Mary John Miller, Nominee for Assistant Secretary for Financial Markets
Opening Statement As Prepared for Delivery
United States Senate Committee on Finance

Thank you, Chairman Baucus, Senator Grassley, and members of the Senate Finance Committee for giving me the opportunity to be here today.  I am honored that President Obama and Secretary Geithner have asked me to serve in the Treasury Department at this critical time for our economy and our country.

I recognize that our time today is limited, so I would like to briefly recognize the members of my immediate family that are with me today: my father James John, a professor of history at Cornell University for over 40 years, my husband of nearly 30 years, James Dabney Miller, and my oldest son, Thomas Marshall Miller, a graduate student in classics at Princeton.  My younger son, James John Miller, could not be here today as he is performing in the production of Romeo and Juliet at Cornell this evening.

Thirty-two years ago I arrived in Washington, a Cornell University graduate with a degree in Government. I worked as a Legislative Aide in the House of Representatives before I went to graduate school at the University of North Carolina at Chapel Hill.  I then spent four years as a research associate in public finance at The Urban Institute here in Washington, where I studied and wrote about the fiscal and capital needs of state and local governments.  I'm proud that for the past five years I have served as a Trustee of The Urban Institute.

In 1983 I took a job in Baltimore, Maryland, as a credit analyst in the municipal bond department of T. Rowe Price Associates, an investment management company.  I have been at T. Rowe Price for over 26 years, and today I am the director of global fixed income investments for the firm. In preparing this opening statement for the Committee I recalled that when I started at T. Rowe Price, our country was recovering from the longest recession since the Great Depression.  The unemployment rate stood at 10.2%, precisely where it stands today.  Interest rates were much higher than today's very low levels.  The Federal Funds rate then was above 8.5%, and the ten-year Treasury bond yield was above 10%.

Looking back at 1983, many people were pessimistic about the future of our economy and our country.  But, as it turned out, we were on the brink of two decades of strong growth.  Certainly there were recessions during these decades, but in general the economy and financial markets performed better than expected.  We face both similar and different challenges today to restore sound growth and financial markets.

My work over the past 26 years has been primarily in the bond market, including the Treasury bond market, although as a member of my firm's Management Committee I do share responsibility for our entire range of investments.  I have participated in the evolution of financial markets and products, as well as working through periods of severe market turmoil, including:

• Saddam Hussein's invasion of Kuwait in August 1990;
• The derivatives and currency problems ignited by the collapse of Long Term Capital Management in1998;
• The frenzy of the dot.com bubble in the late 1990s;
• The tragedy of September 11; and
• Finally, the unprecedented financial crisis of the past two years.

The opportunity before me today is to help with the recovery and restoration of confidence and capital in our financial markets. We need to ensure that our financial institutions are properly regulated, well capitalized, and built to withstand downturns in the economy without creating undue stress and illiquidity.  It is my hope that the recovery we have seen this year in financial markets can lay the foundation for broader economic recovery as we adopt these reforms.                             

If this Committee, and the full Senate, confirms President Obama's nomination of me to be Assistant Secretary of the Treasury for Financial Markets, then I will welcome the opportunity to serve in the Treasury.  I promise the Committee that, if confirmed, I will work hard and do my best to carry out my oath of office. Thank you.

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Charles Collyns, Nominee for Assistant Secretary for International Finance
Opening Statement As Prepared for Delivery
United States Senate Committee of Finance

Thank you, Chairman Baucus, Senator Grassley and distinguished members of this committee for the opportunity to appear before you today as nominee to be Assistant Secretary for International Finance at the Treasury Department. I would like to thank your staff for meeting with me last week to discuss some of the major international financial issues facing the United States at this most challenging time for the global economy.

I am greatly honored by President Obama's nomination for this position, and deeply grateful to Secretary Geithner for recommending me to the President.

I am also deeply grateful to my family for their strong support. Most importantly, my wife Myriam and my two daughters Carmen and Isabel have provided encouragement and love as I have sought to apply myself to public service. I am very proud of their accomplishments. Myriam came to this country from Bolivia to pursue her graduate studies and made a successful career as a translator and editor as well as nurturing her family. Carmen is now a senior at Harvard University and Isabel is a sophomore at the Wharton School of the University of Pennsylvania. I would also like to recognize my parents, who came to this country from England many years ago enticed by the opportunities and ideals that it offered. They went as far as to name each of their six sons after great American leaders-- I myself proudly carry the middle name of "Adlai" after an earlier inspirational leader from Illinois, Adlai Stevenson.

