply to contributions the sole proprietor makes to his or her own HSA.
However, if a sole proprietor contributes to any employee's HSA, the sole
proprietor must make comparable contributions to the HSAs of all comparable
participating employees. In determining whether the comparability rules are
satisfied, contributions that a sole proprietor makes to his or her own HSA are not
taken into account.
(b) Example. The following example illustrates the rules in paragraph (a)
of this Q & A-2:
Example. In a calendar year, B, a sole proprietor is an eligible individual
and contributes $1,000 to B's own HSA. B also contributes $500 for the same
calendar year to the HSA of each employee who is an eligible individual. The
comparability rules are not violated by B's $1,000 contribution to B's own HSA.
Q-3: Do the comparability rules apply to contributions by a partnership to
a partner's HSA?
A-3: (a) Partner not an employee. No. Contributions by a partnership to
a bona fide partner's HSA are not subject to the comparability rules because the
contributions are not contributions by an employer to the HSA of an employee.
The contributions are treated as either guaranteed payments under section
707(c) or distributions under section 731. However, if a partnership contributes

16
to the HSAs of any employee who is not a partner, the partnership must make
comparable contributions to the HSAs of all comparable participating employees.
(b) Example. The following example illustrates the rules in paragraph (a)
of this Q & A-3:
Example. (i) Partnership X is a limited partnership with three equal
individual partners, A (a general partner), B (a limited partner), and C (a limited
partner). C is to be paid $300 annually for services rendered to Partnership X in
her capacity as a partner without regard to partnership income (a section 707(c)
guaranteed payment). D and E are the only employees of Partnership X and are
not partners in Partnership X. A, B, C, D, and E are eligible individuals and each
has an HSA. During Partnership X's Year 1 taxable year, which is also a
calendar year, Partnership X makes the following contributions-(A) A $300 contribution to each of A's and B's HSAs which are treated as
section 731 distributions to A and B;
(B) A $300 contribution to C's HSA in lieu of paying C the guaranteed
payment directly; and
(C) A $200 contribution to each of D's and E's HSAs, who are comparable
participating employees.
(ii) Partnership X's contributions to A's and B's HSAs are section 731
distributions, which are treated as cash distributions. Partnership X's contribution
to C's HSA is treated as a guaranteed payment under section 707(c). The
contribution is not excludible from C's gross income under section 106(d)
because the contribution is treated as a distributive share of partnership income
for purposes of all Code sections other than sections 61 (a) and 162( a), and a
guaranteed payment to a partner is not treated as compensation to an employee.
Thus, Partnership X's contributions to the HSAs of A, B, and C are not subject to
the comparability rules. Partnership X's contributions to D's and E's HSAs are
subject to the comparability rules because D and E are employees of Partnership
X and are not partners in Partnership X. Partnership X's contributions satisfy the
comparability rules.
Q-4: How are members of controlled groups treated when applying the
comparability rules?

17
A-4: All persons or entities treated as a single employer under section
414 (b), (c), (m), or (0) are treated as one employer. See sections 4980G(b) and
4980E(e).
Q-5: What are the categories of employees for comparability testing?
A-5: (a) Categories. The categories of employees for comparability
testing are as follows (but see Q & A-6 of this section for the treatment of
collectively bargained employees)-(1) Current full-time employees;
(2) Current part-time employees; and
(3) Former employees (except for former employees with coverage under
the employer's HDHP because of an election under a COBRA continuation
provision (as defined in section 9832(d)(1 )).
(b) Part-time and full-time employees. For purposes of section 4980G,
part-time employees are customarily employed for fewer than 30 hours per week
and full-time employees are customarily employed for 30 or more hours per
week. See sections 4980G(b) and 4980E(d)(4)(A) and (B).
(c) In general. Except as provided in Q & A-6 of this section, the
categories of employees in paragraph (a) of this Q & A-5 are the exclusive
categories of employees for comparability testing. An employer must make
comparable contributions to the HSAs of all comparable participating employees
(eligible individuals who are in the same category of employees with the same
category of HDHP coverage) during the calendar year without regard to any
classification other than these categories. For example, full-time eligible

18
employees with self-only HDHP coverage and part-time eligible employees with
self-only HDHP coverage are separate categories of employees and different
amounts can be contributed to the HSAs for each of these categories.
0-6: Are employees who are included in a unit of employees covered by
a collective bargaining agreement comparable participating employees?
A-6: (a) In general. No. Collectively bargained employees who are
covered by a bona fide collective bargaining agreement between employee
representatives and one or more employers are not comparable participating
employees, if health benefits were the subject of good faith bargaining between
such employee representatives and such employer or employers. Former
employees covered by a collective bargaining agreement also are not
comparable participating employees.
(b) Examples. The following examples illustrate the rules in paragraph (a)
of this 0 & A-6.
Example 1. Employer A offers its employees an HDHP with a $1,500
deductible for self-only coverage. Employer A has collectively bargained and
non-collectively bargained employees. The collectively bargained employees are
covered by a collective bargaining agreement under which health benefits were
bargained in good faith. In the 2007 calendar year, Employer A contributes $500
to the HSAs of all eligible non-collectively bargained employees with self-only
coverage under Employer A's HDHP. Employer A does not contribute to the
HSAs of the collectively bargained employees. Employer A's contributions to the
HSAs of non-collectively bargained employees satisfy the comparability rules.
The comparability rules do not apply to collectively bargained employees.
Example 2. Employer B offers its employees an HDHP with a $1,500
deductible for self-only coverage. Employer B has collectively bargained and
non-collectively bargained employees. The collectively bargained employees are
covered by a collective bargaining agreement under which health benefits were
bargained in good faith. In the 2007 calendar year and in accordance with the
terms of the collective bargaining agreement, Employer B contributes to the
HSAs of all eligible collectively bargained employees. Employer B does not

19
contribute to the HSAs of the non-collectively bargained employees. Employer
B's contributions to the HSAs of collectively bargained employees are not subject
to the comparability rules because the comparability rules do not apply to
collectively bargained employees. Accordingly, Employer B's failure to contribute
to the HSAs of the non-collectively bargained employees does not violate the
comparability rules.
Example 3. Employer C has two units of collectively bargained employees
- unit Q and unit R - each covered by a collective bargaining agreement under
which health benefits were bargained in good faith. In the 2007 calendar year
and in accordance with the terms of the collective bargaining agreement,
Employer C contributes to the HSAs of all eligible collectively bargained
employees in unit Q. In accordance with the terms of the collective bargaining
agreement, Employer C makes no HSA contributions for collectively bargained
employees in unit R. Employer C's contributions to the HSAs of collectively
bargained employees are not subject to the comparability rules because the
comparability rules do not apply to collectively bargained employees.
Example 4. Employer D has a unit of collectively bargained employees
that are covered by a collective bargaining agreement under which health
benefits were bargained in good faith. In accordance with the terms of the
collective bargaining agreement, Employer D contributes an amount equal to a
specified number of cents per hour for each hour worked to the HSAs of all
eligible collectively bargained employees. Employer D's contributions to the
HSAs of collectively bargained employees are not subject to the comparability
rules because the comparability rules do not apply to collectively bargained
employees.
Q-7: Is an employer permitted to make comparable contributions only to
the HSAs of comparable participating employees who have coverage under the
employer's HDHP?
A-7: (a) Employer-provided HDHP coverage. If during a calendar year,
an employer contributes to the HSA of any employee who is an eligible individual
covered under an HDHP provided by the employer, the employer is required to
make comparable contributions to the HSAs of all comparable participating
employees with coverage under any HDHP provided by the employer. An
employer that contributes only to the HSAs of employees who are eligible

20
individuals with coverage under the employer's HDHP is not required to make
comparable contributions to HSAs of employees who are eligible individuals but
are not covered under the employer's HDHP.
(b) Non-employer provided HDHP coverage. An employer that contributes
to the HSA of any employee who is an eligible individual with coverage under any
HDHP that is not an HDHP provided by the employer, must make comparable
contributions to the HSAs of all comparable participating employees whether or
not covered under the employer's HDHP. An employer that makes a reasonable
good faith effort to identify all comparable participating employees with nonemployer provided HDHP coverage and makes comparable contributions to the
HSAs of such employees satisfies the requirements in paragraph (b) of this Q &
A-7.
(c) Examples. The following examples illustrate the rules in this Q & A-7.
None of the employees in the following examples are covered by a collective
bargaining agreement.
Example 1. In a calendar year, Employer E offers an HDHP to its full-time
employees. Most full-time employees are covered under Employer E's HDHP
and Employer E makes comparable contributions only to these employees'
HSAs. Employee W, a full-time employee of Employer E and an eligible
individual, is covered under an HDHP provided by the employer of W's spouse
and not under Employer E's HDHP. Employer E is not required to make
comparable contributions to W's HSA.
Example 2. In a calendar year, Employer F does not offer an HDHP.
Several full-time employees of Employer F, who are eligible individuals, have
HSAs. Employer F contributes to these employees' HSAs. Employer F must
make comparable contributions to the HSAs of all full-time employees who are
eligible individuals.
Example 3. In a calendar year, Employer G offers an HDHP to its full-time
employees. Most full-time employees are covered under Employer G's HDHP

21
and Employer G makes comparable contributions to these employees' HSAs and
also to the HSAs of full-time employees who are eligible individuals and who are
not covered under Employer G's HDHP. Employee S, a full-time employee of
Employer G and a comparable participating employee, is covered under an
HDHP provided by the employer of S's spouse and not under Employer G'S
HDHP. Employer G must make comparable contributions to S's HSA.
0-8: If an employee and his or her spouse are eligible individuals who
work for the same employer and one employee-spouse has family coverage for
both employees under the employer's HDHP, must the employer make
comparable contributions to the HSAs of both employees?
A-8: (a) In general. If the employer makes contributions only to the HSAs
of employees who are eligible individuals covered under its HDHP where only
one employee-spouse has family coverage for both employees under the
employer's HDHP, the employer is not required to contribute to the HSAs of both
employee-spouses. The employer is required to contribute to the HSA of the
employee-spouse with coverage under the employer's HDHP, but is not required
to contribute to the HSA of the employee-spouse covered under the employer's
HDHP by virtue of his or her spouse's coverage. However, if the employer
contributes to the HSA of any employee who is an eligible individual with
coverage under an HDHP that is not an HDHP provided by the employer, the
employer must make comparable contributions to the HSAs of both employeespouses if they are both eligible individuals. If an employer is required to
contribute to the HSAs of both employee-spouses, the employer is not required
to contribute amounts in excess of the annual contribution limits in section
223(b).

