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Treas.
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Department of the Treasury
PRESS RELEASES
Numbers not used: HP-527, 532, and 537
Dapartment of the Treasury
Ubrary
MAR 2 ( Z008
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August 1, 2007
HP-521
UPDATE
Treasury Secretary Paulson to Visit Montana Next Week
Washington --Treasury Secretary Henry M. Paulson, Jr. will travel to Billings,
Montana on Tuesday, August 7 to discuss the importance of trade and the
economy in rural America.
While in Billings, the Secretary will participate in a public forum on keeping rural
areas competitive in the global economy. He will also tour MRL Equipment, a local
manufacturer focused on domestic and international production of pavement
marking application and removal equipment, and give remarks to MRL employees.
The following events are open to credentialed media:
Who
Treasury Secretary Henry M. Paulson, Jr.
Senate Finance Committee Chairman Max Baucus
What
Tour of MRL Equipment and Remarks to Employees
When
Tuesday, August 7, 9:20 a.m. MDT
Where
5379 Southgate Drive
Billings, MT
Who
Treasury Secretary Henry M. Paulson, Jr.
Senate Finance Committee Chairman Max Baucus
What
Press Availability with Local Media
When
Tuesday, August 7,11:15 a.m. MDT
Where
Montana State University
Cisel Hall
Band Room
27th Street between Poly Drive and Rimrock Road
Billings, MT
Who
Treasury Secretary Henry M. Paulson, Jr.
Senate Finance Committee Chairman Max Baucus
What
Community Jobs Forum
When
Tuesday, August 7, 11 :30 a.m. MDT
Where
Montana State University
Cisel Hall
Auditorium
27th Street between Poly Drive and Rimrock Road
Billings, MT
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August 1, 2007
hp-522
Asst Sec Nason Statement on House TRIA Bill
Washington- Treasury Assistant Secretary for Financial Institutions David G.
Nason issued the following statement today regarding the House Financial Services
Committee mark up of H.R. 2761 to extend the Terrorism Risk Insurance Act:
"The Administration has frequently stated the need for three critical elements in
TRIA reauthorization: the program should remain temporary and short-term, with no
expansion and a continued increase of private sector retention. Today's effort to
extend TRIA does not meet these standards for an improved market and we
strongly oppose this bill.
"We are particularly disappointed with the Committee's decision to extend the
program for 15 additional years. This extension runs counter to the public policy
goal of reducing and eventually eliminating the federal government's role in the
terrorism insurance market, and it sends the wrong message to the marketplace for
a program that was intended to be temporary.
"As the bill moves through the legislative process, the Administration looks forward
to working with the Congress to pursue an improved TRIA."
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August 2,2007
hp-523
Testimony of Treasury Deputy Assistant Secretary
Mark Sobel
Before the Committee on Ways & Means,
Subcommittee on Trade
Hearing on Legislation Related to Trade with China
Washington, D.C.--Chairman Levin, Representative Herger, and members of the
Sub-committee on Trade, thank you for the opportunity to appear before the
subcommittee to speak to you on our views on legislation related to international
currency issues.
The Congress is currently considering legislation to counter perceived unfair
currency practices. While the bills are wide-ranging, many focus on the concept of
"fundamental misalignment" against the background of very legitimate concerns
over China's exchange rate management. Let me share with you our perspectives
on these proposals and their implications for U.S. international monetary policy.
Engagement with China
Secretary Paulson is engaging China forcefully through the Strategic Economic
Dialogue (SED). He frequenlly observes that, given China's economic size and
importance, ensuring a productive U.S.-Chinese relationship is essential to
managing the challenges of the 21 st Century.
Last night, Secretary Paulson returned from a trip to China, where he saw President
Hu and China's financial officials. He conveyed a strong message about the need
for far more vigorous action by China to correct the undervaluation of the renminbi
(RMB), take immediate action to lift the RMB's value, and achieve far greater
currency flexibility.
Our discussions with China in the SED focus on the imperative for China to
rebalance its economy away from exports and investment toward more
consumption, to promote better balanced and more sustainable growth and to
reduce the country's enormous and excessive external surpluses. A more effective
monetary policy, made possible by greater currency flexibility, is also key. It would
enable China to better control domestic inflation, dampen swings in the investment
cycle, liberalize interest rates and improve credit allocation.
In contrast, heavy foreign exchange market intervention by China's central bank to
manage the currency is leading to excess reserve accumulation and rapid
increases in domestic liquidity. This heightens the risk of overheating, a build-up of
non-performing loans leading to further banking sector stress, and asset bubbles.
RMB undervaluation encourages production of exports at the expense of domestic
consumption of goods and services. These trends increase the risk of a renewed
boom-bust cycle, which would significantly harm first and foremost China, but also
the world economy. Chinese currency adjustment is a matter of international
responsibility, with significant implications for the smooth functioning of the
international monetary and trading systems.
RMB appreciation also would to some extent reduce the U.S. bilateral trade deficit
with China. But Chinese and U.S. global imbalances are rooted in the structures of
our economies. That is why the SED process is focused not only on increasing
currency flexibility but also more broadly on the overall rebalancing of the sources
of growth of the Chinese economy.
While we are not satisfied with the pace of change in China, there has been
important progress. China's currency is no longer fixed; it has appreciated by nearly
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10 percent against the dollar in the last two years and the rate of appreciation has
accelerated lately. China also is taking steps to reform its financial sector and to
improve market access for U.S. and other foreign firms. Yet, there is still a long way
to go.
We must continue to work hard for greater progress in our engagement. We
appreciate the frustrations of Congress with the slow pace of Chinese reform.
Indeed, we strongly share those frustrations. Yet, we continue to believe that direct,
robust engagement with China is the best means of achieving progress. We do not
believe that legislation would strengthen the United States' hand in achieving the
goal, which the Administration and Congress share, of promoting faster Chinese
economic reform. Indeed, we believe legislation would be counterproductive and
could lead to unintended adverse consequences.
Multilateral Engagement
While strong bilateral engagement is a vital part of U.S. financial diplomacy,
experience has taught us that multi lateral ism is essential to accomplish our
objectives. Experience also teaches us that China responds defensively to bilateral
pressure and is more open to multilateral engagement. Through multilateralism, the
United States can win the high ground. But perceived unilateral actions would run
the risk of weakening our effectiveness and fostering unwarranted perceptions that
we are an isolationist nation.
That is precisely why we have worked through both diplomacy and multilateral fora
to enhance global understanding of the adverse impact of China's currency
practices and build a multilateral consensus to persuade China to alter its exchange
rate regime. The G7 has repeatedly called for greater currency flexibility in China.
The President of the European Central Bank recently reaffirmed this position.
French President Sarkozy, soon after assuming office, spoke out about Chinese
currency practices. Brazil's Finance Minister also recently made similar comments,
as have many in Southeast Asia.
The United States has also worked hard to strengthen the IMF's focus on currency
surveillance. Last month, the IMF - the only multilateral institution with a mandate
for exchange rate surveillance - modernized its thirty-year old operational rules for
carrying out this responsibility. Under the new Executive Board decision, the IMF
will scrutinize much more closely countries' currency policies and their impact on
the stability of the country and the world economy. This decision was adopted by an
overwhelming consensus of the IMF's membership. Twenty-two of the twenty-four
IMF Board chairs, accounting for 94 percent of the IMF's voting power, supported
the decision. Only China and the Iranian-led chair opposed.
Critically, the new decision sends a strong and welcome message that the IMF is
pulling exchange rate surveillance back at the core of its duties.
U.s. Economy
The performance of the global economy in recent years has been the strongest in
three decades. Much of this owes to the soundness of our economy. But China's
unparalleled growth has also been a hugely positive factor. The United States and
China together account for over 40 percent of global growth over the past five
years.
The global economic landscape is changing rapidly. Technological innovation, trade
and globalization are potent drivers of change. The United States benefits
enormously from openness. Change, however, creates uncomfortable dislocations
and angst, and we have sympathy for American workers affected by these powerful
forces. China has become the face on the poster of rapid global economic change,
and the RMB its symbol. China needs to play by the rules of the game. But neither
RMB appreciation nor currency legislation will alter the underlying forces of
globalization and technological change.
If the United States adopts currency legislation that is perceived abroad as
unilateralist, investors' confidence in the openness of our economy could be
dampened, diminishing capital inflows into the United States, and potentially pulling
upward pressure on interest rates and prices. Further, if we adopt legislation
targeted at one country, we must be mindful of the risk that we will create a
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retaliatory precedent that others might use, including against the United States.
This could have serious adverse effects for the smooth functioning of the
international monetary system.
Currency Misalignment
Many of the proposals under consideration mandate determination of whether
currencies are in "fundamental misalignment" as a basis for remedial measures.
Fundamental misalignment is a useful concept. Indeed, the IMF included
"fundamental misalignment" as a foundation of its new currency surveillance
decision, stressing that it must be thoroughly analyzed and reviewed in IMF
surveillance work.
In assessing currency misalignment, economists typically rely on models first to
compute "real equilibrium exchange rates" and then to compute misalignment -- or
the over- or under-valuation -- as deviations from these computed real equilibrium
exchange rates. There are many approaches to these calculations - some rely on a
"macroeconomic balance" approach, others on "behavioral equilibrium exchange
rate models", and others simply on "purchasing power parity" calculations, to name
a few.
The models make various assumptions. Among others, should a sustainable
external position mean a country has a balanced trade account, or is a deficit of a
given size consistent with external sustainability? What is the underlying saving and
investment balance in a country? Should one assume trading partners are growing
at potential, and if so, what is that potential? How do trade balances respond to
exchange rate changes? What price index should be used in deflating nominal
prices? What is the proper goods basket for measuring purchasing power? What
are the key variables influencing the behavior of exchange rates and their proper
weights?
Depending on the answers to these questions, a wide range of results is yielded.
One study on China, collating academic research, found an extremely large range
of estimates, from as little as zero to as much as 50 percent undervaluation of the
renminbi. The GAO echoed this finding in an April 2005 report.
It is difficult for models to describe fully and accurately all the features of a modern
economy relevant to exchange rate determination. In particular, most models do not
take into account the world's enormous private financial markets and their impact
on currency valuations. Yet, the volume of global foreign exchange transactions in
one week exceeds all trade transactions that take place over an entire year.
Currencies can be substantially "under-valued" as defined by a model, yet this
undervaluation may result from purely market phenomena. This is especially the
case for Japan and Switzerland, countries with floating currencies integrated into
the global financial system, yet experiencing large capital outflows in view of very
low domestic interest rates. Failure to take financial market effects into account
could result in currencies whose exchange rates are wholly market determined
being assessed as fundamentally misaligned.
Most approaches focus on multilateral real exchange rates - or indexes of a
country's currency valuation against its trading partners adjusted for relative price
differences and trade shares of each partner. Economists view bilateral equilibrium
exchange rates as a less robust concept. Practically speaking, computing a bilateral
equilibrium exchange rate implies that one knows the appropriate amounts of
bilateral trade, investment, and other financial activity with another country. To be
sure, many financial institutions compute such bilateral rates, but they are
interested in assessing the direction in which a currency may move for the purpose
of maximizing trading profits.
Equilibrium exchange rate analysis is a worthwhile undertaking. If many multilateral
exchange rate models yield similar directional conclusions and project a broadly
similar range of misalignment, that is valuable information. But while exchange rate
models yield valuable insights, there is no reliable or precise method for estimating
the proper value of an economy's foreign exchange rate or measuring accurately a
currency's undervaluation. As Sam Cross, one of the distinguished architects of
U.S. post-Bretton Woods financial diplomacy put it: "Most of the approaches to
exchange rate determination tell only part of the story - like the several blindfolded
men touching different parts of the elephant's body."
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Using the concept of fundamental misalignment to drive a bilateral exchange rate
calculation for the purpose of imposing trade penalties goes well beyond the IMF
approach to fundamental misalignment. On matters pertaining to the WTO, the
Treasury defers to colleagues at USTR and Commerce. But using currency
calculations that admittedly lack precision and reliability to determine trade
remedies, which appear to raise serious concerns with respect to U.S. compliance
with WTO rules, underscores the weakness of some of the legislative approaches.
QtherJ$$U~$
Some of the bills include provisions requiring the Treasury to oppose any change in
International Financial Institution governance arrangements if a country with a
currency designated for action were to receive a higher voting share. Such
provisions are detrimental to U.S. interests. The IMF's current voting structure is out
of touch with today's global economy and the growing weight of many emerging
market economies. IMF members are currently discussing governance reforms
aimed at shifting voting power from over-represented countries to underrepresented, dynamic emerging market economies. The United States has led this
modernization process, seeking to keep emerging market economies from drifting
away from the multilateral system from which we strongly benefit.
Such legislative provisions could prevent many emerging markets from increasing
their weight in the IMF, presumably in order to keep China from seeing an increase
in its share. Yet even if China's voting share will rise as a result of governance
reform, given the current state of discussions, it will likely still be at a level far less
than China's true weight in the world economy. China already has its own Board
seat in the IMF. On balance, this provision would likely be ineffective in influencing
Chinese behavior, but harm U.S. relations with many fast-growing emerging market
countries around the world and thwart highly necessary modernization of the IMF.
Proposals to consider "remedial intervention" in the foreign exchange markets as a
counter-weight to currency misalignment are ill-advised. It would be enormously
difficult to intervene in a currency that is not traded internationally, as in the case of
the RMB, which is traded only in China. Even if we could intervene in the Chinese
market by buying RMB, China at the same time might be in its own market selling
RMB. In the final analysis, the proposal could detract from our efforts to work with
China to correct the RMB's undervaluation, immediately raise the RMB's value and
achieve far greater flexibility in the currency regime.
Thank you.
-30-
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August 2, 2007
HP-524
Treasury, IRS Release Report on Improving Voluntary Compliance
Washington, D.C.--The Treasury Department and the Internal Revenue Service
(IRS) released today an IRS report addressing the agency's implementation of the
2006 strategy to improve voluntary compliance with federal tax laws. A copy of the
report is attached.
The IRS report, "Reducing the Federal Tax Gap: A Report on Improving Voluntary
Compliance," details steps currently being taken by the IRS, as well as those under
development, to address key elements of the "tax gap." The report builds on the
seven components of the "Comprehensive Strategy for Reducing the Tax Gap,"
which the Treasury Department released in September 2006. Those components
are:
1.
2.
3.
4.
5.
6.
7.
Reducing Opportunities for Evasion
Making a Multi-Year Commitment to Research
Continuing Improvements in Information Technology
Improving Compliance Activities
Enhancing Taxpayer Service
Reforming and Simplifying the Tax Law
Coordinating with Partners and Stakeholders
In each of these areas, the report sets out compliance objectives and initiatives,
along with targeted completion dates, that the I RS is implementing to improve tax
compliance over the next several years.
Detailed information is provided on each step currently being taken to reduce
opportunities for tax evasion, leverage technology, and support legislative
proposals that, as implemented, will improve compliance. At the same time, the
report reaffirms that taxpayer rights must be respected and burdens on compliant
taxpayers must be minimized. The report also presents an outreach approach to
ensure all taxpayers understand their tax obligations. Additionally, it recognizes the
importance of having a multi-year research program that will assist in understanding
both the scope of and reasons for noncompliance.
Full implementation of the initiatives outlined in the report will have a positive effect
on the rate of voluntary compliance. The report reflects the commitment of the IRS
to apply its resources where they are of most value in reducing noncompliance
while ensuring fairness, observing taxpayer rights, and minimizing the burden on
taxpayers who comply.
The overall compliance rate achieved under the U.S. revenue system is quite high.
For the 2001 tax year, the IRS estimates that over 86 percent of tax liabilities were
collected, after factoring in late payments and recoveries from IRS enforcement
activities. Nevertheless, an unacceptable amount of the tax that should be paid
every year is not, short-changing the vast majority of Americans who pay their taxes
accurately and giving rise to the tax gap. The gross tax gap was estimated to be
$345 billion in 2001. After enforcement effects and late payments, this number was
reduced to a net tax gap of approximately $290 billion.
A copy of the Treasury Department's 2006 strategy is available at:
http://www .treas.gov/press/releases/reports/otptaxgapstrategy%20final. pdf.
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Page 2 of 2
REPORTS
•
IRS Report on Improving Voluntary Compliance
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1118/2008
A Comprehensive Strategy for Reducing the Tax Gap
u.S. Department of the Treasury
Office of Tax Policy
September 26, 2006
Executive Summary
In fiscal year 2005, Federal receipts totaled over $2.2 trillion. More than 95 percent of
net receipts were collected by the Internal Revenue Service (IRS) through its
administration of the income, transfer and excise tax provisions of the Internal Revenue
Code. The vast majority of these receipts is collected through our voluntary compliance
system, under which taxpayers report and pay their taxes with no direct enforcement and
minimal interaction with the government. The overall compliance rate achieved under
this system is quite high. In 2001, the compliance rate was over 86 percent, after
including late payments and recoveries from IRS enforcement activities. Nevertheless,
an unacceptably large amount of the tax that should be paid every year is not, requiring
compliant taxpayers to make up for the shortfall and giving rise to the "tax gap."
The Administration is committed to working with Congress to reduce the tax gap. This
document outlines the Administration's aggressive strategy for addressing the tax gap.
The strategy builds upon the current efforts of the Treasury Department and the IRS to
improve compliance. As part of the deliberations in preparing the Administration's fiscal
year 2008 budget request to Congress, the Treasury Department and the IRS are working
with the Office of Management and Budget to further develop this strategy to reduce the
tax gap. This document is intended to provide a broad base on which to build. The more
detailed elements of the tax gap strategy are, in part, contingent upon the budget process
for fiscal year 2008 and beyond. Accordingly, the Treasury Department and the IRS will
provide a more detailed outline of steps they will take to address the tax gap following
release of the Administration's fiscal year 2008 budget request early next year.
Four key principles guided the development of this strategy:
•
First, unintentional taxpayer errors and intentional taxpayer evasion should both be
addressed.
•
Second, sources of noncompliance should be targeted with specificity.
•
Third, enforcement activities should be combined with a commitment to taxpayer
serVIce.
•
Fourth, policy positions and compliance proposals should be sensitive to taxpayer
rights and maintain an appropriate balance between enforcement activity and
imposition of taxpayer burden.
These principles point to the need for a comprehensive, integrated, multi-year strategy to
reduce the tax gap. Our practical and effective overall strategy includes the following
seven components:
1. Reduce Opportunities for Evasion. The Administration's fiscal year 2007 budget
includes five legislative proposals to reduce evasion opportunities and improve the
efficiency of the IRS. The Treasury Department's Office of Tax Policy is working with
the IRS to develop additional legislative proposals for consideration as part of the fiscal
year 2008 budget process. The Treasury Department and the IRS will also continue to
-2-
use the regulatory guidance process to address both procedural and substantive issues to
improve compliance and reduce the tax gap.
2. Make a Multi-Year Commitment to Research. Research is essential to identify
sources of noncompliance so that IRS resources can be properly targeted. Regularly
updating compliance research ensures that the IRS is aware of vulnerabilities as they
emerge. New research is needed on the relationship between taxpayer burden and
compliance and the impact of customer service on voluntary compliance. Research is
also essential to establish accurate benchmarks and to measure the effectiveness of IRS
efforts, including the effectiveness of this comprehensive strategy to reduce the tax gap.
3. Continue Improvements in Information Technology. Continued improvements to
technology would provide the IRS with better tools to improve compliance through early
detection, better case selection, and better case management.
4. Improve Compliance Activities. By improving document matching, examination, and
collection activities, the IRS would be better able to prevent, detect, and remedy
noncompliance. These activities would increase compliance not only among those
directly contacted by the IRS, but also among those who would be deterred from
noncompliant behavior as a consequence of a more visible IRS enforcement presence.
The IRS continues to reengineer examination and collection procedures and invest in
technology, resulting in efficiency gains and better targeting of examination efforts.
These efficiency gains translate into higher audit yields, expanded examination coverage,
and reduced burden on compliant taxpayers.
5. Enhance Taxpayer Service. Service is especially important to help taxpayers avoid
unintentional errors. Given the increasing complexity of the tax code, providing
taxpayers with assistance and clear and accurate information before they file their tax
returns reduces unnecessary contacts afterwards, allowing the IRS to focus enforcement
resources on taxpayers who intentionally evade their tax obligations. The statutorily
mandated Taxpayer Assistance Blueprint, the next phase of which is expected to be
delivered in January, will include a process for assessing the needs and preferences of
taxpayers and will develop a decision model to prioritize service initiatives and funding.
The IRS is also working to provide service more efficiently and effectively through new
and existing tools, such as the IRS web site.
6. Reform and Simplify the Tax Law. Simplifying the tax law would reduce
unintentional errors caused by a lack of understanding. Simplification would also reduce
the opportunities for intentional evasion and make it easier for the IRS to administer the
tax laws. For example, the Administration's fiscal year 2007 budget includes six
proposals to simplify the tax treatment of savings and families by consolidating existing
programs and clarifying eligibility requirements. The Office of Tax Policy is developing
other simplification proposals for consideration in the Administration's fiscal year 2008
budget request. In addition, the Treasury Department is evaluating the report of the
President's Advisory Panel on Federal Tax Reform and is considering options for reform.
These initiatives will continue to be supplemented by IRS efforts to reduce taxpayer
burden by simplifying forms and procedures.
-3-
7. Coordinate with Partners and Stakeholders. Closer coordination is needed between
the IRS and state and foreign governments to share information and compliance
strategies. Closer coordination is also needed with practitioner organizations, including
bar and accounting associations, to maintain and improve mechanisms to ensure that
advisors provide appropriate tax advice. Through contacts with practitioner
organizations, the Treasury Department and the IRS learn about recent developments in
tax practice and hear directly from practitioners about taxpayer concerns and potentially
abusive practices. Similarly, contacts with taxpayers and their representatives, including
small business representatives and low-income taxpayer advocates, provide the Treasury
Department and the IRS with needed insight on ways to protect taxpayer rights and
minimize the potential burdens of compliance strategies.
The success of this comprehensive strategy will depend, in significant part, on IRS
resources and the agency's efficient and effective use of such resources. The IRS has
made significant progress toward improving the efficient use of its allocated resources,
especially in targeting enforcement efforts to areas where they will have the greatest
direct and indirect impact on compliance. The IRS will continue to seek ways to make its
operations more efficient and thus free resources to fund new compliance initiatives. In
implementing this strategy, the Treasury Department and the IRS recognize that it will be
important to establish benchmarks against which progress on each element of the strategy
can be measured.
-4-
I.
The Size and Source of the Tax Gap
The "gross tax gap" is the difference between the amount of tax that taxpayers should pay
under the tax law and the amount they actually pay on time. In February 2006, the IRS
released updated compliance estimates, showing that the gross tax gap was $345 billion
in tax year 2001. I As a percentage of tax liability for tax year 2001, this represents a
compliance rate of about 83.7 percent.
This estimate, however, does not take into account taxes that were paid voluntarily but
paid late, or recoveries from IRS enforcement activities. Taking these factors into
account, the "net tax gap" was an estimated $290 billion in tax year 2001, which
represents a net compliance rate of 86.3 percent.
There are three key characteristics of the tax gap:
•
Over 70 percent of the gross tax gap is attributable to the individual income tax,
which is the largest single source of Federal receipts.
•
Over 80 percent of the gross tax gap is caused by underreporting of tax (i.e., by
underreporting income or overstating deductions and credits), with roughly half this
amount (including self-employment tax) attributable to underreporting of net business
income by individuals. Eighteen percent of the gross tax gap is attributable to
underpayments of taxes or failure to file tax returns.
•
Noncompliance is highest among taxpayers whose income is not subject to thirdparty information reporting or withholding requirements.
These characteristics suggest a targeted response designed to address the most significant
areas of noncompliance. The following overview discusses these characteristics in more
detail.
Type of Tax
As indicated above, the IRS estimates that over 70 percent of the gross tax gap is
attributable to the individual income tax. As Table 1 below shows, the remainder of the
tax gap is associated with employment taxes (chiefly self-employment taxes), corporate
income taxes, and estate taxes.
The estimates of underreporting of individual income and self-employment taxes were derived from
analysis of the 2001 National Research Program (NRP). Most of the other estimates are projections
derived from older compliance studies.
I
-5-
Table 1
Gross Tax Gap by Type of Tax
Type of Tax
Gross Tax Gap
($ Billions)
Individual Income
Corporate Income
Employment
Estate
Excise
TOTAL
I
Share of Gross Tax
Gap (%) I
245
32
59
8
Not Available
345
71
9
17
2
100
Totals may not add up to 100 percent due to rounding.
Type of Error
The IRS estimates that over 80 percent of the gross tax gap is caused by underreporting
of tax (i.e., underreporting of income or overstating deductions and credits). Over 40
percent of the gross tax gap is attributable to underreporting of net business income by
individuals (affecting both income and self-employment taxes). (See Table 2).
The remainder of the gross tax gap is split between two sources of errors:
•
Roughly 10 percent of the gross tax gap is attributable to underpayments, a significant
portion of which is due to employer failures to deposit withheld income and
employment taxes.
•
The remainder of the tax gap is due to failure to file tax returns, mostly for individual
income taxes.
-6-
Table 2
Gross Tax Gap by Type of Error
Type of Error
Underreporting 2
Underpayments3
Nonfilint
Individual Income Tax
Non-Business Income
Business Income
Adjustments, Deductions,
Exemptions, and Credits
Total
Corporation Income Tax
Emplo, ment Tax
FICA
Self-Employment Income Tax
Total
Estate Tax
Total Underreportin~
Individual Income Tax
Employment Tax
Other
Total Underpayments
Individual Income Tax
Estate
Total Nonfilin~
Gross Tax Gap
($ Billions)
Share of Gross
Tax Gap (%)1
56
109
32
16
32
9
197
30
14
39
57
9
4
11
16
1
83
54
4
285
23
5
5
7
1
3
34
25
2
27
Totals may not add up to 100 percent due to rounding.
regarding underreporting of excise taxes is not available.
3 Underpayments include employer failures to deposit withheld income and employment taxes.
4 Information regarding the nonfiling gap associated with corporate income taxes, employment taxes, or
excise taxes is not available.
I
2 Information
Level of Transparency
Tax compliance is greatest for income subject to mandatory withholding by the payer.
Only one percent of the tax due on wage income (reported by employers) was not
reported to the IRS by return filers in 200 1.
Noncompliance rates are higher for income that is not subject to withholding, but that is
reported separately to the IRS by a third party when payments are made. The net
misreporting percentage is about 4.5 percent for interest income, dividends, social
security benefits, pensions, and unemployment insurance, all of which are generally
subject to third-party reporting. The net misreporting percentage is somewhat higher for
income items that are subject to some, but not substantial, information reporting. For
partnership and S corporation income, alimony, reportable exemptions and deductions,
and capital gains, the net misreporting percentage is 8.6 percent.
-7-
10
7
1
8
Noncompliance rates are highest for income that is not subject to either withholding or
third-party reporting requirements. About 54 percent of net income from proprietors
(including farms), rents, and royalties is misreported. Underreporting of selfemployment income also results in high noncompliance for self-employment taxes for
social security and Medicare.
Intentional Versus Unintentional Errors
A common question is the extent to which the tax gap results from intentional evasion
rather than unintentional errors by confused taxpayers. Determining taxpayer intent
under a regular examination is very difficult. For obvious reasons, taxpayers do not
concede that their erroneous reporting is intentional, and any analysis of the nature of the
error by IRS examiners is inherently subjective. Some researchers have applied
econometric techniques to compliance data to measure intentional evasion, but the results
have been inconclusive. In all events, complexity provides those taxpayers who are
predisposed to taking aggressive reporting positions the opportunity to argue that their
errors are unintentional.
It is safe to conclude that both intentional and unintentional errors contribute to the tax
gap and that any strategy to reduce the gap must address both intentional evasion as well
as taxpayer confusion due to the complexity of the code.
II.
Challenges to Reducing the Tax Gap
Addressing the tax gap involves improving voluntary compliance, reducing opportunities
for evasion, and making it easier for the IRS to administer the tax laws. We must,
however, have realistic expectations about the magnitude and timing of the impact of any
reasonable strategy to reduce the tax gap, particularly if it is not accompanied by broader
simplification and reform of the tax code, or significant advances in compliance
technology.
Implementing a strategy to reduce the tax gap will take time. As a result, it will take time
to realize the anticipated benefits. As part of this strategy, the IRS will, for example,
acquire and analyze new data, improve document matching programs, refine examination
selection criteria, purchase and test new technology, and train employees to handle new
enforcement and customer service responsibilities.
Moreover, while it may be possible to develop a comprehensive strategy that reduces the
tax gap, it is not possible to implement a policy that would come close to eliminating the
tax gap without an unacceptable change in the fundamental nature of our tax compliance
system.
-8-
III.
A Comprehensive Strategy to Reduce the Tax Gap
With an estimated net tax gap of $290 billion, no single approach will be successful at
substantially reducing noncompliance. A comprehensive, integrated, multi-year strategy
is necessary, within the context of an annual budget process.
1.
Reduce Opportunities for Evasion
Without reliable third-party data, the IRS cannot easily detect errors in the absence of
expensive and intrusive audits. The IRS receives over 1.5 billion information returns a
year, reporting income from employers, financial institutions, third party payers, and state
and Federal governments. However, the IRS still lacks reliable information on certain
types of income, most notably income earned by the self-employed.
Penalties can deter noncompliance, but they may be set at the wrong level. Some
penalties may be too low under current law to change behavior. Other penalties may be
so high that examiners have been unable or unwilling to assert them, particularly when
they believe that taxpayers may have made inadvertent errors.
The Administration's fiscal year 2007 budget contains five legislative proposals that
would reduce evasion opportunities by focusing on employment taxes, information
reporting, streamlining collection procedures, and problem return preparers. The
legislative proposals in the Administration's fiscal year 2007 budget are an important step
in reducing the tax gap. The Treasury Department is developing other proposals for
consideration during the deliberations on the fiscal year 2008 budget, which would
further reduce opportunities for evasion without unduly burdening honest taxpayers.
During these deliberations, we are exploring a number of different options including
ways to:
•
Strengthen reporting requirements;
•
Expand IRS access to reliable data;
•
Enhance examination and collections authority;
•
Enable the IRS to detect and prevent multi-year noncompliance; and
•
Set penalties at more appropriate levels.
The issuance of regulations and administrative guidance by the Treasury Department and
the IRS will also continue to play an important role in effectively administering the tax
law and responding to the tax gap problem. Guidance clarifies ambiguous areas of the
law, increasing voluntary compliance. Guidance also targets specific areas of
noncompliance, and prevents abusive behavior, such as tax shelters. Each year, the
Treasury Department and the IRS publish a Priority Guidance Plan. The 2006-2007 plan
-9-
includes 264 guidance projects scheduled for completion between July 2006 and June
2007. Many of the 264 guidance items included in this year's plan address potential
areas of noncompliance. A representative sample of these items includes:
•
Guidance regarding transfer-pricing arrangements involving cost-sharing under
section 482;
•
Guidance under section 671 regarding information reporting by widely-held fixed
investment trusts (WHFITs);
•
Final regulations under section 860G(b) regarding withholding obligations of
partnerships allocating income from real estate mortgage investment conduit
(REMIC) residual interests to foreign persons; and
•
Final regulations under section 6655 regarding estimated tax payments by
corporations.
The Treasury Department and the IRS have also successfully used the guidance process
to help curb the involvement of taxpayers and practitioners in abusive tax avoidance
transactions. For example, following enactment of the American Jobs Creation Act of
2004 ("AJCA"), the Treasury Department and the IRS released eleven separate guidance
items to put into effect new reportable transaction disclosure and penalty rules. A major
guidance project is currently underway to incorporate these rules into regulations. In
addition, building on provisions in the AJCA, the Treasury Department and the IRS have
taken significant steps to tighten and enforce the ethical rules that apply to tax
practitioners, targeting improper tax advice as a significant contributor to noncompliance
and the tax gap.
The publication of instructions and forms also contributes to increased efficiencies in tax
administration. For example, the IRS and the Treasury Department developed the
Schedule M-3 for large business taxpayers to disclose and reconcile book-tax differences.
The Schedule M-3 increases the transparency of book-tax differences, resulting in a
material increase in the IRS's ability to detect sources of noncompliance. The Treasury
Department and the IRS are expanding Schedule M-3 coverage to S corporations and
partnerships.
Following release of the Administration's fiscal year 2008 budget request, the Treasury
Department and the IRS will issue a more detailed outline of the steps we will take to
reduce opportunities for evasion and address the tax gap. In addition, the Treasury
Department and the IRS will continue to identify guidance projects targeted to
compliance and include them in regular updates to the Priority Guidance Plan.
2.
Make a Multi-Year Commitment to Research
Research enables the IRS to develop strategies to combat specific areas of
noncompliance, improve voluntary compliance, allocate resources more effectively, and
reduce the tax gap.
- 10-
The National Research Program (NRP) demonstrates the importance of comprehensive
compliance data. As part of the NRP, the IRS reviewed approximately 46,000 randomly
sampled individual income tax returns from tax year 200 1 - the first comprehensive
compliance study for individual income tax returns since 1988. Returns for which
reported information could not be independently verified were audited. An NRP
reporting compliance study of 5,000 S corporation tax returns filed in 2003 and 2004 is
currently underway.
Data from the NRP reporting compliance study have been used to estimate the individual
income tax component of the tax gap and to identify sources of noncompliance. Accurate
NRP data provides a critical benchmark for determining the sources of noncompliance
and for measuring changes in compliance rates over time. The IRS is also using the
findings from the NRP to target examinations and other compliance activities better, thus
increasing the dollar-per-case yield and reducing "no change" audits of compliant
taxpayers. Innovations in audit techniques to reduce taxpayer burden, pioneered during
the 200 1 NRP, have been adopted in regular operational audits.
More compliance research is needed. Without new reporting compliance studies, the IRS
is forced to rely on old studies, conducted over 20 years ago, to estimate compliance for
areas other than individual income tax or S corporations. Moreover, with each passing
year, the data from the 200 1 study on individual income tax compliance becomes more
outdated. Without up-to-date studies in all areas, the IRS is hampered in its ability to
respond rapidly to emerging vulnerabilities in the tax system. A multi-year commitment
to research would ensure that the IRS can efficiently target its resources and effectively
respond to new sources of noncompliance as they emerge. Compliant taxpayers benefit
when the IRS uses the most up-to-date research to improve workload selection formulas
because this reduces the burden of unnecessary taxpayer contacts. Research is also
critical in helping the IRS to establish benchmarks against which to measure progress in
improving compliance.
The IRS is considering new research projects in the following areas:
•
Regularly update NRP reporting compliance studies. NRP studies (such as the 2001
reporting compliance study of individual taxpayers) must be regularly and frequently
scheduled to ensure that the IRS has the most up-to-date compliance data.
•
Initiate new NRP reporting compliance studies. To provide the IRS with more
comprehensive data on the magnitude and sources of noncompliance, NRP studies
could extend to partnerships, other business entities, employment taxes, exempt
organizations, and government entities.
•
Supplement NRP reporting compliance studies with smaller and more targeted
compliance studies. By focusing on specific areas of noncompliance, smaller studies
can yield more information about the sources of noncompliance. Targeted studies
can also provide insight into the effectiveness of different types of compliance
strategies.
- 11 -
•
Examine the linkages between taxpayer services and compliance. Research would
provide a better understanding of the relationship between taxpayer burdens and
compliance and the impact of taxpayer service on voluntary compliance, two areas
where there has been limited work to date. Understanding the link between taxpayer
service and voluntary compliance could help the IRS better target taxpayer services as
well as develop programs that would both ease taxpayer burden and improve
voluntary compliance.
•
Develop new tools to uncover patterns of noncompliance. Research must be done to
understand the changing patterns of noncompliance and to develop tools to discover
and address it. Improved abilities to link data sets and to recognize similarities in
abusive tax reduction strategies allow the IRS to target examination resources on the
most egregious cases.
•
Improve the allocation ofresources. Research could help the IRS better match
enforcement and service resources with the types of noncompliance, thereby
maximizing the overall impact on compliance.
3.
Continue Improvements in Information Technology
Tax administration in the 21 st century requires improved IRS information technology
(IT). The IRS is committed to continuing to make improvements in technology,
including:
•
Replacing antiquated core account management systems and technology. The
Customer Account Data Engine (CADE) is the technological foundation that will
enable the IRS to manage its tax accounts better and provide the data for a
modernized IRS. Over time, the existing data base (the Individual Master File) and
retrieval system (the Integrated Data Retrieval System) will be replaced with new
technologies, new data bases, and new applications.
•
Expanding and enhancing compliance activities through early detection, better case
selection, and better case management.
•
Delivering effective customer service, including E-File systems and web services, at
reduced cost.
•
Investing in infrastructure necessary to perform operations more efficiently, thus
freeing up resources for enforcement and taxpayer service projects.
Upon release of the Administration's fiscal year 2008 budget request, the IRS will report
on specific steps that will be taken to continue to improve its information technology.
4.
Improve Compliance Activities
The IRS has an annual budget of roughly $10.5 billion for fiscal year 2006 to process
roughly 140 million individual, partnership, and corporate income tax returns and 1.5
- 12 -
billion information returns, provide guidance to taxpayers and their preparers, enforce the
tax law, and collect over $2 trillion of taxes. The IRS can address only a small part of the
tax gap each year through its enforcement activities. In 2005 taxpayer contacts by the
IRS included: 3.2 million notices sent to individual taxpayers who made mathematical or
clerical errors on their 2004 tax returns, 3.5 million notices sent to taxpayers who
underreported income on their tax returns or did not file returns, and 1.2 million
examinations of individual income tax returns.
The IRS is continuing to improve efficiency and productivity through process changes,
investments in technology, and streamlined business practices. For example, to combat
abusive tax avoidance transactions, the IRS is expanding its front-line enforcement
activities by redirecting employees. As detailed in the following section, the IRS
continues to take advantage of technological advances, such as the Internet, to improve
taxpayer services. Not only do these technological advances ease taxpayer burden, but
they free valuable IRS resources to be devoted to enforcement activities.
The IRS will continue to reengineer its examination and collection procedures to reduce
time, increase yield, and expand coverage. As part of its regular examination program,
the IRS is expanding the use of cost-efficient audit techniques first pioneered in the NRP.
By increasing its use of reliable third-party data to verify information reported by
taxpayers, the IRS can better target its audit resources. The IRS is expanding its efforts
to shift to agency-wide strategies, which maximize efficiency by better aligning problems
(such as non-filers and other areas of noncompliance) and their solutions within the
organization. The IRS is committed to improving the efficiency of its audit process,
measured by audit change rates and other appropriate benchmarks.
However, efficiency gains in existing programs alone will not significantly reduce the tax
gap. Some of the new steps described elsewhere in this strategy, such as providing the
IRS with access to more third-party data and simplifying the tax code, would also help
make compliance activities more effective.
To reduce the tax gap further, new initiatives, such as the following, are needed:
•
Expand information reporting. If legislation were enacted to strengthen reporting
requirements, the IRS could use the new information to increase and better target its
enforcement activities. Voluntary compliance would also improve, freeing IRS
resources to focus on more questionable returns.
•
Improve document matching program. Increasing the number of inquiries to
taxpayers when there are discrepancies between amounts reported on tax returns and
third-party information returns would improve compliance.
•
Refine detection programs. Refining and expanding detection programs to target
enforcement efforts on noncompliant taxpayers would ensure that IRS resources are
used effectively.
•
Increase examinations in selected areas. Some types of noncompliance (such as the
large amount of noncompliance attributable to unreported business income) can only
- 13 -
be detected and prevented through labor-intensive, expensive examinations.
Reducing the tax gap will require more examinations in areas where they are most
cost-effective in recovering amounts attributable to past noncompliance and deterring
future noncompliance. As noted above, the IRS is continuing to reengineer the
examination process, allowing for some increase in coverage.
Implementation of these initiatives would have both direct and indirect benefits.
Improving compliance activities would result in an increase in enforcement revenues as
more noncompliant taxpayers are contacted and examined (the direct benefit). In
addition, a more visible IRS enforcement presence would deter other taxpayers from
evading their tax obligations, thus leading to an increase in voluntary compliance (the
indirect benefit).
5.
Enhance Taxpayer Service
Taxpayer service is especially important to help taxpayers avoid making unintentional
errors. The IRS provides year-round assistance to millions of taxpayers through many
sources, including outreach and education programs, tax forms and publications, rulings
and regulations, toll-free call centers, the Internet, taxpayer assistance centers, and
volunteer income tax assistance (VITA) and tax counseling for the elderly (TCE) sites.
Assisting taxpayers with their tax questions before they file their returns reduces
burdensome notices and other correspondence from the IRS after returns are filed and
reduces inadvertent noncompliance overall.
Since the enactment of the IRS Restructuring and Reform Act of 1998, the IRS has
significantly improved customer service. For example: (1) in the 2006 filing season,
over 56 percent of all individual taxpayers filed electronically (more than double the
number who filed electronically in fiscal year 1999); (2) Low-Income Taxpayer Clinics
have been established to provide free or nominal charge representation for low-income
taxpayers in Federal tax disputes, and to provide tax education and outreach for taxpayers
who speak English as a second language; (3) the number of hits on the IRS web site
("IRS.gov"), which enables taxpayers to more easily obtain forms, track refunds, and get
answers to their questions, grew to over 135 million during 2006, up nearly 8 percent
from 2005; (4) other services, including the provision of transcripts of tax returns and
matching of taxpayer identification numbers for third-party payers, are now being
provided on-line; and (5) a pilot Compliance Assurance Process (CAP) program, which
allows large corporations to work with the IRS to determine tax return accuracy prior to
filing, provides these corporations with greater accuracy on their tax returns and greater
certainty about their tax liability at an earlier date.
In report language accompanying the fiscal year 2006 Appropriations bill for the
Treasury Department, the Senate Committee on Appropriations requested that the IRS
develop a five-year plan to improve taxpayer services. The Taxpayer Assistance
Blueprint, the next phase of which will be delivered in January, will include a process for
assessing taxpayer needs and preferences, develop a decision model to prioritize service
initiatives and funding, recommend service improvement initiatives, create customercentric performance and outcome measures, and outline a multi-year research plan. The
- 14 -
Taxpayer Assistance Blueprint will also provide an important tool to help establish
benchmarks against which improvements in customer service can be measured.
6.
Reform and Simplify the Tax Law
The current tax code is too complicated. The complexity of the tax code makes the tax
law too difficult for taxpayers to understand and for the IRS to administer. Special rules
and subtle distinctions in the tax law foster a sense of unfairness in our tax system,
discouraging compliance and increasing the tax gap.
Taxpayers who want to comply with the tax code often make unintentional errors on their
returns, as they struggle to understand complicated rules and forms. Complexity also
provides opportunities for those who are willing to exploit the system. Furthermore,
complexity makes it difficult for the IRS to detect noncompliance. Simplifying the tax
code will reduce unintentional errors by well-meaning taxpayers and reduce opportunities
for evasion. A simpler tax code will also be easier for the IRS to administer.
The complexity of the tax law also contributes to the tax gap because limited IRS
resources are increasingly committed to administering a wide array of targeted tax
provisions created to meet social policy goals. These targeted provisions, which
themselves are growing increasingly complicated, divert IRS resources from basic
compliance efforts.
The Administration's fiscal year 2007 budget contains six proposals that would simplify
the tax treatment of savings and families. The Treasury Department will continue to
develop additional legislative proposals to simplify the tax code in ways that will reduce
the tax gap. In addition, the Treasury Department is studying the report of the President's
Advisory Panel on Tax Reform and is considering options for reform. Simplification
proposals aimed at reducing the tax gap would be part of a reform proposal.
Legislative initiatives will continue to be supplemented by administrative efforts to
reduce taxpayer burdens. In recent years, the IRS has taken a number of steps to reduce
taxpayer burden, including the establishment of the Office of Taxpayer Burden Reduction
(TBR). Recent improvements in IRS forms, processes and procedures include
simplifying the filing requirements for Form 944 (Employer's Annual Federal Tax
Return), eliminating the need for filing Form 2688 (Application for Additional Extension
of Time to File U.S. Individual Income Tax Return) by allowing the taxpayer to get an
automatic six month extension to file, and the creation of the EITC Assistant, an on-line
tool that helps taxpayers determine their eligibility for the earned income tax credit
(EITC) and the estimated EITC amount. Additional projects to simplify tax forms and
processes are currently under review by TBR.
7.
Coordinate with Partners and Stakeholders
The Treasury Department and the IRS extensively coordinate with state and foreign
governments, taxpayer representative groups and practitioners to increase compliance,
gain efficiencies in tax administration, improve taxpayer services and minimize taxpayer
- 15 -
burden. Increasing the level of such coordination activities will be an important part of a
successful effort to reduce the tax gap.
•
International Exchange of Information. Through tax treaties and tax information
exchange agreements, the United States is able to obtain from foreign tax authorities
information needed to enforce U.S. tax laws. In addition, the United States
participates in information sharing regarding broader, non-taxpayer-specific
information. For example, through the Joint International Tax Shelter Information
Centre (JITSIC), the IRS and tax authorities in other participating countries will
continue to share information regarding abusive tax avoidance transactions.
•
Federal-State Partnerships. The IRS continues to work with state governments to
develop strategies to address trends in noncompliance. For example, combined
Federal-state employment tax reporting allows extensive coordination between the
IRS and state governments with respect to employer noncompliance with
employment tax obligations. In addition, the Treasury Department's Financial
Management Service and the IRS will launch a pilot program with two states in
January 2007 to enable taxpayers to pay all their Federal and certain state taxes online
by means of the Treasury's Electronic Federal Tax Payment System (EFTPS). This
initiative will provide one stop for taxpayers to make their Federal and state tax
payments. Additional actions to address the tax gap in the next 18 months will
include:
o
o
o
o
o
o
•
Exploring the use of state data-mining capabilities, designed to utilize
proprietary state data, to refine further and prioritize IRS audit leads;
Testing the use of state Department of Revenue audit reports as an efficient
basis for IRS audit assessments;
Testing the use of State Workforce Agency employment tax audit reports as
an efficient basis for similar IRS audit assessments;
Expanding coordination with other Federal agencies with the goal of
leveraging their resources and securing data pertinent to IRS compliance
programs;
Identifying state and Federal resources and programs that can be used to
communicate tax gap messages; and
Identifying non-traditional methods utilizing state and Federal resources to
communicate the societal impact of the tax gap.
Practitioner Liaison and Education. The Treasury Department and the IRS conduct
liaison and education activities with practitioners in order to learn about
developments in tax return preparation and to ensure that advisors provide
appropriate tax advice. The IRS maintains active relationships with several national
practitioner groups, small business representatives, and industry organizations to
provide information related to the most current IRS positions and guidance. The
creation of the Office of Professional Responsibility has helped restore credibility to
enforcement of professional standards. Over the next 12 months, the IRS will
enhance outreach efforts with these practitioner and industry stakeholders to engage
in a discussion of key components of the tax gap including:
- 16 -
o
o
o
•
Proper reporting of gross receipts;
Correct computation of business deductions such as cost of goods sold,
depreciation, travel and entertainment expenses, and motor vehicle expenses;
and
Third party information reporting.
Taxpayer Representatives. The Treasury Department and the IRS often communicate
with taxpayer representative groups to learn about taxpayer concerns, including issues
regarding taxpayer rights in administering the tax code. For example, comments
received from organizations representing low-income taxpayers significantly
improved new EITC procedures that are currently being tested by the IRS. Recent
meetings with representatives of small businesses have focused on the importance of
balancing the IRS's need for action in areas of noncompliance with taxpayer concerns
about increased burdens. Ongoing interaction with these groups is an integral part of
this tax gap strategy.
Conclusion
The Administration is committed to reducing the tax gap. In doing so, the Administration
recognizes that the most effective way to reduce the tax gap is to increase compliance
rates through a combination of initiatives (including targeted legislative and
administrative changes, taxpayer service, and enforcement efforts) that are sensitive to
taxpayer rights and minimize taxpayer burden. Simplification of the tax law is also
critically important to this effort. This document provides a broad strategy for reducing
the tax gap. The Administration is committed to working with Congress to further refine
and implement it.
- 17 -
Tax Gap Strategy Timeline for Fiscal Year 2007
2006
September
October
November
•
•
•
•
December
•
Initial tax gap strategy
Stakeholder meetings to review initial tax gap strategy
Development of Administration legislative proposals for
inclusion in fiscal year 2008 budget request
Development of Administration's budget request for the IRS
for fiscal year 2008
Proposal for next NRP Reporting Compliance Study
2007
January
•
•
•
•
February
•
MarchiApril
•
May
•
June
•
July
•
Taxpayer Advocate's Annual Report to Congress
Update of 2006-2007 Treasury Department/IRS Priority
Guidance Plan
Launch of Federal/State Electronic Federal Tax Payment
System (EFTPS).
Deliver Taxpayer Assistance Blueprint Phase II Report to
Congress
Administration's fiscal year 2008 budget request, including
anticipated legislative proposals for compliance initiatives, tax
code simplification and IRS funding
Detailed outline of IRS tax gap strategy reflecting provisions
in Administration's fiscal year 2008 budget request
Outline steps to reduce opportunities for evasion
0
Outline IRS research initiatives
0
Outline IRS information technology initiatives
0
Outline IRS compliance initiatives
0
Outline IRS taxpayer service initiatives
0
Outline steps to reform and simplify the tax law
0
Stakeholder meetings to discuss Administration's fiscal year
2008 budget request
Treasury Department review of practitioner compliance
initiatives
2007-2008 Treasury Department/IRS Priority Guidance Plan.
Page 1 of 5
August2,2007
hp-525
Transcript of Secretary Paulson's Press Roundtable
Beijing, China,
August 1, 2007
Secretary Paulson: As I look around, since a number of you have heard me talk
about this trip and put it in perspective, what I'm going to do is just be pretty brief,
give you a few comments on the trip overall, then talk about some of the meetings,
and then take your questions. So we'll have plenty of time for questions.
I think you all know that the SED is not just about two meetings a year, two big
meetings. We have constant dialogue, accomplishments, steps toward reform. I
came here to follow up on some of the accomplishments coming out of SED II and
to plan for our upcoming meeting in December.
I think just as a general rule, I've just learned this over the years, that you can do a
lot on the telephone but you're better off if you can sit down face to face and have a
candid discussion. I found that the meetings with the Chinese leaders are
particularly useful because they're pragmatic, there's a give and take, candid
discussion. We learn, they learn. So they're just generally very useful.
As a general matter the topiCS we talked about most were currency reform,
appreciation, energy and the environment and consumer product safety, food
safety.
We had good individual meetings. Why don't I run through some of those meetings
quickly.
I had a lunch with Governor Zhou Xiaochuan. We talked about a wide variety of
economic issues, talked in some depth about currency, talked about investment
issues, talked about sovereign wealth fund issues, talked about our work together
to keep the financial system free from abuse and illicit behavior.
I had a meeting with Liu Mingkang, CBRC, and there the conversation was mainly
about expanding market access, greater market access for foreign banks.
The meeting with Shang Fulin, CSRC, largely following up on things coming out of
SED II and talking about financial sector reform. I was pleased to learn that they
were moving forward to the date that we'd agreed to, we're moving it forward to lift
the moratorium on joint venture security, joint ventures, and they're also broadening
the scope of these joint ventures.
I met with, had lunch with Ma Kai at the NDRC. We talked about a number of
things. Probably the one we talked about the most was climate change. We talked
about President Bush's initiative, their upcoming meeting in the fall and the
importance of engaging major countries, developed and developing, and also that
to really solve this issue it's going to take a concerted effort. It's not going to be
possible unless economies remain strong and competitive and healthy and it's
going to take a big emphasis on low carbon technologies.
I talked with the SFA, the State Forestry Administration. The topics there were
sustainable logging which is fighting illicit logging, sustainable logging, either one,
but it really is very important in terms of climate change and dealing with that issue.
We also talked about conservation initiatives.
And good substantive meetings with Wu Vi and with President Hu. Probably on
these meetings I'd never tell you as much as you'd like to hear because the real
value of these meetings is they're private and if we go into a lot of detail then they
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1/1812008
Page 2 of 5
lose their meaning. That destroys confidence.
But good discussions. I obviously talked about currency reform.
First of all we were talking about the SED. Let me step back even before that and
say one of the things that I had an opportunity to spend time with Minister of
Finance Jin, who was involved in a number of the meetings. He and I agreed to
convene a meeting of the JEC in late October, around the time of the IMF World
Bank meetings. What we'll talk about there are global imbalances, so that will lead
to discussions on currency reform, open investment policies, and financial sector
reform.
I might add that as we think about the SED, the purpose is to manage this very
important economic relationship between our two countries. To take a strategic,
forward-looking focus to deal with the most important issues at anyone time.
Now every economic issue, even before we established the SED, was being talked
about in some form. The JCCT, the JEC, we had multiple dialogues going on in the
energy side, environmental, all of the whole range of economic issues. The
purpose of the SED was never to replace those, it was to provide guidance to those
initiatives, help prioritize and always deal with the most important issues at anyone
time. Again, the WTO compliance is very important. We have mechanisms to deal
with that. We have mechanisms in the JCCT, USTR. What is always most
interesting to me was reform and the pace of reform. WTO compliance. WTO,
what China agreed to to gain admissions to the WTO was to me represented a
minimum level. The interesting thing was when you reform beyond that.
Again, I look forward to a JEC meeting in late October.
Now back to the various meetings with Wu Yi and President Hu focused on the
SED, the importance of the SED. I talked about public sentiment in the U.S.; talked
about sentiment in Congress; talked about a number of the congressional
legislative initiatives; and then obviously talked about currency reform; talked about
product safety; consumer safety; and energy and the environment.
Why don't I end it there and take your questions.
Question: You mentioned sovereign wealth funds. I was wondering if you could
tell us what you told them and if you're worried about that hurting the Treasury
market.
Secretary Paulson: The conversation about investment was with Zhou
Xiaochuan, and we made the point that I've made often publicly but I will say it
again. First of all, I emphasized how committed we, the United States, are. This
administration has open investment. I mentioned that the President recently signed
CFIUS legislation which I believe is a step forward, a better CFIUS bill. It's focused
on national security and the relatively few investments that involve national security
every year. When we talk about sovereign wealth funds. I separate the sources
from the uses. In other words, you can have discussions about what are the
policies that lead to the imbalances and the buildup of reserves, but then once
countries have reserves we expect them to naturally invest them in ways that make
sense economically, to get risk-adjusted returns. We welcome foreign investment
in the United States from sovereign wealth funds or any direct foreign investment. I
believe that that's the highest vote of confidence anyone can pay to our economy or
any economy is to make a direct investment.
We emphasized, and it's not just with China, sovereign wealth funds around the
world, but the importance of transparency.
Question: You don't think there's a fear that they might be shifting to [inaudible]?
Secretary Paulson: I can tell you what I said. I think foreign direct investment is a
good thing.
Question: Can I ask about your discussions about the [inaudible]. Your previous
trip would suggest that China might be [inaudible].
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Page 3 of 5
Secretary Paulson: Let me say on currency, and this is the case with many of the
areas of reform. The positive, and we should never lose sight of the positive, is
there's not a difference as to principle. I heard from everyone right up at the top,
they are committed to currency flexibility, they're committed to currency reform. I
would just say to you as an aside, as someone who watches this carefully, that the
rate of apreciation has increased over the last year and over the last six years. It's
increased. I don't believe it is fast enough. I make the case that they and the
whole world economy would be better off and they would have greater financial
security and greater stability if they increased the pace in the short term and worked
toward the measures that would let them have a market-determined currency in the
intermediate term. That is why I emphasize so much financial sector reform.
I believe that competitive, efficient capital markets are a key to more balanced,
higher quality economic growth on China's behalf and toward a market determined
exchange rate.
Question: [Inaudible] some concern that the stock market [inaudible] generally
quite strong. They're reluctant [inaudible] financial reforms that [inaudible]. The
best example [inaudible]. Do you have any -Secretary Paulson: I would say that the biggest reforms, the Significant ones I'm
talking about, would increase the financial security and the stability because I
believe a competitive, efficient capital market that had sophisticated institutional
investors, had a well developed bond market, would provide more financial security.
And so the reforms I'm talking about are greater access by the best of class foreign
firms.
As I emphasized to the Chinese, there are two issues. One is their regulatory
structure and the range of products they allow and the rate at which they open up
the markets. The other is what is the quality of competition they allow. For the life
of me I cannot understand why competition and letting strong firms in that are
regulated by the Chinese would endanger the stability. As a matter of fact that
would promote the stability of the market.
I think the resistance, it's easy to say stability, but I think resistance comes from
entrenched domestic competition with an interest which every market-driven firm
has and every economy. They all like competition in areas other than their own.
Everyone would like to have a little bit of protectionism. That's my view on stability.
Question: You mentioned sentiments in Congress. What can you go back and
tell, for instance, the Trade Representative in Washington about this meeting that's
going to make them want to postpone drastic action?
Secretary Paulson: In terms of what they will or won't do, I can't speculate. I can
just say several things about this.
I talk with many leaders in Congress. I understand their frustrations. I share a
similar objective with many of them of wanting quicker reform of the currency and
China to move quicker to open up their markets. They know that I don't believe
legislation is the right way to proceed. They know I believe that the right way to
make progress is through direct engagement bilateral and a multilateral basis.
They know I believe we're making progress. They know I believe we should make
quicker progress.
I think legislation would be counter-productive and undermine what we're trying to
accomplish here.
Having said that, I have explained to leaders of Congress why I'm going here, just
as I've explained to you, so I don't need to repeat it. This is to follow up on the last
SED, to plan for the next one.
I also will tell them when I come back that I explained also to the Chinese, the
Chinese had an opportunity to hear directly from the leadership of Congress and
from the Senate Finance and the Ways and Means Committee when they're over
here. I have updated them on developments in Congress. I've told them of the
views of a number of congressional leaders. I've obviously communicated that. I
don't think anyone that I know of in Congress is expecting me to come back with
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1118/2008
Page 4 of 5
some deal on the currency. They know what the SED is trying to accomplish.
Everyone talking to me directly has been very respectful about that. Some of them
have, just as I've respectfully said I don't think legislation is the way to go, I think
direct engagement; they respectfully said continue with your direct engagement, Mr.
Secretary, but we have a different plan. So I've got more work to do with Congress.
Question: Mr. Secretary, with markets tumbling around the world over the last 24
hours, we're obliged to ask for a comment or observation on what may be going on
there. You stated clearly in recent weeks and months that you think the housing
market's near a bottom, that the collapse of the sub-prime markets is contained.
Yet markets continue to fall, companies report their profits are shrinking because of
the effects from the housing market.
Have you seen anything that's changed your view on what's going on?
Secretary Paulson: No. Kevin, let me be pretty clear about what I've said before.
When I said the housing market, that there had been a major correction and the
housing market was at or near the bottom, I also have said that I thought this would
not resolve itself any time soon, and that it would take a reasonably good period of
time for the sub-prime issues to move through the economy as mortgages reset.
But that as, even though this, and it is a cause of concern, the impact on individual
homeowners, and we care a lot about that, but I said as an economic matter I
believe this was largely contained because we have a diverse and healthy
economy.
I also said I thought in an economy as diverse and healthy as this that losses may
occur in a number of institutions, but that overall this is contained and we have a
healthy economy.
Now to talk about what's going on in the markets, my comments -- and let me say
that in my career at Goldman Sachs, I traveled a lot, and I stayed very close to the
markets. In today's world, it's quite easy to stay close to the markets, and it's my
job to be vigilant and stay close to the markets.
I've also, in watching markets for a long time, I'm never surprised by volatility or
adjustments. My starting point is what is the state of the economy? We have the
strongest global economy I've seen in my business lifetime today. We have a
healthy economy in the U.S. So what is going on in my judgment is a
reassessment of risk. There are adjustments and market adjustments going on as
risk is being repriced. Again, when we have the benign markets and strong
economies for extended periods of time you tend to see excesses.
We talked about the sub-prime. There are some excesses there. We've also seen
excesses in terms of other lending behavior. Some of the loans to fund leveraged
buy-outs. These loans have not had traditional covenants. So now the market is
focused on this. There's a wakeup call and there's a, as I've said, an adjustment to
this repricing of risk. But I see the underlying economies being very healthy.
Question: On the [inaudible], did they give you a timeframe for which [inaudible]?
Secretary Paulson: We originally talked about getting that done by December.
Shang Fulin now said he's going to be able to move that forward and do it earlier in
the fall.
Question: For the meeting in October or -Secretary Paulson: I don't want to be that specific. But it was meaningfully
earlier. And I'm always glad to hear that news as opposed to something slipping.
Question: On the currency issue again, in your meetings and discussions with the
Chinese [inaudible], did he give a sense of frustration on the part of them maybe
not being able to feel like they ever satisfy the Members of Congress or [inaudible]?
Secretary Paulson: Let me say this. We agree on the principle. They emphasize
that they're committed to reform but they believe financial stability is every bit as
important, China's financial stability is very important to China, but very important to
the U.S. and the rest of the world.
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1/18/2008
Page 5 of 5
I have also been quoted often frequently as saying the same thing. So many of the
people that have concern about China are worried about the wrong thing. They're
worried that China's going to out-compete and overtake every other economy, as
opposed to worrying about a financial problem in China which would impact us all
negatively.
So I do believe the Chinese are patient, and I believe they ask themselves, they say
we're moving the currency quicker. Our stability is important to you as well as to
us. They also make the point, which we agree with, which is as important as the
currency, is it is not the key driver toward dealing with the economic imbalances
and the trade imbalances. It is a factor but the biggest issues are the structural
issues in the various economies. With China it's their very high savings rate and so
on.
So they're too polite to say they're frustrated, but I do believe they're asking
themselves will they ever be able to satisfy us. But again, the case I make is that
the rate of appreciation so far, there's no evidence it's hurt the Chinese economy,
and if they accelerate the pace I believe they will make it easier to use more
traditional monetary policy, to dampen overheating, and they will be able to hasten
their development of the economy toward higher value-added products.
The Chinese economy, much of what they export to the U.S. is assembled in
China. And they are the last pOint in a manufacturing chain, an integrated chain
throughout Asia where they import commodities, components, and assemble them,
and that their value-added is often relatively low.
So as they seek to develop their economy, if they have a currency that gives market
signals it will be better for them.
In any event, you don't need to hear all that.
Thank you for your time.
-30-
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111812008
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August 3, 2007
HP-526
Treasury, IRS Issue New Proposed Cafeteria Plan Regulations
Washington, D.C.--The Treasury Department and the IRS issued today new
proposed regulations for employee benefit plans under Section 125 of the Internal
Revenue Code. The plans, called "cafeteria plans," allow employees to make a
choice between receiving taxable cash compensation or tax-free employee
benefits, such as health care, dependent care, and other fringe benefits.
The new proposed regulations generally preserve the rules of the existing proposed
regulations, while adding clarifications relating to statutory changes and
administrative guidance changes since the previous regulations were published.
The new regulations also address many issues on which the IRS has previously
provided informal guidance.
The proposed regulations will assist employers, employees, and plan administrators
in utilizing cafeteria plans.
The new proposed regulations:
• Clarify that cafeteria plans are generally the sole method of preserving the
nontaxable nature of employer-provided benefits where employees are
allowed to elect between taxable compensation and nontaxable benefits.
• Include new rules for determining if a cafeteria plan improperly
discriminates in favor of highly compensated employees, including
definitions of key terms. The new rules are generally consistent with the
rules for qualified retirement plans. Also, the rules provide an objective test
to determine if the actual election of benefits is discriminatory.
• Incorporate guidance previously issued relating to debit cards and grace
periods for using health Flexible Spending Arrangements (health FSAs)
money after the end of a plan year.
• Generally retain the rules in the prior regulations for health FSAs, including
a 12-month plan year, requirements that the full reimbursement be available
at anytime during the plan year, restrictions on changing elections in midplan year, and the requirement that unused amounts at plan year end are
forfeited (the "use-or-Iose" rule).
The IRS requests comments on the proposed regulations and will hold hearings on
the proposed regulations on November 15,2007. Taxpayers may rely on the
proposed regulations for guidance pending the issuance of final regulations.
REPORTS
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August3,2007
HP-528
Remarks by Secretary Henry M. Paulson, Jr. at Idaho Quarter Celebration
Boise, 10 - It is a pleasure to be here to celebrate the Idaho quarter, the 43rd
quarter of the 50 State Quarters Program. The Idaho quarter design includes a
striking image of the peregrine falcon. When this spectacular bird was listed as an
endangered species in 1970, its population had been reduced to just 324 known
nesting pairs. While it may not seem that the minting of a quarter and the
conservation of a species have much in common, in fact, they do. Both represent
successful models of government and citizen cooperation.
The Idaho quarter is number 43, because the quarters are being unveiled in the
same order as a state's admission to the Union. The first quarter for the first state,
Delaware, was issued in January of 1999. The Idaho quarter follows Washington
State, and the next state to unveil its quarter is also your neighbor - Wyoming.
The 50 State Quarters Program, authorized by Congress in 1997, has been very
successful. More than 140 million Americans are collecting the 50 state quarters.