Mr. Chairman and Ranking Member Grassley, I welcome this opportunity, if confirmed, to serve our country and to join such a distinguished and talented team at the Treasury Department. I have worked over 25 years in the International Monetary Fund after completing my doctorate at Oxford University, and have gained long experience in dealing with the full range of international economic issues. During the 1980s I was involved in the IMF's efforts to deal with the Latin American debt crisis. During the 1990s I worked mainly with Asian countries grappling with their own decade of crisis, and then in the early part of this decade returned to Latin America at another difficult time for the continent. Most recently I have led the team preparing the IMF's World Economic Outlook report, and I have thus been deeply involved with the Fund's work to understand and respond to the recent global crisis.

If confirmed by the Senate, I would be greatly honored to serve my country at this very challenging time. The swift and strong response by policy makers in the United States, working closely with counterparts in major partner countries around the world, has helped stabilize the global economy following the financial crisis, and restarted growth.

 A recovery is now underway but it is essential to build on this progress to ensure future sustained, strong and balanced growth and robust jobs creation. Achieving this end will require determined, well-directed and concerted policymaking by the United States and its main partners. The Treasury Department will be called on to play a key part in leading these global efforts, and I would strive to contribute to ensuring success for this important task.

If confirmed, I promise to apply myself fully and to the best of my ability to justify your trust and confidence. Thank you for allowing me to appear before you today, and I would be pleased to answer any questions.

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Lael Brainard, Nominee for Under Secretary for International Affairs
Opening Statement As Prepared for Delivery
U.S. Senate Committee on Finance

Chairman Baucus, Ranking Member Grassley, and distinguished members of the Committee, I am honored to appear before this committee today as you consider my nomination to be Treasury Under Secretary for International Affairs.  I want to thank my family for their support:  my husband, Kurt Campbell, my parents, Al and Joanne Brainard and my daughters, Caelan and Ciara, who are here today, and my youngest daughter, Coco. 

I am honored that President Obama has nominated me for this position and, if confirmed, will be privileged to work with Secretary Geithner and the distinguished civil servants in International Affairs at the Treasury. If confirmed, I look forward to working closely with this Committee and your colleagues in Congress to advance President Obama's agenda of strengthening U.S. leadership in the global economy and restarting the great American engine of growth.

My preparation for these issues dates back to my childhood years living behind the Iron Curtain observing the power and promise of American ideals, including the power of individual initiative, dynamic markets and growing economic ties, to lift up lives and underwrite peace and security around the world.  Like many children, I was frequently told to mind my manners, but in our family it was followed by the admonition "don't forget, you are representing America."

For 25 years, my work has focused on strengthening America's leadership in the global economy.  I worked at McKinsey with US car manufacturers struggling to maintain share against Asian competitors and US financial institution clients competing in increasingly complex global markets.  As an economics professor at MIT, my students and I examined how the bracing winds of global competition shape the opportunities of working Americans.  Most recently, I had a unique opportunity to build a community of scholars at Brookings –the fifth new program in its 90 year history-- to undertake innovative work on American competitiveness, the rise of major economies such as China and India, and systemic challenges such as climate change. Throughout, I have maintained a deep interest in emerging solutions to global poverty, starting over twenty years ago working with rural micro entrepreneurs in Senegal. 

If confirmed, this would be my third time in public service – following a proud tradition on both sides of my family, including my father's service in the Army and as a diplomat during the Cold War. I would be proud to once again represent this great nation as we forge a durable and balanced recovery.  I entered public service as a White House Fellow on the eve of Mexico's financial crisis, and stayed on to serve President Clinton as Deputy Assistant to the President for International Economics through the 1997-9 financial crisis, when the groundwork for the G20 was first laid.  At that time, I also had the opportunity to work with this Committee and others in Congress to shape China's entry into the WTO and to expand trade ties with Africa through AGOA.  I also served as the U.S. Sherpa to the G8.  Two decades ago, when we celebrated the fall of the Berlin Wall, I spent an eventful year at the Council of Economic Advisers, working on the design of Poland's successful transition plan, as well as the Structural Impediments Initiative with Japan. 

I look forward to making a contribution as our nation navigates the most complicated economic challenges we have faced in a generation. The global economy is emerging from the most severe and synchronized crisis we have seen--in large part thanks to unprecedented global cooperation led by the United States.

More than any other nation, the United States is at the heart of the global economy with deep and broad ties to every region of the globe. The world needs America if global prosperity and security are to prevail.  And America needs the rest of the world to grow if we are to prosper again here at home. Most immediately, this requires a commitment from major economies to maintain necessary actions to get people back to work and banks back in the business of lending.  But we must also put in place measures to ensure we do not confront a crisis of this severity ever again. 

