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Dapartment of the Treasury
Ubrary

MAR 2 [ 2008

Treas.

HJ
10
.A13
P4
v.444

Department of the Treasury

PRESS RELEASES

Numbers not used: HP-675, 686, 690, 717, and 721

np-(JOu: --UVUATELJ-- Treasury Secretary Paulson Travels to Africa

Page 1 of2

November 9, 2007
hp-660

--UPDATED-Treasury Secretary Paulson Travels to Africa
Treasury Secretary Henry M. Paulson, Jr. will travel to Tanzania, South Africa, and
Ghana next week to attend the meeting of G-20 Finance Ministers and Central
Bank Governors and discuss the positive economic changes taking place on the
continent with government and business leaders.
Africa is experiencing its highest rates of growth and lowest levels of inflation in 30
years, prompting increasing investor interest in the continent. Secretary Paulson will
use his trip to discuss the underpinnings of Africa's recent growth and explore ways
in which the international financial community can further support Africa's
development. Additionally, Secretary Paulson will be highlighting the importance of
conservation efforts in Africa and the complementary role they play with economic
growth.
The Secretary will depart on Nov. 13 and arrive in Arusha, Tanzania on Nov. 14. On
Nov. 15 he will co-host with Tanzanian Finance Minister Zakia Meghji a discussion
on regional financial integration with the other finance ministers of the East African
Community. While in Arusha he will also visit an innovative land trust and tour a
mosquito net factory.
He will then travel to Cape Town, South Africa where he will deliver remarks on
Nov. 16 at the U.S.-Africa Business Summit organized by the Corporate Council on
Africa. While in Cape Town he'll also tour a cookie factory that employs
disadvantaged women from a neighboring township, illustrating the importance of
spreading economic opportunity. He will attend the meeting of G-20 Finance
Ministers and Central Bank Governors in Kleinmond, South Africa on Nov. 17 and
18.
On Nov. 19, Secretary Paulson will be in Ghana to meet with President John Kufuor
and co-host with Ghanaian Finance Minister Kwadwo Baah-Wiredu a meeting with
private-sector financial leaders on financial sector development in West Africa
following a tour of the Ghana Stock Exchange. Later that day he will be joined by
U.K. Chancellor of the Exchequer Alistair Darling and African Development Bank
President Donald Kaberuka to discuss infrastructure investment during a tour of
Akosombo Dam.
The following events are open to the press:

What
When
Where

Visit Manyara Ranch and Meet with Community Leaders
Thursday, November 15, 8:00 a.m. Local Time
Manyara Ranch
Arusha, Tanzania
***

What
When
Where

Tour A to Z Mosquito Net Factory
Thursday, November 15, Time TBA
Unga Limited Industrial Area
Arusha, Tanzania
***

http://www .treas.gov/press/releases/hp660.htlll

1118/2008

I1p-660: --UPDATED-- Trcasury Secretary Paulson Travels to Africa

What
When
Where

Page 2 of2

Remarks to Corporate Council on Africa's U.S.-Africa Business
Summit
Friday, November 16, 8:00 p.m. Local Time
Cape Town Convention Center
Convention Square
1 Lower Long Street
Cape Town, South Africa
***

What
When
Where

Visit Khayelitsha Cookie Company
Sunday, November 18, Time TBA
Khayelitsha Township
Cape Town, South Africa
***

What
When
Where

Tour of Akosombo Dam
Monday, November 19, Time TBA
Akosombo DamAccra, Ghana
-30-

http://www.treas.gov/press/releases/hp660.htm

111812008

Page 1 0 t")~

About CCA

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Board 1 Members 1 Staff 1 Working at CCA 1 Programs & Services I' Business Linkag

About

eeA

The Corporate Council on Africa (CCA), established in 1993, is at the forefront of sl
and facilitating the commercial relationship between the United States and the Afric
CCA works closely with governments, multilateral groups and business to improve'
continent's trade and investment climate, and to raise the profile of Africa in the US
community.
CCA members believe that Africa's future success depends upon the ability of its el
and business people to create and retain wealth through private enterprise. Americ,
and private individuals can contribute most effectively by building partnership and n
the African private sector in the areas that America knows best: private enterprise, I
capital, technology transfer and management.
CCA programs are designed to bring together potential business partners and raiSE
investment profile in the US by developing critical contacts and business relationsh
providing a forum for the exchange of information and ideas.

http://www.africacncLorg/About CCAlindex.asp

1/18/2008

About CCA

Page 2 of2

1100 17th Street, N.W., Suite 1100 Washington, DC 20036
Tel: (202) 835-1115 Fax: (202) 835-1117 E-mail: cca@africacncl.org

http://www.africacnci.org/About CCAlindex.asp

1118/2008

2UU7

Page 1 of 12

U.S.-AFRICA 3UMMIT

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Nov, 14-16. 2007 - Ccipe T G'A;, 1. Sou th A.friu
Agenda (PilCJe)

I Workshops

(Page)

I Summit

EXPO

From November 14-16 more than 800 leaders from the public an~j
private sectors from the United States, Africa and other continent:;
convened for the 6th biennial Corporate Council on Africa 2007 U,S Africa Business Summit at the Cape Town Convention Centre ,,'
CClpe Town, Soutll Africa.

;.,fter yeZlrs of hosting the Summit in tilt' U.S., CCA took

Oil tho \;0
courageous chClllenge of hosting the ~~o\.Jlnn1it in Africa for tllO fir~,i
time-and like many investment opportunities on the continont. 1.
was a high-risk venture that resulted in high returns for CCA al'~
Summit delegates. The environment created by this Summit W2,~
conducive to participants receiving what they ("arne for-Cl bett.;!
understanding of the issues facing the continent, i1nd meetin
representatives who will help them make inroads into the huslnes"
world in Africa.

With experts naming AfricCl as the worlei's emerginS) (1,arkut \A tho
future, the Sumrnit WdS a perfect tiln!- ilnd occ~,:,icn fe'r ki',
stakeholders to discus" the future Oi IIJlJestment <if.': CC,:i:hilil urowth on the continent.
The Summit kicked off with an Opening G,lid Oiill1r;i" which Ir>dUi8C
line-up of esteemed husiness leaders, includinCJ ,1" ::1(Jdress by Sou:
Africa's Oeputy President, Her Excellency PtlllnlZIic r'.llall1b'-l-r~~~Cllk;'

http://www.africacncl.org/(!cd4zx55525 15uau2qxflq45)/CCA Summits/2007 Summit.asp

1118/2008

LDU1 U.~.-AFRICA

Page 2 of 12

SUMMIT

The Summit featured six plenary sessions focusing on important
timely issues facing business leaders on both sides, including a
discussion between U.S. business leaders and an African Head of
State, energy and power, the impact of Chinese investment in Africa,
health, finance and African stock exchanges. Summit delegates also
attended several of the 36 workshops offered. Workshop topics
included telecommunications, tourism, bio-fuels, and many more.
H.E. Hifikepunye Pohamba, President, Republic of Namibia; H.E.
Yoweri Museveni, President, Republic of Uganda; H.E. Rama Krishna
Sithanen, Deputy Prime Minister, Republic of Mauritius; The
Honorable Henry M. Paulson, Jr., Secretary of the Treasury, U.S.
Department of the Treasury; H.E. Mandisi Mpahlwa, Minister of Trade
and Industry, Republic of South Africa; The Honorable Robert
Mosbacher, Jr., President, OPIC; Mr. Ferdinando Beccalli-Falco,
President & CEO, GE International; Mr. Geoffrey White, CEO, Lonrho
PLC; The Honorable Thomas Pickering, Vice Chairman, Hills &
Company, Professor Yang Guang, Director General, Institute of
West-Asian and African Studies, Chinese Academy of Social
Sciences; Ambassador Princeton Lyman, Council on Foreign
Relations, Former United States Ambassador to South Africa and
Nigeria; The Honorable Joseph Grandmaison, Member, Board of
Directors, U.S. Export-Import Bank; Mr. N.N. Kitomari, Chairman,
Commercial Bank of Africa; Mr. Arnold Ekpe, CEO, Ecobank
Transnational Inc; and Mr. Kenneth Ofori Atta, CEO & Founder, Data
Bank, Ghana were just some of the leaders who offered their
opinions and expert analyses during Summit sessions.
More than 130 print and broadcast stories ran in various local and
international media outlets.

If you have any questions, please e-mail summit@africacncl.org

Levels of Sponsorship

TITANIUM LEVEL

Department:
Trade and Industry
REPUBLIC OF SOUTH AFRICA

http://www.africacnc1.org/(lcd4zx5552515uau2qxflq45)/CCA Summits/2007 Summit.asp

1118/2008

Ht'-oo 1: 'I reasury Targets 15 Leaders of Colombian Narco-Terrorist Group

Page 1 of2

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November 1, 2007
HP-661
Treasury Targets 15 Leaders of Colombian Narco-Terrorist Group
The U.S. Department of the Treasury's Office of Foreign Assets Control (OFAC)
today announced the designation of fifteen leaders of the Colombian narco-terrorist
group, the Revolutionary Armed Forces of Colombia or FARC. The individuals
sanctioned today include key FARC commanders involved in large-scale drug
trafficking activities such as Hermilo Cabrera Diaz, Abelardo Caicedo Colorado,
Sixto Antonio Cabana Guillen and Miguel Angel Pascuas Santos. The U.S.
Department of State has offered awards of up to $2.5 million for information leading
to their arrests and/or capture.
"Cocaine has become the financial lifeblood of the FARC, fueling its nefarious
activities, including drug trafficking," said Adam J. Szubin, Director of OFAC.
"Today's action continues our assault on the FARC's leadership and its narcoterrorist activities in Colombia and the region."
On May 29, 2003, President Bush designated the FARC as a significant foreign
narcotics trafficker or drug kingpin pursuant to the Foreign Narcotics Kingpin
DeSignation Act due to its extensive narcotics trafficking activities. The FARC was
named as a Foreign Terrorist Organization by the Secretary of State in October
1997. In addition, the FARC was also designated as a Specially Designated Global
Terrorist pursuant to Executive Order 13224 in November 2001.
In March 2006, the District Court of the District of Columbia unsealed a federal
indictment (known as the FARC indictment) which charges members of the FARC
leadership, including the 15 individuals named today by OFAC, on narcotics
trafficking charges. According to the indictment, the FARC is responsible for
approximately 60% of the cocaine that makes its way into the United States and is
directly involved In the production and distribution of cocaine, including setting the
prices paid to poor peasant farmers across Colombia for cocaine paste, a raw form
of the drug that is transported to Jungle laboratories and turned into cocaine.
This action is part of an ongoing U.S. government effort under the Foreign
Narcotics Kingpin Designation Act to apply financial measures against foreign drug
kingpins. OFAC has worked closely with other agencies on this action, including
the New York Organized Crime Drug Enforcement Strike Force, which is comprised
of agents and officers of the Drug Enforcement Administration; the New York City
Police Department; the Internal Revenue Service's Criminal Investigation Division;
Immigration and Customs Enforcement; the Federal Bureau of Investigation; the
New York State Police; the U.S. Marshals Service; the Secret Service; and the
Bureau of Alcohol, Tobacco, Firearms and Explosives.
More than 300 businesses and individuals associated with 68 drug kingpins named
by the President have been deSignated by OFAC pursuant to the Kingpin Act since
June 2000.
The designation blocks any assets of the 15 designees found within U.S.
jurisdiction and prohibits US. persons from conducting financial or commercial
transactions with these individuals. Penalties for violations of the Kingpin Act range
from civil penalties of up to $1,075,000 per violation to more severe criminal
penalties. Criminal penalties for corporate officers may include up to 30 years in
prison and fines of up to $5,000,000. Criminal fines for corporations may reach
$10,000,000 Other individuals face up to 10 years in prison for criminal violations
of the Kingpin Act and fines pursuant to Title 18 of the United States Code.

http://www.treas.gov/press/releases/hp661.htm

12/312007

HP-661: Treasury Targd~ IS Leaders of Colombian Narco-Terrorist Group

Page 2 of2

REPORTS

http://www.treas.gov/press/releases/bp661.htm

12/3/2007

Revolutionary Armed Forces
of Colombia (FARC)

U.S. Department of the Treasury
Office of Foreign Assets Control

FARC Designated by the President as a
Significant Foreign Narcotics Kingpin in 2003

November 2007

Foreign Narcotics Kingpin
Designation Act

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Sixto Antonio
CABANA GUILLEN
DOB 15 Jun 1955
C.C. 19500634

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Ignacio
LEAL GARCIA
C.C.96186610

Jorge Enrique
RODRIGUEZ MENDIETA
DOB 15 Jan 1963
C.C. 91223461

Hermilo
CABRERA DIAZ
DOB 25 Nov 1941
C.C.9680080

Luis Eduardo
LOPEZ MENDEZ
C.C. 96329889

Emiro del Carmen
ROPERO SUAREZ
DOB 2 Sep 1962
C.C. 13461523

Abelardo
CAICEDO COLORADO
DOB 3 Mar 1960

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MOLINA GONZALEZ
DOB 18 Nov 1957
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Miguel
SANTANILLA BOTACHE
DOB 10 Dec 1963
C.C. 93123586

Norbei
CAMARGO
DOB 5 Aug 1965
C.C.17702895

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OLARTE LOMBANA
DOB 7 Nov 1960
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Miguel Angel
PASCUAS SANTOS
DOB 28 Apr 1952
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Guillermo Enrique
TORRES CUETER
DOB 17 Aug 1954
C.C. 9281858

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Erasmo
TRASLAVINA BENAVIDES
DOB 19 Jun 1958
C.C. 13642033

HP-662: Steel Statement on Basel II Final Rule

Page 1 of 1

November 1, 2007
HP-662
Steel Statement on Basel" Final Rule
Washington- Treasury Under Secretary for Domestic Finance Robert K. Steel
issued the following statement today regarding U.S regulators' release of the final
Basel II rule:

"Treasury applauds the U.S. financial regulators for their cooperation in writing a
final Basel II rule. This achievement will modernize our bank capital regime to
uphold the competitiveness of American capital markets while maintaining and
enhancing safeguards for our institutions and the broader financial system.
Secretary Paulson has long said that certainty on Basel II was a necessary
component of any plan to strengthen the competitiveness of U.S. capital markets,
and we are pleased that the regulators worked tirelessly to complete this complex
task."

http://www.treas.gov/press/releases/hp662.htm

12/312007

hp-663: Statement by Secretary Henry M. Paulson, 1r. on AMT Delay and Need to Help .. ,

Page 1 of 1

November 9, 2007
hp-663
Statement by Secretary Henry M, Paulson, Jr, on AMT Delay and Need to Help
Homeowners
Washington, DC--Treasury Secretary Henry M, Paulson, Jr, today issued the
following statement:
"Since February, we have asked the Congress to adopt one-year AMT relief that
does not raise other taxes, Unfortunately, the House has passed a bill today that
raises the likelihood of confusion for millions of taxpayers,
"As we have made clear, until legislation is enacted that provides AMT relief for
2007, the IRS will not be able to complete substantial preparations for the upcoming
filing season, meaning that millions of filers will - at a minimum - suffer delays in
having their returns processed and refunds paid,
"I am further concerned that the Senate has made clear it will not take up this
urgently needed legislation until December I urge Congress to enact one-year
AMT relief without raising taxes as quickly as possible so the IRS can adjust and
complete its preparations for the upcoming filing season with the least possible
delays and confuSion for taxpayers,
''I'm also eager to see Congressional action on legislation we've asked for to help
homeowners avoid foreclosure The Administration is making a concerted effort on
thiS front. HUD implemented FHA Secure, and as a result FHA hopes to help
240,000 homeowners refinance next year, As you know, we've been working with
a private sector alliance of mortgage servicers and financial counselors, Hope Now,
to enable struggling homeowners to find affordable mortgages and avoid losing
their homes, And the President put forward FHA modernization legislation that
HUD estimates could help an additional 200,000 families access a safe, fair, and
affordable FHA-backed loan, This legislation still hasn't reached the President's
desk, As a result, we are missing opportunities to assist struggling homeowners,
"Our foreclosure avoidance efforts are critical to helping millions of homeowners
keep their homes, These efforts also provide support to the broader credit
markets, Preventing avoidable foreclosures will reduce the impact of the housing
slowdown on mortgage-backed securities and on the balance sheets of those
institutions holding mortgage-backed securities It will also bring relief to
homeowners, our communities, and our economy,"

-30-

http://www .treas.gov /press/re leases/bp663. btm

1118/2008

Ht'-bb4: Under Secretary for Domestic Finance Robert K. Steel Testimony before the House Co ... Page 1 of 5

November 2, 2007
HP-664
Under Secretary for Domestic Finance Robert K. Steel
Testimony 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 efforts to coordinate
and enhance foreclosure prevention.
Let me begin by broadly examining the characteristics of foreclosures, in both good
times and bad, to provide a better perspective on how to approach this issue, and
then provide an update on the various actions we have taken to address the current
situation.
As you know, we are experiencing a period of adjustment in the credit and
mortgage markets. Fortunately, this market stress is occurring against a backdrop
of healthy U.S. fundamentals and a strong global economy. Yet, the Administration
recognizes the importance of housing to our economy, and as Secretary Paulson
has said, the housing decline is the most significant current risk to our economy. In
addition to the housing decline having a penalty on economic growth, a significant
number of homeowners will experience strain due to resetting mortgage rates and
home price depreciation.
The issues of foreclosure are complex and nuanced. In truth, thousands of homes
end up in foreclosure every year, even when housing markets are strong. Between
2001 and 2005, for example, the U.S. rate of foreclosure starts averaged
approximately 1.7 percent, meaning more than 650,000 homeowners began the
foreclosure process each year. This baseline rate of foreclosure can result from
events such as Job loss, credit problems, a change in family circumstances, or other
sources of economic instability. These foreclosures, although unfortunate, are
largely unavoidable.
Over the course of the next 18 months, we expect the foreclosure rate to remain
elevated above its historic level. A rising foreclosure rate during a housing downturn
is not surprising, but largely because of lax underwriting in recent years, especially
in the subprime market, a higher than usual number of homeowners will face
delinquency during the next year and a half.
In total, over 2 million subprime mortgages are expected to reset in the next 18
months, but not all will end In foreclosure. Some homeowners will be able to afford
their new payments without trouble and many others will qualify for refinanced,
fixed-rate mortgages on their own. Others, however, have stretched too far beyond
their means, and unfortunately, foreclosure is inevitable; in fact, many loans enter
into foreclosure before ever reaching the reset date. A third group of homeowners
facing resets fall somewhere in the middle The challenge is for lenders to identify
the homeowners in this middle group, who with a bit of assistance can stay in their
homes.
On August 31 st, President Bush announced an aggressive, comprehensive plan to
help as many homeowners as possible stay in their primary residences. The
President charged Secretary Jackson and Secretary Paulson to lead this effort and
the focus of our hearing today is to discuss one part of this plan.
Whenever facing a challenging public policy issue, the first step is full
understanding. We are appreciative of the interest Chairman Frank and this
Committee have taken in understanding these current challenges. Hearings, such
as this one, have contributed to our process of learning. The Department of
Housing and Urban Development (HUD) and the Treasury Department have also

http://www.treas.gov/press/releases/hp664.htm

12/312007

ttl'-004:

Unaer secretary for Domestic Finance Robert K. Steel Testimony before the House Co...

Page 2 of 5

been working closely With leading servicers, mortgage counselors, lenders, and
investors to understand the causes of foreclosures and the best ways to help
people keep their homes. We are continuing to learn but have reached two early
conclusions:
•

•

First, it is clear to everyone that the earlier we identify struggling borrowers,
the more likely it is that servicers and lenders will be able to refinance or
modify mortgages into something more sustainable for the long term. If we
wait until borrowers miss several payments, their credit profiles will be
tarnished and they will have far fewer refinancing options.
Second, once identified the method and technique of contacting borrowers
are quite important. When contacted by lenders, many borrowers mistakenly
believe that the lenders' goal is to repossess their homes through
foreclosure. Foreclosure is tough on families and bad for communities, but
also very costly for lenders. In almost all cases lenders would rather find a
way to help homeowners stay in their homes than foreclose. Yet according
to most of the servicers and counselors with whom we have spoken, 50
percent of those who lose their homes to foreclosure never contacted their
mortgage servicers or mortgage counselors for help. Frequently, borrowers
are fearful of foreclosure and not aware that their lenders would prefer to
work out a solution - such as a lowered interest rate or a payment plan.

From our review, II became clear 10 us that while many market participanls are
working hard on their own trying to reach and help homeowners, they are not
having as much success as they or we would like. In addition, the mortgage market
today has developed into a system based on securitization. Securization has
brought many benefits but also leads to greater complexity in finding solutions for
homeowners. The breadth of disaggregation in the mortgage market presents a
practical problem that does not lend itself to easy solutions.
Hope Now Alliance
Many of the servicers, lenders, investors and counselors with whom we have met
realized that if they coordinated their efforts behind a unified strategy, they would be
more effective in reaching and helping homeowners. The Treasury Department and
HUD facilitated discussions and encouraged them to work together. On October
10th, they announced the formation of a non-partisan initiative called the Hope Now
Alliance. To date, the Hope Now Alliance consists of four counseling organizations,
seventeen mortgage servicers and lenders (comprising 60 percent of the U.S.
market for mortgage servicing), three investor groups (including the American
Securitization Forum, which represents over 370 members), and ten trade
associations. We applaud these industry leaders for coming together.
Since their launch a few weeks ago, the Alliance has been meeting regularly and
working hard to develop and implement an aggressive plan to help homeowners.
Let me describe the details of their strategy and why we believe such elements are
critically important.
Communication
Earlier this week, the Alliance announced a new, national direct mail campaign to
contact at-risk borrowers, encouraging them to call for help. Servicers have been
mailing letters to their at-risk customers but have had limited success. The role of
counselors is crucial to helping challenged homeowners, and no where is that more
apparent than in communication. We have heard anecdotally that servicers achieve
only a modest success rate with their letters, because borrowers In trouble do not
want to hear from their lenders. In contrast, independent counselors have reported
a significantly higher 25 to 30 percent success rate when sending similar letters to
borrowers. The Alliance expects this new letter campaign, which will come from the
Hope Now Alliance itself, rather than from servicers, to increase their effectiveness
in reaching at-risk borrowers. This is going to be an on-going campaign that
servicers will tailor and adjust as they learn from the response. The more attentiori
we can bring to this unified campaign, the more likely it is that borrowers will pay
attention to this important information and call for help. The Alliance will begin
mailing these letters on November 19th, and will send over 200,000 letters by the
end of this month.
Let me take a minute to emphasize the importance of these letters and to ask for

http://www.treas.gov/press/reieases/hp664.htm

12/312007

HP-bb4: Under Secretary for Domestic Finance Robert K. SteeI Testimony before the House Co ...

Page 3 of ~

your help. Wilerl you are ilorne in your districts over the weekend or for the
holidays. please tell your constituents about tilis mail campaign Tell them it is OK
to contact Hope Now for assistance. This organization is ready to lend a hand, but
we need your ilelp in making their message known.

Process
The Alliance is also working hard to develop strong working relationships between
servrcers and counselors. Some servicers already have dedicated teams and
contacts for counselors to call. Other servrcers do not have dedicated resources to
work with counselors, and, as a result, counselors can spend hours trying to find
the right person to contact. We have learned that some counselors are more
effective than others at efficiently working with borrowers to collect the required
information and pass that on to servicers. Servicers and counselors who joined the
Alliance have agreed to adopt a standard process model tilat will strengthen and
speed work flow, productivity, and communications between them. Improving the
way servicers and counselors work together will make them all more effective at
helping homeowners once they have been contacted.

Counseling
Tile Alliance is working to expand tile capacity of an existing national counseling
network to receive, assess, counsel, refer and connect borrowers to servicers. Most
borrowers feel more comfortable speaking with independent, not-for-profit
counselors than with their lenders. While there are already many conscientious
HUD-certified mortgage counselors, their efforts could be enhanced through a
uniform message. Similarly, servicers want to be able to point their borrowers to
quality counselors who have adopted best practices, and this national network will
serve that function. They are working to ramp up capacity now, but it will take some
time before it is fully operational.

Investors
The American Securitization Forum (ASF), which represents securitization issuers,
investors, and other secondary market participants, has joined the Alliance and
announced that counseling fees can be reimbursed from securitization transactions
in appropriate circumstances. This is extremely important. Historically, counseling
was funded by the government and independent foundations. Now the
securitization issuers and investor community have recognized the important role
counseling plays in avoiding foreclosure and is willing to fund quality counseling.
Having ASF as an active member of this Alliance is important because it can help
manage the complexity resulting from the securitization model by making sure
investors are doing their part.

Metrics
Today, the industry does not have a thorough, standardized set of metrics with
which to evaluate servicers' loss-mitigation performance or to evaluate counselors'
effectiveness. The Alliance IS developing standard mea,::;ures which policyrnakers,
homeowners and investors need in order to monitor performance. These
performance measurements could include data, such as the number of loans in
default, outcomes for these loans, and success rates for modifications and
refinances Developing these metrics will allow us to identify categories of
borrowers who can be helped, determine successful treatments, and measure the
rate of successful outcomes.

Technology
The servicers have agreed to work toward cross-industry technology solutions to
more effectively connect servicers and counselors together In order to better serve
the homeowner. Some major servlcers use sophisticated software to analyze
borrower situations and determine if work-outs or modifications are appropriate.
The Alliance is taking this software and making it web-enabled so other servicers
and counselors can access it. This should speed the loan modification process: if a
counselor can access this software tool, enter the data from the borrower, and pass
that along to the servicer in an automated system, then the servicer will have more
confidence in the data and the recommended solution and can approve

http://www.treas.~o~/presslreleases/hp664.htm

12/3/2007

HP-bb4: Under Secretary for Domestic Finance Robert K. Steel Testimony before the House Co ...

Page 4 of S

modifications In 3 more expeditious manner. This element will likely take the most
time, but the Alliance is working closely with a major information technology
services firm to develop and launch the tool.

Looking forward
The efforts of this private sector alliance alone will not prevent all foreclosures. But
it is a good start and a critical first step. As we work with them, we will all learn and
improve the means of reaching and helping homeowners to prevent foreclosures.
By better Identifying those borrowers in need, we hope to see more loan
modifications and refinancing. For many families, this will be the only viable
solution. Given today's situation, the current process requires a more committed
approach.
Just as the lenders, servicers and counselors have come together to develop
metrics and standards that will measure the most effective ways to make
counseling accessible to troubled borrowers, we have also encouraged them to
come together in a similar way to develop an efficient methodology for offering
suitable mortgage solutions such as loan modifications, refinancings, or other
flexibility as appropriate.
We are optimistic about the effectiveness of our current initiatives. Yet given the
size, nature and implications of current challenges for homeowners, we should
continue to work to find additional solutions without compromising our shared
ambition to not bailout lenders or speculators or those who committed fraud.
Other complementary efforts have already been initiated. For example, we applaud
the guidance that the federal regulators have given to banks which hold mortgages
on their balance sheets to be more flexible in seeking economic solutions in
modifying existing mortgages for distressed homeowners. The same is true with
respect to the guidance that regulators issued to servicers where the record of loan
modification has proven to be more difficult and disappointing for many of the
reasons identified above in addition to the challenges associated with securitization.
We should focus on results and not on prescribing a single approach. Preserving
homeownership is the goal, and we must recognize that many different avenues
can get us there.
Borrowers, too, have responsibility. Mortgage providers must offer clear,
transparent and understandable information on the mortgage products they sell.
And homebuyers have a responsibility to use that information and understand their
mortgages. Buying a home today is a complex process, but that in no way excuses
homebuyers from their obligation for due diligence.

Policy Initiatives
The Administration has requested that Congress also do their part by focusing on
three initiatives. First, Congress should pass Federal Housing Administration (FHA)
modernization to make affordable FHA loans more widely available. Second, to
facilitate mortgage workouts, the President has asked Congress to temporarily
eliminate taxes on mortgage debt forgiven on a primary residence. And third,
Congress should enact comprehensive government sponsored enterprise (GSE)
reform.
FHA modernization is moving through Congress, and we are hopeful that it will
reach the President's desk soon The tax relief proposal has cleared the House of
Representatives and is awaiting further action in the Senate. In large part due to
this Committee's hard work, GSE reform has cleared the House of Representatives,
and now awaits action in the Senate. Congress should enact these bills as quickly
as possible.

Conclusion
Mr. Chairman, in conclusion, let me thank you for holding this hearing. Under the
President's leadership, the Administration is working diligently to help mitigate the

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Impact of f"lSlIlg foreclosures orl homeowners and the economy. We appreciate
having the opportunity to present the Treasury Department's perspectives on these
important issues and pledge to keep you apprised of the progress with Hope Now
and our other Initiatives and programs. Thank you and I look forward to your
questions.

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September 14, 2007

HP-665
Symposium on Building the Financial System of the 21st Century
An Agenda for Japan and the United States
Harvard Law School, Cambridge, MA September 14, 2007, 6:15 pm
Thank you very much to Hal Scott and the organizers of this great event for the
invitation to speak with you today.
I'm proud that the US. Treasury Department has been a significant participant in
these discussions over these ten years, In fact, many of my former bosses - Larry
Summers, Ken Darn, Tim Geithner, John Taylor, and Glen Hubbard - while not
technically my boss, it felt that way - have been contributors, All of these men were
quite demanding so I'm sure they would not have signed off on my remarks tonight.
I am also honored to share the podium this evening with a good friend and
extraordinarily capable colleague from the Ministry of Finance, Naoyukl Shinohara.
ThiS is the tenth anniversary of both thiS symposium and the Asian Financial Crisis
I will leave it to others to flesh out lessons learned and progress made over the
course of tilis conference, But let me suggest that one of the key lessons from ten
years ago is one that we are discovering again today, and I would further suggest,
will be one that we will be drawing on ten years hence, That is, we cannot take
market stability for granted and that volatility can occur abruptly and unexpectedly,
As the Asian Financial Crisis showed and recent events reinforced, market
conditions can change unpredictably, For policy and regulatory officials, it is critical
to bear In mind that, despite our best wishes, we cannot entirely eliminate the
potential for risk from the markets, nor should we try to do so,
Rather, our goal should be to establish a regulatory regime that fosters deep, liquid,
and transparent markets; markets that are robust and resilient enough to withstand
the inevitable volatility that investors face from time to time,
The difficulty of such an objective - I would assert - is that it can never be reached,
Financial markets continually evolve and innovate, and at an accelerating pace in
this era of globalization, It is therefore imperative that finanCial regulation keep pace
so that our markets remain transparent, robust and internationally competitIve,
The greatest danger we face - in the US. and Japan - as policy makers and
regulators is to think we've reached our goal In short, complacency is our enemy:
never being satisfied is our friend,

Recent Market Events
ThiS a theme I'll return to but first, let me detour a bit to try to address a question
that's been on many of our minds over the past month: what exactly has been going
on In the markets?
Let's start with one of the triggers, More defaults than expected in subprime
mortgages underlying mortgage-backed securities created uncertainty regarding
the future prospects of these securities, This compelled investors to' reassess the
risk and reprice these securities accordingly This reappraisal has spread across
the credit market spectrum, first affecting residential-mortgage backed securities

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and then spreading to other asset classes and, in particular, securitized products.
In early August, uncertainty began to spread to the asset-backed commercial paper
market. For instance, faced with a sharp drop in demand for their commercial
paper, structured investment vehicles - off balance sheet entities created by
commercial banks to purchase their loans - exercised credit guarantees from their
parent banks and invoked infrequently-used extension clauses for their outstanding
paper. Banks' demand for precautionary balances surged, while at the same time,
the fear of a credit dislocation - real or feared - sharply raised perceived
counterparty risk.
Overall liquidity became more of a concern, and the US. Federal Reserve Board
took action by adding liquidity to the credit markets. The Federal Reserve also
lowered Ule discount rate and encouraged banks to use the discount window.
These actions have helped stabilize the markets to some degree Nonetheless, we
remain vigilant for other potential sources of stress in the system.
As the recent turmoil sharply reminds us, capital markets are becoming increasingly
Internationalized 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.
Markets in Japan, the United States, and globally continue to go through a period of
adjustment, as market participants work through the repricing of risk. Reassuringly,
the depth of the markets in Japan and the United States, and elsewhere, and the
ability and willingness of our financial authorities to take appropriate action, has
contributed to the continued functioning of markets. The global economy as a whole
also appears to be robust - quite the contrary to 1997-1998 during the Asian Crisis.

Response to Market Events
As we assess recent market events, it is critical that we do not rush to judgment as
events continue to unfold, but take the necessary time to ask the right questions
and fully understand the issues.
As you might expect, we have been in regular communication with other U.S.
regulators, including the other members of the President's Working Group on
Financial Markets (PWG). The PWG is comprised of the Treasury, Federal
Reserve, SEC and CFTC.
On August 31, President Bush announced several steps to examine some of the
broader market issues underlying the recent mortgage problems, help homeowners
in need of assistance avoid foreclosure, and help ensure that the problems now
disrupting the housing industry do not happen again.
The U.S. is also communicating with our G-7 colleagues to determine the root
causes of recent market events and to take timely and appropriate action. The G-7
will ask the Financial Stability Forum (FSF) to review recent events, with input from
the relevant standard setters and international experts, and recommend an
appropriate response. The FSF report will provide input for the G-7 Finance
Ministers at their October meeting.

Avoiding Complacency
Recent events underscore the importance of pollcymakers' constantly reassessing.
Rather than making policy changes only in response to emergencies, effective
regulation needs to be a constant iterative process between regulators and market
participants. Such a process can feed a steady evolution of the regulatory
environment conducive to building and maintaining capital markets that foster
innovation and fuel the business growth that creates jobs and drives our economy.
I'd like now to talk about the efforts underway in the United States and Japan to
energize our regulatory frameworks and avoid complacency.

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U.S. Capital Markets Initiative
Let me first address the efforts underway in the United States. Let me be clear U.S capital markets are the deepest, most efficient, and most transparent in the
world, and are the lifeblood of the U.S. economy. To promote the conditions for
American prosperity and economic growth, It is essential that we maintain the
competitiveness of our capital markets
To energize this process, Secretary Paulson launched a Capital Markets
Competitiveness Initiative, to assess the state of U.S. capital markets, and to
assess, and, if necessary, recalibrate our approach to the balancing of investor
protection, market integrity, and systemic risk. We've reached out to academics,
investors, the business world, and government officials.
The first set of capital markets initiatives was unveiled in May. These focused on
enhancing investor protection by strengthening financial reporting and seeking a
more sustainable and transparent auditing profession. As part of these measures,
we have established a public federal advisory committee, led by former SEC
Chairman Arthur Levitt and former SEC Chief Accountant Donald Nicolaisen. that
will develop proposals for creating a stronger, sustainable auditing profession,.
In June, Secretary Paulson unveiled the second stage of the capital markets
initiative, which includes releasing a blueprint of structural regulatory reforms to
improve oversight, increase efficiency, and reduce regulatory overlap of the
financial services industry. In addition, the PWG will work with asset managers of
private pools of capital and investors to help these two groups define separate sets
of best practices that address investor protection, enhance market discipline, and
mitigate systemic risk.
Further steps will be announced in the near future, as we continue to strive to
enhance the competitiveness of U.S. capital markets.
Japan's Financial Sector Competitiveness Initiative
Turning to Japan, starting with Japan's financial "Big Bang" in 1996, it has made
significant strides in reforming and liberalizing its financial markets. Japan is also
strengthening its financial regulatory regime, moving toward stnking an appropriate
balance between transparency and investor protection on the one hand, and
allowing innovation on the other.
Japan reformed and liberalized its financial system in one of the most difficult
environments possible - the middle of a non-performing loan crJsis. But Japan
pushed forward with reforms And, with the creation of the Financial Supervision
Agency in 1998 - later renamed as the Financial Services Agency - and subsequent
steps like the passage of the Financial Instruments and Exchange Law in 2006,
Japan has shown its commitment to building a stronger flrlancial system.
FSA Commissioner Sato, as he started his term this summer, Increased
communication and consultation with market participants, a step we in the United
States have found is critical to maintaining our competitiveness. In fact, I believe
many of you in this room are already part of the process, and share my appreciation
for the renewed efforts of the FSA in trying to promote Japan as an international
financial center.
So what is needed? Key issues have been identified by a number of observers,
including the American Chamber of Commerce in Japan, the International Bankers
Association, and others. Some of the steps that we see as most beneficial include:
•

•

Improving the consistency, transparency and predictability of regulation and
supervision through expanding the body of written interpretation of laws and
regulations, adopting safe harbor rules.
Rationalizing regulation of financial conglomerates so that firewall
restrictions do not hinder risk management, innovation and market

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•
•

development.
Implementing cost-benefit analyses for proposed and existing regulallons,
including those implementing the Financial Instruments and Exchange Law.
Expanding financial education, both at the professional level and for the
general public.

I should add that an important indicator of Japan's commitment to becoming an
international financial center that is being watched closely is the privatization of
Japan Post. With two of the world's largest financial entities pOised to enter the
competitive financial market, we look forward to the FSA's regulating these entities
in the same manner as their competitors. We hope that a fully level playing field Will
be established in a given market, and that risk management capabilities will be
developed, before Japan Post offers new products.
While I'm sure Naoyukl could suggest an even more robust action plan, these are
some concrete steps to make Tokyo a premier international financial center.
In closing, my caution to Japanese officials and to U.S. officials is a major lesson of
the previous ten years - as well as the previous ten weeks - our work is never done
in fostering deep, liquid, transparent markets that are robust and resilient.
Complacency is our enemy, and never being satisfied is our greatest friend.
Thank you.

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iP-666: Treasury Designates Indivit1~als Furthering Syrian Regime's Efforts to Undermine Lebanese ...

Page 1 of 2

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November 5, 2007
HP-666
Treasury Designates Individuals Furthering Syrian Regime's Efforts to
Undermine Lebanese Democracy

The U.S. Department of the Treasury today designated four individuals affiliated
with the Syrian regime's efforts to reassert Syrian control over the Lebanese
political system.
"Syria has used all means at its disposal - from bribery to intimidation to violence to undermine the legitimate political process in Lebanon," said Stuart Levey, Under
Secretary for Terrorism and Financiallnteiligence. "Today's action exposes four
individuals involved in such activities and serves as a warning to others who would
do likewise."
Syrian troops formally withdrew from Lebanon in April 2005 after a 29-year military
presence. The Syrian regime is working through Lebanese proxies to exert control
over the Lebanese political system; to weaken the majority pro-government March
14 Coalition; and to undermine Lebanese sovereignty and security. The regime has
used a range of tools to further these objectives, including bribing politicians,
intimidation, interference in the selection of a new president, support for violence,
and providing arms to militias and terrorist groups. The four individuals designated
today have worked to undermine Lebanese sovereignty and support the Syrian
regime's efforts to interfere in Lebanon's internal affairs.
Syrian intelligence has assisted Hlzbailah and other oppositionists in Lebanon to
orchestrate protests and demonstrations demanding the resignation of Lebanese
Prime Minister Fouad Siniora's cabinet, which it deems illegitimate. The protests
began in December 2006 in Beirut and continue today. Additionally, the Syrian
regime has provided arms to illicit Lebanese militias and Palestinian terrorist
groups. In addition, the Syrian regime is believed to be intimidating Lebanese who
call for the establishment of an international tribunal to try the killers of former
Lebanese Prime Minister Rafiq Hariri.
Assaad Halim Hardan, Wi'am Wahhab and Hafiz Makhluf were designated
pursuant to Executive Order (E.O.) 1:lIef 1, signed by President George W. Bush on
August 1,2007. E.O. 13441 blocks the property of persons undermining the
sovereignty of Lebanon or its democratic processes and institutions.
Muhammad Nasif Khayrbik was designated pursuant to E.O. 13:n8, which is aimed
at individuals and entities contributing to the Government of Syria's problematic
behavior. President Bush signed E.O. 13338 on May 11,2004 in response to the
Syrian government's continued support of international terrorism, sustained
occupation of Lebanon, pursuit of weapons of mass destruction and missile
programs, and undermining of U.S. and international efforts in Iraq.
Today's designations freeze any assets the designees may have located in the
United States, and prohibit US. persons from engaging in transactions with these
individuals.
Identifying Information

Assaad Halim Hardan
AKAs: Assad Hardan
As'ad Hardan
008: July31,1951

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POB. Rashayya al-Fakllar, Lebanon
Profession: Member of Parliament, Lebanon
Political Affiliation: Chief of the Syrian Socialist Nationalist Party (SSNP) Central
Political Bureau
Assaad Hardan is a senior official in the SSNP. During 2007, the SSNP received
arms and military training from Syria and Hizballah. Hardan works with senior
Syrian officials to significantly influence Lebanese politics in furtherance of Syria's
efforts to undermine Lebanese sovereignty.
Wi'am Wahhab
AKAs: Wi'am Wihab
Wiam Wahhab
Wiyam Wihab
Wiyam Wahab
DOB: 1964
POB: AI-Jahiliya, Shouf Mountains, Lebanon
Wi'am Wahhab, a former member of the Lebanese Parliament, works with senior
Syrian officials to significantly influence Lebanese politics in furtherance of Syria's
efforts to undermine Lebanese sovereignty.
Hafiz Makhluf
AKA: Hafez Makhlouf
Position: General Intelligence Directorate senior official
Military Rank: Colonel
DOB: Circa 1975
POB: Damascus, Syria
Colonel Hafiz Makhluf, a senior official in the Syrian General Intelligence
Directorate, has supported the reassertion of Syrian control or otherwise
contributed to Syrian interference in Lebanon.
Makhluf is a maternal cousin to Syrian President Bashar al-Asad. He is also the
brother of Rami Makhluf, Syria's leading businessman, who has been the subject of
persistent allegations of corruption and cronyism.
Muhammad Nasif Khayrbik
AKAs: Muhammad Nasif Khayr-8ayk
Mohammed Nassif Khairbek
Mohammad Nasif Kheirbek
Address: Damascus, Syria
Position: Deputy Vice President for Security Affairs
Military Rank: Major General
DOB: April 5, 1937
As of early 2007, Khayrbik was one of several key advisors to Syrian President
Bashar al-Asad. In early 2006, Khayrbik was named Deputy Vice President for
Security Affairs. In this position, Khayrbik has played a central role in Syria's
continuing policy of destabilizing Lebanon and Syria's relationship with known
designated terrorist organizations, including Hizballah. In early 2006, Khayrblk
coordinated Syrian and Hizballah positions during regular meetings with Hassan
Nasrallah, the Secretary General of the Lebanese Hizballah.
Khayrbik has long served the Syrian regime, having served as a close advisor to
former President Hafiz al-Asad. In mid-1999, President Hafiz al-Asad appointed
Khayrbik as the deputy director of the Syrian General Intelligence Directorate (GID),
a position he served in until February 2006.

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November 5, 2007
2007 -11-5-16-42-18-6995

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 $69,725 million as of the end of that week, compared to $69,668 million as of the end of the
prior week.
I. Official reserve assets and other foreign currency assets (approximate market value, in US millions)

II
IINovember 2, 2007

I
I
IA. Official reserve assets (in US millions unless otherwise specified)
I( 1) Foreign currency reserves (in convertible foreign currencies)
I(a) Securities

IIEuro

IIYen

I/Total

II
11 14 ,157

II
11 11 ,120

11 69 ,725
11 25 ,277

11 0

II
11 5 ,469

1/19,595

I/O

11 0

lof which: issuer headquartered in reporting country but located abroad
I(b) total currency and deposits with:

I(i) other national central banks, BIS and IMF

11 14 ,126

Iii) banks headquartered in the reporting country

lof which: located abroad

I(iii) banks headquartered outside the reporting country

lof which: located in the reporting country

\(2) IMF reserve position

11 4 ,402

1(3) SDRs

1/9,409

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)

110

I--financial derivatives

I--Ioans to nonbank nonresidents

I--other

II
II

lB. Other foreign currency assets (specify)
I--securities not included in official reserve assets

I
I

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. Predetermined short-term net drains on foreign currency assets (nominal value)

-----'=

1,--1_ _ _ _ _ _IIL--l_ _----JII~-_-,1,--1
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I

IITotal

Il 1. Foreign currency loans, securities, and deposits
I--outflows (-)

IIprincipal

I
I--inflows (+)

IIlnterest
Ilprincipal
Illnterest

IIMaturity breakdown (residual maturity)
More than 1 and
up to 3 months

IUp to 1 month

II
II

More than 3
months and up to
1 year
II

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 (+)

3. Other (specify)
--outflows related to repos (-)

I --inflows related to reverse repos (+)

--trade credit (+)

II
II

--other accounts payable (-)

--other accounts receivable (+)

--trade credit (-)

I
I
I
I

II
II
II

II
II
I

III. Contingent short-term net drains on foreign currency assets (nominal value)

I
I

II
II
IITotal

III
I

II
II
Maturity breakdown (residual maturity, where
applicable)

More than 1 and
up to 3 months

More than 3
months and up to
1 year

to 1 month

Wa) Collateral guarantees on debt falling due within 1
year

II
I

I(b) Other contingent liabilities

112. Foreign currency securities issued with embedded
options (pultable bonds)

II
II
II

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 (+)

11. Contingent liabilities in foreign currency

I--IMF (+)

![fb) with banks and other financial institutions
headquartered in the reporting country (+)

'I(c) with banks and other financial institutions
headquartered outside the reporting country (+)

Undrawn, unconditional credit lines provided to:
(a) other national monetary authorities, BIS, IMF, and
other international organizations
I--other national monetary authorities (-)

II
II

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I--BIS (-)
\--IMF (-)
Ifb) banks and other financial institutions headquartered
In reporting country (- )

J~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
II

II
II

II
II
II
II

I(a) Short positions
I(i) Bought puts
I(ii) Written calls
I(b) Long positions
\(i) Bought calls
!(ii) Written puts
IpRO MEMORIA: In-the-money options 1 I

"II

II
II
II

I(a) Short position

1(3) - 5 % (appreciation of 5%)

I(a) Short position

I(b) Long position

II
II
II
II
II
II
II
II
II

Ira) Short position

II
\

1(4) +10 % (depreciation of 10%)
I(a) Short position

I(b) Long position

1(5) - 10 % (appreciation of 10%)
I(a) Short position

II
II

I(b) Long position

\(6) Other (specify)

I(a) Short position

I(b) Long position

II
II
II
II
II

II
II

I(b) Long position

1(2) + 5 % (depreciation of 5%)

II
II
II

I(b) Long position

II
II

1(1) At current exchange rate

I
I

II
II

II
I
II
II

)

II
II

IV. Memo items

I
1(1) To be reported with standard periodicity and timeliness:

II(a) short-term domestic currency debt indexed to the exchange rate

I~b) financial

instruments denominated in foreign currency and settled by other means (e.g., in domestic

currency)
I--nondeliverable forwards

I
I

I --short positions
I --long positions
I--other instruments
I(c) pledged assets
I--included in reserve assets
II--included in other foreign currency assets

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\(d) seculltles 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

(e) financial denvative assets (net, marked to market)

I--forwards

I--futures

I--swaps

I--options
I--other

Wf) derivatives (forward, futures, or options contracts) that have a residual maturity greater than one
year, which are subject to margin calls.

II--aggregate short and long positions in forwards and futures in foreign currencies vis-a-vis the domestic
ILcurrency (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

II
II

l(i) bought puts
I(ii) written calls

(

I(b) long positions

l(i) bought calls

I
II

I(ii) written puts
1(2) To be disclosed less frequently:
I(a) currency composition of reserves (by groups of currencies)

1169,725

I--currencies in SDR basket

11 69 ,725

I--currencies not in SDR basket

!--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.

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12/3/2007

HP-667: Treasury, IRS Issue Additional Pension Protection Act Guidance

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November 7,2007
HP-667
Treasury, IRS Issue Additional Pension Protection Act Guidance
Washington, DC--The Treasury Department and the Internal Revenue Service
(IRS) today issued proposed regulations implementing new rules that facilitate the
adoption of automatic contributions arrangements in 401 (k) plans and other similar
plans under sections 403(b) and 457 of the Internal Revenue Code. These
regulations provide answers for employers that will allow them to use these new
automatic enrollment features next year. Employers may rely on these proposed
rules pending the issuance of final regulations.
Employers that offer 401 (k) plans must specify what contributions, if any, will apply
to employees covered under the plan who do not make a specific election to
contribute. Historically, most employers designed their plans to treat an employee
who takes no action as if the employee elected no contributions.
There has been a new trend, however, to change this practice. Under these new
arrangements, called automatic contribution arrangements, the default is switched
and employees who take no action are automatically enrolled in the 401 (k) plan at a
specified percentage.
Last year's Pension Protection Act included a number of provisions to make it
easier to adopt these automatic contribution arrangements. Last week, the
Department of Labor released regulations that addressed the investment issues
that relate to automatic contribution arrangements.
The proposed regulations released by Treasury and the IRS today address issues
raised by the new legislation, including the special nondiscrimination safe harbor for
certain qualified automatic contribution arrangements and the ability of an employee
who has been automatically enrolled under an eligible automatic contribution
arrangement to opt out of the arrangement and instead request a distribution of the
contributions made during the first 90 days of the arrangement.

REPORTS
•

R~gulati.o11 133300-07

httP Ilwww.treas.goY/press/releases/hp667.htm

12/3/2007

HP-668: Secretary Paulson to Speak on Progress of Strategic Economic Dialogue with China

Page 1 of 1

November 7,2007
HP-668

Secretary Paulson to Speak on Progress of
Strategic Economic Dialogue with China
Treasury Secretary Henry M. Paulson, Jr. will deliver remarks tomorrow at the
China Institute Executive Summit in New York. His remarks will focus on the
progress of the Strategic Economic Dialogue with China. The dialogue, established
by Presidents Bush and Hu, is a framework for addressing issues of mutual
concern to the U.S. and China.

Who
Secretary Henry M. Paulson, Jr.
What
Remarks on the Progress of the Strategic Economic Dialogue with China
When
Thursday, November 8, 6: 15 p.m. EST
Where
China Institute Executive Summit
4 Times Square (42nd Sl. between 6th Ave. and Broadway)
37th Floor
New York, N.Y.
Note
Media interested in attending should contact Nancy Moon at
Nancy.Moon@verizonnet or (917) 533-8933. Camera crews must arrive by 5:00
p.m.

http://www.treas.gov/press/reJeases/hp668.htm

12/3/2007

HP-669: Treasury Official to Hold Press Briefings in Advance ofSecretary Paulson's Trip to Africa Page 1 of 1

November 7,2007
HP-669

Treasury Official to Hold Press Briefings in Advance
of Secretary Paulson's Trip to Africa
Treasury's Deputy Assistant Secretary for Africa and the Middle East Ahmed Saeed
will brief press Friday in advance of Secretary Henry M. Paulson, Jr.'s upcoming trip
to Tanzania, South Africa, and Ghana. While in Africa next week, the Secretary will
attend the meeting of G-20 Finance Ministers and Central Bank Governors and
discuss the positive economic changes taking place on the continent with
government and business leaders.

What
Pen and Pad Briefing in Advance of Secretary Paulson's Trip to Africa
When
Friday, November 9,10:00 a.m. EST
Where
Department of the Treasury
West Gable Room (5432)
1500 Pennsylvania Avenue, NW
Washington, D.C. 20220
Note
Media without Treasury press credentials should contact Frances Anderson at
(202) 622-2960 or fl,lllCC;S;JII(\t;rSonl(L:cJo (rens ~Jov with the following information:
full name, Social Security number, and date of birth.

What
Pen and Pad Briefing in Advance of Secretary Paulson's Trip to Africa
When
Friday, November 9, 1100 a.m. EST
Where
Washington Foreign Press Center
National Press Club
529 14th Street, NW
Washington, D.C. 20045
Note
For more information please contact Stacy MacTaggert at (202) 504-6320.

http://www.treas.~<:)\./press/releases/hp669.htm

12/3/2007

HP-670: Secretary Paulson Statement on Peru Free Trade Agreement

Page 1 of 1

I-'HLSS HOOM

November 8, 2007
HP-670

Secretary Paulson Statement on Peru Free Trade Agreement
Washington, DC--Treasury Secretary Henry M. Paulson, Jr. today issued the
following statement on House passage of the Free Trade Agreement with Peru:
"I commend Chairman Rangel, Congressman McCrery and other House leaders on
today's vote. This is an important bipartisan accomplishment. I look forward to
working with Congress to secure passage of the other important pending FT As,
each of which incorporates the provisions of the bipartisan May 10 agreement
between the Administration and Congress that addressed labor, environmental and
other issues.
"This bipartisan consensus follows the call we heard from business leaders at the
White House this week highlighting how important these agreements are for
continued job creation and protecting U.S. investments. Members of Congress from
both parties recognize that greater engagement with the world is essential to our
growth. The U.S. must continue to seek partners to join us in advancing a global
agenda that will help more people realize the benefits of international trade and
competition. "

http://www.treas.goy/press/releases/hp670.htm

12/312007

hp-671: Remarks by Secretary Henry M. Paulson, Jr. before the 2007 China Institute Executive Su... Page 1 of 4

f--'HLSS H(;OOM

November 8, 2007
hp-671
Remarks by Secretary Henry M. Paulson, Jr.
before the 2007 China Institute Executive Summit
on Shared Responsibilities and Shared Benefits in U.S.-China Economic
Relations
New York, NY -- Good evening. Thank you, Ginny, and the China Institute for
inviting me to address your Executive Summit. The China Institute's more than
seven decades of work, promoting educational and commercial exchanges with
China, underscore the value of a long-term, constructive approach to U.S.-China
relations.
This conference, China Goes Global: New Perspectives and New Strategies, could
not be more timely. The U.S.-China economic relationship is among my highest
priorities. It is also among the most challenging.
A Strategy for Economic Engagement with China
China and the United States are two of the largest and most influential economies
in the world. That prominence brings responsibilities. Addressing these
responsibilities together will create greater benefit for both our peoples. That proved
true when we worked together to bring China into the WTO. The requirements of
WTO accession led to an acceleration of reform in China. China now has the
responsibilities and must fulfill the obligations of a major WTO member, just as
China has reaped the rewards of the rapid growth that followed WTO accession.
The United States and China have a unique role to play in the coming decades in
assuring a strong global economy and shaping the global economic agenda.
Greater coordination and enhanced cooperation is required - indeed, demanded of us in order to meet those responsibilities.
These dynamics informed the creation of the Strategic Economic Dialogue (SED)
by President Bush and President Hu Jintao in 2006. They have established a forum
that allows both governments to communicate at the highest levels on issues of
long-term and strategic importance to ensure bilateral economic stability and
prosperity. Through the SED, we also work to produce tangible short-term results
which are necessary to demonstrate progress towards achieving our long term
objectives.
Our ecqnomic dialogue now focuses on going beyond China's WTO commitments.
Admission to the WTO represents a minimum level. It is important that China fully
meet those commitments but an equally important challenge is to accelerate reform
beyond those commitments. China's leaders understand the role of markets in
attaining stable, non-inflationary growth to meet the needs and aspirations of their
people. Our discussions have not been about the direction of reform, but rather
about the pace. As China's economy rapidly evolves, the challenges that it faces
and the policies required to continue China's development have also changed.
While some in China and elsewhere may see danger in moving too quickly with
reforms, I believe moving too slowly is the bigger risk to Chinese and world
prosperity.
Understanding Shared Responsibilities and Realizing Shared Benefits
As major global economic players, we both have responsibilities to maintain open
trade and investment regimes, implement domestic poliCies that promote the health
of our own economies and of the global economy, enhance the safety and integrity
of trade, and promote energy conservation and environmental protection.

http://www.treas.gov/press/releases/hp671.htm

12/3/2007

hp-671: Remarks by Secretary Henry M. Paulson, Jr. before the 2007 China Institute Executive Su... Page 2 of 4
Shared Respollsi/Jllity for Open Economies
The first of the responsibilities that the United States and China share in the global
economy is to maintain open trade and investment regimes. Open economies spur
competition, improve productivity, and create good jobs - in our countries and
around the globe.
The U.S. economy is one of the most open in the world, and I am committed to
working to maintain this openness, even in the face of rising protectionist
sentiments in the U.S. Almost thirty years ago, Chinese leaders clearly recognized
the value of an open economy; but China still has much more work to do. This
challenge is becoming more difficult as it confronts strong protectionist sentiment
from Its domestic companies which, like all market-driven firms, welcome
competition in other industries much more than in their own.
The efforts of each of us to maintain open trade and investment regimes at home
strengthen the efforts of the other. The United States is working to reinforce our
open economy policy and keep our markets open to investment and trade. Frankly,
it is easier to keep the U.S. economy open if the American public sees China
continuing to open up their markets. By joining efforts, we will be more effective in
working against this protectionist tide and in promoting the competition and
openness to investment that drive greater innovation and productivity.
Just as openness to competition has kept the U.S. economy on the cutting edge,
further openness to trade and competition is clearly in China's interest. For China,
further opening of key sectors to competition is critical to achieving the growing
prosperity that the Chinese people expect and deserve. For example, opening the
financial services sector to foreign participation will enable China to leap-frog years
of costly and problematic practices. Chinese households across the nation would
more quickly gain access to a wider range of higher-yielding savings instruments
they need to build assets more rapidly for higher living standards today and in
retirement.
Opening markets to trade and competition would further signal to the international
community China's willingness to assume a role as a responsible global economic
power. Also, given growing protectionist sentiments around the world, if Chinese
reforms slow. China may confront a backlash from other nations.

Shared Responsibility for a Healthy Global Economy
The U.S. and China also share a responsibility to support the health of the global
economy. By working together on this, we can create greater benefits for the people
of both our nations.
Balanced growth - growth that does not generate large trade imbalances -- is vital
to each of our country's prosperity and to sustained global economic growth. In the
United States, we remain committed to advancing policies that maintain strong
growth and enhance international confidence in our economy, financial markets and
securities. We are reducing our budget deficit, and we need to address riSing
entitlement costs. This is in our interest, and is also key to addressing global
imbalances in the medium term. We must also maintain the robust productivity
growth that has allowed the United States to be a key driver of global prosperity in
recent years.
For China, balanced growth requires continuing economic reform. The resourceintensive, export-intensive economic model that has driven China's extraordinary
growth has led to growing imbalances that threaten internal harmony and spur trade
conflict. Sustaining China's development in the future will require growth that is
based more on increases in productivity, rising domestic household demand, and a
greater role for services. All of this depends on a greater role for the market in
allocating capital and a reduced reliance on administrative decisions.
China's leaders have pledged to carry out the economic reforms necessary to
rebalance their economy. Of course, implementation is the name of the game. The
expanding size and complexity of the Chinese economy, in particular the influence
of provincial governments in policy implementation, make meeting these
responsibilities more challenging. The question is not whether China can grow

http://www.treas.gov/press/releases/hp671.htm

12/3/2007

hp-671: Remarks by Secretary Henry M. Paulson, Jr. before the 2007 China Institute Executive Su... Page 3 of 4
qUickly over the s~lOrt term, the question is whether it can grow differently and
consistently over the long term.
To enable market forces to efficiently rebalance the economy and spread prosperity
to all the Chinese, China needs more flexible prices, including a much more flexible,
market-driven exchange rate. Exchange rate flexibility is also key to allowing
monetary policy - the most potent instrument for guiding an economy - to focus on
assuring stable and non-inflationary growth.
Also, the RMB's exchange rate is increasingly being viewed by many countries as a
source of unfair competition. China is increaSingly seen as out of step with
international norms and expectations, as evidenced by the growing number of
national leaders and multilateral institutions calling for currency appreciation. The
G-7 Finance Minister's meeting held in Washington two weeks ago concluded with
a communique that specifically called for RMB appreciation.
The United States has a stake in China's structural economic reforms because we
have a stake in a prosperous, stable China. We do not fear an economically
stronger and more competitive China, which benefits the Chinese people, the
American people, and the prosperity of the global economy.
Working together is already bringing benefits to both our nations, but we have the
potential to do much more. We will only realize that potential through direct and
intense engagement such as the Strategic Economic Dialogue.
Last May, when senior Chinese officials came to Washington for our second
meeting of the Strategic Economic Dialogue, we both committed to make consistent
strides towards financial sector liberalization. As a result, a major U.S. bank
recently announced plans to establish at least ten rural banks and loan companies
in China's countryside. It will join the Chinese government's pilot program to allow
foreign investors to operate in the rural areas of western and central China. Such
transactions, over time, will bring transformational benefits to China's economy and
to U.S.-China economic ties.

Shared Responsibility for the Integrity of Trade
WTO accession and integration into the world economy has allowed China to
dramatically grow and thrive. As large beneficiaries of global integration, the U.S.
and China share a responsibility to maintain the integrity of trade. The benefits of
trade can only continue to flow when consumers around the world have confidence
in the quality and integrity of the goods they buy. While the safety of food and
product imports is a global problem, it has touched our bilateral trade relationship in
an acute way in recent months.
We need to work together through respectful, science-based processes to ensure
that products coming to America from China are safe. Effective management of
these safety issues will have a long term, positive impact on U.S.-China trade
relations. As China overcomes these issues, it will be further integrated into the
global trading system and this will benefit China's people and help sustain China's
economic growth.
Through the SED framework, we have expanded bilateral consultations to improve
the U.S. government's ability to certify the safety of food and product imports
coming from China. The United States will continue to seek opportunities to work
with China - by sharing our extensive experience - as China builds the regulatory
infrastructures necessary for safe and secure trade in a globally integrated world.
On Tuesday, the Bush Administration announced a significant expansion of Food
and Drug Administration and Consumer Product Safety Commission authority to
inspect and certify imports, and an effort to work with Congress to implement
measures to ensure effective inspection of imports. We can use this as a model as
we work with China in this crucial area.

Shared Energy and Environmental ResponSibilities
The United States and China also share the responsibility of ensuring secure and
clean energy supplies, and protecting the environment. China's acute
environmental problems are degrading the health of its population and ecosystems

http://www.treas.gov/press/releases/hp671.htm

12/3/2007

hp-671: Remarks by Secretary Hemy M. Paulson, Jr. before the 2007 China Institute Executive Su... Page 4 of 4
as well as underlllll1lrlg Cillna's long-term economic potential. My perspective is not
that of an official of a rich, developed nation, but one borne out by economic truths
and past American experiences balancing these priorities. A healthy environment
and a strong economy are not mutually exclusive; they are mutually necessary. As I
learned during my July trip to Qinghai Province, no one understands this better, or
is more concerned about it, than the Chinese people. I applaud the Chinese
leadership's recent effort to expend extensive financial resource to save Lake TaL
Addressing the issue of climate change by working together on a post-2012
framework will help the United States and China meet our global environmental
responsibilities more effectively, and bring greater benefit to our citizens. And, if we
are to be successful in this, it must be against the backdrop of strong economies. I
was especially pleased that China participated in the recent Major Economies
Meeting hosted by President Bush.
As the world's largest consumers of oil and as net-importers, we clearly share an
interest in energy security and energy conservation. We should expand cooperation
in the development of new sources of supply and in minimizing supply shocks.
Through cooperation in the development of new alternative energy technologies,
we can help ensure that the benefits of a clean, healthy environment endure for
coming generations.

Advancing U.S.-China Economic Relations at SED III
In December, cabinet-level officials from both China and the United States will meet
in Beijing for the third round of the Strategic Economic Dialogue. We have a robust
and comprehensive agenda which will require focused and consistent leadership in
both Washington and Beijing. We will focus on long-term strategic issues, as well
as manage short term issues to show progress and concrete results along the way.
By addressing the most pressing, short-term issues we can build the confidence to
maintain the long-term, strategic relationship that will define the trajectory of U.S.China economic ties.
As our two proud and powerful nations work together to meet our responsibilities,
our citizens and the global economy will benefit. This relationship may ultimately
determine many of the patterns of global prosperity, international security, and
economic stability in the 21 st century.
Thank you.
-30-

http://www.treas.gov/press/releases/hp67I.htm

12/3/2007

HP-672: Paulson Outlines Impact of Delayed AMT Patch in Letter to Congress

Page 1 of 1

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October 23,2007
HP-672

Paulson Outlines Impact of Delayed AMT Patch in Letter to Congress
Please find attached three letters that Secretary Henry M. Paulson, Jr. sent in
response to a letter from Senator Grassley and Congressman McCrery, as well as
a letter from Congressman Reynolds, concerning the impact on the IRS and million
of taxpayers of a delayed AMT patch.

NOTE: The IRS will hold a technical briefing on the impact of a delayed AMT patch
at 11 :30 a.m. Contact IRS Media Relations at (202) 622-4000 to attend the
briefing.
###

REPORTS
•
•
•

Grassley Letter
McCrery Letter
Reynolds Letter

http://www.treas.gov/prcss/rcleascs/hp672.htm

1118/2008

DEPARTMENT OF THE TREASURY
WASHINGTON, D.C.
SECRETA.RY of l'HE TREASURY

October 23, 2007

The Honorable Charles E. Grassley
Ranking Member
Committee on Finance
United States Senate
Washington, DC 20510-6200
Dear Senator GrassIey:
Thank you for your letter to me asking for information about the impact on the 2008 income tax
return filing season if a one-year alternative minimum tax (AMn "patch" is not enacted until
later this year.

To avoid confusion and delays for taxpayers, it is critical that an AMT patch be enacted by early
November. If Congress fails to act, we estimate that 25 million taxpayers will be subject to
AM! in 2007 - 21 million more than were subject to the tax in 2006. We estimate that these 25
million taxpayers will pay on average an additional $2,000 in Federal income tax. For these
taxpayers, failure to enact a patch for 2007 would result in a substantial unexpected tax increase.
Enactment of a patch beyond early November could also significantly delay processing of these
taxpayers' returns and payment of any refunds.
Moreover, the AMT patch has historically been accompanied by a special ordering rule that
applies to a number of popular tax credits - including the child tax credit and the retirement
savings contribution credit - and affects the computation of those credits for millions of
additional taxpayers who are not subject to the AMT. If enactment of the special ordering rule
for credits is delayed beyond early November, as many as 25 million additional taxpayers could
face delays in processing of their returns and payment oftheir refunds.
Based on historical filing patterns, we estimate that enactment of a patch in mid-to-Iate
December could delay issuance of approximately $75 billion in refunds to taxpayers who are
likely to file their returns before March 31, 2008. Millions of taxpayers filing returns after that
date may also have their refunds delayed.
From a tax administration perspective, the Internal Revenue Service (IRS) has advised me that
late enactment of the AMT patch (mid-November or later) will create significant challenges and
poses an extremely high risk to the 2008 filing season. It will also create significant compliance
challenges and will result in confusion for taxpayers, tax return preparers, and tax software
developers.
By this time each year, income tax fonns and instructions have been revised to reflect current
law. Consistent with historical practice, they do not reflect pending legislation. There are 12

forms (the AMT form and 11 credit forms) that will be affected if and when Congress enacts the
AMT patch. These forms are attachments to either the Form 1040 or Form l040A. The IRS will
release the Form 1040 and 1040A tax packages to the printing vendors by November 7,2007.
All additional forms and instructions must be finalized by November 16, 2007, to ensure that the
2008 filing season proceeds with minimal disruption. From the date an AMT patch is enacted,
the IRS would have updated tax forms available on irs.gov in approximately three weeks.
Printed fonus would be sent to libraries, post offices and other distribution sites two to three
weeks later.
Furthermore, the IRS' return processing systems have been programmed to reflect current law.
The IRS' information technology systems readied under current law (not including the AMT
patch) will begin processing returns the frrst day of the tax filing season - January 14, 2008.
From the date an AMT patch is enacted, the IRS estimates it will take 12-13 weeks to reprogram, test, and integrate the changes into the complex computer programs and systems that
process tax returns. All software developers and the Free File Alliance participants will have to
do the same. Updated tax preparation software would be generally available four weeks after the
legislation is signed, although the exact time frame would be somewhat dependent on the extent
of the legislation.
Should the AMT patch be enacted in mid-to-late December:
•

Updated printed fonns would not be available to taxpayers until after the filing season
has started.
• The IRS' returns processing systems would not be ready to process tax returns with the
AMT or 11 credit forms until mid-to-Iate March. The IRS would have to delay receipt
of electronically filed returns, and hold in abeyance paper returns of not only AMT
filers, but also, as described above, many other taxpayers (e.g., those claiming the child
tax credit) who typically file early in anticipation of a refund. Thus, this could
substantially delay issuance of refunds.
• Because of the built-up backlog in processing returns, refunds on returns filed in March
and April could be delayed as well.
• Due to substantial delays in issuance of refunds over the nonnal schedule, the
Government could be required to pay interest if the delay exceeded the time required
under the law for issuing refunds.
• Delays in acceptance of electronic returns could adversely affect the IRS' successful
efforts to expand e-filing.
• There would be a substantial increase in telephone calls for assistance and written
correspondence from people who do not understand the rules, who cannot file their
returns electronically, who experience delays in receiving their refunds, or who get an
IRS error notice because they incorrectly computed their taxes.
• Potential for errors would increase dramatically, as some taxpayers would be confused
and would file incorrect returns or out-of-date fonus, resulting in notices to taxpayers
and further delays in processing their returns.
• There could be a substantial increase in the number of amended returns because
taxpayers would file early using fonns that were later updated, and then they would
have to file amended returns.

The magnitude of these consequences would increase significantly if legislation is enacted that is
broader or more complex than the AMT patch enacted for 2006, or is enacted after December 31,
2007, hut still applicable to 2007 tax returns.
Enclosed with this letter are responses prepared by the IRS to the specific questions you posed in
your letter.
Please be assured that the Treasury Department and the IRS will work as diligently as possible to
implement legislation enacted by Congress. Ifyau need additional information, please contact
me or Acting IRS Commissioner Linda Stiff at (202) 622-9511.

S76~L7
Henry M. PaulsoI4 Jr.

Enclosure

Questions from Congressman McCrery and Senator Grassley
Concerning the 2007 AMT Patch and
Its Effect on the Filing Season
1. On what date will the forms, instructions, and publications be sent to the
printers?
To meet the contractual deadline for the Form 1040 and 1040A tax packages~ the
IRS will release them to the printing vendors by November 7, 2007. All other tax
forms and instructions affecting these fonns must be finalized by November 16,
2007, to ensure that the 2008 filing season proceeds with minimal disruption.

2. If AMT relief is not extended, millions of additional taxpayers may be
subject to interest and penalties. Given how late we are in the year, would
there be an opportunity for the IRS, through a public service campaign to
inform taxpayers that they should send in estimated payments to cover the
tax increase and avoid penalties, and would there be value in such a
campaign? What would be the estimated cost ot such a campaign?
Given how late it is in the year, we do not believe that it is possible to produce a
public service campaign in time to affect taxpayer behavior. In addition, the
underlying message to taxpayers may be too complex to address in typical
advertising campaigns. Rather than a public service campaign, the IRS would use
the news media, the web, tax practitioners and other partners to alert taxpayers to
the need address estimated tax payments.

3. How many taxpayers may not be withholding enough to pay their taxes if
AMT relief is not extended?
If AMT relief is not extended, an estimated 2.8 million taxpayers may not have
sufficient estimated and withheld taxes to cover their 2007 income tax liability.

4. How many of these taxpayers do Dot have sufficient withhoJdings to meet safe
harbor requirements and, as such, could potentially be subject to penalties?
Of the 2.8 million taxpayers, an estimated 100,000 may not have sufficient
estimated and withheld taxes to meet safe-harbor requirements.

5. If taxpayers do not have sufficient withholdings to meet safe harbor
requirements, what interest and penalties could possibly be charged to them?
If AMT relief is not extended, those taxpayers who do not have sufficient
estimated and withheld taxes to meet safe-harbor requirements could be subject to
an estimated tax penalty.

6. How moch additional tax, on average, will be owed by taxpayers subject to
the AMT if AMT rellef is not extended?

Ifthe AMT reliefis not extended, it is estimated that the 2007 income tax liability
of affected taxpayers would increase by an average of approximately $2,000.
7. Bow would the IRS inform taxpayers of a change in the calculation of AMT
liability if an extension of the AMT patch is enacted after tbe tax forms have
been printed?

If Congress enacts AMT relief legislation after the tax forms have been printed,
the IRS will make the revised fonus and instructions available on irs.gov. The
printed copies of the revised tax products will be available within three weeks
after they are available on irs.gov. The IRS would use the news media, the web,
tax practitioners, and other partners to alert taxpayers to the change in the AMT
due to enactment ofthe AMT patch.
8. What additional costs would tbe IRS incur to notify taxpayers of the cbange,
including tbe printing of new forms?
If Congress enacts legislation to extend temporary relief to 2007~ there are 12
forms that will be affected, namely:
•
•
•
•
•
•
•
•
•
•
•
•

Fonn 6251 ~ Alternative Minimum Tax - Individuals
Fonn 2441 ~ Child and Dependent Care Expenses
Form 1116 - Foreign Tax Credit for Individuals
Form 5695 - Residential Energy Credits
Form 8396 - Mortgage Interest Credit
Form 8839 - Qualified Adoption Expenses
Form 8859 - District of Columbia First Time Homebuyer Credit
Form 8863 - Education Expenses
Fonn 8880 - Credit for Qualified Retirement Savings Contributions
Schedule R (Form 1040) - Credit for the Elderly or the Disabled
~chedule 2 (ponn 1040A) - Child and Dependent Care Expense for Fonn
1040A Filers
Schedule 3 (Fonn 1040A) - Credit for the Elderly or the Disabled for
Form 1040A Filers

The IRS will have to revise and reissue these forms and instructions, along with
tax publications that refer to the AMT. The IRS will have to renegotiate the
contracts with the printing vendors if the scheduled print dates are missed. The
additional costs will, at a minimum, be in the hundreds of thousands of dollars
depending on the new time frames established to print and distribute the revised
founs.

9. What additional costs would the IRS incur to reprogram their computer
systems? How long would that process take?
The IRS' information technology (IT) systems for processing the tax year 2007
returns have already been programmed to reflect the current law (i.e., not
including the AMI patch). Significant modifications to the manual and electronic
processing systems will be necessary if the AMT legislation is enacted. The IRS
requires at least 12-13 weeks to re-program, re-test, and implement the changes
upon enactment. At this time, the IRS is still assessing the additional. costs that
will be incurred for re-programming its IT systems.

10. What would continued delay (November 15, December 1, December 15,
December 22?) in passing AMT relief impact the ability of the IRS to process
returns filed during the season, especially during the early part of the filing
season? If so, bow many taxpayers could potentially be affected? How large
of an interest free loan to the government, in terms of total dollars assoeiated
with the delayed refunds of tbese filers, would tbis create?
The IRS' IT systems readied under current law (not including the AMT patch)
will begin proc~sing the fIrst day of the tax fil.i1;lg season - January 14, 2008.
The lRS' return processing systems would not be ready to process tax returns
with the AMT or 11 credit fonns until: (a) mid-February if AMTreliefis enacted
November 15, (b) late Febiuary if enacted December 1, (c) mid-March if enacted
December 15, and (d) mid-to-Iate March if enacted December 22.
Without enactment of AMT relief, an estimated 25 million taxpayers will be
subject to AMT in 2007 - 21 million more than were subject to the tax in 2006.
Although enactment of a patch later in the year may prevent 21 million additional
taxpayers from paying more tax, it could significantly delay processing of their
returns and payment of their refunds.
Moreover, the AMT patch has historically been accompanied by a special
ordering rule that applies to a number of popular tax credits - including the child
tax credit and the retirement savings contribution credit - and affects the
computation of those credits for millions of additional taxpayers who are not
subject to the AMT. If enactment of the special ordering rule for credits is
delayed beyond early November, as many as 25 million additional taxpayers
could face delays in processing of their retwns and payment of their refunds.
Based on historical filing patterns, we estimate that enactment of a patch in midto-late December could delay issuance of approximately $75 billion in refunds to
taxpayers who are likely to file their returns before March 31, 2008. Millions of
taxpayers filing returns after that date may also have their refunds delayed.

11. How would continued delay in passing AMT relief impact tbe ability of the
IRS to program its Electronic Fraud Detection System for the 2008 filing

season? Could the delay lead to more fraud going undetected? How would
continued delay (November 15, December 1, December 15, December 22)
impact IRS efforts to address the tax gap and implement the Secretary's
proposals in this regard?
The Electronic Fraud Detection System (EFDS) is one of the return processing
systems that must be reprogrammed to reflect an AMT patch. The IRS would
have to reject electronically filed returns and hold in abeyance paper returns that
contain the AMT or any of 11 tax credits the computation of which is connected
to the AMT. Because these returns would not be processed until the systems have
been re-programmed, re-tested and implement~ the delay would not result in
more fraud being undetected. Late passage of AMT relief, however, would
require diversion of management and technical resources to ensure the complex
and highly integrated work is Completed timely and accurately. At this time, we
are unable to determine whether the diversion of these resources would affect our
efforts to address the tax gap and implement the Administration's proposals.

12. If AMT relief is enacted late this year, and if taxpayers mistakenly pay too
much tax because they did not incorporate information advising them of
AMT relief, what mechanisms exist for the IRS to catch these mistakes and
refund the overpayment?
Once the IRS' IT systems have been reprogrammed, re-tested, and implemented
to reflect an AMT patch, these systems would automatically flag as an error any
taxpayer who pays too much tax because their return did not reflect the correct
patch. The IRS would notify these taxpayers about the error.

13. In what other ways could a delay in AMT relief affect taxpayers' abilities to
file their tax returns, receive their refunds, and comply with their
obligations?
The following are other consequences that will likely occur due to late passage of
the AMT patch.
•

•

Updated tax preparation software would not be generally available for four
weeks after signed legislation, although the exact timeftame would be
somewhat dependent on the extent of the legislation.
There would be an increase in telephone calls for assistance and written
correspondence from people who do not understand the rules, who cannot file
their returns electronically, who experience delays in receiving their refunds
or who get an IRS error notice because they incorrectly computed their taxes.
Potential for errors would increase dramatically, as some taxpayers would be
confused and would file incorrect returns, resulting in notices to taxpayers and
further delays in processing their returns.

•

There could be a substantial increase in the number of amended returns
because taxpayers would file early without the AMT and credit forms in order
to get a refund and then would have to file amended returns.

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

October 23, 2007
The Honorable Jim McCrery
Ranking Member
Committee on Ways and Means
U.S. House of Representatives
Washington, DC 20515-6348
Dear Mr. McCrery:
Thank you for your letter to me asking for infonnation about the impact on the 2008 income tax
return filing season if a one-year alternative minimum tax (AMT) "patch" is not enacted until
later this year.
To avoid confusion and delays for taxpayers, it is critical that an AMT patch be enacted by early
November. If Congress fails to act, we estimate that 25 million taxpayers will be subject to
AMT in 2007 - 21 million more than were subject to the tax in 2006. We estimate that these 25
million taxpayers will pay on average an additional $2,000 in Federal income tax. For these
taxpayers, failure to enact a patch for 2007 would result in a substantial unexpected tax increase.
Enactment of a patch beyond early November could also significantly delay processing of these
taxpayers' returns and payment of any refunds.
Moreover, the AMT patch has historically been accompanied by a special ordering rule that
applies to a number of popular tax credits - including the child tax credit and the retirement
savings contribution credit - and affects the computation ofthose credits for millions of
additional taxpayers who are not subject to the AMT. If enactment of the special ordering rule
for credits is delayed beyond early November, as many as 25 million additional taxpayers could
face delays in processing of their returns and payment of their refunds.
Based on historical filing patterns, we estimate that enactment of a patch in mid-to-Iate
December could delay issuance of approximately $75 billion in refunds to taxpayers who are
likely to file their returns before March 31, 2008. Millions of taxpayers filing returns after that
date may also have their refunds delayed.
From a tax administration perspective, the Internal Revenue Service (IRS) has advised me that
late enactment ofthe AMT patch (mid-November or later) will create significant challenges and
poses an extremely high risk to the 2008 filing season. It will also create significant compliance
challenges and will result in confusion for taxpayers, tax return preparers, and tax software
developers.
By this time each year, income tax fonns and instructions have been revised to reflect current
law. Consistent with historical practice, they do not reflect pending legislation. There are 12

forms (the AMT fDIm and 11 credit forms) that will be affected if and when Congress enacts the
AMT patch. These forms are attachments to either the Form 1040 or Form 1040A. The IRS will
release the Form 1040 and 1040A tax packages to the printing vendors by November 7,2007.
All additional forms and instructions must be finalized by November 16, 2007, to ensure that the
2008 filing season proceeds with minimal disruption. From the date an AMT patch is enacted,
the IRS would have updated tax forms available on irs.gov in approximately three weeks.
Printed forms would be sent to libraries, post offices and other distribution sites two to three
weeks later.
Furthermore, the IRS' return processing systems have been programmed to reflect current law.
The IRS' information technology systems readied under current law (not including the AMT
patch) will begin processing returns the first day of the tax filing season - January 14,2008.
From the date an AMT patch is enacted, the IRS estimates it will take 12-13 weeks to reprogram, test, and integrate the changes into the complex computer programs and systems that
process tax returns. All software developers and the Free File Alliance participants will have to
do the same. Updated tax preparation software would be generally available four weeks after the
legislation is signed, although the exact time frame would be somewhat dependent on the extent
of the legislation.
Should the AMT patch be enacted in mid-to-Iate December:
•

Updated printed forms would not be available to taxpayers until after the filing season
has started.
• The IRS' returns processing systems would not be ready to process tax returns with the
AMT or 11 credit forms until mid-to-Iate March. The IRS would have to delay receipt
of electronically filed returns, and hold in abeyance paper returns of not only AMT
filers, but also, as described above, many other taxpayers (e.g., those claiming the child
tax credit) who typically file early in anticipation of a refund. Thus, this could
substantially delay issuance of refunds.
• Because of the built-up backlog in processing retwns, refunds on returns filed in March
and April could be delayed as well.
• Due to substantial delays in issuance of refunds over the normal schedule, the
Government could be required to pay interest if the delay exceeded the time required
under the law for issuing refunds.
• Delays in acceptance of electronic returns could adversely affect the IRS' successful
efforts to expand e-filing.
• There would be a substantial increase in telephone calls for assistance and written
correspondence from people who do not understand the rules, who cannot file their
returns electronicaliy, who experience delays in receiving their refunds, or who get an
IRS error notice because they incorrectly computed their taxes.
• Potential for errors would increase dramatically, as some taxpayers would be confused
and would file incorrect returns or out-of-date fonns, resulting in notices to taxpayers
and further delays in processing their returns.
• There could be a substantial increase in the number of amended returns because
taxpayers would file early using forms that were later updated, and then they would
have to file amended returns.

The magnitude of these consequences would increase significantly if legislation is enacted that is
broader or more complex than the AMT patch enacted for 2006, or is enacted after December 31,
2007, but still applicable to 2007 tax returns.
Enclosed with this letter are responses prepared by the IRS to the specific questions you posed in
your letter.
Please be assured that the Treasury Department and the IRS will work as diligently as possible to
implement legislation enacted by Congress. If you need additional information, please contact
me or Acting IRS Commissioner Linda Stiff at (202) 622-9511.

S:;&~4
Henry M. Paulson, Jr.

Enclosure

Questions from Congressman McCrery and Senator Grassley
Concerning the 2007 AMT Patch and
Its Effect on the Filing Season
1. On what date will the forms, instructions, and publications be sent to the

printers?
To meet the contractual deadline for the Fonn 1040 and 1040A tax packages, the
IRS will release them to the printing vendors by November 7, 2007. All other tax
forms and instructions affecting these forms f!1ust be finalized by November 16,
2007, to ensure that the 2008 filing season proceeds with minimal disruption.

2. If AMT relief is not extended, millions of additional taxpayers may be
subject to interest and penalties. Given how late we are in the year, would
there be an opportunity for the IRS, through a public service campaign to
inform taxpayers that they should send in estimated payments to cover the
tax incre~se and avoid penalties, and would there be value in such a
campaign? What would be the estimated cost of such a campaign?
Given how late it is in the year, we do not believe that it is possible to produce a
public service campaign in time to affect taxpayer behavior. In addition, the
underlying message to taxpayers may be too complex to address in typical
advertising campaigns. Rather than a public service campaign, the IRS would use
the news media, the web, tax practitioners and other partners to alert taxpayers to
the need to address estimated tax payments.

3. How many taxpayers may not be withholding enough to pay their taxes if
AMT relief is not extended?
If AMT reHef is not extended, an estimated 2 8 million taxpayers may not have
sufficient estimated and withheld taxes to cover their 2007 income tax liability

4. How many of these taxpayers do not have sufficient withholdings to meet safe
harbor requirements and, as such, could potentially be subject to penalties?
Of the 2 8 million taxpayers, an estimated 100,000 may not have sufficient
estimated and withheld taxes to meet safe-harbor requirements.

5. If taxpayers do not have sufficient withholdings to meet safe harbor
requirements, what interest and penalties could possibly be charged to them?
If AMT relief is not extended, those taxpayers who do not have sufficient
estil11~ted and withheld taxes to meet safe-harbor requirements could be subject to
an estImated tax penalty

6. How much additional tax, on average, will be owed by taxpayers subject to
the AMT if AMT relief is not extended?
If the AMT relief is not extended, it is estimated that the 2007 income tax liability
of affected taxpayers would increase by an average of approximately $2,000.
7. How would the IRS inform taxpayers of a change in the calculation of AMT
liability if an extension of the AMT patch is enacted after the tax forms have
been printed?
If Congress enacts AMT relief legislation after the tax forms have been printed,
the IRS will make the revised forms and instructions available on irs.gov. The
printed copies of the revised tax products will be available within three weeks
after they are available on irs,gov. The IRS would use the news media, the web,
tax practitioners, and other partners to alert taxpayers to the change in the AMT
due to enactment of the AMT patch.
8. What additional costs would the IRS incur to notify taxpayers of the change,
including the printing of new forms?
If Congress enacts legislation to extend temporary relief to 2007, there are 12
forms that will be affected, namely'
•
•
•
•
•
•
•
•
•
•
•
•

Form 6251 - Alternative Minimum Tax - Individuals
Form 2441 - Child and Dependent Care Expenses
Form 1116 - Foreign Tax Credit for Individuals
Form 5695 - Residential Energy Credits
Form 8396 - Mortgage Interest Credit
Form 8839 - Qualified Adoption Expenses
Form 8859 - District of Columbia First Time Homebuyer Credit
Form 8863 - Education Expenses
Form 8880 - Credit for Qualified Retirement Savings Contributions
Schedule R (Form 1040) - Credit for the Elderly or the Disabled
Schedule 2 (Form 1040A) - Child and Dependent Care Expense for Fotnl
1040A Filers
Schedule 3 (Form 1040A) - Credit for the Elderly or the Disabled for
Fonn 1040A Filers

The IRS will have to revise and reissue these forms and instructions, along with
tax publications that refer to the AMT. The IRS will have to renegotiate the
contracts with the printing vendors if the scheduled print dates arc missed. The
additional costs will, at a minimum, be in the hundreds of thousands of dollars
depending 011 the new time frames established to print and distribute the revised
f0D11S

9. What additional costs would the IRS incur to reprogram their computer
systems? How long would that process take?
The IRS' information technology (IT) systems for processing the tax year 2007
returns have already been programmed to reflect the current law (i.e., not
including the AMT patch). Significant modifications to the manual and electronic
processing systems will be necessary if the AMT legislation is enacted. The IRS
requires at least 12-13 weeks to re-program, re-test, and implement the changes
upon enactment. At this time, the IRS is still assessing the additional costs that
will be incurred for re-programming its IT systems.

10. What would continued delay (November 15, December 1, December 15,
December 22?) in passing AMT relief impact the ability of the IRS to process
returns filed during the season, especially during the early part of the filing
season? If so, how many taxpayers could potentially be affected? How large
of an interest free loan to the government, in terms of total dollars associated
with tbe delayed refunds of these flIers, would this create?
The IRS' IT systems readied under current law (not including the AMT patch)
will begin processing the first day of the tax filing season - January 14,2008.
The IRS' return processing systems would not be ready to process tax returns
with the AMT or 11 credit forms until: (a) mid-February if AMT relief is enacted
November 15, (b) late February if enacted December 1, (c) mid-March if enacted
December 15, and (d) mid-to-Iate March if enacted December 22.
Without enactment of AMT relief, an estimated 25 million taxpayers will be
subject to AMT in 2007 - 21 million more than were subject to the tax in 2006.
Although enactment of a patch later in the year may prevent 21 million additional
taxpayers from paying more tax, it could significantly delay processing of their
retunlS and payment of their refunds.
Moreover, the AMT patch has historically been accompanied by a special
ordering rule that applies to a number of popular tax credits - including the child
tax credit and the retirement savings contribution credit - and affects the
computation of those credits for millions of additional taxpayers who are not
subject to the AMT. If enactment of the special ordering rule for credits is
delayed beyond early November, as many as 25 million additional taxpayers
could face delays in processing of their returns and payment of their refunds
Based on historical filing patterns, we estimate that enactment of a patch in midto-late December could delay issuance of approximately $75 billion in refunds to
taxpayers who are likely to file their returns before March 31, 2008 Millions of
taxpayers filing returns after that date may also have their refunds delayed.

11. How would continued delay in passing AMT relief impact the ability of the
IRS to program its Electronic Fraud Detection System for the 2008 filing

season? Could the delay lead to more fraud going undetected? How would
continued delay (November 15, December 1, December 15, December 22)
impact IRS efforts to address the tax gap and implement the Secretary's
proposals in this regard?
The Electronic Fraud Detection System (EFDS) is one ofthe return processing
systems that must be reprogrammed to reflect an AMT patch. The IRS would
have to reject electronically filed returns and hold in abeyance paper returns that
contain the AMT or any of 11 tax credits the computation of which is connected
to the AMT Because these returns would not be processed until the systems have
been re-programmed, re-tested and implemented, the delay would not result in
more fraud being undetected. Late passage of AMT relief, however, would
require diversion of management and technical resources to ensure the complex
and highly integrated work is completed timely and accurately. At this time, we
are unable to determine whether the diversion of these resources would affect our
efforts to address the tax gap and implement the Administration's proposals.

•

Updated tax preparation software would not be generally available for four
weeks after signed legislation, although the exact time frame would be
somewhat dependent on the extent of the legislation.
There would be an increase in telephone calls for assistance and written
correspondence from people who do not understand the rules, who cannot file
their returns ciectronically, who experience delays in receiving their refunds
or who get an IRS error notice because they incorrectly computed their taxes.
Potential for errors would increase dramatically, as some taxpayers would be
confused and would file incorrect returns, resulting in notices to taxpayers and
further delays in processing their retUl11S

•

There could be a substantial increase in the number of amended returns
because taxpayers would file early without the AMT and credit fonns in order
to get a refund and then would have to file amended returns.

DEPARTMENT OF THE TREASURY
WASHINGTON, D.C.
SE.CRETARY OFTHE TREASURY

October 23,2007

The Honorable Thomas M. Reynolds
U.S. House of Representatives
Washington, DC 20515
Dear Mr. Reynolds:
Thank you for your letters to me and Linda Stiff, Acting Commissioner of Intemal Revenue,
asking for infonnation about the impact on the 2008 income tax return filing season if a one-year
alternative minimum tax (AMT) "patch" is not enacted untillater this year.
To avoid confusion and delays for taxpayers, it is critical that an AMT patch be enacted by early
November. If Congress fails to act, we estimate that 25 million taxpayers will be subject to
AMT in 2007 - 21 million more than were subject to the tax in 2006. We estimate that these 25
million taxpayers will pay on average an additional $2,000 in Federal income tax. For these
taxpayers, failure to enact a patch for 2007 would result in a substantial unexpected tax increase.
Enactment of a patch beyond early November could also significantly delay processing of these
taxpayers' returns and payment of any refunds.
Moreover, the AMT patch has historically been accompanied by a special ordering rule that
applies to a number of popular tax credits - including the child tax credit and the retirement
savings contribution credit - and affects the computation of those credits for millions of
additional taxpayers who are not subject to the AMT. If enactment of the special ordering rule
for credits is delayed beyond early November, as many as 25 million additional taxpayers could
face delays in processing of their returns and payment of their refunds.
Based on historical filing patterns, we estimate that enactment ofa patch in mid-to-Iate
December could delay issuance of approximately $75 billion in refunds to taxpayers who are
likely to file their returns before March 31, 2008. Millions of taxpayers filing returns after that
date may also have their refunds delayed.
From a tax administration perspective, the Internal Revenue Service (IRS) has advised me that
late enactment of the AMI patch (mid-November or later) will create significant challenges and
poses an extremely high risk to the 2008 filing season. It will also create significant compliance
challenges and will result in confusion for taxpayers, tax return preparers, and tax software
developers.
By this time each year, income tax forms and instructions have been revised to reflect current
law. Consistent with historical practice, they do not reflect pending legislation. There are 12
forms (the AMT form and 11 credit fonns) that will be affected if and when Congress enacts the
AMT patch. These forms are attachments to either the Form 1040 or Fonn 1040A. The IRS will
release the Form 1040 and l040A tax packages to the printing vendors by November 7, 2007.

All additional forms and instructions must be finalized by November 16, 2007, to ensure that the
2008 filing season proceeds with minimal disruption. From the date an AMT patch is enacted,
the IRS would have updated tax fOIIDs available on irs.gov in approximately three weeks.
Printed forms would be sent to libraries, post offices and other distribution sites two to three
weeks later.
Furthermore, the IRS' return processing systems have been programmed to reflect current law.
The IRS' information technology systems readied under current law (not including the AMT
patch) will begin processing returns the first day of the tax filing season - January 14,2008.
From the date an AMT patch is enacted, the IRS estimates it will take 12-13 weeks to reprogram, test, and integrate the changes into the complex computer programs and systems that
process tax returns. All software developers and the Free File Alliance participants will have to
do the same. Updated tax preparation software would be generally available four weeks after the
legislation is signed, although the exact time frame would be somewhat dependent on the extent
of the legislation.
Should the AMT patch be enacted in mid-to-Iate December:
•
•

•
•

•

Updated printed forms would not be available to taxpayers until after the filing season
has started.
The IRS' returns processing systems would riot be ready to process tax returns with the
AMT or 11 credit forms until mid-to-Iate March. The IRS would have to delay receipt
of electronically filed returns, and hold in abeyance paper returns of not only AMT
filers, but also, as described above, many other taxpayers (e. g., those claiming the child
tax credit) who typically file early in anticipation of a refund. Thus, this could
substantially delay issuance of refunds.
Because of the built-up backlog in processing returns, refunds on returns filed in March
and April could be delayed as well.
Due to substantial delays in issuance of refunds over the normal schedule, the
Govenunent could be required to pay interest if the delay exceeded the time required
under the law for issuing refunds.
Delays in acceptance of electronic retums could adversely affect the IRS' successful
efforts to expand e-filing.
There would be a substantial increase in telephone calls for assistance and written
correspondence from people who do not understand the rules, who cannot file their
returns electronically, who experience delays in receiving their refunds, or who get an
IRS error notice because they incorrectly computed their taxes.
Potential for errors would increase dramatically, as some taxpayers would be confused
and would file incorrect returns or out-of-date forms, resulting in notices to taxpayers
and further delays in processing their returns.
There could be a substantial increase in the number of amended returns because
taxpayers would file early using forms that were later updated, and then they would
have to file amended returns.

The magnitude of these consequences would increase significantly if legislation is enacted that is
broader or more complex than the AMT patch enacted for 2006, or is enacted after December 31,
2007, but still applicable to 2007 tax returns.
Enclosed with this letter are responses prepared by the IRS to the specific questions you posed in
your letter.
Please be assured that the Treasury Department and the IRS will work as diligently as possible to
implement legislation enacted by Congress. If you need additional infonnation, please contact
me or Acting IRS Commissioner Linda Stiff at (202) 622-9511.
Sincerely,

/G~~

Henry M. Paulson, Jr.

Enclosure

Questions from Congressman Tom Reynolds
Concerning the 2007 AMT Patch and
Its Effect on the Filing Season

1. Do the IRS's draft forms and instructions assume that Congress will extend
the temporary AMT relief to 2007, or do they reflect the current law (i.e.,
AMT exemption levels have now reverted to their pre-2001Ievels)?
Consistent with the IRS' historical practice, the draft 2007 Forms 1040 and
1040A tax packages and other tax forms attached to the Forms 1040 and 1040A
for the upcoming filing season reflect current law, not pending legislation.
2. If the draft forms reflect current law, what plans does the IRS have in place
to revise those forms, were Congress to enact legislation to extend temporary
relief to 2007?
If Congress enacts legislation to extend temporary relief to 2007, there are 12
forms that will be affected, namely:
• Form 6251- Alternative Minimum Tax - Individuals
• Form 2441- Child and Dependent Care Expenses
• Form 1116 - Foreign Tax Credit for Individuals
• Form 5695 - Residential Energy Credits
• Form 8396 - Mortgage Interest Credit
• Form 8839 - Qualified Adoption Expenses
• Form 8859 - District of Columbia First Time Homebuyer Credit
• Form 8863 - Education Expenses
• Form 8880 - Credit for Qualified Retirement Savings Contributions
• Schedule R (Form 1040) - Credit for the Elderly or the Disabled
• Schedule 2 (Form 1040A) - Child and Dependent Care Expense for Form
1040A Filers
• Schedule 3 (Form 1040A) - Credit for the Elderly or the Disabled for
Form l040A Filers
The IRS will have to revise and reissue these forms and instructions, along
with tax pUblications that refer to the AMT.
3. By what date does the IRS anticipate distributing its individual tax form
packages to taxpayers and preparers so that taxpayers can begin filing their
2007 taxes in January 2008?
Individual taxpayers who file paper returns will begin receiving tax packages that
reflect the current law within a few days after December 25,2007. Other tax
products will be available to the public beginning the first week in January.

4. In order to meet their contractual deadline with its printing vendors, by what
date does the IRS need to provide the contents of the final tax forms package
to its printing vendors?
To meet the contractual deadline for the Form 1040 and 1040A tax packages, the
IRS will release them to the printing vendors by November 7, 2007. All other tax
forms and instructions affecting these forms must be finalized by November 16,
2007, to ensure that the 2008 filing season proceeds with minimal disruption.

5. In order to meet that contractual deadline with its printing vendors, how
much lead time does the IRS need to compose, arrange, and make final
revisions to its form?
If Congress enacts legislation in November or later, the IRS will make revised
forms and instructions available on its website - irs.gov - within three weeks after
the date of enactment. The printed copies of the revised tax products will be
available within three weeks after they are available on irs.gov. Form 1040 and
1040A tax packages will not be revised.

6. As a practical matter, by what date must the IRs have finalized all of its
forms and instructions to ensure that the 2007 tax filing season proceeds with
minimal disruption?
The individual tax packages will be released to the printing vendors by November
7, 2007. All other forms and instructions affecting these tax forms must be
finalized by November 16, 2007, to ensure that the 2008 filing season proceeds
with minimal disruption.

7. If Congress has not extended the temporary AMT relief to 2007 by that date,
but then does so after the forms have gone to print, what plans does the IRS
have in place to issue supplemental instructions or materials explaining the
impact of those subsequent changes? What cost would be associated with
producing and distributing these supplemental instructions or materials?
If Congress does not extend the temporary AMT relief to 2007 by the time the
IRS has gone to print with the 2007 tax fonns and instructions, the IRS will not
revise or reissue the Forms 1040 and 1040A instructions. The IRS will revise and
reissue Form 6251, the 11 credit fonns (listed in the response to Question 2
above), and any other publications that are affected by AMT legislation. The IRS
will make the revised forms and instructions available on irs.gov and distribute
printed copies through the nonnal distribution channels. Software developers and
Free File Alliance participants will also have to reprogram and re-test their
software.
The IRS will have to renegotiate the contracts with the printing vendors if the
scheduled print dates are missed The additional costs will, at a minimum, be in

the hundreds of thousands of dollars depending on the new time frames
established to print and distribute the revised forms.

8. Under the scenario described above, is there any risk of an increased rate of
taxpayer errors in determining whether particular taxpayers are liable for
AMT or in calculating their AMT liability?
A substantial risk of increased taxpayer error exists because many taxpayers will
be confused and file their tax returns and incorrectly compute AMT, because they
are not aware of the tax law changes. Accordingly, the IRS will have to refigure
their taxes and issue them an error notice. This also could delay issuing any
applicable refunds.

9. If so, could that risk include increased numbers of taxpayers paying AMT
than were, in fact, actually liable for it in 2007?
There is a significant risk that increased numbers of taxpayers will file their
returns paying AMT for which they are not liable in tax year 2007. The IRS will
have to correct returns of taxpayers that erroneously calculated AMT.

10. What impact would Congress's enactment of an extension of AMT relief very
late in the year have on the IRS's manual and electronic processing
capabilities? Would additional training be required of IRS employees to
educate them about that late change in law? If so, what costs would be
associated with this additional training?
The IRS' information technology (IT) systems for processing the tax year 2007
returns have already been programmed to reflect the current law. Those systems,
readied under current law (not including an extension of temporary AMT relief),
will begin processing returns on January 14,2008. Significant modifications to
the manual and electronic processing systems will be necessary if the AMT
legislation is enacted. The IRS requires at least 12-13 weeks to re-program, retest, and implement the changes upon enactment.
Additional training will be required of IRS employees and volunteer income tax
assistors (who prepare returns for taxpayers free of charge through, for example,
the VITA program) to educate them on the tax law changes to the AMT. Revised
.operating procedures for processing returns and assisting taxpayers will be
necessary. Additional resources will be needed to provide for the updated
training and operating procedures.

11. Would the late enactment of such legislation cause you to anticipate an
increase in (a) taxpayers' demand for telephone assistance, (b) delayed
refunds, or (c) amended return filings?

The likely late enactment of temporary AMT relief (late December) will result in
a holding of millions of paper tax returns of not only AMT filers, but also lowincome taxpayers (e.g., those with Child Tax Credit) who are not subject to the
AMT but who typically file early. The IRS will also have to reject e-filed returns
that contain the AMT or any ofthe 11 credit forms until the IRS implements the
systems changes for the AMT. Refunds will be delayed for taxpayers whose
returns cannot be processed timely. This will result in a substantial increase in
telephone calls for assistance and written correspondence due to lack of timely tax
return processing. The number of amended returns will increase because many
taxpayers will file early without the AMT or credit forms in order to get a refund
and will then need to file amended returns).

12. Are you aware of any impact that late enactment of such legislation could
have on developers of tax preparation software? If so, could any of those
potential impacts cause additional disruptions to the tax filing season?
All software developers and the Free File Alliance participants will have to reprogram and re-test their software. In general, these companies begin
programming as soon as the .IRS can provide new programming specifications.
Taxpayers who use tax software or rely on tax professionals who use tax software
to prepare their returns will either not be able to file their returns until the
software changes are available or risk filing an incorrect return because the
software did not reflect the legislation.