22
(b) Examples. The following examples illustrate the rules in paragraph (a)
of this Q & A-B. None of the employees in the following examples are covered by
a collective bargaining agreement
Example 1. In a calendar year, Employer H offers an HDHP to its full-time
employees. Most full-time employees are covered under Employer H's HDHP
and Employer H makes comparable contributions only to these employees'
HSAs. T and U are a married couple. Employee T, who is a full-time employee
of Employer H and an eligible individual, has family coverage under Employer H's
HDHP for T and 1's spouse. Employee U, who is also a full-time employee of
Employer H and an eligible individual, does not have coverage under Employer
H's HDHP except as the spouse of Employee T. Employer H is required to make
comparable contributions to 1's HSA, but is not required to make comparable
contributions to U's HSA.
Example 2. In a calendar year, Employer j offers an HDHP to its full-time
employees. Most full-time employees are covered under Employer j's HDHP
and Employer j makes comparable contributions to these employees' HSAs and
to the HSAs of full-time employees who are eligible individuals but are not
covered under Employer j's HDHP. Rand S are a married couple. Employee S,
who is a full-time employee of Employer j and an eligible individual, has family
coverage under Employer j's HDHP for Sand S's spouse. Employee R, who is
also a full-time employee of Employer j and an eligible individual, does not have
coverage under Employer j's HDHP except as the spouse of Employee S.
Employer j must make comparable contributions to S's HSA and to R's HSA.
Q-9: Does an employer that makes HSA contributions only for one class
of non-collectively bargained employees who are eligible individuals, but not for
another class of non-collectively bargained employees who are eligible
individuals (for example, management v. non-management) satisfy the
requirement that the employer make comparable contributions?
A-9: (a) Different classes of employees. No. If the two classes of
employees are comparable participating employees, the comparability rules are
not satisfied. The only categories of employees for comparability purposes are
current full-time employees, current part-time employees, and former employees.

23
Collectively bargained employees are not comparable participating employees.
But see Q & A-1 in '54.4980G-5 on contributions made through a cafeteria plan.
(b) Examples. The following examples illustrate the rules in paragraph (a)
of this Q & A-9. None of the employees in the following examples are covered by
a collective bargaining agreement.
Example 1. In a calendar year, Employer K maintains an HDHP covering
all management and non-management employees. Employer K contributes to
the HSAs of non-management employees who are eligible individuals covered
under its HDHP. Employer K does not contribute to the HSAs of its management
employees who are eligible individuals covered under its HDHP. The
comparability rules are not satisfied.
Example 2. All of Employer L's employees are located in city X and city Y.
In a calendar year, Employer L maintains an HDHP for all employees working in
city X only. Employer L does not maintain an HDHP for its employees working in
city Y. Employer L contributes $500 to the HSAs of city X employees who are
eligible individuals with coverage under its HDHP. Employer L does not
contribute to the HSAs of any of its city Y employees. The comparability rules
are satisfied because none of the employees in city Yare covered under an
HDHP of Employer L. (However, if any employees in city Y were covered by an
HDHP of Employer L, Employer L could not fail to contribute to their HSAs
merely because they work in a different city.)
Example 3. Employer M has two divisions - division N and division O. In
a calendar year, Employer M maintains an HDHP for employees working in
division N and division O. Employer M contributes to the HSAs of division N
employees who are eligible individuals with coverage under its HDHP. Employer
M does not contribute to the HSAs of division 0 employees who are eligible
individuals covered under its HDHP. The comparability rules are not satisfied.
Q-10: If an employer contributes to the HSAs of former employees who
are eligible individuals, do the comparability rules apply to these contributions?
A-10: (a) Former employees. Yes. The comparability rules apply to
contributions an employer makes to former employees' HSAs. Therefore, if an
employer contributes to any former employee's HSA, it must make comparable
contributions to the HSAs of all comparable participating former employees

24
(former employees who are eligible individuals with the same category of HDHP
coverage). However, an employer is not required to make comparable
contributions to the HSAs of former employees with coverage under the
employer's HDHP because of an election under a COBRA continuation provision
(as defined in section 9832(d)(1 )). See Q & A-5 and Q & A-12 of this section.
The comparability rules apply separately to former employees because they are
a separate category of covered employee. See Q & A-5 of this section. Also,
former employees who were covered by a collective bargaining agreement
immediately before termination of employment are not comparable participating
employees. See Q & A-6 of this section.
(b) Locating former employees. An employer making comparable
contributions to former employees must take reasonable actions to locate any
missing comparable participating former employees. In general, such actions
include the use of certified mail, the Internal Revenue Service Letter Forwarding
Program or the Social Security Administration's Letter Forwarding Service.
(c) Examples. The following examples illustrate the rules in paragraph (a)
of this Q & A-1 O. None of the employees in the following examples are covered
by a collective bargaining agreement.
Example 1. In a calendar year, Employer N contributes $1,000 for the
calendar year to the HSA of each current employee who is an eligible individual
with coverage under any HDHP. Employer N does not contribute to the HSA of
any former employee who is an eligible individual. Employer N's contributions
satisfy the comparability rules.
Example 2. In a calendar year, Employer 0 contributes to the HSAs of
current employees and former employees who are eligible individuals covered
under any HDHP. Employer 0 contributes $750 to the HSA of each current
employee with self-only HDHP coverage and $1,000 to the HSA of each current

25
employee with family HDHP coverage. Employer 0 also contributes $300 to the
HSA of each former employee with self-only HDHP coverage and $400 to the
HSA of each former employee with family HDHP coverage. Employer O's
contributions satisfy the comparability rules.
0-11: Is an employer permitted to make comparable contributions only to
the HSAs of comparable participating former employees who have coverage
under the employer's HDHP?
A-11: If during a calendar year, an employer contributes to the HSA of
any former employee who is an eligible individual covered under an HDHP
provided by the employer, the employer is required to make comparable
contributions to the HSAs of all former employees who are comparable
participating former employees with coverage under any HDHP provided by the
employer. An employer that contributes only to the HSAs of former employees
who are eligible individuals with coverage under the employer's HDHP is not
required to make comparable contributions to the HSAs of former employees
who are eligible individuals and who are not covered under the employer's
HDHP. However, an employer that contributes to the HSA of any former
employee who is an eligible individual with coverage under an HDHP that is not
an HDHP of the employer, must make comparable contributions to the HSAs of
all former employees who are eligible individuals whether or not covered under
an HDHP of the employer.
0-12: If an employer contributes only to the HSAs of former employees
who are eligible individuals with coverage under the employer's HDHP, must the
employer make comparable contributions to the HSAs of former employees who
are eligible individuals with coverage under the employer's HDHP because of an

26
election under a COBRA continuation provision (as defined in section
9832(d)(1 ))?
A-12: No. An employer that contributes only to the HSAs of former
employees who are eligible individuals with coverage under the employer's
HDHP is not required to make comparable contributions to the HSAs of former
employees who are eligible individuals with coverage under the employer's
HDHP because of an election under a COBRA continuation provision (as defined
in section 9832(d)(1 )).
Q-13: How do the comparability rules apply if some employees have
HSAs and other employees have Archer MSAs?
A-13: (a) HSAs and Archer MSAs. The comparability rules apply
separately to employees who have HSAs and employees who have Archer
MSAs. However, if an employee has both an HSA and an Archer MSA, the
employer may contribute to either the HSA or the Archer MSA, but not to both.
(b) Example. The following example illustrates the rules in paragraph (a)
of this Q & A-13:
Example. In a calendar year, Employer P contributes $600 to the Archer
MSA of each employee who is an eligible individual and who has an Archer MSA.
Employer P contributes $500 for the calendar year to the HSA of each employee
who is an eligible individual and who has an HSA. If an employee has both an
Archer MSA and an HSA, Employer P contributes to the employee's Archer MSA
and not to the employee's HSA. Employee X has an Archer MSA and an HSA.
Employer P contributes $600 for the calendar year to X's Archer MSA but does
not contribute to X's HSA. Employer p's contributions satisfy the comparability
rules.

, 54.4980G-4 Calculating comparable contributions.
Q-1: What are comparable contributions?