The state quarters program isn't just for coin collectors, however. Many citizens
have had the opportunity to partiCipate in the quarter design process. Thousands of
Americans have suggested designs that represent their state's unique, positive
features. The final designs are selected from these submissions. In 2005, the
Idaho Commission on the Arts solicited concepts from the public and received over
1,200 submissions. Each state's quarter is minted for only ten weeks, and then will
never be minted again.
The peregrine falcon is the chosen design for the Idaho quarter, and the people of
Idaho can be rightfully proud of their role in helping to protect this charismatic
species.
The peregrine falcon's recovery is a true success story. When the peregrine was
listed as endangered in 1970, the outlook was grim. The species had completely
vanished in eastern America, and nearly 90 percent of the population in the
American west had disappeared. But over the next thirty years, the visionary work
in captive breeding and release coordinated by The Peregrine Fund, working in
cooperation with scientists, several universities, and many state and federal
agencies, led to the falcon's recovery and removal from the endangered species list
in 1999. I know of no more dramatic example of conservation groups working
cooperatively, and with the government, to take a bird that was essentially extinct in
the continental United States and bring it back to normal population levels.
It is fun for me to talk with you today about these two successful, cooperative public
and governmental efforts --- the U.S. Mint's 50 State Quarters Program, and the
restoration of the peregrine falcon. I look forward to the rest of today's program
and, remember, spend your Idaho quarters wisely.
-30-
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August 3, 2007
hp-529
Treasury Economic Update 8.3.07
"The U.S. economy and the job market are healthy, with sustained job growth,
low unemployment, and rising wages. Solid fundamentals will support
continued growth in household spending and business investment. "
Assistant Secretary Phillip Swagel, August 3, 2007
JopCreatiortContirH!.es:
Job Growth: 92,000 new jobs were created in July and nearly 2 million new jobs
have been created in the past 12 months. The U.S. has added 8.3 million jobs since
August 2003 - more than all the other major industrialized countries combined. Our
economy has seen job gains for 47 straight months. Employment has increased in
48 states and the District of Columbia within the past year. (Last updated: August 3,
2007)
Low Unemployment: The unemployment rate of 4.6 percent is close to the lowest
reading in 6 years. Unemployment rates have decreased or held steady in 32
states and the District of Columbia over the past year. (Last updated: August 3,
2007)
Economic Growth: Real GOP growth was 3.4 percent in the second quarter of
2007, supported by strong gains in business investment and exports. (Last
updated: July 27, 2007)
Household Spending: Consumer spending has been affected by increased energy
and food prices and weakness in the housing sector, but the job market is healthy
and should continue to boost incomes and support household consumption. (Last
updated: July 27,2007)
Business Investment: Business spending on commercial structures and
equipment strengthened in the second quarter. (Last updated: July 27, 2007)
Exports: U.S. exports grew by 6.8 percent over the past 4 quarters. (Last updated:
July 27, 2007)
Tax Revenues: Tax receipts rose 11.8 percent in fiscal year 2006 (FY06) on top of
FY05's 14.6 percent increase. As a share of GOP, FY07 receipts are projected to
be above their 40-year average. (Last updated: July 13,2007)
Americans Are Keeping More of Their Hard-Earned Money:
Real Wages Increased 1.3 percent Over the Past 12 Months (ending in June).
This translates into an additional $444 above inflation for the average full-time
production worker.
Pro-GxoY\l1hPolicies wiUli;:nhancel"ong-TermU.S .. EcQnomicStrength:
We are on track to balance the budget by 2012. The Mid-Session Review of the
FY 2008 Budget shows that we are on track to achieve a small surplus in 2012.
This year, the deficit is projected to be down to 1.5 percent of GOP. Much of the
improvement in the deficit reflects strong revenue growth, which in turn reflects the
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continued strength of the U.S. economy. Looking ahead, higher spending on
entitlement programs dominates the future fiscal situation; we must squarely face
up to the challenge of reforming these programs. The time has come for both
political parties to work to achieve comprehensive earmark reform that yields
greater transparency and accountability to the congressional budget process,
including full disclosure for each earmark and cutting the number and cost of all
earmarks by half.
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August7,2007
hp-530
Remarks by Secretary Henry M. Paulson, Jr. at Community Jobs Forum
Billings, MT - Thank you for the opportunity to be with you this morning. I am
pleased to be in Billings, with Senator Baucus. We have had a chance to talk since
I arrived, and first I would like to express my shared concern about the wildfires and
thanks to those who are doing a great job getting them contained, and keeping
people and homes as safe as possible.
The Montana landscape reminds me a bit of the Illinois prairie, where I grew up. At
an early age, I developed an appreciation for wide, open spaces. Although I spent
thirty years of my career in investment banking, whenever we could, my wife
Wendy and I would escape the cities and travel to places like Montana - where we
could hike and fish. I like to spend lots of time in wild, beautiful places and Montana
is certainly one of those. Several years ago, we spent time at the Matador Ranch in
North Central Montana, just north of the Missouri River; two years ago we enjoyed
the Bozeman area. And today it's Billings!
I know that wide, open spaces are a foundation of your economy. But agriculture
isn't the only thriving industry in Montana - your economy is expanding, and taking
advantage of the opportunities created by technology and trade. I look forward to
talking with you today about important issues for the people of Montana and for all
Americans - what are the key factors that will continue our economic leadership
and create new jobs in rapidly changing world markets? And what is the role of a
rural economy, such as Montana's, in those markets?
The good news is that Montana is already very much a part of the global economy.
In the five years between 2002 and 2006, total exports from Montana more than
doubled to $1.4 billion. Agricultural exports were a big part of this increase; they
grew from about $300 million in 2002 to almost $600 million in 2006. Your wheat,
livestock and vegetables are being shipped around the world, and the overall export
increase reflects an economy that is diversifying.
Montana, like the overall American economy, is growing. From 2005 to 2006,
Montana's gross domestic product grew 4.6 percent --- higher than the overall U.S.
average of 2.9 percent during the same time period.
There is also additional good news in the rate of growth in non-agricultural jobs - a
sign that while Montana retains its historical leadership in agriculture, it is also
broadening its economic base. Since January 2001, approximately 55 thousand
non-agriculture related jobs have been created. As new technologies and industries
develop, Montana is keeping pace with the changing economy.
As Montana diversifies and produces more goods, the global economy will provide
expanding opportunities if we remain committed to free trade, to promoting foreign
investment, and to a business tax system that will help our companies and workers
successfully compete.
Proven economic principles show that nations that open themselves up to
competition - in trade, finance, and investment - benefit while those that don't are
left behind. Openness to trade and competition fuels innovation and creates goodpaying jobs that raise productivity and standards of living in both rural and urban
economies.
Despite this, more and more Americans seem to doubt that trade brings greater
benefits than costs. This increase in protectionism is a worrisome trend. Trade is
one of the cornerstones of our economic success as a nation. Retreating to
economic isolationism would mean fewer jobs and lower incomes in Montana, in
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1118/2008
Page 2 of 3
the U.S., and around the world. If we arbitrarily protect our markets, other nations
will surely protect theirs. When farmers and companies have fewer options for
exporting their goods, the impact will be felt by workers throughout Montana.
At every opportunity, this Administration presses our trading partners and other
nations to keep their markets open, and to open them further. I recently returned
from a trip to China where I had candid discussions with Chinese officials about a
wide variety of economic issues, including the need for the Chinese to move more
quickly to adopt market-oriented reforms which would reduce their trade imbalance
with the United States.
In our rapidly changing economy, we see job losses and dislocations in particular
companies, industries, and even regions - just as there are new opportunities in
others. But making trade a scapegoat and enacting protectionist policies would
make us worse off. We should recognize the hardships and work to alleviate them,
while keeping in sight the higher living standards Americans enjoy as a result of
economic dynamism. The global economy is here to stay. To keep growing and
leading the world in innovation and opportunity, the U.S. must trade freely, openly,
and according to the principles of the global marketplace.
Four Free Trade Agreements - with Peru, Colombia, Panama and South Korea are awaiting Congressional action. Approval of these FTAs is critical. Such
agreements are a key element to continued U.S. economic growth. They also
demonstrate our support for democratic countries that are working to develop
greater opportunities for their citizens, which will in turn create new markets for
goods from Montana and the rest of the United States.
To keep America competitive in a global economy, we must also welcome foreign
investment. Foreign investment in the United States is the ultimate vote of
confidence in our economy. It creates high-quality jobs, spurs innovation, and gives
American consumers a wider variety of choices and lower prices on everything from
food to clothes to cars. When we encourage open investment, foreign money
supports local communities across a wide span of industries. In fact, U.S.
subsidiaries of foreign companies play an important role in supporting jobs in
Montana, supplying $3 billion in plant and equipment investment, and providing the
livelihood for over 6,500 of Montana's workers.
The American economy today is healthy and we have low unemployment.
However, we can not rest. Enhancing our future competitiveness, which means new
and better-paying jobs and higher living standards for American workers, requires
making sure that our policies respond to changes in the global marketplace. This
includes a tax regime that does not burden our companies with complexity or put us
at a competitive disadvantage when compared to other nations.
In the 1980's, we reformed and simplified the tax code. We closed loopholes and
lowered individual and corporate rates. These tax reforms set the stage for "The
American Miracle," twenty years of remarkable economic performance in the U.S.
and around the world. Yet, since then we have moved in the opposite direction.
Over the past two decades, U.S. tax law has grown more complicated and our
statutory corporate income tax rate has increased, while other nations have been
reducing their rates. In comparison to our major trading partners, the U.S. has
moved from a country with below-average corporate tax rates to one with aboveaverage rates. Instead of encouraging economic growth by reducing the tax burden
on additional investments, the current tax code distorts capital flows, hurting
productivity, job creation and our global competitiveness.
We have made great strides in the last few years. Tax law changes in 2001 and
2003 have helped flow-through businesses flourish and create jobs. These changes
will help fuel future prosperity in Montana. Over 100,000 Montana small
businesses, including a lot of farmers, will pay lower taxes this year. They will have
more money to invest in growing their businesses and creating jobs.
Let me say again how glad I am to be here with Senator Baucus. We share the
goals of a free, dynamiC marketplace, where government does not pick economic
winners or losers, and business men and women are able to make decisions based
on what is best for their companies and their workers. The benefits of free trade and
economic openness are as compelling in Montana as they are anywhere in the
country.
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1118/2008
Page 3 of 3
Thank you. I look forward to hearing your questions and your insights on the
Montana economy.
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August7,2007
HP-531
Treasury Designates AI-Salah Society
Key Support Node for Hamas
The U.S. Department of the Treasury today designated the AI-Salah Society, one of
the largest and best-funded Hamas charitable organizations in the Palestinian
territories. AI-Salah Society's director, Ahmad AI-Kurd, was also designated today.
"Hamas has used the AI-Salah Society, as it has many other charitable fronts, to
finance its terrorist agenda," said Adam Szubin, Director of Treasury's Office of
Foreign Assets Control (OFAC}. "Today's action alerts the world to the true nature
of AI-Salah and cuts it off from the U.S. financial system."
The AI-Salah Society supported Hamas-affiliated combatants during the first
Intifada and recruited and indoctrinated youth to support Hamas's activities. It also
financed commercial stores, kindergartens, and the purchase of land for Hamas.
One of the most senior Gaza-based Hamas leaders and founders, Ismail Abu
Shanab, openly identified the AI-Salah Society as "one of the three Islamic charities
that form Hamas' welfare arm." The AI-Salah Society has received substantial
funding from Persian Gulf countries, including at least hundreds of thousands of
dollars from Kuwaiti donors.
The AI-Salah Society is directed by Ahmad AI-Kurd, a recognized high-ranking
Hamas leader in Gaza. AI-Kurd's affiliation with Hamas goes back over a decade.
During the first Intifada, AI-Kurd served as a Hamas Shura Council member in
Gaza. As of late 2003, AI-Kurd was allegedly the top Hamas leader in Deir AI8alah, Gaza. Since mid-2005, he has served as the mayor of Deir AI-8alah,
elected as a Hamas candidate.
The AI-Salah Society has employed a number of Hamas military wing members. In
late 2002, an official of the AI-Salah Society in Gaza was the principal leader of a
Hamas military wing structure in the AI-Maghazi refugee camp in Gaza. The
founder and former director of the AI-Salah Society's AI-Maghazi branch reportedly
also operated as a member of the Hamas military wing structure in AI-Maghazi,
participated in weapons deals, and served as a liaison to the rest of the Hamas
structure in AI-Maghazi. At least four other Hamas military wing members in the AIMaghazi refugee camp in Gaza were tied to the AI-Salah Society.
The AI-Salah Society was included on a list of suspected Hamas and Palestinian
Islamic Jihad-affiliated NGOs whose accounts were frozen by the Palestinian
Authority as of late August 2003. After freezing the bank accounts, PA officials
confirmed that the AI-Salah Society was a front for Hamas.
Identifying Information
AI-Salah Society
AKAs:
AI-Salah Association
AI-Salah Islamic Foundation
AI-Salah
AI-Salah Islamic Society
AI-Salah Islamic Association
AI-Salah Islamic Committee
AI-Salah Organization
Islamic Salah Foundation
Islamic Salah Society
Islamic Salvation Society
Islamic Righteous Society
Islamic AI-Salah Society
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1118/2008
Page 2 of 2
Jamiat AI-Salah Society
Jamiat ai-Salah al-Islamiya
Jami'at ai-Salah al-Islami
Jami'a ai-Salah
Jammeat El-Salah
Salah Islamic Association
Salah Welfare Organization
Salah Charitable Association
Addresses:
PO Sox 6035, Seshara Street, Deir ai-Salah, Gaza
Deir AI-Salah Camp, Gaza
Athalatheeniy Street, Gaza
Gaza City, Gaza
Sureij, Gaza
AI-Maghazi, Gaza
Rafah, Gaza
AHMAD HARB AL-KURD
AKAs:
Ahmed EI-Kurd
Ahmed AI Kurd
Ahmed Hard AI-Kurd
Ahmad AI-Kird
Ahmad AI-Kard
DOS:
circa 1949
ALT. DOS: circa 1951
POS:
Deir AI-Salah, Gaza
Address:
Deir AI-Salah, Gaza
- 30-
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August 8, 2007
2007 -8-8-11-9-57 -19862
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 $67,123 million as of the end of that week, compared to $67,062 million as of the end of the
prior week.
I. Official reserve assets and other foreign currency assets (approximate market value, in US millions)
August 3, 2007
.~
."'
A. Official reserve assets (in US millions unless otherwise specified)
,.
'''-
_...
--
Euro
Yen
67,123
(1) Foreign currency reserves (in convertible foreign currencies)
13,288
(a) Securities
~
-"
..
"
--.--~.
10,721
24,009
.-~
0
iof which: issuer headquartered in reporting country but located abroad
-,.-
Total
..
.,,,~
,
..
~.
~.-
:(b) total currency and deposits with:
13.312
:(i) other national c"entral banks, BIS and IMF
ii) ban"kshe~dq~artered in the reporting country
5,293
18,605
0
."
0
of which: located abroad
.-
.
_.
~
~(iii) banks headquartered outside the reporting country
0
-
_.
0
of which: located in the reporting country
(2) IMF reserve position
4,635
i(3)SDRs
9,103
:(4)-gold (in"eluding gold deposits and, if appropriate, gold swapped)
r--volume
~'-~"'-' ~
in "millions
of fine troy ounces
-~
0
'(5) other reserve assets (specify)
--financial derivatives
:--Ioans to nonbank nonresidents
!--other
iB. Other foreign currency assets (specify)
r·""·-·"" .".
""
"
.-.
i--securities not included in official reserve assets
i---'"
~.~.-....
11,041
261.499
.
,
"~
¥
i--deposits not included in official reserve assets
i~~oans"not i"ncl;:;d"ed"in officia"l reserve assets"
i--financial derivatives not included in official reserve assets
[--gold not
;"":-otlier
inci~ded
in official reserve assets
II. Predetermined short-term net drains on foreign currency assets (nominal value)
Maturity breakdown (residual maturity)
Total
Up to 1 month
More than 1 and
up to 3 months
More than 3
months and up to
1 year
i 1. Foreign currency loans, securities, and deposits
i~--outflows (-)
Principal
Interest
,,~
.........
~
--inflows (+)
Principal
Interest
r2~Aggregate short and long positions in forwards and
. futures in foreign currencies vis-a-vis the domestic
. currency (including the forward leg of currency swaps)
-('a)Short positions ( - )
r-(bfCo-ng positions (+)
3. Other (specify)
':outflows'related to repos( =)
, --inflows related to reverse repos (+)
--trade credit (-)
--trade credit (+)
i
--other accounts payable (-)
i --other accounts receivable
(+)
III. Contingent short-term net drains on foreign currency assets (nominal value)
Maturity breakdown (residual maturity, where
applicable)
Total
~:-Contingent liabilities in foreign
ria)
currency
Collateral guarantees on debt falling due within 1
:year
[(blOther contingent liabilities
.Up to 1 month
More than 1 and
up to 3 months
More than 3
months and up to
1 year
1--------------
--------------
.:---
:---
.--
:2. Foreign currency secuntles Issued with embedded
:options (puttable bonds)
;3: Und-~awn, unco~c:litional cr~dit lines provided by:
:(a) other national monetary authorities, BIS, IMF, and
'other international organizations
!--other national monetary authorities (+)
-
-
--BIS (+)
--IMF (+)
(b) with banks and other financial institutions
iheadquartered in the reporting country (+)
,(c) with bcmks and other fi~ancial institutions
[headquartered outside the reporting country (+)
~..
.~,"."
Undrawn, unconditional credit lines provided to:
. __ " __
", ___ ,·v__
~~,,
_"<~.
_''-
(a) other national monetary authorities, BIS, IMF, and
:other international organizations
-
._.-
.~-
.
i--other national monetary authorities (-)
---
i--BIS (-)
i-~i~iF-(
:f-- ".
- ".
l(b) banks and other financial institutions headquartered
lin reporting country (- )
~C)-banks and other financial institutions headquartered
!outside the reporting country ( - )
4. Aggregate short and long positions of options in
foreign currencies vis-a.-vis the domestic currency
,-~-"--'--"-~
:(a) Short positions
I(i) Bought puts
'(ii) written calls
r··----------!(b) Long positions
--~--
:(i)Soughtcalis
I(ii) Written puts
iPROMEMORiA:I~:the~mon~y options 11-1(1) At current exchange rate
m··_.¥¥ ___ +-_."_"
_
I(a) Short position
i(b) Long position
1(2)-:;5-0/0 (depreciation of 5%)
:(a) Shortposition
i(b)Lo~g--posiiion ---
~3):-5 % (appreciation of 5%)
l(arShort position
, - -..•.. _~._ ..... --,0'
l(b) Long position
--.--.~-
....
1(4) +10 % (depreciation of 10%)
;(a)-Short position
c-- - ---
.-
i(b) Long position
:.--.--'.. -
1(5) - 10 % (appreciation of 10%)
Ra:Y"Sho-rt position
'''-
r--'~'~'~"'--
:(b) Long position
;(6)-Oth~r(specify) ..
:(a) Short position
'(b) Long position
IV. Memo items
'(1) To be reported with standard periodicity and timeliness:
(a) short-term domestic currency debt indexed to the exchange rate
~-."
~.,
(b) financial instruments denominated in foreign currency and settled by other means (e.g., in domestic
currency)
l~~~ondeliverable forwards
r'" .__...-
... -- - ' - '
; --short positions
--long positions
. . . .-
.--other instruments
--~
..
~
,_.,.
-,-,",.~--.
:(c) pledged assets
.~-.
--included in reserve assets
- .
,--included in other foreign currency assets
,(d) securities lent and on repo
,--lent or repoed and included in Section I
I--Ient or repoed but not included in Section I
- --borrowed or acquired and included in Section I
,--borrowed or acquired but not included in Section I
(e)fi~-ancia-I derivative assets (net, marked to market)
--forwards
:--futures
--swaps
i--options
:~:otherr--"-- --. - - ..
'(f) derivatives (forward, futures, or options contracts) that have a residual maturity greater than one
iyear, which are subject to margin calls.
:--aggregate short and long positions in forwards and futures in foreign currencies vis-a.-vis the domestic
Icurrency (including the forward leg of currency swaps)
(--~--,-~~
-
~"
(a) short pOSitions ( - )
!(b) long pOSitions (+)
;--aggreg-ate short and long positions of options in foreign currencies vis-a.-vis the domestic currency
:(aj short- positions
!(i)-bought puts
(ii) written calls
i(b) long positions
;(i) bought calls
i(ii) written puts
:(2)Tobe disclosed less frequently:
!(ajcurrency composition of reserves (by groups of currencies)
67,123
"'--
,--currencies in SDR basket
67,123
~
--currencies not in SDR basket
--'-'"~
_.
i--by individual currencies (optional)
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 markedto-market values, and deposits reflect carrying values.
2/ The items, "2. IMF Reserve Position" and "3. Special Drawing Rights (SDRs)," are based on data provided by the IMF
and are valued in dollar terms at the official SDR/dollar exchange rate for the reporting date. The entries for the latest
week reflect any necessary adjustments, including revaluation, by the U.s. Treasury to IMF data for the prior month
end.
3/ Gold stock is valued monthly at $42.2222 per fine troy ounce.
Page 1 of 2
/ a view or prmt the
put- content on thiS page, Gown/oaG the tree AGobe(f3} Acrobal(IV HeaGerr.e;.
August 13, 2007
HP-533
Department of the Treasury
2007-2008 Priority Guidance Plan
Joint Statement by:
Eric Solomon
Assistant Secretary (Tax Policy)
U.S. Department of the Treasury
Kevin M. Brown
Acting Commissioner
Internal Revenue Service
Donald L. Korb
Chief Counsel
Internal Revenue Service
Washington - We are pleased to announce the release of the 2007-2008 Priority
Guidance Plan.
In Notice 2007-41, we solicited suggestions from all interested parties, including
taxpayers, tax practitioners, and industry groups. We recognize the importance of
public input to formulate a Priority Guidance Plan that focuses resources on
guidance items that are most important to taxpayers and tax administration.
The 2007-2008 Priority Guidance Plan contains 303 projects to be completed over
a twelve-month period, from July 2007 through June 2008. In addition to the items
on this year's plan, the Appendix lists the more routine guidance that is published
each year.
In 2002, we began issuing updates to the Priority Guidance Plan during the plan
year. We intend to update and republish the Priority Guidance Plan periodically
again this year to reflect additional guidance that we intend to publish during the
plan year. The periodic updates allow us flexibility throughout the plan year to
consider comments received from taxpayers and tax practitioners relating to
additional projects and to respond to developments ariSing during the plan year. For
example, we updated the 2006 - 2007 Priority Guidance Plan to reflect the
publication of substantial guidance implementing the Pension Protection Act of
2006 and the announcement of a settlement initiative related to the exercise of
certain stock rights. We will continue to evaluate the priority of each guidance
project in light of developments arising during the 2007-2008 plan year, including
the enactment of tax legislation, if any.
The published guidance process can be fully successful only if we have the benefit
of the insight and experience of taxpayers and practitioners who must apply the
rules. Therefore, we invite the public to continue to provide us with their comments
and suggestions as we write guidance throughout the plan year.
Additional copies of the 2007-2008 Priority Guidance Plan can be obtained from the
IRS website on the Internet at http://www.irs.gov/pub/irs-utll2007-2008 . Copies can
also be obtained by calling Treasury's Office of Public Affairs at (202) 622-2960.
-30REPORTS
http://www.treas.gov/press/rcicl1.1es/hp533.htm
1118/2008
Page 2 of 2
•
2007-08 Priority Guidance Plan
http://www.treas.gov/press!rclca.<;es/hp533.htm
1118/2008
OFFICE OF TAX POLICY
AND
INTERNAL REVENUE SERVICE
2007-2008 PRIORITY GUIDANCE PLAN
August 13, 2007
CONSOLIDATED RETURNS
1.
Regulations 1 under section 1502 regarding liquidations under section 332 into multiple
members. Proposed regulations were published on February 22,2004.
2.
Regulations revising section 1.1502-13(g) regarding transactions involving obligations
of consolidated group members.
3.
Regulations regarding transfers of member stock. Proposed regulations were published
on January 23,2007.
4.
Regulations revising section 1.1502-77 regarding agency for a consolidated group.
5.
Regulations regarding the application of section 172(h) (corporate equity reduction interest losses)
to a consolidated group.
CORPORATIONS AND THEIR SHAREHOLDERS
I.
Guidance regarding the recovery of basis in redemptions of corporate stock governed
by section 301. A notice was published in the Federal Register on April 19, 2006.
2.
Regulations regarding basis tracing under section 358 and allocation of boot under
section 356.
3.
Regulations enabling elections for certain transactions under section 336(e).
4.
Regulations regarding treatment of certain nuclear decommissioning funds for purposes
of allocating purchase price in certain acquisitions. Temporary regulations were
published on September 14,2004.
5.
Regulations revising section 1.355-3 regarding the active trade or business requirement.
Proposed regulations were published on May 8, 2007.
As used in this document, unless otherwise indicated, the term "regulations" refers to
proposed regulations, temporary regulations or final regulations.
I
6.
Regulations regarding predecessors and successors under section 355(e). Proposed
regulations were published on November 22,2004.
7.
Regulations regarding the applicability of section 358(h)(2)(B) to the assumption of certain
liabilities. Temporary regulations were published on May 23,2005.
8.
Guidance under section 362(e) regarding the importation or duplication of losses. Notice
2005-70 was published on October 11, 2005. Proposed regulations were published on
October 23,2006 and January 23, 2007.
9.
Regulations regarding continuity of interest. Temporary regulations were published on
March 20, 2007.
10. Regulations regarding transactions involving the transfer or receipt of no net equity
value. Proposed regulations were published on March 10,2005.
11. Regulations revising section 1.368-2(k) regarding transfers of assets after putative
reorganizations. Proposed regulations were published on August 18, 2004.
12. Revision of Rev. Proc. 81-70 providing guidelines for estimating stock basis in
reorganizations under section 368(a)(l )(B). Comments regarding these guidelines were
requested in Notice 2004-44.
13. Guidance regarding the scope of section 368(a)(l)(D). Temporary regulations were
published on March 1, 2007.
14. Regulations under section 368(a)(l)(F). Proposed regulations were published on
August 12,2004.
15. Guidance under sections 382 and 384, including regulations regarding built-in items under section
382(h)(6). Built-in items under section 382(h)(6) were previously addressed in Notice 2003-65.
Temporary regulations regarding the treatment of prepaid income were published on June 13, 2007.
16. Guidance regarding the transfer of treasury stock to a corporation controlled by the
transferor. See Rev. Rul. 2006-2, revoking Rev. Rul. 74-503.
17. Revised regulations under section 1561 regarding the allocation of certain tax benefits
among related corporations. Temporary regulations were published on December 21,
2006.
EMPLOYEE BENEFITS
A.
Retirement Benefits
1.
Guidance on special pay plans for governmental employees.
2.
Notice providing transitional guidance on normal retirement age .
• WILL BE PUBLISHED 8/27/2007 in IRB 2007-35 as NOTICE 2007-69
-2-
(released 8/10/2007)
3.
Guidance regarding the treatment of incidental health insurance benefits provided under
a profit-sharing or stock bonus plan.
4.
Update of Employee Plans Compliance Resolution System (EPCRS).
5.
Guidance on the transfer of assets from a section 40I(a) plan to a Puerto Rico plan.
6.
Proposed regulations under section 401(a)(9) on required minimum distribution rules
for governmental plans, as directed by the Pension Protection Act of 2006.
7.
Guidance on diversification requirements under section 401(a)(35), as added by the
Pension Protection Act of 2006.
8.
Update of model notice under section 402(f) relating to eligible rollover distributions
9.
Announcement on the definition of insurance under section 402(1), as added by the
Pension Protection Act of 2006.
10. Model plan provisions under section 403(b) for public school employees.
11. Announcement on the reporting of distributions of section 404(k) dividends.
12. Final regulations on converting an IRA annuity to a Roth IRA annuity. Temporary
regulations were published on August 22,2005. (408A)
13. Proposed regulations under section 411 (a)( 11) to provide a description of the
consequences of failing to defer, as directed by the Pension Protection Act of 2006.
14. Proposed regulations on hybrid plans under sections 411(a)(13) and 411(b)(5), as added
by the Pension Protection Act of 2006.
15. Guidance under section 414(d), as amended by the Pension Protection Act of2006, for
plans maintained by Indian Tribal governments .
• WILL BE PUBLISHED 8/27/2007 in IRB 2007-35 as NOTICE 2007-67
(released 8/9/2007)
16. Guidance on automatic enrollment under sections 414(w), 401 (k)(l 3) and 401(m)(12), as
added by the Pension Protection Act of 2006.
17. Guidance on applicable interest and mortality assumptions under section 417( e), as
amended by the Pension Protection Act of 2006.
18. Proposed regulations on the measurement of assets and liabilities under section 430, as
added by the Pension Protection Act of 2006.
19. Proposed regulations on the determination of the minimum required contributions under
section 430, as added by the Pension Protection Act of 2006.
20. Final regulations on the funding of single employer plans under section 430, as added by
the Pension Protection Act of 2006.
21. Guidance on the mortality tables for disabled individuals used under sections 430(h)(3)(D)
and 43 1(c)(6)(D)(v), as added by the Pension Protection Act of2006.
22. Guidance on multiemployer plans under section 432, as added by the Pension
Protection Act of 2006.
23. Proposed regulations on funding-based benefit limits under section 436, as
added by the Pension Protection Act of 2006.
24. Proposed regulations under section 4980F with respect to retroactive effective dates.
25. Guidance on Fonn 5500 reporting as a result of the Pension Protection Act of2006.
26.
Guidance on the lO-year amortization election for airlines under section 402(a)(2) of the Pension
Protection Act of 2006.
B.
Executive Compensation, Health Care and Other Benefits, and Employment Taxes
1.
Guidance under section 162(1) regarding 2% S Corporation shareholders.
2.
Guidance under section 162(m) on the definition of outside director.
3.
Guidance on discrete issues on Health Savings Accounts (HSAs).
4.
Guidance on qualified nonpersonal use vehicles.
5.
Guidance under section 409A on funding restrictions applicable to nonqualified
deferred compensation.
6.
Proposed regulations under section 409 A on the calculation of income inclusion and
additional taxes.
7.
Guidance regarding reporting and income tax withholding under section 409A.
8.
Guidance on welfare benefit funds.
9.
Guidance on deductions for contributions to a welfare benefit fund.
10. Guidance under section 419A on reserves for post-retirement medical and life insurance
benefits.
11. Update of the regulations under section 423 regarding employee stock purchase plans.
12. Guidance under section 457(t).
-4-
• PUBLISHED 8/6/2007 in IRB 2007-32 as NOTICE 2007-62
(released 7/23/2007)
13. Final regulations under section 3121 regarding the definition of salary reduction
agreement. Temporary regulations were published on November 16,2004.
14. Revenue ruling on income tax withholding with respect to supplemental wages for
employees who receive no regular wages.
15. Proposed regulation under section 4980B regarding calculation of the applicable
premium for COBRA continuation coverage.
16. Final regulations under section 4980G on comparable HSA contributions. Proposed
regulations were published on June 1, 2007.
17. Proposed regulations on Health Opportunity Patient Empowerment Act of 2006
changes to section 4980G.
18. Regulations for adjusting overpayment or underpayment of employment taxes.
EXCISE TAXES
1.
Guidance under sections 4051 and 4071 on heavy trucks, trailers, tractors, and tires to
update current regulations and to reflect recent statutory changes, including changes
made by the American Jobs Creation Act of2004.
2.
Proposed regulations under sections 4081-4083 and 6427 on fuel tax provisions added
or affected by the American Jobs Creation Act of 2004, the Energy Policy Act, and the
Safe, Accountable, Flexible, Efficient Transportation Equity Act, and the Tax Relief and
Health Care Act of 2006, including issues that are related to kerosene used in aircraft and
the Leaking Underground Storage Tank Trust Fund. Many of these issues were
discussed in Notices 2005-4 and 2005-80.
3.
Final regulations under section 4082, as amended by the American Jobs Creation Act of
2004, on diesel fuel and kerosene that is dyed by mechanical injection. Temporary
regulations were published on April 26, 2005.
4.
Update of existing regulations and rulings regarding the tax on the retail sale of trucks,
tractors, and trailers under sections 4051- 4053. Current guidance is in temporary
regulations, regulations under section 4061 (which was terminated in 1983), and
numerous revenue rulings.
5.
Guidance under section 4481, as amended by the American Jobs Creation Act of2004,
related to electronic filing of highway use tax returns and the proration of tax when
vehicles are sold.
6.
Guidance on the eligibility of the credit or payment allowed for fuel used in certain buses
- 5-
described in sections 6421(b) and 6427(b).
7.
Guidance under section 6426(d)(2)(F), as added by the Safe, Accountable, Flexible,
Efficient Transportation Equity Act, to define "liquid hydrocarbon derived from biomass"
for purposes of the definition of alternative fuel and the credit and payment allowable for
alternative fuel mixtures.
8.
Proposed regulations under sections 40, 40A, 6426 and 6427 on fuel tax provisions
added or affected by the American Jobs Creation Act of2004, the Energy Policy Act, and
the Safe, Accountable, Flexible, Efficient Transportation Equity Act, including issues that
are related to alcohol fuels, biodiesel, renewable diesel, and alternative fuel. Many of
these issues were discussed in Notices 2005-4 and 2005-62.
EXEMPT ORGANIZATIONS
1.
Revenue procedure updating Rev. Proc. 90-27 on processing exemption applications .
• Published 7/23/2007 in IRB 2007-30 as Rev. Proc. 2007-52
(released 7/912007)
2.
Regulations under sections 501(c)(3) and 4958 on revocation standards. Proposed
regulations were published on September 9,2005.
3.
Proposed regulations regarding the new requirements for supporting organizations, as
added by the Pension Protection Act of 2006.
4.
Regulations under section 529 regarding qualified tuition programs.
5.
Final regulations on excise taxes on prohibited tax shelter transactions and related
disclosure requirements.
6.
Proposed regulations regarding the new excise taxes on donor advised funds, as added
by the Pension Protection Act of 2006.
7.
Regulations under section 6033, as amended by the Pension Protection Act of 2006, on
notification requirement for entities currently not required to file.
8.
Regulations to implement Form 990 revisions.
FINANCIAL INSTITUTIONS AND PRODUCTS
1. Guidance for RICs and REITs concerning the application of section 1(h) to capital gain dividends.
2. Final regulations under section 446 on notional principal contracts (NPC) relating to the inclusion in
income or deduction of a contingent nonperiodic payment and guidance relating to the character of
payments made pursuant to an NPC. Proposed regulations were published on February 26, 2004.
3. Guidance addressing the correction of minor errors by RICs and REITs.
-6-
4. Final regulations simplifying the reporting to shareholders of regulated investment companies with
respect to the flow through of the foreign tax credit. Proposed regulations were published on
September 18, 2006.
5. Final regulations under section 860G(b) regarding withholding obligations of partnerships allocating
income from REMIC residual interests to foreign persons. Proposed regulations were published on
August 1, 2006.
6. Proposed regulations under section 860G addressing modifications of commercial mortgages held by
REMICs.
7. Final regulations under section 1221 regarding capital asset exclusion for accounts and notes
receivable. Proposed regulations were published on August 7, 2006.
8. Guidance under section 1286(f) as added by the American Jobs Creation Act of2004 regarding
treatment of stripped interests in bond and preferred stock funds.
GENERAL TAX ISSUES
1.
Notice concerning the section 30B phase out of the Honda Hybrid Vehicle Credit.
2.
Guidance amplifying Notice 2006-54 regarding Fuel Cell Motor Vehicle Credit
Certifications.
3.
Guidance regarding the alternative simplified credit under section 41 (c)( 5), as added by
the Tax Relief and Health Care Act of 2006.
4.
Proposed regulations under section 41 regarding the exception from the definition of
"qualified research" for internal use software under section 41 (d)( 4)(E).
5.
Guidance under section 41 regarding whether the gross receipts component of the
research credit computation for a controlled group under section 41 (f) includes gross
receipts from transactions between group members.
6.
Final regulations under section 42 on applicable utility allowances.
7.
Final regulations under section 42 on the requirements for a qualified contract.
8.
Proposed regulations under section 45D on how an entity serving targeted populations
meets the requirements to be a qualified active low-income community business.
9.
Guidance under section 45D relating to the new markets tax credit.
10. Final regulations under section 45G relating to the railroad track maintenance credit. Temporary
regulations were published on September 8, 2006.
11. Guidance concerning the credit for the production of low sulfur diesel fuel under section
45H regarding the certification requirement for complying with EPA regulations.
-7-
12. Temporary Regulations concerning the credit for production from advanced nuclear power
facilities under section 451.
13. Regulations under sections 46 and 167 relating to normalization.
14. Guidance under section 48 on the energy credit for qualified fuel cell and microturbine
property.
15. Notice regarding the tax treatment and information reporting of market gain on
repayments of Commodity Credit Corporation loans.
16. Revenue ruling under sections 61 and 451 on the inclusion in income of certain federal
tax credits, such as credits related to alcohol and biodiesel fuel.
17. Revenue ruling addressing the consequences of certain transactions on the treatment of
arrangements as leases for federal income tax purposes.
18. Guidance under section 108(t) regarding law school debt forgiveness programs.
19. Guidance addressing significant issues under section 152 concerning the definition of
dependent.
20. Final regulations under section 152, as amended by the Working Families Tax Relief Act
of 2004, regarding the release of a claim for exemption for a child of divorced or
separated parents. Proposed regulations were published on May 2, 2007.
21. Regulations regarding the election by state legislators under section 162(h) relating to
deemed expenses for travel away from home.
22. Regulations regarding the deductibility of expenses for lodging not incurred in traveling
away from home. The expected issuance of these regulations was announced in Notice
2007-47.
23. Guidance under sections 162 and 165 on deducting and accounting for gaming losses
and expenses.
24. Proposed regulations under section 170(t)(12), as added by the American Jobs Creation
Act of 2004, and related provisions, regarding contributions of qualified vehicles. Interim
guidance was issued as Notice 2005-44.
25. Regulations under section 170 regarding substantiation and reporting requirements for
cash and noncash charitable contributions to reflect amendments made by the
American Jobs Creation Act of 2004 and the Pension Protection Act of 2006. Interim
guidance was issued as Notice 2006-96.
26. Guidance under section 174 concerning inventory property.
- 8-
27. Temporary regulations under section 179B regarding the deduction for capital cost
incurred by a refinery in complying with EPA regulations.
28. Guidance under section 179C on the election to expense certain refineries.
29. Guidance under section 179D, amplifying Notice 2006-52, on the deduction for energy
efficient commercial buildings.
30. Final regulations under section 199, as amended by the Tax Increase Prevention and
Reconciliation Act of 2005, on the deduction for income attributable to domestic
production activities.
31. Final regulations under section 199 on the definition of a qualified film.
32. Revenue ruling under section 213 regarding the deductibility of costs incurred for
diagnostic procedures as medical expenses.
33. Guidance regarding the section 274(n) limitations in employee leasing arrangements.
34. Regulations under section 468A, as amended by the Energy Policy Act of 2005, regarding
special rules for nuclear decommissioning costs.
35. Guidance under section 469 involving grouping and regrouping of activities.
36. Regulations under section 1221 regarding the election, as added by the Tax Increase
Prevention and Reconciliation Act of 2005, to treat musical compositions sold or
exchanged before January 1, 2011, as capital assets.
37. Regulations under section 1301(a), as amended by the American Jobs Creation Act of
2004, regarding income averaging for fishermen.
38. Final regulations under section 7701 regarding disregarded entities and employment and
excise taxes. Proposed regulations were published on October 18,2005.
39. Regulations providing criteria for treating an entity as an integral part of a state, local, or
tribal government.
GIFTS, ESTATES AND TRUSTS
1.
Final regulations under section 67 regarding miscellaneous itemized deductions of a
trust or estate. Proposed regulations were published on July 27,2007.
2.
Guidance under section 642( c) concerning the ordering rules for charitable payments
made by a charitable lead trust.
3.
Revenue ruling on the division of charitable remainder trusts under section 664.
Proposed regulations under section 664( c) to reflect the 2006 Tax Relief Act
amendment concerning the effect ofUBIT on charitable remainder trusts.
4.
-9-
5.
Proposed regulations under section 2032(a) regarding the imposition of restrictions on
estate assets during the 6 month alternate valuation period.
6.
Guidance regarding the consequences under various estate, gift and generation-skipping
transfer tax provisions of using a family-owned trust company as the trustee of a trust.
7.
Guidance under section 2036 regarding the tax consequences of a retained power to
substitute assets in a trust.
8.
Final regulations under sections 2036 and 2039 regarding the portion of a split-interest
trust that is includible in a grantor's gross estate in certain circumstances in which the
grantor retains an annuity or other payment for life.
9.
Final regulations providing guidance under section 2053 regarding the extent to which
post-death events may be considered in determining the value of the taxable estate.
10. Revenue Procedure under section 2522 containing sample inter vivos Charitable Lead
Unitrusts.
11. Guidance under section 2642(g) regarding extensions of time to make allocations of the
generation-skipping transfer tax exemption.
12. Guidance under section 2703 regarding the gift and estate tax consequences of the
transfer of assets to investment accounts that are restricted.
13. Guidance under section 2704 regarding restrictions on the liquidation of an interest in a
corporation or partnership.
INSURANCE COMPANIES AND PRODUCTS
1.
Final regulations on the exchange of property for an annuity contract. Proposed
regulations were published on October 18, 2006.
2.
Guidance concerning section 72( e) and partial exchanges of annuity contracts. Interim
rules were provided in Notice 2003-51.
3.
Guidance on the qualification of certain arrangements as insurance.
4.
Final regulations regarding taxable asset acquisitions and dispositions of insurance
companies. Temporary and proposed regulations were published on April 10,2006.
5.
Revenue ruling concerning the meaning of the term "statutory reserves" under section
807 where the company is subject to different statutory reserve requirements in different
states.
6.
Final regulations to expand the list of holders whose beneficial interests in
an investment company, partnership, or trust do not prevent a segregated asset account
- 10-
from looking through to the assets of the investment company, partnership, or trust to
satisfy the requirements of section 817(h). Proposed regulations were published on July
31,2007.
7.
Guidance concerning corporate-owned life insurance under section 863 of the Pension
Protection Act of 2006.
8.
Guidance concerning remediation procedures for life insurance and annuity contracts
based on comments received pursuant to Notice 2007-15.
INTERNATIONAL ISSUES
A.
Subpart FlDeferral
l.
Regulations and other guidance under subpart F related to the American Jobs Creation Act of 2004
and the Tax Increase Prevention and Reconciliation Act of2005. See Notice 2006-48 regarding
active aircraft or vessel leasing rents under section 954(c)(2)(A), which was published on May 22,
2006, and Notice 2007-9 regarding section 954(c)(6), which was published on January 29,2007.
2.
Final regulations under section 959 on previously taxed earnings and profits. Proposed
regulations were published on August 29,2006.
3.
Other guidance under subpart F, including guidance on contract manufacturing and
substantial assistance. See Notice 2007-13 regarding substantial assistance under
subpart F, which was published on January 29,2007.
4.
Final regulations on the gain recognition election and PFIC/CFC overlap rule and other
guidance under sections 1296, 1297 and 1298. Final, temporary, and proposed
regulations on gain recognition election and PFIC/CFC overlap were published on
December 8, 2005.
B.
Inbound Transactions
1.
Guidance on financing activities, including lending activities under section 864.
2.
Guidance related to the American Jobs Creation Act of2004 and other issues under sections 897,
1445, and 1446. Final, temporary, and proposed regulations under section 1446 were published on
May 18,2005. See Notice 2006-46 on the tax treatment of certain restructuring transactions under
section 897, which was published on June 12,2006.
3.
Regulations on withholding and reporting obligations under section 1441 regarding tender offers.
4.
Guidance on documentation, securities lending, and other withholding issues under section 1441.
C.
Outbound Transactions
1.
Guidance on the use of parent stock to avoid dividend treatment. See Notice 2006-85
regarding use of parent stock to avoid dividend treatment, which was published on
- 11 -
October 10,2006, and Notice 2007-48, which was published on June 18,2007.
2.
Final regulations under section 1.367(a)-8.
3.
Regulations or other guidance under section 7701. See Notice 2007-10, adding a
Bulgarian entity to the list of entities always treated as corporations under section 7701,
which was published on January 22,2007.
4.
Regulations under section 7874, as added by the American Jobs Creation Act of 2004,
regarding the treatment of expatriated entities and their foreign parents. Temporary
regulations regarding the determination of ownership under section 7874 were published
on December 28,2005, and temporary regulations regarding the substantial business
activities test were published on June 6, 2006.
5.
Other regulations on international restructurings. Proposed regulations under sections
367 and 1248 regarding the attribution of earnings and profits to stock following certain
nonrecognition transactions were published on June 2, 2006. Final regulations under
section 367(b) were published on August 8, 2006. Temporary regulations under section
367(d) were published on May 16, 1986.
D.
Foreign Tax Credits
1.
Final regulations under section 901 on legal liability. Proposed regulations relating to the
determination of who is considered to pay a foreign tax for purposes of sections 901 and
903 were published on August 4, 2006.
2.
Final regulations on the determination of the amount of taxes paid for purposes of section
901 for taxpayers who claim direct and indirect foreign tax credits. Proposed regulations
were published on March 30, 2007.
3.
Guidance under the American Jobs Creation Act of 2004 on recharacterization of overall domestic
losses under section 904(g), and related guidance on overall foreign loss
recapture provisions under section 904(f).
4.
Regulations or other guidance on other foreign tax credit provisions of the American Jobs Creation
Act of 2004, including the reduction in the number of separate categories under section 904( d), the
credit disallowance rule under section 901(1), and related issues under section 901 (k). A notice
soliciting comments under section 901(1) was published on December 19,2005.
5.
6.
Guidance on foreign tax redeterminations under section 905(c).
Final regulations related to look-through treatment for 10/50 company dividends and other
foreign tax credit guidance. Temporary regulations on look-through treatment for 10/50
company dividends were published on April 25, 2006.
E.
Transfer Pricing
1.
Regulations and other guidance on the treatment of cross border services. Proposed regulations
under section 482 were published on September 10,2003, and temporary and final regulations
- 12 -
were published on August 4,2004. See Rev. Proc. 2007-13, which identifies services eligible to
be evaluated at cost, and Notice 2007-5, which provides transition rules regarding the temporary
regulations, which were both published on January 16,2007.
2.
Regulations and other guidance on global dealing. Proposed regulations under
section 482 were published on March 6, 1998.
3.
Regulations on cost sharing and other guidance under section 482. Proposed cost
sharing regulations were issued on August 22,2005.
4.
Annual Report on the Advance Pricing Agreement Program.
F.
Sourcing and Expense Allocation
1.
Regulations or other guidance under the American Jobs Creation Act of 2004 on interest expense
apportionment, and other guidance on expense allocation, including issues relating to partnership
structures. Notice 2005-53 regarding section 1.882-5 was published on August 8, 2005.
Temporary regulations under section 1.882-5 were published on August 17,2006.
2.
Regulations or other guidance on mixed source of income, including rents and royalties.
G.
Treaties
1.
Guidance under treaties, including on the zero percent reduced withholding rate on
certain dividends.
2.
Announcements of Mutual Agreements under income tax conventions (MAPs).
H.
Other
1.
Regulations or other guidance related to shipping and aircraft transportation. Temporary
regulations under section 1.883-3 were published on June 25, 2007.
2.
Guidance on cross-border treatment of insurance contracts.
3.
Regulations or other guidance on the exemption of certain investment income of foreign
governments under section 892. Temporary regulations under section 892 were
published on June 24, 1988. Regulations finalizing section 1.892-5 were published on
July 31, 2002.
4.
Guidance under section 911, including guidance under the Tax Increase Prevention and
Reconciliation Act of2005.
5.
Regulations or other guidance on the source and effectively connected income rules, and other
guidance on possessions. Temporary regulations, including under section 937, were published on
April 11,2005. Final regulations under section 937 providing residency rules were published on
January 31, 2006.
- 13 -
6.
Regulations and other guidance concerning the treatment of currency gain or loss.
Proposed regulations under section 987 were published on September 7, 2006.
7.
Guidance on cross border information reporting and filing issues, including regulations
relating to the reporting of bank deposit interest. Proposed regulations under section
6049 were published on January 17, 2001.
PARTNERSHIPS
1.
Proposed regulations under section 108( e)(8), as amended by the American Jobs
Creation Act of 2004, regarding debt satisfied by a partnership interest.
2.
Guidance under section 465, 704(b) and 752 concerning the interaction of the at-risk
provisions, deficit and 752 concerning the interaction of the at-risk provisions, deficit
restoration obligations and the partnership liability rules.
3.
Regulations under sections 704 and 737 regarding partnership mergers. Interim
guidance was issued as Notice 2005-15.
4.
Proposed regulations under sections 704, 743, and 755, as amended by the American
Jobs Creation Act of 2004, regarding the disallowance of certain partnership loss
transfers and no reduction of basis in stock held by a partnership in a corporate partner.
Interim guidance was issued as Notice 2005-32.
5.
Guidance under section 704 involving remedials and related parties.
6.
Final regulations under section 704(b )(2) regarding whether partnership allocations have
substantial economic effect. Proposed regulations were published on November 18,
2005.
7.
Revenue procedure under sections 704(b) and 45 that provides the necessary
requirements for partnerships to meet a safe harbor in allocating wind energy production
tax credits.
8.
Modification of Rev. Proc. 2003-84 regarding monthly closing elections for partnership
investments in tax-exempt bonds to impose certain additional conditions on the equity
investment structure of eligible partnerships.
Proposed regulations under section 706( d) regarding the determination of distributive
share when a partner's interest changes.
9.
10. Final regulations under section 707 regarding disguised sales. Proposed regulations
were published on November 26,2004.
11. Final regulations under sections 721 and 83 regarding partnership equity issued in
connection with the performance of services. Proposed regulations were published on
May 24, 2005.
- 14 -
12.
Final regulations under 721 regarding the tax treatment of noncompensatory options and
convertible instruments issued by a partnership. Proposed regulations were published
on January 22,2003.
13. Proposed regulations under section 751(b) regarding unrealized receivables and
inventory items of a partnership.
14.
Final regulations regarding the application of section 1045 to certain partnership
transactions. Proposed regulations were published on July 15, 2004.
SUBCHAPTER S
1.
Revenue ruling on S corporation losses/reduction in tax attributes under section 108(b )
for discharge of indebtedness income that is excluded from gross income.
2.
Proposed regulations under section 1361 to reflect provisions of the American Jobs
Creation Act of 2004 and Gulf Opportunity Zone Act of 2005, including the family
shareholder provision, and to update obsolete provisions in the current regulations.
3.
Guidance under sections 1361 and 1362 regarding employer identification numbers of
parents and subsidiaries in F reorganizations involving S corporations and qualified
subchapter S subsidiaries.
4.
Guidance under section 1362 involving late S corporation elections.
5.
Final regulations under section 1363 providing guidance for S corporation banks.
Proposed regulations were issued on August 24, 2006.
6.
Guidance under sections 1366 and 1367(a)(2) regarding the amount of deduction, and
adjustments to basis of S corporation stock, for charitable contributions of property by
S corporations made after the Pension Protection Act of 2006 amendments.
7.
Final regulations under section 1367 regarding adjustments in basis of indebtedness.
Proposed regulations were published on April 12, 2007.
8.
Guidance under section 1367 regarding S corporations and back-to-back loans.
9.
Guidance under section 1368( e) on whether premiums paid by S corporations for life
insurance decrease the corporation's AAA.
TAX ACCOUNTING
1.
Clarification of Rev. Rul. 2005-28 regarding the treatment of Medicaid rebates incurred
by a pharmaceutical manufacturer in determining gross receipts.
2.
Regulations under sections 162 and 263 regarding the deduction and capitalization of
expenditures for tangible assets.
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3.
Guidance on the treatment of wrap fees.
4.
Guidance under section 174 regarding changes in method of accounting from an
impermissible method.
5.
Regulations under sections 195,248, and 709, as amended by the American Jobs
Creation Act of 2004, regarding the elections to amortize start-up and organizational
expenditures.
6.
Proposed regulations under section 263(a) regarding the treatment of capitalized
transaction costs.
7.
Guidance regarding the supporting documentation required under section 1.263(a)-5(f)
to allocate success-based fees between activities that facilitate a transaction and activities
that do not facilitate a transaction.
8.
Guidance under section 263A regarding the treatment of post-production costs, such as
sales-based royalties.
9.
Guidance under section 263A regarding whether "negative" additional section 263A
costs are taken into account under section 1.263A-l(d)(4).
10. Guidance regarding whether an automobile dealership is a producer for purposes of
section 263A when it installs parts on customer-owned and dealership-owned vehicles.
11. Regulations under section 381 (c)(4) and (5) regarding changes in method of accounting.
12. Revenue procedures updating Rev. Proc. 2002-39 and Rev. Proc. 2006-45 to modify
and clarify the rules for changing an accounting period under section 442.
13. Guidance under section 446 regarding whether a change between (1) separately
reporting an item as income and deducting a related expense (either in the same or a
different tax year) and (2) either (a) excluding the item from income and not deducting the
expense, or (b) netting the item of income with the related expense, is a change in
method of accounting.
14. Update of Rev. Proc. 2002-9 regarding automatic changes in methods of accounting.
15. Guidance regarding the nonaccrual experience method under section 448.
16. Guidance under section 453 addressing the exchange of property for an annuity.
17. Guidance regarding the application of section 453A to contingent payment installment
sales.
18. Regulations under section 460 providing rules for home construction contracts.
19. Guidance under section 460 addressing the application ofthe lookback interest rules to
- 16 -
certain pass-thru entities with tax-exempt owners.
20. Guidance applying the all events test of section 461 to services and other liabilities related
to such services.
21. Guidance under section 468B regarding the tax treatment of a single-claimant qualified
settlement fund.
22. Regulations under section 468B regarding escrow accounts and other funds used in
like-kind exchanges. Proposed regulations were published on February 7, 2006.
23. Guidance regarding the permissibility of a moving average cost method for valuing
inventory.
24. Guidance under section 1.472-8 regarding the inventory price index computation (lPIC)
method.
25. Guidance under section 1.472-8 regarding the treatment of crossover vehicles for
purposes of dollar-value LIFO pooling.
26. Guidance regarding the application of the Gulf Opportunity Zone bonus depreciation
recapture rule in section 1400N(d)(5) to like-kind exchanges.
TAX ADMINISTRATION
l.
Revenue procedure under section 3402 regarding the withholding rules applicable to
poker tournaments.
2.
Notice under section 3402(t) soliciting comments regarding guidance to Government
entities required to withhold on certain payments made by the entities.
3.
Final regulations regarding mandatory Corporate E-File. Temporary regulations were
published on January 12,2005.
4.
Final regulations under section 6011 with respect to taxpayer disclosure of reportable
transactions. Proposed regulations were published on November 2,2006.
5.
6.
Guidance under section 6011 regarding reportable transactions.
Guidance concerning patented transactions.
7.
Final regulations under section 6020(b) regarding substitutes for return. Temporary
regulations were published on July 18,2005.
8.
Guidance regarding information reporting under section 6041 for commissions paid to insurance
agents.
9.
Final regulations under section 6050L, as amended, regarding the information reporting
requirements relating to certain donated property. Proposed regulations were published
- 17 -
on May 23,2005.
10. Regulations regarding information reporting for lump sum timber sales.
11. Guidance under section 6050P regarding the information reporting requirements relating
to the purchase of debt that has been written off as uncollectible. Final regulations were
published on October 25,2004.
12. Notice regarding the use of alternative signature methods by electronic return originators.
13. Regulations under section 6081 simplifying the extension process. Temporary
regulations were published on November 7,2005.
14. Final and temporary regulations under section 6103 regarding disclosures to the
Department of Commerce, Bureau of the Census. Temporary regulations were published
on March 11,2005.
15. Regulations under section 6103 regarding disclosures to whistleblowers under section
7623, as amended by the Tax Reform and Health Care Act of2006.
16. Final regulations under section 6111 with respect to material advisor disclosure of
reportable transactions. Proposed regulations were published on November 2,2006.
17. Final regulations under section 6112 with respect to list maintenance and reportable
transactions. Proposed regulations were published on November 2,2006.
18. Guidance under section 6112 with respect to list maintenance.
19. Regulations under section 6159 regarding installment agreements.
20. Guidance regarding the furnishing of security in connection with an election to pay the
estate tax in installments under section 6166.
21. Revenue procedure under section 6213 regarding internet and oral change of address
requests.
22. Regulations under section 6231 regarding the special enforcement exception to the
application of the TEFRA partnership procedures.
23. Proposed regulations under section 6302 regarding payments under the Electronic
Federal Tax Payment System.
24. Regulations under section 6302 regarding the failure-to-deposit penalty under section
6656.
25. Regulations regarding the filing of Form 941 under the Annual Employment Tax
Return Program. Proposed regulations were published on January 3, 2006.
26. Regulations under section 6323 regarding electronic lien filing authority.
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27 .. Final regulations implementing the substitution of value procedures under section 6325.
Proposed regulations were published on January 11,2007.
28. Guidance regarding the limitations on setoff.
29. Revenue ruling regarding setoff with respect to a taxpayer in bankruptcy.
30. Revision of Notice 2002-44 regarding the filing of certain claims for credit or refund.
31. Final regulations under section 6404(g) regarding the application of the interest
suspension period. Proposed and temporary regulations were published on June 21,
2007.
32. Regulations under section 6501 (c)( 10) regarding the extension of the statute of limitations
for assessment relating to failures to report required information concerning listed
transactions. Interim guidance was issued as Rev. Proc. 2005-26.
33. Regulations under section 6503 regarding the suspension of the period of limitations for
noncompliance with a designated summons. Proposed regulations were published on
July 31, 2003.
34. Regulations under section 6611 regarding interest on overpayments by tax exempt
organizations.
35. Regulations under sections 6662A, 6662 and 6664 regarding accuracy-related penalties
relating to understatements. Interim guidance was issued as Notice 2005-12.
36. Update of Rev. Proc. 94-69 regarding qualified amended returns filed by CIC taxpayers.
Final regulations under section 6664 were published on January 9,2007.
37. Guidance under section 6676 regarding the penalty for erroneous claims for refund.
38. Guidance under section 6694, as amended, regarding the penalty for understatements of
taxpayer's liability by tax return preparers.
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39. Guidance implementing amendments to the return preparer penalties, including guidance
regarding the expansion of the scope of the penalties and clarifying application of those
penalties.
40. Guidance under section 6695A, as added by the Pension Protection Act of 2006,
regarding the penalty applicable to appraisers.
41. Notice identifying additional frivolous positions for purposes of the section 6702 penalty as
amended by the Tax Reform and Health Care Act of 2006. A previous list of frivolous
positions was issued as Notice 2007-30.
42. Regulations under section 6707 regarding the penalty for failure to furnish information
required by section 6111.
43. Regulations under section 6707 A regarding the penalty for failure to disclose reportable
transactions. Prior guidance was issued as Notice 2005-11, Rev. Proc. 2005-51, Rev. Proc. 200721 and Rev. Proc. 2007-25.
44. Revenue procedure regarding the procedures to request Appeals consideration of the
section 6707 A penalty.
45. Regulations under section 6708 regarding the penalty for failure to make a list of advisees
available as required by section 6112. Interim guidance was issued as Notice 2004-80.
46. Guidance under section 7122 as amended by the Tax Increase Prevention and
Reconciliation Act of 2005 regarding the partial payment requirement for offers in
compromIse.
47. Guidance regarding Appeals mediation procedures.
48. Guidance regarding fast track procedures for TEGE taxpayers.
49. Guidance under section 7216 regarding the disclosure and use of tax return information
by tax return preparers. Proposed regulations were published on December 7,2005.
Notice 2005-93 providing additional proposed guidance was published on December 19,
2005.
50. Final regulations under section 7425(c) regarding where to send notices of
nonjudicial sale and wrongful levy claims. Proposed regulations were published on July 20, 2007.
51. Guidance under section 7430 regarding attorney fees to reflect miscellaneous changes
made by the Tax Reform Act of 1997 and the Internal Revenue Service Restructuring and
Reform Act of 1998.
52. Proposed regulations under the section 7477 regarding declaratory judgment procedures
relating to gift tax valuation issues.
53. Final regulations under section 7502 regarding the timely mailing/delivery of documents.
- 20-
Proposed regulations were published on September 21, 2004.
54. Revenue ruling under section 7508 regarding the effect of disaster and combat zone relief
on priority and dischargeability of tax obligations in bankruptcy.
55. Amendments to the section 7508A regulations regarding the postponement of certain
deadlines by reason of a Presidentially declared disaster or terroristic or military actions.
56. Amplification of Notice 2006-56 regarding certain individuals affected by Hurricane
Katrina.
57. Final regulations regarding the procedures relating to third party and John Doe
summonses.
58. Proposed regulations under section 7811 regarding taxpayer assistance orders.
59. Revisions to Circular 230 regarding practice before the IRS. Proposed regulations
regarding various general practice (non shelter) matters were published on February 8,
2006. Final regulations regarding matters relating to tax shelters, including standards for
covered opinions and other written advice, were published on December 20, 2004.
60. Regulations regarding user fees for enrolled actuaries.
61. Guidance regarding the procedures for the imposition of a monetary penalty under
Circular 230. Prior guidance was issued as Notice 2007-39.
62. Update of guidance regarding the Appeals function.
63. Revision of Rev. Proc. 2000-43 regarding ex parte communications with Appeals.
TAX EXEMPT BONDS
1.
Temporary regulations on clean renewable energy bonds under section 54. Interim
guidance was published as Notices 2005-98, 2006-7 and 2007-26.
2.
Update Notice 2001-60, which provides guidance on a voluntary resolution program for tax-exempt
bonds under section 103 and related sections.
3.
Final regulations under section 141, including allocation and accounting principles. Proposed
regulations regarding allocation and accounting principles were published on September 26, 2006.
4.
Final regulations under section 142 regarding solid waste disposal facilities. Proposed
regulations were published on May 10, 2004.
5.
Proposed regulations on the public approval requirements for private activity bonds under section
147(f).
Update Rev. Proc. 92-63, which sets forth the process for recovery of rebate
overpayments under section 148.
6.
- 21 -
7.
Proposed regulations on arbitrage investment restrictions under section 148.
- 22 -
APPENDIX - Regularly Scheduled Publications
JULY 2007
1.
Revenue ruling setting forth tables of the adjusted applicable federal rates for the current
month for purposes of sections 42,382, 1274, 1288 and 7520.
2.
Notice setting forth the weighted average interest rate and the resulting permissible range
of interest rates used to calculate current liability and to determine the required
contribution for plan years beginning in July 2007.
3.
Revenue ruling providing the monthly bond factor amounts to be used by taxpayers who
dispose of qualified low-income buildings or interests therein during the period July
through September 2007.
AUGUST 2007
1.
Revenue ruling setting forth tables of the adjusted applicable federal rates for the current
month for purposes of sections 42,382, 1274, 1288 and 7520.
2.
Notice providing the inflation adjustment factor to be used in determining the enhanced of
recovery credit under section 43 for tax years beginning in the calendar year.
3.
Notice providing the applicable percentage to be used in determining percentage
depletion for marginal properties under section 613A for the calendar year.
4.
Revenue ruling setting forth the terminal charge and the standard industry fare level
(SIFL) cents-per-mile rates for the second half of 2007 for use in valuing personal flights
on employer-provided aircraft.
5.
Notice setting forth the weighted average interest rate and the resulting permissible range
of interest rates used to calculate current liability and to determine the required
contribution for plan years beginning in August 2007.
SEPTEMBER 2007
l.
Revenue ruling setting forth tables of the adjusted applicable federal rates for the current
month for purposes of sections 42, 382, 1274, 1288 and 7520.
2.
Revenue procedure providing the amounts of unused housing credit carryover allocated
to qualified states under section 42(h)(3)(D) for the calendar year.
3.
Revenue ruling under section 6621 regarding the applicable interest rates for
overpayments and underpayments of tax for the period October through December 2007.
4.
Notice setting forth the weighted average interest rate and the resulting permissible range
of interest rates used to calculate current liability and to determine the required
contribution for plan years beginning in September 2007.
- 23 -
5.
Revenue procedure under section 62 regarding the deduction and deemed substantiation
of federal standard mileage amounts.
6.
Revenue procedure under section 62 regarding the deduction and deemed substantiation
of federal travel per diem amounts.
7.
Update of Notice 2004-83 to add approved applicants for designated private delivery
service status under section 7502(t). Will be published only if any new applicants are
approved.
8.
Notice identifying the counties that experienced exceptional, extreme, or severe drought
during the preceding 12-month period ending August 31, 2007, for purposes of
determining whether the replacement period within which to replace livestock sold on
account of drought is extended under section 1033(e)(2)(B) and Notice 2006-82.
OCTOBER 2007
1.
Revenue ruling setting forth tables of the adjusted applicable federal rates for the current
month for purposes of sections 42, 382, 1274, 1288 and 7520.
2.
Notice setting forth the weighted average interest rate and the resulting permissible range
of interest rates used to calculate current liability and to determine the required
contribution for plan years beginning in October 2007.