HP~673:

Treasury Releases Income Mobility Study

Page 1 of 1

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November 13, 2007
HP-673
Treasury Releases Income Mobility Study
Washington DC--The Treasury Department today released a study on income
mobility of U.S. taxpayers from 1996 through 2005.
The study showed that, just as in the previous 1O-year period, a majority of
American taxpayers move from one income group to another over time. The study
also recognizes that the dynamism of the U.S. economy significantly contributes to
income mobility.
The key findings of the study included:
•

•
•

•
•
•
•
•

Income mobility of individuals was considerable in the U.S. economy during
the 1996 through 2005 period with roughly half of taxpayers who began in
the bottom quintile moving up to a higher income group within 10 years.
About 55 percent of taxpayers moved to a different income quintile within 10
years.
Among those with the very highest incomes in 1996--the top 1/100 of one
percent--only 25 percent remained in the group in 2005. Moreover, the
median real income of these taxpayers declined over the study period.
The degree of mobility among income groups is unchanged from the prior
decade (1987 through 1996).
Economic growth resulted in rising incomes for most taxpayers over the
study period:
Median real incomes of all taxpayers increased by 24 percent after
adjusting for inflation;
Real incomes of two-thirds of all taxpayers increased over this period; and
Median incomes of those initially in the lower income groups increased
more than the median incomes of those initially in the high income groups.

REPORTS

http://www.treas.go v/prehttP:leases/hp673.htm

12/3/2007

DEP,'\RT:tll~~T 01')

'rI.t:

TRE,\.SlJR'"

INCOME MOBILITY IN THE

U.S. FROM 1996 TO 2005

REpORT OF THE

DEPARTMENT OF THE TREASURY

NOVEMBER

13, 2007

SUMMARY
This study examines income mobility of individuals over the past decade (1996 through 2005)
using information reported on individual income tax returns.
While many studies have documented the long-term trend of increasing income inequality in the
U.S. economy, there has been less focus on the dynamism of the U.S. economy and the
opportunity for upward mobility. Comparisons of snapshots of the income distribution at points
in time miss this important dimension and can sometimes be misleading.
Economic historian Joseph Schumpeter compared the income distribution to a hotel where some
rooms are luxurious, but others are small and shabby. Important aspects of fairness are that those
in the small rooms have an opportunity to move to a better one, and that the luxurious rooms are
not always occupied by the same people. The frequency with which people move between
rooms is a crucial aspect of the trends in income inequality in the United States.
The key findings of this study include:
•

•
•

rhere was considerable income mobility of individuals in the U.S. economy during the 1996
through 2005 period with roughly half of taxpayers who began in the bottom quintile moving
up to a higher income group within 10 years.
About 55 percent of taxpayers moved to a different income quintile within 10 years.
Among those with the very highest incomes in 1996 - the top 11100 of 1 percent - only 25
percent remained in this group in 2005. Moreover, the median real income of these
taxpayers declined over this period.
The degree of mobility among income groups is unchanged from the prior decade (1987
through 1996).
Economic growth resulted in rising incomes for most taxpayers over the period from 1996 to
2005. Median incomes of all taxpayers increased by 24 percent after adjusting for inflation.
The real incomes of two-thirds of all taxpayers increased over this period. In addition, the
median incomes of those initially in the lower income groups increased more than the median
incomes of those initially in the higher income groups.

The degree of mobility in the overall population and movement out of the bottom quintile in this
study are similar to the findings of prior research on income mobility.

INCOME MOBILITY IN THE U.S. FROM 1996 TO 2005
Many studies have documented the long-term trend of increasing income inequality in the U.S.
economy. U.S. Census data, for example, show that the share of household income of the top 20
percent of households increased from 44.1 percent in 1980 to 50.4 percent by 2005, with the
share of the bottom 20 percent decreasing from 4.2 percent to 3.4 percent.' Similarly, Piketty
and Saez (1998, 2007) find that the share of income of the top 10 percent of taxpayers increased
from 31.7 percent in 1960 to 44.3 percent in 2005, while the share of the top 1 percent increased
from 8.4 percent to 17.4 percent. Economists have suggested a variety of factors as possible
explanations for these trends, including increased returns to skill and education, greater
globalization of labor markets, the decline in unionization, increased immigration, and changes
in the supply of highly educated workers.
To get a broader perspective on these trends, one must look at the opportunity for upward
mobility in the United States, which has sometimes been seen as a defining characteristic of the
nation's economy.2 Comparisons of snapshots of the income distribution at points in time miss
this important dimension and can sometimes be misleading. Research shows that the distribution
of lifetime incomes is more equal than a one-time snapshot implies because a household's
relative position in the income distribution often changes over time. Concerns about income
inequality at a particular point in time may be assuaged if low incomes are temporary and
income mobility provides individuals and families with the opportunity to improve their
economic situation over time. In addition, different policy prescriptions might be appropriate for
assisting those who are persistently low-income as compared to those whose incomes are only
temporarily low.
Economic historian Joseph Schumpeter compared the income distribution to a hotel where some
rooms are luxurious, but others are small and shabby. The rooms are always occupied, but often
by different people. 3 Important aspects of fairness are that those in the small rooms to have an
opportunity to move to a better one, and that the luxurious rooms are not always occupied by the
same people. Mobility means that over time people move between rooms. The frequency with
which people move between rooms is a crucial aspect of the changing trends in income
inequality in the United States.
Another aspect of discussions of income distribution is the extent to which all income rises over
time with an expanding economy. Some have likened this process to an escalator where the
opportunity for mobility means that no matter which step a person starts on, he or she can move
up. With an escalator, while one can get ahead faster by walking up the steps, much of the

U.S. Census Bureau (2006).
Litan and Slemrod (\999) state that "A defining ethic of America has long been that, no matter which step you first
land on or how great the distance to the higher steps, you have a good shot at moving up if, as President Clinton has
frequently said, 'you work hard and play by the rules.'"
3 See Sawhill and Condon (1992) for more discussion of the hotel analogy.
I

movement is due to the escalator itself. That is, the real incomes of households can increase
over time with the growth of the overall economy.
Using three different measures of income mobility that track changes in the incomes of a large
sample of individual taxpayers over time, this study presents new evidence on income mobility
over the decade from 1996 through 2005. Key findings include:
•

There is considerable income mobility of individuals in the U.S. economy over the 1996
through 2005 period. More than half of taxpayers (56 percent by one measure and 55 percent
by another measure) moved to a different income quintile between 1996 and 2005. About
half (58 percent by one measure and 45 percent by another measure) of those in the bottom
income quintile in 1996 moved to a higher income group by 2005.

•

Median incomes of taxpayers in the sample increased by 24 percent after adjusting for
inflation. The real incomes of two-thirds of all taxpayers increased over this period. Further,
the median incomes of those initially in the lowest income groups increased more in
percentage terms than the median incomes of those in the higher income groups. The median
inflation-adjusted incomes of the taxpayers who were in the very highest income groups in
1996 declined by 2005.

•

The composition of the very top income groups changes dramatically over time. Less than
half (40 percent or 43 percent depending on the measure) of those in the top 1 percent in
1996 were still in the top 1 percent in 2005. Only about 25 percent of the individuals in the
top 11l00th percent in 1996 remained in the top 1I100th percent in 2005.

•

The degree of relative income mobility among income groups over the 1996 to 2005 period
is very similar to that over the prior decade (1987 to 1996). To the extent that increasing
income inequality widened income gaps, this was offset by increased absolute income
mobility so that relative income mobility has neither increased nor decreased over the past 20
years.

Prior Studies of Income Mobility
Previous research on income mobility over the past several decades has generally found that
about half of those in the bottom quintile move to a higher quintile and also that more than half
of households move to a different income quintile within about 10 years. 5 Sawhill and Condon
(1992), for example, used the Panel Study ofIncome Dynamics (PSID) to examine the mobility
of individuals between the ages of25 and 54 for the periods 1967-1976 and 1977-1986. Using a
measure of relative mobility that compares households within their sample, they found that over
60 percent of individuals were in a different family income quintile a decade later. Among
individuals initially in the lowest income quintile, 44 percent moved to a higher quintile between
1967 and 1976 and 47 percent moved to a higher quintile between 1977 and 1986. Downward
4 Litan and Slemrod (1999) use the escalator analogy, while McMurrer and Sawhill (l996b) use a similar analogy of
moving up and down the economic ladder. In climbing a ladder, however, all the progress is due to individual
effort. Holtz-Eakin, et aI., (2000) connect mobility with Horatio Alger success stories.
5 McMurrer and Sawhill (I 996a) summarize a number of the early mobility studies.

mobility from the top quintile was experienced by 47 percent and 50 percent in the two periods,
respectively. A later study by McMurrer and Sawhill (1 996b ) concluded that mobility rates had
remained unchanged during this 20-year period.
Two 1992 Treasury studies (1992a and 1992b) examined mobility during the period from 1979
to 1988 using a panel that followed 14,351 income tax returns over the period and controlled for
changes in the definition of income due to changes in the tax law. 6 The Treasury data showed
that 86 percent of taxpayers in the lowest income quintile in 1979 had moved to a higher quintile
by 1988 and 15 percent of them had moved all the way to the top quintile. Among those who
were in the top quintile in 1979,65 percent remained in the top quintile in 1988, and only 1
percent had dropped to the lowest quintile. The high degree of mobility reported by this study
resulted from several features of the analysis, most importantly the inclusion of taxpayers under
age 25, the lack of data on Social Security benefits for older taxpayers, and comparison to the
full taxpayer population. When the sample was limited to taxpayers age 25 to 64 and compared
to taxpayers in the panel, rather than to all taxpayers aged 25 to 64, the Treasury study showed
that 50 percent of the lowest income quintile had moved to a higher quintile after 10 years. 7
Thus, the results were very similar to Sawhill and Condon when a comparable sample and
mobility measure were used.
Bradbury and Katz (2002a, 2002b) used PSID data to examine relative income mobility in the
1970s, 1980s and 1990s. Their results also show that about half of households in the bottom
quintile moved out after 10 years (51 percent for 1969-1979, 50 percent for 1979-1989, 47
percent for 1988-1998). They argue that relative mobility declined slightly in the 1990s as 40
percent of households remained in the same income quintile as compared to 36 percent in the
1970s and 37 percent in the 1980s.8 They also show that the income gaps widened over this
period, which would make mobility across quintiles more difficult, and may account for the
small decline in relative mobility.9

The 1992 Treasury studies limited the sample to non-dependent taxpayers who had filed in all 10 years from 1979
to 1988. Income was defined as real constant law adjusted gross income (AGI). Real constant law income includes
capital gains, but excludes Social Security benefits because they were not taxable until 1984 and thus no data were
available for earlier years. For a more detailed description of constant law AGI, see U.S. Treasury (1992a). Income
percentiles for each year were computed using the IRS Statistics of Income cross-section samples, which represent
the full population of income tax returns filed each year.
7 See U.S. Treasury (1992b). Since Social Security benefits were not taxable prior to 1984, the Treasury income
measure excluded Social Security benefits. Dropping the elderly from the sample eliminated spurious downward
mobility when households stopped earning wages but were not credited with Social Security benefits. Similarly,
dropping those under age 25 eliminated the effects of dramatic income increases when students leave school and get
their first full-time jobs.
8 Gittleman and Joyce (1999) also conclude that income mobility rates differed little between the 1970s and 1980s.
Comparable data for the 1990s would not yet have been available for their 1999 study.
9 It is unclear whether absolute mobility increased or decreased in these data as this study does not examine absolute
income mobility. Table I in Bradbury and Katz (2002b) shows that average real incomes offamilies in the lowest
quintile in 1988 increased from 1988 to 1998 after declining in the previous two decades, which may suggest some
increase in absolute mobility.
6

New Results on Income Mobility -1996-2005
This study examines income mobility over the period from 1996 through 2005 using data from a
large sample of individual income tax returns for these two years. The panel uses a large sample
of approximately 96,700 tax returns with 169,300 primary and secondary (i.e., spouses on joint
returns) taxpayers who filed for tax years 1996 and 2005. 10 The sample represents 117.1 million
taxpayers on 76.9 million income tax returns. While the income data are as reported on tax
returns, the analysis includes both primary and secondary taxpayers who are each followed
separately. Thus, if a married couple filed a joint tax return in 1996, divorced, and then filed
separate tax returns in 2005, each person is followed separately, even if one or both of them
appear as a secondary taxpayer on another tax return. To avoid counting transitions from school
to work as mobility, the analysis follows the common practice in previous research of excluding
taxpayers who were under the age of 25 in 1996. II Income is defined as cash income as reported
on individual income tax returns and supplemented by data on Social Security benefits reported
on information returns filed with the Internal Revenue Service (IRS).12 So as to remove the
effects of inflation, cash income is adjusted to 2005 dollars using the Consumer Price Index
Current Methodology Series.
In order to provide a more complete picture of the different dimensions of income mobility, the
analysis provides three different measures: two measures of relative income mobility and one
measure of absolute income mobility .13 Relative income mobility shows how the income of
households changes over time relative to the incomes of other households, while absolute income
mobility measures show how the real incomes of households change over time.
Taxpayers are grouped by income quintiles (the lowest 20 percent, the second 20 percent, etc.).
Results for the top 1 percent, 5 percent, and 10 percent of the population are also reported. 14 The
two measures of relative income mobility are illustrated using a transition matrix that shows the
movement of individuals across the population quintiles. For individuals in each income quintile
in 1996, the transition matrix shows the percentages that end up in each income quintile in 2005.

10 The sample is based on the IRS Statistics of Income Individual Income Tax Files. The sample used for the study
excludes dependent filers and follows primary and secondary taxpayers separately. The construction of the panel
sample used for the analysis is discussed in more detail in the Technical Appendix.
\I For example, Sawhill and Condon (1992) examine individuals age 25 through 54 in the initial year, while
Gittleman and Joyce (1999) limit their sample to individuals between age 25 and 64 in both the initial and ending
years.
12 The definition of cash income is discussed in more detail in the Technical Appendix.
13 Other income mobility measures include income variance over time, the correlation between income in one year
and income in another year, and the percentages of households that are in a top income class or fall below the
poverty level at least once in a period of years as compared to the percentages in a single year. Instead of following
the income of specific individuals or households over time, some studies compare similar population groups at
different points in time. For example, a recent CBO study (May 2007) reported that the average income of
households with children in the lowest income quintile in 2005 was 35 percent higher than the average income of
comparable households in 1991 after adjusting for inflation. Since this approach does not follow the incomes of
specific households over time, it does not measure income mobility as generally understood.
14 Since primary and secondary taxpayers are followed separately, they are counted separately in determining the
income quintiles of the taxpayer population. Thus, a married couple filing jointly is counted as two observations.
Similar procedures have been followed in some prior studies, some of which count all members of a household
(including children) separately in determining the population quintiles.

The measure of absolute income mobility groups taxpayers by income quintile in 1996 and
shows the distribution of percentage changes in real income by 2005.
The first measure of mobility considers how the incomes of taxpayers in each income group in
1996 changed relative to the incomes of all taxpayers in the filing population in 2005 (Table 1).
The income thresholds in 1996 and 2005 for the income quintile groups in this measure are based
on all taxpayers age 25 and over in the popUlation of all tax return filers in these two years. The
table shows a high degree of income mobility over this period. Nearly 58 percent of households
(i.e., 57.6 = 100 - 42.4) in the lowest income quintile in 1996 had moved to a higher quintile by
2005. While 29 percent moved up to the second quintile, the same percentage moved up at least
two quintiles, and about 5 percent moved all the way to the top quintile.
Table 1: More than 50 percent of taxpayers in the bottom quintile moved to a higher quintile within ten years
Income Mobili!y Relative to the Total Tax Filing POQulation, 1996 to 2005
1996 Income
Quintile
Lowest
Second
Middle
Fourth
Highest
Top 10%
Top 5%
Top 1%

Lowest
42.4
17.0
7.1
4.1
2.6

Second
28.6
33.3
17.5
7.3
3.2

Middle
13.9
26.7
333
18.3
7.1

2.6
2.6
3.2

2.2
1.8
1.3

4.9
3.9
2.2

2005 Income Quintile
Fourth
Highest
Total
9.9
5.3
100.0
15.1
7.9
100.0
29.6
12.5
100.0
40.2
302
100.0
17.8
100.0
69.4
11.8
8.6
4.9

78.6
83.1
88.4

100.0
100.0
100.0

To~ 10%

To~ 5%

To~ 1%

2.3
3.0
4.2
8.6
43.4

1.3
1.2
1.4
2.7
22.5

0.2
0.1
0.3
0.3
4.4

61.1
71.6
82.7

37.6
54.4
75.0

8.3
15.2
42.6

All Income
1.2
13.4
6.4
27.1
13.2
16.8
19.6
23.3
100.0
Groups
Notes The rows sum to 100 percent across the five quintiles in the first five col umns The table uses the tax returns of primary and
secondary non-dependent taxpayers who were age 25 or over in 1996 and filed for both 1996 and 2005. Income breaks for the quintiles
and top percentiles are based on the full cross-sections of tax returns for each year, where the taxpayer IS age 25 and over Income is cash
income In 2005 dollars as defined in the Technical Appendix.
Source: Tabulations by the U.S. Department of the Treasury, Office of Tax Analysis, using data from IRS Statistics of Income, Individual
Income Tax Files for tax years 1996 and 2005.

Middle-income taxpayers also did well with respect to mobility across income quintiles in the
population. A much larger portion moved up to a higher income quintile (42.1 percent = 29.6
+ 12.5) than dropped to a lower quintile (24.6 percent = 7.1 + 17.6). About one-third of the
taxpayers in the middle income quintile in 1996 were still in the middle quintile in 2005. While
households in the top quintile had a higher probability of staying there in 2005, over 30 percent
had dropped to a lower quintile, and 2.6 percent dropped all the way to the bottom quintile.
While not shown directly in the table, 56 percent of the households filing tax returns in 1996 had
moved to a different income quintile in 2005. 15

15 This figure is calculated by summing all of the non-diagonal cells and dividing this number by 5. The diagonal
cells contain households in the same quintile in both years. Dividing by 5 adjusts for the fact that the percentages in
each quintile row sum to 100 percent, or 500 percent for all five rows.

The mobility of the top 1 percent of the income distribution is also important. More than half
(57.4 percent = 100 - 42.6) of the top 1 percent of households in 1996 had dropped to a lower
income group by 2005. This statistic illustrates that the top income groups as measured by a
single year of income (i.e., cross-sectional analysis) often include a large share of individuals or
households whose income is only temporarily high. Put differently, more than half of the
households in the top 1 percent in 2005 were not there nine years earlier. Thus, while the share
of income of the top 1 percent is higher than in prior years, it is not a fixed group of households
receiving this larger share of income. As suggested by the Schumpeter hotel analogy, many of
the more luxurious rooms are occupied by different people at different times.
The second measure of income mobility shows how the incomes of taxpayers in each income
quintile in 1996 changed relative to that same group of taxpayers in 2005 (Table 2). Note that
unlike Table 1 in which the comparison is to all taxpayers age 25 and over in the filing
popUlation in 2005, the comparison in Table 2 is only to the other taxpayers included in the
panel. Unlike Table 1, the construction of Table 2 means that in the bottom row showing all
taxpayers, 20 percent of the 1996 taxpayers are in each of the 2005 quintiles. 16 Since no new
lower-income households enter the comparison population in this table, there is no overall
upward movement of these taxpayers within the overall income distribution. Thus, under this
measure of income mobility, taxpayers in the bottom income quintile are less likely to rise in to a
higher quintile because the only new entrants to the bottom quintile are taxpayers whose incomes
have fallen. Nevertheless, almost half of the lowest income quintile (44.9 percent) moved to a
higher quintile by 2005. Total mobility was approximately the same as in the first mobility
measure, as 55 percent of taxpayers moved to a higher or lower income quintile compared to 56
percent in Table 1. 17 As compared to Table 1, this measure of relative income mobility also
implies more downward mobility. 18 For example, a larger portion of taxpayers in the 1996 top
quintile were in a lower income quintile in 2005: 39 percent (38.6 = 100 - 61.4) as compared to
31 percent in Table 1. Nearly 60 percent of taxpayers in the top 1 percent in 1996 dropped out
of the top 1 percent by 2005, although 87 percent of them remained in the top quintile.

16 This is because Table 2 is constructed by classifying the same group of tax households based on their 1996
income and then by income percentiles based on their 2005 income. There are no additional young or new
immigrant taxpayers against which the incomes of these taxpayers are being compared as in Table 1.
17 The 55 percent figure is calculated by summing all of the non-diagonal cells and dividing this number by 5 as was
done previously for Table I.
18 Table 2 shows greater downward mobility because for every household that moves up another must move down.
The table construction combined with the fact discussed previously that new entrants into the popUlation have lower
incomes on average results in more downward mobility using this measure.

Table 2: The degree of mobility remains substantial after restricting the analysis to taxpayers included in the panel
of tax retu rns
Income Mobility Relative to the Panel POl2ulation, 1996 to 2005
1996 Income
Quintile
Lowest
Second
Middle
Fourth
Highest
Top 10%
Top 5%
Top 1%
All Income
Groups

2005 Income Quintile
Fourth
Total
Highest
6.9
100.0
3.6
10.6
5.6
100.0
23.0
8.7
100.0
38.1
20.8
100.0
21.5
61.4
100.0

Lowest
55.1
24.7
10.8
6.0
3.5

Second
23.7
37.2
23.4
11.0
4.7

Middle
10.8
21.9
34.1
24.2
9.0

3.5
3.2
3.9

3.4
2.8
1.7

6.5
5.0
3.0

13.9
9.6
4.9

72.8
79.4
86.5

100.0
100.0
100.0

20.0

100.0

TOE 5%
0.9
1.0
1.2
2.1
19.8

TOE 1%
1
0.1
0.2
0.3
4.3

54.4
67.2
80.3

33.5
49.7
73.0

7.9
14.4
40.3

10.0

5.0

1.0

TOE 10%
1.7
2.0
3.2
6.4
36.7

Notes The rows sum to 100 percent across the five quintiles in the first five columns. The table uses the tax returns of primary and
secondary non-dependent taxpayers who were age 25 or over In 1996 and filed for both 1996 and 2005 Income breaks for the quintiles
and lOp percentIles are based on only the lax returns of the panel population. Income is cash income in 2005 dollars as defined in the
Technical Appendix.
Source: Tabulalions by the US Department of the Treasury, Office of Tax Analysis, using data from IRS Statistics of Income,
Individual Income Tax Files for tax years 1996 and 2005.

The third measure examines absolute income mobility, that is, the extent to which taxpayers
incomes rose or fell over time. Table 3 shows that median taxpayer income rose by 24 percent
after adjusting for inflation. J9 20 Real income increased for two-thirds (67.5 percent = 17.7 + 14.3
+15.8 +19.7) of taxpayers between 1996 and 2005.
Percentage increases in real income were the largest for taxpayers with the lowest incomes in
1996. Among those taxpayers in the lowest income quintile in 1996, median income increased
by 90 percent by 2005. Real incomes increased over the period for 82 percent (81.7 = 8.6 + 8.7
+ 15.0 +49.4) of these low-income taxpayers and at least doubled for nearly half of this group
(49.4 percent).
Among taxpayers in the highest income quintile in 1996, real income increased for over half
(54.7 percent = 19.5 + 14.0 + 12.7+8.5) and doubled for only 8.5 percent. The median real
income of taxpayers in the top quintile in 1996 rose by 10 percent, while the median income of
those in the top 1 percent in 1996 declined by 25.8 percent. While this study does not examine
these results in detail, the likely causes include the typical life cycle of income and "mean
reversion" in which the incomes of taxpayers whose incomes were temporarily high in 1996
revert to a level closer to their long-run average. 21

19 By comparison, in the U.S. Census data (2006), median household real income increased by 5.4 percent from
$43,967 to $46,326 over this time period in 2005 dollars. One difference is that the Census data measures changes
in the full cross-section popUlation including new entrants, while the data in Table 3 show changes in incomes of
individuals that filed income tax returns in 1996 and 2005.
20 Median income refers to the income of the individual in the middle of the income distribution, with halfhaving
higher incomes and half having lower incomes. Mean or average income is the arithmetic average of the all
taxpayers in the sample. In each case, the calculations are weighted to reflect the total tax-filing popUlation.
21 The results of Auten and Gee (2007) illustrate the effects of the life cycle of incomes. Taxpayers age 45 to 54 had
the highest incomes of any age group in 1987, but the median inflation-adjusted income of these taxpayers declined
by 1996. By comparison, taxpayers age 25 to 34 had the lowest incomes in 1987, but the most rapid increases in
incomes between 1987 and 1996.

Among households in the middle income quintile in 1996, median income increased by 23.3
percent. Real income increased for about two-thirds of taxpayers in this group and at least
doubled for 14.5 percent. The results reported in Table 3 demonstrate that over the 1996 to 2005
period, incomes rose for the majority of households, and that upward income mobility was the
greatest among those that began the period in the lowest income groups.
Table 3: Were taxpayers better off in 2005 than in 19961
Absolute Income Mobility, 1996 to 2005

1996 Income
Quintile

Distribution of Percenta~e Chan~es in Income from 1996 to 2005 in $2005
Decreased
Increased
more than Decreased Decreased Increased Increased Increased
100% or
25 to 50% u~ to 50% u~ to 25% 25 to 50% 50 to 100%
50%
Total
more

Percent Change in:
Mean
Income

Median
Income

Lowest
Second
Middle
Fourth
Highest

6.8
6.7
6.6
7.9
14.0

4.6
7.8
10.1
10.6
14.0

6.9
12.6
14.8
17.3
17.3

8.6
16.6
20.2
21.7
19.5

8.7
14.7
15.5
17.6
14.0

15.0
17.5
18.3
15.8
12.7

49.4
24.1
14.5
9.1
8.5

100.0
100.0
100.0
100.0
100.0

232.5
70.6
43.1
28.3
26.2

90.5
34.8
23.3
16.6
10.0

Top 10%
Top 5%
Top 1%

18.6
25.0
38.9

15.6
16.3
13.8

16.4
15.4
12.1

17.1
13.3
8.6

10.9
9.4
6.0

12.0
9.6
7.6

9.6
11.1
13.0

100.0
100.0
100.0

27.6
29.5
12.5

2.9
-6.8
-25.8

All Income
24.2
17.7
100.0
38.0
8.6
9.7
14.2
14.3
19.7
15.8
Groups
Notes: The table uses the tax returns of primary and secondary non-dependent taxpayers who were age 25 or over in 1996 and filed for both
1996 and 2005. Income breaks for the quintiles and top percentiles are based on the full cross-sections of tax returns for each year, where the
primary taxpayer is age 25 and over. Income is cash income in 2005 dollars as defined in the Technical Appendix.
Source: Tabulations by the U.S. Department of the Treasury, Office of Tax Analysis, using data from IRS Statistics of Income, Individual
Income Tax Files for tax years 1996 and 2005.

Income Dynamics of the Top 11100, 1110, and 1 Percent of the Population
One of the advantages of using data from income tax returns to examine income mobility is that
these data include a very detailed and complete sample of the very highest income taxpayers. In
contrast, most survey data used to study income dynamics, such as the PSID, include only a few
high-income households and exclude the very highest income households altogether. This
section examines the income mobility of the top 1 percent of the population in detail.
Approximately 117 million taxpayers who filed tax returns for 1996 and 2005 are represented in
the sample for this study. Thus, the top 1 percent included about 1.17 million taxpayers, the top
0.1 percent was about 117,000 thousand taxpayers and the top 0.01 percent was about 11,700
taxpayers. Table 4 below shows the income mobility of the top 1 percent compared to the total
tax filing population in 2005. This table uses the same measure of relative income mobility as
Table 1, but shows the top 1 percent in greater detail.
The central theme that emerges from an examination of the very highest income taxpayers is that
the composition of this group changes dramatically over time (Table 4). The vast majority of
taxpayers in this group at the beginning of the 10 year period are absent from this group 10 years
later; that is, the very top of the income distribution is highly transient. Among those in the top
0.01 percent in 1996, only 25 percent remained in this group in 2005. While over 80 percent
(82.4 = 24.2 + 32.9 + 25.3) of these taxpayers remained within the top 1 percent in 2005,6
percent dropped out of the top income quintile. Similarly, about 25 percent of those who were in

the top 0.1 percent in 1996, but below the top 0.01 percent, remained in this group in 2005.
About 3.8 percent of these taxpayers moved to the top 0.01 percent and over 70 percent moved
further down in the income distribution.

Table 4: How did the incomes of the top 1 percent of taxpayers in 1996 change relative to the total population?
Income Mobility of the Top 1 Percent Relative to the Total Population
Percent Distribution b~ 2005 Income Percentile
1996 Income
Percentile
0.1 to 1%
0.01 to 0.1%
Top 0.01%

Below top
20%
12.0
8.4
6.0

10 to 20%
6.0
2.9
1.1

5 to 10%
8.1
4.3
1.6

1 to 5%
0.1 to 1%
34.2
35.1
16.8
39.1
9.1
24.2

0.01 to 0.1%

Top 0.01%
0.3
24.7
3.8
25.3
32.9

4.2

All
100.0
100.0
100.0

100.0
72.9
13.7
5.2
1.0
00
7.0
0.1
All Income Groups
Notes: The table includes taxpayers age 25 or over and in the top I percent of tax returns in 1996 who filed for both 1996 and 2005. Income breaks
for the quintiles and top percentiles are based on the full cross-sections of tax returns for each year, where the primary taxpayer is age 25 and over.
Income is cash income as defined in the Technical Appendix.
Source: Tabulations by the U.S. Department of the Treasury, Office of Tax Analysis, using data from IRS Statistics of Income, Individual Income
Tax Files for tax years 1996 and 2005.

The data also indicate that the incomes of many taxpayers at the highest income levels are very
volatile. Table 5 shows that real incomes increased for about 35 percent (35.2 = 8.6 + 6.0 +7.6 +
13.0) of taxpayers in the top .01 percent in 1996. On the other hand, about 59 percent of
taxpayers in the top 0.01 percent experienced declines in real income of at least 50 percent.
Similarly, 52 percent of those in the top 0.1 percent, but below the top 0.01 percent, experienced
income declines of at least 50 percent. These results illustrate that the incomes of a significant
portion of those in the very highest income classes in a given year are highly transitory and not
maintained over time.

Table 5: Absolute Income Mobility of the Top 1 Percent in 1996: Distribution of Changes in Income by 2005
1996 Income
Percentile
0.1 to 1%
0.01toO.1%
Top 0.01%

Distribution of Ratio of 2005 Income to 1996 Income in $2005
Less than
1.25 to
1.50 to
2.00 and
0.50
.50 to .75 0.75 to 1.0 1.0 to 1.25
1.50
2.00
over
12.7
8.3
12.1
38.7
14.8
6.2
7.2
53.1
10.9
8.0
5.9
4.1
5.5
12.4
60.1
6.1
4.4
3.7
4.7
11.7
9.3

Total
100.0
100.0
100.0

All Income
Groups

18.2
10.5
15.7
13.9
14.2
18.1
9.3
100.0
Notes: The table includes taxpayers age 25 or over and in the top I percent of tax returns in 1996 who filed for both 1996 and
2005. Income breaks for the quintiles and top percentiles are based on the full cross-sections of tax returns for each year, where
the primary taxpayer is age 25 and over. Income is cash income as defined in the Technical Appendix.
Source: Tabulations by the U.S. Department of the Treasury, Office of Tax Analysis, using data from IRS Statistics of Income,
Individual Income Tax Files for tax years 1996 and 2005.

Table 6 shows the mean and median incomes of taxpayers in the top 1 percent in 1996 and 2005
and the percentage changes over time. As in Table 5, this table shows that the real incomes of
the majority of those in the very top income classes in a given year are likely to be lower in a
later year. Thus, the median income of those in the top 0.01 percent of taxpayers in 1996 fell by

64.6 percent from $11.6 million to $4.1 million. The pattern was similar, if less dramatic, for the
other subgroups of the top 1 percent in 1996. The basic result is that the income of many of the
highest-income taxpayers is transitory. Thus, for the majority of this group at least, the rich do
not get richer. Instead, their income drops to a lower level, albeit generally to a level well above
average.
Table 6: How did the Absolute Incomes of the Top 1 Percent in 1996 Change by 2005?
1996 Income
Percentile
0.1 to 1%
0.01 to 0.1%
Top 0.01%
All Income
Grou~s

1996

Mean Income
2005

%Chanae

1996

Median Income
2005
% Chanae

654,953
2,854,752
17,518,043

801,672
3,150,686
14,391,130

22.4
10.4
-17.8

557,503
2,375,946
11,592,130

412,433
1,180,878
4,102,806

-26.0
-50.3
-64.6

70,420

97,206

38.0

48,684

60,487

24.2

Notes: The table includes taxpayers age 25 or over and in the top I percent of tax returns in 1996 who filed for both
1996 and 2005. Income breaks for the quintiles and top percentiles are based on the full cross-sections of tax returns
for each year, where the primary taxpayer is age 25 and over. Income is cash income as defined in the Technical
Appendix.
Source: Tabulations by the U.S. Department of the Treasury, Office of Tax Analysis, using data from IRS Statistics of
Income, Individual Income Tax Files for tax years 1996 and 2005.

Has Income Mobility Increased or Decreased Over Time?: Comparing 1996-2005 to 19871996
Some studies have argued that income mobility decreased in the 1990s as compared to earlier
periods. 22 The income tax data used for this study can be used to compare income mobility in
the 1996 to 2005 period with income mobility in the 1987 to 1996 period. 23 Both time periods
begin and end roughly during the middle of periods of economic expansion and thus should
allow for comparisons that are not greatly affected by the business cycle.
Table 7 shows comparable mobility data for the two time periods using the first measure of
relative income mobility that compares each initial period sample to the total population in the
ending year. While the mobility measure in this table is comparable to that in Table 1, the
sample population follows tax households as measured by the tax return of the primary
taxpayer. 24 This sample restriction is necessary in order to allow comparable analysis for the two
time periods. 25
22 See, for example, Bradbury and Katz (2002a, 2002b). Kopczuk, Saez and Song (2007) conclude that both shortterm and long-term earnings mobility among all workers has been fairly constant since about 1950.
23 The mobility data for the 1987 to 1996 period are taken from Auten and Gee (2007) who examined income
mobility for that period using a large panel sample of individual income tax returns and income and mobility
measures similar to those in this study.
24 The analysis in this section is based on households as defined for income tax purposes, which differs in some
cases from households as defined for Census studies and in various surveys. Since the definitions of "income tax
units" and "households" are the same in most cases, this section uses the term "households" in describing the family
units reflected on the income tax returns.
25 Auten and Gee (2007) examined the income mobility of tax households, following the primary taxpayer. The
sample for Tables 7 and 8 differs from the sample used for the prior sections of the current study in that secondary

For each initial income quintile, the upper row shows the income mobility over the 1987 to 1996
period and the lower row shows the income mobility over the 1996 to 2005 period. Thus, one
can examine how income mobility changed by comparing the upper and lower rows for the
various initial and final income quintile combinations. For example, the upper left part of the
table shows that 38.9 percent of taxpayers in the lowest income quintile in 1987 remained in the
lowest quintile in 1996, while 37.8 percent of those in the lowest quintile in 1996 were in the
lowest quintile in 2005. Thus, the degree of upward mobility from the lowest quintile periods is
essentially the same in the two time periods: 61.1 percent from 1987 to 1996 and 62.2 percent
from 1996 to 2005.
The 1.1 percentage point difference (37.8 percent versus 38.9 percent) for the upper left cells is
neither economically nor statistically meaningful, nor are other differences of a few percentage
points. The reason is that each cell of the table is based on a sample, albeit a very large one, and
the values are subject to sampling error, as well as measurement error from misreported incomes.
An examination of the various cells suggests that income mobility was approximately the same
in almost all income groups during these time periods. This result may seem surprising given
that other studies have reported widening income gaps over time. However, it may indicate that
increases in absolute mobility have been able to offset any effects of wider income gaps.
A few differences, however, may be large enough for further analysis. For example, the
percentage of households in the top income quintile that remained there increased from roughly
68 percent to 73 percent. Interestingly, the percentage of the top 1 percent that remained in the
top 1 percent stayed the same, about 45 percent to 46 percent in both periods. This result
suggests that the decrease in downward mobility occurred among households in the top 20
percent, but below the top 1 percent of the population. 26 In addition, the percentage of
households in the middle-income quintile that moved to a higher income quintile increased by
4.8 percentage points (4.8 = (31.1 - 28.4) + (16.3 - 14.2)), a change that may suggest slightly
greater upward mobility among middle-income households. While these differences are
interesting, more careful analysis is needed to understand them, such as whether they represent
changes among certain income or occupational groups. The basic finding of this analysis is that
relative income mobility is approximately the same in the last 10 years as it was in the previous
decade.

taxpayers are not followed if they file separately in the ending year. An extension of the analysis would be to apply
the analytical framework of the current study by tracking primary and secondary taxpayers separately in the data for
the earlier period.
26 The more detailed version of this table provided in the Technical Appendix (Table A.4) shows that the
percentages of households remaining in the top 5 percent and top 10 percent of households increased. Thus, the
decrease in downward mobility occurred for all but the top 1 percent of households.

Table 7: Income Mobility Relative to the Total Tax Filing Population, Age 25 and Over,
1987-1996 and 1996-2005
Initial Income
Quintile

Time
Period

Lowest

End of Period Income Quintile (1996 or 2005)
Second
Middle
Total
Highest
Fourth

T021%

Lowest

1987-1996
1996-2005

38.9
37.8

28.3
27.1

14.9
16.1

10.6
11.8

7.3
7.2

100.0
100.0

0.3
0.3

Second

1987-1996
1996-2005

14.2
15.8

33.8
30.1

26.4
28.0

16.4
17.2

9.3
9.0

100.0
100.0

0.2
0.2

Middle

1987-1996
1996-2005

6.1
5.9

17.4
140

33.9
32.6

28.4
31.1

14.2
16.3

100.0
100.0

0.3
0.3

Fourth

1987-1996
1996-2005

3.0
3.1

7.5
5.7

19.4
15.5

40.1
41.9

30.0
33.8

100.0
100.0

0.5
0.3

Highest

1987-1996
1996-2005

1.8
2.0

2.5
2.0

7.3
5.7

20.6
17.2

67.8
73.2

100.0
100.0

5.4
4.8

Top 1%

1987-1996
1996-2005

2.1
2.7

0.9
1.0

2.5
1.5

4.7
4.5

89.9
90.3

100.0
100.0

46.0
44.7

All Income
Groues

1987-1996
1996-2005

11.3
11.7

16.5
14.7

20.1
19.1

24.1
24.4

28.0
30.0

100.0
100.0

1.5
1.3

Notes: For each initial income quintile, the upper row shows the 1987-1996 period and the lower row shows the 1996-2005
period. Each row sums to 100 percent across the five quintiles. The table includes returns of households where the primary
taxpayer filed in both years and is age 25 or over in the initial year. Income breaks for the quintiles and top percentiles are
based on the full cross-sections of tax returns for each year, where the primary taxpayer is age 25 and over. Income is cash
income in 2005 dollars as defined in the Technical Appendix.
Source: U.S. Treasury Department, Office of Tax Analysis, 1987-1996 Family Panel, Tax Year 1996 and 2005 Individual
Income Tax Files.

An important related question is whether absolute income mobility changed over this time
period. As shown in Table 8 below, absolute income mobility increased at all income levels in
the 1996 to 2005 time period as compared to the 1987 to 1996 time period. For example, median
incomes of taxpayers in the lowest income quintile increased by 81 percent in the 1987 to 1996
period, but by 109 percent in the more recent period. Similarly, median incomes of taxpayers in
the middle quintile increased by 9 percent in the earlier period and 26 percent in the more recent
period. Median incomes of taxpayers in the top quintile declined nearly 2 percent in the earlier
period, but increased nearly 9 percent in the more recent period. Finally, the median income of
taxpayers initially in the top 1 percent for each period declined by about 23 percent to 24 percent
in each time period. The percentages of each initial income group whose real incomes doubled
also increased for every income group. The percentage of taxpayers initially in the lowest
income quintile whose income doubled increased from 47.3 percent to 53.5 percent, for example.
Overall, the table shows that upward absolute income mobility increased in the most recent
decade as compared to the previous decade.

Table 8: Absolute Income Mobility of Households Age 25 and Over, 1987·1996 and 1996·2005

Time
Period

Initial Income
Quintile

Percent Distribution of Changes in Income
in 2005 Dollars
Decreased
Increased Increased
more than Decreased
5 to 50% No change 5 to 50% 50 to 100%
50%

% Chanrae in:
Increased
100% or
more

Mean
Income

Median
Income

Lowest

1987-1996
1996-2005

8.7
6.8

10.3
9.3

4.0
2.6

17.0
14.2

12.8
13.7

47.3
53.5

247.5
284.6

8D.6
108.7

Second

1987-1996
1996-2005

6.0
6.6

22.0
17.1

8.7
5.3

28.0
28.4

14.8
15.9

20.6
26.8

53.9
82.6

221
38.0

Middle

1987-1996
1996-2005

7.0
6.0

29.2
20.2

10.7
7.6

28.7
31.0

13.2
17.0

11.2
18.3

30.9
52.5

9.1
26.2

Fourth

1987-1996
1996-2005

8.1
6.7

34.5
25.1

10.2
7.9

30.9
34.1

9.6
15.6

6.6
10.7

15.6
15.6

2.3
17.0

Highest

1987-1996
1996-2005

14.2
12.5

36.3
28.9

9.1
8.3

25.6
30.2

7.4
11.9

7.5
8.2

9.6
25.0

-1.8
8.7

Top 1%

1987-1996
1996-2005

37.0
36.7

26.7
25.8

4.8
4.3

14.3
13.3

6.6
7.3

10.7
12.6

1.6
13.6

-23.8
-23.4

All Income
Groue s

1987·1996
1996-2005

9.0
7.9

27.6
20.8

8.8
6.5

26.4
28.1

11.3
14.7

17.0
22.0

24.1
41.0

11.1
30.2

Notes For each initial income quintile. the upper row shows the distribution of changes over the 1987·1996 period and the lower row shows
the 1996-2005 period. Each row sums to 100 percent across the first six columns. The table includes returns of households where the primary
taxpayer filed in both years and is age 25 or over in the initial year Income breaks for the base year quintiles and top percentiles are based on
the tax returns of primary taxpayers whose age is 25 and over. Income is cash income in 2005 dollars as defined in the Technical Appendix.
Source US. Treasury Department. Office of Tax Analysis, 1987-1996 Family Panel, Tax Year 1996 and 2005 Individual Income Tax Files.

Conclusions
This study examined income mobility of individual taxpayers age 25 and over for the period
from 1996 through 2005 using information reported on individual income tax returns. The key
findings are that there was considerable income mobility of individuals in the U.S. economy
during the 1996 through 2005 period and that the degree of income mobility among income
groups is unchanged from the prior comparable period (1987 through 1996).
The analysis found that more than half of taxpayers (56 percent by one measure and 55 percent
by another measure) moved to a different income quintile between 1996 and 2005. About half
(58 percent by one measure and 45 percent by another measure) of those in the bottom income
quintile in 1996 moved to a higher income group by 2005.
Economic growth resulted in rising incomes for most taxpayers over the period from 1996 to
2005. Median incomes of all taxpayers increased by 24 percent after adjusting for inflation. In
addition, the real incomes of two-thirds of all taxpayers increased over this period. Further, the
median incomes of those initially in the lower income groups increased more than the median
incomes of those in the higher income groups.
The analysis also found that the composition of the very top income groups changes dramatically
over time. Less than half (40 percent or 43 percent by different measures) of those in the top 1
percent in 1996 were still in the top 1 percent in 2005. Only about 25 percent of individuals in
the top 0.01 percent in 1996 remained in the top 0.01 percent in 2005.

REFERENCES
Ackerman, Deena, James Cilke, Julie-Anne Cronin, Janet Holtzblatt, Gillian Hunter, Emily Lin,
Janet McCubbin and James R. Nunns. "Treasury's Panel Model for Tax Analysis," U.S.
Department of the Treasury, OTA Paper, forthcoming 2007.
Auten, Gerald and Geoffrey Gee. "Income Mobility in the U.S.: Evidence from income Tax
Returns for 1987 and 1996," OTA Paper 99, U.S. Treasury Department, May 2007.
Bradbury, Katherine and Jane Katz. "Are Lifetime Incomes Growing More Unequal? Looking at
New Evidence on Family Income Mobility" Regional Review, No.4, Federal Reserve Bank
of Boston, September, 2002a.
_. "Women's Labor Market Involvement and Family Income Mobility When Marriages
End," New England Economic Review, No.4, 2002b.
Carroll, Robert, David Joulfaian and Mark Rider, "Income Mobility: The Recent American
Experience," Andrew Young School of Policy Studies, Georgia State, Working Paper 06-20,
July 2006.
Cilke, James, Julie-Anne M. Cronin, Janet McCubbin, James R. Nunns, and Paul Smith.
"Distributional Analysis: A Longer Term Perspective," in Proceedings of the Ninety-Third
Annual Conference on Taxation, 248-258. Washington, D.C.: National Tax Association,
2001.
Congressional Budget Office. "Changes in the Economic Resources of Low-Income Households
with Children," Congressional Budget Office Paper, May 2007.
Congressional Budget Office. "Trends in Earnings Variability Over the Past 20 Years,"
Congressional Budget Office Paper, April 2007.
Gittleman, Maury and Mary Joyce. "Have Family Income Mobility Patterns Changed?",
Demography 36, No.3, August 1999,299-314.
Holtz-Eakin, Douglas, Harvey Rosen and Robert Weathers. "Horatio Alger Meets the Mobility
Tables," Small Business Economics 14, No.4, June 2000, 243-274.
Kopczuk, Wojciech, Emmanuel Saez, and Jae Song. "Uncovering the American Dream:
Inequality and Mobility in Social Security Earnings Data Since 1937," NBER Working
Paper 13345, August 2007.
McMurrer, Daniel and Isabel Sawhill. "'Economic Mobility in the United States," No. 6722,
Urban Institute, 1996a.

McMurrer, Daniel and Isabel Sawhill. "'How Much Do Americans Move Up and Down the
Economic Ladder?," in the Opportunity in America Series, No.3. Washington, D.C.: Urban
Institute November 1996b.
Piketty, Thomas and Emmanuel Saez, "Income Inequality in the United States, 1913-1998,"
Quarterly Journal of Economics, CXVIII, No.1, February 2003.
Piketty, Thomas and Emmanuel Saez, "Income Inequality in the United States, Tables and
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Stewart, Kenneth and Stephen Reed "CPI research series using current methods, 1978-98,"
Monthly Labor Review, June 1999, pp. 29-38.
Sawhill, Isabel and John E. Morton, Economic Mobility: Is the American Dream Alive and
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2007.
Sawhill, Isabel and Mark Condon. "Is U.S. Income Inequality Really Growing?: Sorting Out the
Fairness Question," Policy Bites. Washington, D.C.: Urban Institute, 1992.
Sawhill, Isabel V., "Still the Land of Opportunity?," Urban Institute web site.
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2005, Current Population Reports P60-231. U.S. Government Printing Office, Washington,
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U.S. Treasury Department, Office of Tax Analysis. "Household Income Changes over Time:
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1980s: A Statistical Assessment Based on Tax Return Data," Special Supplement, Tax Notes
55, June 1, 1992b.

TECHNICAL ApPENDIX
The data for this study are based on income reported on individual income tax returns,
supplemented by data on Social Security benefits from Form SSA-l 099 for lower-income
households that are not required to report this information on their income tax returns. The 1996
base year sample uses income tax data for the 1996 tax year from the 1996 IRS Statistics of
Income (SOl) Individual Income Tax File and from late-filed returns included in the 1997 and
1998 income tax files. Tax returns for which the primary taxpayer is under age 25 or a
dependent filer in 1996 are excluded. In order to obtain the maximum number of matches for
2005, the corresponding data for 2005 were obtained from the IRS Individual Returns Master
File at the IRS Computer Data Warehouse. Data for 2005 were obtained for both primary and
secondary taxpayers in cases where taxpayers who filed jointly in 1996 filed separately or were a
secondary taxpayer in a different tax unit for 2005. Since the data for late-filed tax returns are
not yet available for tax year 2005, the analysis does not include such returns. Late-filed tax
returns are generally 1 percent or 2 percent of tax returns filed, and are generally more complex
tax returns of high-income tax households. Matches were found for 88 percent of the primary
and secondary taxpayers in the 1996 sample. This attrition rate is quite low and is likely
primarily accounted for by the death of the taxpayer.
Cash income is defined to include wages and salaries, tip income, taxable and tax-exempt
interest, dividend income, alimony, net income from business (sole proprietorships, partnerships,
and S corporations), farm income, net rental income, royalty income, net capital gain or loss in
adjusted gross income (AGI), other gain or loss, unemployment compensation, taxable and nontaxable pension and annuity income, Social Security benefits (including the non-taxable portion),
and other income included in AGl. Net operating losses carried over from prior years are added
back. Alimony payments are subtracted to reflect cash income. These sources of income are as
reported on individual income tax returns and supplemented by data from information returns on
Social Security benefits received but not subject to tax. The inclusion of tax-exempt interest and
Social Security benefits are important improvements to income as generally measured on income
tax returns. The inclusion of Social Security benefits is particularly important because it is the
main source of income of many older households. Transfer payments subject to tax and thus
included in income tax return data accounted for about 84 percent of all cash transfer payments
in 1995, the closest year to 1996 for which data were available. (See Technical Appendix A in
Auten and Gee, 2007).
Overall, the income measure used in this study should generally provide a good measure of cash
income for most households, though it may understate income for households receiving
significant amounts of tax-exempt income from workers' compensation, Supplemental Security
Income, family assistance, or certain veterans disability programs. In addition, the refundable
portion of the Earned Income Tax Credit is not included because cash income is a before-tax
measure. Cash income can be affected by changes in financial and compensation arrangements.
For example, in recent years many mutual funds have learned how to manage their portfolios so
as to reduce currently taxable capital gains of investors (i.e., capital gains distributions), even
though the market values of the mutual fund shares have been increasing. This change could
reduce the incomes of households that owned mutual funds in 2005 compared to the income that
would have been reported absent the change.

The definition of cash income used in this analysis is similar, but not identical, to measures used
in other studies. For example, the definition used here includes capital gains income, while the
Census measure of money income does not include capital gains. Some CBO and Treasury
analyses have used measures of income that include employer-paid payroll taxes such as the
employer share of Social Security taxes and unemployment insurance taxes. These employerpaid taxes are considered to be part of the economic income of households, but are not included
in cash income in this study as households do not regard such items as part of their cash income.
Income is adjusted for inflation using the Consumer Price Index Research Series Using Current
Methods (CPI-U-RS).
Table A.I shows the cash income levels for the income quintiles and the top 10 percent, 5
percent, and I percent of the taxpayer population.
Table A.1: Income Breaks for Population Quintiles for 1996 and
2005 (in 2005 dollars)
Income Quintile or
Percentile
Bottom
Second

1996
Income Cutoff
Under 15,326

2005
Income Cutoff

Middle
Median
Third

15,326
25,787
31,785
38,881

Under 19,488
19,488
33,120
41,242
51,257

Fourth

60,897

83,138

85,387
116,425
284,603

120,211
171,856
463,615

Top 10%
Top 5%
Top 1%

Source: IRS, Statistics of Income 1996 and 2005 Individual Income Tax Files.

Since the data for this study is based on income tax returns, an important question is the extent to
which the sample accurately represents the total population. The sample includes individuals
~·1.' ,ire either primary or secondary non-dependent taxpayers on tax returns filed in 1996. Table
A.2 shows that as of 1996, the population of income tax filers used in this study included 85.5
percent of the population age 25 and over and 90.7 percent of the resident popUlation age 25 to
64. Thus, the sample is highly representative of the population aged 25 to 64. In addition, to
low-income individuals, the 9.1 percent of individuals in the non-filing popUlation includes noncompliant taxpayers who should have filed returns, late filers, individuals who filed but were
claimed as dependents on other tax returns, and individuals who retired and began collecting
Social Security benefits prior to age 65. Representation of younger and older individuals was not
as complete. About 69 percent of individuals age 20 to 24 and 56 percent of individuals age 65
and over were represented on tax returns. The filing rate for older households declines because
Social Security benefits constitute a large portion of the incomes of many older households, but
are not subject to tax until modified adjusted gross income exceeds $32,000 for married couples
filing jointly and $25,000 for non-married individuals.
.

Table A.2: Comparison of the Adult Tax Filing Population with the U.S.
Age in 1996

Resident
Population,
July 1,1996

1996 Primary and
Taxpayers as Percent
Secondary
of Resident Population
Taxpayers

20-24

17,508

12,604

72.0

25-64

158,675

143,856

90.7

55-64

21,353

18,831

88.2

65 and over

33,956

20,893

61.5

25 and over

192,631

164,749

85.5

Notes: Secondary taxpayer refers to the spouse of the taxpayer on joint tax returns tiled by married
taxpayers. Dependent taxpayers who are claimed as dependents on other tax returns are excluded
from the numbers of primary and secondary taxpayers.
Source: Resident population from Resident Population Estimates of the United States by Age and
Sex: April 1, 1990 to July 1, 1999. U.S. Census Bureau. Numbers of taxpayers from U.S. Treasury
Department, IRS Statistics of Income, Individual Income Tax Files.

As shown in the table below, overall attrition in the panel was 16.2 percent. Of the 18,646
returns for which no tax return was found for 2005, infonnation returns for Social Security
benefits were found in 4,161 instances or 22 percent. These 4,161 individuals are not included in
the analysis because of the lack of infonnation about other potential sources of income such as
interest, dividends, wages and self-employment income. While infonnation on the deaths of
taxpayers is not available for this panel, based on experience with the tax panel for the 19871996 period, it is likely that as many as half of the missing returns are attributable to the death of
the taxpayer. This is suggested by the fact that of 14,485 not accounted for by Social Security
recipient non-filers, 6,251 or 43 percent were accounted for by taxpayers over age 65 in 1996. It
is likely that several thousand additional late-filed 2005 returns could be found in later years.
After accounting for these factors, the remaining attrition due to factors including noncompliance and income falling below the filing threshold appears to be relatively small.

Table A.3: Attrition in the 1996-2005 Panel of Tax Returns
Numbers of Non-Deeendent Returns
1996 Income
Quintile
Lowest
Second
Middle
Fourth
80-9Oth pct
90-95th pct
95-99th pct
99-99.9 pct
99.9-99.99 pct
Top .01 pct
Total
1996 Age
25-34
35-44
45-54
55-64
65 and over
Total

1996
Samele
11,295
8,851
9,977
11,418
6,725
4,867
14,795
18,700
19,022
9,666
115,316
13,251
25,574
31,134
22,732
22,625
115,316

925
889
636
415
165
106
257
309
297
162
4,161

No 2005
Match
2,137
1,493
1,493
1,421
776
496
1,900
2,045
1,821
903
14,485

82
160
349
1,316
2,254
4,161

1,568
2,529
2,538
1,599
6,251
14,485

Only Social
Securit~

Percent Attrition From 1996 Samele
1996-2005
Panel
8,233
6,469
7,848
9,582
5,784
4,265
12,638
16,346
16,904
8,601
96,670

Only Social
Securi!i:
8.2
10.0
6.4
3.6
2.5
2.2
1.7
1.7
1.6
1.7
3.6

11,601
22,885
28,247
19,817
14,120
96,670

No 2005
Match
18.9
16.9
15.0
12.4
11.5
10.2
12.8
10.9
9.6
9.3
12.6

Total
Attrition
27.1
26.9
21.3
16.1
14.0
12.4
14.6
12.6
11.1
11.0
16.2

11.8
9.9
8.2
7.0
27.6
12.6

12.5
10.5
9.3
12.8
37.6
16.2

0.6
0.6
1.1
5.8
10.0
3.6

Notes: The column labeled "Only Social Security" shows the numbers of cases in which Form SSA-I 099 information
returns were found for 2005 but no income tax return was filed. The column labeled "No 2005 Match" shows the
numbers of cases for which neither Form SSA-1099 nor a tax return were found for 2005.
Source: IRS, Statistics of Income 1996 and 2005 Individual Income Tax Files.

The following tables provide the complete mobility comparisons between the 1987-1996 period
and the 1996-2005 period. These more detailed tables show the results for the top 5 percent and
top 10 percent as well as the results for the second measure of relative income mobility.
Table A.4: Income Mobility Relative to the Total Tax Filing Population, Age 25 and Over, 1987-1996 and 1996-2005
Initial
Income
Quintile
Lowest
Second
Middle
Fourth
Highest
Top 10%
Top 5%
Top 1%

End of Period Income Quintile
Time
Period
1987-1996
1996-2005
1987-1996
1996-2005
1987-1996
1996-2005
1987-1996
1996-2005
1987-1996
1996-2005
1987-1996
1996-2005
1987-1996
1996-2005
1987-1996
1996-2005

Lowest
38.9
37,8
14.2
15.8
6.1
5.9
3.0
3.1
1.8
2.0
1.8
2.2
1.9
2.7
2.1
2.7

Second
28.3
27.1
338
30.1
17.4
14.0
7.5
5.7
2.5
2.0
1.5
12
1.4
1.0
09
10

Middle
14.9
16.1
26.4
28.0
33.9
32.6
19.4
15.5
7.3
5.7
4.4
2.9
3.2
1.5
2.5
1.5

Fourth
10.6
11.8
16.4
172
28.4
311
401
41.9
206
17.2
13.6
7.4
82
4.5
4.7
4.5

Highest
7.3
72
9.3
9.0
14.2
16.3
30.0
33.8
67.8
73.2
78.7
86.3
85.2
90.3
89.9
90.3

p 996 or 2005~
Total
100.0
1000
100.0
100.0
100.0
100.0
100.0
100.0
100.0
100.0
1000
100.0
100.0
100.0
1000
100.0

TOE! 10%
3.4
29
3.2
3.5
5.6
58
10.3
11.2
426
46.7
60.6
75.1
73.3
85.0
83.3
85.0

TOE! 5%
17
1.5

1.2
1.5
2.3
2.0
38
3.8
23.9
246
38.9
58.3
56.3
77.7
75.8
77.7

TOE! 1%
0.3
0.3
0.2
0.2
0.3
0.3
0.5
0.3
5.4
4.8
9.9
15.7
17.3
44.7
46.0
44.7

24.1
28.0
100.0
14.4
1987-1996
20.1
7.3
1.5
11.3
16.5
All Income
24.4
30.0
100.0
15.3
7.3
1996-2005
11.7
19.1
1.3
14.7
Groul2s
Notes: For each initial income qUlntile, the upper row shows the 1987-1996 period and the lower row shows the 1996-2005 period. The table
includes returns of households where the primary taxpayer filed for both years and is age 25 or over in the initial year. Income breaks for the
quintiIes and top percentiles are based on the full cross-sections of tax returns for each year, where the pnmary taxpayer is age 25 and over
Income IS cash income as defined in the Technical Appendix.
Source US. Treasury Department, 1987-1996 Family Panel, Tax Year 1996 and 2005 Individual Income Tax Files.

Table A.5: Income Mobility Relative to the Base Year Population, Age 25 and Over, 1987-1996 and 1996-2005
Initial
Income
Quintile
Lowest
Second
Middle
Fourth
Highest
Top 10%
Top 5%
Top 1%

End of Period Income Quintile 11996 or 2005)
Time
Period
1987-1996
1996-2005
1987-1996
1996-2005
1987-1996
1996-2005
1987-1996
1996-2005
1987-1996
1996-2005
1987-1996
1996-2005
1987-1996
1996-2005
1987-1996
1996-2005

Lowest
54.6
54.1
25.5
27.1
12.0
10.6
5.1
5.4
2.7
2.8
2.5
2.7
2.5
2.9
2.5
3.4

Second
22.1
22.8
36.5
36.7
24.6
26.0
12.3
10.4
4.6
4.1
3.0
2.7
2.4
2.3
1.6
1.2

Middle
11.1
11.1
20.3
19.7
32.9
33.1
25.0
26.7
10.8
9.6
6.7
6.0
4.6
4.6
3.5
2.9

Fourth
7.5
7.8
12.0
10.9
19.9
20.5
37.0
37.7
23.5
23.1
14.9
14.0
9.6
8.9
6.1
4.7

Highest
4.7
4.3
5.7
5.7
10.6
9.7
20.5
19.9
58.4
60.4
72.9
74.7
80.9
81.4
86.3
87.8

Total
100.0
100.0
100.0
100.0
100.0
100.0
100.0
100.0
100.0
100.0
100.0
100.0
100.0
100.0
100.0
100.0

Top 10%
2.2
20
2.0
2.2
4.2
3.5
6.8
6.7
34.8
35.7
52.9
54.1
67.1
68.5
80.0
81.9

Toe 5%
1.1
1.1
0.6
1.1
1.7
1.4
2.7
2.3
18.9
19.1
31.5
33.0
47.5
50.6
71.6
74.5

Top 1%
0.2
0.2
0.2
02
0.3
0.3
0.3
0.3
4.1
4.1
7.6
7.6
13.5
14.0
38.1
40.4

20.0
1987-1996
20.0
20.0
20.0
1.0
20.0
100.0
10.0
5.0
1996-2005
20.0
20.0
20.0
1.0
20.0
20.0
100.0
10.0
5.0
Notes: For each initial income quintile, the upper row shows the 1987-1996 period and the lower row shows the 1996-2005 period. The table
includes returns of households where the primary taxpayer filed in both years and is age 2S or over in the initial year. Income breaks for the
quintiles and top percentiles use only the tax returns where the primary taxpayer is age 25 and over in the base year and filed in both years.
Income is cash income as defined in the Technical Appendix.
All Income
Grou~s

Source U.S. Treasury Department, 1987-1996 Family Panel, Tax Year \996 and 2005 Individual Income Tax Files

Table A.6: Absolute Income Mobility of Households Age 25 and Over, 1987-1996 and 1996-2005

Initial
Income
Quintile
Lowest
Second
Middle
Fourth
Highest
Top 10%
Top 5%
Top 1%

Base
Year
1987-1996
1996-2005
1987-1996
1996-2005
1987-1996
1996-2005
1987-1996
1996-2005
1987-1996
1996-2005
1987-1996
1996-2005
1987-1996
1996-2005
1987-1996
1996-2005

Distribution of Percentage Changes in Income in $2005
Decreased
Increased Increased
No
Increased
more than Decreased
50 to
100% or
50%
5 to 50%
5 to 50%
100%
more
change
17.0
8.7
10.3
4.0
12.8
47.3
6.8
9.3
2.6
14.2
13.7
53.5
6.0
22.0
8.7
28.0
14.8
20.6
28.4
15.9
6.6
17.1
5.3
26.8
28.7
7.0
29.2
10.7
13.2
11.2
31.0
17.0
6.0
20.2
7.6
18.3
30.9
8.1
34.5
10.2
9.6
6.6
6.7
34.1
25.1
7.9
15.6
10.7
14.2
9.1
25.6
7.4
7.5
36.3
30.2
12.5
8.3
11.9
28.9
8.2
18.0
34.7
8.1
22.6
7.6
8.9
7.8
26.0
11.2
16.4
29.6
8.9
23.2
31.7
20.3
8.0
6.5
10.2
20.3
10.3
22.6
29.6
6.8
10A
14.3
6.6
37.0
26.7
4.8
10.7
13.3
36.7
25.8
4.3
7.3
12.6

Percent Change in:
Mean
Income
247.5
284.6
53.9
82.6
30.9
52.5
15.6
15.6
9.6
25.0
10.3
25.8
9A
27.7
1.6
13.6

Median
Income
80.6
108.7
22.1
380
9.1
26.2
2.3
17.0
-1.8
8.7
-4.0
4.0
-8.2
-3.7
-23.8
-23.4

26.4
11.3
1987-1996
9.0
27.6
8.8
17.0
All Income
24.1
111
28.1
1996-2005
7.9
20.8
14.7
6.5
22.0
41.0
30.2
Groues
Notes: For each initial income quintile, the upper row shows the distribution of changes over the 1987-1996 period and the lower
row shows the 1996-2005 period. Each row sums to 100 percent across the first six columns. The table includes returns of
households where the primary taxpayer filed in both years and is age 25 or over in the initial year. Income breaks for the base year
quintiles and top percentiles are based on the tax returns of primary taxpayers whose age is 25 and over. Income is cash income in
2005 dollars as defined in the Technical Appendix.
Source: U.S. Treasury Department, 1987-1996 Family Panel, Tax Year 1996 and 2005 Individual Income Tax Files.

HP-674: Treasury Announces the Appointment of Gambrell to Serve as Director of the Community De... Page 1 of 1

November 9, 2007
HP-674
Treasury Announces the Appointment of Gambrell to Serve as Director of the
Community Development Financial Institutions Fund
Treasury Secretary Henry M. Paulson, Jr. today announced the appointment of
Donna Gambrell to serve as Director of Treasury's Community Development
Financial Institutions Fund. The appointment is effective November 26,2007.
As Director of the CDFI Fund, Gambrell will oversee the expansion of access to
capital and financial services in critically under-served urban, rural and Native
American communities, where one of the biggest obstacles to economic
development is a lack of access to mainstream sources of private sector capital.
Gambrell comes to CDFI from the Federal Deposit Insurance Corporation (FDIC)
where she served as Deputy Director, Consumer Protection and Community Affairs
in the Division of Supervision and Consumer Protection. She began her career with
the FDIC in April 1991 as a Community Affairs Officer for the New York Region.
In 2006, Gambrell worked on the Gulf Coast rebuilding efforts in Louisiana and
Mississippi where she spearheaded partnerships among financial institutions,
government agencies, and community-based organizations to promote community
and economic development in areas devastated by Hurricanes Katrina and Rita
including low and moderate-income neighborhoods.
Prior to joining the FDIC, Gambrell worked at the Resolution Trust Corporation
(1989-1991), the Federal Savings and Loan Insurance Corporation (1987-1989),
and the U.S. General Accounting Office (1979-1987).
Gambrell is a graduate of Towson State University and received a masters of
science degree from New York University. In 2004, she received a National Public
Service Award for her innovative work over the years in formulating public-private
partnerships.
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12/312007

HP-676: Treasury Targets Lukashenko-controllcd Petrochemical Conglomerate

Page 1 of 1

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November 13, 2007
HP-676

Treasury Targets Lukashenko-controlJed Petrochemical Conglomerate
Washington, D.C.--The U.S. Department of the Treasury today designated
Belarus' largest petrochemical conglomerate under Executive Order 13405 as
being controlled by oppressive Belarusian president Alexander Lukashenko.
"Today's action tightens our sanctions against Lukashenko and his cronies by
imposing financial sanctions against a massive conglomerate under the regime's
control," said Adam Szubin, Director of Treasury's Office of Foreign Assets Control
(OFAC).
Belarusian State Concern for Oil and Chemistry, a.k.a. Belneftekhim, along with its
representative offices in Germany, Latvia, the Ukraine, Russia, and China, and its
wholly-owned U.S. subsidiary Belneftekhim USA, Inc., were added to Treasury's list
of Specially Designated Nationals and Blocked Persons, with the result that any
assets the entities hold under U.S. jurisdiction must be frozen and U.S. persons are
prohibited from transacting or doing business with the designated entities.
Today's action follows the 2006 blocking of the assets of Lukashenko and nine
other senior officials of his administration. In February 2007, Treasury blocked the
assets of another 6 high-ranking Belarusian officials, bringing the total number of
designated officials to 16.
Today's designations are made pursuant to Executive Order (E.O.) 13405, which
was issued in 2006 in light of the oppression by Lukashenko and key members of
his administration. E.O. 1:)4()S authorizes the Secretary of the Treasury, after
consultation with the Secretary of State, to block the assets of individuals or entities
determined to be responsible for, or to have participated in, actions or policies that
undermine democratic processes or institutions in Belarus; to be responsible for, or
have participated in, human rights abuses related to political repression in Belarus;
to be senior officials, family members of such officials, or persons closely linked to
such officials who are responsible for, or have engaged in, public corruption related
to Belarus; to have materially assisted, sponsored, or provided financial, material,
or technological support for, or goods or services in support of, the activities
described above or any person listed in or designated pursuant to E.O. 134()S; or to
be owned or controlled by, or acting or purporting to act for or on behalf of, directly
or indirectly, any person listed in or designated pursuant to E.O. 13405.

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12110007

HP-677: Under Secretary for Domestic Finance Robert K. Steel Remarks before the American ... Page 1 of 4

November 13, 2007
HP-677

Under Secretary for Domestic Finance
Robert K. Steel
Remarks before the American Enterprise Institute
Washington - Thank you very much. Peter, thank you for that introduction and to
everyone gathered here today, thank you for welcoming me.
It is a privilege to be here today at the American Enterprise Institute (AEI) AEI has
played a key role in policy-making for over sixty years, welcoming many of our most
respected public servants as scholars and fellows, such as Peter, who served as
General Counsel at the Treasury Department from 1981 to 1985 and White House
Counsel to the President during 1986 and 1987. These esteemed scholars and
fellows have strengthened and consistently reaffirmed AEI's mission to "defend the
principles and improve the institutions of American freedom and democratic
capitalism."
The Administration, the Treasury Department, and Secretary Paulson share these
objectives, which are reflected in their willingness to explore reform of the
regulatory structure related to financial institutions, also the subject of today's panel
discussions. Private-sector financial institutions are some of the more nimble and
critical contributors to this core AEI mission, to the spread of democratic capitalism.
Such institutions serve as a catalyst for economic growth in the United States,
contributing over 8 percent to GOP, and have historically dominated the global
financial services industry landscape.
Recognizing the need to maintain and enhance these institutions' competitiveness
so as to fulfill this mission in an increasingly global environment, this past June
Secretary Paulson announced that the Treasury Department would undertake a
comprehensive review of the regulatory structure surrounding these institutions as
part of a broader initiative focused on U.S. capital markets competitiveness.
Today, let me first explore the genesis of this initiative and then our plan for the
regulatory blueprint project.
Globalization's Impact on Competitiveness
Upon arriving at the Treasury Department in July 2006, Secretary Paulson
immediately focused on enhancing the competitiveness of U.S. capital markets.
From his previous position as the head of a major financial institution engaging in
transactions all around the globe, he had experienced first-hand the changing
nature of the capital markets and U.S.-based financial institutions' ability to compete
in these markets.
He chose to deliver his first speech as Secretary, not here in Washington, but in
New York, reasoning: "I chose New York for my first public remarks because this
city is unquestionably the world's financial capital. New York is home to financial
institutions that are leaders in the United States and in every major market around
the globe - and that is saying something'"
At that time, he pointed out, "the challenge before us now is how to achieve the
right regulatory balance to allow us to be competitive in today's world while
guarding against the recurrence of past abuses." In other words, our task is to
maintain U.S. preeminence in global capital markets for today and into the future.
Refining these thoughts, a few months later in November 2006, Secretary Paulson
devoted a speech, again delivered in New York, to U.S. capital markets
competitiveness, focusing on a number of issues impacting this competitiveness,
including financial services industry regulation.

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12/3/2007

HP-677: Under Secretary for Domestic Finance Robert K. Steel Remarks before the American ... Page 2 of 4
At apprOXllllately the same time of the Secretary's arrival at the Treasury
Department, the financial community actively began to debate the causes of the
decline in the U.S. share of global initial public offering (IPO) dollar volume and
question whether this decline signaled the diminishing competitiveness of the U.S
capital markets. Acknowledging this trend and this question, Secretary Paulson
suggested in his November speech that part of this decline likely reflected
globalization and the successful dissemination of market-based ideas to other
regions of the world.
In addition to dollar volume, other IPO statistics also indicate this globalizing trend:
Many foreign economies have been rapidly transforming to market-based
economies. Of the largest 20 IPOs in 2006, 19 were foreign companies listing in
foreign jurisdictions, five of which were privatizations of Chinese state-owned
companies listing in Hong Kong or Shanghai. Only one--a U.S. company--of the 20
largest IPOs listed on a U.S. exchange.
Ninety percent of the companies going public in 2006 listed on their domestic
exchanges. The number of global IPOs more than doubled from 839 in 2002 to
1729 in 2006 (with just over 10 percent listing in the United States) and the amount
invested in these offerings nearly quadrupled from $66 billion in 2002 to $246 billion
in 2006. On one level, the United States should be concerned about its declining
share in global IPO dollar volume; on another level, the United States should
acknowledge globalization at work and take credit for the exportation of marketbased ideas to other regions.
Although IPOs have become an often-referenced benchmark of capital markets
competitiveness, to my mind focusing solely on that measurement is overly
simplistic. Instead, we should look broadly at measures that gauge our ability to
foster human capital, encourage innovation, and reward efficiency. As these
conditions are met, we will continue to excel in areas such as: asset management;
alternative asset management vehicles, such as hedge funds, venture capital, and
private equity; technology; mergers and acquisitions; trading and execution models:
and listed and unlisted derivatives.
By most of these measurements we remain the uncontested leader. Yet, the
United States must understand these new challenges to its dominance and
recognize it helped foster this foreign competitiveness.
Another figure might also demonstrate the continuing U.S. influence in this
globalization and the importance of competitive U.S. financial institutions. Seven of
the top 10 financial institutions in terms of 2006 investment banking revenues are
based in the United States. Clearly symbolizing the global presence of U.S.-based
financial institutions, at the same time this number should give us pause: Could
these numbers suggest a "regulatory escapism" of U.S.-based financial
institutions? That is, are U.S.-based financial institutions in some instances
purposely avoiding the U.S. marketplace and seeking to do business in different
Jurisdictions with a regulatory climate more conducive to innovation and
entrepreneurialism? Due to the relative youth of their market-based economies,
many of these jurisdictions benefit from a recently created or a newly developing
regulatory structure highly homogenized with a modern and complex financial
environment.
The United States, however, does not possess the luxury of such a regulatory
tabula rasa. Over several decades the U.S. financial services industry has
accumulated layers of regulation, act upon act, rule upon rule, often difficult for
market participants to navigate, often exposing consumers and Investors to
unnecessary regulatory gaps.
Our regulatory system has adapted to market events by expanding (sometimes in
crisiS moments) rather than aiming for the broader objectives of market stability,
consumer and investor protection, and cost-effectiveness ThiS creates a difficult
environment for both regulators and regulated. Regulators must find ways to
balance appropriately these matters
Regulatory Blueprint and the Rate of Innovation
After reflecting on these issues and hearing from investors, market participants, and

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HP-677: Under Secretary for Domestic Finance Robert K. SteeI Remarks before the American ... Page 3 of 4
public policy experts at a Treasury-hosted conference on U.S. capital markets
competitiveness last spring, Secretary Paulson asked the Treasury Department to
undertake a comprehensive review of the regulatory structure surrounding financial
institutions and develop recommendations to modernize the U.S. regulatory
system. The goal of this regulatory blueprint is to improve the effectiveness of the
regulatory structure relating to financial institutions, to find the "right regulatory
balance ... marry[ing) high standards of integrity and accountability with a strong
foundation for innovation, growth, and competitiveness."
The Treasury Department will approach its review of the current financial services
regulatory structure holistically, taking into account all financial services industry
participants including insurance, securities, and futures firms, in addition to
depository institutions, upon which most past Treasury Department studies have
focused.
One of the great challenges in undertaking this project will be to find a regulatory
system ensuring consumer and investor protection and market stability and
adaptive to the accelerating rate of innovation and complexity in the financial
services industry.
Having spent 30 years in the financial services industry prior to my appointment as
Under Secretary for Domestic Finance, I witnessed considerable innovation in the
capital markets. But, it was really my last few years in the financial services
industry that thiS change accelerated at a nearly mesmerizing pace.
When I began my career in the securities industry, technology was an infrequentlydiscussed skill or asset, thought of only as a processing tool. The capital markets
were characterized by a nationalistic perspective and innovative vehicles, such as
derivatives, were just appearing. Compare that with today when the skilled
technologist is a key actor in the industry, markets are global--operating 24/7
without boundaries--, and innovation is a skill reqUired for success.
Technological developments have led to innovations in financial products and
forever changed information flow. As a result, some have suggested the world has
flattened; it has, at the very least, become more compressed. And, this
compression will only increase with the passage of time.
This past summer, I heard current AEI fellow and accomplished public servant,
Newt Gingrich, discuss this rate of change in terms of science. "In scientific
knowledge and advancement, we are experiencing today a rate of change that is
four times greater than what we did during the last 25 years--making the scale of
change we will experience in the 25 year period 2006-2031 at least equivalent to
what we experienced in the 100 year period 1906-2006."
I would posit that the financial services industry will experience similar accelerating
rates of change. In my final five years in the financial services industry I saw as
much innovation as I saw in my first 25 years. At the same time. financial innovation
and complexity, propelled forward by globalization, will increasingly expose existing
fissures and gaps as well as obstructions and inefficiencies in our regulatory
system.
What does this mean for policymakers? What does this mean for the Treasury
Department's blueprint? We must work to find a regulatory system that fills these
fissures and gaps, removes these obstructions, and nimbly allows for adaptation to
innovation and complexity.
To inform our work on the regulatory blueprint, the Treasury Department published
a Federal Register notice last month seeking public comment on a number of topics
impacting the regulation of financial institutions, including overlapping state and
federal regulation, consumer and investor protection, and the strengths and
weaknesses of having multiple regulators and multiple federal charters.
The Federal Register notice also includes a section of general questions to enable
consideration from a broad and integrated perspective, including questions
regarding functional regulation, overall risk to the financial system, principles-based
and rules-based regulation, and macro-level regulatory structure models.

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These matters should be very familiar to many of you in this audience. The Report
of the Financial Services Roundtable's Blue Ribbon Commission on
Competitiveness, the subject of the panels that have preceded and will follow my
remarks, addresses several of these issues. Let me commend the Financial
Services Roundtable and the Co-Chairs of the Roundtable's Commission on
Enhancing Competitiveness, Richard M. Kovacevich and James Dimon, for their
important work in this area, which will inform the debate as the Treasury
Department moves forward. In past speeches, the Treasury Department has
highlighted several issues that the Roundtable's Report conSiders, including the
need for finding an appropriate balance between rules-based and principles-based
regulation, enhancing the dialogue between the regulator and the regulated, and a
continual and comprehensive regulatory cost-effectiveness analysis.
The Treasury Department recognizes the urgency of updating U.S. regulatory
structure. Although the regulatory blueprint initiative was contemplated well before
the recent market events, the regulatory gaps and fissures these events revealed
underscore its necessity. Unlike many of the regulatory studies the Treasury
Department has undertaken in the past, which have been mandated by Congress,
Secretary Paulson initiated this project. We fully intend to adhere to our friend
Peter Wallison's advice to "be bold" when making our final recommendations.
The reports and analysis of private sector organizations, such as the Financial
Services Roundtable, reaffirm this sense of urgency. In the past, the United States
has served as a model to other economies in its ability to achieve regulation
effectively protecting consumers and investors, ensuring market stability, and
fostering innovation. Federal policymakers should be obliged to work to update this
model so that the United States can continue to lead a regulatory race to the top.
Conclusion
I mentioned at the beginning of my remarks that Secretary Paulson chose the
setting of New York as his first speech as Treasury Secretary because of that city's
being the financial capital of the world, home to several globally-dominant financial
institutions. The Secretary also suggested another reason: "I also chose to come to
New York because I know from experience that the solutions to our nation's
challenges are not always found in Washington."
I am delivering these remarks in Washington, populated with federal policymakers
and departments and agencies, because I know from experience that the shared
responsibility between the private sector and public sector of defining and
implementing the optimal solutions regarding regulatory structure lies here in the
city.
Thank you.

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HP-678: Treasury Welcomes IMF Debt Relief for Liberia, U.S. Government to Provide Additional Fun ... Page 1 of 1

November 13, 2007
HP-678
Treasury Welcomes IMF Debt Relief for Liberia, U.S. Government to Provide
Additional Funding to Help Liberia Close the Deal at the African Development
Bank
Washington, DC--Treasury Secretary Henry M. Paulson, Jr. today welcomed the
announcement from the International Monetary Fund (IMF) that over 80 IMF
member countries have agreed to provide approximately $840 million in financing
for debt relief for Liberia.
"I am proud of the U.S. leadership role, alongside our G-8 partners and
management at the international financial institutions, in mobilizing financing for full
debt relief for Liberia at the IMF, World Bank and African Development Bank," said
Paulson. "This debt relief will help strengthen the economic turn-around begun by
President Johnson Sirleaf."
Additionally Treasury announces today that it will provide funding for Liberia's
required approximately $2.5 million contribution to clearance of its arrears at the
African Development Bank (AfDB). This will bring the total U.S. contribution to
clearing Liberia's arrears at the AfDB to about $17.5 million. Without this extra
contribution from the United States, the Liberian government would have had to put
up $2.5 million at the AfDB.
"We would rather see the Liberians use their money for schools, health clinics and
other urgent rebuilding needs," said Paulson. "It is time to close the deal and move
forward with debt relief plans at all three of the international financial institutions."
Paulson departs today for a six-day trip to Africa to discuss the positive economic
changes taking place on the continent with government and business leaders.
"This debt relief will allow Liberia to move forward. By sustaining natural resources,
building physical infrastructure, developing financial markets, improving business
climates and promoting free trade, African leaders will bring jobs and greater
prosperity to all Africans. The traditional African values of hard-work and
persistence, combined with leadership dedicated to good governance, will make
this possible," said Paulson.

Background
The U.S. Treasury had earlier said that it would:
•

Provide over $185 million (SDR 118 million) as part of Liberian debt relief
financing at the IMF;
• Provide $15 million to the African Development Bank for Liberian debt relief
financing;
• Forgive our $391 million in claims on Liberia under the Heavily Indebted
Poor Country (HIPC) framework. President Bush requested funding in the
FY2008 budget to cover the start of the process.

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HP-679: Remarks by Ambassador Alan F. Holmer at Qinghua University Entitled Establishin... Page 1 of 5

November 14, 2007
HP-679
Remarks by Ambassador Alan F. Holmer at
Qinghua University Entitled
Establishing New Habits of Cooperation
in U.S.-China Economic Relations
Beijing - Good evening. It's a pleasure to visit Qinghua University today. Your
institution has provided China with an abundance of its top political, business and
academic leaders, many of whom have played critical roles in advancing the U.S.China relationship. I applaud their efforts. I hope many of you will embrace their
commitment to the U.S.-China relationship in your future careers.
Personal Reflections
When I became Special Envoy for China and the Strategic Economic Dialogue in
February of this year, Vice Premier Wu Yi encouraged me to visit the parts of China
beyond Beijing and Shanghai. I happily followed her advice. During this year, I have
been privileged to visit Shenyang, Qinghai, Xian, Chengdu, Guangzhou, Shenzhen
and Hong Kong. My trips have included several visits to rural villages to see the
depths of the challenges you face in promoting balanced, harmonious growth.
The complexity of your country is fascinating - and daunting. I have found China to
be: rich and poor, modern and ancient, Communist and capitalist, reforming and
conservative, and passive and proactive. I am deeply impressed with China's
dynamism, creativity, and diversity.
President Bush and Treasury Secretary Paulson recognize that a prosperous China
and stable bilateral relations are in America's interests. Yet, China is so large and
populous that by merely changing itself China is also changing the world. This
situation has created both challenges and opportunities for U.S.-China economic
relations. I would like to outline my views on those today. Our Changing Economic
Relationship
China's re-emergence on the global stage is one of the most consequential
geopolitical events of recent times. There is hardly an issue - from trade, to national
security, to climate change - or a place - from North Korea to Iran to Sudan where American and Chinese interests do not increasingly overlap. Because China
is so fully integrated into the global economy, what happens in China's economy
affects the entire international community.
A cooperative, constructive and candid U.S.-China relationship is central to
understanding and responding to China's rise. in all its possible manifestations.
As I look across the U.S.-China economic relationship, it is clear to me that this
relationship is entering a new phase.
First. U.S.-China economic interdependence is deepening. We need each other
more and on a broader number of economic and economically consequential
issues. Over the past 5 years. according to U.S. data. U.S. exports to China have
grown from $18 to $52 billion. while U.S. imports from China have grown from $102
to $287 billion
Moreover, the United States and China are shaping. and being shaped by, global
energy and environmental trends. which have strong economic consequences. For
example. our countries are the world's largest energy consumers and the largest
emitters of greenhouse gases.

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Second, whereas trade and Investment were once largely a source of stability in
bilateral relations, they are now increasingly also a source of tension. Such tensions
are straining the domestic consensus in both the United States and China on the
benefits of economic engagement.
When I first became deeply involved in international trade issues in the 1980s, we
didn't have significant trade tensions with China - mainly because we didn't have
much bilateral trade. In a sense, the fact that we have trade tensions reflects a
maturing of our relationship and the rapid growth in bilateral trade and investment.
We need to make sure we manage those tensions effectively in order to keep our
bilateral economic relationship on an even keel.
Raising trade issues within the WTO is a normal mechanism for addressing
disagreements among equal, sovereign trading nations. According to WTO
statistics, the United States has had 99 cases filed against us since the WTO's
founding in 1994; and the United States has filed 88 cases against 28 countries. In
the case of China, five cases have been filed against China by the United States
and two cases against the U.S. by China. The EU has brought the most cases
against the United States (31 ), followed by Canada (14).
Anxieties about increasing trade manifest themselves in several ways, which leads
me to the third dynamic confronting us: the rise of economic nationalism and
protectionism in both our nations. These sentiments may constrain leaders from
adopting policies that are in the long-term interests of the citizens and economies of
the United States and China.
In responding to globalization, policymakers in both countries must resist the
impulse to discard the hard-fought and long-term gains of open economies by
pursuing short-term and misguided policy responses. [For example, in the US., the
Bush Administration continues to oppose congressional proposals, addressed at
China's currency practices, which would be counter-productive and pose risks to
the U.S. economy. At the same time, Chinese barriers to U.S. exports and
investment, in the context of a large and rising Chinese current account surplus and
protracted large-scale interventions in foreign currency markets, make it more
difficult to keep the U.S. economy open.
These three emerging dynamics to our economic relationship - deepening
interdependence, a strained policy consensus, and the rise of economic
protectionism - are mutual and require cooperative solutions. Managing Complexity
and Establishing New Habits of Cooperation
These dynamics informed the creation of the Strategic Economic Dialogue (SED)
by President Bush and President Hu Jintao in 2006. They envisioned a forum to
allow both governments to communicate at the highest levels and with one voice on
issues of long-term and strategic importance.
Managing our complex and increasingly interdependent relationship is daunting and requires speaking to the right people - at the right time - on the right issues and in the right way.
I learned a long time ago that if you are going to be successful in any kind of
dialogue, it IS essential that you do everything you can to put yourself in the other
person's shoes, to try to see the world the way he or she does. This is the way you
achieve win-win agreements, ones that advance mutual interests, agreements that
will withstand the tests of lime. The StrategiC Economic Dialogue embraces this
approach.
As a new and leading institution in U.S.-China relations, the SED has created useful
channels among policymakers in Washington and Beijing. In doing so, we are resetting the foundation for stable and prosperous economic interactions.
The United States has three core objectives for the SED.

Establishing New Habits of Cooperation
First, through this framework, we are advancing the U.S-China economic

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relationship by establishing new tlabits of bilateral cooperation.
We have embraced a broad agenda that covers cross-cutting economic and
economically consequential issues. including regulatory transparency. energy
conservation. environmental protection. innovation, food and product safety, as well
as the important economic issues of exchange rate and macroeconomic policies,
market access, and financial sector development and liberalization.
Our approach engages multiple and diverse government officials in both countries
to facilitate more inclusive interactions. It breaks down classic bureaucratic stovepipes that hinder effective communication and impede results. At the same time, we
have continual, high-level interactions to set priorities and ensure their full
implementation.
Having said that, good process does not ensure good results.
Dialogue among senior Chinese and American officials, while useful, needs to be
more than talking for the sake of talking and can not give leaders "a pass" on issues
of disagreement. It is about setting priorities, specifying consequences and
fashioning practical solutions.
And that's what direct engagement does: it keeps the relationship on an even keel
by lessening miscommunication and dispelling misperceptions so common in the
history of the U.S.-China relationship.
It helps us signal to China that we welcome the rise of a confident, peaceful and
prosperous China. A weak and insecure China is not in America's economic or
security interests.
Accelerating China's Economic Transition
Second, it is vitally important that our policies accelerate the next wave of China's
"reform and opening" process. The pace of China's growth has clearly been
remarkable, but continued effort is needed.
China's top leaders now realize that a key challenge they face is taking the bold
policy steps necessary for an economy that is no longer in the first stages of
economic growth.
We applaud the leadership's current efforts to transition to an economy that is more
market-oriented, less reliant on low-value added manufacturing exports, one that
depends more on the skills and resourcefulness of the Chinese people and less on
material inputs and natural resource consumption.
A major risk China faces is that its government won't act quickly enough to take the
policy steps necessary to deal with the economic and social imbalances created by
its growth model. Without strong policy adjustments, China's economic growth path
becomes unsustainable, as Chinese top leaders have publicly stated. We are
encouraging key reforms that will help China manage the blistering pace of its
economic growth; these include financial market liberalization and a plan for
rebalancing growth. China has proven to the world that it can grow fast, but can it
grow differently and. ultimately, sustainably, where the quality of growth is as
important as the quantity.
Bold structural policies are needed to shift China's growth away from heavy
industry, high energy use, capital intensiveness, and dependence on exports towards greater reliance on domestic demand, production of services. and a greater
share of China's national income accruing to China's households.
To enable market forces to efficiently rebalance the economy and spread prosperity
to all the Chinese, China needs more flexible prices, including a much more flexible,
market-driven exchange rate. Exchange rate fleXibility is also key to allowing
monetary policy - the most potent instrument for guiding an economy - to focus on
assuring price and financial stability.

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Also, the RMB's exctlange rate IS increasingly being viewed by many countries as a
source of unfair competition. A growing number of national leaders and multilateral
institutions are calling for currency appreciation The IMF's annual meeting held in
Washington last month concluded with a communique that called for greater
flexibility of the RMB.
The IMF communique acknowledged that an orderly unwinding of global
imbalances while sustaining global growth is a shared responsibility. For America, it
requires, among other things, steps to boost national saving in the United States,
including continued fiscal consolidation. I'm pleased to report that we are making
progress, though our work is not done. According to the latest data, the U.S. federal
budget deficit fell by about half, from 2 Y, % of GOP to 1 Y. % between 2005 and
2007.
A key to China's future success will be its willingness to accelerate the pace of its
market-based economic reforms. Meeting and going beyond its WTO commitments,
resisting protectionist sentiment, and opening up its economy to greater
international competition for goods, and particularly, services, will help rebalance
the Chinese economy and spread prosperity more broadly among the Chinese
people.
These reforms are - and will continue to be - resisted by increasingly influential
Chinese businesses. In my judgment, the greatest risk to China's long-term
economic security is not that China opens too fast, but. rather, that protectionists
prevail, and Chinese reforms proceed too slowly.
Encouraging China's Responsible Global Engagement
Third, and finally, we are also encouraging China to act responsibly as a global
economic power. We welcome China into key international financial institutions and
are giving China a greater voice in them as well.
Since the initiation of the SED in September 2006, we have supported China's
efforts to Join the Inter-American Development Bank (IADB) and the Paris-based
Financial Action Task Force (FATF). We also strongly support a greater voting
share for China in the IMF and World Bank.
Increased participation will allow China to advance its interests in those institutions,
but it is also important that Beijing recognize the responsibilities of greater
participation.
China has become a major source of foreign aid for many of the poorest countries.
We look forward to working with China, as a new and welcome participant, in
multilateral efforts to assure that foreign aid and lending practices promote
sustainable development.
This new era in U.S.-China economic relations requires new and dynamic ways of
doing business. We are meeting these challenges through the creation of the
political space and the institutional capacity for long-term stability in our bilateral
economic relations. Our Guiding Principles
Our strategy for pursuing these objectives is guided by the principles of shared
responsibilities and shared benefits. Although simple - perhaps deceptively so these principles form the core of an economic logiC that is key to supporting deeper
reform in China and advancing U.S.-China economic relations.
I raise shared responsibilities and shared benefits to underscore that U.S. economic
policy towards China does not spring from a desire to shape China in the image of
the United States or according to another model of economic development. Chma IS
a sovereign nation with a unique history, culture, and economy. Nonetheless, we
hope Chinese leaders will fully appreciate the depth of the U.S. experience In
building a strong and open economy.
The SED's approach towards China is based on sound lessons from history, a firm
belief in the role of markets, and recognition that the United States and China have
common strategic interests. It reflects an economic imperative for China to pursue

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market-based reforms ttlat are central to sustainable, non-inflationary growth.
By acting on these principles of shared responsibilities and shared benefits, U.S.
and Chinese policymakers can continue global economic integration and maintain
stable relations. Together, we will incur costs, shoulder burdens and reap benefits.
The risk here is that - by not standing up to meet our shared responsibilities - the
citizens of China and the United States will not share in the future benefits.
Signposts and Benchmarks
While dialogue and negotiations are important, they are far from sufficient to ensure
that we keep the bilateral relationship future-oriented and on an even keel. Tangible
progress is critically important to demonstrating that we are achieving our long term
objectives.
In May, we announced a new air services agreement that will double passenger
traffic between the United States and China by 2012 and allow full air cargo
services between both countries by 2011. In addition to the commercial gains for
both countries, additional benefits include more commerce, greater cultural
exchanges, and enhanced understanding.
We are collaborating with China on a series of policies to foster demand for the
development and deployment of clean and efficient, next-generation energy
technology. This, in turn, will create a future in which two of the largest economies
in the world become examples of bilateral cooperation towards sustainable
development.
In the SED, we are working with China to develop more modern and efficient capital
markets in China. This will also help China move more quickly toward a marketdetermined exchange rate which will improve the government's ability to use
monetary policy to promote price and financial stability.
Our enhanced dialogue has allowed us to confront problems frankly and honestly and often rapidly. Recent and repeated reports of tainted food and product imports
are causing fear and uncertainty in American consumers and harming the "Made in
China" brand in the United States.
The effectiveness with which China manages these safety issues will have long
term implications for U.S.-China trade relations, the integration of China into the
global trading system, and the sustainability of China's economic growth. We also
need to make sure that policymakers in both countries are focused on sciencebased safety decisions, not protectionism or retaliation.
Our next cabinet-level meeting of the SED in December in Beijing will discuss a
number of these objectives. Specifically, we will focus on the integrity of trade,
balanced economic development, energy conservation, financial sector reform,
environmental sustainability, and advancing bilateral investment.Towards a New
Future for Bilateral Economic Relations
President Bush and President Hu have set a positive agenda for strengthening our
economic relationship. The SED is a core part of that agenda because it is longterm in its vision, comprehensive in its scope, and immediate in its ability to deal
with the most sensitive bilateral economic tensions.
The economic and geopolitical landscape of the 21 st century will be greatly
influenced by the way in which the United States and China work together. That
emerging future requires a distinct vision and effective mechanisms to achieve it.
By establishing new habits of cooperation, the SED has allowed both the United
States and China to begin to write the next chapter of our strategic economic
relationship.

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HP·680: Deputy Assistant Secretary Valerie Abend Before the U.S. House of Representative Judi...

Page 1 of2

November 14, 2007
HP-680

Deputy Assistant Secretary Valerie Abend Before the
U.S. House of Representative Judiciary Committee
Washington- Mr. Chairman, Ranking Member Smith, and Members of the
Committee, it is my privilege to represent the Treasury Department today to discuss
the Unlawful Internet Gambling Enforcement Act of 2006 (the "Act").
Proposed Rulemaking Process
The Act is designed to require the various payment systems to stop the flow of
funds from gamblers to businesses providing unlawful Internet gambling services.
To accomplish this, the Act requires the Treasury Department and the Federal
Reserve Board, in consultation with the Justice Department, to jointly prescribe
regulations requiring participants in designated payment systems to establish
policies and procedures that are reasonably designed to prevent or prohibit such
funding flows.
On October 4,2007 the Treasury Department and the Federal Reserve Board
published a Notice of Proposed Rulemaking seeking public comment on the
proposed rule. Our goal when writing this proposed rule was to faithfully adhere to
the mandates set forth by Congress in the Act.
I would like to take a moment to discuss the process the Treasury Department
followed to develop this proposed rule. As you are aware, joint rule making requires
extensive coordination. The Treasury and the Federal Reserve Board began this
proposed rulemaking first by identifying individuals within our offices that have
experience with rulemaking and payment systems' operations. At the Federal
Reserve, this included individuals responsible for FedWire, one of the largest
payment systems in the country.
We have learned a lot since the passage of the statute by working with both the
Federal Reserve Board and the Justice Department. Payment systems are complex
and vary greatly. They are built to meet the needs of the particular participants and
while some are modernized, others are paper-based systems. The complexity and
differences necessitate different approaches to meet the requirements of the statute
effectively. We expect to learn more from the comments that we will receive during
the comment period, which runs through December 12, 2007.

Fulfilling the Act's Mandates
As I mentioned earlier, our overarching principle has been that the proposed rule
should faithfully adhere to the Congressional mandates in the Act. First, the Act
requires us to designate payment systems that could be used in connection with
unlawful Internet gambling. The proposed rule designates the following 5 payment
systems:
• Automated Clearing House Systems
• Card Systems (e.g., credit cards, as well as stored value cards)
• Check Collection Systems
• Money Transmitting Businesses
• Wire Transfer Systems (i.e., CHIPS)
Second, the Act requires us to provide exemptions if the Treasury Department and
the Federal Reserve jointly determine that it is not reasonably practical for
participants in designated payment systems to prevent or prohibit unlawful Internet
gambling transactions. No payment system is exempted completely from this

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proposed regulation. However, the proposed rule does partially exempt certain
participants within some of the designated payment systems from having to
establish policies and procedures. The Treasury and the Federal Reserve Board
determined that this was the most appropriate way to implement the Act consistent
with Congressional intent.
Under the proposed rule, the gambling business's bank, or, if abroad, the first U.S.
bank dealing with that bank, is not exempted because it could, through reasonable
due diligence, ascertain the nature of its customer's business and ensure that the
customer relationship is not used to receive unlawful Internet gambling
transactions. Let me emphasize that there are requirements under the proposed
rule for the bank in the United States that has a corresponding relationship with a
gambling business's bank. The proposed exemptions generally extend to the
gambler's bank. For example, in the case of checks, the check collection system is
highly automated and it is not reasonably practical for the gambler's bank to know
whether a check presented to it for payment involves unlawful Internet gambling.
However, the gambling business's bank, or, if abroad, the first U.S. bank to receive
the check under the proposed rule would need to have policies and procedures to
block the processing of the check.
Third, the Act requires us to provide nonexclusive examples of policies and
procedures, which would be deemed "reasonably designed" to prevent or prohibit
unlawful Internet gambling transactions. As a result, this proposed rule contains a
"safe harbor" provision, as mandated by the Act that includes for each designated
payment system nonexclusive examples of reasonably designed policies and
procedures.
Fourth, the Act requires us to ensure that certain transactions excluded from the
definition of the term "unlawful Internet gambling" are not prevented or prohibited by
the proposed rule. For example, the UIGEA states that "the term 'unlawful internet
gambling' shall not include any activity that is allowed under the Interstate
Horseracing Act of 1978 (IHA). This provision was immediately followed by the
Sense of Congress provision that states that the UIGEA was not intended to
change the relationship between the IHA and other federal statutes. The IHA did
not amend or repeal existing criminal statutes. Since the proposed rule only covers
"unlawful internet gambling", it in no way requires participants to prevent or prohibit
transactions that are lawful under the Interstate Horseracing Act and all other
applicable federal statutes.

Conclusion
Through our efforts to date, we are making progress in reaching our objective of
promulgating a final rule that strictly adheres to the statute. We expect to receive a
large number of comments as we approach the close of the comment period. We
have an open mind on all aspects of the proposed rule. We will be providing
analysis of the comments received, and reasons for any decisions that will be
made, as we publish the final rule. Let me assure you that we are committed to
giving fair consideration to all relevant comments as we work toward promulgating a
final rule. We have much work to do, but we understand the task ahead and what
we will need to do to reach our objective. Thank you, I would be happy to answer
your questions.
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November 14, 2007
HP-681
Under Secretary for International Affairs David H. McCormick
Testimony before the Senate Committee on Banking, Housing,
and Urban Affairs
Chairman Dodd, Ranking Member Shelby, Members of the Committee, good
afternoon. I very much appreciate the opportunity to appear before you today to
discuss sovereign wealth funds. This is a timely hearing on a very important topic.
At Treasury, we have been increasingly focused on sovereign wealth funds for
more than a year now. I am pleased to be able to share with the Committee some
of our views.
History and Context
First, some history: sovereign wealth funds are not new. The oldest of these funds
date back to the 1950s in Kuwait and Kiribati. Over the next four decades, their
numbers slowly grew. Three of the largest and most respected funds - the Abu
Dhabi Investment Authority, Singapore's Government Investment Corporation, and
Norway's Government Pension Fund-Global- were founded in 1976, 1981, and
1990, respectively. By the year 2000, there were about 20 sovereign wealth funds
worldwide managing total assets of several hundred billion dollars.
Today, what is new is the rapid increase in both the number and size of sovereign
wealth funds. Twenty new funds have been created since 2000, more than half of
these since 2005, which brings the total number to nearly 40 funds that now
manage total assets in a range of $1.9-2.9 trillion. Private sector analysts have
projected that sovereign wealth fund assets could grow to $10-15 trillion by 2015.
Two trends have contributed to this ongoing growth. The first is sustained high
commodity prices. The second is the accumulation of official reserves and the
transfers from official reserves to investment funds in non-commodity exporters. It
should be noted, that within this group of countries, foreign exchange reserves are
now sufficient by all standard metrics of reserve adequacy. For these noncommodity exporters, more flexible exchange rates are often necessary, and
Treasury actively pushes for increased flexibility. [1 J
So what are sovereign wealth funds? At the Department of the Treasury, we have
defined them as government investment vehicles funded by foreign exchange
assets, which manage those assets separately from official reserves.[2] Sovereign
wealth funds generally fall into two categories based on the source of the foreign
exchange assets:
•

Commodity funds are established through commodity exports, either owned
or taxed by the government. They serve different purposes, including
stabilization of fiscal revenues, intergenerational saving, and balance of
payments sterilization. Given the recent extended sharp rise in commodity
prices, many funds initially established for fiscal stabilization purposes have
evolved into savings funds. In the case of commodity funds, foreign
currency typically accrues to the government, and does not increase the
money supply and create unwanted inflationary pressure.
• Non-commodity funds are typically established through transfers of assets
from official foreign exchange reserves. Large balance of payments
surpluses have enabled non-commodity exporting countries to transfer
"excess" foreign exchange reserves to stand-alone funds. In the case of
non-commodity funds, foreign exchange assets often derive from exchange
rate intervention, which then increases a country's money supply. Monetary
authorities take additional steps to lower the money supply and stave off
inflation by issuing new debt, but there may be a cost associated with this if
the cost of the new debt is more than the returns that the government earns
on its foreign exchange assets.