27
A-1: (a) Definition. Contributions are comparable if, for each month in a
calendar year, the contributions are either the same amount or the same
percentage of the deductible under the HDHP for employees who are eligible
individuals with the same category of coverage on the first day of that month.
Employees with self-only HDHP coverage are tested separately from employees
with family HDHP coverage. Similarly, employees with different categories of
family HDHP coverage may be tested separately. See Q & A-2 in '54.4980G-1.
An employer is not required to contribute the same amount or the same
percentage of the deductible for employees who are eligible individuals with one
category of HDHP coverage that it contributes for employees who are eligible
individuals with a different category of HDHP coverage. For example, an
employer that satisfies the comparability rules by contributing the same amount
to the HSAs of all employees who are eligible individuals with family HDHP
coverage is not required to contribute any amount to the HSAs of employees who
are eligible individuals with self-only HDHP coverage, or to contribute the same
percentage of the self-only HDHP deductible as the amount contributed with
respect to family HDHP coverage. However, the contribution with respect to the
self plus two category may not be less than the contribution with respect to the
self plus one category and the contribution with respect to the self plus three or
more category may not be less than the contribution with respect to the self plus
two category.

28
(b) Examples. The following examples illustrate the rules in paragraph (a)
of this Q & A-1. None of the employees in the following examples are covered by
a collective bargaining agreement.
Example 1. In the 2007 calendar year, Employer A offers its full-time
employees three health plans, including an HDHP with self-only coverage and a
$2,000 deductible. Employer A contributes $1,000 for the calendar year to the
HSA of each employee who is an eligible individual electing the self-only HDHP
coverage. Employer A makes no HSA contributions for employees with family
HDHP coverage or for employees who do not elect the employer's self-only
HDHP. Employer A's HSA contributions satisfy the comparability rules.
Example 2. In the 2007 calendar year, Employer 8 offers its employees
an HDHP with a $3,000 deductible for self-only coverage and a $4,000
deductible for family coverage. Employer 8 contributes $1,000 for the calendar
year to the HSA of each employee who is an eligible individual electing the selfonly HDHP coverage. Employer 8 contributes $2,000 for the calendar year to
the HSA of each employee who is an eligible individual electing the family HDHP
coverage. Employer 8's HSA contributions satisfy the comparability rules.
Example 3. In the 2007 calendar year, Employer C offers its employees
an HDHP with a $1,500 deductible for self-only coverage and a $3,000
deductible for family coverage. Employer C contributes $1,000 for the calendar
year to the HSA of each employee who is an eligible individual electing the selfonly HDHP coverage. Employer C contributes $1,000 for the calendar year to
the HSA of each employee who is an eligible individual electing the family HDHP
coverage. Employer C's HSA contributions satisfy the comparability rules.
Example 4. In the 2007 calendar year, Employer D offers its employees
an HDHP with a $1,500 deductible for self-only coverage and a $3,000
deductible for family coverage. Employer 0 contributes $1,500 for the calendar
year to the HSA of each employee who is an eligible individual electing the selfonly HDHP coverage. Employer D contributes $1,000 for the calendar year to
the HSA of each employee who is an eligible individual electing the family HDHP
coverage. Employer D's HSA contributions satisfy the comparability rules.
Example 5. (i) In the 2007 calendar year, Employer E maintains two
HDHPs. Plan A has a $2,000 deductible for self-only coverage and a $4,000
deductible for family coverage. Plan 8 has a $2,500 deductible for self-only
coverage and a $4,500 deductible for family coverage. For the calendar year,
Employer E makes contributions to the HSA of each full-time employee who is an
eligible individual covered under Plan A of $600 for self-only coverage and
$1,000 for family coverage. Employer E satisfies the comparability rules, if it

29
makes either of the following contributions for the 2007 calendar year to the HSA
of each full-time employee who is an eligible individual covered under Plan 8-(A) $600 for each full-time employee with self-only coverage and $1,000
for each full-time employee with family coverage; or
(8) $750 for each employee with self-only coverage and $1,125 for each
employee with family coverage (the same percentage of the deductible Employer
E contributes for full-time employees covered under Plan A, 30% of the
deductible for self-only coverage and 25% of the deductible for family coverage).
(ii) Employer E also makes contributions to the HSA of each part-time
employee who is an eligible individual covered under Plan A of $300 for self-only
coverage and $500 for family coverage. Employer E satisfies the comparability
rules, if it makes either of the following contributions for the 2007 calendar year to
the HSA of each part-time employee who is an eligible individual covered under
Plan 8-(A) $300 for each part-time employee with self-only coverage and $500 for
each part-time employee with family coverage; or
(8) $375 for each part-time employee with self-only coverage and $563 for
each part-time employee with family coverage (the same percentage of the
deductible Employer E contributes for part-time employees covered under Plan
A, 15% of the deductible for self-only coverage and 12.5% of the deductible for
family coverage).
Example 6. (i) In the 2007 calendar year, Employer F maintains an
HOHP. The HOHP has the following coverage options-(A) A $2,500 deductible for self-only coverage;
(8) A $3,500 deductible for self plus one dependent (self plus one);
(C) A $3,500 deductible for self plus spouse (self plus one);

(0) A $3,500 deductible for self plus spouse and one dependent (self plus
two); and
(E) A $3,500 deductible for self plus spouse and two or more dependents
(self plus three or more).
(ii) Employer F makes the following contributions for the calendar year to
the HSA of each full-time employee who is an eligible individual covered under
the HOHP-(A) $750 for self-only coverage;

30

(8) $1,000 for self plus one dependent;
(C) $1,000 for self plus spouse;

(0) $1,500 for self plus spouse and one dependent; and
(E) $2,000 for self plus spouse and two or more dependents.
(iii) Employer F's HSA contributions satisfy the comparability rules.
Example 7. (i) In a calendar year, Employer G offers its employees an
HOHP and a health flexible spending arrangement (health FSA). The health FSA
. reimburses employees for medical expenses as defined in section 213(d). Some
of Employer G's employees have coverage under the HDHP and the health FSA,
some have coverage under the HOHP and their spouse's FSA, and some have
coverage under the HOHP and are enrolled in Medicare. For the calendar year,
Employer G contributes $500 to the HSA of each employee who is an eligible
individual. No contributions are made to the HSAs of employees who have
coverage under Employer G's health FSA or under a spouse's health FSA or
who are enrolled in Medicare.
(ii) The employees who have coverage under a health FSA (whether
Employer H's or their spouse's FSA) or who are covered under Medicare are not
eligible individuals. Specifically, the employees who have coverage under the
health FSA or under a spouse's health FSA are not comparable participating
employees because they are not eligible individuals under section 223(c)(1).
Similarly, the employees who are enrolled in Medicare are not comparable
participating employees because they are not eligible individuals under section
223(b)(7) and (c)(1). Therefore, employees who have coverage under the health
FSA or under a spouse's health FSA and employees who are enrolled in
Medicare are excluded from comparability testing. See sections 4980G(b) and
4980E. Employer G's contributions satisfy the comparability rules.
0-2: How does an employer comply with the comparability rules when
some non-collectively bargained employees who are eligible individuals do not
work for the employer during the entire calendar year?
A-2: (a) In general. In determining whether the comparability rules are
satisfied, an employer must take into account all full-time and part-time
employees who were employees and eligible individuals for any month during the

31
calendar year. (Full-time and part-time employees are tested separately. See Q

& A-5 in '54.4980G-3.) There are two methods to comply with the comparability
rules when some employees who are eligible individuals do not work for the
employer during the entire calendar year; contributions may be made on a payas-you-go basis or on a look-back basis. See Q & A-9 through Q & A-11 in
, 54.4980G-3 for the rules regarding comparable contributions to the HSAs of
former employees.
(b) Contributions on a pay-as-you-go basis. An employer may comply
with the comparability rules by contributing amounts at one or more dates during
the calendar year to the HSAs of employees who are eligible individuals as of the
first day of the month, if contributions are the same amount or the same
percentage of the HDHP deductible for employees who are eligible individuals as
of the first day of the month with the same category of coverage and are made at
the same time. Contributions made at the employer's usual payroll interval for
different groups of employees are considered to be made at the same time. For
example, if salaried employees are paid monthly and hourly employees are paid
bi-weekly, an employer may contribute to the HSAs of hourly employees on a biweekly basis and to the HSAs of salaried employees on a monthly basis. An
employer may change the amount that it contributes to the HSAs of employees at
any point. However, the changed contribution amounts must satisfy the
comparability rules.
(c) Examples. The following examples illustrate the rules in paragraph (b)
of this Q & A-2:

32
Example 1. (i) Beginning on January 1st, Employer H contributes $50 per
month on the first day of each month to the HSA of each employee who is an
eligible individual on that date. Employer H does not contribute to the HSAs of
former employees. In mid-March of the same year, Employee X, an eligible
individual, terminates employment after Employer H has contributed $150 to X's
HSA. After X terminates employment, Employer H does not contribute additional
amounts to X's HSA. In mid-April of the same year, Employer H hires Employee
Y, an eligible individual, and contributes $50 to V's HSA in May and $50 in June.
Effective in July of the same year, Employer H stops contributing to the HSAs of
all employees and makes no contributions to the HSA of any employee for the
months of July through December. In August, Employer H hires Employee Z, an
eligible individual. Employer H does not contribute to Z's HSA. After Z is hired,
Employer H does not hire additional employees. As of the end of the calendar
year, Employer H has made the following HSA contributions to its employees'
HSAs-(A) Employer H contributed $150 to X's HSA;
(8) Employer H contributed $100 to V's HSA;
(C) Employer H did not contribute to Z's HSA; and
(D) Employer H contributed $300 to the HSA of each employee who was
an eligible individual and employed by Employer J from January through June.
(ii) Employer H's contributions satisfy the comparability rules.
Example 2. In a calendar year, Employer J offers its employees an HDHP
and contributes on a monthly pay-as-you-go basis to the HSAs of employees
who are eligible individuals with coverage under Employer J's HDHP. In the
calendar year, Employer J contributes $50 per month to the HSA of each of
employee with self-only HDHP coverage and $100 per month to the HSA of each
employee with family HDHP coverage. From January 1st through March 31 th of
the calendar year, Employee X is an eligible individual with self-only HDHP
coverage. From April 1st through December 31 th of the calendar year, X is an
eligible individual with family HDHP coverage. For the months of January,
February and March of the calendar year, Employer J contributes $50 per month
to X's HSA. For the remaining months of the calendar year, Employer J
contributes $100 per month to X's HSA. Employer J's contributions to X's HSA
satisfy the comparability rules.
(d) Contributions on a look-back basis. An employer may also satisfy the
comparability rules by determining comparable contributions for the calendar
year at the end of the calendar year, taking into account all employees who were