3.
Revenue procedure under section 1 and other sections of the Code regarding the inflation
adjusted items for 2008.
4.
Revenue procedure providing the loss payment patterns and discount factors for the 2007
accident year to be used for computing unpaid losses under section 846.
5.
Revenue procedure providing the salvage discount factors for the 2007 accident year to
be used for computing discounted estimated salvage recoverable under section 832.
6.
Update of Rev. Proc. 2005-27 listing the tax deadlines that may be extended by the
Commissioner under section 7508A in the event of a Presidentially-declared disaster or
terrorist attack.
7.
Revenue ruling providing the monthly bond factor amounts to be used by taxpayers who
dispose of qualified low-income buildings or interests therein during the period October
through December 2007.
NOVEMBER 2007
l.
Revenue ruling setting forth tables of the adjusted applicable federal rates for the current
month for purposes of sections 42,382, 1274, 1288 and 7520.
2.
Revenue ruling providing the "base period T-Bill rate" as required by section 995(t)(4).
- 24-
3.
Revenue ruling setting forth covered compensation tables for the 2008 calendar year for
determining contributions to defined benefit plans and permitted disparity.
4.
Notice setting forth the weighted average interest rate and the resulting permissible range
of interest rates used to calculate current liability and to determine the required
contribution for plan years beginning in November 2007.
5.
Update of Rev. Proc. 2006-48 regarding adequate disclosure for purposes of the section
6662 substantial understatement penalty and the section 6694 preparer penalty.
6.
News release setting forth cost-of living adjustments effective January 1, 2008, applicable
to the dollar limits on benefits under qualified defined benefit pension plans and other
provisions affecting certain plans of deferred compensation.
DECEMBER 2007
1.
Revenue ruling setting forth tables of the adjusted applicable federal rates for the current
month for purposes of sections 42,382, 1274, 1288 and 7520.
2.
Revenue procedure modifying Rev. Proc. 2006-53 to reflect the increased section 179
limitations in the Small Business and Work Opportunity Tax Act of2007.
3.
Revenue ruling under section 6621 regarding the applicable interest rates for
overpayments and underpayments of tax for the period January through March 2008.
4.
Notice setting forth the weighted average interest rate and the resulting permissible range
of interest rates used to calculate current liability and to determine the required
contribution for plan years beginning in December 2007.
5.
Revenue procedure setting forth, pursuant to section 1397E, the maximum face amount
of Qualified Zone Academy Bonds that may be issued for each state during 2008.
6.
Federal Register notice on Railroad Retirement Tier 2 tax rate.
JANUARY 2008
1.
Revenue procedure updating the procedures for issuing private letter rulings,
determination letters, and information letters on specific issues under the jurisdiction of
the Chief Counsel.
2.
Revenue procedure updating the procedures for furnishing technical advice, including
technical expedited advice, to certain IRS offices, in the areas under the jurisdiction of the
Chief Counsel.
3.
Revenue procedure updating the previously published list of "no-rule" issues under the
jurisdiction of certain Associates Chief Counsel other than the Associate Chief Counsel
(International) on which advance letter rulings or determination letters will not be issued.
- 25 -
4.
Revenue procedure updating the previously published list of "no-rule" issues under the
jurisdiction of the Associate Chief Counsel (International) on which advance letter ruling
or determination letters will not be issued.
5.
Revenue procedure updating procedures for furnishing letter rulings, general information
letters, etc. in employee plans and exempt organization matters relating to sections of the
Code under the jurisdiction of the Office of the Commissioner, Tax Exempt and
Government Entities Division.
6.
Revenue procedure updating procedures for furnishing technical advice in employee
plans and exempt organization matters under the jurisdiction of the Commissioner, Tax
Exempt and Government Entities Division.
7.
Revenue ruling setting forth tables of the adjusted applicable federal rates for the current
month for purposes of sections 42,382, 1274, 1288 and 7520.
8.
Revenue ruling setting forth the prevailing state assumed interest rates provided for the
determination of reserves under section 807 for contracts issued in 2007 and 2008.
9.
Revenue ruling providing the dollar amounts, increased by the 2008 inflation adjustment,
for section 1274A.
10. Revenue procedure providing procedures for limitations on depreciation deductions for
owners of passenger automobiles first placed in service during the calendar year and
amounts to be included in income by lessees of passenger automobiles first leased during
the calendar year.
11. Revenue procedure updating procedures for issuing determination letters on the qualified
status of employee plans under sections 401(a), 403(a), 409, and 4975.
12. Revenue procedure updating the user fee program as it pertains to requests for letter
rulings, determination letters, etc. in employee plans and exempt organizations matters
under the jurisdiction of the Office of the Commissioner, Tax Exempt and Government
Entities Division.
13. Notice setting forth the weighted average interest rate and the resulting permissible range
of interest rates used to calculate current liability and to determine the required
contribution for plan years beginning in January 2008.
14. Revenue procedure under section 143 regarding average area purchase price.
15. Revenue procedure providing the maximum allowable value for use of the fleet-average
value and vehicle-cents-per-mile rules to value employer-provided automobiles first made
available to employees for personal use in the calendar year.
16. Revenue ruling providing the monthly bond factor amounts to be used by taxpayers who
dispose of qualified low-income buildings or interests therein during the period January
through March 2008.
- 26-
FEBRUARY 2008
1.
Revenue ruling setting forth tables of the adjusted applicable federal rates for the current
month for purposes of sections 42,382,1274,1288 and 7520.
2.
Notice setting forth the weighted average interest rate and the resulting permissible range
of interest rates used to calculate current liability and to determine the required
contribution for plan years beginning in February 2008.
MARCH 2008
1.
Revenue ruling setting forth tables of the adjusted applicable federal rates for the current
month for purposes of sections 42,382, 1274, 1288 and 7520.
2.
Notice providing the 2008 calendar year resident population estimates used in
determining the state housing credit ceiling under section 42(h) and the private activity
bond volume cap under section 146.
3.
Revenue ruling under section 6621 regarding the applicable interest rates for
overpayments and underpayments of tax for the period April through June 2008.
4.
Revenue ruling setting forth the terminal charge and the standard industry fare level
(SIFL) cents-per-mile rates for the first half of 2008 for use in valuing personal flights on
employer-provided aircraft.
5.
Notice setting forth the weighted average interest rate and the resulting permissible range
of interest rates used to calculate current liability and to determine the required
contribution for plan years beginning in March 2008.
APRIL 2008
1.
Revenue ruling setting forth tables of the adjusted applicable federal rates for the current
month for purposes of sections 42,382, 1274, 1288 and 7520.
2.
Notice providing the inflation adjustment factor, nonconventional fuel source credit, and
reference price for the calendar year that determines the availability of the credit for
producing fuel from a nonconventional source under section 45K.
3.
Revenue procedure providing a current list of countries and the dates those countries are
subject to the section 911(d)(4) waiver and guidance to individuals who fail to meet the
eligibility requirements of section 911 (d)( 1) because of adverse conditions in a foreign
country.
4.
Notice setting forth the weighted average interest rate and the resulting permissible range
of interest rates used to calculate current liability and to determine the required
contribution for plan years beginning in April 2008.
- 27 -
5.
Revenue ruling providing the monthly bond factor amounts to be used by taxpayers who
dispose of qualified low-income buildings or interests therein during the period April
through June 2008.
6.
Notice providing the calendar year inflation adjustment factor and reference prices for the
renewable electricity production credit under section 45.
MAY 2008
1.
Revenue ruling setting forth tables of the adjusted applicable federal rates for the current
month for purposes of sections 42,382, 1274, 1288 and 7520.
2.
Notice setting forth the weighted average interest rate and the resulting permissible range
of interest rates used to calculate current liability and to determine the required
contribution for plan years beginning in May 2008.
3.
Revenue procedure providing guidance for use of the national and area median gross
income figures by issuers of qualified mortgage bonds and mortgage credit certificates in
determining the housing cost/income ratio under section 143.
4.
Revenue procedure under section 223 regarding the inflation adjusted items for 2009.
JUNE 2008
1.
Revenue ruling setting forth tables of the adjusted applicable federal rates for the current
month for purposes of sections 42,382, 1274, 1288 and 7520.
2.
Revenue ruling under section 6621 regarding the applicable interest rates for
overpayments and underpayments of tax for the period July through September 2008.
3.
Notice setting forth the weighted average interest rate and the resulting permissible range
of interest rates used to calculate current liability and to determine the required
contribution for plan years beginning in June 2008.
4.
Revenue procedure providing the domestic asset/liability percentages and the domestic
investment yield percentages for taxable years beginning after December 31, 2007, for
foreign companies conducting insurance business in the U.S.
5.
Revenue ruling providing the average annual effective interest rates charged by each
Farm Credit Bank District.
- 28 -
~.~.-
-
.-~-
~-~.
-
""PRESS·Roo M
FROM THE OFFICE OF PUBLIC AFFAIRS
We recommend printing this release using the PDF file below.
To view or print the PDF content on this page. download the free Adobe® Acrobat® Reader®.
August 15, 2007
HP-534
Treasury International Capital (TIC) Data for June
Treasury International Capital (TIC) data for June are released today and posted on the U.S. Treasury web site
(www.treas.gov/tic). The next release, which will report on data for July, is scheduled for September 18, 2007.
Net foreign purchases of long-term securities were $120.9 billion.
•
Net foreign purchases of long-term U.S. securities were $148.6 billion. Of this, net purchases by foreign official
institutions were $53.8 billion, and net purchases by private foreign investors were $94.8 billion.
•
U.S. residents purchased a net $27.8 billion of long-term foreign securities.
Net foreign acquisition of long-term securities, taking into account adjustments, is estimated to have been $107.0 billion.
Foreign holdings of dollar-denominated short-term U.S. securities, including Treasury bills, and other custody liabilities
decreased $27.6 billion. Foreign holdings of Treasury bills decreased $17.9 billion.
Banks' own net dollar-denominated liabilities to foreign residents decreased $20.5 billion.
Monthly net TIC flows were $58.8 billion. Of this, net foreign private flows were $0.7 billion, and net foreign official flows were
$58.2 billion.
-30-
TIC Monthly Reports on Cross-Border Financial Flows
(Billions of dollars, not seasonally adjusted)
2005
2006
12 Months Through
Jun-06 Jun-07 Mar-07 Apr-07 May-07 Jun-07
Foreigners' Acquisitions of Long-term Securities
1
2
3
Gross Purchases of Domestic U.S. Securities
Gross Sales of Domestic U.S. Securities
Domestic Securities Purchased, net (line 1 less line 2) /1
17157.5 21066.7 18928.2 24299.3
16145.9 19931.7 17801.0 23014.3
1011.5 1135.0 1127.2 1285.0
2711.1 2023.8
2612.2 1926.3
98.9
97.5
2414.1 2611.2
2250.5 2462.6
163.7 148.6
4
5
6
7
8
Private, net 12
Treasury Bonds & Notes, net
Gov't Agency Bonds, net
Corporate Bonds, net
Equities, net
891.1
269.4
187.6
353.1
81.0
938.4
125.9
196.0
471.8
144.6
1005.0
211.1
224.5
430.8
138.5
1022.1
170.2
159.4
488.5
204.0
78.1
28.6
-1.0
41.4
9.1
72.2
-9.0
22.4
30.6
28.1
152.2
26.2
14.7
68.6
42.7
94.8
21.8
23.7
22.2
27.2
9
10
Official, net 13
Treasury Bonds & Notes, net
Gov't Agency Bonds, net
Corporate Bonds, net
Equities, net
120.4
68.7
31.6
19.1
1.0
196.6
69.6
92.6
28.6
5.8
122.2
34.7
52.0
26.3
9.2
262.9
94.9
134.2
35.2
-1.4
20.8
1.4
16.1
2.9
0.4
25.3
9.4
13.7
2.9
-0.7
11.5
-4.6
12.8
4.0
-0.7
53.8
32.5
16.0
3.7
1.7
3700.0
3872.4
-172.4
5515.9
5766.8
-250.9
4741.7
4929.8
-188.1
6707.7
7016.4
-308.6
706.4
748.7
-42.3
631.9
649.2
-17.3
742.3
780.0
-37.6
730.5
758.2
-27.8
-45.1
-127.3
-144.5
-106.5
-63.7
-124.4
-180.6
-128.0
-34.9
-7.4
-9.7
-7.7
-2l.2
-16.5
-14.2
-13.5
11
12
13
14
15
16
17
18
Gross Purchases of Foreign Securities from U.S. Residents
Gross Sales of Foreign Securities to U.S. Residents
Foreign Securities Purchased, net (line 14 less line 15) /4
Foreign Bonds Purchased, net
Foreign Equities Purchased, net
19
Net Long-Term Securities Transactions (line 3 plus line 16):
839.1
884.1
939.1
976.4
56.6
80.1
126.0
120.9
20
Other Acquisitions of Long-term Securities, net 15
-140.0
-155.3
-150.7
-162.2
-13.8
-7.6
-13.5
-13.9
Net Foreign Acquisition of Long-Term Securities
(lines 19 and 20):
699.1
728.8
788.4
814.2
42.8
72.5
112.5
107.0
Increase in Foreign Holdings of Dollar-denominated Short-term
U.S. Securities and Other Custody Liabilities: 16
-47.6
135.2
71.4
48.3
18.9
-25.9
1.2
-27.6
21
22
23
U.S. Treasury Bills
-58.9
-9.0
-28.1
-24.1
20.4
-28.6
-4.5
-17.9
24
Private, net
Official, net
Other Negotiable Instruments
and Selected Other Liabilities: n
Private, net
Official, net
-15.6
-43.3
16.0
-25.0
-8.1
-20.1
0.0
-24.1
7.3
13.1
-11.7
-17.0
0.9
-5.5
-6.2
-11.8
11.4
10.6
0.8
144.2
164.0
-19.8
99.6
101.4
-1.8
72.5
90.7
-18.3
-1.5
-4.3
2.7
2.7
7.2
-4.4
5.7
5.3
0.4
-9.7
-14.3
4.6
16.4
185.1
247.2
20.9
-29.1
50.8
-6.4
-20.5
667.9
1049.1
1107.0
883.4
32.7
97.4
107.3
58.8
580.6
87.3
907.11
142.0
1002.31
104.7
642.01
241.5
4.1
28.5
83.9
13.5
109.0
-1.7
0.7
58.2
25
26
27
28
29
Change in Banks' Own Net Dollar-Denominated Liabilities
30 Monthly Net TIC Flows (lines 21,22,29) /8
of which
Private, net
31
Official, net
32
Net foreign purchases of u.s. securities (+)
Includes international and regional organizations
The reported division of net purchases of long-term securities between net purchases by foreign official institutions and net purchases
of other foreign investors is subject to a "transaction bias" described in Frequently Asked Questions 7 and 1O.a.4 on the TIC web site.
Net transactions in foreign securities by U.S. residents. Foreign purchases of foreign securities = U.S. sales of foreign securities to foreigners.
Thus negative entries indicate net U.S. purchases of foreign securities, or an outflow of capital from the United States; positive entries
indicate net U.S. sales of foreign securities.
Minus estimated unrecorded principal repayments to foreigners on domestic corporate and agency asset-backed securities +
estimated foreign acquisitions of U.S. equity through stock swaps estimated U.S. acquisitions of foreign equity through stock swaps +
increase in nonmarketable Treasury Bonds and Notes Issued to Official Institutions and Other Residents of Foreign Countries.
These are primarily data on monthly changes in banks' and broker/dealers' custody liabilities. Data on custody claims are collected
quarterly and published in the Treasury Bulletin and the TIC web site.
"Selected Other Liabilities" are primarily the foreign liabilities of U.S. customers that are managed by U.S. banks or broker/dealers.
TIC data cover most components of international financial flows, but do not include data on direct investment flows, which are collected
and published by the Department of Commerce's Bureau of Economic Analysis. In addition to the monthly data summarized here, the
TIC collects quarterly data on some banking and nonbanking assets and liabilities. Frequently Asked Question 1 on the TIC web
site describes the scope of TIC data collection.
11
/2
/3
/4
/5
/6
17
/8
REPORTS
•
(PDF) TIC Monthly Reports on Cross-Border Financial Flows (Billions of dollars, not seasonally adjusted)
Page 1 of 2
PRESS ROOM
10 View or prmt the PUr content on thiS page, OownloaO the tree Aaobe(f?} Acrobal(IIJ HeacJer®.
August 15, 2007
hp-535
Treasury Targets Financial Network of Ramierz Abadia
The U.S. Department of the Treasury's Office of Foreign Assets Control (OFAC)
today added to its list of Specially Designated Narcotics Traffickers 23 Colombian
individuals and 23 Colombian companies tied to Juan Carlos Ramirez Abadia
(a.k.a. Chupeta), a leader of Colombia's North Valle drug cartel.
"At the peak of his career, Juan Carlos Ramirez Abadia was one of the wealthiest
and most elusive drug traffickers in Colombia," said OFAC Director Adam J.
Szubin. "Today he is under arrest and his assets are under attack. OFAC will
continue its assault on Chupeta's ill-gotten gains until his empire collapses."
Juan Carlos Ramirez Abadia was named as a Specially Designated Narcotics
Trafficker (SDNT) by OFAC in August 2000 and was arrested in Brazil on August 7,
2007. He was indicted on federal drug trafficking charges in Colorado in 1994 and
the Eastern District of New York in 1995. In 2004, the District Court for the District
of Columbia indicted the North Valle drug cartel under the Racketeer Influenced
and Corrupt Organizations Act (RICO) and named Juan Carlos Ramirez Abadia as
one of its leaders. OFAC has worked closely with the Drug Enforcement
Administration (DEA) on this investigation.
Among the 23 individuals designated today, Hernan Felipe Ramirez Garcia, Jhon
Jairo Ramirez Lenis, Sergio Alberto Ramirez Rivera, and German Rosero Angulo
help form the leadership of the criminal organization headed by Ramirez Abadia.
Other individuals named as SDNTs today include Alvaro Barrera Marin and his son
Alvaro Enrique Barrera Rios, who act as key front persons by holding companies
and real estate on behalf of Juan Carlos Ramirez Abadia.
Companies designated today include: APVA S.A., a real estate company located in
Cali, Colombia; Campo a la Diversion E.U. (a.k.a. Parque Yaku) , an amusement
park located in Yumbo, Valle, Colombia; Criadero Santa Gertrudis S.A., a horse
breeding farm in Jamundi, Valle, Colombia; and Ensambladora Colombiana
Automotriz S.A., an automotive assembly company located in Barranquilla,
Colombia.
SDNTs are subject to the economic sanctions imposed against Colombian drug
cartels in Executive Order 12978. Today's designation action freezes any assets
the designees may have subject to U.S. jurisdiction, and prohibits all financial and
commercial transactions by any U.S. person with the designated companies and
individuals.
The assets of a total of 1,521 business and individuals in Aruba, Barbados,
Colombia, Costa Rica, Ecuador, Guatemala, Honduras, Jamaica, Mexico, Panama,
Peru, Spain, Vanuatu, Venezuela, the Bahamas, the British Virgin Islands, the
Cayman Islands, and the United States have been blocked pursuant to E.O.
12978. The 597 businesses that have been named as SDNTs include agricultural,
aviation, consulting, construction, distribution, financial, hotel, investment,
manufacturing, maritime, mining, offshore, pharmaceutical, real estate, retail,
service, sporting, telecommunication, and textile companies. The SDNT list
includes 22 kingpins from the Cali, Medellin, North Valle, and North Coast drug
trafficking organizations in Colombia.
A detailed look at the program against Colombian drug organizations is provided in
OFAC's March 2007 Impact Report on Economic Sanctions Against Colombian
Drug Cartels.
http://www .treasu ry .gov/offices/enforcemenVofac/repo rts/na reo _imQact report 0504200IJ291
http://www.treas.goy/press/releast.<)/hp535.htm
1/18/2008
Page 2 of 2
REPORTS
•
Chart of the Individuals and Entities Included in Today's Designation
http://wvw.treas.gov/pressrfeleITSes/hp535.htm
1118/2008
u.s. Department of the Treasury
North Valle Cartel
Office of Foreign Assets Control
Financial Network
Specially Designated
Narcotics Traffickers
August 2007
Juan Carlos RAMIREZ ABADIA
CC 16684736 (Colombia)
DOB 16 February 1963
(a.k.a. "Chupeta")
Over $70 Million Seized
from "Chupeta" in 2007
Key Associates of "Chupeta"
~
:".":1
...........
[0
German
ROSERO ANGULO
CC 16708846 (Colombia)
Sergio Alberto
RAMIREZ RIVERA
CC 16694220 (Colombia)
Arrested in Brazil
August 7, 2007
.~ .
~
,/
Hernan Felipe
RAMIREZ GARCIA
CC 16772586 (Colombia)
":'
lhon lairo
RAMIREZ LENIS
CC 79395056 (Colombia)
Alvaro Enrique
BARRERA RIOS
CC 16758185 (Colombia)
r?Sl.4-~"
~
Alvaro
BARRERA MARIN
CC 6451857 (Colombia)
Key Companies of "Chupeta"
Cali, Colombia
r----------------------------------------------------------------(]
(]
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ALFONSO BARRERA
RIOS Y CIA. S. EN C.S.
ALVARO ENRIQUE
BARRERA RIOS Y CIA. S. EN C.S.
APVAS.A.
ARQUITECTOS
UNIDOS LTDA.
ASESORIAS
OCUPACIONALES LTDA.
BARRERA RIOS NEGOCIOS
INMOBIUARIOS E.U.
(]
(]
(]
;J
;J
CECEPS.A.
CECEP
EDITORES S.A.
COMERCIALIZADORA
DE BIENES Y SERVICIOS
ADMINISTRATIVOS
Y FINANCIEROS S.A.
CONSULTORIAS
FINANCIERAS S.A.
ESVAS.C.S.
(a.k.a. FLEXX GYM)
;J
(]
;J
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M S CONSTRUCTORES
LTDA.
QUINONES MELO
Y CIA. LTDA.
RFA CONSULTORES
Y AUDITORES LTDA.
SPITIA
VALENCIA LTDA.
WORLD LINE
SYSTEM S.A.
UNIDAD
CARDIOVASCULAR LTDA.
1_____________________________________________________ - - - - - - - ____ _
Other Colombian Locations
----------------~-------------------------------~----------------l
I
(]
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I
I
BENOIT VELEZ
CAMPO A LA
CIDCA
CRIADERO SANTA
E.C.A. S.A.
NEGOCIOS Y
I
DIVERSION E.U.
Bogota, Colombia
GERTRUDIS S.A.
Barranquilla, Colombia
CAPITALES S.A.
I
I AGROPECUARIA
I LA VEREDA Y CIA. S.C.S.
a.k.a. PARQUE YAKU
lamundi,
Pereira, Colombia
I
_ _ _Colombia
_ _ _ _ _ _ _ Yumbo,
____
__
_ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _Valle,
___
________________ - - - - - ______ J
I_ _Pereira,
Valle,
Colombia
Colombia
August 17,2007
2007 -8-17 -13-54-10-22970
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 $67,032 million as of the end of that week, compared to $67,139 million as of the end of the
prior week.
I. Official reserve assets and other foreign currency assets (approximate market value, in US millions)
I
II
I
IA. Official reserve assets (in US millions unless otherwise specified)
!lAugust 10, 2007
IIEuro
liVen
!lTotal
1(1) Foreign currency reserves (in convertible foreign currencies)
II
II
1167,032
I(a) Securities
11 13 ,213
11 10 ,765
11 23 ,978
lof which: issuer headquartered in reporting country but located abroad
II
II
II
II
11 0
I(b) total currency and deposits with:
13,227
l(i) other national central banks, SIS and IMF
II
5,313
11 18,540
Iii) banks headquartered in the reporting country
11 0
lof which: located abroad
I(iii) banks headquartered outside the reporting country
110
11 0
lof which: located in the reporting country
11 0
1(2) IMF reserve position
11 4 ,366
1(3) SDRs
11 9 ,107
1(4) gold (including gold deposits and, if appropriate, gold swapped)
1111,041
I--volume in millions of fine troy ounces
11 2 61.499
1(5) other reserve assets (specify)
11 0
I--financial derivatives
II
http://www.treas.gov/press/releases/2007S1713541022970.htm
1IlS/200S
I--Ioans to nonbank nonresidents
I--other
Is. Other foreign currency assets (specify)
I--securities not included in official reserve assets
I--deposits not included in official reserve assets
I--Ioans not included in official reserve assets
I--financial derivatives not included in official reserve assets
I--gold not included in official reserve assets
II
I --other
II
II. Predetermined short-term net drains on foreign currency assets (nominal value)
I
II
"Maturity breakdown (residual maturity)
II
ITota
I 1. Foreign currency loans, securities, and deposits
I--outflows (-)
IIPrincipal
I
"Interest
I--inflows (+)
"Principal
I
"Interest
IUp to 1 month
"
More than 1 and
up to 3 months
More than 3
months and up to
1 year
1\
2. Aggregate short and long positions in forwards and
futures in foreign currencies vis-a.-vis the domestic
currency (includinq the forward leq of currency swaps)
(a) Short positions ( - )
(b) Long positions (+)
I
3. Other (specify)
--outflows related to repos (-)
--inflows related to reverse repos (+)
--trade credit (-)
--trade credit (+)
--other accounts payable (-)
http://www.treas.gov/press/releasesI200781713541022970.htm
1118/2008
/I
--other accounts receivable (+)
II
II
II
\I
1\
III. Contingent short-term net drains on foreign currency assets (nominal value)
II
II
I Maturity breakdown (residual maturity, where
\I
II
applicable)
Total
Up to 1 month
More than 3
months and up to
1 year
More than 1 and
up to 3 months
II
11. Contingent liabilities in foreign currency
(a) Collateral guarantees on debt falling due within 1
year
II
I(b) Other contingent liabilities
2. Foreign currency securities issued with embedded
options (puttable bonds)
13. Undrawn, unconditional credit lines provided by:
II~a) other national monetary authorities, BIS, IMF, and
other international organizations
II
I--other national monetary authorities (+)
I--BIS (+)
I--IMF (+)
(b) with banks and other financial institutions
headquartered in the reporting country (+)
(c) with banks and other financial institutions
headquartered outside the reporting country (+)
IUndrawn, unconditional credit lines provided to:
(a) other national monetary authorities, BIS, IMF, and
other international organizations
I--other national monetary authorities (-)
I--BIS (-)
I--IMF (-)
(b) banks and other financial institutions headquartered
in reporting country (- )
I
http://www.treas.gov/press/releasesI200781713541022970.htm
1118/2008
r (c)
banks and other financial institutions headquartered
outside the reporting country ( - )
II
4. Aggregate short and long positions of options in
foreign currencies vis-a.-vis the domestic currency
II
II
11
I(a) Short positions
II
11
I
I
I
II
I
I(i) Bought puts
I(ii) Written calls
I(b) Long positions
I(i) Bought calls
I(ii) Written puts
I
IPRO MEMORIA: In-the-money options 11
I
1(1) At current exchange rate
I(a) Short position
I
I(b) Long position
1(2) + 5 % (depreciation of 5%)
II
I(a) Short position
I(b) Long position
\(3) - 5 % (appreciation of 5%)
I(a) Short position
I(b) Long position
1(4) +10 % (depreciation of 10%)
I(a) Short position
I(b) Long position
1(5) - 10 % (appreciation of 10%)
I(a) Short position
I(b) Long position
I
I(a) Short position
II
II
I(b) Long position
II
II
1(6) Other (specify)
II
IV. Memo items
II
http://www.treas.gov/press/releases/200781713541022970.htm
II
]
1118/2008
f, (1) To be reported with standard periodicity and timeliness:
I(a) short-term domestic currency debt indexed to the exchange rate
(b) financial instruments denominated in foreign currency and settled by other means (e.g., in domestic
currency)
I--nondeliverable forwards
1 --short positions
1 --long positions
I--other instruments
I(C) pledged assets
I--included in reserve assets
I--included in other foreign currency assets
I(d) securities lent and on repo
I--Ient or repoed and included in Section I
I--Ient or repoed but not included in Section I
I--borrowed or acquired and included in Section I
I--borrowed or acquired but not included in Section I
I(e) financial derivative assets (net, marked to market)
I--forwards
I--futures
I--swaps
I--options
I--other
(f) derivatives (forward. futures. or options contracts) that have a residual maturity greater than one
year. which are subject to margin calls.
--aggregate short and long positions in forwards and futures in foreign currencies vis-a.-vis the domestic
currency (including the forward leg of currency swaps)
II
II
I(a) short positions ( - )
I(b) long pOSitions (+)
I--aggregate short and long positions of options in foreign currencies vis-a.-vis the domestic currency
I(a) short positions
I(i) bought puts
I(ii) written calls
I(b) long positions
I(i) bought calls
I(ii) written puts
i
http://www.treas.gov/press/releases/200781713541022970.htm
1118/2008
1(2) To be disclosed less frequently:
II
I(a) currency composition of reserves (by groups of currencies)
1\67,032
I--currencies in SDR basket
\167,032
I--currencies not in SDR basket
I
II
II
I--by individual currencies (optional)
I
III
I
I
I
I
Notes:
1/ Includes holdings of the Treasury's Exchange Stabilization Fund (ESF) and the Federal Reserve's System Open Market
Account (SOMA), valued at current market exchange rates. Foreign currency holdings listed as securities reflect markedto-market values, and deposits reflect carrying values.
2/ The items, "2. IMF Reserve Position" and "3. Special Drawing Rights (SDRs)," are based on data provided by the IMF
and are valued in dollar terms at the official SDR/dollar exchange rate for the reporting date. The entries for the latest
week reflect any necessary adjustments, including revaluation, by the U.S. Treasury to IMF data for the prior month
end.
3/ Gold stock is valued monthly at $42.2222 per fine troy ounce.
http://www.treas.gov/press/releasesI200781713541022970.htm
1118/2008
August 20, 2007
2007-8-20-15-21-57-23681
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 $67,271 million as of the end of that week, compared to $67,032 million as of the end of the
prior week.
I. Official reserve assets and other foreign currency assets (approximate market value, in US millions)
-
--
--
I
II
I
IA. Official reserve assets (in US millions unless otherwise specified)
IIAugust 17, 2007
IIEuro
IIYen
IITotal
1(1) Foreign currency reserves (in convertible foreign currencies)
II
II
11 67 ,271
I(a) Securities
11 13,076
11 11 ,176
11 24 ,252
lof which: issuer headquartered in reporting country but located abroad
II
II
II
II
11 0
I(b) total currency and deposits with:
I(i) other national central banks, BIS and IMF
13,049
II
5,511
11 18,560
Iii) banks headquartered in the reporting country
11 0
lof which: located abroad
I(iii) banks headquartered outside the reporting country
110
11 0
lof which: located in the reporting country
11 0
1(2) IMF reserve position
11 4 ,349
1(3) SDRs
11 9 ,070
1(4) gold (including gold deposits and, if appropriate, gold swapped)
1111 ,041
I--volume in millions of fine troy ounces
11 261 .499
1(5) other reserve assets (specify)
0
I--financial derivatives
I--Ioans to nonbank nonresidents
I--other
lB. Other foreign currency assets (specify)
http://www.treas.gov/press/releasesI200782015215723681.htm
1118/2008
F':securities not ,ncllldeai"n official reserve assets
!--deposits not included in official reserve assets
I--Ioans not included in official reserve assets
II
I--financial derivatives not included in official reserve assets
I
I
I
I
I--gold not included in official reserve assets
--other
II
II
I
II. Predetermined short-term net drains on foreign currency assets (nominal value)
II
II
II
II
II
II
IIMaturity breakdown (residual maturity)
Total
Up to 1 month
More than 1 and
up to 3 months
More than 3
months and up to
1 year
I 1. Foreign currency loans, securities, and deposits
I--outflows (-)
IIPrincipal
I
IIlnterest
I--inflows (+)
IIPrincipal
I
IIlnterest
2. Aggregate short and long positions in forwards and
futures in foreign currencies vis-a.-vis the domestic
currency (including the forward leg of currency swaps)
(a) Short positions ( - )
(b) Long positions (+)
3. Other (specify)
--outflows related to repos (-)
--inflows related to reverse repos (+)
--trade credit (-)
--trade credit (+)
--other accounts payable (-)
--other accounts receivable (+)
III. Contingent short-term net drains on foreign currency assets (nominal value)
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1118/2008
~
I
JI
11. Contingent liabilities in foreign currency
(a) Collateral guarantees on debt falling due within 1
year
II
:n:
\I
II
I Maturity breakdown (residual maturity, where
1
applicable)
i
Total
I
Up 101 month
More than 1 and
up to 3 months
More than 3
months and up to
1 year
II
I(b) Other contingent liabilities
2. Foreign currency securities issued with embedded
options (puttable bonds)
13. Undrawn, unconditional credit lines provided by:
(a) other national monetary authorities, BIS, IMF, and
other international organizations
"
I--other national monetary authorities (+)
I--BIS (+)
I--IMF (+)
(b) with banks and other financial institutions
headquartered in the reporting country (+)
(c) with banks and other financial institutions
headquartered outside the reporting country (+)
IUndrawn, unconditional credit lines provided to:
(a) other national monetary authorities, BIS, IMF, and
other international organizations
I--other national monetary authorities (-)
I--BIS (-)
I--IMF (-)
(b) banks and other financial institutions headquartered
in reporting country (- )
I
(c) banks and other financial institutions headquartered
outside the reporting country ( - )
4. Aggregate short and long positions of options in
foreign currencies vis-a-vis the domestic currency
I(a) Short positions
I(i) Bought puts
I(ii) Written calls
I(b) Long positions
l(i) Bought calls
I(ii) Written puts
I
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II
II
II
1118/2008
lPRO MEMORIA:
-
In-th~-money options d '
1(1) At current exchange rate
I(a) Short position
]I\I
.
-
1\
1\
1
I
II
II
II
I(b) Long position
1(2) + 5 % (depreciation of 5%)
I(a) Short position
I(b) Long position
1(3) - 5 % (appreciation of 5%)
I(a) Short position
I(b) Long position
1(4) +10 % (depreciation of 10%)
I(a) Short position
I(b) Long position
1(5) - 10 % (appreciation of 10%)
I(a) Short position
I(b) Long position
1(6) Other (specify)
II
I(a) Short position
II
I(b) Long position
II
IV. Memo items
--
--
- -
I
1(1) To be reported with standard periodicity and timeliness:
I(a) short-term domestic currency debt indexed to the exchange rate
(b) financial instruments denominated in foreign currency and settled by other means (e.g., in domestic
currency)
II
I--nondeliverable forwards
I
I
--short positions
--long positions
I--other instruments
I(c) pledged assets
I--included in reserve assets
I--included in other foreign currency assets
I(d) securities lent and on repo
I
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1118/2008
/--Ient or repoed and included in Section I
I--Ient or rep oed but not included in Section I
I--borrowed or acquired and included in Section I
"
1\
II
~I~
I
I--borrowed or acquired but not included in Section I
I(e) financial derivative assets (net, marked to market)
I--forwards
I--futures
I--swaps
I--options
I--other
(f) derivatives (forward, futures, or options contracts) that have a residual maturity greater than one
year, which are subject to margin calls.
1
1
--aggregate short and long positions in forwards and futures in foreign currencies vis-a.-vis the domestic
currency (including the forward leg of currency swaps)
I(a) short positions ( - )
I(b) long positions (+)
I--aggregate short and long positions of options in foreign currencies vis-a.-vis the domestic currency
I(a) short positions
l(i) bought puts
I(ii) written calls
I(b) long positions
I(i) bought calls
I(ii) written puts
1(2) To be disclosed less frequently:
I(a) currency composition of reserves (by groups of currencies)
11 67 ,271
I--currencies in SDR basket
1167,271
I--currencies not in SDR basket
II
II
II
I--by individual currencies (optional)
1
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 markedto-market values, and deposits reflect carrying values.
2/ The items, "2. IMF Reserve Position" and "3. Special Drawing Rights (SDRs)," are based on data provided by the IMF
and are valued in dollar terms at the official SDR/dollar exchange rate for the reporting date. The entries for the latest
week reflect any necessary adjustments, including revaluation, by the U.S. Treasury to IMF data for the prior month
http://www.treas.gov/press/releases/200782015215723681.htm
1118/2008
end.
3/ Gold stock is valued monthly at $42.2222 per fine troy ounce.
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Page 1 of 2
10 view or Print tne pUr content on tnlS page, download the tree AClobe® AcrobatQ!) Header®.
May 3, 2007
HP-536
2007 National Money laundering Strategy Released
The U.S. Departments of Treasury, Justice, and Homeland Security today joined
together in issuing the 2007 National Money Laundering Strategy, a report detailing
continued efforts to dismantle money laundering and terrorist financing networks
and bring these criminals to justice.
"The 2007 National Money Laundering Strategy is a direct result of close
cooperation by the Departments of Justice, Treasury and Homeland Security, along
with our foreign counterparts, and signifies our collective commitment to fight
money laundering," said Assistant Attorney General Alice S. Fisher of the Justice
Department's Criminal Division. "Implementation of this strategy will greatly assist in
efforts to seize and forfeit millions in illegal proceeds that flow through the
international financial system."
The 2007 Strategy addresses the priority threats and vulnerabilities identified by the
Money Laundering Threat Assessment released in 2006, the product of an
extremely valuable investigation into the current and emerging trends and
techniques used by criminals to raise, move, and launder proceeds. The
Assessment - the first government-wide analysis of its kind - brought together the
expertise of regulatory, law enforcement, and investigative officials from across the
government, culminating in a comprehensive analysis of specific money laundering
methods, patterns of abuse, geographical concentrations, and the associated legal
and regulatory regimes.
"The 2007 National Money Laundering Strategy builds upon the groundbreaking
work of the Money Laundering Threat Assessment," said Pat O'Brien, Treasury's
Assistant Secretary for Terrorist Financing. "Focusing on well-established money
laundering methods and emerging trends identified in the Assessment, we have
created a robust strategy for combating money laundering, deterring criminals, and
addressing areas vulnerable to exploitation."
The 2007 Strategy builds on initiatives and programs pioneered in preceding
National Money Laundering Strategies. The constant searching by criminals for new
ways to launder and hide dirty money is evidence of our successful regulatory and
law enforcement efforts to safeguard the banking system. With an aim at continuing
these robust efforts, the 2007 Strategy places an emphasis on bolstering the
efficiency of the anti-money laundering processes currently in place.
"In every type of case, from human smuggling and drug trafficking to intellectual
property rights violations and illegal alien employment schemes, the need to hide
and move ill-gotten gains is a constant. ICE's anti-money laundering initiatives are
at the forefront of attacking existing and emerging money laundering threats" said
Julie L. Myers, Assistant Secretary for Immigration and Customs Enforcement at
the Department of Homeland Security. "ICE's trade transparency unit, bulk cash
smuggling initiative and programs targeting illegal money service businesses and
stored value card schemes are making it less profitable to commit these crimes."
Additionally, the 2007 Strategy focuses on leveling the playing field internationally,
helping to ensure U.S. financial institutions are not disadvantaged through the
implementation of controls and standards to combat money laundering and terrorist
P://wWw.treas.gov/presslreleaseslhpS3e.htm
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financing. Indeed, money laundering is a global threat the United States is working
to address through international bodies, including the Financial Action Task Force
(FATF), and through direct private sector outreach in regions around the world.
REPORTS
•
2007 National Money Laundering Strategy
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111812008
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PRESS ROOM
November 15, 2004
HP-538
Performance & Accountability Report FY 2004
On behalf of the U.S. Department of the Treasury, I am pleased to present
our Fiscal Year (FY) 2004 Performance and Accountability Report. This
report provides clear information on Treasury's operations,accomplishments
and challenges over the past year. Treasury aids national prosperity by
developing policies that stimulate economic growth and job creation as well as
maintaining public trust and confidence in our economic and financial
systems.
In FY 2004, Treasury focused on its core missions of economy and finance. In FY
2004, Treasury worked to implement the Jobs and Growth Tax Relief Reconciliation
Act of 2003 as well as other tax relief efforts. Treasury moved forward with
improvements in our core functions in the areas of domestic and international
economies, banking oversight, tax law compliance, cash and debt management,
and the production of coins
and currency. We also continue to work on streamlining our nation's regulatory
framework to ensure the integrity of the financial sector and promote the growth of
financial services worldwide.
Treasury is making the nation safer by detecting, disrupting and dismantling the
financial sources of terrorism. During this year we created the Office of Terrorism
and Financial Intelligence (TFI), a new office that centralizes policy-making and
coordinates Treasury's efforts to eradicate terrorist funding and protect the integrity
of financial systems. This office also fights financial crime, enforces economic
sanctions against
rogue nations, and assists in the ongoing search for Iraqi assets.
Regarding the management and reporting of finances, Treasury has again received
an unqualified opinion on our financial statements. This accomplishment
demonstrates the accuracy and reliability of the information presented. Treasury
also met most of its performance targets for the year, and I have determined that
the enclosed performance data are reliable and complete. During FY 2004, we
continued our emphasis on
ensuring that Treasury has strong internal controls in place to minimize the risk of
waste, fraud, and erroneous payments. We also intensified our efforts to identify
and reduce improper payments across Treasury and continued our progress toward
addressing material management control weaknesses.
As we look ahead, Treasury will continue its work to generate economic growth,
increase the number of jobs for our citizens, and keep our financial systems strong
and secure. Treasury will develop and implement strategies to find and eliminate
sources of funding for terrorists and to detect and pursue financial criminals. Finally,
for our customers, America's taxpayers, Treasury will continue to work very hard to
provide excellent
service, efficiency and value.
Sincerely,
John W. Snow
Secretary of the Treasury
REPORTS
J.ttP://wWw.trea~.gov/press/releases/hp538.J.tm
1118/2008
Page 2 of 2
•
periormance & Accountability Report FY 2004
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Page 1 of 1
November 15, 2005
HP-539
Fiscal Year 2005 Performance & Accountability Report
Mission: The mission of the Department of the Treasury is to promote the
conditions for prosperity and stability in the United States and encour~ge prosperity
and stability in the rest of the world.
History: On September 2, 1789, the First Congress of the United States created a
permanent institution for the management of government finances. The Congress
assembled a Department of the Treasury and named the following officers: a
Secretary of the Treasury, a Comptroller, an Auditor, a Treasurer, a Register, and
an Assistant to the Secretary.
Alexander Hamilton took the oath of office as the first Secretary of the Treasury on
September 11, 1789. Hamilton foresaw the development of industry and trade in
the United States, and suggested that government revenues be based upon
customs duties. His vision also inspired investment in the Bank of the United
States, which acted as the government's fiscal agent. Throughout history, the
Department of the Treasury has been a dynamic institution of the government's
service to the people, expanding to accommodate a growing and ever-changing
nation.
Leadership Changes: Treasury experienced leadership changes in Fiscal Year (FY)
2005 with the departure of Deputy Secretary Samuel Bodman (now Secretary of
Energy), and a handful of other top officials. During the third quarter of 2005, the
Administration nominated and the Senate confirmed a new Treasury deputy
secretary, two under secretaries, and five assistant secretaries including a newly
created position, the assistant secretary for the Office of Intelligence and Analysis,
as well as new leadership at the Office of Thrift Supervision, the Office of the
Comptroller of the Currency, and the Alcohol and Tobacco Tax and Trade Bureau.
REPORTS
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111812008
Page 1 of 1
PRESS ROOM
/0 view or prmt the put- content on thiS page, aown/oaa the tree AaoIJe<B) AcroIJat<B) Header®.
November 15, 2006
HP-540
Performance and Accountability Report
On behalf of the Department of the Treasury, I am submitting the
Department's Performance and Accountability Report for Fiscal Year
(FY) 2006. This report presents information on the Department's
financial, management and programmatic results for the previous
year and provides a transparent picture of the Department's successes
and shortcomings
REPORTS
•
PGrformance and AccoLlntabilily Report
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111812008
Page 1 of 6
August2,2007
HP-541
14th APEC Finance Ministers' Meeting 2007
Joint Ministerial Statement
I. Introduction
We, the finance ministers of the APEC economies, convened our 14th annual
meeting in Coolum, Queensland, Australia on 2-3 August 2007 under the
chairmanship of the Honourable Mr Peter Costello, MP, Treasurer of Australia. The
meeting was also attended by the First Deputy Managing Director of the
International Monetary Fund, the President of the World Bank, the President of the
Asian Development Bank and the Chair of the APEC Business Advisory Council
(ABAC).
Under Australia's APEC 2007 theme of strengthening our community, building a
sustainable future, we discussed the key economic and financial issues that are
shaping our region's future prosperity.
In discussing the regional economic outlook, we considered two key medium-term
challenges. The first is to ensure that sufficient well-targeted investment occurs to
underpin sustainable economic growth. We highlighted the need for appropriate
macroeconomic policies and continued structural reform in our economies to further
enhance investment in the region, sustain domestic growth and help resolve global
imbalances and reap the benefits of globalisation. The second challenge is to
ensure that energy markets operate efficiently and transparently to deliver longterm energy security and meet the dual key objectives of sustaining economic
growth while addressing climate change. We recognise that these are
fundamentally economic issues that are best addressed through market-based
solutions.
Consistent with the policy priorities outlined in the Hanoi Medium-Term Agenda, we
considered two policy themes in our meeting - the importance of managing fiscal
risks, including contingent liabilities and longer term fiscal pressures, and the need
to deepen private capital markets to create new economic opportunities. Identifying
and managing off-balance sheet risks in a transparent manner contributes to fiscal
sustainabilily. We noted the important role private capital markets play in providing
diverse sources of funding and channelling savings to fuel economic growth,
including for infrastructure.
We discussed the evolving regional economic architecture and stressed the
importance of APEC in drawing Asia-Pacific economies together. Recognising the
need to take strong and early actions to address the challenge of climate change
while maintaining economic growth, we considered the global architecture for
addressing climate change and shared the view that it is important to establish an
effective framework beyond the Kyoto Protocol under the UN climate process.
Our ongoing objective is to realise the APEC region's economic potential by
drawing together the interests of member economies and exploring opportunities for
cooperation and capacity building.
These issues are integral to continuing the strong economic performance of the
APEC region and we support further discussion of them by APEC Economic
Leaders.
II. Global and Regional Economic Developments
We noted the continued strong contribution the APEC region is making to global
economic growth. Despite the persistent threat of high oil prices, the APEC region
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1118/2008
Page 2 of 6
grew by a robust 4 per cent in 2006 and inflation across the region has generally
been moderate. This strong economic performance has raised living standards and
reduced poverty throughout the region, and we remain committed to sound
economic policies that will help to sustain this performance.
Growth and development in our region are based on an open and rules-based
global trading system. We regard a rise in protectionist trade and investment
sen.timent ar~und the ~Iobe as a serious threat to growth and living standards in our
region. We will work with our own trade authorities towards a successful outcome in
the Doha Develo~ment Round that is comprehensive and well-balanced, resulting
In n~w trade a~d .Investment flows. We agree to work towards this goal in financial
services negotiations.
The orderly reduction of global imbalances remains a priority. In the APEC region,
this requires efforts to increase national savings in the United States, strengthen
consumption in China, continue structural reform efforts including fiscal
consolidation in Japan, and encourage domestic investment in much of emerging
Asia. Flexibility of exchange rates and prices will facilitate these necessary
adjustments and reduce the costs. Such changes are in the interests of each
individual economy, are desirable from a multilateral perspective and would help
dampen protectionist sentiment.
As the process of integration intensifies, new ways of conducting business and new
barriers to trade and investment are emerging. We noted the increased focus on
behind-the-border impediments to trade and investment and the need for ongoing
domestic structural reform to tackle them. We are firmly committed to reforms that
support the efficient operation and integration of domestic markets. We expressed
our strong support for the work of the APEC Economic Committee in advancing the
APEC Leaders' Agenda to Implement Structural Reform.
Strengthening investment in the region
We noted the important role that domestic and foreign investment has in driving
economic growth and development and enhancing regional economic integration.
While the investment outlook for the region looks promising, we considered why
investment levels in some APEC economies remain relatively low despite
favourable financing conditions. It was noted that most APEC economies had
improved their monetary and fiscal policy frameworks and strengthened their
financial systems, particularly through balance-sheet restructuring and improved
lending practices.
Investment outcomes are affected by institutional and regulatory factors, including
barriers to market entry, the operation of financial markets, and the degree of policy
certainty. Sound monetary and fiscal policies, well-established legal and regulatory
frameworks, and high-quality public- and private-sector governance all contribute to
reducing risk and encouraging investment. Deep and liquid financial markets also
offer an expanded source of funding for investment and assist with risk
management and diversification.
We noted that the quality of investment, both public and private, is important and
that investment should be attracted to areas where the greatest social and
economic returns can be achieved. In this context, we identified infrastructure and
the services sector as priority areas for future investment within the region. Stronger
and more efficient investment, both domestic and foreign, is expected to strengthen
domestic growth and stability and help resolve global imbalances.
Energy security and climate change
We recognise the ongoing economic risks around high and volatile energy prices
and the need to maintain vigilance in macroeconomic policy to sustain growth and
manage inflation. We noted that medium-term macroeconomic frameworks are
proving very useful in managing the challenges of energy shocks and that greater
flexibility in price mechanisms, including exchange rates, can enable economies to
better manage the macroeconomic impact of changes in energy markets. We
discussed a range of policy instruments that could be adopted to protect the poor
from the effects of higher and more volatile energy prices while ensuring that price
signals work and other government spending that matters for economic and social
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111812008
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progress is not crowded out.
Looking to the medium-term, rising energy demand and import dependence in the
Asia Pacific can be met by expanded trade and investment to boost supply and
greater efficiency in use. For markets to be able to provide energy security, they
need to be strong, open and transparent, with depth in spot and derivatives
markets. long-term contracting. and investment. Markets need to be underpinned
by effective regulatory regimes, transparency and governance, and efficient firms in
both the private and state-owned sectors.
The region needs strong financial markets both to fund the investment required to
expand supply and to provide the range of financial instruments - including
derivatives - that are necessary for firms and governments to manage the risks
around high and volatile energy prices.
Climate change is one of the major international challenges with implications for
both the environment and global economy. New clean technology initiatives and
greater efficiency and diversity in energy supply provide greater energy security and
underpin a sustainable response to the challenges of climate change. Energy
efficiency. based on advances in education, science and technology, is one of the
most cost-effective means for achieving these objectives. As finance ministers, we
playa key role in developing and linking market-based economic policy responses
to these challenges.
It is important that new domestic policies are comprehensively assessed to ensure
they meet the desired objectives of ongoing economic growth, energy efficiency,
and clean development consistently over time and do not give rise to unanticipated
adverse consequences. Practical cooperation between Asia Pacific economies is
necessary to meet these objectives, especially in the development and transfer of
cleaner and more efficient technology and the strengthening of domestic carbon
accounting and reporting frameworks.
To respond effectively to the challenge of ensuring economic growth, addressing
energy security and minimising the environmental impact of increased energy use,
it is important to understand the economic and market impact of policy and
business responses to deal with climate change. We welcome further work on this
by APEC economies. In particular, we see value in bringing together and sharing
APEC economies' experience with the suite of policy instruments for promoting
energy efficiency and greenhouse gas reduction, including market-based
mechanisms (such as emissions trading and taxes), incentives for new
technologies and alternative energy sources, and regulation.
III. 14th APEC Finance Ministers' Process Policy Themes
1. Making private capital markets work better
Deep and integrated private capital markets can assist governments in achieving
their economic and social objectives by providing secure and diverse funding
sources for development. We noted the importance of private domestic capital
markets in funding infrastructure and investment and helping manage key risks,
including with respect to volatile energy prices and an ageing population.
We reaffirmed commitments to strengthen the legal, regulatory and commercial
infrastructure needed to support financial deepening. We agreed that broadening
and diversifying the investor base is critical for strengthening capital markets.
Greater participation of specialist institutions such as pension funds, insurance
companies, fund managers and securitisation originators is needed to provide
depth and innovation in markets. We noted the potential complementary roles that
savings policy, structural and regulatory policies and taxation policy can have in
fostering capital market deepening, and the positive spill-over effects that
investment in education and information technology can have on private capital
markets. Macroeconomic stability is essential for financial markets to grow.
Similarly, we recognised the importance of developing and allowing greater access
to a wider range of financial products such as corporate bonds, equities and
derivatives for domestic and foreign participants. It is also essential to have
effective trading, settlement and custodial arrangements, maintain credible
corporate governance, ensure reliable disclosure and ratings, and strengthen
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1118/2008
Page 4 of 6
regulatory supervision.
In considering priorities and sequencing of reform within our own economies we
agreed that it is important to approach reform holistically and strategically - e'nsuring
that reforms are mutually reinforcing and consistent with economies' development
priorities - and also pragmatically.
Implementing to the extent possible, we embrace international best practice and
standards to support the achievement of important objectives such as investor
protection; fair, transparent and efficient markets; and management of systemic
risks. Continued progress in strengthening financial institutions and regulatory
frameworks is central to secure the benefits of increasing regional and international
market integration. We recognise that there are many domestic, regional and global
mechanisms available to help economies progress financial market reform,
including domestic reviews and the IMFlWorld Bank Financial Sector Assessment
Program (FSAP) and associated reports on standards and codes. We encourage
participation in FSAPs, taking into account the level and pace of development and
the specific conditions of each member economy, to help economies prioritise
financial sector reforms and evaluate risks to the financial system.
Recognising the contribution of capital flows, we emphasised the importance of
open investment regimes to develop and strengthen domestic financial institutions
and markets, improve productivity and boost growth.
We endeavour to support each other in strengthening and deepening the region's
capital markets. Many of the initiatives underway in the finance ministers' process
target capacity building and the sharing of experience with regard to the financial
sector. We agreed to develop a web-based information system - the APEC
Catalogue of Policy Experience and Choice - for finance ministries, central banks
and regulatory agencies in the APEC region to collect and share knowledge on
financial reform based on the practical experience of member economies and
international agencies. We welcomed ABAC's report and recognise its contribution
to strengthening financial systems in the region.
2. Transparency and sustainability of the public balance sheet
We agree that fiscal sustainability is essential for economic development and
stability. Fiscal risks that are not well managed can result in obligations that
damage the budget position, increase government indebtedness, and amplify the
effect of negative economic and financial shocks.
We discussed our experience in managing a range of off-balance sheet risks,
including public-private partnerships, state-owned enterprises, layers of
government, pensions and health care, and guarantees. In the areas of
infrastructure investment, we noted that public-private partnership projects, when
supported by sound management and appropriate risk sharing, tend to have lower
ongoing operating costs and significant public benefit. We also noted that
guarantees work more effectively when their likely costs are identified, quantified
where possible, and assessed against competing calls on government resources.
We recognised that risks related to state-owned enterprises and layers of
government are lower when they are adequately resourced to meet their
responsibilities and where central agencies are well informed about their financial
pOSitions and effective accountability arrangements are in place.
We discussed these issues within the framework of addressing risks at their source,
sharing risks with the private sector where appropriate, and ensuring that residual
risks are effectively monitored and managed. We acknowledge the extensive
assistance available to economies seeking to improve fiscal transparency in these
areas.
We welcomed the steps being taken by APEC economies to improve fiscal risk
management, agreeing that small changes made now can generate large
improvements in the long-term fiscal position. We identified a need for further
guidance to support continued fiscal sustainability ~n.d highlighted the im~ortance of
a set of principles to guide further progress, recognising that our economies are at
various stages of economic development and that the form of implementation is a
matter for each economy. The APEC fiscal sustainability principles include:
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111812008
Page 5 of 6
•
•
•
•
•
•
•
fostering well-functioning markets to reduce fiscal pressures on
governments;
establishing a clear framework of accountability and responsibility for
addressing fiscal risks;
collecting and reporting information about on and off-balance sheet risks
across the whole of government;
assessing the potential consequences of current and emerging fiscal risks
or long-term pressures to determine the best ways to manage these risks;
including risk in government measures of fiscal performance to help
governments understand the true nature of their fiscal position;
improving transparency and accountability to the public through appropriate
means; and
creating fiscal space or provisioning - even notionally - for expected future
payments, especially for liabilities with a high probability of realisation in the
near to medium-term.
In this context, the IMF and World Bank may provide further practical insights into
best practices in managing fiscal risks.
We welcomed the revisions to the IMF Fiscal Transparency Manual and Code of
Good Practices and acknowledged the benefits of undertaking a fiscal transparency
Report on the Observance of Standards and Codes (ROSC). We encouraged
economies to take advantage of this initiative and for those that have already
undertaken this ROSC, to assess their current practices against the revised code.
We welcomed the work by the Pacific Economic Cooperation Council on publicprivate partnerships.
IV. Other Matters and the Venue FOR the Next Meeting
We supported further work on quota and voice reform in the IMF and underscored
the need for early agreement on comprehensive second-stage reform to enhance
the Fund's legitimacy and representativeness. APEC economies believe
comprehensive reform of IMF quotas and voice should recognise the strong growth
of many emerging markets with significant increases in voting share, while
protecting the voice of low-income members. We call for support to conclude
negotiations as soon as the 2007 IMF annual meeting.
We support continuing efforts of the IMF and World Bank to respond to global
challenges and early progress on reform of World Bank governance. We also
welcomed commencement of the ADB's review of its Long-Term Strategic
Framework as an important opportunity to reinforce the ADB's strategic and
operational priorities consistent with the current and future needs of its developing
members and its poverty reduction mandate.
We are committed to fighting money laundering, terrorist financing, and other illicit
financing involving similar risks to the stability and integrity of financial markets, and
will continue to work to comply with international standards. To this end, we tasked
our officials to continue to collaborate closely with the APEC Anti-Corruption
Taskforce, APEC Counter-Terrorism Taskforce and other jurisdictions. We call on
the IMF and the World Bank to cooperate more closely with the Financial Action
Task Force (FATF). We see merit in further efforts by the FATF in examining the
risks involved in financing the proliferation of weapons of mass destruction.
We thanked Australia for hosting the APEC Finance Ministers' Process this year.
We will meet again for our 15th meeting in Trujillo, Peru in October 2008.
http://www.treas.gov/press/releas~s!hp541.htm
1118/2008
Page 1 of 1
10 vIew or prmt the fJUf- content on thIS page, download the tree Adobe(R) Acrobal(f!} Headertl§
August 28, 2007
hp-542
Treasury, IRS Issue Proposed Regulations
Outlining New Rules Restricting Benefits in Underfunded Pension Plans
Washington, D.C.--The Treasury Department and IRS issued today proposed
regulations to provide guidance on new rules enacted as part of the Pension
Protection Act of 2006 (PPA) that restrict benefits in pension plans that are
underfunded.
The restrictions on benefits will apply next year to underfunded pension plans under
section 436 of the Internal Revenue Code. The proposed regulations reflect the
new law and include a number of transition rules. The proposed regulations also
include gUidance under section 430(f) of the Internal Revenue Code regarding the
treatment of an employer's contributions in excess of the minimum required
contribution for a plan year that results in a credit or funding balance. PPA
generally requires such a balance to be excluded in determining a plan's funded
percentage for purposes of applying the limitations of section 436.
The proposed regulations will apply to plan years beginning after December 31,
2007, and can be relied on for qualification purposes pending the final regulations.
A copy of the proposed regulations is attached.
-30REPORTS
• RJ;.G
113J~!:)L07
http://www.treas.gov/press/releases;~p542.htm
1118/2008
PRESSROOM
August 29, 2007
2007-8-29-15-39-46-26849
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 $67,292 million as of the end of that week, compared to $67,271 million as of the end of the
prior week.
I. Official reserve assets and other foreign currency assets (approximate market value, in US millions)
--
-
I
I
IA. Official reserve assets (in US millions unless otherwise specified)
II
IIAugust 24, 2007
IIEuro
IIYen
IITotal
II
11 10 ,954
1167,292
I(a) Securities
II
11 13 ,226
11 24 ,180
lof which: issuer headquartered in reporting country but located abroad
II
II
11 0
I(b) total currency and deposits with:
II
11 13 ,208
II
l(i) other national central banks, BIS and IMF
Iii) banks headquartered in the reporting country
II
11 0
110
11 0
1(1) Foreign currency reserves (in convertible foreign currencies)
lof which: located abroad
II
I(iii) banks headquartered outside the reporting country
II
lof which: located in the reporting country
1(2) IMF reserve position
II
11 4 ,363
1(3) SDRs
11 9 ,100
1(4) gold (including gold deposits and, if appropriate, gold swapped)
11 11 ,041
I--volume in millions of fine troy ounces
11 261.499
1(5) other reserve assets (specify)
11 0
I--financial derivatives
II
http://www.treas.gov/press/releases/200782915394626849.htm
5,399
II
11 18 ,607
11 0
1118/2008
I--Ioans to nonbank nonresidents
I--other
lB. Other foreign currency assets (specify)
I--securities not included in official reserve assets
I--deposits not included in official reserve assets
I--Ioans not included in official reserve assets
I--financial derivatives not included in official reserve assets
I--gold not included in official reserve assets
I --other
II
II
II. Predetermined short-term net drains on foreign currency assets (nominal value)
II
II
II
II
IIMaturity breakdown (residual maturity)
II
II
Total
Up to 1 month
More than 1 and
up to 3 months
More than 3
months and up to
1 year
I 1. Foreign currency loans, securities, and deposits
I--outflows (-)
IIPrincipal
I
I--inflows (+)
II Interest
I
IIlnterest
IIPrincipal
2. Aggregate short and long positions in forwards and
futures in foreign currencies vis-a-vis the domestic
currency (inciudinQ the forward leq of currency swaps)
(a) Short positions ( - )
(b) Long positions (+)
3. Other (specify)
--outflows related to repos (-)
--inflows related to reverse repos (+)
--trade credit (-)
--trade credit (+)
--other accounts payable (-)
http://www.treas.gov/press/releasesI200782915394626849.htm
1118/2008
/1 --either accounts receivable
(+)
"
"
II
"
1\
II
II
I
III. Contingent short-term net drains on foreign currency assets (nominal value)
I
II
I
I
I
II
IMaturity breakdown (residual maturity, where
applicable)
Total
Up to 1 month
More than 3
months and up to
1 year
More than 1 and
up to 3 months
11. Contingent liabilities in foreign currency
II
(a) Collateral guarantees on debt falling due within 1
year
I
I
I(b) Other contingent liabilities
II~. Foreign currency securities issued with embedded
options (puttable bonds)
I
I
I
I
13. Undrawn, unconditional credit lines provided by:
(a) other national monetary authorities, 81S, IMF, and
other international organizations
I--other national monetary authorities (+)
1--8IS (+)
I--IMF (+)
(b) with banks and other financial institutions
headquartered in the reporting country (+)
I
(c) with banks and other financial institutions
headquartered outside the reporting country (+)
IUndrawn, unconditional credit lines provided to:
(a) other national monetary authorities, 81S, IMF, and
other international organizations
I--other national monetary authorities (-)
I
I
I
1--8IS (-)
I--IMF (-)
(b) banks and other financial institutions headquartered
in reporting country (- )
I
http://www.treas.gov/press/releasesI200782915394626849.htm
1118/2008
(c) banks and other financial institutions headquartered
outside the reporting country ( - )
4. Aggregate short and long positions of options in
foreign currencies vis-a-vis the domestic currency
II
I
\I
II
I(a) Short positions
lei) Bought puts
I
I(ii) Written calls
I(b) Long positions
l(i) Bought calls
l(ii) Written puts
IPRO MEMORIA: In-the-money options JJ
/
/(1) At current exchange rate
lea) Short position
I(b) Long position
/(2) + 5 % (depreciation of 5%)
lea) Short position
I(b) Long position
1(3) - 5 % (appreciation of 5%)
lea) Short position
I(b) Long position
1(4) +10 % (depreciation of 10%)
I(a) Short position
I(b) Long position
/(5) - 10 % (appreciation of 10%)
lea) Short position
/(b) Long position
/(6) Other (specify)
lea) Short position
I(b) Long position
IV. Memo items
II
http://www.treas.gov/press/releases/200782915394626849.htm
/I
-~
1118/2008
11(1) To be reported with standard periodicity and timeliness:
I(a) short-term domestic currency debt indexed to the exchange rate
(b) financial instruments denominated in foreign currency and settled by other means (e.g., in domestic
currency)
!--nondeliverable forwards
! --short positions
! --long positions
I--other instruments
I(c) pledged assets
I--included in reserve assets
I--included in other foreign currency assets
I(d) securities lent and on repo
I--Ient or repoed and included in Section I
I--Ient or repoed but not included in Section I
I
I--borrowed or acquired and included in Section I
I--borrowed or acquired but not included in Section I
I(e) financial derivative assets (net, marked to market)
I--forwards
I--futures
I--swaps
I--options
I--other
(f) derivatives (forward, futures, or options contracts) that have a residual maturity greater than one
year, which are subject to margin calls.