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III contrast to traditional reserves, which are typically invested for liquidity and
safety, sovereign wealth funds seek a higher rate of return and may be invested in
a wider range of asset classes. Sovereign wealth fund managers have a higher risk
tolerance than their counterparts managing official reserve. They emphasize
expected returns over liquidity and their investments can take the form of stakes in
U.S. companies, as has been witnessed in recent months with increased regularity.

However, sovereign wealth fund assets are currently fairly concentrated. By some
market estimates, a handful of funds account for the majority of total sovereign
wealth fund assets. Roughly two-thirds of sovereign wealth fund assets are
commodity fund assets ($1.3-1.9 trillion), while the remaining one-third are noncommodity funds transferred from official reserves ($0.6-1.0 trillion).
To get a better perspective of the relative importance of sovereign wealth funds it is
useful to consider how they measure up against private pools of global capitaL
Total sovereign wealth fund assets of $1.9-2.9 trillion may be small relative to a
$190 trillion stock of global financial assets or the roughly $53 trillion managed by
private institutional investors. But sovereign wealth fund assets are currently larger
than the total assets under management by either hedge funds or private equity
funds, and are set to grow at a much faster pace.
In sum, sovereign wealth funds represent a large and rapidly growing stock of
government-controlled assets, invested more aggressively than traditional reserves.
Attention to sovereign wealth funds is inevitable given that their rise clearly has
implications for the international financial system. Sovereign wealth funds bring
benefits to the system, but also raise potential concerns.
Benefits

A useful starting point when discussing the benefits of sovereign wealth funds is to
stress that the United States remains committed to open investment. On May 10,
President Bush publicly reaffirmed in his open economies statement the U.S.
commitment to advancing open economies at home and abroad, including through
open investment and trade. Lower trade and investment barriers benefit not only
the United States, but also the global economy as a whole. The depth, liquidity and
efficiency of our capital markets should continue to make the United States the
most attractive country in the world in which to invest.
Foreign investment in the United States, including from sovereign wealth funds,
strengthens our economy, improves productivity, creates good jobs, and spurs
healthy competition. In 2006, there was a net increase of $1.9 trillion in foreignowned assets in the United States. Foreign direct investment (FDI) is particularly
beneficial to our economy. FDI supports nearly 10 million U.S jobs directly or
indirectly, 13% of R&D spending in the U.S., 19% of U.S. exports, and pays 30%
higher compensation than the U.S. average.
As many observers have pointed out, sovereign wealth funds have the potential to
promote financial stability. They are, in principle, long term, stable investors that
provide significant capital to the system. They are typically not highly leveraged and
cannot be forced by capital requirements or investor withdrawals to liquidate
positions rapidly. Sovereign wealth funds, as public sector entities, should have an
interest in and a responsibility for financial market stability.
Potential Concerns

Yet, sovereign wealth funds also raise potential concerns. Primary among them is a
risk that sovereign wealth funds could provoke a new wave of investment
protectionism, which would be very harmful to the global economy. Protectionist
sentiment could be partially based on a lack of information and understanding of
sovereign wealth funds, in part due to a general lack of transparency and clear
communication on the part of the funds themselves. Concerns about the crossborder activities of state-owned enterprises may also at times be misdirected at
sovereign wealth funds as a group. Better information and understanding on both
sides of the investment relationship is needed.
Second, transactions involving investment by sovereign wealth funds, as with other
types of foreign investment, may raise legitimate national security concerns. The

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Page 3 of 4

new Foreign Investment and National Security Act (FINSA) authored by the
Chairman and Ranking members of this committee and signed into law by
President Bush last summer, implemented through the Committee on Foreign
Investment in the United States (CFIUS), ensures robust reviews of investment
transactions, based on the consideration of genuine national security concerns, and
requires heightened scrutiny of foreign government-controlled investments. CFIUS
is able to review investments from sovereign wealth funds just as it would other
foreign government-controlled investments, and it has and will continue to exercise
this authority to ensure national security
As we take our work forward on sovereign wealth funds, Treasury is also
considering, non-national security issues related to potential distortions from a
larger role of foreign governments in markets. For example, through inefficient
allocation of capital, perceived unfair competition with private firms, or the pursuit of
broader strategic rather than strictly economic return-oriented investments,
sovereign wealth funds could potentially distort markets. Clearly both sovereign
wealth funds and the countries in which they invest will be best served if investment
decisions are made solely on commercial grounds.
Finally, sovereign wealth funds may raise concerns related to financial stability.
Sovereign wealth funds can represent large, concentrated, and often nontransparent positions in certain markets and asset classes. Actual shifts in their
asset allocations could cause market volatility. In fact, even perceived shifts or
rumors can cause volatility as the market reacts to what it perceives sovereign
wealth funds to be doing.

Policy Response
Treasury has taken a number of steps to help ensure that the United States can
continue to benefit from open investment while addressing these potential
concerns.
First, we are aggressively implementing FINSA through the CFIUS process. I want
to be clear that CFIUS reviews the investment transactions of sovereign wealth
funds, based on the consideration of genuine national security concerns, just as it
would for any other foreign government-controlled investment.
FINSA protects our national security while keeping investment barriers low and
reaffirming investor confidence and the longstanding U.S. open investment policy.
We believe the U.S. investment security framework provides a good model for other
countries where protectionist sentiment has been on the rise due to concerns about
sovereign wealth funds, and we are actively engaged with these countries to help
them avoid undue protectionist responses.
Second, we have proposed that the international community collaborate on a
multilateral framework for best practices. The International Monetary Fund, with
support from the World Bank, should develop best practices for sovereign wealth
funds, building on existing best practices for foreign exchange reserve
management. These would provide guidance to new funds on how to structure
themselves, reduce any potential systemic risk, and help demonstrate to critics that
sovereign wealth funds can be responsible, constructive participants in the
international financial system.
Third, we have proposed that the Organization for Economic Cooperation and
Development (OECD) should identify best practices for countries that receive
foreign government-controlled investment, based on its extensive work on
promoting open investment regimes. These should have a focus on proportionality,
predictability and accountability, and should be guided by the well-established
principles embraced by OECD and its members for the treatment of foreign
investment. It is important to address the growing importance of sovereign wealth
funds, on both sides of the investment equation.
We have already seen meaningful progress along these lines. On May 12-13 of this
year, Treasury hosted a G-20 meeting of Finance Ministry and Central Bank
officials on commodity cycles and financial stability, which included perhaps the first
multilateral discussion of sovereign wealth funds among countries with these funds
and countries in which they invest. Following a period of extensive direct bilateral

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outreach with sovereign wealth funds, Secretary Paulson hosted a G-7 outreach
meeting on October 19 with Finance Ministers and heads of sovereign wealth funds
from eight countries (China, Korea, Kuwait, Norway, Russia, Saudi Arabia,
Singapore, and the United Arab Emirates) to build support for best practices. The
next day, the International Monetary and Financial Committee - a ministerial level
advisory committee to the IMF - issued a statement calling on the IMF to begin a
dialogue to identify best practices for sovereign wealth funds.
Fourth, Treasury has taken a number of steps internally and within the U.S
Government to enhance our understanding of sovereign wealth funds. Treasury has
created a working group on sovereign wealth funds that draws on the expertise of
Treasury's offices of International Affairs and Domestic Finance. Treasury's new
market room is ensuring vigilant, ongoing monitoring of sovereign wealth fund
trends and transactions. Through the President's Working Group on Financial
Markets, chaired by Secretary Paulson, we continue to discuss and review
sovereign wealth funds. We also have initiated bilateral outreach to ensure an
ongoing and candid dialogue with countries with significant sovereign wealth funds
and their management.
Treasury is actively coordinating with Congress through staff briefings and
committee hearings. As you know, we informed Congress in June of some of our
Initial thinking on sovereign wealth funds in an appendix to the Report on
International Economic and Exchange Rate Policies, and we will continue to
provide updates on a semi-annual basis.
The Treasury Department will continue Its work on sovereign wealth funds through
sound analysis and focused bilateral and multilateral efforts to ensure the United
States shapes an appropriate international response to this issue, addresses
legitimate areas of concern, and ensures that the United States remains open to
and welcoming of foreign investment.
-30[1 J Russell Green and Tom Torgerson, "Are High Foreign Exchange Reserves in
Emerging Markets a Blessing or a Burden?" Office of International Affairs
Occasional Paper NO.6, U.S. Department of the Treasury, March 2007.

l2] "Sovereign Wealth Funds," Appendix 3 of the Semi-Annual Report to Congress
on International Economic and Exchange Rate Policies, June 2007.

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hp-682: - Update Three - Treasury Secretary Paulson Travels to Africa

Page 1 of3

November 14, 2007
hp-682
- Update Three - Treasury Secretary Paulson Travels to Africa
Treasury Secretary Henry M. Paulson, Jr. will travel to Tanzania, South Africa, and
Ghana to attend the meeting of G-20 Finance Ministers and Central Bank
Governors and discuss the positive economic changes taking place on the
continent with government and business leaders.
Africa is experiencing its highest rates of growth and lowest levels of inflation in 30
years, prompting increasing investor interest in the continent. Secretary Paulson will
use his trip to discuss the underpinnings of Africa's recent growth and explore ways
in which the international financial community can further support Africa's
development. Additionally, Secretary Paulson will be highlighting the importance of
conservation efforts in Africa and the complementary role they play with economic
growth.
The Secretary will depart on Nov. 13 and arrive in Arusha, Tanzania on Nov. 14. On
Nov. 15 he will co-host with Tanzanian Finance Minister Zakia Meghji a discussion
on regional financial integration with the other finance ministers of the East African
Community. While in Arusha he will also visit an innovative land trust and tour a
mosquito net factory.
He will then travel to Cape Town, South Africa where he will deliver remarks on
Nov. 16 at the U.S.-Africa Business Summit organized by the Corporate Council on
Africa. He will also attend the meeting of G-20 Finance Ministers and Central Bank
Governors in Kleinmond, South Africa on Nov. 17 and 18.
On Nov. 19, Secretary Paulson will be in Ghana to meet with President John Kufuor
and co-host with Ghanaian Finance Minister Kwadwo Baah-Wiredu a meeting with
private-sector financial leaders on financial sector development in West Africa
following a tour of the Ghana Stock Exchange. Later that day he will be joined by
African Development Bank President Donald Kaberuka to discuss infrastructure
investment during a tour of Akosombo Dam.
The following events are open to the press:
What
Visit Manyara Ranch and Meet with Community Leaders
When
Thursday, November 15, 8:00 a.m. Local Time
Where
Manyara Ranch
Arusha, Tanzania

What
Visit Lake Manyara Primary School
When
Thursday, November 15, 10:00 a.m. Local Time
Where
Lake Manyara Primary School
Manyara Ranch
Arusha, Tanzania

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hp~682:

- Update Three - Treasury Secretary Paulson Travels to Africa

Page 2 of3

What
Tour A to Z Mosquito Net Factory
When
Thursday, November 15, 12:00 p.m. Local Time
Where
Unga Limited Industrial Area
Arusha, Tanzania
***

What
Joint Press Availability with Tanzanian Finance Minister Meghji
When
Thursday, November 15, 2: 15 p.m. Local Time
Where
Arusha Coffee Lodge
Arusha. Tanzania

What
Signing Ceremony for USAID Financial Support for South African Small Businesses
When
Friday, November 16, 2:30 p.m. Local Time
Where
Commodore Hotel
Portswood Road
Portswood Square
V&A Waterfront
Cape Town, South Africa
***

WHAT
Remarks to Corporate Council on Africa's U.S.-Africa Business Summit
When
Friday, November 16, 8:00 p.m. Local Time
Where
Cape Town Convention Center
Convention Square
1 Lower Long Street
Cape Town, South Africa
***

What
Tour of Thandi Wines
When
Sunday, November 18.1215 p.m. Local Time
Where
R310, Lynedoch
Stellenbosch, South Africa
What
Tour of Ghana Stock Exchange Trading Floor and Ring Opening Bell
When
Monday, November 19, 9:30 a.m. Local Time
Where
Cedi House
Accra, Ghana
Note Open to cameras only

What
Press Conference on OPIC Investment in Africa
When

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hp·682: - Update Three - Treasury Secretary Paulson Travels to Africa

Page 3 of3

Monday, Novernber 19,11 :00 a.m. Local Time
Where
Cedi House, 1st Floor
Accra, Ghana

What
Tour of Akosombo Dam
When
Monday, November 19, 1:45 p.m. Local Time
Where
Akosombo Dam
Accra, Ghana

What
Press Availability
When
Monday, November 19,3:15 p.m. Local Time
Where
Volta Hotel
Accra, Ghana
- 30 -

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Page 1 of 4

November 14, 2007
2007 -11-14-15-2-40-15672

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 $70,834 million as of the end of that week, compared to $69,725 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
IA. Official reserve assets (in US millions unless otherwise specified)

IINovember 9, 2007

IIEuro

IIYen

I/Total

II
11 14 ,374

11 70 ,834

11 11 ,508

11 25 ,882

lof which: issuer headquartered in reporting country but located abroad

110

I(b) total currency and deposits with:

II
11 14 ,316

1(1) Foreign currency reserves (in convertible foreign currencies)
I(a) Securities

l(i) other national central banks, BIS and IMF

II
II

Iii) banks headquartered in the reporting country
lof which: located abroad
I(iii) banks headquartered outside the reporting country

lof which: located in the reporting country

1(2) IMF reserve position

11 4 ,442

1(3) SDRs

119,495

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)

110

I--financial derivatives

I--Ioans to nonbank nonresidents

I--other

lB. 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

1 --other

II. Predetermined short-term net drains on foreign currency assets (nominal value)

11 5,658

11 19,974

110

11 0

II
II

I/o
110

~~[------------~II~_ _ _ _~I~I_ _ _ _~II~----~I~I----~II~- -_ _~II
http://www.treas.gov/press/releases/200711141524015672.htm

12/3/2007

Page 2 of 4

IIMaturity breakdown (residual maturity)

ITotal

I
[ 1. Foreign currency loans, securities, and deposits

IUp to 1 month

More than 1 and
up to 3 months

I--ou tflows (-)

Ilprincipal

I
I--i nflows (+)

IIlnterest
IIprincipal

IIlnterest

More than 3
months and up to
1 year
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 (+)

II
II
II

I --trade credit (-)

I --trade credit (+)

I --other accounts payable (-)

I --other accounts receivable (+)

III. Contingent short-term net drains on foreign currency assets (nominal value)

ITota

I
11. Contingent liabilities in foreign currency

III
1

More than 3
months and up to
1 year

More than 1 and
up to 3 months

Up to 1 month

I(b) Other contingent liabilities

Ir.

Foreign· currency securities issued with embedded
options (puttable bonds)

13. Undrawn, unconditional credit lines provided by:

II
II
II

(a) other national monetary authorities, 815, IMF, and
other international organizations

(a) Collateral guarantees on debt falling due within 1
year

II
1\
Maturity breakdown (residual maturity, where
applicable)

l--other national monetary authorities (+)

\--815 (+)

I--IMF (+)

headquartered outside the reporting country (+)

Undrawn, unconditional credit lines provided to:

(a) other national monetary authorities, 815, IMF, and
other international organizations

[--other national monetary authorities (-)

(b) with banks and other financial institutions
headquartered in the reporting country (+)

II(e} with banks and other financial institutions

r
http://www.treas.gov/press/releases/200711141524015672.htm

II
II

12/3/2007

Page 3 of 4
I--BIS (-)

I--IMF (-)

(b) banks and other financial institutions headquartered
in reporting country (- )

I
I

4. Aggregate short and long positions of options in
foreign currencies vis-a-vis the domestic currency

II
II
II

10) Bought puts

I(ii) Written calls

II
II
II
II

I(b) Long positions

I(a) Short positions

I(i) Bought calls

I
II
II
II

II
II

I
I

II
II

II
I!

1(1) At current exchange rate

l!
II

I(b) Long position

II
II

I(a) Short position

1(2) + 5 % (depreciation of 5%)

I(a) Short position

l(ii) Written puts
IPRO MEMORIA: In-the-money options

I(b) Long position

1(3) - 5 % (appreciation of 5%)

II
II

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

II
II

1(6) Other (specify)

j(a) Short position

I(b) Long position

I
I
I

II
II

II
II
II

II
II

I
I
I

II
II
II
II

IV. Memo items

I
1(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)
I--nondeliverable forwards

!
I

I --short positions
I --long positions

i--other instruments

tic) pledged assets

E-inCIUded in reserve assets

--included in other foreign currency assets

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12/3/2007

Page 4 of 4
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

II--borrowed or acquired but not included in Section I
II(e) financial derivative assets (net, marked to market)
I--forwards

I
II
II

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 ( - )
j(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

1(2) To be disclosed less frequently:

I(a) currency composition of reserves (by groups of currencies)

11 70 ,834

I--currencies in SDR basket

11 70 ,834

I--currencies not in SDR basket
I--by individual currencies (optional)

II
II

I
I

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

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12/3/2007

Page 1 of 4

November 14, 2007
2007 -11-14-15-52-52-16338
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 $70,834 million as of the end of that week, compared to $69,725 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
IA Official reserve assets (in US millions unless otherwise specified)

IINovember 9, 2007

1(1) Foreign currency reserves (in convertible foreign currencies)

IIEuro

I(a) Securities

II
11 14 ,374

lof which: issuer headquartered in reporting country but located abroad

liVen

IITotal

11 70 ,834

11 11 ,508

11 25 ,882

11 0

I(b) total currency and deposits with:

l(i) other national central banks, BIS and IMF

11 14 ,316

115,658

II
11 19,974

Iii) banks headquartered in the reporting country

II
II
II
II

11 0

/10
11 0

lof which: located abroad
I(iii) banks headquartered outside the reporting country
lof which: located in the reporting country
1(2) IMF reserve position

11 4 ,442

1(3) SDRs

119,495

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

I--Ioans to nonbank nonresidents
I--other

II
II

lB. Other foreign currency assets (specify)
II--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
I --other

I
I
I
I
I

II. Predetermined short-term net drains on foreign currency assets (nominal value)

[~[_ _ _ _ _ _ _ _ _ _~II~_ _ _ _~Il~__--~II~----~II~----~II~----~Il
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Page 2 of 4

11. Foreign currency loans, securities, and deposits
I--outflows (-)

IIPrincipal

I
I--inflows (+)

Illnterest
IIprincipal

IIlnterest

II Maturity breakdown (residual maturity)

IITotal

2. Aggregate short and long positions in forwards and
futures in foreign currencies vis-a-vis the domestic
currency (includinq the forward leg of currency swaps)

More than 1 and
up to 3 months

Up to 1 month

II
II

II
II
II

More than 3
months and up to
1 year

I
I
I
I

I
I
I
I
I
I
I

I (a) Short positions ( - )
I (b) Long positions (+)

I 3. Other (specify)

I --outflows related to repos (-)

--inflows related to reverse repos (+)
--trade credit (-)
--trade credit (+)

I
II

II
II
II

--other accounts payable (-)

! --other accounts receivable (+)

!
II
II

"II

"II"
II

III. Contingent short-term net drains on foreign currency assets (nominal value)

[

applicable)
Total

I(b) Other contingent liabilities

112. Foreign currency securities issued with embedded
ILoptions (putlable bonds)

II
/I

I
I

"II

Undrawn, unconditional credit lines provided to:

II
II

(a) other national monetary authorities, BIS, IMF, and
other international organizations

II"
II

E-other national monetary authorities (+)

BIS (+)

E-IMF (+)
(b) with banks and other financial institutions
headquartered in the reporting country (+)

lather national monetary authorities (-)

(a) Collateral guarantees on debt falling due within 1
year

(a) other national monetary authorities, BIS, IMF, and
other international organizations

More than 3
months and up to
1 year

More than 1 and
up to 3 months

Up to 1 month

11. Contingent liabilities in foreign currency

I~. Undrawn, unconditional credit lines provided by:

1/
II
II
I Maturity breakdown (residual maturity, where

II
II

http://www.treas.g~~/pr~~s/releases/2007111415525216338.htm

"II

I
I
I

I
II

I
I
I

12/3/2007

Page 3 of 4
I--SIS (-)
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

hal Short positions

II
I
II
II

II
II
11
II

l(i) Bought puts
I(ii) Written calls

I(b) Long positions
I(i) Sought calls

II
II

"
II"

I(ii) Written puts
IpRO MEMORIA: In-the-money options

1(1) At current exchange rate

I(a) Short position

"
"

I(a) Short position
I(b) Long position

II
II

1(3) - 5 % (appreciation of 5%)

"/I
II

I(a) Short position

I
II

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
II
II

II
II

I(b) Long position
1(6) Other (specify)
I(a) Short position

"II
II

I(b) Long position

IV. Memo items

I(b) Long position

1(2) + 5 % (depreciation of 5%)

"II
"

I
I

II
I

I
I

[

(1) To be reported with standard periodicity and timeliness:

(a) short-term domestic currency debt indexed to the exchange rate

II~b) financial instruments denominated in foreign currency and settled by other means (e.g., in domestic

currency)
r--nondeliverable forwards
[ --short positions

I
"II

[ --long positions

[-other instruments

KC) pledged assets

[included in reserve assets

--included in other foreign currency assets
I

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Page 4 of 4
I(d) seCUrities lent and on repo
--lent or repoed and included in Section I
--lent or repoed but not included in Section I
II--borrowed or acquired and included in Section I

--borrowed or acquired but not included in Section I

(e) financial derivative assets (net, marked to market)

I--forwards

I--futures

I--swaps
I--options

I--other

IW) 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)

III

hal short positions ( - )
hb) long positions (+)
I--aggregate short and long positions of options in foreign currencies vis-a-vis the domestic currency

II
II

I(a) short positions

l(i) bought puts
I(ii) written calls

I(b) long positions

l(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 70 ,834

[--currencies in SDR basket

11 70 ,834

I--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.

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hp683: Treasury Targets Charity Covertly Supporting Violence in Sri Lanka

Page 1 of2

November 15, 2007
hp683

Treasury Targets Charity Covertly Supporting Violence in Sri Lanka
Washington - The U.S. Department of the Treasury today targeted the support
network of the designated terrorist group Liberation Tigers of Tamil Eelam (L TTE)
by designating a charitable organization that acts as a front to facilitate fundraising
and procurement for the L TTE. Tamils Rehabilitation Organisation (TRO) was
designated today under Executive Order 13224, which is aimed at financially
isolating terrorist groups and their support networks.
"TRO passed off its operations as charitable, when in fact it was raising money for a
designated terrorist group responsible for heinous acts of terrorism," said Adam J.
Szubin, Director of the Treasury's Office of Foreign Assets Control (OFAC).
The L TTE is a terrorist group that has waged a violent secessionist campaign for
over two decades to secure a separate state for Tamil-majority regions in Sri
Lanka's North and East. The conflict between the L TTE and Sri Lankan military
forces has claimed over 60,000 lives and displaced hundreds of thousands of Sri
Lankan citizens.
In the United States, TRO has raised funds on behalf of the L TTE through a
network of individual representatives. According to sources within the organization,
TRO is the preferred conduit of funds from the United States to the LTTE in Sri
Lanka.
TRO also has facilitated L TTE procurement operations in the United States. Those
operations included the purchase of munitions, equipment, communication devices,
and other technology for the LTTE.
TRO's efforts worldwide reportedly have allowed the LTTE to use humanitarian aid,
which TRO collected from the international community after the December 2004
tsunami, to launch new campaigns to strengthen LTTE military capacity.
According to its website, TRO maintains a headquarters office in Kilinochchi, Sri
Lanka and operates branch offices throughout Sri Lanka and in seventeen
countries worldwide, including the United States, Australia, Belgium, Canada,
Denmark, Finland, France, Germany, Italy, Malaysia, the Netherlands, New
Zealand, Norway, South Africa, Sweden, Switzerland, and the United Kingdom.
The L TTE oversees the activities of TRO and other LTTE-linked non-governmental
organizations (NGOs) in Sri Lanka and abroad. Directives issued by the L TTE
suggest that L TTE-affiliated branch representatives are expected to coordinate their
efforts with the respective TRO representatives in their locations and report all
activity to the L TTE.
Recent information indicates that the LTTE has ordered international NGOs
operating in its territory to provide all project funding through local NGOs, which are
managed collectively by TRO, This arrangement allows TRO to withdraw money
from the local NGO accounts and to provide a portion of the relief funds to the
L TTE The L TTE has reportedly exerted pressure to comply on a few international
NGOs that have resisted these arrangements,
The U.S. Department of State deSignated the LTTE a Foreign Terrorist
Organization (FTO) on October 8,1997, in accordance with Section 219 of the
Immigration and Nationality Act, as amended, On November 2,2001. the U.S.
Department of State named the LTTE a Specially Designated Global Terrorist
(SDGT) under E.O. 13224. Additionally, the LTTE IS listed as a terrorist

http://www.treas.gov/press/releases/hp683.htm

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hp683: Treasury Targets Charity Covertly Supporting Violence in Sri Lanka

Page 2 of2

organization by the European Union and Canada.
The Treasury Department is taking this action today pursuant to Executive Order
13224, which freezes any assets the designees may have under U.S. jurisdiction
and prohibits U.S. persons from transacting with the designees.
The United States continues to support a just, negotiated political settlement to the
conflict in Sri Lanka that meets the aspirations of all communities, including Sri
Lanka's Tamils. The U.S. will continue to vigorously support efforts to stop human
rights violations against Tamils, including abductions and threats against Tamil
journalists.
Identifier information for Tamils Rehabilitation Organisation, including AKAs and
address information for its branches worldwide, can be found at the following link:
http://www.treasury.gov/offices/enforcement/ofac/actions/index.shtml.

-30-

http://www.treas.go v /press/releases/hp683.htm

12/312007

HP-684: Treasury Under Secretary to Participate in Minnesota Townhall Forum on Mortgage Fina... Page 1 of 1

November 15, 2007
HP-684

Treasury Under Secretary to Participate
in Minnesota Townhall Forum on Mortgage Financing
U.S. Treasury Under Secretary for Domestic Finance Robert K. Steel will attend a
townhall forum hosted by Senator Norm Coleman in Minneapolis, Minn., on
Monday, Nov. 19. The Under Secretary will hear firsthand from affected
homeowners and discuss a new outreach effort by HOPE NOW, a national alliance
of leading counselors, services, and investors working together to educate more
homeowners about their mortgage options.
Under Secretary Steel's visit is part of Treasury's broader initiative to help struggling
homeowners. U.S. Treasurer Anna Escobedo Cabral has been traveling to some of
the hardest hit regions around the country to help homeowners understand their
options. Secretary Paulson and U.S. Housing and Urban Development Secretary
Alfonso Jackson encouraged the creation of HOPE NOW last month and have been
working closely with the alliance to help them reach more homeowners. For more
information on Treasury's mortgage financing efforts, please visit
Ilttp.·/vvww IrCdS cJu·J. t(JfiIC:-'lllllilllCl;jl-lildl':",'ls .

The following event is open to credentialed media:

Who
U. S. Treasury Under Secretary for Domestic Finance Robert K. Steel
What
Townhall Forum on Mortgage Financing
When
Monday, November 19, 2:30 p.m. (CST)
Where
Greater Twin Cities United Way
404 South Eighth Street
Minneapolis, Minn.

http://WWw.treas.gov/press/releases/hp684.htm

12/3/2007

u.s. TREASURY DEPARTMENT OFFICE OF PUBLIC AFFAIRS
EMBARGOED UNTIL 9 AM (EST), November 16,
CONTACT Ann Marie Hauser, (202) 622-2960

2007

Treasury International Capital Data for September
Treasury International Capital (TIC) data for September are released today and posted on the U.S.
Treasury web site (www.treas.gov/tic).Thenextrelease.whichwillreportondataforOctober.is
scheduled for December 17,2007.
Net foreign purchases of long-term securities were $26.4 billion.
•

Net foreign purchases oflong-term U.s. securities were $55.4 billion. Of this, net purchases by
foreign official institutions were $28.5 billion, and net purchases by private foreign investors
were $26.8 billion.

•

U.S. residents purchased a net $29.0 billion oflong-term foreign securities.

Net foreign acquisition of long-term securities, taking into account adjustments, is estimated to have
been $5.8 billion.
Foreign holdiJ;1gs of dollar-denominated short-term U.S. securities, including Treasury bills, and other
custody liabilities increased $3.8 billion. Foreign holdings of Treasury bills decreased $10.3 billion.
Banks' own net dollar-denominated liabilities to foreign residents decreased $24.3 billion.
Monthly net TIC flows were minus $14.7 billion. Of this, net foreign private flows were negative $27.8
billion, and net foreign official flows were positive $13.1 billion.

TIC Monthly Reports on Cross-Border Financial Flows
(Billions of dollars not seasonally adjusted)
2005

2006

12 Months Through
Sep-06
Sep-07

Jun-07

Jul-07

Aug-07

Sep-07

Foreigners' Acquisitions of Long-term Securities

I
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) /I

17157.5 21186.9
16145.9 20021.0
1011.5 1165.9

19613.1
18470.0
1143.1

27538.7
26485.3
1053.3

2609.4
2487.7
121.7

2474.0
2449.0
25.0

33233
3359.4
-36.1

2332.7
2277.3
55.4
26.8
11.6

4
5
6
7
8

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

891.1
269.4
1876
353.1
81.0

967.0
135.4
201.4
485.5
144.6

969.6
164.6
2072
4548
143.\

877.0
192.0
129.2
406.8
149.0

93.9
18.2
23.6
24.8
27.2

20.6
-2.4
3.4
18.4

-11.8
26.9
4.3
-3.9
·39.1

9
10
1\

Ofl1cial, net !3
Treasury Bonds & Notes, net
Gov't Agency Bonds, net
Corporate Bonds, net
Equities, net

120.4
68.7
31.6
19.1
1.0

199.0
7\.8
926
28.5
6.0

173.5
60.8
77. \
26.4
9.1

176.4
15.7
123.6
38.0
·1.0

27.8
6.4
16.0
3.7
1.7

4.4
·6.9
7.5
1.0
2.8

-24.2
-29.7
4.1
3.0
-1.6

28.5
\4.6
9.2
4.6
0.1

3700.0
3872.4
·172.4

5527.1
5778.9
-251.8

5056.0
5249.6
-193.6

7648.0
7972.3
-324.3

730.5
752.2
-21.8

759.3
764.9
·5.5

823.8
858.3
-34.5

555.2
584.2
-29.0

·45.1
·127.3

·144.1
·107.7

-96.4
·97.2

-170.7
·153.6

·8.2
·13.5

0.9
·6.4

-21.7
-12.9

-19.7
-9.2

839.1

914.2

949.5

729.1

99.9

19.5

-70.6

26.4

-143.0

-169.9

-156.8

-198.9

-15.4

-22.2

-16.1

·20.6

696.2

744.2

792.7

530.1

84.4

-2.7

-86.7

5.8

-47.6
-58.9
-15.6

·43.3

146.2
-9.0
16.1
·25.0

124.0
-12.3
3.7
·16.0

140.0
13.9
15.2
-1.3

-15.8
-17.9
·6.1
·11.8

55.9
18.6
3.3
15.3

33.9
21.0
17.2
3.8

3.8
-10.3
-8.5
-1.8

11.4
10.6
0.8

155.1
174.9
-19.8

136.3
143.7
·7.4

126.1
95.0
31.1

2.1
·2.5
4.6

37.4
36.4
1.0

12.8
-14.6
27.4

14.1
5.2
8.9

16.4

183.7

259.7

-101.7

-25.0

30.3

-97.8

-24.3

665.0

1074.1

1176.4

568.S

43.6

83.5

-150.7

-14.7

578.0
87.0

931.4
142.7

1027.9
148.5

374.8
193.7

11.7
32.0

45.3
38.2

-129.6
·21.1

·27.8
13.1

12
i3
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

Net Long-Term Securities Transactions (line 3 plus line 16):

Other Acquisitions of Long-term Securities, net 15

Net Foreign Acquisition of Long-Term Securities
(lines 19 and 20):

27
28

Increase in Foreign Holdings of Dollar-denominated Short-term
U.S. Securities and Other Custody Liabilities: /6
V.S. Treasury Bills
Private, net
Official, net
Other Negotiable Instruments
and Selected Other Liabilities: 17
Private, net
Official, net

Change in Banks' Own Net Dollar-Denominated Liabilities

23
24
25
26

30 Monthly Net TIC Flows (lines 21,22,29) 18
of which
31
Private, net
32
Official, net
/I
12
13

/6
17
/8

1.2

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 I O.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 outtlow 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 c1alms 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 tlows, but do not include data on direct investment tlows, which are collected
and published by the Department of Commerce's Bureau of Economic Analysis. In addiuon to the monthly data summarized here, the
TIC collects quarterly data on some banking and nonbanking assets and liabilities. Frequently Asked Question I on the TIC web
site describes the scope of TIC data collection.

-30-

2J
10.5
2.5

hp687: Remarks by Secretary Henry M. Paulson, Jr. before the U.S.-Africa Business Summit on the Re... Page 1 of 4

November 16, 2007
hp687

Remarks by Secretary Henry M. Paulson, Jr. before the U.S.-Africa Business
Summit on the Remarkable Change and Progress in Africa's Economic
Development Change and Progress in Africa's Economic Development

Cape Town, South Africa--Good evening. Thank you, Dr. Sturchio, for the kind
introduction, and thank you to the Corporate Council on Africa for the opportunity to
speak to such a notable gathering of business, government and academic leaders.
Africa is a unique continent: diverse in people and heritage, with some of the most
spectacular geography and biodiversity on the planet. All too often, however, those
who do not know Africa well associate the continent with issues like famine, conflict
and disease. Tonight, I will talk about a much different Africa, one with which I
suspect most of you are more familiar - a continent of diverse nations increasingly
defined by economic opportunity and promise.
Most importantly, I will talk about an Africa where leaders are taking control of their
own economic futures and continuing to move beyond reliance on donors.
Evidence of Progress - Growth and Investment
On this visit to Africa, I have seen the economic advances ushered in by a new
generation of leaders. Improved fiscal and monetary policies, combined with
favorable global conditions and strong commodity prices, have had dramatic
consequences across the continent: annual GOP growth has exceeded 5 percent
for half a decade, inflation rates have dramatically declined, debt levels are more
sustainable and the IMF projects that, this year, foreign exchange reserves will
reach record levels. Yesterday, in Arusha, I met with the economic leaders of the
East African Community - it was heartening to see the progress those countries
have made since I last visited that part of the world in the early 1990s.
Africa's macroeconomic statistics only tell part of the story: as a former business
person I find what is happening on the ground also particularly illuminating. Africa's
thriving telecommunications industry perhaps best illustrates the benefits of creating
a sound environment for private investment. Africa is the fastest growing mobile
phone market in the world. Over the last few years, the penetration level for mobile
phone use has grown from almost zero to an average of over 20 percent - over 200
million new mobile phones. Driven by private sector investment, with reasonable
government regulations, African and foreign telecom companies have created
thousands of jobs at all levels - for engineers, salesmen, managers and customer
care representatives.
In many respects, increased foreign investment is the ultimate vote of confidence in
Africa's economic future. And the votes are coming in. We see new private equity
funds, with a focus on Africa, being raised. We see the stock of U.S. foreign direct
investment in Africa growing by over 90 percent in the last few years. And we see
this successful conference -- proof positive that the world sees these remarkable
changes and wants to partiCipate as Africa takes its place in the global economy. In
essence, investors see attractive direct, portfolio and equity investment
opportunities all across the continent.
These results demonstrate the immediate impact of good leadership. While a
supportive international economic environment has helped, this progress comes
because of sound macroeconomic policies, and a commitment to improving
business climates. In my 30 years of financial market experience, this is the
formula that I have seen work around the world for making rapid strides in poverty
reduction.
Yet, to ensure benefits for the long run, Africa's leaders and people must maintain a
firm commitment to reform, combat corruption, respect human rights, adhere to the

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hp687: Remarks by Secretary Henry M. Paulson, 1r. before the U.S.-Africa Business Summit on the Re... Page 2 of 4
rule of law and spread the benefits of economic growth to more of Africa's
population. Inclusive growth is not easy As President Bush has observed "Real
prosperity is the work of many years. It's hard work."
'
United States Supports Reform Efforts
The United States has long supported Africa. We have focused significant health
assistance on those who are most needy, such as through the President's Malaria
and HIV initiatives. Our economic assistance is increasingly directed towards
supporting countries where economic policies reflect the lessons learned over the
last 30 years. These lessons teach us the importance of market principles, of
sound fiscal and monetary policies. transparency and the rule of law.
Debt Relief/Liberia
The U.S. Treasury led the charge for comprehensive debt relief; our efforts under
HIPC and MDRI have resulted in over $60 billion in debt forgiven for the world's
poorest nations. Recently, we played a key role in helping bring together over 80
countries to help support Liberia, another of Africa's economic reformers. Together
with our G-8 partners and management at the international financial institutions, we
have mobilized financing for full debt relief for Liberia's billions in arrears to the IMF
and World Bank and almost closing the gap at .the African Development Bank,
which we expect to be completed very soon.
Millennium Challenge Account
Through the Millennium Challenge Corporation the United States provides grant
finance - so-called Compacts -- for development investments in countries with
sound political, economic and social policies. The Compacts finance those
investments prioritized by our African partners.
Since 2004, MCC has approved $4 billion in grants to nine African countries. In
Tanzania, President Kikwete and I discussed the positive impact the upcoming
$698 million Compact will have on the country's infrastructure. Ghana - where I
travel next - recently signed a $547 million Compact. I know that we could be
doing more, particularly on the issue of Compact implementation, and as a board
member of MCC I am committed to pushing for greater effectiveness.
Technical Assistance
I am also committed to helping train Africa's public finance professionals. Through
our 19 resident advisors throughout Africa, Treasury's technical assistance program
is helping develop local debt markets in Ghana, Nigeria, Zambia and East Africa,
and is working in countries such as Guinea and Mauritius to create a more
professional and transparent budgeting system. I am committed to expanding this
program because it has proven to make a difference.
Important Next Steps - Sustainable Natural Resource Policies, Financial Markets,
Business Climate, and Free Trade
U.S. support is only one component of Africa's growing economic promise; what
really matters is African leadership. FoUr areas where African leadership is
essential to accelerate and sustain development are natural resource policies,
financial markets, business climates, and free trade.
Sustainable Natural Resource Policies
This is a vast continent - 48 countries, 2,000 languages and 750 million people. It
has some of the most remarkable geographic and biological diversity on the planet.
Natural resource issues are critical for Africa's future: they are an essential part of
the continent's heritage and figure prominently in economic opportunities, but can
often be the spark in regional conflicts. Throughout my career, I have maintained
an ardent interest in the conservation of land and wildlife.
Yesterday, I visited Manyara Ranch and saw an innovative example of how Africa
can both preserve its heritage and create economic opportunities for its people.
The ranch land is a critical migratory corridor for a broad range of species from
nearby parks, and is also important for the cattle raising activities of the local
Maasai tribes. The Africa Wildlife Foundation - with support from USAID - has set
up a land trust that seeks to make the ranch commercially viable through tourism
and beef sales, with a plan to use the proceeds to protect these valuable tribal

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hp687: Remarks by Secretary Henry M. Paulson, Jr. before the U.S.-Africa Business Summit on the Re... Page 3 of 4
lands.
The U.S.- sponsored Congo Basin Forest Partnership provides another model for
fostering sound management practices and involving local communities so that
conservation's benefits align with the perceived costs. The Partnership is a
regional initiative which brings together the governments of the Congo Basin with
non-regional partners such as the U.S, France and various NGOs. It fights illegal
logging and poaching while Improving the livelihoods of those who depend on the
forest. The Partnership has already trained thousands of students and
professionals in forestry and resource management, strengthened local and
national institutions devoted to national resource protection, and helped establish
new national parks in the Congo Basin region.
I know that some may believe that these initiatives are a luxury. But I know that
natural resource protection is key to Africa's long-term, sustainable, and inclusive
economic advancement. We all know that there are significant economic and
political risks for mismanagement of natural resources. I believe that Africa can
unlock real economic potential through careful management of its natural
resources.
Financial Markets
A lifetime in financial markets leads me to make special mention of the importance
of a sound financial system. and the critical role that it plays in allocating resources
efficiently in a developing economy. Africa needs properly-regulated and wellfunctioning financial markets. This includes legal structures - with property rights,
contract law and mechanisms to resolve disputes - that protect individuals,
businesses and investors.
Strong financial systems help everyone - from large multinationals to the farmers
and the seamstresses that seek to build small businesses of their own. Reliable,
solvent banking systems provide the tools for savings, investment and credit
needed by entrepreneurs, families, small and large businesses.
Research shows that a lack of access to finance - caused by weak technical
capacity in the financial sector and inappropriate public sector policies - is one of
the biggest constraints for private sector growth in Africa. Less than 20 percent of
Africans have bank accounts - the lowest level in the world, and this is one of the
reasons why President Bush announced the Africa Financial Sector Initiative last
June. This initiative is expected to mobilize up to $1 billion in privately-managed
investment funds to help spur job creation and economic growth, and provide
technical assistance to address financial sector impediments.
BUSiness Climate Reform
A stronger financial sector needs to be combined with an improved business
climate, so that businesses can be formed and take advantage of ready capital.
Africa's government leaders, particularly in Ghana, Tanzania, Kenya and
Mozambique have recognized that they need to enhance transparency, shorten the
business start-up process, improve the rule of law, and strengthen property rights
so that the private sector can do what it does best - start businesses, create job~,
and sustain and accelerate growth. In 2006, Kenya launched an ambitious program
to eliminate and simplify hundreds of business start-up license requirements.
Similar changes in Tanzania reduced the cost of business registration by 40
percent over the last two years. In many respects, it is simple - cutting the costs of
doing business allows for greater competition, and greater competition is vital for
improving productivity, fostering innovation, and generating jobs.
Free Trade
It is the concept of competition that led South Africa's Finance Minister Trevor
Manuel to recently talk about the importance of pushing for greater trade
liberalization. Trevor is right. Trade liberalization should not be feared - it should
be embraced. It is a development strategy that has worked for countries as diverse
as Singapore, Chile. Ireland and Mauritius And it is a strategy that can work for
other countries in Africa. That is why I am such a believer In the power of Doha.
The United States stands ready to negotiate off the texts that have been produced
in Geneva. I think Africa can playa strong role by also negotiating to achieve an
ambitious result.
Conclusion

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hp687: Remarks by Secretary Henry M. Paulson, Jr. before the U.S.-Africa Business Summit on the Re... Page 4 of 4
In the last 30 years, the world has experienced an unprecedented reduction in
global poverty. China. a country I have come to know well, and India - where I was
just last month - have both shown strong commitment to implementing sound
economic policies, and to creating economic opportunities for their populations. As
a result, hundreds of millions of their people have emerged from poverty and
created businesses, acquired jobs, and enriched their lives in countless ways. In
Africa - just as in China, India, and other places in the world - reforms, once
started. have to be completed in order to realize their full benefits.
It is heartening to see that African leaders are showing a strong commitment to the
difficult work of reform. Results do speak for themselves. We all know Africa is rich
in talent. resources and tradition. All it takes is good leadership to unlock this
potential.
Thank you.

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HP-688: Statement by U.S. Treasury Secretary Henry M. Paulson, Jr. at the G-20

Page 1 of2

November 18, 2007
HP-688

Statement by U.S. Treasury Secretary Henry M. Paulson, Jr. at the G-20
Kleinmond, South Africa -- U.S. Treasury Secretary Henry M. Paulson, Jr. issued
the following statement during the G-20 meeting of Finance Ministers and Central
Bank Governors in Kleinmond, South Africa.
My career in the financial sector has allowed me to witness the emergence and
growing relevance of new participants in international financial markets. Indeed, the
resilience of many dynamic emerging markets in the face of the current global
financial market turmoil is testimony to the sound economic stewardship in these
countries and the importance of the G-20 as a forum for contributing to the
management of the international financial system. I was pleased to have the
opportunity to meet bilaterally with many colleagues.
When we discussed the turmoil in the capital markets, I explained that we are going
through a period of reassessing risk and that will take time and we will experience
volatility along the way. In discussions on the decline in the U.S. housing market I
noted it is still unfolding and I view it as the most significant current risk to our
economy. Even so, I believe we have a healthy, diversified economy that will
continue to grow.
As I've noted before, we are taking a two-pronged approach to dealing with the
capital markets turmoil and the housing downturn in the U.S. In the short term, we
are working to avoid preventable foreclosures and promote orderly markets. We are
also focused on policy issues such as transparency, risk management, the
accounting and valuation of complex products and the role of rating agencies so we
can avoid a recurrence of these events in the future. We took note of the ongoing
work of the Financial Stability Forum (FSF) on these topics, which are of great
relevance to the G-20. We also agreed to establish a G-20 Study Group to further
our understanding of the lessons from the latest credit market turmoil, and this
should help supplement the FSF's work.
A major focus of this weekend has been reform of the International Financial
Institutions. The G-20 is uniquely situated to constructively address this issue; its
member countries make up 85 percent of global GOP and emerging markets have
a growing and important role in this group. At both the World Bank and the
International Monetary Fund we have strong leaders who have put forward
compelling agendas and who now have an opportunity, with support from the
member countries, to energize reform efforts and make good progress.
I urged my G-20 counterparts to join the U.S. in showing greater leadership on the
Doha talks, and underscored the equal importance of results in agriculture, nonagriculture market access, and services - including financial services. Reducing
tariff and other trade and investment barriers and maintaining open markets is
critical to ensuring that the benefits of trade are shared broadly and success on
Doha is the single most effective thing we can do to raise living standards around
the world. The United States is committed to working with our global trading
partners and is ready to negotiate off the texts that have been produced in Geneva
to ensure a successful Doha Round.
We spoke about commodity market dynamics, managing commodity-led booms
and busts, hedging strategies, and non-renewable resource funds. Non-renewable
resource funds are one type of sovereign wealth fund. The U.S. is committed to
open investment. Sovereign wealth funds should be able to invest globally, but it is
inevitable that when large, government-run, opaque funds are investing around the
globe, questions will arise. To address thiS we believe a considered, multilateral
approach to sovereign wealth funds that maintains openness is in the best interest

http://WWw.treas.go v/press/releases/hp688.htm

12/312007

HP-688: Statement by U.S. 1 reasury Secretary Henry M. Paulson, Jr. at the G-20

Page 2 of2

of both countries that have these funds and countries in which the funds invest. We
have had good support for our proposal that the IMF develop best practices for
sovereign wealth funds. Work is also progressing in the OECD to develop best
practices for countries that receive foreign government-controlled investment.
Recipient countries have a responsibility to maintain openness
We must continue to stand against threats to the global financial system, including
the financing of terrorism and proliferation, money laundering and other forms of
illicit finance. Continued cooperation among the IMF, World Bank, and the Financial
Action Task Force (FATF) to promote strong international standards is essential to
this effort. In particular, we recognize the recent warning by the FATF about the
risks posed by Iran to the international financial system and calion all countries to
take appropriate action to mitigate those risks. Leaders in the G-20 have a
responsibility to prevent Iran, and illicit actors more generally, from misusing the
financial system to support their threatening conduct.
Finally, I would like to congratulate and thank South Africa for its outstanding
leadership as chair of the G-20 for 2007. The United States was much honored to
have contributed by hosting one of the three workshops, on commodity cycles and
financial stability, in May at the Treasury in Washington. We look forward to working
closely with Brazil as it takes the G-20 chair in 2008.

- 30 -

http://www.treas.go v/press/releases/hp688.htm

12/312007

hp689: Under Secretary for Domestic Finance Robert K. Steel Remarks at Senator Norm Coleman's H...

Page 1 of 3

November 19, 2007
hp689
Under Secretary for Domestic Finance Robert K. Steel Remarks at Senator
Norm Coleman's Housing Townhall Forum
Minneapolis, Minn- I appreciate the invitation to be here today.
It has been a privilege working with Senator Coleman in Washington. He has been
highly focused on these mortgage issues and is working hard to help keep
Minnesota homeowners in their homes. I commend him for holding this townhall
forum today. Our discussion will give us a chance to learn together how we can
better assist affected homeowners.

As you know, we are experiencing a period of adjustment in the housing and
mortgage markets. Fortunately, this market stress is occurring against a backdrop
of healthy US. fundamentals and a strong global economy. Yet, as Secretary
Paulson has said, the housing decline is the most significant current risk to our
economy.
A significant number of homeowners will be affected by challenges in the housing
market and many could face foreclosure.
These are complex issues and we must look beyond the headline numbers when
thinking about this challenge. Each year, thousands of homes end up in
foreclosure, even when housing markets are strong. Between 2001 and 2005
more than 650,000 homeowners began the foreclosure process each year.
Falling house prices, lax underwriting standards, and resetting mortgages have
caused the foreclosure rate to rise above its natural rate. And we expect the rate to
remain elevated over the course of the next 18 months.
About 2 million subprime mortgages will reset in the next year and a half, but not all
of these mortgages will end in foreclosure. Some homeowners will be able to afford
their new payments without trouble and many others will qualify for a refinanced,
fixed-rate mortgage on their own.
Other homeowners, however, have stretched too far beyond their means or have
made bets on the housing market, buying up multiple houses expecting to make a
profit. Unfortunately, for many of these borrowers, foreclosure is inevitable. And let
me be clear - we have no interest in bailing out speculators. Our concern is for the
Americans who are struggling to make payments on their primary residence.
Our challenge in Washington has been to work With the private sector to identify the
group of homeowners who, with a bit of assistance, can stay in their homes.
Treasury and the Department of Housing and Urban Development have
encouraged mortgage serVlcers, lenders, investors and counselors to work together
to reach as many struggling borrowers as possible. Last month they announced
the formation of an alliance called HOPE NOW and just two weeks ago unveiled a
new direct mail campaign to help homeowners more effectively.
Today is an important day in this public-private outreach effort. Starting today,
HOPE NOW will send more than 300,000 letters by the end of this month alone to
struggling homeowners who could be in a position to move into a more affordable
mortgage. That is 100,000 more homeowners than they initially expected to reach
this month. And they will continue reaching out to more borrowers over the next
several months.

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bp689: Under Secretary for Domestic Finance Robert K. Steel Remarks at Senator Norm Coleman's H...

Page 2 of 3

We expect this new letter campaign, which will come from the HOPE NOW Alliance
rather than from mortgage servicers, to increase their effectiveness reaching at-risk
borrowers.
The method and technique of contacting borrowers is quite important Many
borrowers mistakenly believe that the lenders' or servicers' goal is to repossess
their homes .'n foreclosure. While many lenders and servicers are working hard on
their own trYing to help homeowners, they are not having as much success as they
or we would like. Servlcers have reported limited success reaching at-risk
customers, but Independent counselors have reported a significantly higher
success rate.
This letter will come from an alliance with the sole purpose of helping more
homeowners keep their homes, encouraging at-risk borrowers to contact their
servicer or the hotline, 888-995-HOPE, for help.
Let me take a minute to emphasize the importance of these letters. If you or
someone you know receives a letter from HOPE NOW, please take notice. It is OK
to reach out for help. This Alliance is ready to lend a hand and the U.S.
government endorses their efforts.
It is in no one's interest to see a home go into foreclosure. To date HOPE NOW
consists of four counseling organizations; 20 mortgage servicers and lenders,
comprising 65 percent of the U.S. market for mortgage servicing and 76 percent of
the subprime servicing market; three Investor groups, including the American
Securitization Forum, which represents over 370 members; and 10 trade
associations.
The earlier we identify struggling borrowers, the more likely servicers and lenders
will be able to modify or refinance into a more sustainable mortgage. If we wait until
borrowers miss several payments, their credit profiles will be tarnished and they will
have far fewer refinancing options.
The Alliance is developing standard performance measures to identify categories of
borrowers who can be helped, determine successful treatments, and measure the
rate of successful outcomes. Additionally, servicers and counselors who join the
Alliance agree to adopt a standard process that will strengthen and speed work
flow, productivity, and communications between them. All of these steps ultimately
help to maximize the number of homeowners they reach.
HOPE NOW's efforts are critical to reaching more homeowners, but President Bush
has also directed the Administration to pursue other methods of assisting
homeowners. Many of these initiatives require the assistance of Senator Coleman'S
colleagues in Congress.
For instance, the President has asked Congress to eliminate taxes temporarily on
mortgage debt forgiven on a primary residence. The Administration has also
requested that Congress pass Federal Housing Administration (FHA) modernization
to make affordable FHA loans more widely available Senator Coleman has
supported all of these efforts and we are grateful.
And finally, just as the lenders, servicers and counselors have come together to
develop metrics and standards that will measure the most effective ways to make
counseling accessible to troubled borrowers, we have encouraged them to come
together in a similar way to develop an efficient methodology for offering mortgage
solutions such as loan modifications when appropriate.
Let me conclude by emphasizing one final point: Borrowers have a responsibility as
well. Mortgage providers must offer clear, transparent and understandable
information on the mortgage products they sell. And homebuyers have a
responsibility to use that information and understand their mortgages. Buying a
home today is a complex process, but that in no way excuses homebuyers from
their obligation for due diligence
Thank you. I look forward to our discussion

http://ww w.treas.gov/press/releases/hp689.htm

12/312007

Page 1 of 4

November 19, 2007
2007 -11-19-17 -8-27 -22399
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 $70,747 million as of the end of that week, compared to $70,834 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
IINovember 16, 2007
liVen

IITotal
11 70 ,747

11 14 ,375

II
11 11 ,499

lof which: issuer headquartered in reporting country but located abroad

11 0

I(b) total currency and deposits with:
I(i) other national central banks, BIS and IMF

II
11 14 ,315

II
11 5 ,650

II
11 19 ,965

Iii) banks headquartered in the reporting country

11 0

lof which: located abroad

I(iii) banks headquartered outside the reporting country

lof which: located in the reporting country

110
11 0

11 0

1(2) IMF reserve position

11 4 ,420

1(3) SDRs
1(4) gold (including gold deposits and, if appropriate, gold swapped)

11 9 ,477
11 11 ,041

I--volume in millions of fine troy ounces

11 261 .499

1(5) other reserve assets (specify)

11 0

IIEuro

1(1) Foreign currency reserves (in convertible foreign currencies)

I(a) Securities

11 2 5,874

I-~financial derivatives
I-~Ioans to nonbank nonresidents

I--other

IS. 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

I--gold not included in official reserve assets

I --other

II. Predetermined short-term net drains on foreign currency assets (nominal value)

It[~__________~I~I_ _ _ _~I[~_ _ _ _~I~I_ _ _ _~II~____~ILI_ _ _ _~II
http://WWw.treas.gov!press/releases/200711191782722399.htm

12/312007

Page 2 of 4

IITota,

IUp to 1 month

I--outflows (-)

Ilprincipal

I
I--inflows (+)

IIlnterest

IIPrincipal

IIlnterest

1. Foreign currency loans, securities, and deposits

2. Aggregate short and long positions in forwards and
futures in foreign currencies vis-a-vis the domestic
currency (including the forward le..9. of currency swaps)

I (a) Short positions ( - )

II
II
II

--trade credit (-)
--trade credit (+)

I --other accounts payable (-)
I --other accounts receivable (+)

I
I

II
II

3. Other (specify)
--inflows related to reverse repos (+)

More than 3
months and up to
1 year

More than 1 and
up to 3 months

(b) Long positions (+)

--outflows related to repos (-)

JIMaturity breakdown (residual maturity)

I
II
II
II

II
II

I
II

II
II
II

II
II
II
II
II
II
II

I
I

III. Contingent short-term net drains on foreign currency assets (nominal value)

I
11. Contingent liabilities in foreign currency
(a) Collateral guarantees on debt falling due within 1
year

IITotal
II

I(b) Other contingent liabilities
options (puttable bonds)

13. Undrawn, unconditional credit lines provided by:

II
II

I--other national monetary authorities (+)

I--BIS (+)

II
II

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 (+)

I~ndrawn,

unconditional credit lines provided to:

ii~a) other national monetary authorities, SIS, IMF, and
other international organizations
I--other national monetary authorities (-)

II
Maturity breakdown (residual maturity, where
applicable)

JI
JI

JI
II
II

http://www.treas.gQy/press/releases/200711191782722399.htm

More than 3
months and up to
1 year

More than 1 and
up to 3 months

to 1 month

I
I

1~2. Foreign currency securities issued with embedded

(a) other national monetary authorities, SIS, IMF, and
other international organizations

II
II
II

II
\I

II
II

12/312007

Page 3 of 4
I--BIS (-)

l--IMF (-)

(b) banks and other financial institutions headquartered
In reporting cou ntry (- )

4. Aggregate short and long positions of options in
foreign currencies vis-a-vis the domestic currency
I(a) Short positions
ITi) Bought puts
I(ii) Written calls

II
II
II
II
II

Bb) Long positions

I(i) Bought calls

II
II

I(ii) Written puts
IpRO MEMORIA: In-the-money options I I

1(1) At current exchange rate

I(a) Short position

I(b) Long position

II
II

1(2) + 5 % (depreciation of 5%)

II
II

II
II
II

"
II

II
II

II
II
II"

I
I

!
I

I
I
I

1(3) - 5 % (appreciation of 5%)

I(a) Short position

II
II
II

II
II

j(a) Short position

I(b) Long position

1(5) -10 % (appreciation of 10%)

II
II

I(a) Short position

I(b) Long position

1(6) Other (specify)

I(a) Short position

I(b) Long position

1(4) +10 % (depreciation of 10%)

"II

I(b) Long position

I(a) Short position

\(b) Long position

II
I

II
II

IV. Memo items

I
j(1) To be reported with standard periodicity and timeliness:

II
II

ha) short-term domestic currency debt indexed to the exchange rate

Wb) financial instruments denominated in foreign currency and settled by other means (e.g., in domestic I!
currency)

I
I

I--nondeliverable forwards

I --short positions
1 --long positions

I--other instruments

I(C) pledged assets

I--included in reserve assets

--included in other foreign currency assets

http://www.treas.gQY!Qtes;;/releases/200711191782722399.htm

12/312007

Page 4 of 4
I(d) seCUritIes lent and on repo

Ir--Ient or repoed and included in Section I

I--Ient or repoed but not included in Section I

II--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--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

II
II
II
II
II
II
II

I(a) short positions
I(i) bought puts
I(ii} written calls
I(b) long positions

l(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 70 ,747

I--currencies in SDR basket

11 70 ,747

I--currencies not

SDR basket

I--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/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.g(LYLpresslr~1~~~s/200711191782722399.htm

12/3/2007

HP·691: Secretary Paulson Statement on the Retirement of FMS Commissioner Kenneth R. Papaj

Page 1 of 1

November 20, 2007
HP-691
Secretary Paulson Statement on the Retirement of FMS Commissioner
Kenneth R. Papaj

Washington- Treasury Secretary Henry M. Paulson, Jr. issued the following
statement today upon the retirement of Financial Management Service
Commissioner Kenneth R. Papaj. effective January 4, 2008:
"Ken Papaj's 34 years at the Treasury Department have been dedicated to
improving government-wide financial management. Ken demonstrated outstanding
leadership and Judgment as FMS Commissioner.
"In key executive positions over the last 20 years, he has been instrumental in
modernizing federal disbursements, revenue collections, central accounting, debt
collection, and the regulation of government securities. He has been a highly
respected leader in the financial management community.
"I commend his recent efforts to improve Treasury's relationship with Chief
Financial Officers across the Government, for ensuring operational excellence
throughout FMS, and for his genuine commitment to our strategic goal of the allelectronic Treasury. We will miss his vast knowledge of government fiscal
operations. "
Commissioner Papa} served as the FMS Commissioner since 2006. He was the
FMS Deputy Commissioner from 1998 to 2006, and prior to that held senior
executive positions at Treasury's Bureau of the Public Debt. He began his Federal
career at the Bureau of Government Financial Operations, FMS's predecessor
organization.
FMS has primary responsibility for the Federal Government's payments and
collections, annually processing more than one billion disbursements to more than
100 million people, processing over $3 trillion in Federal revenues, and collecting
over $3.5 billion in delinquent debt. As manager of the Government's central
accounting and financial reporting systems, FMS issues the annual Financial
Report ofthe U.S. Government.

·30·

http 11www.treas.gov/press/releases/hp691.htm

1213/2007

hp-692: Secretary Paulson Statement on the Appointment of Judith R. Tillman as FMS Commissi... Page 1 of 1

November 20, 2007
hp-692
Secretary Paulson Statement on the Appointment
of Judith R. Tillman as FMS Commissioner
Washington- Treasury Secretary Henry M. Paulson, Jr. issued the following
statement today announcing the appointment of Financial Management Service
Commissioner Judith R. Tillman, effective January 4, 2008, upon the retirement of
Commissioner Kenneth R. Papaj:
"I am pleased to announce the appointment of Judith Tillman as FMS
Commissioner. I am confident that Ms. Tillman will serve the American people in an
exemplary manner in her new position. She is an outstanding addition to our team
of bureau heads within Treasury and brings a wealth of experience to our critical
responsibility of effectively managing U.S. government finances."
Ms. Tillman has worked at FMS and the Internal Revenue Service for more than 34
years. For the past 18 months, she has served as FMS Oeputy Commissioner.
Prior to that, she was the FMS Assistant Commissioner for Regional Operations,
responsible for issuing federal payments at Financial Centers across the country for
hundreds of Federal agencies.
FMS has primary responsibility for the Federal Government's payments and
collections, annually processing more than one billion disbursements to more than
100 million people, processing over $3 trillion in Federal revenues, and collecting
over $3.5 billion in delinquent debt. As manager of the government's central
accounting and financial reporting systems, FMS issues the annual Financial
Report of the U. S. Government.

-30-

httpf/WWW.treas.govlpress/releases/hp692.htm

12/3/2007

hp-693: Statement by Secretary Paulson on the Intent to Nominate Shulman as IRS Commissioner

Page 1 of 1

November 21,2007
hp-693
Statement by Secretary Paulson on the Intent to Nominate Shulman as IRS
Commissioner
Washington, DC - "I am extremely pleased that the President intends to nominate
Doug Shulman to be IRS Commissioner, and am grateful for Doug's willingness to
serve. Doug is a highly capable executive with extensive management experience
and a proven ability to provide innovative leadership to a large organization. His
experience as Senior Policy Advisor and Chief of Staff on the National Commission
on Restructuring the IRS provides him with fundamental knowledge of the IRS and
its critical responsibility of administering the tax code. Doug is an excellent choice to
lead the IRS. His energy, creativity, strong management skills, and technology
experience will ensure that the IRS fully serves its mission to provide America's
taxpayers top quality service by helping them understand and meet their tax
responsibilities and by applying the tax law with integrity and fairness."
-30-

ttp:IIWW w.treas.gov.JJresslreleases/hp693.htm

1213/2007

lp-694: U.S. and China to Hold Meeting of the Strategic Economic Dialogue in China Next Month

Page 1 of 1

To view or print the PDF content on this page, download the free Adobe® Acrobat® Reader®.

November 20, 2007
hp-694

U.S. and China to Hold Meeting of the Strategic Economic Dialogue in China
Next Month
Washington, DC - Treasury Secretary Henry M. Paulson, Jr. will lead the U.S.
delegation to China next month for the next meeting of the LJ S -CtlllliJ SlrdlccjlC
ECOf)()IIlIC DI~liuljuC . Secretary Paulson will be joined by Commerce Secretary
Carlos Gutierrez, Health and Human Services Secretary Mike Leavitt, U.S. Trade
Representative Susan Schwab, EPA Administrator Stephen Johnson, Acting
Agriculture Secretary Chuck Conner, and other Administration officials.
The third Cabinet-level meeting of the SED will focus on integrity of trade, balanced
economic development, energy conservation, financial sector reform, environmental
sustainability, and advancing bilateral investment. The dialogue was launched by
President Bush and President Hu in September 2006.
China's Ministry of Foreign Affairs (MFA) will issue credentials to all media planning
to cover the SED. If you are seeking press credentials, you must complete and
submit the attached form along with a digital passport photo to the Treasury
Department's Office of Public Affairs at pless@cio.treCis.gov no later than Thursday,
November 29. Treasury will submit the information to the MFA on November 30this deadline will be enforced by the MFA.
The talks will take place December 12-13 near Beijing at Grand Epoch City.

REPORTS
•

Press Creeielltl3i Rr;CllstlilliClil Form

httpIIWWW.treas.gov/press/releases/hp694.htm

1213/2007

Page 1 of 4

November 26, 2007
2007 -11-26-16-19-33-28064

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 $71,718 million as of the end of that week, compared to $70,747 million as of the end of the
prior week.
I. Official reserve assets and other foreign currency assets (approximate market value, in US millions)

IINovember 23, 2007

IA. Official reserve assets (in US millions unless otherwise specified)

IIEuro

1(1) Foreign currency reserves (in convertible foreign currencies)

II Total

II Yen
II

I(a) Securities

11 14 ,576

/111,808

11 26,384

lof which: issuer headquartered in reporting country but located abroad

II
II

11 0

l(i) other national central banks, BIS and IMF

11 14 ,495

1\5,801

11 2 0,296

Iii} banks headquartered in the reporting country

II
II

11 0

II
II

11 0

I(b) total currency and deposits with:

lof which: located abroad
I(iii) banks headquartered outside the reporting country

lof which: located in the reporting country
1(2) IMF reserve position

II
11 4 ,462

1(3) SDRs

11 9 ,536

1(4) gold (including gold deposits and, if appropriate, gold swapped)

11 11 ,041

I--volume in millions of fine troy ounces

1\261.499

1(5) other reserve assets (specify)

11 0

11 71 ,718

11 0

II
II

I--financial derivatives
I--Ioans to nonbank nonresidents

It-securities not included in official reserve assets

I--other
lB. Other foreign currency assets (specify)

IL--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. Predetermined short-term net drains on foreign currency assets (nominal value)

____________~IIL____~II~

____

ttp://WWW.treas.g.Q~lpre~sheleases/2007112616193328064.htm

~I~I----~II~----~II~_ _ _ _~II
12/312007

Page 2 of4
I

IIMaturity breakdown (residual maturity)

IITotal
II

I Up to 1 month
II

Ilprincipal

IIlnterest

I
11. Foreign currency loans, securities, and deposits
--outflows (-)

-inflows (+)

More than 3
months and up to
1 year

2. Aggregate short and long positions in forwards and
futures in foreign currencies vis-a-vis the domestic
currency (including the forward leg of currencl' swaps)

(a) Short positions ( - )
(b) Long positions (+)

3. Other (specify)
--outflows related to repos (-)

I --inflows related to reverse repos (+)

More than 1 and
up to 3 months

I --trade credit (-)

I --trade credit (+)

I --other accounts payable (-)

I --other accounts receivable (+)

II\. Contingent short-term net drains on foreign currency assets (nominal value)

1/
1/
II
IMaturity breakdown (residual maturity, where

II
IITotal

IUp to 1 month

II
II

I
11. 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 (puttable bonds)

@. Undrawn, unconditional credit lines provided by:
(a) other national monetary authorities, BIS, IMF, and
other international organizations
tother national monetary authorities (+)

applicable)

II
II

II
I

[gndrawn, unconditional credit lines provided to:

II"

I
I

[IMF (+)

[other national monetary authorities (-)

(a) other national monetary authorities, BIS, IMF, and
other international organizations

t BIS (+)

(b) with banks and other financial institutions
headquartered in the reporting country (+)

More than 3
months and up to
1 year

More than 1 and
up to 3 months

http://WWW.treas.gov/press/releases/2007112616193328064.htm

II
II

I
I

12/3/2007

Page 3 of 4
1--8IS (-)

[IMF (-)

II
I

(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

[a) Short positions

I
I

[(i) Bought puts

II
II
II

II
II
II
II

II
II
II
II
II

l(ii) Written calls

"
"

I(b) Long positions
I(i) Bought calls

I(ii) Written puts
IpRO MEMORIA: In-the-money options

1(1) At current exchange rate

[(a) Short position

I(b) Long position

1(2) + 5 % (depreciation

/I
JI

of 5%)

I(a) Short position

I(b) Long position

1(3) - 5 % (appreciation of 5%)

I(a) Short position

I(b) Long position

II
II"
II
II

/I
/I

II
II

II
II
II"

1(5) - 10 % (appreciation of 10%)

lib) Long position

\(b) Long position

I(a) Short position

I
I
I

1(6) Other (specify)

I(b) Long position

II
II

I(a) Short position

II
II

I(a) Short position

1(4) +10 % (depreciation of 10%)

"IIII

I
I

IV. Memo items

~1) To be reported with standard periodicity and timeliness:

lia) 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)

t-nondeliverable forwards

[ --short positions

[ --long positions

t-other instruments

~) pledged assets
[included in reserve assets
tincluded in other foreign currency assets

http 11www.treas.gov/presslreleases/2007112616193328064.htm

II
IIII

I
I
I

12/3/2007

Page 4 of 4
l(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

[--borrowed or acquired but not included in Section I

I(e) financial derivative assets (net, marked to market)

II
II

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
I(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 71 ,718

I--currencies in SDR basket

11 71 ,718

I--currencies not in SDR basket

I--by individual currencies (optional)

II
II

1
Notes:

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.gQ..dpress/Ie)~ases/2007112616193328064.htm

12/3/2007

HP-695: Remarks by Ambassador Holmer at the Center for Strategic and International Studies on '"

Page 1 of 4

November 27, 2007
HP-695

Remarks by Ambassador Holmer at the Center for
Strategic and International Studies on Establishing
New Habits of Cooperation in U,S.-China Economic Relations
Good morning. I want to thank Charles Freeman for inviting me today. I sincerely
appreciate the efforts of CSIS to create a forum about China that merges economic,
political and security issues. This is an important service to policymakers,
businesspersons, and scholars.

Our Changing Economic Relationship
China's re-emergence on the global stage is one of the most consequential
geopolitical events of recent times. There is hardly an issue - from trade, to national
security, to climate change - or a place - from North Korea to Iran to Sudan where American and Chinese interests do not increasingly overlap. Because China
is so fully integrated into the global economy, what happens in China's economy
affects the entire international community.
The U,S.-China economic relationship is entering a new phase.
First, U.S.-China economic interdependence is deepening. We need each other
more and on a broader number of economic and economically consequential
issues. Over the past 5 years, according to U ,So data, U.S, exports to China have
grown from $18 to $52 billion, while U. S. imports from China have grown from $102
to $287 billion.
Moreover, the United States and China are shaping, and being shaped by, global
energy and environmental trends, which have strong economic consequences, For
example, our countries are the world's largest energy consumers and the largest
emitters of greenhouse gases. Clearly, our interdependence is deepening,
Second, whereas trade and investment were once largely a source of stability in
bilateral relations, they are now increasingly also a source of tension. Such tensions
are straining the domestic consensus in both the United States and China on the
benefits of economic engagement.
When I first became deeply involved in international trade issues in the 1980s, we
didn't have Significant trade tensions with China - mainly because we didn't have
much bilateral trade. In a sense, the fact that we have trade tensions today reflects
a maturing of our relationship and the rapid growth in bilateral trade and investment.
We need to make sure we manage those tensions effectively in order to keep our
bilateral economic relationship on an even keel and in our mutual interests.
Anxieties about increasing trade manifest themselves in many ways, which leads
me to the third dynamic confronting us: the rise of economic nationalism and
protectionism in both our nations. These sentiments may constrain leaders from
adopting policies that are in the long-term interests of the citizens and economies of
the United States and China.
These three emerging dynamics to our economic relationship - deepening
interdependence, a strained policy consensus, and the rise of economic
protectionism - are mutual and require cooperative solutions,

Managing Complexity and Establishing New Habits of Cooperation

http://WWw.treas.gov/presslreleases/hp695.htm

12/3/2007

hP-695: Remarks by Ambassador Holmer at the Center for Strategic and International Studies on .. , Page 2 of 4
These dynamics Informed the creation of the Strategic Economic Dialogue (SED)
by President Bush and President Hu Jlntao In 2006. They envisioned a forum to
allow both governments to communicate at the highest levels and with one voice on
issues of long-term and strategic importance.
Managing our complex and increasingly interdependent relationship is daunting _
and requires speaking to the nght people - at the right time - on the right issues _
and in the right way.

I learned a long time ago that if you are going to be successful in any kind of
dialogue, it is essential that you do everything you can to put yourself in the other
person's shoes, to try to see the world the way he or she does. This is the way you
achieve win-win agreements, ones that advance mutual interests, agreements that
will withstand the tests of time. The Strategic Economic Dialogue embraces this
approach.
The United States has three core objectives for the SED as a new and leading
institution in U.S.-China relations.

Establishing New Habits of Cooperation
First, through this framework, we are advancing the U.S.-China economic
relationship by establishing new habits of bilateral cooperation.
We have embraced a broad agenda that covers cross-cutting economic and
economically consequential issues, including regulatory transparency, energy
conservation, environmental protection, innovation. food and product safety, as well
as the important economic issues of exchange rate and macroeconomic policies,
market access, and financial sector development and liberalization.
Our approach engages multiple and diverse government officials in both countries.
It breaks down classic bureaucratic stove-pipes that hinder effective communication
and impede results.
And that's what direct engagement does: it keeps the relationship on an even keel
by lessening miscommunication and dispelling misperceptions so common in the
history of the U.S.-China relationship.
It helps us signal to China that we welcome the rise of a confident, peaceful and
prosperous China. A weak and insecure China is not in America's economic or
security interests.

Accelerating China's Economic Transition
Second, it is vitally important that our policies accelerate the next wave of China's
"reform and opening" process. The pace of China's growth and economic reform
has clearly been remarkable, but continued effort is needed.
China's top leaders now realize that a key challenge they face is taking the bold
policy steps necessary for an economy that is no longer in the first stages of
economic growth.
We welcome the leadership's current efforts to transition to an economy that is
more market-oriented, less reliant on low-value added manufacturing exports, one
that depends more on the skills and resourcefulness of the Chinese people and
less on material inputs and natural resource consumption.
A major risk China faces is that its government won't act quickly enough to take the
policy steps necessary to deal with the economic and social imbalances created by
its growth model. Without strong policy adjustments, China's economic growth path
becomes unsustainable, as Chinese top leaders have publicly stated. We are
encouraging key reforms that will help China manage the blistering pace of its
economic growth; these include financial market liberalization and a plan for
rebalancing growth. China has proven to the world that it can grow fast, but the key
issue now is whether it can grow differently and sustainably, where the quality of

http:ttp:llwww.treas.gov/press/releases/hp695.htm

12/3/2007

HP-695: Remarks by Ambassador Holmer at the Center for Strategic and International Studies on ... Page 3 of 4
growth is as Important as [tie quantity.
Bold structural policies are needed to shift China's growth away from heavy
industry, high energy use, capital intensiveness, and dependence on exports towards greater reliance on domestic demand, production of services, and a greater
share of China's national income accruing to China's households.
To enable market forces to efficiently rebalance the economy and spread prosperity
to all the Chinese, China needs more flexible prices, including a much more flexible,
market-driven exchange rate. Exchange rate flexibility is also key to allowing
monetary policy - the most potent instrument for guiding an economy - to focus on
assuring price and financial stability.
A key to China's future success will be its willingness to accelerate the pace of its
market-based economic reforms. Meeting and going beyond its WTO commitments,
resisting protectionist sentiment, and opening up its economy to greater
international competition for goods, and particularly, services, will help rebalance
the Chinese economy and spread prosperity more broadly among the Chinese
people.
These reforms are - and will continue to be - resisted by increasingly influential
Chinese businesses due to growing suspicion about U.S. efforts to encourage
further liberalization of key sectors of China's economy. However, in my judgment,
the greatest risk to China's long-term economic security is not that China opens too
fast, but, rather, that protectionists prevail, and Chinese reforms proceed too slowly.
Encouraging China's Responsible Global Engagement
Third, and finally, we are also encouraging China to act responsibly as a global
economic power. We welcome China into key international financial institutions and
are giving China a greater voice in them as well.
Since the initiation of the SED in September 2006, we have supported China's
efforts to join the Inter-American Development Bank (IADB) and the Paris-based
Financial Action Task Force (FATF). We also strongly support a greater voting
share for China in the IMF and World Bank.
Increased participation will allow China to advance its interests in those institutions,
but it is also important that Beijing recognize the responsibilities of greater
participation.
China has become a major source of foreign aid for many of the poorest countries.
We look forward to working with China, as a new and welcome participant, in
multilateral efforts to assure that foreign aid and lending practices promote
sustainable development.
This new era in U.S.-China economic relations requires new and dynamic ways of
doing business. We are meeting these challenges through the creation of the
political space and the institutional capacity for long-term stability in our bilateral
economic relations.
Signposts and Benchmarks
I spoke before about the importance of new habits of cooperation between our
governments and our countries. While habits of cooperation are important, good
process does not ensure good results.
Dialogue needs to be more than talking for the sake of talking and can not give U.S.
or Chinese leaders "a pass" on issues of disagreement. It is about setting priorities,
specifying consequences and fashioning practical solutions.
Sec. Paulson refers to "signposts and benchmarks" along the path toward reform.
Is progress occurring as fast as we prefer or as fast as is in China's interest? No.
But is progress occurring faster than would have been the case without the SED?
Absolutely.

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12/312001

HP-695: Remarks by Ambassador Holmer at the Center for Strategic and International Studies on .,. Page 4 of 4
Time after- time, U.S. government agencies have been able to "draft behind" the
momentum created by the SED.
Examples include a new air services agreement, collaboration on energy security
and the environment, moving toward more efficient capital markets, and addressing
concerns about tainted food and product imports.
The SED is not just an event that happens at Cabinet-level meetings twice a year_
Rather, engagement is continuous, with progress announced throughout the year.
Towards a New Future for Bilateral Economic Relations

President Bush and President Hu have set a positive agenda for strengthening our
economic relationship. The SED is a core part of that agenda because it is longterm in its vision, comprehensive in its scope, and immediate in its ability to deal
with the most sensitive bilateral economic tensions.
As we chart the future course of our economic relationship with China, we would be
well-advised to remember the words of a former American diplomat and Chairman
of the Senate Finance Committee, Daniel Patrick Moynihan, who said we shouldn't
"let the politics of last month or next month affect decisions toward China that go to
half-century strategic issues."
The politics of U.S.-China economic relations are intensely dynamic and sensitive,
in both countries. The SED is complex international economic diplomacy. We are
tackling some of the biggest structural challenges in China's economic future and in
U.S.-China relations.
The economic and geopolitical landscape of the 21 st century will be greatly
influenced by the way in which the United States and China work together. That
emerging future requires a distinct vision and effective mechanisms to achieve it.
By establishing new habits of cooperation, the SED has allowed both the United
States and China to begin to write the next chapter of our strategic economic
relationship.
-30-

http://www.treas.gov/press/releases/hp695.htm

12/312007

HP-696: Treasury Calls for Large Position Reports

Page 1 of 1

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November 27, 2007
HP-696
Treasury Calls for Large Position Reports
The Treasury is calling for Large Position Reports from those entities whose
reportable position In the 3-7/8% Treasury Notes of October 2012 equals or
exceeds $2 billion as of close of bUSiness Monday, November 26,2007. This call
for Large Position Reports is a test. Entities with reportable positions in this note
equal to or exceeding this $2 billion threshold must report these positions to the
Federal Reserve Bank of New York. Entities with positions in this note below $2
billion are not required to file Large Position Reports. Reports must be received by
the Government Securities Dealer Statistical Unit of the Federal Reserve Bank of
New York before noon Eastern Time on Monday, December 3,2007, and must
include the required position and administrative information. Large Position Reports
may be faxed to (212) 720-5030 or delivered to the Bank at 33 Liberty Street, 4th
floor.
Details on Call for Large Position Reports
Security Description:
3-7/8% Treasury Notes of October 2012, Series R-2012
CUSIP Number:
912828 HG 8
CUSIP Number of STRIPS Principal Component: 912820 QD 2
Maturity Date:
October 31,2012
Date for Which Information Must Be Reported:
November 26, 2007 as of COB
Large Position Reporting Threshold:
$2 Billion (Par Value)
Date Report Is Due:
December 3,2007, before noon Eastern time
This call for large position information is made under Treasury's large position
reporting rules (17 CFR Part 420). The notice calling for Large Position Reports is
also being published in the Federal Register. This press release and a copy of a
sample Large Position Report, which appears in Appendix B of the rules at 17 CFR
Part 420, are available at the Bureau of the Public Debt's Internet site at:
www.treasurydirect.gov/institlstatreg/gsareg/gsareg.htm
Questions about Treasury's large position reporting rules should be directed to
Treasury's Government Securities Regulations Staff at Public Debt on (202) 5043632. Questions regarding the method of submission of Large Position Reports
should be directed to the Government Securities Dealer Statistical Unit of the
Federal Reserve Bank of New York at (212) 720-7993.

REPORTS
•

Background Information

http://www.treas.gov/press/reJeases/hp696.htm

12/3/2007

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

EMBARGOED UNTIL

BACKGROUND ON CALL FOR LARGE POSITION REpORTS

Treasury's large position reporting rules (17 CFR Part 420), which were issued in final form on
September 12, 1996 (61 FR 48338), established recordkeeping and reporting requirements for entities
that control large positions in certain Treasury securities. An amendment to the rules was issued on
December 18,2002, and was effective January 17,2003. The rules put in place an on-demand reporting
system which, in response to a notice by Treasury requesting large position information, requires large
position reports to be filed by entities that control a position in a particular Treasury security or
securities equaling or exceeding the specified large position threshold. Holders will have three and onehalf days in which to respond to the request, unless otherwise noted on the press release.
The rules were first effective March 31, 1997. When the rules were announced, Treasury said that it
would issue a test call annually. Treasury has issued seven previous test calls, and one non-test call.
The purpose of the rules is to give Treasury the means to acquire information quickly on concentrations
of a security's holdings in the event of a market dislocation affecting that security. The rules are
intended to improve the information available to Treasury and other regulators regarding concentrations
of control and to ensure that regulators have the tools necessary to monitor the Treasury securities
market. Large positions, in and of themselves, are not inherently harmful, and there is no presumption
of manipulative or illegal intent on the part of a controlling entity merely because it is required to submit
a large position report in response to these rules. The Treasury does not expect to have to use such
authority for such purposes frequently, but it wants holders' reporting systems to be fully functional in
the event it needs to require large position information.
-30-

HP-697: U.S. Treasurer to Visit Atlanta to Offer Mortgage Financing Advice

Page 1 of 1

November 27,2007
HP-697
U.S. Treasurer to Visit Atlanta
to Offer Mortgage Financing Advice
The United States Treasurer Anna Escobedo Cabral will be in Atlanta, Ga. Friday,
Nov. 30, at The Commerce Club to discuss ways Atlanta homeowners can find help
if they are struggling to make their mortgage payments. HOPE NOW Alliance
members NeighborWorks America and Consumer Credit Counseling Service of
Greater Atlanta will host the event.
More than half of borrowers who go into foreclosure never reach out for help.
Treasurer Cabral's remarks will cover the mortgage financing services and options
offered by counseling agencies, which may help homeowners find more affordable
mortgage solutions.
The Treasurer's efforts are part of Treasury Secretary Henry M. Paulson's initiative
to help subprime homeowners stay in their homes. Secretary Paulson and U.S.
Housing and Urban Development Secretary Alphonso Jackson previously
encouraged the creation of the HOPE NOW Alliance, a national alliance of leading
counselors, servicers, and investors who are working together to educate more
homeowners about their mortgage options. The Alliance recently began a new
direct mail campaign, sending 300,000 letters to struggling homeowners this month
alone. The letters provide helpful information on where to turn to get help
refinancing or modifying a mortgage. For more information on Treasury's mortgage
financing initiatives, please visit http://www.treas.gov/topics/financial-markets/.
The following event is open to the media:
Who
U.S. Treasurer Anna Escobedo Cabral
What
Remarks on Mortgage Financing
When
Friday, November 30, 8:00 a.m. EST
Where The Commerce Club
34 Broad Street, NW
Atlanta, Ga.

http://www.treas.gov/press/releases/hp697.htmI2/3/2007

hP-798: Treasury, IRS Issue Model Provisions for Section 403(b) Plans

Page 1 of 1

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November 27,2007
hp-798
Treasury, IRS Issue Model Provisions for Section 403(b) Plans
Washington, DC--The Treasury Department and Internal Revenue Service (IRS)
today issued Revenue Procedure 2007 -71, which includes model plan provisions
for use by public school employers to comply with regulations under section 403(b)
that were issued in July (72 FR 41128). In addition, Rev. Proc. 2007-71 provides
relief from certain requirements of the regulations with respect to contracts issued
before January 1, 2009.

REPORTS

http://www.treas.gov/press/releases/hp798.htm

12/312007

Part III --Administrative, Procedural, and Miscellaneous

26 CFR 601.201: Rulings and determination letters.
(Also, Part I, § 403; § 1.403(b)-3.)

Rev. Proc. 2007-71

SECTION 1. PURPOSE
This revenue procedure provides model plan language that may be used by public schools
either to adopt a written plan to reflect the requirements of § 403(b) and the regulations
thereunder or to amend its § 403(b) plan to reflect the requirements of § 403(b) and the
regulations thereunder. This revenue procedure also provides rules for when plan amendments
or a written plan are required to be adopted by public schools or other eligible employers to
comply with the recently published final regulations under § 403(b) (72 FR 41128; TD 9340).
This revenue procedure also provides guidance relating to the application of § 403(b) to certain
contracts issued before 2009.
SECTION 2. BACKGROUND AND GENERAL INFORMATION
.01 Section 403(b) applies to contributions made for employees who are performing
services for a public school of a State or a local government or for employees of employers that
are tax-exempt organizations under § 501 (c )(3). Section 403(b) also applies to contributions
made for certain ministers. Under § 403(b), contributions are excluded from gross income only
if made to certain funding arrangements: (1) contracts issued by an insurance company qualified
to issue annuities in a State that includes payment in the form of an annuity; (2) custodial
accounts that are exclusively invested in stock of a regulated investment company (as defined in

§ 851(a) relating to mutual funds); or (3) a retirement income account for employees ofa
church-related organization (as defined in §IA03(b)-2 of the Income Tax Regulations) .
.02 Final regulations under § 403(b) (TD 9340) were published in the Federal

Register (72 FR 41128) on July 26, 2007 (2007 regulations). The 2007 regulations
replaced existing regulations that were published in the Federal Register (29 FR 18356)
on December 24, 1964,1965-1 C.B. 180, that provided guidance for complying with
§ 403(b), as well as certain provisions of regulations that were published in the Federal

Register (60 FR 49199) on September 22, 1995, relating to eligible rollover distributions
and regulations that were that were published in the Federal Register (67 FR 18987) on
April 17,2002, relating to minimum distributions under § 401(a)(9). The 2007
regulations reflected the numerous amendments made to § 403(b) by legislation enacted
since 1964. Subject to a number of special effective date rules, the 2007 regulations are
generally effective for taxable years beginning after December 31, 2008 .
.03 The 2007 regulations include comprehensive guidance relating to § 403(b),
including the requirement that § 403(b) contracts must be maintained pursuant to a
written plan. (References in this revenue procedure to a contract or an issuer include a
custodial account under § 403(b )(7) and an issuer of such an account, respectively.) As
indicated in the preamble to the regulations, while § 403(b) contracts that are subject to
the Employee Retirement Income Security Act of 1974 (ERISA) are already maintained
pursuant to written plans, there may be a potential cost associated with satisfying the
written plan requirement for those employers that do not have existing plan documents,
such as public schools. This revenue procedure is intended to address this concern by
providing model plan language that may be used for this purpose by public schools.

.04 Section 1A03(b )-3(b )(3) of the 2007 regulations requires that contracts be
issued under a plan, which, in both form and operation, satisfies the requirements of the
2007 regulations and which contains all the material terms and conditions for eligibility,
benefits, applicable limitations, the contracts available under the plan, and the time and
form under which benefit distributions would be made. Section 1A03(b )-1 O(b) of the
2007 regulations includes a special rule for situations in which a contract has been
exchanged for another contract, under which the successor contract (an "exchange
contract") is treated as part of the plan if certain conditions are satisfied, including an
information sharing agreement between the employer and the issuer. Section 1A03(b )11 (g) of the 2007 regulations provides that those conditions are not imposed with respect
to a contract if the exchange occurred before September 25, 2007, and the exchange
satisfied applicable requirements at that time (a "grand fathered exchange contract").
SECTION 3. USE OF MODEL PLAN LANGUAGE BY PUBLIC SCHOOLS
.01 Any public school employer with respect to its employees performing services
for it, to the extent provided, may comply with the written plan requirements of the 2007
regulations by adopting the model provision(s) contained in the Appendix to this revenue
procedure. The model language has been prepared to take into account the general
requirement that a § 403(b) plan include all the material terms and conditions for benefits
under the plan. For example, the model language does not incorporate the applicable
legal requirements by reference, but instead describes them in a manner intended to
enable the plan administrator to implement the plan provisions on the basis of the model
language to the extent feasible .
.02 The 2007 regulations provide that a § 403(b) plan, including one established

by a public school employer, may contain certain optional features not required to satisfy
§ 403(b), such as in-service distributions from rollover accounts, distributions for

financial hardships, loans, contract exchanges, and plan to plan transfers. If optional
provisions are used, the optional provisions must meet, in both form and operation, the
relevant requirements under the Code and the 2007 regulations, as well as operate in
accordance with the terms of the plan. If a public school employer adopts one or more of
these optional model plan language provisions for its § 403(b) plan, the form of the plan
will be treated as meeting the requirements under § 403(b) with respect to those
prOVISIOns.
SECTION 4. RELIANCE BY PUBLIC SCHOOL EMPLOYERS ON MODEL PLAN
LANGUAGE
.01 Amendments. (a) Reliance. Ifa public school employer amends its plan
language to include any portion of the model language, the form of the written plan will
be treated as meeting the requirements of § 403(b), to the extent covered by the model
plan language that is adopted. This reliance applies only if the employer adopts the
model language on a word-for-word basis or adopts an amendment that is substantially
similar in all material respects.
(b) Effect on public schools. If a public school employer adopts any portion of
the model plan language, the written plan must also be operated in accordance with the
amendment, from and after the effective date of the amendment, and the § 403(b) plan
must continue to satisfy, in both form and operation, all other requirements of § 403(b) in
order to maintain § 403(b) status. To the extent a public school employer's § 403(b) plan
does not include the model plan language or an amendment that is substantially similar in
all respects, a public school that requests a private letter ruling from the Internal Revenue

Service (IRS) with respect to the qualification of its § 403(b) written plan must clearly
highlight and describe in the written request how its plan provisions differ from the
model language .
.02 Adoption of written plan. The model language is also designed for use by a
public school that does not have a written § 403(b) plan. Thus, adoption of the entire
model language (on a word-for-word basis or using language that is substantially similar
in all material respects) by a public school has the same status as a private letter ruling
which provides that the written form of the plan satisfies § 403(b). However, if a public
school employer adopts the entire model plan language, the § 403(b) written plan must
also be operated in accordance with that language, from and after the effective date of
adoption, and must continue to satisfy in both form and operation all other requirements
of § 403(b) in order for the plan to maintain its § 403(b) status.
SECTION 5. USE OF THE MODEL PLAN LANGUAGE BY EMPLOYERS THAT
ARE NOT PUBLIC SCHOOLS
.01 The model plan language in the Appendix to this revenue procedure is
designed for use by a public school employer with respect to its employees. The model
language is intended for a basic plan under which contributions are limited to pre-tax
elective deferrals (without any designated Roth, employer matching, or other employer
nonelective contributions). An eligible employer that is not a public school may use the
provisions of the Appendix as sample language to comply with one or more of the
requirements imposed by the 2007 regulations issued under § 403(b) .
.02 Because the model plan language in the Appendix has been designed for a
State or local government with respect to its employees performing services for a public
school, a § 501(c)(3) organization must determine the extent to which the model

language is appropriate for use in connection with its § 403(b) plan to comply with one or
more of the requirements imposed by the regulations issued under § 403(b). Notes in the
Appendix identify the principal provisions which require modification for use by an
eligible employer that is not a public school maintaining a § 403(b) arrangement.
Moreover, if an eligible employer that is not a public school uses the model language in
the Appendix, additional or revised provisions may be necessary or appropriate in order
to comply with the 2007 regulations and, if applicable, ERISA, especially if either (i) the
plan is not limited to elective deferrals, (ii) the plan is designed to not be an employee
pension benefit plan under ERISA in accordance with 29 CFR 2510.3-2(f) of the
Department of Labor Regulations, or (iii) the plan is maintained by a church (or a churchrelated organization described in § 414(e)(3)(A) or a qualified church-controlled
organization under § 3121 (w)(3)(8)) or applies with respect to one or more ministers. 1
.03 Adoption of the model plan language contained in the Appendix by an eligible
employer that is not a public school does not have the same status as a private letter
ruling with respect to the adopted language. However, if an eligible employer that is not
a public school has received from the IRS a favorable private letter ruling under § 403(b),
then, except as provided in section 5.02 of this revenue procedure, the eligible employer's
adoption of appropriate plan model language contained in the Appendix will not result in
the loss of its reliance on the private letter ruling for periods prior to the effective date of
the 2007 regulations.
SECTION 6. DATE AMENDMENTS ARE ADOPTED
Pursuant to this revenue procedure, a § 403(b) plan will be treated as having been
amended timely to reflect a requirement of the 2007 regulations if an amendment that
1 See United States Department of Labor Field Assistance Bulletin No. 2007-02.

satisfies that requirement (such as the model language in the Appendix of this revenue
procedure that reflects that requirement) is adopted no later than the first day of the first
taxable year beginning after December 31,2008, the amendment is effective as of the
applicable effective date of the requirement under the 2007 regulations, and the written
plan is operated as if that amendment is in effect. This section 6 applies to the
requirement to have a written plan. However, for a special rule with respect to
amendments made pursuant to the Pension Protection Act of 2006, Public Law 109-280
(PPA '06), see section 1107 of the PPA '06.
SECTION 7. AREAS NOT COVERED BY SECTIONS 3 AND 4 OF THIS REVENUE
PROCEDURE
Except as provided in section 5 of this revenue procedure, the model plan
language referenced in sections 3 and 4 of this revenue procedure is not designed to apply
to any employer other than a State or local government with respect to its employees
performing services for a public school.
SECTION 8. GUIDANCE REGARDING CERTAIN CONTRACTS ISSUED BEFORE
2009
.01 Contracts issued before 2009 as part of employer's plan. In the case of a
contract issued after December 31, 2004 and before January 1, 2009 by an issuer that
does not receive contributions under the plan in a year after the contract was issued (e.g.,
due to the issuer having been discontinued as an issuer under the plan or the issuer having
become an issuer under the plan due to the contract having been issued in a postSeptember 24,2007 exchange permitted under Rev. Rul. 90-24,1990-1 CB 97), the
contract will not fail to satisfy § 403(b) for the year merely because the contract is not
part of a written plan that satisfies § I.403(b )-3(b )(3) of the 2007 regulations if the

employer makes a reasonable, good faith effort to include the contract as part of the
employer's plan that satisfies § 1A03(b)-3(b)(3) of the 2007 regulations. For this
purpose, a reasonable, good faith effort to include those contracts as part of the
employer's plan includes collecting available information concerning those issuers (for
which purpose, the information is not required to be collected for issuers that ceased to
receive contributions before January 1, 2005) and notifying them of the name and contact
information for the person in charge of administering the employer's plan for the purpose
of coordinating information necessary to satisfy § 403(b). As an alternative to the actions
described in the preceding sentence, a reasonable, good faith effort to include that
contract as part of the employer's plan also includes the issuer taking action before
making any distribution or loan to the participant or beneficiary which constitutes a
reasonable, good faith effort to contact the employer and exchange any information that
may be needed in order to satisfy § 403(b) with the person in charge of administering the
employer's plan .
.02 Contracts issued before 2009 held for former employees or beneficiaries. In
the case of an issuer that holds § 403(b) contracts under a § 403(b) plan, but which ceases
to receive contributions before January 1,2009 (e.g., due to the issuer having been
discontinued as an issuer under the plan, the employer having ceased to exist, or the
issuer having become an issuer under the plan due to the contract having been issued in a
post-September 24, 2007 exchange permitted under Rev. Rul. 90-24, 1990-1 CB 97),
those contracts continue to be subject to the requirements of § 403(b) and the 2007
regulations to the extent applicable. However, pursuant to this revenue procedure, a §
403(b) plan will not be treated as failing to satisfy the requirements of § lA03(b)-3(b)(3)

if the plan does not include terms relating to those contracts. If the participant or
beneficiary requests a loan from the contract in accordance with § 72(p )(2), this relief
applies only if the issuer makes such a loan only after the issuer has made reasonable
efforts to determine: (1) whether the participant or beneficiary has in the prior 12 months
had any other outstanding loans from qualified employer plans of the employer (taking
into account §§ 72(p)(2)(D) and 72(p)(5)); and (2) if the participant or beneficiary has
had any such loans, the highest outstanding balance of such loans during that period. For
this purpose, assuming the employer is still in existence at the time of the loan, mere
reliance on information from the participant or beneficiary about outstanding loans does
not constitute reasonable efforts to determine whether the participant or beneficiary has
other outstanding loans from plans of the employer.
The special rules in this section 8.02 apply only with respect to a contract that has
been issued before January 1,2009, under a § 403(b) plan that is held on behalfofa
participant who, on January 1, 2009, is a former employee of the employer or for a
beneficiary. For this purpose, the issuer can rely on information from the participant as
to whether the participant is a former employee, assuming that reliance on that
information is not unreasonable under the facts and circumstances.
8.03. Re-exchange back into plan. If, after September 24,2007 and before
January 1, 2009, a contract is issued in an exchange permitted under Rev. Rul. 90-24 (an
"intermediate contract") and, before July 1,2009, the contract is exchanged in
accordance with Rev. Rul. 90-24 for a contract issued by an issuer which is either
receiving contributions as part of the plan or has an information sharing agreement as set
forth in § 1.403(b)-1 O(b )(2)(i)(C)(l) and (2.) of the 2007 regulations, then the information

sharing conditions in § 1.403(b)-1 O(b )(2)(i)(C)(l) and (f) of the 2007 regulations do not
apply to the intermediate contract.
8.04. Information sharing agreements. The model plan in this revenue procedure
includes optional provisions in Section 6.4(a) through (d) to allow contract exchanges
with an issuer that is not receiving contributions. See Section 6.4(d) of the model
language for the type of information that would satisfy the information sharing agreement
conditions in § 1.403(b)-1 O(b )(2)(i)(C)(l) and

(~)

of the 2007 regulations.

SECTION 9. COMMENTS REQUESTED
Treasury and IRS are interested in receiving comments on the model language
contained in this revenue procedure and any other model language that interested parties
believe should be added to this revenue procedure. Comments are specifically requested
on the following questions. While the model language has generally been prepared for
use by employers based on provisions commonly found in defined contribution
retirement plans, are there additional provisions which should be added to reflect features
that are widely used? Are there changes that should especially be made to reflect the
circumstances applicable to public schools, including not only revised versions of the
model language, but also whether additional provisions are necessary or appropriate for
them? Should the provisions found in section 7.3 of the model language, which have
been prepared to satisfy the 2007 final regulations requirements for the plan document to
reflect the available vendors, be expanded, including changes to reflect the special relief
in section 8 of this revenue procedure?
Comments should be sent to the following address: Internal Revenue Service,
Attn: CC:PA:LPD:PR (Rev. Proc. 2007-71), Room 5203, P. O. Box 7604, Ben Franklin

Station, Washington, DC 20044. Written comments may be hand delivered Monday
through Friday between 8 a.m. and 4 p.m. to: Internal Revenue Service, Courier's Desk,
Attn: CC:PA:RU (Section 403(b) Plans), 1111 Constitution Avenue, NW., Washington,
DC 20224. Alternatively, written comments may be submitted electronically via the
Internet to notice.comments@irscounsel.treas.gov (Rev. Proc. 2007-71). Comments
should be received by March 16, 2008.
SECTION 10. EFFECTIVE DATE
This revenue procedure is effective December 17,2007.
DRAFTING INFORMATION
The principal author of this revenue procedure is Robert Architect of the
Employee Plans, Tax Exempt and Government Entities Division. For further infonnation
regarding this revenue procedure, please contact the Employee Plans taxpayer assistance
telephone service at (877) 829-5500 (a toll-free number) between the hours of 8:30 am
and 4:30 pm Eastern Time, Monday through Friday. Mr. Architect may be e-mailed at
RetirementPlanQuestions@irs.gov.
APPENDIX FOR REVENUE PROCEDURE 2007-71
MODEL PLAN LANGUAGE
Note to sponsors: The model language in this Appendix is designed primarily
for use by a public school in order for it to offer its employees the ability to elect
to make pre-tax elective deferrals in accordance with § 403(b) of the Internal
Revenue Code. (See section 5 of the revenue procedure for use of the model
language by an organization that is a tax-exempt organization under § 501 (c)(3)
or for a church entity.) In addition, the contributions permitted under the model
language are limited to pre-tax elective deferrals, and it is assumed that the plan
is maintained on the basis of the calendar year. This model language is not
designed for a plan that provides for matching contributions or other employer
nonelective contributions, or for adoption by any other type of employer. The
model language also includes certain optional alternatives, including an
alternative under which the plan may automatically enroll employees for elective
deferrals (or alternatively to enroll only employees who file an affirmative

election) and an alternative under which the plan may permit a contract issued
under the plan by a vendor to whom contributions are made to be exchanged for
a contract issued by vendors to whom contributions are not made under the plan.
The portions of this Appendix printed in italics are explanatory notes for the
benefit of the public school plan sponsor and thus are not to be included in the
model plan document. In addition, certain items indicated by brackets can be
filled in by the plan sponsor as appropriate.

Section 403(b) Model Plan Language for a Public School
Section 1
Definition of Terms Used
The following words and terms, when used in the Plan, have the meaning set forth
below.
1.1 "Account": The account or accumulation maintained for the benefit of any
Participant or Beneficiary under an Annuity Contract or a Custodial Account.
1.2 "Account Balance": The bookkeeping account maintained for each
Participant which reflects the aggregate amount credited to the Participant's Account
under all Accounts, including the Participant's Elective Deferrals, the earnings or loss of
each Annuity Contract or a Custodial Account (net of expenses) allocable to the
Participant, any transfers for the Participant's benefit, and any distribution made to the
Participant or the Participant's Beneficiary. If a Participant has more than one
Beneficiary at the time of the Participant's death, then a separate Account Balance sha1l
be maintained for each Beneficiary. The Account Balance includes any account
established under Section 6 for rollover contributions and plan-to-plan transfers made for
a Participant, the account established for a Beneficiary after a Participant's death, and any
account or accounts established for an alternate payee (as defined in section 414(p )(8) of
the Code).