33
eligible individuals for any month during the calendar year and contributing the
same percentage of the HDHP deductible or the same dollar amount to the HSAs
of all employees with the same category of coverage for that month.
(e) Examples. The following examples illustrate the rules in paragraph (d)
of this Q & A-2:
Example 1. In a calendar year, Employer K offers its employees an HDHP
and contributes on a look-back basis to the HSAs of employees who are eligible
individuals with coverage under Employer K's HDHP. Employer K contributes
$600 ($50 per month) for the calendar year to the HSA of each of employee with
self-only HDHP coverage and $1,200 ($100 per month) for the calendar year to
the HSA of each employee with family HDHP coverage. From January 1st
through June 30 th of the calendar year, Employee Y is an eligible individual with
family HDHP coverage. From July 1st through December 31, Y is an eligible
individual with self-only HDHP coverage. Employer K contributes $900 on a
look- back basis for the calendar year to V's HSA ($100 per month for the
months of January through June and $50 per month for the months of July
through December). Employer K's contributions to V's HSA satisfy the
comparability rules.
Example 2. On December 31 S t. Employer L contributes $50 per month on
a look-back basis to each employee's HSA for each month in the calendar year
that the employee was an eligible individual. In mid-March of the same year,
Employee T, an eligible individual, terminated employment. In mid-April of the
same year, Employer L hired Employee U, who becomes an eligible individual as
of May 1st and works for Employer L through December 31 st. On December 31 st ,
Employer L contributes $150 to Employee T's HSA and $400 to Employee U's
HSA. Employer L's contributions satisfy the comparability rules.
(f) Periods and dates for making contributions. With both the pay-as-you
go method and the look-back method, an employer may establish, on a
reasonable and consistent basis, periods for which contributions will be made (for
example, a quarterly period covering three consecutive months in a calendar
year) and the dates on which such contributions will be made for that designated
period (for example, the first day of the quarter or the last day of the quarter in
the case of an employer who has established a quarterly period for making

34
contributions). An employer that makes contributions on a pay-as-you-go basis
for a period covering more than one month will not fail to satisfy the comparability
rules because an employee who terminates employment prior to the end of the
period for which contributions were made has received more contributions on a
monthly basis than employees who have worked the entire period. In addition,
an employer that makes contributions on a pay-as-you-go basis for a period
covering more than one month must make HSA contributions for any comparable
participating employees hired after the date of initial funding for that period.
(g) Example. The following example illustrates the rules in paragraph (f)
of this Q & A-2:
Example. Employer M has established, on a reasonable and
consistent basis, a quarterly period for making contributions to the HSAs of
eligible employees on a pay-as-you-go basis. Beginning on January 1s t,
Employer M contributes $150 for the first three months of the calendar year to
the HSA of each employee who is an eligible individual on that date. On January
15th , Employee V, an eligible individual, terminated employment after Employer
th
M has contributed $150 to V's HSA. On January 15 , Employer M hired
st
st
Employee W, who becomes an eligible individual as of February 1 . On April 1 ,
Employer M has contributed $100 to W's HSA for the two months (February and
March) in the quarter period that Employee W was an eligible employee.
Employer M's contributions satisfy the comparability rules.
Q-3: How do the comparability rules apply to employer contributions to
employees' HSAs if some non-collectively bargained employees work full-time
during the entire calendar year, and other non-collectively bargained employees
work full-time for less than the entire calendar year?
A-3: Employer contributions to the HSAs of employees who work full-time
for less than twelve months satisfy the comparability rules if the contribution
amount is comparable when determined on a month-to-month basis. For

35
example, if the employer contributes $240 to the HSA of each full-time employee
who works the entire calendar year, the employer must contribute $60 to the
HSA of each full-time employee who works on the first day of each three months
of the calendar year. The rules set forth in this Q & A-2 apply to employer
contributions made on a pay-as-you-go basis or on a look-back basis as
described in Q & A-3 of this section. See sections 4980G(b) and 4980E(d)(2)(8).
Q-4: Mayan employer make contributions for the entire year to the HSAs
of its employees who are eligible individuals at the beginning of the calendar year
(on a pre-funded basis) instead of contributing on a pay-as-you-go or on a lookback basis?
A-4: (a) Contributions on a pre-funded basis. Yes. An employer may
make contributions for the entire year to the HSAs of its employees who are
eligible individuals at the beginning of the calendar year. An employer that prefunds the HSAs of its employees will not fail to satisfy the comparability rules
because an employee who terminates employment prior to the end of the
calendar year has received more contributions on a monthly basis than
employees who work the entire calendar year. See Q & A-12 of this section.
Under section 223(d)(1 )(E), an account beneficiary's interest in an HSA is
nonforfeitable. An employer must make comparable contributions for all
employees who are comparable participating employees for any month during
the calendar year, including employees who are eligible individuals hired after the
date of initial funding. An employer that makes HSA contributions on a prefunded basis may also contribute on a pre-funded basis to the HSAs of

36
employees who are eligible individuals hired after the date of initial funding.
Alternatively, an employer that has pre-funded the HSAs of comparable
participating employees may contribute to the HSAs of employees who are
eligible individuals hired after the date of initial funding on a pay-as-you-go basis
or on a look-back basis. An employer that makes HSA contributions on a prefunded basis must use the same contribution method for all employees who are
eligible individuals hired after the date of initial funding.
(b) Example. The following example illustrates the rules in paragraph (a)
of this Q & A-4:
Example. (i) On January 1, Employer N contributes $1,200 for the
calendar year on a pre-funded basis to the HSA of each employee who is an
eligible individual. In mid-May, Employer N hires Employee B, who becomes an
eligible individual as of June 1st . Therefore, Employer N is required to make
comparable contributions to B's HSA beginning in June. Employer N satisfies
the comparability rules with respect to contributions to B's HSA if it makes HSA
contributions in anyone of the following ways-(A) Pre-funding B's HSA by contributing $700 to B's HSA;
(B) Contributing $100 per month on a pay-as-you-go basis to B's HSA; or
(C) Contributing to B's HSA at the end of the calendar year taking into
account each month that B was an eligible individual and employed by Employer
M.
(ii) If Employer M hires additional employees who are eligible individuals
after initial funding, it must use the same contribution method for these
employees that it used to contribute to B's HSA.
Q-5: Must an employer use the same contribution method as described in
Q & A-2 and Q & A-4 of this section for all employees who were comparable

participating employees for any month during the calendar year?

37
A-5: Yes. If an employer makes comparable HSA contributions on a payas-you-go basis, it must do so for each employee who is a comparable
participating employee as of the first day of the month. If an employer makes
comparable contributions on a look-back basis, it must do so for each employee
who was a comparable participating employee for any month during the calendar
year. If an employer makes HSA contributions on a pre-funded basis, it must do
so for all employees who are comparable participating employees at the
beginning of the calendar year and must make comparable HSA contributions for
all employees who are comparable participating employees for any month during
the calendar year, including employees who are eligible individuals hired after the
date of initial funding. See Q & A-4 of this section for rules regarding
contributions for employees hired after initial funding.
0-6: How does an employer comply with the comparability rules if an
employee has not established an HSA at the time the employer contributes to its
employees' HSAs?
A-6: (a) Employee has not established an HSA at the time the employer
funds its employees' HSAs. If an employee has not established an HSA at the
time the employer funds its employees' HSAs, the employer complies with the
comparability rules by contributing comparable amounts plus reasonable interest
to the employee's HSA when the employee establishes the HSA, taking into
account each month that the employee was a comparable participating
employee. See 0 & A-13 of this section for rules regarding reasonable interest.

38
(b) Employee has not established an HSA by the end of the calendar year.
[Reserved]
(c) Example. The following example illustrates the rules in paragraph (a)
of this Q & A-6:
Example. Beginning on January 1st, Employer 0 contributes $500 per
calendar year on a pay-as-you-go basis to the HSA of each employee who is an
eligible individual. Employee C is an eligible individual during the entire calendar
year but does not establish an HSA until March. Notwithstanding C's delay in
establishing an HSA, Employer 0 must make up the missed HSA contributions
th
plus reasonable interest for January and February by April 15 of the following
calendar year.
Q-7: If an employer bases its contributions on a percentage of the HDHP
deductible, how is the correct percentage or dollar amount computed?
A-7: (a) Computing HSA contributions. The correct percentage is
determined by rounding to the nearest 1/1 ~Oth of a percentage point and the
dollar amount is determined by rounding to the nearest whole dollar.
(b) Example. The following example illustrates the rules in paragraph (a)
of this Q & A-7:
Example. In this Example, assume that each HDHP provided by
Employer P satisfies the definition of an HDHP for the 2007 calendar year. In the
2007 calendar year, Employer P maintains two HDHPs. Plan A has a deductible
of $3,000 for self-only coverage. Employer P contributes $1,000 for the calendar
year to the HSA of each employee covered under Plan A. Plan B has a
deductible of $3,500 for self-only coverage. Employer P satisfies the
comparability rules if it makes either of the following contributions for the 2007
calendar year to the HSA of each employee who is an eligible individual with selfonly coverage under Plan B-(i) $1,000; or
(ii) $1,167 (33.33% of the deductible rounded to the nearest whole dollar
amount).