If we are to achieve more sustainable and balanced growth, we must move from global growth based on U.S. demand to growth based on global demand.  If our financial system is to be put on sounder footing, regulators in all major financial centers will need to work together to promote a race to the top. If we are to spread opportunity to the poorest communities, we must redouble our efforts to overcome food, fuel, and financial insecurity.  If America is to reach our goals of creating jobs and increasing incomes, our businesses, factories and farms must be able to sell to consumers in the dynamic economies of Asia. Just this past week, President Obama announced his intention to engage with the Trans Pacific partnership countries "with the goal of shaping a regional agreement that will have broad-based membership and the high standards worthy of a 21st century trade agreement."  And he affirmed the importance of seeking a WTO agreement "that will open up markets and increase exports around the world."  

These are the challenges of our time.  If confirmed, I look forward to working on them closely with the members of this Committee and Congress.

Thank you, Mr. Chairman, Senator Grassley. I would be pleased to answer any questions.

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Treasury Announces Intent to Sell Warrant Positions in Public Dutch Auctions

The US Department of the Treasury today announced its intention to dispose of several warrant positions received in consideration for investments made under the Capital Purchase Program (CPP).  Over the next month, Treasury intends to conduct auctions to sell its warrant positions in JP Morgan Chase & Co., Capital One Financial Corporation, and TCF Financial Corporation. 

Each of these banks has fully repurchased Treasury's preferred stock investment.  The warrant sales anticipated over the next month, if consummated in full, would represent Treasury's disposition of its remaining holdings in these companies.  The proceeds of these sales will provide an additional return to the American taxpayer from Treasury's investments in these banks beyond the dividend payments it received on the related preferred stock. 

Treasury intends to sell the warrants through registered public offerings.  These offerings will be executed using a modified Dutch auction methodology that establishes a market price by allowing investors to submit bids at specified increments above a minimum price specified for each auction.    More detailed guidance for the auctions will be available in prospectuses that will be filed by the warrant issuers prior to the opening of each auction.  Treasury expects to conduct similar auctions in the future for other warrant positions it holds in banks that have repaid CPP investments.

Deutsche Bank Securities Inc. (Deutsche Bank) has been retained as the auction agent and sole bookrunning manager for these offerings.  In this role, Deutsche Bank will accept bids and identify a clearing price for each auction.  If investors do not have an account with Deutsche Bank, they may be able to participate in the auction through their own brokers, as a network of several dozen brokerage firms will be invited to aggregate suitable client orders and submit them to Deutsche Bank. The warrants are complex securities that are not suitable for all investors.

Prospective investors will be able to obtain copies of the prospectuses relating to these securities, when available, from Deutsche Bank Securities Inc., Prospectus Department, Harborside Financial Center, 100 Plaza One, Jersey City, New Jersey 07311-3988, telephone: 1-800-503-4611.

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Secretary of the Treasury Timothy F. Geithner
Written Testimony before the Joint Economic Committee
Financial Regulatory Reform
November 19, 2009

Chairwoman Maloney, Vice Chairman Schumer, I am pleased to appear before the Joint Economic Committee today.  The House and the Senate are both making rapid progress toward the goal of comprehensive financial reform, and I appreciate the opportunity to talk about why that reform effort is so essential for the health of our economy and what, in our view, is necessary to make the effort successful. 

The United States is in the process of recovering from the worst financial and economic crisis in generations.  After an extended and painful contraction, we saw solid annualized GDP growth of 3.5 percent last quarter.  We expect continued growth in the fourth quarter and ahead in 2010. 

But as we press forward towards recovery, there is still much work to do – not only to ensure that many more Americans see the tangible benefits of recovery, but also to help ensure that Americans are never again forced to suffer the consequences of a preventable economic collapse. 

In the years leading up to the crisis, our financial regulatory regime permitted an excessive build-up of risk, both inside and outside the traditional banking system.  The shock absorbers critical to preserving stability – capital, margin, and liquidity cushions in particular – were inadequate.  Outdated, ineffective regulation left our system too weak to withstand the failure of major financial institutions. 

Firms took huge risks with borrowed funds and little of their own capital at stake.  They funded long-term, illiquid assets with cheap, short-term debt.  This risky behavior migrated from the regulated and partially regulated parts of our financial system to the almost entirely unregulated parts, making it difficult for us to control or even gauge its dimensions. 

The result was a financial system vulnerable to bubbles, panic and collapse. 