Note: A vendor is not required to maintain a separate account for each
beneficiary in order to satisfy § 401 (a)(9) , but this sample plan language provides for
such separate accounts so that installment payments are permitted to be made over each
beneficiary's life expectancy as permitted under § 1.401(a)(9)-8, A-2(a)(2) of the Income
Tax Regulations. However, because, under the sample plan language, each separate
account is permitted to have only a single beneficiary, certain beneficiary designations
are not permitted under the sample plan language, such as a death benefit in the form of
a fixed dollar payment that is not determined as of the date of death and that is not to be
maintained in a separate account to which gains and losses are credited.

1.3 "Administrator": [INSERT IDENTITY OF PERSON, COMMITTEE, OR
ORGANIZA TION APPOINTED TO ADMINISTER THE PLAN].

1.4 "Annuity Contract": A nontransferable contract as defined in section
403(b)( 1) of the Code, established for each Participant by the Employer, or by each
Participant individually, that is issued by an insurance company qualified to issue
annuities in [Insert name of State] and that includes payment in the form of an annuity.
1.5 "Beneficiary": The designated person who is entitled to receive benefits
under the Plan after the death of a Participant, subject to such additional rules as may be
set forth in the Individual Agreements.
1.6 "Custodial Account": The group or individual custodial account or
accounts, as defined in section 403(b )(7) of the Code, established for each Participant by
the Employer, or by each Participant individually, to hold assets of the Plan.
1.7 "Code": The Internal Revenue Code of 1986, as now in effect or as
hereafter amended. All citations to sections of the Code are to such sections as they may
from time to time be amended or renumbered.
1.8 "Compensation": All cash compensation for services to the Employer,
including salary, wages, fees, commissions, bonuses, and overtime pay, that is includible
in the Employee's gross income for the calendar year, plus amounts that would be cash
compensation for services to the Employer includible in the Employee's gross income for
the calendar year but for a compensation reduction election under section 125, 132(t),
401(k), 403(b), or 457(b) of the Code (including an election under Section 2 made to
reduce compensation in order to have Elective Deferrals under the Plan).
1.9 ''Disabled'': The definition of disability provided in the applicable Individual
Agreement.
1.10 "Elective Deferral": The Employer contributions made to the Plan at the
election of the Participant in lieu of receiving cash compensation. Elective Deferrals are
limited to pre-tax salary reduction contributions.
1.11 "Employee": Each individual, whether appointed or elected, who is a
common law employee of the Employer performing services for a public school as an
employee of the Employer. This definition is not applicable unless the employee's
compensation for performing services for a public school is paid by the Employer.
Further, a person occupying an elective or appointive public office is not an employee
performing services for a public school unless such office is one to which an individual is
elected or appointed only if the individual has received training, or is experienced, in the
field of education. A public office includes any elective or appointive office of a State or
local government.
1.12 "Employer": [NAME OF PUBLIC SCHOOL].

Note: The definitions of "Employee" and "Employer" are specifically tailored
for use by a State or local government maintaining a § 403(b) plan for its employees who
perform services for a public school and must be modified for use by any other employer.

1.13 "Funding Vehicles": The Annuity Contracts or Custodial Accounts issued
for funding amounts held under the Plan and specifically approved by Employer for use
under the Plan.
1.14 "Includible Compensation": An Employee's actual wages in box 1 of
Form W-2 for a year for services to the Employer, but subject to a maximum of $200,000
(or such higher maximum as may apply under section 401(a)(l7) of the Code) and
increased (up to the dollar maximum) by any compensation reduction election under
section 125, 132(f), 401(k), 403(b), or 457(b) of the Code (including any Elective
Deferral under the Plan). The amount of Includible Compensation is determined without
regard to any community property laws.
1.15 "Individual Agreement": The agreements between a Vendor and the
Employer or a Participant that constitutes or governs a Custodial Account or an Annuity
Contract.
1.16 "Participant": An individual for whom Elective Deferrals are currently
being made, or for whom Elective Deferrals have previously been made, under the Plan
and who has not received a distribution of his or her entire benefit under the Plan.
1.17 "Plan": [INSERT NAME OF PLAN].
1.18 "Plan year": The calendar year.
1.19 "Related Employer": The Employer and any other entity which is under
common control with the Employer under section 414(b) or (c) of the Code. For this
purpose, the Employer shall determine which entities are Related Employers based on a
reasonable, good faith standard and taking into account the special rules applicable under
Notice 89-23, 1989-1 C.B. 654.

Note: The definition of "Related Employer" is specifically tailored for use by a
State or local government maintaining a § 403(b) plan/or its employees who perform
services for a public school and must be modified/or use by any other employer by
deleting the sentence in Section 1. 19 that begins "For this purpose '" " because Notice
89-23 only applies to employers that are State or local public schools and churches.
See § 1.414(c)-5 of the Income Tax Regulations (and the related discussion at pages
41137 and 41138 of the Federal Register (72 FR 41128) in the preamble to those
regulations) .
1.20 "Severance from Employment": For purpose of the Plan, Severance from
Employment means Severance from Employment with the Employer and any Related
Entity. However, a Severance from Employment also occurs on any date on which an
Employee ceases to be an employee of a public school, even though the Employee may
continue to be employed by a Related Employer that is another unit of the State or local
government that is not a public school or in a capacity that is not employment with a

public school (e.g., ceasing to be an employee performing services for a public school but
continuing to work for the same State or local government employer).

Note: The definition of "Severance from Employment" is specifically tailored for
use by a State or local government maintaining a § 403(b) plan for its employees who
perform services for a public school and must be modified for use by any other employer.
1.21 "Vendor": The provider of an Annuity Contract or Custodial Account.
1.22 "Valuation Date": [Each business day/The last day of the calendar
month/The last day of the calendar quarter/ Each December 31].
Section 2
Participation and Contributions
2.1 Eligibility. Each Employee shall be eligible to participate in the Plan and
elect to have Elective Deferrals made on his or her behalf hereunder immediately upon
becoming employed by the Employer. However, an Employee who is a student-teacher
(i.e., a person providing service as a teacher's aid on a temporary basis while attending a
school, college or university) or who normally works fewer than 20 hours per week is not
eligible to participate in the Plan. An Employee normally works fewer than 20 hours per
week if, for the 12-month period beginning on the date the employee's employment
commenced, the Employer reasonably expects the Employee to work fewer than 1,000
hours of service (as defined under section 410(a)(3)(C) of the Code) and, for each plan
year ending after the close of that 12-month period, the Employee has worked fewer than
1,000 hours of service.

Note: This model language assumes that the plan has immediate eligibility, that
the plan is limited to pre-tax elective deferrals, and that the plan has no matching or
other employer non-elective contributions.

The model language in Section 2.1 also assumes that employees who normally
work fewer than 20 hours per week or who are student-teachers are not eligible. Either
of these exclusions may be deleted on a uniform basis for all employees. If this model
language is used by a § 501 (c)(3) employer that is not a public school and the plan is
subject to ERISA, the plan should delete the exclusion for employees who normally work
fewer than 20 hours per week.
2.2 Compensation Reduction Election. (a) General Rule. An Employee
elects to become a Participant by executing an election to reduce his or her Compensation
(and have that amount contributed as an Elective Deferral on his or her behalf) and filing
it with the Administrator. This Compensation reduction election shall be made on the
agreement provided by the Administrator under which the Employee agrees to be bound
by all the terms and conditions of the Plan. The Administrator may establish an annual
minimum deferral amount no higher than $200, and may change such minimum to a
lower amount from time to time. The participation election shall also include designation
of the Funding Vehicles and Accounts therein to which Elective Deferrals are to be made

and a designation of Beneficiary. Any such election shall remain in effect until a new
election is filed. Only an individual who performs services for the Employer as an
Employee may reduce his or her Compensation under the Plan. Each Employee will
become a Participant in accordance with the terms and conditions of the Individual
Agreements. All Elective Deferrals shall be made on a pre-tax basis. An Employee shall
become a Participant as soon as administratively practicable following the date applicable
under the employee's election.
(b) Special Rule for New Employees. (1) Automatic Enrollment for New
Employees. For purposes of applying this Section 2.2, a new Employee is deemed to
have elected to become a Participant and to have his or her Compensation reduced by
[5%] (and have that amount contributed as an Elective Deferral on his or her behalf), at
the time the Employee is hired, and to have agreed to be bound by all the terms and
conditions of the Plan. Contributions made under this automatic participation provision
shall be made to the Funding Vehicle or Vehicles selected for this purpose for all new
Employees by the Administrator. Any Employee who automatically becomes a
Participant under this Section 2.2(b) shall file a designation of Beneficiary with the
Funding Vehicle or Vehicles to which contributions are made.
(2) Right to File a Different Election; Notice to Employee. This Section 2.2(b)
shall not apply to the extent an Employee files an election for a different percentage
reduction or elects to have no Compensation reduction, or designates a different Funding
Vehicle to receive contributions made on his or her behalf. Any new Employee shall
receive a statement at the time he or she is hired that describes the Employee's rights and
obligations under this Section 2.2(b) (including the information in this Section 2.2(b) and
identification of how the Employee can file an election or make a designation as
described in the preceding sentence, and the refund right under Section 2.2(b )(3),
including the specific name and location of the person to whom any such election or
designation may be filed), and how the contributions under this Section 2.2(b) will be
invested.
(3) Refund of Contributions. An Employee for whom contributions have been
automatically made under Section 2.2(b)( 1) may elect to withdraw all of the contributions
made on his or her behalf under Section 2.2(b)( 1), including earnings thereon to the date
of the withdrawal. This withdrawal right is available only if the withdrawal election is
made within 90 days after the date of the first contribution made under Section 2.2(b)(1).

Note: Section 2.2(b) is an optional provision that provides for any new employee
to be automatically enrolled in the Plan, with 5% of Compensation to be contributed to
the Plan, unless the employee elects otherwise. See §§ 414(w) and 4979(j) of the Code
for special relief that applies to a plan that uses automatic enrollment, as provided in
Section 2.2(b). Plan sponsors should make any revisions in this optional provision that
may be necessary in order to take into account any additional guidance that may be
provided by the Treasury Department or the IRS regarding automatic enrollment under
§§ 414(w) and 4979(j) of the Code.

2.3 Information Provided by the Employee. Each Employee enrolling in the
Plan should provide to the Administrator at the time of initial enrollment, and later if
there are any changes, any information necessary or advisable for the Administrator to
administer the Plan, including any information required under the Individual Agreements.
2.4 Change in Elective Deferrals Election. Subject to the provisions of the
applicable Individual Agreements, an Employee may at any time revise his or her
participation election, including a change of the amount of his or her Elective Deferrals,
his or her investment direction, and his or her designated Beneficiary. A change in the
investment direction shall take effect as of the date provided by the Administrator on a
uniform basis for all Employees. A change in the Beneficiary designation shall take
effect when the election is accepted by the Vendor.
2.5 Contributions Made Promptly. Elective Deferrals under the Plan shall be
transferred to the applicable Funding Vehicle within 15 business days following the end
of the month in which the amount would otherwise have been paid to the Participant.
2.6 Leave of Absence. Unless an election is otherwise revised, if an Employee is
absent from work by leave of absence, Elective Deferrals under the Plan shall continue to
the extent that Compensation continues.

Note: If this Section 2 is adopted separately, the following definitions from
Section 1 should also be adopted: Account, Administrator, Beneficiary, Compensation,
Elective Deferral, Employee, Employer, Funding Vehicles, Individual Agreement,
Participant, Plan, and Vendor.

Section 3
Limitations on Amounts Deferred
3.1 Basic Annual Limitation. Except as provided in Sections 3.2 and 3.3, the
maximum amount of the Elective Deferral under the Plan for any calendar year shall not
exceed the lesser of (a) the applicable dollar amount or (b) the Participant's Includible
Compensation for the calendar year. The applicable dollar amount is the amount
established under section 402(g)(l )(B) of the Code, which is $15,500 for 2007, and is
adjusted for cost-of-living after 2007 to the extent provided under section 415( d) of the
Code.
3.2 Special Section 403(b) Catch-up Limitation for Employees With 15 Years
of Service. Because the Employer is a qualified organization (within the meaning of
§ 1.403(b )-4( c )(3 )(ii) of the Income Tax Regulations), the applicable dollar amount under
Section 3.1(a) for any "qualified employee" is increased (to the extent provided in the
Individual Agreements) by the least of:
(a) $3,000;
(b) The excess of:

(l) $15,000, over
(2) The total special 403(b) catch-up elective deferrals made for
the qualified employee by the qualified organization for
pnor years; or
(c) The excess of:
(l) $5,000 multiplied by the number of years of service of the
employee with the qualified organization, over

(2) The total Elective Deferrals made for the employee by the
qualified organization for prior years.
For purposes of this Section 3.2, a "qualified employee" means an employee who has
completed at least 15 years of service taking into account only employment with the
Employer.
Note: Section 3.2 is specifically written for use by a State or local
government maintaining a § 403(b) plan for its employees who perform services for a
public school and, if used by a § 501 (c)(3) employer, must be limited to cases in which
the Employer is a "qualified organization" under § 1.403(b)-4(c)(3)(iU) of the Income
Tax Regulations.
3.3 Age 50 Catch-up Elective Deferral Contributions. An Employee who is a
Participant who will attain age 50 or more by the end of the calendar year is permitted to
elect an additional amount of Elective Deferrals, up to the maximum age 50 catch-up
Elective Deferrals for the year. The maximum dollar amount of the age 50 catch-up
Elective Deferrals for a year is $5,000 for 2007, and is adjusted for cost-of-living after
2007 to the extent provided under the Code.
3.4 Coordination. Amounts in excess of the limitation set forth in Section 3.1
shall be allocated first to the speciaI403(b) catch-up under Section 3.2 and next as an age
50 catch-up contribution under Section 3.3. However, in no event can the amount of the
Elective Deferrals for a year be more than the Participant's Compensation for the year.
3.5 Special Rule for a Participant Covered by Another Section 403(b) Plan.
For purposes of this Section 3, if the Participant is or has been a participant in one or
more other plans under section 403(b) of the Code (and any other plan that permits
elective deferrals under section 402(g) of the Code), then this Plan and all such other
plans shall be considered as one plan for purposes of applying the foregoing limitations
of this Section 3. For this purpose, the Administrator shall take into account any other
such plan maintained by any Related Employer and shall also take into account any other
such plan for which the Administrator receives from the Participant sufficient
information concerning his or her participation in such other plan. Notwithstanding the
foregoing, another plan maintained by a Related Entity shall be taken into account for
purposes of Section 3.2 only if the other plan is a § 403(b) plan.
3.6 Correction of Excess Elective Deferrals. If the Elective Deferral on behalf
of a Participant for any calendar year exceeds the limitations described above, or the
18

Elective Deferral on behalf of a Participant for any calendar year exceeds the limitations
described above when combined with other amounts deferred by the Participant under
another plan of the employer under section 403(b) of the Code (and any other plan that
permits elective deferrals under section 402(g) of the Code for which the Participant
provides information that is accepted by the Administrator), then the Elective Deferral, to
the extent in excess of the applicable limitation (adjusted for any income or loss in value,
if any, allocable thereto), shall be distributed to the Participant.

Note: Corrective distributions are generally required to be made within 212
months after the end of the calendar year, but can be made within 6 months after the end
of the calendar year if the plan uses the optional provision at Section 2.2(b) and
otherwise constitutes an eligible automatic contribution arrangement. See §§ 414(w)(3)
and 4979(j) of the Code.
3.7 Protection of Persons Who Serve in a Uniformed Service. An Employee
whose employment is interrupted by qualified military service under section 414(u) of the
Code or who is on a leave of absence for qualified military service under section 414(u)
of the Code may elect to make additional Elective Deferrals upon resumption of
employment with the Employer equal to the maximum Elective Deferrals that the
Employee could have elected during that period if the Employee's employment with the
Employer had continued (at the same level of Compensation) without the interruption or
leave, reduced by the Elective Deferrals, if any, actually made for the Employee during
the period of the interruption or leave. Except to the extent provided under section
414(u) of the Code, this right applies for five years following the resumption of
employment (or, if sooner, for a period equal to three times the period of the interruption
or leave).

Note: If this Section 3 is adopted separately, the/ollowing definitions from
Section 1 should also be adopted: Administrator, Code, Compensation, Elective Deferral,
Employee, Employer, Includible Compensation, Participant, Plan, and Related
Employer.
Section 4
Loans
4.1 Loans. Loans shall be permitted under the Plan to the extent permitted by the
Individual Agreements controlling the Account assets from which the loan is made and
by which the loan will be secured.
4.2 Information Coordination Concerning Loans. Each Vendor is responsible
for all information reporting and tax withholding required by applicable federal and state
law in connection with distributions and loans. To minimize the instances in which
Particpants have taxable income as a result of loans from the Plan, the Administrator
shall take such steps as may be appropriate to coordinate the limitations on loans set forth
in Section 4.3, including the collection of information from Vendors, and transmission of
information requested by any Vendor, concerning the outstanding balance of any loans
made to a Participant under the Plan or any other plan of the Employer. The

Administrator shall also take such steps as may be appropriate to collect information
from Vendors, and transmission of information to any Vendor, concerning any fail ure by
a Participant to repay timely any loans made to a Participant under the Plan or any other
plan of the Employer.
4.3 Maximum Loan Amount. No loan to a Participant under the Plan may
exceed the lesser of:
(a) $50,000, reduced by the greater of (i) the outstanding balance on any loan
from the Plan to the Participant on the date the loan is made or (ii) the highest
outstanding balance on loans from the Plan to the Participant during the one-year period
ending on the day before the date the loan is approved by the Administrator (not taking
into account any payments made during such one-year period); or
(b) one half of the value of the Participant's vested Account Balance (as of the
valuation date immediately preceding the date on which such loan is approved by the
Administrator).
For purposes of this Section 4.3, any loan from any other plan maintained by the
Employer and any Related Employer shall be treated as if it were a loan made from the
Plan, and the Participant's vested interest under any such other plan shall be considered a
vested interest under this Plan; provided, however, that the provisions of this paragraph
shall not be applied so as to allow the amount of a loan to exceed the amount that would
otherwise be permitted in the absence of this paragraph.

Note: Loans are included in taxable income under certain conditions, including:

if the loan, when combined with the balance of all other loans from plans of the
employer, exceeds the limitations described in Section 4.3; or if there is afailure to repay
the loan in accordance with the repayment schedule. Because the tax treatment of a loan
depends on information concerning aggregate loan balances under all annuity contracts
and custodial accounts within the Plan (and under all plans of the employer), information
about loan balances under the contracts and accounts of other vendors is needed before
making a loan. That information may be obtained from the participant, but this sample
language provides for the Administrator also to collect and coordinate that information
in order to decrease the instances in which participants have taxable income from plan
loans.
Note: See § 1. 72(p)-1 of the Income Tax Regulationsfor thefederal income tax
treatment of loans generally.
Note: If this Section 4 is adopted separately, thefollowing definitions from
Section 1 should also be adopted: Account, Administrator, Account Balance, Employer,
Individual Agreement, Participant, Plan, Related Employer, Valuation Date, and Vendor.
Section 5
Benefit Distributions

5.1 Benefit Distributions At Severance from Employment or Other
Distribution Event. Except as permitted under Section 3.6 (relating to excess Elective
Deferrals), Section 5.4 (relating to withdrawals of amounts rolled over into the Plan),
Section 5.5 (relating to hardship), or Section 8.3 (relating to termination of the Plan),
distributions from a Participant's Account may not be made earlier than the earliest of the
date on which the Participation has a Severance from Employment, dies, becomes
Disabled, or attains age 5912. Distributions shall otherwise be made in accordance with
the terms of the Individual Agreements.
5.2 Small Account Balances. The terms of the Individual Agreement may
permit distributions to be made in the form of a lump-sum payment, without the consent
of the Participant or Beneficiary, but no such payment may be made without the consent
of the Participant or Beneficiary unless the Account Balance does not exceed $5,000
(determined without regard to any separate account that holds rollover contributions
under Section 6.1) and any such distribution shall comply with the requirements of
section 40l(a)(31)(B) of the Code (relating to automatic distribution as a direct rollover
to an individual retirement plan for distributions in excess of $1 ,000).
5.3 Minimum Distributions. Each Individual Agreement shall comply with the
minimum distribution requirements of section 401(a)(9) of the Code and the regulations
thereunder. For purposes of applying the distribution rules of section 401(a)(9) of the
Code, each Individual Agreement is treated as an individual retirement account (IRA)
and distributions shall be made in accordance with the provisions of § 1.408-8 of the
Income Tax Regulations, except as provided in § 1.403(b)-6(e) of the Income Tax
Regulations.
Note: This Section 5.3 assumes that each individual agreement with a vendor
complies with the minimum distribution requirements of§ 401 (a)(9) of the Code. See
section 5 of the Appendixfor Rev. Proc. 2004-56, 2004-2 CB. 37, for model language
that may be used to set forth the minimum distribution requirements of§ 401 (a)(9) of the
Code.
5.4 In-Service Distributions From Rollover Account. If a Participant has a
separate account attributable to rollover contributions to the plan, to the extent permitted
by the applicable Individual Agreement, the Participant may at any time elect to receive a
distri bution of all or any portion of the amount held in the rollover account.

Note: A plan is not required to permit in-service distribution from a rollover
account. See Rev. Ru!. 2004-12, 2004-1 CB. 478.
5.5 Hardship Withdrawals. (a) Hardship withdrawals shall be permitted under
the Plan to the extent permitted by the Individual Agreements controlling the Account
assets to be withdrawn to satisfy the hardship. If applicable under an Individual
Agreement, no Elective Deferrals shall be allowed under the Plan during the 6-month
period beginning on the date the Participant receives a distribution on account of

hardship.
(b) The Individual Agreements shall provide for the exchange of information
among the Employer and the Vendors to the extent necessary to implement the Individual
Agreements, including, in the case of a hardship withdrawal that is automatically deemed
to be necessary to satisfy the Participant's financial need (pursuant to § lAO I (k)I (d)(3)(iv)(E) of the Income Tax Regulations), the Vendor notifying the Employer of the
withdrawal in order for the Employer to implement the resulting 6-month suspension of
the Participant's right to make Elective Deferrals under the Plan. In addition, in the case
of a hardship withdrawal that is not automatically deemed to be necessary to satisfy the
financial need (pursuant to § lAO I (k)-l (d)(3 )(iii)(B) of the Income Tax Regulations), the
Vendor shall obtain information from the Employer or other Vendors to determine the
amount of any plan loans and rollover accounts that are available to the Participant under
the Plan to satisfy the financial need.
5.6 Rollover Distributions. (a) A Participant or the Beneficiary of a deceased
Participant (or a Participant's spouse or former spouse who is an alternate payee under a
domestic relations order, as defined in section 414(p) of the Code) who is entitled to an
eligible rollover distribution may elect to have any portion of an eligible rollover
distribution (as defined in section 402(c)(4) of the Code) from the Plan paid directly to an
eligible retirement plan (as defined in section 402(c)(8)(B) of the Code) specified by the
Participant in a direct rollover. In the case of a distribution to a Beneficiary who at the
time of the Participant's death was neither the spouse of the Participant nor the spouse or
former spouse of the participant who is an alternate payee under a domestic relations
order, a direct rollover is payable only to an individual retirement account or individual
retirement annuity (IRA) that has been established on behalf of the Beneficiary as an
inherited IRA (within the meaning of section 408(d)(3)(C) of the Code).
(b) Each Vendor shall be separately responsible for providing, within a
reasonable time period before making an initial eligible rollover distribution, an
explanation to the Participant of his or her right to elect a direct rollover and the income
tax withholding consequences of not electing a direct rollover.

Note: Section 402(f) of the Code requires a plan administrator to provide a
written explanation to any recipient of an eligible rollover distribution. The written
explanation must cover the direct rollover rules, the mandatory income tax withholding
on distributions not directly rolled over, the tax treatment of distributions not rolled over
(including the special tax treatment available for certain lump sum distributions), and
when distributions may be subject to different restrictions and tax consequences after
being rolled over. Section 402(f) provides that this explanation must be given within a
reasonable period of time before the plan makes an eligible rollover distribution. See
Notice 2002-3, 2002-1 C.B. 289, that contains a Safe Harbor Explanation that plan
administrators may provide to recipients of eligible rollover distributions from employer
plans in order to satisfy the notice requirement.
Note: See generally § 1.403(b)-6 of the Income Tax Regulations for rules relating
to restrictions on distributions.

Note: If this Section 5 is adopted separately, the following definitions from
Section 1 should also be adopted: Account, Account Balance, Beneficiary, Code,
Disabled, Elective Deferral, Employer, Individual Agreement, Participant, Plan,
Severance from Employment, and Vendor.
Section 6
Rollovers to the Plan and Transfers
6.1 Eligible Rollover Contributions to the Plan.
(a) Eligible Rollover Contributions. To the extent provided in the Individual
Agreements, an Employee who is a Participant who is entitled to receive an eligible
rollover distribution from another eligible retirement plan may request to have all or a
portion of the eligible rollover distribution paid to the Plan. Such rollover contributions
shall be made in the form of cash only. The Vendor may require such documentation
from the distributing plan as it deems necessary to effectuate the rollover in accordance
with section 402 of the Code and to confirm that such plan is an eligible retirement plan
within the meaning of section 402( c)(8)(8) of the Code. However, in no event does the
Plan accept a rollover contribution from a Roth elective deferral account under an
applicable retirement plan described in section 402A( e)(1) of the Code or a Roth IRA
described in section 408A of the Code.
Note: This provision does not permit rollovers to be accepted from a Roth
elective deferral account or a Roth IRA because the Plan does not provide for designated
Roth contributions.
(b) Eligible Rollover Distribution. For purposes of Section 6.1 (a), an eligible
rollover distribution means any distribution of all or any portion of a Participant's benefit
under another eligible retirement plan, except that an eligible rollover distribution does
not include (1) any installment payment for a period of 10 years or more, (2) any
distribution made as a result of an unforeseeable emergency or other distribution which is
made upon hardship of the employee, or (3) for any other distribution, the portion, if any,
of the distribution that is a required minimum distribution under section 401 (a)(9) of the
Code. In addition, an eligible retirement plan means an individual retirement account
described in section 408(a) of the Code, an individual retirement annuity described in
section 408(b) of the Code, a qualified trust described in section 401(a) of the Code, an
annuity plan described in section 403(a) or 403(b) of the Code, or an eligible
governmental plan described in section 457(b) of the Code, that accepts the eligible
rollover distribution.
(c) Separate Accounts. The Vendor shall establish and maintain for the
Participant a separate account for any eligible rollover distribution paid to the Plan.
6.2 Plan-to-Plan Transfers to the Plan. (a) At the direction of the Employer,
for a class of Employees who are participants or beneficiaries in another plan under
section 403(b) of the Code, the Administrator may permit a transfer of assets to the Plan

as provided in this Section 6.2. Such a transfer is permitted only if the other plan
provides for the direct transfer of each person's entire interest therein to the Plan and the
participant is an employee or former employee of the Employer. The Administrator and
any Vendor accepting such transferred amounts may require that the transfer be in cash or
other property acceptable to it. The Administrator or any Vendor accepting such
transferred amounts may require such documentation from the other plan as it deems
necessary to effectuate the transfer in accordance with § 1.403(b)-1 O(b )(3) of the Income
Tax Regulations and to confirm that the other plan is a plan that satisfies section 403(b)
of the Code.
(b) The amount so transferred shall be credited to the Participant's Account
Balance, so that the Participant or Beneficiary whose assets are being transferred has an
accumulated benefit immediately after the transfer at least equal to the accumulated
benefit with respect to that Participant or Beneficiary immediately before the transfer.
(c) To the extent provided in the Individual Agreements holding such transferred
amounts, the amount transferred shall be held, accounted for, administered and otherwise
treated in the same manner as an Elective Deferral by the Participant under the Plan,
except that (1) the Individual Agreement which holds any amount transferred to the Plan
must provide that, to the extent any amount transferred is subject to any distribution
restrictions required under section 403(b) of the Code, the Individual Agreement must
impose restrictions on distributions to the Participant or Beneficiary whose assets are
being transferred that are not less stringent than those imposed on the transferor plan and
(2) the transferred amount shall not be considered an Elective Deferral under the Plan in
determining the maximum deferral under Section 3.

Note: This provision limits transfer to the plan to cases involving a class of
participants whose entire benefit is being transferred, such as where employees are being
transferred from another employer to employment with the employer maintaining this
plan and the portion of the other plan held on their behalf is being merged into this plan.
Plan-to-plan transfers are not required to be limited to such situations. See § 1.403(b)10(b)(3) of the Income Tax Regulationsfor rules relating to plan-to-plan transfers among
§ 403(b) plans and, in the case ofplans that are subject to ERISA, see also § 1.414(1}-1
of the Income Tax Regulations.
6.3 Plan-to-Plan Transfers from the Plan.
(a) At the direction of the Employer, the Administrator may permit a class of
Participants and Beneficiaries to elect to have all or any portion of their Account Balance
transferred to another plan that satisfies section 403(b) of the Code in accordance with §
1.403(b )-1 O(b )(3) of the Income Tax Regulations. A transfer is permitted under this
Section 6.3(a) only if the Participants or Beneficiaries are employees or former
employees of the employer (or the business of the employer) under the receiving plan and
the other plan provides for the acceptance of plan-to-plan transfers with respect to the
Participants and Beneficiaries and for each Participant and Beneficiary to have an amount

deferred under the other plan immediately after the transfer at least equal to the amount
transferred.
(b) The other plan must provide that, to the extent any amount transferred is
subject to any distribution restrictions required under section 403(b) of the Code, the
other plan shall impose restrictions on distributions to the Participant or Beneficiary
whose assets are transferred that are not less stringent than those imposed under the Plan.
In addition, if the transfer does not constitute a complete transfer of the Participant's or
Beneficiary's interest in the Plan, the other plan shall treat the amount transferred as a
continuation of a pro rata portion of the Participant's or Beneficiary's interest in the
transferor plan (e.g., a pro rata portion of the Participant's or Beneficiary's interest in any
after-tax employee contributions).
(c) Upon the transfer of assets under this Section 6.3, the Plan's liability to pay
benefits to the Participant or Beneficiary under this Plan shall be discharged to the extent
of the amount so transferred for the Participant or Beneficiary. The Administrator may
require such documentation from the receiving plan as it deems appropriate or necessary
to comply with this Section 6.3 (for example, to confirm that the receiving plan satisfies
section 403(b) of the Code and to assure that the transfer is permitted under the receiving
plan) or to effectuate the transfer pursuant to § I A03(b)-lO(b)(3) of the Income Tax
Regulations.

Note: This provision limits transfer from the plan to cases involving a class of
participants whose entire benefit is being transferred, such as where employees are being
transferred from employment with the employer maintaining this plan to another
employer and the portion of the plan held on their behalf is being merged into another
plan. Plan-to-plan transfers are not required to be limited to such situations. See §
1.403(b)-10(b)(3) of the Income Tax Regulationsfor rules relating to plan-to-plan
transfers among § 403(b) plans and, in the case ofplans that are subject to ERISA, see
also § 1.414(1}-1 of the Income Tax Regulations.
6.4 Contract and Custodial Account Exchanges. (a) A Participant or
Beneficiary is permitted to change the investment of his or her Account Balance among
the Vendors under the Plan, subject to the terms of the Individual Agreements. However,
an investment change that includes an investment with a Vendor that is not eligible to
receive contributions under Section 2 (referred to below as an exchange) is not permitted
unless the conditions in paragraphs (b) through (d) of this Section 6.4 are satisfied.
(b) The Participant or Beneficiary must have an Account Balance immediately
after the exchange that is at least equal to the Account Balance of that Participant or
Beneficiary immediately before the exchange (taking into account the Account Balance
of that Participant or Beneficiary under both section 403(b) contracts or custodial
accounts immediately before the exchange).

(c) The Individual Agreement with the receiving Vendor has distribution
restrictions with respect to the Participant that are not less stringent than those imposed
on the investment being exchanged.
(d) The Employer enters into an agreement with the receiving Vendor for the
other contract or custodial account under which the Employer and the Vendor will from
time to time in the future provide each other with the following information:
(1) Information necessary for the resulting contract or custodial account, or any
other contract or custodial accounts to which contributions have been made by the
Employer, to satisfy section 403(b) of the Code, including the following: (i) the
Employer providing information as to whether the Participant's employment with the
Employer is continuing, and notifying the Vendor when the Participant has had a
Severance from Employment (for purposes of the distribution restrictions in Section 5.1);
(ii) the Vendor notifying the Employer of any hardship withdrawal under Section 5.5 if
the withdrawal results in a 6-month suspension of the Participant's right to make Elective
Deferrals under the Plan; and (iii) the Vendor providing information to the Employer or
other Vendors concerning the Participant's or Beneficiary's section 403(b) contracts or
custodial accounts or qualified employer plan benefits (to enable a Vendor to determine
the amount of any plan loans and any rollover accounts that are available to the
Participant under the Plan in order to satisfy the financial need under the hardship
withdrawal rules of Section 5.5); and
(2) Information necessary in order for the resulting contract or custodial account
and any other contract or custodial account to which contributions have been made for
the Participant by the Employer to satisfy other tax requirements, including the
following: (i) the amount of any plan loan that is outstanding to the Participant in order
for a Vendor to determine whether an additional plan loan satisfies the loan limitations of
Section 4.3, so that any such additional loan is not a deemed distribution under section
72(p)(l); and (ii) information concerning the Participant's or Beneficiary's after-tax
employee contributions in order for a Vendor to determine the extent to which a
distribution is includible in gross income.
(e) Ifany Vendor ceases to be eligible to receive Elective Deferrals under the
Plan, the Employer will enter into an information sharing agreement as described in
Section 6.4(d) to the extent the Employer's contract with the Vendor does not provide for
the exchange of information described in Section 6.4( d)(l) and (2).

Note: Section 6.4(a) through (d) are optional provisions for a plan that chooses
to allow participants to exchange all or a portion of their account balance with vendors
with respect to which the plan has no regular contact, i.e., insurance companies or
mutual funds that do not receive regular contributions made for participants. Note also
that additional information would be necessary in the case of an exchange involving a
designated Roth account. See generally § 1.403(b)-IO(b)(2) of the Income Tax
Regulations for rules relating to exchanges of contracts.

6.S Permissive Service Credit Transfers.
(a) Ifa Participant is also a participant in a tax-qualified defined benefit
governmental plan (as defined in section 414( d) of the Code) that provides for the
acceptance of plan-to-plan transfers with respect to the Participant, then the Participant
may elect to have any portion of the Participant's Account Balance transferred to the
defined benefit governmental plan. A transfer under this Section 6.S(a) may be made
before the Participant has had a Severance from Employment.
(b) A transfer may be made under Section 6.S(a) only if the transfer is either for
the purchase of permissive service credit (as defined in section 41S(n)(3)(A) of the Code)
under the receiving defined benefit governmental plan or a repayment to which section
41S of the Code does not apply by reason of section 41S(k)(3) of the Code.
(c) In addition, if a plan-to-plan transfer does not constitute a complete transfer of
the Participant's or Beneficiary's interest in the transferor plan, the Plan shall treat the
amount transferred as a continuation of a pro rata portion of the Participant's or
Beneficiary's interest in the transferor plan (e.g., a pro rata portion of the Participant's or
Beneficiary's interest in any after-tax employee contributions).

Note: See § 1.403(b)-IO(b)(4) of the Income Tax Regulationsfor rules relating to
transfers for permissive service credit.
Note: If this Section 6 is adopted separately, the following definitions from
Section 1 should also be adopted: Administrator, Account Balance, Beneficiary, Code,
Elective Deferral, Employee, Employer, Individual Agreement, Participant, Plan,
Severance from Employment, and Vendor.
Section 7
Investment of Contributions

7.1 Manner of Investment. All Elective Deferrals or other amounts contributed
to the Plan, all property and rights purchased with such amounts under the Funding
Vehicles, and all income attributable to such amounts, property, or rights shall be held
and invested in one or more Annuity Contracts or Custodial Accounts. Each Custodial
Account shall provide for it to be impossible, prior to the satisfaction of all liabilities with
respect to Participants and their Beneficiaries, for any part of the assets and income of the
Custodial Account to be used for, or diverted to, purposes other than for the exclusive
benefit of Participants and their Beneficiaries.
7.2 Investment of Contributions. Each Participant or Beneficiary shall direct
the investment of his or her Account among the investment options available under the
Annuity Contract or Custodial Account in accordance with the terms of the Individual
Agreements. Transfers among Annuity Contracts and Custodial Accounts may be made
to the extent provided in the Individual Agreements and permitted under applicable
Income Tax Regulations.

Note: See generally § 1.403(b)-8 of the Income Tax Regulations for rules relating
to funding.
Note: If this Section 7 is adopted separately, the following definitions from
Section 1 should also be adopted: Annuity Contract, Beneficiary, Custodial Account,
Individual Agreement, Elective Deferral, Participant, and Plan.
7.3 Current and Former Vendors. The Administrator shall maintain a list of
all Vendors under the Plan. Such list is hereby incorporated as part of the Plan. Each
Vendor and the Administrator shall exchange such information as may be necessary to
satisfy section 403(b) of the Code or other requirements of applicable law. In the case of
a Vendor which is not eligible to receive Elective Deferrals under the Plan (including a
Vendor which has ceased to be a Vendor eligible to receive Elective Deferrals under the
Plan and a Vendor holding assets under the Plan in accordance with Section 6.2 or 6.4),
the Employer shall keep the Vendor informed of the name and contact information of the
Administrator in order to coordinate information necessary to satisfy section 403(b) of
the Code or other requirements of applicable law.
Section 8
Amendment and Plan Termination
8.1 Termination of Contributions. The Employer has adopted the Plan with the
intention and expectation that contributions will be continued indefinitely. However, the
Employer has no obligation or liability whatsoever to maintain the Plan for any length of
time and may discontinue contributions under the Plan at any time without any liability
hereunder for any such discontinuance.
8.2 Amendment and Termination. The Employer reserves the authority to
amend or terminate this Plan at any time.
8.3 Distribution upon Termination of the Plan. The Employer may provide
that, in connection with a termination of the Plan and subject to any restrictions contained
in the Individual Agreements, all Accounts will be distributed, provided that the
Employer and any Related Employer on the date of termination do not make
contributions to an alternative section 403(b) contract that is not part of the Plan during
the period beginning on the date of plan termination and ending 12 months after the
distribution of all assets from the Plan, except as permitted by the Income Tax
Regulations.

Note: See generally § 1.403(b)-IO(a) of the Income Tax Regulations for rules
relating to discontinuance of contributions and plan termination.
Note: If this Section 8 is adopted separately, the following definitions from
Section 1 should also be adopted.' Account, Employer, Individual Agreement, Plan, and
Related Employer.
Section 9
Miscellaneous
28

9.1 Non-Assignability. Except as provided in Section 9.2 and 9.3, the interests
of each Participant or Beneficiary under the Plan are not subject to the claims of the
Participant's or Beneficiary's creditors; and neither the Participant nor any Beneficiary
shall have any right to sell, assign, transfer, or otherwise convey the right to receive any
payments hereunder or any interest under the Plan, which payments and interest are
expressly declared to be non-assignable and non-transferable.

Note: The anti-alienation rules of section 401 (a)(13) of the Code generally do not
apply to § 403(b) plans ofpublic schools. but the parallel rule at section 206(d) of ERISA
applies to plans that are subject to ERISA.
9.2 Domestic Relation Orders. Notwithstanding Section 9.1, if a judgment,
decree or order (including approval of a property settlement agreement) that relates to the
provision of child support, alimony payments, or the marital property rights of a spouse or
former spouse, child, or other dependent of a Participant is made pursuant to the domestic
relations law of any State ("domestic relations order"), then the amount of the Participant's
Account Balance shall be paid in the manner and to the person or persons so directed in the
domestic relations order. Such payment shall be made without regard to whether the
Participant is eligible for a distribution of benefits under the Plan. The Administrator shall
establish reasonable procedures for determining the status of any such decree or order and
for effectuating distribution pursuant to the domestic relations order.

Note: Section 9.2 is specifically written for use by a State or local government
maintaining a § 403(b) plan for its employees who perform services for a public school
and. ifused by a § 501 (c)(3) employer. must be revised to be limited to cases in which the
domestic relations order is "qualified" under § 414(p) of the Code.
Note: See generally § 414(p) of the Code and § 1.403(b)-10(c) of the Income Tax
Regulations for rules regarding domestic relations orders.
9.3 IRS Levy. Notwithstanding Section 9.1, the Administrator may pay from a
Participant's or Beneficiary'S Account Balance the amount that the Administrator finds is
lawfully demanded under a levy issued by the Internal Revenue Service with respect to
that Participant or Beneficiary or is sought to be collected by the United States
Government under a judgment resulting from an unpaid tax assessment against the
Participant or Beneficiary.
9.4 Tax Withholding. Contributions to the Plan are subject to applicable
employment taxes (including, if applicable, Federal Insurance Contributions Act (FICA)
taxes with respect to Elective Deferrals, which constitute wages under section 3121 of the
Code). Any benefit payment made under the Plan is subject to applicable income tax
withholding requirements (including section 3401 of the Code and the Employment Tax
Regulations thereunder). A payee shall provide such information as the Administrator
may need to satisfy income tax withholding obligations, and any other information that
may be required by guidance issued under the Code.

9.5 Payments to Minors and Incompetents. If a Participant or Beneficiary
entitled to receive any benefits hereunder is a minor or is adjudged to be legally incapable
of giving valid receipt and discharge for such benefits, or is deemed so by the
Administrator, benefits will be paid to such person as the Administrator may designate
for the benefit of such Participant or Beneficiary. Such payments shall be considered a
payment to such Participant or Beneficiary and shall, to the extent made, be deemed a
complete discharge of any liability for such payments under the Plan.
9.6 Mistaken Contributions. If any contribution (or any portion of a
contribution) is made to the Plan by a good faith mistake of fact, then within one year
after the payment of the contribution, and upon receipt in good order of a proper request
approved by the Administrator, the amount of the mistaken contribution (adjusted for any
income or loss in value, if any, allocable thereto) shall be returned directly to the
Participant or, to the extent required or permitted by the Administrator, to the Employer.
9.7 Procedure When Distributee Cannot Be Located. The Administrator shall
make all reasonable attempts to determine the identity and address of a Participant or a
Participant's Beneficiary entitled to benefits under the Plan. For this purpose, a
reasonable attempt means (a) the mailing by certified mail of a notice to the last known
address shown on [INSERT NAME OF THE EMPLOYER] 's or the Administrator's
records, (b) notification sent to the Social Security Administration or the Pension Benefit
Guaranty Corporation (under their program to identify payees under retirement plans),
and (c) the payee has not responded within 6 months. If the Administrator is unable to
locate such a person entitled to benefits hereunder, or if there has been no claim made for
such benefits, the funding vehicle shall continue to hold the benefits due such person.
9.8 Incorporation of Individual Agreements. The Plan, together with the
Individual Agreements, is intended to satisfy the requirements of section 403(b) of the
Code and the Income Tax Regulations thereunder. Terms and conditions of the
Individual Agreements are hereby incorporated by reference into the Plan, excluding
those terms that are inconsistent with the Plan or section 403(b) of the Code.
9.9 Governing Law. The Plan will be construed, administered and enforced
according to the Code and the laws of the State in which the Employer has its principal
place of business.
9.10 Headings. Headings of the Plan have been inserted for convenience of
reference only and are to be ignored in any construction of the provisions hereof.
9.11 Gender. Pronouns used in the Plan in the masculine or feminine gender
include both genders unless the context clearly indicates otherwise.

IN WITNESS WHEREOF, the Employer has caused this Plan to be executed this
day of

Employer:
By:
Title:
Date signed:
Effective Date of the Plan:

Note: The provisions in Section 9 are optional provisions that are not required to
be adopted.
Note: If this Section 9 is adopted separately, the following definitions from
Section 1 should also be adopted: Administrator, Account Balance, Beneficiary,
Employer, Individual Agreement, Participant, and Plan.

hp-699: Treasury Targets Criminal and Financial Network of Southwest Asian Drug Kingpin

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November 27,2007
HP-699
Treasury Targets Criminal and Financial Network of
Southwest Asian Drug Kingpin
Washington, DC--The U.S. Department of the Treasury's Office of Foreign Assets
Control (OFAC) today announced the designation of 9 individuals and 13 entities
associated with Pakistani drug kingpin Shahbaz Khan. Shahbaz Khan was
designated as a significant foreign narcotics trafficker by President Bush on June 1,
2007 pursuant to the Foreign Narcotics Kingpin Designation Act ("Kingpin Act").
Shahbaz Khan is currently serving a life sentence in the United Arab Emirates for
drug trafficking and an additional five years for money laundering. This is the first
derivative designation by OFAC against the criminal and financial network of a
designated drug kingpin in the Southwest Asia/Middle East region.
"Today's action exposes the international criminal and financial network of a lethal
drug kingpin in Southwest Asia," said Adam Szubin, Director of OFAC. "We will
continue to work with the international community to identify the financial networks
of drug kingpins worldwide and disrupt the flow of their illicit monies through the
financial system."
Szubin added, "OFAC commends the efforts of UAE authorities to investigate,
prosecute and dismantle the drug trafficking organization of Shahbaz Khan."
The individuals designated by OFAC today include key criminal associates of
Shahbaz Khan who are also in jail in the United Arab Emirates (UAE) for their
participation in his drug trafficking activities. Amir Azam, a British national, is
serving a life sentence in the UAE for drug trafficking and five years for money
laundering. Ahmad Abdulla Mohammad Abdulla Behzad (UAE), Waseem Rauf
Loan (Pakistan), Mohammad Nadeem Ghani (United Kingdom) and Tom
Michielsen (Belgium) are each serving ten year sentences for drug trafficking.
Waseem Rauf Loan, Mohammad Nadeem Ghani and Tom Michielsen face an
additional five year sentence for money laundering. Sherbaz Khan (Pakistan), the
son of Shahbaz Khan, is a key lieutenant in his father's drug trafficking organization
and manages Shahbaz Khan's financial network in Pakistan.
OFAC also targeted 13 companies which comprise an international financial
network for Shahbaz Khan and his associates. These companies are located in the
UAE (5), Pakistan (4), Spain (1), Germany (1), the Netherlands (1) and Belgium (1).
These front companies are involved in the following trade areas: electronics and
home appliances, general household merchandise, import/export, flowers and
plants, and automotive parts and vehicles. Designated drug kingpin Shahbaz Khan
and his partner Waseem Rauf Loan were able to incorporate their companies in the
UAE through the use of Ahmad Abdulla Mohammad Abdulla Behzad, who acted as
the local sponsor which is required under UAE law in order for a foreign national to
incorporate in the UAE.
This action is part of an ongoing U.S. government effort under the Kingpin Act to
use financial measures against foreign drug kingpins. This OFAC action would not
have been possible without key support from the U.S. Drug Enforcement
Administration and UAE authorities, including several UAE police departments.
The designation blocks any assets of the 22 designees found within U.S.
jurisdiction and prohibits U.S. persons from conducting financial or commercial
transactions with these individuals. More than 300 businesses and individuals
associated with 68 drug kingpins named by the President have been designated by
OFAC pursuant to the Kingpin Act since June 2000. Penalties for violations of the

http://www.treas.gov/presslreleases/hp699.htm

12/312007

P-699: Treasury Targets Criminal and Financial Network of Southwest Asian Drug Kingpin

Page 2 of2

Kingpin Act range from civil penalties of up to $1,075,000 per violation to more
severe criminal penalties. Criminal penalties for corporate officers may include up to
30 years in prison and fines of up to $5,000,000. Criminal fines for corporations
may reach $10,000,000. Other individuals face up to 10 years in prison for criminal
violations of the Kingpin Act and fines pursuant to Title 18 of the United States
Code.
REPORTS

http://www.treas.gov/press/releases/hp699.htm

12/312007

Shahbaz KHAN
Criminal and Financial Network

u.s. Department of the Treasury
Office of Foreign Assets Control

November 2007

Foreign Narcotics Kingpin Designation Act

jl~'.---~
Convicted of drug trafficking and
I·'

f,1

•

Shahbaz KHAN
DOB 1 Jan 1948

money laundering in the UAE

POB Landi Kohl, Pakistan

KHAN Criminal Aasociates

·rw
"

AmirAZAM
DOB 2 Nov 1971
POB Chlswlck, England

Abdulla BEHZAD
D08 2 Nov 1971
POB Dubai, UAE

Waseem Rauf LOAN
a.ILa. Abdul Majid RASHID
DOB 03 Mar 1966
POB Lahore, Pakistan

Other Key Associates

Sinon SCHNEIDER
DOB 14 lui 1967
POB Hoorn, Netherlands

I~
~

Abdul Majid NOOR MOHAMMAD
DOB 1957
POB Chagal, Pakistan

Tom MICHIELS EN
DOB 22 Dec 1975
POB Kapellen, Belgium

GHANI
PPN 093055372
(United Kingdom)

Sherbaz KHAN
DOB 04 Mar 1979
POB Pakistan

Ceylan DUZCAN
DOB 01 Mar 1975
POB Sanat, Turkey

Aasoclated Entities
United Arab Emirates

Europe

~
Khan aSchirindel GMBH
Weisbaden, Germany

Offenbach
Haushaltwaren B.V.
Beverwljk, Netherlands

SAFTechS.L
Barcelona, Spain

Bal. Flower.
Import Export BVBA
Antwerp, Belgium

n
Shahbaz Khan
General Trading LLC.
Dubal, UAE

Pakistan

Zulekha General
Trading LLC
Ajnan,UAE

Sher Matr.:h
Industries PVT LTD.
Peshawar, Pakistan

/":
Shahnawaz Traders
Peshawar, Pakistan

A.A. Trading FlCa
Dubal,UAE

n
FMF General Trading
Sharjah, Duba~ UAE

~
AI Amlod Trading
Dubal, UAE

Shahbaz TV Center
Peshawar, Pakistan

Dubai Trading Company
Peshawar, Pakistan

hp-700: Treasury Issues Report on International Tax Issues

Page 1 of2

To view or print the PDF content on this page, download the free Adobe® Acrobat® Reader®.

November 28, 2007
hp-700
Treasury Issues Report on International Tax Issues
Washington, DC--The Treasury Department today sent to Congress a
Congressionally mandated report on three international tax issues.
The "Report to the Congress on Earnings Stripping, Transfer Pricing and U.S.
Income Tax Treaties" describes current issues regarding U.S. earnings stripping
rules, transfer pricing rules, and the misuse of income tax treaties to which the
United States is a party. The report provides conclusions and recommendations in
each of the three areas studied.
Study on Earnings Stripping
The focus of the earnings-stripping study is on excessive payments of deductible
interest by foreign-controlled U.S. corporations to related persons in whose hands
that interest is partially or fully exempt from U.S. tax. While the study notes that it
is not possible to quantify accurately the extent of earnings stripping generally,
strong evidence exists of earnings stripping by foreign-controlled domestic
corporations that have undergone so-called "inversion" transactions, in which the
U.S. parent company of a multinational corporate group is replaced with a foreign
parent in a low-tax or no-tax country.
The study did not find conclusive evidence of earnings stripping by foreigncontrolled domestic corporations that had not inverted. More information is needed
to reach a definitive conclusion on that issue. In order to obtain this additional
information and to further the administration of the current earnings stripping rules,
the study recommends that the relevant tax forms be modified to require more
information about earnings stripping. The IRS released a new proposed form
today. [See Announcement 2007-114.]
Study on Transfer Pricing
The transfer pricing study focuses on issues relating to the shifting of income from
the United States through transactions between related parties. The study reviews
Treasury regulatory guidance under Internal Revenue Code section 482 and the
effectiveness of current transfer-pricing rules and compliance efforts to ensure that
related-party transactions cannot be used to shift income out of the United States
improperly.
The study indicates that the transfer pricing rules must be continually monitored to
ensure their relevance to changing business conditions and to prevent income
shifting from non-arm's length transfer pricing. The study recommends that the
Treasury Department modernize and finalize three sets of transfer-pricing
guidance. More specifically, the study recommends:
•

•

Cost Sharing: Revision of the existing guidance on contributions for which
arm's length consideration ("buy-in" payments) must be provided as a
condition to entering into a cost sharing arrangement;
Services: Completion of the related-party services regulations to reflect
legal, business and economic developments since the regulations were
issued in 1968; and
Global Dealing: Completion of new rules to allow taxpayers to determine
the amount of income from a global dealing operation that is subject to tax
in the United States, as well as the source of such income and the

http://www.treas.goy/pressireleases/hp700.htm

1213/2007

hp-700: Treasury Issues Report on International Tax Issues

Page 2 of2

circulTlstances under willch such income is effectively connected with a U.S.
trade or business.
Study on U.S. Income Tax Treaties
The study on U.S. income tax treaties focuses on the need to prevent third-country
residents from inappropriately obtaining the benefits of U.S. income tax treaties, in
particular by achieving inappropriate reductions in U.S. withholding taxes. The
study notes that in recent years interest payments have surged from foreigncontrolled U.S. corporations to related parties in countries that are a party to a U.S.
tax treaty with no "limitation on benefits" (LOB) provisions and that provides
significant reductions in withholding rates. Such exploitation of those treaties
without anti-treaty shopping protections confirms (1) the LOB provisions in other
U.S. agreements appear to provide significant deterrence against abuse, and (2)
the Treasury Department must continue its ongoing efforts to revise treaties with no
or inadequate LOB provisions.

REPORTS

•

Report to The Congress on Earnings Stripping, Transfer Pricing and U.S.
Income Tax Treaties

http://www.treas.gov/press/releases/hp700.htm

12/3/2007

hp-701: Paulson to Deliver Remarks at OTS'S National Housing Forum Next Week

Page 1 of

November 29, 2007
hp-701
Paulson to Deliver Remarks at OTS'S National Housing Forum Next Week

Treasury Secretary Henry M. Paulson, Jr. will deliver remarks on Monday at the
National Housing Forum hosted by the Office of Thrift Supervision. Paulson's
remarks will focus on the efforts to address current housing and mortgage markets
issues.
Who Treasury Secretary Henry M. Paulson, Jr.
What Remarks at the OTS National Housing Forum
When Monday, December 3, 10:30 a.m. EST
Where National Press Club
529 14th Street, NW
Washington, DC
-30-

nttp://www.treas.gov/press/releases/hp701.htm

12/3/200

hp-702: Remarks by Ambassador Holmer at the Southern Center for International Studies on Establishi... Page 1 of 4

November 29, 2007
hp-702

Remarks by Ambassador Holmer at the Southern Center for International
Studies on Establishing New Habits of Cooperation in U.S.-China Economic
Relations
Good evening. I would like to thank Peter White and the Southern Center for
International Affairs for inviting me to speak tonight. As a U.S. government official
tasked with building bridges to China and maintaining them, I applaud the SCIA's
role as Atlanta's bridge to the world over the last forty years.

Our Changing Economic Relationship
China's re-emergence on the global stage is one of the most consequential
geopolitical events of recent times. There is hardly an issue - from trade, to national
security, to climate change - or a place - from North Korea to Iran to Sudan where American and Chinese interests do not increasingly overlap. Because China
is so fully integrated into the global economy, what happens in China's economy
affects the entire international community.
The U.S.-China economic relationship is entering a new phase.
First, U.S.-China economic interdependence is deepening. We need each other
more and on a broader number of economic and economically consequential
issues. Over the past 5 years, according to U.S. data, U.S. exports to China have
grown from $18 to $52 billion, while U.S. imports from China have grown from $102
to $287 billion.
Moreover, the United States and China are shaping, and being shaped by, global
energy and environmental trends, which have strong economic consequences. For
example, our countries are the world's largest energy consumers and the largest
emitters of greenhouse gases. Clearly, our interdependence is deepening.
Second, whereas trade and investment were once largely a source of stability in
bilateral relations, they are now increasingly also a source of tension. Such tensions
are straining the domestic consensus in both the United States and China on the
benefits of economic engagement.
When I first became deeply involved in international trade issues in the 1980s, we
didn't have significant trade tensions with China - mainly because we didn't have
much bilateral trade. In a sense, the fact that we have trade tensions today reflects
a maturing of our relationship and the rapid growth in bilateral trade and investment.
We need to make sure we manage those tensions effectively in order to keep our
bilateral economic relationship on an even keel and in our mutual interests.
Anxieties about increasing trade manifest themselves in many ways, which leads
me to the third dynamic confronting us: the rise of economic nationalism and
protectionism in both our nations. These sentiments may constrain leaders from
adopting policies that are in the long-term interests of the citizens and economies of
the United States and China.
These three emerging dynamics to our economic relationship - deepening
interdependence, a strained policy consensus, and the rise of economic
protectionism - are mutual and require cooperative solutions.

Managing Complexity and Establishing New Habits of Cooperation

bttp:llwww.treas.gov/press/releases/hp702.htm

12/3/2007

hp-702: Remarks by Ambassador Holmer at the Southern Center for International Studies on Establishi... Page 2 of 4
These dynamics Inforilled tlle creation of the Strategic Economic Dialogue (SED)
by President Bush and President Hu Jintao in 2006. They envisioned a forum to
allow both governments to communicate at the highest levels and with one voice on
issues of long-term and strategic importance.
Managing our complex and increasingly interdependent relationship is daunting and requires speaking to the right people - at the right time - on the right issues and in the right way.
I learned a long time ago that if you are going to be successful in any kind of
dialogue, it is essential that you do everything you can to put yourself in the other
person's shoes, to try to see the world the way he or she does. This is the way you
achieve win-win agreements, ones that advance mutual interests, agreements that
will withstand the tests of time. The Strategic Economic Dialogue embraces this
approach.
The United States has three core objectives for the SED as a new and leading
institution in U.S.-China relations.
Establishing New Habits of Cooperation

First, through this framework, we are advancing the U.S.-China economic
relationship by establishing new habits of bilateral cooperation.
We have embraced a broad agenda that covers cross-cutting economic and
economically consequential issues, including regulatory transparency, energy
conservation, environmental protection, innovation, food and product safety, as well
as the important economic issues of exchange rate and macroeconomic policies,
market access, and financial sector development and liberalization.
Our approach engages multiple and diverse government officials in both countries.
It breaks down classic bureaucratic stove-pipes that hinder effective communication
and impede results.
And that's what direct engagement does: it keeps the relationship on an even keel
by lessening miscommunication and dispelling misperceptions so common in the
history of the U.S.-China relationship.
It helps us signal to China that we welcome the rise of a confident, peaceful and
prosperous China. A weak and insecure China is not in America's economic or
security interests.
Accelerating China's Economic Transition

Second, it is vitally important that our policies accelerate the next wave of China's
"reform and opening" process. The pace of China's growth and economic reform
has clearly been remarkable, but continued effort is needed.
China's top leaders now realize that a key challenge they face is taking the bold
policy steps necessary for an economy that is no longer in the first stages of
economic growth.
We welcome the leadership's current efforts to transition to an economy that is
more market-oriented, less reliant on low-value added manufacturing exports, one
that depends more on the skills and resourcefulness of the Chinese people and
less on material inputs and natural resource consumption.
A major risk China faces is that its government won't act quickly enough to take the
policy steps necessary to deal with the economic and social imbalances created by
its growth model. Without strong policy adjustments, China's economic growth path
becomes unsustainable, as Chinese top leaders have publicly stated. We are
encouraging key reforms that will help China manage the blistering pace of its
economic growth; these include financial market liberalization and a plan for
rebalancing growth. China has proven to the world that it can grow fast, but the key
issue now is whether it can grow differently and sustainably, where the quality of

http://www.treas.gov/presslreleases/hp702.htm

12/3/2007

hp-702: Remarks by Ambassador Holmer at the Southern Center for International Studies on Establishi... Page 3 of 4
growth is as important as the quantity.
Bold structural policies are needed to shift China's growth away from heavy
industry, high energy use, capital intensiveness, and dependence on exports towards greater reliance on domestic demand, production of services, and a greater
share of China's national income accruing to China's households.
To enable market forces to efficiently rebalance the economy and spread prosperity
to all the Chinese, China needs more flexible prices, including a much more flexible,
market-driven exchange rate. Exchange rate flexibility is also key to allowing
monetary policy - the most potent instrument for guiding an economy - to focus on
assuring price and financial stability.
A key to China's future success will be its willingness to accelerate the pace of its
market-based economic reforms. Meeting and going beyond its WTO commitments,
resisting protectionist sentiment, and opening up its economy to greater
international competition for goods, and particularly, services, will help rebalance
the Chinese economy and spread prosperity more broadly among the Chinese
people.
These reforms are - and will continue to be - resisted by increasingly influential
Chinese businesses due to growing suspicion about U.S. efforts to encourage
further liberalization of key sectors of China's economy. However, in my judgment,
the greatest risk to China's long-term economic security is not that China opens too
fast, but, rather, that protectionists prevail, and Chinese reforms proceed too slowly.

Encouraging China's Responsible Global Engagement
Third, and finally, we are also encouraging China to act responsibly as a global
economic power. We welcome China into key international financial institutions and
are giving China a greater voice in them as well.
Since the initiation of the SED in September 2006, we have supported China's
efforts to join the Inter-American Development Bank (IADB) and the Paris-based
Financial Action Task Force (FATF). We also strongly support a greater voting
share for China in the IMF and World Bank.
Increased participation will allow China to advance its interests in those institutions,
but it is also important that Beijing recognize the responsibilities of greater
partici pation.
China has become a major source of foreign aid for many of the poorest countries.
We look forward to working with China, as a new and welcome participant, in
multilateral efforts to assure that foreign aid and lending practices promote
sustainable development.
This new era in U.S.-China economic relations requires new and dynamic ways of
doing business. We are meeting these challenges through the creation of the
political space and the institutional capacity for long-term stability in our bilateral
economic relations.
Signposts and Benchmarks
I spoke before about the importance of new habits of cooperation between our
governments and our countries. While habits of cooperation are important, good
process does not ensure good results.
Dialogue needs to be more than talking for the sake of talking and can not give U.S.
or Chinese leaders "a pass" on issues of disagreement. It is about setting priorities,
specifying consequences and fashioning practical solutions.
Sec. Paulson refers to "signposts and benchmarks" along the path toward reform.
Is progress occurring as fast as we prefer or as fast as is in China's interest? No.
But is progress occurring faster than would have been the case without the SED?
Absolutely.

http://www.treas.gov/press/releases/hp702.htm

12/312007

hp-702: Remarks by Ambassador Holmer at the Southern Center for International Studies on Establishi... Page 4 of
Time after tune, U.S. government agencies have been able to "draft behind" the
momentum created by the SED.
Examples include a new air services agreement, collaboration on energy security
and the environment, moving toward more efficient capital markets, and addressing
concerns about tainted food and product imports.
The new air services agreement is of particular relevance to this great city of
Atlanta and America's southeast. This landmark agreement will not only stimulate
an estimated $5 billion in new business over the next several years, it will open new
routes which will double passenger traffic by 2012 and allow full air cargo services
by 2011. Possibly as early as next Spring, there will be the first non-stop flight
between Atlanta and Shanghai, the first from America's southeast for a U.S. airline.
The SED is not just an event that happens at Cabinet-level meetings twice a year.
Rather, engagement is continuous, with progress announced throughout the year.

Towards a New Future for Bilateral Economic Relations
President Bush and President Hu have set a positive agenda for strengthening our
economic relationship. The SED is a core part of that agenda because it is longterm in its vision, comprehensive in its scope, and immediate in its ability to deal
with the most sensitive bilateral economic tensions.
As we chart the future course of our economic relationship with China, we would be
well-advised to remember the words of a former American diplomat and Chairman
of the Senate Finance Committee, Daniel Patrick Moynihan, who said we shouldn't
"let the politics of last month or next month affect decisions toward China that go to
half-century strategic issues."
The politics of U.S.-China economic relations are intensely dynamic and sensitive,
in both countries. The SED is complex international economic diplomacy. We are
tackling some of the biggest structural challenges in China's economic future and in
U.S.-China relations.
The economic and geopolitical landscape of the 21 st century will be greatly
influenced by the way in which the United States and China work together. That
emerging future requires a distinct vision and effective mechanisms to achieve it.
By establishing new habits of cooperation, the SED has allowed both the United
States and China to begin to write the next chapter of our strategic economic
relationship.
-30-

http://www.treas.goy/press/releases/hp702.htm

12/3/200'

HP-703: Remarks of Treasurer Anna Escobedo Cabral on Working Together to Help Struggling H...

Page 1 of2

November 30, 2007
HP-703
Remarks of Treasurer Anna Escobedo Cabral
on Working Together to Help Struggling Homeowners
Atlanta- Good morning. It's a pleasure to be here today.
I want to thank Suzanne and the Consumer Credit Counseling Service of Atlanta for
bringing us all together today to talk about what is truly one of the most significant
issues our economy is facing.
Many Americans in cities and communities across our country are experiencing
challenges due to the turbulence in the housing and mortgage markets. Many are
struggling to keep their homes as their mortgages reset to higher rates. In fact, I'm
sure most of you have heard the statistic that an estimated 2 million subprime
mortgages will reset in the next year and a half.
The good news is not all of these families will face foreclosure. Some will adjust into
their new payments and others will refinance to better rates. But a portion of
homeowners will not be able to stretch to make their new monthly payments, and
these are the borrowers we aim to help.
I know a little later on Mark Duda is going to share his data on the specific impact of
foreclosures in Atlanta so I will let him speak to the local numbers and statistics. But
I've had the opportunity to visit places like Detroit, Cleveland, and other affected
cities, and I've seen firsthand the serious consequences of foreclosures. The
bottom line is that foreclosures are painful for families, for communities and for the
broader economy. We need to do our best prevent as many families from
experiencing this blow.
I applaud all of you for coming together to address this critical challenge, and I want
to take some time to share with you some of the ways we've been working to reach
struggling homeowners.
I've spent a majority of my career working in the federal government, and if there is
one thing I've learned, it's that the government can accomplish much more when
we bring everyone to the table. As we've worked to address the challenges in the
housing market, Treasury and the Department of Housing and Urban Development
have talked to mortgage lenders, financial institutions, housing counselors and a
range of industry experts, and we've brought together our resources to help more
borrowers.
Recently, a new national alliance made up of our nation's leading counselors,
servicers, and investors called HOPE NOW was formed to identify and reach out to
struggling homeowners. CCCS and NeighborWorks are among the many dedicates
partners in this effort. This partnership is a significant step to educating more
homeowners about their mortgage options.
One of the main goals of this effort is to implement a unified, aggressive outreach
strategy. More than half of borrowers whose mortgages go into foreclosure never
reach out to their lender or a homeownership counselor for help. Many bury their
heads and believe that foreclosure is inevitable.
To get more borrowers to act and reach out for help early, the alliance recently
launched a new direct mail campaign. While their heads are buried in the sand,
many struggling homeowners ignore the letters from their lenders. The HOPE NOW
mail campaign provides good information about foreclosure prevention under one
recognizable and trustworthy HOPE NOW banner. HOPE NOW has sent more than

http://www.treas.goy/press/releases/hp703.htm

12/3/2007

HP-703: Remarks of Treasurer Anna Escobedo Cabral on Working Together to Help Struggling H...

Page 2 of 2

300,000 letters this month to borrowers who could have the option to work out a
more affordable solution, and they will continue to reach more borrowers in the
coming months. For borrowers who are reluctant to call their lender, they can call 1888-995-HOPE to reach an independent, non-profit counselor who can help guide
them through their options.
But we can't do this alone. We need your help. At Treasury, we're asking Congress,
state and local leaders, community leaders and many others to help spread the
word to their community members on how critical it is to reach out for help early. I
encourage you to help us make your community members aware of the HOPE
NOW letters. Homeowners need to know that when they receive a letter from
HOPE NOW, they should not be afraid to open it and to call the number on that
letter.
We are also getting ready to help launch a public service campaign that lets
homeowners know, "Nothing is worse than doing nothing." But we need the help of
these community leaders to encourage local television and radio stations to run this
announcement.
In addition to outreach, the HOPE NOW Alliance has streamlined efforts between
counselors and services so that they can communicate better and improve their
efficiency. The Alliance is also developing standard performance measures. Any
strong initiative must have measures of progress. New performance standards will
help determine categories of borrowers who can be helped and track progress to
ensure people are getting the help they need.
Foreclosures are in the interest of no one. The borrower, the lender and our
communities suffer as a result. The investment community has also acknowledged
that foreclosure prevention is in their interest and has taken steps to recognize the
important role of counselors in helping more Americans remain in their homes.
HOPE NOW is laying the groundwork for tremendous progress going forward. But
work remains for all of us. We know that the most important step that struggling
homeowners in Atlanta can take is to call their lender or a local HUD-certified
counselor. The HUD web site at HUD.gov offers a complete list of local housing
counseling organizations. More information can also be found at HOF)E~JOW.cOfl1.
I spend a lot of time talking about financial education, and what we are seeing in the
housing market underscores the important responsibility we all have to remain
informed. The mortgage process can be extremely complicated, and lenders must
offer clear and understandable information with the products they sell. At the same
time, individuals must take the responsibility of being informed into their own hands.
There is a variety of information and help out there.
Treasury's financial education website MyMoney.gov offers lists many helpful
resources that can walk individuals through the process of buying a home. The
price of not being informed is too high, and we all can do more to empower
ourselves and others around us to become more informed about our financial
choices.
I encourage you to help us spread this important message to as many homeowners
as possible, and if there is any way we can be of help to you in reaching your
community members, please let us know. In the end, if we can help keep more
families in their homes, our country and economy will be better off as a whole. Once
again, I applaud you for your leadership, and thank you for your important
partnership in helping to preserve the dream of homeownership for families and
citizens of Atlanta.
Thank you.

http://www.treas.gov/press/releases/hp703.htm

12/3/2007

HP-704: Paulson to Speak on Forging Consensus and Generating Results in U.S. - China Econom... Page 1 of 1

November 30, 2007
HP-704

Paulson to Speak on Forging Consensus and Generating
Results in U.S. - China Economic Relations
Secretary Henry M. Paulson, Jr. will deliver remarks next week to the Asia Society.
His remarks will focus on the U.S - China economic relationship and the upcoming
Strategic Economic Dialogue (SED) meeting in Beijing. The dialogue, established
by Presidents Bush and Hu, is a framework for managing our bilateral economic
relationship on a iong-term strategic basis. The third Cabinet-level meeting of the
SED will take place December 12-13, 2007 near Beijing at Grand Epoch City.

Who
Treasury Secretary Henry M. Paulson, Jr.
What
Remarks on Forging Consensus and Generating Results in U.S.-China Economic
Relations
When
Wednesday, December 5, 11:45 a.m. EST
Where
Capital Hilton
1001 16th Street, NW
Washington, DC
Media
Media should register at 202-833-2742 or riclnio,i[\JSIClSOclctj em].

http://www.treas.gov/press/releases/hp704.htm

12/3/2007

hp-705: REPORT ON U.S. PORTFOLIO HOLDINGS OF FOREIGN SECURITIES AT END-YEAR ...

Page 1 oL~

To view or print the PDF content on this page, download the free Adobe® Acrobat® Reader®.

November 30, 2007
hp-705
REPORT ON U.S. PORTFOLIO HOLDINGS OF FOREIGN SECURITIES AT ENDYEAR 2006

Report on U.S. Portfolio Holdings of Foreign Securities at End-Year 2006

The findings from an annual survey of U.S. portfolio holdings of foreign securities at
end-year 2006 are released today and posted on the U.S. Treasury web site
(h II P /. WWW.tlr;:JS.CjOV.'tlcfpIS lit 1111lt1isclolill s).

A complementary survey measuring foreign portfolio holdings of U.S. securities is
also carried out annually. Preliminary results from the most recent such survey,
covering securities held as of June 30, 2007, are expected to be reported by
February 29, 2008.
These surveys are undertaken jointly by the U.S. Treasury, the Federal Reserve
Bank of New York, and the Board of Governors of the Federal Reserve System.
Overall Results
The survey measured the value of U.S. holdings of foreign securities at year-end
2006 of approximately $5,991 billion, with $4,329 billion held in foreign equities,
$1,294 billion in foreign long-term debt securities (original term-to-maturity in
excess of one year), and $368 billion in foreign short-term debt securities. The
previous survey measured U.S. holdings at year-end 2005 of approximately $4,609
billion, with $3,318 billion held in foreign equities, $1,028 billion in foreign long-term
debt securities, and $263 billion in foreign short-term debt securities (see Table 1 ).
U.S. portfolio holdings of foreign securities by country atthe end of 2006 were by
far the largest for the United Kingdom ($1,076 billion), followed by Japan ($596
billion) and Canada ($478 billion) (see Table 2).
The surveys are part of an internationally-coordinated effort under the auspices of
the International rvlonetary Fund (IMF) to improve the measurement of portfolio
asset holdings.

Table 1. Value of U.S. holdings of foreign securities, by type of security, at
end-2005 and end-2006[1]
(Billions of dollars)
Type of Security
Long-term Securities
Equity
long-term debt
Short-term debt securities

http://www.treas.goy/press/reieases/hp705.htm

Dec. 31, 2005

Dec. 31, 2006

4,346
3,318
1,028
263

5,623
4,329
1,294
368

12/3/2007

hP-705: REPORT ON U.S. PORTFOLIO HOLDINGS OF FOREIGN SECURITIES AT END-YEAR ...
ITotal

4,6091

Page 2 of3

5,9911

U.S. Portfolio Investment by Country

Table 2. Value of U.S. holdings of foreign securities, by country and type of
security, for the countries attracting the most U.S. investment, as of
December 31, 2006
(Billions of dollars, except as noted)

Total

1
2
3

14
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25

Equities

Debt securities:
Long-term
Short-term

United Kingdom
Japan
Canada
France
Cayman Islands
Germany
Switzerland
Netherlands
Bermuda
lAustralia
Korea, South
Ireland
Spain
Brazil
Mexico
Italy
Sweden
Hong Kong
China, mainland[2]
Taiwan
Luxembourg
Finland
Netherlands Antilles
Sinqapore
Norway
Rest of world

1,076
596
478
401
376
292
264
234
208
173
124
121
111
110
108
106
102
88
75
74
60
60
58
53
51
592

674
544
298
307
161
220
263
161
192
102
114
48
86
92
85
93
59
86
74
74
16
56
56
44
32
393

245
46
162
63
178
62
1
68
14
62
10
38
24
18
24
12
24
2
1
37
4
2
9
15
174

4
24

Total value of
investment

5,991

4,329

1,294

368

156
7
18
32
37
10
*

5
3
10
*

34
1
*
*

1
19
*

0
7
*
*
*

$500 million. Note: items may not add to total
due to rounding.

* Greater than zero and less than

-30-

[1] The stock of foreign securities for December 31, 2006, reported in this survey
does not, for a number or reasons, correspond to the stock of foreign securities on
December 31,2005, plus cumulative flows reported in Treasury's transactions
reporting system. An analysis of the relation between the stock and flow data is
available in Table 4 and the associated text of the final report on U.S.
[2] Excludes Hong Kong and Macau, which are reported separately.

http://www.treas.gs:>~/pr~sslreleases/hp705.htm

12/3/2007

hP-705: REPORT ON U.S. PORTFOLIO HOLDINGS OF FOREIGN SECURITIES AT END-YEAR ... Page 3 of3
REPORTS
•

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http://www.treas.gov/press/releases/hp705.htm

12/3/2007

u.s. TREASURY DEPARTMENT OFFICE OF PUBLIC AFFAIRS
4 PM (EST), November 30, 2007
CONTACT Ann Marie Hauser, (202) 622-2960

EMBARGOED UNTIL

REpORT ON

U.S. PORTFOLIO HOLDINGS OF FOREIGN SECURITIES AT
END-YEAR 2006

The findings from an annual survey of U.S. portfolio holdings of foreign securities at end-year 2006 are
released today and posted on the U.S. Treasury web site (www.treas.gov/tic/fpis.html).
A complementary survey measuring foreign portfolio holdings of U.S. securities is also carried out
annually. Preliminary results from the most recent such survey, covering securities held as of June 30,
2007, are expected to be reported by February 29, 2008.
These surveys are undertaken jointly by the U.S. Treasury, the Federal Reserve Bank of New York, and
the Board of Governors of the Federal Reserve System.
Overall Results
The survey measured the value of U.S. holdings of foreign securities at year-end 2006 of approximately
$5,991 billion, with $4,329 billion held in foreign equities, $1,294 billion in foreign long-term debt
securities (original term-to-maturity in excess of one year), and $368 billion in foreign short-term debt
securities. The previous survey measured U.S. holdings at year-end 2005 of approximately $4,609
billion, with $3,318 billion held in foreign equities, $1,028 billion in foreign long-term debt securities,
and $263 billion in foreign short-term debt securities (see Table I).
U.S. portfolio holdings of foreign securities by country at the end of 2006 were by far the largest for the
United Kingdom ($1,076 billion), followed by Japan ($596 billion) and Canada ($478 billion) (see Table
2).
The surveys are part of an internationally-coordinated effort under the auspices of the International
Monetary Fund (lMF) to improve the measurement of portfolio asset holdings.

Table 1. Value of V.S. holdings of foreign securities, by type of security,
at end-2005 and end-2006 1 (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. Value of V.S. holdings of foreign securities, by country and type of security,
for the countries attracting the most V.S. investment, as of December 31,2006
(Billions of dollars, except as noted)
Debt securities:
Total

2
3
4
5
6
7
8
9
10
II

12
13
14
15
16
17
18
19
20
21
22
23
24
25

Equities

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

1,076
596
478
401
376
292
264
234
208
173
124
121
110
108
106
102
88
75
74
60
60
58
53
51
592

674
544
298
307
161
220
263
161
192
102
114
48
86
92
85
93
59
86
74
74
16
56
56
44
32
393

Total value of investment

5,991

4,329

III

Long-term

245
46
162
63
178
62
I

68
14
62
10
38
24
18
24
12
24
2

Short-term

156
7
18
32
37
10

5
3
10

34
1

*
*
I

*
*

0
7

37
4
2
9
15
174

4
24

1,294

368

*
*
*

I The stock of foreign securities for December 31, 2006, reported in this survey does not, for a number or reasons, correspond
to the stock of foreign securities on December 31, 2005, plus cumulative flows reported in Treasury's transactions reporting
system. An analysis of the relation between the stock and flow data is available in Table 4 and the associated text of the final
report on U.S. holdings offoreign securities at end-year 2006.
2 Excludes Hong Kong and Macau, which are reported separately.
* Greater than zero and less than $500 million. Note: items may not add to total due to rounding.

hP-706: Remarks by Secretary Paulson on Actions Taken and Actions Needed in U.S. Mortgage ...

Page 1 of 4

December 3, 2007
HP-706

Remarks by Secretary Paulson
on Actions Taken and Actions Needed in U.S. Mortgage Markets
at the Office of Thrift Supervision National Housing Forum
Washington, DC·-Thank you, John, The Office of Thrift Supervision plays an
Important role in our financial system, and I appreciate your leadership at this
agency, Thanks, also, for hosting this second national housing forum and providing
a timely opportunity for me to give an update on the US, economy and mortgage
markets, I mention timeliness because housing issues are affecting citizens all
across the country, and because Congress returns to Washington today. In the final
days of this congressional session, there is much that Congress can do to help
America's homeowners.
As we are all aware, the housing and mortgage markets are working through a
period of turmOil, as are other credit markets, as risk is being reassessed and repriced. We expect that this turbulence will take some time to work through, and we
expect some penalty on our short-term economic growth. The pOSitive news is that
we are confronting and managing these challenges against the backdrop of a
strong global economy. And the U,S. economy remains fundamentally sound - core
Inflation is contained, continued job gains are providing a good foundation for
household spending, corporate balance sheets remain healthy overall, and strong
growth abroad IS supporting US, exports. Our economy will contmue to grow, but it
is facing a number of challenges,
And as I have said before, the housing market downturn is the biggest challenge to
our economy, When home foreclosures spike, the damage is not limited only to
those who lose their homes. Homes in foreclosure can pose costs for whole
neighborhoods, as crime goes up and property values decline.
Avoiding preventable foreclosures, then, is in the interest of all homeowners.
Mortgage market financial innovation has benefited the U,S. economy and U.S.
homeowners; it has also IIltroduced some of the challenges we face today.
Financial IIlnovation led to the creation of mortgage products that put
homeownership within the reach of more people. At the same time, innovation also
made riskier loans - with no down payments or minimal documentation - more
widely available. Similarly, securitization has brought benefits and challenges making more capital available for mortgages, but creating greater market
complexity. As a result, we now have an array of different market participants, often
with different interests.
Still, foreclosure is expensive for all participants - lenders and investors - and thiS
expense is an incentive to avoid foreclosure when a homeowner has the financial
wherewithal to own a home. An appropriate role for government is to bnng the
private sector together when innovation has greatly increased the complexity of
achieving beneficial solutions for all parties involved, The number of subprime
mortgage resets is going to increase dramatically next year, and we need to make
sure the capacity is there to handle it.
And so, Treasury is aggressively pursuing a comprehensive plan to help as many
able homeowners as possible keep their homes, We began by convening a diverse
group of market participants, who represent all segments of the mortgage industry
Based on what we have learned, we are implementing a three point plan to avoid
preventable foreClosures and to minimize the impact of the housing downturn on
the U.S. economy
First, we are mcreasing efforts to reach able homeowners who are struggling with

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hP-706: Remarks by Secretary Paulson on Actions Taken and Actions Needed in U.S. Mortgage...

Page 2 of 4

their mortgages. Second, we are working to increase the availability of affordable
mortgage solutions for these borrowers. Third, we are leading the industry to
develop a systematic means of efficiently moving able homeowners into sustainable
mortgages. This morning, I will provide more detail on the three elements of this
plan, an update on the private sector's efforts, the government's efforts, and the
additional steps that are needed in each area.
Increase Efforts to Reach Struggling Homeowners
First, we must reach homeowners who are struggling, reach them early, and reach
them with information and hope. The need for this effort became starkly clear when
we learned that 50 percent of foreclosures occur without borrowers ever talking to
their lender or a mortgage counselor. We knew that if we are to make a difference
that number has to be reduced.
We learned that mortgage industry leaders had already stepped-up their efforts to
reach delinquent borrowers, but many borrowers in trouble were afraid to speak to
their lenders. Borrowers did respond more favorably to mortgage counselors, but
the counselors didn't know which borrowers most needed assistance. Treasury and
HUD helped bring these two groups together in the HOPE NOW alliance - a
coalition of mortgage servicers, counselors and investors that are working to avoid
preventable foreclosures and to improve the functioning of the mortgage markets.
Since its formation less than two months ago, the HOPE NOW alliance has made
significant progress. In the past, some servicers may not have contacted borrowers
until after their loans were delinquent. Today, all HOPE NOW servicers are
contacting borrowers 120-days in advance of their mortgage reset, to reach them
early, before their mortgage problem becomes overwhelming. For those troubled
borrowers that servicers haven't been able to reach, HOPE NOW has launched a
nationwide letter campaign. These simple, one-page letters, on HOPE NOW
letterhead, provide a toll-free hotline which homeowners can call to explore options
with their servicer that may help them keep their home.
Mortgage investors recognize that foreclosure is costly and often not in their
Interest. And they recognize that quality mortgage counseling can help prevent
foreclosures. By bringing together counselors, servicers and investors, the HOPE
NOW alliance has brought the resources of investors to bear to enable non-profit
mortgage counselors to be more widely available. The Alliance is scaling up a
national hotline that borrowers can call for mortgage counseling. And let me say to
those listening out there - if you are worried about losing your home, call this
number, 1-888-995-HOPE, to see if you are eligible for assistance. This hotline is
available 24-hours a day to provide vital mortgage counseling in multiple
languages. Nothing is worse than doing nothing.
The HOPE NOW effort to streamline refinancings and modifications is a positive
step, but it is not a silver bullet. There IS no single solution to address all of the
issues currently affecting the housing and mortgage markets.
The government has a role to play, as well. First, we need to draw attention to
these letters and urge borrowers who receive them to act on them. Secretary
Jackson and I have been doing just that, recently we sent copies of these letters to
all Members of Congress so they can alert their constituents. We are asking
governors and mayors to do the same. We will also join HOPE NOW's efforts to
broaden Its public service announcement campaign, to spread the word that hope is
but a phone call away.
While increased industry funding is very important, we also need to do our part to
support non-profit mortgage counseling organizations. For this public outreach
campaign to be successful there must be enough trained mortgage counselors to
answer the phone when homeowners call The Administration requested fundlllg for
NeighborWorks America and other non-profit mortgage counseling operations in its
budget. But the appropriations bill has yet to be finalized; Congress needs to get it
done quickly.
Increase Availability of Affordable Mortgage Solutions
Of course, reaching homeowners is only part of the equation. The second part of

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hP-706: Remarks by Secretary Paulson on Actions Taken and Actions Needed in U.S. Mortgage ...

Page 3 of 4

our action plan IS to make more mortgage products available for borrowers who
have the financial wherewithal to own a home, but are struggling with the higher
adjusted rate on their subprime mortgages To help with this, the industry is looking
at several innovative solutions - including both modifications and refinancings.
State and local governments, especially in the hardest hit areas, are also
developing solutions, including proposing funds that may help finanCially-able
borrowers refinance out of expensive subprime loans.
Given the local nature of housing markets, state and local solutions can be
particularly effective. Current law allows states and localities to issue tax-exempt
bonds only to assist first time homebuyers or homebuyers in deSignated distressed
areas. Some states' housing agencies have initiated pilot programs, backed by
taxable bonds. to help refinance struggling subprime borrowers into more affordable
mortgages.
Today, we are proposing to allow state and local governments to temporarily
broaden their tax-exempt bond programs to include mortgage refinancings; if
enacted, this will reduce the cost of innovative mortgage programs and allow these
programs to reach more struggling homeowners.
We in the federal government are also taking steps This fall, HUD initiated
"FHASecure" to give the FHA the flexibility to help more families stay in their
homes, even those who have good credit but may not have made all of their
mortgage payments on time. An estimated 240,000 families can avoid foreclosure
by refinancing their mortgages under the FHASecure plan.
The Administration is taking action to help homeowners, and Congress must do the
same before it leaves for the year. Since August, the President has been calling on
Congress to pass his FHA modernization proposal which, by lowering the down
payment requirement, increasing the loan limit and allowing risk-based pricing, will
make affordable FHA loans more Widely available. The Administration's proposed
bill would help refinance another estimated 200,000 families into FHA-Insured
loans.
Since August the President has also called on Congress to provide tax relief for
mortgage debt forgiven; homeowners who finally find relief shouldn't get put back in
financial straits because of the tax code. Additionally, Congress needs to complete
its work and create a strong, independent regulator for Fannie Mae and Freddie
Mac. Fannie Mae and Freddie Mac have an important role to play in making
mortgages available and affordable, and appropriate regulatory oversight is critical
to their ability to serve their public policy purpose.
Oevelop a Systematic Solution for Transition into Affordable Mortgages

The third element of our plan Involves a pragmatic response to the reality that the
number of homeowners struggling with their resetting sub prime mortgage will
increase throughout 2008. As volume increases, we Will need an aggressive,
systematic approach to fast-track able borrowers into a refinance or mortgage
modification. This third element does not, and will not, include spending taxpayer
money on funding or subsidies for industry partiCipants or homeowners.
While the reality is a bit more complex, in the interest of simplicity, there are four
categories of subprime borrowers. There are those who can afford their adjusted
interest rate; these homeowners need no assistance. There are also a substantial
number of homeowners who haven't been making payments at the starter rate on
their subprime loan and may not have the financial wherewithal to sustain home
ownership; some of these homeowners will become renters again. A third category
of homeowners might choose to refinance their mortgage - putting them in a
sustainable mortgage while keeping Investors whole This IS the first, best option.
Servicers should move quickly to assist those who can refinance.
And the fourth category is those with steady incomes and relatively clean payment
histories who could afford the lower introductory mortgage rate but cannot afford
the higher adjusted rate. We are fOCUSing on thiS group. determining who they are
and what steps may appropriately assist them.
However, given the diffuse nature of today's mortgage market, the steps toward

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1/3/2008

hP-706: Remarks by Secretary Paulson on Actions Taken and Actions Needed in U.S. Mortgage .,.

Page 4 of 4

refillancing and modification G()n lJe more difficult than it would seem.
The company collecting your mortgage payment every month is most often doing
that on behalf of those who own the mortgage, and they are limited in the decisions
they can make on behalf of those ultimate owners, who are spread allover the
world.
We are determined to bring this diverse group together, to develop a set of
standards that will be implemented across the industry, from the largest mortgage
servicers to the smaller specialty servicers. An industry-wide approach is critical to
the effectiveness of this effort.
To speed up the modification process, Treasury is working through the HOPE NOW
alliance with the American Securitization Forum to convene servicers and investors
so they can develop categories of borrowers eligible for appropriate modifications
and refinancings, and an industry-wide solution. This work takes time, as all parties
seek to define categories of borrowers for streamlined refinance and modification
where that is in the best interest of both the borrower and the mortgage investor. I
am confident they will finalize these standards soon. And I expect all servicers will
implement them quickly, and create benchmarks to measure their progress along
the way. As a result, what was a fragmented, cumbersome process can be a
coordinated effort which more quickly helps able homeowners.
Through continued, dedicated efforts by industry, non-profit organizations and the
government, we can strike the necessary balance to mitigate the risk to our
economy of the housing downturn. The issues are complex, and will take time. We
are working aggressively and quickly, utilizing available tools and creating new
ones, to help financially responsible but struggling homeowners. This, in turn, helps
their neighbors, by preventing foreclosures and sales which can drive down
property values and undermine the financial stability of families and communities: it
also helps investors and lenders avoid unnecessary and costly foreclosures that are
not in their interest.
We will continue these efforts, measuring progress and mak'lng adjustments when
necessary, to ensure as many able homeowners as possible are reached and
helped. The Administration and the private sector are taking action. Congress now
needs to also act - to appropriate funds for mortgage counseling, to pass FHA
modernization and GSE oversight legislation, to pass legislation to temporarily
relieve tax liability for mortgage debt forgiven, and legislation to temporarily
increase capacity and allow state and local governments new flexibility to use taxexempt bonds for home mortgage refinancings. The US. economy and America's
communities deserve no less.

http://www.treas.goy/pressireleases/hp706.htm

1/3/2008

HP-707: Treasury, IRS Issue Notice Allowing 409A Corrections

Page 1 of 1

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December 3. 2007
HP-707
Treasury, IRS Issue Notice Allowing 409A Corrections
Washington, DC-- Tile Treasury Department and the Internal Revenue Service
(IRS) today issued a notice that gives taxpayers the ability to correct certain
operational failures to comply with seclion 409A of the Internal Revellue Code,
WillCll addresses nonqualifled deferred compensation,
Notice 2007 -100 prOVides relief for certain operational failures that are corrected In
the same year Tile notice also prOVides transition I'elief tilrough 2010 for
operational failures up to a certain amount that are not corrected III tile same
taxable year by limiting the amount of Income Inclusion and additional taxes, In
addition, tile notice describes anei requests comments on a potential expanded
program that would limit the income Inclusion and additional taxes under section
409A for certain operation failures InvolVing larger amounts,
Section 409A was Signed Into law as part of the American Jobs Creation Act In
2004 to addl'ess concerns over reported abuses in nonquallfied deferred
compensation plans

REPORTS

ttp:llwww.treas.gov/presslreleases/hp707.htm

1/3/2008

Part III - Administrative, Procedural, and Miscellaneous

Transition Relief and Guidance on Corrections of Certain Failures of a Nonqualified
Deferred Compensation Plan to Comply with § 409A(a) in Operation

Notice 2007-100
I. PURPOSE

This notice provides transition relief and guidance on the correction of certain
failures of a nonqualified deferred compensation plan to comply with § 409A(a) in
operation (an operational failure). This transition relief and additional guidance
includes:
•

Methods for correcting certain operational failures during the taxable year of the
service provider in which the failure occurs to avoid income inclusion under

§ 409A(a).
•

Transition relief limiting the amount includible in income under § 409A(a) for
certain operational failures occurring in a service provider's taxable year
beginning before January 1, 2010, that involve only limited amounts.

•

An outline of, and request for comments on, a potential corrections program that
would permit service recipients and service providers to limit the amounts
required to be included in income under § 409A(a) due to certain operational
failures.

II. CORRECTIONS OF CERTAIN OPERATIONAL FAILURES IN THE SAME
TAXABLE YEAR AS THE FAILURE OCCURS
A. General Requirements
If an unintentional operational failure to comply with § 409A(a) occurs, but the
operational failure is corrected in accordance with this § II, no amount is required to be
included in income under § 409A(a) as a result of the failure. The relief provided by this

§ II applies only to unintentional operational failures, which means an unintentional
failure to comply with plan provisions that satisfy the requirements of § 409A(a) and the
guidance thereunder, or an unintentional failure to follow the requirements of § 409A(a)
in practice, due to one or more inadvertent errors in the operation of the plan . This § II
does not provide relief for plan terms and provisions that fail to meet the requirements of

§ 409A and the applicable guidance or for operational failures for which a correction is
not described in this § 11.1 Relief is not available under this § II with respect to any
intentional failure to comply with the terms of a plan or the requirements of § 409A in the
operation of a plan . In addition , relief is not available under this § II with respect to any
exercise of a stock right that otherwise would result in a failure to comply with § 409A.
Relief otherwise available under this § II is conditioned upon the timely filing and
providing of the information required by § IV of this notice.
The relief provided under this § II is not available unless, in addition to correcting
the operational failure in accordance with this § II, the service recipient takes

1 Reliance on the transition relief provided in Notice 2007-86 , 2007-46 IRB 990, the
preamble to the final regulations under § 409A, 72 Fed. Reg . 19234, Notice 2006-79 ,
2006-43 IRB 763, the preamble to the proposed regulations under § 409A, 70 Fed. Reg .
57930 , or Notice 2005-1, 2005-1 CB 274 , for the years to which such transition relief
applies, does not preclude a taxpayer from qualifying for the relief provided in this notice
with respect to unintentional operational errors occurring in taxable years beginning
before January 1, 2009 .

commercially reasonable steps to avoid a recurrence of the operational failure. If the
same or a substantially similar operational failure has occurred previously, the relief is
not available for any taxable year of the service provider beginning after December 31,
2008, unless the service recipient demonstrates that the service recipient had
established practices and procedures reasonably designed to ensure that such an
operational failure would not recur, had taken commercially reasonable steps to avoid a
recurrence of the operational failure, and the operational failure occurred despite the
diligent efforts of the service recipient.
Relief is not available under this § II with respect to any intentional failure to
comply with the terms of a plan or the requirements of § 409A in the operation of a plan.
The relief provided in this section also is not available with respect to an operational
failure that is egregious, or where the failure is directly or indirectly related to
participation in an abusive tax avoidance transaction (meaning any listed transaction
under § 1.6011-4(b)(2)).
In each instance, the taxpayer claiming the relief has the burden of
demonstrating that the taxpayer was eligible for the relief and that the requirements of
this section have been met. Any application of the relief provided in this section is
subject to examination by the IRS.
B. Failure to Defer Amount or Incorrect Payment Corrected in the Same Taxable Year
This § II.B applies to amounts of nonqualified deferred compensation that, under
the terms of the plan and any applicable deferral election, and § 409A and the
applicable guidance, should not have been paid or made available to a service provider
in a taxable year of the service provider, but were paid or made available in that year

due to an unintentional operational failure with respect to the plan, other than a payment
that fails to meet the requirements of § 409A(a)(2)(8)(i) and the applicable guidance
thereunder (requirement to delay for six months payments to a specified employee upon
separation from service). For rules relating to correction of certain payments made in
violation of § 409A(a)(2)(8)(i) and the applicable guidance under that section, see § Il.e
of this notice.
An amount to which this § 11.8 applies is treated as having been timely deferred
in accordance with the terms of the plan and any applicable deferral election (or as
having continued to be deferred under the terms of the plan) if the service provider
repays to the service recipient the amount that was erroneously paid or made available
to the service provider on or before the last day of the service provider's taxable year in
which such amount was erroneously paid or made available, and immediately after such
repayment the service provider has a legally binding right under the plan to be paid the
amount that would have been due if such amount had not been erroneously paid or
made available to the service provider during such taxable year, at the same time and in
the same form of payment that the amount would have been payable if such amount
had not been erroneously paid or made available to the service provider during such
taxable year.
In addition, if the total of all amounts to which this § 11.8 applies that are
erroneously paid or made available under a plan (as defined for purposes of § 409A) in
a service provider's taxable year exceeds the limit on elective deferrals that would apply
to a qualified plan under § 402(g)(1 )(8) for the year in which the erroneous payment
was made and the service provider is an insider (as defined in this § 11.8) with respect to

the service recipient, to qualify for the relief provided in this section, the service provider
must also pay interest to the service recipient at the time the service provider repays the
amount to the service recipient equal to the amount of the erroneous payment (E)
multiplied by the short-term applicable Federal rate (AFR) under § 1274(d)(1) (r)
multiplied by a fraction, the numerator of which is the number of days from the
erroneous payment date to the repayment date (n1) and the denominator of which is the
number of days in such taxable year (n2), or (E x r x n1/n2). For purposes of the
preceding sentence,

r is the short-term AFR, based on annual compounding, for the

month in which the erroneous payment was paid or made available to the service
provider. For purposes of counting days under this § 11.8, the first day of the period is
disregarded and the last day is taken into account. Where a repayment is made
through a reduction of the service provider's other compensation, the repayment date
occurs on each date the compensation otherwise would have been paid to the service
provider, and if the amount withheld on a repayment date is less than the entire
erroneous payment, the interest calculation in the preceding sentence is applied by
substituting the unpaid balance immediately before the repayment for the amount of the
erroneous payment.
For purposes of this notice, a service provider is an insider with respect to a
service recipient if the service provider is a director or officer of the service recipient or
is directly or indirectly the beneficial owner of more than 10 percent of any class of any
equity security of the service recipient, determined in accordance with the rules of the
Securities and Exchange Commission under § 16 of the Securities Exchange Act of
1934, as amended, 15 USC 78p, without regard to whether the service recipient has

any class of equity securities registered under § 12 of such Act, 15 USC 781. See 17
CFR § 240.16a-1 (a) (beneficial owner) and (f) (officer). In the case of a service
recipient that is not a corporation, such rules are applied by analogy.
The service provider may satisfy the requirement to repay the service recipient
the amount erroneously paid to the service provider and interest (if applicable) by
paying the service recipient the equivalent amount on or before the last day of such
taxable year. Alternatively, in lieu of such repayment, the service recipient may reduce
the service provider's compensation that otherwise would have been paid during such
taxable year by an equivalent amount on or before the last day of such taxable year. In
either case, an amount will not be treated as paid by the service provider if, in
connection with such payment, the service recipient pays the service provider, or
otherwise provides a benefit (including an obligation to pay an amount or provide a
benefit in the future), intended as a substitute for all or part of the amount the service
provider is required to repay the service recipient.
The amount erroneously paid to the service provider that is repaid by the service
provider to the service recipient is not required to be included in income by the service
provider, or reported as income to the service provider on a Form W-2 or Form 1099 by
the service recipient. To the extent employment taxes have been withheld and paid
with respect to such payment, appropriate adjustments should be made under the
applicable rules under § 6413. To the extent that, in lieu of repayment, the service
recipient reduces other compensation that would have been paid to the service
provider, the other compensation that would have been paid to the service provider, but
instead is used to repay the erroneous payment or to pay any required interest on the

erroneous payment, is includible in income (and wages if the service provider is an
employee); however, any employment taxes withheld and paid with respect to the
original erroneous payment may be applied to satisfy the requirement to withhold and
pay employment taxes on such compensation, in which case no adjustment to the
employment taxes previously withheld and paid should be made.
For purposes of this § II.B, the service provider's account balance or other
amount of deferred compensation under the plan may be adjusted for earnings (or
losses) retroactive to the date the amount should have been credited to the service
provider's account or otherwise deferred (or if the amount should have otherwise
remained deferred compensation after the end of the service provider's taxable year,
retroactive to the date the amount was paid or made available), provided that such
adjustment must be made on or before the last day of such taxable year (or if it is
impracticable to make the adjustment by the end of such taxable year, the service
provider (in the case of earnings) and the service recipient (in the case of losses) must
have a legally binding right to have such adjustment made on or before the last day of
such taxable year).
The relief provided in this § 1I.B is not available with respect to any erroneous
payment occurring during any taxable year of the service provider in which the service
recipient experienced a substantial financial downturn or otherwise experienced
financial or other issues that indicated a significant risk that the service recipient would
not be able to pay the amount deferred when the payment became due.
In each of the following examples, it is assumed that Employer does not make
any payment to Employee, or otherwise provide a benefit (including an obligation to pay

an amount or provide a benefit in the future) to or on behalf of Employee, that is
intended as a substitute for all or part of the amount that Employee pays to Employer
(or the reduction in compensation otherwise payable to Employee), that Employee is an
individual whose taxable year is the calendar year, that Employer did not experience a
substantial financial downturn or otherwise experience financial or other issues that
indicated a significant risk that the service recipient would not be able to pay the amount
deferred when the payment became due, and that Employee and Employer each satisfy
the other applicable requirements of this § II.
Example 1: Employee, who is not an insider with respect to Employer, makes a
timely election to defer 50% of a bonus payable in 2007 pursuant to an account balance
plan maintained by Employer. The bonus is $100,000. Due to an unintentional
operational failure with respect to the plan, Employer defers only 10% of the bonus, or
$10,000, and pays Employee the other $90,000 in 2007 (including the $40,000 that
should have been deferred). The deferral is treated as made in accordance with the
terms of the plan and the deferral election if, on or before December 31 , 2007, the
additional $40,000 is credited to Employee's account balance and Employee pays
Employer $40,000. The $40,000 erroneously paid to Employee is not required to be
included in income by Employee or reported by Employer on Form W-2. Alternatively,
in lieu of the $40,000 repayment by Employee to Employer, compensation otherwise
payable to Employee in 2007 (such as salary payments) may be reduced by $40,000,
provided that the $40,000 reduction in Employee's compensation used to repay the
amount (but not the $40,000 erroneous payment) is included in income by Employee
and reported as wages by Employer on the 2007 Form W-2. Employer may also adjust

Employee's account to reflect the earnings (or losses) that would have been allocated to
Employee's account had the amount been timely deferred and credited to Employee's
account balance, if such adjustment for earnings (or losses) is made on or before
December 31, 2007. Alternatively, if it is impracticable to make the adjustment on or
before December 31,2007, such adjustment may be made later retroactively to
December 31,2007, provided that Employee and Employer each has a legally binding
right on December 31, 2007 with respect to such adjustment. For example, if the
original incorrect deferral would have been credited with 10% in deemed investment
earnings, the deferral plus earnings would be $11,000. This amount must be increased
by the $40,000 repaid by Employee and may also be increased by an additional $4,000
($40,000 multiplied by 10%), to result in the $55,000 account balance that would have
been reflected had the amount been properly deferred. If the original incorrect deferral
would have been charged with 10% in deemed investment losses, the deferral less
losses would be $9,000. This account balance must be increased by the $40,000, but
may also be reduced by $4,000, for a net increase of $36,000, to result in the $45,000
account balance that would have been reflected had the amount been properly
deferred.
Example 2: Pursuant to a nonqualified deferred compensation plan sponsored
by Employer, Employee, who is an insider with respect to Employer, is scheduled to
receive a $10,000 installment payment in 2007 that is not subject to the 6-month delay
for payments to specified employees upon separation from service under

§ 409A(a)(2)(8)(i). Due to an unintentional operational failure with respect to the plan,
Employer pays Employee $11,000. The installment payment is treated as made in

accordance with the terms of the plan and the deferral election if on or before December
31,2007, the excess $1,000 payment is credited to Employee's account balance, and
Employee pays Employer $1,000. The $1,000 is not required to be included in income
by Employee or reported by Employer as wages on Form W-2. Alternatively, in lieu of
the $1,000 payment by Employee to Employer, Employee's compensation otherwise
payable in 2007 (such as salary payments) may be reduced by $1,000, provided that
the $1,000 reduction in Employee's compensation used to repay the amount (but not
the $1,000 erroneous payment) is included in income by Employee and reported by
Employer as wages on the 2007 Form W-2. Because the excess $1,000 payment does
not exceed the applicable limit on elective deferrals that would apply to a qualified plan
under § 402(g)(1 )(B), Employee is not required to pay any interest to qualify for the
relief. Employer may also adjust Employee's account to reflect the earnings (or losses)
that would have been allocated to Employee's account had the amount been timely
deferred and credited to Employee's account balance, if such adjustment for earnings
(or losses) is made on or before December 31,2007. Alternatively, if it is impracticable
to make the adjustment on or before December 31, 2007, such adjustment may be
made later retroactively to December 31,2007, provided that on December 31,2007,
Employee and Employer each has a legally binding right with respect to such
adjustment.
Example 3: Employee, who is an insider with respect to Employer, makes a
timely election to defer 80% of a $100,000 bonus payable on July 1,2009, pursuant to
an account balance plan maintained by Employer. Due to an unintentional operational
failure with respect to the plan, Employer defers only 10% of the bonus, or $10,000, and

pays Employee the other $90,000 (including $70,000 that should have been deferred)
on July 1, 2009. Assume for purposes of this example that the short-term AFR, based
on annual compounding, for July 2009 is 4.0 percent. Employer notifies Employee of
the error and Employee pays Employer $70,705.75 on October 1, 2009, consisting of
the $70,000 erroneous payment plus interest equal to $705.75 ($70,000 x .04 x 92/365)
(because the erroneous payment exceeds the limit on elective deferrals that would
apply to a qualified plan under § 402(g)(1 )(B) for 2009 and Employee is an insider).
The deferral is treated as made in accordance with the terms of the plan under this §
II.B. The $70,000 is not required to be included in income by Employee or reported as
wages by Employer on Form W-2. Alternatively, in lieu of the $70,705.75 payment by
Employee to Employer, compensation otherwise payable to Employee in 2009 (such as
salary payments) may be reduced by $70,000 plus applicable interest, in which case the
reduction in Employee's compensation used to repay the amount plus interest (but not
the erroneous $70,000 payment) must be reported by Employer as wages on the 2009
Form W-2 issued to Employee and included in Employee's income for 2009. Employer
may also adjust Employee's account to reflect the earnings that would have been
allocated to Employee's account had the amount been timely deferred and credited to
Employee's account balance, if such adjustment for earnings is made on or before
December 31, 2009. Alternatively, if it is impracticable to make the adjustment on or
before December 31, 2009, such adjustment may be made retroactively to December
31,2009, provided that Employee and Employer each have a legally binding right on
December 31,2009 with respect to such adjustment.