--aggregate short and long positions in forwards and futures in foreign currencies vis-a-vis the domestic
currency (including the forward leg of currency swaps)
I(a) short positions ( - )
I(b) long positions (+)
I--aggregate short and long positions of options in foreign currencies vis-a-vis the domestic currency
I(a) short positions
\
l(i) bought puts
l(ii) written calls
I(b) long pOSitions
I
l(i) bought calls
I
I(ii) written puts
I
I
http://www.treas.gov/press/releasesI200782915394626849.htm
I
1118/2008
1(2) To be disclosed less frequently:
II
I(a) currency composition of reserves (by groups of currencies)
\167,292
I--currencies in SDR basket
1167,292
I--currencies not in SDR basket
II
\--by individual currencies (optional)
1\
I
II
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 markedto-market values, and deposits reflect carrying values.
2/ The items, "2. IMF Reserve Position" and "3. Special Drawing Rights (SDRs)," are based on data provided by the IMF
and are valued in dollar terms at the official SDR/dollar exchange rate for the reporting date. The entries for the latest
week reflect any necessary adjustments, including revaluation, by the U.S. Treasury to IMF data for the prior month
end.
3/ Gold stock is valued
monthly at $42.2222 per fine troy ounce.
http://www.treas.gov/press/releases!200782915394626849.htm
1118/2008
Page 1 of 2
/0 vIew or prmt tne pUr content on tnlS page, Gown/oaG the tree AGQIJe(l?)AcrolJat(f!) HeaeJerlFY.
August 30, 2007
HP-543
Treasury Targets Colombian Drug Traffickers
The U.S. Department of the Treasury's Office of Foreign Assets Control (OFAC)
today designated four significant Colombian drug traffickers, Miguel Angel Mejia
Munera, Victor Manuel Mejia Munera, Ramiro Vanoy Murillo and Francisco Javier
Zuluaga Lindo as Specially Designated Narcotics Traffickers (SDNTs) pursuant to
Executive Order 12978. OFAC also designated today several front companies and
related individuals.
"The Mejia Munera brothers are violent fugitives from justice," said OFAC Director
Adam J. Szubin. "Today's action furthers OFAC's effort to destabilize and
undermine the operations of these Colombian traffickers."
In 2004, the District Court for the District of Columbia indicted twin brothers Miguel
Angel Mejia Munera and Victor Manuel Mejia Munera ("Los Mellizos") on narcotics
trafficking charges. The Mejia Munera brothers have been involved in narcotics
trafficking since the early 1990s when they guarded ships transporting cocaine
loads from the western coast of Colombia to Mexico. Over time, Los Mellizos rose
through the ranks to lead their own narcotics trafficking organization. Recent reports
indicate that Los Mellizos may be funding their own illegal armed groups to facilitate
their narcotics trafficking activities. Both are fugitives from justice and the United
States is offering up to $5 million for information leading to the arrest of Miguel
Angel Mejia Munera.
In 1999, the Southern District of Florida indicted Ramiro Vanoy ("Cuco Vanoy") and
ZUluaga Lindo ("Gordo Lindo") on narcotics trafficking charges. Ramiro Vanoy
Murillo and Francisco Javier Zuluaga Lindo are currently in a Colombian prison
awaiting extradition to the United States.
OFAC also designated several front companies and individuals including a Mejia
Munera holding company, Compania Comercializadora de Bienes Raices Ltda. in
Cali and a sporting company, Sociedad Superdeportes Ltda. in Bogota owned by
Zuluaga Lindo. Two key Zuluaga Lindo front individuals, Daniel Alberto Mora
Ricardo and Mary Luz Nova Carvajal were also named by OFAC along with their
company, ABS Health Club SA
This deSignation is part of the ongoing interagency effort by the Departments of the
Treasury, Justice, State and Homeland Security and others to implement Executive
Order 12978 of October 21, 1995, which applies economic sanctions against
Colombia's drug cartels. Today's designation action freezes any assets the
designees may have subject to U.S. jurisdiction, and prohibits all financial and
commercial transactions by any U.S. person with the designated companies and
individuals.
The assets of a total of 1,530 businesses and individuals in Aruba, Barbados,
Belize, Colombia, Costa Rica, Ecuador, Guatemala, Honduras, Jamaica, Mexico,
Panama, Peru, Spain, Vanuatu, Venezuela, the Bahamas, the British Virgin Islands,
the Cayman Islands, and the United States have been blocked pursuant to E.O.
12978. The 600 businesses that have been named as SDNTs include agricultural,
aviation, consulting, construction, distribution, financial, hotel, investment,
manufacturing, maritime, mining, offshore, pharmaceutical, real estate, retail,
service, sporting, telecommunication, and textile companies. The SDNT list
includes 26 drug kingpins from the Cali, Medellin, North Valle, and North Coast
narcotics trafficking organizations in Colombia, including those named today.
Please find attached a chart of the individuals and entities designated today.
http://wv.·w.treas.gov/presslre1ea-ses/hp543.htm
1118/2008
Page 2 of 2
-30-
REPORTS
•
Chart
http://wvfw.treas.goy/press/releasc.;;/hp543.htm
111812008
u.S. Department of the Treasury
Office of Foreign Assets Control
Specially Designated Narcotics Traffickers
NEW PRINCIPAL NARCOTICS TRAFFICKERS
August 2007
'
7i
'~I'..J
~~'"!
r - - - - - - - - ';
.
,--_ _
1,---------,
7~,
. -.;-1.' _ _----,
/TIl
., :4IIIl
u.s. Federal Indictment
Southern District of Florida
November 1999
Narcotics Trafficking
U.S. Federal Indictment
District Court for the District of Columbia
January 2004
Narcotics Trafficking
"Los Mellizos"
"The Twins"
MEJIA MUNERA
"Pablo Mejia"
OOB 11 Jul1959
CC 16627309
"Cuco"
DOB 31 Mar 1948
CC462653
"
~
r ~
i
'D!II:
1
~.;'iV;
~
SOCIEOAO SUPEROEPORTES LTOA.
Bogota
NIT # 800971233·7
~
Q
CIA COMERCIALlZAOORA DE BIENES RAICES LTOA.
I.k .•. MEJlA MUNERA HERMANOS LTOA.
Cati
NIT # 800068928-4
Mary Luz NOVA CARVAJAL
OOB 19 DEC 1974
c.c. 52253223
~
ABS HEALTH CLUB SA
Bogota
NIT # 830121474-8
Page 1 of 1
August 30, 2007
HP-544
Treasury Updates Department Homepage
Washington, DC-- Treasury launched an updated website this week designed to
improve access to information on key issues before the Department.
New Homepage Look & Features
Treasury's homepage (www.treasury.gov) has a new look and feel including
additional options for web-users to access press releases, speeches and reports on
key issues before the Department. The day's top news and most recent releases
will continue to be featured in the center column of the page. Information tabs on
Treasury's core issues - financial markets, taxes, economy, fighting illicit finance,
international affairs and coins and currency - are listed along the top of the page.
Links listed in the left navigation bar were consolidated and reorganized to provide
easy access to the most popular pages on the site. And key priorities for Secretary
Paulson are featured in the right hand navigation bar. In the lower right-hand corner
of the page is a new feature called the Secretary's Corner where all of Secretary
Paulson's speeches, statements, testimony and travel updates have been
consolidated.
New Email and RSS Capabilities
Treasury also recently updated its email subscription service and added RSS
capability. Web users can now sign up to receive email or RSS updates on specific
topics they're interested in. Options include:
• Press Releases by Topic
• Press Releases by Type (reports, speeches, testimony, etc.)
• Treasury Official Staff Updates
• Accounting and Budget Information
• Auctions
• Economic Statistics
• Interest Rate Statistics
• Health Savings Account Information
• Treasury International Capital (nTIC") Data
Please send any comments or concerns on the updated website using the red E2mg n
comment form. Feedback is appreciated.
http://w\\'w.treas.goy/press/release:>/h
1118/2008
Page 1 of 1
September 4, 2007
HP-545
Treasury Department Names Jeb Mason
as Deputy Assistant Secretary for Business Affairs
and Public Liaison
The Treasury Department announced that Jeb Mason has been appointed as
Deputy Assistant Secretary for Business Affairs and Public Liaison.
In this position, Mason will manage the Treasury Department's outreach to the
business, advocacy, and financial community. He will advise Secretary Henry M.
Paulson, Jr. and the Department's leadership on economic and international issues.
He will solicit information, analysis, and opinions from public and private
organizations representing business and consumer interests, and will communicate
Treasury's views to these organizations.
Immediately prior to this appointment, Mason served as Policy Advisor to Secretary
Paulson. In this role he provided counsel to the Secretary and the Department's
leadership on key policy matters. Mason also will continue to advise the Secretary
on policy matters in his new position.
Prior to joining Treasury, Mason served as Associate Director for Strategic
Initiatives at the White House. He previously held several positions with the
Department of Defense, including Executive Secretary for the Coalition Provisional
Authority.
Mason earned degrees in economics and public policy from Southern Methodist
University.
l:lIww w.treas.gov/press/reJeases/hpS45.htm
10/1/2007
Page 1 of 5
PRESS ROOM
September 4, 2007
2007 -9-4-14-27 -10-28537
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 $67,376 million as of the end of that week, compared to $67,292 million as of the end of the
prior week.
I. Official reserve assets and other foreign currency assets (approximate market value, in US millions)
I
I
IA. Official reserve assets (in US millions unless otherwise specified)
II
IIAugust 31,2007
IIEuro
IIYen
IITotal
II
11 13 ,232
II
11 10 ,984
11 67 ,376
I(a) Securities
11 24 ,216
lof which: issuer headquartered in reporting country but located abroad
II
II
11 0
I(b) total currency and deposits with:
II
1(1) Foreign currency reserves (in convertible foreign currencies)
l(i) other national central banks, BIS and IMF
II
13,214
5,413
Iii) banks headquartered in the reporting country
11 0
11 0
lof which: located abroad
l(iii) banks headquartered outside the reporting country
11 0
11 0
lof which: located in the reporting country
1(2) IMF reserve position
11 4 ,373
1(3) SDRs
11 9 ,120
1(4) gold (including gold deposits and, if appropriate, gold swapped)
11 11 ,041
I--volume in millions of fine troy ounces
11 261 .499
1(5) other reserve assets (specify)
II
11 18 ,627
0
I--financial derivatives
[--loans to nonbank nonresidents
t-other
[8. Other foreign currency assets (specify)
t-securilies not included in official reserve assets
[deposits not included in official reserve assets
[--loans not included in official reserve assets
[financial derivatives not included in official reserve assets
EgOld not included in official reserve assets
[-other
II
II
II. Predetermined short-term net drains on foreign currency assets (nominal value)
:llwww.treas.t;ov/presslreleases/200794J4271028537.htm
10/1/2007
Page 2 of 5
II
II
II
II
II
IIMaturity breakdown (residual maturity)
II
Total
1. Foreign currency loans, securities, and deposits
-outflows (-)
IIPrincipal
II Interest
I--inflows (+)
IIPrincipal
I
IIlnterest
I
More than 1 and
up to 3 months
Up to t month
II
II
II
II
II
II
I
I
More than 3
months and up to
1 year
2. Aggregate short and long positions in forwards and
I
futures in foreign currencies vis-a.-vis the domestic
currency (inciudinQ the forward leg of currency swaps)
(a) Short positions ( - )
I
(b) Long positions (+)
3. Other (specify)
--outflows related to repos (-)
--inflows related to reverse repos (+)
--trade credit (-)
I
--trade credit (+)
I
--other accounts payable (-)
I
--other accounts receivable (+)
I
III. Contingent short-term net drains on foreign currency assets (nominal value)
I
II
I
II
II
Total
I
11. Contingent liabilities in foreign currency
(a) Collateral guarantees on debt falling due within 1
year
~b) Other contingent liabilities
II
I
II
Maturity breakdown (residual maturity, where
applicable)
I
I
More than 1 and
up to 3 months
Up to 1 month
II
II
II
II
II
1/
More than 3
months and up to
1 year
2. Foreign currency securities issued with embedded
options (puttable bonds)
~. Undrawn,
unconditional credit lines provided by:
"
(a) other national monetary authorities, 81S, IMF, and
other international organizations
[other national monetary authorities (+)
[SIS (+)
tlMF (+)
(b) with banks and other financial institutions
headquartered in the reporting country (+)
r
II
dlwww.treasgoY/press/releases/20-07g414271028537.htm
I
1/
101l/2007
Page 3 of 5
(c) with banks and other financial institutions
headquartered outside the reporting country (+)
II
II
II
1/
II
IUndrawn, unconditional credit lines provided to:
I
(a) other national monetary authorities, BIS, IMF, and
other international organizations
I--other national monetary authorities (-)
I--BIS (-)
I--IMF (-)
(b) banks and other financial institutions headquartered
in reporting country (- )
I
(c) banks and other financial institutions headquartered
outside the reporting country ( - )
I
I
I
4. Aggregate short and long positions of options in
foreign currencies vis-a-vis the domestic currency
I(a) Short positions
I(i) Bought puts
I(ii) Written calls
I(b) Long positions
I
l(i) Bought calls
I(ii) Written puts
IPRO MEMORIA: In-the-money options JJ
1(1) At current exchange rate
I
I(a) Short position
I(b) Long position
1(2) + 5 % (depreciation of 5%)
I(a) Short position
I(b) Long position
1(3) - 5 % (appreciation of 5%)
I(a) Short position
I(b) Long position
1(4) +10 % (depreciation of 10%)
I(a) Short position
I(b) Long position
1(5) - 10% (appreciation of 10%)
I(a) Short position
I(b) Long position
1(6) Other (specify)
I(a) Short position
[(b) Long position
IV. Memo items
[
~) To be reported with standard periodicity and timeliness:
~) short-term domestic currency debt indexed to the exchange rate
(b) financial instruments denominated in foreign currency and settled by other means (e.g., in domestic I
J://wWw.treas.gov/presslreleases/2007Y4 14271028537.htm
I
I
1
I
10/1/2007
Page 4 of 5
[currency)
[-nondeliverable forwards
[ --short positions
[ --long positions
[--other instruments
[(c) pledged assets
[--included in reserve assets
--included in other foreign currency assets
[(d) securities lent and on repo
[--lent or rep oed and included in Section I
[--lent or repoed but not included in Section I
I--borrowed or acquired and included in Section I
I--borrowed or acquired but not included in Section I
I(e) financial derivative assets (net, marked to market)
I
I--forwards
I--futures
I--swaps
I--options
I--other
(f) derivatives (forward, futures, or options contracts) that have a residual maturity greater than one
year, which are subject to margin calls.
1\
11
--aggregate short and long positions in forwards and futures in foreign currencies vis-a-vis the domestic
currency (including the forward leg of currency swaps)
I(a) short positions ( - )
II
I(b) long positions (+)
I--aggregate short and long positions of options in foreign currencies vis-a-vis the domestic currency
I(a) short positions
I(i) bought puts
l(ii) written calls
I(b) long positions
I(i) bought calls
l(ii) written puts
1(2) To be disclosed less frequently:
I(a) currency composition of reserves (by groups of currencies)
1/67,376
I--currencies in SDR basket
11 67 ,376
I--currencies not in SDR basket
II
II
II
I--by individual currencies (optional)
I
Notes:
1/ Includes holdings of the Treasury's Exchange Stabilization Fund (ESF) and the Federal Reserve's System Open Market
Account (SOMA), valued at current market exchange rates. Foreign currency holdings listed as securities reflect markedto-market values, and deposits reflect carrying values.
2/ The items, "2. IMF Reserve Position" and "3. Special Drawing Rights (SDRs)," are based on data provided by the IMF
and are valued in dollar terms at the official SDR/dollar exchange rate for the reporting date. The entries for the latest
week reflect any necessary adjustments, including revaluation, by the U.s. Treasury to IMF data for the prior month
://www.treas.sov/press/releases/200794~4271028537.htm
10/1/2007
Page 5 of 5
end.
3/ Gold stock is valued monthly at $42.2222 per fine troy ounce.
http://www.trea •. g0v/pfeSS/relea~esn0079414271028537.htm
10/1/2007
Page 1 of 5
PRESS ROOM
September 4, 2007
2007 -9-4-14-27 -39-28545
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 $67,376 million as of the end of that week, compared to $67,292 million as of the end of the
prior week.
I. Official reserve assets and other foreign currency assets (approximate market value, in US millions)
I
I
IA. Official reserve assets (in US millions unless otherwise specified)
II
IIAugust 31,2007
IIEuro
liVen
IITotal
II
11 13 ,232
II
11 10 ,984
11 67 ,376
I(a) Securities
11 24 ,216
lof which: issuer headquartered in reporting country but located abroad
II
II
11 0
I(b) total currency and deposits with:
II
1(1) Foreign currency reserves (in convertible foreign currencies)
II
II
11 5 ,413
11 18 ,627
Iii) banks headquartered in the reporting country
II
lof which: located abroad
II
11 0
11 0
I(iii) banks headquartered outside the reporting country
II
I(i) other national central banks, SIS and IMF
13,214
II
lof which: located in the reporting country
1(2) IMF reserve position
11 4 ,373
1(3) SDRs
11 9 ,120
1(4) gold (including gold deposits and, if appropriate, gold swapped)
11 11 ,041
I--volume in millions of fine troy ounces
11 261 .499
[(5) other reserve assets (specify)
11 0
11 0
0
[--financial derivatives
I--Ioans to nonbank nonresidents
I--other
[s. Other foreign currency assets (specify)
[-securities not included in official reserve assets
[-deposits not included in official reserve assets
tloans not included in official reserve assets
tfinancial derivatives not included in official reserve assets
tgold not included in official reserve assets
[-other
II
II
II. Predetermined short-term net drains on foreign currency assets (nominal value)
://wWw.treas.g0y/press/releasesI20079414273928545.htm
101112007
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II
[
[
II
II
II
II
IIMaturity breakdown (residual maturity)
II
[
Total
[ 1. Foreign currency loans, securities, and deposits
[outflOws (-)
Ilprincipal
[
II Interest
[--inflows (+)
IIPrincipal
I
IIlnterest
More than 3
months and up to
1 year
More than 1 and
up to 3 months
Up to 1 month
I
I
II
II
2. Aggregate short and long positions in forwards and
futures in foreign currencies vis-a.-vis the domestic
currency (including the forward leg of currency swaps)
(a) Short positions ( - )
(b) Long positions (+)
3. Other (specify)
--outflows related to repos (-)
--inflows related to reverse repos (+)
--trade credit (-)
II
--trade credit (+)
I --other accounts payable (-)
II
I --other accounts receivable (+)
II
III. Contingent short-term net drains on foreign currency assets (nominal value)
I
II
I
/I
I
II Tala'
11. Contingent liabilities in foreign currency
II
(a) Collateral guarantees on debt falling due within 1
year
II
II
II
I
II
IMaturity breakdown (residual maturity, where
applicable)
I
More than 1 and
up to 3 months
Up 10 1 monlh
More than 3
months and up to
1 year
I(b) Other contingent liabilities
2. Foreign currency securities issued with embedded
options (puttable bonds)
I
13. Undrawn, unconditional credit lines provided by:
(a) other national monetary authorities, 81S, IMF, and
other international organizations
~-other national monetary authorities (+)
I
I
t- BIS (+)
~-IMF (+)
(b) with banks and other financial institutions
headquartered in the reporting country (+)
r
1\
I
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/I
1\
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(c) with banks and other financial institutions
headquartered outside the reporting country (+)
I
II
IUndrawn, unconditional credit lines provided to:
I
II
(a) other national monetary authorities, BIS, IMF, and
other international organizations
II
I--other national monetary authorities (-)
II
I--BIS (-)
I--IMF (-)
(b) banks and other financial institutions headquartered
in reporting country (- )
(c) banks and other financial institutions headquartered
outside the reporting country ( - )
4. Aggregate short and long positions of options in
foreign currencies vis-a.-vis the domestic currency
I(a) Short positions
I(i) Bought puts
I(ii) Written calls
I(b) Long positions
I(i) Bought calls
I(ii) Written puts
IPRO MEMORIA: In-the-money options 11
1(1) At current exchange rate
I(a) Short position
I(b) Long position
1(2) + 5 % (depreciation of 5%)
I(a) Short position
I(b) Long position
1(3) - 5 % (appreciation of 5%)
I(a) Short position
I(b) Long position
1(4) +10 % (depreciation of 10%)
I(a) Short position
I(b) Long position
1(5) - 10 % (appreciation of 10%)
I(a) Short position
[(b) Long position
[(6) Other (specify)
[(a) Short position
~b) Long position
IV. Memo items
[
I
~) To be reported with standard periodicity and timeliness:
[a) short-term domestic currency debt indexed to the exchange
I
rate
(b) financial instruments denominated in foreign currency and settled by other means (e.g., in domestic I
://wWw.treasgov/presslreleases/200ilJ4 14273928545.htm
I
I
10/1/2007
Page 4 of 5
Icurrency)
I--nondeliverable forwards
--short positions
I
--long positions
I
I--other instruments
II
I
II
II
I
I(c) pledged assets
I--included in reserve assets
I--included in other foreign currency assets
I(d) securities lent and on repo
I--Ient or repoed and included in Section I
I--Ient or repoed but not included in Section I
I--borrowed or acquired and included in Section I
I--borrowed or acquired but not included in Section I
I(e) financial derivative assets (net, marked to market)
I--forwards
I--futures
I--swaps
I--options
I--other
(f) derivatives (forward, futures, or options contracts) that have a residual maturity greater than one
year, which are subject to margin calls.
--aggregate short and long positions in forwards and futures in foreign currencies vis-a.-vis the domestic
currency (including the forward leg of currency swaps)
I
I
I
I(a) short positions ( - )
I(b) long positions (+)
I--aggregate short and long positions of options in foreign currencies vis-a.-vis the domestic currency
I(a) short positions
I(i) bought puts
l(ii) written calls
I(b) long positions
I(i) bought calls
l(ii) written puts
1(2) To be disclosed less frequently:
I(a) currency composition of reserves (by groups of currencies)
11 67,376
t-currencies in SDR basket
11 67 ,376
t-currencies not in SDR basket
II
II
tby individual currencies (optional)
[
II
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 markedto-market values, and deposits reflect carrying values.
2/ The items, "2. IMF Reserve Position" and "3. Special Drawing Rights (SDRs)," are based on data provided by the IMF
and are valued in dollar terms at the official SDR/dollar exchange rate for the reporting date. The entries for the latest
week reflect any necessary adjustments, including revaluation, by the U.s. Treasury to IMF data for the prior month
:I/w Ww .treas.,Sov/presslreleasesli60794 I 4273928545.htm
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end.
3/ Gold stock is valued monthly at $42.2222 per fine troy ounce.
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September 5, 2007
HP-546
Testimony of Robert K. Steel
Under Secretary for Domestic Finance
U.S. Department of the Treasury
Before the House Committee on Financial Services
Washington- Chairman Frank, Ranking Member Bachus, Members of the
Committee, good morning. I very much appreciate the opportunity to appear before
you today to present the Treasury Department's perspective on the recent events in
the credit and mortgage markets and their impact upon consumers and the
economy. The Treasury Department and Secretary Paulson know that these events
are of considerable interest to the American people, this Committee, and other
Members of Congress.
To give context to the current market situation, I would like to begin my remarks
today with a description of both domestic and global economic conditions. In the
United States, the unemployment rate is at 4.6%, close to its lowest reading in 6
years. Real GDP growth was 4.0 percent in the second quarter, supported by
strong gains in business investment and exports. Core inflation is under control.
Since August 2003, 8.3 million jobs have been created, more jobs than all the major
industrialized countries combined; over the past 12 months, nearly 2 million jobs
have been created. Real wages have increased 1.7% over the past 12 months. In
the corporate sector, earnings continue to outperform expectations and default
rates on corporate credits of all kinds are at historically low levels. On the
government side, the U.S. fiscal deficit is declining and well below long-term
averages as a share of the economy, reflecting strong revenue growth and the
continued strength of the U.S. economy.
The global economy continues to grow at around 5% annually, with many emerging
market economies growing even more rapidly than the global average. The
advanced economies also continue to perform well, with unemployment down
sharply in Europe, helping to make growth of the last several years the strongest
since the early 1970s.
The Treasury Department, as the steward of economic and financial systems in the
United States, is committed to ensuring these strong U.S. and global economic
fundamentals. At the same time, the Treasury Department's mission includes the
promotion of economic stability. It is important to appreciate that the core
fundamental economic environment is strong globally, and it is against this
backdrop that I turn to the current credit and market challenges.
General Trends in the Mortgage Industry
As just discussed, over the past several years the United States has enjoyed
favorable economic conditions: low unemployment, low inflation, and low interest
rates. These positive conditions served to fuel a demand for credit and investment
and the marketplace responded with a vast supply of both to satisfy consumers and
sophisticated market participants. At the consumer level, this demand was very
noticeable in the mortgage industry, and in recent years particularly, the subprime
arena. For the first time, in the early 1990s, consumers with lower incomes and
challenged credit history--typical subprime borrowers--were able to gain access to
mortgage credit at interest rates a few percentage points higher than prime
borrower rates. Homeownership became more widely available in the United
States, growing from 64% in.1994 to 69% today, some of that due to subprime
mortgage origination volume, which increased from less than 5%, or $35 billion, of
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total mortgage origination volume in 1994 to nearly 20%, or $625 billion, in 2005.
Mortgage securitization has fundamentally changed the mortgage industry and has
played a significant role in the growth of the mortgage market. Typically in a private
label mortgage securitization, the mortgage originator transfers loans to a
securitization sponsor, who pools together mortgages into mortgage-backed
securities, and sells pieces, or tranches, of these securities to investors. Thus, the
mortgage originator, instead of holding the mortgage loan on its balance sheet,
distributes the loan and its attendant risks to a securitization sponsor in return for
capital. The credit rating agencies work closely with the sponsor to rate the credit
risk of each tranche.
These innovative securities offered sophisticated investors a diversification tool and
the ability to better target their risk/return profile. The demand for mortgage-backed
securities has been global in nature and has helped to provide mortgage originators
with a steady stream of capital. Over 55% of total mortgage origination volume and
over 70% of subprime mortgage origination volume were securitized in 2006.
Further fueling this growth has been the development of another structured product,
the collateralized debt obligation, which purchases asset-backed securities, such as
mortgage-backed securities. Mortgage-backed COOs, nearly 40% of the entire
$500 billion COO market in 2006, have been one of the major purchasers of
mortgage-backed securities, in particular the lower rated tranches.
Recent Mortgage Market and Credit Market Events
Through most of the 1990s, annual mortgage origination stood at approximately $1
trillion. With the historically low interest rate environment of 2001-2003, mortgage
origination climbed to nearly $4 trillion in 2003. Infrastructure build-up and the entry
of many new participants into the mortgage industry matched this increase. With
the rise in interest rates in 2004, mortgage origination fell to just under $3 trillion.
With this decline, there was significant overcapacity in the mortgage industry.
Competition among mortgage originators and brokers intensified. At the same time,
investor demand for securitized products remained unabated. To satisfy this
demand and their excess capacity, some mortgage originators relaxed their
underwriting standards, lending to individuals with a lower standard of
documentation and selling mortgage products, which for some borrowers would
become unaffordable.
In the past few years, some of the most popular subprime products were adjustable
rate mortgages, like the 2/28: a hybrid mortgage with a fixed rate of interest, often
free of amortization payments, for the first two years, resetting at an adjustable rate
for the remaining 28 years. The fixed rate of interest in the first two-year period was
typically lower than the initial adjustable rate in the reset period. In the initial period
of these resets, rising housing prices enabled these borrowers to refinance their
original mortgages on terms more attractive and affordable. Eventually, due to both
an upwards adjustment in rates and commencement of principal amortization as
these mortgages began to reset in 2005, 2006, and 2007, many borrowers were
faced with payment shock. These resets, combined with a decline in housing price
appreciation, led to rising delinquencies and defaults among subprime borrowers,
first widely evidenced in autumn 2006. In 2007 this trend has continued and spread
to other participants in the mortgage industry: several mortgage originators and
brokers have exited the industry.
In turn, the mortgage-backed securities investor has felt the repercussions of the
weaknesses in the mortgage assets underlying some of these securitized products:
in autumn 2006 with rising defaults on the underlying assets, mortgage-backed
securities spreads began to widen. Over the past several months, a small number
of U.S. and foreign financial institutions and hedge funds that invested in mortgagebacked COOs and other mortgage-backed securities have reported large losses.
Some have suspended or limited redemptions, while others have closed or received
capital infusions. At the same time, credit rating agencies announced their intent to
downgrade some of these securitized products and revise their ratings
methodologies.
The uncertainty regarding both the future prospects of these mortgage-backed
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securities and the methodologies the credit rating agencies used to rate these
securities compelled investors to reassess the risk of these securities and
subsequently reassess price. Given the uncertainty of the underlying credit and
cash flows, few buyers were willing to risk their capital. Valuation became extremely
difficult as a no-bid environment seized certain segments of the market. This
reappraisal has spread across the credit market spectrum, first affecting residentialmortgage backed securities and then spreading to other asset classes and,
particularly, securitized products. Spreads have widened and a lack of liquidity has
affected these other asset classes. The financing of buy-out transactions has also
been challenged as higher risk premia resurfaced after a long period of favorable
conditions. Volatility has increased: from Treasury bills to the stock markets.
This reappraisal of risk is normal and typically follows periods of widely available
credit when markets have undervalued risk. As in other times of reappraisal,
investors, adverse to risk and protective of their capital, have fled to quality assets,
demanding and driving up the prices--and in turn driving down significantly the
rates--of Treasury bills. For example, during the past three weeks, the demand for
Treasury securities by global investors was so enormous that rates on the safest,
most liquid asset in the world dropped over 250 basis points--a decline of such
magnitude not seen in the past.
In early August, this uncertainty began to spread to the asset-backed commercial
paper market, typically a very liquid market. The uncertainty surrounding the health
of the assets underlying commercial paper (especially asset-backed commercial
paper, which represents approximately 55% of the commercial paper market)
compelled investors to shorten the terms to maturity that they were willing to
purchase and, in some cases, even to decline to buy such paper altogether.
Subsequently, banks became increasingly concerned about their own liquidity in
view of the possibility that they might have to provide backup for commercial paper
and take other assets onto their balance sheets. In response to such developments,
the Federal Reserve took several measures to increase liquidity and promote the
orderly functioning of financial markets. The Federal Reserve provided additional
reserves through open market operations in order to promote trading in the Federal
Funds market at rates close to the target rate. The Federal Reserve also lowered
the discount rate and changed Reserve Banks' usual practices to allow the
provision of term funding at the discount window. Such actions have helped
stabilize the markets.
The ultimate impact of these events on the economy has yet to play out. At the time
of its discount rate cut, the Federal Reserve noted that "[f]inancial market conditions
have deteriorated, and tighter credit conditions and increased uncertainty have the
potential to restrain economic growth going forward. In these Circumstances,
although recent data suggest that the economy has continued to expand at a
moderate pace ... the downside risks to growth have increased appreciably."
The Treasury Department respects the independent actions and leadership of the
Federal Reserve. Like the Federal Reserve, the Treasury Department shares the
perspective that recent market developments pose downside risks to economic
growth. However, the economy was in strong condition going into the recent period
of volatility, and while certain sectors like housing are undergoing a transition,
overall economic fundamentals remain solid. And while recent difficulties in the
subprime mortgage market are having and will continue to have a profound effect
for many families, the underlying strength of the economy should allow for
continued growth. Just last Friday, the President announced plans to help those
homeowners facing mortgage delinquencies and foreclosures and I will return to
these initiatives later.
Impact of Recent Market Developments on the Mortgage and Credit Markets
The financial services industry has enjoyed a period of extraordinary growth over
the last several decades. Key drivers to this growth have been successful
engagement with the trends of innovation, institutionalization, and
internationalization.
The complexity and innovation of financial products have brought great benefits to
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the mortgage and credit markets. In the mortgage industry, securitization allows
mortgage originators to undertake better risk management as they do not have to
hold loans on their balance sheets and instead have another source of capital
funding. Investors purchasing a securitized product have reduced transaction costs
and can purchase an array of products at targeted risk levels. Homebuyers have
expanded product offerings and more lenders competing for their business.
The recent market events have revealed potential complexities in the securitization
model. In some cases, risk evaluation of securitized products can be difficult. In
mortgage-backed securities and mortgage-backed collateralized debt obligations,
the performance of the underlying assets, particularly many of the innovative
subprime mortgage products, may not have been properly understood, or investors
may have failed to perform adequate due diligence prior to their investment
decision. At the same time, mortgage originators may have possessed less
incentive to perform appropriate levels of due diligence because of their distributing
their loans and the attendant risks through securitization.
Over the past few decades the capital markets have experienced growing
institutionalization. These institutions, such as pension funds, mutual funds, and
hedge funds, have provided the markets with liquidity, pricing efficiency, and risk
dispersion. These institutions have also spurred on financial product innovation and
complexity and possess the incentives, resources, and information to make prudent
decisions. At the same time, these institutions can be highly leveraged and employ
highly correlated strategies, potentially leading to more widespread market
disruptions.
Finally, the capital markets are becoming increasingly internationalized. Market
participants, sources of capital, product offerings, and trading strategies ignore
national borders. This has contributed to the significant global economic growth
over the past decade, especially in the emerging market economies. At the same
time, an event in one country's market may impact the rest of the world.
Treasury, Administration, and Federal Banking Regulator Actions
The Treasury Department closely monitors the global capital markets on a daily
basis. This is especially true given the events unfolding in the credit and mortgage
markets. Secretary Paulson has been communicating regularly with federal banking
regulators and the members of the President's Working Group on Financial
Markets, which includes Federal Reserve Chairman Bernanke, Securities and
Exchange Commission Chairman Cox, and Commodity Futures Trading
Commission Acting Chairman Lukken. This complements information gathering
from market partiCipants, finance ministers, and other participants in the global
marketplace. Enhanced communication is vitally important for understanding where
disruptions are occurring, and evaluating what actions can be considered.
Under Secretary Paulson's leadership, the President's Working Group on Financial
Markets will examine some of the broader market issues underlying the recent
market events, including the impact of securitization and the role of rating agencies
in the credit and mortgage markets. The Treasury Department will also be releasing
early next year a blueprint of structural reforms to make financial services industry
regulation more effective, taking into account consumer and investor protection and
the need to maintain U.S. capital markets competitiveness.
Most important and in addition to efforts to fully understand the current situation in
the financial markets, the Treasury Department, the Department of Housing and
Urban Development, and others in the Administration have carefully focused on
evaluating the challenges faced by individuals in the subprime market. Last week,
the President announced a series of market-based initiatives to help more
homeowners keep their homes. The Administration, led by the Treasury
Department and HUD, has undertaken several actions to provide assistance to
homeowners, including the Administration's continued pursuit of legislation
modernizing the Federal Housing Administration. Coordinating with HUD, the
Treasury Department also will reach out to a wide variety of entities, such as
NeighborWorks America, mortgage originators and servicers,. and. governmentsponsored entities, like Fannie Mae and Freddie Mac, to Identify struggling
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homeowners and expand their mortgage financing options. The President has also
asked Congress to temporarily change a provision of the federal tax code that
currently considers cancelled mortgage debt on a primary residence as taxable
income. The Treasury Department looks forward to working with Congress in the
days ahead.
In addition, the federal government has taken several actions to increase
transparency and enhance lending standards in the mortgage industry. For
example, in 2006, the banking regulators issued supervisory guidance addressing
nontraditional mortgages and in June 2007 finalized subprime lending guidance.
Separately, the Federal Reserve has undertaken a comprehensive review of the
disclosure system for mortgage loans under the Truth in Lending Act and is
currently addressing unfair and deceptive mortgage practices using its authority
under the Home Ownership and Equity Protection Act. Later this fall, HUD will
propose reforms to the Real Estate Settlement Procedures Act to promote
comparative shopping for the best loan terms, provide more transparent and
comprehensible disclosures, including fee disclosure, and limit settlement cost
increases.
Conclusion
The recent volatility in the credit and mortgage markets reflects a reassessment of
risk across a broad spectrum of securities. These events have occurred during a
time of solid domestic and global growth, helping to mute some of the impact of this
turbulence. I do want to caution policymakers that this process is far from over. It
will take more time to play out and certain segments of the capital markets are
stressed. Risk is being repriced. This repricing will lead to a reevaluation of assets.
This reevaluation will inevitably impact the balance sheets of financial market
participants. As investors review fundamental characteristics and confidence
returns, liquidity will improve. Yet, policymakers must remain vigilant as further
stress could create further challenges and continued volatility.
It is critical that policymakers understand these issues and their underlying causes
and continue to enhance the capital markets regulatory structure to adapt to market
developments. I appreciate having the opportunity to present the Treasury
Department's perspectives on these important issues.
-30-
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PRESS ROOM
September 5, 2007
HP-547
Treasury Assistant Secretary Swagel to Hold Monthly Economic Briefing
U.S. Treasury Assistant Secretary for Economic Policy Phillip Swagel will hold a
media briefing to review economic indicators from the last month as well as discuss
the state of the U.S. Economy. The event is open to credentialed media:
Who
U. S. Treasury Assistant Secretary Phillip Swage I
What
Economic Media Briefing
When
Friday, September 7,2007, 11 :30 a.m. (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.gQY with the following information:
full name, Social Security number and date of birth.
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10/1/2007
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September 6, 2007
HP-548
Testimony of Treasury Assistant Secretary for Economic
Policy Phillip Swagel
Before the House Committee on Financial Services
Subcommittees on Capital Markets, Insurance,
and Government Sponsored Enterprises; and
Housing and Community Opportunity
Washington, DC -- Good afternoon Chairman Kanjorski, Chairwoman Waters,
Ranking Member Pryce, Ranking Member Biggert, and Members of the
Subcommittees. The effects of Hurricanes Katrina, Rita, and Wilma are reminders
of the destructive forces of nature. Insurance coverage against natural catastrophes
cannot undo the toll of these events, but insurance can provide families and
businesses with the ability to recover from their financial losses. Government
actions that interfere with well-functioning private insurance markets can have
unintended consequences that make it more difficult and costly for families and
businesses to obtain coverage. Such actions can further detract from the long-term
financial soundness of our government.
The Administration seeks to ensure that there is a stable and well-developed
private market for natural hazard insurance and reinsurance. The Administration
strongly opposes H.R. 3355 because its provisions are at odds with this goal.
The Private Insurance Market Provides Coverage for Natural Hazards
Private insurance markets for natural hazard insurance are active and effective.
The experiences with catastrophes in 2004 and 2005 led insurers to increase their
estimates of probable losses from future hurricanes. As a result, insurers obtained
state regulatory approval and increased their premiums to cover future losses and
enhance solvency. Certain coastal areas have experienced increases in rates. This
can be difficult for homeowners, but this is fundamentally a reflection of the cost of
risk, not a defect of the market. While certain coastal areas have seen reduced
availability of private insurance as well, these shortages generally can be traced to
state regulatory actions.
H.R. 3355: The Homeowners' Defense Act of 2007
H.R. 3355, the Homeowners' Defense Act of 2007, is intended to provide support
and assistance to state-sponsored insurance and reinsurance programs. Statesponsored programs generally can be divided into two categories: (1) programs
such as assigned risk pools or residual market facilities that provide coverage
directly to homeowners who cannot obtain private coverage, and (2) state-run
reinsurance programs that provide coverage for private insurers and state-run
residual funds. Florida, for example, has both types of programs: the statesponsored Citizens Property Insurance Corporation sells wind-loss property
insurance and homeowners' insurance to homeowners, and the Hurricane
Catastrophe Fund, backed by the state's ability to cover future losses through
taxation, provides reinsurance to private insurers at below-market rates. Florida is
currently the only state with a reinsurance program.
H.R. 3355 provides two distinct mechanisms to help state-sponsored programs.
The first is the creation of a federally chartered organization, the National
Catastrophe Risk Consortium. The bill empowers the Consortium to issue risklinked securities in the capital markets and enter into reinsurance contracts. The
Consortium would facilitate the transfer of catastrophe risks insured by state-
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Page 2 of 3
sponsored programs to private reinsurance markets and capital markets. The
second proposed mechanism is the establishment of the National Homeowners'
Insurance Stabilization Program at the Treasury Department. Through the
Stabilization Program, the Treasury Department would provide medium- and longterm loans to state insurance programs at below-market rates.
The Consortium and the Stabilization Program Provide Subsidies
The functions of the Consortium could be accomplished without new legislation.
State-sponsored programs are free to pool risks today and they have access to
competitive, world-wide reinsurance and capital markets designed to pool risks
globally. This can be done today with traditional reinsurance arrangements or
through natural catastrophe bonds.
I understand that in designing the Consortium, the intent of the bill's sponsors may
not have been to create a new subsidy; nevertheless, as written, the Consortium
would provide one. The Consortium's federal charter would benefit state-sponsored
programs in that the reinsurance contracts and financial instruments entered into or
facilitated by the Consortium would be seen as carrying an implicit federal
government guarantee. This implicit guarantee would distort prices for these
instruments and result in subsidized coverage for the participating states. This
would impose a hidden cost to all taxpayers.
The Stabilization Program would provide subsidies in a more straightforward
manner. The Stabilization Program's title requires Treasury to extend 5- to 10-year
"liquidity loans" and longer-term, post-disaster "catastrophe loans" at below-market
rates to state-sponsored programs.
The ability to borrow at below-market rates would lower the cost of running a statesponsored program and reduce the need for states to purchase private reinsurance
and charge adequate rates in order to maintain capital reserves. This would lead
the state-sponsored programs to further subsidize rates.
Subsidizing Insurance Would Displace Private Markets, Promote Riskier
Behavior, Be Costly, and Be Unfair to Taxpayers
The subsidies provided by the Consortium and the Stabilization Program would
encourage the creation of new state-sponsored programs and the expansion of
existing state-sponsored programs to offer subsidized insurance and reinsurance.
These subsidies would result in the displacement of private coverage, lead to costly
inefficiencies, and retard innovation in the private sector. Lower insurance
premiums would reduce economic incentives to mitigate risks and encourage
individuals to take on inappropriate risks. This would also make taxpayers
nationwide subsidize insurance rates in high-risk areas.
Rather than relying on the federal government, state programs should purchase
private market reinsurance to cover their capital needs. Purchasing reinsurance
from private markets would allow the states to take full advantage of the world-wide
diversification of private markets and send the appropriate economic signals to
mitigate risk and to discourage individuals from taking on inappropriate risk.
State-sponsored programs that lower insurance prices below the actuarially fair
value encourage people to locate in high-risk areas. The experience of the National
Flood Insurance Program (NFIP) illustrates this concern. The NFIP provides
insurance to some older properties at below-market rates, including some
properties that have been damaged numerous times by floods. This encourages
families to continue to live in vulnerable areas without sufficient mitigation.
Subsidies for natural catastrophe insurance will encourage over-development in
hurricane- and earthquake-prone areas, putting more people in harm's way.
The bill could result in large liabilities for the federal government, which might be
expected to step in to support the operations of the ~ontracts entere~ .int~ or
facilitated by the Consortium. In addition, there is a risk that the Stabilization
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Page 3 of 3
.Program would not receive full repayment of the loans with interest. The
Stabilization Program reduces incentives for state reinsurance programs to be
sufficiently capitalized--state programs will hold less capital because they have the
federal line of credit. The burden of repaying those federal loans will fall on the
state's citizens. This tax burden may lead the state to seek deferrals or reductions
in its federal loans. With federal financing, it is more than likely that there will be
significant pressures to forgive outstanding debt in the case of a huge catastrophe.
The NFIP again illustrates this likelihood. In these cases, taxpayers nationwide
would subsidize insurance rates in high-risk areas, which would be both costly and
unfair.
Conclusion
Allowing private insurance and capital markets to fulfill their roles is the best way to
maintain the economic sustainability of communities at greatest risk of natural
catastrophes. Federal government interference in a functioning natural hazard
insurance market would crowd out an active and effective private market, increase
the incentive for people to locate in high-risk areas, result in potentially large federal
liabilities, and be unfair to taxpayers. For these reasons, the Administration
opposes H.R. 3355.
IW WW .treas.~ov/press/releases/hp548.f rtm
10/1/2007
Page 1 of 2
PRESS ROOM
September 7,2007
HP-549
Treasury Economic Update
"Hiring in August came in below where anyone would want it to be but a
broad view of the economy reveals many sources of strength. Th~
unemployment rate remains low, wages are rising, core inflation is contained
business investment has picked up, and strong global growth is boosting
,
U.S. exports. Recent developments in housing and financial markets will
affect economic growth, but the U.S. economy is fundamentally healthy."
Assistant Secretary Phillip Swagel, September 7, 2007
Job Growth: Employment edged down by 4,000 in August partly due to a large
drop in government jobs. Private-sector job growth continued for a 48 th straight
month, with 24,000 new jobs added in August. The United States has added 1.6
million jobs in the past 12 months and over 8.2 million since August 2003.
Employment increased in 48 states and the District of Columbia over the year
ending in July. (Last updated: September 7, 2007)
Low Unemployment: The unemployment rate of 4.6 percent is close to the lowest
reading in 6 years. Unemployment rates have decreased or held steady in 23 states
and the District of Columbia over the year ending in July. (Last updated: September
7,2007)
Economic Growth: Real GOP growth was 4.0 percent in the second quarter of
2007, supported by strong gains in business investment and exports. (Last
updated: August 30, 2007)
Household Spending: Consumer spending has been affected by increased energy
and food prices and weakness in the housing sector, but incomes are growing and
should continue to support household consumption. (Last updated: August 30,
2007)
Business Investment: Business spending on commercial structures and
equipment strengthened in the second quarter. Strong corporate profits and healthy
balance sheets bode well for continued investment growth. (Last updated: August
30,2007)
Exports: Strong global growth is boosting U.S. exports, which grew by 7.1 percent
over the past 4 quarters. (Last updated: August 30, 2007)
Inflation: Core inflation remains contained. The consumer price index excluding
food and energy rose 2.2 percent over the 12 months ending in July.
Tax Revenues: Tax receipts rose 11.8 percent in fiscal year 2006 (FY06) on top of
FY05's 14.6 percent increase. As a share of GOP, FY07 receipts are projected to
be above their 40-year average. (Last updated: July 13, 2007)
NwW.treas.g0v/press/releases/hp549Jr.m
1011/2007
Page 2 of 2
Real Wages Increased 1.7 percent Over the Past 12 Months (ending in July).
This translates into an additional $553 above inflation for the average full-time
production worker over the last year.
Pro~GrQwth. Policies. will .Enhance Long-Term U.$.I;COllomic$lreIl9th:
We are on track to balance the budget by 2012. The Mid-Session Review of the
FY 2008 Budget shows that we are on track to achieve a small surplus in 2012.
This year, the deficit is projected to be down to 1.5 percent of GOP. Much of the
improvement in the deficit reflects strong revenue growth, which in turn reflects the
continued strength of the U.S. economy. Looking ahead, higher spending on
entitlement programs dominates the future fiscal situation; we must squarely face
up to the challenge of reforming these programs.
www.1re~s....goY/~con_omic-PlalJ
www.treas.goy/press/releases/hp549.hcrn
10/1/2007
Page 1 of 1
September 10, 2007
HP-550
Treasury Secretary Paulson to Visit Paris and London Next Week
Treasury Secretary Henry M. Paulson, Jr. will travel to Europe next week to meet
with officials in Paris and London. Secretary Paulson will meet with French
President Nicolas Sarkozy, and senior French officials, including Finance Minister
Christine Lagarde, on Monday, September 17. He will then travel to London to meet
with Prime Minister Gordon Brown and Chancellor of the Exchequer Alistair Darling
that afternoon.
-30-
//www.treas·s;oy/press/releases/hp:;Slti-J.tm
10/1/2007
Page 1 of 1
/ a view or pnnt the /-,UI- content on thiS page, aown/oaa tl7e tree AaolJe(H) A crolJaliEJ HeaeJeri8•.
September 10, 2007
HP-551
Treasury, IRS Extend Documentation Deadline for 409A Compliance
Washington, DC -- The Treasury Department and the Internal Revenue Service
(IRS) announced today that taxpayers will have until December 31, 2008 to bring
documents into compliance with the final nonqualified deferred compensation
regulations under section 409A of the Internal Revenue Code.
In April, Treasury and IRS issued final 409A regulations, which provided guidance
regarding the requirements for deferral elections and payment timing under section
409A. Affected plans and arrangements were required to comply with the final
regulations by December 31 , 2007. IRS Notice 2007 -78 extends the document
compliance deadline for one year and provides additional limited transition relief,
but does not extend the January 1, 2008 effective date of the final regulations.
Notice 2007-78 also announces that Treasury and the IRS anticipate issuing
guidance containing a limited voluntary compliance program that will permit
corrections of certain unintentional operational violations of section 409A.
The final regulations were in response to legislation enacted by Congress in 2004
to address concerns involving reported abuses of nonqualified deferred
compensation plans.
###
REPORTS
•
Notice 2007 -78
ttp:llwww.Irea~.-goV/presslreleases/hp551.htm
10/112007
Part III - Administrative, Procedural, and Miscellaneous
2008 Transition Relief and Additional Guidance on the Application of § 409A to
Nonqualified Deferred Compensation Plans
Notice 2007-78
I. PURPOSE
This notice provides transition relief and additional guidance on the application of
§ 409A of the Internal Revenue Code to nonqualified deferred compensation plans.
This transition relief and additional guidance includes:
•
Extension to December 31, 2008, of the deadline to adopt documents that
comply with § 409A, subject to limited requirements regarding the timely written
designation of a time and form of payment.
•
Guidance and additional relief addressing certain issues raised by the application
to employment agreements and cashout features of § 409A and the final
regulations.
•
Announcement that the Treasury Department and the IRS anticipate issuing
guidance containing a limited voluntary compliance program that will permit
taxpayers to correct certain unintentional operational violations of § 409A and
thereby limit the amount of additional taxes due under § 409A.
•
Announcement that the relief from the application of § 409A(b) (which prohibits
the use of certain types of arrangements to pay for nonqualified deferred
compensation) provided in Notice 2006-33 with respect to certain "grace period
assets", which expires December 31,2007, is not being extended, so that after
December 31, 2007, taxpayers must comply with a reasonable, good faith
interpretation of § 409A(b) with respect to all assets in arrangements subject to
§ 409A(b).
II. BACKGROUND
Section 409A provides certain requirements applicable to nonqualified deferred
compensation plans. If a plan does not meet those requirements, participants in the
plan are required to immediately include amounts deferred under the plan in income
and pay additional taxes on such income.
The Treasury Department and the IRS issued final regulations under § 409A in
April 2007 (72 Fed. Reg. 19234 (April 17,2007)). The final regulations apply to taxable
years beginning on or after January 1, 2008. In general, the final regulations require
that the material terms of a nonqualified deferred compensation plan be in writing. See
§ 1.409A-1(c). Commentators stated that taxpayers anticipate difficulties in formally
amending existing plans to comply with the final regulations by the January 1, 2008
deadline. In addition, a number of commentators have raised questions regarding the
application of the final regulations to certain types of plans. This notice is issued in
response to these comments and questions.
III. 2008 TRANSITION RELIEF
A. In General
Section 409A generally applies to amounts deferred under a nonqualified
deferred compensation plan to the extent the amounts deferred under the plan were not
2
earned and vested before January 1, 2005. The final regulations are applicable for
taxable years beginning on or after January 1,2008, and a nonqualified deferrec
compensation plan must meet the requirements set forth in the final regulations as of
the first day of the taxable year. This section provides certain limited transition relief,
until December 31 , 2008, with respect to the plan document requirements. The
transition relief in this notice is not an extension of any of the transition relief provided in
Notice 2005-1,2005-1 CB 274, the preamble to the proposed regulations under § 409A,
70 Fed. Reg. 57930 (Oct. 4, 2005), or Notice 2006-79, 2006-43 IRS 763. Accordingly,
except where otherwise provided in the section of the preamble to the final regulations
entitled "Effect on Other Documents," taxpayers may not rely upon Notice 2005-1, the
proposed regulations, or a reasonable, good faith interpretation of the statute for taxable
years beginning on or after January 1,2008. In addition, after December 31,2007,
taxpayers may not change the time and form of payment except as permitted under the
final regulations and this notice, and no change in the time and form of payment after
December 31,2007, may result in an amount that was deferred as of December 31,
2007, qualifying for an exclusion from the definition of deferred compensation under the
final regulations. See § 1.409A-1 (a)(1).
B. Retroactive Amendment Period
The written provisions of a plan may fail to meet the requirements of § 409A, the
final regulations, and any other applicable guidance, because the plan includes a
provision that causes the plan to fail to satisfy the requirements of § 409A, or because
the plan fails to include a written provision that is required to satisfy the requirements of
§ 409A. (For purpose of this notice, § 409A, the final regulations, and any other
3
guidance applicable to a plan or a deferred amount is referred to collectively as "the
§ 409A guidance".) However, under the transition relief provided in this notice, except
as otherwise provided in section IIl.e of this notice addressing the designation of the
time and form of payment of deferred amounts, a nonqualified deferred compensation
plan will not violate the requirements of § 409A on or before December 31, 2008 merely
because the written provisions of the plan fail to meet the requirements of the § 409A
guidance, provided that the plan is operated in accordance with the requirements of the
§ 409A guidance and is amended on or before December 31,2008 to comply with the
§ 409A guidance retroactively to January 1, 2008.
A plan is treated as having been amended to comply with the § 409A guidance
retroactively to January 1, 2008, only if the written plan, as amended, contains all of the
written provisions required by the final regulations and accurately reflects the operation
of the plan on and after January 1, 2008, through the date of the amendment, including
the terms and conditions under which any initial deferral elections or subsequent
deferral elections were permitted, and how the operation of such plan met the
requirements of the § 409A guidance on and after January 1, 2008, through the date of
the amendment. For additional guidance related to the adoption of new plans, or the
adoption of an amendment to an existing plan increasing amounts deferred under the
plan, see § 1.409A-1 (c)(3)(i) and (vi).
C. Transition Relief - Designation of a Compliant Time and Form of Payment
This section provides guidelines under which, for periods on or before December
31,2008, a nonqualified deferred compensation plan will be treated as meeting the
requirement to timely designate a time and form of payment of an amount deferred
4
under the plan. Nothing in this section alters the requirement that the plan be operated
in accordance with the requirements of the § 409A guidance (including this notice) on
and after January 1,2008, and be amended on or before December 31, 2008, to
comply with § 409A and the applicable guidance retroactively to January 1, 2008. For
example, nothing in this notice alters the taxpayer's burden to demonstrate that any
initial deferral election or subsequent deferral election was made in a manner that
complied in operation with the § 409A guidance. In addition, nothing in this section
alters the restrictions on changes in the time and form of payment on or before
December 31, 2007 under the transition rules set forth in Notice 2005-1, the preamble
to the proposed regulations, Notice 2006-79, and the preamble to the final regulations.
1. How to Designate the Time and Form of Payment
Unless a later date is permitted under the final regulations, if there have been
deferrals of compensation under a plan as of January 1, 2008, but the deferred
compensation has not been paid, the plan will not comply with § 409A after December
31, 2007, unless the plan designates in writing before January 1,2008, a compliant time
and form of payment of such deferred compensation. Amounts deferred after
December 31, 2007, and before January 1,2009, will not comply with § 409A unless the
plan deSignates in writing a compliant time and form of payment of such amounts on or
before the applicable deadline under the final regulations (See § 1.409A-2(a) for the
rules governing initial deferral elections). For purposes of this section, a plan will
designate a compliant time and form of payment of an amount if the written plan terms,
disregarding any written plan provisions that do not comply with the § 409A guidance
(including this section), provide a compliant time and form of payment as described in
5
section III.C.2 of this notice. For example, if a plan provides for a payment upon a
separation from service, but permits the service provider to elect an immediate lump
sum payment subject to a forfeiture of a specified portion of the deferred amount (a
haircut provision), the haircut provision may be disregarded and the plan will be treated
as providing for a payment upon a separation from service, provided the haircut
provision is not utilized, and that the haircut provision is removed and the time and form
of payment is otherwise fully compliant with the regulations by December 31, 2008.
Also, for purposes of this section, a separate written document may be adopted that
provides a time and form of payment for amounts deferred under arrangements that are
specifically identified (for example, amounts deferred under the Company X Salary
Deferral Plan), or that provides a time and form of payment for amounts deferred under
arrangements that are not specifically identified (for example, amounts deferred under
any arrangement with the service recipient providing the service provider deferred
compensation subject to § 409A), or a combination (for example specifying a time and
form of payment for amounts deferred under the Company X Salary Deferral Plan, and
another time and form of payment for amounts deferred under all other arrangements
with the service recipient providing the service provider deferred compensation subject
to § 409A), provided that the deferred amounts to which each designated time and form
of payment applies are objectively determinable.
2. How to Designate a Compliant Time and Form of Payment
For purposes of this section III.C, a plan will only provide for a compliant time and
form of payment for a deferred amount if the plan provides for an objectively
determinable form of payment payable upon:
6
(1) A separation from service;
(2) A change in control event;
(3) An unforeseeable emergency;
(4) A specified date or fixed schedule of payments;
(5) Death; or
(6) Disability.
For example, a plan may provide that an amount deferred under the plan will be paid in
the form of a life annuity commencing on the later of the service provider's separation
from service or attaining age 65. However, a plan may not provide that an amount
deferred under the plan will be paid during the three years following the service
provider's separation from service (with the exact timing of the payment during the
three-year period determined at the discretion of the service recipient), because that
plan term would not provide a compliant time and form of payment. Similarly, a stock
option that is subject to § 409A could not provide the service provider the discretion to
exercise the stock option over more than one taxable year, because that plan term
would not provide a compliant time of payment. See § 1.409A-3(c) for rules on when a
plan may designate alternative specified dates or payment schedules with respect to
particular payment events.
If the objectively determinable form of payment is a series of installment
payments, as defined in § 1.409A-2(b)(2)(iii), the series of installment payments is
treated as a single payment unless the plan designates in writing on or before the
deadline by which the time and form of payment must be set forth in writing under
section III.C.1 of this notice (the section III.C.1 deadline), that the series of installment
7
payments is to be treated as a right to a series of separate payments. On and after the
section IILC.1 deadline, the treatment of a series of installment payments as a single
payment or as a series of separate payments may not be modified except as permitted
under the final regulations.
The plan may specify any combination of payment events that is permissible
under the final regulations, including that a deferred amount is to be paid upon the
earliest of these events or the latest of these events. However, if a payment event is
not specified in writing as a potential payment event on or before the section IILC.1
deadline, the addition of that payment event as a potential payment event is subject to
the anti-acceleration provisions under § 1 A09A-3U) and the subsequent deferral
election provisions under § 1 A09A-2(b). For example, a plan providing for the payment
of an amount upon the earliest of a service provider's death, disability, or separation
from service would provide for a compliant time and form of payment. However, the
modification of the provision after the section IILC.1 deadline to provide for the payment
of the amount upon the earliest of a service provider's death, disability, or separation
from service, or a change in control event, would be an impermissible acceleration of
the payment. Similarly, if a payment event is specified in writing on the section IILC.1
deadline as a potential payment event, the removal of the payment event after the
applicable deadline as a potential payment event is subject to the anti-acceleration
provisions under § 1 A09A-3U) and the subsequent deferral election provisions under
§ 1.409A-2(b).
3. Retroactive Adoption of Permissible Payment Event Definitions
8
For purposes of this section, separation from service means any event that may
qualify as a separation from service under § 1.409A-1 (h), change in control event
means any event that may qualify as a change in control event under § 1.409A-3(i)(5),
unforeseeable emergency means any event that may qualify as an unforeseeable
emergency under § 1.409A-3(i)(3), and disability means any event that may qualify as a
disability under § 1.409A-3(i)(4). For example, a plan providing only that a payment will
be made upon a separation from service (or similar term such as termination of
employment) may be treated as providing for a payment upon a separation from service
as defined in § 1.409A-1 (h). However, the plan must be operated in accordance with
the final regulations, so that a payment due upon the service provider's separation from
service could only be made upon an event that met the requirements of the definition of
separation from service set forth in §1.409A-1(h), and the plan must be amended by
December 31,2008 to accurately reflect the application of the provisions during 2008
and to fully comply with the requirements of the final regulations. Similarly, a plan
providing that a payment will be made upon the service provider's disability may be
treated as providing for a payment upon a disability as defined in § 1.409A-3(i)(4).
However, the plan must be operated in accordance with the final regulations, so that a
payment due upon the service provider's disability could only be made upon a disability
that met the requirements of the definition of disability set forth in § 1.409A-3(i)(4), and
the plan must be amended by December 31,2008 to accurately reflect the application
of the provision during 2008 and to fully comply with the requirements of the final
regulations.
9
For a deferred amount, a plan will not be treated as failing to meet the
requirements of § 409A and the final regulations merely because the plan fails to
specify in writing the definition of a payment event that is a separation from service, a
change in control event, disability, or unforeseeable emergency, applied under the plan
on or before December 31, 2008, provided that the definition applied is permissible
under the final regulations and the plan is amended on or before December 31, 2008, to
accurately reflect the application of the provision during 2008 and to fully comply with
the requirements of the final regulations. For example, § 1.409A-1 (h)(1 )(ii) provides that
whether a termination of employment that is a separation from service has occurred is
determined based on whether the facts and circumstances indicate that the employer
and employee reasonably anticipated that no further services would be performed after
a certain date or that the level of bona fide services the employee would perform after
such date (whether as an employee or as an independent contractor) would
permanently decrease to no more than 20 percent of the average level of bona fide
services performed (whether as an employee or an independent contractor) over the
immediately preceding 36-month period (or the full period of services to the employer if
the employee has been providing services to the employer for less than 36 months).
Section 1.409A-1(h)(1 )(ii) further provides that a plan may treat another level of
reasonably anticipated permanent reduction in the level of bona fide services as a
separation from service, provided that the level of reduction required must be
designated in writing as a specific percentage, and the reasonably anticipated reduced
level of bona fide services must be greater than 20% but less than 50% of the average
level of bona fide services provided in the immediately preceding 36 months. A plan is
10
not required to set forth in writing as of January 1, 2008 whether this alternative
definition has been adopted, and may provide that a payment is to be made upon a
separation from service of an employee without designating whether the required
reduction in the level of services is 20%, 50%, or some other reduction in the level of
services available under the final regulations. However, not later than December 31,
2008, the written terms of the plan, including the designation of the payment date, must
be both fully compliant with the final regulations and consistent with the application of
such designated payment event on and after January 1, 2008.
If a payment event that is a separation from service, a change in control event,
an unforeseeable emergency, or a disability, has been timely designated, a later
adoption of an alternative definition of the designated payment event, as applicable (or if
an alternative definition has been adopted, an adoption of the default definition or
another alternative definition), on or before December 31, 2008, will not be treated as a
change in the time or form of payment, regardless of whether the adoption of the
alternative definition would result in a payment being made at an earlier or later date
than under the default definition or the previously designated definition (for example, an
alternative definition is adopted during 2007, and a new alternative definition is adopted
during 2008). Solely for purposes of effecting the relief provided in this section III.C.3,
the availability of a payment to a service provider had the service recipient not been
permitted to adopt an alternative definition will not be treated as causing the amount to
be includible in income under § 451 or the doctrine of constructive receipt. However,
once an event has occurred in 2008 and been treated as a payment event (or as not
qualifying as a payment event), the service recipient and service provider may not
11
retroactively alter the definition of the payment event applicable to such deferred
amount.
For example, assume that as of December 31,2007, a plan provided for a
deferred amount to be paid as a lump sum payment on or before the 30 th day following
an employee's separation of service whose level of services for the past 3 years has
been 40 hours per week. Assume further that on April 1, 2008, the participating
employee (who is not a specified employee) permanently reduces his level of services
from 40 hours per week to 10 hours per week. If the amount is paid on or before
December 31, 2008, the payment would be consistent with the adoption of a definition
of separation from service that is consistent with the requirements of the final
regulations for a separation from service, which in this case would be a permanent
reduction in the level of services to a level at or below 25% of the level of services
previously provided. As of December 31, 2008, the plan would be required to be
amended retroactively with respect to that deferred amount to reflect a definition of
separation from service consistent with that treatment. In contrast, if the amount is not
paid on or before December 31, 2008, the failure to make a payment would be
consistent with a definition of separation from service that did not include a reduction in
the level of services to a level at or above 25% of the level of services previously
provided. As of December 31, 2008, the plan either would be required to apply the
default definition of separation from service in the final regulations or would be required
to be amended retroactively to reflect a definition of separation from service consistent
with that treatment, and any change in the definition of separation from service with
respect to such deferred amount after the participating employee's permanent reduction
12
in the level of services on April 1, 2008, would be subject to the anti-acceleration
provisions of § 1.409A-3U) and the subsequent deferral election provisions of § 1.409A2(b).