And unfortunately, the regulatory regime that failed so terribly leading up to the financial crisis is precisely the regulatory regime we have today.  That is why recovery alone is not enough.  To ensure the vitality, the strength and the stability of our economy going forward, we must bring our system of financial regulation into the twenty-first century.  We need comprehensive financial reform. 

To achieve financial reform, the Administration has advanced a broad set of proposals.  We have worked closely – and continue to work closely – with Chairman Frank, Chairman Dodd and members of their respective committees and other important legislators, including many on this Committee, to craft strong financial reform legislation that we hope will be enacted as soon as possible.

Given the range and complexity of the issues with which we are dealing and the critical stage at which our work has now arrived, it is important to step back for a moment and remind ourselves of the central objective of reform – and the key principles that, in the Administration's judgment, are essential to achieving that objective. 

The central objective of reform is to establish a safer, more stable financial system that can deliver the benefits of market-driven financial innovation even as it guards against the dangers of market-driven excess.  It is to ensure that the financial system functions in a way that creates opportunity and reduces risk.  It is to provide stronger protections for consumers, investors, and tax-payers. 

In our view, there are at least four key principles that we must follow in order to achieve that objective.  These are not meant to be exhaustive.  But we do believe they are essential. 

First, firms must not be able to escape or avoid regulation by choosing one legal form over another.  Firms engaged in the same kind of business, performing the same essential economic functions, must be subject to fundamentally the same regulation and supervision. 

Today, bank holding companies are subject to one supervisory regime, thrift holding companies to another, investment bank holding companies to yet another.  Without changing its core business, a firm can change – or avoid altogether – regulation at the holding company level simply by switching its legal form.  

The fact that investment banks like Bear Stearns or Lehman Brothers or other large firms like AIG could escape meaningful consolidated federal supervision simply by virtue of their legal form should be considered unthinkable from now on.  The largest, most interconnected firms must be subject to one uniform, consistent set of standards, regardless of charter. 

Similar inconsistencies plague the market for consumer lending.  Banks and non-banks operate in the same market and compete for the same customers.  But they play with a different rulebook.  Non-banks like mortgage brokers, consumer credit companies and payday lenders escape federal supervision almost entirely.  The inconsistent regulatory regime sparked a race to the bottom in the mortgage lending market, and the consequences are tragic and well known. 

The second principle of reform is that there must be clear regulatory accountability.  The principle is particularly important with respect to oversight of the largest, most interconnected firms. 

The regulation of the largest, most interconnected firms requires tremendous institutional capacity, clear lines of authority and single-point accountability.  This is no place for regulation by council or by committee.  The stakes are simply too high to allow diffuse authorities and responsibilities to weaken accountability. 

In addition, an essential element of accountability is that rule-writing and enforcement authority must not be divided.  Separating rule-writing from enforcement deprives the rule-writer of vital, hands-on information – and gives both the rule-writer and the supervisor an excuse for failure.  A rule-writer that is also a supervisor and enforcer, on the other hand, is unmistakably accountable for success – or failure.

Today, responsibility for consumer financial protection is divided among numerous regulators, none of whom regard consumer protection as their top priority.  To ensure more responsive and more effective rule writing and enforcement, we have proposed the creation of the Consumer Financial Protection Agency (CFPA).  Consolidating the consumer protection authority of the Fed and other prudential regulators, the CFPA would be fully accountable for setting and enforcing rules of the road for the benefit of responsible consumers. 

The third principle is that the financial system as a whole must be more capable of absorbing shocks and coping with failures. 

One of the most salient lessons of the recent crisis is that financial firms are deeply intertwined, linked by a complex web of contractual and reputational connections.  These inter-firm connections allow financial distress to spread contagion across the system.  The risk of such contagion means that capital, liquidity and margin requirements must be increased, system-wide – and set with a view to ensuring the stability of the financial system as a whole, not just the solvency of individual institutions. 

In addition, there must in the future be a greater focus on the quality of capital, and an effort to design capital requirements that are more forward-looking and reduce pro-cyclicality. 

While the buffers need to be increased system-wide, the largest firms should face still higher prudential requirements.  They should be forced to internalize the cost of the risks they impose on the financial system, and to strengthen their ability to withstand shocks and downturns.

While strengthening prudential standards for firms is one element of making the system as a whole more resilient and risk-absorptive, it is not alone sufficient.

To strengthen the system overall, the Administration has called for measures to strengthen financial markets and the financial market infrastructure.  For example, we have proposed to strengthen supervision and regulation of critical payment, clearing, and settlement systems and to regulate comprehensively the derivatives markets. 

We should never again face a situation – so devastating in the case of AIG – where a virtually unregulated major player in the derivatives market can impose risks on the entire system. 