C. Incorrect Payment in Violation of § 409A(a)(2)(8)(i) Corrected in the Same Taxable
Year
This section applies to amounts of nonqualified deferred compensation that,
under the terms of the plan and any applicable deferral election, and § 409A(a)(2)(8)(i)
(requirement to delay for six months payments to a specified employee upon separation
from service) and the applicable guidance, should not have been paid or made available
to a service provider for at least six months following the service provider's separation
from service, but that were paid or made available to the service provider before the
expiration of such six-month period due to an unintentional operational failure with
respect to the plan. For the ability to correct certain other payments in violation of

§ 409A and the applicable guidance, see § 11.8 of this notice.
With respect to an amount to which this § II.C applies, the service provider will
not be treated as having failed to comply with § 409A(a)(2)(8)(i) and the terms of the
plan and any applicable deferral election as a result of the amount being paid or made
available at the earlier date if, on or before the last day of the service provider's taxable
year in which the amount was paid or made available, the service provider repays to the
service recipient the amount that was erroneously paid or made available to the service
provider, immediately after such repayment the service provider has a legally binding
right to receive such amount from the service recipient on the date that is the same
number of days after the later of (i) the date the amount would otherwise have been
payable under the terms of the plan and the applicable deferral election or (ii) the date
of the repayment as the number of days from the date the service recipient made the
erroneous payment to the service provider through the date the service provider repaid
the erroneous payment to the service recipient, and the repaid amount is not paid or

made available to the service provider before such date. For purposes of counting days
under this § II.C, the first day of the period is disregarded and the last day is taken into
account (for example, if on June 1, 2008, a service recipient mistakenly paid a service
provider an amount that the service provider repaid on June 30, 2008, there would be
29 days from the date of payment through the date of repayment).
If the requirements of this § II.C are met, the original payment from the service
recipient to the service provider that has been repaid to the service recipient is not
required to be reported as income on Form W-2 or Form 1099, as applicable. To the
extent employment taxes have been withheld and paid with respect to such payment,
appropriate adjustments should be made under the applicable rules under § 6413.
However, the subsequent payment of the amount by the service recipient to the service
provider is required to be reported appropriately as income on Form W-2 or Form 1099,
as applicable, and subject to the applicable employment taxes. If the payment is
deductible by the service recipient, the taxable year in which such deduction is
allowable will be determined in accordance with § 404(a)(5) and the service recipient's
method of accounting.
The relief provided in this section is not available with respect to any erroneous
payment occurring during any taxable year of the service provider in which the service
recipient experienced a substantial financial downturn or otherwise experienced
financial or other issues that indicated a significant risk that the service recipient would
not be able to pay the amount deferred when the payment became due.
In each of the following examples, it is assumed that: Specified Employee is an
individual whose taxable year is the calendar year; at all relevant times Specified

Employee is a specified employee of Employer for purposes of § 409A(a)(2)(8)(i); at all
relevant times Employer is not experiencing any substantial financial downturn or any
other financial or other issue that indicates a significant risk that Employer would not be
able to pay the relevant deferred amounts when due; and Employee and Employer each
satisfy the other applicable requirements of this § II.
Example 1: Under a nonqualified deferred compensation plan sponsored by
Employer, Specified Employee has a legally binding right to a payment of deferred
compensation on the first day of the seventh month following Specified Employee's
separation from service. Specified Employee separates from service on November 15,
2007 so that the payment is due on June 1, 2008. Due to an unintentional operational
failure with respect to the plan, Employer pays Specified Employee the amount of
deferred compensation on May 1, 2008. Employer discovers the error on July 1, 2008,
and Specified Employee repays the amount to Employer on July 1, 2008 (61 days after
the erroneous payment). Provided that immediately after such repayment Specified
Employee has a legally binding right to receive the amount from Employer on August
31, 2008 (61 days after the July 1, 2008 repayment date) and Employer does not repay
the amount to Specified Employee before that date, Specified Employee will not be
treated as having failed to comply with § 409A(a)(2)(8)(i) and the terms of the plan and
the applicable deferral election solely as a result of the early payment.
Example 2: Under a nonqualified deferred compensation plan sponsored by
Employer, Specified Employee has a legally binding right to a payment of deferred
compensation payable on the first day of the seventh month following separation from
service. Specified Employee separates from service on May 1, 2008 so that the

payment is due on December 1, 2008. Due to an unintentional operational failure with
respect to the plan, Employer pays Specified Employee the amount of deferred
compensation on May 1, 2008. Employer discovers the error and Specified Employee
repays the amount to Employer on July 1,2008 (61 days after the erroneous payment).
Provided that immediately after such repayment Specified Employee has a legally
binding right to receive the amount from Employer on January 31,2009 (61 days after
December 1,2008) and Employer does not repay the amount to Specified Employee
before that date, Specified Employee will not be treated as having failed to comply with

§ 409A(a)(2)(8)(i) and the terms of the plan and the applicable deferral election solely
as a result of the early payment. The erroneous payment is not includible in Specified
Employee's income, and is not required to be reported on the 2008 Form W-2. Such
amount is includible in Specified Employee's income in the year in which the amount is
repaid by Employer to Specified Employee pursuant to the plan, and is required to be
reported on that year's Form W-2 and subject to applicable employment taxes.
D. Excess Deferred Amount Corrected in the Same Taxable Year
If under the terms of a plan and an applicable deferral election, and § 409A and
the applicable guidance, an amount that should not have been deferred compensation
under the plan is credited to the service provider's account or otherwise treated as
deferred compensation under the plan as a result of an unintentional operational failure
with respect to the plan, and such excess amount otherwise would have been paid to
the service provider during the service provider's taxable year in which the excess
amount was incorrectly credited to the service provider's account or otherwise treated
as deferred compensation under the plan, the excess amount is not treated as an

amount deferred under the plan if the excess amount is paid to the service provider on
or before the last day of the service provider's taxable year in which the excess amount
was incorrectly treated as deferred compensation. The amount to which the service
provider has a legally binding right under the plan at the end of the year must be
adjusted to reflect the payment (for example, through a reduction in the account
balance). In addition, if the service provider is an insider with respect to the service
recipient (as defined in § II.B of this notice), the remaining account balance (or other
deferred compensation under the plan) must be adjusted for positive earnings
retroactive to the date the excess amount was incorrectly credited to the service
provider's account or otherwise incorrectly treated as deferred under the plan, provided
that such adjustment must be made on or before the last day of the service provider's
taxable year in which such amount was incorrectly treated as deferred compensation
under the plan (or if it is impracticable to make the adjustment by the end of such year,
the service recipient must have a legally binding right on the last day of such taxable
year to make such adjustment retroactively to such date). In other cases, such
adjustment may be (but is not required to be) made. Where the amount was subject to
losses, the remaining account balance (or other deferred compensation under the plan)
is not required to be adjusted, but may be adjusted for such losses retroactive to the
date the excess amount was incorrectly credited to the service provider's account or
otherwise incorrectly treated as deferred under the plan, provided that such adjustment
must be made on or before the last day of the service provider's taxable year in which
such amount was incorrectly treated as deferred compensation under the plan (or if it is
impracticable to make the adjustment by the end of such taxable year, the service

provider must have a legally binding right on the last day of such taxable year to require
that such an adjustment be made retroactively to the date of the failure). The service
recipient may (but is not required to) pay reasonable interest to (or otherwise
reasonably compensate) the service provider to reflect the time value of money with
respect to the late payment, provided that such interest or other compensation is paid or
made available by the end of the service provider's taxable year in which such amount
was incorrectly treated as deferred compensation under the plan.
This relief is not applicable to a service recipient's failure to timely pay in the
proper taxable year of a service provider amounts that were deferred in one or more
previous taxable years of the service provider. However, see § 1.409A-3(d) for certain
circumstances under which such payments may be treated as made in accordance with
a designated payment date.
Example: Employee, who is an insider with respect to Employer and whose
taxable year is the calendar year, makes a timely election pursuant to an account
balance plan to defer 10% of a bonus otherwise payable in 2007. The bonus is
$100,000. Due to an unintentional operational failure with respect to the plan, Employer
defers 50% of the bonus, or $50,000, and pays Employee $50,000 (instead of deferring
$10,000 and paying Employee $90,000). The excess $40,000 will not be treated as
deferred under the plan if on or before December 31,2007, Employer pays Employee
$40,000 of the account balance under the plan, and Employee and Employer each
satisfy the other applicable requirements of this § II. The remaining account balance
must be adjusted for earnings and may be adjusted for losses that were allocable to
such amount under the plan. For example, if the account was credited with 10% in

deemed investment earnings, the account balance must be reduced by both the
$40,000 paid to Employee and the $4,000 in earnings, or $44,000, to result in the
$11,000 account balance that would have been reflected had the deferred
compensation under the plan been properly deferred. The adjustment must be made by
December 31,2007, except that the adjustment can be made later, retroactively as of
that date, if it is impracticable to make the adjustment by December 31, 2007 and the
service recipient has a legally binding right on that date to make such a retroactive
adjustment. If the account was charged with 10% in deemed investment losses, the
account balance must be reduced by the $40,000, but may be increased not later than
December 31,2007, by the $4,000 in losses on the improperly deferred amount, for a
net reduction of $36,000, to result in the $9,000 account balance that would have been
reflected had the deferred compensation under the plan been properly deferred.
Alternatively, if it is impracticable to make the adjustment on or before December 31,
2007, such $4,000 adjustment may be made later retroactively to December 31,2007,
provided that the service provider has a legally binding right on December 31,2007, to
have such adjustment made. Employer may (but is not required to) pay Employee
reasonable interest on the $40,000 erroneous deferral provided such payment is made
by December 31 , 2007.
E. Correction of Exercise Price of Otherwise Excluded Stock Rights
This § II.E applies if under the terms of a stock right, the stock right would not be
nonqualified deferred compensation under § 1.409A-1 (b)(5)(i)(A) (excluded stock
options) or § 1.409A-1 (b)( 5)(i )(8 ) (excluded stock appreciation rights), except that the
exercise price of the stock right is less than the fair market value of the underlying stock

on the date of grant. This section applies only if the failure of the exercise price to equal
or exceed the fair market value of the underlying stock results from an unintentional
administrative error in determining the exercise price. If this section applies to a stock
right, the stock right is treated from the date of grant as not providing for nonqualified
deferred compensation for purposes of § 409A. This section applies if before the stock
right is exercised and not later than the last day of a service provider's taxable year in
which the service recipient granted the service provider the stock right, the exercise
price is reset to an amount equal to or exceeding the fair market value of the underlying
stock on the date of grant, and at all times before such increase in the exercise price the
stock right otherwise would not have provided for nonqualified deferred compensation
for purposes of § 409A. For example, assume that on January 1, 2008, an employer
grants an employee a stock option to purchase 100 shares of stock, and the stock
option would otherwise be excluded from coverage under § 409A except that due to an
unintentional administrative error the exercise price is set at an amount below the fair
market value of the stock on January 1, 2008. Assume further that on July 1, 2008, the
employee partially exercises the stock option and purchases 40 shares, but retains a
stock option to purchase 60 shares. Provided that on or before December 31, 2008, the
exercise price of the remaining stock option to purchase 60 shares is reset to a price at
or above the fair market value of the underlying stock on January 1, 2008, the stock
option to purchase 60 shares may qualify for the relief provided in this section. Because
the exercise price was not reset before July 1, 2008, the portion of the stock option that
was exercised to purchase 40 shares is not eligible for the relief provided in this section.

III. TRANSITION RELIEF FOR CERTAIN OPERATIONAL FAILURES INVOLVING
LIMITED AMOUNTS OCCURRING DURING TAXABLE YEARS BEGINNING
BEFORE 2010
A. General Requirements
If an unintentional operational failure to comply with § 409A(a) occurs during a
service provider's taxable year beginning before January 1,2010, but the operational
failure qualifies for the relief provided in this § III and is corrected in accordance with this

§ III, the amount required to be included in income under § 409A(a) as a result of the
failure, and the resulting additional taxes under § 409A, are limited in accordance with
the provisions of this section. In each instance, the taxpayer claiming the relief (the
service provider, the service recipient, or both) has the burden of demonstrating that
such taxpayer was eligible for the relief and that the requirements of this section have
been met. Any application of the relief provided in this section is subject to examination
by the IRS.
The relief provided by this section applies only to unintentional operational
failures, which means an unintentional failure to comply with plan provisions that satisfy
the requirements of § 409A(a) and the guidance thereunder, or an unintentional failure
to follow the requirements of § 409A in practice, due to one or more inadvertent errors
in the operation of the plan. This notice does not apply to plan terms that fail to meet
the requirements of § 409A and applicable guidance or to operational failures for which
a correction is not provided in this § III.
The relief provided under this § III is not available unless, in addition to correcting
the operational failure in accordance with this § III, the service recipient takes
commercially reasonable steps to avoid a recurrence of the operational failure. For any

taxable year of the service provider beginning after December 31, 2008, if the same or a
substantially similar operational failure has occurred previously, the service recipient
must demonstrate that the service recipient had established practices and procedures
reasonably designed to ensure that such an operational failure would not recur, had
taken commercially reasonable steps to avoid a recurrence of the operational failure
and that the operational failure occurred despite the diligent efforts of the service
recipient. Relief otherwise available under this § III is conditioned upon the timely filing
and providing of the information required by § IV of this notice.
The relief provided by this section is not available with respect to any failure
unless all of the requirements of this section (other than the requirements of § IV of this
notice) have been satisfied not later than the end of the second taxable year of the
service provider following the taxable year of the service provider in which such failure
occurred. In addition, the relief provided in this section is not available if a federal
income tax return of the service provider for the taxable year of the service provider in
which the failure occurred is under examination with respect to the plan. For this
purpose, an individual service provider is treated as under examination with respect to
the plan if the individual is under examination with respect to the individual's federal
income tax return (for example, Form 1040) for the taxable year.
Relief is not available under this § III with respect to any intentional failure to
comply with the terms of a plan or the requirements of § 409A in the operation of a plan.
The relief provided in this section also is not available with respect to an operational
failure that is egregious, or where the failure is directly or indirectly related to
participation in an abusive tax avoidance transaction (meaning any listed transaction

under § 1.6011-4(b )(2)). The relief provided in this section also is not available with
respect to a failure to comply with § 409A resulting from an exercise of a stock right.
B. Failure to Defer Limited Amount not Corrected in the Same Taxable Year and
Certain Erroneous Payments
This § III.B applies if during a service provider's taxable year beginning before
January 1, 2010, an unintentional operational failure occurs that meets the following
requirements:
(1) An amount should have been treated as deferred compensation under the
terms of the plan and any applicable deferral election, and § 409A and the applicable
guidance, but the amount was not credited to the service provider's account or
otherwise treated as deferred compensation during the service provider's taxable year,
or did not remain deferred compensation after the end of such year;
(2) Because the amount was not credited to the service provider's account or
otherwise treated as deferred compensation under the plan during such year, or did not
remain deferred compensation under the plan after the end of such year, the amount
was paid or made available to the service provider during the service provider's taxable
year;
(3) Section II.B of this notice does not apply because relief is not available under

§ 11.8 of this notice with respect to the failure, the failure is not corrected under § 11.8 of
this notice, or otherwise; and
(4) The amount paid or made available to the service provider does not exceed
the limit on elective deferrals that would apply to a qualified plan under § 402(g)(1 )(B)
for the year of the operational failure.

In such a case, if the plan is otherwise compliant with the requirements of § 409A
and the applicable guidance, the amount includible in income under § 409A(a) as a
result of such payment is limited to the amount that should have been treated as
deferred compensation under the plan (or should have continued to be deferred
compensation under the plan) but was instead paid or made available to the service
provider, and does not include any other amounts deferred under the plan. In addition,
with respect to such amount includible in income under § 409A(a), the service provider
is required to pay the additional tax under § 409A(a)(1 )(8)(i)(II) (the additional 20% tax),
but is not required to pay the additional tax under § 409A(a)(1 )(8)(i)(I) (the premium
interest tax).
For purposes of this section, a payment of an amount (including a payment of an
amount that is one of a series of installment payments or life annuity payments) that
under the terms of the plan and § 409A(a)(2)(8)(i) and the applicable guidance is
required to be delayed for at least six months following a separation from service, but is
paid before the completion of that six months, may be treated as the payment of an
amount that should have continued to be deferred compensation. In addition, for
purposes of this section, the plan includes any arrangements treated as a single plan
under § 1.409A-1 (c), so that this section will apply only if any and all erroneous
payments under the plan, in the aggregate, of amounts that otherwise should have been
treated as deferred compensation with respect to the service provider during the taxable
year (or should have continued to be deferred compensation during the taxable year),
do not exceed the limit on elective deferrals that would apply to a qualified plan under

§ 402(g)(1 )(8) for such year. The relief provided in this § 111.8 is not available if the

operational failure occurred during a taxable year of the service provider in which the
service recipient experienced a substantial financial downturn or otherwise experienced
financial or other issues that indicated a significant risk that the service recipient would
not be able to pay the amount deferred when the payment became due.
It is assumed for purposes of the following examples that: Employee is an
individual whose taxable year is the calendar year; Employee's tax return is not under
examination for any relevant period; during all relevant periods Employer did not
experience any financial downturn or financial or other issues indicating a significant risk
that Employer would not be able to pay relevant deferred amounts when due; and
Employee and Employer each satisfy the other applicable requirements of this § III.
Example 1: Employee makes a timely election to defer 10% of a bonus payable
in 2007 pursuant to an account balance plan. The bonus is $10,000. Due to an
unintentional operational failure with respect to the plan, Employer defers only 8% of the
bonus, or $800, and pays Employee $9,200 (instead of deferring $1,000 and paying
Employee $9,000). The amount is not corrected by December 31,2007, when
Employee's account balance is $100,000. As a payment to Employee, Employer must
treat the amount as a wage payment for employment tax and reporting purposes, as
appropriate, including reporting as income and wages on the 2007 Form W-2.
Employer is permitted to report as income under § 409A on the 2007 Form W-2 (or
2007 Form W-2c), Box 12, using Code Z, only $200, and Employee is permitted to
include in income under § 409A for 2007 only $200. Furthermore, Employee is
permitted to pay the additional 20% tax only with respect to the $200 (or $40 in
additional income tax), and is not required to pay the premium interest tax.

Example 2: Employee is a specified employee entitled under a nonqualified
deferred compensation plan to a life annuity commencing upon the first day of the
seventh month following the specified employee's separation from service. The annuity
payments are $2,000 per month. Employee separates from service on April 18,2007,
and is scheduled to receive an initial annuity payment on November 1,2007. Due to an
inadvertent miscalculation of the specified employee's separation from service date,
Employee receives a $2,000 payment on October 1,2007, before the end of the 6month period following Employee's separation from service. Employer and Employee
do not discover the error until 2008, so that the relief provided in § II.C of this notice is
not available. As a payment to Employee, Employer must treat the amount as a wage
payment for employment tax and reporting purposes, as appropriate, including reporting
as income on the 2007 Form W-2. Employer is permitted to report as income under

§ 409A on the 2007 Form W-2 (or 2007 Form W-2c), Box 12, using Code Z, only
$2,000, and Employee is permitted to include in income under § 409A in 2007 only
$2,000. Furthermore, Employee is permitted to pay the additional 20% tax only with
respect to the $2,000 (or $400 in additional income tax), and is not required to pay the
premium interest tax.
C. Limited Excess Deferred Amount not Corrected in the Same Taxable Year
This § III.C applies if on or before the last day of a service provider's taxable year
beginning before January 1, 2010, the following requirements are met:
(1) Under the terms of the plan and any applicable deferral election, and § 409A
and the applicable guidance, an amount of deferred compensation under the plan
should have been paid or made available to the service provider during the service

provider's taxable year, or an amount is treated as deferred compensation under the
plan that should have been paid or made available to the service provider during the
service provider's taxable year, but such amount is not paid or made available due to an
unintentional operational failure with respect to the plan;
(2) Section II.D of this notice does not apply because relief is not available under

§ liD of this notice with respect to the failure, the failure is not corrected under § II.D of
this notice, or otherwise;
(3) The amount that should have been paid or made available to the service
provider during that service provider's taxable year does not exceed the limit on elective
deferrals that would apply to a qualified plan under § 402(g)(1 )(8) for such year;
(4) 8y the later of the end of the service provider's taxable year in which the
failure is discovered or the fifteenth day of the third month following the date upon which
the failure is discovered, the service recipient pays the service provider the amount that
should have been paid or made available to the service provider, provided that any
earnings allocable to such amounts through the date of the payment are either forfeited
or added to the payment to the service provider, and any losses allocable to such
amounts through the date of the payment are either permanently disregarded or
subtracted from the payment to the service provider, and the service recipient reports
such payment on a Form W-2 or Form 1099, as applicable, in accordance with the
requirements of this section; and
(5) The service provider includes such amount in income and pays the additional
taxes under § 409A(a) as described in this section on a timely filed federal income tax

return (including an income tax return filed in accordance with a timely request for
extension, but not including an amended income tax return).
In such a case, if the plan otherwise complies with the requirements of § 409A
and the applicable guidance, the amount includible in income under § 409A(a) as a
result of such failure is limited to the excess amount paid to the service provider, and
does not include any other deferred compensation under the plan, and the amount is
includible in income only when paid to the service provider in accordance with this
section. In addition, with respect to this amount includible in income under § 409A(a),
the service provider is required to pay the additional 20% tax, but is not required to pay
the premium interest tax. If the service recipient properly reports the payment as
includible in income under § 409A on a Form W-2, if applicable, for the year in which the
payment was made, including reporting such amount on Form W-2, 80x 12 using Code
Z, the service recipient will not be subject to penalties or liability for the failure to
properly withhold under § 3402.
For purposes of this section, the plan includes any arrangements treated as a
Single plan under § 1.409A-1 (c), so that this section will apply only if any and all
erroneous deferrals under the plan, in the aggregate, of amounts that otherwise should
have been paid during the service provider's taxable year to the service provider do not
exceed the applicable limit on elective deferrals that would apply to a qualified plan
under § 402(g)(1 )(8).
Example: Employee, who has a calendar year taxable year, makes a timely
election to defer 8% of a bonus payable in 2007 into an account balance plan. The
bonus is $10,000. Due to an unintentional operational failure with respect to the plan,

Employer defers 10% of the bonus, or $1,000, and pays Employee $9,000 (instead of
deferring $800 and paying Employee $9,200). The plan otherwise complies with

§ 409A and the applicable guidance. Employer discovers the error on February 1,
2008, so that the excess deferred amount of $200 is not corrected by December 31,
2007. On March 1,2008, at which time Employee's account balance includes $15 in
earnings on the excess $200 credited to the account, Employer pays Employee $215.
Employer reports the $215 as income under § 409A on the 2008 Form W-2, Box 1 and
Box 12, using Code Z and satisfies the other applicable requirements of this § III,
including the requirements of § IV of this notice. Provided that Employee reports such
income and pays the applicable taxes, including the additional § 409A taxes, on a timely
filed 2008 Form 1040 (including a 2008 Form 1040 filed under extension, but not an
amended 2008 Form 1040), and satisfies the applicable requirements of § IV of this
notice, Employee is not required to include any additional amounts deferred under the
plan in income under § 409A(a) or to include any amount in income under § 409A for
years before 2008, and with respect to the $215 includible in income under § 409A is
required to pay only the additional 20% tax (or $42.50 in additional income tax), and not
the premium interest tax. Employer may also have paid Employee only the $200
excess deferred amount if the $15 in earnings on such amount were forfeited.

IV. INFORMATION AND REPORTING REQUIREMENTS
A. Information Required with Respect to Correction of an Operational Failure in the
Same Taxable Year as the Failure Occurs
A service recipient described in § II of this notice must attach to its timely-filed
(including extensions) original federal income tax return for its taxable year in which the
failure occurred a statement entitled "§ 409A Relief under § II of Notice 2007-100"

setting out the information required by § IV.A.1 of this notice, and must provide to each
service provider affected by such failure a statement entitled u§ 409A Relief under § II of
Notice 2007-100" setting out the information required by § IV.A.2 of this notice by no
later than the date (with extensions) on which it is required to provide an information
return (Form W-2 or 1099) to such service provider for the calendar year in which such
failure occurred (or if no information return is required for such service provider, not later
than the January 31 following the calendar year in which such failure occurred).
Notwithstanding the foregoing, to qualify for the relief described in § II.E of this notice
(Correction of Exercise Price of Otherwise Excluded Stock Rights), the service recipient
is not required to provide a statement to such service provider with respect to such
failure. In addition, each taxpayer relying on the relief provided in § II of this notice must
provide notice to the examining agent upon the commencement of an examination of
such taxpayer's federal tax return that the taxpayer was relying upon the relief provided
under this notice for years covered by the examination (except in the case of a service
provider for whom a correction has been made under § II.E of this notice).
1. Attachment to Service Recipient Tax Return for Failures Described in § II
The service recipient must attach a statement to its federal income tax return stating
that it is relying upon § II of this notice with respect to a correction of a failure to comply
with § 409A and setting out the following information with respect to each such failure:
a. The name and taxpayer identification number of each service provider affected
by the failure and whether such service provider is an insider with respect to the service
recipient. Where the same or a substantially similar operational failure has occurred
with respect to multiple service providers, the information required in § IV.A.1.b through

e of this notice may be supplied only once with respect to such operational failure,
provided that the identification of each service provider affected by the operational
failure in this § IV.A.1.a references such information and the amount involved in the
operational failure with respect to such service provider.
b. Identification of the nonqualified deferred compensation plan with respect to
which such failure occurred.
c. A brief description of the failure and the circumstances under which it occurred,
including the amount involved and date on which the failure occurred.
d. A brief description of the steps taken to correct the failure and the date on which
such correction was completed.
e. A statement that the operational failure is eligible for the correction under the
terms of this notice, and that the service recipient has taken all actions required, and
otherwise met all requirements, for such correction.
2. Information to be Provided to Service Provider for Failures Described in § II
The service recipient must provide the following information to each service provider
affected by correction of a failure to comply with § 409A who is entitled to relief under

§ II of this notice (other than § II.E of this notice (Correction of Exercise Price of
Otherwise Excluded Stock Rights)) with respect to such failure:
a. A statement that the service provider is entitled to the relief provided in § II of this
notice with respect to a failure to comply with § 409A.
b. The information described in § IV.A.1.b through e of this notice.

B. Information Required with Respect to Transition Relief for Certain Operational
Failures Involving Limited Amounts
A service recipient described in § III.B or III.C of this notice must attach to its
timely-filed (including extensions) original federal income tax return for its taxable year
in which it discovers the failure a statement entitled "§ 409A Relief under § III of Notice
2007 -100" setting out the information required by § IV.B.1 of this notice and, not later
than the date (with extensions) on which it is required to provide an information return
(Form W-2 or 1099) for the calendar year in which it discovers such failure to a service
provider who is affected by such failure (or if no information return is required for such
service provider, not later than the January 31 following the calendar year in which it
discovers such failure), must provide to each such service provider a statement entitled
"§ 409A Relief under § III of Notice 2007-100" setting out the information required by

§ IV.B.2 of this notice. A service provider who is relying on the relief provided in § III.B
or III.C of this notice with respect to a failure to comply with § 409A must attach to the
service provider's timely-filed (including extensions) original federal income tax return
for the year in which such failure was discovered the information required by § IV.B.3 of
this notice. In addition, each taxpayer relying on the relief provided in § III of this notice
must provide notice to the examining agent upon the commencement of an examination
of such taxpayer's federal tax return that the taxpayer was relying upon the relief
provided under this notice for years covered by the examination.
1. Attachment to Service Recipient Tax Return for Failures Described in § III.B or III.C.
The service recipient must attach a statement to its return setting out the following
information with respect to each failure described in § III.B. or III.C of this notice:

a. The name and taxpayer identification number of each service provider affected
by the failure. Where the same or a substantially similar operational failure has
occurred with respect to multiple service providers, the information required in

§ IV.B.1.b through e of this notice may be supplied only once with respect to such
operational failure, provided that the identification of each service provider affected by
the operational failure in this § IV.B.1.a references such information and the amount
involved in the operational failure with respect to such service provider.
b. Identification of the nonqualified deferred compensation plan with respect to
which such failure occurred.
c. A brief description of the failure and the circumstances under which it occurred,
including the amount involved and date on which the failure occurred.
d. A brief description of the steps taken by the service recipient to avoid a
recurrence of the failure, including the date on which such steps were implemented.
e. A statement that the operational failure is eligible for the correction under the
terms of this notice, and that the service recipient has taken all actions required, and
otherwise met all requirements, for such correction.
2. Information to be Provided to Service Provider for Failures Described in § III.B or
III.C.
The service recipient must provide the following information to each service provider
affected by a failure to comply with § 409A who is entitled to relief under § III.B or III.C
of this notice with respect to such failure:
a. A statement that the service provider is entitled to the relief provided in § III.B or
III.C of this notice (as applicable) with respect to a failure to comply with § 409A and

that the service provider must attach a copy of the statement to the service provider's
income tax return for the taxable year in which the failure was discovered.
b. The information described in § IV.B.1.b through e of this notice.
3. Attachment to Service Provider Tax Return for Failures Described in § III.B or III.C.
The service provider must attach to the service provider's income tax return a copy
of the statement the service provider received from the service recipient with respect to
each such failure.

POTENTIAL PROGRAM TO CORRECT CERTAIN FAILURES TO COMPLY WITH

§ 409A(a) IN OPERATION
The Treasury Department and the IRS are considering establishing a corrections
program under which taxpayers could correct certain failures to comply with § 409A(a)
in the operation of a nonqualified deferred compensation plan (operational failures),
including correction after the end of the service provider's taxable year in which an
operational failure occurs. The Treasury Department and the IRS request comments on
all aspects of this potential program. For information regarding the submission of
comments, see § VI of this notice.
The program under consideration would cover failures that are not eligible for the
transition relief provided in § III of this notice because the amount involved is too large.
The program may also provide that the relief in § III for failures involving small amounts
would be available permanently. In addition, it is expected that the program under
consideration WOUld, in general, permit a service provider with respect to whom an
operational failure occurred that is addressed by the program but not eligible for the
relief provided in § III of this notice, to include an amount in income, and pay the
additional taxes under § 409A with respect to, only the amount involved in the

operational failure, and not other amounts deferred under the plan. For example, if a
service provider erroneously deferred an additional $50,000 to a plan under which the
service provider had previously deferred $1,000,000 (for a total of $1,050,000), and the
$50,000 deferral and the error were corrected pursuant to the program, the service
provider would not be required to include in income under § 409A, and pay the
additional § 409A taxes with respect to, the $1,000,000 deferred under the plan that
was not involved in the operational failure.
The Treasury Department and the IRS anticipate that the IRS would not issue a
ruling, enter into a closing agreement or otherwise issue any formal approval evidencing
that participating taxpayers had met the requirements of, and qualified for the relief
available under, the program. Rather, if the IRS examined the relevant tax returns, the
service recipient and service provider would have the burden of demonstrating that the
applicable requirements had been met. The corrections program would be restricted to
service providers that at the time of the correction are not under examination for the
year or years in which the operational failure occurred, and would be limited to
operational failures that are corrected promptly after discovery and in any case within
two years after the occurrence. As part of the corrections program, the service recipient
and the service provider would be required to satisfy information and reporting
requirements substantially similar to those set forth in § IV.B of this notice and the
service recipient and service provider would also be required to provide notice to the
examining agent upon the commencement of an examination that the taxpayer was
relying upon the relief provided under the program for years covered by the
examination.

The Treasury Department and the IRS anticipate that the program would include
the following limitations and requirements:
•

Relief would only be available with respect to an operational failure that has
occurred notwithstanding the service recipient's reasonable efforts to comply with
the terms of the plan. Thus relief would only be available if the service recipient
had established practices and procedures reasonably designed to ensure
compliance with § 409A.

•

Relief would only be available with respect to an operational failure if the service
recipient also took commercially reasonable steps to avoid a recurrence of the
same type of operational failure.

•

Relief would also not be available to correct an operational failure that is
egregious, intentional, or where the failure is directly or indirectly related to
participation in an abusive tax avoidance transaction (meaning any listed
transaction under §1.6011-4(b)(2)).

•

If the operational failure involved an accelerated payment that did not otherwise
satisfy the plan's terms and the requirements of § 409A(a), the correction of the
failure would require that the service provider return to the service recipient the
amount improperly paid by the service provider to the service recipient. The
service provider would not be entitled to any loss or deduction for either the year
of the repayment or the year to which the correction applied. However, if the
plan does not otherwise violate the provisions of § 409A and the applicable
guidance, the service provider would be required thereafter to include in gross
income only additional amounts subsequently paid from such plan (as if the

amount taken into gross income in the year of the failure resulted in investment in
the contract with respect to the amount that was actually included in gross
income for the year of the erroneous payment).
•

Relief would not be available for an accelerated payment that did not otherwise
satisfy the terms of the plan and the requirements of § 409A(a) if the service
recipient made the payment proximate to a financial downturn of the service
recipient or the service recipient experiencing any financial or other issue that
indicated a significant risk that the service recipient would not be able to pay the
amount deferred when the payment became due under the plan.

•

If the operational failure involved an amount that was improperly deferred (for
example, the deferral of salary in excess of the applicable deferral election under
the terms of the plan), or an amount of deferred compensation that was not paid
to the service provider on the date applicable under the terms of the plan, the
correction of the operational failure would require that the service recipient pay
the amount to the service provider. The service provider would be required to
include the amount in gross income in the service provider's taxable year in
which the failure occurred and not at the time the service recipient made the
corrective payment, with the service provider being required to report the amount
on an original or amended return for such year and pay the appropriate tax
thereon.

•

Investment earnings (potentially including losses) in accordance with the terms of
the plan for the period of time after the operational failure through the date of
correction would be required to be taken into account.

•

In addition to the requirement of income inclusion described above, the service
provider would be required to pay income taxes, including the additional § 409A
taxes (and any applicable interest on the underpayment of such § 409A taxes),
as applicable. The service recipient would be required to file with the IRS and
provide to the service provider a Form W-2c or corrected Form 1099, as
applicable. If the service recipient and service provider met the requirements for
the correction program, the service recipient would not be liable for any failure to
withhold income taxes on the amount required to be included in income under

§ 409A as a result of the operational failure, to the extent the amounts required to
be included in income had not been paid or made available to the service
provider.
•

Some or all of the relief may be available only to service providers that are not
insiders with respect to the service recipient.

VI. SUBMISSION OF COMMENTS
The Treasury Department and the IRS are currently considering formulating
general guidance on the correction of operational failures under a nonqualified deferred
compensation plan resulting in a failure to meet the requirements of § 409A. Some of
the guidance being considered has been set forth in this notice. The Treasury
Department and the IRS request comments on all aspects of a potential corrections
program, including but not limited to the topics addressed in this notice and specifically
request comments on the following:
•

With respect to the program under consideration described in § V of this notice,
potential methods of tracking the "investment in the contract" created when an

amount is included in income under § 409A but not yet paid to the service
provider.
•

With respect to the program under consideration described in § V of this notice,
potential methods of addressing the service recipient's deduction for payments
made, and the affect of repayments by the service provider to the service
recipient on such deductions.
Comments must be submitted by March 3, 2008. All materials submitted will be

available for public inspection and copying.
Comments may be submitted to Internal Revenue Service, CC:PA:LPD:RU
(Notice 2007-100), Room 5203, PO Sox 7604, Sen Franklin Station, Washington, DC
20044. Submissions may also be hand-delivered Monday through Friday between the
hours of 8 a.m. and 4 p.m. to the Courier's Desk at 1111 Constitution Avenue, NW,
Washington, DC 20224, Attn:CC:PA:LPD:RU (Notice 2007-100), Room 5203.
Submissions may also be sent electronically via the internet to the following email
address: Notice.comments@irscounsel.treas.gov. Include the notice number (Notice
2007-100) in the subject line.
VII. EFFECT ON OTHER DOCUMENTS
For service recipients and service providers who are entitled to relief under this
notice, Notice 2006-100,2006-51 IRS 1109 (relating to reporting and wage withholding
for 2006) and Notice 2007-89,2007-46 IRS 998 (relating to reporting and wage
withholding for 2007) are modified to conform to the provisions of this notice with
respect to (i) the amount that is required to be included in income by a service provider
under section 409A(a), and (ii) the amount that is required to be reported by the service

recipient as an amount includible in income under section 409A(a) on Form W-2, Box 1
and Box 12, using Code V, or Form 1099-MISC, Box 7 and Box 15b, as applicable.

VIII. PAPERWORK REDUCTION ACT
The collection of information contained in this notice has been reviewed and
approved by the Office of Management and Budget in accordance with the Paperwork
Reduction Act (44 USC. 3507) under control number 1545-2086.
An agency may not conduct or sponsor, and a person is not required to respond
to, a collection of information unless the collection of information displays a valid control
number.
The collection of information in this notice is in section IV. This information is
required to determine whether the taxpayers claiming the relief are eligible for the relief
and that the applicable requirements for relief are met. The likely respondents are
corporations and individuals.
The estimated annual reporting and/or record keeping burden is 5,000 hours.
The estimated annual burden per respondent/record keeper is .5 hours.
The estimated number of respondents is 10,000.
The estimated annual frequency of response is on occasion.
Books or records relating to a collection of information must be retained as long as their
contents may become material in the administration of any internal revenue law.
Generally, tax return and tax return information are confidential, as required by § 6103.

IX. DRAFTING INFORMATION
The principal authors of this notice are Stephen Tackney and Bill Schmidt of the
Office of Division Counsel/Associate Chief Counsel (Tax Exempt and Government

Entities), although other Treasury and IRS officials participated in its development. For
further information on the provisions of this notice, contact Stephen Tackney or Bill
Schmidt at (202) 927-9639 (not a toll-free number).

Page I of4

December 4, 2007
2007 -12-4-10-22-4-15419

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 $70,945 million as of the end of that week, compared to $71,718 million as of the end of the
prior week.
I. OffiCial reserve assets and other foreign currency assets (approximate market value,

US millions)

IINovember 30, 2007

"II

IIYen

IITotal

11 70 ,945

1114.430

11 11 .503

)!25,933

lof which: Issuer headquartered in reportmg country but located abroad

110

lib) total currency and deposits With:

[(i) other national central banks, BIS and IMF

11 14 ,372

11 5 ,653

11 2 0,025

Iii) banks headquartered

II
II

110

IA. Official reserve assets

(10

US millions unless otherwise specified)

Eu ro

!(1) Foreign currency reserves (in convertible foreign currencies)

[Ta) Securities

the reportlllg country

lof which: located abroad

II
I

!(iii) banks headquartered outside the reporting country
lof which located In the reporting country

110

11 0

I
I
I
I

I
I

1(2) IMF reserve position

114.445

)

1(3) SDRs

1\9,501

1(4) gold (Including gold deposits and, if appropnate, gold swapped)

1f11 ,041

I
I

I--volume in millions of fine troy ounces

11261 499

)

1(5) other reserve assets (speCify)

1[0

)

I--financlal derivatives

I--Ioans to nonbank nonresidents

I
I

I--other

IB, Other foreign currency assets (speCify)

--deposits not included in official reserve assets
--loans not included in official reserve assets

--securities not Included In official reserve assets

--financial derivatives not included in official reserve assets

I--gold not included in official reserve assets

I --other

)

I
I

II. Predetermined short-term net drains on foreign currency assets (nomillal value)

11.-1_ _--'11<--_-_11,--___IlL--_~II,-------.JIl

!L.-.[_ _ _ _ _ _

tp://www.treas.gov/press/releases/20071241022415419.htm

1/3/2008

Page 2 of4
I

I
1. Foreign currency loans, securities, and depOSits
I
llprinclpal
l--outfIOws (-)

II Maturity breakdown (residual maturity)

IITotal

More than 1 and
up to 3 months

to 1 mooth

II
II
II
II
II

IIlnterest

I
I--inflows (+)

IIPrincipal

IIlnterest
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)

I (b) Long positions (+)

--outflows related to repos (-)

I
I
I
I
I

II
I

I (a) Short pOSitions ( - )

I 3. Other (specify)

More ti,an 3
months and up to
1 year

--inflows related to reverse repos (+)

II
II
II
II

--trade credit (-)
--trade cred it (+)
--other accounts payable (-)
--other accounts receivable (+)

III. Contingent short-term net drains on foreign currency assets (nominal value)

I MatUrity breakdown (reSidual maturity, where
applicable)
More than 3
months and up to
1 year

More than 1 and
up to 3 montils

IITotal

IUp to 1 month

11 Contingent liabilities in foreign currency

(a) Collateral guarantees on debt falling due within 1
year

I(b) Other contingent liabilities
2. Foreign currency seCUrities issued with embedded
options (puttable bonds)

13 Undrawn, unconditional credit lines provided by:
(a) other nalional 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 (+)

Undrawn, unconditional credit lines provided to:

(a) other national monetary authorities, 81S, IMF, and
other International organizations

I--other national monetary authOrities (-)

http://www.treas·g2v/press/releases/20071241022415419.htm

II
II

I
I

1/3/2008

Page 3 of 4

I--BIS (-)

I--IMF (-)

(b) banks and other financial institutions headquartered
in reporting country (- )

"II

(c) banks and other financial institutions headquartered
outside the reporting country ( - )
4. Aggregate short and long positions of options in
Iforeign currencies vis-a-vIs the domestic currency

I(a) Short positions

l(i) Bought puts
I(ii) Written calls
I(b) Long positions

"\I
II

"\I

l(i) Bought calls
I(ii) Written puts

II"

IpRO MEMORIA: In-the-money options

I( 1) At current exchange rate

"\I

"II

I(a) Short position
I(b) Long position
\(2) + 5 % (depreciation of 5%)

I(a) Short position

"IIII

"II
II

I(b) Long position

1(3) - 5 % (appreciation of 5%)

I(a) Short position

I(b) Long pOSition

II"

1(4) +10 % (depreciation of 10%)

I(a) Short position

I(b) Long position

1(5) - 10 % (appreciation of 10%)

I(a) Short position

II
II
II
II
II

I(b) Long position
1(6) Other (specify)

I(a) Short position

I(b) Long position
IV. Memo items

"II

I
I

I
1(1) To be reported with standard periodicity and timeliness:

(a) short-term domestic currency debt Indexed to the exchange rate
1I,(b) financial instruments denominated In foreign currency and settled by other means (e.g .. in domestic
currency)

I
I

!--nondeliverable forwards
! --short positions
I --long positions
I--other instruments

I(C) pledged assets
I--included in reserve assets
--included In other foreign currency assets

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113/2008

Page 4 of4
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 ill Section I

II
II
II

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
11 (f) derivatives (forward, futures, or options contracts) that have a residual maturity greater than one

year, which are subject to margin calls.

II~-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 ( - )

j{b) long positions (+)

I--aggregate short and long positions of options in foreign currencies vis-a-vis the domestic currency

II
II

I(a) short positions
j{i) bought puts

/I
/I

I(ii) written calls
I(b) long positions

hi) bought calls

II
II
II

I(ii) written puts

1(2) To be disclosed less frequently:
I(a) currency composition of reserves (by groups of currencies)

1/70,945

I--currencles

/170,945

III

SDR basket

I--currencies not in SDR basket

I--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/dollar exchange rate for the reporting date. The entries for the latest
week reflect any necessary adjustments, including revaluation, by the U,S, Treasury to IMF data for the prior month
end,
3/ Gold stock is valued monthly at $42.2222 per fine troy ounce,

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-IP-708: Treasury Designates AQIM Emir

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December 4, 2007
HP-708
Treasury Designates AQIM Emir
Washington, DC--The US Department of the Treasury today designated
Abdelmalek Droukdel (Droukdel), the leader or enm of AI Oaida m the Lands of the
Islamic Maghreb (AOIM) AOIM, a violent extremist group I)ased m Algeria, merged
with al Oalda in September 2006
"As emir of AOIM, Droukdel has supervised and ordered deadly terrorist attacks
against innocents," said Adam J. Szubin, Director of the Office of Foreign Assets
Control (OFAC). "We will continue efforts to dismantle AOIM's financial
infrastructure and finanCially isolate Its members."
As a result of the merger With AI Oaida, AOIM, formerly known as the Salaflst
Group for Preachmg and Combat (GSPC), changed ItS name to AOIM Droukdel
assumed leadership of AOIM in mld-2004.
Today's action was taken pursuant to Executive Order 13224, which targets the
financial networks of terrorist groups and their facilitators. As a result of the
deSignation, any assets Droukdel may have under U.S. JUrisdiction are frozen, and
U.S persons are prohibited from doing business with Droukdel.
Droukdel reportedly supervised the April 2007 AOIM bombings of the Prime
Minister's office and police facilities in Algiers, killing 33 Droukdel used an April
2007 Internet video addressmg these bombings as a vehicle to urge his followers to
become suicide bombers. He also ordered the December 2006 attack on a US
company's bus In Algiers that killed one and wounded nine, including a U.S citizen
Further, Droukdel ordered the March 2006 assassination of a fonner AOIM leader
who had surrendered to Algerian authOrities.
In a May 2007 Video announcement, Oroukdel pUblicly called on regional AOIM
commanders to seek recruits and select targets for suiCide bombings. Speaking on
behalf of AOIM, Droukdel has announced AOIM's formal allegiance to al Oalda,
encouraging other Jihadist movements to join al Oaida, and reaffirmed allegiance to
Usama bin Laden (UBL). Droukdel publicly announced GSPC's name change to AI
Oaida in the Lands of the Islamic Maghreb, and stated AOIM's decision in May
2007 to use "future martyrdom operations."
Droukdel in 2006 stated that he had consulted with al Oaida second-In-command
and Specially Designated Global Terrorist Ayman al-Zawahiri I'egarding AOIM's
upcommg plans and missions In Algeria and the Maghreb COlilltrles.
GSPC was one of the fifteen entitles origmally named as an SDGT pursuant to E.O.
13224 on September 23,2001 and was added to the UN's consolidated list of
mdlvlduals and entities associated With UBL, al Oalda and the Tallban 011 October
6,2001.

Identifying Information
AKAs: Abdelmalek Droukdal
Abdelmalek Droukadal
Abdelmalek Dardakil
Abdelmalek Drokdal
Abdelmalek Dourkdal
Abdelmalek Drougdel
Abdelmalek Droukbel
Abdelmalek Derdoukal

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IP-708: Treasury Designates AQIM Emir

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Abdel Malek Deroudel
Abdel Malek Droukdel
Abdelmalik Droukdal
Abd ai-Malik Drukdal
Abd ai-Malik Durikdal
Abd-al-Malik Drokdal
Abd-al-Malik Dridqal
Abdelouadour Droukdel
Abu-Mus'ab Abd-al-Wadud
ABDELMALEK DROUKDEL
Abou Mossaab Abdelouadoud
Abu Musab Abdeloudoud
Abu Mussaab Abdelouadodud
Abu Mus 'ab Abdelouadoud
Abu Mossab Abdelouadoud
Abou Moussaab Abdelouadoude
Abou Moussab Abdelouadoud
Abou Mousaab Abdelouadoud
Abou Musab Abdelouadoud
Abu Musab Oudoud
Abou Mossab Abdelouadoud
Abou Mossab Abd EI Ouadoud
Abou Mousab Abd EI Ouadoud
Abi Mossaab Abd EI-Ouadoud
Abi Mousaab Abdelouadoud
Abu Mossaab Abdel EI-Wadoud
Abou Mossab Abdel Wadoud
Abou Mossab Abdelwadoud
Abou Moussaab Abdel Wadoud
Abdou Moussa Abd al-Wadoub
Abou Mosaab Abkelwadoud
Abou Abdelwadoud
Abdelouadoud Abou Mossab
Abdelouadoud Abou Mossaah
Abdelwadoud Abou Mossaab
Abdelwadoud abu Musab
Droukdal Abdelmalek
Drokdal Abdelmalek
Droukdel Abdelmalek
DOB: 20 April 1970
POB: Meftah, Algeria
Alt. POB: Khemis EI Khechna, Algeria
Address: Meftah, Algeria
Nationality: Algerian

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1/3/2008

-IP-709: Assistant Secretary for Financial Markets Anthony W. Ryan Remarks at the Euromoney ...

Page 1 of 5

December 4, 2007
HP-709
Assistant Secretary for Financial Markets Anthony W. Ryan
Remarks at the Euromoney Euro Fixed Income Forum
Paris- Bonjour Thank you for inviting me to Join you here in Pans at the
Euromoney Euro Fixed Income Forum. The citizens of this great city have long
been renowned for their Itltellectual curiOSity, their diverse discourse, and their
resilience in the face of adverSity. These same characteristics are again tn demand
as market participants face uncertainty and dislocations in the financial markets.
While challenges are no longer necessarily constrained to a Single city or even
country, given how interconnected financial markets and economies are In the
world today, the qualities inherent to citizens of thiS nation are equally Important to
stakeholders globally as we move forward
At the U.S. Department of the Treasury, we know this firsthand. Our views range far
beyond the Treasury market In the United States and impact a global audience.
This morning, I'd like to begin by discussing the current state of the financial
markets and the economy I'll then share a few thoughts about the demand for U.S
Treasury securities and regulation of the government securities market. Following
that, I'd be happy to answer some queslions.
Current State of the Markets
A comprehensive reassessment of nsk is occurnng by partiCipants In capital
markets, resulting In the repricltlg of securities across asset classes and sectors.
This process, while ultimately constructive, will be long and slow. Some of the
repncing has occurred with significant volatility, with very few asset classes tJeing
immune, even U.S. Treasunes.
Leading tnto the summer, It was clear that nsk was prtced very cheaply.
Developments tn the U.S. subpnme mortgage market may well have prOVided the
initial spark for the repricing of risk, but there was plenty of kindling available In
other sectors of the markets. Consequently, challenges have been widespread and
global in nature.
As market participants seek to gain a better understanding of the root causes of
recent volatility, they Will find some of the traditional causes and conditions such as
an abundant supply of easy credit and a decline in lending standards. Other
contributory factors are more unique to this episode given the profusion of financial
innovation and Its accompanytng characteristiCS such as the compleXity and opacity
of many finanCial Instruments and Ule heavy reliance by investors on rating agency
assessments.
Earlier thiS year, uncertainty regarding the probability of defaults of subprime
mortgage-backed securities caused tnvestor concerns This concern led to broader
uncertainty as market partiCipants sought to reassess Ule credit nsk of many assetbacked securities. In itself, such discrimination serves a purpose - It IS tn fact
"market discipltne" In action.
However, this credit worthtness evaluation spread further and faster than most
Investors anticipated. ThiS created liquidity challenges as tnvestors shunned certatn
securttles This IlliqUidity spread to short term money markets creating stress and
volatility in markets normally noted for their stability Including Fed funds, LlBOR,
and commercial paper. These short-term credit markets play an Important role in
facilitating finanCing activity and enhancing the liquidity III the broader capital
markets - all of which is important to economic vitality and for growth going forward

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While there has been some improvement in certain sectors of the credit markets
since this past summer, risks still eXist as participants work through market-based
solutions to the current challenges and stresses. As we head into year end. we are
witnessing a resurgence of risk aversion and continued impaired liquidity across ttle
credit spectrum It will take additional time for markets to regain confidence. and we
Will likely witness more unforeseen challenges leading to more headlines and
volatility as additional disclosures are made In Ihe weeks and months ahead. Bul
we should acknowledge thai we are fortunate to confront these challenges with the
backdrop of a growing global economy
Global Economy
From a global perspective. economic growth has been qUite strong. The
International Monetary Fund projects that by tile end of this year. the world will have
experienced five consecutive years in which real groWttl exceeded 4 percent. In
fact, the average of those five years IS almost 5 percent. This is the best five year
growth period in over three decades. Not only is this growth Widespread, but at the
same time. world consumer price inflation is at its lowest level In three decades.
averaging 3.6 percent dUring the past five years. according to the IMF
The US economy was also In good shape going into the current period of market
dislocations and economic fundamentals remain sound For instance. job creation
remains strong With over 1.7 million new jobs being created in the past year. and
the US. economy has now added jobs for 50 straight months. The unemployment
rate is at 4.7 percent. close to its lowest reading In 6 years.
In the US .. real GDP growth was 4.9 percent in the third quarter, supported by
strong gains in consumer spending, business investment and exports. Corporate
profits are solid, and global growth is boosting U.S. exports, helping to improve the
current account balance. The fiscal deficit has been substantially reduced. and
importantly. core inflation remains contained. While the US economy does face
serious headwinds from a weak Ilousing market and high energy prices In addition
to current credit market conditions, solid economic fundamentals should support
continued growth.
Capital Markets
However, despite many solid economic fundamentals. capital market conditions
remain a formidable challenge. At the US. Department of the Treasury we are
confronting both the Immediate and longer term challenges in the capital markets
As part of our effort to be vigilant when we monitor markets, we are In daily contact
with market participants - be it global investors, reserve managers. financial
Institullons, and policy makers - to discuss market conditions. Throughout these
discussions, we encourage the private sector to continue to focus on responding to
market challenges In a proactive manner.
Broader Policy Implications of Recent Market Dislocations
Market challenges have also sparked legitimate diSCUSSion and debate on a broad
range of policy issues impacting our capital markets. It is important for policy
makers and market partiCipants to assess the Implications of finanClallllnovatlon and we are doing Just thaL
The President's Working Group on Financial Markets. or PWG. which Secretary
Paulson chairs and includes the Chairmen of the Federal Reserve. the Securities
and Exchange Commission. and the Commodity Futures Trading Commission, is
conducting a comprehensive review of such Issues. Given the global nature of our
financial markets, we are also working with the G7. and through the Financial
Stability Forum to address several of tllese issues
One area where the PWG was already ahead of the recent credit and mortgage
market challenges IS hedge funds. Back in February, the PWG produced forwardleaning gUidance for the IIldustry and its participants The PWG's Prlllcipies and
GUidelines Regarding Private Pools of Capital serve as a foundation to enhance
vigilance and market diSCipline, strengthen investor protection and guard against
systemic risk. While a small number of hedge funds were forced to wind down In

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recent months, there have been no systemic events associated with their closure
Ironically, many regulated Institutions both in the US and Europe appear to have
underestimated all of the risks associated with the securitized assets on their
balance sheets or the risks associated with commitments to provide liquidity to offbalance sheet vehicles. such as conduits and structured Investment vehicles
(SIVs)
Many of the policy issues we are currently reviewing are directly tied to the credit
and mortgage markets: others affect the capital markets more broadly. One area
that clearly warrants examination IS the role of credit rating agencies. In addition,
we are also addressing financial institution risk management and related regulatol'y
issues.
These complementary reviews are focused on efforts that range from enhancing
the management of counterparty credit nsk, to market infrastructure issues, to
issues surrounding reportlllg and risk disclosure and how the eXisting regulatory
structure and tools respond to a financial system that is constantly evolving.
Investors
Another area that deserves attention is the role played by professional investors.
Strong market discipline relies on investors to assess risk In a comprehensive and
diligent manner. Many investors are purchasing, either directly or Indirectly,
increasingly complex securities. While nsk evaluation can be difficult and
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 secunty to
justify a loss. Investors and fidUCiaries must understand the nsks associated with a
potential investment. This is true of any Investment - whether It is an asset, such as
an equity, or a derivative product, such as a COO.
Insufficient understanding or failure to perform independent and adequate due
diligence pnor to making an investment decision is simply unacceptable Investors
must also monitor their holdings and exposures, Including reassessing their risks
and validating their assumptions given changing economic and market conditions
Our capital markets need more nsk analYSIS, not risk paralysis.
Housing/Mortgages
As investors continuously discover, risks are often positively correlated. Another
risk to economic growth that we face In the US. is a decline in housing. This sector
has been a drag on U.S. economic growth since early 2006, and the correction In
both homebuilding and housing pnces is still unfolding. The longer hOUSing pnces
remain stagnant or fall, the greater the penalty to near-term economic growth and
the bigger the effect on Amencan families.
With respect to the housing sector in the short term, our first ambition is to limit the
number of avoidable foreclosures FollOWing a series of meetings this sLimmer and
fall, Treasury encouraged mortgage serVlcers, counselors and lenders to work
together In a coordinated, efficient and expedited fashion. This group launched a
large non-partisan, pnvate-sector alliance, named HOPE NOW, which is
coordinating efforts to reach more homeowners to help them find affordable
solutions. There is an immediate need to identify struggling borrowers who will be
able to refinance or modify their mortgages into something more sustainable in
order to stem the rising number of defaults and foreclosures nationwide.
The President has also been calling on the U S Congress to modernize the Federal
Housing Administration, to make affordable loans more widely available. In order to
facilitate mortgage workouts, the President has called on Congress to eliminate
taxes temporarily on mortgage debt forgiven on a primary residence.
Our longer-term ambition with respect to hOUSing is to identify publiC policy changes
to reduce the likelihood of repeating the excesses of recent years while maintaining
access to credit for able homeowners.

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The patchwork combination of overlapping federal and state regulation of tI,e
mortgage industry needs to be streamlined and modemized. This fragmented
system has complicated an already difficult situation. Currently, the Treasury IS
working on a blueprint for reformll1g the US finanCial regulatory system.
Additionally, homebuyel' education and effective disclosure are cntlcal to helping
borrowers understand the nsks of innovative mortgage products, as fillancial
choices become more and more complex
In order to continue to derive the assOCiated benefits of economic growth and to
foster sustainability, stakeholders in the capital markets and economy must address
challenges, and we are dOlllg Just that Some challenges are natlol,al. others are
global
Importance of Open Capital Markets
One global challenge is the growing risk of protectionism We live in, compete In,
and benefit from, a global economy. Open economies create greater opportunity for
citizens including the opportunity to expand markets by facilitating trade and
welcoming foreign investment. In fact, one reason the US economy has been
resilient dunng this houslllg correction has been the strength of our export sector
Open Investment and the free flow of capital are essential to healthy capital
markets. Let me take this opportunity to assure international investors that they are
welcome in our markets. President Bush reaffirmed the U.S.'s commitment to an
open investment poliCY earlier thiS year statlllg that "The United States
unequivocally supports International investment In thiS country and IS equally
committed to securing fair, eqUitable, and nondlscrrmlnatory treatment for U.S.
investors abroad."
Last year, there was a net IIIcrease of $1.9 trilliOll III foreign-owned assets In the
United States over 5 million US. workers are directly employed by foreign-based
firms and about an eqUivalent number of additional Jobs are Indirectly supported by
foreign direct IIlvestment Into the United States. We understand that when Amerrca
embraces international investment. its bUSinesses. workers and consumers
ultimately benefit. The same is true for all markets.
Ultimately, open capital markets Improve the effiCiency of markets, Improving
liqUidity and reducing the costs of Investing. As stakeholders we need to ensure
that our regulatory and bUSiness practices encourage openness, as well as, fair and
honest competition
U.S Treasury Marketplace
We have certainly embraced the philosophy of open IIlvestment as It relates to tile
U.S Treasury marketplace. We encourage broad partiCipation in the US Treasury
market. ThiS broad partiCipation enhances tradlllg volumes, market depth and
liqUidity, which in turn enables the US government to borrow at a lower cost over
time. These savings are passed on to the U S. taxpayer In terms of lower interest
costs.
Currently, 52 percent of tile pnvately held publiC debt outstandlllg IS held by
Individuals, pension plans and the central banks of other countrres. TI,IS level of
international investment as a percent of debt outstanding is comparable to other
vibrant, open sovereign debt markets that we see amongst the G7.
Given the massive flows that need to be Invested as a result of international
transactions globally, the US Treasury market remains the preeminent
marketplace for commerce No other marketplace In the world has the depth and
liqUidity of the US. Treasury market, and we are not taking our competitive position
for granted We are always looking for new ways to Improve the U S. Treasury
ma rketplace.
Earlier this year, several pnvate sector firms gathered and established the Treasury
Market Practices Group. This group, comprised of representatives from the dealer
community, buy-side firms and custodians, was formed to foster dialogue and offer

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recommendations for the Treasury cash, repo and related markets This group
developed and released "Treasury Market Best Practices" to promote trading
integrity and market efficiency. Their Prlllcipies based approach .. a self regulating
mechanism essentially for a lightly regulated market .. and the subsequent market
reaction has been very encouraging. The Introduclion of these practices represents
another step in the continual process of enhancing our Treasury market. We
encourage other private sector market partiCipants, such as the Securities Industry
and Financial Markets Association, to contillue their efforts to ensure the
preeminence of the U.S. Treasury market.
It is very encouraging to see the private sector take a leading role In promoting
market integrity and orderliness.
ConclUSion
The global economy derives much of its strength from robust and diverse capital
markets: As participants in the global economy, each of us must contribute to
ensure the integrity, openness and competitiveness of our markets.
It is a privilege to do such work. With such priVilege comes responsibility. To attain
our goals, we must recognize that the responSibility is borne by both the publiC and
private sectors. Welcoming investment from abroad, addreSSing both the near term
and strategic challenges, and doing all we can to ensure high quality, compelltlve
capital markets remain our goals. Using sound principles as a gUide, we can
strengthen the vitality, stability and integrity of our capital markets, and in turn our
economies.
Merci beaucoup.

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113/2008

1P-71O: Remarks by Deputy Secretary Kimmitt to the U.S.-GCC Investment Forum in Bahrain

Page 1 of 5

December 4. 2007
HP-710
Remarks by Deputy Secretary Kimmitt to the
U.S.-GCC Investment Forum in Bahrain
Thank you both for your kind introduction and for the opportunity to speak at this
very timely Forum. The United States Treasury Department welcomes the
Inauguration of the Forum and hopes it is the first of what will become an annual
dialogue on the increasingly important topic of investment.
Almost exactly two years ago in December 2005, a company from the United Arab
Emirates submitted a proposed acquisition to the Committee on Foreign Investment
In the United States, known as CFIUS, for national security review. That company
was Dubai Ports World (DPW) The US Government's handling of that transaction,
as well as the US. public's reaction and the aftermath of the case, called into
question the United States' long-standing commitment to open investment.
This evening, I want to talk about what we In the U.S Government have done since
that time to correct this image and reinforce our unshaken commitment to
welcoming foreign investment.
Our strategy has three components (1) Improve our IIlternal processes and reaffirm
our open Investment policy, (2) work with Congress on CFIUS reform legislation to
rebuild faith in and strengtllen the national security review process, while remaining
open to foreign investment, and (3) engage bilaterally, regionally, and multilaterally
with our international partners to stress the importance of opening markets to
investment opportunities
I bring this message to you because the Middle East and North Africa (MENA) IS a
region of high priority for our open investment policy. In 2003, President Bush
proposed the Middle East Free Trade Initiative, a plan of graduated steps for Middle
Eastern nations to increase trade and investment among themselves and With the
United States. We already have Bilateral Investment Treaties (BITs) or Free Trade
Agreements (FTAs) containing investment chapters with Bahrain, Egypt, Jordan,
Morocco, and TuniSia, as well as an FTA with Oman lilat has been ratified but not
yet implemented. We have also explored BITs and FTAs With several other
countries In the region, as well as Trade and Investment Framework Agreement
action plans With nine countries III the region.
Beyond government initiatives, there is also a growing Interest by U.S investors in
the region. From 2000-2006, the stock of U.S foreign direct investment (FDI) III
Gulf Cooperation Council (GCC) countries increased by $9.4 billion - a 57 percent
increase. Granted, we started from a relatively small base, but this increase
significantly exceeds the 45 percent increase in U.S FDlto all other destinations.
The Middle East region is also a Significant source of IIlvestment - and potential
investment - into the United States. The United Nations Conference on Trade and
Development reports that the global stock of outwal'd FDI from Middle Eastern
countries has more than tripled since 2001, totaling $43 billion in 2006. OffiCial US
data shows that over $17 billion of that $43 billion was invested in the United
States, nearly a two-fold increase from 2001 to 2006.
And these impressive statistics are part of the significant growth in Investment flows
across the globe. Let me thus spend a few moments on the global environment
within which our bilateral investment relationship operates.
Open economies are crucial in today's integrated global marketplace. The free
movement of capital across borders is a crucial source of economic growth.
International trade has often garnered the most headlines, and it IS indeed an

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essential component of open economies. However, International Investment IS of
substantial and growing importance. In fact, IIlvestment flows dwarf trade flows. In
the United States, foreign purchases of long-term securities f"om U S reSidents
totaled over $26 trillion last year, compared to $14 trrll,on III U.S exports of goods
and services. Investment flows are also growing more rapidly than tl-ade flows
Global private capital flows, as measured by the World Bank, grew at almost double
the rate of trade flows from 1991 to 2005 - 13.7 percent annual growth of capital
flows versus 7.8 percent annual growth of exports
There is growing global I-ecognitlon of the Importance of FDI and open lI!Vestment
policies In June 2007, at Heiligenclamm, the G-8 countries stated in their summit
declaration that they would "work together to strengthen open and transparent
Investment regimes and to fight against tendenCies to restrict them." Tile G-8 also
"reaffirm[ed) that freedom of II!Vestment is a crucial pillar of economic growth,
prosperity and employment." The Organization for Economic Cooperation and
Development (OECD), too, has done excellent work on freedom of investment,
which it has identified as an OECD "core value." A recent OECD declaration states
that members are "convinced of the long term benefits of an open international
Investment enVironment, including In i'espect of job creation, a more efficient
resource allocation, and SOCial and environmental progress." A number of you are
partiCipating In the MENA OECD Investment program, which has made Impol1ant
strides in assisting efforts to improve the investment climate and dialogue In the
region
In the United States, foreign direct Investment supports good jobs, improves
productivity, and increases exports and research and development (R&D)
investment. The U.S economy benefits significantly from inward and outward
foreign direct investment. U.S. multinational companies that invest abroad have
contributed strongly to overall productivity growth in the United States, accounting
for half of the increase III U.S. productiVity growth between 1995 and 2000. During
this five-year period, productiVity at US multinationals surged, growing six percent
annually.
Foreign-owned firms based in the United States contribute significantly and
disproportionately positively to the US economy. For every $10 million tnvested
from abroad, 30 direct and 30 Indirect Jobs are created or supported III the United
States. Research shows that foreign-owned firms In the United States employ over
5 million Americans, or 4.5 percent of the work force. But these firms account for 6
percent of output, 10 percent of all US Investment in plant and equipment, 13
percent of R&D spending, and 19 percent of US exports These firms also pay
more than 30 percent higher compensation on average than do their counterparts In
the rest of the U.S. economy, and over 30 percent of these jobs are III
manufacturing, compared with fewer than 10 percent of all U.S jobs. Foreign firms
in the United States also re-invested $71 billion - or 52 percent of their Income back into the US economy in 2006. Thus, foreign tnvestment, and the healthy
competition it brings creates good jobs, spurs innovation, Improves productiVity, and
results In lower prices and greater variety for consumers.
Because of these important benefits to the U.S economy, steps have been taken
recently to reaffirm the long-standing US commitment to open Investment. We
have long welcomed foreign Investment and worked diligently around the globe to
create an environment conducive to foreign Investment. In an Important step,
PreSident Bush issued an open Investment policy statement in May of this year that
made clear that "a free and open international tnvestment regime is Vital for a stable
and growing economy, both here at home and throughout the world"
Subsequent CFIUS reform reaffirms thiS US commitment to open investment. The
Foreign Investment and National Security Act (FINSA) of 2007 passed in July of
this year with broad bipartisan support and demonstrated Congress' renewed faith
in CFIUS to carry out its important national security responsibilities within the
context of the U.S. open investment poliCY. FINSA made numerous procedural
improvements in the CFIUS process, many of which CFIUS had already begun
implementlllg on its own in response to lessons learned dUring the DPW case. It IS
very Important to note, however, that FINSA was careful to maintatn CFIUS' focus
on genuine national security concerns - not broader factors like economic Interests,
national champions, or industrial policy.
CFIUS IS an efficient, disciplined process and reviews only a small portion of
eligible transactions. Thomson FinanCial reports that In 2006 there were nearly

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11,000 mergers and acquisitions in the United States, of which 1.730 Involved
foreign acquirers. CFIUS reviewed oilly 113 cases, or fewer than 7 percent of these
foreign acquisitions Since 2000, CFIUS has reviewed an annual average of fewer
than 6 percent of foreign acquisitions of US. bUSinesses
FINSA also maintains CFIUS' efficient tllnelines for considering trallsactlons, with
strict deadlines for action. First-stage national security reviews must be completed
within 30 days. Second-stage investigations must conclude within 45 days. Any
action by the President must be taken within 15 days following the conclUSion of an
investigation. Investigalions are very rare. Out of over 100 cases revieweclln 2006,
there were seven that went into IIlVestlgation, only two of which required a
Presidential decision, and the President allowed both transactions to proceed
Stated more generally, the vast majority of CFIUS cases are cleared Within 30 days.
The process is designed to resolve concerns efficiently, rather than prohibit
transactions.
More specifically, since Dubal Ports, CFIUS has reviewed 207 transactions,
including 15 transactions from four countries In thiS region. While three of those
acquisitions from the region proceeded to an investigation, none of tilem was
blocked.
Despite the clear benefits of open investment policies, there is rlsmg protectionist
sentiment globally. Sovereign wealth funds (SWFs) are one focus of rising
protectionist sentiment. SWFs are not a new phenomenon. This region has been
path-breaking, with one of the first funds, the Kuwait Investment Board established
in 1953, and several of the largest. such as the Abu Dhabi Investment Authority
However, the recent rapid increase In the number and asset size of SWFs has
raised their profile and generated concerns. Globally the number of funds has
doubled since 2000: from 20 in 2000 to almost 40 now, With over 10 established
Just since 2005. SWFs manage total assets of $1.9-2.9 trillion Private sector
estimates suggest that figure could grow to $10-15 trillion by 2015. German
Chancellor Angela Merkel and others have expressed concerns about whether
sovereign investors such as SWFs might be tempted to Invest based on political or
strategic goals, rather than true commercial purposes. These concerns are now
being discussed more broadly within the European Union and elsewhere.
These developments should not cause alarm, but they do point to a need to take a
step back and look at SWFs With calm and precIsion As SWFs are an outgrowth of
domestic and internalional economic policies, It makes sense to conSider them III
terms of their potential Impact on f"lanclal stability. Here, there IS much reason to
be reassured. SWFs are in principle long-term Investors that typically do not deviate
frolll their strategic asset allocation in the face of short-term volatility. They are not
highly leveraged, and it is difficult to see how they could be forced by regulatory
capital requirements or sudden investor withdrawals to liqUidate positions qUickly. In
this context, SWFs may be conSidered a force for financial stability, supplying
liqUidity to the markets, bidding up asset prices, and lowering borrowing Yields in
the countries in which they invest.
It IS also Important to distinguish SWFs from other sources of sovereign Investment.
There are similarities, but also important differences. There is no universally
accepted definition of a SWF. However, a SWF can be thougllt of as a goveillment
Investment vehicle funded by foreign exchange assets, and which manages those
assets separately from official reserves. In contrast, international reserves are
external assets that are readily available to and controlled by finance ministries and
central banks for direct finanCing of international payment Imbalances. Reserves
are by definition invested in highly liqUid and marketable securities. Public pension
funds are Investment vehicles funded with assets set aSide to Illeet the
government's future entitlement obligations to its citizerls. Public pension funds
differ from SWFs in that they are denominated and funded in local currency, usually
with relatively low exposure to foreign assets. State-owned enterprises (SOEs) can
be defined as enterprises where the state has Significant control, through full,
majority, or significant minority ownership. SOEs may undertake foreign direct
investment and occasional portfolio Investments, but the majority of state-owned
enterprises do not invest abroad
It appears that SWFs have so far been seeking to generate higher Investment
returns without generating political controversy. However, It IS necessary to remain

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Page 4 of 5

vigilant, as SWFs do raise a number of Issues. First, does the cleatlon of a SWF
perpetuate undesirable underlYing mauoeconomic and fillancial policies? It IS
critical that countries do not use SWF s that are non-commodity funds as a
mechanism to accumulate more foreign assets In order to avoid exchange rate
appreciation Second, what IS tile potential Impact of SWFs on fmanCial stability? To
date, they have not caused financialmalket dlsrupllon, but SWFs do represent
large, concentrated, and often non-transparent positions in financial markets. TllIrd,
transactions involving SWF s, like other types of foreign mvestment, may give rise to
legitimate national security concerns As with any form of foreign Investment,
recipient countries of SWF investment need to ensure that any national security
concerns are addressed.
Inward investment review regimes are another area in which protectioilist sentiment
may be expressed, whether In response to SWFs or broader concerns. Recently,
numerous countries have established or proposed new review mechanisms - not
all of which appear as narrowly focused and disciplined as the US CFIUS process.
China's new Anti-Monopoly Law, approved In August 2007, creates an as yet
undefined FDI review process that will take effect In 2008. TillS IS In addition to a
separate process established In 2006 that autllorlzes review of foreign investment
In China based on "economic security" concerns These review processes go
beyond national security considerations, and the rules and plans for Implementmg
these review mechanisms remain opaque Similarly, RUSSia has a bill pending In
the Duma that would establish a new review process for FDI In a number of
"strategic sectors" and would add to Russia's existing FDI restrictions. There are
rumblings in other countries as well Canada, Korea, and Germany, among others,
are debating new or expanded investment review regimes Outcomes remain to be
seen, but we hope tilat resulting processes will be limited to genuine national
security concerns, rather than advanCing protectionist interests
The United States IS fully engaged In combating Investment protectionist sentiments
both at home and abroad, Including by promoting sound poliCies regarding SWFs
and Investment review regimes, in order to counter any tendency toward uSing
these Issues as an excuse for protectionism
We recognize that there are genuine reasons for limited, national security reviews
of FDI transactions to conSider whether a foreign Investor could use ItS Investments
to engage in actiVity to impair national security. SWF Investment, like that of other
foreign Investors, may raise legitimate questions about national security. In addition,
their scale/number and tendency toward lack of transparency raise the pOSSibility of
potentially negative impacts on global fillancial stability If funds operate without
prudent governance and Investment management standards,
We strongly believe the best response to these concerns IS to promote sound,
reasoned poliCies, rather than uSing these Issues as a cover for restricting FDI for
protectionist ends, The United States is actively conveymg this message in
multilateral forums, To initiate high-level discussion of the Impact of SWFs,
Secretary Paulson hosted an outreach dinner at the Treasury Department In
October 2007 with the finance ministers of the G-7: the Ileads of the International
Monetary Fund (IMF), the OECD, and the World Bank: and finance ministers and
heads of SWFs from China, Kuwait, Norway, RUSSia, Saudi Arabia, Singapore,
South Korea, and the United Arab Emirates. There was a shared realization among
partiCipants of a common interest in maintaining open Investment and promoting
financial stability. The following day, the International Monetary and Fillancial
Committee - a ministerial-level committee whose members represent all 185 IMF
member countries - tasked the IMF With Identifying best practices for SWFs.
We are also encouraging reCipient countnes to resist protectionist pressures and
not treat SWFs differently from other foreign government-controlled investors,
Accordingly, we have asked that the OECD identify inward investment poliCy best
practices for recipient countries of sovereign investment, consistent With open
investment principles
likeWise, the United States is promotlllg a sound, reasoned, open Investment
approach to inward investment policy through other multilateral and bilateral
engagement. Our involvement in the Strategic Economic Dialogue With China, the
Trans-AtlantiC Economic Council Investment Dialogue, and other forums include
Significant engagement on inward Investment issues, Senior-level Treasury offiCials
have traveled to RUSSia, China, GermarlY, Singapore, multiple countries In the Gulf,
and other key regions emphasiZing investment Issues We hope to continue to

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-IP-710: Remarks by Deputy Secretary Kimmitt to the U.S.-GCC Investment Forum in Bahrain

Page 5 of 5

contribute to other countries'lnternal deliberations on potential investment regime
reforms, including by sharing our experience with protecting national security while
welcoming foreign investment We are also engaging the general public and
business communities through various publications and outreach events Tilat is
precisely why this US-GCC Investment Forum is so tllnely and Important
In conclUSion, let me reiterate that one callnot overstate the ImpOl-tance of open
Investment policies for the health of the global economy and our respective
econOlllles The Gulf region is a key part of our open Investment commitment. As a
result. you can count on LIS to remain Vigilant against protectloilist pressures that
could threaten global economic growtll and prospenty. However, the United States
cannot fight this battle on ItS own Each country, including in this region, needs to
take a careful look at its own investment poliCies as well as ItS contribution to global
efforts to promote greater openness and resist protec!lonlsrn We know we count on
your active support in this regard
Thank you for the opportunity to speak with you this evening
-30-

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Page 1 of I

December 4,2007
HP-711

Paulson Statement on Passage of Peru Free Trade Agreement
Washington, DC--Treasury Secretary Henry M. Paulson, Jr. today issued the
following statement Oil Senate passage of the Free Trade Agreement Witll Peru:
"I commend the Senate on today's vote. ThiS is an important blpal'tlsan
accomplishment that will give U.S businesses and exporters access to Peru's
markets. Free trade agreements are a proven way to Increase exports of U S
goods alld agricultural products and are essential for continued Job creation and
protecting U S Investments. ThiS vote slgllals the United States' commitment to
reducing trade barriers and spreading prosperity in the hemisphere I look forward
to working with Congress to secure passage of tile other important pending free
trade agreements With Colombia. Panama, and South Korea."

-30-

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December 5, 2007
HP-712
Remarks by Secretary Henry M. Paulson, Jr.
on Maintaining Forward Momentum in U.S.-China Economic Relations
before The Asia Society
Washington, DC-- Gooel mornlllg Thank you, Bill, anel thank you to the ASia
Society for the opportunity to be With you today. Let me also thank the Society for
your long, productive history of leadership in strengthening relationships among the
United States and Asian nations
My prevIous remarks leadlllg up to next week's meeting of the U.S.-China Strategic
Economic Dialogue have focused largely on the dynamics which led to the creation
of the SED and my Vision for the future of the U.S.-China economic relationship I
will briefly touch on those Issues today, and also on the misconceptions in that
relationship that are influencing the rise of protectionism and economic nationalism
in both nations
The Foundatioll of the Strateulc Ecollomlc Dialogue

In recognition of the Importance and complexity of the U.S.-China economic
relalionshlp, a year ago September PreSident Bush and President Hu created the
SED. Their intent was not to replace the many economic dialogues already taking
place, but to create an over-arching, senior level forum that was both
comprehensive and strategic. The goals have included creating work plans to
achieve shared objectives and building trust on both sides by demonstrating
progress on the Immediate Issues we face.
The Strategic Economic Dialogue has made substantial progress In achieVing these
goals. Over the last year, we have bUilt stronger relationships and established
constructive channels of communication that didn't previously exist. These
Innovations have ilelped keep the U.S.-China economic relationship on an even
keel and helped us manage difficult Issues, even in times of tension. Because we
have a framework for senior-level dialogue, we can - and do - pick up the phone
and we talk. We work towards solutions, which can only be reached when there are
mutual benefits.
The SED meetlllg next week in Beijing will focus on five areas. They are integrity of
trade and product safety: balanced economic development, Including finanCial
sector reform: energy efficiency and security: environmental sustainabillty: and
bilateral investment. The meeting comes at a delicate time, as a new group of
leaders move Into China's most senior pOSitions We look forward to working With
the Chinese leadership team to ensure that the SED process continues to be an
effective m8cilanlsm for promoting our shared interests and responsibilities. We Will
also thank our retiring colleague, Madame Wu Vi, who IS an extraordinary
representative of her country.
Through economic dialogue, we have achieved concrete and significant results,
including a civil aviation agreement, greater market access In the financial services
sector, expansion of US. exports, and enhanced energy security and
environmental protection We would not have accomplished what we have without
the speCifiC framework of a focused and strategic economic dialogue, and we can
accomplish more.
A Broader Bilateral EconomiC Agencla

Through the SED, we have broadened our bilateral economic agenda to include
food and product safety, energy effiCiency and security, and enVIronmental
sustainability. All three carry deep Implications for our economic ties.

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American consumers need to have confidence III the safety of the products they
purchase. whether produced at home or abroad. Chllla's management of food and
product safety issues will have a long-term Impact on our trade relations. the
sustainability of China's growth strategy and its further integration Illto the global
trading system. U.S. and Chinese government agencies have been working
together to address these safety Issues - a hallmark of the construclive,
cooperative and candid nature of our broader relationship
For both our countries. greater energy efficiency and security requires reliance
upon market price signals. technology. Innovallon. and diversified energy sources.
The Global Nuclear Energy Partnership. clean coal development through
FutureGen. and Industrial efficiency audits represent some of the best areas of ongoing cooperation.
We also encourage China's active parllcipatlon in tile Major Economies Meeting
efforts to develop a post-2012 framework for greenhouse gas reduction. I was
pleased to see tllat a large Chlrlese ellergy company. Shanghai Electric. recently
indicated public support for substalltial reductions in greenhouse gas emiSSions.
Balanced Economic Growth and China's Exchange Rate
One of the most pressing and Important issues - for the United States, China and
the global economy - IS China's move to a more fleXible exchange rate poliCY.
China is reformmg its policy. as a part of a movement to a more market-determlrled
exchange rate. The pace of I'eform has accelerated. In the past year the RMB has
appreciated by six percent. but the pace is stili not fast enough to reduce China's
global trade surplus. its internal imbalances. or fOI'eign exchange market pressures
A more fleXible currency IS espeCially Important now. when the risks of Inflation are
clearly rising in the Chinese economy. Increased currency fleXibility would allow
Chma's central bank to use the powerful tool of monetary policy for Chllla's finanCial
and price stability. As Premier Wen Jiabao recently emphasized in a speech in
Singapore, Chma must now undertake comprehensive measures to control
mounting inflation. growmg asset bubbles, and an overheating economy. We share
the concerns of China's top leaders on this issue.
The Rise of Economic Nationalism
In the U.s.-China relationsilip. the RMB exchange rate has become more than an
economic parameter: It lias become a touchstone for broader anxieties about
competition from China. As globalization has advanced and economies have
become more lightly integrated. wornes about the effects of foreign compelltlon through trade or through foreign Investment - have led to a rise in economic
nationalism and protectionist sentiments. US and Chinese leaders both face thiS
challenge
Many Americans worry about losing Jobs to low cost manufacturing or assembly In
China. Some worry about losing our economic pride and leadership. There IS fear
that, due to China's rise. we will no longer be stewards of our own economic future
We have been through this very type of debate before. Twenty years ago. we were
gripped by fear that Japan would overtake our economic leaderShip - a concern
that was unfounded then and. in hindsight. looks profoundly mistaken.
These misconceptions in the US - both then and now - reflect a fundamental lack
of confidence in the American worker. And they couldn't be more wrong. America
continues to lead the world in standard of living. productivity and innovation China's
continued economic growth and Illtegration into the global economy gives us even
greater opportunities to grow and succeed. In fact. the bigger risk to both US and
Chinese prosperity is that China's growth stalls or China pulls back from ItS path of
further integrating into tile global economy - that it reforms too slowly, rather than
too quickly.
The rise of economic nationalism IS OCCUrring not only In the United States. but also
In China.

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-IP-712: Remarks by Secretary Henry M. Paulson, Jr. on Maintaining Forward Momentum in U.S .... Page 3 of 4
Some In China are suspicious lilat the US push for RMB appreciation and flrlanCial
market liberalization is really an attempt to galrl tl'ade advantages and generate
profits for American companies while slOWing China's economic expanSion They
mistakenly believe that yen appreciation during the InJd-1980s caused Japan's
weak economic performance in the 1990s. Rather, we now know that Japan's
economic difficulties were causec! by the grOWnl, and then collapse, of a huge stock
and property price bubble. and the failure to use monetary poliCY to prevent tile
emergence of deflalion after the bubble burst.
Financial sector liberalization is 110t about foreign firms drilling holes In China's
economy Foreign participation In the financial services sector brings the expertise
needed to provide more effiCient savings instruments, the ability to Irlsure against
risk, and the ability to assure tllat China's savings flow to their most productive
uses. But to brrng and Lise that expertise - the most valuable asset a globally
competitive financial institution has - the Investor needs to have control over tile
operations of the firm In which it Invests Tilis is why China's limits on the amount of
equity that a foreign Investor can IIOld in a Chinese financial Institution are so costly
to the Chinese economy. and why raising these limits is so Important
There are also those in China who argue that the US focus on food and product
safety is part of a strategy to restnct Chinese Impol1s and reduce the bilateral trade
defiCIt. ThiS argument has 110 baSIS In fact. Our concerns are shared by numerous
other countries. notably EU nations. Tile United States has Issued recalls and
Import alerts about exports from many nations; our concerns about food and
product safety are not targeted specifically at China.
Collectively. these misconceptions erode the political confidence we need to
maintain stability In our bilateral economiC relationship
Finally. after welcomlrlg foreign Investment which contributed greatly to Chinese
manufactUring growth and export competitiveness. some In China would now
tighten restrictions on foreign Irlvestillent to protect Chlrla's domestic Industries.
Domestic protectionism IS not unique to Chinese Irldustry, as all market-driven
companies welcome competition in other IIldustries much more than In their own.
The US faces Similar protectionist pressures, even though we are one of the most
open economies In the world. I am committed to working to maintain this openness
because It is good for America and for our workers. Frankly, It will be easier to do
thiS If the American public and the US Congress see tllat China IS serious about
reform and expanding access to their markets. China cannot protect ItS way to
prosperity - protectionism harms China's industrial development and our efforts to
build stronger trading relationships.
Towards a New Future for Bilateral Economic Relations
The SED IS one valuable tool III combating protectionist sentiments and clarifYing
these misconceptions. In our actions In the SED and other bilateral dialogues. we
have demonstrated that we welcome and encourage the rise of a prosperous and
stable China. We supported China's membership in the WTO. the Inter-American
Development Bank and the Financial Action Task Force. We have also supported a
greater voting share for China. and otller rapidly growing emerging markets. in the
IMF and the World Bank. It IS also Important for Beijing to recognize that, while
increased participation allows China to advance its Interest. greater participation
also brings greater responsibilities
The agreements we Ilave achieved thus far are like signposts showing progress
along the mutually-beneficial economic road While progress has not been as rapid
as we would like, these signposts pOint the way to further benefits for the Amerrcan
and Chinese people. To turn back on. or away from, thiS road would Jeopardize our
long-term strategic Interests for short-term political expediency
To succeed, the steps and poliCy actions must make sense to both sides That is
the purpose of economiC dialogue. to listen openly to China's views and, In return.
they listen openly to ours I am ever mlrldful of the complexity of working With a
sovereign economic partner upon whom we rely, and who relies on us. to urge
them to take difficult. Irlternal actions which we believe are economic Imperatives It
is economic diplomacy. wrrt large. which has potential. perhaps far beyond wllat we

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-IP-712: Remarks by Secretary Henry M. Paulson, Jr. on Maintaining Forward Momentum in U.S .... Page 4 of4
can envision today. for greater global economic prosperity.
Thank you and I am pleased to answer your questions.

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113/2008

HP-712: Remarks by Secretary Henry M. Paulson, Jr. on Maintaining Forward Mom... Page 1 of 4

December 5, 2007
HP-712
Remarks by Secretary Henry M. Paulson, Jr.
on Maintaining Forward Momentum in U.S.-China Economic Relations
before The Asia Society
Washington, DC-- Good morning. TI1ank you. Bill, and thank you to the Asia
Society for tl1e opportunity to be with you today. Let me also thank the Society for
your long, productive history of leadership m strengthenmg I'elatlonshlps among the
United States and ASian nations
My previous remarks leading up to next week's meeting of the U.S.-China Strategic
Economic Dialogue have focused largely on the dynamics which led to the creation
of the SED and my vision for the future of the U.S-China economic relationship. I
will bnefly touch on those issues today, and also on the misconceptions In that
relationship that are mfluenclllg the rise of protectionism and economic nationalism
In both nations.

The Foundation of the Strategic Economic Dialogue
In recognition of the Importance and complexity of the U.S.-Chllla economic
relationship, a year ago September President Bush and President Hu created the
SED. Their intent was not to replace the many economic dialogues already taking
place. but to ueate an over-archmg, senior level forum that was both
comprehensive and strategic. The goals have included creating work plans to
achieve shared objectives and building trust on both sides by demonstratlllg
progress on the Immediate issues we face.
The Stl'ateglc Economic Dialogue has made substantial progress m achieving these
goals. Over the last year, we have built stronger relationships and established
constructive channels of communication that didn't previously eXls!. These
innovalions have helped keep the U.S.-Chma economic relationship on an even
keel and helped us manage difficult issues, even in times of tension. Because we
have a framework for senior-level dialogue, we can - and do - pick up the phone
and we talk. We work towards solutions, which can only be reached when there are
mutual benefits
The SED meeting next week In Beijing will focus on five areas. They are: Integnty of
trade and product safety; balanced economic development. including financial
sector reform; energy efficiency and security; environmental sustamability; and
bilateral investment. The meeting comes at a delicate time, as a new group of
leaders move into China's most senior positions. We look forward to working with
the Chinese leadership team to ensure that the SED process contmues to be an
effective mechanism for promoting our shared IIlterests and responsibilities. We will
also thank our retiring colleague, Madame Wu Vi, who is an extraordmary
representative of her country.
Through economic dialogue, we have achieved concrete and significant results.
includmg a CIVil aviation agreement. greater market access In the financial services
sector, expansion of US exports, and enhanced energy secul'ity and
environmental protection We would not have accomplished what we have without
the specific framework of a focused and strategic economic dialogue, and we can
accomplish more.

A Broader Bilateral Economic Agenda

http://www.treas.gov/press/releases/ho712.htm

ill 8/2008

HP-712: Remarks by Secretary Henry M. Paulson, Jr. on Maintaining Forward Mom...

Page 2 of 4

Through the SED, we have broadened our bilateral economic agenda to IIlciude
food and product safety, energy efficiency and security, and environmental
sustalllability. All three carry deep Implications for our economic ties
American consumers need to have confidence III the safety of the products they
purchase, whether produced at home or abroad China's management of food and
product safety Issues will have a long-term Impact on our trade relations, the
sustainablilty of Chllla's growth strategy and Its further integration into the global
trading system. U.S. and Chlllese government agencies have been working
togetller to address these safety issues - a hallmark of the constructive,
cooperative and candid nature of our broader relationship.
For both our countries, greater energy efficiency and security requires reliance
upon market price Signals, technology, Innovation, and diversified energy sources
The Global Nuclear Energy Partnership, clean coal development through
FutureGen, and industrial effiCiency audits represent some of the best areas of ongOlllg cooperation
We also encourage Chllla's active participation In the Major Economies Meeting
efforts to develop a post-20 12 framework for greenhouse gas reduction I was
pleased to see that a large Chlllese energy company, Shanghai Electric, recently
mdicated public support for substantial reductions in greenhouse gas emissions.
Balancecf EconOll7lC Growth ancf China's Exchange Rate

One of the most presSing and Important Issues - for the United States, Cilina and
the global economy - IS China's move to a more fleXible exchange rate policy
China is reformlllg ItS policy, as a part of a movement to a more market-determined
exchange rate. The pace of reform has accelerated. In the past year the RMB has
appreciated by six percent, but the pace is still not fast enough to reduce China's
global trade surplus, its internal Imbalances, or foreign exchange market pressures.
A more fleXible currency IS espeCially important now, when the risks of mflatlon are
clearly rising in the Chmese economy Increased currency flexibility would allow
China's central bank to use the powerful tool of monetary policy for China's finanCial
and price stability. As Premier Wen Jlabao recently emphasized in a speech in
Smgapore, Chllla must now undertake comprehenSive measures to control
mounting Inflation, growing asset bubbles, and an overheating economy. We share
!t,e concerns of Chma's top leaders on this Issue.
The Rise of Economic NatIOnalIsm

In the U.S.-China relatlollship, the RMB exchange rate has become more than an
economic parameter: it has become a touchstone for broader anxieties about
competition from China As globalization has advanced and economies have
become more tightly IIltegrated, worries about the effects of foreign competition through trade or through foreign IIlvestment - have led to a rise in econOllllC
nationalism and protectionist sentiments. U.S. and Chinese leaders both face thiS
challenge
Many Americans worry about lOSing Jobs to low cost manufacturing or assembly III
Chllla Some worry about losing our economic pride and leadership. There IS fear
that, due to China's rise, we Will no longer be stewards of our own economic future.
We have been through this very type of debate before. Twenty years ago, we were
gripped by fear that Japan would overtake our economic leadership - a concern
that was unfounded then and, in hmdslghl, looks profoundly mistaken
These misconceptions In the U.S. - both then and now - reflect a fundamental lack
of confidence in the American worker. And they couldn't be more wrong. America
continues to lead the world in standard of I[vlng, productiVity and IIlnovalion China's
continued economic growth and integration Into the global economy gives us even
greater opportunities to grow and succeed In facl, the bigger risk to both US and

http://www.treas.gov/press/releases/hp712.htm

1/18/2008

HP-712: Remarks by Secretary Henry M. Paulson, Jr. on Maintaining Forward Mom... Page 3 of 4

Chinese prosperity IS that China's growth stalls or China pulls back from Its path of
further integrating into the global economy - that It reforms too slowly, rather than
too quickly.
The rise of economic nationalism IS occurring not only in the United States, but also
in China.
Some in Cillna are SUSpiCIOUS that the US. push for RMB appreciation and finanCial
market Ilbel'allzation is really an attempt to gain trade advantages and generate
profits for American companies while slowing Chlf1a's economic expansion. They
mistakenly believe that yen appreciation durlllg the mld-1980s caused Japan's
weak economic performance In the 1990s. Rather. we now know that Japan's
economic difficulties were caused by the growth. and then collapse, of a huge stock
and property price bubble, and the failure to use monetary poliCy to prevent the
emergence of deflation after the bubble burst.
Financial sector liberalization IS not about foreign firms drilllllg holes If1 China's
economy Foreign partiCipation In the financial services sector brlllgs the expertise
needed to provide more efficient savings instruments, the ability to insure against
risk, and the ability to assure that Chlf1a's savlllgs flow to their most productive
uses. But to bnng and use that expertise - the most valuable asset a globally
competitive fillancial institution has - the If1vestor needs to have control over the
operations of the firm In which it If1vests. This IS why China's limits on the amount of
equity that a foreign Investor can hold In a Chinese financial institution are so costly
to the Chinese economy, and why raislf1g these limits IS so Important.
There are also those in Chilla who argue that the US focus on food and product
safety IS part of a strategy to restrict Chinese Imports and reduce the bilateral trade
defiCIt. ThiS argument has no basis III fact Our concerns are shared by numerous
other countries. notably EU nations. The United States has Issued recalls and
import alerts about exports from many nations: our concerns about food and
product safety are not targeted specifically at Chilla.
Collectively, these misconceptions erode the political confidence we need to
maintain stability In our bilateral economic relationship.
Finally, after welcoming foreign investment which contributed greatly to Chinese
manufacturing growth and export competitiveness, some in China would now
tighten restrictions on foreign investment to protect China's domestic industries.
Domestic protectionism is not unique to Chinese industry, as all market-driven
companies welcome competition in other If1dustrles much more than In their own.
The U.S. faces similar protectionist pressures, even though we are one of the most
open economies in the world. I am committed to working to maintain this openness
because It IS good for America and for our workers. Frankly. It Will be easier to do
thiS if the American public and the US Congress see that China IS serious about
reform and expanding access to their markets. China cannot protect its way to
prosperity - protectionism harms China's industrial development and our efforts to
build stronger trading relationships.
Towarcls a New Future for Bilateral Econol7JIc Relations

The SED is one valuable tool in combating protectionist sentiments and clarifying
these misconceptions. In our actions If1 the SED and other bilateral dialogues, we
have demollstrated that we welcome and encourage the rise of a prosperous and
stable China We supported Chlf1a's membership In the WTO. the Inter-American
Development Bank and the FinanCial Action Task Force. We have also supported a
greater voting share for China, and other rapidly growing emerging markets, If1 the
IMF and the World Bank. It is also important for Beijing to recognize that. while
Increased participation allows China to advance Its interest, greater partiCipation
also brings greater responSibilities.
The agreements we have achieved thus far are like signposts showing progress

http://www.treas.goy/press/releases/hp712.htm

1118/2008

HP-712: Remarks by Secretary Henry M. Paulson, Jr. on Maintaining Forward Mom... Page 4 of4

along the mutually-beneficial economic road. While progress has not been as rapid
as we would like, these signposts point the way to further benefits for the American
and Chinese people. To turn back 011, or away fmm, this load would Jeopardize our
long-term strategic interests for short-term political expediency.
To succeed, the steps and policy actions must make sense to both Sides. That IS
the purpose of economic dialogue, to listen openly to China's views and, In return,
they listen openly to ours. I am ever rnlndful of the compleXity of working with a
sovereign economic partner upon whom we rely, and who relies on us, to urge
them to take difficult, internal actions which we believe are economic Imperatives. It
IS economic diplomacy, Writ large, which has potential, perhaps far beyond what we
can envIsion today, for greater global economiC pmsperity.
Thank you and I am pleased to answer your questions.

http://www.treas.gov/press/reieases/hp712.htm

1/18/2008

hp-713: Paulson, Jackson to Host Mortgage Briefing

Page I of I

December 5, 2007
hp-713

Paulson, Jackson to Host Mortgage Briefing
Treasury Secretary Henry M Paulson, Jr. will JOin Houslllg and Urban Development
Secretary Alphonso Jackson, members of the mortgage Industry, as well as
mortgage mvestors and mortgage counselors Thursday for a press confel'ence to
discuss the Busll Admlnrstratioll'S ongoing efforts to help struggling homeowners
keep ttlelr Iloilles.
The pl'ess conference Will be followed by an additional technical briefing
Will not be pennltted In the technical briefing

Cameras

The follOWing events are open to the media

What
Press Conference
When
Thursday, December' 6, 145 p.rll EST
Where
Department of the Treasury
Media Room (4121)
1500 Pennsylvania Avenue, NW
Washington, D.C.
Note Media without Treasury press credentials should contact Frances Anderson
at (202) 622-2960 or'
with the following mformatlon
full name, Social Security number, and date of birth,

What
Technical Briefing
When
Thursday, December 6, 235 p.m, EST
Where
Department of the Treasury
West Gable Room (5432)
1500 Pennsylvania Avenue, NW
Washington, DC
Note No cameras Will be permitted Media without Treasury press crec1entlals
should contact Frances Anderson at (202) 622-2960 or
with the following Informatron. full name, Social
Security nUlllber, and date of birth

http://www .treas.gov/press/releases/hp713.htm

113/2008

lp-714: Treasury Assistant Secretary Swagel to Hold Monthly Economic Briefing

Page 1 of I

December 6, 2007
hp-714

Treasury Assistant Secretary Swage I to Hold Monthly Economic Briefing
US Treasury Assistant Secretary for Economic Policy Phrilip Swagel will hold a
medra brleflllg to review economic Indicators from ttle last month as well as drscuss
the state of the US Economy The event is open to credentialed media

Who

U S Treasury Assistant Secretary Phillip Swagel

What

Economrc Media Briefing

When

Friday, DecemlJeI 7,2007, 1100 a,m, EST

Where

Treasury Department
Media Room (Room4121)
1500 Pennsylvania Ave, NW
Washington, DC

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

-30-

http://www.treas.gov/press/releases/hp714J.t..-.