13
4. How to Designate a Specified Payment Date or a Fixed Schedule of Payments
For purposes of section III,C.1, the designation of a specified payment date or a
fixed schedule of payments, including the use of a specified payment date or a fixed
schedule of payments after a permissible payment event or the lapse of a substantial
risk of forfeiture, must meet the requirements of § 1.409A-3(i)(1). Accordingly, the plan
must meet the requirements of § 1.409A-3(i)(1) by December 31, 2007, for any amount
that will be paid in accordance with:
(1) § 1.409A-3(i)(1 )(i) (specified time or fixed schedule in general);
(2) § 1.409A-3(i)(1 )(ii) (payment schedules with formula and fixed limitations);
(3) § 1.409A-3(i)(1 )(iii) (payment schedules determined by timing of payments
received by the service recipient);
(4) § 1.409A-3(i)(1 )(iv) (reimbursement or in-kind benefit plans); and
(5) § 1.409A-3(i)(1 )(v) (tax gross-up payments)
However, a payment schedule that would otherwise qualify as a fixed schedule of
payments under § 1.409A-3(i)(1 )(v) (tax gross-up payments), except that the
arrangement does not require that the payment be made by the end of the service
provider's taxable year next following the service provider's taxable year in which the
service provider remits the related taxes, will be treated as designating a fixed schedule
of payments if the plan is amended on or before December 31, 2008 to provide for such
a requirement, and the plan is operated in compliance with such requirement for periods
after December 31,2007 through the date of the amendment.
In addition, for a specified payment date or a fixed schedule of payments, the
addition or deletion of a designated payment provision that meets the requirements of
14
§ 1.409A-3(b) or § 1.409A-3(i)(1 )(i), as applicable, and does not affect the taxable year
in which the payment will be made, is not treated as a change in the time and form of
payment if the addition or deletion is made on or before December 31, 2008. For
example, if a plan provides for an immediate lump sum payment upon death, the
addition of a plan provision on or before December 31,2008, providing that the payment
will be made on or before the end of the service provider's taxable year in which the
event occurs will not be treated as a change in the time and form of payment. The
addition, deletion or modification of a provision that provides that a payment (including a
payment that is part of a schedule) is to be made during a designated period objectively
determinable and nondiscretionary at the time the payment event occurs if the
designated period is not more than 90 days and the service provider does not have a
right to designate the taxable year of the payment (other than an election that complies
with the subsequent deferral election rules of § 1.409A-2(b)), also will not be treated as
a change in the time and form of payment. For example, if a plan provides that a
payment will be made in a lump sum payment upon separation from service, a
modification of the plan on or before December 31, 2008, to provide that the payment
will be made on or before the 90 th day following the separation from service, determined
at the sale discretion of the service recipient, is not treated as a change in the time and
form of payment. However, plan provisions designating the time and form of payment
must be fully compliant with the final regulations as of December 31, 2008.
15
5. Retroactive Amendments and the Six-Month Delay on Payments to Specified
Employees
Section 1.409A-3(i)(2) provides that in the case of any service provider who is a
specified employee (as defined in § 1.409A-1 (i)) as of the date of a separation from
service, the requirements of § 1.409A-1 (a)(1) permitting a payment upon a separation
from service are satisfied only if payments may not be made before the date that is six
months after the date of separation from service (or, if earlier than the end of the sixmonth period, the date of death of the specified employee). Section 1.409A-1 (c)(3)(v)
generally requires that the delay requirement be a written provision of any plan
providing for a payment upon separation from service to a specified employee.
Provided that such payments are delayed in accordance with § 1.409A-1 (a)(1), a plan
will not be treated as failing to meet the requirements of § 1.409A-1 (c)(3)(v) provided
that the plan is amended on or before December 31,2008, retroactively to January 1,
2008, to contain the requirement, and the written plan provision accurately reflects the
operation of the plan through the date of the amendment. Taxpayers must demonstrate
that the required delay was applied to affected payments. Accordingly, if the service
recipient has used any provisions other than the default provisions of § 1.409A-1 (i) to
identify specified employees, taxpayers must demonstrate the method by which the
service recipient identified any specified employees, and that such method of identifying
specified employees was applied consistently to all plans and all service providers.
16
IV. APPLICATION OF FINAL REGULATIONS AND ADDITIONAL RELIEF
A. Employment Agreements - Good Reason Provisions
Whether a separation from service is involuntary generally is important for the
application of the exception from the definition of deferred compensation contained in
§ 1.409A-1 (b )(4) (the short-term deferral rule). Under the short-term deferral rule, an
arrangement that provides for a payment within certain limited periods following the
lapse of a substantial risk of forfeiture may not constitute deferred compensation.
Section 1.409A-1 (d) provides that if a service provider's entitlement to an amount is
conditioned on the occurrence of the service provider's involuntary separation from
service without cause, the right is subject to a substantial risk of forfeiture if the
possibility of forfeiture is sUbstantial.
Whether a separation from service is involuntary is also important for the
application of the exclusion for certain separation pay arrangements under § 1.409A1(b )(9). That provision excludes from deferred compensation a right to certain amounts
that are payable within a limited period of time following an involuntary separation from
service, and is available only if the amounts are payable upon an involuntary separation
from service (often referred to as the "two-year, two-time rule").
Section 1.409A-1 (n) provides a definition of an involuntary separation from
service. Section 1.409A-1 (n)(2)(i) provides that as a general rule a service provider's
voluntary separation from service will be treated as an involuntary separation from
service if the separation from service occurs under certain limited bona fide conditions,
where the avoidance of the requirements of § 409A is not a purpose of the inclusion of
these conditions in the plan or of the actions by the service recipient in connection with
17
the satisfaction of these conditions, and a voluntary separation from service under such
conditions effectively constitutes an involuntary separation from service. Section
1.409A-1 (n)(2)(ii) contains a safe harbor setting forth a set of conditions often referred
to as the "safe harbor good reason conditions". The safe harbor states that if a plan
provides that a voluntary separation from service will be treated as an involuntary
separation from service if the separation from service occurs under certain express
conditions, a separation from service satisfying the conditions set forth in the plan will
be treated as an involuntary separation from service if the necessary conditions (or set
of conditions) satisfy the requirements of the regulations.
Commentators have stated that to ensure qualification for one or both of the
short-term deferral rule or the two-year, two-time rule, taxpayers have considered
modifying employment arrangements that currently provide for a payment upon a
voluntary separation from service under certain conditions (often referred to as "good
reason conditions"), including modifying the good reason conditions under which an
employee could voluntarily terminate employment and receive payments. Some
taxpayers want to replace the existing good reason conditions in their agreements with
a set of safe harbor good reason conditions qualifying under § 1.409A-1 (n)(2)(ii). Other
taxpayers want to add only some of the safe harbor good reason conditions (for
example, adding a requirement that the employee provide notice to the employer that
the good reason condition has been satisfied). Other taxpayers have proposed
removing a condition from an existing agreement, because the condition is not a
condition found in the good reason safe harbor.
18
The modification of these arrangements raises issues regarding whether a
substantial risk of forfeiture condition has been added or modified in a manner that
would not be respected under Notice 2005-1, Q&A-10, proposed § 1.409A-1(d) or final
§ 1.409A-1 (d). Notice 2005-1, Q&A-10 provides that any addition of a substantial risk of
forfeiture after the beginning of the service period to which the compensation relates, or
any extension of a period during which compensation is subject to a substantial risk of
forfeiture, in either case whether elected by the service provider, service recipient or
other person (or by agreement of two or more of such persons), is disregarded for
purposes of determining whether such compensation is subject to a substantial risk of
forfeiture. See also proposed and final § 1.409A-1 (d).
The Treasury Department and the IRS understand that taxpayers may desire to
conform existing good reason conditions to the requirements of the definition of an
involuntary separation from service under the regulations. Accordingly, to the extent
that a right to a payment subject to an existing good reason condition is subject to a
substantial risk of forfeiture, the modification of the good reason condition on or before
December 31, 2007 to conform to some or all of the conditions set forth in § 1.409A1(n)(2) will not be treated as an extension of the substantial risk of forfeiture. However,
if the right to a payment subject to existing good reason conditions is not subject to a
SUbstantial risk of forfeiture, the modification of such condition to include one or more of
the conditions set forth in § 1.409A-1 (n)(2)(ii), or to remove one or more of the existing
good reason conditions, will not cause the amount to be treated as subject to a
SUbstantial risk of forfeiture.
19
As provided by Notice 2006-79, for amounts subject to § 409A, a plan may
provide, or be amended to provide, for new payment elections on or before December
31, 2007, with respect to both the time and form of payment of such amounts and the
election or amendment will not be treated as a change in the time or form of payment
under § 409A(a)(4) or an acceleration of a payment under § 409A(a)(3), provided that
the plan is so amended and elections are made on or before December 31,2007. With
respect to an election or amendment to change a time and form of payment made on or
after January 1, 2007, and on or before December 31,2007, the election or amendment
may apply only to amounts that would not otherwise be payable in 2007 and may not
cause an amount to be paid in 2007 that would not otherwise be payable in 2007. An
election of a new time and form of payment under these transition rules may cause an
amount to be excluded from coverage under § 409A. In the case of a right to a
payment of deferred compensation, the modification of the time and form of the
payment such that the payment will only be made upon an involuntary separation from
service may result in the exclusion of such right, or a portion of such right, from the
definition of deferred compensation under § 1.409A-1 (b)(9) (the two-year, two-time
rule), to the extent the amended arrangement otherwise met the requirements for the
exclusion. In modifying the arrangement, however, taxpayers should ensure that the
amendment does not affect amounts that otherwise would be payable in 2007 (for
example, because a separation from service occurred during 2007).
B. Employment Agreements - Application of Substitution Rule
Commentators have asked about the conditions under which rights to deferred
compensation under an extension of an employment agreement, or a negotiation of a
20
new employment agreement, will constitute a new legally binding right to compensation
rather than a substitution for rights to deferred compensation contained under a
previous agreement. Until further guidance, if a right to deferred compensation payable
only upon an involuntary separation from service (as defined under § 1.409A-1 (n)) at all
times under an employment agreement would automatically be forfeited at the end of
the term of the employment agreement, then the grant of a right to deferred
compensation in an extended, renewed or renegotiated employment agreement will not
be treated as a substitute for the right that was forfeited at the termination of the prior
employment agreement. For example, if an employment agreement at all times
provides that an employee has a right to deferred compensation if the employee is
involuntarily separated from service without cause during the three-year term of the
employment agreement, but that deferred compensation will become payable at the end
of the original three-year term of the employment agreement if the employee is available
to perform services and the employer does not extend, renew, or replace the
employment agreement, and at the end of the three-year term of the employment
agreement the employee has not been involuntarily separated, the right to deferred
compensation in a renewed, extended or renegotiated employment agreement may be
viewed as a substitute for the right to deferred compensation in the original agreement.
However, if the employment agreement had not provided that any deferred
compensation would become payable at the end of the original three-year term of the
employment agreement if the employee had been available to perform services and the
employer had not extended, renewed or replaced the employment agreement, and the
employee had not been involuntarily separated during the three-year term of the
21
employment agreement, then a right to deferred compensation under an employment
agreement covering services after the end of the original three-year term would not be
treated as a substitute for the right to the deferred compensation upon an involuntary
separation from service during the original three-year term.
C. Predetermined Cashouts
Section 1.409A-2(b)(2)(iii) provides a limited ability to provide for the cashout of
all remaining installments under an installment payment provision when the present
value of the remaining payments falls below the predetermined threshold. Section
1.409A-2(b)(2)(ii) provides a similar rule with respect to annuity payments.
Commentators asked whether a plan may provide for a lump sum payment at the
payment date only if the present value of the payments at that date is below a
predetermined amount, but continue to make any properly elected installment payments
or annuity payments if the present value of the payments at the original payment date is
above the predetermined amount, even if the present value of the remaining payments
falls below the predetermined amount at a future date. In other words, the cashout
threshold would apply only at the time of the original payment date, and not at any
future date.
Section 1.409A-2(b)(2)(ii) and (iii) does not provide for this type of payment.
However, commentators have asked whether such a provision would be treated as an
objective, nondiscretionary payment formula for purposes of § 1.409A-3(b). Section
1.409A-3(b) provides that a plan may provide that a payment upon a qualifying payment
event is to be made in accordance with a schedule that is objectively determinable and
nondiscretionary based on the date the event occurs and that would qualify as a fixed
22
schedule under § 1.409A-2(i)(1) if the payment event were instead a fixed date,
provided that the schedule must be fixed at the time the permissible payment event is
designated.
The use of this type of a cashout provision may, in certain circumstances, be
subject to manipulation, so that this type of provision is not an objectively determinable
and nondiscretionary schedule of payments. However, until further guidance, a
taxpayer may treat such a provision as part of an objectively determinable and
nondiscretionary payment schedule if the payment schedule would otherwise meet the
requirements of the regulations, including that the cashout threshhold be fixed at the
time the permissible payment event is designated, and if the taxpayer can demonstrate
that the provision operated in an objective, nondiscretionary manner and did not operate
so as to provide either the service provider or the service recipient with rights having
substantially the effect of a right to a late election as to the time and form of payment.
Any subsequent change in a cashout threshold applicable to a deferred amount is
subject to the rules governing subsequent deferral elections and the acceleration of
payments.
If such a provision is used in conjunction with an installment payment or annuity,
the payment schedule generally would not meet the definition of an installment payment
or annuity under § 1.409A-2(b)(2)(ii) and (iii), because the payment schedule would not
necessarily provide for substantially equal payments over the service provider's lifetime
or other predetermined period of time, but instead a lump sum payment if the threshold
were not met and periodic payments if the threshold were met. However, until further
guidance, the classification of the resulting schedule of payments if the cashout
23
threshold is exceeded at the applicable payment date, whether or not such schedule of
payments is intended to be an installment payment or life annuity, is determined as if
the lump sum payment cashout threshold were not available. Accordingly, the resulting
schedule of payments if the threshold is met must otherwise meet the requirements of
§ 1.409A-3, and if the resulting schedule of payments qualifies as a life annuity under
§ 1.409A-2(b)(ii), or as a series of installment payments treated as a single payment
under § 1.409A-2(b)(2)(iii), the schedule of payments will be treated as a single
payment for purposes of the subsequent deferral rules.
V. ANTICIPATED LIMITED VOLUNTARY COMPLIANCE PROGRAM
The Treasury Department and the IRS anticipate issuing guidance in the near
future establishing a limited voluntary compliance program that will apply to certain
unintentional operational failures to comply with § 409A. The Treasury Department and
the IRS anticipate that such guidance will provide methods by which certain
unintentional operational failures may be corrected in the same taxable year in which
the operational failure occurred to avoid application of § 409A, and other methods by
which certain unintentional operational failures may result in only limited amounts
becoming includible in income and subject to additional taxes under § 409A.
VI. APPLICATION OF § 409A(b) (RESTRICTIONS ON CERTAIN TRUSTS AND
OTHER ARRANGEMENTS)
Section 409A(b)( 1) and (2) generally prohibits the use of offshore trusts in
connection with amounts payable under a nonqualified deferred compensation plan,
and also prohibits the use of restrictions on assets to protect the payment of benefits
under a nonqualified deferred compensation plan in connection with a change in the
24
service recipient's financial health. Section 409A(b)(3) generally also prohibits the
transfer of assets to a trust or other arrangement for purposes of paying nonqualified
deferred compensation to an applicable covered employee during, or the use of
restrictions on assets to protect the payment of benefits under a nonqualified deferred
compensation plan in connection with, a restricted period with respect to a singleemployer defined benefit plan. For this purpose, a restricted period with respect to a
single-employer defined benefit plan generally means any period during which the plan
is in at-risk status (as defined in § 430(i), which was added by the Pension Protection
Act of 2006), any period the plan sponsor is a debtor in a bankruptcy filing, and the 12month period beginning on the date which is 6 months before the termination of the
defined benefit plan if, as of the termination date, the plan is underfunded. Section
409A(b} provides generally that if these requirements are not met, the assets are
treated for purposes of § 83 as property transferred in connection with the performance
of services whether or not such assets are available to satisfy claims of general
creditors, and that the taxpayer is liable for the additional § 409A taxes on the resulting
income inclusion.
Notice 2006-33 provides that until further guidance is issued, taxpayers may rely
upon a reasonable, good faith interpretation of § 409A(b) to determine whether the use
of a trust or other arrangement causes an amount to be included in income under
§ 409A(b). The Treasury Department and the IRS intend to issue further guidance
regarding the application of § 409A(b}. Until such guidance is issued, taxpayers may
continue to rely upon a reasonable, good faith interpretation of § 409A(b) to determine
whether the use of a trust or other arrangement causes an amount to be included in
25
income under § 409A(b), including the application of § 409A(b)(3) to transfers of assets
during restricted periods.
Notice 2006-33 also provides that with respect to assets set aside, transferred or
restricted on or before March 21, 2006 so as to be subject to inclusion under
§ 409A(b)(1) or 409A(b)(2) (grace period assets), taxpayers will be treated as not
having triggered the inclusion or additional tax provisions of § 409A(b) if the
nonqualified deferred compensation plan comes into conformity on or before December
31,2007, with the requirements of § 409A(b) and any guidance issued before such
date. Nothing in this section curtails this relief; however, this relief is not extended
beyond December 31,2007. Accordingly, for grace period assets, a taxpayer will
trigger the income inclusion and additional tax provisions of § 409A(b) if the nonqualified
deferred compensation plan is not in conformity with a reasonable, good faith
interpretation of § 409A(b) on or after December 31, 2007. If with respect to grace
period assets the nonqualified deferred compensation plan is not in conformity with a
reasonable, good faith interpretation of § 409A(b) on December 31,2007, the taxpayer
will trigger the income inclusion and additional tax provisions of § 409A(b) on January 1,
2008.
VII. DRAFTING INFORMATION
The principal author of this notice is Stephen Tackney of the Office of Division
Counsel/Associate Chief Counsel (Tax Exempt and Government Entities). However,
other personnel from the Treasury Department and the IRS participated in its
development. For further information regarding this notice, contact Stephen Tackney at
(202) 927-9639 (not a toll-free call).
26
Page 1 of 5
September 11, 2007
2007-9-11-11-59-5-17643
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 $68,093 million as of the end of that week, compared to $67,376 million as of the end of the
prior week.
I. Official reserve assets and other foreign currency assets (approximate market value, in US millions)
I
\I
I
IA. Official reserve assets (in US millions unless otherwise specified)
IISeptember 7, 2007
IIEuro
IIYen
IITotal
1(1) Foreign currency reserves (in convertible foreign currencies)
\I
II
11 68 ,093
I(a) Securities
11 13,398
1111 ,213
11 24 ,611
lof which: issuer headquartered in reporting country but located abroad
II
II
11
I(b) total currency and deposits with:
II
I(i) other national central banks, SIS and IMF
II
13,351
5,521
Iii) banks headquartered in the reporting country
11 18 ,872
"
11 0
lof which: located abroad
11
I(iii) banks headquartered outside the reporting country
11
lof which: located in the reporting country
0
0
110
1(2) IMF reserve position
11 4 ,396
[(3) SDRs
11 9,173
1(4) gold (including gold deposits and, if appropriate, gold swapped)
1111 ,041
t-volume in millions of fine troy ounces
11 261 .499
1(5) other reserve assets (specify)
0
0
t-financial derivatives
t-Ioans to nonbank nonresidents
tother
@. Other foreign currency assets (specify)
--securities not included in official reserve assets
--deposits not included in official reserve assets
--loans not included in official reserve assets
--finanCial derivatives not included in official reserve assets
--gold not included in official reserve assets
[other
II
II
II. Predetermined short-term net drains on foreign currency assets (nominal value)
//wWw.treas ..gOV/press/releases/200791l1159517643.htm
10/1/2007
Page 2 of 5
[
[
II
"
II
[
I
I
II
IIMaturity breakdown (residual maturity)
"
Total
Up to 1 month
"
More than 3
months and up to
1 year
More than 1 and
up to 3 months
11. Foreign currency loans, securities, and deposits
1--outfIOWS (-)
Ilprincipal
I
IIlnterest
I--inflows (+)
"Principal
I
"Interest
2. Aggregate short and long positions in forwards and
futures in foreign currencies vis-a-vis the domestic
currency (including the forward leg of currency swaps)
I
(a) Short positions ( - )
(b) Long positions (+)
3. Other (specify)
--outflows related to repos (-)
--inflows related to reverse repos (+)
--trade credit (-)
--trade credit (+)
--other accounts payable (-)
--other accounts receivable (+)
III. Contingent short-term net drains on foreign currency assets (nominal value)
I
II
!
II
I
I
II
I Maturity breakdown (residual maturity, where
applicable)
Up to 1 month
Total
"
"
More than 3
months and up to
1 year
More than 1 and
up to 3 months
[1. Contingent liabilities in foreign currency
(a) Collateral guarantees on debt falling due within 1
year
[b) Other contingent liabilities
2. Foreign currency securities issued with embedded
options (putlable bonds)
3. Undrawn, unconditional credit lines provided by:
I
(a) other national monetary authorities, 81S, IMF, and
other international organizations
[other national monetary authorities (+)
EBIS (+)
EiMF (+)
(b) with banks and other financial institutions
headquartered in the reporting country (+)
r
tp:llwWw.treas.gov/press/releasesI2007gJ11159517643.htm
I
II
II
II
II
II
II
10/1/2007
Page 3 of 5
(c) with banks and other financial institutions
headquartered outside the reporting country (+)
I
/I
[Undrawn, unconditional credit lines provided to:
(a) other national monetary authorities, BIS, IMF, and
other international organizations
I--other national monetary authorities (-)
l
I
I
I--BIS (-)
I--IMF (-)
(b) banks and other financial institutions headquartered
in reporting country (- )
I
(c) banks and other financial institutions headquartered
outside the reporting country ( - )
II
4. Aggregate short and long positions of options in
foreign currencies vis-a-vis the domestic currency
I(a) Short positions
l(i) Bought puts
IOi) Written calls
/I
I
I
/I
I
I
II
I
I(b) Long positions
10) Bought calls
[(ii) Written puts
I
IPRO MEMORIA: In-the-money options 11
1(1) At current exchange rate
"/I
I(a) Short position
I(b) Long position
1(2) + 5 % (depreciation of 5%)
I(a) Short position
I(b) Long position
I
1(3) - S % (appreciation of 5%)
I(a) Short position
I(b) Long position
1(4) +10 % (depreciation of 10%)
I(a) Short position
I(b) Long position
liS) - 10 % (appreciation of 10%)
[(a) Short position
lib) Long position
li6) Other (specify)
lia) Short position
I
/I
[b) Long position
II
II
IV. Memo items
[
I
I
(a) short-term domestic currency debt indexed to the exchange rate
I
I
(b) financial instruments denominated in foreign currency and settled by other means (e.g., in domestic
I
I
(1) To be reported with standard periodicity and timeliness:
)'/1
.' WWw.treasgov/press/releases/200791l1159517643.htm
I
10/1/2007
Page 4 of 5
~rrency)
II
I
"
I
tnondeliverable forwards
I
[ --short positions
[--long positions
I
[other instruments
I
lie) pledged assets
I
I
[included in reserve assets
[included in other foreign currency assets
[@. securities lent and on repo
Elent or rep oed and included in Section I
[-lent or repoed but not included in Section I
I--borrowed or acquired and included in Section I
[-borrowed or acquired but not included in Section I
I(e) financial derivative assets (net, marked to market)
F-forwards
I--futures
[--swaps
I--options
I--other
(f) derivatives (forward, futures, or options contracts) that have a residual maturity greater than one
year, which are subject to margin calls.
--aggregate short and long positions in forwards and futures in foreign currencies vis-a.-vis the domestic
currency (including the forward leg of currency swaps)
I(a) short positions ( - )
I(b) long positions (+)
I--aggregate short and long positions of options in foreign currencies vis-a.-vis the domestic currency
I(a) short positions
I(i) bought puts
I(ii) written calis
I(b) long positions
I(i) bought calls
I(ii) written puts
1(2) To be disclosed less frequently:
I(a) currency composition of reserves (by groups of currencies)
//68,093
I--currencies in SDR basket
11 68 ,093
1--currenCies not in SDR basket
[-by individual currencies (optional)
"1/
I
1/
I
Notes:
1/ Includes holdings of the Treasury's Exchange Stabilization Fund (ESF) and the Federal Reserve's System Open Market
Account (SOMA), valued at current market exchange rates. Foreign currency holdings listed as securities reflect markedto-market values, and deposits reflect carrying values.
2/ The items, "2. IMF Reserve Position" and "3. Special Drawing Rights (SDRs)," are based on data provided by the IMF
and are valued in dollar terms at the official SDRjdollar 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
P:11w Ww.treas.gov/press/releases/200791tl159517643.htm
10/1/2007
Page 5 of 5
end.
3/ Gold stock is valued monthly at $42.2222 per fine troy ounce.
wwW.treas ..gov/press/releases/20079ill1595l7643.htm
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September 11 , 2007
HP-552
Treasury Secretary Paulson to Visit Chicago This Week
Treasury Secretary Henry M. Paulson, Jr. will travel to Chicago Friday to discuss
the importance of trade and investment for U.S. Job creation and economic growth.
The Secretary also will announce $27.3 million in awards to organizations investing
in rural and urban low-income communities in 30 states and the District of
Columbia.
The Secretary will tour ATLAS Material Testing Technology, a local business that
exports to several countries around the world including Korea, Colombia, Panama,
and Peru. Secretary Paulson will note the importance of passing the four pending
Free Trade Agreements with those countries for U.S. businesses like ATLAS.
Secretary Paulson will join Community Development Financial Institutions Fund
Director Kimberly Reed to announce the national 2007 CDFI Fund Program
Awards. The announcement will take place at the Neighborhood Housing Services
of Chicago, a counseling agency that helps area homeowners avoid foreclosure.
President Bush recently tasked Secretary Paulson and HUD Secretary Alphonso
Jackson to reach out to groups that offer foreclosure counseling and refinancing for
homeowners with the goal of expanding mortgage financing options, identifying
homeowners before they face hardships, helping them understand their financing
options, and assisting them in finding a mortgage product that works for them.
The following events are open to media:
What
Community Development Financial Institutions Program Award Announcement
When
10 a.m. COT
Where
Neighborhood Housing Services of Chicago
1279 North Milwaukee, 5th Floor
Chicago, III.
What
Tour and Remarks at ATLAS Material Testing Technology
When
12:30 p.m. COT
Where
4114 North Ravenswood Avenue
Chicago, III.
wwW.treas.&Qv/press/releases/hp552.htm
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September 13, 2007
HP-553
Statement by Secretary Paulson
on the
Volcker Report of the World Bank's Department of Institutional Integrity
Washington--Treasury Secretary Henry M. Paulson, Jr. issued the following
statement today on the Independent Review Panel's report of the World Bank's
Department of Institutional Integrity (INT), chaired by Paul Volcker.
"I join World Bank President Zoellick in welcoming this report and would like to
thank Chairman Volcker and his panel for their invaluable contribution to this
essential work. The panel's report makes clear that fighting corruption is critical to
fulfilling the Bank's core mission of economic development and poverty reduction
around the world, that the INT must continue to playa central role in this effort and
that more work is needed to integrate its work into the Bank's operations effectively
and consistently. I look forward to working closely with other shareholders and
President Zoellick as he carries this vital work forward."
IwWw.treas.~v/press/releases/hp553.tttrn
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September 14, 2007
HP-554
Update: Treasury Secretary Paulson to Visit Paris and London Next Week
Treasury Secretary Henry M. Paulson, Jr. will travel to Europe next week to meet
with officials in Paris and London. Secretary Paulson will meet with French
President Nicolas Sarkozy, and senior French officials, including Finance Minister
Christine Lagarde on Monday, September 17. He will then travel to London to meet
with Prime Minister Gordon Brown and Chancellor of the Exchequer Alistair Darling
that afternoon.
The following events are open to credentialed media:
Who:
Secretary Henry M. Paulson, Jr.
What:
Press Availability with French Finance Minister Christine Lagarde
Where: Ministry of Finance
139, rue de Bercy
Paris, France
When:
Monday, September 17, 8:50 a.m. CEST
Who:
Secretary Henry M. Paulson, Jr.
What:
Press Availability with Chancellor of the Exchequer Alistair Darling
Where:
11 Downing Street
London, England
When:
Monday, September 17, 5:45 p.m. BST
/www.treas.t;ov/press/releases/hp554.Ftm
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September 14, 2007
HP-555
u.s. Treasury Secretary Announces $27.3 Million for
Organizations Serving Economically Distressed BR>Organizations Serving
Economically Distressed Communities
Chicago - U.S. Treasury Secretary Henry M. Paulson, Jr. joined the Treasury's
Director of the Community Development Financial Institutions Fund, Kimberly A.
Reed, in Chicago today to announce more than $27 million in awards to 68
organizations serving economically distressed communities in 30 states and the
District of Columbia. The awards were made under the 2007 round of the CDFI
Fund's Community Development Financial Institutions Program.
"The vision of the CDFI Fund is to help give all Americans access to affordable
credit, capital, and financial services," said Secretary Paulson. "The President
asked Treasury to focus on helping struggling homeowners keep their primary
residence, and we will rely on the help of CDFI organizations like Neighborhood
Housing Services of Chicago to reach borrowers who are likely to have trouble, and
work with them to help them keep their homes."
"Many of the organizations we are awarding today are on the front lines of creating
real solutions for those facing foreclosure in our nation's rural and urban lowincome communities," said CDFI Fund Director Reed. "The awards we are making
today will provide these community-based lenders with the resources to do even
more for their communities --such as more foreclosure prevention counseling and
capital for market-rate loans to refinance mortgages and keep families in their
homes."
Treasury chose Chicago as the site for the national award announcement to
highlight one of its award recipients - Neighborhood Housing Services of Chicago which has been recognized for administering one of most successful antiforeclosure programs in the country. NHS of Chicago's Home Ownership
Preservation Initiative is a unique public-private partnership with the City of
Chicago, the Federal Reserve Bank of Chicago, and several leading financial
institutions. Since 2003, the program has provided solutions to the many problems
associated with predatory lending, loan default, and foreclosure. In the past three
years, their counseling and refinancing strategies have saved 1,300 Chicago-area
homeowners from foreclosure.
The organizations awarded were selected through a competitive review of 184
applications from organizations nationwide requesting more than $138.4 million in
funding under the 2007 round of the CDFI Program. Nationwide, the awards totaled
$27,336,573.
Through the CDFI Program, the CDFI Fund invests in and builds the capacity of a
nationwide network of community-based, private, for-profit and non-profit financial
institutions with a primary mission of community development in economically
distressed urban, rural and Native communities. These institutions - certified by the
CDFI Fund as community development financial institutions, or CDFls - are able to
respond to gaps in local markets that traditional financial institutions are not
adequately serving. CDFls provide critically needed capital, credit, basic financial
products such as savings and checking accounts and technical assistance such as
financial literacy training to community residents and businesses, service providers,
and developers working to meet the community and economic development needs
of the communities they serve.
IW Ww .treas.-gov/press!releaseslhp555.htm
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Page 2 of 2
For a list or other detailed information regarding these awards please visit the
Fund's website at: http://www.cdfilund.gov
-30-
wWw.treas.~v/press/releaseslhp55"5.iJtm
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September 14, 2007
hp-556
Remarks by Secretary Henry M. Paulson, Jr.
at Atlas Material Testing Technology
Chicago, III. - Thank you, Russell, for the opportunity to learn more about Atlas and
your operations.
For those who don't know, Atlas is an innovative company, founded in 1918, that
manufactures equipment that simulates weather conditions --- sun rain heat and
humidity --- for their clients who manufacture products, providing them the data
needed to test their products' durability.
Atlas continues to pioneer new methods of durability testing, and from its
headquarters here in America's heartland, Atlas sells across the globe. Companies
like Atlas, and your employees, form the basis and promise of the American
economy.
And we have a healthy U.S. economy today, and the strongest global economy I've
seen in my business lifetime. Our unemployment rate remains low and real wages
are rising. The United States' businesses and workers are the envy of the world. In
industry after industry, we innovate, create and define what's possible.
In order to keep our economy healthy and extend this sixth year of economic
expansion, we need to focus on areas that are vital to maintain our economic
leadership.
First, international trade and investment, opening markets around the world to U.S.
goods and services and keeping our markets open to competition. I see rising
protectionist sentiment in the U.S. and around the world. It is ironic that
protectionism is rising at a time when the global economy is so strong.
Trade is vital to continued growth in Illinois and throughout the U.S. And the U.S.
has long been a leading advocate and beneficiary of global trade and investment
and we must keep it that way. Globalization is here to stay and it is important that
we continue to benefit from it rather than retreat Into isolationism.
Illinois is the fifth largest exporter of the fifty states, selling over $42 billion of goods
overseas last year. $12 billion of those goods were machinery manufacturing.
Over the past five years, Atlas has grown its exports by 12% on average each year
and this year will export $30 million worth of goods.
About 14,000 Illinois companies, almost 90% of them companies that employ fewer
than 500 people, exported goods in 2005. That is clear proof that it's not just
multinational and Fortune 500 companies that benefit from trade --- the benefits of
free trade spread across the economic landscape, and create jobs in companies of
every size.
Congress has the opportunity to act quickly to generate even more opportunities for
Illinois and U.S. workers --- by approving four Free Trade Agreements. The Peru
Agreement will be the first Congress considers - but it shouldn't be the last.
Colombia should follow quickly. And then we need to press for Panama and South
Korea, too.
Ilwww.trea~.-gov/press/releaseslhp556.htm
1011/2007
Page 2 of 2
Colombian President Uribe has taken tough steps to improve conditions in his
country, and he deserves our support. And, as the 8th largest economy in the
world, South Korea is a very significant market for U.S. exports.
Far from creating obstacles for economic growth, these trade agreements will level
the playing field and provide greater opportunity for Illinois' companies to sell goods
to these countries.
I agree with Russell that lowering trade barriers in Latin America would mean
growth for his company and his employees -- it would provide access to large and
growing markets in our American neighborhood. Atlas sells products around the
world and in each of the four countries where agreements await --- Peru, Colombia,
Panama and Korea --- and Russell knows what he's talking about.
Trade with China is also critical to our continued economic growth. Our exports to
China are rising rapidly, and there is great potential for more. I recognize that China
has become a big political issue --- due, in part, to their own actions and also
because China has become a symbol for globalization fears.
Our relationship with China is complex, and that makes the issues more difficult.
But keeping our economic relationship on an even keel is critical - maintaining and
building trade, and also working to persuade the Chinese to reform their own
economy more quickly, because the health of their economy affects the health of
the global economy.
I am impatient with the pace of change in China, and I know Congress is impatient.
But legislation that would impose unilateral, punitive trade sanctions isn't the
answer. I don't want to start a trade war. Punitive trade legislation could have
enormous repercussions, especially when we are working to extend our economic
expansion and get through a turbulent time in our markets.
Proven economic principles show that nations that open themselves up to
competition - in trade, finance, and investment - benefit, while those that don't are
left behind. Openness to trade and competition fuels innovation and creates goodpaYing jobs that raise productivity and standards of living in both rural and urban
economies.
In our rapidly changing economy, we see Job losses and dislocations in particular
companies, industries, and even regions - just as there are new opportunities in
others. But making trade a scapegoat and enacting protectionist policies would
make us worse off. We should recognize the hardships and work to alleviate them,
while keeping in sight the higher living standards Americans enjoy as a result of
economic dynamism.
That dynamism will be best served by Congress acting quickly to enact these free
trade agreements. The global economy is here to stay. To keep growing and
leading the world in innovation and opportunity, the U.S. must trade freely, openly,
and according to the principles of the global marketplace.
Thank you for the opportunity to meet with you this afternoon.
/(w,treas.~{)v/press/releaseslhp556.hrm
10/112007
Page 1 of 1
September 14, 2007
HP-557
Treasury Department Appoints Michael Duffy
as
Deputy Assistant Secretary for Information
Systems and Chief Information Officer
The Treasury Department announced this week the appointment of Michael Duffy
as the Department's Deputy Assistant Secretary for Information Systems and Chief
Information Officer. Duffy comes to Treasury from the U.S. Department of Justice
where he served as Deputy Chief Information Officer, eGovernment for the past
four years. The apPointment is effective September 10,2007.
In his 15 years in the Justice Department's CIO office, Duffy directed the
development and implementation of the national strategy to exchange criminal
investigative and intelligence data across all jurisdictions. Duffy led the
implementation of a multi-agency wireless communications system for federal law
enforcement and homeland security field operations. He has also worked with the
Office of Management and Budget to implement multiple eGovernment initiatives.
The Deputy Assistant Secretary for Information Systems/Chief Information Officer
serves as Treasury's principal advisor on information technology issues. This
position is responsible for acquiring and managing information resources and
provides broad leadership in planning, budgeting, acquiring, and managing
Departmental and bureau technology resources.
Duffy will also formulate policies and programs to maximize the value of technology
Investments and manage investment risks across the Department. In partnership
with the CIO Council, the CIO ensures that Department-wide and enterprise-wide
corporate systems development, integration, and operational and security issues
are addressed.
Duffy has a BA from Bowdoin College and a Masters in public administration from
the University of Massachusetts.
Iww w.treas.gVv/press/releases/hp557.htm
1118/2008
Page 1 of 1
September 14, 2007
hp-558
Media Advisory:
Treasury Asst. Secretary to Visit Boston
Treasury Assistant Secretary for Financial Markets Anthony W. Ryan will give
remarks Tuesday before the Asset Managers Group at the SIFMA Management
Conference in Boston, Mass. The Assistant Secretary will discuss risk
management, fiduciary responsibility and the Principles and Guidelines for Private
Pools of Capital that the President's Working Group on Financial Markets released
in February. The following event is open to credentialed media:
Who
What
When
Where
Assistant Secretary for Financial Markets Anthony W. Ryan
Remarks on Risk Management and Fiduciary Responsibility
Tuesday, September 18,12 p.m. EDT
2007 SIFMA Management Conference, SIFMA Asset Managers Group
The Algonquin Club
217 Commonwealth Avenue
Boston, Mass.
-30-
1IWWw.treas.gov/press/releaseslhp558.lttm
10/112007
Page 1 of 1
September 17, 2007
hp-559
Treasury Assistant Secretary Swagel to Participate in Panel on Outlook for
the U.S. Economy
Treasury Assistant Secretary for Economic Policy Phillip Swagel will participate in a
panel discussion on the outlook for the U.S economy as part of the Women
Impacting Public Policy and Small Business & Entrepreneurship Council Policy and
Politics Conference on Tuesday. He will discuss the key indicators driving economic
performance and what this means for business conditions both in the short and
long-term. Raymond J. Keating, Chief Economist for Small Business &
Entrepreneurship Council and Margo Thorning, Senior Vice President and Chief
Economist at American Council for Capital Formation will also participate in the
panel discussion. The following event is open to all credentialed media:
Who
Treasury Assistant Secretary for EconomiC Policy Phillip Swagel
What
Panel on Outlook for the Economy
Women Impacting Public Policy and Small Business &
Entrepreneurship Council Policy and Politics Conference
When
Tuesday, September 18, 2007, 2:00 p.m. (EDT)
Where
Renaissance Mayflower Hotel
State Room
1127 Connecticut Avenue, NW
Washington, DC
-30-
//www.treas.gov/press/releaseslhp55S..htm
101112007
PRESS ROOM
FROM THE OFFICE OF PUBLIC AFFAIRS
We recommend printing this release using the PDF file below.
To view or print the PDF content on this page, download the free Adobe® Acrobat® Readet®.
Se~ember18,2007
H~~O
Treasury International Capital (TIC) Data for July
Treasury International Capital (TIC) data for July are released today and posted on the US. Treasury web site (www.treas.gov/tic). The next release, which
will report on data for August, is scheduled for October 16, 2007.
Net foreign purchases of long-term securities were $19.2 billion.
•
Net foreign purchases of long-term U.S. securities were $24.7 billion. Of this, net purchases by foreign official institutions were 84.4 billion, and net
purchases by private foreign investors were $20.3 billion.
•
U.S. residents purchased a net $5.5 billion of long-term foreign securities.
Net foreign acquisition of long-term securities, taking into account adjustments, is estimated to have been minus $3.0 billion.
Foreign holdings of dollar-denominated short-term U.S. securities, including Treasury bills, and other custody liabilities increased S66.6 billion. Foreign
holdings of Treasury bills increased 818.7 billion.
Banks' own net dollar-denominated liabilities to foreign residents increased $40.3 billion.
Monthly net TIC flows were $103.8 billion. Of this, net foreign private flows were $65.4 billion, and net foreign official flows were $38.4 billion.
-30-
TIC Monthly Reports on Cross-Border Financial Flows
,
2005
12 Months Through
2006
Jul-06
lul-07
Apr-07 May-07
lun-07
Jul-07
Foreigners' Acquisitions of Long-term Securities
http://www.treas.gov/press/relcases/hp560.htm
111812008
2
uross l-'urchases~ot"Dornestic U.S. Securities
Gross Sales of Domestic U.S. Securities
3
Domestic Securities Purchased, net (line 1 less line 2) /1
17157.5 21066.7
192iY'i.
25478.5
2028.8
2691.0
2606.8
2473.7
16145.9 19931.7
18116.1
24269.1
1931.2
2534.0
2487.7
2449.0
1011.5
1135.0
1096.9
1209.4
97.6
157.0
119.1
24.7
"c'.
5
6
7
8
Private, net /2
Treasury Bonds & Notes, net
Gov't Agency Bonds, net
Corporate Bonds, net
Equities, net
891.1
269.4
187.6
353.1
81.0
938.4
125.9
196.0
471.8
144.6
959.7
188.7
199.7
427.9
143.4
993.7
155.1
154.5
474.4
209.8
72.3
-8.9
22.4
30.6
28.1
145.5
18.1
14.3
70.4
42.7
91.3
18.2
23.6
22.2
27.2
20.3
-2.4
1.2
3.2
18.4
9
10
11
12
13
Official, net /3
Treasury Bonds & Notes, net
GOy't Agency Bonds, net
Corporate Bonds, net
Equities, net
120.4
68.7
31.6
19.1
1.0
196.6
69.6
92.6
28.6
5.8
137.2
39.3
60.9
26.0
10.9
215.7
52.2
128.5
35.1
-0.2
25.3
9.4
13.7
2.9
-0.7
11.5
-4.6
12.8
4.0
-0.7
27.8
6.4
16.0
3.7
1.7
4.4
-6.9
7.5
1.0
2.8
3700.0
3872.4
-172.4
5515.9
5766.8
-250.9
4851.3
5041.7
-190.5
7085.9
7374.0
-288.1
631.9
649.2
-17.3
742.3
780.0
-37.6
730.5
752.2
-21.8
759.3
764.9
-5.5
-45.1
-127.3
-144.5
-106.5
-72.31
-118.1
-156.21
-131.9
-9.7
-7.7
-21.2
-16.5
-8.2
-13.5
0.9
-6.4
4
14
15
16
17
18
Gross Purchases of Foreign Securities from U.S. Residents
Gross Sales of Foreign Securities to U.S. Residents
Foreign Securities Purchased, net (line 14 less line 15) /4
Foreign Bonds Purchased, net
Foreign Equities Purchased, net
19
Net Long-Term Securities Transactions (line 3 plus line
839.1
884.1
906.5
921.3
80.2
119.4
97.3
19.2
20
Other Acquisitions of Long-term Securities, net /5
-143.0
-169.9
-161.6
-188.2
-9.8
-15.2
-15.4
-22.2
696.2
714.11
744.81
733.11
70.5
104.1
81.8
-3.0
-47.6
-58.9
-15.6
-43.3
135.2
-9.0
16.0
-25.0
113.0
-16.9
0.3
-17.2
88.9
-9.5
0.4
-9.9
-25.9
-28.6
-11.6
-17.0
1.2
-4.5
0.9
-5.5
-27.6
-17.9
-6.2
-11.8
66.6
18.7
3.5
15.3
11.4
10.6
0.8
144.2
164.0
-19.8
129.9
125.1
4.8
98.4
113.0
-14.6
2.7
7.1
-4.4
5.7
5.3
0.4
-9.7
-14.2
4.6
47.8
46.8
1.0
16.4
185.1
248.41
44.21
50.1
-6.1
-19.8
40.3
21
Net Foreign Acquisition of Long-Term Securities
(Ii nes 19 and 20):
28
Increase in Foreign Holdings of Dollar-denominated ShortU.S. Securities and Other Custody Liabilities: /6
U.S. Treasury Bills
Pri vate. net
Official. net
Other Negotiable Instruments
and Selected Other Liabilities:
Private. net
Official, net
29
Change in Banks' Own Net Dollar-Denominated Liabilities
22
23
24
25
26
27
n
http://www.treas.gov/press/releaseslhp560.htm
111812008
30 Monthly Net TIC Flows (lines 21,22,29) /8
of which
Private, net
Official, net
31
32
/1
/2
/3
665.0
1034.4
1106.2
866.2
94.6
99.2
34.4
103.8
578.0
87.0
894.1
140.4
978.1
644.4
221.8
81.2
101.2
13.4
-2.0
2.5
31.9
65.4
38.4
128.1
Net foreign purchases of U.S. securities (+)
Includes international and regional organizations
The reported division of net purchases of long-tenn securities between net purchases by foreign official institutions and net purchases
of other foreign investors is subject to a "transaction bias" described in Frequently Asked Questions 7 and lO.a.4 on the TIC web site.
Net transactions in foreign securities by U.S. residents. Foreign purchases of foreign securities = U.S. sales of foreign securities to foreigners.
Thus negative entries indicate net U.S. purchases of foreign securities, or an outflow of capital from the United States; positive entries
indicate net U.S. sales of foreign securities.
Minus estimated unrecorded principal repayments to foreigners on domestic corporate and agency asset-backed securities +
estimated foreign acquisitions of U.S. equity through stock swaps estimated U.S. acquisitions of foreign equity through stock swaps +
increase in nonmarketable Treasury Bonds and Notes Issued to OffIcial Institutions and Other Residents of Foreign Countries.
These are primarily data on monthly changes in banks' and broker/dealers' custody liabilities. Data on custody claims are collected
quarterly and published in the Treasury Bulletin and the TIC web site.
"Selected Other Liabilities" are primarily the foreign liabilities of U.S. customers that are managed by U.S. banks or broker/dealers.
TIC data cover most components of international financial flows, but do not include data on direct investment flows, which are collected
and published by the Department of Commerce's Bureau of Economic Analysis. In addition to the monthly data summarized here, the
TIC collects quarterly data on some banking and nonbanking assets and liabilities. Frequently Asked Question 1 on the TIC web
site describes the scope of TIC data collection.
/4
/5
/6
n
/8
REPORTS
•
(PDF) TIC Monthly Reports on Cross·Border Financial Flows (Billions of dollars, not seasonally adjusted)
http://www.treas.goy/press/releases/hp560.htm
111812008
Page 1 of 5
September 18, 2007
2007-9-18-10-26-13-22122
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 $68,057 million as of the end of that week, compared to $68,093 million as of the end of the
prior week.
I. Official reserve assets and other foreign currency assets (approximate market value, in US millions)
I
I
IA. Official reserve assets (in US millions unless otherwise specified)
II
I
IISeptember 14,2007
I
IIEuro
IIYen
IITotal
1(1) Foreign currency reserves (in convertible foreign currencies)
II
II
11 68 ,057
I(a) Securities
11 13 ,460
1111 ,047
11 24 ,507
lof which: issuer headquartered in reporting country but located abroad
II
II
II
II
11 0
I(b) total currency and deposits with:
l(i) other national central banks, BIS and IMF
13,435
I
I
II
5,438
Iii) banks headquartered in the reporting country
11 18 ,873
11 0
11 0
lof which: located abroad
I(iii) banks headquartered outside the reporting country
11 0
11 0
lof which: located in the reporting country
1(2) IMF reserve position
11 4 ,417
1(3) SDRs
11 9 ,218
1(4) gold (including gold deposits and, if appropriate, gold swapped)
11 11 ,041
I--volume in millions of fine troy ounces
11 261 .499
0
1(5) other reserve assets (specify)
I--financial derivatives
I--Ioans to nonbank nonresidents
I--other
[B. Other foreign currency assets (specify)
[--securities not included in official reserve assets
I--deposits not included in official reserve assets
[--loans not included in official reserve assets
II
--financial derivatives not included in official reserve assets
I
--gold not included in official reserve assets
I
[ --other
II
II
II
II. Predetermined short-term net drains on foreign currency assets (nominal value)
bt~. .//www.trr.;as.govlpress/releases/200791810261322122.htm
10/1/2007
Page 2 of 5
[
[
II
I
II
[
II
II
II
I
I
IIMaturity breakdown (residual maturity)
Total
More than 3
months and up to
1 year
More than 1 and
up to 3 months
Up to 1 month
[ 1. Foreign currency loans, securities, and deposits
t-outflowS (-)
IIprinciPal
[
IIlnterest
[--inflows (+)
IIPrincipal
I
IIlnterest
2. Aggregate short and long positions in forwards and
futures in foreign currencies vis-a.-vis the domestic
currency (including the forward leg of currency swaps)
[(a)
I
I
]I
Short positions ( - )
I (b) Long positions (+)
I
I
I
II
)
3. Other (specify)
--outflows related to repos (-)
--inflows related to reverse repos (+)
--trade credit (-)
I --trade credit (+)
I --other accounts payable (-)
I --other accounts receivable (+)
II
II
II
III. Contingent short-term net drains on foreign currency assets (nominal value)
I
II
I
II
11. Contingent liabilities in foreign
I
II
applicable)
More than 1 and
up to 3 months
Up to 1 month
Total
I
II
II
I Maturity breakdown (residual maturity, where
More than 3
months and up to
1 year
currency
(a) Collateral guarantees on debt falling due within 1
year
I~) Other contingent liabilities
2. Foreign currency securities issued with embedded
options (putlable bonds)
~ Undrawn, unconditional credit lines provided by:
(a) other national monetary authorities, 81S, IMF, and
other international organizations
II
/I
/I
tother national monetary authorities (+)
[SIS (+)
I
BMF(+)
II
(b) with banks and other financial institutions
headquartered in the reporting country (+)
r
/I
http://www.trea~.gov/press/releasesI200791810261322122.htm
II
II
I
II
10/1/2007
Page 3 of 5
(e) with banks and other financial institutions
headquartered outside the reporting country (+)
I
lundrawn, unconditional credit lines provided to:
II:a) other national monetary authorities, 81S, IMF, and
other international organizations
I
/I
II
II
II
I--other national monetary authorities (-)
[SIS (-)
1\
I
1\
I--IMF(-)
(b) banks and other financial institutions headquartered
in reporting country (- )
II
(e) banks and other financial institutions headquartered
outside the reporting country ( - )
4. Aggregate short and long positions of options in
foreign currencies vis-a-vis the domestic currency
I(a) Short positions
I(i) Bought puts
I
1\
I
II
I
"
"
I(ii) Written calls
I(b) Long positions
I(i) Bought calls
I(ii) Written puts
IPRO MEMORIA: In-the-money options 11
I
I
1(1) At current exchange rate
I
I
I(a) Short position
I
I(b) Long position
1(2) + 5 % (depreciation of 5%)
I(a) Short position
I
I(b) Long position
1(3) - 5 % (appreciation of 5%)
I
I
1\
I(a) Short position
1\
I
I
j(b) Long position
1(4) +10 % (depreciation of 10%)
[raj Short position
j(b) Long position
US) - 10 % (appreciation of 10%)
I(a) Short position
I
[b) Long position
[6) Other (specify)
~) Short position
ITb) Long position
IV. Memo items
[
(1) To be reported with standard periodicity and timeliness:
(a) short-term domestic currency debt indexed to the exchange rate
(b) financial instruments denominated in foreign currency and settled by other means (e.g., in domestic
'VWw _trea~.gov/pressfreleasesI20079 181 02613 22122. htm
I
I
II
I
I
I
I
1011/2007
Page 4 of 5
I
I
I
lcurrency)
"I
!--nondeliverable forwards
[ --short positions
[ --long positions
I
I
[--other instruments
[(C) pledged assets
I--included in reserve assets
l
--included in other foreign currency assets
I(d) securities lent and on repo
[--lent or repoed and included in Section I
[--lent or repoed but not included in Section I
[--borrowed or acquired and included in Section I
[--borrowed or acquired but not included in Section I
I(e) financial derivative assets (net, marked to market)
I--forwards
I--Mures
I--swaps
I--options
I--other
(t) derivatives (forward, futures, or options contracts) that have a residual maturity greater than one
year, which are subject to margin calls.
--aggregate short and long positions in forwards and futures in foreign currencies vis-a-vis the domestic
currency (including the forward leg of currency swaps)
II
II
I(a) short positions ( - )
I(b) long positions (+)
I--aggregate short and long positions of options in foreign currencies vis-a-vis the domestic currency
I(a) short positions
l(i) bought puts
l(ii) written calls
I(b) long positions
[(i) bought calls
I(ii) written puts
[(2) To be disclosed less frequently:
[(a) currency compOSition of reserves (by groups of currencies)
11 68 ,057
[-currencies in SDR basket
11 68 ,057
[currencies not in SDR basket
II
[by individual currencies (optional)
[
"
II
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 markedto-market values, and deposits reflect carrying values.
2/ The items, "2. IMF Reserve Position" and "3. Special Drawing Rights (SDRs)," are based on data provided by the IMF
and are valued in dollar terms at the official SDR/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
//wWw.treasgov/press/releasesI200791810261322122.htm
10/1/2007
Page 5 of 5
end.
3/ Gold stock is valued monthly at $42.2222 per fine troy ounce.
>:lIwww.rreas.gov/presslreIeases!20079i810261322122.htm
10/1/2007
Page 1 of 3
September 18, 2007
HP-561
Assistant Secretary Ryan Remarks before the SIFMA Asset Managers' Group
Boston- Good afternoon. Thank you for inviting me to join you. It's great to return to
Boston and it's my pleasure to be here.
A Historical Perspective
Massachusetts is rich in history and this city is rightly proud of the many
contributions it has made to our nation, including those in the fields of finance and
asset management.
Massachusetts lays claim to a fundamental concept that serves as a cornerstone to
the asset management industry: prudence in the role of a fiduciary. The Prudent
Man Rule was established by a Massachusetts court decision in 1830 in which
trustees were directed to "observe how men of prudence, discretion and
intelligence manage their own affairs, not in regard to speculation, but in regard to
the permanent disposition of their funds, considering the probable income, as well
as the probable safety of the capital to be invested."
The standard has evolved over time, but after almost two centuries, the principle
stili resonates. The challenge for fiduciaries is not to avoid risks. Rather, prudence
dictates that fiduciaries seek to identify, assess and manage risks. Despite more
tools and greater experience the responsibility seems to be becoming harder to
fulfill.
The asset management industry is constantly evolving. Its growth and development
mirrors the interests of the increasingly broad range of investors and their myriad
investment objectives. One group of institutional investors has had a large influence
on the asset management industry --- pension plans. Their assets are invested on
behalf of millions of beneficiaries. These beneficiaries include retirees and workers.
Some are firemen and policemen; others include teachers, factory workers and
service providers. These beneficiaries entrust their savings and the important job of
investing on their behalf to you and your colleagues in the asset management
industry. These workers answer the bell every day -- whether it is the one in a
firehouse or schoolhouse -- or the one on their alarm clock. Fiduciaries working on
their behalf must do the same.
Fiduciaries to pension plans include trustees and asset managers. We continue to
witness pension plans, both private and public, diversifying their investment
portfolios. In doing so, they are frequently increasing their allocation to alternative
investments. These allocations are meant to complement other investments, an
increasing number of which utilize more complex and opaque investment strategies
and instruments.
In fulfilling their obligations, fiduciaries must appreciate that they represent the first
and most important line of defense for the interests of their beneficiaries. No one
should suggest that plan trustees or portfolio managers should not take risks - in
fact they must take risks in order to generate desired returns. Investors must have
the opportunity to succeed, and in doing so they thus also have the freedom to fail.
However, given the characteristics of many of the strategies and securities defining
our markets today, fiduciaries must return to some of the fundamentals of
investment management. They must seek to excel in risk management as much as
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return management. Risk management is not some part-time responsibility - it's a
fundamental obligation of a fiduciary's duty.
Every investment strategy introduces risks. As fiduciaries acting in your clients' best
Interests you play an important role In identifying, assessing and managing risks.
We should acknowledge that the risks are many. They range beyond volatility to
include valuation, liquidity, credit, operational risk and reputation fisk. Many
investment strategies and securities today are very complex and opaque. These
characteristics create added challenges including valuation and performance
calculations.
A decade ago, investors received holdings statements and performance reports
from their custodians who simply relied on having actively-traded securities priced
off of independent pricing feeds. That is no longer the case. Today, many
investment strategies contain illiquid investments. Assets are often priced by
complex quantitative models, in many instances built by the asset managers
themselves. In the most disconcerting cases, assets were priced to rating where, in
just a few weeks, they went from priced to perfection --- to priced to rejection.
Over the years, marketplace behavior has been influenced by the growth and scale
of institutional assets, coupled with the obligations required by laws, such as
E.R.I.S.A., and prudent fiduciary practices. The presence of institutional investors
has influenced many practices ranging from reporting standards to fees. These
trends are well-established within the traditional long only asset management
space. More recently, we are witnessing how hedge fund managers are evolving in
response to institutional investors' demands for more detailed information, higher
quality business standards and operational practices, effective compliance and
increased transparency.
These eHorts help to define market discipline. Policy makers are very supportive of
efforts that strengthen market discipline, since such efforts serve to mitigate
systemic risk.
Fiduciaries play two critical roles. Besides contributing to market discipline,
fiduciaries -- both trustees and asset managers -- playa powerful and important
investor protection role. By continuously evaluating and monitoring their
investments, they help protect their beneficiaries' financial interests, and either
indirectly or directly, their own interests.
Sound practices on the part of fiduciaries are critical to fulfilling their obligations.
Fiduciaries have an ongoing responsibility to perform due diligence and must
continually ensure that their investment decisions are prudent and conform to
sound practices, including diversification. We therefore need to ensure governance
and asset management practices are as robust as possible.
As asset managers, you must appreciate that you are a part of a larger group of
stakeholders - each with its own role and responsibilities. Besides yourselves,
other stakeholders include your clients, as well as your counterparties and
creditors, and the regulators.
Early this year, the President's Working Group on Financial Markets (PWG). which
is chaired by Treasury Secretary Paulson and includes the Chairmen of the Federal
Reserve, the Securities and Exchange Commission, and the Commodity Futures
Trading Commission, issued Principles and Guidelines Regarding Private Pools of
Capital for these four groups of stakeholders. Speaking with a unified voice, the
PWG advocated for stronger market discipline. The PWG did not wish to endorse
the status quo and therefore issued a call to action for each group of stakeholders.
The principles and guidelines address a range of issues including the need to
ensure that risk management systems are sufficiently robust and sophisticated to
Identify, analyze and manage the broad array of risks. The principles also focused
on the need for clear and meaningful disclosure so that Investors can properly
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evaluate risk, decision making and performance. The PWG noted that qualitative
measures should also be a part of any well designed due-diligence process,
including information on the formation and structure of vehicles, reporting,
administration, audits, and other factors and terms.
The principles and guidelines also focused on the importance of counterparty risk.
As asset managers, you have to appreciate that your counterparty lending
institutions must understand the risks inherent in your investment strategies and
operations. They must determine appropriate credit terms. In doing so, they must
assess liquidity risk and operational risk. They also need to be disciplined and
independent in quantifying valuations. Furthermore, they need to guard against the
risks to their reputation. Prudential regulators closely monitor the lending
institutions' management of these risks and assess whether their performance is in
line with expectations set out in supervisory guidance.
To deal with these challenges, asset managers must be part of the solution and
maintain appropriate poliCies, procedures, and protocols. While current practices
are in place, they must be reviewed, clearly defined, implemented, and continually
enhanced. Besides counterparty risk management, asset managers also have a
responsibility to continue to strengthen and enhance the processing, clearing, and
settlement arrangements for all securities, and in particular OTC derivatives.
The PWG guidelines serve as an excellent foundation. But now is the time to
complement the initial effort with secondary efforts. Along these lines, Secretary
Paulson recently announced the establishment of two separate yet complementary
private sector committees. The first will be comprised of investors and the second
of asset managers.
The first task for each group is to develop detailed guidelines that would define
"best practices" for their respective communities. These efforts will help strengthen
market discipline, mitigate systemic risk, augment regulatory safeguards regarding
investor protection, and complement regulatory efforts to enhance market integrity.
These guidelines will have as a foundation and be consistent with the broader
principles and guidelines comprising the PWG agreement released in February
2007, and will build on existing industry work where possible.
Conclusion
As fiduciaries and leaders within the asset management community, I want to
encourage you to answer the call to action. There is much work to do. The bell is
ringing, and you must all take the necessary steps to protect your clients and
enhance market discipline.
As stakeholders in the asset management industry you must continually uphold and
enhance the highest quality standards of excellence. Failure to do so only
compromises an industry with deep roots and a proud legacy. As fiduciaries, you
must stand for your clients' interests, for as our first Secretary of the Treasury
Alexander Hamilton warned, "Those who stand for nothing fall for anything."
It is a privilege to be entrusted with the public's interest and capital. With such a
privilege comes responsibility. To achieve our goals we need to recognize that the
responsibility is borne by both the private and public sectors. Building upon the
efforts to date, all stakeholders must continue to do more. Collectively, we can
strengthen the vitality, stability and integrity of the public's investments and our
capital markets. The system works when all stakeholders recognize the benefits,
mitigate the risks, and choose to participate.
Thank you again for the opportunity to speak here today.
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September 18, 2007
hp-562
Media Advisory:
Treasury Deputy Secretary to Visit Montana
U.S. Treasury Deputy Secretary Robert M. Kimmitt and Treasury's Community
Development Financial Institutions (CDFI) Fund Director Kimberly A. Reed will
travel to Montana this week to promote community organizations that can help
homeowners avoid foreclosure in rural America and to recognize two local
organizations receiving more than S200,000 in CDFI Fund awards. The Deputy
Secretary will also address the University of Great Falls and announce the
establishment of the J. Stanley Kimmitt Public Service Lecture and Internship at the
University of Montana.
Deputy Secretary Kimmitt and Director Reed will present an award to the Montana
HomeOwnership Network, which works with local service partners throughout the
state to provide mortgage education and foreclosure prevention assistance. On
Friday they will recognize Sovereign Leasing and Finance Company, Inc., which is
receiving an award to expand its mortgage counseling and financial services.
Deputy Secretary Kimmitt will participate Friday In the announcement of the J.
Stanley Kimmitt Public Service Lecture and Internship, named in honor of the
Deputy Secretary's late father, former Secretary of the Senate Stan Kimmitt, who
grew up in Great Falls and attended the University of Montana. The following
events are open to credentialed media:
Who:
What:
When:
Where:
Deputy Secretary Robert M. Kimmitt
CDFI Director Kimberly A. Reed
CDFI Fund Award to Montana HomeOwnership Network
Thursday, September 20,2:45 p.m. MDT
422 Fifth Street North
Great Falls, Mont.
Who:
What:
When:
Where:
Deputy Secretary Robert M. Kimmitt
Remarks
Thursday, September 20,4:00 p.m. MDT
University of Great Falls
Student Center
1301 20th Street South
Great Falls, Mont.
Who:
Deputy Secretary Robert M. Kimmitt
CDFI Director Kimberly A. Reed
CDFI Fund Award to Sovereign Leasing and Finance Company, Inc
Friday, September 21,9:45 a.m. MDT
Tribal Complex
58141 US. Highway 93
Pablo, Mont.
What:
When:
Where:
Who:
What:
When:
Where:
Deputy Secretary Robert M. Kimmitt
Remarks on Establishment of the J. Stanley Kimmitt Public
Service Lecture and Internship
Friday, September 21,3:00 p.m. MDT
University of Montana
Don Anderson Hall, Room 210
32 Campus Drive
Missoula, Mont
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PRESS ROOM
September 19, 2007
HP-563
Paulson to Sign Update to U.S-Canada Income Tax Treatv
U.S. Treasury Secretary Henry M. Paulson, Jr. will join Canadian Finance Minister
James M. Flaherty in signing a protocol that would amend our income tax treaty
with Canada, Friday, September 21,2007 in Chelsea, Ouebec. This will be the fifth
updated agreement between the U.S. and Canada since the two countries signed
the original treaty in 1980.
Who
Treasury Secretary Henry M. Paulson, Jr.
Canadian Finance Minister James M. Flaherty
What
Signing of Update to Income Tax Treaty and Press Availability
When
Friday, September 21, 12 p.m. (EDT)
Where Willson House
Gatineau Park
654 Meech Lake Road
Chelsea, Ouebec
Note Media must RSVP to Fannie Ouellette at (613) 943-3073 or
Ouellette.fannie@fin.gc.ca. All media will be required to provide photo identification
on site.
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PRESS ROOM
September 19, 2007
HP-564
Secretary Paulson Supports Strauss-Kahn for Managing Director of IMF
Washington, DC-- Treasury Secretary Henry M. Paulson, Jr. made the following
statement today in support of the candidacy of Dominique Strauss-Kahn for
Managing Director at the International Monetary Fund:
"I urge the Board to positively consider the candidacy of Dominique Strauss-Kahn
to succeed Rodrigo de Rato. The U.S. is supporting Mr. Strauss-Kahn because we
believe he will work to make the bold reforms necessary to lead a strong and
relevant Fund into the future. Mr. Strauss-Kahn's experience and drive have
prepared him well to vigorously pursue reform of the IMF, including implementation
of the Fund's new decision on exchange rate policies and giving a greater voice to
emerging market countries."