The fourth and final principle is that no financial institution should be considered "Too Big to Fail."   

During the recent crisis, in order to preserve the stability of the financial system, protect the savings of Americans and prevent a far more devastating economic collapse, the government was forced to provide financial support to individual institutions in extremis.  Those interventions were necessary, but they must not – and do not – set a precedent.

Institutions and investors must be responsible for their decisions.  No financial system can operate efficiently if financial institutions and investors assume that the government will protect them from the consequences of failure.  And as the President said two months ago in New York, "Those on Wall Street cannot resume taking risks without regard for consequences, and expect that next time, American taxpayers will be there to break their fall." 

Part of the answer is simply making the financial system more resilient – as just discussed – by strengthening supervision, eliminating loopholes, building up capital and liquidity buffers, and increasing transparency in key markets.  In most circumstances, those precautions will be enough.  And for that reason, bankruptcy will remain the dominant means of dealing with the failure of a non-bank financial firm.

But as Lehman's collapse showed quite starkly last year, the U.S. government does not have the tools to respond effectively when failure of large, non-bank financial institutions truly threatens the stability of the system at large. 

That is why the Administration has proposed that the government have the authority – as we have today for banks and thrifts – to break apart or unwind major non-bank financial firms in an orderly way, imposing pain on shareholders, creditors, and managers, but limiting collateral damage to the system and sparing the taxpayers.   

The proposed resolution authority would not authorize the government to provide open-bank assistance to any failing firm.  In other words, the authority would facilitate the orderly demise of a failing firm, not ensure its survival.

Moreover, if there are losses to the government in connection with the resolution, the losses will be recouped from the largest financial institutions in proportion to their size.  The financial industry – not taxpayers – will be on the hook. 

We must be sure we have the necessary tools to cushion the broader financial system against potential shocks, in times of severe stress.  Otherwise, in a financial panic, credit to our economy, to small businesses and homeowners could grind to a halt.  To make sure the tools we have are effective but narrowly tailored to achieving financial stability goals, we have proposed to modify the emergency authorities of the FDIC and the Federal Reserve.  Their authorities should be subject to appropriate checks and balances and should be available only to protect the financial system as a whole, not individual institutions. 

Should new financial crises occur, despite our best efforts to prevent them, these tools are essential to preserve the government's ability to respond in an effective, responsible way.

Let me close by saying this:  In today's markets, capital moves at speeds unimaginable when our current regulatory framework was created.  Financial instruments that were mere novelties a few decades ago have grown to play a critical role in our financial system.  Whatever statutory framework we erect today will, undoubtedly, encounter new, unfamiliar institutions, instruments and markets. 

But if we put in place a set of financial reforms that prioritizes consistency, accountability, and resilience, and responsibility; if we fight to close gaps, eliminate loopholes, empower regulators and hold them accountable, raise standards, and give the government the tools it needs to manage crises while ensuring that no one is insulated from the consequences of their actions; if we do those things, we will be able to say that we have met our obligation to the next generation.

Finally, let me thank again the members of this committee.  And let me thank again those members of the House Financial Services Committee and the Senate Banking Committee for the good work that you are all doing to advance this important legislation.

Thank you.

Treasury Secretary Timothy Geithner
Opening Remarks – Small Business Conference
November 19, 2009

Good morning. Thank you all for joining us.
Three weeks ago, the President announced a series of new initiatives to help support small businesses.

He also announced that Karen and I would be bringing together businesses, lenders, policy officials and legislators to make sure we are doing everything possible to get credit flowing to small businesses that are seeking to expand and create more jobs.

That's why we are here today, to explore ways we can strengthen our existing programs and to discuss new ideas.

America's small businesses are critical engines of job growth and have historically led us out of recessions.  But to play that role they need access to credit.

Over the past ten months, we have stabilized the financial system and brought down the cost of borrowing for businesses and families.  Companies across the country are now able again to raise equity and issue bonds.  Credit terms are easing as markets that were once frozen are beginning to open up.

But this process is incomplete. Small businesses, in particular, are still facing a very challenging credit environment.

The basic cycle of financial crises is that credit is cheap and easy to get for a time.  Banks relax their standards too much, leading to excess lending and leverage.

When the credit crisis hits, they slam on the brakes and shift into reverse.  Banks pull back, not just from those companies that are more at risk of failure, but from all companies.  This hurts the prudent and the responsible as well as those who simply borrowed more than they could afford.

Although the demand for credit necessarily falls in a recession, particularly one following a long period of excessive borrowing, the risk is that banks over-correct, forcing viable businesses to lay off workers, reduce wages, close factories, and defer investments.