1/3/2008

Ip-715: U.S. Treasury Assistant Secretary to Discuss U.S. Capital Markets Competitiveness in London

Page 1 of 1

December 6, 2007
hp-715
U.S. Treasury Assistant Secretary to Discuss U.S. Capital Markets
Competitiveness in London

US Treasury Assistant Secretary David G Nason Will discuss Treasury efforts to
[
J before the City of London
Corporation In London. England on Tues, Dec 11

When US Treasury Secretary Henry M. Paulson, Jr first took office,
[
J promotlllg the competitiveness of
US capital markets IS a vital Issue to strengthening the US economy. He hosted a
major
[
Jill Marcil with
International leaders on tills Issue
As part of his
J for
strellgttlenlng American capital markets he called for an examination of the
structure of the US. finanCial regulatory system. One area of focus has been the
difference between the U.S. finanCial regulatory structure and regulators around tile
world, including the benefits of tile UK financial regulatory structure. Additionally,
Treasury has been examining the benefits and consequences of the overlapping
federal and state-based oversight on Issues such as mortgage origination and
Insurance. The Department Will release its recommendations for improvement early
next year. For more Information on tile Secretary's capital markets competitiveness
initiative, please VISIt:
Tile following event IS open to media.
Who US Treasury Assistant Secretary
David G. Nason
What Remarks on Amencan Capital
Markets Competitiveness
When Tuesday, December 11, 2007
1130 am (Local Time)
Where City of London Corporation
ManSion House
London, Englancl EC4N 8BH

-30-

http://www .treas.gov/press/releases/hp715.htm

113/2008

-IP-716: Statement by Secretary Henry M. Paulson, Jr. at Press Conference to Announce Framework to ... Page 1 of2

December 6, 2007
HP-716
Statement by Secretary Henry M. Paulson, Jr. at Press Conference to
Announce Framework to Help Preserve Communities by Preventing
Foreclosure
Washington, DC -- Good afternoon Thank you, Secretary Jackson, Chairman
Balr, Comptroller Dugan, Governor Kroszner, Director Lockhart, Director Reich and
representatives f!"Om the American Securitization Forum, HOPE NOW, the
Mortgage Bankers Association and the Housing Policy Council for youl' creativity
and flexibility during these recent months, We have worked th!"Ough an evolVing
process to Ilelp minimize the Impact of the housing downturn on homeowners,
neighborhoods and the U.S economy
The infrastructure to reach struggling borrowers IS now in place: outreach letters are
being sent to borrowers likely to be facing trouble, a tOil-free number has been
expanded alld there are counselors available to work with struggling borrowers.
The American Secllrllization Forum represents mortgage investors and mortgage
serVlcers, and they have announced today a set of guidelines to streamline the
process of refinancing and modifying subprime loans for able homeowners. We
hope that these gUidelines will be adopted as reasonable and customary standard
praclice across the entire serviCing industry.
This is a private sector effort, Involving no government money; so some may ask
"Why are these government officials here today?" We are here because we all
know that It is In everyone's Interest - homeowner, serVlcer, investor - to develop a
market-based approach to avoid foreclosul'es that are preventable. And the current
system for working out those problem loans would not be sufficient to handle the
anticipated 1.8 million owner-occupied subprlme mortgage resets IIlat will occur In
2008 and 2009. The Investors who own these loans recognize that foreclosure is
costly, and that a workout plan or mortgage modification often brings them greater
value than foreclosure, But the standard loan-by-Ioan evaluation process that is
current Industry practice would not be able to handle the volume of work that will be
required Instead, the Industry needed a streamlined approach to address thiS
Increased volume.
The complexity that exists In current mortgage and mortgage seCUrities markets
poses some very practical and difficult problems, The vast majority of mortgage
servlcers are collecting homeowners' payments on behalf of investOl's scattered
around the world, While each of these partiCipants has an Interest in avoiding
preventable foreclosul'es. they are not eqUipped to Ilandle the anticipated volume
on IIlelr own. I saw a role for government here - to convene market partiCipants
with common Interests to deterl1llne If, and then how, they could develop a shared
framework to address both the market complexity and the upcoming volume of
mortgage resets
The Industry standards announced today do not change the nature of tile
responsibilities in the serVicing industry - servlcers will continue to modify loans
when It IS In the best interests of the investors. Indeed, these industry standards
announced today are the product of c!iscussions among Investors and serVlcers,
With the Investor community on board and as a clear benefiCiary of thiS approaCh,
the fisk of lillgatlon should be manageable Therefore, I expect servlcers across the
mdustry to pursue ttllS streamlined approach
The HOPE NOW alliance represents servlcers who cover 84% of currently
outstanding subprrme mortgages. HOPE NOW estimates that under this
streamlined approach up to 1.2 million subpflille ARM borrowers will be eligible for

http://www.treas.gov/press/releases/hp716.htm

1/3/2008

1P-716: Statement by Secretary Henry M. Paulson, lr. at Press Conference to Announce Framework to... Page 2 of 2
fast-tracking Into consideration for affordable reflllanced or modified mortgages
Servlcers have committed to reporting progress. and we all look forward to
transparent and monthly reports 011 the results of these efforts.
We owe thanks to the mortgage investors who have stepped up and enabled
servicers to streamline the modification and refinancing process. Streamlining will
free-up resources so servlcers can better focus on borrowers whose situations
require more Ill-deptil review Tilank you, also, to the HOPE NOW members for
significantly increasing I'esources to Identify, contact and counsel struggling
homeowners.
Additional thanks to the regulators who are here today They regulate mortgage
lending, servIcing and Investing Institutions, so they see thiS Issue from all
perspectives. Ttleir support for thiS effort is much appreciated by all participants
The approach announced today IS not a silver bullet. We face a difficult problem for
which there IS no peliect solution
Today's announcement IS a significant step. I know that everyone here has worked
very hard since August, and we will continue working. As events unfold, our
approach Will continue to adapt and evolve.
Now, Secretary Jackson will make a few remarks.

·30 .

http://www.treas.gov/press/releases/hp716.htrn

1/312008

-IP-718: Paulson Urges House to Take Up Senate AMT Patch

Page 1 of 1

December 7,2007
HP-718

Paulson Urges House to Take Up Senate AMT Patch
Washington, DC--The Treasury Departrnent released a statement frorn Secretary
Hemy M Paulson, Jr. today urging the House of Representatives to qUickly enact
the Senate-passed AMT patch
"I thank the Senate for passlllg a bill that pl'events 21 million Americans frorn paylllg
the Alternative MIIlInlUrn Tax this year, alld that does not raise other taxes It IS
Imperative that the House approve this and send It to the President without delay
We are only weeks away from the time when taxpayers can tYPically file their
leturns and Will expect millions of dollars In refund checks quickly, The longer It
takes to put this AMT patch into the law, the greater the delay In the filing season
and those refunds."

http://www.treas.gov/press/releases/hp718.htm

1/3/2008

[P-719: update

u.s. and China to Hold Meeting of the Strategic Economic Dialogue in China <b...

Page 1 of2

December 7, 2007
HP-719

update
U.S. and China to Hold Meeting of the Strategic Economic Dialogue in China
Next Week
Washington, DC -Treasury Secretary Henry M Paulson, Jr. wilileaci a U.S
delegation to China next week for the meeting of the U.S.-Chllla Strategic
Economic Dialogue Secretary Paulson will be Joined by Commerce Secretary
Carlos Gutierrez, Health and Human Services Secretary Mike Leavitt, U.S. Trade
Representative Susan Schwab, EPA Administrator Stephen Johnson, Acting
Agriculture Secretary Chuck Conner, and other Administration offiCials
The third Cabinet-level meeting of the SED Will focus on integrity of trade, balanced
economic development, energy conservation, financial sector reform, environmental
sustalnabillty, and advancing bilateral investment. The dialogue was launched by
President Bush and PreSident Hu In September 2006.

Who
Secretary Henry M Paulson, Jr.
Mayor Michael R Bloomberg
New York Stock Exchange CEO Duncan L Niederauer
What
NYSE Grand Opening of Office In Beijing
When
Tuesday, December 11,2007,320 pm Local Time
Where
Multi-function Room, No. 17 Building
Dlaoyutai State Guesthouse
No 2 Fucheng Road
Haldlan, Beijing
What
Opening Statements and Introductions
When
Wednesday, December 12, 2007, 915 a.m. Local Time
Where
Zhengan Palace Hotel
Eight Dragon Room, 2nd Floor
Grand Epoch City
Note
Media must have SED credentials to attend SED credentialed media must be preset by 830 a.1Il.
What
Family Photo
When
Thursday, December 13,2007,810 a.m. Local Time
Where
Zhengan Palace Hotel
Eight Dragon Room Lobby, 2nd Floor
Grand Epoch City
Note
Media must have SED credentials to attend SED credentialed photographers must
be pre-set by 730 a.m.
What
ClOSing Statements by Madame Wu and Secretary Paulson
When
Thursday, December 13, 2007,1200 p.m. Local Time

http://www.treas.gov/press/releases/hp719.htm

113/2008

IP-719: update U.S. and China to Hold Meeting of the Strategic Economic Dialogue in China <b ... Page 2 of2
Where
Zhengan Palace Hotel
Chinese Restaurant, 2nd Floor
Grand Epoch City
Note
Media must have SED credentials to attend. SED credentialed media illust be preset by 1100 a.m
What
US Delegation Press Conference
When
Thursday, DecemlJer 13, 2007,1230 pm. Local Tirne
Where
Zhellgan Palace Hotel
West Multi-Function Room, 3rd Floor
Grand Epoch City

http://www.treas.gov/press/releases/hp719.html/3/2008

IP-720: Treasury Designates Individuals with Ties to Al Qaida, Former Regime

Page 1 of 4

December 7,2007
HP-720

Treasury Designates Individuals with Ties
to AI Qaida, Former Regime
Washington, DC-- The US Depaliment of the Treasury today designated seven
individuals with ties to the Iraqi IIlsurgency and the former Iraqi regime. One
Individual was designated for provldlllg financial and material support to AI-Oaeda
III Iraq (AOI) and the SIX other individuals were designated as senior officials of the
former Iraqi regime or their Immediate family members, some of whom provided
fJllanciai and material suppoli to Iraq Insurgents.
"The Uilited States IS acting today against former regime elements and others
supportlllg the Iraqi IIlsurgency out of Syria," said Stuart Levey, Under Secretary for
Terrorism and Financial Intelligence. "Syria must take action to deny safe haven to
those supporting violence from within its borders."
F awzi Mutiaq AI-Rawi was designated pursuant to Executive Order 13224, which is
aimed at terrorists and those providing them with financial and other support. The
other six Individuals were designated pursuant to Executive Order 13315, which
targets senior officials of the former Iraqi regime or their immediate family
members.
Designations under E.O 13224 and E.O 13315 are Implemented by Treasury's
Office of Foreign Assets Control, and prohibit all transactions between the
designees and any US person and freeze any assets the designees Jllay have
under US JUrisdiction

Identifying Information
Fawzi Mutiaq AI-Rawi
AKAs:
AL-RAWI, Fawzi ISJlla'll AI-Husaynl
ABU FIRAS
ABU AKRAM
Title
ChalrJllan of the Iraqi WiJlg of the Syrian Ba'th Party
DOB.
1940
POB
Rawah City, Iraq
Nationality:
Iraqi
Citizenship
SyriaJl
LocatioJl.
DaJllascus, Syrra
Address
Syrian Government-owned apartment, AI-Mazzah district, DaJllascus, as of several
years ago
Office Location.
Syrian Ba'th Party COJllmand Building, AI-Halbuni district, Damascus, as of several
years ago
Fawzi Mutlaq AI-Rawi, the leader of the Iraqi wing of the Syrian Ba'th Party, was
designated under E.O. 13224 for providing financial and Jllaterlal support to AOI.
AI-Rawi In November 2005 facilitated the proviSion of $300,000 to members of
AOI In addition, he provided AOI with vehicle-borne ImprOVised explosive devices.

http://www.treas.gov/press/releases/hp720.htm

1/3/2008

IP-720: Treasury Designates Individuals with Ties to Al Qaida, Former Regime

Page 2 of4

rifles, and suicide bombers at the request of a senior AOI leader In Iraq AI-Rawl
and that same leader in September 2005 attended a meeting In Ar Ramadl, Iraq.
with other senior AOI representatives where they discussed financing. lIIllfylllg AOI
forces. conducting airborne IIllprovlsed explosive device attacks against the U S
Embassy. and concentrating attacks agalilst the IIlternatlonal zone
As of March 2005. AI-Rawl was present at regular meetings to plan fundlllg for
Muhammad Yunls Ahmad's network in Iraq. Ahmad. who was deSignated pursuant
to E.O 13315 In June 2005 and named on the United Nations SeCLmty Council
Resolution 1483 list. has provided gUidance. fillancial support. and coord illation for
insurgent attacks throughout Iraq AI-Rawi also ran a charity organization which
was actually a front for fundlllg the network. As of December 2006. AI-Rawl
continued to support AOI, meeting regularly with a senior member of the
organization to discuss funding and to plan future operations in Iraq.
AI-Rawi was apPolilted leader of tile Iraqi wlllg of the SYrian Ba'th Party by Synan
PI'esident Bashar AI-Asad in 2003. The Iraqi wing of the Syrian Ba'th Party has
since provided significant fUllding to Iraqi insurgents at AI-Rawl's direction. AI-Rawl
is supported financially by the Syrian Government. and has close ties to Syrian
Intelligence. He has met with Syrian Intelligence Director Asif Shawkat, and 11as
received financial support directly from DllU al-Himilla al-Shallsh. former Chief of
Asad's Presidential Security Guard Shawkat was named a Specially Designated
National pursuant to E. O. 13338 on January 18. 2006 for directly furtherlllg the
Government of Syria's support for terrorism and IIlterference In the sovereignty of
Lebanon. Shallsh was named a SpeCially Designated National pursuant to E.O.
13315 III June 2005 for acting on behalf of Saddam Hussein's former regime.
Under the authOrization of the Synan government, AI-Rawl In 2004 met twice With a
former commander of Saddam Hussein's Army of Muhammad - a militant group
formed by Saddam Husselll to fight against Coalition forces In Iraq. AI-Rawl
reportedly informed the commander that the Army of Muhammad would receive
material aid from Syria in the form of goods given to the Army for resale III Iraq
rather than money, due to International concerns that Syria was supportlllg
terrorism and the resistance III Iraq
Hasan Hashim Khalaf AI-Dulaymi
AKA
WISSAM. Abu
DOB
1942
POB
Baghdad. Iraq
Nationality:
Iraqi
Address
30th Street, AI-Yarmuk Area of Jadat AI-Jaysh District of Damascus. Syria
Alt Address
House #43. Lane #17. SubdiVision #808. AI-Dawrah. Baghdad.
Iraq

Hasan Hashim AI-Dulayml was designated under E.O. 13315 as a senior official of
the former Iraqi regime. In 2005, AI-Dulaymi was a deputy of SYria-based
Muhammad Yunis Ahrnad. a financial facilitator and operational leader who helped
reconstitute the Iraqi Ba'th Party. In late 2004, AI-Dulayml served as a prinCipal
assistant to Izzat Ibrahim al-ourl and viSited Baghdad to coordinate IIlsurgent
activities. Additionally. AI-Dulayml dll'ected an anti-coalition cell in Baghdad in late
2003.
In addition. AI-oulayml. who operates out of Syria and Iraq. has been an active
member of the Iraqi Ba'th Party and served as the Ba·th Party Treasury Secretary
under Saddam Hussein's regime. The Central Criminal Court of Iraq In July 2006
named AI-oulaymi on their list of 41 most-wanted individuals and issued a warrant
for his arrest. Currently. AI-oulayml is In contact With leading former regime
officials, IIlcluding designated former regime offiCials Muhammad Yunis Ahmad.
Izzat Ibrahim al-Duri and Taha Yasin Ramadan.
Ahmed Watban Ibrahim Hasan AI-Tikriti
AKAs

http://www.treas.gov/press/releases/hp720.htm

113/2008

IP-720: Treasury Designates Individuals with Ties to Al Qaida, Former Regime

Page 3 of4

AL-TIKRITI, Ahmad Watban Ibrahim Hasan
MUHAWDAR,lmad 'Udi
DOB
1975
ALT DOB
1979
POB
Baghdad, Iraq
Nationality
Iraqi
Address
AI-Ra'is bUilding Milla Street, Tartus City, Tartus Province Syna
Address
Jlrmanall neighborhood, Damascus, Syna
Address
AI-Hadcla Hotel, Sana'a, Yemen
Syria-based Ahmed Watban Ibrahim Hasan AI-Tlkntl IS the son of Watban Ibrailim
Hasan AI- Tlkntl - the former Iraqi Minister of the Intenor - who was designated
pursuant to E.O. 13315 In June 2003. AhmecJ Watban has provided financial and
operational support to the Iraq IIlsurgency. He also has transported money Into Iraq
for IIlsurgents and facilitates foreign fighter movement IIltO Iraq The Central
Cnmillal Court of Iraq has Issued a warrant for Ahmed Watban's arrest.

Ahmad Muhammad Yunis AI-Ahmad
AKAs
AL-BADANI, Ahmad Muhammad Mahmud 'Abdallah
AL-BARRANI, Ahmad Muhammad AI-Abdullah
Nationality
Iraqi
DOB.
19 September 1978
POB
AI-An bar, Iraq
Passport number
347417, expiration 19 February 2011
Passport number:
H034 7417, expiration 19 February 2011
Date of Issue
20 February 2003
Place of Issue
AI-Anbar, Iraq
Address:
AI-Mazzah AI-Jabal District
6 Subdistrict, 3 area AI-Iskan complex 40/2, Fifth floor
Damascus, Syria
Syria-based Ahmad Muhammad Yunls AI-Ahmad is a son of Muhammad Yunis
Ahmad - a finanCial facilitator and operational leader of the New Regional
Command of the reconstituted Ba'th Paliy - who was deSignated pursuant to E.O,
13315 on June 17, 2005, AI-Ahmad helped transport funds belonging to hiS father,
Muhammad Yunls Ahmad and Saddam Husselll from Iraq to Syria before the fall of
the Hussein regime. The Central Cnminal Court of Iraq Issued a warrant for AIAhmad's arrest on January 9, 2005.

Sa'ad Muhammad Yunis AI-Ahmad
DOB
1 Jan 1981
POB,
Baghdad
Nationality
Iraqi
Iraq National 10
159014
Address.
Damascus, Syria
Syria-based Sa'ad Muhammad Yunis AI-Ahmad is another son of Muhammad
Yunis Ahmad - a financial faCilitator and operational leader of tile New Reglollal

http://www.treas.gov/press/releases/hp720.htm

1/3/2008

IP-720: Treasury Designates Individuals with Ties to AI Qaida, Former Regime

Page 4 of4

Command of the reconstituted Ba'th Party - who was designated pursuant to E.O
13315 on June 17, 2005. Sa'ad regularly accompanies his father and IS suspected
of having acted as a money courier for him to finance anti-coalition activities
Thabet AI-Ouri
DOB
1943 or 1944
POB
Dur, Iraq
Address
Karkh District, Baghdad, Iraq
Address
Rukan ai-Dill, Syria
Thabet AI-Duri, who operates out of SYria and Iraq, served as a former regime Ba'th
Party branch secretary and a general manager for ttle Party's regional security
office. He was also the governor of Basra under the former Iraqi regime
Hatem Hamdan AI-Azawi
DOB
circa 1937
Address
Dlyall, AI-Khalis Sector, Iraq
Address
Deli Abbas, Iraq
Hatam Hamdan AI-Azawi, fornlerly a close associate of Saddam Hussein, served
as the head of Saddam's presidential administration. AI-Azawi obtained a
fraudulent diplomatic passport and fled to Syria after the fall of the Iraqi regime. AIAzawi worked to reconstitute the Iraqi Ba'th Party.

http://www .treas.gov/press/releases/hp720.htm

113/2008

IP-722: Treasury Economic Update 12/7/2007

Page 1 of 1

December 7, 2007
HP-722
Treasury Economic Update 12/7/2007
"Today's (lata fIlet/cate that the labor market rema/ns healthy with a low
unemployment rate and contflluecl job growth. We expect the economic expansion
to continue even with the challenges we face 111 the housmg and credit markets."
- Assistant Secretary Phillip Swagel, December 7,2007

Job Creation Continues:
Job Growth: 94,000 new jobs were created In November, the 51 st straight month
of job gains. Tile United States has added 1.5 million jobs In the past 12 montilS
and about 8 and a half million jobs since August 2003 Employment increased In
48 states and tile Dlstrtct of Columbia over the year ending in October. (Last
upclalee/. Decem/Jer 7, 2007)
Low Unemployment: November's 4.7 percent unemployment rate is close to its
lowest reading in 6 years. Unemployment rates have declined In 25 states and the
Distrtct of Columbia over the year ending in October. (Last updated December 7,
2007)
There Are Many Signs of Economic Strength:
Economic Growth: Real GOP growth was 4.9 percellt III the tllird quarter of 2007.
sUPP0l1ed by strong gaills III bUSiness Investment and expol-ts. (Last updatee/.
November 29, 2007)
Business Investment: Busilless spending on commercial structures and
equipment rose solidly in the third quarter. Healthy corporate balance sheets bode
well for contillued Investment growth. (Last updated November 29,2007)
Exports: Strong global growth is boosting US exports, which grew by 10.2 percent
over the past 4 quarters (Last updateci. November 29, 2007)
Inflation: Cme Inflation remains contained. The consumer price IIldex excludlllg
food and energy rose 2.2 percent over the 12 months ending in October. (Last
updaleei. November 15, 2007)
Tax Revenues: Tax receipts rose 6 7 percent In fiscal year 2007 (FY07) on top of
FY06's 11.8 percent Increase As a share of GOP, FY07 receipts exceeded their
40-year average (Last upcfated. October 12, 2007)
Americans Are Keeping More of Their Hard-Earned Money:
Real after-tax income per person increased 2.7 percent over the past 12
months (ending in October). (Last updated. November 30. 2007)
Pro-Growth Policies Will Enhance Long-Term U.S. Economic Strength:
We are on track to make significant further progress on the deficit. The FY07
budget defiCit was down to 1.2 percent of GOP. from 1.9 percent in FY06. Much of
the improvement In the defiCit reflects strong revenue growth, which In turn reflects
the contillued strength of the U S economy. Looking ahead, Illgher spending on
entttlelTlent programs dominates the future fiscal Situation. we must squarely face
up to tile challenge of reformlllg these programs

http://ww w .treas.gov/press/releases/hp722.htm

113/2008

IP-723: UPDATE: U.S. Treasury Assistant Secretary to Discuss U.S. Capital Markets Competitiv... Page 1 of 1

December 10, 2007
HP-723

UPDATE: U.S. Treasury Assistant Secretary to Discuss
U.S. Capital Markets Competitiveness in London
US Treasury Assistant Secretary David G Nason will discuss Treasury efforts to
strengtllen the competillveness of US capital markets before the City of London
Corporation In London, England on Tues., Dec. 11 When US. Treasury Secretary
Henry M. Paulson, Jr first took office, he said promoting the competitiveness of
U.S capital markets is a vital Issue to strengthening the U.S. economy. He hosted a
major conference in March With international leaders on thiS Issue. As part of hiS
plan for strengthening American capital markets he called for an examination of the
structure of the US financial regulatory system One area of focus has been the
difference between the US finanCial regulatory structure and regulators around the
world, Includlllg the benefits of the UK financial regulatory structure. Additionally,
Treasury has been examining the benefits and consequences of the overiapplllg
federal and state-based overSight on Issues such as mortgage origination and
IIlsurance. The Department Will release ItS recommendalions for improvement early
next year For more IIlfOrmatlon on the Secretary'S capital markets competitiveness
initiative, please VISit http://www.treas.gov/inltiatives/capital-marketsl.

Who
U. S Treasury Assistant Secretary DaVid G. Nason
What
Remarks on American Capital Markets Competitiveness
When
Tuesday, December 11,2007 1130 a.m. (Local Time)
Where
City of London Corporation
'Baslllghall SUite
Guildhall, Corner of Gresham and Aldermanbury
London, England EC4N 8BH

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lp724: Under Secretary Steel Speaks at Subprime Lending and Foreclosure Summit

Page 1 of 1

December 10, 2007
~lp724

Under Secretary Steel Speaks at Subprime Lending and Foreclosure Summit
Under Secretary for Domestic Finance Robert K. Steel will speak Wednesday at tile
New York City Subpnlne Lending and Foreclosure Summit The summit IS a
collaborative forum between New York City federal banking regulators and the City's
Department of Housing Preservation and Development
The forum will focus on national solutions to the current subpnme mortgage
situation, as well as programs designed specifically to address the needs of New
York City homeowners
Who
Under Secretary for Domestic Finance Robert K. Steel
What
Remarks at New York City Subprime Lending and Foreclosure Summit
When
Wednesday, December 12,2007900 a.m. EST
Where
City UniverSity of New York Graduate Center
365 Fifth Avenue
Manhattan. NY.

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IP-725: Statement by Secretary Paulson on Opening ofNYSE Office in Beijing

Page 1 of 1

December 11. 2007
HP-725
Statement by Secretary Paulson on Opening of NYSE Office in Beijing
Beijing, CHINA--Treasury Secretary Henry M Paulson. Jr. today issued the
following statement on the opening of the NYSE's lepresentatlve office In BeiJing.
"Good afternoon. I'm pleased to be here with Duncan Niederauer and Mayor
Bloomberg. Today's event marks China's continued progress in developing and
opening Its financial markets. A presence for the NYSE here creates opportunities
for US Investors and US financial services firms.
"The presence of the NYSE here will also give Chinese companies, and particularly
Its dynamic private sector, greater oppol1unlties to access global finanCial markets
Meeting U.S. listing requirements Will support China's efforts to strengthen
corporate governance.
"As I've said before, as China opens to foreign financial services institutions. Chilla
IS the big gainer. International expertise coming to do business here prOVides Jobs
and training for Cilinese professionals, budding expertise here that results in more
competitive financial markets which spread the benefits of economic growth more
broadly among the ChlTlese people."

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December 11, 2007
HP-726
U.S. Treasury Assistant Secretary for Financial Institutions David G. Nason
Remarks before the City of London Corporation
Redesigning U.S. Financial Regulation for a Global Marketplace
London - Thank you very much Michael, thank you for that kind introduction and
to everyone gathered here today for welcoming me.
It IS a pnvilege to be here today at the City of London in this beautiful and hlstonc
venue. The City of London has played a significant role In enhancing the position of
London as a key center of financial and business activity. In late October In New
York City, US. Treasury Secretary Henry M. Paulson. Jr. met with City of London
officials. Policy and Resources Committee Chairman Michael Snyder, Assistant
Director of Economic Development Paul Sizeland. and Director of Public Relations
Tony Halmos, and New York City Mayor Michael Bloomberg to discuss the global
competitiveness of the financial services IIldustry.
I appreciate the City of London welcoming me here to continue this dialogue.
would like to begin today with a brief snapshot of current economic conditions and a
short discussion of President Bush's recent announcement on housing issues.
Finally, I will describe our current thinking about capital markets competitiveness as
it relates to the Treasury Department's review of U.S. financial services regulation.
Economic Conditions
A common theme in my remarks today IS that capital markets are no longer
confilled to geographical or national boundanes. Therefore, it makes sense to
begin with a global economic view. From a global perspeclive, economic growth
has been qUite strong The International Monetary Fund projects that by the end of
this year. the world will have expefienced five consecutive years in which real
growth exceeded 4 percent. In fact, the average of those five years IS almost 5
percent. ThiS IS tile best five-year growth period in more than three decades. Not
only IS thiS growth widespread, but at the same time, world consumer price IIlflatlon
IS at its lowest level, averaging 3.6 percent during the past five years
And although facing challenges, the U.S. economy remains fundamentally sound.
Job creation IS healthy with over 1.5 million new jobs belllg created In the past year,
and the US. economy has now added Jobs for 51 straight months. Tile
unemployment rate is at 4.7 percent, close to Its lowest reading in SIX years.
Real GOP growth in the United States was 4.9 percent in the third quarter of 2007,
supported by strong gains in business Investment and exports. Business spendlllg
on commercial structures and equipment rose solidly In the third quarter. Healthy
corporate balance sheets bode well for contlilued Investment growth. Strong global
growth is boosting U.S exports, which grew by 10.2 percent over the past four
quarters. Importantly. core inflation remalils contained, and the fiscal deficit has
been reduced substantially.
However, the U.S. economy does face sefiOUS headwinds. A housing market
correction, rooted in an eight-year period of exceptional housing price appreciatloll,
remalils the most sefiOUS risk to future economic growth. Other challenges Include
financial market dislocations and high energy prices. But our solid economic
fundamentals coupled with the backdrop of the strong global economy should
support continued economic growth in the United States.
Housing Markets and the Administration's Response
Regardless of any impact the hOUSing correction Will have on the economy. the
Bush Administration recognizes the difficulty of this situation for the indiVidual

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homeowners undergoing strain. Therefore I thought I would take a few momellts to
share our most current response to these issues.
Foreclosures are a fact of life, even in strong housing years. However, fOl'eclosure
starts have almost doubled In the last year and a half, and SlgllS pOint to further
increases. When rising at a rate outside of historical norms and concentrated In
pal1lculal' communities, foreclosures have a wider negative Impact, drrving down
property values and underrnlning the financial stability of nelgtlborlng families
Therefore, we have worked through an evolVing process to help Illlnimize the
Impact of the housing downturn on homeowners, neighborhoods and the US
economy
It IS Important to note at tile outset the pl'inclples we use to approach thiS problem
Our efforts are targeted at homeowners who have demonstrated the finanCial ability
to own a home over the long-term Our efforts will not be designed to assist
speculators who acquired real estate for investment purposes We must endeavor
to avoid bailing out lenders and investors, who should recognize the value of these
impaired mortgages and should not expect government assistance in these
commercial transactions Lastly, the government should not subject lenders and
investors to abrogation of bargained-for contractual rrghts

Based on those core principles, we are implementing a three pOint plan First. we
are increaSing efforts to reach able homeowners who are struggling with their
mortgages. Second, we are working to Increase the availability of affordable
mortgage solutions for these borrowers. Tilird, we are leading the industry to
develop systematic means of effiCiently moving able homeowners With unaffordable
subprrme mortgages Into sustainable mortgages.
The Administration called together a large group of mortgage serVlcers, counselors
and Investors, called the HOPE NOW alliance, to coordinate and Improve efforts to
reach more homeowners and find long-term solutions. The HOPE NOW alliance
represents servlcers who cover 84 percent of currently outstanding subprime
mortgages. As Secretary Paulson said, the infrastructure to reactl struggling
borrowers IS now In place outreach letters have been sent to distressed borrowers,
a toll-free number has been expanded and counselors are available to work with
struggling borrowers.
The Adllllnistration has used existing authority to expand the Federal HOUSing
Administration, a government-subsidized mortgage Insurance program, to prOVide
additional solutions. ThiS expansion could help around 300,000 homeowners
through 2008. However, we do need the U.S, Congress to pass Widely supported
bipartisan housing related legislation to expand the availability of affordable
mortgage options for eligible distressed borrowers.
Last week, we announced the third part of the plan. The HOPE NOW alliance,
which includes the American Securrtizatlon Forum, a group representing Significant
mortgage investors, announced a set of guidelines to streamline the process of
refinancing and modifying subprrme loans for able homeowners. The HOPE NOW
alliance estimates up to 1.2 million subprrme adjustable-rate mortgage (ARM)
borrowers will be eligible for fast-tracking into affordable refinanced or modified
mortgages ullder this streamlined approach. Servlcers have committed to reporting
progress in these efforts and we all look forward to transparent and montilly reports
on the results of these efforts.
We antiCipate Illat these guidelines will be adopted as reasonable and customary
standard practice across tile serviCing Industry. This IS In everyone's Interest homeowner, servicer, and investor - to develop a market-based approach to aVOid
preventable foreclosures,
This plan will not prevent all foreclosures, nor should it Some borrowers,
particularly those who received loans under the most lax underwriting standards
and who have not been able to make even their initial payments, likely Will become
renters again. The problems we are facing In the mortgage market are complex
and unprecedented, and there IS no perfect way to address them. This plan has
evolved over time and Will not be easy to implement. We continue to monitor the
Situation closely and work to address issues proactively as they arrse
The issues in the mortgage market highlight the challenges we as policymakers see

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IP-726:

u.s. Treasury Assistant Secretary for Financial Institutions David G. Nason Remarks beL.

Page 3 of6

with the constant evolution and innovations In our global capital markets. On tile
one hand. the complexity of the global and secuntized mortgage market made It
more difficult for the private sector to help ilomeowners modify their mortgages On
tile other Iland. this financial Innovation Increased access to credit and brought tile
dream of ilomeownership to a greater number of people than ever Capable
borrowers with less-than-perfect cree!lt histories found opportunity througll the
ingenuity of our capital markets. So we must be careful that any response to this
situation does not unnecessarily harm those borrowers or stifle beneficial financial
innovation.
Financial Services Regulation
The recent stl'ess In the financial markets demonstrates that economiC systems can
benefit from Improvec! fillanClal services regulation. Indeed, few regulated and nonregulated financial Institutions have escaped tile effects of market volatility over the
past few months. It IS In everyone's Interest to have a more optimal framework for
fillancial services regulation.
I would like to take a few minutes to underscore the importance of a competitive
financial services industry. Over the past few decades the finanCial services
Industries In London and New York have contributed significantly to their countries'
econOllllC growth and prosperity, The financial services industry's contribution to
the GOP in the United Kingdom has risen from 6.6 percent in 1996 to 9.4 percent In
2006 and III the US. from 6.8 percent in 1996 to 7.8 percent In 2006
We. as policymakers, need to ensure that the financial services industry contillues
to contribute to this economic growth. And, one area where the United States must
focus attention is the regulatory structure for the financial services industry. To lhat
end, Secretary Paulsoll has asked the Treasury Department to undertake a
comprehensive review of financial institutions regulation and to develop
recommendations to modernize our regulatory system. We expect thiS review to be
complete by early next year
Examination and reexamination of fillancial services regulation are essential to
fulfilling the Treasury Department's miSSion to promote the conditions for prosperity
and stability In tile United States and to encourage prosperity and stability ill tile
rest of the world.
The globalization of the capital markets also prompts the need for analySIS of the
current regulatory structure In the United States. Companies now can raise capital
across the world. seeking environments tilat provide adequate capital and liquidity
at the best cost
Initial public offerings (IPOs) data provide some of the more telling statistiCS of thiS
new globalized environment. The number of global IPOs more than doubled from
839 in 2002 to 1729 in 2006. With 90 percent of the companies going publiC listing
on their domestic exchanges. European exchanges raised the most capital. 39
percent (US$95 billion) of the total IPO capital raised In 2006. followed by ASlaPaCific excllanges with 35% (US$85.5 billion), and North Aillerican exchanges with
19 percent (US$463 billion)
Clearly, market partiCipants today have many jurisdictional options for raislllg and
investing capital. Because of thiS dynamic, market participants have choices today
that were unavailable as recently as 10 years ago.
This borderless world pressures regulatory regimes to compete With each ollier
because capital flows to where investors expect to achieve the greatest riskadjusted return. However. a welcoming regulatory regime does not mean one that
It is lIleffective or lenlen!. In fact, market participants value well-regulated markets
on account of their fostertng market IIltegrity and investor confidence
Therefore. our working assumption IS tllat in this new globalized marketplace. we
are engaged in a race-to-the-top. to achieve the optimal regulatory structure for the
financial services industry. The optimal regulatory structure needs to attract capital
based on its effectiveness in promoting Innovation, managing system-wide risks.
and fostering consumer and investor confidence

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I believe that the race-to-the top is occurring at both a macro- and a micro-level. At
the macro-level, we are witnesslllg the evolution and testing of various regulatory
structures for the flllancial services sector.
For example, as you well know, the United Kingdom closely analyzed Its regulatory
structure Just over a decade ago and made seminal changes such as separatlflg
bank supervision and monetary poliCY and consolidating finanCial services
supervision under the umbrella of a slllgie regulator There are other macro-level
models such as the "Twill Peaks" model adopted in Australia This regulatory
structure creates two dlStlllCt regulatory bodies - one responsible for pruclentlal
regulation of entitles of SUCll consequence that require prudential regulation and
one responsible fm market and disclosure regulation of financial products belllg
offered to consumers and investms
Quite different from these two relatively new approaches, the US finanCial services
regulatory structure has been largely knit together over the last 75 years Much of
this framework was put IIlto place for particular reasons In a different time and In
response to circumstances that no longer exist. We currently have five federal
depository institution regulators, one federal seCUrities regulator, one federal futures
regulator and a state-based insurance regulatory system. We also Ilave additional
state based supervision of depOSitories and securities firms as well as selfregulatory organizations with broad regulatory powers. Our structure has evolved
III order to meet the growing demands of our financial services Industry. but ttllS
evolution has resulted lal'gely In adding layers of regulation Without an ovel'all
evaluation of the optimal way to regulate the financial services industry.
It IS useful and productive to evaluate the strengths and weaknesses of these
regulatory models. Ttlis testing and comparison Will have the salutary effect of
making each structure stronger.

[1] Ernst & Young, Globalization Global IPO Trends Report 2007, 18,20,24,
[2]ld, at 4-5.
In addition to macro-level regulatory competition issues, market and regulatory
forces around the globe are also compelling dramatic changes at a more IIIdustryspeCific level. Because we are in Europe, I thought it might be instructive to explore
some European-led regUlatory drivers that have had a Significant Impact in shaplllg
U.S. regulatory policy. These issues are not new and are often discussed and
debated between my colleagues at the Treasury Department and European officials
III various regulatory dialogues.
One of the clearest examples of regulatory policies of non-U.S. JUrisdictions shaping
the regulatory landscape of US firms IS the consolidated supervised entities (CSE)
regime administered by the US Securities and Exchange Commission (SEC). The
creation of thiS regulatory regime was motivated largely by the requirements of the
European Union's (E U ) Financial Conglomerates Directive. ThiS Directive
requires non-E. U. financial Institutions doing bUSiness In Europe to be supervised
on a consolidated basis.
The CSE regime was created in 2004 and covers the largest investment banks that
are not regulated by the Federal Reserve as bank holding companies. Fm the
large investment banks that are part of the CSE regime, the SEC oversees not only
the U.S.-registered broker-dealer, but also the consolidated entity, whicll may
include other regulated entitles such as foreign-registered broker-dealers and
banks, as well as unregulated entities, such as derivatives dealers and the holding
company itself. The CSE regime's mission is to diminish the likelihood that
weakness in the holding company itself or any of its unregulated affiliates would
place a regulated entity or the broader fillancial system at risk.
Insurance IS another US IIIdustry With a regulatory structure heavily Influenceej by
external regulatory factors. In the US" insurance companies are regulated almost
enlirely by the states (unlike banks and other fillancial IIIstitutions that are regulated
prlmal'ily at the federal level or on a dual federal/state basis). While the Insurance
regulatory structure debate dates back to a US. Supreme Court deCision In 1869,
Congress reaffirmed the decision to regulate insurance at the state level in the
McCarran-Ferguson Act in 1945 and again In the Gramm-Leach-Bliley Act (GLBA)

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in 1999.
Under our current state-based regulatory system. each state has an Insurance
regulator charged with administering state Insurance laws. promulgating
regulations, and other duties pertaining to the supervision of the Insurance
business. The National Association of Insurance CommiSSioners (NAIC) IS the
primary vehicle through Wllicll state insurance regulators exchange information and
coordinate activities to enhance the effectiveness of insurance regulation and
attempt to bring about some degree of uniformity.
ThiS structure raises a number of Issues with an international dimenSion. Our
regulatory structure raises questions of comity because foreign firms find adapting
to over 50 differing state standards more difficult ThiS can limit international firms'
operalions In the United States, ultimately hurting US. consumers Similarly,
because of our structure. foreign offiCials and insurance companies have no Single
federal regulator with whom to coordinate on Insurance matters.
Of course. the US Insurance market and the global nature of insurance are vastly
different than they were SIX decades ago when McCarran-Ferguson was enacted
and even from the almost 10 years since GLBA. Non-U.S. regulatory authorilies
are reevaluating tile insurance regulatory regime reflecting the changes taking
place In the Insurance markets.
The European Commission's proposed new Solvency II legislation, coupled with the
Reinsurance Directive. represents a major effort to reorient and modernize
insurance regulation, treating insurance firms as cross-border actors.
Not surprisingly. these decisions are impacting how we in the United States view
our Insurance regulatory structure. The NAIC is currently considering updates to
the U.S. risk-based capital and reinsurance poliCies As we evaluate proposals to
modernize our own system of Insurance regulation. we must consider what will best
serve our interests and the global economy in maintaining an Insurance
marketplace that attracts capital and does not set up artificial and costly bafllel·s.
There are other examples than those that I mention here, and there are numerous
circumstances in which the US regulatory approach has shaped other countries'
approaches. Therefore, it seems clear that now more than ever significant external
regulatory competitive pressures require a constant reevaluation of finanCial
services regulatory structul·e.

The Blueprint for Reform
Thus, I hope I have described adequately some of the motivating forces for the
Treasury Department's undertaking to naft a blueprint for an Improved US
financial regulatory structure. Let me share our approach to thiS prOject and what
we tlope to achieve. Our overarching goal IS to naft recommendations that will
result in a regUlatory regime that most effiCiently
•
•
•

safeguards the safety and stability of the financial system:
maintains high standards of both consumer and Investor protection: and
promotes efficient and competitive capital markets.

As part of thiS effort and In order to inform our work, the Treasury Department
published a Federal Register notice seeking publiC comment on a series of
questions about regulatory structure and received more than 350 comment letters
In response. This level of participation In the Department's study highlights the
Importance and complexity of our task.
As we analyze these comment letters, we are forming the framework of our
recommendations which Will fall Into two main categories.
First. in keeping with the theme I described earlier, we Will propose some broad
ideas for an optimal regulatory structure to match the globally-integrated U S
finanCial services Industry. You should not be surprised to hear that thiS optimal
structure will not match our current structure exactly. This Will be a newly-deSigned
model for the US finanCial services industry that should meet the needs of today

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Page 6 of6

and be flexible enough to address the issues that might come tomorrow. It will
recognize the global nature of our capital markets, the greatly increased compleXity
of financial products, the importance of technology to the financial services sector,
and the importance of consumer and investor protection In IIle provIsion of financial
products
Of course, we recognize IIlat there are many difficulties In obtalnlllg wholesale
changes to regulatory structule. There are many political and parochial concerns
and some are hesitant and generally opposed to cllallge. We recognizE: tillS fact.
Therefore, our second category will consist of less conceptual recommenriatlons
that we believe will serve as Intermediate steps to put us on the path towards the
optimal structure of financial services regulation.
Success of this initialive will not and should not be tied to short-term
accomplishments Today, I have Identified the Issues and segments where we Will
focus during this prOjeCt. Some of the recommendations will be immediately
relevant to legislative and regulatory policy issues. On these matters, our hope IS
that the Treasury Department's report Will spur near-term tangible results.
Implementation of othel-, longer-term recommendations will be subject to outside
factors but will be ready should support for these reforms develop. Finally, our
hope is that some of the recommendations will shape future debates regarding
regulatory structure Issues.
[3]
"Viewpoint: The Roadblocks for Regulatory Revamp."
American Banker 26 Oct. (2007) (noting the difficulties of wholesale changes but
the importance of undertaklflg thiS type of evaluation).
Thank you for your time and your hospitality. It is truly a privilege to be here and I
am happy to continue this dialogue if you have any questions.

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December 11, 2007
2007-12-11-11-12-51-11495

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 $70,728 million as of the end of that week, compared to $70,945 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

II
IIDecember 7, 2007

IA. Official reserve assets (in US millions unless otherwise specified)

IIEuro

IIYen

IITotal

1(1) Foreign currency reserves (in convertible foreign currencies)

II
11 14 ,403

II
11 11 ,435

11 70 ,728
11 25 ,838

I
I

I(a) Securities
lof which Issuer Ileadquartered in reporting countr-y but located abroad

11 0

I(b) total currency and deposits with:
I(i) other national central banks, BIS and IMF

II
11 14 ,359

II
115,618

II
11 19,977

Iii) banks headquartered rn the reporting country

lof which located abroad

11 0
11 0

1(lil) banks headquartered outside the reportlllg country

11 0

lof which. located in the reporting country

11 0

1(2) IMF reserve positron

II
11 4 ,391

1(3) SDRs

119,481

1(4) gold (lIlcludrng gold deposits and, if approprrate, 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--financlal derivatives

I--Ioans to nonbank nonresidents
I--other
IB Other foreign currency assets (specify)
--securities not included in official reserve assets
--depOSits not IIlcluded 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

JI
II
I
I
Ii

I --other

II. Predetermined short-term net drains on foreign currency assets (nominal value)

________________~I~I______~I~I______~II~------~II~----~I~I_____ _

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II

IIMaturity breakdown (residual maturity)

ITotal

I
1. Foreign currency loans, securities, and deposits
I
IIPrlncipal
I--outflows (-)

IIlnterest

I--inflows (+)

IIPrincipal

IIlnterest

More than 1 and
up to 3 months

Up to 1 month

More than 3
months and up to
1 year
I

"
"

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)

I (a) Short positions ( - )
I (b) Long POSitions (+)

I 3. Other (specify)

"
I
II

I --outflows related to repos (-)
I --inflows related to reverse repos (+)
I --trade credit (-)

I --trade credit (+)

I --other accounts payable (-)

I --other accounts receivable (+)

II
II
II
II

I
II

III. Contingent short-term net drains on foreign currency assets (nominal value)

I
11 Contingent liabilil1es in foreign currency
(a) Collateral guarantees on debt falling due with III 1
year
I(b) Other contlllgent liabilities
2. Foreign currency securities Issued With embedded
options (putlable bonds)
3. Undrawn, uncondll1onal credit lines prOVided by
(a) other national monetary authOrities, BIS, IMF, and
other international organizations
I--other national monetary authorilies (+)

Iapplicable)
MatUrity breakdown (reSidual maturity, where

IITotal

JI
II

II
II

II
II
/I
\I

[--IMF (+)
(b) with banks and other finanCial institutions
headquartered in the reporting country (+)

1~1C) With banks and other finanCial institutions

~ndrawn, unconditional credit lines provided to
/I(a) other national monetary authorities, BIS, IMF, and
other international organizations

I--BIS (+)

headquartered outside the reportlllg country (+)

More tllan 3
months and up to
1 year

More than 1 and
up to 3 months

Up to 1 month

I--other national monetary authorities (-)

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I
II

II
II

\13/2008

Page 3 of4
I--BIS (-)

I--IMF (-)

II
II

(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 tile domestic currency
I(a) Short positions

10)

Bought puts

II
II

I(ii) Written calls
I(b) Long positions

10)

II
I

Bought calls

I(ii) Written puts
\PRO MEMORIA In-the-moneyoptlons
1(1) At current exchange rate

II
II
II

I(a) Short POSition

j(b) Long position
j(2) + 5 % (depreciation of 5%)

I(a) Short posilion

II
II
II
II

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%)

II
II
I

I(a) Short POSition
I(b) Long position
1(6) Other (specify)

I
II

I(a) Short position
I(b) Long position

IV. Memo items

I
1(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)

I--nondeliverable forwards

[

--short positions

[ --long positions
t-other Instruments
I(c) pledged assets

t-included in reserve assets

--Included In other foreign currency assets

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I

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I(d) seCUrities lent and on repo

--lent or repoed and included in Section I
--lent or repoed but not included in Section I

II--borrowed or acquired and Included in Section I

II--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--optlons

I--other

IW) derivatives (forward, futures, or options contracts) that have a residual maturity greater than one
II

year, which are subject to margin calls.

II--aggregate sllort and long positions III forwards and futures in foreign currencies vis-a-vis the domestlcl
currency (lilcludlllg 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
/I

l(i) bought puts
I(ii) written calls

"
II

I(b) long positions

l(i) bought calls

/I
/I

I(ii) written puts
1(2) To be disclosed less frequently:

hal currency composition of reserves (by groups of currencies)

11 70 ,728

11 70 .728

I--currellcies In SDR basket

/I
/I

I--currencies not in SDR basket
I--by individual currencies (optional)
I

Notes:

II 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.

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

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

p:llwww.treas.gov/press/releases/2007121111125111495.htm

11312008

1p727: Opening Statement by Secretary Henry M. Paulson, lr. at the Meeting of the U.S.-China St... Page 1 of 2

December 12, 2007
hp727
Opening Statement by Secretary Henry M. Paulson, Jr.
at the Meeting of the U.S.-China Strategic Economic Dialogue
Good morning. It is a distinct pleasure to Jointly convene this third meeting of the
U.S.-Cllina Strategic Economic Dialogue. Thank you, to all of my colleagues for
attending and to Vice Premier Wu Yi and the distillguished Chinese delegation for
hosting this important meeting.
In recognition of the importance and complexity of the U.S.-China economic
relationship, a year ago September PreSident Bush and President Hu created the
SED Their intent was not to replace the many economic dialogues already taking
place. Rather, they envisioned an over-arching, senior level forum that IS long term.
comprehensive and strategic: one that would proVide a positive forum to deal witll
common objectives, including immediate and senSitive economic issues as they
arise.
We have spent the year Since our inaugural meeting last December putting
speCifics to that vision. Now, at our third meeting. and after continuous on-going
discussions in the interim, we see some areas of progress. We have built stronger
relationships and established new, constructive channels of communication. Our
focused engagement has produced agreements we may not otherwise have
reached. And I am confident we can accomplish more
I hope our meetings here develop further confidence among US. and Chinese
leaders for continuing, candid discussions. Our goals should be to Increase our
understanding, expand our cooperation and broaden our partnership.
As we Sit down to our work over these next two days, I will highlight two features of
our economic ties: first, our deepening interdependence and, second, the rise of
economic nationalism and protectionism in both our countries.
U.S. - China Economic Interdependence
There is hardly an issue - from trade, to product safety, to climate change - where
American and Chinese economic Interests do not overlap. The U.S.-China
relationship has become central to each nation's interest and to maintaining a
stable, secure and prosperous global economic system.
As our economic lies Increase, Chinese and American citizens must Ilave
confidence in tile goods they buy and another example of our growing
interdependence is the challenge of ensuring food and product safety. We Signed
Agreements this week to bolster our cooperation on this critical issue: this IS
another critical step in what will be an on-going effort.
The United States welcomes the rise of a stable and prosperous China. Cillna's
leaders' have VOiced concerns about China's macroeconomic stability, In particular
mounting inflation, growing asset bubbles and pOSSible overheating A more fleXible
exchange rate policy is especially important to China now, given these risks. The
pace of RMB appreciation remaJils one of the key levers to deal With China's
internal and external imbalances
The U.S economy also faces challellges from our hOUSing market and In our
capital markets as risk is being reassessed and repnced. As we work through thiS
period. deep and liquid US capital markets are playing a Vital role In maintaining
stability, Just as they have in providing the financing which allowed 69 percent of US
families to own homes. Similarly, China needs to further open its financial sector. to

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lp727: Opening Statement by Secretary Henry M. Paulson, lr. at the Meeting of the U.S.-China St... Page 2 of2
develop capital markets that can provide access to the capital it needs for continued
inclusive economic growth
The United States and China also share the responsibility of ensuring secure and
clean energy supplies, and protecting the enVIronment. My perspective is not that of
an official of a rich, developed nation, but one borne out by economic truths and
past American experiences balanCing these priorities A healthy environment and a
strong economy are not mutually exclusive; they are mutually necessary

On the Rise of Economic Nationalism and Protectionist Sentiments
Whereas trade was once largely a source of stability in U.S.-China relations, It has
recently become a source of tension. and not only because of safety concerns.
Worrres about H1e effects of forelgl1 competition - through trade or through fOI'eign
investment - have led to a rise in economic nationalism and protectionist sentiments
in both our nations.
Neither China nor the United States can protect our way to further prosperity We
must resist attempts to reduce transparency or increase regulatory obstacles In
order to protect domestic Industries. Taking short-term, politically expedient actions
Will almost certarnly impede our log-term prosperity and ability to address long-term
strategic issues.
The United States has shown support and taken action to advance China's global
economic interests, such as greater Chinese roles in the IMF and the World Bank
and supporting China's membership in the IADB and Financial Action Task Force
The US. Federal Reserve recently the branch application of Chrna Merchant's
Bank. and soon that bank will open a branch In the United States. The Bush
Administration also has consistently opposed protectionist legislation directed at
China. A US economy which is open to foreign investment and trade and welcomes
competition has always been in our nation's best interest. But many people in the
US are not sure that this continues to be true or that the benefits of trade are being
shared fairly. Our arguments will be more effective as we fight to maintain our
openness if the American people see China continuing to open its markets.

A Positive Vision for U.S.-China Economic Relations
Through the SED we remain focused on the most Important 10llg-term strategic
Issues. while addreSSing the most urgent short term problems. My focus is keeping
our economic relationship on an even keel, through times of tension and times of
calm. The success of the SED will ultimately be Judged by whether or not we have
demonstrated progress.
Again, thank you to our hosts and I look forward to working with you towards to
achieve our shared objectives.

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Page 1 of 3

December 12. 2007
hp-728
Remarks by Under Secretary Robert K. Steel
to the NYC Subprime Lending and Foreclosure Summit
New York, NY--Thank you, Scott. for your kind introduction. And let me also thank
the Office of Thrift Supervision, the Office of the Comptroller of tile Currency. the
Federal DepOSit Insurance Corporation. the Federal Reserve Bank of New York.
and the City of New York for hostlllg this important summit.
Today's event has brought together some of the best millds In houslllg, finance,
government, regulatory and academic research institutions to discuss the
importance of housing, here in New York City and throughout the nation. I am
optimistic that we will all agree on the significance of these Issues and learn from
each other about ways to address current challenges
The Success of America's Housing System
The housing system in the United States IS respected around the world. And our
housing fillance structure IS a marvel III ItS Size, scope, and effiCiency. The strong
American tradition of private ownership did not happen by aCCident; Instead it has
been fostered over many many years. As a society, we In thiS country have long felt
that homeownershlp has many underlying benefits. For example. the late Edward
Gramlich points out In his book that homeowners tend to save more, invest more in
their children, and build more wealth than their neighbors In rental hOUSing.
At the center of America's success in hOUSing is our modern day houslllg finance
system. which has produced high quality homes for millions of Americans and over
time increased the homeownership rate to Its current level of 68 percent.
One of the many recent benefits of our housing finance system has been the
extension of credit to borrowers Without a long credit history or perfect credit scores.
Today. families With lower scores on the FICO scale - the most commonly used
method of determining credit scores - can access mortgage credit at IIlterest rates a
few percentage pOints higher than the prime interest rate The market for these
borrowers has risen dramatically In recent years. In 1994. subpnme mortgage
originations were only $35 billion. Today, the subprime mortgage market IS about
$1 trillion.
Although today the term subprime evokes some uncomfortable feelings, we should
pause for a moment and recognize that the increased use of subpmne products
over the last thirteen years resulted in millions of new mortgages For example. one
industry source estimates that there are currently about 6 million total subprime
mortgages In 2000, there were less than a million.
As a result of this financialillnovation, together With the overall strength of ttle U.S
economy, the homeownershlp rate reached hlstonc levels dunng the past thirteen
year period And the homeownershlp rate among minOrities Increased to new highs
For Instance, the homeownership rate for African Americans rose from 42 percent
to 49 percent, and the rate for Hispanic Americans rose from 45 to 50 percent
Also dUring thiS period, the percentage of successful homeowners reached
extremely high levels. Just two years ago, the foreclosure rate stood at less tllan 1
percent (0.97 percent) and the delinquency rate was only 4.44 percent - that is.
almost 95 percent of American homeowners were successfully staYIllQ In their
homes and paying their mortgage on time. It is worth pOinting out however. that
even during periods of historically strong housing markets. not all homeowners
were successful. Even in strong housing years, some borrowers who over-extend
themselves or experience a change In life circumstance find they can no longer

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Ip-728: Remarks by Under Secretary Robert K. Steel to the NYC Subprime Lending and Foreclos...

Page 2 of 3

afford their home. In fact. between 2001 and 2005 the rate of foreclosures started
averaged approximately 1.7 percent a year, meaning more than 650,000
homeowners began the foreclosure process each year.

Current Challenges
Foreclosures - like unemployment - are an unfortunate reality given the dynamism
of our economy today. Recently, lax underwriting standards and resetting
adjustable rate mortgages combined with falling house prices are causing the
foreclosure rate to rise above its longer-term average. When foreclosures rise, and
are concentrated in particular neighborhoods, they begin to have an even greater
negative Impact. Concentrated foreclosures drive down property values and
undermine the financial stability of families, communities and ultimately our
economy
An estimated 1.8 million owner-occupied subprime mortgages are scheduled to
reset In 2008 and 2009. Not all will end in foreclosure Some homeowners Will be
able to afford their new payments without trouble and many otilers Will qualify for a
refinanced, fixed-rate mortgage. Other homeowners, however. have stretched
beyond their means or have made speculative bets on the houslllg market. bUYing
up multiple Ilouses or condos expecting to make a profit Unfortunately, for many of
these borrowers, foreclosure is Inevitable.
A third group of homeowners facing resets fall somewhere in the middle. Our
ambition IS to identify the group of homeowners who, with a bit of assistance and
flexibility, can find affordable solutions and stay In their homes.

Our Approach
Whenever faCing a challenging public poliCY issue, the first step IS full
understanding. Throughout the spring and summer months, as we watched
challenges in the housing and mortgages markets unfold, we embarked on a
comprehenSive campaign of understanding and evaluation. We spoke With leading
experts, counselors and markets partiCipants to learn as much as we could about
the size and scale of the problem and the scope of potential poliCY responses. We
are, of course, continuing to learn and always seeking new perspectives but thiS
period of initial conversation helped shaped our early conclusions.
On August 31 st, PreSident Bush announced an aggressive, comprehensive plan to
prevent avoidable foreclosures and help as many homeowners as possible stay In
their primary residences. The Departments of Housing and Urban Development and
Treasury have been working closely with leading serVlcers, mortgage counselors,
lenders, and investors to help people stay in their homes.
In October. a large group of servicers, counselors. lenders and Investors came
together and announced the formation of an alliance called Hope Now. To date. the
Hope Now Alliance consists of four counseling organizations, 21 mortgage
servlcers and lenders (comprising 65 percent of the US. market for mortgage
serviCing and almost 85 percent of the subprime serVicing market). tilree investor
groups (Including the American SeCUritization Forum. which represents over 370
members), and 10 trade associations.
The initial task was to set up a method of identifying and reaching struggling
borrowers. This Infrastructure was established through outreach letters, an
expanded toll-free hotllne and counselors who are on call to help struggling
homeowners.
The next phase. announced Just last week by the President. Includes a
complementary private sector agreement to streamline the process for modifying
and refinanCing subprime mortgages for eligible homeowners These new Industry
gUidelines, issued by the American Securitization Forum. Will create an efficient
process for IdentifYing borrowers who qualify for a loan modification or refinanCing
This, In turn, will free up resources and allow mortgage servicers to focus on those
borrowers who require more in-depth analysiS. It will also expedite the evaluation
process, a critical necessity given the approaching wave of resets in the coming 18
months.

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Ip-728: Remarks by Under Secretary Robert K. Steel to the NYC Subprime Lending and Foreclos...

Page 3 of 3

Going Forward: Implementation and Measurement
Under this new agreement, the servicers estimate that up to 1.2 million subpnme,
adjustable rate mortgage holders may be eligible for a fast-track refinance or loan
modification.
We are committed to tracking and measuring the success of this program as It is
Illlplemented. Today, the industry does not have a thorough. standardized set of
metrlcs with which to evaluate sel-vlcers' loss-mitigation performance. evaluate
counselors' effectiveness, or determine the precise number of modifications and
refrnancings being made. The Hope Now Alliance IS developing standard measures
whicl, will allow us to Identify categories of borrowers who can be helped. determine
successful treatments. and measure the rate of successful outcomes.
This agreeillent has developed over time and will likely continue to evolve In the
future. Implementation wrll not be easy but we will closely monitor it and as
Secretary Paulson has said "do our best to address Issues as they arise."

Conclusion
The efforts announced last week are part of a larger Initiative to help distressed
homeownel·s. We have also asked Congress to do their part In August, President
Bush requested that Congress temporarily eliminate taxes on mortgage debt
forgiven on a primary residence, pass Federal HOUSing Administration (FHA)
modernization to make affordable FHA loans more widely available, enact
comprehensive reform of government sponsored enterprises, and move
appropriations bills to the President's desk that include additional funding for
mortgage counselors.
There are significant social and economic Implications of addressing the challenges
we are facing in the mortgage markets. Although there is no perfect solution, we
believe our efforts will help encourage stability in household wealth and home
prices. as well as the broader financial markets and the US economy.
Thank you. I will now be pleased to take questions.

http://www.treas.goY/wess/releases/hp728.htIll

113/2008

IP-729: Treasury Designates Financial Empire of Key Mexican Money Launderer Blanca M... Page 1 of 2

10 view or pnnr tile /-'Ur COil tent 011 tlJiS page. (IOWIl/Odil tllC rree

December 12, 2007
HP-729
Treasury Designates Financial Empire of Key Mexican
Money Launderer
Blanca Margarita Cazares Salazar
Washington, D.C.--The US Department of the Treasury's Office of Foreign Assets
Control (OFAC) today designated MeXican money launderer Blanca Margarita
Cazares Salazar (Blanca Cazares) and 19 companies and 22 individuals in MeXICO
that are part of her financial network as specially deSignated narcotics traffickers
subject to economic sanctions pursuant to the Foreign Narcotics Kingpin
Designation Act
"Today's action exposes Blanca Cazares' sophisticated money laundering
apparatus and subjects it to powerful economic sanctions," said OFAC Director
Adam J. Szubin "ThiS Kingpin Act designation also puts the global community on
notice about the illicit activities of thiS network."
Blanca Cazares and her widespread money laundering organization act as fronts
for MeXican drug kingpins Ismael Zambada Garcia (Mayo Zambada) and Victor
Emilio Cazares Salazar, leaders of Mexico's Sinaloa Cartel. Blanca Cazares, also
known as Blanca Cazares Gastelum, is the sister of Mexican drug kingplll Victor
Emilio Cazares Salazar. The President identified Ismael Zambada Garcia and
Victor Emilio Cazares Salazar in 2002 and 2007, respecllvely, as Significant foreign
narcotics traffickers pursuant to the Kingpin Act.
Blanca Cazares' money laundering organization operates throughout Mexico and in
California, and IS run by member's of her immediate and extended family. Arturo
Meza Gaspar, Blanca Cazares' spouse, and their three adult children, Arturo,
Gipsy, and Lizbeth Meza Cazares, were deSignated today because of their key
roles In the ownership and control of Blanca Cazares' front companies and assets
In Mexico. Other key financial associates of Blanca Cazares designated today
include Jorge Normando Patraca Ponce, Roberto Perez Verduzco, Maria Trburcla
Cazarez Perez, Epifanlo Zazueta Urrea, and Marco Antonio Olivas Ojeda. Blanca
Armida AgUirre Sanchez, a Tijuana, Baja California-based money launderer who
works wrth Blanca Cazares, was also named by OFAC.
Blanca Cazares owns and controls a complex network of bUSinesses located
throughout Mexico In Culiacan, Sinaloa; Guadalajara, Jalisco; TIjuana, Baja
California; and MeXICO City, Distrito Federal. The OFAC designation targets key
Blanca Cazares front companies based in Culiacan, Sinaloa, including Conso(cro
Innlobrlrario del Valle de CuJiacan SA de C V., SEPRIV SA (Ie C V, Cazper
Importaciones S.A. de C V, and Patraca S.A de C V (aka Bout/que Patraca)
Also targeted are three Tijuana-based money service businesses Including
Mexglobo S A. de C V.. Multiselvlc/oS AGSA SA de C V, and AGBAS Consu/lores
S.A (Ie C V, all owned or controlled by Blanca Cazares associate Blanca Armida
Aguirre Sanchez.
Today's action also targeted Toys Factory S.A de C V and Hacien(ia Glen AIJOS de
Tijuana S de R.L. de C V, a popular restaurant. Both entities are located In
Tijuana, Baja California.
In addition, the OFAC action exposes CHIKA'S, a cham of approximately 20 jewelry
and cosmetics boutiques located in eight Mexican states, which ale operated by
Sin-Mex Importadora S.A. de C V in MeXICO City and ComercraJizadora Jalsin SA
de C. V in Guadalajara, Jalisco. ThiS particular network of Blanca Cazares front
companies also uses the entities Comerc/alrzadora ToqUln, ComerCial Joana.

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113/2008

HP-729: Treasury Designates Financial Empire of Key Mexican Money Launderer Blanca M... Page 2 of2
Comercial Dornely and Comercializadora Brimar's to facilitate the stores'
transactions both internationally and within Mexico.
Ismael Zambada Garcia is a US. fugitive and the State Department has offered a
$5 million dollar reward for information leading to his arrest. In January 2003, the
US District Court for the District of Columbia returned a federal indictment agalllst
Ismael Zambada Garcia for his narcotics trafficking activities. Victor Emilio Cazares
Salazar IS also a U.S. fugitive and is the subject of a February 2007 federal
Indictment for drug trafficking and money laundering in the Soutllern District of
California.
This action IS part of ongoing efforts under the Foreign Narcotics Kingpin
Designation Act to apply financial measures against significant foreign narcotics
traffickel·s worldwide. More than 300 businesses and indiViduals assOCiated with the
68 drug kingpins have been deSignated pursuant to the Kingpin Act since June
2000. Today's designation would not have been possible without key support from
Department of Homeland Security's Immigration and Customs Enforcement (ICE)
field offices In Los Angeles and San Diego; the Drug Enforcement Administration
(DEA) field office in San Diego; the ICE Attache Mexico City: DEA's Special
Operations DiviSion; DEA's Financial Operations Division; and the US Attorney's
Office. Central District of California.
Today's deSignation action freezes any assets the 42 designees may have under
U.S. Jurisdiction and prohibits US persons from conducting financial or commerCial
transactions with these individuals and entitles. Penalties for violations of the
Kingpin Act range from Civil penalties of up to $1,075,000 per violation to more
severe cr-imlnal penalties. Criminal penalties for corporate officers may Include up to
30 years in prison and fines of up to $5,000,000. Criminal fines for corporations
may reach $10,000,000. Other Individuals face up to 10 years In prison for criminal
violations of the Kingpin Act.

For a complete list of the indiViduals and entities designated today. please visit.

REPORTS

http://www.treas.gov/press/releases/hp729.htm

1/3/200

Foreign Narcotics Kingpin Designation Act
December 2007

Cazares Salazar Financial Network

Department of the Treasury
Office of Foreign Assets Control

All individuals depicted in this chart
are Mexican nationals

Victor Emilio CAZARES SALAZAR
(a.k.a. Victor Emilio CAZARES GASTELLUM)

Ismael ZAMBADA GARCIA
"EI Mayo Zambada"

Previoully de5:ignaled by the
Pre.ident IItI Tier I Kingpins

Blenca Margarita CAZARES SALAZAR
(a.k.a. Chiquls CAZARES SALAZAR)
DOB 18 Sop 1954
Alt. DOB 18 Sep 1955
CURP # CASB540918MSLZLLOO
R.F.C. #CASBS40918LVI

~.~:-.~ ..

Key Financial Associates

~
....•

Arturo MEZA CAZARES
0086 Mar 1976
R.F.C. II MECAJfiOl06V70

Arturo MEZA GASPAR
008 4Juf 1946
R.F.C. # MEGM60704

f]~liJ
Uzbeth MEZA CAZARES
DOB S Jan 1981
R.f.C. # MECl810115

larve Normando PAmACA PONCE Roberto PEREZ VERDUZOO
00823 Apr 1974
00829 Oct 1963

R.F.C. "PAPJ740423D88

•

(?)

/,\

PAlRACAS.A. DE C.V.

SEPRIV S..A. DE C.Y.

(0.1<.0. BOUTIQUE PATRACA)

R.F.c.. # SEP980319CS68

:.P~J

SIN-MEX IMPORTAOORA SA DE C.V.
OOMERCIAUZAOORA JAL5IN SA. DE C.V.
(d.b .... OIlKA'S ACCESORWS Y COSMETICOS) (a.k.a. COMERClAlIZADORA lAl2Dt, S.A. DE C.V.)
(d.b••• CHIKA'S)
(d.b ••• OilKA'S ACCESORIDS Y COSMET1COS)
(d.b.a. IMPORTCLUB)
(d. b .•. CHII(A'S)
Guadalajara, laUsCJJ, Mexico
R.F.C•• CJA980901J13

R..F.c •• SMI010730DH8

SISTEMA DE RADIO De SINALOA s.A. DE C.V.
R.F.C. # SRS9903153C5

CDNSORaO INMOBILlARIO DEL VAlLE DE CULlACAN S.A. DE C.V.
R.F.C. # ClV01061GGMA

___

I~~q
CAZPER IMpCRTACIONES S.A. DEC.V.
R..F.C. "CIM040429UH4

CHIKA'S

.:,'"

DOB 1 Aug 1947
R.F.C "ZAUE4708010K6

M.""008 14June 1960
R..F.C # OIOM600614YA.5

Mana nburda CAZAREZ PEREZ
008 14 Od 1961
aJRP # CAP'T621014MSUR800

frijuene, Baja California Network

DlstrttD Federal, MexICo

R.F.C. • PAT040318Gf7

Blanca ArmIda AGUlRRE SANCHEZ
DOB 7 Mar 1958
R.F.C. II AUS8580307CR4

HIKA'S Hetwo",

Culiecen, Sinaloa Network

A..F.C. II PEVR63102920B

.E}
~-,..-

1t(('l7/~

R.F.C. " MAG94112.3BYA

R.F,C. " AC0040630893

9tl

COMERelALIZADORA BRIMAR'S SA. DE C.V.
O.tIIICln, Slnaloa, Mexlm
R..F.C. # CBS9710303N4