39
Q-8: Does an employer that contributes to the HSA of each comparable
participating employee in an amount equal to the employee's HSA contribution or
a percentage of the employee's HSA contribution (matching contributions) satisfy
the rule that all comparable participating employees receive comparable
contri butions?
A-8: No. If all comparable participating employees do not contribute the
same amount to their HSAs and, consequently, do not receive comparable
contributions to their HSAs, the comparability rules are not satisfied,
notwithstanding that the employer offers to make available the same contribution
amount to each comparable participating employee. But see Q & A-1 in
'54.4980G-5 on contributions to HSAs made through a cafeteria plan.
Q-9: If an employer conditions contributions by the employer to an
employee's HSA on an employee's participation in health assessments, disease
management programs or wellness programs and makes the same contributions
available to all employees who participate in the programs, do the contributions
satisfy the comparability rules?
A-9: No. If all comparable participating employees do not elect to
participate in all the programs and consequently, all comparable participating
employees do not receive comparable contributions to their HSAs, the employer
contributions fail to satisfy the comparability rules. But see Q & A-1 in
'54.4980G-5 on contributions made to HSAs through a cafeteria plan.
Q-10: If an employer makes additional contributions to the HSAs of all
comparable participating employees who have attained a specified age or who

40
have worked for the employer for a specified number of years, do the
contributions satisfy the comparability rules?
A-10: No. If all comparable participating employees do not meet the age
or length of service requirement, all comparable participating employees do not
receive comparable contributions to their HSAs and the employer contributions
fail to satisfy the comparability rules.
0-11: If an employer makes additional contributions to the HSAs of all
comparable participating employees who are eligible to make the additional
contributions (HSA catch-up contributions) under section 223(b)(3), do the
contributions satisfy the comparability rules?
A-11: No. If all comparable participating employees are not eligible to
make the additional HSA contributions under section 223(b)(3), all comparable
participating employees do not receive comparable contributions to their HSAs,
and the employer contributions fail to satisfy the comparability rules.
0-12: If an employer's contributions to an employee's HSA result in noncomparable contributions, may the employer recoup the excess amount from the
employee's HSA?
A-12: No. An employer may not recoup from an employee's HSA any
portion of the employer's contribution to the employee's HSA. Under section
223(d)(1 )(E), an account beneficiary's interest in an HSA is nonforfeitable.
However, an employer may make additional HSA contributions to satisfy the
th

comparability rules. An employer may contribute up until April 15 following the
calendar year in which the non-comparable contributions were made. An

41
employer that makes additional HSA contributions to correct non-comparable
contributions must also contribute reasonable interest. However, an employer is
not required to contribute amounts in excess of the annual contribution limits in
section 223(b). See 0 & A-13 of this section for rules regarding reasonable
interest.
0-13: What constitutes a reasonable interest rate for purposes of making
comparable contributions?
A-13: The determination of whether a rate of interest used by an
employer is reasonable will be based on all of the facts and circumstances. If an
employer calculates interest using the Federal short-term rate as determined by
the Secretary in accordance with section 1274(d), the employer is deemed to use
a reasonable interest rate.
r

54.4980G-5 HSA comparability rules and cafeteria plans and waiver of excise

tax.
0-1: If an employer makes contributions through a section 125 cafeteria
plan to the HSA of each employee who is an eligible individual, are the
contributions subject to the comparability rules?
A-1: (a) In general. No. The comparability rules do not apply to HSA
contributions that an employer makes through a section 125 cafeteria plan.
However, contributions to an HSA made through a cafeteria plan are subject to
the section 125 nondiscrimination rules (eligibility rules, contributions and
benefits tests and key employee concentration tests). See section 125(b), (c)
and (g) and the regulations.

42
(b) Contributions made through a section 125 cafeteria plan. Employer
contributions to employees' HSAs are made through a section 125 cafeteria plan
and are subject to the section 125 cafeteria plan nondiscrimination rules and not
the comparability rules if under the written cafeteria plan, the employees have the
right to elect to receive cash or other taxable benefits in lieu of all or a portion of
an HSA contribution (meaning that all or a portion of the HSA contributions are
available as pre-tax salary reduction amounts), regardless of whether an
employee actually elects to contribute any amount to the HSA by salary
reduction.
0-2: If an employer makes contributions through a cafeteria plan to the
HSA of each employee who is an eligible individual in an amount equal to the
amount of the employee's HSA contribution or a percentage of the amount of the
employee's HSA contribution (matching contributions), are the contributions
subject to the section 4980G comparability rules?
A-2: No. The comparability rules do not apply to HSA contributions that
an employer makes through a section 125 cafeteria plan. Thus, where matching
contributions are made by an employer through a cafeteria plan, the contributions
are not subject to the comparability rules of section 4980G. However,
contributions, including matching contributions, to an HSA made under a
cafeteria plan are subject to the section 125 nondiscrimination rules (eligibility
rules, contributions and benefits tests and key employee concentration tests).
See 0 & A-1 of this section.

43

0-3: If under the employer's cafeteria plan, employees who are eligible
individuals and who participate in health assessments, disease management
programs or wellness programs receive an employer contribution to an HSA and
the employees have the right to elect to make pre-tax salary reduction
contributions to their HSAs, are the contributions subject to the comparability
rules?
A-3: (a) In general. No. The comparability rules do not apply to
employer contributions to an HSA made through a cafeteria plan. See 0 & A-1
of this section.
(b) Examples. The following examples illustrate the rules in this §
54.4980G-5:
Example 1. Employer A's written cafeteria plan permits employees to
elect to make pre-tax salary reduction contributions to their HSAs. Employees
making this election have the right to receive cash or other taxable benefits in
lieu of their HSA pre-tax contribution. The section 125 cafeteria plan
nondiscrimination rules and not the comparability rules apply because the HSA
contributions are made through the cafeteria plan.
Example 2. Employer B's written cafeteria plan permits employees to
elect to make pre-tax salary reduction contributions to their HSAs. Employees
making this election have the right to receive cash or other taxable benefits in
lieu of their HSA pre-tax contribution. Employer B automatically contributes a
non-elective matching contribution or "seed money" to the HSA of each
employee who makes a pre-tax HSA contribution. The section 125 cafeteria plan
nondiscrimination rules and not the comparability rules apply to Employer B's
HSA contributions because the HSA contributions are made through the cafeteria
plan.
Example 3. Employer C's written cafeteria plan permits employees to
elect to make pre-tax salary reduction contributions to their HSAs. Employees
making this election have the right to receive cash or other taxable benefits in
lieu of their HSA pre-tax contribution. Employer C makes a non-elective
contribution to the HSAs of all employees who complete a health risk
assessment and participate in Employer C's wellness program. Employees do
not have the right to receive cash or other taxable benefits in lieu of Employer C's

44
non-elective contribution. The section 125 cafeteria plan nondiscrimination rules
and not the comparability rules apply to Employer C's HSA contributions because
the HSA contributions are made through the cafeteria plan.
Example 4. Employer D's written cafeteria plan permits employees to
elect to make pre-tax salary reduction contributions to their HSAs. Employees
making this election have the right to receive cash or other taxable benefits in
lieu of their HSA pre-tax contribution. Employees participating in the plan who
are eligible individuals receive automatic employer contributions to their HSAs.
Employees make no election with respect to Employer D's contribution and do
not have the right to receive cash or other taxable benefits in lieu of Employer D's
contribution, but are permitted to make their own pre-tax salary reduction
contributions to fund their HSAs. The section 125 cafeteria plan
nondiscrimination rules and not the comparability rules apply to Employer D's
HSA contributions because the HSA contributions are made through the cafeteria
plan.

45
0-4: Mayall or part of the excise tax imposed under section 4980G be
waived?
A-4: In the case of a failure which is due to reasonable cause and not to
willful neglect, all or a portion of the excise tax imposed under section 4980G
may be waived to the extent that the payment of the tax would be excessive
relative to the failure involved. See sections 4980G(b) and 4980E(c).

Deputy Commissioner for Services and Enforcement.

Approved:

Acting Deputy Assistant Secretary (Tax Policy).