Left to the market, this process can feed on itself. 

A credit crunch can amplify the recession, slow recovery, and cause more businesses to fail and unemployment to rise, putting more pressure on banks to cut credit lines for fear of higher defaults. 

If this seems unfair, unjust and counter-productive to economic recovery and job creation, it is.

That's why it's so important for governments to act aggressively to break financial panics, to make sure that banks are able to fund at reasonable rates and that the overall banking system has enough capital to provide credit.  And that's why governments must provide temporary support for private demand and the spark for a recovery in economic growth. 

Now, we know that small businesses are more vulnerable to the after effects of financial crises.

They are more reliant on banks and the types of credit that take the most time to come back. Large businesses get only 30 percent of their financing from banks, compared to 90 percent for small businesses.  So when banks pull back, small businesses take the hardest hit. 

Also, small businesses have fewer resources to tide them over.

They often start on a personal credit card – as many in this room can attest – and finance expansion, in part, by borrowing against their personal assets and property. But if their bank made a lot of risky loans to commercial real estate developers or less viable companies, their credit lines could be cut and applications for new loans turned down.

This is a very hard problem to solve.  It's not something we can fix easily.  It takes a coordinated mix of different strategies and policies.

Let me briefly describe the critical elements of any successful response, alongside broader efforts to establish economic growth, and alongside the need to constantly evaluate our initiatives to make sure they are working as effectively as possible.
 
First, we need to provide direct help to small businesses.  We've done that through the Recovery Act by establishing targeted tax relief to small businesses, allowing them to write off more of their expenses and to earn and instant refund on their taxes by `carrying back' their losses five years instead of two.

And we've done that by implementing higher guarantees and lower fees for Small Business Administration loans, greatly increasing SBA lending, which Karen will talk more about in a moment.

Second, we need to support those who support small businesses.  That's why the President announced a new program last month to provide low-cost capital to community banks that submit a plan to increase their small business lending and to Community Development Financial Institutions that serve the hardest-hit communities.

And that's why the Recovery Act provided $100 million in additional support for CDFIs and an additional $3 billion in New Market Tax Credit investments to support small businesses as they spur growth in those struggling communities.

Third, we need to continue improving the health of securitization markets that provide key channels of credit for small businesses. Since the government launched the TALF program, new issuance of asset-backed securities, including loans that directly help small businesses, has averaged $14 billion per month, compared to less than $1 billion last fall.  Spreads have come down substantially.

Fourth, we need to make sure supervisors are providing guidance to their examiners to counter the risk of overcorrection. It is a delicate balance and we need to get it right.

Fifth, we must support expanded exports including through programs like EXIM.

And finally, we need our nation's banks to put the assistance the government provided to work and get back to the business of lending, helping companies raise capital and investing in the promise of American innovation.

We need banks to be working with us, not against recovery. 

The recovery in earnings across the banking system, which is a necessary part of putting out the financial fire that caused huge losses to the savings of Americans, is not because the surviving banks are particularly smart and clever.  It's because the taxpayers of the United States and their elected representatives decided that to save the economy, we had to save the financial system. 
 
All banks, strong and weak, benefitted from those actions. Banks bear some responsibility for the extent of the damage caused by the crisis. And you carry a substantial obligation to help our communities get back on their feet. 

I encourage Members of Congress to work with us to create the conditions so that small banks in their communities, the banks that do the greatest percentage of their commercial lending to small businesses, participate in our efforts to promote small business lending. That means providing them with the confidence that if they take capital today from our new programs, they will not face a change in the rules tomorrow.

Let me close by saying that we are entering a new phase in our response to this crisis, moving from rescuing the economy towards repairing and rebuilding the foundation for future growth.

As the financial system has stabilized, banks have repaid the government more than $70 billion. We have earned more than $12 billion from those investments.  And we are now in the process of winding down and terminating some of the extraordinary government programs put in place last fall.

But even with such progress, even with our economy growing again for the first time in a year, we continue to face a daunting set of challenges, underscored by an unemployment rate now above ten percent.

Without increased access to credit for American families and small businesses, growth will be weaker, companies will defer long term investments and we will not be able to create a recovery that is self-sustaining and led by private demand.

That's why, as we wind down programs that help big banks, we are committed to doing more to help small businesses access the credit they need to grow and hire new workers. 

We have taken positive steps in the past, and aim to take even more in the future. 

The President wants to hear the best ideas and this conference – feeding into his jobs forum – is a critical way to get those ideas from across America and make sure that our recovery is shared by all American working families.