COMERClAL JOANA SA. DE C.V.
GuadalaJara, Jallsco, Meldoo
R.F.C. # CJOO10202HQH

~~~

COMERClAl DOMELYSA. DE C.V.
CUUacan,SIMlo.a. MmO)
R.F.c. "Coool0522917

MULTISERVICIOS AGSA S.A. DE C. V.

AGBAS CONSUlTORES SA DEC.V.
(d.b .•. AGBA CONSULTORES CASA DE CAMBIO)

DIS"trtbuto~

';~~

MEXGLOBO S.A. DE c.y,
R.F.C. II MEX9gog034VO

COMERCIALIZAOORA TOQUIN SA. DE C.V.
GYadal»Jar'l, Jails-CO, Ne>dQ)
R.F.C•• CTOO10731CH9

TOYS FACTORY S.A.. DE C.V.
R.F.C. # TfA021112AR9

If II
HAClENDAClEN ANOS DETDUANAS. DE R.L DE
(a.k.a. COClNA ANTIGUA S. DE R.l. DE c.v.)
R.F.C. # HTI010102GR7

OPERAOORA INTeGRAL DE CDMERCIO SA. DE C.V.
R.F.c. # OIC04Q925S.A9

TEOiOlOGIA DIGiTAl Y SERVIClDS S.A. DE

R.F.C .• TDS011031UD6

c.y.

~I
ill
COCINADE TDUANAS. DE R.L DEC.Y.
R.F.C. # CllOS0414A55

c.v.

hp-730: Secretary Henry M. Paulson, Jr. Closing Statement Meeting of the US-China Strategic... Page 1 of

December 13, 2007
hp-730

Secretary Henry M. Paulson, Jr.
Closing Statement
Meeting of the US-China Strategic Economic Dialogue
Thank you Vice Prelllier Wu Yi and the Chinese Delegation for your hospitality In
hosting this tlwd meeting of our Strategic EconomiC Dialogue. These have been
instructive and constructive discussions. On behalf of my colleagues, we thank our
retiring colleague, Madame Wu, who has been an extraordinary I'epresentatlve for
the Chinese people.
We have had substantive, I'obust and engaging exchanges on a range of issues
important to both our nations including the Integrity of trade, balanced growth
Including financial services, energy security and environmental sustainability, and
bilateral investment. The quality of our discussions has Improved over the last
year, as we have all come to know one another better. By building closer
relationships we have clarified perceptions and Increased understanding, WhlCll is
vital to keeping our economic relationship on an even keel.
I am particularly pleased that the SED provided a strong foundation from which to
manage the emerging challenges in the area of food and product safety. The
signing of agreements thiS week, and other agreements this fall, is an example of
the SED's effectiveness In addreSSing immediate concerns, while advanCing longterm shared interests The progress we have made In recent months on tilis Issue
serves as a model for cooperation in the SED on all areas of our dialogue.

Both the United States and China are major contributors to global growth As such,
we each benefit from the other's success. We discussed the importance of
balanced growth in both our nations, and the role of competitive markets in
spreading the benefits of growth to all our people. We also both recognize the need
to fight economic nationalism and protectionism In our two nations. Countries
cannot protect their way to prosperity.
China and the US recognize that working together we can each be more effective In
achieving energy efficiency, energy security and a cleaner environment. Toward
that end, we agreed to conduct extensive cooperation over a 1O-year perrod to
focus on technological innovation, adoption of clean technology and sustainable
natural resources.

I am pleased With the great strrdes we have made In the last 12 months, and there
is much more to do. The SED has proven to be an effective forum for progress,
and I look forward to continuing progress in managing our economic relationship for
the benefit of both our nations.

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December 13, 2007
hp-731

Statement by Secretary Henry M. Paulson, Jr.
at U.S. Delegation Press Conference at Closing of Strategic Economic
Dialogue
Thank you to my Cabinet colleagues for your substantive engagement In this SED
meeting. Active participation from everyone here - as well as additional colleagues
back In Washington - enabled us to make substantial progress In our economic
relationship With China.
As I said earlier, to me the handling of the food and product safety Issues emerging
In recent months IS pl'Oof of the effectiveness of the SED. Rather than
recriminations and fillgerpointing when thiS issue arose, both our nations were
QUick to sit down together and work the substance of the issues. We are able to do
that because In this first year of our Dialogue we have deepened relationships and
understanding across our governments.
Mike Leavitt's work on this issue IS a model for addreSSing all the Issues within our
economic dialogue.
Let me note a few other highlights of our meeting, before we turn to Questions. First,
we agreed to put a working group together to develop a 1O-year plan for review at
our next meeting on cooperation on energy and the environment. The issues of
energy security and envil'Onmental sustainability are vitally Important to both our
countries. I find It an exciting prospect that we will set out a long-term and strategic
plan for working together toward progress In these areas.
I also am very pleased that we are beginning a strategic effort to work together to
combat illegal logging. This is a long-term challenge, and I am encouraged by this
significant first step
We had very healthy diSCUSSions about China's progress rebalancing ItS economy,
expanding domestic consumption and moving away from export led growth. The
Chlllese recognize growing inflationary pressures in their economy and that a more
fleXible currency expands their ability to use monetary policy to stabilize their
economy. I would also note we have made modest progress in the financial
services area, expanding opportunities for global financial services companies to do
business In China Openlllg China's financial markets to foreign competition
strengthens the finanCial backbone of the Chinese economy, and IS critical to
China's goals of spreading the benefits of growth to all the Chinese people.
While we hold these formal meetlllgs twice a year, the work of the SED proceeds all
year long. We will host the next formal meeting in Washington next spring In the
meantime, I am confident we will be working closely together to Implement our
strategic plans and announce results as they occur.
-30-

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December 13, 2007
hp-732

The Third U.S. - China Strategic Economic Dialogue
December 12 - 13, 2007, Beijing
Joint Fact Sheet
At Grand Epoch City near Beijing on December 12 and 13, the United States ami
China held the third Strategic Economic Dialogue (SED). As special representatives
of President George W Bush and President Hu Jintao, Treasury Secretary Henry
M. Pauslon, Jr. and Vice Premier Wu Yi served as co-chairs of the SED.
Discussions at the third SED led to a number of results that strengthen and deepen
the bilateral economiC relationship. including
•

In product quality and food safety, the United States and China committed
to expand their dialogue and Information-sharing to enhance the
infrastructure of laws. policies. programs and Incentives that allow for
effective government oversight of exports of food, drugs, medical products,
and consumer goods. To this end, the two countries signed memorandums
in eight areas intended to improve the safety of exports. These Included
o Food and feed: Memorandum of agreement between the U.S
Department of Health and Hurnan Services (HHS) and China's
General Administration of Ouality SupervIsion, Inspectloll. and
Ouarantlne (AOSIO), signed on December 11. 2007;
o Drugs and medical products Agreement between the US
Department of Health and Human Services (HHS) and China's State
Food and Drug Administration (SFDA), Signed on December 11,
2007;
o Environmentally compliant exports/imports Memorandum of
understanding signed between the U.S EnVironmental Protection
Agency (EPA) and China's AOSIO:
o Food safety: The U.S Department of Agriculture (USDA) and
China's AOSIO agree to upgrade their food safety memorandUIll of
cooperation to a ministerial-level:
o Alcohol and tobacco products Memorandum of understanding
between the US Department of the Treasury and China's AOSIO.
signed on December 11, 2007; and,
o Additional areas Toys. fireworks, lighters, and electrical products:
motor vehicle safety; and pestiCides tolerance and trade.

•

In financial services, China agrees to announce before SED IV that the
China Securities Regulatory Commission (CSRC) will conduct a careful
assessment on foreign participation In China's seCUrities firms and Its
influence on China's securities market and based on the results of its
assessment, Will make a policy recommendation on the Issue of adjusting
foreign equity partiCipation in China's seCUrities firms. The China Banking
Regulatory Commission (CBRC) IS currently conducting a SCientifiC study of
foreign partiCipation In China's banking sector, that will be completed by
December 31, 2008. By that time. based on the poliCy assessment's
conclUSions. the CBRC Will make poliCy recommendations on foreign equity
partiCipation. China agrees to allow. In accordance With relevant prudential
regulations, qualified foreign-invested companies, Including banks. to Issue
RMB denominated stocks; qualified listed companies to issue RMB
denominated corporate bonds: and qualified Incorporated foreign banks to
issue RMB denominated financial bonds. The United States and China
welcome the recently approved application by Cilina Merchants Bank to
establish a branch in the United States. The US government remains
committed to apply national treatment to Chinese banks. confirms that
applications by Chinese banks will be evaluated consistent With the prinCiple
of national treatment, and applies the same prudential standards to all

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applications by foreign banks to establish branches or subsidiaries or to
acquire stakes in eXisting US banking If)stitutlons The U.S notes China's
request that the relevant US regulatms process expeditiously the
applications of Chinese banks accmdlng to relevant regulations and
procedures. The U.S. government also remains committed to apply national
treatment to Cilinese broker-dealers and Investment advisers seeking to
I'egister and operate in the United States Chil13 Banking Regulatory
Commission (CBRC) and tile US Securities and Exchange CommiSSion
(SEC) have agreed in principle that the signing of an eXChange of letters Will
be done in the near future on IIlfOrmatlon sharing If) connection with the
cross border activity of financial institutions licensed by either the CBRC or
SEC.

•

In energy and the environment, the United States and Chma signed a
memorandum of understanding strengthening cooperallon in the area of
biomass resources conversion fm fuel, and negotiated a memmandum of
understanding to cooperate on combating illegal loggmg and aSSOCiated
trade In order to promote sustainable forest management. Chma will
develop and implement a nationWide program on S02 emission trading in
the power sector, and the US will prOVide technical assistance for this
program, as well as for basic water management programs and fm adopting
clean fuels and vehicle policies. The United States and China reaffirm our
commitment "to reduce, or as appropriate, eliminate tariffs and non-tariff
barriers to environmental goods and services" In the WTO.

•

In transparency, the United States and China agree that transparency In
administrative rule-makmg has been Increased and public partlclpallorl has
been strengthened They also agree to respect and bUild upon their
international obligations on transparency, including their APEC and WTO
commitments. Each country will:
o When possible, publish in advance any measure covered by its
WTO obligations that are proposed fm adoption, and prOVide where
applicable Illterested persons a reasonable opportunity to comment
on such proposed measures. Each country may comply With this
obligation by regularly publishing such proposed measures If) ItS
designated offiCial journal or by posting and permanently malntalnmg
these measures on an offiCial website:
o Publish in ItS deSignated offiCial journal any final measure covered
by its WTO obligations before implementation m enforcement.

•

In rebalanCing growth, both the United States and China commit to
communicate on measures to address U.S.-China economic Imbalances
through dialogue and consultation, including diSCUSSions under the U.SChina Joint Economic Committee. Both Sides agreed to put great emphasis
on opposing trade and Investment protectionism The United States and
China welcome efforts both In the US and internationally to assess the
challenges created by the recent turbulence in tile U.S sub-prime market
and in other global finanCial markets. The two countnes agree to continue
communication and mformatlon sllarmg In a timely manner on systemically
Significant economic and financial developments FinanCial supel'visory
agencies In both countnes agree to continue eXChanges on supervisory
measures. On December 13 and 14,2007, Chinese Customs and U.S
Customs and Border Protection offiCials will hold technical diSCUSSions to
agree on the JOint validation procedure of the Customs- Trade Palinershlp
Against Terrorism (C-TPAT) pilot project In China, which is expected to
begm in early January 2008, with joint validations led by China Customs and
technical mput prOVided by US Customs and Border Protection

•

In Innovation, the United States and China co-hosted an Innovation
Conference on December 10, 2007 in Beijing. Both sides discussed tile
factors contributing to a successful ecosystem for Iflnovatlon, the
approprrate roles of the public and private sectors In fosterlflg Innovation,
and how to encourage the creation, protection and dissemination of
Intellectual assets. The two sides agreed to sustain dialogue, jOllltly host
public-private innovation discussions, and other cooperation as outlined In
the SED III Innovation Conference Outcomes document.

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BOtl1 sides decided to prioritize work during the next SIX months The two countries
will:
•

•

Further Intensify dialogue and exchanges in the areas of product and
consumer safety. including food, feed, and drug and medical products,
through new and existing bilateral cooperation mecllanlsms.
Conduct extensive cooperation over a ten-year period that will address
energy and tile environment. This ten yeal collaboration will advance
technological innovation, adoption of Ilighly-efflclent, clean energy
technology and tecllnology In adclresslng climate change, and promote tile
sustainabillty of natural resources. We will establish a working group In
order to start planning as soon as possible
Meet early next year and work together to JOintly promote tile negotiation in
the WTO on the reduction or, as appropriate, the elimination of tariffs and
non-tariff barriers to environmental goods and services to achieve results as
soon as pOSSible, recognizing the urgency of environmental challenges.
Expand cooperation on development of a detailed plan to gradually reduce
the sulfur content in fuels to 50 ppm or lower and Introduce corresponding
advanced vehicle pollution control technology, for Incorporation Into China's
12th Five Year Plan. Strengthen cooperation on construction and
management of strategic oil stocks through the exchanges of information
and technologies, as well as training, Including cooperation With the
International Energy Agency.
Begin a high-level exchange of investment policies, practices, and climates
IntenSify ongoing discussions regarding the prospects for negotiating a
Bilateral Investment Treaty Contillue consultations in a cooperative manner
on China achieving market economy status. Continue cooperation through
tile JCCT High Technology and Strategic Trade Working Group by
POSitively implementing "Guidelines for U.S.-China High Technology and
Strategic Trade Development" and taking appropriate constructive
measures and working out an action plan to expand and facilitate bilateral
high-tech and strategic trade. Relevant departments of the two sides Ilave
agreed to meet or hold a digital video conference (DVC) In the field of rules
of origin
Explore the scope of respec\lve International obligations on transparency.
Continue to exchange information on reViewing and responding to
comments received dUring the rulemaklng process. Establish a
communication mechanism to eXChange Information regularly on the
conditions, procedures and timeframes for granting admillistrative licenses
in areas of the Chinese market of Interest to the United States and areas of
the US market to China.

The fourth SED will be held In Washington In June 2008.

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hp~733: U.S. Fact Sheet: The Third Cabinet-Level Meeting of the U.S.-China Strategic Economic...

Page 1 of ~

December 13, 2007
hp-733
U.S, Fact Sheet:
The Third Cabinet-Level Meeting of the U,S,-China Strategic Economic
Dialogue
December 13, 2007, Beijing
The United States and China today concluded the ttllrd Cabinet-level meeting of the
Strategic Economic Dialogue (SED) President George W Bush and President Hu
Jilltao established the SED to create a Cabinet-level forum to articulate 10llg-term
objectives while managing short-term challenges In our economic relationship
DUring the meeting held December 12 and 13, 2007 at Grand Epoch City near
BeiJing, 6 U.S. Cabinet officials and agency heads jOined Secretary Paulson for
discllssions With China's Vice Premier Wu YI and a delegation of 14 Chinese
millisters and agency heads.
The SED is a mechanism for managing the US.-China economic I'elationship on a
strategic basis. Stable and prosperous bilateral economic relations are IIlcreasingly
Important to both countries. At the meeting this week, leaders from both countries
discussed the following topics Integrity of trade and product safety: balanced
economic development, Includlllg financial sector reform, enel'gy effiCiency and
security: environmental sustamabillty, arld bilateral Investment.
Integrity of Trade and Product Safety
The United States is one of the most open economies in the world, and American
consumers benefit from this openness through access to a wide variety of products
from around the world. Americans have every expectation these products are safe,
and the United States continues to take steps With all trading partners to maintain
that confidence in the safety and quality of these products.
China IS an important trading partner for the United States, and both countries have
a continuing dialogue to strengthen the Integrity of their trade relationship. ThiS has
resulted in agreements thiS week by China to meet the strict requirements the
United States has In place to protect consumers and ensure the safety and quality
of products sold In the marketplace.
•

Food and Feed Safety As a result of a Memorandum of Agreement
between the U.S Department of Health and Human Services (HHS) and
China's General Administration of Quality Supervision, Inspection and
Quarantine (AQSIQ), Cilina will strengthen requirements for registering and
regulating companies that export food and feed products to the United
States. This step will help prevent adulterated and substandard food and
feed products from being transported between China and the United States.
Additionally, China will begin to certify products that meet the requirements
of HHS. To continuously ensure and monitor the safety of food and feed
coming from China, the United States will establish processes to audit
Chillese procedures for registration and certification of exporting
companies.
o The U.S. Department of Agriculture (USDA) IS finalizing a separate
agreement With China's AQSIQ to allow both countries to facilitate
trade related to meat, poultry and egg products.

•

Drugs and Medical Products HHS and China's State Food and Drug
Admillistration (SFDA) have agreed to expand cooperation In tile areas of
the safety of drugs and medical deVices. These steps will allow China to
further combat pharmaceutical counterfeits, and strengthen the quality and
safety of finished drugs, active pharmaceutical ingredients and exported to
the United States.

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•

Environmentally Compliant Imports and Exports The EnVIronmental
Protection Agency and China's AQSIQ have signed a Memorandum of
Agreement to strengthen cooperation on sound enVironmelltal management
practices related to imports and exports

•

Alcohol and Tobacco Products: The United States and China have signed a
Memorandum of Undel-standing to expand collaboralion and cooperation for
the excllange of Information on regulatory standards for alcohol and tobacco
products, to improve the safety of Imports and exports between the two
countries

•

Consumer Products Additionally, since September 2007, tile United States
and Chilla have signed three separate agreements and work plans that
strengthen cooperation With the goal of increaslllg the safety of consumer
products. These agreements and work plans cover toys, fireworks, lighters.
and electrical products: motor-vehicle safety: and pesticides The
agreements, in total, demonstratR the United States' contilluing commitment
to ensuring the safety of the American consumers and the integrity of
products in the American marketplace

Financial Sector Reform
New Commitments at the Third Cabtnet-Ievel SED
•

Foreign Issuance of RMB Stocks and Bonds: China has agreed to allow
foreign companies doing business In China, Including banks, to issue RMBdenomillated stocks and bonds. ThiS Will provide US companies With new
opportunities to finance and expand their sales in China

•

Limits on Foreign Investment By the end of next year, China agreed to
complete a study With recommendations on policies governing foreign
equity partiCipation in the banking sector. China also agreed to complete a
study With recommendations on adjusting the extent of foreign equity
participation in the securities sector This will pave the way for greater
business opportunities In China's growing financial sector for US.
companies.

•

Bank Administered Mutual Funds: Chinese and U.S. regulators have
agreed to an exchange of letters allowing mutual funds administered by
Chinese banks to invest III the US stock market. This will create new
business opportunities for U.S money managers and new finanCing
opportunities for U.S. compailies.

Implementation of PrevIous SED Comlmtmellts
•

Securities: China announced they will resume licenSing of new JOint-venture
securities companies. In addition, China has also announced that It will
allow foreign securrties firms to expand their operations in China to Illclude
brokerage, proprietary trading and fund management. This will cleate new
opportunities for US firms in a variety of securities bUSinesses. Several
foreign firms, includlllg some U.S. firms are in advanced stages of
establishing new JOint ventures.

•

Qualified Foreign Institutional Investors China has raised the quota for
Oualified Foreign Institutional Investors, which allow foreign mutual funds to
invest in China's domestic stock market, from $10 billion to $30 billion,
creating new opportunities for U.S. mutual funds and money managers

Exchange Rate Policy
•

RMB Appreciation: The RMB has appreciated 12.2% since July 2005, and
in the past year the annual pace of appreciation has accelerated from 3.4%
in 2006 to 6,1% in 2007 year to date.

Energy Efficiency and Security and Climate Change

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Building on the themes of the Major Econolllies Meetmg hosted by President Bush
in September, which stressed energy secunty and climate change, the United
States and China agreed to conduct extensive cooperation over a ten-year period
to address the challenges of environmental sustalnabllity, climate change alld
energy security. This ten year collaboration Will advance technological innovation,
further the adoption of highly-efficient, clean energy technology, promote the
development of technology to address climate change, and promote the
sustainability of natural resources We will establish a workmg group In order to
start planning as soon as possible
Both sides agreed to take additional steps to promote energy effiCiency and security
and address climate change
•

Low Sulfur Fuels. The United States and Chma agreed to expand
cooperation on development of a detailed plan to gradually reduce the sulfur
content III fuels to 50 PPM or lower and to Introduce correspondlllg
advanced vehicle pollution control technology, for Incorporation Into Chllla's
12th Five-Year Plan Sulfur dioxide IS one of the contributors to aCid ram,
and adopting low sulfur fuels will allow Chilla to reduce sulfur dioxide
emissions from vehicles while addressing global energy effiCiency and
security challenges.

•

Bloluels The United States and China signed a memorandum of
understanding to strengthen cooperation on the development of blofuels,
which enhances energy sufficiency and lowers countries' carbon profile

•

Eliminating Barriers to Trade III EnVIronmental Goods and Services The
United States and China reaffirmed their commitment "to reduce, or as
appropriate, eliminate tariffs and non-tariff barriers to environmental goods
and services" in the WTO. Recognizing the urgency of enVIronmental
challenges, both Sides also agreed to meet In early 2008 and to work
together to promote the negotiation in the WTO on the reduction or, as
appropriate, the elimination of tariffs and non-tariff barriers to enVIronmental
goods and services to achieve results as soon as possible.

•

Cooperation on Strategic Oil Stocks The United States and China agreed to
strengthen cooperation on construction and management of strategiC oil
stocks, includlllg cooperation With the International Energy Agency (lEA).
Coordinated use of strategic petroleum reserves Increases energy security
for net oil importlllg countries dUring times of significant supply disruption

Environmental Sustainability

Protecting the environment and promoting clean energy represent a shared Priority
for the United States and China. The two countries are the two largest consumers
of natural resources, and recognize that meaningful results reqUire cooperation on
a Wide range of sustainable resource and ellVlronment Initiatives. Agreements
reached between the two countnes Include
•

Establishment of a National Emissions Tradlllg Program In China Chilla
announced that based on a JOint U.S and China study Initiated at tile first
Cabillet-level meeting of the SED, Chilla Will develop and implement a
nationWide program on sulfur diOXide emiSSions tradlllg III the power sector
Sulfur dioxide emissions frolll power plants contribute to acid ralll and fille
particle pollution, and emissions trading is one of the most cost effective
methods for reducing these emiSSions. The United States has agreed to
provide technical assistance to support the development of the necessary
infrastructure and Institutional capacity for the successful Implementation of
the program.

•

Combating Illegal Logging and Associated Trade China and the United
States concluded a Memorandum of Understandlllg (MOU) to combat illegal
logging and associated trade and to promote sustaillable forest
management. The MOU establishes a bilateral forum that Will commence
work immediately to share IIlformatlon concerning shipments of timber.
enhance law enforcement against Illegal actiVity and encourage
partnerships With the private sector to promote sustainable forest

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management The MOU provides the basis for the negotiation of a detailed
bilateral agreement on illegal logglllg and associated trade Issues.
The MOU between the United States and Chilla IS groundbreaklllg as It is the fllst
to address the important issue of Illegal trade in a natural resource SUCll as timber.
Illegal logging contributes Significantly to the high I'ates of deforestation currently
occurring worldWide. Deforestation not only threatens the health and surVival of
forests and the humans and Wildlife ttlat depend on them, It is also estimated to
contribute to 20 percent of worldWide greenhouse gas emiSSions
•

Clean Water: The United States Will provide technical assistance III baSIC
water management programs to assist Chilla In the establishment of sound
water pollution control and management pracllces, Including pernllttlllg, the
development of technology-based effluent standards, monitoring,
enforcement, and compliance

Bilateral Investment
The United States contillues to vigorously promote openness to trade alld
investment. Inbound and outbound Investment benefits the United States by
stimulating growth, creating jobs, enhancing prosperity, and fostering
competitiveness Both the United States and China have a mutual interest in
supporting and promoting open Investmerlt and market-based competition, and
have agreed to create a high-level exchange on investment that covers investment
poliCies, practices and climates.
•

Progress on a Bilateral Investment Treaty The United States and China
jointly agreed to intensify ongoing diSCUSSions regardlllg the prospects of
negotiating a Bllatel'al Investment Treaty prOViding meaningful Investor
protections The next steps In discussions will continue to focus, In concrete
terms, on the potentially most significant differences and expand the focus
on other BIT obligations.

Transparency
Transparency In the rule-making process promotes confidence In government and
provides predictability for market partiCipants, thereby facilitating informed
economic and business planning deciSions. The United States and China have
agreed to have rule-making systems that provide for publiC partiCipation in rulemaking, and to continue cooperating 011 transparency issues,
•

Admifllstratlve Rulemaklng China and the United States each agreed,
when pOSSible, to publish III advance any measure covered by ItS WTO
obligations that are proposed for adoption, and provide where applicable
interested persons a reasonable opportunity to comment on such proposed
measures, Each country may comply with thiS obligation by regularly
publishing such proposed measures In its deSignated official journal or by
posting and permanently maintaining these measures on an official webSite.
They also agreed to publish in its designated official journal any fill a I
measure covered by ItS WTO obligations before implementation or
enforcement.

•

Cooperation: China and the United States agreed to diSCUSS the scope of
their international obligations on transparency, lIIc1udlng their respective
WTO and APEC obligations, before the next Cabinet-level meeting of the
SED. They also agreed to continue exchanging Information on
administrative rule-making, Including methods for revieWing and responding
to public comments, and on the conditions, procedures, and timeframes for
granting admifllstratlve licenses In areas of the Chinese market of interest to
the United States and areas of the U,S market of intel'est to China.

Innovation
The U,S. Departments of Commerce and State and the Cilinese Ministry of SCience
and Technology, National Development and Reform CommiSSion, and Ministry of
Commerce co-hosted an Innovation Conference on December 10, 2007 In Beijing
At thiS important meeting, both Sides discussed tile factors contrrbutlng to a

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successful ecosystem for innovation, the appropl'iate roles of the public and private
sectors in fostering Innovation, and how to encourage the creation, protection and
dissemination of intellectual assets, BOtil sides also reaffirmed the Importance of
tile rule of law, market orrented poliCies and competition for Innovation and
confirmed the role of a robust Intellectual property protection regime In supporting
an Innovation ecosystem. Tile two Sides agreeel to sustain dialogue allel JOintly host
public-private innovation discussions

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HP-734: UPDATE: Secretary Paulson to Visit Florida, Missouri, California to Discuss the Administrati... Page 1 of 2

December 14. 2007
HP-734
UPDATE: Secretary Paulson to Visit Florida. Missouri, California to Discuss
the Administration's Efforts to Reduce Foreclosures
Secretary Henry M. Paulson. Jr will travel to Orlando. Kansas City. Stockton, Calif.
and Los Angeles next week to discuss IIle Admlnlstratlon's efforts to address
mortgage market Issues and help families struggling with their' mortgage avolcl
foreclosure.
Paulson Will meet with local offiCials, community leaders, and representatives frolll
local businesses to discuss wllat has been proposed and what can be done to help
more people. Last week Paulson JOined PreSident Bush and HUD Secretary
Jackson to commend a private sector effol1 to streamline the refinancing and
modification process and deliver quicker help to homeowners facing foreclosure
(For more information on this announcement go to:
,)

He will also participate in an event to hlglllight the Importance of open investment In
Los Angeles on Wednesday,
The following events are open to the media
What DISCUSSion on Housing
When Monday December 17, 245 p.m EST
Where
East Orange Community Center
12050 East Colonial Drive
Orlando. Fla.
Note Media should arrive by 2:30 p.m.

What Discussion on HOUSing
When Tuesday, December 18,1000 a.m CST
Where
Bruce Watkins Cultural Herrtage Center and Museum
3700 Blue Parkway
Kansas City. Mo.

What Discussion on HOUSing
When Tuesday, December 18, 130 pm PST
Where
Van Buskirk Community Center
734 Houston Avenue
Stockton. Calif

What Roundtable on Trade
When Wednesday, December 19, 930 a m PST
Where
World Trade Center
Investment Room 1 &2
1 World Trade Center
Long Beach. Calif.

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HP-735: Paulson Statement on IDA Replenishment

Page I of I

December 14, 2007
HP-735

Paulson Statement on IDA Replenishment
Washington, DC--Treasury Secretary Hemy M. Paulson, Jr. today issued the
followlIlg statement on the announcement of the U.S pledge to the International
Development Association (IDA)
"Today's announcement demonstrates the United States' strong commitment to the
poorest countries In the world and to IDA. I'd like to thank World Bank PreSident
Robert Zoellick for his leadership and the donor community for their contributions
and commitment to fightlllg povelty. Our pledge of $37 billion IS a 30 percent
increase and represents the largest three-year Increase since the Carter
administration and helps finance President Bush's debt relief initiative for the
poorest countries. The IDA 15 replenishment furthers the World Bank's commitment
to effective engagement In fragile states and Improving results on the ground I look
forward to working with Congress to fund these commitments and I urge them to
meet the PreSident's bu(Jget request for paying back our arrears."

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HP-736: Paulson Statement on Signing of Peru Free Trade Agreement Act

Page 1 of I

December 14. 2007
HP-736

Paulson Statement on Signing of Peru Free Trade Agreement Act
Washington, DC-- Treasury Secretary Hemy M Paulson. Jr. today Issued the
followlllg statement following the President's signing of H R. 3688. the United
States-Peru Trade Promotion Agreement Implementation Act Wltll Peru's President
Alan Garcia
"Today's signing demonstrates the United States' continued commitment to
reduclllg trade barriers and spreading prosperity Irl the Americas. Free trade
agreements are a proven way to stimulate U.S exports. create Jobs and usher Irl
foreign investment and bOtil of our countries will benefit from thiS Important
bipartisan accomplishment US businesses and exporters will gain access to
Peru's markets while Peru will continue its economic growth and stability with an
expanded trade relationship with the largest market in the world
I look forward to working with Congress to secure passage of the other Important
pending free trade agreements with Colombia. Panama. and South Korea."

http://www.treasgo v/press/rele as e s /bp736.htm

113/2008

hp737: Treasury Warns Public About E-Mail Scams

Page I of I

December 14, 2007
hp737

Treasury Warns Public About E-Mail Scams
Washington, DC -Treasury has become aware of phony e-mail messages
claiming to come from Department offiCials For example, these messages, which
are unsolicited by the I'eclplents, falsely assert that TreasulY IS seeking to transfer
funds to the reCIpient of the e-mail or accuse the recipient of tax avoidance or
money launderrng. These e-malls may request sensitive Information from the
recIpient. supposedly In order to process the bogus transaction
These messages are a hoax deslgneel to trick Victims into revealing confidential
information Treasury recommends that reCIpients not responcl to such messages
Treasury does not send unsoliCited requests and does not seek personal or
financialillformation from members of the publiC bye-mail. Anyone who receives an
email of this nature should file a complaint at
E-mail users should be wary of any unsoliCited messages IIlat purport to come from
U,S Government agencies asking them to prOVide senSitive personal information
The transmission of phony e-mail messages requesting confidential mformatlon is a
practice known as "phIShlllg." The perpetrator of a "phishlng" scam attempts to trick
the Victim IIlto revealing cOllfldentlal illformatlon, which then is used for purposes of
Identity theft or other crrmes.
Members of the public can learn more about protectlllg themselves from "phlshlng"
and other internet-based threats at OnGuardOnline.gov, a web site created by the
Department of Justice in partnership with other federal agencies and the technology
industry to help stay safe online.
Anyone receiving a solicltal1on purporting to be from, or otherWise Involving the
Internal Revenue Service, may report it to the Treasury Inspector General for Tax
Administration at
Treasury Inspector General for Tax Admlllistration Hotline
PO Box 589 Ben Franklin Station
WaShington, DC 20044-0589
Email:
Phone 1-800-366-4484
Fax: 202-927-7018
Solicitations purporting to be from, or otherWise Involving the Department or the
Secretary of the Treasury, may be reported It to the Treasury Office of Inspector
General at:
Treasury Hotline
Office of Inspector General
1500 Pennsylvania Ave, NW
Washington, D.C 20220
Email:
Phone' 1-800-359-3898
Fax: 202-927-5799
-30-

lttp:llwww.treas~ov/press/releases/hp737.ptm

1I3/2008

Page 1 of 3

FROM THE OFFICE OF PUBLIC AFFAIRS
We recommem7 pontlllg tIJIS release lISlIlg
To view or pont tile PDF content on t/lIS p~

'Iow
lJe free

December 17. 2007
HP-738

Treasury International Capital (TIC) Data for October
Treasury International Capital (TIC) de
which will report on data for Novembe

~r are released today and posted on the U.S. Treasury web site (www.treas.gov/tic). The next release.
d for January 16. 2008

Net foreign purchases of long-term se

S114.0 billion.

•

Net forelgll purchases of longpurchases by private foreign ir

urltles were S118.0 billion
$96.2 billion.

•

U S reSidents purchased a ne

)f long-term foreign securities.

Of ti,lS. net purchases by foreign official institutions were $21.8 billion. and net

Net foreign acquIsition of long-term se

g into account adjustments. IS estimated to have been $101.5 billion.

Foreign holdings of dollar-denominate
1l0ldlngs of Treasury bills Increased $~

JS. seCUrities. including Treasury bills. and other custody liabilities increased S299 billion

Banks own net dollar-denominated lia

ign reSidents decreased S33.7 billion

Monthly net TIC flows were positive $~
billion

'f this. net foreign private flows were positive $562 billion. and net foreign offiCial flows were positive S41 .6

Foreign

-30-

TIC Monthly Reports on Cross-Border Financial Flows

http://www.treas.gov/press/reJeases/hp73S.htm

111S/200S

IJO.

~ 1 C;a;:'U1Y HHClllallUll<11 ~<1Pll<11 ~ 11~)

Page 2 of 3

uara for Uctober

- -

2005
--~

Foreigners' Acquisitions of Long-term Securities
I

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) II

17157.5 21186.9
16145.9 20021.0
1011.5 1165.9

20000.1
18858.5
1141.6

28340.8
27274.2
1066.7

2474.0
2448.8
25.2

3323.3
3359.3
-36.0

2332.7
2276.3
56.4

2671.9
2553.8
ll8.0

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

967.0
135.4
201.4
485.5
144.6

953.8
147.3
186.1
458.0
162.4

893.8
231.0
125.5
385.9
151.4

20.9
-2.4
1.2
3.7
18.4

-11.7
26.9
4.3
-3.8
-39.1

27.9
11.6
2.3
11.4
2.5

96.2
45.9
4.8
15.7
29.9

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

199.0
71.8
92.6
28.5
6.0

187.8
73.3
79.2
26.8
8.5

172.9
1.2
128.4
43.5
-0.2

4.4
-6.9
7.5
1.0
2.8

-24.2
-29.7
4.1
3.0
-1.6

28.5
14.6
9.2
4.6
0.1

21.8
4.0
10.0
7.4
0.4

3700.0
3872.4
-172.4

5527.1
5778.9
-251.8

5171.8
5378.5
-206.7

7961.2
8284.8
-323.5

759.3
764.9
-5.5

823.8
858.3
-34.5

557.8
598.8
-41.0

809.4
813.5
-4.1

-45.1
-127.3

-144.11
-107.7

-107.71
-99.0

-170.71
-152.8

0.9
-6.4

-21.7
-12.9

-19.7
-21.3

-9.1
5.0

839.1

914.2

934.9

743.1

19.7

-70.5

15.4

114.0

-143.0

-169.9

-155.6

-199.9

-22.2

-16.1

-20.6

-12.5

Net Foreign Acquisition of Long-Term Securities
(lines 19 and 20):

696.2

744.2

779.3

543.2

-2.5

-86.6

-5.2

101.5

Increase in Foreign Holdings of Dollar-denominated ShortU.S. Securities and Other Custody Liabilities: 16
U.S. Treasury Bills

-47.6
-58.9

146.21
-9.0

118.41
-13.6

169.41
22.8

56.1
18.6

33.7
21.0

3.7
-6.7

29.9
9.0

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) 14
Foreign Bonds Purchased. net
Foreign Equities Purchased, net

Net Long-Term Securities Transactions (line 3 plus line

Other Acquisitions of Long-term Securities, net 15

22
23

http://www.treas.goy/press/releases/hp738.htm

1118/2008

Page 3 of 3

Private, net
Official, net
Other Negotiable Instruments
and Selected Other Liabilities: 17
Private, net
OfficiaL net

24
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
31
Private, net
32
OfficiaL net

11
/2
/3
/4

17
/8

-15.6
-43.3

16.1
-25.0

7.7
-21.3

21.0
1.8

3.3
15.3

17.2
3.8

-4.9
-1.8

6.9
2.2

11.4
10.6
0.8

155.1
174.9
-19.8

132.0
144.3
-12.3

146.6
84.2
62.5

37.5
36.6
1.0

12.6
-14.7
27.4

10.4
1.5
8.9

20.9
0.9
20.0

16.4

183.7

228.8

-123.3

47.2

-97.8

-31.3

-33.7

665.0

1074.1

1126.5

589.3

100.8

-150.8

-32.8

97.8

578.0
87.0

931.4
142.7

999.5
127.0

346.3
243.0

62.6
38.2

-129.3
-21.4

-46.2
13.4

56.2
41.6

Net foreign purchases of U.S. securities (+)
Includes intemational 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 I O.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 tlows, but do not include data on direct investment tlows, 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 I on the TIC web
site describes the scope of TIC data collection.

REPORTS

http://www.treas.gov/press/releases/hp738.htm

u.s. TREASURY DEPARTMENT OFFICE OF PUBLIC AFFAIRS
9 AM (EST), December 17,2007
Ann Marie Hauser, (202) 622-2960

EMBARGOED UNTIL
CONTACT

TREASURY INTERNATIONAL CAPITAL DATA FOR OCTOBER

Treasury International Capital (TIC) data for October 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 November, is scheduled
for January 16,2008.
Net foreign purchases oflong-term securities were $114.0 billion.
•

Net foreign purchases oflong-term U.S. securities were $118.0 billion. Of this, net purchases by
foreign official institutions were $21.8 billion, and net purchases by private foreign investors
were $96.2 billion.

•

U.S. residents purchased a net $4.1 billion of long-term foreign securities.

Net foreign acquisition of long-term securities, taking into account adjustments, is estimated to have
been $101.5 billion.
Foreign holdings of dollar-denominated short-term U.S. securities, including Treasury bills, and other
custody liabilities increased $29.9 billion. Foreign holdings of Treasury bills increased $9.0 billion.
Banks' own net dollar-denominated liabilities to foreign residents decreased $33.7 billion.
Monthly net TIC flows were positive $97.8 billion. Of this, net foreign private flows were positive
$56.2 billion, and net foreign official flows were positive $41.6 billion.

TIC Monthly Reports on Cross-Border Financial Flows
,
(Billions of dollars not sC'lsonall
ya d·.Ius ted)
ZOOS

200(,

12 Months Throu~h
Oct-06
Oct-(J7

Oct-iJ7

1ulv-1I7

Auo-1I7

Scp-1I7

33233
3359.3
-36.0

2.132.7
227(>.1
56.4

255J.S
IIH.I)

-11.7
26.9
4.3

27.9
IU,

96.2
45.()

Foreigners' Acquisitions of Long-term Sccuritil'S
I

2
J

Gross Purchases of Domestic U.S. Secunt,es
Gross Sales of Domestic U.S. Secuntles
Domestic Securities Purchased, net (line I less IlIle 2) II

17157.5 21186.9
1(,145') 20021.0
1011.5
1165.9

20000.1
18858.5
1141.6

28340.8
27274.2
1066.7

247411
244g~

25.2

2(,71 ()

4
5
6
7
8

Private, net /2
Treasury Bonds & Notes, net
GO\ 't Agency Bonds. net
Corporate Bonds. net
EqUities. net

891.1
269.4
187.6
353.1
81.0

967.0
1354
201.4
485.5
144.6

953.8
147.3
186.1
458.0
162.4

893.8
231.0
125.5
385.9
1514

20.9
-2.4
1.2
37
184

-J.S

2.3
I l.l

4X
15.7

-391

2().9

9
10
II
12
13

Official, net /3
Treasury Bonds & Notes. net
Gov't Agency Bonds, net
Corporate Bonds, net
Equities, net

120.4
68.7
31.6
19.1
1.0

199.0
71.8
92.6

172.9
1.2
128.4
43.5
-0.2

4.4
·6.9
7.5
1.0
2.8

-24.2
-29.7
4.1
3.0
-1.6

28.5
14.1,
9.2
46
0.1

21.8

6.0

187.8
73.3
79.2
26.8
8.5

37000
3872.4
-172.4

5527.1
5778.9
-251.8

5171.8
5378.5
-206.7

7961.2
8284.8
-323.5

759.3
76-1')
-5.5

8238
8583
-34.5

557.8
5'18.8
-41.0

8094

-45.1
·127.3

-144.1
-1077

-1077
-99.0

-170.7
-1528

0.9
-6.4

-21.7
-12 'I

-19.7
-21.3

-9 I
50

839.1

914.2

934.9

743.1

19.7

-70.5

15.4

114.fl

-143.0

-169.9

-155.6

-199.9

-22.2

-16.1

-20.6

-12.5

696.2

744.2

779.3

543.2

-2.5

-86.6

-5.2

101.5

-47.6
-58.9
-15.6
-43.3

146.2
-9.0
16.1
-25.0

118.4
-13.6
7.7

169.4
22.8
210

29.9
9.0
6.9

33.7
21.0
17.2
3.8

3.7
-6.7
.4.9

-213

56.1
18.6
3.3
15.3

-1.8

2.2

11.4
10.6
0.8

155.1
174.9
·19.8

132.0
144.3
-12.3

146.6
8-1.2
62.5

37.5
36.6
1.0

12.6
-147
27A

lOA
1.5
8.9

20.9
0.9
20 (J

16.4

183.7

228.8

-123.3

47.2

-97.8

-31.3

-33.7

665.0

1074.1

1126.5

589.3

100.8

-150.8

-32.8

97.8

578.0
87.0

9314
142.7

999.5
127.0

346.3
243.0

62.6
38.2

-129.3
-214

·46.2
13 -1

5(,.2
41.6

14
15
16
17
18

Gross Purchases of Foreign Securities from U.s. ReSidents
Gross Sales of Foreign Securities to US Residents
Foreign Securities Purchased, net (line 14 less IlI1e 15) /4
Foreign Bonds Purchased. net
Foreign Equities Purchased, net

Net Long-Term Securities Transactions (11Ile 3 pillS IlI1e 16)·

Other Acquisitions of Long-term Securities, net 15

Net Foreign Acquisition of Long-Term Securities
(lines 19 and 20):

Increase in Foreign Holdings of Dollar-denominated Short-term
U.S. Securities and Other Custody Liabilities: /6
U.S. Treasury Bills
Private. net
Official, net
Other Negotiable Instruments
and Selected Other Liabilities: !7
Private, net
OffiCial. net

Change in Banks' Own Net Dollar-Denominated Liabilities

23
24
25
26

30 Monthly Net TIC Flows (lines 21,22,29) /8
of which
31
Private. net
32
Official, net
II

n.5

Net foreign purchases of U.S. secunties (+)

Includes international and regIOnal organizations

The reported diviSion of net purchases of long-term securities between net purchases by foreign offiCial instltutlOns and net purchases
of other foreign investors is subject to a "transaction bias" described in Frequently Asked Questions 7 and I O.aA
the TIC web Site.
Net transactions in foreign securities by U.S. resldents. Foreign purchases of foreign securities = U.S. sales offoretgn S~(lIf1t1es to fon!lgners
Thus negative entries indicate net U.S. purchases of foreign securitIes, or an outnow of capital from the United States. po~ill\"e enlne~
indicate net U.S s<.tJes 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
acqUIsitions of foreign equity through stock swaps +
increase in nonmarketable Treasury Bonds and Notes Issued to Official Institutions and Other Residents of Foreign Countnes
These are primarily data on monthly changes 111 banks' and brokerldealers' custody liabilities. Data on custody clall11S arc collected
quarterly and publIShed in the Treasury Bulletin and the TIC web site.
"Selected Other Liabilities" are primarily the loreign liabilities of Us. customers that are managed by U.S. banks or broker/dealers
TIC data cover most components of internationallinancwl flows. but do not include data on direct investment 110\\5. which arc collected
and published by the Department of Commerce's Bureau of Economic AnalysIS. In addition to the monthly data summanzed here. the
TIC collects qual1erly data on some banking and nonbankll1g assets and liabilities. Frequently Asked Question I on the TIC web

u.s.

i7
18

site deSCribes the scope of Tie data collection.

-30-

HJ
10.0
74
0.4

813.5
-4.1

HP-739: U.S. Government Releases FY 2007 Financial Report

Page 1 of I

December 17, 2007
HP-739
U.S. Government Releases FY 2007 Financial Report
Washington - Tile Treasury Department and the Office of Management and
Budget today released the Fiscal Year 2007 FinanCial Report of the United States
Government The report details the US government's short-term and long-term
flllanCial outlook, Includlllg the government's biggest fiscal challenge- the
unsustainable growth in entitlement programs The report complements the
President's Budget to be released In February 2008.
"The $2.6 trillion in record-breaking revenues that flowed into the Treasury this year
reflect a healthy economy The 39 percent drop In our net operatlllg costs
complements the defiCit reduction reported in October," said Treasury Secretary
Henry M. Paulson, Jr "But to continue thiS progress, we must maintain diSCipline on
spending. The expected revenue in years ahead will not come close to meetlllg the
growing cost of our social insurance programs We all have a responSibility to fiX
this problem now, before it becomes a severe economic burden for our children and
grandchildren"
"This year's budget results reinforce that tax relief combilled With spending restralilt
works. This formula has helped promote economic expansion that, In turn, has
helped generate higher-than-expected revenue and resulted in defiCit reduction of
$250 billion over the last three years," said OMB Director Jim Nussle. "Reducing
the deficit in the short-term Will put us In a better position for dealing with the longerterm entitlement issue, which can only be characterized as an oncoming fiscal tralll
wreck."
Revenue results in thiS year's fiscal report were $2.6 trillion, a 7.6 percent
improvement from last year. Consistent with the improved budget results, the
FinanCial Report's 2007 net operating cost of $276 billion is approximately $175
billion lower than the 2006 figure.
The report indicates that fundlllg for Social Security and Medicare Will come up $45
trillion short in the next 75 years Without reform, the cost of these programs will
total 18 percent of GOP by 2080
The Government Accountability Office audited the Statement of Social Insurance
for the first time and issued a clean opinion thiS year The SOSI, a CrItical
component of the Financial Report, compares the government's expected
resources for programs such as Social Security and Medicare to what it expects to
have to pay In benefits over the next 75 years III current dollar terms. A clean
opinion indicates that the report fairly and accurately reflects the financial position of
the social insurance programs.
For the past four years, Treasury has Issued the report on December 15 or the first
business day following that date, well ahead of the statutory March 31 deadlille.
The report can be found at

http://www.treas.gov/press/releases/hp739.htm

1/312008

HP-740: Secretary Paulson Prepared Remarks Before the Housing Townhall Meeting at the Ea... Page 1 of:::

December 17, 2007
HP-740
Secretary Paulson Prepared Remarks
Before the Housing Townhal\ Meeting
at the East Orange Community Center
Orlando, Fla. - Good afternoon Tilank you, Congressman Feeney and tilanks to
all of you for Joining me to discuss the current housing market.
After years of unsustainable home price appreciation and an abundant supply of
easy credit, the US hOUSing market IS experiencing an Inevitable downturn. Here
In Orlando, house prices increased by an average of over 15 percent a year from
2001 to mid-2006. Now, that trend has reversed and house prices declined 7
percent in the last year. Your city has been particularly hard-hit by foreclosures.
Although the hOUSing market downturn IS a significant challenge, homeownershlp
remains a Vital and positive aspect of American life --- 68 percent of American
households own their own home and 93 percent of Americans pay their mortgages
every month, rigllt on time
We do expect that the hOllsing market turbulence will take some time to work
through, and that there Will be some penalty on our short-term economic growth.
Fortunately, the economic picture in Orlando is relatively strong you have a healthy
Job market, with an unemployment rate over one percentage point below the
national average
Overall, the US. economy will continue to grow and is fundamentally sound Core
inflation IS contained, continued job gains are providing a good foundation for
household spending, corporate balance sheets remain healthy overall, and strong
growth abroad IS supportlllg U.S exports. Our economy is operating against the
backdrop of a strong global economy
We want, when possible, to minimize the housing market downturn's impact on the
national economy, Florida's economy and Cities like Orlando. A spike In home
foreclosures can pose costs for whole neighborhoods, causing property values to
decline and crime to increase. This can undermine the financial stability of
neighboring families and communities.
Foreclosure isn't only expensive for homeowners. Investors - the owners of the
mortgage - also get hit with steep losses. Investors would ratiler find a solution
other than foreclosure, if there IS one.
In any normal bUSiness situation where both Sides see that they are gOing to suffer
losses. they would get together and strike a deal to minimize those losses. But thiS
situation isn't normal; the company that made your mortgage may no longer hold It.
Instead, mortgage Investors are spread allover tile world, making it very difficult for
them to reach an Individual decision on each troubled mortgage.
Until recently, our system has been able to shoulder the burden of this compleXity
because the volume of struggling borrowers was manageable In a period when
home prices were generally increasing. But today, there are a rising number of
sub prime borrowers who will face a problem when their mortgage Interest rate
resets and their monthly payments increase. We anticipate that 1.8 million owneroccupied subpnme mortgage resets will occur In 2008 and 2009 This rising volume
makes it impossible for the Investors who own the mortgages to deal With them In
the usual way
The government acted to prevent a market failure and to try to avoid unnecessary

http://www.treas,.gQy/press/releases/hp740. htrn

1/312008

HP-740: Secretary Paulson Prepared Remarks Before the Housing Townhall Meeting at the Ea... Page 2 of:
harm that would result from a cumbersome, difficult decIsion-making process due to
a coming wave of struggling subprlme borrowers We developed a solution that
involves no government funding or subsidies for IIldustry or homeowners
Our solution centers on bringing mortgage market participants together In the
HOPE NOW alliance. The alliance IS a coalition of mortgage servicers - the people
who collect your payments - counselors and Investors that are working to avoid
preventable foreclosures
As I see it, subpnme bormwers fall Into three broad categories. There are those
who can afford their adjusted Interest rate: these homeowners need no assistance.
There are homeowners who haven't even been making payments at the loan's
starter rate and may not Ilave IIle finanCial wherewithal to sustain home ownership:
some of these homeowners will become renters again
A third category is homeowners with steady Incomes and relatively clean payment
histOries who cannot afford tile higher adjusted rate. These are the homeowners we
need to see fast-tracked Into a modification or refinanCing
Through ttle HOPE NOW alliance we are fOCUSing on this third group, determining
who they are and what steps may appropriately assist them. With HOPE NOW. we
announced a three pomt plan to aggressively help as many able homeowners as
possible keep their homes.
First. we are increaSing efforts to reach able homeowners who are struggling With
their mortgages. We leamed that 50 percent of foreclosures occur Without
borrowers ever asking for help Many borrowers in trouble are afraid to speak to
their lenders. But we know that ttle sooner a struggling borrower reaches out to
address the problem, the more likely it's possible that It can be resolved Nothing IS
worse than dOlllg nothing.
HOPE NOW IS sending outreach letters to borrowers likely to be facing trouble, and
has expanded a toll-free number where concerned homeowners can talk to
mortgage counselol's about their financial circumstances.
Second, we are working to Increase the availability of affordable mortgage solutions
for these borrowers. The industry is developing modifications and other mortgage
products that may allOW more people to stay In their homes. HUD has implemented
FHASecure. which is already refillancing more homeowners Into FHA mortgages I
am very hopeful that Congress Will pass a final version of an FHA modernization
bill, so more borrowers will have the option of an affordable FHA mortgage
Third, we have led the industry to develop a systemalic means of effiCiently moving
able homeowners into sustainable mortgages. The industry came together and
developed straight-forward criteria to allow them to qUickly identify borrowers who
can't afford their mortgage reset. but have the financial wherewithal to continue to
own their home, For the mortgages in this group, both the borrower and the Investor
are better off If foreclosure is aVOided The industry announced two weeks ago that
they Will now be able to fast-track these borrowers into mortgage modifications --which will result In a 5-year Interest rate freeze for some mortgage holders.
ThiS effort is not an across-the-board mortgage payment freeze. There are many
subprlme borrowers who Will be able to afford their higher mortgage payments, so
they don't need help. Othel's Will not be eligible for fast-tracking, but will go through
a longer process to demonstrate that they can't afford the mortgage reset. And, of
course, some may not be able to afford any reasonable mortgage modification
The fast-tracking of a significant portion of these subprime bormwers Into a
refinance or a modification frees up resources so that lenders can work with other
borrowers. We are working to prevent a market failure by aVOiding foreclosures IIlat
otherwise would occur Just because someone wasn't reached in time or the system
could not respond qUickly enough to produce an outcome In the best interest of the
homeowners and the investors who own the mortgages
And let me say to all of you here today - that If you, a friend or family member IS
worned about losing their home, please call the HOPE NOW hot line or your
mortgage servicer immediately.

tttp:IIWWw.treas.gov/press/releases/hp740.htm

1/3/2008

HP-740: Secretary Paulson Prepared Remarks Before the Housing Townhall Meeting at the Ea... Page 3 of:
Our plan won't prevent every foreclosure. and modification will be available only
when It's a finanCially feasible and necessary solution. Tile Industry Ilas committed
to reporting results of this effort. and we Will measure our success by number of
foreclosures prevented, not the number of mortgages modified
This plan IS neither a silver bullet, nor is It perfect. but it is tile best way to deal With
the unprecedented volumes that threatened to overwhelm the normal functioning of
thiS market.
We can, and will, monitor tile situation closely and do our best to address Issues as
tlleyarrse.

http://www.treas.gov/press/releases/hp740. htm

113/2008

Page 1 of

December 17, 2007
2007 -12 -17 -17 -13-46-9210

U.S. International Reserve Position

The Treasury Department today released US reserve assets data for the latest week, As indicated in this table, U.~
reserve assets totaled $69,955 million as of the end of that week, compared to $70J28 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
IIDecember 14, 2007

I
IA Official reserve assets (in US millions unless otherwise specified)

IIEuro

1(1) Foreign currency reserves (in convertible foreign currencies)

IIYen

1
IITotal
11 69 ,955

1
I

II
11 11 ,268

11 2 5.431

II
11 14 ,144

II
11 5,543

II
11 19,687

Iii) banks headquartered In the reporting country

lof which: located abroad

I(iil) banks headquartered outside the reporting country

110

0
11

I(a) Securities
lof which: issuer headquartered

I'eporting country but located abroad

I(b) total currency and depOSits with
1(1) other national central banks, BIS and IMF

14 ,163

lof which: located in the reporting country
1(2) IMF reserve position

11 4 ,367

1(3) SDRs

11 9 .429

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)

110

I--financial derivatives

I--Ioans to nonbank nonresidents

I--other
IB Other foreign currency assets (specify)

II
II

--securities not included In official reserve assets

I
1

0
0

I--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. Predetermined short-term net drains on foreign currency assets (nominal value)

~~[------------~I~I_ _ _ _~II~_ _ _ _~I~I----~I~I----~III_ _ _ __
http://www.treaS~Qv/press/releases/20071? 171711.1(;Q? 1n htm

1/3/2008

Page 2 of4
II

[

I
I
I

"
"
"
"
"
"

[ 1 Foreign currency loans, seCUrities, and depOSits

IIpllnclpal

IIlnterest

I--inflows (+)

IIPrlnclpal

IIlnterest
2. Aggregate short and long positions in forwards and
futures In foreign cLmencies vis-a-VIs the domestic
currency (including the forward leg of currency swaps)

I (a) Short pOSitions ( - )

1 (b) Long positions

(+)

I 3. Other (specify)
--outflows related to repos (-)

--inflows related to reverse repos (+)
--trade credit (-)
--trade credit (+)

--other accounts payable (-)

I --other accounts receivable (+)

More IIlan 3
months and up to
1 year

More than 1 and
up to 3 months

Up to 1 month

IITota

I--outflows (-)

IIMaturity breakdown (residual maturity)

Ill. Contingent short-term net drains on foreign currency assets (nominal value)

II
IITota

applicable)

"
II

I(b) Other conltngent liabilities

More than 3
months and up to
1 year

More than 1 and
up to 3 months

IUp to 1 mooth

11 Contingent liabilities In foreign currency
(a) Collateral guarantees on debt falling due Within 1
year

IMaturity breakdown (residual maturity, where

2. Foreign currency securities issued with embedded
options (pultable bonds)

13 Undrawn, unconditional credit lines provided by:
(a) other national monetary authOrities, 81S, IMF, and
other international organizations

[--other national monetary authorities (+)

E-BIS (+)

E-IMF (+)

(b) with banks and oliler finanCial institutions

"II
II

headquartered In the reporting country (+)
(c) with banks and other fillancial institutions
headquartered outSide the reporting country (+)

~ndrawn,

unconditional credit lines provided to:

(a) other national monetary authorities, 81S, IMF, and
other international organizations

tother national monetary authorities (-)

http://www.treas.gov/press/releases/200712171713469210.htm

I
II

1/3/2008

Page 3 of4
I--BIS (-)
[--IMF (-)
(b) banks and other financial institutions headquartered
in reporting country (- )
(c) banks and other financial institutions headquartered
outside the reporting country ( - )

II
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
I(ii) Written calls
I(b) Long positions

\I
\I

I(i) Bought calls

Iri!) Written puts

IpRO MEMORIA In-the-money options

I( 1) At current exchange rate

II
II

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
\I

I(a) Short position
I(b) Long position

1(5) - 10 % (appreciation of 10%)

I(a) Short pOSition
hb) Long POSition

1(6) Other (specify)

I(a) Short pOSition
I(b) Long position

IV. Memo Items

I
1(1) To be reported with standard periodiCity and timeliness
lia) 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

G-nondeliverable forwards

I
I

[ --short positions
[ --long pOSitions

[other Instruments

[C) pledged assets

[inClUded in reserve assets

[inclUded in other foreign currency assets

lttp:llwww.treas.gov/nress/releases/200712171713469210.htm

1/3/2008

Page 4 of 4

I
I
I

I(d) securities lent and on repo
--lent or repoed and included in Section I

Il--Ient or repoed but not Included in Section I
--borrowed or acquired and included in Section I
--borrowed or acquil-ed but not included in Section I
(e) financial derivative assets (net, marked to market)
I--forwards
I--futures
I--swaps
I--optlons

II
1/

I--other

(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 (rncludlng the forward leg of currency swaps)
I(a) short positions ( - )
j{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

l(i) bought calls
I(ii) wntten puts

1(2) To be disclosed less frequently

I(a) currency composition of reserves (by groups of currencies)

11 6 9.955

I--currencies In SDR basket

11 6 9.955

I--currencles not In SDR basket

I--by IndiVidual currencies (optional)

Notes:

21 The items, "2. IMF Reserve Position" and "3. Special Drawing Rights (SDRs)," are based on data provided by the IMF
and are valued in dollar terms at the official SDRldollar exchange rate for the reporting date. The entries for the latest
week reflect any necessary adjustments, including revaluation, by the U.s. Treasury to IMF data for the prior month
end.
31 Gold

stock

valued monthly at $42.2222 per fine troy ounce.

http://www.trea>-govJpresslreleases/lD071217171346921O.htm

1/312008

HP-741: Treasury Statement on Federal Reserve Rules to Improve Mortgage Oversight

Page I of I

December 18. 2007
HP-741
Treasury Statement on Federal Reserve Rules to Improve Mortgage Oversight
Washington- US Treasury Under Secretary for Domestic Finance Robert K Steel
Issued the following statement today regarding the Federal Reserve Board of
Governor's release of proposed rules for tile Home Ownership and Equity
Protection Act
"Treasul'y commends the Federal Reserve's efforts announced today to Improve
mortgage lending practices. The Federal Reserve has used its authority to restrict
certain practices that are unfair or deceptive and to prOVide enhanced IIlfOrmatlon to
consumers. We support the development of such rules, which recognize the need
to protect consumers without unnecessarily restricting their access to credit"

http://www.treas.gov/pressireleasesJho741.b trn

11312008

HP-742: Secretary Paulson Prepared Remarks Before the Housing Town Hall Meeting in Ka...

Page 1 of

December 18, 2007
HP-742
Secretary Paulson Prepared Remarks
Before
the Housing Town Hall Meeting in Kansas City
Kansas City, Mo. - Good morning Thanks to all of you for JOining me to discuss
the current housing market.
After years of unsustainable home price appreciation and an abundant supply of
easy credit, the US housing market is experiencing an lIlevitable downturn. While
home prices in Kansas City did not Increase as much as in other parts of the
country. appreciation has slowed to about two percent over the last year and your
city has been particularly hard-hit by foreclosures.
Although the houslflg market downturn is a significant challenge, homeownershlp
remains a Vital and positive aspect of American life --- 68 percent of American
households own their own home and 93 percent of Americans pay their mortgages
every month, right on time.
We do expect that the housing market turbulence will take some time to work
through. and that there will be some penalty on our short-term econOllllC growth
Kansas City is facing these difficullies with a somewhat weaker economy than other
parts of the country, With an unemployment rate about a point and a half above the
national average.
Overall, the US economy Will continue to grow and is fundamentally sound Core
IIlflation is contained, continued Job gains are providing a good foundation for
household spending, corporate balance sheets remalfl healthy overall, and strong
growth abroad is supporting U S. exports. Our economy is operating against the
backdrop of a strong global economy.
We want. when possible, to minimize the housing market downturn's impact on the
national economy, Missouri's economy and places like Kansas City. A spike In
home foreclosures can pose costs for whole neighborhoods, cauSing property
values to decline and crime to Increase This can undernllne the financial stability of
neighboring families and communities.
Foreclosure isn't only expensive for homeowners. Investors - the owners of the
mortgage - also get hit With steep losses. Investors would rather find a solution
other than foreclosure, if there IS one.
In any normal bUSiness situation where both sides see that they are gOlllg to suffer
losses, they would get together and strike a deal to mlflimize those losses. But thiS
situation isn't normal: the company that made your mortgage may no longer hold it.
Instead, mortgage investors are spread all over the world, making it very difficult for
them to reach an Individual deciSion on each troubled mortgage
Until recently, our system has been able to shoulder the burden of this compleXity
because the volume of struggling borrowers was manageable In a period when
home prices were generally increasillg. But today, there are a riSing number of
subprime borrowers who Will face a problem when their mortgage IIlterest rate
resets and their monthly payments Iflcrease We anticipate that 1.8 million owneroccupied subprime mortgage resets will occur In 2008 and 2009. ThiS rising volume
makes it Impossible for the investors who own the mortgages to deal With them In
the usual way.
The government acted to prevent a market failure and to try to avoid unnecessary

http://www.treas gOy/press/releases/hp742

htITl

1/3/2008

HP-742: Secretary Paulson Prepared Remarks Before the Housing Town Hall Meeting in Ka...

Page 2 of:

harm that would result from a cumbersome, difficult decision-making process due to
a coming wave of struggling subprlme borrowers We developed a solution that
involves no government funding or subsidies for Industry or homeowners
Our solution centers on bringing mortgage market participants together In the
HOPE NOW alliance. The alliance IS a coalition of mortgage servicers - the people
who collect your payments - counselors and investors that are working to aVOid
preventable foreclosures.
As I see It, subprime borrowers fall mto three broad categories There are those
who can afford their adjusted Intel'est rate; these homeowners need no assistance
Tllel'e are homeowners wtlO haven't even been makmg payments at the loan's
starter rate and may not have ttle finanCial whereWithal to sustam home ownership,
some of these homeowners Will become renters again
A third category IS homeowners with steady incomes and relatively clean payment
histOries who cannot afford the higher adjusted rate These are the homeowners we
need to see fast-tracked mto a modification or refillanclllg
Through the HOPE NOW alliance we are fOCUSing on thiS third group, deternllnlng
who they are and what steps may appropriately assist them With HOPE NOW, we
announced a three pOint plan to aggressively help as many able homeowners as
possible keep their homes.
First, we are Increasing efforts to reach able homeowners who are struggling With
their mortgages We learned that 50 percent of foreclosures occur Without
borrowers ever asking for help. Many borrowers In trouble are afraid to speak to
their lenders. But we know that the sooner a struggling borrower reaches out to
address the problem. the more likely It'S possible that It can be resolved Nothing is
worse than doing nothing.
HOPE NOW IS sending outreach letters to borrowers likely to be facing trouble, and
has expanded a toll-free number where concerned homeowners can talk to
mortgage counselors about their financial circumstances.
Second, we are working to increase the availability of affordable mortgage solutions
for these borrowers. The industry is developing modifications and other mortgage
products that may allow more people to stay In their homes. HUD has implemented
FHASecure, which is already refinanCing more homeowners into FHA mortgages, I
am very hopeful that Congress will pass a final version of an FHA modernization
bill, so more borrowers will have the option of an affordable FHA mortgage
Third. we have led the Industry to develop a systematic means of effiCiently moving
able homeowners into sustainable mortgages. The industry came together and
developed straight-forward criteria to allow them to quickly Identify borrowers who
can't afford their mortgage reset, but have the finanCial wherewithal to continue to
own their home. For the mortgages in this group, both the borrower and the mvestor
are better off if foreclosure IS aVOided. The Industry announced two weeks ago that
they Will now be able to fast-track these borrowers into mortgage modifications --which Will result III a 5-year Interest rate freeze for some mortgage holders.
This effort is not an across-the-board mortgage payment freeze. There are many
subprime borrowers who will be able to afford their higher mortgage payments, so
they don't need help. Others Will not be eligible for fasHracklng, but Will go through
a longer process to demonstrate tllat they can't afford the mortgage reset. And, of
course, some may not be able to afford any reasonable mortgage modification
The fast-traCking of a Significant portion of these subprlme borrowers Into a
refinance or a modification frees up resources so that lenders can work With other
borrowers. We are working to prevent a market failure by aVOiding foreclosures that
otherwise would occur Just because someone wasn't reached In time or the system
could not respond qUickly enough to produce an outcome in the best Interest of the
homeowners and the investors who own the mortgages
And let me say to all of you here today - that If you, a friend or family member IS
worried about losing their home, please call the HOPE NOW hotllne or your
mortgage servlcer Immediately.

http://www.treas.gov/p.ressJreleases/hp742.htITl

11312008

HP-742: Secretary Paulson Prepared Remarks Before the Housing Town Hall Meeting in Ka...

Page 3 of 3

Our plan won't prevent every foreclosure, and modification will be available only
when it's a financially feasible and necessary solution. The industry has committed
to reporting results of this effort. and we will measure our success by number of
foreclosures prevented, not the number of mortgages modified
This plan is neither a silver bullet, nor IS it perfect, but it is the best way to deal with
the unprecedented volumes that threatened to overwhelm the normal funclloning of
this market. We can, and will, nlOnltor tile situation closely and do our best to
address Issues as they arise

http://www.treas.gov/press/releases/hp742.htm

113/2008

hp-743: Secretary Paulson Prepared Remarks Before Stockton Housing Town Hall Meeting

Page I of ~

December 18, 2007
hp-743

Secretary Paulson Prepared Remarks
Before Stockton Housing Town Hall Meeting
Stockton, Cali. -Good afternoon. Thank you, Governor, and thanks to all of you for
jOllllllg III a discussion of the current housing market.
After years of unsustainable home price appreciation and an abundant supply of
easy credit, the US housing market IS expenenclllg an lIlevitable downturn. Here
In Stockton, house prices IIlcreased by an average of over 17 percent a year from
2001 to early 2006. That trend has now reversed and house prices declined 10
percent III the last year Your city has been particularly hard-hit by foreclosures.
Although the houslllg market downturn is a significant challenge, homeownershlp
remains a vital and POSitive aspect of Amencan life --- 68 percent of Amencan
households own their own home and 93 percent of Americans pay their mortgages
every month. nght on time
We do expect that the houslrlg market turbulence Will take some time to work
through, and that there Will be some penalty on ollr short-term economic growth.
Stockton IS facing these difficulties With a somewhat weaker economy than other
parts of the country, With an unemployment rate about five percentage pOints above
the national average
Overall, the U S economy will continue to grow and IS fundamentally sound Core
inflation IS contallled, contmued Job gains are providing a good foundation for
household spending, corporate balance sheets remain healthy overall, and strong
growth abroad IS supportlllg US, exports. Our economy is operating against the
backdrop of a strong global economy
We want, when possible, to minimiZe the housing market downturn's Impact on the
national economy, California's economy and cities like Stockton, A spike In home
foreclosures can pose costs for whole neighborhoods, causing property values to
decline and crime to increase, This can undermine the financial stability of
neighboring families and communities.
Foreclosure Isn't only expensive for homeowners, Investors - the owners of the
mortgage - also get hit with steep losses, Investors would rather find a solution
other than foreclosure, If there IS one,
In any normal business situation where both sides see that they are gOlllg to suffer
losses, they would get together and strike a deal to minimize those losses. But thiS
situation Isn't normal: the company that made your mortgage may no longer hold It.
Instead, mortgage investors are spread all over the world, making It very difficult for
them to reach an Irldivldual deCISion on each troubled mortgage,
Until recently, our system has been able to shoulder the burden of this complexity
because the volume of strugglmg borrowers was manageable in a period when
home prices were generally increasing, But today, there are a nSlng number of
subprime borrowers who will face a problem when their mortgage Interest rate
resets and their monthly payments IIlcrease We anticipate that 1 8 million owneroccupied subprime mortgage resets Will occur In 2008 and 2009. ThiS rlsmg volume
makes It impOSSible for the Investors who own the mortgages to deal With them In
the usual way
The government acted to prevent a market failure and to try to avoid unnecessary
harm that would result from a cumbersome; difficult decision-making process due to

http://WWw.treas.goYip.ress/releases/ho743.j1tfYl

1/3/2008

hp-743: Secretary Paulson Prepared Remarks Before Stockton Housing Town Hall Meeting

Page 2 of 3

a coming wave of struggling subpnme borrowers We developed a solution that
involves no government funding or subsidies for industry or homeowners
Our solution centers on bnnglllg mortgage market participants together In the
HOPE NOW alliance. The alliance is a coalition of mortgage servicers - the people
who collect your payments - counselors and investors that are working to avoid
preventable foreclosures.
As I see it, subprime borrowers fall into three broad categories There are those
who can affol'd their adjusted interest rate; these homeowners need no assistance.
Thel'e are homeownel's who haven't even been making payments at the loan's
starter rate and may not Ilave the financial wherewithal to sustalll home ownership;
some of these homeowners will become renters again.
A third categol'y is homeowners with steady incomes and relatively clean payment
hlstorres who cannot afford the higher adjusted rate These are the homeowners we
need to see fast-tracked IIItO a modification or refinancillg.
Through lIle HOPE NOW alliance we are focusing on this third group, determining
who they are and what steps may approprrately assist them. With HOPE NOW, we
announced a thl'ee pOint plan to aggressively help as many able homeowners as
possible keep their homes.
First, we are increasing efforts to reach able homeowners who are struggling with
their Illortgages We learned that 50 percent of foreclosures occur without
borrowers ever asklllg for help. Many borrowers in trouble are afraid to speak to
their lenders. But we know that the sooner a struggling borrower reaches out to
address the problem, the more likely it's possible that it can be resolved. Nothlllg is
worse than dOlllg nothing
HOPE NOW IS sending outreach letters to borrowers likely to be facing trouble, and
has expanded a toll-free number where concerned homeowners can talk to
mortgage counselors about their financial circumstances.
Second, we are working to increase the availability of affordable mortgage solutions
for these borrowers. The industry is developing modifications and other mortgage
products that may allow more people to stay in their homes. HUD has Implemented
FHASecure. whicll is already I'efinanclng more homeowners Into FHA mortgages I
am very hopeful that Congress will pass a final version of an FHA modernization
bill, so more borrowers will have the option of an affordable FHA mortgage.
Third, we have led the industry to develop a systematJc means of efficiently moving
able homeowners Into sustainable mortgages. The Industry came together and
developed straight-forward crrterla to allow them to quickly identify borrowers who
can't afford their mortgage reset, but have the fillancial wherewithal to continue to
own their home. For the mortgages in thiS group, both the borrower and the Investor
are better off if foreclosure IS avoided. The industry announced two weeks ago lIlat
they Will now be able to fast-track these borrowers into mortgage modifications --which Will result In a 5-year IIlterest rate freeze for some mortgage holders.
ThiS effort IS not an across-the-board mortgage payment freeze. There al'e many
subprime borrowers who will be able to afford their higher mortgage payments. so
they don't need help. Others Will not be eligible for fast-tracking, but will go through
a longer process to demonstrate lIlat they can't afford the mortgage reset And, of
course, some may not be able to afford any reasonable mortgage modification
The fast-tracking of a significant portion of these subpnme borrowers IIlto a
refinance or a modification frees up resources so that lenders can work with other
borrowers. We are working to prevent a market failure by aVOiding foreclosures that
otherwise would occur Just because someone wasn't reached in time or the system
could not respond quickly enough to produce an outcome In the best Interest of the
homeowners and the Investors who own the mortgages
And let me say to all of you here today - that if you, a frrend or family member IS
worried about losing their home, please call the HOPE NOW hotilne or your
mortgage servlcer immediately.

http://www.treas.goy/press/releases/hp743.h tm

1/3/2008

Ip.743: Secretary Paulson Prepared Remarks Before Stockton Housing Town Hall Meeting

Page 3 of 3

Our plan won't prevent every foreclosure, and modification will be available only
when it's a financially feasible and necessary solution. The industry has committed
to repol1ing results of this effort, and we will measure our success by number of
foreclosures prevented, not the number of mortgages modified.
ThiS plan is neither a silver bullet, nor IS it perfect, but it is the best way to deal with
the unprecedented volumes IIlat threatened to overwhelm the normal functioning of
thiS market We can, and will, monitor the situation closely and do our best to
address issues as they arise
-30-

Ittp:llwww.treas.gov/press/releases/hp743.htm

1/312008

hp-744: 6th Round of New Markets Tax Credit Competition Kicks Off; Credits Available for $3....

Page 1 of2

December 18. 2007
hp-744

6th Round of New Markets Tax Credit Competition Kicks Off;
Credits Available for $3.5 Billion in Investments to Help Low-Income
Communities
Washington - The US Department of the Treasury announced today the openlllg
of the sixth round of competition for tax credits on $35 billion of equity investments
under the New Markets Tax Credit (NMTC) Program The NMTC Program attracts
private-sector capital investment into the nation's urban and rural low-income areas
to help finance community development projects, stimulate economic growth and
create Jobs
"I am very Impressed with how this program IS making significant Impact in lowIncome communities across the nation," said CDFI Fund Director Donna Gambrell.
"Capital IS bell1g raised and invested into projects many thought of as Just a dream
- from critically needed community facilities and charter schools to grocery stores
and other bUSinesses."
To date. the organizations awarded tax credits on $121 billion in equity
IIlvestments in the first four rounds have already raised $8.84 billion in equity from
investors. Through fiscal year 2006, these allocatees reported deploYll1g a total of
$5.45 billion in qualified loans and Investments in low-income communities across
the nalion. Since the program's IIlception, these allocatees have reported
•
•
•
•

Developing or rehabilitatlllg over 46 million square feet of commercial real
estate:
Creating 146,000 full-time construction jobs;
Creating or mall1tainlllg 20,000 full-time jobs through loans or investments
supportlllg businesses operaling in low-illcome communities: and
Provldlllg FinanCial Counseling and other related services to 1,200
busillesses.

This year's NMTC allocation round will include an emphasis on placing IIlvestments
in underserved rural communities The allocation application deadline IS March 5,
2008.

To Learn More
Guidance and applicalion materials on the Sixth round of the NMTC Program are
available on the New Markets Tax Credit Program webpage of the CDFI Fund's
webSite at
The CDFI Fund will be conducting SIX Application Workshops on the NMTC
Program around the country In January 2008. The purpose of these workshops is to
describe how the NMTC Program works, including how to apply for certification as a
CDE and how to apply for all allocation of NMTCs 111 the upcomlllg round
The Application Workshops will be held III the cities listed below. To learn more
detailed information about these workshops or to register, please viSit the CDFI
Fund's webSite at
Charleston, WV
Detroit, MI
Miami, FL
Oklahoma City. OK
Portland, OR
Sioux Falls, SO

January
January
January
January
January
January

~ttp://www.treas goYipress/releases/hp744.j1tm

15, 2008
7, 2008
18, 2008
9, 2008
8, 2008
10, 2008

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Page 2 of2

Background on NMTC Program
The NMTC Program, established by Congress in December of 2000, permits
individual and corporate taxpayers to receive a credit against federal income taxes
for making qualified equity investments in investment vehicles known as
Community Development Entities (CDEs) The credit provided to the investor totals
39 pel'cent of the cost of the equity investment and IS claimed over a seven-year
period. Substantially all of the taxpayel's investment must In turn be used by the
CDE to make qualified investments In low-income communities. Successful
applicants are selected only after a competitive application and rigorous review
process that is administered by Treasury's Community Development FinanCial
Institutions (CDFI) Fund.

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11312008

hp-745: Paulson Statement on Passage of Mortgage Debt Forgiveness Bill

Page 1 of 1

December 18, 2007
hp-745

Paulson Statement on Passage of Mortgage Debt Forgiveness Bill
Washington, D,C--The Treasury Department released a statement from Treasury
Secl'etary Henry M Paulson, Jr, upon passage of legislation that would provide
temporary tax relief for homeownels facing incl'eased taxes due to forgiven
mortgage debt.
"I thank both the Senate and the House for their qUick passage of tillS Important
piece of leglslatlo\1, Homeowners who restructure their mortgages to avoid
foreclosure should not be tlit With a tax bill as a result. ThiS legislation will
temporarily exclude homeowners who have restructured their mortgage loans from
haVing to paying taxes on the mortgage debt forgiven,
"Today's legislation is one piece of a larger plan the PreSident has put forward to
help able homeowners avoid foreclosure, I'm also eager to see fillal Congressional
action on the other pieces, including GSE and FHA reform and allowing state and
local authorrtles more tax-exempt bond auttlonty to help homeowners refinance
their existlllg loans,
"Preventing avoidable foreclosures Will reduce the Impact of the hOUSing slowdown
on homeowners, our communities, and our economy,"

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1/3/2008

hp-746: Paulson Statement on Final Passage of AMT Patch

Page I of 1

December 1g, 2007
hp-746
Paulson Statement on Final Passage of AMT Patch
Washington, D.C.--The Treasury Department released a statement from Treasury
SeCl"etary Hemy M Paulson, Jr. on final passage of a patch for the Alternative
Minimum Tax (AMT)
"I thank the House for taking action today on an AMT patch that will protect millions
of Americans from an unexpected tax Increase this year With legislation now 011
the way to the President for his signature, the Internal Revenue Service can begin
the rel11ainlng preparations for next year's filing season
"The IRS IS dOlrlg all It can to have a fully successful filing season. However. It IS
likely that there Will be some delays, including delays of some refunds. The
Treasury Department and the Internal Revenue Service will do everything possible
to keep American taxpayers Irlformed throughout the course of the upcomlrlg filing
season"
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1/3/2008

hp-747: Media Advisory: Treasury to Release Study Outlining Approaches to Address Competiti...

Page I of I

December 19. 2007
hp-747
Media Advisory:
Treasury to Release Study Outlining Approaches to Address Competitiveness
of U.S. Business Tax System
The Treasury Depal-tment will release tomorrow a study on buslTless taxation and
global competitiveness that addresses our current business tax system and outilTles
broad approaches to reform to Inform the public policy debate on tile Issue
Treasury ASSistant Secretary for Tax Policy Eric Solomon and Deputy Assistant
Secretary for Tax AnalysiS Robert Carroll will provide a pen and pad briefing of the
study The study IS a follow up to the July conference on business taxes that was
hosted by Secretary Paulson.
Who

Assistant Secretary for Tax Policy Eric Solomon
Deputy Assistant Secretary for Tax AnalYSis Robert Carroll

What

Pen and pad briefing on business tax study

When

Thursday. December 20. 1130 a.m. EST

Where

Media Room (4121)
Treasury Department

Note

Media without Treasury press credentials should contact Courtney
Forsell at (202) 622-2960. or
with the
following Information full name. Social Security numbel- and date of birth.

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1/3/2008

hp-748: Treasury Releases Semiannual Report on International Economic and Exchange Rate Policies

Page 1 of 1

December 19. 2007
hp-748
Treasury Releases Semiannual Report on International Economic and
Exchange Rate Policies
The Treasury Departmellt released Its Semiannual Report on International
Economic and Exchange Rate Policies today. A copy of the report
IS available below.
REPORTS

•

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113/2008

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/0 view or Print me /-,UI- COlllpnl Of) IIlfS flilge. Clown/oau Ill(? Irbe

December 20, 2007
hp-749
Approaches to Improve the Competitiveness of the U.S. Business Tax System
for the 21 st Century
A Summary
Approach 1: Replacing the BUSiness Income Tax System Wltl, a BUSiness ActiVity
Tax (BAT)
•

The BAT tax base would be gross receipts from sales of goods and services
minus purchases of goods and services (including purchases of capital
items) from other bUSinesses.
• Wages and other forms of employee compensation (such as fringe benefits)
would not be deduclible
• Interest would be removed from the tax base -- It would neltl,er be Included
in Income nor deductible.
• Individual level taxes on dividends and capital gains would be retained
Interest Income received by individuals would be taxed at the current 15
percent dividends and capital gains rates.
• This approach IS eslimated to Improve economic performance, ultimately
increasing the size of the economy by roughly 2.0 percent to 2.5 percent
• This kind of reform would have various Implementation and admlnlstralive
Issues.
Approach 2: Broadening the Business Tax Base and Lowering the Statutory Tax
Rate/Providing ExpenSing
•

•

•
•

Broadening the bUSiness tax base by eliminating all special provIsions
would allow:
- The top federal bUSiness tax rate to be lowered to 28 percent
- If accelerated depreCiation IS retained, the rate would drop only to 31
percent
- Alternatively, acquisitions of new Investment could be parlially expensed
(35% could be written off Immediately).
- Treasury analyses show that the revenue-neutral rate reduction provides
little economic impact. and expensing would provide benefits only to certain
Industries.
More Significant benefits to the economy and US competitiveness might be
achieved through a substantially lower business tax rate (e.g. 20 percent)
or greater expensing (e.g., 65 percent).
- Such a reduction would require non-revenue neutral reform of the
bUSiness tax system.
The present U.S IIlternatlonal tax system may result In a compelitlve
disadvantage for US companies competing With foreign-based companies.
The present Internalional tax system distorts economic behavior by
Discouraging repatriation of foreign earnings: and
Encouraging Significant tax planning

Approach 3: SpecifiC Areas of our Current BUSiness Tax System That Could be
Addressed
•
•
•
•
•

Multiple taxation of corporate profits
Corporate capital gains and diVidends received deduction
Tax bias favoring debt finance
Taxation of international Income
Treatment of losses
Book-tax conformity

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•

Other areas to improve tax administration

NOTE: The approaches presented in this study are not intended to be all InclUSive
and do not favor one approach over another.
REPORTS

•

ttp:11www.treas.gov/presslreleases/hp749.htm

11312008

Approaches to Improve the Competitiveness of
the U.S. Business Tax System for the 21 st Century

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

December 20, 2007

Approaches to Improve the Competitiveness of
the U.S. Business Tax System for the 21 st Century
Table of Contents
Executive Summary ........................................................................................................... i
Chapter I: The U.S. Business Tax System Presents Challenges to U.S.
Competitiveness ......................................................................................................... :... 1
A. Introduction ........................................................................................................... I
B. Business tax reform and the economy ................................................................. 3
C. How business taxation in the United States compares with that of the United
States' major trading partners .................................................................................... 6
D. Summary ........... ................................................................................................... 16
Chapter II: Replacing Business Income Taxes with a Business Activities Tax ....... 19
A. Introduction .... ..... '" ............................................................................................. 19
B. Description of a BAT .......................................................................................... 20
C. Economic effects of a broad-based BAT ........................................................... 22
D. Distributional issues ............................................................................................ 29
E. Border tax adjustments and international trade ............................................. 34
F. Simplicity and enforceability ............................................................................. 35
G. Implications for state and local governments ................................................... 36
H. VATs in other countries ..................................................................................... 37
Chapter III: Business Tax Reform with Base Broadening/Reform of the U.S.
International Tax Rules .................................................................................................. 43
A. Introduction ......................................................................................................... 43
B. Broadening the business tax base and either lowering the business tax rate or
permitting faster write-off of investment.. ................................................................ 47
C. Territorial tax systems ........................................................................................ 54
Chapter IV: Addressing Structural Problems with the U.S. Business Tax System. 66
A. Multiple taxation of corporate profits ............................................................... 66
B. Tax bias that favors debt financing ................................................................... 81
C. Taxation of international income ...................................................................... 84
D. Tax treatment of losses ....................................................................................... 89
E. Book-tax conformity ... ...... , ................................................................................. 96
F. Illustrative areas to improve tax administration ........................................... 101
Acknowledgements ....................................................................................................... 116

Executive Summary
The global economy has changed markedly over the past half century. Trade and
investment flow across borders in greater volume and with greater ease. Increasingly, the
ability of U.S. companies to grow and prosper depends on their ability to do business
globally.
As we look to the future of the U.S. economy and U.S. workers, we must look at
our competitiveness through the lens of the global marketplace. There are many factors
that affect the ability of U.S. workers and U.S. companies to compete globally, and issues
as diverse as education, immigration, and trade policy have all been examined in this
context. This paper examines the role of tax policy in affecting the global
competitiveness of U.S. companies and U.S. workers.
In the 1960s, international trade and investment flows were much less important
to the U.S. economy and the decisions of U.S. companies than they are today. Thus, the
United States was free to make decisions about its tax system based primarily on
domestic considerations. Moreover, our trading partners generally followed the U.S. lead
in tax policy.
Globalization - the growing interdependence of countries resulting from
increasing integration of trade, finance, investment, people, information, and ideas in one
global marketplace - has resulted in increased cross-border trade and the establishment of
production facilities and distribution networks around the globe. Businesses now operate
more freely across borders, and business location and investment decisions are more
sensitive to tax considerations than in the past.
As barriers to cross-border movement of capital and goods have been reduced,
differences in nations' tax systems have become a greater factor in the success of global
companies. Recognizing this, many nations have changed their business tax systems.
During the past two decades, many of our major trading partners have lowered their
corporate tax rates, some dramatically. The United States, which had a low corporate tax
rate in the late 1980s as compared to other countries in the Organisation for Economic
Co-operation and Development (OECD), now has the second highest statutory corporate
tax rate among OECD countries. Moreover, other OECD countries continue to reduce
their corporate income tax rates leaving the United States further behind.
As other nations modernize their business tax systems to recognize the realities of
the global economy, U.S. companies increasingly suffer a competitive disadvantage. The
U.S. business tax system imposes a burden on U.S. companies and U.S. workers by
raising the cost of investment in the United States and burdening U.S. firms as they
compete with other firms in foreign markets.
Taxing business income discourages investment by raising the cost of capital.
The higher the cost of capital, the greater the disincentive to invest. The relatively high
U.S. tax rate, compared to our trading partners, places a higher cost on investment.
Business taxes playa particularly key role in the economy because they influence the

incentive to acquire and use capital - the plants, offices, equipment, and software that
corporations employ to produce goods and services. In general, an economy with more
capital is more productive and ultimately attains a higher standard of living than
economies that have accumulated less capital. Workers gain when businesses have more
capital and, correspondingly, workers stand to lose when the tax system leads businesses
to invest less and have a smaller capital stock.
On July 26,2007, the Treasury Department hosted a conference on Global
Competitiveness and Business Tax Reform that brought together distinguished leaders and
experts to discuss how the U.S. business tax system could be improved to make U.S.
businesses more competitive. The conference highlighted the need for the U.S. business
tax system to be reformed to keep pace with the changing global economy and the
changes in the business tax systems of other nations.
This report is a follow-up to the July 26 th conference and, as with the conference,
it seeks to advance an important dialogue on the key linkages between tax policy and
American competitiveness in the global economy. Three broad approaches for reforming
the U.S. business tax system are outlined: (1) replacing business income taxes with a
business activities tax (BAT), a type of consumption tax, (2) eliminating special business
tax provisions coupled with either business tax rate reduction or faster write-off of
business investment, potentially combined with the exemption of active foreign earnings,
and (3) implementing specific changes that focus on important structural problems within
our business tax system. Rather than present a particular recommendation, this report
examines the strengths and weaknesses of the various approaches. The various policy
ideas discussed in this report represent just some of the approaches that could be
considered. This report does not advocate any specific recommendation nor does it call
for or advance any legislative package or regulatory changes.
The approaches discussed in this report would improve the competitiveness of the
United States as compared to the current system for taxing U.S. businesses.
Nevertheless, the approaches differ in a number of dimensions. The BAT described in
Chapter II would possibly provide the largest benefit in terms of its effect on expanding
the size of the economy - ultimately increasing output by roughly 2.0 percent to 2.5
percent - but raises a number of serious implementation and administrative issues.
Chapter III discusses base broadening, which could entail elimination of certain
business tax provisions that make substantial contributions to economic growth, such as
accelerated deprecation. Thus their elimination may offset some of the economic
benefits of business tax rate reduction. While dramatically broadening the business tax
base could finance a reduction of the business tax rate to 28 percent, retaining accelerated
depreciation and maintaining revenue neutrality would only lower the business tax rate to
3 I percent. Alternatively, base broadening and faster write-off of business investment
(i.e., 35-percent expensing) would have a substantial effect on the size of the economyultimately increasing output by roughly 1.5 percent - but would have effects that may
vary considerably across industries and sectors. Chapter III also discusses international
taxation and considers issues regarding territorial tax systems.

Chapter IV focuses on speci fic areas of business income taxation that could be
refonned separately or in the context of a broad-based reform. These include, for
example, the multiple taxation of corporate profits, the tax bias favoring debt finance, the
tax treatment of losses, and book-tax conformity. A comprehensive approach, however,
is likely to be more effective in improving the competitiveness of the U.S. business tax
system than addressing specific issues outside of broad-based business tax reform.
A fundamental question is the extent to which any of these approaches would
markedly affect the competitiveness of U.S. businesses. Lowering the business tax rate
to 31 percent would mean that instead of having the second highest statutory corporate
tax rate among the thirty OECD countries, the United States would have the third highest
tax rate, while with a 28-percent U.S. statutory corporate tax rate, the United States
would have the fifth highest tax rate. Providing faster write-off of investment, either
through partial expensing or replacing business income taxes with a BAT, may provide
larger economic benefits, but would take the United States in a different policy direction.
Moreover, today's global landscape continues to shift as other countries
contemplate further changes in their business tax systems. Thus, it remains unclear
whether a revenue neutral refonn would provide a reduction in business taxes sufficient
to enhance the competitiveness of U.S. businesses.
In summary, because the role of the United States in the world economy is
changing, because business taxes play an important role in economic decision-making by
influencing the incentive to acquire and use capital, and because foreign competitors are
refonning their business tax systems, now is the time for the United States to re-evaluate
its business tax system to ensure that U.S. businesses and U.S. workers are as competitive
as possible and Americans continue to enjoy rising living standards.

111

Chapter I: The U.S. Business Tax System Presents Challenges to U.S.
Competitiveness
A.

Introduction

Americans deserve a tax system that is simple, fair, and pro-growth - in tune with
the nation's dynamic economy. The tax relief proposed by President Bush and enacted
by Congress in the past few years has helped lay the foundation for considering ways to
ensure that the U.S. tax system helps U.S. businesses compete in a global economy. In
2005, the President established the President's Advisory Panel on Federal Tax Reform
(the Tax Panel) to identify the major problems with the current tax system and to provide
recommendations on making the tax code simpler, fairer, and better suited to the modern
economy. The Tax Panel's report recommended two options for comprehensive overhaul
of our federal income tax system - the Growth and Investment Tax plan and the
Simplified Income Tax plan.! These approaches differ somewhat, but both would reduce
taxes on business and capital income.
In 2007, Secretary Paulson initiated a review of the nation's system for taxing
businesses. On July 26, 2007, the Secretary hosted a conference on Global
Competitiveness and Business Tax Reform, at which distinguished leaders and experts
discussed how the current business tax system can be improved to make U.S. businesses
more competitive in today's global economy. The conference highlighted the need for
reform. The participants stressed that the business tax system has not kept pace with
changes in the world economy. The United States has become increasingly linked to the
world economy through trade and investment. Businesses operate more freely across
borders and business location and investment decisions are more sensitive to tax
considerations than in the past. Several countries have responded to the increasingly
competitive environment by reforming their corporate incomes taxes and reducing
corporate income tax rates. The conference participants expressed a conviction that in
order for U.S. companies and U.S. workers to compete and thrive in today's global
economic climate, the U.S. business tax system also must adapt to these changes.

The discussion at the conference emphasized that the global economy is very
different today than it was in the 1960s, the time when many of our current tax rules
regarding cross-border activities and investment were first enacted. The same is true of
the U.S. role in the global economy. In the 1960s, international trade and investment
flows were much less important to the U.S. economy than they are today. Thus, the
United States was free to make decisions about its tax system based primarily on
domestic considerations. Moreover, U.S. trading partners generally followed the U.S.
lead in tax policy.
Circumstances have changed. Globalization - the growing interdependence of
countries resulting from increasing integration of trade, finance, investment, people,
information, and ideas in one global marketplace - has resulted in increased cross-border
i

The President's Advisory Panel on Federal Tax Refonn (2005),

trade and the establishment of production facilities and distribution networks around the
globe. Technology continues to accelerate the growth of the worldwide marketplace for
goods and services. Advances in communications, information technology, and transport
have dramatically reduced the cost and time required to move goods, capital, people, and
infornmtion around the world. Firms in the global marketplace differentiate themselves
by applying more cost-efficient technologies or innovating faster than their competitors.
The significance of globalization to the U.S. economy is apparent from the
statistics on international trade and investment. In 1960, trade in goods to and from the
United States represented just over 6 percent of Gross Domestic Product (GDP). Today,
it represents over 20 percent ofGDP, a three-fold increase, while trade in goods and
services amounts to more than 25 percent of GDP. 2
Cross-border investment, both inflows and outflows, also has grown dramatically
since 1960. Cross-border investment represented just over I percent of GDP in 1960, but
by 2006, it was more than 18 percent of GDP, representing annual cross-border flows of
more than $2.4 trillion,3 with the aggregate cross-border ownership of capital valued at
4
roughly $26 trillion. In addition, U.S. multinational corporations are now responsible
for more than one-quarter of U.S. output and about 15 percent of U.S. employment.
The internationalization of the world economy has made it imprudent for the
United States, or any other country, to enact tax rules that do not take into account what
other countries are doing. The U.S. system for taxing businesses should not hinder the
ability of U.S. businesses to compete on a global scale. Thus, maintaining the
competitiveness of the U.S. economy requires that the United States re-evaluate the
current business tax system and consider how it can be designed to ensure that the United
States continues to attract and generate the investment and innovation necessary to
further advance the living standards of U.S. workers.
th

This rep0l1 follows up the Treasury Department's July 26 conference. It extends
the discussion of business tax reform contained in the Tax Panel's report by focusing on
the treatment of business and capital income, and it is shaped by the discussion at the
conference on competitiveness. This report discusses three bold approaches for business
tax reform: (I) a business activity tax (BAT) (a type of consumption tax), while retaining
taxes on capital income through the individual income tax, (2) a broad-based, low-rate
business income tax, potentially combined with the exemption of active foreign earnings,
and (3) a broad-based business tax system with faster write-off of business investment,
also potentially combined with the exemption of active foreign earnings. In addition, it
provides ideas for other changes that could improve the current business income tax
system.

2
3
4

U.S. Department of Commerce (2007).
U.S. Department of the Treasury (2007).
International Monetary Fund (2005).

Business tax reform and the economy

Since 1980, the United States has gone from a high corporate tax-rate country to a
low-rate country (following the Tax Reform Act of 1986) and, based on some measures,
back again to a high-rate country today because other countries recently have reduced
their statutory corporate tax rates. Within the Organisation for Economic Co-operation
and Development (OECD), the United States now has the second highest statutory
corporate tax rate at 39 percent (including state corporate taxes) compared with the
average OECD statutory tax rate of 31 percent.
Other countries continue to reduce their corporate tax rates. Germany will reduce
its total corporate tax rate from 38 percent to 30 percent in 2008. The United Kingdom
will reduce its corporate tax rate from 30 percent to 28 percent next year. France and
Italy have signaled that they may also lower their corporate tax rates. Smaller countries
among the OECD also have been particularly aggressive in cutting their corporate tax
rates, with Iceland, Ireland, Hungary, Poland, the Slovak Republic, Greece, Korea, and
Luxembourg reducing their corporate tax rates significantly in recent years.
Maximizing economic efficiency generally requires that a tax system raise a given
amount of revenue with the least possible interference in economic decisions. The
United States' current system for taxing businesses and multinational companies has been
developed in a patchwork fashion spanning decades, resulting in a web of tax rules that
are unlikely to promote maximum economic efficiency.
The U.S. tax system also disrupts and distorts business and investment decisions,
leading to an inefficient level and allocation of capital through the economy. A smaller
and poorly allocated stock of capital lowers the productive capacity of the economy and
reduces living standards. Importantly, workers share in these economic losses because
they have less productive capital with which to work, and thus earn lower wages.

Taxation of saving and investment
A key policy question is the appropriate level of tax on the return to saving and
investment. Taxes on capital income discourage saving and capital forn1ation. Reduced
capital formation provides labor less capital with which to work, lowering labor
productivity and, consequently, living standards. Moreover, with the continuing decline
in corporate tax rates abroad, the United States may become a relatively less attractive
location in which to invest, further reducing U.S. labor productivity and living standards.
The U.S. tax system also taxes investment income very unevenly across sectors,
industries, asset types, and financing. Uneven taxation causes investment decisions to be
based in part on tax considerations rather than on the fundamental economic merit of
investment projects. For example, the United States taxes profits from an equity-financed
investment in the corporate sector more heavily than the return earned on other
investments. Corporate profits are heavily taxed because they are subject to multiple
layers of tax: the corporate income tax, investor-level taxes on capital gains and
dividends, and the estate tax.
3

The multiple taxation of corporate profits distorts a number of economic decisions
important to a healthy economy. It distorts corporate financing choices by taxing interest
eamed on corporate bonds less heavily than corporate profits. As a result, corporations
are induced to use more debt than they otherwise would. It distorts corporate distribution
policy by taxing dividends more heavily than corporate eamings that are retained and
later realized as capital gains (primarily due to the deferral of gains until sale and the
opportunity for step-up of stock basis at death). As a result, it confounds market signals
of a company's financial health and may have important implications for corporate
govemance. It also penalizes investment in the corporate form by taxing corporate
income more heavily than other capital income. Consequently, it discourages investment
in and through corporations in favor of investment in other less heavily taxed business
forms (such as partnerships) or in non-business assets (such as owner-occupied housing).
The double tax on corporate profits was reduced in 2003 with the enactment of lower tax
rates on dividends and capital gains, although this relief, which focused primarily on
equity-financed investment, did not completely remove the double tax.
In contrast to corporate profits, the U.S. tax system taxes the retums to many
other important investments very lightly, if at all. For example, some business
investment is eligible for special tax treatment, and the retum eamed on investment in
residential housing typically is not taxed at all. In some cases, special tax provisions are
so generous that they actually subsidize the investment by making the net tax burden
negative. These special tax provisions can encourage over-investment in the tax-favored
activity. Even where they do not encourage over-investment, they substantially narrow
the tax base and drive other tax rates higher, which may distort choices elsewhere in the
economy. In addition, special tax provisions add complexity to the tax system and
contribute to a substantial business tax compliance burden on the economy, estimated at
$40 billion annually for business taxpayers. s

Taxation offlow-through businesses
The individual income tax also is important to the taxation of businesses. The
non-corporate business sector and certain corporations (i.e., flow-through entities such as
sole proprietorships, partnerships, and S corporations) are subject to the individual
income tax on the business income of the owners or partners. Many of these businesses
are small and are an important source of innovation and risk taking in the economy.
These businesses and their owners benefited from the 2001 and 2003 income tax rate
reductions. According to estimates by the Treasury Department, roughly 30 percent of
all business taxes are paid through the individual income tax on business income eamed
by the owners of flow-through entities. The importance of flow-through entities has
grown substantially over time. This sector has more than doubled its share of all business
receipts since the early 1980s, and plays a more important role in the U.S. economy as
compared to other member countries of the OECD. Flow-through businesses account for
one-third of salaries and wages and claim 27 percent of depreciation deductions.
Moreover, flow-though income is concentrated in the top two tax brackets, with this

Slemrod (2005).

group receiving over 70 percent of flow-through income and paying more than 80 percent
of the taxes on this income.

Risk of standing still
It is important to consider the effects of leaving the system for taxing U.S.
businesses unchanged while other nations reform their systems. In general, inaction
would make the United States a less attractive place in which to invest, innovate, and
grow. The impact of allowing the U.S. tax system to stagnate and fall behind relative to
other countries would be modest at first. The United States would see less benefit from
inflows of foreign capital and investment, and U.S. firms would face a higher cost of
capital than foreign firms, making it more difficult to compete in foreign markets. In the
short run, this would translate into slower growth, less productivity, and less
employment.
Over the long run, however, the impact of the United States falling further behind
its major trading partners is likely to become more dramatic. Industries that are relatively
large producers or users of capital goods would be most affected. American
manufacturers, for example, would find themselves especially disadvantaged by a tax
code that causes them to face a higher cost of capital than their competitors in other
countries. In a world of greater economic integration and increased trade and capital
flows, a firm's decision about where to locate and expand its operations would be
increasingly influenced by factors such as a country's corporate tax code and overall
investment climate. 6
The current U.S. tax system clearly is not optimal and likely discourages
investment in the United States. A more disturbing possibility is that the U.S. tax system
may also slow the pace of technological innovation. The pace of innovation is a key
determinant of economic growth, and innovation tends to take place where the
investment climate is best. For example, new technologies are often "embedded" in new
types of capital - a firm does not benefit from an increase in computer processing speed,
for example, unless it purchases a new computer that incorporates the faster chip. Thus,
firms do not reap the benefits of technological advances until new capital is brought into
production. Similarly, higher investment can spur innovation by raising the demand for
new technologies. Given this interplay between innovation and capital accumulation,
allowing U.S. corporate taxes to become more burdensome relative to the rest of the
world could result in a cumulative effect in which U.S. firms fall increasingly behind
those in other nations.
In addition, entrepreneurship would likely be more successful in an environment
in which tax burdens are lower. Lower business tax rates are associated with increased
business formation. The creation of new business enterprises is important in order to
bring new ideas and new products to the market and, therefore, represents another
channel by which business taxes can potentially influence innovation.

See Altshuler, Grubert, and Newlon (200 I).

Reforming the U.S. business tax system would raise capital accumulation and
ultimately lead to a higher level of GOP and higher living standards for Americans.
Some of this improvement in living standards may result from other economic effects,
including the effects of firms relocating their plant and equipment, the additional
dynamic effects of bringing new, more effective techniques into production, and potential
effects on entrepreneurship. As capital moves more freely across borders, and emerging
countries begin to approach U.S. levels of education and training, advantages that the
United States currently has will erode. Tax burden differentials may become more
important going forward than they have been in the past and, right now, the United States
is becoming less competitive in that regard.
C.

How business taxation in the United States compares with that of the United
States' major trading partners

In an increasingly global economy, the choices that the United States makes for
business taxation affect the ability of its businesses to compete with foreign firms subject
to different tax regimes. A comparison of the U.S. tax regime with those of the United
States' major trading partners may provide important guidance to U.S. business tax
reform.

International comparison of corporate and investor-level taxes
Statutory corporate income tax rates
Statutory corporate income tax (CIT) rates are the most common measure of the
tax burden imposed on corporations. The first column of Table 1.1 shows total statutory
CIT rates, incorporating sub-national taxes, where relevant, for OECD countries. The
United States has the second highest statutory CIT rate (39 percent) in the OECD after
Japan (40 percent). This compares with an average rate of 31 percent for the major
industrialized economies.
The evolution ofOECD corporate tax rates over the past two decades suggests
that CIT rate setting is an interactive process subject to the pressures of international
competition. Chart 1.1 shows the U.S. statutory CIT rate compared to the overall OECD
rate weighted by GOP since 1982. In the early 1980s, the United States had a relatively
high statutory CIT tax rate of nearly 50 percent (i.e., combined federal and average state
CIT rate). The Tax Reform Act of 1986 lowered the U.S. federal CIT rate to 34 percent,
and the U.S. combined CIT rate fell to 38 percent, well below the then prevailing OECD
CIT rates. OECD rates trended steadily down over the ensuing decade, while the top
U.S. federal CIT rate was increased to 35 percent in 1993. The average and median
OECD statutory CIT rates fell below the U.S. CIT rate in the 1990s and have continued
to decline. Now, the United States is once again a high corporate tax rate country. The
decline in OECD corporate tax rates appears likely to continue. In 2008, Germany will
reduce its CIT rate from 38 percent to 30 percent, and the United Kingdom will reduce its
CIT rate from 30 percent to 28 percent, financed by base broadening. Italy's government

has proposed lowering its corporate tax rate from 33 percent to 27.5 percent in 2008, and
cutting corporate taxes is also part of the current French government's policy platform. 7
Table 1.1: Statutory Corporate Income Tax Rates, Depreciation Allowances and
Effective Marginal Tax Rates for Selected OECD Countries, 2005

Country

Statutory
Corporate
Income Tax
Rate

Present
Discounted
Value of
Depreciation
Allowance Equipment
(Equity)

Effective
Marginal
Tax Rate*
Equipment
(Equity)

Effective
Marginal
Tax Rate*
Equipment
(Debt)

Percent
66
66
75
73
73
77
73
71
87
66
82
73
73
67
79
78
78
78

France
United Kingdom
Germany
Greece
Ireland
Italy
Japan
Netherlands
Norway
Portugal
Spain
Sweden
Switzerland

30
25
34
36
26
34
30
38
32
13
37
40
32
28
28
35
28
34

20
22
25
17
20
20
29
12
10
19
28
21
22
15
21
16
20

-23
-18
-35
-37
-23
-36
-28
-37
-40
-8
-48
-40
-29
-21
-29
-38
-29
-36

United States

-46

Average (Unweighted)

-32

G-7 Average (Unweighted)

-39

Australia
Austria
Belgium
Canada
Finland

*Effective Marginal Tax Rates (EMTRs) are discussed in the following section.
Source: Institute for Fiscal Studies, Corporate Tax Database, www.ifs.org.uk

7 BNA ,

Daily Tax Report (2007), Market News International (2007).

Chart 1.1: The U.S. Corporate Tax Rate Currently Exceeds the Average OECD Corporate Tax Rate
Percent

55
Average and Median Statutory Corporate Tax Rates (National and Subnatlonal)
U.S. and 22 OECD Countries 1982·2005

----

•

~
\

-, "- "-

'\
'\

•

----

-... ....... ..",r- _ _ ,

\
\

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

......

Non-U.S.OECD
Median

~------------------------------------------------------~
1982

1984

1986

1988

1990

1992

1994

1996

1998

2000

2002

2004

Source: Institute for Fiscal Studies (www.ifsorg) and the Organisation for Economic Co-operation and Development (www.oecd.org)

Several factors contribute to the increased competition in corporate tax rates. The
rapid increase in international capital mobility over the past two decades has made
corporate investment more sensitive to relative CIT rates. Capital market integration has
been particularly pronounced within the European Union, whose members' ongoing CIT
reductions are, to some degree, reacting to the low CIT rates in Eastern Europe.
Increasingly sophisticated tax planning methods may also be contributing to increased tax
competition among OECD countries.

Effective marginal tax rates (EMTRs)
Statutory corporate tax rates provide an incomplete picture of the corporate tax
burden because they reflect neither the corporate tax base nor investor-level taxes.
Depreciation allowances - the rate at which capital investment costs may be deducted
from taxable income over time - are a key determinant of the corporate tax base and an
important factor distinguishing the statutory CIT rate from the effective marginal CIT
rate (EMTRs). The EMTR combines corporate tax rates, depreciation allowances, and
other features of the tax system into a single measure of the share of an investment's
economic income needed to cover taxes over its lifetime. This measure of the "tax
wedge" between the before-tax and after-tax return on an investment is measured relative
to the before-tax return.
The EMTR varies depending on the source of finance - debt or equity - because
interest is generally deductible, but dividends are not. The required rate of return for
debt-financed investment, therefore, is lower than the required return for equity-financed
8

investment in proportion to the CIT rate. This lower discount rate also increases the
present discounted value (PDY) of depreciation allowances for debt-financed investment.
In fact, due to interest deductibility and accelerated depreciation, the corporate EMTR on
debt-financed investment is negative for all OECD countries, implying a tax subsidy for
debt-financed investment. (However, incorporation of individual-level taxes on interest
income generally restores taxation of debt-financed investment to a positive rate.) Thus,
in addition to affecting the allocation of capital across borders, the corporate tax also
affects financing decisions, favoring the use of debt finance instead of equity finance.
Column 2 of Table 1.1 shows the importance of depreciation allowances for
explaining differences in corporate tax bases (and EMTRs) for OECD countries. A PDY
of one is equivalent to immediate write-off (expensing) of investment, while a PDY of
zero means that investment is non-depreciable. If the rate of tax depreciation equals the
rate of economic depreciation (and there is zero inflation), then the EMTR for equityfinanced investment equals the statutory CIT rate (and the EMTR on debt-financed
investment equals zero). Most OECD countries offer accelerated depreciation for
equipment investment, such that their equity EMTRs are lower than their statutory tax
rates. In contrast to its high statutory CIT rate, the United States has relatively generous
depreciation allowances for equipment, with a PDY of79 percent. In the OECD, only
Greece and Italy have more generous depreciation allowances.
The trend in OECD depreciation allowances over the past two decades has been
toward slower depreciation, as countries have at least partially offset CIT rate cuts with
corporate base broadening. According to the Institute for Fiscal Studies, the average
PDY of OECD depreciation allowances fell from 82 percent in 1980 to 75 percent in
2005. Depreciation allowances among the G-7 also declined during the same period, but
s
remained generally higher, falling from 85 percent to 76 percent.
The corporate EMTRs for equity-financed and debt-financed equipment
investment, respectively, for the OECD countries are shown in Columns 3 and 4 of Table
1.1. The U.S. EMTR for equity-financed equipment investment, 24 percent, is above the
OECD average of20 percent, but equal to the G-7 average. The U.S. EMTR for debtfinanced investment in equipment, -46 percent, is below average for both the G-7 (-39
percent) and the OECD (-32 percent). These figures illustrate the divergent influence of
statutory CIT rates on equity and debt EMTRs. A higher CIT rate produces a higher
equity EMTR but a lower debt EMTR because the value of the interest deduction
increases with the corporate tax rate. The above-average U.S. statutory CIT rate thus
contributes to a below-average debt EMTR. Indeed, the United States has the greatest
disparity between debt and equity EMTRs in the OECD, possibly resulting in a more
pronounced tax bias of financing decisions in the United States than in other OECD
countries.
To gauge the net effect of statutory CIT rates and the size of the corporate tax
base, empirical measures of the average corporate tax rate are sometimes considered,
such as the ratio of corporate income tax revenues to gross domestic product (GOP).

Institute for Fiscal Studies, Corporate Tax Database, www.ifs.org.uk

Over the period of 2000 through 2005, the average ratio of corporate income tax revenues
to GOP for the OECD was 3.5 percent; for the United States, the average ratio was 2.2
percent. Thus, the high U.S. corporate tax rate does not result in higher corporate tax
revenue relative to GOP due to the narrowness of the U.S. corporate tax base. The
narrow corporate tax base results not only from accelerated depreciation allowances, but
also from special tax provisions for particular business sectors (such as domestic
production activities) as well as debt finance and tax planning.

Emerging market countries
Because U.S. corporations are increasingly investing in and competing with
corporations in emerging markets, comparison of the U.S. corporate tax regime with
those of major emerging market countries is also important. Table 1.2 shows statutory
CIT rates, depreciation allowances, and corporate effective marginal tax rates for three
large, emerging market U.S. trading partners - China, India, and Mexico. Their domestic
statutory CIT rates are fairly close to the OECD average of 31 percent. However, both
China and India have levied corporate tax on domestic and foreign investors at different
rates. In China, while the total statutory CIT rate on domestic firms was 31 percent
(equal to the OECD average), special low rates of 15 percent to 24 percent were accorded
foreign corporations investing in particular sectors and geographic regions. Although
China has recently passed legislation that will unify its domestic and foreign corporate
tax rate at 25 percent - substantially below the OECD average - it will continue to offer
special tax relief for investment in particular sectors and regions. India, conversely, taxes
foreign investors more heavily than domestic firms. The statutory CIT rate faced by
foreign corporations is more than 10 percentage points higher than the 34-percent rate
levied on domestic firms. Mexico's statutory tax rate, 32 percent, is slightly above the
OECD average.
Table 1.2: U.S. vs. Emerging Market Country Tax Rates, 2006

Country

Statutory Corporate
Tax Rate
Domestic Foreign

PDV of Depreciation
Allowance Equipment (Equity)
Domestic
Percent

EMTR
Equipment
(Equity)
Domestic

China*
India
Mexico

31
34
32

15-24
45
32

48
51
53

34
36
33

United States

*Foreign investment in Chinese special enterprise zones is subject to a 15 percent or 24 percent CIT rate.
China has passed legislation to unify its domestic and foreign corporate tax rates at 25 percent.
Source: I nternational Bureau of Fiscal Documentation (2007b).

Depreciation allowances in these three emerging market countries, which have an
average PDY of 51 percent, are markedly less favorable than the OECD average of 75
percent. Despite having domestic statutory CIT rates roughly equal to the OECD
average, these three countries' broad corporate tax bases result in equity EMTRs that,
with an average rate of 34 percent, are well above the OECD average of 20 percent.

Individual-level taxation of corporate income
Firm-level taxation provides an incomplete picture of the tax burden on corporate
investment because corporate profits distributed in the form of interest, dividends, and
capital gains are often subject to a second level of tax at the investor level. Because
interest is deductible by the corporation, debt-financed investment is subject to only a
single layer of tax at the investor level. However, dividends and retained earnings (which
produce capital gains) may not be deducted by the corporation, so that equity-financed
investment is frequently subject to "double taxation" - it is taxed first under the corporate
income tax and then again under the individual income tax when distributed to investors
as dividends or retained by the corporation and realized by investors as capital gains.')
The importance of investor-level taxes for affecting investment decisions depends
on the tax rate faced by the marginal investor. If the marginal corporate investor is taxexempt (such as a pension fund), then the corporate-level EMTR alone describes
marginal investment incentives in the corporate sector. However, if the marginal investor
is subject to taxes on corporate interest, dividends, and capital gains, then that layer also
needs to be taken into account in calculating the EMTR on corporate investment.
Typically, it is assumed that the marginal investor is a weighted average of business
taxpayers that are tax-exempt and taxpayers who are subject to investor-level taxes.
Most countries offer some type of integration scheme to alleviate double taxation,
which usually takes the form of either: (1) reduced tax rates on (long-term) capital gains
and dividends, (2) a tax imputation system, which gives the investor credit for part or all
of the tax paid at the corporate level, or (3) a dividend exclusion combined with basis
adjustments for corporate income that is retained by the firm. Another increasingly
popular method of capital income taxation, sometimes referred to as the "Scandinavian
system," is to tax interest, dividends, and capital gains at a single rate well below the top
marginal rate on earned income.
OECD countries offering partial or full imputation of dividend taxes include the
United Kingdom, Canada, and Mexico. The United States, Japan, and India offer
reduced tax rates on long-term capital gains (which the United States currently also
applies to dividends), while Germany and France offer a 50-percent exclusion of
dividend income. Countries that have adopted Scandinavian systems include Italy and
1o
China.

') The return to these investments may be taxed again under the estate tax.
10 OEeD, Tax Database, www.oecd.org

..
Table 1.3 S?oWS t.he top statutory tax rates levied on residents' receipts of interest,
dividends, and capital gams for the G-7 countries. The United States has an aboveaverage tax rate on interest, a below-average tax rate on dividends, and an average tax
rate on long-term capital gains. Table 1.4 shows the integrated EMTRs for the G-7
countries calculated for a taxable domestic investor in the top marginal income tax
bracket. The United States has an above-average EMTR for equipment investment
financed with debt or retained earnings, and a roughly average EMTR for investment
financed with new share issues.
Table 1.3: Top Investor-Level Capital Income Tax Rates for the G-7, 2006
Interest
Tax Rate

Dividend
Tax Rate
Percent

Capital Gains
Tax Rate

Canada
France
Gennany
Italy
Japan
United Kingdom

46.4
27.0
47.5
12.5
16.3
40.0

30.0
23.0
23.7
12.5
30.0
25.1

23.2
26.0
23.7
20.0
10.0
10.0

United States

37.9

18.8

Unweighted average

32.5

23.3

18.8

Country

Note: Where applicable, data include sub-national tax rates, dividend tax rates incorporate
integration allowances, and tax rates are for long-term, large-scale investment.
Source: International Bureau of Fiscal Documentation (2007a).

Worldwide vs. territorial systems
Another respect in which the U.S. corporate tax system differs from that of the
majority of the United States' trading partners is in its taxation of corporations'
worldwide earnings. U.S. corporations pay tax on the active earnings of their foreign
subsidiaries when those earnings are paid out as dividends to their parent corporations
(although credit is given for taxes paid on those earnings to foreign governments). The
major alternative to a worldwide system is a territorial system in which the home country
exempts all or a portion of foreign earnings from home-country taxation.
Although a predominantly worldwide approach to the taxation of cross-border
income was once prevalent, Table 1.5 shows that it is now used by roughly less than onehalfofOECD countries. Instead, many of these countries now use predominantly
12

territorial tax systems. To protect the integrity of investor-level taxes under the
ind~vidual income tax system~ however, countries with predominantly territorial systems
typI~ally do not exempt certaI.n foreig~ earnings of foreign subsidiaries, including
earnm~s ge.nerate? ~ro~ ~oldmg mobile financial assets, or certain payments that are
deductible m the JUrIsdictIOn from which the payment is made, such as foreign source
royalty payments.
Table 1.4: Integrated Effective Marginal Tax Rates for G-7 Countries, 2006
Retained Earnings**
New Shares*
Percent

Country

Debt

Canada
France
Germany
Italy
Japan
United Kingdom

5 \.8
12.6
56.8
-29.7
-49.0
46.1

63.4
49.9
64.0
29.0
49.9
55.8

5 \.8
43.7
58.7
28.3
25.3
38.8

United States

3 \.0

5 \.8

46.1

Unweighted average

17.1

52.0

4\.8

*The applicable tax rate for new share issues is the tax on dividends.
**The applicable tax rate for retained earnings is the tax on long-term capital gains. The effective marginal
tax rates on retained earnings assume 10 years of deferral.
Source: International Bureau of Fiscal Documentation (2007a).

Consumption taxes
Another respect in which the U.S. tax system differs markedly from that of the
United States' major trading partners is the reliance on consumption taxes. Table 1.6
11
shows OECO countries' usage of taxes on goods and services and taxes on general
consumption. 12 It also shows the standard value-added tax (VAT) rate in OECD
countries. The United States relies less heavily on taxes on goods and services than all
other OECO countries, measured both as a percentage of GOP and as a share of total
taxation. 13 As a percentage of GOP, taxes on goods and services in 2005 were 4.8
percent in the United States compared with the OECO average of 11.4 percent. As a
percentage of total taxation, taxes on goods and services were 17.4 percent in the United
States compared with the OECO average of 31.9 percent. Japan was the only other

II Taxes on goods and services include all taxes and duties levied on the production, extraction, sale,
transfer, leasing or delivery of goods, and the rendering of services, and certain other taxes.
12 General consumption taxes include value-added taxes, sales taxes and multi-stage cumulative taxes.
13 The tax levied in the United States on goods and services is imposed by most states in the form of retail

sales taxes.

OECD country that was similar to the United States using those measures - taxes on
goods and services were 5.3 percent of GOP and 19.4 percent of total taxation.

Table 1.5: Territorial vs. Worldwide Treatment of Foreign Dividend Income
by Country, 2005
Territorial
(Exemption)

Worldwide
(Foreign Tax Credit)

Australia*
Austria
Belgium
Canada*
Denmark
Finland
France**
Germany
Greece*
Hungary
Iceland
Italy**
Luxembourg
Netherlands
Norway
Portugal*
Slovak Republic
Spain
Sweden
Switzerland
Turkey

Czech Republic
Ireland
Japan
Korea
Mexico
New Zealand
Poland
United Kingdom
United States

*Exemption by treaty agreement.
**Exemption of95 percent.
Source: President's Advisory Panel on Federal Tax Reform (2005).

The United States also relies less heavily on general consumption taxes (such as
V A Ts and general sales taxes) than all other OECD countries. As a percentage of GOP,
general consumption taxes in 2005 were 2.2 percent in the United States compared with
the OECD average of6.9 percent. As a percentage of total taxation, general consumption
taxes were 8.0 percent in the United States compared with the OECD average of 18.9
percent. Japan was the only other OECD country that was similar to the United States
using those measures - general consumption taxes were 2.6 percent of GOP and 9.5
percent of total taxation. Finally, the United States is the only OECD country without a
VAT, although most states impose retail sales taxes.

Table 1.6: Consumption Taxes among OECD Countries

Country

Australia
Austria
Belgium
Canada
Czech Republic
Denmark
Finland
France
Germany
Greece
Hungary
Iceland
Ireland
Italy
Japan
Korea
Luxembourg
Mexico
Netherlands
New Zealand
Norway
Poland
Portugal
Slovak Republic
Spain
Sweden
Switzerland
Turkey
United Kingdom
United States
Unweighted Average

Taxes on Goods and
Services*
Percentage of
Percentage
Total
ofGDP
Taxation

Taxes on General
Consumption*
Percentage of
Percentage
Total
ofGDP
Taxation
Percent

Value-Added
Taxation**
Standard
VAT Rate

8.6
12.0
11.5
8.5
11.8
16.2
13.8
11.2
10.1
9.4
14.8
16.7
11.6
10.8
5.3
8.8
11.1
11.3
12.4
12.1
12.2
12.6
13.6
12.5
10.0
13.2
7.0
15.9
11.1

27.8
28.4
25.3
25.4
31.3
32.2
31.3
25.3
29.0
34.6
39.7
40.4
37.8
26.4
19.4
34.3
28.8
56.7
31.7
32.1
27.9
36.7
39.3
39.7
28.0
26.1
23.6
49.3
30.3

4.1
7.9
7.3
5.0
7.2
10.0
8.7
7.8
6.3
6.0
10.5
11.5
7.7
6.0
2.6
4.5
6.2
3.8
7.6
9.0
7.9
7.7
8.3
7.9
6.2
9.4
4.0
7.1
6.8

13.4
18.9
16.1
15.0
19.2
19.9
19.8
17.1
18.0
22.2
28.1
27.7
25.1
14.6
9.5
17.5
16.1
19.1
19.5
23.8
18.1
22.5
23.8
25.1
17.5
18.5
13.4
21.8
18.6

10.0
20.0
21.0
7.0
19.0
25.0
22.0
19.6
16.0
19.0
20.0
24.5
21.0
20.0
5.0
10.0
15.0
15.0
19.0
12.5
25.0
22.0
21.0
19.0
16.0
25.0
7.6
18.0
17.5

4.8

17.4

2.2

8.0

0.0

11.4

31.9

6.9

18.9

17.1

'Figures are for 2005.
"Figures are for 2006.
Source: OECD, Revenue Slalislics(2007) and OECD Tax Database, www.oecd.org

Summary

The U.S business tax system has not kept pace with changes in the global
economy. The tax reforms enacted by the United States in the 1980s were followed by
reforms in other countries. The U.S. statutory corporate income tax rate is now the
second highest among the OECD countries, and the U.S. corporate effective marginal tax
rate is roughly average, discouraging both foreign direct investment and labor
productivity.
The U.S. system for taxing businesses differs from those in other OECD countries
in other important respects. The United States taxes corporations on their worldwide
earnings, a once prevalent approach now used by less than one-half of OECD countries.
Instead, many countries use predominantly territorial systems that exempt all or a portion