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PRESS ROOM
September 20, 2007
HP-565
Testimony of Treasury Secretary Henry M. Paulson, Jr,
Before the House Committee on Financial Services
On the Legislative and Regulatory Options
For Minimizing and Mitigating Mortgage Foreclosures
Washington- Chairman Frank, Ranking Member Bachus, Members of the
Committee, good morning. I very much appreciate the opportunity to appear before
you today to present the Treasury Department's perspective on the recent events in
the credit and mortgage markets and their impact upon consumers and the
economy. I am also pleased to be here today with my Cabinet colleague, Secretary
Jackson, and with my fellow President's Working Group Member, Chairman
Bernanke.
Credit Markets and the Overall Economy
Recently, there has been an adjustment taking place in the overall credit market
and the mortgage market in particular. The current market turbulence stems from
financial practices, but unlike many previous episodes of market volatility, takes
place against a backdrop of a healthy U.S. economy and strong global growth. In
the United States, the unemployment rate is at 4.6 percent, close to its lowest
reading in 6 years. Growth in real gross domestic product was 4.0 percent at an
annual rate in the second quarter, supported by strong gains in business
investment and exports. Core inflation is under control. Since August 2003, 8.2
million jobs have been created and over the past 12 months, 1.6 million jobs have
been created. Real wages have increased 2.2 percent over the past 12 months. In
the corporate sector, earnings continue to outperform expectations and default
rates on corporate credits of all kinds are at historically low levels. The Federal
government's fiscal deficit is declining and well below long-term averages as a
share of the economy, reflecting strong revenue growth and the continued strength
of the U.S. economy.
The global economy also remains strong, with annual growth at around 5 percent
and with many emerging market economies growing even more rapidly than the
global average. The advanced economies also continue to perform well, with
unemployment down sharply in Europe, helping to make growth of the last several
years the strongest since the early 1970s.
Credit markets playa vitally important role in the eHicient operation of our economy
by intermediating funds between investors and borrowers. Credit market
participants are constantly evaluating their views on risk and their appetite for risk.
Larger fundamental reappraisals in the pricing and appetite of risk have taken place
numerous times over our nation's history, which is fundamentally the way that
markets work. We are in the process of another such reappraisal period today.
As has been well documented, the current credit market reappraisal started in the
subprime mortgage market. The performance of subprime mortgages deteriorated,
as a result of higher than expected delinquencies and defaults. This introduced
greater uncertainty regarding both the future prospects of subprime mortgagebacked securities and the methodologies the credit rating agencies used to rate
these securities. These factors led investors fundamentally to reassess the risk of
these securities and subsequently to reassess price. Compounding the challenge
was the increased complexity and opacity of many of the mortgage backed
securities investment strategies and instruments. The combination of uncertainty
and complexity resulted in few investors willing to put capital at risk.
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Given the interconnectedness of the various components of our capital markets,
these concerns over subprime mortgages and related securities had an impact on
investors' confidence and assumptions about the credit quality and value of other
assets. Consistent with expectations, we have witnessed a reassessment of risk,
and hence a subsequent revaluation across capital markets globally. Certain asset
classes were able to reassess fairly quickly and Investors have greater confidence
in their fundamental assessments. In such markets, liquidity has returned and
markets are operating in a more customary fashion. Good examples of these would
include most world equity markets, sovereign debt markets, and even investment
grade corporate debt. Alternatively, certain markets are still operating under stress
with impaired liquidity. These would include the jumbo mortgage market, the
leveraged loan markel, and the asset backed commercial paper market.
Given the importance of credit markets to the functioning of our economy, when we
experience a fundamental reappraisal like we have over the last several weeks, it is
essential that policymakers evaluate the potential impact on the economy.
Chairman Bernanke can provide additional details, but the Federal Reserve
undertook several measures - providing additional reserves through open market
operations, lowering the discount rate, and changing practices associated with
discount rate borrowing - to increase liquidity and promote the orderly functioning
of financial markets. Additionally, this week, the Federal Reserve lowered its target
for the federal funds rate by 50 basis points and approved another 50-basis-point
decrease in the discount rate. The Federal Reserve's actions have helped to
stabilize financial markets.
At the Treasury Department, we have been closely analyzing the global capital
markets on a daily basis. As Chair of the President's Working Group (PWG) on
Financial Markets, I have been in regular contact with members of the of the PWG,
which includes Federal Reserve Chairman Bernanke, Securities and Exchange
Commission Chairman Cox, and Commodity Futures Trading Commission Acting
Chairman Lukken. I also have been in frequent contact with other Federal
regulators, including the heads of the OCC, OTS, FDIC, and the Federal Reserve
Bank of New York. These contacts complement information gathered from market
participants, finance ministers, and other participants in the global marketplace. I
have been keeping the President apprised as well. Enhanced communication is
vitally important for understanding how markets are operating, where disruptions
are occurring, and evaluating what actions, if any, should be considered.
As I have said before, the recent reappraisal of risk could result in some modest
penalty to economic growth. However, as I noted at the outset, the economy was in
strong condition going into the recent period of volatility, and while certain sectors
like housing are undergoing a transition, overall economic fundamentals remain
solid. It will take time for the current reappraisal to work itself out, but in my view the
underlying strength of the economy should allow for continued growth.
Challenges in the Mortgage Market and the Administration's Plan
While the current reappraisal of risk in the credit markets will work itself out over
time, the transition taking place in the mortgage market is causing difficulties for
many borrowers and we are quite focused on this issue. This will be especially so
for borrowers who took out subprime adjustable rate mortgages in recent years.
We should not lose sight of the fact that the subprime mortgage market improved
access to credit and homeownership for millions of Americans. Starting in the early
1990s, consumers with less-than-perfect credit histories were able to gain easier
access to mortgage credit at interest rates above prime borrower rates. Individuals
and families could use this new source of credit to tap previously illiquid home
equity wealth through refinancing or to purchase homes. Subprime mortgage
origination volume increased from less than 5 percent, or S35 billion, of total
mortgage origination volume in 1994 to nearly 20 percent or $625 billion, In 2005.
During this time period homeownership rates also Increased, growing from 64
percent in 1994 to 69 percent today, some of which was due to expanded
opportunities in the sub prime mortgage market.
The growth in the subprime mortgage market (and the mortgage market generally)
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was facilitated to a large degree by securitization, a process by which individual
loans are transformed into securities. In a typical pnvate label mortgage
securitization, the mortgage originator transfers loans to a securitization sponsor,
who pools together mortgages into mortgage-backed securities, and sells pieces, or
tranches, of these securities to investors. In this way, the securitization process
allows for the creation of securities that better match investor preferences for
particular types of risk, which broadens the availability of capital. The benefits of
such development are (1) increased capital for mortgages resulting in more
products and lower costs, and (2) greater dispersion of investor risk. While these
are net benefits, securitization also has introduced some challenges which are
described later and are the focus of additional work for the PWG.
Further expanding the potential investor base was the development of another
structured product, the collateralized debt obligation (COO), which purchases assetbacked instruments, such as mortgage-backed securities. Mortgage-backed COOs,
nearly 40 percent of the entire $500 billion COO market in 2006, have been one of
the major purchasers of mortgage-backed securities, in particular the lower-rated
tranches_ For both individual mortgage-backed securities and COOs, the credit
rating agencies work closely with the sponsor to rate the credit risk of various
pieces of the transaction.
A key challenge in the current subprime mortgage market (and to a lesser extent in
the prime market) is the significant amount of hybrid adjustable rate mortgages that
will be resetting in the next few years. Hybrid adjustable rate mortgages have a
fixed rate of interest, often free of amortization payments, for an initial period,
resetting at an adjustable rate for the remaining term of the loan. The most popular
hybrid adjustable rate mortgage was the 2/28 - a fixed rate for two years, then an
adjustable rate for the remaining 28 years of the mortgage. The fixed rate of interest
in the first two-year period was typically lower than the initial adjustable rate in the
reset period, and it often had an even lower teaser rate at the outset.
Hybrid adjustable rate mortgages can be a useful product, and, in the past, rising
house prices often enabled borrowers with hybrid adjustable rate mortgages to
refinance on more attractive terms prior to the first reset. However, the recent trend
of a decline in house price appreciation (or depreciation in home values) has made
refinancing more difficult. Other problems in the subprime market (and in some
cases in the prime market) include lax underwriting standards, especially in 2005
and 2006, which have led to a significant amount of early defaults. Finally, while this
is not a new issue, mortgage fraud continues to be a problem and may have
increased with growth in the subprime market over the past few years. Some of the
most egregious individual stories in the subprime mortgage market involve some
type of fraudulent activity that is already illegal. A combination of these factors has
led to a significant spike in mortgage delinquencies and foreclosure starts. Much of
the increase is concentrated in subprime adjustable rate products, and it is also
concentrated in areas of the country that are experiencing some degree of
economic difficulty or a decline in housing prices.
To address the current situation, President Bush recently announced an aggressive
plan to help as many homeowners as possible stay in their homes and to improve
our mortgage finance system for the future - the HomeOwner Protection Effort
(HOPE). As part of HOPE, the Treasury Department has, in coordination with the
Department of Housing and Urban Development (HUD), started working on a new
foreclosure prevention initiative to help struggling borrowers. The goal is to expand
mortgage financing options and to identify and reach struggling homeowners before
they face hardships, helping them understand their financing options, and helping
them to find a mortgage product that keeps them in their home. Community
organizations, mortgage servicers, and mortgage finance entities all play key roles
in helping borrowers avoid foreclosure. Community organizations, such as
mortgage counselors, work with struggling borrowers to help them identify all the
options available to them. Mortgage servicers are often the first contact with
borrowers and they have tools available to help borrowers who are in trouble. And
mortgage finance entities, whether it is the Federal Housing Administration (FHA),
government sponsored enterprises (GSEs) such as Fannie Mae and Freddie Mac,
or insured depository institutions, all develop mortgage products that borrowers can
use to refinance existing obligations. I and other Treasury officials have held
important and useful meetings with these organizations to understand the
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challenges borrowers face and to explore ways to help them. We will continue to do
so in an effort to minimize foreclosures.
We are working very hard to try to help as many Americans as possible keep their
homes. We have learned several things already, two of which I would like to take an
opportunity to share today.
First, it is clear to everyone that the earlier we identify struggling borrowers, the
more likely they will be able to modify their mortgage or refinance into a more
affordable mortgage. If we wait until borrowers miss several payments, their credit
profiles will be tarnished and they will have far fewer refinancing options.
Second, many borrowers mistakenly believe that their lender wants to repossess
their house in foreclosure. Foreclosure is tough on families, bad for communities,
and very costly for lenders. The vast majority of lenders would rather find a way to
help the homeowner stay in their home than foreclose. Yet according to most of the
servicers and counselors we have spoken to, 50 percent of those who lose their
home to foreclosure never contacted their mortgage servicer or a mortgage
counselor for help. Often times borrowers are fearful of foreclosure and not aware
that their lender may be able to work out a solution - such as a lowered interest
rate or a payment plan. Clearly, we need a concerted effort to reach those who
might have trouble meeting their payments and urge them to look for help before
they get behind on their payments. There is a public service announcement running
now, encouraging homeowners to call for help. I went 10 Chicago last week and
held an event to publicize the availability of homeownership counseling. I plan to do
more to urge people to be proactive, and I urge all of you to hold events in your
districts, highlighting the availability and importance of mortgage counseling.
In addition, as part of HOPE, the Treasury Department has been working closely
with Congress to change temporarily a provision of the federal lax code that
currently considers cancelled mortgage debt on a primary residence as taxable
income. Today, if borrowers are able to secure a loan modification or refinancing
that involves a write down of existing principal, they could be subject to federal
income tax liability on the value of the write-down. Moving forward, by providing
much-needed tax relief to homeowners that are faced with this Situation, we will
remove an obstacle to keeping more borrowers in their homes. As President Bush
has said, "when your home is losing value and your family is under financial stress,
the last thing you need to do is to be hit with higher taxes."
Finally, the President has asked me to lead efforts of the President's Working
Group on Financial Markets in examining some of the broader market issues
associated with the challenges in the mortgage market, which include: the role of
credit rating agencies; and how securitization has changed the mortgage industry
and related business practices.
Secretary Jackson can provide additional details on HUD's efforts related to HOPE
including FHA modernization legislation, the new FHA-Secure initiative, and
reforms to the Real Estate Settlement Procedures Act (RESPA).
Considering Other Issues to Address Mortgage Market Issues
The Ro/eot Government Sponsored Enterprises (GSEs)
The President directed Secretary Jackson and me to work with all mortgage market
participants to see what can be done to help struggling homeowners stay in their
homes. Given that the GSEs playa significant role in the mortgage market, we
believe they can be helpful in assisting many homeowners in this period. In fact,
Fannie Mae and Freddie Mac were created in part to assist in these types of
situations.
Fannie Mae and Freddie Mac were established in part to help provide a degree of
liquidity to the secondary market for home mortgages to increase the capital
available for home mortgage financing. To perform that mission, Congress granted
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the GSEs benefits and imposed constraints. The benefits include exemptions from
state and local taxes, conditional lines of credit with the Treasury Department, and
the ability of banks to make unlimited investments in GSE debt securities. But the
most important benefit is the market's perception that they are somehow backed by
the Federal govemment, even though this is not the case. This benefit,
unfortunately referred to as the "implicit" government guarantee, is the one that
provides the GSEs with a funding advantage over other mortgage market
participants.
The constraints imposed on the GSEs include that they: are limited to operating in
the secondary mortgage market; can only purchase or guarantee loans below the
conforming loan limit set by Congress (currently $417,000 or lower); and must have
credit enhancements if the loan-to-value ratio exceeds 80 percent. In addition, they
are also subject to safety and soundness oversight, and they must meet affordable
housing goals.
Fannie Mae and Freddie Mac operate in the secondary mortgage market by
providing credit guarantees on mortgage-backed securities (MBS) or by directly
investing in mortgages and mortgage-related securities through their retained
mortgage portfolios. In the credit guarantee business, Fannie Mae and Freddie
Mac generally enter into to swap agreements with mortgage lenders under which
individual mortgages are transformed into MBS guaranteed by the GSEs. Fannie
Mae and Freddie Mac also have the ability to purchase mortgages and package
them into MBS. In the mortgage investment business, Fannie Mae and Freddie
Mac issue debt securities to fund an investment portfolio of mortgage-related
securities. In comparison to the credit guarantee business where credit risk is the
main exposure, the mortgage investment business involves both credit and interest
rate risk. The mortgage investment businesses of Fannie Mae and Freddie Mac
presents the greatest potential risks, while at the same time having a much less
clear connection to their housing mission than the credit guarantee business.
The GSEs are an unusual construct - they are government-sponsored with a public
service mission, but they are also publicly held companies that have to answer to
boards of directors and shareholders. If we knew then what we know now, we likely
would not have designed entities like the GSEs that have private ownership but are
required to undertake a public mission. These competing interests are too difficult
to manage, and the potential long-term market distortions and public policy
concerns are too significant. The tension born by this construct is highlighted in the
current situation in the subprime mortgage market. On the one hand, assisting
subprime borrowers is at the heart of their affordable housing mission. On the other
hand, these mortgages do pose greater risks, which if not managed correctly could
lead to less return for shareholders.
We all understand that the GSEs have had some accounting and risk management
problems in recent years. To some extent these problems are a result of their
unusual construct - the private sector goal of increasing earnings led to the rapid
growth in the GSEs' retained mortgage portfolios, and contributed to a lack of focus
on internal controls and risk management. I see no benefit in restating these issues
which have been well publicized and documented. It is worth noting, however, that
the new managements at both institutions have improved their operations. Despite
these improvements, however, there are still legitimate concerns about the
systemic risk posed by the GSEs' retained portfolios due to their large size and the
lack of ordinary and effective market discipline.
Turning to current market conditions, the conforming loan market, which is the
segment of the mortgage market in which the GESs primarily operate, has
continued to function well during periods of market stress. This should not be a
surprise. Investors do not take on the credit risk of the underlying mortgages when
they purchase GSE-guaranteed mortgage backed securities. In contrast, in the
non-GSE mortgage market, the securitizing, packaging, and trading of credit risk
have created an increased amount of complexity. As we have seen, market
participants are growing more cautious and deliberative in evaluating credit risk in
non-GSE securitized instruments.
We are starting to see encouraging signs that other markets, such as the jumbo
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mortgage market (loans greater than $417,000), are loosening up but these
markets are not functioning as normal. While some financial institutions are more
willing to t~ke these loans onto their balance sheets than they were weeks ago,
others are In a sense compelled to do so because the demand for jumbo and other
non-conforming mortgage backed securities (and other asset backed securities)
has broken down and liquidity concerns remain. Over time, we expect market
conditions to improve. In other areas, such as subprime, this process will take even
longer. Market liquidity will adjust as investors reassess risks and return, relative to
the underlying fundamentals. But all of this will take time as markets digest new
information.
As we work to alleviate stress in these markets, we naturally must ask what the
GSEs can do toward that end. And to the extent we see room for them to do more,
any consideration of a change in policy must find a balance between competing and
distinct concerns, including: the temporary needs of today's market; the legitimate
public policy question of how much of the mortgage market should be directly or
indirectly influenced by GSEs, which the market perceives as being backed by the
federal government; and the issues of size, systemic risk and longer-term market
distortions that will occur by inserting perceived government intervention.
And, just as important, how will we change market participants' expectations and
behavior if they assume, rightly or wrongly, that there is a risk that their own market
functions would be displaced by the GSEs at any point in time? The existence of
government influence certainly helps when confidence in credit quality is causing
marketplace stress. However, this "benefit" is not without cost in the form of a
reduction in market discipline and competition, innovation, and efficiency.
Some have suggested that the GSEs should be permitted to inject some liquidity
into the jumbo mortgage market. There is little question that allowing the GSEs to
securitize jumbo mortgages would give a short term lift which would be helpful to a
segment of the housing market that has shown some recent improvement but is not
functioning as normal. GSE entry into this sector would improve liquidity. The jumbo
mortgage market traditionally has been a very profitable part of the mortgage
market, with low default rates. For that reason it seems logical that this market will
right itself in the weeks and months ahead. Therefore, consideration of this issue
should be limited to a provision that is temporary and is part of legislation
strengthening the regulatory structure. If it goes beyond that, it raises difficult public
policy issues and could be seen as detracting from the GSEs' affordable housing
mission and displacing private sector participation, which the Administration does
not support.
The borrowers who are facing the greatest stress today are those who have lessthan-perfect credit, and also those who have little equity in their homes, due to a
decline in house price appreciation or a depreciation in home values. These
difficulties are not limited solely to subprime mortgages, but are also surfacing
among some prime jumbo mortgage holders. Anything the GSEs do to provide
liquidity in this area, then, would mean taking on more risk. Therefore, such steps,
and any additional authority permitting such steps, must be contemplated only in
conjunction with legislation that addresses the inadequate regulatory structure of
the GSEs.
The current GSE regulator has less authority than a federal bank regulator. Many
argue that a good solution would be for the GSEs to be regulated in a manner
consistent with regulation of large national banks. However, in our view, the GSE
regulator should have more tools available than does a bank regulator to take into
account the unique characteristics and tensions of the GSEs.
This Committee and the House of Representatives worked very hard to pass a
meaningful GSE regulatory reform bill. In our view, the Housebill is not perfect, but
it goes a long way in addressing the issues that must be conSidered. The Senate
now must act. The case cannot be stronger for the Senate to take up GSE reform
legislation.
It would be unreasonable and irresponsible to expand the GSEs' businesses
without addressing the fundamental problems of their regulatory structure. I would
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welcome this debate and repeat our request for the Congress to send the President
a strong GSE reform bill. I frankly am disappointed that we have not had further
engagement on these important issues.
Helping Struggling Homeowners
We also have been discussing with the GSEs how they might playa meaningful
role to help struggling borrowers keep their homes. Of course, there are a number
of constraints on the GSEs ability to help, especially where struggling homeowners
have little equity in their homes. Many mortgages were originated with high loan-tovalue ratios, and the declines in house price appreciation (or depreciation in home
values) have put additional pressure on the current loan-to-value ratios of all types
of mortgages. The GSE charters require that they have adequate credit
enhancement on any loans they securitize or purchase that have a high loan-tovalue ratio (greater than 80 percent LTVs). Changing this would require legislation.
Again, I would welcome the debate in Congress about whether the GSEs should
have the ability to go deeper into the credit spectrum to help current homeowners
and to support further their affordable housing mission. This debate should be part
of the broader regulatory reform discussion because allowing the GSEs to take on
more risk elevates the importance of having adequate regulatory oversight.
Another, perhaps larger, constraint on their ability to assist borrowers is their own
internal underwriting standards. Many of these borrowers represent significant
credit risk, and present greater risk management issues for the GSEs in
comparison to the traditional prime market. To undertake more business to assist
these borrowers, the GSEs would have to reevaluate their own underwriting
standards and develop new products that can help reach troubled homebuyers. By
guaranteeing these types of products they would increase the flow of liquidity
available to refinance some subprime borrowers into mortgages they can afford.
We are encouraging the GSEs to do more. However, we recognize that the GSE
management teams must also answer to their boards of directors and their
shareholders in making these business decisions. We would expect the GSEs to
evaluate fully the risks associated with any new initiatives in that context along with
their public purpose mission.
In financing mortgages for either of these two types of struggling homeowners those with credit problems or those with little equity in their homes - the GSEs
would be taking on greater risk. Legislation that encourages them to assume more
risk must also create an appropriate regulator to provide the proper regulatory
oversight We should not create tomorrow's problem as we constructtoday's
solution.
Portfolio Caps
Recently, there have been calls on the Administration and the Office of Federal
Housing Enterprise Oversight (OFHEO), the GSEs' independent regulator, from
some policymakers and market participants to undertake certain actions to expand
the market segments in which the GSEs may operate. Most prominently, the
Administration has been asked to lift the temporary caps on the GSEs' retained
portfolios.
It is important to note that the portfolio caps were imposed by the GSEs'
independent regulator because of the well-publicized and documented concerns
that I referred to earlier. It is also important to note that this regulatory decision
does not affect their securitization activities at all.
I view the GSEs' requests for an increase in their investment portfolio as legitimate
from a business perspective, but less so from a public policy perspective. From a
business perspective, when mortgage spreads widen, growth in the GSEs' retained
mortgage portfolio provides enhanced profit opportunitie~ given the GSEs' debt
funding advantage. Thus, the business motivation for thiS request IS clear and
sound.
Whether this request will have a positive impact on the mortgage market is much
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less clear. There is already ample liquidity in the prime conforming marketplace,
the marketplace in which the GSEs concentrate their investment portfolio business.
The securitization efforts of Fannie Mae and Freddie Mac have been a huge
contributor to this liquidity. The more efficient use of their capital to ease current
market strains is in the guarantee business, where each dollar of capital goes
further in adding liquidity.
Given that the prime conforming market is functioning well, I would largely
characterize the portfolio cap debate as misplaced. It is easy for some to point to
lifting the portfolio caps as a "solution" to a complicated problem that, regrettably,
needs more time to work out. This portfolio cap issue is something that the
regulator should look at and continue to evaluate. Just yesterday, OFHEO
announced steps to adjust Fannie Mae's Inveslment portfolio cap and 10 provide
more flexibility to both enterprises with regard to the management of their
investment portfolios. I hope that both GSEs will use this new flexibility to provide
liquidity to parts of the market experiencing the most strain.
This matter is not something that requires Congressional action. This is a
regulatory decision, and it is being addressed where it should be, at OFHEO.
Generally speaking, the caps may be lifted, at OFHEO's discretion, when each
GSE becomes up-to-date and current in their filings with the SEC. My
understanding is that because of the good work of the new management teams,
both enterprises likely will complete their restatements some time in 2008.
Because this regulatory matter does not impose negative consequences on the
overall economy, I see no reason for legislative intervention.
At the Treasury Department, we are very open to ways to enable the GSEs to do
more to relieve the strains in the mortgage markets. Our discussions have been
thoughtful and constructive. They understand that this is a critical moment for them
to demonstrate their ability to make a meaningful difference in the affordable
housing market.
Mongage Origination Issues
As noted earlier, securitization has fundamentally altered the process of obtaining a
mortgage. Securitization has led to innovation in product design and increased
capital availability. Of course, the decentralized nature of the mortgage market also
presents certain challenges as many different participants - mortgage brokers,
mortgage banks, insured depository institutions, investment banks, and ratings
agencies - playa role in the mortgage process.
As we evaluate ways to improve the mortgage process in the future, we must look
broadly across all participants in the process. While there are many issues that can
be considered, I would arrange them in three broad segments: (1) disclosure
provided to the borrower; (2) market practices; and (3) capital markets aspects. A
thorough evaluation will require looking at each of the segments.
Imponance of Disclosure
Adequate disclosures are a key component in fully empowering consumers to shop
for the best mortgage product and promoting competition among mortgage
originators. Our current system provides a voluminous amount of disclosure, but
still consumers are confused about key aspects of their mortgage loans.
We need to work toward simplified disclosures that provide consumers information
about key features of their mortgage. The key is not more disclosure, the key is
better disclosure and this might be a case where less is more. Taking it as a given
that many people will not read all (or even most) of the disclosure documents, we
should try to evaluate what type of information is most critical for a lending decision
to be consummated. Some of the proposals to create a one-page mortgage
disclosure have been designed with this goal in mind.
As we consider new legislative proposals for enhanced or simplified disclosures, we
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should be fully aware of the efforts that are currently underway to improve
disclosures. The Federal Reserve is engaged in a comprehensive review of the
disclosure regime underlyin9 the Truth in Lending Act, with the goal of developing
disclosures that more effectively help consumers understand their loan terms.
Chairman Bernanke and I have discussed this issue and I have confidence that he
and the Federal Reserve will work diligently to achieve this goal. I am sure that
Chairman Bernanke can provide additional details on the scope of the Federal
Reserve's efforts.
Similarly, as described in Secretary Jackson's testimony HUD is engaged in an
effort to propose RESPA reforms that would promote comparative shopping by
consumers for the best loan terms, provide clearer disclosures, limit settlement cost
increases, and require fee disclosures.
Simplified and meaningful disclosures should be in everyone's interest. The
question is not whether we should strive for this goal, but more so the best way to
achieve this goal.
Market Practices
Many of the most egregious problems related to mortgage fraud - such as falsifying
income, inflating appraisals, or deceiving customers - are currently illegal under
existing statutes. Federal agencies such as HUD, the Department of Justice, and
the Federal Trade Commission are aggressively pursuing perpetrators of mortgage
fraud. State authorities have also taken numerous actions. At the most basic level,
we must ensure that our law enforcement agencies have the resources necessary
to fight mortgage fraud at all levels.
Another issue that should be considered is inconsistency in the practices of
participants in the mortgage market. Mortgage brokers have often been singled out
as the main problem, and it appears that many of the mortgages that are currently
under stress were arranged by mortgage brokers. But that is not the complete story
as in many cases mortgage brokers were arranging loans based on lax
underwriting standards developed by mortgage originators who could then fund
these loans through securitization transactions arranged by investment banks.
Nonetheless, issues of mortgage fraud, whether committed by mortgage brokers or
other mortgage originators, have been a long-standing problem, and much of the
focus has been on entities that are licensed at the state-level, where the degree of
regulation varies.
Unfortunately, this is not a new problem, although the scale of the problem we are
facing today is larger. It is especially difficult for States to monitor the actions of
individuals that move their operations across state boundaries. In response to this
problem, State regulators have started an effort geared toward uniform licensing
and education requirements for mortgage brokers. We support this effort, but it
remains unclear whether State regulators will be able to complete successfully this
task on a national basis. Additional efforts to encourage the development of a more
consistent licensing, education, and monitoring system for mortgage originators are
worth considering and such a system could help to weed out some of the bad
actors.
As we take a closer look at what caused some of the problems in the subprime
market we should look at all aspects of the transaction. Much of the focus has been
on practices of mortgage brokers and originators. I have no doubt that some
mortgage brokers and originators engaged in deceptive and predatory practices in
marketing loans to people that they did not understand or have the ability to repay.
Just as important, and not said as often, I have no doubt that there was an
abundance of borrower-level fraud as well. Some people chose to inflate their
income or mislead a lender into thinking the property was to be owner occupied as
opposed to being an investment property. Both of these practices have a profoundly
negative effect on the mortgage market.
There are legitimate calls for creating a uniform national predatory lending
standard. This is a very important issue that is quite complex. Great care must be
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taken when considering a national predatory lending standard or banning certain
practices so as to not overly constrain credit availability. What some people
consider a predatory practice or loan could be a useful product for some borrowers
as long as they fully understand it. Achieving the nght balance here is critically
important.
The Federal Reserve is engaged in a comprehensive review of its authority under
the Home Ownership and Equity Protection Act (HOEPA), including its authority to
define broadly unfair and deceptive practices that would apply to the entire
mortgage industry. I have spoken with Chairman Bernanke and I have confidence
that he will carefully consider what actions to take in this area. It is clear that the
Federal Reserve has the ability to reach all mortgage loan originators through a
rulemaking under HOEPA. This provides the Federal Reserve with the opportunity
to inject greater uniformity and objective standards into the mortgage origination
process.
Capital Markets Issues
As I noted earlier, capital markets generally, and mortgage markets more
specifically, have changed dramatically in the last 25 years. We at the Treasury
Department are committed to being a leading force in better understanding some of
the important issues raised during the recent period of market disruption. The PWG
has already begun reviewing four important issues. First is financial institutions'
liquidity, market and credit risk practices, including treatment of complex credit
products and conduits. The second is accounting and valuation procedures for
financial derivative instruments, particularly for complex, narrowly traded products
that become difficult to price in times of stress. Third is basic supervisory oversight
principles for regulated financial entities, especially given exposures to off· balance
sheet, contingent claims. And fourth is the role of credit rating agencies in
evaluating structured finance products. In addition, because these issues have
global consequences, we have asked the Financial Stability Forum (FSF) - a body
of finance ministries, central banks and regulatory bodies from leading financial
centers created after the Asian financial crisis - to also examine these issues.
Conclusion
Mr. Chairman, in conclusion, I want to thank you for holding this hearing. Under the
President's leadership, the Administration is working diligently to help mitigate the
impact of rising foreclosures on homeowners and the economy. I appreciate having
the opportunity to present the Treasury Department's perspectives on these
important issues and look forward to working with this Committee and the Congress
in the weeks and months ahead. Thank you and I welcome your questions .
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September 20, 2007
HP-566
Remarks Prepared for Delivery by
Under Secretary McCormick
Peking University on
Rebalancing the U.S.-China Economic Relationship
Beijing--Thank you very much. I am very happy to be back in Beijing, and I
appreciate your warm welcome.
Just over a year ago, Presidents George Bush and Hu Jintao established the
Strategic Economic Dialogue, under the leadership of Vice Premier Wu Vi and
Secretary Paulson, to address the fundamental strategic challenges and
opportunities that lay ahead in our bilateral economic relationship. One thing that
has emerged from this dialogue is an even greater recognition of the huge interest
each of our countries has in the continued growth and prosperity of the other. When
China succeeds, the United States succeeds.
The United States and China have accounted for over 40 percent of total global
economic growth in the past five years, and each is a critically important market for
the other. For example, U.S. exports of services to China support some 37,000 jobs
in high-paying, high-productivity sectors of the U.S. economy. And imports from
China provide U.S. consumers and companies with far richer consumer choices
and access to more eHicient global supply chains than they could hope for in the
absence of trade with China. For China, access to the U.S. and international
markets - and openness to international investment - has helped to create a worldclass export sector and to drive the spectacular rates of economic growth that have
turned this country into the global economic leader it is today.
We owe much of the strength and vitality of our economic relationship today to the
remarkable success of China's economic development over the last three decades:
growth of almost 1 percent per year, a more than eightfold increase in per capita
income, and over 250 million people lifted out of poverty. No one here should have
any doubt about our admiration for what China has achieved.
°
But China's economy has changed fundamentally over the past 30, and even 10
years, and you now face a set of new and different challenges in sustaining future
economic growth.
The growth model that has transformed China from a largely homogeneous,
agricultural economy into a dynamic, increasingly technologically sophisticated
economy has been hugely successful to this point. But some of the policies
developed for a far different China are now responsible for the buildup of large and
rising imbalances.
China's most senior leaders have clearly identified these imbalances. They include
imbalances in growth between rural and urban areas, between the coast and the
interior, between economic and social advancement, between reliance on internal
and external demand, between rich and poor households, and between economic
development and environmental protection.
Current growth model creating increasingly difficult challenges
Based on China's current growth model, these challenges are likely to grow.
China's growth model for the past several decades has featured high levels of
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investment in physical inputs to production, such as plants for producing
manufacturing exports, but has done comparatively less to foster innovation,
entrepreneurship, and the development of the deep and competitive markets. The
current growth model has served China well to this point, but it is now exacerbating
some of the challenges in achieving balanced growth.
First, growth has been increasingly energy-intensive, causing environmental
degradation to accelerate despite Chinese leaders' efforts to strengthen and
enforce environmental regulations. Since 2001, the ratio of growth in energy
demand to GOP growth in China - a good measure of the energy-intensity of
growth - has tripled relative to its level between 1978 and 2000 - putting more
pressure on energy supply and increasing the environmental damage from growth.
Second, growth has been highly capital-intensive, reducing the rate at which
incremental growth creates new employment opportunities for the Chinese people.
Capital and labor are substitutes in economic production, and in an environment of
cheap money, Chinese firms have had strong incentives to use more capital and
less labor despite China's need to provide jobs for many workers who are now
seeking to move from the state and agricultural sectors to the private manufacturing
and services sectors.
Third, recent growth has gone hand-in-hand with a decline in both consumption as
a share of GOP and household income as a share of GOP. National saving has
risen to its highest rate since the beginning of market reforms, and the share of
wages in GOP has fallen more than 10 percentage points in less than 10 years. As
a result, the Chinese people are capturing a smaller and smaller share of the
benefits of growth.
These features of the current growth model are mutually reinforcing. The capitalIntensive nature of China's economic growth has been fueled by high national
saving, which has both provided the resources for capital investment and
encouraged the use of capital-intensive techniques. The pattern of prices maintained by an inflexible exchange rate - has encouraged production in export
industries, many of which are highly resource-intensive. At the same time, as
Chinese production has increasingly targeted foreign consumers, domestic
consumption has remained low, and the resulting high saving has been channeled
back into investment in export sectors, perpetuating the cycle.
High and increasing national saving - and its counterpart, the slow growth of
domestic demand - has led to increasing trade surpluses and made Chinese
growth increasingly dependent on external demand.
Meeting the challenges
China's leaders understand these issues well and are right to be turning their
attention now - rather than later - to reforms aimed at achieving economic growth
that stems more from domestic demand, innovation, and high quality investment.
Those reforms include efforts to rebuild the social safety net and address the
causes of precautionary household saving, efforts to make education less costly
and more widely available, efforts to improve environmental safeguards, and efforts
to build a more robust services sector.
The development of the financial services sector - including increased access to
consumer finance for Chinese households - will be particularly important to
ensuring that strong Chinese growth continues. Access to capit~1 is key to en~uring
that Chinese entrepreneurs are able to capitalize on their capacity for innovation.
And access to a wider range of higher-yielding savings instruments would provide
all Chinese households with the tools they need to build assets more rapidly,
allowing for higher consumption and living standards both today and in retirement.
Developing a modern financial sector is not an easy thing, but investment by foreign
firms - and the advanced risk management skills and market expertise that comes
with it - can play an important role in expediting the process.
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While rebalancing growth will require a number of the major structural measures
that I have mentioned, price measures ~ including exchange rate adjustment _
must also playa role. Flexible prices playa critical function of allocating resources
on the baSIS of accurately-matched costs and benefits, and they fulfill this function
with great effectiveness and at very low cost.
The exchange rate has become a highly charged issue in U.S.-China economic
relations. This is unfortunate, because as many non-official and non-American
observers have argued, exchange rate flexibility is extremely important to China. I
therefore want to be very clear about what increased currency flexibility in China
will, and will not do, for the United States and China.
For the United States, what it will not do is cause a significant reduction in the U.S.
trade deficit, nor will it provide a magiC bullet for solving the problems of American
industries facing overseas competition. What increase currency flexibility will do is
remove a major cause of the perceived unfairness in our bilateral relationship,
allowing us to move on to the important long term challenges the United States and
China jointly face.
For China, more currency flexibility will not restrain growth, nor will it lead to
deflation. We have already seen the resilience of China's exporters to currency
appreciation, with many enjoying higher profit margins today than they did two
years ago. In East ASia, Korea, IndoneSia, and Australia have all had currency
appreciations far larger than China's, while maintaining strong growth and price
stability. So did Japan in the 1970s, an example more relevant to China than Japan
in the 1990s.
What currency flexibility will do for China is support - and in fact be a necessary
component of - a growth strategy that brings higher consumption to Chinese
households and more balanced, harmonious, and sustainable growth. This
transition will occur through a decrease in the price of imports and the introduction
of stronger incentives for Chinese companies to produce for Chinese consumers.
What currency reform will also do is provide Chinese policymakers with greater
freedom to use monetary policy to maintain price stability and avoid asset bubbles.
This is of particular significance given China's recent acceleration of inflation. All of
this will lead to growth that is more stable, more China-centered, and more effective
in raising the living standards of the Chinese people than China's current growth
model now is.
I know there are many in China who have expressed concern that more rapid
currency appreciation will hurt low income workers in some sectors. To the
contrary, by encouraging employment growth in less capital-intensive domesticoriented industries, exchange rate appreciation will open up new opportunities for
low- and un-skilled workers. Even more important for the poor is that industries
serving domestic consumption demand will create new jobs at a much faster rate.
According to a recent study by Robert Feenstra (an economist from the University
of California) growth in domestic demand has proven three times more effective in
generating employment in China than growth in exports
Building a mutually beneficial and politically sustainable relationship
I have said a great deal about the current challenges for China. What about for the
United States?
We have emphasized that the U.S. trade deficit and China's trade surplus are
outcomes that are primarily driven by domestic rather than international economic
factors. For the United States, our trade deficit can only be reduced through
deciSive measures to increase both private and public saving - the opposite
problem China faces in its efforts to reduce a large trade surplus. To meet this
challenge, we are committed to continuing to improve our fiscal outlook, particularly
through measures to address the challenge of entitlement spending reform. We
have already taken steps to increase incentives for private saving through tax
reforms affecting capital income, and we are striving to broaden these tax reforms
to further boost personal saving.
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The United States must also continue to strive to avoid the siren song of
protectionism. We must not sacrifice the long-term gains of openness by pursuing
short-term and misguided responses to the challenges presented by global
international markets. President Bush and Secretary Paulson are committed to
ensuring America's open trade and investment climate.
Before concluding, I would like to emphasize the importance of re-energizing
bilateral investment, a critical aspect of our economic relationship. Talk of
protectionism can easily invoke national passions, and it is important for both our
countries to keep in mind the tremendous benefits that openness to foreign
investment has brought to our economies. It is critical that we promote better
mutual understanding. Both sides could benefit from sharing information on and
discussing our respective policies to foreign direct investment. On our side, we
warmly welcome investment from all of our international economic partners, and
China is a very important partner to us.
Conclusion
Ensuring that both the U.S. and Chinese economies continue to grow strongly - in
ways that do not worsen global or domestic imbalances - is vital to each of us and
to the global economy. In today's dynamic and transforming economy, recipes for
past success do not guarantee success in the future. China and the United States
need to adjust their policies to ensure vibrant economies as well as harmonious
societies, both at home and globally.
Out mutual commitment to overcoming these challenges is critical to the well-being
of the people of both our countries and will shape the broader global economic
landscape for generations to come.
Thank you very much.
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September 20,2007
HP-567
Testimony of Chief Information Officer Michael D. Duffy
Before the U.S. Senate Committee on Homeland Security
and
Governmental Affairs Subcommittee on Federal
Financial Management, Government Information,
Federal Services, and International Security
Mr. Chairman and Members of the Subcommittee, I appreciate the opportunity to
appear before you to discuss the management of information technology (IT)
investments. Like the other Federal agencies represented here today, the
Department of the Treasury is diligently working to improve the management of
information technology and especially, those investments considered to be "high
risk." The Department has experienced its share of IT challenges in recent years. In
response, Secretary Henry Paulson made IT management one of his top priorities
when he took over the Department last year. And as the most recent addition to the
Secretary's senior management team, I am fully committed to improving our ability
to effectively manage our IT investments and receiving value from these
investments on behalf of the Congress and the American Taxpayer. I hope by
discussing some of Treasury's recent and planned actions, and by offering some of
my own perspectives, I can contribute to the discussion today. With your
permiSSion, I will summarize my remarks and submit my complete written testimony
for the record.
My Personal Background
Today, I appear before you honored to serve as the Chief Information Officer (CIO)
of the U.S. Department of the Treasury. I began working in this position on
September 10th of this year. Since I am relatively new to my position, I would like to
preface my comments today by briefly sharing a synopsis of my IT and general
management experience. Prior to joining the Treasury Department, I served at the
Department of Justice (DOJ) for 15 years, the past 4 as the Deputy CIO for eGovernment. In this role, I directed the development of the Justice information
sharing strategy, and I led the deployment of a tactical wireless communications
system used by federal field agents from multiple agencies. Prior to my tenure as a
Deputy CIO, I managed DOJ's telecommunications program, led the DOJ
information security and information technology planning efforts, and architected a
department-wide office automation system. In sum, I had a broad array of IT
management experiences at DOJ. I will draw on that experience as I undertake my
new role as CIO at Treasury.
Strengthening Treasury's Investment Management Capability through
Executive Leadership
The Department of the Treasury has a significant IT investment portfolio that totals
$2.958 in FY08 billion - about 25 percent of its budget - funding 285 discrete
investments. Of the total, $2.398 billion (81 %) funds Treasury's 63 major
investments, and the remaining $560 million support 222 "non-major" investments
(i.e., those that cost less than $5 million annually).
The Department and its bureaus rely significantly on information technology to carry
out its extensive and varied mission. Our largest investments are at the Internal
Revenue Service (IRS), which relies on IT to administer its tax programs. But the
Department also relies on technology for other critical purposes, such as assisting
Treasury to analyze financial intelligence information to combat terrorism.
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Given the Importance and nature of Treasury's IT Investments, the Government
Accountability Office (GAO) reviewed and issued a report on Treasury's IT
management. The July 2007, GAO report found that while Treasury had
established many of the capabilities needed to select, control, and evaluate its IT
investments, t~e Department had significant weaknesses. Due to these findings,
the GAO Identified the need for Treasury to implement an executive level review
board to monitor the progress of IT investments through the entire life cycle of the
proJects. The GAO also recommended that Treasury implement a comprehensive
process by which to manage all IT investments, irrespective of size, scope or dollar
value.
The Department concurred with the GAO recommendations and began to
Immediately address the key issues raised. I strongly support these steps and
believe this IS a clear indication of the commitment of the Department's leadership
to rapidly and comprehensively improve Treasury's overall management of IT.
As the new CIO, I have taken a particular interest in the GAO's findings and
recommendations. I believe regular engagement of our Department and bureau
executives and continuous attention to the progress of Treasury IT investments are
integral to Treasury's successful planning, implementation and use of IT. Indeed,
effective management of IT is a prerequisite for effective use of IT to facilitate
accomplishment of Treasury's mission. I am committed to working collaboratively
across the Department - as well as with the Office of Management and Budget and
the Congress - to ensure Treasury IT expenditures provide value for the
Department and the citizens we serve.
In the coming months, the Department intends to make several key changes to
address its IT management issues. Per the GAO's recommendation, we will
revitalize the Executive Investment Review Board during the first quarter of FY
2008, in order to bring greater executive and leadership involvement in Treasury's
management of IT. We will also use this forum to further ensure our IT portfolio
decisions are driven by our business requirements and strategies. Additionally, we
will be reviewing our existing IT management organizations and processes to
assess their maturity and effectiveness. Finally, we intend to better leverage
existing management tools and processes that can be used coincidently to improve
investment management capabilities across Treasury.
As we work towards addressing our IT management issues in the coming months,
the Treasury Investment Review Board, which is comprised of the Department's
senior-level IT executives, will continue to perform oversight assessments of IT
investments consistent with our continued commitment to the Clinger-Cohen Act.
Additionally, I will be offering to partiCipate in governance and investment review
boards at the bureau level.
Notwithstanding the planned changes I just mentioned, I note that the Department
has already taken a number of steps to improve Treasury IT management. To
ensure that all IT investments receive comprehensive oversight. the Department
began implementing process changes in June 2007 to ensure that "non-major"
investments are formally selected by the appropriate Treasury Governance Board
and reviewed quarterly to validate cost, schedule, and performance goals. The
Department established a Capital Planning and Investment Control Working Group
which will convene shortly to implement changes needed to ensure that the
Department and its bureaus perform in a comprehensive manner the four core
disciplines of IT capital planning: the Pre-Select, Select, Control and Evaluate
functions.
Recognizing the importance of managing IT from an enterprise perspective, the
Department currently collaborates with bureau executives from both the IT and
business side. This collaboration ensures active stakeholder engagement which
helps validate the alignment of IT investments with the Department's business
requirements. Finally, the Department currently interacts with industry users
through its Chairmanship role on the Federal User Group for Its portfolio .
management tool "Prosight." In this capacity, the Department'partlclpate~ In a
variety of discussions on best practices and emerging strategies In effective IT
portfolio management.
Ww.treaS"f~\JVlpress'releasesrnp~(57
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10/1/2007
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Conclusion
In summary, the Department has made significant strides in the past year to
improve the management and performance of its information technology resources.
We believe these efforts and the actions through which we plan to fully engage
executive stakeholders across the Department will result in significant progress
towards implementing comprehensive IT investment management at Treasury. In
so doing, Treasury IT programs will provide value-added services to the bureaus
and offices performing Treasury mission functions, and we will do so in a manner
mindful of the citizen taxpayer's investments in those programs.
Thank you for the opportunity to partiCipate on this panel. I would be happy to
answer any questions that you have at this time.
'Ww.treas.~Jvfl'ress/releases/hp567
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September 20, 2007
HP-568
Update: Treasury Deputy Secretary to Visit Montana
U.S. Deputy Secretary Robert M. Kimmitt and Treasury's Community Development
Financial Institutions (CDFI) Fund Director Kimberly A. Reed will travel to Montana
this week to promote community organizations that can help homeowners avoid
foreclosure in rural America and to recognize two local organizations receiving
more than $200,000 in CDFI Fund awards. The Deputy Secretary will also address
the University of Great Falls and announce the establishment of the J. Stanley
Kimmitt Public Service Lecture and Internship at the University of Montana.
Deputy Secretary Kimmitt and Director Reed will present an award to the Montana
HomeOwnership Network, which works with local service partners throughout the
state to provide mortgage education and foreclosure prevention assistance. On
Friday they will recognize Sovereign Leasing and Finance Company, Inc., which is
receiving an award to expand its mortgage counseling and financial services.
Deputy Secretary Kimmitt will participate Friday in the announcement of the J.
Stanley Kimmitt Public Service Lecture and Internship, named in honor of the
Deputy Secretary's late father, former Secretary of the Senate Stan Kimmitt, who
grew up in Great Falls and attended the University of Montana. The following
events are open to credentialed media:
Who:
Deputy Secretary Robert M. Kimmitt
CDFI Director Kimberly A. Reed
What:
CDFI Fund Award to Montana HomeOwnership Network; Remarks to Students
When:
Thursday, September 20,4:00 p.m. MDT
Where:
University of Great Falls
Student Center
1301 20th Street South
Great Falls, Mont
Who:
Deputy Secretary Robert M. Kimmitt
CDFI Director Kimberly A. Reed
What:
CDFI Fund Award to Sovereign Leasing and Finance Company, Inc
When:
Friday, September 21,9:45 a.m. MDT
Where:
Tribal Complex
58141 U.S. Highway 93
Pablo, Mont.
Who:
Deputy Secretary Robert M. Kimmitt
What:
Remarks on Establishment of the J. Stanley Kimmitt Public Service Lecture and
Internship
When:
Friday, September 21,3:00 p.m. MDT
Where:
v.treas.g0V1press/releaseslhp568.htm
10/1/2007
Page 2 of 2
University of Montana
Don Anderson Hall, Room 210
32 Campus Drive
Missoula, Mont.
'W .treas. £!oV/press/releaseslhp568.htm
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September 21 , 2007
HP-569
Paulson Remarks on Signing of Update to U.S.-Canada Income Tax Treaty
Chelsea, Quebec--Thank you for your kind remarks, Minister Flaherty. It is a
pleasure to join you in marking this important day.
Today, we are signing a protocol that is the fifth update to the tax treaty originally
signed in 1980. Mutually beneficial tax agreements between the United States and
Canada have a long tradition, dating back at least to 1928 when our countries
signed an agreement on the taxation of income from shipping.
Our existing tax treaty is a significant part of the U.S. - Canada relationship. It
strengthens our economic relations. It promotes growth and investment. These
treaties have evolved as the ties between our nations have grown stronger.
We share not only a 5,500 mile border, we share a commitment to trade and open
investment. By further reducing barriers to cross-border activities for U.S. and
Canadian taxpayers, this updating of our treaty enables us to move even more
swiftly in the dynamic global economy.
Our countries have the largest bilateral trade relationship in the world, with total
exports and imports exceeding $530 billion in 2006. Canada is the United States'
largest single-country trading partner. The Ambassador Bridge that links Detroit
and Windsor is the largest trade link in the world --- 7,000 trucks cross daily,
carrying goods worth more than $120 billion per year.
The vast majority of our cross-border trade flows without difficulty. We share
Canada's commitment to a "safe, secure and efficient" border, and we have learned
that security and efficient flow of legitimate trade and travelers are not mutually
exclusive.
This robust economic relationship with Canada is vital to continued growth in
America, and the U.S. Congress has the opportunity to generate even more
opportunities by approving the pending Free Trade Agreements with Peru,
Colombia, Panama and South Korea. Our deep, beneficial ties with Canada clearly
demonstrate the value of global trade and investment.
This updating of our treaty represents the welcome culmination of many years of
dedicated work by officials in both Canada and the United States, and it is an honor
to be here on behalf of those whose efforts made this possible. Both countries
worked very hard to find a balance of priorities and goals that will benefit our
Citizens.
I want to express my appreCiation for Minister Flaherty's advancement of a mutually
respectful and productive collaboration between our countries. He was
instrumental in our ability to reach agreement on this treaty and, during the recent
turbulence in financial markets has proven to be a sure and steady hand on
Canada's economic keel.
As Minister Flaherty mentioned, this protocol includes several important provisions.
It eliminates the withholding tax on cross-border interest payments and updates tax
wWw.treas.g-vV/press/reIeases/hp5b9.htm
101112007
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rules on pensions for workers who cross the U.S. - Canada border. It also updates
and clarifies the existing treaty in areas such as the treatment of partnerships.
There is also a provision for arbitration of unresolved double-taxation cases; this will
lead to more expedient and efficient resolutions of these cases. The inclusion of an
arbitration provision is a new development for the United States.
I look forward to working with the Senate Foreign Relations Committee to have this
protocol ratified by the full Senate as soon as possible. I also appreciate the work
the Foreign Relations Committee has done In reviewing the other four tax
agreements that President Bush has sent to the Senate, and I am hopeful that they
will be ratified very soon.
The U.S. - Canada economic relationship is also characterized by substantial
mutual investment; 11 percent of U.S. direct investment abroad is invested in
Canada. In turn, Canada is a dominant investor in the United States, representing
9 percent of total foreign direct investment in our country. We welcome Canadian
Investment; it is the ultimate vote of confidence in the U.S. economy.
We reciprocate that confidence --- the natural result when we are committed to
economic cooperation.
Minster Flaherty and I also share a commitment to environmentally sound business
practices, and to preserving our abundant natural heritage for generations to come.
So it is particularly appropriate that we are here in beautiful Gatineau Park.
Thank you for your hospitality today. I look forward to working in partnership with
you to bring this agreement into force, and on economic issues that will surely arise
in the future.
REPORTS
•
ifth Protocol to the U.S.-Canada Income Tax Treaty of 1980
~w.treas.suV/preSS/releasesl hp569
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PROTOCOL
AMENDING THE CONVENTION BETWEEN
THE UNITED STATES OF AMERICA AND CANADA
WITH RESPECT TO TAXES ON INCOME AND ON CAPITAL
DONE AT WASHINGTON ON 26 SEPTEMBER 1980
AS AMENDED BY THE PROTOCOLS DONE ON 14 JUNE 1983,
28 MARCH 1984, 17 MARCH 1995 AND 29 JULY 1997
The United States of America and Canada, hereinafter referred to as the "Contracting States",
DESIRING to conclude a Protocol amending the Convention between the United States of
America and Canada with Respect to Taxes on Income and on Capital done at Washington on
26 September 1980, as amended by the Protocols done on 14 June 1983,28 March 1984, 17
March 1995 and 29 July 1997 (hereinafter referred to as the "Convention"),
Paragraph 1 of Article III (General Definitions) of the Convention shall be amended by deleting
the word "and" at the end of subparagraph (i), by replacing the period at the end of
subparagraph U) with "; and", and by adding the following subparagraph:
(k)
The term "national" of a Contracting State means:
(i)
Any individual possessing the citizenship or nationality of that
State; and
(ii)
Any legal person, partnership or association deriving its status as
such from the laws in force in that State.
Article 2
1.
Paragraph 3 of Article IV (Residence) of the Convention shall be deleted and replaced
by the following:
3.
Where by reason of the provisions of paragraph 1, a company is a
resident of both Contracting States, then
(a)
If it is created under the laws in force in a Contracting State, but
not under the laws in force in the other Contracting State, it shall be
deemed to be a resident only of the first-mentioned State; and
(b)
In any other case, the competent authorities of the Contracting
States shall endeavor to settle the question of residency by mutual
agreement and determine the mode of application of this Convention to
the company. In the absence of such agreement, the company shall not
be considered a resident of either Contracting State for purposes of
claiming any benefits under this Convention.
2.
Article IV (Residence) of the Convention shall be amended by adding the following
a person who is a resident of a Contracting State where:
(a)
The person is considered under the taxation law of that State to
have derived the amount through an entity (other than an entity that is a
resident of the other Contracting State); and
(b)
By reason of the entity being treated as fiscally transparent under
the laws of the first-mentioned State, the treatment of the amount under
the taxation law of that State is the same as its treatment would be if that
amount had been derived directly by that person.
7.
An amount of income, profit or gain shall be considered not to be paid to
or derived by a person who is a resident of a Contracting State where:
(a)
The person is considered under the taxation law of the other
Contracting State to have derived the amount through an entity that is not
a resident of the first-mentioned State, but by reason of the entity not
being treated as fiscally transparent under the laws of that State, the
treatment of the amount under the taxation law of that State is not the
same as its treatment would be if that amount had been derived directly
by that person; or
(b)
The person is considered under the taxation law of the other
Contracting State to have received the amount from an entity that is a
resident of that other State, but by rcason of the entity being treated as
fiscally transparent under the laws of the first-mentioned State, the
treatment of the amount under the taxation law of that State is not the
same as its treatment would be if that entity were not treated as fiscally
transparent under the laws of that State.
1.
The first sentence of paragraph 6 of Article V (Permanent Establishment) of the
Convention shall be amended by deleting the word "and" preccding the first reference to
paragraph 5, inserting a comma, and adding the words "and 9," following that reference to
paragraph 5.
2.
Paragraph 9 of Article V (Permanent Establishment) of the Convention shall be deleted
and replaced by the following two paragraphs:
9.
SUbject to paragraph 3, where an enterprise of a Contracting State
provides services in the other Contracting State, if that enterprise is found not to
have a permanent establishment in that other State by virtue of the preceding
paragraphs of this Article, that enterprise shall be deemed to provide those
services through a permanent establishment in that other State if and only if:
(a)
Those services are performed in that other State by an individual
who is present in that other State for a period or periods aggregating 183
days or more in any twelve-month period, and, during that period or
periods, more than 50 percent of the gross active business revenues of
the enterprise consists of income derived from the services performed in
that other State by that individual; or
(b)
The services are provided in that other State for an aggregate of
183 days or more in any twelve-month period with respect to the same or
connected project for customers who are either residents of that other
State or who maintain a permanent establishment in that other State and
the services are provided in respect of that pennanent establishment.
10.
For the purposes of this Convention, the provisions of this Article shall
be applied in determining whether any person has a permanent establishment in
any State.
Paragraph 2 of Article VII (Business Profits) of the Convention shall be deleted and replaced
by the following:
2.
Subject to the provisions of paragraph 3, where a resident of a
Contracting State carries on, or has carried on, business in the other Contracting
State through a pennanent establishment situated therein, there shall in each
Contracting State be attributed to that pennanent establishment the business
profits which it might be expected to make if it were a distinct and separate
person engaged in the same or similar activities under the same or similar
conditions and dealing wholly independently with the resident and with any
other person related to the resident (within the meaning of paragraph 2 of Article
IX (Related Persons».
Article 5
1.
Subparagraph 2(a) of Article X (Dividends) of the Convention shall be deleted and
replaced by the following:
(a)
5 percent of the gross amount of the dividends if the beneficial owner is
a company which owns at least 10 percent of the voting stock of the company
paying the dividends (for this purpose, a company that is a resident of a
Contracting State shall be considered to own the voting stock owned by an
entity that is considered fiscally transparent under the laws of that State and that
is not a resident of the Contracting State of which the company paying the
dividends is a resident, in proportion to the company's ownership interest in that
entity);
2.
Paragraph 3 of Article X (Dividends) of the Convention shall be deleted and replaced
by {he following.
from shares or other rights, not being debt-claims, participating in profits, as
well as income that is subjected to thc same taxation treatmcnt as income from
shares under the laws of the State of which the payer is a resident.
3.
Paragraph 4 of Article X (Dividends) of the Convention shall be deleted and replaced
by the following:
4.
The provisions of paragraph 2 shall not apply if the beneficial owner of
the dividends, being a resident of a Contracting State, carries on, or has carried
on, business in the other Contracting State of which the company paying the
dividends is a resident, through a permanent establishment situated therein, and
the holding in respect of which the dividends are paid is effectively connected to
such permanent establishment. In such case, the provisions of Article VII
(Business Profits) shall apply.
4.
Paragraph 5 of Article X (Dividends) of the Convention shall be amended by deleting
the words "or a fixed base" following the words "effectively connected with a permanent
establishment".
5.
Subparagraph 7(c) of Article X (Dividends) of the Convention shall be deleted and
replaced by the following:
(c)
Subparagraph 2(a) shall not apply to dividends paid by a resident of the
United States that is a Real Estate Investment Trust (REIT), and subparagraph
2(b) shall apply only if:
(i)
The beneficial owner of the dividends is an individual holding an
interest of not more than 10 percent in the REIT;
(ii)
The dividends are paid with respect to a class of stock that is
publicly traded and the beneficial owner of the dividends is a person
holding an interest of not more than 5 percent in any class of the REIT's
stock: or
interest of not more than 10 percent in the REIT and the REIT is
diversified.
Otherwise, the rate of tax applicable under the domestic law of the United States
shall apply. Where an estate or testamentary trust acquired its interest in a REIT
as a consequence of an individual's death, for purposes of this subparagraph the
estate or trust shall for the five-year period following the death be deemed with
respect to that interest to be an individual.
Article 6
Article XI (Interest) of the Convention shall be deleted and replaced by the following:
Article XI
Interest
1.
Interest arising in a Contracting State and beneficially owned by a
resident of the other Contracting State may be taxed only in that other State.
2.
The tenn "interest" as used in this Article means income from
debt-claims of every kind, whether or not secured by mortgage, and whether or
not carrying a right to participate in the debtor's profits, and in particular,
income from government securities and income from bonds or debentures,
including premiums or prizes attaching to such securities, bonds or debentures,
as well as income assimilated to income from money lent by the taxation laws of
the Contracting State in which the income arises. However, the tenn "interest"
does not include income dealt with in Article X (Dividends).
3.
The provisions of paragraph I shall not apply if the beneficial owner of
the interest, being a resident of a Contracting State, carries on, or has carried on,
business in the other Contracting State in which the interest arises, through a
In such case the provisions of Article VII (Business Profits) shall apply.
4.
For the purposes of this Article, interest shall be decmcd to arise in a
Contracting State when the payer is that State itself, or a political subdivision,
local authority or a resident of that State. Where, however, the person paying the
interest, whether he is a resident of a Contracting State or not, has in a State
other than that of which he is a resident a permanent establishment in connection
with which the indebtedness on which the interest is paid was incurred, and such
interest is borne by such permanent establishment, then such interest shall be
deemed to arise in the State in which the permanent establishment is situated
and not in the State of which the payer is a resident.
5.
Where, by reason of a special relationship between the payer and the
beneficial owner or between both of them and some other person, the amount of
the interest, having regard to the debt-claim for which it is paid, exceeds the
amount which would have been agreed upon by the payer and the beneficial
owner in the absence of such relationship, the provisions of this Article shall
apply only to the last-mentioned amount. In such case the excess part of the
payments shall remain taxable according to the laws of each Contracting State,
due regard being had to the other provisions of this Convention.
6.
Notwithstanding the provisions of paragraph 1:
(a)
Interest arising in the United States that is contingent interest of a
type that does not qualify as portfolio interest under United States law
may be taxed by the United States but, if the beneficial owner of the
interest is a resident of Canada, the gross amount of the interest may be
taxed at a rate not exceeding the rate prescribed in subparagraph (b) of
paragraph 2 of Article X (Dividends);
(b)
Interest arising in Canada that is determined with reference to
receipts, sales, income, profits or other cash flow of the debtor or a
payment made by the debtor to a related person may be taxed by Canada,
and according to the laws of Canada, but if the beneficial owner is a resident of the United States, the gross amount of the interest may be taxed
at a rate not exceeding the rate prescribed in subparagraph (b) of
paragraph 2 of Article X (Dividends); and
(c)
Interest that is an excess inclusion with respect to a residual
interest in a real estate mortgage investment conduit may be taxed by
each State in accordance with its domestic law.
7.
Where a resident of a Contracting State pays interest to a person other
than a resident of the other Contracting State, that other State may not impose
any tax on such interest except insofar as it arises in that other State or insofar as
the debt-claim in respect of which the interest is paid is effectively connected
with a permanent establishment situated in that other State.
Article 7
1.
Paragraph 5 of Article XII (Royalties) of the Convention shall be deleted and replaced
by the following:
5.
The provisions of paragraphs 2 and 3 shall not apply if the beneficial
owner of the royalties, being a resident of a Contracting State, carries on, or has
carried on, business in the other Contracting State in which the royalties arise,
through a permanent establishment situated therein, and the right or property in
respect of which the royalties are paid is effectively connected to such
pennanent establishment. In such case the provisions of Article VII (Business
Profits) shall apply.
2.
Subparagraph 6(a) of Article XII (Royalties) of the Convention shall be deleted and
is a resident of that State. Where, however, the person paying the royalties,
whether he is a resident of a Contracting State or not, has in a State a permanent
establishment in connection with which the obligation to pay the royalties was
incurred, and such royalties are borne by such pennanent establishment, then
such royalties shall be deemed to arise in the State in which the permanent
establishment is situated and not in any other State of which the payer is a
resident; and
3.
Paragraph 8 of Article XII (Royalties) of the Convention shall be amended by deleting
the words "or a fixed base" following the words "effectively connected with a permanent
establishment" .
Article 8
1.
Paragraph 2 of Article XIII (Gains) of the Convention shall be deleted and replaced by
the following:
2.
Gains from the alienation of personal property forming part of the
business property of a permanent establishment which a resident of a
Contracting State has or had (within the twelve-month period preceding the date
of alienation) in the other Contracting State, including such gains from the
alienation of such a permanent establishment, may be taxed in that other State.
2.
Paragraph 5 of Article XIII (Gains) of the Convention shall be deleted and replaced by
the following:
5.
The provisions of paragraph 4 shall not affect the right of a Contracting
State to levy, according to its domestic law, a tax on gains from the alienation of
any property derived by an individual who is a resident of the other Contracting
State if:
(i)
For at least 120 months during any period of 20
consecutive years preceding the alienation of the property; and
(ii)
At any time during the 10 years immediately preceding
the alienation of the property; and
(b)
The property (or property for which such property was
substituted in an alienation the gain on which was not recognized for the
purposes of taxation in the first-mentioned State):
(i)
Was owned by the individual at the time the individual
ceased to be a resident of the first-mentioned State; and
(ii)
Was not a property that the individual was treated as
having alienated by reason of ceasing to be a resident of the
first-mentioned State and becoming a resident of the other
Contracting State.
3.
Paragraph 7 of Article XIII (Gains) of the Convention shall be deleted and replaced by
the following:
7.
Where at any time an individual is treated for the purposes of taxation by
a Contracting State as having alienated a property and is taxed in that State by
reason thereof, the individual may elect to be treated for the purposes of taxation
in the other Contracting State, in the year that includes that time and all
subsequent years, as if the individual had, immediately before that time, sold
and repurchased the property for an amount equal to its fair market value at that
time.
4.
Subparagraph 9(c) of Article XIII (Gains) of the Convention shall be amended by
deleting the words "or pertained to a fixed base" following the words "permanent
establishment" .
Article XIV (Independent Personal Services) of the Convention shall be deleted and the
succeeding Articles shall not be renumbered.
Article 10
1.