Page 1 of6

July 28, 2006
hp-33

Remarks of Anna Escobedo Cabral
U.S. Treasurer
Before the Texas Association of Mexican-American
Chambers of Commerce
Good afternoon - buenos dl3S a todos.
It IS truly a gl'eat pleasure to JOin you today at TAMACC's 31 51 Annual Convention
and Expo Women's Lunctleon. It's a real thrill to be in the Lone Star State
particularly In EI Paso, Texas. Thanks again for inviting me.
'
TileY say lilat everything in Texas IS bigger, and from the looks of today's fantastic
turnout at this event, I guess what they say IS true I really appreciate you being
here and I appreciate your energy and enthusiasm.
Before we move on. I think we should all give a hand to today's event organizers,
T AMACC and particularly the EI Paso business community and chambers of
commerce. Thanks again to all ttle staff, but also to the business-women and
entrepreneul's present in thiS room today. Many thanks for your courage,
determination and contributions. They are essential to improving our economy and
improving OUI' communities.
More Importantly, I really want to express my profound appreciation to all of you for
being such an inspiration to the Hispanic community and to the many professional
Latinas who you tnsplre. You may be unaware of what a true role model each and
everyone of you is for perhaps a young professional hoping to start her own
business one day. And on behalf of Secretary Paulson and President Bush, I want
to express their gratitude for all of your hard work to keep our economy going.
Quite frankly, I'm really excited about thiS opportunity to share with you much about
the work thiS Administralion is focused on to ensure the continued vitality of our
economy. But It is also Important to make you aware of some of the President's
current poliCY priorities, particularly In the area of immigration reform, which most of
you here I'm sure are somewhat familiar with - perhaps from reading or Iistentng to
recent news reports
I also think you'll find of significant value some inforrnalion I'll share with you today
about the day-to-day work we're engaged in at the Treasul'y Department to help
promote the economic conditions which can truly help Individuals grow and prosper
- a prosperity which often translates to improved opportunities for indiViduals and
improved lives for whole families and whole comillunities. For Instance, the
Department's work In tile area of improving financial education is particularly
noteworthy. I hope you'll consider tapping into many of the tools and resources
we've made available for you, your employees and your customers.
But I'm sincerely not here to tell you, "I'm from the federal government and I'm here
to help" On the contraryl I'm here as a representative of tile federal government to
ask for your help. As trusted leaders in your community, you really are the best
conduit to help us get the word out about many useful tools and resources the
government has developed to assist your customers, employees, and busrness
partners make the best financial decisions. All kidding aside - we really do need
your help and your leadership to disseminate crucial information througllout our

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Page 2 of6

communities - communities tilal are contributing significantly to our economy, and
that unfortunately have heen Ir,ldltlonZllly underserved.
That is still a real ch(lllen~Je tOdZlY, hut we're seeing some positive cllanges 111
people's level of ClW,)I'PllCSS, dlll1 tililt II1cllJlies il helgiltelled awareness 111 the
W(lshlngtoll and ,llso 111 tl10 flnililCIClI S(;I-VICes community.
A significant number of govemmelll leilciers 111 Washington and corporate leaders
are acutely aware that millority mZlrkets III the US represent an important area of
growth fortlle AmericZln economy They also have a sillcere Interest in optimizing
Opportullities in these communities More and more, the fmanclal services
community IS looklllg to Illinority I1lZlrkets as areas for demonstrable growth - and
that Includes the Hlsp3nlc malket. Just take mto consideration projections from
2004 to 2009, which Indicate a Hispanic buying power gall1 of 45 percentl
However, despite tllese significant contnbutions to the national economy, many
mll10rltles, palilcularly Immigrants are less likely to participate 111 mainstream
fmanclal services. Trlere are a vclnety of reasons for thls_ And while we've seen
Improvements In some areas, such as mcreased homeownershlp, there IS slill much
room for Improvement ConSider that wllile the rate for homeownership among
mlnonty households is IlIgllel- than It has been, minority populations still are not
purcllaslng homes at rates similar to other groups In the past decade, the
Caucasian homeownershlp rate lias increased from 71 percent to 76 percent: while
the HispaniC homeownership rate has Increased from 42 percent to 50 percent
between 1995 through the first quarter of 2005
The PreSident IS aware of the challenges and opportunities that lie ahead and that
is why he IS truly committed to ensllrmg that we remain focused on promoting those
policies that Ilave placed the U.S. on the path to tremendous economic growth_
In the U.S we've seen that our economy has surged over the past few years
The US economy continues gettll1g stronger. Much of the economic momentum
we've expenenced in recent years can be explained by the PreSident's firm
commitment to promoting a pro-growth economic agenda. The resilience and
strength of the US economy is a fact - and this IS true despite many of the recent
and significant unforeseen challenges our country faced since the President first
came Into office - the effects of the tech stock market bubble burst, the monstrous
9/11 terronst attacks on our soil and the devastating impact expenenced of the Gulf
Coast hUrricanes In 2005.
The President's economic team nonetheless IS focused on furthering poliCies which
encourage enhanced opportunities for businesses to expand, as well as hire more
workers to meet increased customer demands.
It IS eVident that these pro-growth poliCies are working and generating even better
than expected results. Just consider the positive business Investment and solid
economic growth we've seen We've had 36 straight months of capital investment
growth averaging 9%, and more than 5.4 million jobs have been created since the
PreSident's tax relief took effect III mld-2003. We also now boast a 4.6%
unemployment rate - a rate lower than the average rate in each of the last four
decades. Thanks also III great part to businesses that understand their customers
and continue to respond to the growing purchaslllg power of minOrities, the
economy has added an additional 121,000 additional jobs in just June of 2006
alone. Businesses, particularly small business like many of yours, are a significant
driving force for our US economy. Tiley are really the backbone of the U.S.
economy.
Additionally, although since mld-2003 people are keeping more of the money they
make, pro-growth poliCies have nonetheless helped the federal government
increase its tax revenue In June, Treasury's monthly statement shows continued
strong economic results. Receipts were lip 13 percent so far thiS year over last
year's 14.6% IIlcrease.

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3/6/2007

Page 3 of6

To put it Into perspective, It may be useful to draw some comparisons. The US
economy is the fastest growing of any IllClJor industrialized nation In the world
Productivity is growing at the highest rate In years. In 2005, our economy grew
faster than Japan and more than tWice as fast as France It also grew more than
three-times as fast as Germany
Agalll, we really must also nedlt small bUSiness owners for much of thiS growth. As
I mentioned earlier, there is a significant amount of new busilless investment out
III ere - and that is really fantastic news. It serves as an indication of the confidence
we have In our economy and confldellce that we will continue to do well for
ourselves far IIltO the futLlI'e.
Much of thiS new business Investment IS lead by the HispaniC bUSiness community.
I find It truly encouraging that the number of Hispanic-owned businesses is growing
at three times the national rate. I also find very encouraging that the most recent
economic indicators show that Hispanic unemployment is at the lowest rate In years
- at only 5 percent.
One important explanation for tillS resilient and growing economy, again, is that we
left more to businesses to Invest by lowering their tax burden. It's about Simple
economics - when you allow people to keep more of their own money, they have
more money to Invest, and more of It to start or expand a bUSiness, or to pay for
other important IIllngs like a college education or a purchase of a first home.
I can assure you 1I1at the President and hiS economic team will remain focused on
furthering those proven and time-tested poliCies which encourage the innovator, the
entrepreneur and the investor to dare believe in what's possible, in their own
abilities and pursue dreams for a more frUitful future.
Nonetheless, increased opportunity necessitates increased preparation and
education As I mentioned earlier we can't expect the government to make money
for us. We've got to do it for ourselves and we have to create our own
opportunities. Doing so will require ensuring that individuals, particularly those in
our respective communities, acquire the necessary skills necessary to manage their
money Wisely and invest It intelligently.
I mentioned earlier the Importance of improVing personal finance knowledge for all
people across the country Although our economy continues to grow, we still have
much work ahead of us to Improve finanCial education, particularly In minority
communities, and Including among HispaniCs.
This challenge could be attributed to a complex and burgeoning economy like ours,
which creates more chOices and sophisticated vehicles for saving and making one's
money grow. But often, It can also be attributed to lack of knowledge about
available opportunities and resources
When we talk about finanCial education in today's terms, what we're really talklllg
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 requires more than Just presenting information in a nice neat package.
We find that we can have a greater impact when this information IS delivered
through trusted channels. The business community can play an Instrumental role Ifl
this important task. And 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 or planning for
a secure retirement.
Alternatively, we've also seen what can happen to those with little or no access to
personal finance information and services We realized the urgency of thiS task
after witnessing first-hand the added difficulties many "unbanked" indiViduals faced
as a result of last year's Gulf Coast Hurricanes. Many people Without bank
accounts in these hard-hit areas found it exceedingly difficult to access their

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3/6/2007

Page 40[6

government benefits. M~lIlY of those displaced from I/lell· homes were not easily
tracked. Because they Ilild no ilccount reliltlonshlp with a bank 01 credit union, and
thel·efore no debit carli mallY hild to Wellt to receive a replacement check via
traditional mall
Because of this experience, Tre<ls\lry hZls strelll]thellecJ Its commitment to helping
people understalld the vallie of est,lbllShlrlU a relationship Wltll a traditional fmancial
institution: and we are ef)ncl~jer! In several ccHllpalgns and multi-agency effmts to
Improve fillancial educZltlon In tile Coulitry. I'll give you Just a snap-sllot of tile
efforts we're 118lpI11~J lear! In the federdl govemment, particularly at Treasury.
First and foremost. TI·easLiry leclds the effmts of a federal commiSSion - the
Fmanclal Literacy and Edllcation COlllllllsslon - created In 2003 after Presldellt
Bush slglled the Fair and Accurate Credit Transaclions Act, and the 20 agenCies
that fmm It were tasked With developing a plall to Improve the money management
skills of people In the US Commonly referred to as the FLEC, It recently released
a strategy for fillancial education durlllg Fillancial Literacy Month In April of 2006
titled - Taklrlg Ownersilip of the Future The National Strategy for FinanCial
Literacy
The Commission was also tasked With developing a federal finanCial education web
site and toll-free hotlllle, which were launched in English and Spanish in October of
2004 - MyMoney.gov and 1-888-MyMoney I urge you to visit and spread the wmd
about MyMoney.gov It has been recently updated to include an interactive qUIz
called the "Money Twenty" and the strategy that I mentioned earlier is also available
and can be downloaded at MyMoney.gov.
The Strategy looks at a variety of Important topics, such as homeownershlp, credit
management, retirement savings, and "banking the unbanked" - all tOPICS of
concern as we've seen for the Hispanic community.
It also describes the challenges and some possible solutions The solutions may
come from the Federal government, but often nonprofit mganizations, businesses
like yours and other private sector players prOVide Important resources for those
Wishing to leam mme about personal finance Issues.
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 III the strategy, you will notice that Calls to Action
are highlighted. It is our hope that tllese calls to action will provide a springboard
for further open and Inclusive discussion on a whole myriad of personal finance
issues
Another very important campaign my office has been Involved in is the Go Direct
campaign About a year and half ago, the Treasury and Federal Reserve Banks
launched a campaign called Go Direct - III Spanish it is known as Dlrecto A Su
Cuenta
The campaign's objective IS to encourage seniors to receive their SOCial
Security benefits by direct depOSit
It not only comlllunicates the Importance of direct depOSit - but prOVides the means
by which seniors can Illake the SWitch from a paper check to direct deposit. We
have a dedicated call center staffed by bilingual personnel ready to assist all
benefiCia rles.
The call center IS only one of many ways we are helping beneficiaries sign up for
direct deposit. Our Web sites wwwGoDlrecLorg and wwwDlrectoASuCuenta.org,
allow beneficiaries to access a step-by-step online tool to sign up - eitller on their
own or through their bank or credit union.
Direct deposit is not only the most secure way for receiving SOCial Security benefits:
it IS also the IllOSt convenient way for all benefiCiaries to have Immediate access to