Let me now turn it over to Karen

November 18, 2009
TG-411

Treasury, SBA Host Small Business Financing Forum

To view Secretary Geithner's remarks, as prepared for delivery, click here.
To view biographies of the small business owners in attendance, click here. 

Today's Small Business Financing Forum marks another step in the Obama Administration's commitment to ensuring small businesses can play a crucial role in leading job growth and recovery. As they search for the best ideas and strategies to bring to the President, Treasury Secretary Tim Geithner and Small Business Administrator Karen Mills will build on the measures the Obama Administration has already taken to help small businesses expand through increased access to credit and new tax cuts as part of the American Recovery and Reinvestment Act. 
 

I.       Administration Efforts to Improve Access to Credit

• Since the Transition, Treasury and SBA Have Worked Together to Increase Access to Credit for Small Businesses:
  • Recovery Act Provisions Raised Loan Guarantees and Reduced Fees for SBA Programs: As part of the Recovery Act, the Administration increased the maximum guarantee on 7(a) loans to 90 percent and temporarily eliminated borrower fees for the 7(a) program and both borrower and lender fees for 504 loans.
  • Treasury Worked With SBA to Introduce Programs to Unlock Secondary Markets: On March 16, Treasury and SBA announced a new initiative to make direct purchases of securities backed by 7(a) loans on the secondary market. In response to concerns that TALF as originally designed would not have any impact on SBA secondary markets, Treasury and SBA also worked with the Federal Reserve to improve the terms under the program for securities backed by SBA-guaranteed loans.

o   Additional SBA Efforts to Improve Access to Credit: SBA has taken other efforts to increase access to credit, including:

• Expanding 7(a) Loan Eligibility to More Than 70,000 Businesses Through Alternate Size Standards
• Supporting $30 Million in Inventory Financing for Auto, RV and Boat Dealerships Under a New Dealer Floor Plan Financing Pilot Program
• Approving More Than 4,000 ARC Loans Totaling $130 Million to Viable Businesses
• SBA Weekly Loan Volume Is Up More Than 75 Percent Since the Beginning of the Year: Compared to the beginning of the year – before the Recovery Act provisions were implemented and the secondary market initiative was announced – average weekly SBA loan volume for the 7(a) and 504 programs is up 79 percent. Since February, more than 900 lenders have made SBA loans that had not done so since 2007.
• Secondary Markets Have Recovered: In January 2009, the total volume of loans settled from lenders to broker-dealers on the secondary market for SBA loans had fallen to just $85.9 million. From May to October, however, the average monthly volume settled to broker-dealers was $344 million – above pre-crisis levels. Market participants have publicly cited the TALF program – which has financed more than $1 billion in purchases of SBA securities – and the announcement of a secondary market purchase program under the Financial Stability Plan as helping to unfreeze the markets, providing lenders with the promise of increased liquidity if they make new loans.
• New Reporting Requirements for Small Business Lending: Since June, Treasury's monthly lending survey, which tracks the 22 largest institutions receiving TARP funds, has included data on small business lending, allowing the Administration to better monitor the impact of the Financial Stability Plan on small businesses. In addition, Treasury is working with the bank supervisors to require all banks to report their small business lending in their quarterly call reports, rather than simply once a year, beginning in the first quarter of 2010.
• Treasury and SBA Have Announced Steps to Go Further:

o   New Programs Under the Financial Stability Plan to Increase Small Business Lending: Last month, the President announced two new programs under the Financial Stability Plan designed to increase access to credit for small businesses. These programs –for  which Treasury is preparing final terms – will support institutions that do a disproportionate share of their lending to small businesses through:

• An initiative that provides lower-cost capital to community banks that submit a plan to increase small business lending
• A program to support Community Development Financial Institutions lending to small businesses in the hardest-hit rural and urban communities

o   Increasing the Cap on SBA Loans: The Administration has called for increasing the maximum size of 7(a) loans to $5 million and increasing the maximum 504 loan guarantee from $2 million to $5 million for standard borrowers and $4 million to $5.5 million for manufacturers. Increasing the maximum SBA loan size will allow more small businesses to get the credit they need to grow their businesses and hire additional workers.