The title of Article XV (Dependent Personal Services) of the Convention shall be
deleted and replaced by "Income from Employment".
2.
Paragraphs 1 and 2 of renamed Article XV (Income from Employment) of the
Convention shall be deleted and replaced by the following:
1.
Subject to the provisions of Articles XVIII (Pensions and Annuities) and
XIX (Government Service), salaries, wages and other remuneration derived by a
resident of a Contracting State in respect of an employment shall be taxable only
in that State unless the employment is exercised in the other Contracting State. If
the employment is so exercised, such remuneration as is derived therefrom may
be taxed in that other State.
2.
Notwithstanding the provisions of paragraph 1, remuneration derived by
a resident of a Contracting State in respect of an employment exercised in the
other Contracting State shall be taxable only in the first-mentioned State if:
(a)
Such remuneration does not exceed ten thousand dollars
($10,000) in the currency of that other State; or
(b)
The recipient is present in that other State for a period or periods
not exceeding in the aggregate 183 days in any twelve-month period
commencing or ending in the fiscal year concerned, and the
remuneration is not paid by, or on behalf of, a person who is a resident of
that other State and is not borne by a pennanent establishment in that
1.
Paragraph I of Article XVI (Artistes and Athletes) shall be amended by deleting the
words "XIV (Independent Personal Services)" following the words "Notwithstanding the
provisions of Articles" and replacing them with the words "VII (Business Profits)" and by
deleting the words "XV (Dependent Personal Services)" and replacing them with the words
"XV (Income from Employment)'
2.
Paragraph 2 of Article XVI (Artistes and Athletes) shall be amended by deleting the
words "XIV (Independent Personal Services)" following the words "notwithstanding the
provisions of Articles VII (Business Profits)," and by deleting the words "XV (Dependent
Personal Services)" and replacing them with the words "XV (Income from Employment)".
3.
Paragraph 4 of Article XVI (Artistes and Athletes) shall be amended by deleting the
words "XIV (Independent Personal Services)" following the words "Notwithstanding the
provisions of Articles" and replacing them with the words "VII (Business Profits)" and by
deleting the words "(Dependent Personal Services)" in both places they appear in the paragraph
and replacing them with the words "(Income from Employment)'
Article 12
Article XVII (Withholding of Taxes in Respect of Personal Services) of the Convention shall
be deleted and the succeeding Articles shall not be renumbered.
Article 13
1.
Paragraphs 3 and 4 of Article XVIII (Pensions and Annuities) of the Convention shall
be deleted and replaced by the following:
3.
For the purposes of this Convention:
superannuation, pension or other retirement arrangement, Armed Forces
retirement pay, war veterans pensions and allowances and amounts paid
under a sickness, accident or disability plan, but does not include
payments under an income-averaging annuity contract or, except for the
purposes of Article XIX (Government Service), any benefit referred to in
paragraph 5; and
(b)
The term "pensions" also includes a Roth IRA, within the
meaning of section 408A of the Internal Revenue Code, or a plan or
arrangement created pursuant to legislation enacted by a Contracting
State after September 21, 2007 that the competent authorities have
agreed is similar thereto. Notwithstanding the provisions of the
preceding sentence, from such time that contributions have been made to
the Roth IRA or similar plan or arrangement, by or for the benefit of a
resident of the other Contracting State (other than rollover contributions
from a Roth IRA or similar plan or arrangement described in the
previous sentence that is a pension within the meaning of this
subparagraph), to the extent of accretions from such time, such Roth IRA
or similar plan or arrangement shall cease to be considered a pension for
purposes of the provisions of this Article.
4.
For the purposes of this Convention:
(a)
The term "annuity" means a stated sum paid periodically at stated
times during life or. during a specified number of years, under an
obligation to make the payments in return for adequate and full
consideration (other than services rendered), but does not include a
payment that is not a periodic payment or any annuity the cost of which
was deductible for the purposes of taxation in the Contracting State in
which it was acquired; and
annuity contract (including a withdrawal in respect of the cash value
thereof) shall be deemed to arise in a Contracting State if the person
paying the annuity or other amount (in this subparagraph referred to as
the "payer") is a resident of that State. However, if the payer, whether a
resident of a Contracting State or not, has in a State other than that of
which the payer is a resident a pennanent establishment in connection
with which the obligation giving rise to the annuity or other amount was
incurred, and the annuity or other amount is borne by the pennanent
establishment, then the annuity or other amount shall be deemed to arise
in the State in which the permanent establishment is situated and not in
the State of which the payer is a resident.
2.
Paragraph 7 of Article XVIII (Pensions and Annuities) of the Convention shall be
deleted and replaced by the following:
7.
A natural person who is a citizen or resident of a Contracting State and a
beneficiary of a trust, company, organization or other arrangement that is a
resident of the other Contracting State, generally exempt from income taxation
in that other State and operated exclusively to provide pension or employee
benefits may elect to defer taxation in the first-mentioned State, subject to rules
established by the competent authority of that State, with respect to any income
accrued in the plan but not distributed by the plan, until such time as and to the
extent that a distribution is made from the plan or any plan substituted therefor.
3.
Article XVIII (Pensions and Annuities) of the Convention shall be amended by adding
the following paragraphs:
8.
Contributions made to, or benefits accrued under, a qualifying retirement
plan in a Contracting State by or on behalf of an individual shall be deductible
or excludible in computing the individual's taxable income in the other
that other State, where:
(a)
The individual performs services as an employee in that other
State the remuneration from which is taxable in that other State;
(b)
The individual was participating in the plan (or another similar
plan for which this plan was substituted) immediately before the
individual began performing the services in that other State;
(c)
The individual was not a resident of that other State immediately
before the individual began performing the services in that other State;
(d)
The individual has perfonned services in that other State for the
same employer (or a related employer) for no more than 60 of the 120
months preceding the individual's current taxation year;
(e)
The contributions and benefits are attributable to the services
perfonned by the individual in that other State, and are made or accrued
during the period in which the individual performs those services; and
(f)
With respect to contributions and benefits that are attributable to
services performed during a period in the individual's current taxation
year, no contributions in respect of the period are made by or on behalf
of the individual to, and no services performed in that other State during
the period are otherwise taken into account for purposes of determining
the individual's entitlement to benefits under, any plan that would be a
qualifying retirement plan in that other State if paragraph 15 of this
Article were read without reference to subparagraphs (b) and (c) of that
paragraph.
This paragraph shall apply only to the extent that the contributions or benefits
would qualify for tax relief in the first-mentioned State if the individual was a
resident of and performed the services in that State.
paragraph 8 to a citizen of the United States shall not exceed the benefits that
would be allowed by the United States to its residents for contributions to, or
benefits otherwise accrued under, a generally corresponding pension or
retirement plan established in and recognized for tax purposes by the United
States.
10.
Contributions made to, or benefits accrued under, a qualifying retirement
plan in a Contracting State by or on behalf of an individual who is a resident of
the other Contracting State shall be deductible or excludible in computing the
individual's taxable income in that other State, where:
(a)
The individual performs services as an employee in the first-
mentioned state the remuneration from which is taxable in that State and
is borne by an employer who is a resident of that State or by a permanent
establishment which the employer has in that State; and
(b)
The contributions and benefits are attributable to those services
and are made or accrued during the period in which the individual
performs those services.
This paragraph shall apply only to the extent that the contributions or benefits
qualify for tax relief in the first-mentioned State.
11.
For the purposes of Canadian taxation, the amount of contributions
otherwise allowed as a deduction under paragraph 10 to an individual for a
taxation year shall not exceed the individual's deduction limit under the law of
Canada for the year for contributions to registered retirement savings plans
remaining after taking into account the amount of contributions to registered
retirement savings plans deducted by the individual under the law of Canada for
the year. The amount deducted by an individual under paragraph 10 for a
taxation year shall be taken into account in computing the individual's deduction
registered retirement savings plans.
12.
For the purposes of United States taxation, the benefits granted under
paragraph 10 shall not exceed the benefits that would be allowed by the United
States to its residents for contributions to, or benefits otherwise accrued under, a
generally corresponding pension or retirement plan established in and
recognized for tax purposes by the United States. For purposes of determining
an individual's eligibility to participate in and receive tax benefits with respect to
a pension or retirement plan or other retirement arrangement established in and
recognized for tax purposes by the United States, contributions made to, or
benefits accrued under, a qualifying retirement plan in Canada by or on behalf of
the individual shall be treated as contributions or benefits under a generally
corresponding pension or retirement plan established in and recognized for tax
purposes by the United States.
13.
Contributions made to, or benefits accrued under, a qualifying retirement
plan in Canada by or on behalf of a citizen of the United States who is a resident
of Canada shall be deductible or excludible in computing the citizen's taxable
income in the United States, where:
(a)
The citizen performs services as an employee in Canada the
remuneration from which is taxable in Canada and is borne by an
employer who is a resident of Canada or by a permanent
establishment which the employer has in Canada; and
(b)
The contributions and benefits are attributable to those
services and are made or accrued during the period in which the
citizen performs those services.
This paragraph shall apply only to the extent that the contributions or benefits
qualify for tax relief in Canada.
14.
The benefits granted under paragraph 13 shall not exceed the benefits
retirement plan established in and recognized for tax purposes by the United
States. For purposes of determining an individual's eligibility to participate in
and receive tax benefits with respect to a pension or retirement plan or other
retirement arrangement established in and recognized for tax purposes by the
United States, contributions made to, or benefits accrued under, a qualifying
retirement plan in Canada by or on behalf of the individual shall be treated as
contributions or benefits under a generally corresponding pension or retirement
plan established in and recognized for tax purposes by the United States.
15.
F or purposes of paragraphs 8 to 14, a qualifying retirement plan in a
Contracting State means a trust, company, organization or other arrangement:
(a)
That is a resident of that State, generally exempt from
income taxation in that State and operated primarily to provide
pension or retirement benefits;
(b)
That is not an individual arrangement in respect of which the
individual's employer has no involvement; and
(c)
Which the competent authority of the other Contracting State
agrees generally corresponds to a pension or retirement plan established
in and recognized for tax purposes by that other State.
16.
For purposes of this Article, a distribution from a pension or retirement
plan that is reasonably attributable to a contribution or benefit for which a
benefit was allowed pursuant to paragraph 8, 10 or 13 shall be deemed to arise
in the Contracting State in which the plan is established.
17.
Paragraphs 8 to 16 apply, with such modifications as the circumstances
require, as though the relationship between a partnership that carries on a
business , and an individual who is a member of the partnership, were that of
employer and employee.
Article XIX (Government Service) of the Convention shall be amended by deleting the words
"XIV (Independent Personal Services)" and replacing them with the words "VII (Business
Profits)" and by deleting the words "XV (Dependent Personal Services)" and replacing them
with the words "XV (Income from Employment)".
Article 15
Article XX (Students) of the Convention shall be deleted and replaced by the following:
Payments received by an individual who is a student, apprentice, or business
trainee, and is, or was immediately before visiting a Contracting State, a resident
of the other Contracting State, and who is present in the first-mentioned State for
the purpose of the individual's full-time education or full-time training, shall not
be taxed in that State, provided that such payments arise outside that State, and
are for the purpose of the maintenance, education or training of the individual.
The provisions of this Article shall apply to an apprentice or business trainee
only for a period of time not exceeding one year from the date the individual first
arrives in the first-mentioned State for the purpose of the individual's training.
Article 16
l.
Paragraphs 4,5 and 6 of Article XXI (Exempt Organizations) of the Convention shall
be renumbered as paragraphs 5, 6 and 7 respectively.
2.
Paragraphs 1 through 3 of Article XXI (Exempt Organizations) of the Convention shal
be deleted and replaced by the following four paragraphs:
1.
Subject to the provisions of paragraph 4, income derived by a religious,
to the extent that such income is exempt from tax in that other State.
2.
Subject to the provisions of paragraph 4, income referred to in Articles X
(Dividends) and XI (Interest) derived by a trust, company, organization or other
arrangement that is a resident of a Contracting State, generally exempt from
income taxation in a taxable year in that State and operated exclusively to
administer or provide pension, retirement or employee benefits shall be exempt
from income taxation in that taxable year in the other Contracting State.
3.
Subject to the provisions of paragraph 4, income referred to in Articles X
(Dividends) and XI (Interest) derived by a trust, company, organization or other
arrangement that is a resident of a Contracting State, generally exempt from
income taxation in a taxable year in that State and operated exclusively to earn
income for the benefit of one or more of the following:
(a)
An organization referred to in paragraph 1; or
(b)
A trust, company, organization or other arrangement
referred to in paragraph 2;
shall be exempt from income taxation in that taxable year in the other
Contracting State.
4.
The provisions of paragraphs 1, 2 and 3 shall not apply with respect to
the income of a trust, company, organization or other arrangement from carrying
on a trade or business or from a related person other than a person referred to in
paragraphs I, 2 or 3.
Article 17
Article XXII (Other Income) of the Convention shall be amended by adding the following
paragraph:
a resident of a Contracting State in respect of the provision of a guarantee of
indebtedness shall be taxable only in that State, unless such compensation is
business profits attributable to a pennanent establishment situated in the other
Contracting State, in which case the provisions of Article VII (Business Profits)
shall apply.
Article 18
Paragraph 2 of Article XXIII (Capital) of the Convention shall be amended by deleting the
phrase", or by personal property pertaining to a fixed base available to a resident of a
Contracting State in the other Contracting State for the purpose of performing independent
personal services,".
Article 19
Subparagraph 2(b) of Article XXIV (Elimination of Double Taxation) of the Convention shall
be deleted and replaced with the following:
(b)
In the case of a company which is a resident of Canada owning at least
10 percent of the voting stock of a company which is a resident of the United
States from which it receives dividends in any taxable year, Canada shall allow
as a credit against the Canadian tax on income the appropriate amount of income
tax paid or accrued to the United States by the second company with respect to
the profits out of which the dividends are paid.
1.
Paragraph 1 of Article XXV (Non-Discrimination) of the Convention shall be deleted
and replaced by the following:
1.
Nationals of a Contracting State shall not be subjected in the other
Contracting State to any taxation or any requirement connected therewith that is
more burdensome than the taxation and connected requirements to which
nationals of that other State in the same circumstances, particularly with respect
to taxation on worldwide income, are or may be subjected. This provision shall
also apply to individuals who are not residents of one or both of the Contracting
States.
2.
Paragraph 2 of Article XXV (Non-Discrimination) of the Convention shall be deleted,
and paragraphs 3 to 10 of Article XXV shall be renumbered accordingly.
3.
Renumbered paragraph 3 of Article XXV (Non-Discrimination) of the Convention shall
be amended by deleting the words "Article XV (Dependent Personal Services)" and replacing
them with the words "Article XV (Income from Employment)".
Article 21
1.
Paragraph 6 of Article XXVI (Mutual Agreement Procedure) of the Convention shall be
deleted and replaced by the following:
6.
Where, pursuant to a mutual agreement procedure under this Article, the
competent authorities have endeavored but are unable to reach a complete
agreement in a case, the case shall be resolved through arbitration conducted in
the manner prescribed by, and subject to, the requirements of paragraph 7 and
any rules or procedures agreed upon by the Contracting States by notes to be
exchanged through diplomatic channels, if:
States with respect to the taxable years at issue in the case;
(b)
The case:
(i)
Is a case that:
(A)
Involves the application of one or more Articles
that the competent authorities have agreed in an exchange
of notes shall be the subject of arbitration; and
(8)
Is not a particular case that the competent
authorities agree, before the date on which arbitration
proceedings would otherwise have begun, is not suitable
for determination by arbitration; or
(ii)
Is a particular case that the competent authorities agree is
suitable for determination by arbitration; and
(c)
All concerned persons agree according to the provisions of
subparagraph 7(d).
7.
F or the purposes of paragraph 6 and this paragraph, the following rules
and definitions shall apply:
(a)
The term "concerned person" means the presenter of a case to a
competent authority for consideration under this Article and all other
persons, if any, whose tax liability to either Contracting State may be
directly affected by a mutual agreement arising from that consideration;
(b)
The "commencement date" for a case is the earliest date on
which the information necessary to undertake substantive consideration
for a mutual agreement has been received by both competent authorities;
(c)
Arbitration proceedings in a case shall begin on the later of:
(i)
Two years after the commencement date of that case,
unless both competent authorities have previously agreed to a
subparagraph (d) has been received by both competent
authorities;
(d)
The concerned person(s), and their authorized representatives or
agents, must agree prior to the beginning of arbitration proceedings not
to disclose to any other person any information received during the
course of the arbi tration proceeding from either Contracting State or the
arbitration board, other than the determination of such board;
(e)
Unless a concerned person does not accept the determination of
an arbitration board, the determination shall constitute a resolution by
mutual agreement under this Article and shall be binding on both
Contracting States with respect to that case; and
(f)
For purposes of an arbitration proceeding under paragraph 6 and
this paragraph, the members of the arbitration board and their staffs shall
be considered "persons or authorities" to whom information may be
disclosed under Article XXVII (Exchange of Information) of this
Convention.
Article 22
1.
Subparagraph 8(a) of Article XXVI A (Assistance in Collection) of the Convention
shall be deleted and replaced by the following:
(a)
Where the taxpayer is an individual, the revenue claim relates either to a
taxable period in which the taxpayer was a citizen of the requested State or, if
the taxpayer became a citizen of the requested State at any time before
November 9 , 1995 and is such a citizen at the time the applicant State applies for
collection of the claim, to a taxable period that ended before November 9, 1995;
shall be deleted and replaced by the following:
9.
Notwithstanding the provisions of Article II (Taxes Covered), the
provisions of this Article shall apply to all categories of taxes collected, and to
contributions to social security and employment insurance premiums levied, by
or on behalf of the Government of a Contracting State.
Article 23
Article XXVII (Exchange ofInformation) of the Convention shall be deleted and replaced by
the following:
Article XXVII
Exchange of Information
1.
The competent authorities of the Contracting States shall exchange such
information as may be relevant for carrying out the provisions of this
Convention or of the domestic laws of the Contracting States concerning taxes
to which this Convention applies insofar as the taxation thereunder is not
contrary to this Convention. The exchange of infonnation is not restricted by
Article I (Personal Scope). Any information received by a Contracting State
shall be treated as secret in the same manner as information obtained under the
taxation laws of that State and shall be disclosed only to persons or authorities
(including courts and administrative bodies) involved in the assessment or
collection of, the administration and enforcement in respect of, or the
determination of appeals in relation to the taxes to which this Convention
applies or, notwithstanding paragraph 4, in relation to taxes imposed by a
political subdivision or local authority of a Contracting State that are
substantially similar to the taxes covered by this Convention under Article II
in judicial decisions. The competent authorities may release to an arbitration
board established pursuant to paragraph 6 of Article XXVI (Mutual Agreement
Procedure) such information as is necessary for carrying out the arbitration
procedure; the members of the arbitration board shall be subject to the
limitations on disclosure described in this Article.
2.
If information is requested by a Contracting State in accordance with this
Article, the other Contracting State shall use its information gathering measures
to obtain the requested information, even though that other State may not need
such information for its own tax purposes. The obligation contained in the
preceding sentence is subject to the limitations of paragraph 3 but in no case
shall such limitations be construed to permit a Contracting State to decline to
supply information because it has no domestic interest in such information.
3.
In no case shall the provisions of paragraph 1 and 2 be construed so as to
impose on a Contracting State the obligation:
(a)
To carry out administrative measures at variance with the laws
and administrative practice of that State or of the other Contracting State;
(b)
To supply infonTIation which is not obtainable under the laws or
in the normal course of the administration of that State or of the other
Contracting State; or
(c)
To supply information which would disclose any trade, business,
industrial, commercial or professional secret or trade process, or
information the disclosure of which would be contrary to public policy
(ordre public).
4.
For the purposes of thi.s Article, this Convention shall apply,
notwithstanding the provisions of Article II (Taxes Covered):
(a)
To all taxes imposed by a Contracting State; and
applies, but only to the extent that the infonnation may be relevant for
the purposes of the application of that provision.
5.
In no case shall the provisions of paragraph 3 be construed to pennit a
Contracting State to decline to supply information because the information is
held by a bank, other financial institution, nominee or person acting in an
agency or a fiduciary capacity or because it relates to ownership interests in a
person.
6.
If specifically requested by the competent authority of a Contracting
State, the competent authority of the other Contracting State shall provide
infonnation under this Article in the fonn of depositions of witnesses and
authenticated copies of unedited original documents (including books, papers,
statements, records, accounts, and writings).
7.
The requested State shall allow representatives of the requesting State to
enter the requested State to interview individuals and examine books and
records with the consent of the persons subject to examination.
Article 24
1.
Paragraph 2 of Article XXIX (Miscellaneous Rules) of the Convention shall be deleted
and replaced by the following:
2.
(a)
Except to the extent provided in paragraph 3, this Convention
shall not affect the taxation by a Contracting State of its residents (as
detennined under Article IV (Residence)) and, in the case of the United
States, its citizens and companies electing to be treated as domestic
corporations.
(b)
Notwithstanding the other provisions of this Convention, a
accordance with the laws of the United States with respect to income
from sources within the United States (including income deemed under
the domestic law of the United States to arise from such sources).
2.
Subparagraph 3(a) of Article XXIX (Miscellaneous Rules) shall be deleted and replaced
by the following:
(a)
Under paragraphs 3 and 4 of Article IX (Related Persons),
paragraphs 6 and 7 of Article XIII (Gains), paragraphs 1,3,4,5, 6(b), 7,
8, 10 and 13 of Article XVIII (Pensions and Annuities), paragraph 5 of
Article XXIX (Miscellaneous Rules), paragraphs 1, 5, and 6 of Article
XXIX B (Taxes Imposed by Reason of Death), paragraphs 2, 3,4, and 7
of Article XXIX B (Taxes Imposed by Reason of Death) as applied to
estates of persons other than former citizens referred to in paragraph 2 of
this Article, paragraphs 3 and 5 of Article XXX (Entry into Force), and
Articles XIX (Government Service), XXI (Exempt Organizations),
XXIV (Elimination of Double Taxation), XXV (Non-Discrimination)
and XXVI (Mutual Agreement Procedure);
Article 25
Article XXIX A (Limitation on Benefits) of the Convention shall be deleted and replaced by
the following:
Article XXIX A
Limitation on Benefits
1.
For the purposes of the application of this Convention by a Contracting
State,
(a)
a qualifvimr oerson shall be entitled to all of the benefits of this
not a qualifying person shall not be entitled to any benefits of this
Convention.
2.
For the purposes of this Article, a qualifying person is a resident of
a Contracting State that is:
(a)
a natural person;
(b)
a Contracting State or a political subdivision or local authority
thereoC or any agency or instrumentality of any such State, subdivision
or authority;
(c)
a company or trust whose principal class of shares or units (and
any disproportionate class of shares or units) is primarily and regularly
traded on one or more recognized stock exchanges;
(d)
a company, if five or fewer persons each of which is a company
or trust referred to in subparagraph (c) own directly or indirectly more
than 50 percent of the aggregate vote and value of the shares and more
than 50 percent of the vote and value of each disproportionate class of
shares (in neither case including debt substitute shares), provided that
each company or trust in the chain of ownership is a qualifying person;
(e)
(i)
a company, 50 percent or more of the aggregate vote and
value of the shares of which and 50 percent or more of the vote
and value of each disproportionate class of shares (in neither case
including debt substitute shares) of which is not owned, directly
or indirectly, by persons other than qualifying persons; or
(ii)
a trust, 50 percent or more of the beneficial interest in
which and 50 percent or more of each disproportionate interest in
which, is not owned, directly or indirectly, by persons other than
qualifying persons;
detennined in the State of residence of the company or trust) that are
paid or payable by the company or trust, as the case may be, for its
preceding fiscal period (or, in the case of its first fiscal period, that
period) directly or indirectly, to persons that are not qualifying persons is
less than 50 percent of its gross income for that period;
(t)
an estate;
(g)
a not- for-profit organization, provided that more than half of the
beneficiaries, members or participants of the organization are qualifying
persons;
(h)
a trust, company, organization or other arrangement described in
paragraph 2 of Article XXI (Exempt Organizations) and established for
the purpose of providing benefits primarily to individuals who are
qualifying persons, or persons who were qualifying persons within the
five preceding years; or
(i)
a trust, company, organization or other arrangement described in
paragraph 3 of Article XXI (Exempt Organizations) provided that the
beneficiaries of the trust, company, organization or other arrangement
are described in subparagraph (g) or (h).
3.
Where a person is a resident of a Contracting State and is not a
qualifying person, and that person, or a person related thereto, is engaged in the
active conduct of a trade or business in that State (other than the business of
making or managing investments, unless those activities are carried on with
customers in the ordinary course of business by a bank, an insurance company, a
registered securities dealer or a deposit-taking financial institution), the benefits
of this Convention shall apply to that resident person with respect to income
derived from the other Contracting State in connection with or incidental to that
trade or business (including any such income derived directly or indirectly by
activity carried on in that other State giving rise to the income in respect of
which benefits provided under this Convention by that other State are claimed.
4.
A company that is a resident of a Contracting State shall also be entitled
to the benefits of Articles X (Dividends), XI (Interest) and XII (Royalties) if:
(a)
Its shares that represent more than 90 percent of the aggregate
vote and value of all of its shares and at least 50 percent of the vote and
value of any disproportionate class of shares (in neither case including
debt substitute shares) are owned, directly or indirectly, by persons each
of whom is a qualifying person or a person who:
(i)
Is a resident of a country with which the other Contracting
State has a comprehensive income tax convention and is entitled
to all of the benefits provided by that other State under that
convention;
(ii)
Would qualify for benefits under paragraphs 2 or 3 if that
person were a resident of the first-mentioned State (and, for the
purposes of paragraph 3, if the business it carried on in the
country of which it is a resident were carried on by it in the firstmentioned State); and
(iii)
Would be entitled to a rate of tax in the other Contracting
State under the convention between that person's country of
residence and that other State, in respect of the particular class of
income for which benefits are being claimed under this
Convention, that is at least as low as the rate applicable under this
Convention; and
(b)
The amount of the expenses deductible from gross income (as
determined in the company's State of residence) that are paid or payable
by the company for its preceding fiscal period (or, in the case of its first
income for that period.
5.
For the purposes of this Article,
(a)
The term "debt substitute share" means:
(i)
A share described in paragraph (e) of the definition "term
preferred share" in the Income Tax Act, as it may be amended
from time to time without changing the general principle thereof;
and
(ii)
Such other type of share as may be agreed upon by the
competent authorities of the Contracting States.
(b)
The term "disproportionate class of shares" means any class of
shares of a company resident in one of the Contracting States that entitles
the shareholder to disproportionately higher participation, through
dividends, redemption payments or otherwise, in the earnings generated
in the other State by particular assets or activities of the company;
(c)
The term "disproportionate interest in a trust" means any interest
in a trust resident in one of the Contracting States that entitles the interest
holder to disproportionately higher participation in, or claim to, the
earnings generated in the other State by particular assets or activities of
the trust;
(d)
The term "not-for-profit organization" ofa Contracting State
means an entity created or established in that State and that is, by reason
of its not-for-profit status, generally exempt from income taxation in that
State, and includes a private foundation, charity, trade union, trade
association or similar organization;
(e)
The term "principal class of shares" of a company means the
ordinary or common shares of the company, provided that such class of
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majority of the aggregate voting power and value of the company, the
"principal class of shares" are those classes that in the aggregate
represent a majority of the aggregate voting power and value of the
company; and
(£)
The term "recognized stock exchange" means:
(i)
The NASDAQ System owned by the National
Association of Securities Dealers, Inc. and any stock exchange
registered with the Securities and Exchange Commission as a
national securities exchange for purposes of the Securities
Exchange Act of 1934;
(ii)
Canadian stock exchanges that are "prescribed stock
exchanges" or "designated stock exchanges" under the
Income Tax Act; and
(iii)
Any other stock exchange agreed upon by the Contracting
States in an exchange of notes or by the competent authorities of
the Contracting States.
6.
Where a person that is a resident of a Contracting State is not entitled
under the preceding provisions of this Article to the benefits provided under this
Convention by the other Contracting State, the competent authority of that other
State shall, upon that person's request, determine on the basis of all factors
including the history, structure, ownership and operations of that person
whether:
(a)
Its creation and existence did not have as a principal purpose the
obtaining of benefits under this Convention that would not otherwise be
available; or
(b)
It would not be appropriate, having regard to the purpose of
this Article, to deny the benefits of this Convention to that person.
where the competent authority determines that subparagraph (a) or (b) applies.
7.
It is understood that this Article shall not be construed as restricting in
any manner the right of a Contracting State to deny benefits under this
Convention where it can reasonably be concluded that to do otherwise would
result in an abuse of the provisions of this Convention.
Article 26
1.
Paragraph 1 of Article XXIX B (Taxes Imposed by Reason of Death) of the Convention
shall be deleted and replaced by the following:
1.
Where the property of an individual who is a resident of a Contracting
State passes by reason of the individual's death to an organization that is
referred to in paragraph 1 of Article XXI (Exempt Organizations) and that is a
resident of the other Contracting State,
(a)
If the individual is a resident of the United States and the
organization is a resident of Canada, the tax consequences in the United
States arising out of the passing of the property shall apply as if the
organization were a resident of the United States; and
(b)
If the individual is a resident of Canada and the organization is a
resident of the United States, the tax consequences in Canada arising out
of the passing of the property shall apply as if the individual had
disposed of the property for proceeds equal to an amount elected on
behalf of the individual for this purpose (in a manner specified by the
competent authority of Canada), which amount shall be no less than the
individual's cost of the property as detem1ined for purposes of Canadian
tax and no greater than the fair market value of the property.
shall be deleted and replaced by the following:
5.
Where an individual was a resident of the United States immediately
before the individual's death, for the purposes of subsections 70(5.2) and (6) of
the Income Tax Act, both the individual and the individual's spouse shall be
deemed to have been resident in Canada immediately before the individual's
death. Where a trust that would be a trust described in subsection 70(6) of that
Act, if its trustees that were residents or citizens of the United States or domestic
corporations under the law of the United States were residents of Canada,
requests the competent authority of Canada to do so, the competent authority
may agree, subject to tenns and conditions satisfactory to such competent
authority, to treat the trust for the purposes of that Act as being resident in
Canada for such time and with respect to such property as may be stipulated in
the agreement.
Article 27
This Protocol shall be subject to ratification in accordance with the applicable
procedures in the United States and Canada. The Contracting States shall notify each other in
writing, through diplomatic channels, when their respective applicable procedures have been
satisfied.
2.
This Protocol shall enter into force on the date of the later of the notifications referred to
in paragraph 1, or January 1, 2008, whichever is later. The provisions of this Protocol shall
have effect:
(a)
In respect of taxes withheld at source, for amounts paid or credited on or after
the first day of the second month that begins after the date on which this Protocol enters
into force;
notifications referred to in paragraph 1 is dated in 2007, taxable years that begin in and
after) the calendar year in which this Protocol enters into force.
3.
Notwithstanding paragraph 2,
(a)
Paragraph 1 of Article 2 of this Protocol shall have effect with respect to
corporate continuations effected after September 17, 2000;
(b)
New paragraph 7 of Article IV (Residence) ofthe Convention as added by
Article 2 of this Protocol shall have effect as of the first day of the third calendar year
that ends after this Protocol enters into force;
(c)
Article 3 of this Protocol shall have effect as of the third taxable year that ends
after this Protocol enters into force, but in no event shall it apply to include, in the
determination of whether an enterprise is deemed to provide services through a
permanent establishment under paragraph 9 of Article V (Pennanent Establishment) of
the Convention, any days of presence, services rendered, or gross active business
revenues that occur or arise prior to January 1, 2010;
(d)
In applying Article 6 of this Protocol to interest paid or credited during the first
two calendar years that end after entry into force of this Protocol, paragraph 1 of Article
XI (Interest) of the Convention shall be read as follows:
1.
Interest arising in a Contracting State and beneficially owned by a
resident of the other Contracting State may be taxed only in that other State.
However, if the interest is not exempt under paragraph 3 of Article XI (Interest)
as it read on January 1,2007, and the payer of the interest and the beneficial
owner of the interest are related, or would be deemed to be related if the
provisions of paragraph 2 of Article IX (Related Persons) applied for this
purpose, such interest may also be taxed in the Contracting State in which it
arises, and according to the laws of that State, but the tax so charged shall not
exceed the following percentage of the gross amount of the interest:
(a)
If the interest is paid or credited during the first calendar year that
that ends after entry into force of this paragraph, 4 percent;
(e)
Paragraphs 2 and 3 of Article 8 of this Protocol shall have effect with respect to
alienations of property that occur (including, for greater certainty, those that are deemed
under the law of a Contracting State to occur) after September 17, 2000;
(f)
Article 21 of this Protocol shall have effect with respect to
(i)
Cases that are under consideration by the competent authorities as of the
date on which this Protocol enters into force; and
(ii)
Cases that come under such consideration after that time,
and the commencement date for a case described in subparagraph (f)(i) shall be the date
on which the Protocol enters into force; and
(g)
Article 22 of this Protocol shall have effect for revenue claims finally
detennined by an applicant State after November 9, 1985.
IN WITNESS WHEREOF the undersigned, being duly authorized thereto by their
respective Governments, have signed this Protocol.
DONE in duplicate at Chelsea this twenty-first day of September 2007 in the English
and French languages, each text being equally authentic.
FOR THE GOVERNMENT OF
THE UNITED STATES OF AMERICA:
FOR THE GOVERNMENT OF
CANADA:
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September 24,2007
hp-570
Treasury Assistant Secretary Ryan
Remarks at Real Return USA:
The Euromoney Inflation Linked Products Conference
New York City- Good morning. It is a pleasure to be here in New York City, and I
appreciate you inviting me to join you.
As Assistant Secretary for Financial Markets at the Department of the Treasury, I
have a number of responsibilities ranging from supporting Secretary Paulson in his
capacity as Chairman of the President's Working Group on Financial Markets, to
working on efforts that serve to enhance the competitiveness of our capital markets,
to overseeing the U.S. Treasury debt issuance and management. Our first
Secretary of the Treasury, Alexander Hamilton, appreciated the value of effective
debt management. Hamilton understood that though the United States was a young
nation, it had to repay in full the debt incurred from the Revolutionary War having
once remarked that "The debt of the United States ... was the price of liberty."
Our nation's debt has grown since the first days of our republic and today, we have
nearly $9 trillion in debt outstanding, issue over $4 trillion in marketable debt
annually, monitor over $500 billion in daily secondary market turnover, maintain and
invest an average daily cash balance of over $20 billion, and hold auctions nearly
every single business day of the year.
Included within those figures are Treasury Inflation Protected Securities, or TIPS.
They too possess impressive underlying numbers: over $450 billion outstanding,
nearly $70 billion in new issuance per year, and over $8 billion in average turnover
daily. These statistics make our Treasury market the largest and most efficient
government debt market in the world.
We are in an enviable position, but we cannot take our leadership for granted.
Every day, the U.S. Treasury, like other issuers, must compete for capital in the
global marketplace. With our well defined mission, prudent operating principles and
robust, yet flexible issuance and management strategy. we remain committed to
ensuring that the U.S. Treasury market remains the preeminent sovereign debt
market in the world.
Let me take a few moments to give you some background on our debt management
efforts, then discuss TIPS, and finally address a strategic issue that looms on the
horizon.
Objective, Constraints and Operating Principles
As the largest issuer in the world of sovereign debt, our objective is clear and
unambiguous. We seek to achieve the lowest cost of borrowing over time.
Achieving 'the lowest cost of borrowing necessitates the management of two other
variables: constraints and risks. If issuers and investors have learned anything over
the past few months it is that one must address risk in its many dimensions. From
Treasury's perspective, our constraints and risks are numerous, and, once again,
very large.
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One constraint we face is: uncertainty. Uncertainty emanates from a number of
sources. These include: significant forecast errors, unexpected legislation, issues
related to the debt limit, and fluctuations in the issuance of non-marketable debt all
impact our marketable borrowing.
Let me give you a specific example. The best and brightest on Wall Street, the
Office of Management and Budget (OMB), and the Congressional Budget Office
(CBO), each publish forecasts of the annual deficit. Despite their best efforts over
the past decade, forecast errors have on average varied by $120 billion one year
ahead of the upcoming fiscal year end.
Realizing the nature and presence of uncertainty requires Treasury to be as flexible
as possible in our issuance decisions. However, here too we face a competing
constraint, namely: size. Simply put, Treasury is too large to behave
opportunistically.
Given our size, our debt issuance effectively sets the yield curve. We are unable to
quickly alter issuance to take advantage of rate changes. Hence, we do not attempt
to time the market or issue opportunistically.
Not surprisingly, our short term cash needs are also dynamic and effective liquidity
management is critical. Our cash balances are extremely volatile and can range
from $5 billion to $125 billion on a given day. While some expenditures such as
Social Security and Medicare are fairly predictable, others are much more difficult to
forecast both in terms of timing or scale. Similarly, tax revenues can shift
dramatically in size and direction with little warning. Other non-marketable activities
such as an abrupt increase in State and Local Government Securities (SLGS) may
also force Treasury to reconsider our financing needs.
Like any liquidity manager, we need an array of tools and capabilities in order to
most effectively manage cash balances. Some we have, others we seek.
Enhancing our cash management capabilities is one of the major priorities of the
Cash and Debt Management modernization initiative announced by Secretary
Paulson in July.
Operating Principles
Given our objective, and in recognition of our constraints and risks, our debt
management team has developed and operates with the following core principles:
We seek to be regular market participants and are committed to regular and
predictable issuance;
We seek to maintain flexibility;
We seek to be transparent;
We support efforts that seek to ensure marketplace integrity, liquidity, and
openness.
These operating principles guide Treasury in our debt management, and result in
what we believe is the lowest cost of borrowing over time. By reducing uncertainty
regarding supply through regular and predictable issuance, investors are free to
focus more closely on the demand side, thus mitigating their - and our - risk.
Moreover, by being transparent, we believe we exact a liquidity premium - a direct
result of certainty of supply - which lowers the cost of borrowing for Treasury over
the long run.
Because our operating principles and practices are well established, buyers of
Treasury securities come to us in greater numbers, bid with more confidence, and
in larger amounts. Our predictability, coupled with our unitary financing approach to
debt issuance and support of practices that enhance market integrity and
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openness, all serve to increase the depth and liquidity of the Treasury marketplace
and lower our borrowing costs.
'
The development of our marketplace has been strongly supported by efforts
undertaken by market partiCipants. Recently, the introduction of the principlesbased framework outlined by the Treasury Market Practices Group (TMPG), a
private sector initiative, is encouraging. Their principles and guidelines provide a
framework for market participants to evaluate and enhance their current activities in
the secondary markets and to fulfill their responsibilities as stakeholders in the
Treasury market. The guidelines are practical, and possess the flexibility to deal
with the global and dynamic environment in which stakeholders operate.
Risk Management
In fulfilling our misSion, the Debt Management Office--like any prudent asset
manager--must successfully identify, assess and manage risk exposures. There are
many risk measures to consider and no single metric is ideal. Risk management
must be approached from multiple perspectives.
Quantitative measures of risk are simply a starting point and raise some interesting
questions. Should we as an issuer, look at a cost at risk model (CaR)? If so, what
time period should we utilize? How should we weight certain risks versus others?
Does an efficient frontier really apply for an issuer, and if so, how should we react?
Do duration and convexity really apply to an issuer given our seemingly infinite
asset base (i.e. tax revenues)? Can risk measures readily be applied that are
consistent with our policy of regular and predictable issuance yet accommodate the
huge potential variances in future fiscal environments?
A multidimensional framework helps fulfill our objective. We answer these questions
by addressing the challenge from several perspectives as we assess risks, cost,
and time.
Some risks increase over time, such as the probability of default on subprime
mortgages the longer credit remained cheap and lending standards lax.
Alternatively, some risks decrease over time such as the probability of an investor
buying subprime asset backed commercial paper just because it was rated AAA.
We can approach costs in a similar perspective. Some costs, such as the price of
an option as it approaches expiration, decrease over time. Other costs increase
over time, and as a father of four, I can attest that one is tuition.
Applying this framework over time provides us with constructive and
complementary perspectives. By identifying risks - including rollover risk, liquidity
risk, duration risk, and inflation risk, we more effectively identify and mitigate
potential costs. Including portfolio composition, diversification of funding sources,
and demand dynamics as potential metrics also enhances Treasury's ability to
measure, and ideally reduce overall costs. Such measures provide us with some
perspective, but we also appreciate the limitations of such quantifiable models, and
are cognizant of the underlying assumptions. We therefore supplement such
perspectives with sound judgment that is informed by experience, and reviewed via
routine consultation with the marketplace. Here we are fortunate to have access to
the Treasury Borrowing Advisory Committee (TBAC), the primary dealer
community, and other participants in our global marketplace.
Inflation and Treasury Inflation Protected Securities
Let me take a moment to focus on the topic du jour - inflation indexed securities.
Treasury Inflation-Protected Securities (TIPS) have become a core portion of our
overall debt portfolio. Having started the program 10 years ago, we have seen
liquidity slowly build, and greater interest develop amongst various investor groups.
Just as the Federal Reserve must constantly be on guard for inflation, so must
investors. Inflation remains a constant foe. TIPS offer investors an instrument to
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Page 4 of 5
protect against inflation risk by offering real --- rather than nominal returns. From a
capital preservation perspective, managing risk from a real return basis is essential.
As would be expected, TIPS are negatively correlated to equities over shorter to
medium term horizons. Moreover, TIPS' low correlations with other asset classes
Including corporate bonds may serve to reduce a portfolio's volatility and potentially
Improve overall returns.
From a debt issuer's perspective, TIPS offer potential benefits, including a broader
Investor base and a more diversified portfolio of liabilities. Over the past decade,
Treasury has grown the inflation indexed portion of our portfolio nearly five times
faster than that of nominal debt. Today, it represents almost 10% of our marketable
debt portfolio.
As mentioned earlier, portfolio composition and diversification are among the many
factors considered when measuring lowest cost versus risk. Given the improvement
of our fiscal deficit from over S400 billion in 2003 to well less than one half of that
amount in fiscal year 2007, Treasury has needed to make numerous adjustments to
our portfolio, while all the while remaining true to our Core operating principles.
Reducing issuance remains more challenging than increasing issuance given
liquidity threshold constraints and the potential uncertainty surrounding deficit
forecasts. However, as Our net marketable borrowing needs decline, we generally
follow the following guidelines:
Initially, we seek to redUce issuance size;
If necessary, we subsequently seek to adjust issuance cycle and finally;
If deemed appropriate, we seek to discontinue or eliminate a security.
Consistent with these guidelines, we have made decisions to pare issuance over
the past year. This included reducing the sizes of bills outstanding, lowering coupon
issuance sizes, lowering the issuance size of TIPS, and most recently,
discontinuing the issuance of the 3-year note. In keeping with one of our well
established principles, we attempt to make such decisions in as transparent a
fashion as possible such that the market impact is minimal.
While our TIPS issuance sizes have been reduced in response to smaller borrowing
needs, we remain very committed to TIPS. Treasury ~ as well as investors and
broker-dealers ~ have made significant investments in this market, and inflation
indexed securities will remain a core component of our overall portfolio. Moreover,
recent comments by the TBAC suggesting adjustments to the TIPS program are
simply one of a broad set of alternative ideas.
Evaluating the proper number, type and mix of securities in our portfolio is an
ongoing effort. We will continue to evaluate our financing needs in light of economic
conditions and fiscal forecasts. We will make necessary adjustments as needed
bearing in mind our overarching debt management prinCiples.
Longer Term Risks
I have spoken this morning about risks and fiscal challenges. But no review would
be complete without addressing the most significant fiscal challenge taxpayers and
future generations of Americans face: the escalating costs of entitlements.
No better example exists of a risk and cost that grows over time than the risk and
cost of inaction. No panacea exists, but procrastination is not the answer to the
untenable fiscal situation that we as a nation face over the long term.
I'd like to offer an alternative perspective to those made by other policy makers in
addressing entitlement reform.
IIwww .treas.gov/press/releases/hp570.htm
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Page 5 of 5
The perspective I offer is that of the issuer who finances the programs. Our Debt
Management Office recently asked the TBAC to provide an analysis of the costs of
inaction. The results were sobering. Using estimates and scenarios provided by the
Congressional Budget Office, the TBAC report to Secretary Paulson concluded
that, "In spite of the relatively conservative assumptions used, the results of the
analysis were disturbing to all members of the Committee and highlighted quite
strongly that without significant reform to entitlement programs, the strains on
Treasury to finance the projected deficits over the next 40 years are dramatic and
would undoubtedly result in a significant increase in 'rea/' borrowing costs by the
U.S. Government."
In relation to the size of the economy, it is estimated that current gross coupon
issuance will need to be between four and fifteen times larger by 2050. The sharp
elevation in the financing needs starts to become apparent as early as 2020.
More concerning, the TBAC estimated that, under the most optimistic scenario,
Treasury auction sizes in the two-year note could approach $380 billion per month
by 2050, while Issuance of 1O-year notes could approach $1.9 trillion per quarter.
Just as a reference, today we auction $18 billion in 2-year notes each month and
we issue $21 billion in 1O-year notes each quarter. Interest costs would rise to over
4% of GOP by 2050 from just under 1.5% currently. The repercussions of inaction
are simply too big to ignore.
Conclusion
I am optimistic that we can address both our short term and longer term fiscal
challenges with the same framework with which we approach debt management define the objective, identify and quantify the risks, evaluate the costs, and take
action. This approach is applicable not just in the realm of finance, but also to public
policy. I look forward to working with my colleagues in Washington, D.C., as well as
continuing to work with market participants to address these critical issues.
Thank you.
For more information on the Office of Debt Management, see
http'//www.treas.gov/offices!domesNc-finance/debt-managementlindex.shtml
To review the Treasury Borrowing Advisory Commit1ee Presentation to the US
Treasury July 31, 2007 "The Costs of Inaction Regarding Entitlement Reform:
Potential Implications for Treasury Debt Issuance, Interest Costs, and Overall
Market Dynamics", see http.//wwwtreas.gov!offlces/domestic-financ:e/debtmanCJgementlquarlerly-refunding/OB-O 1-200 7/discussion-charts. pdf
-30-
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September 24, 2007
hp571
Statement by Secretary Henry M. Paulson, Jr. on First in Series of Treasury
Social Security Papers on Common Ground
"I have had many conversations with members of Congress in both parties, inviting
them to discuss Social Security reform with no preconditions. While differences
over personal accounts and taxes dominate the public debate over this issue, in my
conversations I found that there are many other things on which people agree.
Everyone I talked with recognizes the seriousness of the problem, and most agreed
on some of the principles and policies that must be part of the solution.
"To build on these discuSSions, Treasury will release a series of issue briefs that will
focus on areas of common ground, and provide straightforward analysis of the
challenges facing Social Security and the implications of potential reforms.
"By focusing first on areas of agreement, I hope these issue briefs will narrow the
divide and spur further discussions of reform."
-30LINKS
•
1:
Issue Bnef No 1 Social Security Reform: The Nature of the Problem
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September 24,2007
HP-572
Issue Brief No.1 Social Security Reform: The Nature of the Problem
This is the first in a series of issue briefs that the Treasury will release on Social
Security reform topics. This brief explains the magnitude of the financial challenge
facing Social Security and why acting sooner and spreading the burden of reform
across more generations is fairer to future generations.
LINKS
•
Paulson Statement on First in Series of Social Security Papers on Common
Ground
REPORTS
•
Issue8rief NQ. 1 SpcialSecurity Reform: The Na,ti.JTe.oUheProPlernJVie.W
Full Report)
MwWw.treas.gov/press/releases/hp572.htm
101112007
SOCIAL SECURITY REFORM: THE I'-JAlURF OF THI:: PROBl.EM • ISSUE BRIEF NO. 1
ISSUE BRIEF NO. 1
SOCIAL SECURITY REFORM:
THE NATURE OF THE PROBLEtv\
INTRODUCTION
This is the first in a series of issue briefs that the Treasury will release on Social Security reform topics. This brief explains the magnitude of the financial challenge facing Social Security and why acting
sooner and spreading the burden of reform across more generations is fairer to future generations.
THE KEY POINTS IN THIS ISSUE BRIEF ARE:
• Social Security faces a shortfall over the indefinite future of $13.6 trillion in present-value terms, an
amount equal to 3.5 percent of future taxable payrolls. Looking at the gap over a shorter horizon
provides only limited information on the financial status of the program.
• Social Security can be made permanently solvent only by reducing the present value of scheduled
benefits and/or increasing the present value of scheduled tax revenues. Other changes to the program might be desirable, but only these changes can restore solvency permanently.
• Delaying changes to Social Security reduces the number of cohorts over which the burden of reform
can be spread. Not taking action is thus unfair to future generations. This is a significant cost of
delay.
• By itself, faster economic growth will not solve Social Security's financial imbalance-realistically,
there is no way to "grow out of the problem."
OVERVIE'y\I OF THE SOCiAL SECURITY PROGRAM.
The Social Security Act of 1935-which became the basis for the current Social Security system-created a program to prOVide lifetime payments to retired workers beginning at age 65. In signing the
Social Security Act, President Roosevelt stated that the law sought to "give some measure of protection
to the average citizen ... against poverty-ridden old age." Although the modest benefits provided for by
the original program were not intended to be the sole source of income for retirees, Social Security has
become a de focto retirement plan for many Americans.
Social Security has grawn to become by far the Single largest social program of the federal government,
with expansions in coverage, increases in benefits, and the extension of the program to prOVide benefits
to workers' spouses and minor children, the survivors of deceased workers, and disabled workers. Currently, more than 49 million retired or disabled workers, their families, and their survivors receive monthly
Social Security benefits. Total benefits in 2007 will amount to approximately $576 billion-about
20 percent of the entire federal budget-comprising roughly 40 percent of all income received by indi-
U.S. DEPARTMENT OF THE TREASURY
2
SOCIAL SECURITY REFORM: THE NArURE OF THE f)ROBIEM • ISSUE BRIEF NO. I
viduals aged 65 and older.l
Social Security includes two parts: old age and survivors insurance (OASI), for which the federal government began collecting taxes in 1937 and which provides retirement benefits; and disability insurance
(DI), for which the government began collecting taxes in 1957 The programs together are referred to
as OASDI; this issue brief will refer to them collectively as "Social Security."
Both OASI and DI are financed with payroll taxes levied on earnings up to a maximum that grows every
year in line with overage economy-wide wages. In 2007, maximum taxable earnings are $97,500
with payroll tax rates of 10.6 percent for OASI and 1.8 percent for 01, implying a total tax rate of
12.4 percent. For individuals employed by others, half of payroll taxes are paid by the employer and
half are paid by the employee. Nearly all economists agree, however, that the employer's portion of
the tax reduces employees' take-home wages one-for-one, so the employee bears the entire burden of
the tax regardless of how it is ostensibly divided between employers and employees. Self-employed
individuals pay both halves of the tax, though half of a self-employed worker's tax payment is deducted
from his or her adjusted gross income. 2
Social Security taxes are used to pay benefits; the program is self-financing in the sense that revenues
collected from other parts of the government are not directly used to finance benefit payments. To the
extent that taxes exceed current benefit payments, the resulting surpluses are used to purchase special-issue federal securities that are held in the Social Security trust funds (technically, the separate OASI and
DI trust funds) and that are redeemed as needed to pay benefits. The trust fund is credited with interest
comparable to interest paid on federal debt issued to the public. Social Security benefit payments are
automatically authorized prOVided sufficient funds are present in the pertinent trust fund.
Individuals can begin collecting retirement benefits as early as age 62, although the normal retirement
age-when a full benefit can be claimed-is currently 66 years. Benefits are calculated in three steps
• First, the Social Security Administration calculates a special overage of on individual's taxable wages
while working-called "overage indexed monthly earnings," or AIME. This measure uses data on
national wage growth to scale up earnings throughout a worker's lifetime so that the wages a worker
earned at, soy, age 25 are more closely comparable to the wages a worker earns later in life. 3
• Second, a progressive formula is used to convert AIME into a baseline benefit or "primary insurance amount" (PIA). In general, workers with higher lifetime earnings receive benefits that are larger
than those received by workers with low lifetime earnings, so benefits rise with earnings. However,
workers with low lifetime earnings receive a benefit that represents a higher percentage of their
lifetime earnings relative to high-earning workers, implying that the benefit formula is progressive. For
example, if one worker has lifetime earnings that are twice as high os another's, the first worker will
receive retirement benefits that are higher, but not twice as high. It is important to note that benefits
are derived from lifetime earnings, not what a person makes in a single year. Box 1 considers one
confusion that can arise from the use of lifetime income.
Current population survey data for 2005 tabulated by the US Census Bureau (http!/pubdb3censusgov/mac
ro/032006/perinc/new09 _006htm)
2
This mimics the treatment of the employer's shore of the payroll tax, which is not conSidered individual Income for lax
purposes.
3
Technically, only earnings up to oge 60 are wage-Indexed, earnings after age 60 are included In Ihe AIME measure
in nominal terms.
us.
D[PARTM[r----!T OF TIlE !R[/\SURY
3
SOCIAL SECURITY REFORM: THE NATURE OF THE PROBI.EM • ISSUE BRIEF NO. 1
• Finally, the actual amount of initial benefits is determined by 1) adjusting the primary insurance
amount (PIA) for retirement before or after the normal retirement age and 2) adjusting for price
inflation between age 62 and the time the individual begins collecting benefits. These adjustments
ensure that people receive lower benefits if they retire before the normal retirement age or higher benefits if they retire after it, and that they are compensated for inflation based on when they retire. After
benefit payments commence, they are adjusted for price inflation each January.
BOX 1
LIFETIME VERSUS SINGLE-YEAR EARNINGS
Social Security benefits are computed on the basis of Metime earnings, and thus do not relate directly to
earnings In a particular year. While this appropriately ensures that benefits reflect contributions to the
system over the course of a person's working years (In proctice, the top 35 years of earnings are used),
the computation can prove confUSing in some contexts. For example, only 15 percent of all workers
have overage Metime annual taxable earnings of at least $60,000 (overage indexed monthly earnings
of at least $5,000), even though a considerably larger fraction of workers earn more than $60,000
in a given year. Intuitively, workers with overage lifetime earnings of $60,000 per year were typicolly
making much less than thiS at the start of their career. In addition, woges above the taxable maximum
do not count in the calculation of lifetime earnings for Social Security; people making six-figure incomes
in 2007, for example, would be counted as making $97,500.
This pOint about lifetime earnings should be kept in mind when assessing the consequences of reform
proposols that include benefit adjustments A hypothetical proposal that reduces the benefits of the top
15 percent of eorners might be seen as affecting workers with Social Security lifetime earnings of "only"
$60,000 Without understanding that the $60,000 figure is calculated in a porticular way, one might
mistakenly believe that this hypothetical reform proposal is affecting middle-closs workers rather than
being limited to workers in the top 15 percent of the lifetime earnings distribution.
Disability benefits are computed in a similar fashion. The principal difference, however, is that the number of years used to compute the AIME amount is reduced to take into account the person's shorter work
history.
Social Security has been very generous to early birth cohorts who were in the middle or later part of
their working life either at the time the program began or on the several occasions when the program's
taxes and real benefit levels were increased. [Figure 1 shows how the OASDI tax rate has been raised
numerous times over the history of the program.) It was decided from the outset that birth cohorts in
mid-to-Iote working life at the time of the program's inception would be paid large benefits relative to
the taxes they hod paid in. In addition, each time new legislation has ratcheted up taxes and real
benefits, substantial windfalls have been conveyed to individuals in mid-to-Iate working life at the time of
the change, as these individuals face increased taxes for only a relatively few years but are entitled to
receive the full advantage of the benefit increases. For example, people born in 1954 faced tax rates
between the ages of 25 and 46 that were 1.6 percentage points higher on overage than the tax rates
faced at the same ages by people born in 1943 (Figure 2). This is so even though the benefit formula
is equally generous on overage to both cohorts. People born before 1943, such as the 1930 birth cohort shown in the figure, were still more advantaged, as the tax rates they faced were even lower than
those faced by people born in 1943 and beyond.
U.S. DEPARTMEf'-!T OF THE TRE;\SURY
4
SOCIAL SEClJRITY
Rc.··.cORM.·
LI
THE NAlURE OF THE PJ<O[3LEM • ISSUE BRIEF NO. 1
--------------------------
Figure 1: OASDI Tax Rates by Year
(Total Employer and Employee Shares)
Percent
13
------
12
11
10
9
8
7
6
5
4
3
2
1
1937
1947
1957
1967
1977
1987
1997
2007
Source: Social Security Administration
Figure 2: OASDI Tax Rates Paid by 1930, 1943 and
1954 Birth Cohorts
(Total Employer and Employee Shares)
Percent
14
13
1954 Birth Cohort
12
--./
"'-,'---,-_-_
..../-',..- - - - - - - - . - . • ••
11~
_,,---7./
10
9
8 /
-
I
,-_
1943 Birth Cohort
/
7
!
6
1930 Birth Cohort
5
4
3L-____
25
~
______
30
~
______- L______
35
~
40
______
~
50
45
____
~L_
____
55
~
__
~
60
Age
Sources: Social Security Administration and Deportment
of the
Treasury
Because Social Security benefits paid to the earliest Social Security beneficiaries were more generous
than what could be financed out of the proceeds from their own contributions, those benefits were largely financed with taxes paid by younger birth cohorts. And because the younger birth cohorts' taxes
were paid out rather than saved, their benefits must in turn be financed by the taxes of still younger birth
u.s.
DEPt,RTMENT
or
5
THE TREASURY
SOCIAL SECURITY REFORM: THE NAlURE OF THE PROBLEM. ISSUE BRIEF NO.1
cohorts. This method of financing benefits is referred to as "pay-as-you-go," in which each generation's
taxes finance the benefits of the generation that preceded it. The alternative to pay-as-you-go finance
is pre-funding, in which each generation accumulates assets to be drawn upon to pay that generation's
future benefits.4
Figure 3 shows that Social Security has been financed almost entirely on a pay-as-you-go basis for most
its history (currently, a small amount of potential pre-funding of benefits is also involved). As a shore
of tax revenues, program outlays rose very rapidly in the early years of the program, reaching 100 percent in 1958 and staying near 100 percent through 1983. Social Security's cash surpluses since 1983
reflect reforms that resulted in the large baby-boom generations paying more taxes than were needed
to finance the benefits of earlier birth cohorts. Whether these surpluses resulted in true pre-funding of
future benefits is discussed in Treasury's second issue brief. Between the end of 1983 and the end of
2006, Social Security costs averaged 88 percent of non-interest income, and the inflation-adjusted trust
fund balance rose from $50 billion to $2 trillion (in 2006 dollars). In 2006, Social Security brought in
$87 billion more revenue than it paid out in benefits and administrative costs. As shown in Figure 4, Social Security's annual cash surplus is projected to peak in 2009, and then to decline steadily, reaching
zero in 2017 After that point, Social Security's cash flows are negative, as costs will exceed revenues.
Even so, full benefits will be paid under current law until the trust fund is exhausted. These benefits will
be funded from non-Social Security taxes or by issuing new public debt to redeem debt held by the trust
fund.
of
Figure 3: OASDI Cash Outflow as a Share of Non-Interest Receipts
Percent
120~----------------------------------------------------------~
Outflows> Receipts
100
~--------------y
Outflows < Receipts
80
60
40
20
O~~
1937
__- L_ _ _ _~_ _ _ _ _ _~_ _ _ _~_ _ _ _ _ _L -_ _~~~_ _~
1947
1957
1967
1977
1987
1997
Fiscal Year
Source: Office of Management and Budget
4
The special Treasury securities in the present trust funds represent claims on the government and-ultimately-the public,
in the form of future general tax revenues. Whether these trust fund accumulations constitute true pre-funding IS on open
question, and is discussed in Treasury's second issue brief.
u.s. DEPARTMENT OF THE TREASURY
----.------------------~
----
-----
SOCIAL SECUI<ITY RErORM: THE I\lAl URI~ OF 1HI: f)ROBIEM • ISSLJr BRIEF r'~o
Figure 4: Actual and Proiected Social Security Balances
Billions of dollars
,
200~-------------------------------.------------------.
Peak in 2009: $99 Billion
100
o~__--~~~~------------------~------~~~------100
First Becomes
Negative in 2017
-200
I
I
I
I
I
I
I
I
-300
Historical : Projected
-400L-__~L-__~_____ J_ _ _ _~_ _ _ __ L_ _ _ __L~I--~----~----L-----LJ
1975
1980
1985
1990
1995
2000
2005
2010
2015
2020
2025
Source: Social Security Admini5tration
SOCIAL SECURITY/S
FII'~ANCIAL 1~,A\BALJ:.J'-lCE
Social Security is officially solvent so long as the trust fund balance is positive Based on economic and
demographic assumptions from the Social Security Board of Trustees, the Social Security Administration
projects that the OASDI trust fund (the combined OASI and DI trust funds) will have insufficient funds
to pay currently scheduled benefits beginning in 2041. The projected trust fund exhaustion date can
change from year to year as new data and assumptions are introduced into the Social Security Administration's calculations. For exomple, the 2000 Trustees Report projected a trust fund exhaustion dote of
2037; since then, the date has been pushed back four years, to 2041, That said, if the current projections prove accurate and if no program changes are made, then current law mandates that benefits
actually paid be scaled back to a level that is consistent with then-current payroll tax income when the
trust fund is depleted, In other words, if no action is taken, current projections imply that all beneficiaries will have their benefits reduced in 2041 by 25 percent compared to whot is promised, The share
of scheduled benefits that would be payable would then slowly decline from 75 percent in 2041 to
70 percent in 2081,
The financial challenge Social Security faces has implications for the federal budget even before 2041,
As shown in Figure 4, Social Security cash flows become increasingly negative after 2017; as a result,
Social Security will have a larger and larger impact on the rest of the federal budget, as general revenues and/or greater public debt issuance are needed in order to redeem trust fund bond holdings and
fund full benefit payments until 2041.
U,S
DEP!\RTMLI'-JT OF n·!L TREt\SLJRY
7
SOCIAL SECU[<ITY [<rEORM: THE NAIURE OF THE PROBtEM • ISSUE BRIEF NO. 1
The projected time path for the trust fund balance reflects projected future cash flows. Figure 5 shows
historical and prolected values for income (excluding interest) and costs expressed as shares of projected
taxable payroll; these concepts are referred to as the income rate and the cost rate! respectively. In
2006! the Income rate was 12.73 percent! the cost rate was 11.02 percent! and the difference-the
surplusrate-wos 1.71 percent. The surplus rate is projected to peak in 2008 at 1.74 percent and then
to decline steadily; the rate becomes negative starting in 2017, reaching -5.35 percent in 2085.
Figure 5: Historical and Proiected OASDI Income and
Cost as a Share of Taxable Payroll
Percent
20
r-------------------;----------------------------------------Proiection
18
•
/
16
Cost Rate
14
/'
12
Income Rate (Excludes Interest Income)
10
8
6
~
1970
__
~
____J -_ _ _ _L __ _
1980
1990 2000
~
_ _ _ _~_ _ _ _L __ _~_ _ _ _~_ _ _ _L __ _~_ _ _ _~~
2010 2020
2030
2040 2050
2060 2070
2080
Source: Social Security Administration
The most Widely cited Single measure of Social Securit/s financing shortfall is the 75-year actuarial
deficit! which is currently estimated at $5.1 trillion in present-value terms! or 1.95 percent of the present
value of taxable payroll over the 2007 to 2081 period 5 This estimate implies that Social Security can
achieve actuarial balance by redUCing the present value of Social Securit/s 75-year net outflow (benefits less taxes) by $5.1 trillion. One way to do this would be to immediately raise the payroll tax rate by
1.95 percentage points (i.e., to 14.35 percent); alternatively! scheduled benefits could be immediately
reduced by 13 percent.
Either of these two steps would bring Social Security into 75-year balance! but it would not make the
system permanently solvent. Under a hypothetical tax increase of this size, Social Security could pay
scheduled benefits through to the end of the 75-year projection period! but continuing cosh deficits
would imply that the trust fund would drop below the threshold required for actuarial balance in the follOWing year (see Figure 6). Put differently, just one year after implementing such a reform! Social Security would again be out of 75-year actuarial balance-that is! if reform were implemented in 2007, the
system would fallout of balance in 2008. Moreover! with each passing year the Trustees would report
5
This measure requires the trust fund balance 10 be sufflClenl to pay 100 percenl of program costs in Ihe final year of the
period; Without this requirement the unfunded obligation would equal $47 trillion Note that all present values
75 year
referred to in this brief are computed as of the start of 2007
U.S. DEPf\RTMENT OF THE TREf\SURY
8
SOCIAL SECURITY REFORM: THE NAlURE OF THE PROBlEM. ISSUE BRIEF NO. 1
on ever-larger financial imbalance as the 75-year scoring window moves forward to include years with
ever-larger gaps between expected system costs and income
Figure 6: Proiected OASDI Trust Fund Balance as a Share of Cost
700r-------------------------____________________________~~
I
600
I
I
I
I
I
I
I
500
400
I
I
I
Raise Payroll Tax Rate
1.95 Percentage Points in 2007
, ................ ....
~
~
End of 75-Year :
Horizon~
!