http://www.treas.goy/press/releases/hr>33.htm

3/6/2007

Page 5 0[6

their benefits. However. despite 95 percent of Americans rlavillg heard or read
about Identity tlleft. a survey sp(JIlsorecJ by the US Department of Treasury and
the Fedel'al Reserve Banks revealed th;lt IllrlllY are lillaware of the security benefits
of direct deposit over pdper checks
I urge you to help us spread the word about tillS fantastic I'esource too. Keep In
mrnd 1I1at direct deposit carl also provlcie seillors receiving SSA payments With a
sense of control of tilelr money TillS IS true even under ttle most difficult
circumstances. Agarn. as YOll know HlIfllcclile Katrina displaced tens of thousands
of beneficiaries Just days before their checks arrived In the mall In uncertarn times
like these, enrolling In direct depOSit can offer a muctl needed peace of mind to
federal benefit reCipients.
I have had a chance to sllare some very good economiC news With you today. But
1I1e reality IS that statistics canllOt adequately captul'e the contrrbutlons of bUSiness
leaders like you. IndiViduals who have the potential of brrngrng about POSitive
change alld Improving people's lives
Unfoliunately. it IS also true that thiS data may not adequately capture the
contributions of some Illlmlgrarlts, particularly for some who remain in the U.S,
illegally - a Significant amount of those IndiViduals are HispaniC, comrng from
MeXICO and other countries In Latlll America
They remain in the shadows and are often easy prey for those that would take
advantage of the precarious situation in whicll they live. The PreSident understands
that while It IS important to control our borders and protect our citizens. It IS also
Illlperalive that we prOVide legal alternatives for those who which to gain entry into
the U.S In a safe and legal manner,
As the PreSident says. It IS rather telling when people from other countrres make a
conscIOus deCISion to leave their homes and families. rrsklng everything to come to
this coulltry in search of a brighter and better future. We are a carrng people, and
we can not let therr talent and desire to work go to waste, In fact. this country can
surely benefit from it. That IS why the PreSident has outlined a comprehenSive plan
to reform our Immigration laws
The PreSident believes the US can be a lawful society and a welcoming society at
the same time, He's said that he IS committed to enforCing our Immigration laws. but
It will also be important to honor thiS country's proud immigrant heritage.
The PreSident's comprehenSive Immigration reform approach aims to accomplish
some very clear objectives. First. it is imperative that we protect our citizens and
secure our borders. Second, it will be Important to develop a temporary worker
program - a program which will proVide foreign workers a legal mechanism to come
Into the country, and In many rnstances do the Jobs that Americans aren't dorng,
However. under the President's proposal, employers Will also be held accountable
for hiring undocumented workers
But the reality IS that there are millions of Illegal immigrants who are already here in
the country, While these IndiViduals will obviously not be granted automatic
citizensilip. It IS not a Viable alternative to Simply kick all these people out of the
country. We'll have to deal With tillS challenge in a rational way - the President's
plan also offers the pOSSibility of dOing so
As Congress continues consideflllg leglslatloll on IITlmlgratlon reform. I hope that
the bUSiness and 1l0nproflt community will work together and help government
provide these indiViduals With the tools to succeed - everything frOIll learning
English, pursuing an education and becoming frnancially literate- particularly as
1I1ey move toward the path of legalization. ThiS IS particularly Importallt III a society
like ours filled With opportunity. but also replete With a varrety of finanCial services
options - options wllich many recent immigrants will not have likely yet been
exposed to, particularly III their own native countries.

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3/6/2007

Page 60f6
Ultimately, as the President has said, when it comes to devising a comprehensive
approach to imilligration reforlll, all eleillents of the problem must be addressed
together, or none of them will be solved at <:lll
Thank you agalll for YOllr time and ilttclltlon - thiS has been a tremendous
opportulllty to make new frlcl1(is ;lIlet COlmectlons with the busrness community here
III EI Paso and I look forward to Iliture opportunities to work together as we take
positives steps toward mallY of our sl1,lfcci goals. It has [)cen a real pleasure for
me to share Wlttl you Just il few of tile efforts we're involved rn 118re at Treasury and
to highlight the PreSident's prlorrtles to keep our economy and bUSinesses going
strong. Wltll your 11elp i1nd contrlblJtlons, I know we will together continue to
enhance opportunities for those WilO seek them.
-30-

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Page I of I

July 28, 2006
hp-34

-UPDATEDTreasury Secretary Paulson to Deliver First Speech in NYC
Washington, DC--Treasury Secretary Henry M Paulson will deliver his first speech
as Secretary In New York next week, 011 Tuesday, August 1, at the Columbia
BUSiness School The speech will foclls 011 the outlook and challenges for the U.S.
and global eCOnOITlieS
While In New Ymk, the SecretalY will also visit the New York Stock Exchange and
NASDAQ's Stock Market. He will meet with bUSiness leaders at both stops to
diSCUSS cllrrent economic cOlldltlons
What NYSE Flom Tour
When 930 a.1n. (EDT)
Where 11 Wall Street. New Ymk, NY
Contact Allison Circle, 212-656-5717 or 646-938-6533, acircle@nyse.com
What Remarks at the Columbia Business School
When 1130 a.m (EDT)
Where 535 W 116th Street, 101 Low Library, The library Rotunda, New Ymk, NY
Contact Jane Trombley or Keshla Mark at (212) 854-2747
Note Space IS limited - media should RSVP by July 28.
What NASDAQ ClOSing Bell
When 4 pm. (EDT)
Where 43rd Street and Broadway, Tlllles Square, New York, NY
Contact SilVia Davl, 646-441-5014, silvia.davi@nasdaq.com
Note Media should RSVP.

-30-

http://www.tfeas.gov/press/releases/ht>~14.htm

3/6/2007

Page 10f2

July 31, 2006
2006-7 -31-13-5 7-44-26128
U.S. International Reserve Position
The Treasury Department today released US reserve assets data for the latest week. As indicated In this table, U.S reserve assets
totaled $67,814 million as of tile end of that week, compared to $67,451 million as of the end of the prior week.

I. Official U.S. Reserve Assets (in US millions)
July 21, 2006

I

I

TOTAL

67,451

11 Foreign Currency Reserves 1

Euro

I a Securities

11,877

Of which. Issuer headqual1ered in the US

II

II
II

Yen
10,894

II

TOTAL

II

July 28, 2006

II

67,814

II

II

22,771

II

II

0

II

II

17,129

II

II
II
II

0

Euro
11,949

II

Yen

II

11,043

II

I
I

II
II

TOTAL
22,992

II

0

II
II

17,269

II
II
II

0

I b Total depOSits with:
b.i. Other central banks and BIS

I

b.iI. Banks headquartered in the US
Ibll Of which, banks located abroad

12 IMF Reserve Position 2
13 Special Drawlllg Rights (SDRs) 2
14 Gold Stock 3

15. Other Reserve Assets

5,316

I

II

b.II/' Banks headquartered outslcle the US
Ib.lii Of which, banks located in the US

11,813

I

II
II
II
II
II

I

II

II

0

I

0
7,900

II

II
II
II

II

I

5,390

II

0

II

I

11,879

II

0

0
0
7,901

8,611

11

8,611

11,041

Jl

11,041

0

II

0

I

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

I

I

I

1. Foreign currency loans and securities

Euro

I

II
II

Yen

II
I

TOTAL

II

0

I

Yen

Euro

0

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

12.a

Short positions

2.b. Long positions
3. Other

II

II
II
II

I
I

I

0

I

0

I

July 28, 2006

II

II

II

I
I

I

TOTAL

I

I

0

I

II
II
II

0

I

0

I

0

I

III. Contingent Short-Term Net Drains on Foreign Currencry_A_s_s_et_s_ _ _ _ _ _ _ _ _-,

II
I

II

I

July 21,2006
Euro

II
II

http://www.ureas.gov/press/releases/200673113574426128.htm

Yen

I
II

TOTAL

II

I

July 28, 2006
Euro

II
"