of foreign active earnings from home-country taxation. In addition, the United States
relies less heavily on consumption taxes than other OECD countries and is the only
OECD country that does not have a V AT.
The current U.S. system for taxing businesses clearly is not optimal. It includes
ad hoc policies and special tax provisions that narrow the tax base and create distortions
that divert capital from its most efficient use. This lowers the productive capacity of the
economy.
The U.S. business tax system needs to be designed to help U.S. companies and
workers compete by taking into account the increasingly integrated global economy.
With a view to future competitiveness, U.S. tax policy must respond to and anticipate
changes in the global marketplace. The U.S. system for taxing businesses needs to be reevaluated to consider how it can be improved to attract and generate the investment and
innovation necessary to advance the living standards of all Americans.
The remainder of this report discusses approaches that could be considered for
reforming the taxation of business income. Chapter II examines an approach that would
replace business income taxes with a BAT (a type of consumption tax), while retaining
taxes on capital income through the individual income tax. Chapter III explores an
approach that would broaden the income tax base and use the revenues either to lower
business income tax rates or permit more rapid write-off of business investment,
potentially combined with the exemption of foreign active earnings. Chapter IV
discusses specific areas of business income taxation that could be reformed separately or
in the context of a broad-based reform.

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011

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Proposals to Fix America's Tax System. Washington, DC: U.S. Government
Printing Office.

Slemrod, Joel. 2005. "The Costs of Tax Complexity," Presentation to the President's
Advisory Panel on Federal Tax Reform, March 3,2005.
The Economic Times. 2007. "FM Hints at Tax Cuts, Yields to Area-Wise Incentives."
August 1,2007.
U.S. Department of Commerce. 2007. Bureau of Economic Analysis news release,
November 2007.
http://www .bea.gov /newsreleases/nationall gdp/2007 /pdf/ gdp3 07p. pdf
U.S. Department of the Treasury, Office of Tax Analysis. 2006. A Dynamic Analysis of
Permanent Extension of the President's Tax Relief Washington, DC: U.S.
Department of the Treasury, July 25, 2006.
http://www .treas. gov/press/releases/reports/treasurydynamicanal ysisreporj jul y25 2
006.pdf
U.S. Department of the Treasury. 2007. Report on Foreign Portfolio Holdings ofU.S.
Securities. Washington, DC: U.S. Department of the Treasury, June 2007.
http://www .treasury.gov /tic/shI2006r.pdf
U.S. Department of the Treasury. 2007. Treasury Conference on Business Taxation and
Global Competitiveness: Background Paper. Washington, DC: U.S. Department
of the Treasury, July 23, 2007.
http://www.treas.gov/press/releaseslreports/07230%20r.pdf

Chapter II: Replacing Business Income Taxes with a Business Activities
Tax
A.

Introduction

This chapter examines replacing present U.S. business income taxes with a broadbased Business Activities Tax (BAT), which is a type of consumption tax. Assuming a
very broad base, a BAT imposed at a rate of roughly 5 percent to 6 percent would replace
the revenue from current U.S. business income taxes.
Under this approach the corporate income tax as well as the existing individual
income taxes collected from pass-through entities (partnerships, sole proprietorships, and
S corporations) would be replaced with a BAT. While business income taxes would be
repealed and replaced by a BAT, the individual income tax that includes investor-level
taxes on dividends and capital gains would be retained, and the tax treatment of interest
received by individuals would be conformed to that for dividends and capital gains (i.e.,
taxed at the lower rates currently available for dividends and capital gains).
For two reasons, this approach is estimated to improve economic performance,
ultimately increasing the size of the economy by roughly 2.0 percent to 2.5 percent.
First, because a BAT does not tax the normal retum to saving or investment,14 it is likely
to stimulate additional saving and investment. Greater investment means businesses
would have more capital, which increases workers' productivity, and ultimately improves
living standards. Second, it would likely reduce a variety of tax distortions that arise
under the current tax system due to the uneven treatment of investment and other
.
..
15
economic activity.
Because this approach entails repeal of the corporate income tax but retains the
individual income tax, it could create incentives for individuals to accumulate passive
investment income in the corporate form to defer or avoid paying individual investorlevel taxes on such income. It also could create incentives for business owners to
minimize payments for their own labor services, which would not be deductible, to avoid
income and payroll taxes. These issues could be addressed through special rules, which
could create additional complexity. Other distortions may arise because a BAT base is
unlikely to cover all consumer goods and services. For example, taxing consumer
financial services under a BAT is difficult in practice and small businesses are often
exempt from consumption taxes in other countries for administrative reasons.
The remainder of this chapter describes a BAT and discusses the economic effects
of this approach in more detail. It also describes the main features of the similar valueadded taxes (VATs) typically imposed in other countries.
See Box 2.2 below for a description of the normal return to saving or investment.
The estimate of the improvement in economic performance includes the effect of reducing distortions
among investments in different sectors (such as the distortion between investment in the corporate sector
and investment in owner-occupied housing), but does not include the effect of reducing distortions in the
treatment of investment in different assets within the business sector (such as distortion in the treatment of
investment in equipment and investment in buildings).
14

Replacing business income taxes with a BAT would be a bold reform. Indeed, it
is a reform that has not been attempted in other countries. Nevertheless, it is possible to
overemphasize the novelty of a BAT for the United States. Although perhaps not
universally understood, the actual U.S. tax system is not a pure income tax, but a hybrid
combination of an income tax and a consumption tax. 16 The U.S. tax system already has
important features that move in the direction of a BAT. For example, accelerated
depreciation is a step toward the immediate deduction of the cost of an investment that
would be allowed by a BAT. Further, certain investment costs, such as investments
undertaken by certain small businesses and the costs of producing certain intangibles, are
currently allowed an immediate deduction, the same treatment as under a BAT. Thus,
while the BAT approach outlined in this chapter is a consumption tax, it is worth noting
that the U.S. tax system currently has some features that are similar.

Description of a BAT

A BAT is a tax on goods and services sold to consumers. Under a BAT, the tax
base for each firm is the gross receipts from the sales of goods and services minus
purchases of goods and services (including purchases of capital goods) from other
businesses. Wages and other forms of employee compensation (such as fringe benefits)
are not deductible and, therefore, the effective tax rate on labor could be increased, as
discussed below. Under a BAT, financial flows, such as interest and dividends (whether
received or paid), would not enter into the tax base. For the economy as a whole, the tax
base of a BAT is the sales of real goods and services to consumers, because sales from
one business to another have been deducted from the tax base.
A BAT is similar to the VATs imposed in many countries around the world.
These VATs, however, generally use a credit-invoice method. In contrast, a BAT uses a
17
deduction or subtraction method for calculating the tax. In a credit-invoice method, a
business is taxed on all receipts but receives a credit for the amount of tax paid by the
seller on the business' purchases. 18 ABATis also similar to a broad-based retail sales
tax. 19

Calculation of a BAT
To understand how a BAT works, consider the illustration below (Table 2.1) of
how bread produced by a farmer, miller, and baker would be taxed under a BAT with a
Auerbach (1996).
Japan, however, operates a V AT with many subtraction method features. The Japanese V AT uses an
annual accounting period, and taxpayers subject to the Japanese V AT derive the amount of their applicable
credit for the V A T paid based on their total purchases from domestic entities, rather than based on the V AT
paid as shown in a credit-invoice method. See Schenk (1995) and Japanese Ministry of Finance, Tax
Bureau (2005). A BAT would have similarities to the current US business tax system by having an annual
tax period and a tax return submitted by businesses to the taxing authority.
18 [n some countries, the credit-invoice V A T is referred to as a Goods and Services Tax (GST).
19 Sales taxes levied by state and local governments differ considerably from the ideal retail sales tax for
many reasons, including the fact that some apply to many business-to-business sales that would not be
taxed under an ideal retail sales tax or involve substantially narrow tax bases that exempt certaIn sales.
16

10-percent tax rate. In this example, the farmer grows wheat and sells it to the miller
who makes flour for sale to the baker. In turn, the baker uses the flour to make bread:
which is then sold to consumers.
Table 2.1: Calculation of a BAT

Economic Activity
1.
2.
3.
4.

Sales
Purchases
Value added (lines 1-2)
BAT (10% of line 3)

Farmer

Miller

Baker

Total

$300
$0
$300
$30

$700
$300
$400
$40

$1,000
$700
$300
$30

$1,000
$100

Source: Department of the Treasury, Office of Tax Analysis.

A BAT is calculated by subtracting purchases from sales at each stage of the
production and distribution process. The baker, for example, applies a 10-percent tax rate
to the $300 difference between total bread sales and purchase of grain and owes $30 of
BA T. The farmer and the miIler calculate tax in the same way and the total BAT paid is
$100. This is the same amount of total tax that would be paid under a 10-percent retail
sales tax. The only difference is that the 1O-percent retail sales tax would be levied only
on the final $1,000 sale to consumers.

The BAT base
In principle, a BAT would tax a broad range of consumption goods and services.
20
Most existing VATs, however, do not tax all consumption. Some goods are excluded
for administrative reasons. Other goods are excluded, or taxed at preferentially low rates,
in order to pursue policy or social objectives. Nevertheless, keeping the base of a BAT as
broad as possible minimizes the distortions caused by the tax.
Total consumption is the broadest conceivable BAT base. However, taxing total
consumption would be impractical, if not impossible, for several reasons. First, some
goods and services could be difficult to value, such as consumer financial services and
government-provided goods and services. 2 ! Second, other goods and services, while
perhaps easy to value, would raise difficult enforcement problems. For example,
underreporting of sales by small businesses or casual service providers would be a
problem under a BAT, as it is under our current tax system. Third, the taxation of some
goods and services may raise measurement and bookkeeping challenges (e.g., spending
that provides employees compensation that is nondeductible must be identified and
See chapter III in Congressional Budget Office (1992).
The annual consumption flows from the existing stock of owner-occupied housing and other consumer
durables (e.g., automobiles) also would be difficult to value under a BAT. New housing and consumer
durables could be taxed on a pre-payment basis. Tax would be imposed on the purchase price, which is
equivalent in present value to a tax on the annual consumption flow. For a detailed explanation, see
Bradford (1986).
20

separated from other business spending such as business meals). Of course, many of
these issues represent significant challenges under our current tax system.
Some goods may be viewed as especially desirable because their consumption
benefits society as a whole. Because they provide benefits to others, there may be a
policy reason to reduce or eliminate the rate of tax on "merit goods," such as education,
health care, welfare services, cultural activities, and religious and charitable activities.
Other goods, such as necessities, may be taxed at a low rate in order to reduce the tax
burden on the poor. These might include medical care, food, electricity, heating oil and
gas, and clothing. A lower rate for necessities is generally viewed as an inefficient way
to address perceived regressivity, however, because the wealthy typically consume more
than the poor, including with respect to most "necessities." Moreover, such special
treatment would require a higher BAT rate for other consumption.

Economic effects of a broad-based BAT

Replacing the present system of business taxes with a broad-based BAT would
likely improve economic performance by eliminating features of the present income tax
that create economic distortions such as the tax penalty on saving and investment and the
uneven taxation of economic activity. The Treasury Department estimates that this
approach would ultimately increase the size of the economy by roughly 2.0 percent to 2.5
percent.

Economic gains from replacing business taxes with a broad-based BA T
The economic gains have two primary sources. First, a BAT lowers the tax on the
return to saving and investment. (Box 2.1 discusses the effect of a consumption tax on
saving and investment.) Replacement of the existing tax on business income with a BAT
would lower the effective marginal tax rate on investment from its current level of 17
percent to 8 percent overall, and from 25 percent to 15 percent in the business sector. 22
The lower tax on saving and investment, which is likely to be quantitatively more
important for producing economic gains than the more even taxation of economic
activity, would increase capital formation, enhance labor productivity, and ultimately,
increase living standards.
Box 2.1: The Incentive to Save and Invest Under a Consumption Tax23
The key difference between an income tax and a consumption tax is that an
income tax discourages savings while a consumption tax does not. Because a
consumption tax imposes an equal tax on present and future consumption, it does not
discourage saving for future consumption. In contrast, an income tax taxes the return to
saving, thereby taxing consumption in the future more heavily than consumption today.
22 The effective marginal tax rate combines corporate tax rates, depreciation allowances, and other features
of the tax system into a single measure of the share of an investment's economic income needed to cover
taxes over its lifetime. This measure of the "tax wedge" between the before-tax and after-tax returns on an
investment is measured relative to the before-tax return.
23 For a detailed discussion, see Slemrod and Bakija (1996).

An income tax discourages saving for the future by reducing the after-tax rate of retum
received by the investor below the pre-tax rate of retum produced by the investment.
An important feature that distinguishes an income tax from a consumption tax lies
in how each treats the cost recovery of capital goods (i.e., the tax treatment of
investment). Under an income tax, the cost of capital goods is deducted over time
through depreciation allowances as the capital goods wear out, which results in the
investor's after-tax retum faIling below the pre-tax retum. Under a consumption tax, the
cost of capital goods is deducted fully in the year of purchase (i.e., capital is "expensed"),
which results in the investor's after-tax retum exactly equaling the pre-tax retum. This
occurs because, under a consumption tax, the value of the expensing deduction exactly
offsets the tax on the ret~m to the investment (in present value) for the marginal, or
break-even, investment.
These points are illustrated in the following simple example of a business'
investment decision under a 20-percent income tax and a 20-percent consumption tax
(Table 2.2). Consider a business that has eamed $1,000 in profit. The business owner
must decide whether to invest in a machine that will produce output next year that sells
for 10 percent more than the machine's cost, after which the machine is totally wom out.
If the business owner does not invest, he will pay $200 in tax on the $1,000 profit and
will have $800 to spend on consumption - the same result under both the income tax and
the consumption tax.
For each tax, we now enquire: How much consumption can the owner obtain in
the second year if he foregoes this $800 of first-year consumption and instead invests?
Under the income tax, if the business owner invests in the machine, he will still pay $200
in tax in the first year and can buy an $800 machine. In the next year, given the 10percent pre-tax rate of retum, the machine produces $880 of output, which is taxable.
Because the business owner can deduct the full $800 cost of the machine as depreciation
in the second year, his taxable income is $80. The tax on the income is $16, and he is left
with $864 in cash to consume. The owner gives up $800 consumption in the first year to
obtain $864 consumption in the second year. Thus, after taxes he eams a rate of retum of
8 percent «$864-$800)/$800), which is less than the I O-percent pre-tax rate of retum that
the investment produces.
Under a consumption tax, the business owner who invests in the machine could
deduct the fuIl $1,000 cost of a machine when it is purchased. This means that the
business owner can invest $1,000 in the first year. Compared to consuming the proceeds,
investing gives him a first year tax savings of $200, which he invests in the machine.
Given a 10-percent pre-tax rate of retum, the $1,000 investment in the machine would be
worth $1,100 in the next year. All of the $1, I 00 would be taxable, and there would be no
deduction so that the business owner would be left with $880 after taxes. This $880
leaves hi~ with a 10-percent after-tax rate of retum on his investment because the aftertax cost of the $880 in year 2 is the $800 of consumption he gave up in year I. Under the

24 The full deduction in the year of purchase will offset (in present value) what economists call the expected
nonnal return. Supra-nonnal returns would continue to be taxed under this type of consumption tax.

consumption tax the after-tax rate of return and the pre-tax rate of return are exactly
equal. Stated somewhat differently, the time value of money on the $200 in tax savings
generated by the investment (i.e., $20 given the I O-percent rate of return) just offsets the
tax on the investment's return that is paid in the second year ($20), which eliminates the
net tax liability on the rate of return. In present value terms, consumption tax liability is
the same regardless of when the business owner consumes.
Table 2.2: Comparison of Taxes on Investment under an Income Tax and a Consumption Tax
Income
Tax

Consumption
Tax

Year I pre-tax income

$1,000

If income is consumed in year 1
Pre-tax income (= pre-tax consumption)
Income tax (20%)
Consumption tax (20%)
After-tax consumption (pre-tax income minus tax)

$1,000
$200
na
$800

$1,000
na
$200
$800

$1,000
$0
$200
na
$800
$800

$1,000
$1,000
na
$0
$1,000
$800

$880
$800
$80
$16
na
$864

$1,100
$0
na
na
$220
$880

10%

If income is invested in year 1
Pre-tax income
Less deduction for investment cost
Income tax (20%)
Consumption tax (20% on pre-tax income minus investment)
Investment (pre-tax income minus tax)
Memo: Taxpayer's cost for the investment (consumption given
up)
Potential consumption in year 2
Pre-tax cash-flow (i = 10%)
Less depreciation
Income from the investment (pre-tax cash-flow minus depreciation)
Income tax (20%)
Consumption tax (20%)
After-tax consumption (pre-tax cash-flow minus tax)
After-tax rate ofretum on investment'
na

not applicable.

'The after-tax rate of return on investment is equal to: [(consumption in year 2/consumption forgone in year I) - I].
Source: U.S. Department of the Treasury, Office of Tax Analysis.

Because a BAT does not allow businesses to deduct labor compensation, a BAT
would add several percentage points to the tax rate on labor income. Thus, the economic
benefits of greater capital formation would be offset to some extent by the reduction in
labor supply caused by the higher tax rate on labor income. After accounting for the
wage-increasing effect of a larger stock of capital and the wage-decreasing effect of a
higher tax rate on wages, on net, the after-tax wage rate falls slightly under a BAT in the
24

Treas.ury Department simulations. However, the tax on the return to saving discourages
WOrkl?g to finance future consumption, and so induces taxpayers to work too little. By
~owenng the tax on future consumption, a BAT's reduction in the tax rate on capital
Income could help to push down the overall lifetime tax burden on labor.
Second, a broad-based BAT would tax business activity more uniformly
throughout the economy. The current taxes on business income distort the allocation of
capital throughout the economy because they do not impose the same tax burden on all
sources of capital. Tangible business capital (e.g., equipment, buildings) is unevenly
taxed while owner-occupied housing and intangible capital (e.g., patents, trademarks) are
generally not taxed at all or at very low effective rates. Current law's tax differentials
encourage over-investment in low-tax assets and activities at the expense of more
productive investments in high-tax assets. This reduces the value of the output produced
with our nation's stock of capital because taxes, rather than economic fundamentals,
affect investment choices.
The more uniform treatment under a broad-based BAT would reduce a number of
existing tax distortions that interfere with efficient consumption and investment
decisions. However, narrowing of a BAT base through various special tax provisions,
such as exemptions for food and drugs, would undermine the economic benefits of a
BAT by reintroducing tax distortions.
The current tax system also distorts a number of consumption choices. For
example, the value of fringe benefits, such as employer-provided health care, is excluded
from an employee's taxable income. In contrast, cash wages are generally taxable. The
tax advantage of such fringe benefits over cash wages induces workers to over-consume
fringe benefits and to under-consume other goods and services. Under a BAT, these tax
distortions would be reduced because fringe benefits would not be deductible.
It is commonly noted that consumption taxes place a tax burden on the value of
wealth that exists at the time the consumption tax is imposed. The tax on wealth is
unavoidable and so does not distort economic decisions. The tax occurs because the
expensing of investment under a consumption tax reduces the value of old capital relative
to new investment. Once the consumption tax is in place, all old capital would be worth
less than an equally productive amount of new investment. The intuition is that old
capital has already received the tax benefit from expensing, and has had its tax basis
reduced accordingly, but must compete with new capital that has not been expensed.
25
Consequently, old capital is worth less than new capital. One particular aspect of the
reduction in the value of old relative to new capital is that a consumption tax would
reduce the value of assets in place at the time the consumption tax went into effect.

Focusing on capital in place at the time of the tax change, this effect is perhaps most clearly seen by
noting that this stock of capital is not allowed to be expensed (assuming no transition relief), but
nonetheless the taxpayer has a zero basis. If the asset were sold, say for $100, the full proceeds would be
subject to tax, so that the business owner would be left with only $80 after taxes, assuming a 20 percent
consumption tax rate. For a new asset, the tax savings from expensing would offset in present value the tax
paid on the investment's cash flow (including any tax paid on the sale of the asset). So the old asset would
be worth 20 percent less that an equivalently productive new asset.
25

Compared to a world without the consumption tax, the value of old capital, including
capital in place at the time of the tax change, would be reduced in proportion to the
consumption tax rate.
However, because under the BAT approach business income taxes would be
replaced, the net effect on asset values must include not only the effects of the BAT, but
also any effects from repealing business income taxes. It is important to note that current
law business income taxes are not pure income taxes, which would have no effect on
asset values. Instead, business income taxes under current law are hybrids of income and
consumption taxes and have some degree of expensing that already reduces the value of
old capital relative to new investment. Consequently, repealing business income taxes
would raise the value of existing assets. The net effect on asset values depends on
whether repealing business income taxes would raise asset values by a greater or lesser
extent than imposing the BAT would lower asset values. Because the BAT tax rate is so
low (roughly 5 percent to 6 percent), it seems likely that in some cases the net effect
would be a negligible change or possibly an increase in value. 26 Thus, it is not clear that
the BAT approach discussed in this chapter would lower asset values, which might
mitigate the need for transition relief to address the impact on the value of existing assets.
Nevertheless, in certain cases transition relief may be viewed as desirable to
address possible windfall losses associated with the loss of existing tax attributes. For
example, unused net operating losses or credits accumulated prior to enactment of a BAT
could be phased out over a specified time period. Although transition relief can be
provided with a view toward avoiding large changes in wealth, allowing transition relief
would increase the cost of the approach and require a higher BAT rate, which would
reduce a BAT's economic benefits. Nonetheless, it is important to note that if transition
relief were financed by a higher BAT rate imposed over a fixed period of time (e.g., five
or ten years), then transition relief would have no effect on the GDP and other benefits of
a BAT in the long run.

Inefficiencies and distortions created by replacing business taxes with a BAT
Repealing business income taxes and imposing a BAT while retaining an
individual income tax would create some inefficiencies and distortions. This section
considers such inefficiencies and also potential distortions that would arise from a BAT
that fails to cover all consumer goods and services, exempts small businesses and
continues to require income to be calculated for certain purposes.
Repealing the corporate income tax while retaining the individual income tax
creates an incentive for individual taxpayers to accumulate passive investment income in
the corporate form to defer paying tax on dividends, capital gains, and interest. Special
rules to deal with these situations, such as the personal holding company tax and the
Indeed, some rough estimates suggest that a BAT actuaJly could raise the value of assets in aggregate.
For example, Auerbach (1996) estimates that the consumption tax aspects of current law cause corporate
assets to sell at about an 8 percent discount relative to new assets and non-corporate assets to sell at about a
6 percent discount. If these estimates proved accurate, a BAT at a 5 percent or 6 percent rate would cause a
small net increase in asset values in the aggregate.
26

accumulated earnings tax under present law, may be necessary but could also introduce
.
27
'
complexity.
Another issue is how the income of flow-though business entities, such as limited
liability corporations, S corporations, partnerships, and sole proprietorships, would be
treated under the BAT approach. Unlike C corporations,28 the income of flow-through
entities would be taxable under the individual income tax when it is earned. To provide
the same tax treatment for income earned by flow-through entities and income earned by
C corporations, flow-through businesses could be treated as separate entities subject to
the same rules as C corporations.
Alternatively, if flow-through businesses were not required to be treated as C
corporations, flow-through entities with positive income would have an incentive to elect
to be treated as C corporations for tax purposes, because they would be exempt from
income tax until that income is paid to the owners and taxed at the individuallevel. 29
However, flow-through businesses with losses from their business operations might
choose to maintain their flow-through status. Because the individual income tax would
be retained under the BAT approach, the business loss of a flow-through entity would be
deductible from the owner's personal income (such as wages) in computing taxable
income, as is the case under current individual income tax rules. In contrast, the owner of
a C corporation is not allowed (nor would he be allowed under the BAT approach) to
deduct the corporation's loss for individual income tax purposes. To help ensure the
same treatment of operating losses for owners of flow-through businesses and C
corporations, rules would be needed to prevent flow-through businesses that do not elect
to be treated as C corporations from using business losses to offset ordinary income.
Further, rules would be needed to determine how business losses would be treated for
taxpayers with multiple business interests.
Under a BAT approach, business entities (C corporations and entities treated as C
corporations) would have an incentive to minimize the compensation paid to an owner
for his own labor services because the owner's labor income would be taxable when it is
received at individual income tax rates, and the business entity would not be permitted to
deduct compensation payments. To the extent labor income is characterized as capital
income and deferred, the Social Security and Medicare Trust Funds also would be

The personal holding company tax was enacted when the highest corporate tax rate was lower than the
highest individual income tax rate. This provision of current law is intended to prevent individuals from
establishing a corporation to receive and hold investment income so that it would not be taxed at higher
individual income tax rates. The tax is 15 percent of undistributed personal holding company income. The
accumulated earnings tax applies if a corporation is formed or used to avoid personal income tax on its
shareholders by accumulating earnings and profits rather than distributing them. The accumulated earnings
tax rate is 15 percent of the accumulated earnings. These taxes are in addition to any regular income tax.
28 C corporations are entities that are subject to the corporate income tax under current law.
29 Under the existing "check the box" regulations, entities other than corporations are generally allowed to
elect corporate tax treatment. Business entities that are sole proprietorships, partnerships or limited liability
companies under state law are allowed to be treated as C corporations (and subject to an entity level tax) or,
if they meet the eligibility criteria, as S corporations (not subject to an entity level tax).
27

affected. Rules requiring reasonable labor compensation would need to be retained, or
even strengthened, to address this issue. 3D
Additional issues arise from the imposition of a BA T. 31 Although a BAT is
intended to apply equally to sales of goods and services by all business entities, certain
services provided to consumers, such as financial services, would be difficult to tax under
a BAT. Member countries of the Organisation for Economic Co-operation and
Development (OECD) generally exempt financial services under their V ATs because of
the difficulty of determining the value added in financial intermediation. Although a
BA T can be imposed on financial services that are fee-based, such as safety deposit
boxes, it is much more difficult to impose tax when the charge for the service is
contained in the margin between the return paid to lenders and the amount charged to
borrowers. Taxing financial services on a cash-flow basis is one approach, but that
would create considerable complexity by requiring a different set ofrules for financial
32
services. Further, a BAT would entail difficult line-drawing as corporations would
have to distinguish between the value added ofreal and financial transactions that are
coupled, such as the purchase of a car financed by the seller.
If only larger businesses are subject to a BAT (i.e., only businesses with sales
above a certain threshold must charge BAT), then larger businesses might have an
incentive to outsource work to exempt small businesses. Under a BAT, wages paid to
employees would not be deductible, but fees paid to third parties, including possibly
exempt small businesses, would be deductible, potentially leading to opportunities for tax
planning. Rules to deal with this issue might be necessary and introduce additional
complexity for businesses.
Replacing business income taxes with a BAT would impose new burdens on
businesses without fully relieving them of pre-existing tax compliance burdens. The
retention of investor-level taxes under the individual income tax would require businesses
to continue to calculate income in order to distinguish between dividends and the return
of the investor's capital, because dividends and capital gains would continue to be taxable
at the individual shareholder level, whereas the return of capital would not be taxable.
Moreover, businesses would also have to comply with the new BAT.

Concerns about growth of a BAT
Some have asserted that V ATs, particularly if initially imposed at low rates, could
be increased and, over time, lead to the growth in federal outlays as a share of GOP. This
view is based, in part, on the following premises. First, because a V AT base is large,

30 Under current law, reasonable compensation rules are in place to prevent S corporations from paying
owner-employees too little as wages in order to avoid payroll taxes. The rules are also in place to prevent
C corporations from paying owner-employees too much compensation in order to reduce corporate income
taxes.
31 Note that these issues may also arise if, instead of replacing the corporate income tax, a BAT were added
to the current income tax system.
32 For a more detailed discussion of the treatment of financial intermediaries under a V AT, see Barham.
Poddar and Whalley (1987), Poddar and English (1997). and Zee (2005).

small increases in the VAT tax rate can generate large amounts of revenue. Second,
depending on how a V AT is administered, it could be perceived as an invisible tax if
collected from businesses rather the households. 33 Third, because a V A T is a relatively
economically efficient way to collect revenue, it is less costly to the economy to expand a
V A T to finance a larger federal government.
There are relatively few empirical studies on the relationship between the
adoption of a V A T and the growth of government spending. 34 The empirical research,
for example, has not been able to adequately address the direction of causality between
the tax structure and the size of government. Casual empiricism suggests that countries
without V A Ts, such as the United States, have smaller government sectors than countries
with a V A T. More careful empirical work that controls for other factors that influence
the relationship between the size of government and the presence of a V A T yield mixed
results. The evidence is inconclusive on whether a V A T would facilitate the growth of
government and well-known tax authorities disagree. 35

Distributional issues

Broad-based consumption taxes, such as a V A T, are commonly criticized for
being regressive. The extent to which this criticism is accurate depends on several
factors including, for example, whether households are classified according to annual
income, lifetime income, or annual consumption, assumptions regarding who bears the
corporate income tax, and the extent to which economic behavior changes in response to
imposing a V AT.
In distributional analyses, when households are classified as rich or poor
according to a broad measure of annual income, a V A T is generally found to be
regressive because annual consumption falls as a percentage of annual income as annual
income increases. 36 This method of classifying households' ability to pay is common
because it is convenient and has intuitive appeal, and because detennining alternative,
simple, and explainable classifications has proven difficult. It is used in the Treasury
Department's distributional analysis of a BAT that is discussed below. Nonetheless, it is
important to keep in mind that using annual-income measures can provide an incomplete
and perhaps somewhat misleading metric of whether a household is "rich" or "pOOr.,,37
A conceptually preferable alternative to annual income is lifetime income, which
gives a comprehensive measure of an individual's ability to pay taxes over his entire
economic life. A lifetime perspective is important because a household's income can
change from year to year. For example, most individuals' or households' lifetime
earnings histories follow a hump-shaped pattern. Households in the lower annual income

Of course, sales receipts to consumers could be required to separately list the V AT collected on the sale.
34 See, for example, Becker and Mulligan (2003).
35 Tait ( 1988), Stockfisch (1985) suggest that a VAT would not increase the size of the government sector,
but McClure (1983) suggests that it would increase the size of the government sector.
36 For example, see Congressional Budget Office (1992). See also Feenberg, Mitrusi and Poterba (1997)
and Mieszkowski and Palumbo (2002).
37 See, for example, Poterba (1989).
J3

brackets contain not only those who are perennially poor, but also those who are
temporarily poor due to unemployment or illness, those who are young but have high
potential lifetime earnings (e.g., those just entering the work force), and those who are
retired and are wealthy but have low incomes. Moreover, households tend to smooth
consumption between low and high earnings periods. Therefore, some studies use annual
consumption as a measure of well being. 38 Studies find that a V AT remains regressive
when households are classified according to lifetime income, but the extent of the
regressivity diminishes significantly.39
Most conventional distributional analyses of VA Ts also do not take into account
that VATs continue to tax a significant portion of the return to investment - the supranormal return. Recognizing that both income taxes and VATs tax a significant portion of
the return to investment can also change the distributional effects of a V AT in ways that
are not considered in most distributional analyses, including those that the Treasury
Department prepared for this report, and that are discussed in more detail in Box 2.2
below.
Another factor that influences the progressivity of replacing business income
taxes with a BAT is one's view regarding who bears the burden of the corporate income
tax and personal taxes imposed on business income. 4o For decades it has been clearly
understood that the corporate income tax is not borne exclusively by corporate
shareholders, but is borne by households more generally. Consumers, workers, and
owners of other types of capital all may bear the corporate income tax through higher
prices, lower real wages, or lower returns, respectively. The extent to which the
corporate tax is shifted from corporate equity owners to other economic actors depends
on the details of the tax system, how the revenue from the tax is spent, the degree to
which various economic actors respond to tax prices, the time frame of the analysis, and
the details of the economy. Consequently, it has proven difficult to determine, precisely,
who bears the burden of the corporate income tax.
Research dating back to the early 1960s suggested that the corporate income tax
might primarily be borne by owners of capital as the corporate income tax lowers the
returns to all types of capital, not just capital used in the corporate sector. Capital shifts
out of the corporate sector in response to the lower after-tax return offered by
corporations. This research, however, assumed a fixed capital stock reflecting the
dominant position of the United States in world capital markets at the time. If the capital
stock varies either because of international capital flows or a savings response, the
corporate tax (and, more generally, business taxes) may more easily be shifted to labor.
While there remains uncertainty in this area of research, there is increasing
evidence that suggests that the corporate income tax may be borne not entirely (or even
principally) by owners of capital, but instead a substantial portion of the tax may be
38

When ability to pay is measured by annual consumption, then by definition the burden of a broad-based

VAT is proportional.
Casperson and Metcal f (1994).
. . . . .
40 This issue is particularly relevant to an approach that entails replacmg current busmess mcome taxes WIth
39

a BAT.

shifted onto workers, affecting their wages and living standards. Globalization plays a
role. In an open economy, with mobile capital, but immobile labor, a source-based tax
like the corporate income tax could well be paid in large part by domestic labor. The
intuition is simple: the incidence of a tax will generally fall on the input that is least
mobile. In an international setting, where capital increasingly flows freely across
borders, but labor is considerably less mobile, much of the corporate income tax will be
borne by labor through lower real wages. This occurs because as capital flows out of the
country, capital formation declines. As labor has less capital with which to work, labor
productivity falls, which translates into lower living standards than would otherwise have
occurred.
The extent to which domestic labor bears a burden depends on the degree to
which investment is internationally mobile and the extent to which the United States has
the power to shift some of the corporate tax burden abroad by influencing the terms of
international trade in its favor. One recent study, for example, finds that U.S. labor may
bear as much as 70 percent of the corporate income tax burden when capital is perfectly
mobile and the country lacks the ability to shift any of the burden abroad by improving
41
the international terms oftrade. That study and another recent stud/ 2 find that labor's
burden is reduced when capital mobility is less than perfect or the United States has the
power to affect the prices of traded goods and services produced in the corporate
43
sectors.
In several recent papers, empirical research focusing on the relationship between
cross-country variation in corporate taxes and wages finds that labor bears a substantial
portion of the corporate income tax. 44 Again, the mechanism is less capital investment,
which reduces labor productivity and, ultimately, living standards. While corporate tax
rates change infrequently within a single country, many countries have had major
corporate tax reforms over the last 25 years. These papers use these reforms to estimate
the effects of corporate taxation. Whether these results, which may have been derived to
some extent from the changes in tax rates among smaller economies, can be applied
directly to the United States is an open question. Nevertheless, this empirical research
suggests a link between corporate taxes and wages.
Even without international capital flows, prominent economic models suggest that
changes in the level of domestic savings may also result in a shift of much of the burden
of the corporate tax onto labor. In these models, the corporate tax lowers the return to
saving, which causes households to save less, which lowers the capital stock, which in
tum reduces labor productivity and real wages. Both of the most commonly used
theoretical economic models of the effects of taxes on household decisions about
Randolph (2006).
Gravelle and Smetters (2006).
43 Analyses of the incidence of the corporate tax that focus on international capital flows often assume that
other countries do not change their corporate taxes in response to a change in the U.S. corporate tax. Under
that assumption, for example, if the United States reduced its corporate tax rate and other countries did not
change their corporate tax rates, the United States would attract more capital and labor would benefit from
higher wages. However, if other countries responded to the U.S. rate reductIon by reducll1g theIr tax rates,
capital inflows might be more modest and capital would be likely to bear more ofth~ corporate IIlcome tax.
44 Arulampalam, Devereux, and Maffini (2007), Hassett and Mathur (2006), and Felix (2007).
41

working, saving, and consuming suggest that a large fraction of the corporate tax is likely
shi~ted on~o la~0r.45 Of ~ourse, the actual degree of shifting depends on the extent to
WhICh s.avm~s IS responsIve to changes in taxes, a subject on which there is considerable
uncertamty. Nevertheless, these models are highly suggestive that the burden of the
corporate income tax shifts in large part to labor.

Table 2.3: Distribution of the Federal Tax Burden Under Current Law and a Business
Activities Tax With Two Assumptions on the Incidence of the Corporate Income Tax

Income
Percentile

Corporate Income Tax Borne by
Owners of Capital
Administration's
Policy Baseline*

Business
Activities Tax

Labor Bears 70% of the
Corporate Income Tax
Administration's
Policy Baseline*

Business
Activities Tax

Percent of Federal Taxes Paid
First Quintile
Second Quintile
Third Quintile
Fourth Quintile
Fifth Quintile

0.3
2.1
8.0
17.9
71.5

0.5
3.0
9.7
20.1
66.6

0.4
2.5
8.7
18.7
69.6

0.5
3.0
9.7
20.1
66.6

Bottom 50%
Top 10%
Top 5%
Top 1%

5.5
54.9
42.0
23.4

7.4
48.3
34.4
16.4

6.3
52.2
38.9
20.5

7.4
48.3
34.4
16.4

Note: Estimates of 20 15 law at 2007 cash income levels. Quintiles begin at cash income of: Second $13,310;
Third $28,507; Fourth $50,448; Highest $87,758; Top 10% $128,676; Top 5% $177,816; Top 1%$432,275;
Bottom 50% below $38,255.
*The Administration's policy baseline is similar to current law but assumes permanent extension of the 2001 and
2003 tax relief.
Source: U.S. Department of the Treasury, Office of Tax Analysis.

To reflect these differing views and build on the recent research, the Treasury
Department prepared two sets of distributional analyses for replacement of business
income taxes with a BAT (Table 2.3). In the first set of distributional analysis (columns
1 and 2), the traditional assumption employed by the Treasury Department - that the
corporate income tax is borne entirely by owners of capital- is used. In the second set of
distributional analysis (columns 3 and 4), the Treasury Department prepared tables that
assume labor bears 70 percent of the corporate income tax. This analysis is consistent
with one recent study,47 but perhaps more conservative than the recent trio of empirical

Auerbach and Kotlikoff (1987) and Judd (2006).
Bernheim (2002).
47 Randolph (2006).
45

papers discussed above. In both analyses, the BAT is distributed to the income sources capital and labor.
Two conclusions can be drawn from Table 2.3. First, replacing business income
taxes with a BAT tends to reduce the share of federal taxes paid by higher income
taxpayers regardless of how much of the corporate income tax is borne by labor. Second,
replacing business income taxes with a BAT is substantially less regressive when the
current corporate income tax is assumed to be borne substantially by labor. The increase
in the share of federal taxes paid by the bottom four quintiles (i.e., families with incomes
up to $87,758) is only 3.0 percentage points rather than 5.0 percentage points when labor
is assumed to bear 70 percent of the current corporate income tax.

Box 2.2: Distributional Effects of Taxing Consumption
It is sometimes suggested that a consumption tax is less fair than an income tax
because the benefit of not taxing capital income accrues disproportionately to those with
higher incomes. As has been noted, consumption taxes are generally less regressive from
a lifetime perspective than an annual perspective. Consumption taxes may also be less
regressive than often thought because a consumption tax and income tax base both
include key elements of capital income. This point runs counter to conventional
distributional analyses of consumption taxes, which broadly conclude that the major
difference between a consumption and income tax is that the former imposes no tax on
capital income.
Capital income can be decomposed into four components: (1) the return to
waiting (i.e., the opportunity cost of capital), (2) the return to risk taking (i.e., the risk
premium for investing), (3) economic profit (i.e., the infra-marginal return to investing),
and (4) the difference between expected and actual returns. The key to analyzing the
different distributional effects of a consumption tax base and an income tax base is that a
consumption tax exempts the first component of capital income - the return to waiting or
opportunity cost of capital - from tax, while it is included under an income tax. The
three remaining components - sometimes referred to as the "supra-normal" return - are
taxed under both a consumption and income tax.
To understand how a consumption tax subjects to tax some capital income, it is
useful to consider exactly how the tax treats investment expenditures. Under a BAT, for
example, a firm expenses its capital purchases. A successful investment generates a
series of future cash flows to the firm. These future cash flows will be subject to tax, but
the present value of the expected future series of tax liabilities using the opportunity cost
of funds (e.g., the Treasury bill rate) will exactly equal the tax value of expensing the
capital expenditure. What is important to recognize is that to the extent the future cash
flows from the investment exceed (in present value) the initial investment, the excess (or
supra-normal return) will be subject to tax under either an income or consumption tax.
The general public can be viewed as a proportional shareholder in all enterprises a co-investor - under both an income tax or consumption tax. The public, in effect,
shares in the rewards and risks to the extent returns are unusually high or low. Only the
33

return to waiting or w.hat economists call the opportunity cost of capital is exempt from
tax under a consumptlon tax. Whether this distinction is important depends critically on
how large the opportunity cost of capital is in relation to total capital income and who
tends to receive this component of capital income.
How important the appropriate conceptual treatment of supra-normal returns is to
the distribution of the tax burden under a BAT is largely an empirical question. Gentry
and Hubbard (1997) found that replacing the current income tax with a consumption tax .
would be considerably less regressive than conventional analysis would indicate when
the analysis recognized that the consumption tax would collect tax on supra-normal
returns. In contrast, Cronin, Nunns, and Toder (1996) found that accounting for supranormal returns made little difference.

Border tax adjustments and international trade

V A Ts (of which a BAT is one type) are typically levied on a destination basis, in
which goods are taxed according to where they are consumed. Alternatively, a V A T can
be levied on an origin basis, in which goods are taxed according to where they are
produced.
An origin-based BAT taxes exports but not imports, and a destination-based BAT
taxes imports but not exports. Border tax adjustments, which refund the accumulated
BAT on goods that are exported and impose BAT on imports as if they were produced
domestically, are needed to remove the tax on exports and impose the tax on imports
under a destination-based BAT. Applying a BAT on a destination-basis and
implementing border tax adjustments ensures that businesses may only claim deductions
that are offset by corresponding inclusions. Closing the system in this way helps prevent
tax evasion through cross-border transactions structured to generate tax deductions for
payments to foreign parties.
Border tax adjustments are commonly perceived as providing a trade advantage,
although many argue that adjustments do not improve the balance of trade in the
aggregate. 48 Any apparent cost advantage would be offset by differences in the real price
level across nations as reflected through changes in exchange rates or in other prices.
These price adjustments work over time to negate any permanent improvement in
competitiveness. There could, however, be effects on specific sectors or industries within
the economy.
To illustrate the argument that border tax adjustments do not improve the balance
of trade, consider a simple example. 49 Assume that the United States imposes a 25percent origin-based tax and that it exports 100 of X-goods at $10 each and imports from
Europe 100 of M-goods at $10 each. Trade is balanced, exports and imports equal
$1,000, and the exchange rate is € I per dollar. U.S. producers charge $10 for each X-

Congressional Budget Office (1992) and Joint Committee on Taxation (1991).
49 See Viard (2004).
48

good and clear $8 after tax. European producers charge € I 0 for each M-good exported to
the United States and clear €I O.
Assume that the United States decides to border-adjust its tax system and imposes
a 25-percent tax on imports and rebates the 25-percent tax previously imposed on
exports. With the border adjustment, exports are tax free. As a result, U.S. producers
need to charge only $8 for each X-good to receive $8, while European producers need to
charge € 12.5 to receive €1 0 for each M-good exported to the United States. If exchange
rates did not change, the lower price for U.S. exports would increase the number of Xgoods purchased abroad and the higher price for M-goods would reduce imports
purchased by Americans. However, this situation cannot persist indefinitely because the
number of dollars demanded by Europeans would have increased (because Europeans
will desire more X-goods) while the number of dollars supplied by Americans would
have fallen (because Americans will desire less M-goods).
To restore balance in the foreign exchange market, the value of the dollar must
rise by 25 percent to €1.25. At the new exchange rate, the number of dollars demanded
and supplied return to balance. U.S. producers charge $8 for X-goods, which translates
to € 10 at the new exchange rate and exports of X -goods stay at their original level.
European producers charge €12.5 for M-goods sold in the United States, which translates
to $10 at the new exchange rate, and U.S. imports remain at their original level. Absent
flexible exchange rates, the real price level across nations would still adjust to achieve the
same result, although the adjustment process might well take longer. Through the
adjustment process, trade would ultimately be unaffected by the border adj ustments. 50

Simplicity and enforceability

Like other taxes, a BAT would impose compliance costs on businesses that are
required to calculate and pay it and administrative costs on the federal government to
operate and enforce it. Some countries have encountered significant cases of evasion or
51
fraud in the operation of their V ATs, particularly with respect to VAT refunds.
Several studies have estimated the federal government's administrative costs and
businesses' compliance costs for a hypothetical V AT in the United States.
Administrative and compliance costs of a V A T depend heavily on design features, such
as whether there are multiple rates and the sales threshold for registration. The Treasury
Department has previously estimated that the administrative costs of a credit-method
V AT would be about $700 million per year when fully phased in, while other studies
52
indicate that the administrative costs may be as high as $2.3 billion.
This conclusion depends on all goods and services being taxed equally. If exemptions are introduced, the
impact on the trade balance will depend on tax rates applied to the imported or exported goods and
services.
51 Decisions regarding SAT exemptions, thresholds, and zero-rating would affect the likelihood of
fraudulent claims (Keen and Smith (2007)).
.
52 U.S. Department of the Treasury (1984). The Congressional Sudg.et ~ffice (1992) estimated that the
administrative costs would have been about $750 million to $1.5 bIllion In 1988. The General Accounting
Office (1993) estimated that the administrative costs of a broad-based V.A: T would be $1.8 billion per year
when fully phased in. These costs were estimated to decrease to $1.4 billIOn per year With a $25,000 small
50

The Congressional Budget Office estimated that the annual cost for businesses of
complying with a V AT with a $25,000 smalI business exemption would have been from
53
$4 billion to $7 bilIion in 1988. About 90 percent of the cost would have been incurred
by businesses with sales under $1 milIion. 54 These estimates suggest that a BAT may
have a large potential compliance cost saving compared to the present business income
taxes, which are estimated to be roughly $40 billion annually.55 However, as noted
above, the extent to which business compliance costs would decrease depends upon the
particular features of a BAT. In addition, some of the apparent cost saving from
replacing business income taxes with a BAT may not occur if states retain their business
.
56
Income tax systems.
Further, as noted above, with a BAT that retains the individual income tax system,
the benefits of replacing business income taxes with a single rate broad-based BAT
would be counteracted to some extent because businesses would continue to have to
determine income in order to distinguish between dividends and capital gains (which
would be taxable at the individual level) from returns of the investor's capital (which
would not be taxable).

Implications for state and local governments

Another effect of eliminating the federal corporate income tax would be the effect
on the ability of states to administer their current business income taxes. Many states
with business income taxes generally conform to the federal tax system and rely heavily
on federal definitions of income and deductions. In addition, states build upon the federal
structure of definitions and regulations, information reporting, and tax withholding.
Without that structure, it would be extremely difficult for states to maintain their existing
business income tax systems, and if they did maintain them, the simplicity gains from
eliminating the federal business income taxes could be eroded.
State and local governments also would be faced with the prospect of conforming
their tax bases to the federal base, including both their retail sales taxes and state
corporate income taxes. Deviations from the federal base would increase firms'
compliance costs. If state and local governments primarily raise revenue by
piggybacking on a federal BAT, tax rates could rise to a level that would make
enforcement more difficult. On the other hand, to the extent state and local governments
conform to a federal BAT, enforcement difficulties could be reduced.

business exemption, and $1.2 billion per year with a $100,000 exemption. Th.e IRS (1993) estimated that
the administrative cost of a V AT with a $100,000 exemption would be $2.3 bllhon In the second year of
full implementation.
53 Congressional Budget Office (1992).
. . ,
54 In addition to these U.S. studies, a recent study for the UOited KIngdom estImated that the burden of
preparing and filing V A T returns costs £ 170 per registered business (£ 120 million per year for 1.8 million
.
registered businesses). See HM Revenue and Customs (2006).
55 This compliance cost estimate includes both corporate and non-corporate bUSInesses.
56 Slemrod and Bakija (1996).

VATs in other countries

Over 140 countries have VATs. Twenty-nine of the 30 OECD countries have
VATs. The United States is the exception, although most states impose a retail sales tax.
There are major differences in the rates and structures of the VATs in OECD
countries (Table 2.4). The average standard VAT rate for OECD countries is 17.6
percent, but ranges from 5 percent (Japan) to 25 percent (Denmark, Norway, and
Sweden). Six of the 29 OECD countries have standard V AT rates under 15 percent
(Australia, Canada, Japan, Korea, New Zealand, and Switzerland). The remaining 23
countries have standard rates between 15 percent and 25 percent. Many countries also
have reduced rates or zero rates. Reduced rates generally apply to basic essentials (e.g.,
medical and hospital care, food and water supplies), certain utilities (e.g., public
transport, postal services, and public television), and certain socially desirable activities
(e.g., charitable services, culture, and sports). Under zero rates (such as for exports), no
tax is levied on the good or service and credit for V AT paid is allowed.
In addition to reduced or zero rates, countries also provide V A T exemptions (i.e.,
sales are not taxed but V AT paid on purchases from other businesses is not recovered).
Most OECD countries exempt sectors that are viewed as important for social reasons,
such as health, education, and charities. Most countries also exempt certain sectors for
practical reasons. Financial and insurance services are generally exempt because of the
practical difficulties in determining the tax base. In addition, those services may be
subject to specific taxes. Other activities that are sometimes exempt include postal
services, letting of immovable property, and the supply of land and buildings.
Approximately two-thirds of OECD countries offer exemptions for small
businesses to reduce administrative and compliance costs. Businesses with sales below a
specified threshold generally are not required to register for the VAT (Table 2.4). The
threshold for exemption varies considerably, ranging from approximately $2,400
(Iceland) to $93,700 (United Kingdom). Ten countries have thresholds below $25,000
(Austria, Canada, Denmark, Finland, Gem1any, Greece, Iceland, Luxembourg, Norway,
and Poland), and nine countries have thresholds of $25,000 or more (Australia, Czech
Republic, France, Ireland, Japan, New Zealand, Slovak Republic, Switzerland, and the
United Kingdom). Ten OECD countries report no general exemption threshold
(Belgium, Hungary, Italy, Korea, Mexico, Netherlands, Portugal, Spain, Sweden, and
Turkey).

Table 2.4: V A T Rates and Structure in OECD Countries*
Country
Australia
Austria
Belgium
Canada
Czech Republic
Denmark
Finland
France
Germany
Greece
Hungary
Iceland
Ireland
Italy
Japan
Korea
Luxembourg
Mexico
Netherlands
New Zealand
Norway
Poland
Portugal
Slovak Republic
Spain
Sweden
Switzerland
Turkey
United Kingdom
Unweighted Average

Standard
Rate
10.0
20.0
21.0
7.0
19.0
25.0
22.0
19.6
16.0
19.0
20.0
24.5
21.0
20.0
5.0
10.0
15.0
15.0
19.0
12.5
25.0
22.0
21.0
19.0
16.0
25.0
7.6
18.0
17.5
17.6

Reduced
Rate

10.0 and 12.0
6 and 12.0
5
8.0 and 17.0
2.0 and 5.5
7
4.5 and 9.0
5 and 15
14
4.8 and 13.5
4.0 and 10.0

3.0,6.0 and 12.0
6
8.0 and 13.0
7
5.0 and 12.0
4.0 and 7.0
6.0 and 12.0
2.4 and 3.6
1.0 and 8.0
5

Domestic
Zero Rate **
yes
no
yes
yes
no
yes
yes
no
no
no
no
yes
yes
yes
no
yes
no
yes
no
yes
yes
yes
no
no
no
yes
yes
no
yes

Threshold
$ U.S.
36,496
24,229
23,622
68,439
5,910
9,081
85,061
18,637
12,912
2,442
50,495
75,188
10,163

26,846
5,274
10,580
87,209

42,373
93,700

*The standard rate applies to 2006. Information on reduced rates, domestic zero rates and thresholds
applies to 2005.
** Domestic zero rate means tax is applied at a rate of zero to certain domestic sales. It does not include
zero rated exports.
Sources: OECD, Consumption Tax Trends, 2006, and the OECD Tax Database at www.OECD.org

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Added Tax. Washington, DC: Internal Revenue Service.
Japanese Ministry of Finance, Tax Bureau. 2005. An Outline ofJapanese Taxes. Tokyo,
Japan.
Joint Committee on Taxation. 1991. Factors Affecting the International Competitiveness
of the United States. Washington, DC: U.S. Government Printing Office.
Judd, Kenneth L. 2001. "The Impact of Tax Reform in Modem Dynamic Economies." In
Transition Costs of Fundamental Tax Reform, eds. Kevin A. Hassett and R. Glenn
Hubbard, 5-53. Washington, DC: AEI Press.
Keen, Michael and Stephen Smith. 2007. "VAT Fraud and Evasion: What Do We Know,
and What Can Be Done?" IMF Working Paper WP/07/31.
Lyon, Andrew B. and Peter R. Merrill. 1999. "Asset Price Effects of Fundamental Tax
Reform." In Transition Costs of Fundamental Tax Reform, eds. Kevin A. Hassett
and R. Glenn Hubbard, 58-92. Washington, DC: AEI Press.
McLure, Charles E., Jr. 1987. The Value-Added Tax: Key to Deficit Reduction?
Washington, DC: American Enterprise Institute.

McClure, Charles E. 1983. "Value Added Tax: Has the Time Come?" In New Directions
in Federal Tax Policy for the 1980s, eds. Charls E. Walker and Mark Bloomfield.
Cambridge: Ballinger.
Mieszkowski, Peter and Michael Palumbo. 2002. "Distributive Analysis of Fundamental
Tax Reform." In United States Tax Reform in the 2 I"l Century, eds. George
Zodrow and Peter Mieszkowski, 140-178. Cambridge: Cambridge University
Press.
Organisation for Economic Co-operation and Development. 2006. Revenue Statistics
1965 - 2005. Paris: Organisation for Economic Co-operation and Development.
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Trends. Paris: Organisation for Economic Co-operation and Development.
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Randolph, William C. 2006. "International Burdens of the Corporate Income Tax."
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Schenk, Alan. 1995. "Japanese Consumption Tax After Six Years: A Unique VAT
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Cambridge, MA: Cambridge University Press.

Chapter III: Business Tax Reform with Base Broadening/Reform of the
U.S. International Tax Rules
A.

Introduction

The existing U.S. system of taxing capital income creates a number of distortions
that interfere with the efficient and productive functioning of the U.S. economy. These
distortions include: a tax disincentive to save and invest generally, caused by taxing the
return earned on investment; a tax disincentive to invest in the corporate business sector,
caused by the double tax on corporate profits; a tax incentive for corporations to finance
with debt rather than with equity, caused by tax provisions that allow firms to deduct
interest but not dividends; a tax incentive to engage in certain economic activities rather
than others, caused by special tax provisions that are only selectively available; and a tax
disincentive to repatriating foreign earnings. These distortions waste economic resources
and lower the standard of living produced by the U.S. economy. 57
This chapter discusses approaches for reform of business income taxation that
would broaden the tax base and either lower the business tax rate or provide a faster
write-off of the cost of investment. It also discusses an approach for reforming the U. S.
international tax system by moving to a territorial tax system.
One approach for reforming the business tax system is to eliminate the various
special business tax provisions in exchange for either lower business tax rates or faster
write-off of business investment. This revenue-neutral approach would replace the vast
array of special tax provisions, which are sometimes highly targeted to encourage
particular economic activity, with broad tax relief for all businesses.
Lowering the tax rate on business income (including both the corporate income
tax rate and the tax rate imposed on non-corporate businesses) would help to reduce all
five of the distortions enumerated above. A lower tax rate would reduce the tax on the
return to saving and investing in the U.S. economy, thereby promoting U.S. saving and
capital formation. Importantly, a lower rate would benefit both U.S. citizens and foreign
companies doing business in the United States and would make the United States a more
attractive place in which to invest. Lowering the corporate tax rate, by lowering the tax
rate on profits, would help to reduce the tax penalty on corporate investment and the tax
incentive for corporations to finance with debt rather than with equity. A lower tax rate
also would reduce the benefit conveyed by many special tax provisions, thereby reducing
the economic distortions caused by these special tax provisions. Finally, a lower tax rate
would reduce the residual tax on repatriated foreign earnings.
Rather than being used to lower the tax rate, the revenue from base broadening
could be used to allow partial expensing. Partial expensing, by lowering the effective tax
burden on business income, would in several respects have effects that are qualitatively
similar to a reduction in the tax rate. Like a tax rate reduction, partial expensing would
stimulate U.S. capital formation and reduce the tax penalty on business investment.
57

Several of these distortions are discussed in more detail in the U.S. Department of the Treasury (2007).

Indeed, as a policy to encourage investment, partial expensing has an advantage over tax
rate reduction. The benefits of partial expensing are generally limited to new investment,
whereas tax rate reduction provides a tax benefit to the return earned on new and old
capital alike. Thus, partial expensing would encourage more investment per dollar of
revenue spent than a tax rate reduction. Expensing also would benefit both U.S. and
foreign investors alike, generally making the United States a more attractive place to
locate businesses. To the extent that partial expensing is generally available for a wide
variety of business investments, it would provide uniform treatment that would not
encourage some types of investment over others for tax reasons. In contrast to rate
reduction, however, partial expensing is unlikely to reduce the tax incentive for
corporations to finance with debt rather than with equity, nor would it reduce the tax
disincentive to repatriating foreign earnings.
Broadening the tax base means repealing a wide variety of special tax provisions.
Such repeal would help to remove taxes from investment decisions, allowing market
fundamentals to drive investors' choices. By rationalizing the tax system, base
broadening would add to the benefits of rate reduction. In another sense, however, base
broadening works against a reduction in the tax rate or partial expensing because repeal
of special tax provisions means a higher tax burden on those investments, and hence on
average for all investments in the economy. This effect makes it less likely that the
combination of base broadening and, in particular, rate reduction would dramatically
increase the amount of capital used in the U.S. economy. Nonetheless, in other ways the
revised tax system would generally be more efficient because it would have reduced to
some extent distorting tax differences across sectors, assets, and financing. In other
words, the tax system would be more neutral or uniform in its treatment of income earned
on alternative investments.
The size of the economic benefits achieved by revenue-neutral business tax
reform is an empirical matter. Results depend on how much rate reduction or partial
expensing can be achieved and on the effects of repealing specific special business tax
provisions. The Treasury Department estimates that broadening the business tax base by
eliminating a broad range of special tax provisions would allow the top federal business
tax rate to be lowered to 28 percent or, in the alternative, would allow 35 percent of new
business investment to be expensed (written off immediately), in either case without any
58
change in total federal revenues.
In the Treasury Department's economic model, the economic benefit from such a
revenue neutral rate reduction appears to be relatively modest, while the economic
benefit of partial expensing is somewhat larger. As discussed more completely below,
negligible or small gains seem especially likely when base broadening is used to finance
a lower business tax rate. This raises the question of whether such a revenue-neutral
reform would allow deep enough reductions in business taxes to improve the
competitiveness of U.S. businesses.

Lowering the top federal business tax rate to 28 percent would reduce the combined U.S. federal-state tax
rate from 39 percent to 33 percent.

A larger tax rate reduction or greater partial expensing could potentially achieve
larger economic benefits, stemming from a larger inflow of capital into the United States
than the Treasury Department's economic model suggests. Such a reforn1 could not be
financed by raising other taxes on business through base broadening, and so would have
to be financed in some other way (e.g., by raising non-business taxes, by borrowing, or
by cutting government spending). The net benefits would ultimately depend on how
business taxes were reduced (rate reduction or partial expensing) and on the details of
how the tax relief was financed. 59 I f financed by increased borrowing, for example, a
reduction in business taxes, whether lower business tax rates or partial expensing, would
at least partially be offset by the rise in interest rates as the extra government borrowing
crowds out private investment. Nevertheless, the key point is that large reductions in
U.S. business taxes (e.g., a 20-percent corporate tax rate or 65-percent expensing) could
potentially produce larger economic benefits than the Treasury Department model
suggests as the United States moves from its current position as a high-tax rate country to
a low-tax rate country.
The tax disincentive to repatriating foreign earnings, the fifth distortion
enumerated above, could be addressed by moving to a "territorial" tax system. Under
current law, U.S. corporations are taxed on their worldwide income and are provided a
tax credit for income taxes paid to foreign governments. This foreign tax credit is
generally limited to the amount of U.S. tax that would have been incurred if the income
had been earned in the United States. The foreign earnings of a subsidiary of a U.S.
corporation with an active business abroad (such as a manufacturing operation) are taxed
by the United States only when those active earnings are repatriated as a dividend. Under
the type of territorial system used by many U.S. trading partners, some or all active
overseas earnings of their businesses are exempt from taxation in the home country.
The present U.S. system for taxing the foreign source income of U.S.
multinational corporations has several undesirable effects.6o The present system distorts
economic behavior. For example, corporations may forgo U.S. investment opportunities
to avoid U.S. taxes. The current system also distorts the choice of where to exploit
intangible assets, such as patents, and the choice of where to locate income and expenses
for tax purposes. Finally, the current system is very complex, and corporations may incur
planning costs to restrict their dividend repatriations from abroad.
A type of territorial system often referred to as a "dividend exemption" system
would have several advantages as compared to present law. United States multinational
corporations would no longer have an incentive to forgo U.S. investment opportunities to
avoid U.S. tax on repatriated foreign earnings. Nor would they have to engage in
elaborate tax planning to restrict such dividend repatriations.
Such a system would, however, alter the U.S. tax treatment of royalties and
certain other income subject to low foreign taxes. Under present law, foreign tax credits
59 For example, a 20-percent corporate tax rate or 6S-percent expensing for all new business investment
could be obtained at a net revenue cost of about $1.2 trillion over 10 years.
60 For a detailed discussion, see Grubert and Mutti (2001), Grubert and Altshuler (forthcoming), and U.S.
Department of the Treasury (2007).

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December 19, 2007
hp-750

Transcript of Secretary Paulson and Governor Schwarzenegger
Roundtable on Trade
Long Beach, Calif.
RANDY GORDON. Good morning, welcome to Long Beach My name IS Randy
Gordon, I'm the President and CEO of the Chamber here And on behalf of our
mayor, Bob Foster, and one of our most famous residents, former governor George
DeukmeJian, I want to welcome you to this exciting sumlTlit. BUilding the California
Economy. Our Chamber IS pleased to be one of the sponsors of this event today.
want to thank our other sponsors, the LA Chamber, the Southern California
Leadership Council, and the Los Angeles Economic Development Corporation
It's my sincere pleasure to Introduce someone who doesn't really need an
introduction, and someone who really understands how to build the California
economy, and he understands trade, commerce and infrastructure, and he's a great
fl'lend of business. Would you please welcome our Governor, Arnold
Schwarzenegger. (Applause)
GOVERNOR Thank you very much, Randy, for the nice introduction You must
have had a couple of cups of coffee already, right? Yeah. That's very nice, I like
that. He's all pumped up. And I want to thank all of you for being here today, this is
really terrific.
And I want to thank Secretary Paulson for being with us. He has Just come back
from China from a trade mission, and is trying to strip away some of the trade
barriers that are still existing. And he obViously has done a great Job, because I've
seen him happy ever since he landed here.
And also yesterday we did a wonderful event up in Stockton where he talked and
addressed the sub-prime crisis that we are facing, and are in. And I Just want to
say, Mr. Secretary, that you have done a spectacular Job yesterday. It's really
amazing to see a room of around 200 people that were homeowners that are In
trouble With their mortgage rates and With all of this mess that we are In, and he
really made them all feel comfortable and good, and they all walked out and really
felt like the federal government is on top of the situation. And so we really
appreciate you making such a great effort. And also to be here today, and to talk to
us a little bit about Infrastructure and about trade, and the things that we can do.
So thank you very much.
And I want to thank also Governor Deukmejian for being here today with us, and
Senator Lowenthal IS here, and then Assemblywoman Karnette and Mayor Foster,
thank you very much, a great mayor. And Mayor Dellums, my buddy here, my
pump-up buddy here also with us, coming all the way down from Oakland And of
course we are talking a lot about Oakland, because you have a great port up there,
so we're going to talk about that. And Secretary Bonner is also with us. Where IS
the Secretary? Right over here, yes. Thank you also for being here And DaVid
Crane IS also here with us, thank you very much. I thank all of you again
The Secretary IS going to talk about stripping away some of the trade barrrers,
which is gOing to be advantageous and great for the United States, but it's also
gOing to be great for California, because that means more trade for us. And as you
know, that last year alone we had exports of 128 billion dollars worth of goods, and
that is staggerrng. And I think that the more we strip away some of those obstacles,
trade barriers. I think the more business we Will do and the more exports we will
have. ThiS baSically represents -- you know, In our ports In California, Oakland and
Los Angeles and San Diego, we bring In 40 percent of the cargo that comes mto the
United States, comes through our pOliS, so it Just shows to you And I think that we
have a great chance to increase that amount

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The only tiling, I think, that we have to really pay attention to is to build the
infrastructure so we can get our goods off the ports much qUicker And we have a
major problem. I think that our trade IS a very important part of our economy, and I
tllink that in California there are around 2 million people that are employed, that are
trade-related in one way or the other, If It is moving goods or managing goods. or
distributing goods and so on. But we are not operating right now With all 12
cylinders, that's for sure, and I thlilk it is because we don't get the goods off tile
ports qUick enough.
And thiS is why In my January 2006 State of the State Address I challenged the
Legislators and the people of California that we should start rebulldlllg California.
because we have to face the fact that California has not I)uilt for the last 30 years
We did not keep up with the population growth. Our infrastructure that we have
right now is for 18 or 20 million people, but sure not for 37 million people, If It has to
do with transpoliatlon, or our schools, universities, our levees have not been fixed
for all these years. So I think that It was really great to see in 2006 the Legislators
make a commitment to start rebuilding California, and to make the commitment and
then to send thiS In a ballot to the people. And the people have made also a
commitment of 42 billion dollars In Infrastructure bondS.
So now we are moving forward with all this. And the great thing IS not only that we
have broken records In as much of the commitment that we made to rebuilding
California, but also in how quickly the money is being appropnated. 8.4 billion
dollars has already been appropnated. And we are already building. and we are full
steam ahead With rebUilding California. the roads, transportation, schools, and so
on, and also fixlIlg the levees and so on.
But the reality of it is that If we really look closely at Callforl1la, It IS so far behind
With the InfrastructUl'e that we need actually 500 billion dollars -- all of our agencies
come up with the number 500 billion dollars -- to really rebuild California Now, we
all know that that money cannot be raised through our bonds or anything like thiS.
There's no way that our government can take on that challenge. And thiS IS why we
are now looking IIltO, and I Will be talking more about that In my State of the State
Address. whicll IS what I call P3, which IS public-private partnerships. This is where
the aclion is. A lot of money is out there In the private sector, and we are going to
push for public-private partnerships, because it's the only way we're gOing to raise
that kind of money and really rebuild California fully.
I think the 42 billion dollars, plus the 8 billion that we made in the commitment In
rebuilding our prison system, the 53,000 new beds, which makes It altogether 50
billion dollars. And let's say we get the water bonds done. which IS another 10
billion dollars -- because we are right now negotiating for the water bonds to rebuild
the Delta and the ecosystem up there and to get a better delivery system and more
above and below the ground water storage. All of those things are belllg worked
out But that will be another 10 billion dollars. Now we would have 60 billion
dollars, but not 500 billion. So I think through public-private partnerships we will be
able to do that
And we have seen in Europe very successful public-private partnerships, we have
seen It in British Columbia and in Vancouver, where they have wonderful publicprivate partnerships, or P3 as I call It, where trade IS happy, the trade unions are
happy. the private sector is happy, the politicians are happy, the people are happy.
So It'S a win/win situation. That's what we want to do also III California.
So with that I Just want to say that I have great hopes that we can get thiS movlllg
forward It is my responsibility as the governor to make sure that this Golden State
stays the Golden State, and that we move forward, and that we can really live up to
the fullest potential, 100 percent of the potential, In our economy We have a great
economy, and the only hiccup we have nght now and the bump In the road IS the
housing market. But we are gOing to overcome that. and that's why it IS also very
Important that we pay a lot of attention to trade
So With that, I Just want to say again thank you all for being here today, and I want
to hand It over to Secretary Paulson now who is going to talk more about trade and
about the economy and about public-private partnerships Thank you very much
Secretary? (Applause)
SECRETARY PAULSON: Thank you very much, Governor, and It'S an honor for

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me to be here with you. And as I look around this table at all of these Illustnous
figures, let me remind you all that I'm relatively new to the political process. I've got
a lot to learn there. I've spent a lot of time focusing on economic Issues and
focusing on markets, and one thing I've learned since I've been In Washmgton is
Democrats and Republicans both have a very strong interest In Ilavlng there be a
strong Amenca with a strong economy It creates more and better Jobs. And so
we're all united In lila!.
And we have today a healthy economy, as the Governor said. in Amenca. In
California. but we've got some challenges. I believe the economy is gOing to
continue to grow. but it's my Job as Treasury Secretary to focus on the challenges.
the turilloilill the credit markets, the housing downturn, and do everything we can
to mlrlillllZe the spillover into our economy overall. And so we're focused on that
And as the Governor said, we were together yesterday in Stockton Before gOlllg to
Stockton I was III Kansas City. Mlssoun. and before that In Orlando. Florida And
the focus was on hOUSing. on the downturn. promoting a plan which will prevent a
market failure In the sub-prime area, and keep people In their homes wherever It'S
possible to do so. So there's a big focus on that. There's no doubt that the housing
problem, the problems III tt18 credit markets, are going to be a drag on our economy
for some time
Are there strengths? As the Governor said, one of the real strengths IS trade and
exports There IS a strong global economy, markets are growlrlg around the world.
and our exports are increasing. And you know, when I'm In thiS state it Just reminds
me all the time that our busillesses and workers are the envy of the world In
industry after Industry after Irldustry, we set the standard, we Innovate, we create,
we define the future. And that's particularly so in California. SO It'S very important
to stick to the principles that have made us great. And as the Governor said. that
means fighting to open up markets for our products, our goods and services around
the world, and keeping our markets open
Now, I talked about the challenge we face in the credit markets and in hOUSing.
There's another challenge we face in the U.S .. which is also a serious challenge,
and that's the challenge of protectionism. And it's really ironic that at a time where
we are more dependent than ever, and prosperous In terms of our trade, that some
people are beginning to question the economic prinCiples that have made this
country great. And even some economists are somehow or other It'S becoming
fasillonable to recant economic prinCiples, and say maybe there's a different
paradigm we need Irl thiS age of globalization. But trust me, globalization has not
reversed economic gravity. Isolationism doesn't work, protectionism doesn't work.
Your governor knows thiS, all of you know this, California knows thiS.
I was looking at some statistics, and I'm sure the numbers are much better today,
but in 2005 there were 51.000 companies In California that exported Into the global
markets. and tllat's why I know your governor is making such a big emphaSIS on
Irlfrastructure. which IS absolutely critical. But of those 51,000 companies, 95
percent of them employed 500 or fewer workers. So again, thiS IS not Just the
Fortune 500 companies: thiS cuts across various industries and companies of all
sizes In California. And so again, It'S Just so critical not to be isolationist, not to be
protectionist.
Now, PreSident Bush has been a real champion of open trade, open Investment,
competition, economic dynamism. He Signed a bill last week which was a very. I
think. a very noteworthy agreement, the free trade agreement With Peru. And tile
reason I say it was noteworthy was thiS had bipartisan support, strong support from
Democrats and Republicans In Congress, and It was the first of four free trade
agreements. And we now need Congress to move quickly and to enact, so that the
President can Sign, the next three, and those are Colombia, Panama, and Korea.
Now, Colombia. President Uribe has got some tough challenges, he's making some
tough deCisions. he's making progress. he deserves our support.
Korea IS the eighth largest economy In the world In 2006 California exported more
than 7 billion dollars of goods to Korea. But you've Just begun to tap that potenlial.
and the free trade agreement would help you do so. And again, I'm not talking
about economic theory here, I'm talklrlg about what can be proved We took a look
at two free trade agreements which were signed in 2004. Chile and Australia. and

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looked at the impact on California Since the Chile FTA was signed in 2004
California exports to Chile have gone up 150 percent Sillce the Australian
agreement was signed exports have gone up 25 percent. So as the Governor said,
these trade agreements help break down barriers, open ti,e way for the export of
US. products, California products So they're very important.
Now,the Governor mentioned China, and I got back from China very early Friday
mornillg. And as a matter of fact, when I woke up this morning, I woke up very
early, and I said to my Chief of Staff, Jim Wilkinson, I said, "You know, I feel like I'm
111 Chllla. I'm a little big jetlagged." And he said, "Well, be careful not to call for
California to appreciate their currency." Because, as the Governor said -- well, first
of all, to step back, I want to tell you the obvious about China.
Ctllna IS an economy which is very important to California, because your exports to
Chilla are growlllg very qUickly. So thiS is an Important market. Now, I unclerstand
China is a tough political issue, partly because of the things they do, actions they
take, but partly because China has become a symbol for the fears surroundlllg
globalization But when I'm in China -- and I was, as I said, in China very recently,
leadll1g a delegation for our Strategic Economic Dialogue with top officials in China
And when I'm there, I make the case that they need to contll1ue to open their
markets and appreciate their currency so that it really reflects economic
fundamentals And I make the case that they need to speed up the process of
reform. It's in their II1terest and it's in our interest, and it's in the whole world's
interest.
Now, there's a fair amount of tension 111 the US.lChina trade relations, but it IS very,
very important that we keep this relationship on an even keel, thiS economic
relationship. It's too important. We need to continue to build trade, particularly
now, work to open the markets, because China is our fastest growing market for
exports, and a healthy Chinese market economy is very important to the US, just
like a healthy U S. economy IS very important to China
So, in summary, let me say that in my 32 years in markets it was really clear to me,
the overriding lesson, and It was that those countries that weren't afraid of
competition, that opened themselves up to trade, competition and trade, investment
and finance, benefited, and the rest of the world. others were left behind. And
opening yourself up to this competition leads to innovation, it leads to better jobs,
more jobs, it leads to a higher standard of living. There are many benefits. It
produces an economic dynamism which you can just feel when you're out here in
California. It must be something 111 the air, and there's just thiS economic
dynamism. But economic dynamism brings with it rapid change, and in some
Instances hardships and job losses. There's no doubt about it. But what we need
to do is figure out how to deal with the job losses that come from trade, which are
very viSible, and make sure that we don't turn protectionist, because the benefits of
trade are reflected broadly across an economy with more better jobs and a higher
standard of living for the people of this state and the people of our country.
So again, what I would Just encourage all of us to do is to fight protectionist
sentiments, encourage your Representatives and your leaders in Washington to
support trade agreements, free trade agreements with Colombia, Panama and with
Korea, and encourage the U.S to continue to trade freely, openly, and according to
the principles of the global marketplace. So With that. I again look forward to the
discussion, look forward to talking about some of the issues that the Governor
raised.
GOVERNOR. Thank you very much, Secretary. Really appreCiate your thoughts.
(Applause)
And now next I would like to have Mayor Ron Dellums say a few words, because
Ron IS a great mayor of Oakland, and faces a lot of challenges, but has taken on
those challenges and has been a great partner in the State of California. Of course
that's one of the ports that are very important in order for us to be competitive and
to increase trade and to fix the infrastructure So he has been really terrific. And
also, terrific III bringing tourism back, because he's fighting gang violence, which is
so Important, because people are always scared of when there's violence In the
town, and people don't show up as much. But he has been dOing a great job 111
fighting the gang Violence and turning the whole thing around, ti,e whole city
around. So it's great to have you here, so please say a few words. (Applause)

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MAYOR DELLUMS: Thank you, Governor Schwarzenegger, to the distinguished
Secretary, to my distinguished colleagues. First I'd like to thank the Governm for
hosting, and the various entities fm sponsoring this important conversation.
because to me this is a recognition that there are significant challenges that we
must ultimately wrestle to the ground It is also a recognition that unless we engage
III unprecedented public JUrisdictional collaboration. from the local government to
the state government, to the federal government, until and unless we engage in
ueative and appropriate public-private partnerships, and until and unless we thlilk
substantively. we think coherently. we think comprehensively and we tllink
strategically, that we engage in tile long view and the broad perspective. that there
ultlillately Will be consequences. perhaps unintended, but those consequences will
Illanifest themselves in econOllllC terms, In environmental terms, In quality of life
terms. particularly the public Ilealth of our people, and in a post-9/11, post-Katrina
world. from the standpoint of safety and security, these issues will be significant
The good news IS, here we are in California. Our ports, we're the gateway to the
rest of the world. We handle 43 percent of the container activity in thiS entire
country. By 2020 that willillcrease by a factor of 3. That's the good news. Tile
downside of It is. question Can our rapidly deteriorating IIlfrastructure handle that
level of IIIcredible and significant growth? What Will manifest itself In terms of the
environmental consequences in a global warming environment? How Will we deal
with the quality of life Issues and the public health issues of people who al'e being
harmed dally by the infusion of toxics in our air? And given the fact that we're
presently dealing with hometown and homeland security Issues in 2007, when we
move to that order of magnitude, we multiply the safety and security issues. All of
these matters must be dealt with.
Finally, I would just say remember, if we're going to be a globally competitive
economy. there must be a significant investment In education, in research. and in
IIlfrastructure And so I welcome this conversation, because I think it is important
and significant And Governor, I would yield back to you. thanking you very much
for the opportunity to speak and be Invited to this august body. (Applause)
GOVERNOR Thank you very Illuch, Ron, wonderful. And now Mayor Bob Foster,
who IS another great mayor and great partner of the State, and has done an
extraordinary job for the City of Long Beach Thank you very much for being here
today. If you have a few words. please?
MAYOR FOSTER I do. Thank you, Governor. I want to thank you and Governor
Deukmejlan, and Mr. Secretary. and Mayor Dellums. Thank you for being here
today. thank you all.
I just have a couple of remarks to sort of set the context for the discussion that Will
follow. The ports are essential fm the economic vitality of the State of CallfOinla,
and I want to just give a little bit of historic context
In the early '90s Southern California In particular was actually at Depression-level
conditions. 50.000 defense and aerospace jobs left thiS area Here III Long Beach
the Navy Withdrew. and thiS place was in very severe economic times, very difficult
And what eventually replaced that III large part were two things. In large part It was
the international commerce from the ports, International trade, and tourism here in
Long Beach. And what is essential to make sure that we continue to be able to
have the economic engine of international trade. and have the ports thrive are two
things
One, we're gOlllg to have to improve the infrastructure In these ports. and that's
gOing to take billions of dollars. We need to move a greater quantity of goods at
greater velocities.
But equally Illlportant, we have to also understand the environmental
consequences of that goods movement And I'm happy to say that the Ports of
Long Beach and Los Angeles have worked cooperatively together, they've adopted
a principle I have advocated and they have now adopted. which is they're gOing to
link IIIfrastructure improvement with enVIronmental Improvement, so that we now
have a plan, between the two ports, to clean up the air by 45 percent over the next
five years And this week the Port of Long Beach took the action to make sure It
has the resources necessary, the funds. to be able to Implement those plans

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So we've done an awful lot to grow green and grow smart. QUite frankly, that's the
only way these ports are gOing to grow. They're gOing to have to be sensitive to the
environment, and make things cleaner than they are, even with the growth of
commerce.
But the infrastructure needs are next, and we're going to look at that, and I think the
resources are going to be available to the ports to do that as well. But things like
public-private partnerships are crucial. I do agree with Mr. Secretary I thlilk
international trade and globalization provides a more flexible and vibrant economy
I think It also makes It more Immune from a tax, from an economic assault, If you
will If you look at wllat's Ilappened in the last 10 years in terms of economic
impact. our eCOllomles tlave really withstood them with relative ease I think that's
in large measure because it's a much more flexible economy because of
globalization.

Public-private partnerships are an essential part of building infrastructure here in
Long Beach where we have two projects. One, a new courthouse that we're
looking to engage In a public-private partnership on, and secondly a CIVIC center
that we are in the process of examilling a public-private partnership It's the way to
be able to build facilities more quickly and more cheaply.
So what I'd like to do IS throw this open for discussion. And let's talk about
infrastructure, let's talk about how we get things built, and built both In an
environmentally sound way, but also in a way in which we can mmlmize the
expense on the publiC Side and maximize the increase of IIlfrastructure. What I
would ask you to do when you want to speak -- since we can't all see the name
tags, I certainly can't. I only have one good eye anyway -- If you would Just
announce your name, I will calion you, announce your name, we'll have a
discussion about this, and I'm sure the Governor will Jump In, and the Secretary will
lump in whenever they care to. So on the subject of goods movement and With
public-private partnerships and infrastructure, I throw it open to conversation.
GOVERNOR Well, I'm Governor Arnold Schwarzenshriver. (Laughter) And I just
wanted to say that I think that you Just hit the nail on the head when you said that
while we create the Infrastructure and while we increase trade, we also have to
think about the environment, because I think this is absolutely essential, because
we cannot go, continue on down that road that we have been, which is to just
expand the economy, but not really take care of the environment. We can do both.
I thlilk we have proven this last four years that we can do both. I think that Long
Beach and LA Just have proven that by making the commitment that we can do
both I think It'S all about where there's a will there's a way. That's what ttllS is
about. And I think if we all make a commitment we can be the leaders and show
the federal government, actually, how It'S done. And I thmk that California has done
a great Job with that, and has been known now worldwide that we are takmg this
very seriously. Anyway, any questions to the Secretary that you may have, please.
Q (IA) the regional expansion of commerce in Long BeaCh. Mr. Governor. great to
see you here, Mayor, everybody else. At (IA) we work With small entities, small
business, the mmorities, the disadvantaged. We also trade a lot In lookmg to trade
and work With the ports. And green -- the environment is a concern to everyone.
The thing that we're able to do with the Chamber of Commerce IS bring everything
to the local level, to the individuals, to the families. There's a lot of small entitles
here, both individual family members, small one-time owners, and larger families
and larger bUSinesses that are part of thiS. And we're reaching out as Latinos,
where it's a growing mass, It'S a number. Right now it's our turn In the drum. We're
up because of tt18 numbers around the state, not only the state, across the United
States.
All this has to do with voting Everything comes down to people, and we're trYlllg to
get, educate the communities, the individuals, from down at the little schools, down
to high schools, down to the refineries have an issue, the railroads have issues, and
It'S all great because we all want to live -- we all live here, so we have to share the
space. And it's all very Important. And the thing is, we have to get education out
there, we have to get people out and informed and we're working hard to do that.
And I think If we could get it down and get the small streams out we can inclUSively
Include everyone and become a large force and have everyone Involved, and have
everyone educated. Because I think the biggest problem, obstacles tllat we tend to
see, IS ignorance. People Just assume It'S bad, or it's corporate, It'S this, It'S that.

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And this is a global, but this is a state Issue, this is a world issue Green, we need
to be green.
Union Pacific, the ports, everyone is being involved, because we're trying to lead
the way California, set apart from the state, the United States, sets the pattern,
sets the tone. And we're here, and hopefully we can all unify and get on the right
project But the tiling is we need to share, and we need to hopefully educate
everyone so everyone can understand the reason and the return m the long term IS
for our families, for our kids. and for the state. Thank you
GOVERNOR Thank you, Tony
SECRETARY PAULSON Governor, let me make -- because we've all talked about
bemg green -- make a comment about being green and the enVIronment, because
thiS IS an Issue I've cared about for a long time. And of course when we talk about
the climate and emissions, thiS is a global issue If I've ever seen one. And a ton of
carbon m the atmosphere from China IS every bit as harmful as one from California
or New York, or anyplace else So it's a global issue.

And one thmg that I don't believe was reported as maybe as comprehenSively as It
might have been, that one of the positive outcomes from Ball was that -- and I thHlk
tllis is largely as a result of the President's major economy Initiative -- that gettmg
developing countries for the first time getting China, India, and Brazil to make some
undertakings and comlTHt to take some actions, because again, we can't solve thiS
issue unless we do it globally. And a lot of thiS is going to be engaging the
developing world. and a lot of it is going to be about developing clean technologies.
And we talked about trade today, but I spent a fair amount of time in China working
with them on environmental Issues, talking about clean technologies, collaborating
One of the things we agreed to do with the StrategiC Economic Dialogue is work,
prior to the next meeting In New York, to come up With a 10-year program where
the U.S and China would work together and collaborate on energy efficiency,
energy security and environmental issues and technology. One of the things the
PreSident has asked me to do is work with major nations around the world on
putting together a clean technology fund to mcent the use of technologies around
the world. So again, it's a global issue, and air and water don't know any
boundaries. So again, you've been real leaders in this state, that's for sure. And
it's also, this is something, a battle that needs to be fought also globally
GOVERNOR

Thank you.

Mr. Secretary, I thmk the statistiCS are overwhelming for Southern California, if
you look at what we need as far as infrastructure improvements, air quality, public
health, public safety. I think everybody in the room knows it. Whether it be LAX or
the two ports, we have a tremendous need. What we don't have, If the Governor
said we're the Golden State, well, the airport and the two ports are the Golden
Goose. Right now, without infrastructure and without funding, we are killing this
state. Not only locally, statewide, but federal. This IS the largest Customs district
for the federal government. And without that revenue coming through, Without
ideas, whether It be for you as Secretary, or for your background at Goldman
Sachs, we would like to know what suggeslions you may have, because we have
over a 50 billion dollar deficit In the next 10 years for infrastructure m Southern
California for the airports and the ports, Just to get the commodities in. So we'd like
to hear from you, maybe. Do you have speCifiCS? Because we need them.
SECRETARY PAULSON: Let me first of all say I am the Treasury Secretary, not
Transportalion Secretary. And so as Treasury Secretary I've been focused on
other economic issues, trade Issues and so on. But I'm going to draw on my
experience in the capital markets and working around the world, and working on
Infrastructure finance, and so on. And I would say I think -- I don't know the details
of the Governor's plan. I just heard him outline P3. But I think lie's got it right,
because the fact is that there's no way government is going to be able to pay for the
infrastructure needs you've got. And there are plenty of models around the world
When I think of some of the major port facilities in Hong Kong and in China, and I
look at how those have been financed with private capital.

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The key, though, IS designing the project properly, having there be clear
projections. The private sector needs to know that the risks are manageable, and
that there aren't going to be political risks, where people will come in afterwards and
say you're making too mucll profit And It'S fascinatlllg, because as I tl-avel around
the world, infrastructure IS the biggest problem in many, many places In terms of ttle
biggest obstacle that democratic capitalism faces, or capitalism faces, In terms of
spreading the benefits of growth broadly to the people In Latin America It'S a big
issue, in India it's a big issue. And so designing these projects properly so that they
attract the private sector, I think is key. And there's plenty of money out there, so
it's all in how these projects are structured.
MAYOR FOSTER: Tim Romer, and then Assemblywoman Karnette.
TIM ROMER HI, my name IS Tim Romer, I'm in the infrastructure group at
Goldman Sachs, and just want to make a couple comments on the public-private
partnerships. But agaill. If you Sit here and you listen, you rally tlave to think
differently given the size of the problem in terms of the new capacity we need to
build And you want to think differently about how you deliver the infrastructure, but
also about how you maintain it. And I emphasize both, because it's not just the
upfront cost, but it's the cost of the life of these projects that's very important And If
you do this in the right way you can extract savings and benefits on both ends, so
you can do more, you can do it sooner, and you can do it in a green way.
And when you think about public-private partnerships, what you're really trying to do
is, you're really trying to tap into the global expertise, the global Innovation out there
of the private sector. People are doing this around the world. They have
experience, ttley can bring It to bear to help get these projects done sooner. There
are examples here in the U.S. The Miami Port Tunnel went through a pUblic-private
partnership process They looked at what the government thought they could do It
for, they got three bids from three consortiums. The delta between the high and the
low was over 40 percent A private sector entity came in there and thought about a
different way to do It
And when you think about it, why IS that? Well. when you think about it. they can
think differently about how to design it so they can build It cheaper. They think
differently how they build it, so they can operate it cheaper. They think differently
how they operate it, so they can maintain it cheaper. And then they can bring the
capital and the fillancing to bear to get the project done sooner. And when you
think about it. you've got to emphasize the partnership aspect of this, which I think
is what the Secretary was getting at. You can't take a project that's unviable and
think the private sector is going to make it viable. You need to ttllllk about It. The
stakeholders need to sit down, they need to agree on the projects, they need to
agree on the goals. They need to align the incentives amongst all the parties,
because it is a partnership. And then you've got to share the risks, and there are
risks that the private sector has an Infinite capacity to assume. They're Willing to do
It, they're eager to do. And by doing this you do get, I think what the goal is here
today, which is you want to get it done sooner, you want to do it for less, and you
want better service over the time and the life of the project And so I think publlcprivate partnerships won't solve all the problems, but they're a key component that
we have to facilitate. and we have to allow work in the marketplace here in
California.
SECRETARY PAULSON: Can I make one other point. which has to do With
protectionism? There's protectionist sentiment in terms of trade, and there IS also
protectionist sentiment in terms of foreign investment I view foreign investment as
the ultimate vote of confidence that any country can pay to our economy. But when
you think back, thiS is not new in America, but I remember back -- do you remember
back in the '80s and the early '90s, and you remember when the Japanese -- it
might have been Pebble Beach, and people were very concerned. Or when the
Rockefeller Center -- I remember having to explain to someone, you know, the
Japanese aren't going to be able to put Rockefeller Center on an aircraft carrier and
bring it to Japan. They've invested in it, we still have the Rockefeller Center.
Well, right now -- the reason I mention this is there is foreign capital that IS
interested III infrastructure finance. And in a number of states where governors -or at least one state I can think of that did a big infrastructure financing project. and
there was an Australian bank that came in. There was great public concern about
it So that's the other Issue, because I think you can attract foreign capital, but
you've got to ask the question, how will the public look if foreign capital IS Invested

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in your ports or other things? So in any event, It'S an Issue.
ASSEMBLYWOMAN KARNETTE
MAYOR FOSTER Yes, Betty

Shall I go?

I'm sorry.

ASSEMBL YWOMAN KARNETTE Thank you I never hesitate. I'm Assembly
Member Betty Karnette, and most of you have seen me and heard I've been here
a long time. I've lived here a long time, and I've been around a long time. But I
also, right now -- and I'm mterested In the trade, and also the Infrastructure, and
how they relate to foreign Investments and all that kmd of thmg. However. I
represent California on a small group in the National Conference of State
Legislatures, and just recently we discussed what some of the real serious
problems are. And one of the thmgs, when you want to get to specifics, we came
out -- this was several states represented, I don't remember all of them -- but one of
the things we all agreed upon IS that before we can do anything, we've got to
maintain what we have, and that the federal government, Mr. Secretary. would be
the logical group to do that. entity, because of the sales tax on gasolme However.
there's not enough to do the maintenance that we need, and we really feel that. as
states, that the federal government should really be looking at maintenance of what
we have. And I have publiC partnerships, private-public partnerships, I've been
supportive of ever since I chaired Transportation in the California State Senate, and
I thmk that's fine. But we're got to maintain what we have: the bridges, the bridges
espeCially. The one In Long Beach called the Gerald Desmond Bridge. And there
are all kmds of things along this line that we have to look at. And I think that I heard
Mary Peterson, the Secretary of Transportation, but she seemed to think we the
states should be giving her the ideas. Well, I'm giving her one, and I'm giving you
one, and I'll be the Governor will give her some too. But that maintenance issue,
we Just can't handle all of that and the new infrastructure that's required

SECRETARY PAULSON
MAYOR FOSTER

I Will pass that on to Mary Peterson.

Alan Rothenberg.

ALAN ROTHENBERG Thank you. Alan Rothenberg, PreSident of the Los
Angeles Board of Airport Commissioners, and I have a question primarily. I guess.
directed to the Governor and the Senator and the Assemblywoman Both for
safety, economic and environmental reasons, we have to do a lot of things at LAX.
And I am Just curious to understand if there is any work underway to expedite the
environmental process We don't want to do anythmg that's not enVIronmentally
correct, and indeed the irony of delay at the airport IS that the new aircraft that's
commg on IS qUieter and pollutes less than the current fleet. And yet the process IS
torturous. It takes forever to get ready to go mto the environmental process I'm
told that we face about a two-year study before something comes out of the
enVIronmental process. And if history is any predictor, somebody is gOtng to sue
us. and there Will be further delay. Meanwhile, we're sitting there risking public
safety, we're Sitting there risking the continued growth of the economy, as has been
discussed by everybody, because of the value of goods that come and go from
LAX. And It'S clear that I'm pretty frustrated: we all are. Is anythtng underway to
come up with more expeditious ways to go through the environmental process to
get projects of that scope approved?
GOVERNOR Well, first of all, you're talking about California, the process in
California, or federal?
ALAN ROTHENBERG I'm talking CEOA We do have to face federal as well, but
right now the first baffler IS CEOA.
GOVERNOR Well, it shouldn't' be taking two years, but maybe Secretary Bonner
can address that. But the fact is that we're trying to speed up all of thiS. As you
know, With infrastructure, one of the biggest challenges in building transportation
tnfrastructure IS that the people vote on the bonds, and then sometimes It takes five
years for all the studies to fmd out how can you move forward and build, and can
you, in fact, build. Well, we have speeded up that process. and we made
agreements, which was part of the infrastructure negotiations, to speed up the
process and to build. And thiS is why we have already bUilt and have allocated and

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are funding 84 billion dollars in prOjects, which is the fastest ever, that less than a
year after the people t,ave approved It, we are already buildll1g and spending that
money, which IS great. So we're going to look into that also. But Secretary, If you
maybe want to address tlla!?
SECRETARY BONNER Good morning What I would say IS, we are not looking at
the moment, we were always considering how you can streamline the CEQA
process. But building on the Governor'S point, one of the things we're looking at In
trying to better work with the process that we have is by havlllg better coordination
amongst the parties who are Involved III getting the environmental reviews
completed. And just not as much on the airport side, but on the transportation, the
highways and the other infrastl'ucture side, we have signed an agreement maybe
two months ago with a numbel' of the agencies that are involved with building some
of tile larger transportation projects, and they are going to be working with regional
air quality agencies, the federal government and the state, to coordinate and try to
streamline as much as possible the review process. But the law itself is one, as
you know, that is very cumbersome, and we are looking at ways to work withlll the
eXisting law before we are considering reforms of CEQA
GOVERNOR But I'm going to bring that to the attention of Secretary Adams and
Secretary Nichols just to make sure. And I want to get your card so we can follow
up on that. Thank you.
MAYOR FOSTER John Hemmlngway
JOHN HEMMINGWAY Tilank you, Mayor. Our company, SSA Marine has been
fortunate to do busilless in California ports for the last 107 years. And for the last
dozen years we've been Involved III port infrastructure development in places like
Mexico, Panama, Colombia, Chile, Vietnam, and a number of other countries, so I
appreciate the Secretary's remarks about the importance of free trade agreements
with Panama and Colombia. It's vital to our leadership in the region
In being involved in port infrastructure development, and most recently with pier
paths here in Southern California, I've learned a lot about port infrastructure
development models and public-private partnerships. I think I want to echo some of
the remarks I've heard about frustration with the amount of process costs. As a
company that's Involved in building facilities like this and engaging with public
entities, it's frustrating to us to see millions of dollars go to paper that doesn't really
get read, and not go to the communities where we do business. And so anythlllg
that the Governor's Office can do to help with enabling legislation so that money
goes more properly to meet higher standards, to mitigate community impacts and
promote cleaner air is something that we III industry are all in favor of
We do business in British Columbia, we're very familiar with the model there. We
think It's one worth emulating, certalilly. One of the advantages they t,ave is a
great deal of alignment between the provincial and local government. And of
course your leadership will be Vital to that. And of course any role that Industry can
play and help developing consensus, I think we've proved with Pier Pass and other
programs down here, we're capable of doing our part too. So I'm very interested in
hearing anything that IIldustry can do to contribute to that effort. So thank you
GOVERNOR

Thank you. Okay, we have time for one more.

MAYOR FOSTER

Alan Lowenthal

SENATOR LOWENTHAL Thank you. And I just want to comment a little bit about
the process also. I've worked with Secretary Bonner and others In terms of how
we're going to take the monies that the bond, the TCIF, the 2 billion dollars that
Californians voted in 2006, under the leadership of Governor Schwarzenegger, to
put Into IIlfrastructure for goods movement, and the 1 billion dollars for air quality
think the thing that we are seeing is that one of the consequences of that bond IS
that we're breaking down the Silos, That IS, part of the problems With some of the
air quality or maybe the CEQA process is that frequently people get Involved in the
CEQA process late, The project has been deSigned, and then the community gets
involved. I think that what we're seeing with the bonds IS that of all the new
projects, we have llilked and brought together bottl Secretaries of the EPA, Air
Quality, and the Secretary of Transportation and HOUSing, to deSign It upfront. All
projects Will be designed right from the beginning, taklllg IIltO account air quality so

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to speed it up. It will be part of the selection process and also part of the criteria.
That's one thing.
Tile other thing is, to defend California, Mr. Secretary, to understand we do not only
have a problem with global warming, which we are. We have. when we're talking
about the enVironment, we have a public health crisis. We lose, in Hlis region
alone, 2,400 premature deaths a year due to old diesel tecllnology. So we're
talking about the need -- and the ports have stepped up, the state has stepped up
and that's what you're hearing, to immediately beglll to change that tecllnology,
because we're not gOlllg to have community supporting what we want to do If
they're dying, and that's what we've got to end.
And that's why we say there's a three-legged stool, and the rest of the nation has to
understand that we provide them, we are the gateway to them. It IS In their Interest
to protect California also, because we protect them. Or else we'll have a
reoccurrence of what tlappened three, four years ago when there was the lockout
and they couldn't get their goods in the rest of the states. If people want to benefit
by this, we need to educate Iowa and Kansa and the rest that It IS Important that
they help to support us, because we support them also at this moment. And I think
that educational process has not taken place, and we don't have allies throughout
the rest of the nation to understand our importance to them. And they don't
understand it, they don't see the IlIlkage between California, what we're going
through, and the fact that they have goods on their shelves when they want those
goods, and that's really what we're asking the federal government to help us In that
educational process, and to make sure that this is the nation's priority, not just
California's priority. We are doing service to the nation, and the nation needs to
understand that.
GOVERNOR: Thank you And talking about educational process and educatlllg, I
think It'S very important that when we talk in our State of the State about publlcprivate partnerships, and you hear P3, just remember that we need a lot of support.
We need a lot of support. We need a lot of support from all of you, because we
have to still do a lot of educating when it comes to the legislators in that area.
There are a lot of legislators -- now, you maybe see two here that love it, but
remember there are 120 legislators up there, and everyone has their own opinion
about all of those things, which is terrific, which makes the world go around.
Different opinions, love it. But there are a lot of them that do not understand publiCprivate partnerships. I talk to them. They think It'S a disadvantage. They thlllk that
it hurts the unions, or the workers, or that people will be put out of work. All of
those kind of -- there's a suspicion there, and all of those kinds of things that we
have to overcome.
And so what we need is, when we talk about that and try to move that ball forward
thiS comlllg year, we need all of your support. Because I think the thlllgs that we
have gotten accomplished here in thiS state IS because of all of you. There are the
legislators, the Governor's Office, there's the federal government. We all work
together. But In the end it's you, the people that are in the trenches, the people that
are III the communities, the people in general, that are our partners, that make
thlllgs happen. So we want to Just ask you again to be with us III thiS next year
when we move that ball forward.
So thank you very much agalll, everyone. Mr. Secretary, thank you very much for
being out here. Let's give him a big hand. (Applause)

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December 20, 2007
HP-751

Asst. Sec. Solomon Statement on Release of Treasury Study
"Today the Treasury Department released a comprehensive study addressing
business taxation and global competitiveness that is a follow-up to the July
conference with business leaders, economists, and policy makers about this
important issue
"This report, Approaches to Improve the Competitiveness of the US Bus/IJess Tax
st
System for the 21 Century, outlines several broad approaches to business tax
reform. The study also outlines specific business tax areas that can be addressed.
There are no policy recommendations in this study. We believe it will provide
significant substance for discussion, and will further the effort to inform the publiC
policy debate.
"The world economy has changed dramatically over the past half century and so
too has the U.S role in that economy. Trade and investment flow with greater
volume and greater ease. As we look to the future, many factors, including
education, immigration, and trade poliCies play an important role in the lives and
living standards of U.S. workers and in the ability of US. companies to compete
globally. By influencing incentives to acquire and use capital, business taxes also
play an important role in economic decision making. Our major trading partners
recognize this. Many have or plan to modify their bUSiness tax systems to Improve
their global competitiveness. The current US system is far from optimal, and we
cannot afford to be left behind
"To maintain the competitiveness of US. businesses and US. workers in a global
economy, an examination of our business tax system in the context of the global
marketplace is overdue. As we continue our work on this Important issue, we look
forward to discussions with Congress, the business community, and other policy
makers."

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December 13, 2007
hp-752
Transcript of U.S. Delegation Press Conference
Third Meeting of the U.S.-China Strategic Economic Dialogue
Xianghe, China
Secretary Paulson: Good afternoon, everyone, and thank you for being Ilere.
Thank you, my cabinet colleagues, for your sUbstantive engagement in this SED
meeting. Active participation frolll everyone here as well as additional colleagues
back In Washington enabled us to Illake substantial progress in our economic
relationship with China.
As I said earlier, to me the handling of the food and product safety issues eillerging
in recent months IS proof of the effectiveness of the SED. Rather than
recnminatlons and finger pOlllting when this Issue arose, bOttl our nations were
qUick to sit down together and work the substance of the issues
We are able to do that because In this first year of our dialogue we have deepened
relationships and understanding across our governments
Mike Leavitt's work on this issue is a model for addressing all the Issues Within our
economiC dialogue.
Let me note a few other highlights of our meeting before we get to your questions
First, we agreed to put a worklllg group together to develop a ten year plan for
review at our next meeting on cooperation on energy and the environment. The
Issues of energy security and environmental sustainabillty are vitally important to
both of our nations. I find it an exciting prospect that we will set out a long term and
strategic plan for worklllg together toward progress In these important areas
I am also pleased that we are begillning a strategic effort to work together to
combat Illegal logging. This IS a long term challenge and I am encouraged by ttllS
significant first step
We had very healthy discussions about China's progress III rebalancing its
econolllY, expanding domestic consumption and moving away from export led
growth. The Chinese recognize growing inflationary pressures In their economy and
that a more flexible currency expands their ability to use Illonetary policy to stabilize
their economy.
I would also note that we have made Illodest progress in the financial services
area, expanding opportunities for global financial services cOlllpanles to do
business In China.
Openlllg Chllla's financial markets to foreign competition strengthens the flllanCial
backbone of the Chinese economy and it's Critical to China's goals of spreading the
benefits of growth to all the Cilinese people
While we hold these meetings twice a year, the work of the SED pmceeds all year
long. Progress proceeds at a different pace on different Issues over the coul·se of a
year.
We will host the next formal meeting in Washlllgton next spring. In the Illean time
I'm confident we'll be working closely together to implement our strategic plans and
announce results during the course of the year.

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Now let's take your questions.
Question: A question about the finanCial services [Inaudible] I didn't know If YOll
could maybe spend some time Just outlllllllg where ttle caps eXist now, wllere you'd
like to see the caps go In securities and banklllg in particular And if you could
maybe outline more generally what was achieved here alld how Important they are
Secretary Paulson: Let me make a general comment first, and then I'll make your
comment on equity caps
You all know how strongly I feel about fillancial serVices, and the reason I do IS
because when you look at balanCing growth in the Cilinese economy or III any
economy, capital markets playa very Important role and they have a multiplier
effect really throughout the entire economy and they also help Citizens develop
savings. By increasing their rate of return they'll have to save less III order to
accomplish the same goal. So ttllS is important
Again, the POlllt we make on ownerShip caps IS, we make It because It'S not only
good for foreign firms to come in and invest, it baSically is the right way to develop
an industry and the securities industry operates best when the owner, when there's
control by a world class firm, and It helps the entire society.
So we've made progress In virtually every area of the seCUrities business and III the
financial services bUSiness over the course of the SED, and thiS reflects the fact
that China is committed to opening up the markets and has been opening up the
markets for some time.
With regard to ownerShip, I think this is a very important issue. The Chinese have
not agreed to raise equity ownership caps. What they've agreed to do IS, what
they're gOlllg to do over the next year In both the banking area and In securities to
have a study, to develop recommendations regarding foreign ownership or equity
participation In the industry. And what they had agreed to do after the last SED
which they're moving forward With IS expanding the scope of operations for foreign
secuntles and JOint ventures and to halt the moratorium on JOint ventures
Yes?
That's [lilaudible) baSically negotiating, trying to negotiate another deal. She's
working hard for both of our countries here. [Laughter].
Question: From Market News International. Governor Zhou Xiaochuan Just said
that you discussed gradually enlarging the pace of yuan flexibility. ECB President
[Jean-Claude] Trichet left Beijing a few weeks ago suggesting that the Chinese had
said they would also, that they would study faster appreCiation as well. Did you get
a similar message or any indicalion that China IS Willing to pick up the pace of
appreciation?
secretary Paulson: Let's first of all look at the facts. They've agreed to the
principle They've been appreciating their renmlnbl and tile pace of appreCiation
has IIlcreased. Over the last year it's been Increasing at an anllual rate of close to
six percent
I've talked with the Chinese long enougll about thiS that we don't spend a lot of time
talklllg about how fast is fast. Okay? It's very easy for people to say words. We
agree With the prillClple and we talked about a number of topics. We talked about
the benefits of faster appreciation. There's no sign that depreCiation to date Ilas
done anything to hurt the Chinese economy. And at a time when tlleY are focused
on the overheating and containing Inflation, I don't think anybody debates the fact
that monetary policy can be an effective tool as opposed to Just uSing administrative
means and having a currency that reflects market fundamentals would be a good
thing. You all read the newspapel's, you know that they're hearing from others
around the world. So that's how I'd leave that.
Question: Mr. Secretary, I'm Allen Cheng, Bloomberg News here in BeiJing. The
U,S. Trade Representative, Mrs. Schwab, yesterday mentioned that there's been
some back-slidlllg by the Chinese over the last couple of years Can you talk a little

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bit? Over this SED did you see some areas where the Chinese have not kept their
commitments? Where they are not making progress on commitments __
Secretary Paulson: I would just say two things. First of all there are two sets of
issues. One is WTO compliance whictl is very very important. I don't think It'S
strategically interesting, it's essential. There we have dispute resolution
mechanisms, we have direct negotiations I know Sue Schwab and Carlos
Gutierrez and others are very very much focused on that. There IS no doubt that
there are areas where our side believes they could be dOing a better Job of living up
to their commitments and where there has been some retrogression
In terms of the SED which IS focused on long term economic issues and tile most
presslllg, sensitive short term Issues, there's been only progress So we could all
debate whether there should be more progress, but thel'e has been progress and
there's been progress that we wouldn't have if we didn't have this. So I'm focused
on the progress I'm focused on tile opportunity and the size of the market and the
rate at which our exports are growing and the very real progress we're making here.
I have a lot of other people up here who Will be happy to take your questions. too
Question: Financial Times. Mr. Paulsoll, as Treasury Secretary do you have any
comment on the announcement overnight by the four central banks? Have you
seen that announcement?
Secretary Paulson: I Ilaven't. There was just an announcement by four central
banks? So I don't have a comment on that, no.
Question: You mentioned and have spoken at length about currency and the
impact that a faster yuan appreciation would allow more leeway for the Chinese to
have monetary policy options. Yesterday the Governor of the Chinese Central Bank
said that the feds rate cut could lead to more liqUidity throughout the world and
therefore have an Impact on China's monetary poliCY Would you like to comment
on -Secretary Paulson: I leave the monetary policy to Ben Bernanke In the US and
my central banking fflends, so I'm not gOing to comment on It other than the
comment that I've already made that it IS pretty hard to tlave effective monetary
policy With a degree of sterilization. And Zhou Xiaochuan understands that. To the
extent they're Issuing renminbi to buy In dollars, that they don't have a lot of
flexibility With their monetary policy. But overall, I don't have any comment on it.
Question: AP. Minister Chen yesterday mentioned that he was quite worried about
the weakness of the US currency. weakness In the US economy. and that when
he was confronted by the American side with calls for a faster UN appreciation he
responded that he was more concerned with those issues. Were you able or are
you now able to offer any assurances. any reassurances, that that won't be a
problem for China?
Secretary Paulson: Let me say first of all I think what both countries understand is
that we both benefit by economic strength in each place. The Chinese, It'S very
important to them that the US economy is strong and continues to grow. It's very
important to the U.S. that China has a strong. stable development. So you can't
have a diSCUSSion like this without talking about our economies I gave my view that
our economy was a healthy. diverSified economy that was going to continue to
grow. I talked openly. as I have whenever I'm asked about this publicly, I talked
about the risk in housing and the turmoil in the capital markets. But the backdrop IS
a strong global economy, a healthy US. economy, and as we work through this
Question: Adrian Mullen from NBC News. I tllink you commented on thiS earlier.
but perhaps you or Ambassador Schwab could clarify this. Is there actually a ball
on further U.S.-made movies in China through February? If not, what exactly IS
going on?
Secretary Paulson: What was your question? The ban on movies? Sue, do you
want to comment, or Carlos?

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Ambassador Schwab: We don't actually know If there is a ban. There have been
rumors, stories, concerns expressed about it. We are making Inquiries. Obviously If
there were such a ban, whether It'S one month, three months, five monttlS. It would
be a very serious matter
Secretary Gutierrez: We're still addressing that Issue. We are equally concerned.
We don't have a precise response but we are allover it and we want to find out if
there IS a ban, and if there is sLlcll a ban why. So we stili don't have a precise
answer for you, but before we leave we're still going to take up ttlis Issue.
Secretary Paulson: We got it, so that was two for one.
Question: [Inaudible] TeleVision. Could you maybe clarify a little bit more
[inaudible] the Chinese? You mentioned [inaudible] security Industry In China, but
did you get any concrete pledges at all about lifting the moratoriulll on the
brokerages?
Secretary Paulson: I have every confidence from every ttl In g we've been told on
what's underway that you'll see a lifting of moratoriums and expansion of the scope
Remember, there have been Just a whole series of things, steps in almost evel-y
industry that they've agreed to do, and these take new rules. They need to roll It
out. One of ttle things I had an 0ppol1unlty to do when I first arrived was to Sit down
With Shang Fulin, the CSRC, and Ile's very focused on all ttlese things. They're
moving ahead and you'll see them
I would say from our perspective, we want them to do more, move faster. From his
perspective, he's running like a bunny, believe me They're busy, they're aclive, alld
we keep lists not only of things we're dOing when we look forward and With new
deliverables, but we and the Chinese keep a list of what's been agreed to. They're
very meticuloLis about saying we've done thiS, it's going to take a little bit longer to
get this done, but we'll get It done and so on.

Question: [Inaudible]?
Secretary Paulson: Yes, I do.
Question: [Inaudible] red herring. The most important thing for China at thiS time,
particularly at a time of potential economic weakness In the US. and elsewhere.
Secretary Paulson: I would say thls-Question: I know, but IS the most Important thHlg about China boosting ItS own
domestic demand, isn't that a much more important -Secretary Paulson: I was Just gOing to say here's how I've always thought about
the currency. You've heard me speak about It before
For those who believe that solVing the currency Issue and having a renminbl that's
more realistically valued, would get at the Imbalances In a really Significant way.
they're misinformed because the IIllbalances are created by the fact that our nation
IS growing and not saving, and that China has an economy that IS built around
exports, investing heaVily In export lnefustrles, alld has relative low levels of
domestic consumption and vel-y high savings rates and high precautionary savings
rates. So It'S going to take a while to get at tillS and it's going to have to deal With
the fundamental structural issues.
We focus on the renminbi because in Illany ways that IS a proxy for reform. It's very
difficult to have a market driven economy With all the tools you would have III a
market driven economy if you don't have real market signals. And It'S very hard to
develop a financial services industry if you don't have real market ~Ignals And If
you have a currency that doesn't reflect fundamental economiCS, It s difficult to do
this.
Again, I emphaSize the Chinese understalld thiS. they see the need to appreciate
the renmlnbi, so we're arguing, again, about stability. And we both agree we need a

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China that's economically stable and successful and grOWlllg There's a pOint of
discussion as to whether It's riskier to take bigger steps III the reform area or not
And frankly, we believe that there's a greater risk 111 moving too slowly here So
that's from China's perspective
From the global community, there will contillue to I)e Issues and concems because
China IS a bit of an anomaly It's beell a nllracle their economic growttl, so tlley now
are a very big factor in econOllllC trade In goods and services. But whlie all the other
countnes that play that killd of role In tile global economy have currencies that are
market delermllled, Chilla Isn't I'eady to have a market determined currency yet, but
they need 10 move In that direction and they're gOing to continue to hear about It
until I think they get a market determilled currency That's why I talk so much about
capital markets, because I think that's. haVing more competitive capital markets IS a
prerequisite to a market determined currency.
Anyone else before we -Question: Mr. Secretary, Glenn Summerville from Reuters The fact sheet cites a
deCision by China to permit foreign companies dOing business In China to Issue
yuan-denominated equity. How Illuch pressure was there for that from the US
side, and how much resistance from the Chinese, and what is the potential impact
of that?
Secretary Paulson: First of all, I think It'S a very positive move. I'm glad you've
cited it. Let me Just say on all of these things, there's not one of the issues we're
talking about In the securities area where the Chinese don't say we'I'e moving III
that direction, We understand what we need to do. We're opening up OUI' securities
markets It's important that we have to develop our regulatory structure, we have to
develop our infrastructure. We're moving as quickly as we think IS prudent. So there
had always been a recognition on their part that this was something that would be a
good thing to do. It's something we encourage them to do. I think General Motors
has done a finanCing, there's been some moveillent here. and you'll see more
movement. And I think that's very Important and It'S gOlllg to be a very healH1Y part
of the development of their capi\al markets,
One more,
Question: I'm with the South China Morning Post. I Just wanted to ask a little bit of
clarification on the Issuance of renmlnbl stocks and bonds. Does this mean that
US companies are gOlllg to be able to Issue [Inaudible] In China? And when IS thiS
gOing to happen? And has there been a demand f!'Om US companies to do thiS?
Thank you
Secretary Paulson: There's clearly a demand for US or foreign companies, any
company doing business III Chlrla and IIlVesting In Chlrla. to be able to finance
yourself III renmlnbi and the domestic market IS a good thing. And being able to
finance debt securities or asset backed secuntles like General Motors did, or
eqUities. And so you will see thiS I think. You say when, It will be, I'm sure, rolled out
gradually But I think you're going to see, you Will be seeing foreign companies With
IIlveslments here being able 10 finance themselves In the equity and debt markets,
Thank you all very mudl

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