2007 Intermediate Projection
"" ..
...
I
I
I
I
I
I
I
I
I
I
I
I
I
~
300
~
~
200
~
~
~
..
100
Threshold for Actuarial Balance
~
""
2037
or-------~------~--------L-~#----~--------L-------~-------L--~~
2007
2017
2027
2047
2057
2067
2077
Sources: Social Security Administration and Deportment of the Treasury
As this example makes clear, estimates mode over a 75-year horizon do not fully capture the financial
status of the Social Security program. In fact, no finite forecast period completely embodies the financial
status of the program because people pay taxes in advance of receiving benefits; at any finite cutoff
dote, people will have been promised benefits that have not yet been paid. For example, the current
75-year proiections include nearly all of the taxes that people born in 2010 are expected to pay over
their working lifetimes but virtually none of the benefits that they will receive in retirement. In order to
get a complete picture of Social Security's financial problem, the time horizon for calculahng income
and costs must be extended to the indefinite future. Such a calculation is provided in the 2007 Trustees
Report, where it is estimated that the present value of scheduled benefits exceeds the present value of
scheduled tax income by $13.6 trillion; this is the financing gap that program reforms must ultimately
close. To put this figure in perspective, eliminating the permanent deficit could be accomplished with
an immediate and permanent 3.5 percentage point increase in the payroll tax rate (to 15.9 percent), or
with roughly a 20 percent reduction in current-law scheduled benefits 6
It is important to understand that the magnitude of the infinite-horizon actuarial deficit is not driven by the
use of distant or speculative long-range proiections. Rather, the smaller size of the 75-year (or any finiteperiod) deficit results from its use of a truncated time horizon. The Trustees Report indicates that Social
Security's unfunded obligation for only past and current workers equals $14.4 trillion, which is actually
6
The benefil reduction 10 achieve infinrle horizon balance is calculaled assuming that the ratio
payroll is Ihe some belween 2081 and Ihe inflnile fulure as il is belween 2007 and 2081
u.s. DEPARTMENT 01 TI\[: TREASURY
9
of
income 10 laxable
SOCIAL SECURITY REFORM: THE NATURE OF THE P/<OBIEM • ISSUE BRIEF NO. 1
slightly greater than the infinite-horizon shortfall. As soon as one accounts for the full amount of benefit
obligations that have been promised to past and current porticipants, it becomes apparent that Social
Security's $13.6 trillion financing gop is already "on the books" in on important sense, and does not
merely arise from looking far beyond a 75-year horizon.
PERMANENT SOLVENCY AND THE INFI~~ITE-HORIZO~'4
ACTU,.6.RIAL BALANCE
Hoving a non-negative infinite-horizon actuarial balance does not by itself assure that Social Security is
permanently solvent. For Social Security to be technically solvent over a given period, it must have a
trust fund balance that is sufficient to pay scheduled benefits over that period. By contrast, a non-negative actuarial balance could be achieved even if the trust fund were insolvent during certain periods, so
long as the program's revenues were to exceed its payments on overage.
The Trustees Report has for many years made reference to an approximate test for permanent solvency
called "sustainable solvency" Sustainable solvency is said to be achieved if the ratio of the trust fund
balance to projected annual benefit payments (the "trust fund ratio") is positive throughout the 75-yeor
projection period and is stable or rising at the end of the period. Implicitly, the idea is that if trends at
the end of the 75-year projection period persist, then sustainable solvency implies that the trust fund ratio
will be forever positive.
A fully satisfactory solution to Social Security's long-term solvency problem will both meet the criterion
of sustainable solvency and include a mechanism for ensuring that trends at the end of the projection
period are in fact sustained. For example, ensuring Social Security remains permanently solvent could
mean taking into account that increasing longeVity is likely to forever increase the gap between Social
Security's benefits and revenues unless benefit levels, tax rates, or both are somehow indexed to longevity This is because increased longeVity means that retirees are collecting benefits for additional years
but not paying additional taxes (if workers continue to retire at the same age). Also, sustainable solvency does not necessarily prOVide for permanent solvency if past demographic changes such as changes
in fertility or immigration rates cause the age distribution of the population to be unstable at the end of
75 years.
THE ORIGINS OF SOCIAL SECURITY/S
AND ITS !fI\PUCATIO~~S
FII'~ANCIAL
SHORTFALL
The fundamental reason Social Security must be reformed is that the benefits promised to the public
have a present value that is $13.6 trillion greater than the present value of the revenues that the system
is proiected to receive. Relative to scheduled benefits and taxes, therefore, the present value of benefits
less taxes (what might be referred to as "net payments to the public") must be reduced by $13.6 trillion.
This can be done by increasing revenues relative to what is provided for under current law and/or by
lowering benefits relative to what is currently promised (but not actually payable given that the system is
insolvent). There is no alternative to these two choices.
It might be surprising that Social Security promises to payout so much more than it takes in. As is well
known, the program promises current and future workers a below-morket rate of return on contributions
in the sense that most workers would do better by directly investing their contributions (ie, the taxes
u.s.
DEP!\,~Ttv,\ENT
or
10
THE TRE/\SURY
they pay into the system) into U.S. Treasury bonds. 7 Why must the system increase net receipts by
$136 trillion if it is already requiring current and future workers to pay in more than they will receive~
The answer relates to the system's generosity to early birth cohorts-generations of workers now either
retired or deceased. Social Security paid these previous cohorts benefits that exceeded their lifetime
contributions by more than $13.6 trillion. In order to finance this gap, later birth cohorts must receive
benefits whose value (relative to the value of the taxes they pay in) is lower by the same amount-that
is, they must pay a net tax (again, the difference between the present value of taxes and benefits) of
more than $13.6 trillion. Under current law, a portion of this net tax is being levied already; in order to
make the system solvent, the net tax needs to be increased by an additional $13.6 trillion.
These observations are supported by estimates made by the Social Security Administration and the
Congressional Budget Office (CBO). The Social Security Administration has broken down the infinitehorizon actuarial imbalance into imbalances attributable to net payments to two brood generational
groupings. Generations born after 1992-those aged zero to 14 years in 2007 and those not yet
born in that year-are estimated to receive net payments (the difference between their lifetime benefits
and taxes) from Social Security with a present value that is slightly negative (the shortfall is $0.8 trillion).
This implies that the excess of benefits over taxes mode to generations born before 1993 accounts for
essentially all of the $13.6 trillion infinite-horizon actuarial imbalance. In addition, estimates mode by
the CBO and others suggest that generations born between 1940 and 2000 will receive less in lifetime
benefits thon they pay in as taxes (that is, their net benefits from Social Security over their lifetime will
have a negative present value)8 The bottom-line implication of these estimates (which are summarized
in the lost two rows of the first column of figures in Table 11 is that cohorts subject to reform-roughly
people born in 1953 or later-will receive net lifetime scheduled benefits under current low that are
negative? The value of these net lifetime benefits is given as -X trillion dollars in the table (their exact
magnitude is not known). This in turn implies that cohorts not subject to reform-that is, current and near
retirees and earlier cohorts-receive positive net lifetime benefits of $13.6 + X trillion under current low.
The second column of figures in Table 1 shows the implications of these findings for the ultimate generational breakdown of Social Security's net benefits In the end, the present value of all Social Security
cosh flows must be zero, with the present value of revenues equal to the present value of benefits. In
addition, most proposals for Social Security reform start with the assurance that those in and near retirement will not be affected (again, this is assumed to include persons born in 1952 or earlier); hence, net
lifetime benefits for these individuals are unlikely to change much from scheduled current-low levels. The
$13.6 trillion-plus net benefit received by current and near retirees and the generations preceding them
thus must be financed by later birth cohorts. Relative to current low, therefore, these later cohorts-the
"reform cohorts/l-will face on additional nel tax of $l3.6 trillion in the form of either lower benefits than
promised under current low or higher taxes. There is no escaping this budget arithmetic.
7
8
9
Technically, this implies that the program as currently constituted levies a "'let tax" on current ond future workers: The
present value of their benefits is less than the present value of their contributions.
See Congressional Budget Office, "15 Sociol Security Progressive 2 " December 15, 2006.
In defining the cohorts subiect to reform to be those born In 1953 and later, only those aged 55 or younger at the
time the reforms toke place are counted as being sublect to their provIsions
Table 1
f :;'111'1,'11('"
cf r'~,,'1
SC)(I(II
'(
Ii!!:,' 1)(1';'11','111'0 j\;\'J(
(\ldll()!I~ uf (lOU/
\)[(:,{;'II
Ir)
P)II'
C:r:i1rAt Cr')IJr')')
\fnl,J(: \»)i\c;':')
Value of payments under.
Birth cohort
Current law
Ultimate program
Estimates
All birth cohorts, total
13.6
Cohorts born 1993 and loter (total)
-0,8
Cohorts born 1992 and earlier (total)
14.4
Cohorts born 1940 to 2000 (each cohort)
<0
'0-
Inferred totals
Cohorts subject to reform (born 1953 and later)
Cohorts exempt from reform (born 1952 and before)
-x
13.6 + X
- (13.6 + X)
13.6 + X
Source. lines I to 3 are derived from the mfinile,horizon octuardlmbalonce reported in the 2007 Trustees Report, Table IV.B7 line 4
IS
based on a December 15, 2006 paper by the Congressional Budget Office (CBO) entitled 'Is Socd Security Progressive?"
REFORMING THE SYSTEM: SOONER IS BETTER THAN LATER
Viewing Social Security from the perspective of how it affects current and future individuals and generations explains why reform can be fairer to future generations the sooner it is implemented. Delay reduces the options for distributing the financial burden of reform across generations because delay exempts
additional generations from sharing in the financial consequences of reform.
To make this point more concretely, consider a policy of closing Social Security's permanent financing
gop by immediately increasing the payroll tax rate by 3.5 percentoge points, This policy would affect
all current and future workers. If the tax increase were instead delayed until 2041, when the trust fund
is proiected to be depleted, the requisite tax increase would be 5.8 percentage points rather than only
3.5 percentage points-the difference being that there ore fewer cohorts (and therefore less resources) to
tax the longer one waits. Similarly, all retirees' benefits would have to be cut by 20,4 percent in 2007
to make Social Security permanently solvent-but this would rise to a benefit adiustment of 30.4 percent
if reform were initiated in 2041. These examples show that fairness to future generations requires that
action be taken sooner rather than later.
FAIRNESS TO FUTURE GENERATIONS REQUIRES TRUE PRE-FUNDING
An issue that will be discussed in Treasury's second issue brief is whether trust fund accumulations
(ie., Social Security surpluses) increase the government's capacity to pay future Social Security benefits
and the implications that the answer to this question has for Social Security reform. Social Security surpluses increase the government's capacify fo pay future benefits only to the extent that they result in less
debt issued to the public than would have been issued in the absence of Social Security surpluses, In
that case, near-term surpluses increase the government's capacity to issue public debf in the future to
finance Social Security benefits.
Many analysts believe Social Security surpluses do not result in smaller levels of publicly held debt,
but instead result in some combination of higher spending or lower taxes in the non-Social Security
budget. To the extent that this is true, attempting to make Social Security fairer to future generations by
running near-term Social Security surpluses would not succeed; only if pre-funding is "real" can this goal
of fairness be achieved.
INCREASED ECONOMIC GROWTH BY ITSELF CANNOT HELP
SOLVE THE PROBLEM
More rapid economic growth cannot, by itself, close Social Security's infinite-horizon financing gop.
Realistic increases in productivity or population growth are simply not sufficient to have more than a
modest effect on the program's long-range shortfall, especially over the very long term.
In this context, it is important to note that the ultimate effect of foster growth on Social Security's financing gap will be overstated by the 75-year estimates that are given in the Trustees Report. Because each
person's taxes precede their benefit payments by about 30 years on overage, the 75-year horizon captures a large share of the increased revenues that come about because of increased real wage growth
or fertility, but a relatively smaller share of the resulting future increase in benefit payments. Hence, a
finite-horizon measure will capture only a portion of the effect that foster economic growth has on future
benefit promises; by contrast, on infinite-horizon calculation fully captures both the tax and benefit implications of Social Security reforms.
INCREASED ECONOMIC GROWTH DOES MAKE REFORM EASIER
While increased economic growth cannot solve the problem of Social Security's current-low financial
shortfall, it does make the reform burden easier to bear. Higher fertility and/or immigration means that
there are more people over whom to distribute the $13.6 trillion burden of reform. And higher real
wage growth means that disposable income (income after taxes) will be higher for future generations.
This increase in disposable income makes it easier for them to shoulder the burden of reforming Social
Security, since what they have left after the reform is greater than it would otherwise be.
CONCLUSION
Because Social Security paid or promised more to early birth cohorts than they paid in, and because
it is neither feasible nor desirable to go back on those promises, the burden of ensuring the system's
solvency can only fall on current and future workers. This burden will be imposed one way or another-under current low, when the trust fund reaches its projected exhaustion dote in 2041, benefits will be
automatically cut to a level that is consistent with then-current payroll tax income. However, the manner
in which this would occur will be drastic and unfair, with low-earning retirees faCing benefit reductions
in the some proportion as high earners. By contrast, taking action now will allow people who most
depend on Social Security for their retirement income to be shielded, and will allow a more gradual
transition to a sustainable system. The sooner that reform is implemented, the more birth cohorts there
will be that can contribute to making Social Security solvent, and the fairer Social Security will be to
future generations.
I]
Page 1 of 5
September 24, 2007
2007 -9-24-14-22-15-12258
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 $68,519 million as of the end of that week, compared to $68,057million as of the end of the prior
week.
Official reserve assets and other foreign currency assets (approximate market value, in US millions)
I
I
IA. Official reserve assets (in US millions unless otherwise specified)
II
IISeptember 21, 2007
IIEuro
IIYen
IITotal
II
II
11 68,519
I(a) Securities
11 13 ,677
11 11 ,016
11 24 ,693
lof which: issuer headquartered in reporting country but located abroad
II
1(1) Foreign currency reserves (in convertible foreign currencies)
I(b) total currency and deposits with:
II
II
II
I(i) other national central banks, BIS and IMF
1/13,667
115,425
11
0
II
11 19 ,092
Iii) banks headquartered in the reporting country
110
lof which: located abroad
110
I(iii) banks headquartered outside the reporting country
11 0
lof which: located in the reporting country
110
1(2) IMF reserve position
1/4,436
1(3) SDRs
11 9 ,257
1(4) gold (including gold deposits and, if appropriate, gold swapped)
11 11 ,041
I--volume in millions of fine troy ounces
11 261 .499
0
[(5) other reserve assets (specify)
[--financial derivatives
I--Ioans to nonbank nonresidents
I--other
@. Other foreign currency assets (specify)
[securities not included in official reserve assets
--deposits not included in official reserve assets
I
--loans not included in official reserve assets
II
--financial derivatives not included in official reserve assets
II
[gold not included in official reserve assets
[-other
II
II
II. Predetermined short-term net drains on foreign currency assets (nominal value)
IP:llwww.treas.gov/presslreleases/200792414221512258_htm
10/112007
Page 2 of 5
[
[
I[
II
J
I
[1. Foreign currency loans, securities, and deposits
IITola,
II
II
JI
\lPrincipal
[
1\
1[lnterest
II
I--inflows (+)
II
II
IIPrincipal
/I
/I
I
1[lnterest
futures in foreign currencies vis-a-vis the domestic
currency (including_ the forward leg of currency swap~
I (a) Short positions ( - )
I (b) Long positions (+)
I 3. Other (specify)
I --outflows related to repos (-)
II
II
I
II
II
II
II
"\I
II
I
I
11
II
II
II
II
II
1/
II
/I
JI
II
II
II
II
II
II
II
II
II
I --trade credit (-)
II
I
I
II
I--other accounts receivable (+)
II
II
II
II
I
II
II
I --other accounts payable (-)
II
II
JI
"II
II
II
I
I
I
II
I --inflows related to reverse repos (+)
I --trade credit (+)
I
More than 3
months and up to
1 year
More than 1 and
up to 3 months
IUp 10 1 monlh
1--outflowS (-)
2. Aggregate short and long positions in forwards and
II
II
II Maturity breakdown (residual maturity)
II
II
II
!
I
I
1\
II
I
1/
I
/I
I
III. Contingent short-term net drains on foreign currency assets (nominal value)
I
I
1/
!I
IITola,
I
(1. Contingent liabilities in foreign currency
(a) Collateral guarantees on debt falling due within 1
year
[(b) Other contingent liabilities
II
JI
II
2. Foreign currency securities issued with embedded
options (puttable bonds)
_II
3. Undrawn, unconditional credit lines provided by:
II
(a) other national monetary authorities, BIS, IMF, and
other international organizations
II
t-other national monetary authorities (+)
III
/I
Maturity breakdown (residual maturity, where
applicable)
More than 1 and
up to 3 months
IUp 10 1 monlh
I
More than 3
months and up to
1 year
II
II
1/
II
II",
III
II
II
I
II
II
II
I
I
I
[SIS (+)
II
~-IMF (+)
\I
I
II
1/
I
II
I
(b) with banks and other financial institutions
headquartered in the reporting country (+)
r
[I
Itlp:/IwWw.treas.gov/presslreleases/200792414221512258.htm
I
II
II
II
II
I
lOI112007
Page 3 of 5
(e) with banks and other financial institutions
headquartered outside the reporting country (+)
~ndrawn. unconditional credit lines provided to:
(a) other national monetary authorities. 81S. IMF. and
other international organizations
I
t
II
I
II
II
I
II
/I
I
II
II
I
II
I
II
II
II
I
I
I
I
I
I
t-other national monetary authorities (-)
II
BIS (-)
I
[--IMF(-)
(b) banks and other financial institutions headquartered
in reporting country (- )
(e) banks and other financial institutions headquartered
outside the reporting country ( - )
)1
JI
4. Aggregate short and long positions of options in
foreign currencies vis-a-vis the domestic currency
II
I
I
/I
I(a) Short positions
10) Bought puts
I(ii) Written calls
I(b) Long positions
I(i) Bought calls
II
I(ii) Written puts
IpRO MEMORIA: In-the-money options 11
II
1(1) At current exchange rate
II
I(a) Short position
/I
I(b) Long position
II
1(2) + 5 % (depreciation of 5%)
I
II
I(a) Short position
/I
/I
I(b) Long position
II
1(3) - 5 % (appreciation of 5%)
/I
I(a) Short position
II
I(b) Long pOSition
~4) +10 % (depreciation
I
I
II
of 10%)
I(a) Short position
I(b) Long Position
@) -10 % (appreciation of 10%)
II
II
II
I
J
[a) Short position
[lli) Long pOSition
@) Other (specify)
~) Short position
@) Long position
I
II
II
/I
I
I
IV. Memo items
[
IT> To be reported with standard periodicity and timeliness:
[§ Short-term domestic currency debt indexed to the exchange rate
(b) financial instruments denominated in foreign currency and settled by other means (e.g .. in domestic
P;llwwW.hcas.gov/press/releases/200792414221512258.htm
I
I
I
I
10/112007
Page 4 of 5
Icurrency)
tnondeliverable forwards
"IIII
[ ··short positions
[ ··Iong positions
II
II
II
tother instruments
lli:) pledged assets
I·· included in reserve assets
II
-·included in other foreign currency assets
I(d) securities lent and on repo
I
1··lent or repoed and included in Section I
I
-·Ient or rep oed but not included in Section I
I
--borrowed or acquired and included in Section I
I
I--borrowed or acquired but not included in Section I
I
I
I
I(e) financial derivative assets (net, marked to market)
I--forwards
I--futures
I--swaps
I--options
I--other
I
(f) derivatives (forward, futures, or options contracts) that have a residual maturity greater than one
year, which are subject to margin calls.
I
I
--aggregate short and long pOSitions In forwards and futures in foreign currencies vis-a-vis the domestic
currency (including the forward leg of currency swaps)
I
I(a) short positions ( - )
I(b) long positions (+)
I
I--aggregate short and long positions of options in foreign currencies vis-a-vis the domestic currency
I(a) short positions
I(i) bought puts
I(ii) written calls
[(i) bought calls
I
II
I(ii) written puts
II
[(2) To be disclosed less frequently:
lia) currency composition of reserves (by groups 01 currencies)
II
11 68,519
t-currencies in SDR basket
1168,519
[-.currencies not in SDR basket
II
[by individual currencies (optional)
II
[
II
I(b) long pOSitions
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 markedto-market values, and deposits reflect carrying values.
2/ The items, "2. IMF Reserve Position" and "3. Special Drawing Rights (SDRs)," are based on data provided by the IMF
and are valued in dollar terms at the official SDR/dollar exchange rate for the reporting date. The entries for the latest
week reflect any necessary adjustments, including revaluation, by the U.s. Treasury to IMF data for the prior month
~:..wWw.treas.gov/press/releases/200792414221512258.htm
101112007
Page 5 of 5
end.
3/ Gold stock is valued monthly at $42.2222 per fine troy ounce.
~:l!www.treas.gov/press/releases/200792414221512258.htm
10/112007
Page 1 of 1
September 24,2007
HP-573
Treasury Secretary Paulson Meets with Indian
Finance Minister Chidambaram
Washington, DC - Treasury Secretary Henry M. Paulson, Jr. welcomes Indian
Finance Minister Palaniappan Chidambaram to the Department of the Treasury on
Tuesday, September 25,2007. They will discuss the Secretary's upcoming trip to
India, as well as the importance of developing Mumbai into an international financial
center and boosting private financing for the country's infrastructure needs.
Additionally, they will discuss how the United States and financial regulators can
best assist India in achieving its economic and development goals.
~:I/wWw.treas.gov/presslreleaseslhp573.htm
10/1/2007
Page 1 of 1
September 25, 2007
HP-574
Today: Steel, Ryan to Host Capital Markets Briefing
Under Secretary for Domestic Finance Robert K. Steel and Assistant Secretary for
Financial Markets Anthony W. Ryan will hold a press conference today at 11 a.m. in
the Treasury Department Gallatin Room to discuss the next steps in part of
Treasury's capital markets competitiveness initiative announced in June. The
following event is open to credentialed media:
Who
Under Secretary for Domestic Finance Robert K. Steel
Assistant Secretary for Financial Markets Anthony W. Ryan
What
Press Conference on Capital Markets
When
Tuesday, September 25,2007 11 a.m. (EDT)
Where
U.S. Treasury Department
Gallatin Room (2124)
1500 Pennsylvania Ave., NW
Washington, D.C.
Note
Media without Treasury press credentials should contact Frances Anderson at
(202) 622-2960, or frances.ancJerson@do.treas.gov with the following Information:
full name, Social Security number and date of birth.
Mwww.treas.gov/press/releaseslhp574.htm
10/1/2007
Page 1 of 2
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on /hIS page. aOWnl08a me tree AaolJe(p) AcrOlJal(5) Heaaert!!.
February 22, 2007
HP-272
President's Working Group Releases
Common Approach to Private Pools of Capital
Guidance on hedge fund issues
focuses on systemic risk, investor protection
Washington, DC- The President's Working Group on Financial Markets (PWG)
released a set of principles and guidelines today that will guide U.S. financial
regulators as they address public policy issues associated with the rapid growth of
private pools of capital, includmg hedge funds. The agreement among the PWG
and U.S. agency principals, which will serve as a framework for evaluating market
developments, specifically concentrates on investor protection and systemic risk
concerns.
"The President's Working Group believes that public policy toward private pools of
capital should be governed by consistent principles that set out a uniform approach
to specific policy objectives," said Secretary Henry M. Paulson, chair of the group.
''These principles demonstrate that U.S. regulators and policymakers have a unified
perspective and are committed to providing forward-leaning guidance for the
industry and its participants. These guidelines should serve as a foundation to
enhance vigilance and market discipline further, which will strengthen investor
protection and guard against systemic risk. We will continue to monitor
developments in this ever-evolving market with these principles in mind."
The group has designed the principles to endure as financial markets continue to
evolve. They provide a clear but flexible principles-based approach to address the
issues presented by the growth and dynamism of these investment vehicles.
The principles are intended to reinforce the significant progress that has been made
since the PWG last issued a report on tledge funds in 1999 and to encourage
continued efforts along those same lines:
•
Private Pools of Capital: maintain and enhance information, valuation, and
risk management systems to provide market participants with accurate,
suffiCient, and timely information.
• Investors: consider the suitability of investments in a private pool in light of
investment objectives, risk tolerances, and the principle of portfolio
diversification.
• Counterparties and Creditors commit sufficient resources to maintain and
enhance risk management practices.
• Regulators and Supervisors: work together to communicate and use
authority to ensure that supervisory expectations regarding counterparty risk
management practices and market integrity are met.
The PWG, chaired by the Treasury Secretary and composed of Ihe chairmen of the
Federal Reserve Board, the Securities and Exchange Commission, and the
Commodity Futures Trading Commission, was formed in 198810 further the goals
of enhancing the integrity, efficiency, orderliness, and competitiveness of financial
markets and maintaining investor confidence. The PWG worked With the Federal
Reserve Bank of New York and the Office of the Comptroller of the Currency in
developing the guidance.
Click here for the agreement among PVVG and U.S. agency prinCipals on principles
ttp://wWw.treas.gov/presslreleaseslhp272.htm
10/1/2007
Page 2 of 2
and gUidelines regardmg private pools of capital
)://www.treas.gov/press/releaseslhp272.htm
101112007
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September 25, 2007
HP-575
PWG Announces Private Sector Groups
to Address Market Issues for Private Pools of Capital
Washington - The President's Working Group on Financial Markets announced the
chairs, members and mission statements for two private sector committees, one
comprised of investors and the other comprised of asset managers. These private
sector committees will assess and foster a private sector dialogue on issues of
significance to their industry and the market. The first task of the committees will be
to develop best practices using the PWG's pnnciples-based gllldanQe released in
February. The committees will create and publicly release the besl practices so
market participants may enhance investor protection and systemic risk safeguards
consistent wIth the PWG principles and guidelines.
"These groups are drawn from among the industry's finest in their respective
areas," said Treasury Secretary and PWG Chairman Henry M. Paulson, Jr. 'The
market will benefit if experienced participants develop and implement best
practices. "
The President's Working Group is encouraging market participants to move beyond
the status quo as they work to strengthen market discipline. The committees
represent a milestone toward a more competitive U.S. marketplace with the world's
highest standards for protecting investors and safeguarding against systemic risks.
Russell Read, Chief Investment Officer of the California Public Employees
Retirement System, will serve as the chair of the Investors' Committee. Eric
Mindich, CEO of Eton Park Capital Management, will serve as the chair of the
Asset Managers' Committee.
The PWG and the committee chairmen sought a broad range of experienced
members, listed below, to participate on the Committees. The Investors' Committee
includes representatives from labor organizations, endowments, foundations,
corporate and public pension funds, investment consultants, and non-U.S.
investors. The Asset Managers' Committee includes representatives from a diverse
group of hedge fund managers representing many different strategies.
The groups will make the best practices available for public comment before they
are finalized.
The PWG first discussed the establishment of these groups in June, with the
announcement of the second stage of Treasury's capital markets competitiveness
pJan. The PWG created the groups to complement the work underway between the
global regulators and the financial inst~tutions they regulate that serve as creditors,
lenders and counterparties to these pnvate pools of capItal.
Asset Managers' Committee
Mission Statement IZl
Investors' Committee
Mission StatementlZl
Eric Mindich, Chair
Eton Park Capital Management
Russell Read, Chair
CalPERS
Anne Casscells
Sandra Urie, Vice-Chair
http://www.treas.goy/press/releasesihp575.htm
1118/2008
Page 2 of 2
AETOS Capital, LLC
Cambridge Associates, LLC
James S. Chanos
Kynikos Associates LP
Gary Bruebaker
Washington State Investment Board
Anne Dinning
D. E. Shaw & Co., L.P.
Myra Drucker
Commonfund
Jonathon S. Jacobson
Highfields Capital Management
Tom Dunn
New Holland Capital
Marc Lasry
Avenue Capital Group
Peter Gilbert
Lehigh University Endowment Fund
Edward A. Mule
Silver Point Capital
Andrew Golden
Princeton University Investment
Company
Daniel S. Och
Och-Ziff Capital Management
George Main
Diversified Global Asset
Management Corporation
Daniel H. Stern
Reservoir Capital Group
Ellen Shuman
Carnegie Corporation of New York
William Von Mueffling
Cantillon Capital
Michael Vranos
Ellington Management Group LLC
Damon Silvers
AFL-CIO
Greg Williamson
BP America Inc.
-30-
http://www.treas.gov/press/releaseslhp575.htm
111812008
AGREEMENT AMONG PWG AND U.S. AGENCY PRINCIPALS ON
PRINCIPLES AND GUIDELINES REGARDING PRIVATE POOLS OF CAPITAL
PREAMBLE
The Preside~t's Working Group on Financial Markets, in the course of our ongoing review of
market practices and events, has set forth the following fundamental principles that will infonn
our approach to private pools of capital. Since we last made a statement on these issues in 1999,
the market has matured and expanded considerably, and these fundamental principles have
increasingly been reflected in best practices. The current regulatory structure, which is also
based on these principles, is working well. As we noted in 1999, "[i]n our market-based
economy, market discipline of risk-taking is the rule and government regulation is the
exception." We look forward to further progress as these principles continue to infonn our
actions and strengthen our vibrant capital markets.
OVERARCHING PRINCIPLES
1. Private pools of capital bring significant benefits to the financial markets.
However, these pools of capital also present challenges for market
participants and policymakers. Investors, creditors, counterparties, pool
managers, and supervisors must be aware of these challenges, including
those related to some over-the-counter derivatives, and work to address
them. Public policies that support market discipline, participant
awareness of risk, and prudent risk management are the best means of
protecting investors and limiting systemic risk.
2. The vitality, stability and integrity of our capital markets are a shared
responsibility between the private and public sectors. Market discipline
most effectively addresses systemic risks posed by private pools of capital.
Supervisors should use their existing authorities with respect to creditors,
counterparties, investors, and fiduciaries to foster market discipline on
private pools of capital. Investor protection concerns can be addressed
most effectively through a combination of market discipline and regulatory
policies that limit direct investment in such pools to more sophisticated
investors.
INVESTOR PROTECTION PRINCIPLES
3. Private pools of capital can be an appropriate investment vehicle for more
sophisticated investors. Because these pools can involve complex, illiquid
or opaque investments and investment strategies that are not fully
disclosed, the risks associated with direct investment in these pools are
1
most appropriately borne by investors with the sophistication to identify,
analyze and bear these risks.
3.1
Investors should understand their investments and the corresponding risks, and should not
expose themselves to risk levels they cannot tolerate.
3.2
S~phisticat.e~ investors that determine to invest in a private pool of capital should ensure
that the SIze of theIr lllvestment is consistent with their investment objectives and the principle of
portfolio diversification.
4. Investors in private pools of capital should obtain accurate and timely
historical and ongoing material information necessary to perform due
diligence regarding the pool's strategies, terms, conditions, and risk
management, thereby enabling such investors to make informed
investment decisions.
4.1
As with all investment products and vehicles, clear and meaningful disclosure is essential
for investors to evaluate properly their investment decisions.
4.2
Investors should evaluate the investment objectives, strategies, risks, fees, liquidity,
performance history, and other relevant characteristics of a private pool.
4.3
Investors should evaluate the pool's managers and personnel, including background,
experience, and disciplinary history. Investors also should assess the pool's service providers
and evaluate their independence from the pool's managers.
4.4
Investors should consider the private pool's manager's conflicts-of-interest and whether
the manager has appropriate controls in place to manage those conflicts.
4.5
Investors should conduct an appropriate analysis regarding the valuation methodology
and perfonnance calculation processes and business and operational risk management systems
employed by a private pool, including the extent of independent audit evaluation of such
processes and systems.
5. Concerns that less sophisticated investors are exposed indirectly to private
pools through holdings of pension funds, fund-of-funds, or other similar
pooled investment vehicles can best be addressed through sound practices
on the part of the fiduciaries that manage such vehicles. These fiduciaries
have a duty under applicable law to act in the best interest of the
beneficiaries. They have an ongoing responsibility to perform due
diligence to ensure that their investment decisions are prudent and
conform to sound practices for fiduciaries. Such pooled investment
vehicles should address any special issues relating to investment in private
2
pools of capital, including the availability of relevant, accurate, and timely
historical and ongoing material information.
5.1
Fiduciaries should consider the suitability of an investment in a private pool within the
context of the overall portfolio and in light of the investment objectives and risk tolerances.
Fiduciary evaluation should include the investment objectives, strategies, risks, fees, liquidity,
performance history, and other relevant characteristics of a private pool.
5.2
Fiduciaries should evaluate the pool's manager and personnel, including background,
experience, and disciplinary history. Fiduciaries also should assess the pool's service providers
and evaluate their independence from the pool's managers. Fiduciaries should consider the
private pool's manager's conflicts-of-interest and whether the manager has appropriate controls
in place to manage those conflicts.
5.3
Fiduciaries should conduct the appropriate due diligence regarding valuation
methodology and performance calculation processes and business and operational risk
management systems employed by a private pool, including the extent of independent audit
evaluation of such processes and systems.
5.4
Fiduciaries that determine to invest in a private pool of capital should ensure that the size
of their investment is consistent with their investment objectives and the principle of portfolio
diversification.
SYSTEMIC RISK PRINCIPLES
6. Market discipline by creditors, counterparties, and investors is the most
effective mechanism for limiting systemic risk from private pools of capital,
which is the possibility that losses at one or more entities could threaten the
stability of the broader financial system.
6.1
Creditors and counterparties of private pools of capital are generally large, sophisticated
financial firms that have the incentives and the expertise to provide effective market discipline.
As institutional investors have become an increasingly important source of capital to private
pools, the potential for market discipline from investors has increased.
6.2
By limiting their own exposures to losses from a default by a private pool, creditors and
counterparties can better protect their own solvency from losses at a private pool. Moreover, the
financing terms provided by creditors and counterparties can be an important constraint on
leverage employed by private pools of capital.
7. Key creditors and counterparties must commit resources and maintain
appropriate policies, procedures, and protocols to define, implement, and
continually enhance best risk management practices. Those policies,
procedur;s, and protocols should address how the quality of information
3
from a private pool of capital should affect margin, collateral, and other
credit terms and other aspects of counterparty risk management.
7.1
Creditors and counterparties should undertake appropriate and effective due diligence
before extending credit to a private pool of capital and on an ongoing basis thereafter. Due
diligence should include a review of the counterparty's ability to measure and manage its
exposures to market, credit, liquidity, and operational risks. Due diligence should establish the
information flows that will occur during the course of the credit relationship.
7.2
Creditors and counterparties should measure their credit exposures to a private pool of
capital frequently, taking into account the availability of collateral to mitigate both current and
potential future exposures, and should assess the range of uncertainty around their exposure
estimates. Rigorous stress testing should be used to quantify the impact of adverse market
events, both at the level of an individual counterparty and aggregated across counterparties.
Stress tests should take into account potential adverse market liquidity events in which multiple
market participants seek to unwind trades simultaneously.
7.3
The amount of credit exposure to a private pool of capital that creditors or counterparties
assume should reflect the level quantity and quality of available information about the pool, the
extent to which exposures to the pool can be mitigated through margin and other credit terms,
and the amount of capital that the creditors or counterparties have allocated to support the
exposure.
7.4
Information that creditors and counterparties should seek to obtain from a private pool
includes both quantitative and qualitative indicators of a private pool's net asset value,
performance, market and credit risk exposure, and liquidity. The level of detail expected should
respect the legitimate interest of the private pool in protecting its proprietary trading strategies.
Where sufficient information is not forthcoming from a particular private pool, creditors and
counterparties should tighten margin, collateral, and other credit terms.
7.5
Creditors and counterparties should implement and comply with industry sound practices
to strengthen processing, clearing, and settlement arrangements for credit derivatives and other
over-the-counter derivatives. These practices include protocols for issuing and completing trade
confirmations, obtaining prior written consent for assignments, and using cash-settlement
procedures for over-the-counter credit derivatives following a credit event.
7.6
Large exposures to private pools of capital are among the risks that should be reported to
senior management periodically. Senior management should ensure that its firm's aggregate
exposure to such pools is consistent with approved risk tolerance for bearing losses in adverse
markets.
8. Investors in a private pool of capital should carefully evaluate the
strategies and risk management capabilities of the private pool to ensure
that the pool's risk profile is compatible with their own appetites for risk.
4
~.1
. Such investors ~hould undertake appropriate and effective due diligence before investing
In a pnvate pool of capital and on an ongoing basis. Due diligence should include a review of
t~e counterp~~'s ability to manage its exposures to market, credit, liquidity, and operational
nsks. Due dIhgence should establish the information flows that will occur during the course of
the relationship.
8.2
Such investors should seek assurances that the private pool in which they invest complies
with industry sound practices, including practices for risk management, reporting, and internal
controls.
8.3
Such investors should evaluate the extent to which similarities in strategies pursued by
multiple private pools in which they invest undennine efforts to limit their risks through
diversification.
9. Managers of private pools of capital should have information, valuation,
and risk management systems that meet sound industry practices and
enable them to provide accurate information to creditors, counterparties,
and investors with appropriate frequency, breadth, and detail.
9.1
Managers must devote sufficient resources to the creation and maintenance of
information, valuation, and risk management systems to ensure that high quality, material
information can be delivered to creditors, counterparties, and investors in a timely fashion.
9.2
Risk management and valuation policies employed by private pools of capital should
comply with the industry sound practices. Such pools also should implement and comply with
industry sound practices to strengthen processing, clearing, and settlement arrangements for
credit derivatives and other over-the-counter derivatives. These practices include protocols for
issuing and completing trade confirmations, obtaining prior written consent for assignments, and
using cash-settlement procedures for over-the-counter credit derivatives following a credit event.
9.3
The information provided by managers of private pools to their creditors, counterparties,
and investors should adhere to the sound practices articulated in industry guidance. Managers of
private pools of capital should provide information frequently enough and with sufficient detail
that creditors, counterparties, and investors stay informed of strategies, the amount of risk being
taken by the pool, and any material changes.
10. Supervisors should clearly communicate their expectations regarding
prudent management of counterparty credit exposures, including those to
private pools of capital and other leveraged counterparties, who are
increasingly utilizing complex instruments, including certain over-thecounter derivatives and structured securities, such as collateralized debt
obligations. Because key creditors and counterparties to pools are
organized in various jurisdictions, international policy collaboration and
coordination are essential.
5
10.1
Supervisors' expectations with respect to prudent risk management practices should take
into account developments in financial markets and advances in best practices for counterparty
credit risk management. Supervisors should actively monitor such developments and revise their
policies and associated guidance as appropriate in a timely manner. In tum, supervisors should
actively monitor and assess whether policies and procedures measure up to regulatory guidance
and industry efforts to identify best practices.
10.2 Supervisors should take full advantage of both formal and informal channels of
coordination and cooperation across financial industry sectors and international borders when
carrying out their responsibilities related to internationally active financial institutions'
management of exposures to private pools and leveraged counterparties.
6
Page 1 of 2
June 27, 2007
HP-476
Paulson Announces Next Steps to Bolster
U.S. Markets' Global Competitiveness
Washington- Treasury Secretary Henry M. Paulson, Jr. announced the next steps
of his capital markets competitiveness action plan today, focusing on maintaining
the global. leadership of America's capital markets. The plan follows Treasury's first
set of capital markets initiatives announced in May to strengthen financial reporting
and seek a more sustainable and transparent auditing profeSsion.
"To maintain our capital markets' leadership, we need a modern regulatory
structure complemented by market leaders embraCing best practices," Secretary
Paulson said. "The steps we are announcing today will help to strengthen our
global competitiveness."
The second stage of the capital markets competitiveness plan seeks a rationalized
regulatory structure with improved oversight, increased efficiency, reduced overlap
and the ability to adapt to market participants' constantly-changing strategies and
tools. The plan will suggest improvements for all financial market participants,
including the Treasury Department itself.
Experts at Treasury's March Conference on U.S. Capital Markets Competitiveness
noted that the right regulatory balance would combine high standards of market
integrity, stability and investor protection with a strong foundation for innovation,
growth, and competitiveness.
The next steps of the plan will include:
•
•
•
•
•
•
Pursuing a Modernized Regulatory Structure. The Treasury Department
is examining the structure of the regulatory system for all financial services
providers and will release its blueprint for reforms by early next year.
Encourage Development and Adoption of Industry Best Practices for
Asset Managers and Investors in Hedge Funds. The President's Working
Group on Financial Markets will work with asset managers and investors to
help these two groups define separate sets of best practices that address
investor protection, enhance market discipline and mitigate systemic risk.
This effort, based on the PWG principles and gUidelines released earlier this
year, will complement the ongoing reviews of counterparties' and creditors'
practices by supervisors globally.
Modernize Treasury's Cash Management and Debt Management. The
Department will strengthen the U.S. Government's cash and debt
management systems through a broad series of public initiatives in the
coming year, further improving the efficiency, integrity, transparency and
competitiveness of the U.S. Treasury market.
Complete Basel II Rulemaking. Treasury will work with U.S. regulators to
move the Basel II capital requirements forward. These new rules will reduce
uncertainty, relieve burdens for both domestic and foreign banks, and
enhance the United States' competitive position.
Empower All Investors through FinanCial Education. Any effort to
improve the oversight of the financial services industry to protect investors
must be coupled with empowering investors to better understand their
options and decisions. Treasury will lead the President's inter-agency public
initiative to help all Americans better understand money and personal
finance. By encouraging saving and better access to financial services,
Treasury can help broaden America's investor class.
Encourage International Investment Opportunities with Recognition of
Comparable Regulatory Regimes. Mutual recognition between countries
with regulatory schemes comparable to the United. States could increase
international investment opportunities and enhance nsk diverSification while
preserving investor protection. Treasury supports SEC consideration of
http://www.treas.gov/press/releases/hp476.htm
1/18/2008
Page 2 of 2
mutual
. stock exchanges
" recognition for fo'
reign bro k er-dealers and foreign
off enng services to U.S. investors.
1118/2008
http://www.treas.gov/press/releases/hp476.htm
Page 1 of 1
September 25,2007
HP-576
Paulson to Meet with Mexican Finance Minister Agustin Carstens
Washington, DC - Treasury Secretary Henry M. Paulson, Jr. will
welcome Mexican Finance Minister Agustin Carstens to the U.S. Department of the
Treasury today, September 25,2007. This meeting is a continuation of their regular
dialogue and close cooperation on a range of issues, including global and regional
economic and financial developments, the effectiveness of international financial
institutions, efforts to combat money laundering and terrorist finance,
and tax issues.
UP:llwww.treas.gov/press/releaseslhp576.htm
10/1/2007
Page 1 of 1
September 26, 2007
HP-577
Paulson and Gutierrez Call for Permanent Moratorium on Internet Taxes
WASHINGTON, DC--U.S. Treasury Secretary Henry M. Paulson and Commerce
Secretary Carlos M. Gutierrez issued a statement today calling for the Senate to
make permanent the moratorium on Internet access taxes and on multiple or
discriminatory taxes on electronic commerce. The Senate Commerce Committee
will mark up S. 1453, the Internet Tax Freedom Extension Act of 2007, on
Thursday.
"The Internet is an innovative force that opens up the vast potential economic and
social benefits of electronic commerce. Preventing the taxation of Internet access
will help sustain an environment for innovation, ensure that consumers continue to
have affordable access to the Internet, especially high-speed Internet, and
strengthen the foundations of electronic commerce as a vital and growing part of
our economy.
"Congress has an opportunity to demonstrate bipartisan leadership by passing
essential legislation before the current moratorium expires on November 1 of this
year. We urge the Congress to expedite passage of a permanent extension so that
President Bush can sign it into law before the current moratorium expires.
"The Administration has worked hard, in a bipartisan fashion, to promote innovation
and the economic benefits that come from electronic commerce. We look forward to
working with Congress on this important issue."
Ittp:llwww.treas.gov/presslreleaseslhp577.htm
10/1/2007
Page 1 of 2
September 27, 2007
hp-578
Treasury Action Targets Violent Burmese Suppression
The U.S. Department of the Treasury today is designating 14 senior Burmese
Government officials in the wake of that government's longstanding oppression of
the Burmese people and its recent use of violence against peaceful demonstrators.
Treasury's action follows President George W. Bush's announcement of plans for
tightening U.S. sanctions against the military regime in Burma, made before the UN
General Assembly on September 25,2007.
"We are today imposing sanctions against senior officials of the Government of
Burma," said Adam Szubin, Director of the Office of Foreign Assets Control
(OFAC). "The President has made clear that we will not stand by as the regime
tries to silence the voices of the Burmese people through repression and
intimidation. "
The designations were made pursuant to Executive Order 13310, which authorizes
the Secretary of the Treasury, in consultation with the Secretary of State, to
designate senior officials of the Government of Burma, the State Peace and
Development Council of Burma (the military regime that rules Burma), the Union
Solidarity and Development Association of Burma, or any of their successor
organizations, as well as any individuals or entities that are owned or controlled by,
or acting for or on behalf of, any person, whose property or interests in property are
blocked pursuant to the order. Executive Order 13310 also blocked property and
interests in property of the four entities listed on its Annex, the State Peace and
Development Council of Burma and three banks controlled by the Government of
Burma.
The Burmese government leaders designated today by OFAC include Senior
General Than Shwe, Minister of Defense and Chairman of the State Peace and
Development Council (SPDC); Vice Senior General Maung Aye, Commander of the
Army and Vice Chairman of the SPDC; Lieutenant General Thein Sein, Acting
Prime Minister and First Secretary of the SPDC; and General Thura Shwe Mann,
Joint Chief of Staff, Armed Forces and Member of the SPDC. The other senior
officials of the Government of Burma named include other members of the State
Peace and Development Council, key military officials, and other government
ministers.
As a result of Treasury's designations, any assets these individuals and entities
may have that are within U.S. jurisdiction must be frozen, and U.S. persons are
prohibited from transacting or doing business with them.
IttP://www.treas.gov/presslreleaseslhp578.htm
10/1/2007
Page 1 of 2
September 27, 2007
HP-579
Prepared for Delivery
Remarks by Treasury Secretary Paulson
at the Major Economies Meeting
Washington, D.C.-- This evening marks the half-way point of two important days.
President Bush has convened senior officials from the world's major economies to
launch the necessary next phase towards achieving our common objective of
reducing global greenhouse gas emissions. The nations that produce more than 80
percent of the world's emissions are here. This broad participation is evidence that
collectively we take our stewardship responsibilities seriously and recognize that
addressing climate challenge is a global public good. Our work is intended to
support and contribute to a global agreement under the UN Framework Convention
on Climate Change. If the major economies can agree on a way forward, that could
accelerate the prospects of a broader agreement on a way forward in the UN.
I am particularly honored to have the chance to speak with you tonight because I
care deeply about the protection of our planet. Over time, my love of nature has
grown into appreciation for how fragile our environment is and how urgent is the
need to protect and conserve it. And so I laud the President's leadership that began
the major economies meeting process.
Last May, he asked the world's major nations to work to develop a post-2012
framework that will encompass the environmental, energy security and economic
aspects of climate change. The purpose of the President's initiative is to make sure
all the major economies, not just a select few, work together as equals to develop a
way forward.
In this regard, I am especially pleased to see our friends from the large, emerging
economies here --- particularly China, Brazil and India --- since we will accomplish
this effort only If we all take an active part. Pitting the developed and the developing
countries against each other will not lead to economic development and
environmental sustainability.
Cost effective policy tools are needed to provide incentives for the necessary
building blocks for reducing emissions. These include deployment of advanced
technologies, increased energy efficiency, investment in research and
development, market-based solutions and eliminating tariff and non-tariff barriers.
Governments can and should do more to work together to advance the adoption of
clean technologies. We need strong research and development incentives for
commercialization of new technologies. But we must realize the vast scale of our
challenge.
The International Energy Agency has estimated that between 2005 and 2030 the
world will need to invest $20 trillion in energy-supply infrastructure. Public sector
investment will matter only to the extent that it leverages clean technology
investments by the private sector, where most of this investment will occur. This will
mean working closely with the private sector and adopting market-based solutions
to increase the adoption rate for proven, cleaner technologies. Under UN Secretary
General Ban Ki-Moon's leadership, the United Nations is addressing the important
issue of climate change and we look forward to working with him on these critical
issues.
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Progress requires the rapid development and deployment of clean and efficient
energy technology across the globe. Developing countries today have access to
technologies that didn't exist a century ago when we in the industrialized world
developed. We must tear down artificial barriers that impede the spread of today's
clean technologies. There is no moral or economic reason for tariffs or non-tariff
barriers on environmental goods or services. Countries need to act quickly to
eliminate these trade restrictions and increase access to these crucial
environmental technologies --- technologies that will allow nations to pursue a path
that embraces both economic growth and clean energy development.
The future will be built by leaders who recognize that economic growth and
responsible environmental stewardship are not incompatible. Just as America
recognizes that our prosperity is linked to the strength of your economies, we also
recognize that the long-term environmental health of our planet depends on the
success of the actions each of our nations take to limit greenhouse gas emissions.
Globalization and interdependence are here to stay, so we all have a role to play
protecting our environment for our own children and the children of the world.
Thank you for the opportunity to share my thoughts with you.
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September 28, 2007
HP-580
Statement of Secretary Paulson on the Debt Limit
"The Senate's swift action on the debt limit today helps to protect the full faith and
credit of the United States and avoids creating unnecessary uncertainty in the U.S.
Treasuries market. I commend Congress for passing legislation that ensures the
U.S. government can deliver on promises already made, such as Social Security
and Medicare payments."
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September 26, 2007
HP-581
Assistant Secretary for Financial Markets Anthony W. Ryan
Remarks on Financial Evolution and Innovation
Before the International Swaps and Derivatives
Association Regional Member Conference
New York City - Good morning. Thank you for inviting me to join you. It is a
privilege to be here in New York City, the capital of global financial markets.
Dramatic changes have occurred in capital markets in recent years. Globalization
and innovation are two of the most significant forces driving that evolution. Today, I
would like to focus my remarks not just on the benefits and challenges resulting
from the remarkable wave of financial innovation that is sweeping across global
markets, but also to remind all participants that markets and practices must
continue to evolve in order to remain competitive.
The pace of financial innovation has gathered momentum in recent years as
information technology and financial engineering have significantly changed the
global capital market environment. The influence of these catalysts is evidenced by
the increased diversity of investment instruments such as structured credit,
investment vehicles such as exchange traded funds and by the array of innovative
investment strategies, many of which are deployed by hedge fund managers.
Rapid change is not constrained to the financial landscape. Scientists observe
similar events in the natural world. The scientific theory of "punctuated equilibrium"
suggests that lengthy periods of relative stability, or stasis are periodically
interrupted or "punctuated" by shorter, rapid bursts of change. These rapid changes
often result in specialization, increased complexity, and after some period of
acclimation or adjustment, eventual integration into the larger system. The same is
true in finance, as sudden "environmental" changes often result in specialized or
customized products and business models, increased complexity and after a period
of adjustment, eventual integration into the global marketplace.
Recently, market stress emanating from the subprime mortgage sector, a relatively
minor segment of the overall financial markets, has sparked discussions about
securitization as a whole, even causing some to question the benefits of such
financial innovation. This questioning is not only fair, it is appropriate. Policy makers
and market participants must continually assess the myriad implications of financial
innovation.
Just as some species become extinct in nature, some new financing techniques
may prove to be less successful than others. But let's recognize that over the longterm, financial innovation is integral to enhancing capital markets' competitiveness.
Innovative markets become more efficient, ultimately strengthening the economies
they serve by facilitating job growth and improving productivity.
A Case of Financial Innovation
One example of innovation as it relates to financial instruments is the development
of structured credit products. At their inception, the buyers of products such as
credit derivatives were banks, who purchased protection from traditional insurers to
manage their exposures to the corporate loans they retained on their balance
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sheets. Spurred largely by the 1988 Basel Accord, demand for credit derivatives
greIN as banks realized that they could transfer the credit risk of borrowers to
entities not subject to bank capital requirements while at the same time retain the
ownership of and revenue from such loans.
The market evolved from primarily a bank/insurer market to one with a much
broader range of non-ban.k participants, including asset managers, hedge funds,
pension funds, and seCUrities firms. There are many additional positive externalities
associated with this development. For example, market makers of corporate
Issuances can reduce their exposure to single name credits but at the same time
Increase their role asliquidlty providers to particular issuances without taking on too
m~ch concentr~tlOn nsk In a single entity. As a result, users and providers of capital
gain more effiCient pricing. Moreover, through credit derivatives investors (or
protection sellers) can isolate their investment solely to an entity's credit risk as
opposed to nsks associated with investing in a single debenture, such as liquidity
nsk.
The range of products also evolved from more traditional-type credit protection to
Single-name credit default swaps (C~S), to multi-name CDS, and more recently, to
more complex securitized asset-backed instruments such as credit derivative
indices (including those backed by commercial mortgages, subprime residential
mortgages, and leveraged loans), collateralized debt obligations (COOs), and
collateralized loan obligations (CLOs). Whereas credit derivatives initially were
hedging instruments whose prices were derived directly from the price of a single,
less complex underlying asset (a corporate loan and its implied credit risk/default
probability), credit derivatives now increasingly include more complex instruments
whose prices are derived from a basket of underlying assets, securitized assets, or
tranched assets.
Benefits of Financial Innovation
Credit derivatives are just one example of financial innovation. But before
discussing the benefits of structured credit or other specific instruments, it is useful
to recognize the broader benefits of such innovation at the market level from the
perspective of capital providers and capital users.
Financial innovation benefits both suppliers of capital, or investors, as well as users
of capital. Suppliers of capital benefit from the greater flexibility afforded by more
choices. This ultimately facilitates greater diversification. Today, investors have a
host of investment instruments, vehicles and strategies from which to choose.
Investors also benefit from the ability to more explicitly target their capital. For
example, securitization enables investors to improve their risk management,
achieve better risk adjusted returns, access more liquidity, and lower the cost of
implementation.
Users of capital, therefore also benefit from securitization. Historically, users of
capital had only a few instruments that they could issue or choose from to access
capital. Today, they can access capital from a broad array of investors, each with
unique return and risk objectives. Thus, investors can be more optimally matched to
meet the needs of each user's specific needs and objectives. Users of capital,
therefore, benefit from a lower cost of capital, which in turn results in higher returns.
Innovation makes the movement of capital more efficient, risk management more
targeted, and trading less costly.
That is all true at the broader market level. Yet, as we focus our assessment to the
impact of a specific set of instruments such as credit derivatives, the many benefits
of innovation remain clear. Credit derivatives have Improved the management and
transfer of credit risk, the unbundling and tranching of risk, enhanced liquidity,
created greater portfolio diversification, and broadened credit risk dispersion. Users
of capital hold that these instruments enhance the effiCiency and stability of the
credit markets and the resiliency of the broader finanCial markets.
Over time, there can be little doubt that consumers and market partiCipants around
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the world benefit from financial innovation in the area of securitization and the
corresponding increases in credit availability. The ability to securitize credit has
expanded the sources of capital and credit for homeowners, business owners, and
other borrowers throughout the global economy.
For example, if one evaluates mortgage securitization, even in spite of recent
market challenges which I will address in a moment, it would be difficult to suggest
that the net benefits are not real. Securitization has fundamentally improved the
mortgage Industry. Over the past few decades, instead 01 holding a mortgage and
collectmg payments every month from the homeowner, originators have used
capital markets to pool mortgages into mortgage-backed securities, selling tranches
to investors. This activity distributed the risks across a broader spectrum of
Investors, and freed originators to issue new loans. The result has been an
increased availability of capital at lower cost and today, more Americans have
access to homeownership - up from 64% in 1994 to 69% today. The same process
of securitization has targeted other asset classes such as credit card receivables,
auto loans, home equity loans, which in turn reduces risk as well as benefits the
ultimate end users of capital.
Challenges of Financial Innovation
While there are numerous benefits to financial innovation such as securitized credit,
we must also recognize the real challenges such innovation poses to investors,
regulators and other market participants. Recall, that while rapid changes often
result in increased specialization and increased complexity, they are often followed
by a period of acclimation, prior to becoming accepted in the mainstream
marketplace.
Financial incentives, coupled With advancements in technology and financial
engineering skills, can result in situations where new instruments, vehicles and
strategies outpace the existing market and regulatory infrastructures. Such
developments have the potential to present challenges for both market participants
and supervisors.
Challenges often emerge during periods of change, as participants acclimate to the
specialization and increased complexity. When these traits emerge in a relatively
benign environment the adjustment period may appear smooth, but as we know,
environments change. Just as in nature, when the environment changes, the
success of a species can alter dramatically.
The development of some instruments such as credit derivatives illustrates how
innovation leads to greater complexity. As we have witnessed, the rapid growth of
complex new products can strain not just the infrastructure for processing, clearing
and settling trades, but also introduce additional challenges for market participants
including valuation and risk management.
Many investors are grappling with this increasing complexity in the markets, and in
particular securitized products. In some cases, risk evaluation can be difficult. While
complexity may be a very legitimate reason a potential investor decides not to
invest, it can be no excuse for an existing investor or buyer of such a security to
justify a loss. Investors and their fiduciaries must understand the risks associated
with a potential investment. This is true of any investment - whether It IS an
underlying asset, such as an equity, or a derivative product, such as a COO.
Insufficient understanding or failure to perform independent and adequate due
diligence prior to making an investment decision is simply unacceptable. That's not
investing" ... that's gambling.
Investors must also monitor their holdings and exposures, which includes
reassessing their risks after making their initial investments. Recently, many of
these assets have gone from AAA: allunng, attractive and acceptable to CCC,
complicated, challenged and contaminated. Could such ~ cha~ge In so short a
period of time suggest the need for stronger market discipline.
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Responding to the Challenges
In recent years, we have witnessed fundamental change in capital markets. In order
to continue to strengthen our markets and secure the tangible benefits of such
financialln~ovation, we must acknowledge the challenges. As markets evolve,
market participants and public policies must also adapt. As leaders, we must
possess both Judgment and confidence: judgment to recognize when additional
changes are necessary and confidence to make needed changes.
Already, encouraging signs of improvement are emerging. Impressive progress has
been made In addreSSing some of these challenges. International Swaps and
Denvatlves Association, Depository Trust and Clearing Corporation, Federal
Reserve Bank of New York, the Counterparty Risk Management Policy Group, and
others should all be commended for their leadership and eHorts towards ensuring
such progress. ISDA's novation protocol, cash settlement auction protocol, and
documentation eHorts contributed significantly to resolving processing backlogs,
phYSical shortages, and other issues facing these markets. Still, we must not be
complacent. Further collective and cooperative action is necessary to prevent and
resolve other challenges. Some of the necessary adaptations will take additional
time to implement. Some will be easier to implement than others, but none will be
easy.
Capital markets are a microcosm of the natural world, rich in history and ever
adapting in response to changing environmental conditions. In the financial world,
while we are already beginning to see some positive adaptation in the wake of
recent market issues, we need to do more. With respect to addressing complexity,
both issuers, investors, and rating agencies all have important roles and
responsibilities. We should encourage more transparency, better information and
disclosure, less complacency, and stronger fiduciary practices. Financial industry
bodies around the world are now launching initiatives to address some of the
challenges including calls for transparency and encouraging disclosure so investors
have the information they need to make more informed decisions.
A process of investor education or "adaptation" should also be encouraged. The
importance of investor diligence cannot be overemphasized in the context of
financial innovation and the need for strong market discipline. As new instruments
and strategies emerge, investors need to evaluate new opportunities through
rigorous due diligence. Following the crowds or accepting conventional practice and
investing in something they do not fully understand is a recipe for failure.
Hedge Funds
Financial innovation has manifested itself not just in regard to new instruments, but
also in the emergence of new investment strategies, many of which are often
deployed by hedge fund managers. Here too, the growth and development of such
pools of capital has brought many benefits and yes, some challenges. In February,
the President's Working Group on Financial Markets (PWG) released principles and
guidelines to address the challenges these strategies pose; namely investor
protection and systemic risk.
Yesterday, Secretary Paulson announced the next steps In the formation of two
separate, yet complementary private sector committees. One is comprised of asset
managers and the other is made up of investors. Eachcommittee will define a set
of "best practices" that will help to strengthen market discipline, mitigate systemic
risk augment regulatory safeguards regarding investor protection, and complement
reg~latory efforts to enhance market integrity. These "best practices" will have as a
foundation and be consistent with the PWG pnnclples and gUidelines, and Will
complement the ongoing reviews of counterparties' and creditors' practices
by supervisors globally.
I should note that the PWG stated that investors, creditors, counterparties, asset
managers, and supervisors must be aware of the challenges, including those
related to over-the-counter derivatives and must work to address them. PubliC
policies that support market discipline, participant awareness of risk, and prudent
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risk management are the best means of protecting investors and limiting systemic
risk. All stakeholders should implement and comply with industry sound practices to
strengthen processing, clearing, and settlement arrangements for credit derivatives
and other over-the-counter derivatives. These practices include protocols for
issuing and completing trade confirmations, obtaining prior written consent for
assignments, and using cash-settlement procedures for over-the-counter credit
derivatives following a credit event.
The PWG has also commenced an examination of some of the issues underlying
the recent market events, including the impact of securitization and the role of rating
agencies in the credit and mortgage markets. These efforts were included as part of
a broader initiative President Bush recently announced to help homeowners facing
mortgage delinquencies and foreclosures.
Conclusion
We must continually evaluate changing market conditions and practices. And while
being ever prepared to adapt, we should do so with prudence, examining root
causes and considering possible unintended consequences, before making lasting
changes.
It is a privilege to be entrusted with the public's interest and capital. And with such a
privilege comes responsibility. To achieve our goals we need to recognize that the
responsibility is borne by both the private and public sectors. Building upon the
efforts to date, all stakeholders must continue to do more. Collectively, we can
strengthen the vitality, stability and integrity of the public's investments and our
capital markets. The system works when all stakeholders recognize the benefits,
mitigate the risks, and choose to participate.
Thank you for the opportunity to speak here today.
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September 28, 2007
HP-582
Preliminary Annual Report on US Holding of Foreign Securities
Preliminary data from an annual survey of U.S. portfolio holdings of foreign
securities at year-end 2006 are released today and posted on the U.S. Treasury
web site al (http://www.treas.gov/ttc/fplshtml). Final survey results, which will
include additional detail as well as revisions to the data, will be reported on
November 30, 2007.
The survey was undertaken jointly by the U.S. Treasury Department, the Federal
Reserve Bank of New York, and the Board of Governors of the Federal Reserve
System.
A complementary survey measuring foreign holdings of U.S. securities also is
conducted annually. Data from the most recent such survey, which reports on
securities held on June 30, 2007, are currently being processed. Preliminary
results are expected to be reported on February 29, 2008.
The survey measured U.S. holdings at year-end 2006 of approximately $6.0 trillion,
with $4.3 trillion held in foreign equities, $1.3 trillion in foreign long-term debt
securities (original term-to-maturity in excess of one year), and $0.4 trillion held in
foreign short-term debt securities. The previous such survey, conducted as of yearend 2005, measured U.S. holdings of $4.6 trillion, with 53.3 trillion held in foreign
equities, $1.0 trillion in foreign long-term debt securities, and $0.3 trillion held in
foreign short-term debt securities.
REPORTS
•
Iabl~
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Table 1. U.S. holdings of foreign securities, by type of security, as of survey dates·
(Billions of dollars)
Type of Security
Dec. 31, 2005
Dec. 31,2006
Long-term Securities
Equity
Long-term debt
Short-term debt securities
4,346
3,318
1,028
263
5,623
4,329
1,294
368
Total
4,609
5,991
u.s. Portfolio Investment by Country
Table 2. U.S. holdings of foreign securities, by country of issuer and type of security, for the
countries attracting the most U.S. portfolio investment, as of December 31,2006
(Billions of dollars, except as noted)
I
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
Country
United Kingdom
Japan
Canada
France
Cayman Islands
Germany
Switzerland
Netherlands
Bermuda
Australia
Korea, South
Ireland
Spain
Brazil
Mexico
Italy
Sweden
Hong Kong
2
China, mainland
Taiwan
Luxembourg
Finland
Netherlands Antilles
Singapore
Norway
Rest of world
Total
Total
1,076
596
478
402
376
292
264
234
208
173
124
121
111
110
108
106
102
88
75
E-.!lui!y
674
544
298
307
161
220
263
161
192
102
114
48
86
92
85
94
59
86
74
LT Debt
245
46
162
63
178
62
I
68
14
62
10
38
24
18
24
12
24
2
1
74
60
60
58
53
51
592
5,991
74
16
56
56
44
32
393
4,329
37
4
2
9
15
174
1,294
*
ST Debt
156
7
18
32
37
10
*
5
3
10
*
34
1
*
*
1
19
*
*
*
7
*
*
*
4
24
368
1 The stock of foreign securities for December 31, 2006 reported in this survey may not, for a number of reasons,
correspond to the stock of foreign securities on December 31,2005, plus cumulative flows reported in Treasury's
transactions reporting system. The final report on U.S. holdings of foreign securities as of end-year 2006 will contain an
analysis of the relation between the stock and flow data.
2 Excludes Hong Kong and Macau, which are reported separately.
* Greater than zero but less than $500 million.
@FedFRASER