Yen

II

TOTAL

II
3/612007

Page 2 of2

1. Conlingent liabilities in foreign currency

1.a. Collateral guarantees on debt due wltllin 1
year
11.b. OHler conlingent liabilities
2. Foreign currency seCUrities with embedded
options
3. Undrawn, unconditional credit lliles

13 a

0

I

II

I
I

I

I
I

I"

0

II

0

I

"

0

I

I

I"

I

II

I

II
II

I
II

0

I

I

0

With other centra/ banks

3.b With banKS and other flnancla/lnstilutlons

1Headqual1ered

In

the U S

Jc Wlt/J banKS and other financia/IIJstltutlOlls
1Headqual1ered outside the US
4. Aggregate short and long pOSitions of options
In foreign

"

"

I

"

II

"I

II

"
"

Icurrencles Vis-a-VIS the U.S dollar

114a.2 Written calls
14b Long positions
14b 1. Bought calls
4b2 Written puts
1

II"

"

I

I"
0

I.J. a Short positions
14a 1. Bought puts

"
"
"

0

"

"

II

II

"

II"
II

II

"

II

"
"

"
1

II

II"
II

II

I

II

II

"
Notes:

11 Includes holdings of the Treasury's Exchange Stabilization Fund (ESF) and the Federal Reserve's System Open Market Account
(SOMA), valued at current market exchange rates. Foreign currency holdlilgs listed as securities reflect marked-to-market values, and
depOSits reflect carrylilg values. Foreign Currency Reserves for the latest week may be subject to reVision. Foreign Currency
Reserves for the prior week are flilal.
21 The items, "2. IMF Reserve POSition" and "3. Special Drawlilg Rights (SDRs)," are based on data provided by the IMF and are
valued in dollar terms at the offiCial SDRldollar exchange rate for the reportlilg date. The entries for the latest week reflect any
necessary adjustments, includlilg revaluation, by the US Treasury to IMF data for the prior month end
31 Gold stock IS valued monthly at $42.2222 per fine troy ounce.

http://www.treas.go v /oress/releases/2(f..)673113574426128.htm

3/612007

Page 1 of 1

10 view or pnnt tne /-'Ur content on tnlS page, Gown/oaG tne tree AGooel!') AcroOa(1!') KeaCferI!'.J,

July 31 , 2006
HP-35
Treasury Announces Market Financing Estimates
TI'easul'y announced Its current estimates of net marketable flnallClng for the July September 2006 and October - December 2006 quarters
•

Over the July - September 2006 quarter, the Treasury expects to borrow
$30 billion of net marketable debt. assumlllg an end-of-September cash
balance of $35 billion The current estimate is $59 billion lower than
announced In May 2006 Cash outlays are expected to exceed cash
receipts by $23 billion this quarter, resulling in a flllanclllg need which IS $55
billion lower thall our prevIous estllnate and IS the primary contributor to the
decrease In borroWing of Ilet marketable debt thiS quarter
• Over the Octabel - December 2006 quarter, the Treasury expects to borrow
$104 billion of net marketable debt to meet a projected finanCing need of
$106 billion, assuming an end-of-December cash balance of $25 billion.

Durlllg the April - June 2006 quarter, Treasury paid down $92 billion af net
marketable debt, ending With a cash balance of $46 billion on June 30. In May
2006, Treasury announced an estlinated pay down In net marketable borrowing of
$51 billion, assuming an end-of-June cash balance of $25 billion. Cash receipts
exceeded cash outlays by $137 billion, contributing to a financing need that was
$61 billion less than previously assumed. The pay down in net marketable
borrOWing over the quarter was $41 billion larger than previously estimated,
Since 1997, the average absolute forecast error In net borrowing of marketable debt
for the current quarter IS $10 billion and the average absolute forecast error for the
end-of-quarter cash balance is $9 billion, Similarly, the average absolute forecast
error for the followlllg quarter IS $33 billion and the average absolute forecast error
for the end-of-quarter cash balance IS $11 billion,
Additional finanCing details relating to Treasury's Quarterly Refunding will be
released at 9:00 A,M. on Wednesday, August 2,
-30REPORTS

•

Sources and Uses Table

http://www.tfeas.goy/press/releases/ht>~5.htm

3/6/2007

Sources and Uses Reconciliation Table
Financing
FillalKillg Mark.:tablc Ali Other
Need
Ilorrowing Sources
lotal

Jail - Mar
II
2OOb -.:\ciiiiir---------------------------t:::::!:?E:::::l::_::-:-!-~--~~--::-:--::-:-::J- : _:_!:LII_: 4~J:
::::

:___:

--:ir..:,ii;j--Tlji:;·~:;iiTR-l:i:ii;;jj;

Jut - ~ep 1_~_~ll __~:_~_U_~~ _____________________ ______ :L~
2006 July31,2006
23
---Ue-,-,i;j~-Tlji:e~:;;'r-R~:i:J.,;;;;i

IUd-Dec

2006

________ _______ ___________
~~

J~L

30

(17)

Mell10
Change in
fml-()j:(juurtcr
Cash Balance ('".\h 13,,/ul/cc

:::::::::!~~::::::::: ::::::::I~:~r:::::: :::::::::::~::::::::::::

____________~_~ ____________________ ~______________________~!! __________ _

------(33r----- ------(5C/j----- ----Tr:n----

13
(II)
---------mr-------------('T6r------

~

35

-----------3------------

~~~;,~F~~;~~:;;;;:;;;:;;;;;;; ::::::!R~::::::: 1::::::!Rr:::: ::::::~~r::: :::::::::~~_::::::::::~ :::::::::::~~:::::::::::

Notes: All data reported on a cash basis ($ billions)

Page I of2

July 31,2006
HP-36

Deputy Assistant Secretary for Macroeconomics
Of The Office of Economic Policy
Robert Stein
Statement for The Treasury Borrowing Advisory Committee
of The Bond Market Association
In tile three months since the COlnrlllttee last met, the economy has moderated
someWhat, as expected FollOWing a surge In overall activity in the first quarter ~
suppor1ed by strong consumer spending ~ declining residential construction and
slOWing busilless spending on equipment and software softened the overall growth
pace. Stili. tile labor market remains healthy and core Inflation remains under
contl-ol.
According to the advance figures from the Bureau of Economic Analysis (BEA), real
GOP grew at a 2.5 percent clilnual rate In the second quar1er. This followed a 5.6
percent pace of growth In the first quar1er and a 1.8 percent pace in the four1h
quar1er of 2005. The see-saw pattern of GOP growth has resulted largely from
losses and recovery related to last fall's hurrrcanes and erratic patterns in motor
vehicle sales and federal purchases. Looking over the four quarters ending in the
second quar1er to smooth out the temporary accelerations and decelerations, real
GOP grew 3.5 percent, a very solid shOWing.
The composition of the four-quarter growth IS favorable to continued expansion.
Over the last four quar1ers, while real consumer spendlllg has risen 3.0 percent,
business spendlllg on plant, equipment. and software rose 6.8 percent and exports
rose 7.4 percent. Faster growth in these latter two categories suggests continued
support for productiVity growth ahead ~ as businesses use the new capital
purchased ~ and a more competitive stance abroad.
Along With second-quarter figures, BEA also released reVised estimates of real
GOP since 2003. The reviSions were not unusually large and left the quarterly
pattern of real GOP growth largely unchanged. On average, annual real GOP
growth from 200204 to 2005:04 was marked down by 0.3 percentage pOint to 3.4
percent from 3.7 percent previously. Because national accounts data are used to
calculate labor productiVity measures, estimates of labor productivity from 20032005 will also be reVised
The outlook for future business spending to expand capacity and continue the
recent strong productiVity performance is relatively positive. Corporate profits grew
strongly In tile first quarter (latest available) and as a share of GOP are at their
highest level since 1966. These profits represent not only the potential for future
capacity expanSion, but also the potential for future hiring and Increases in worker
compensation
The unemployment rate during the second quar1er averaged 4.6 percent, the lowest
quar1erly unemployment rate since the second quar1er of 2001 The rate has fallen
about half a percentage pOint In the last year. Payroll Job gains averaged about
108,000 In the second quarter, down somewhat from the first quarter average of
176,000. Over the last year the economy has added more than 1.8 million Jobs
Job gains will help to keep Incomes up, which Will continue to support expansion.
Inflation Increased In the second quar1er, largely due to energy price increases.
Consumer prices were up 4.3 percent from year-earlier levels in June, while
consumer energy prices were up more than 23 percent and gasoline prices were up

http://www.treas.gov/press/releases/ht>36.htm

3/612007

Page.2 of.2
more than 33 percell! In late Marcil, the price of a barrel of West Texas
Intermediate crude was about $66 per barrel, while In late July it has averaged
about $74 per barrel ConsLimers are once again facing gasolille prices In excess
of $3 per gallon Strong demand for petroleum-based fuels and geo-polltlcal
considerations are probably boosting 011 prices
OutSide of food and energy prices. core Inflation was much more contained Core
inflation was 2.6 percent III the year ending in June. the biggest twelve-month
increase since late 2001 Some statistical qUirks may be partly responsible: a
firming home rental market may be raising rents, which are used In constructing the
owner-equivalent rent measure for hOUSing costs. Looking back, the weakness In
the home rental market as buyers took advantage of low Interest rates to acquire a
home Illay have lowered rents III 2003 and 2004, perhaps making Inflation appear
too low In those years.
In SUIll, despite recent ups and downs, the overall economy appears to be In a
good position to continue growing at a moderate pace - around 3 percent - for the
remainlllg quarters of the year

- 30-

http://www.tl.eas.goy/press/releases/ht>36. htm

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