II.    Cutting Taxes for Small Businesses

In its efforts to support an economic recovery, the Administration has enacted tax cuts for small businesses, providing them with a boost to their cash flow that can help them support an economic recovery:

• Extension of Enhanced Small Business Expensing:  The Recovery Act allows small businesses to immediately write off up to $250,000 of qualified investment in 2009, providing an immediate tax incentive to invest and create jobs.  This provision is estimated to cut small business taxes by more than $1 billion in 2009 and 2010.
• Five-Year Carryback of Net Operating Losses: The Recovery Act allows small businesses to carry back 2008 net operating losses (NOLs) for up to five years, as opposed to two years under prior law. This longer carry back period gives small businesses that experienced losses in 2008 the ability to get immediate refunds of income taxes they paid in earlier years and is estimated to give back $4.7 billion to small businesses in 2009.  The unemployment insurance bill signed by the President on November 6 extended this provision by a year as part of a broader expansion of the provision to more businesses.
• Exclusion of Small Business Capital Gains: The Recovery Act encourages investment in small businesses by excluding from taxation 75 percent of the capital gains for investors in small businesses that hold their investments for five years.  The President's Budget proposes to completely eliminate the capital gains tax on this small business stock.
• Estimated Tax Payment Relief: The Recovery Act provides immediate tax relief for small businesses by reducing their liability for estimated tax payment by about $275 million in 2009.

III. Supporting Small Businesses Through Contracting Programs

• Recovery Act Contracts Are Getting Into The Hands Of Small Businesses: SBA is responsible for ensuring that 23 percent of all federal government contracts go to small businesses.  As of November 9, 2009, 26.7 percent of federal agency Recovery Act contracting dollars have gone into the hands of small businesses.
• The SBA Is Taking Steps To Support Disadvantaged Small Businesses In Government Contracting: Vice President Biden, SBA and the Department of Commerce are co-leading a Stakeholder Outreach Initiative to promote Recovery Act contracting outreach for small and disadvantaged businesses.

###

Secretary of the Treasury Timothy F. Geithner
Written Testimony before the Senate Foreign Relations Committee

Chairman Kerry, Ranking Member Lugar, members of the Senate Foreign Relations Committee, thank you for the opportunity to testify today on the role of the Group of 20 (G-20) in the global economy. 

This Committee has long played a central role in strengthening America's leadership in the international financial system.  This role is more important than ever at this moment when global cooperation is critical for promoting America's well being and our national interests.

In the wake of the most severe global recession in decades, strong American growth will require stronger growth in our trading partners.  Moving from a global economy based on U.S. demand to one based on global demand is critical to our domestic efforts to reduce unemployment and increase the wages of middle-class Americans.

At the start of this year, the world confronted the very real risk of a great depression, global deflation, and financial collapse.  Over the past year, President Obama has worked closely with G-20 partners to adopt a forceful response to the global financial crisis. U.S. leadership and action, coupled with historic G-20 cooperation and response, has put out the financial fire and restarted growth in private activity.  We are now moving from a period of rescue and repair to one of recovery.  As growth strengthens and financial headwinds diminish, we will begin the essential process of restoring balance to public finances and fully removing the broad backstop still in place for credit markets. 

Cooperation through the G-20 will remain essential as we start to unwind extraordinary measures and put in place the broad framework to achieve a strong, sustainable, and balanced recovery, and implement profound financial reforms at home and abroad.

After the experiences of the Great Depression and World War II, the United States led in the creation of the international financial system that anchored prosperity and stability for more than 60 years.  Today, that system must be reformed to address 21^st century challenges.  The United States again faces an opportunity to help shape a system that ensures better economic potential for future generations in America and around the world.  As this Committee recognized by organizing today's hearing, the United States will be more effective in achieving our economic goals and our strategic priorities and interests when we work in partnership.

Let me briefly describe how we are working with the G-20 to advance our central objectives:   rebalancing the global economy to achieve stronger and more sustainable U.S. growth goals; promoting global financial stability; and forging multilateral solutions to threats such as food insecurity, fragile states, and climate change.  To achieve all of these goals, we will need to reform the global financial architecture.

Rebalancing the Global Economy to Achieve Strong and Sustainable Growth

As stabilization and recovery take hold, our policy challenge will shift to catalyzing private demand and business investment.  This will require continued policy support.  We cannot make the mistake of putting on the brakes too early or withdrawing support prematurely.  This is why our recovery programs were designed to provide support for growth over a two-year period, and that is why other governments around the world are committed to continue the recovery now underway, before the G-20 shifts to restraint.  At the recent G-20 Ministerial meeting in St. Andrews, Scotland, Finance Ministers and Central Bank Governors were united on the central point that growth remains the dominant policy imperative across our countries.  

But the financial crisis also showed clearly that previous global economic patterns were unsustainable.  To establish a more global foundation for growth and avert future crises of this nature, we must rebalance global demand.

As U.S. consumers save more and spend less in the years ahead, and as our government embarks on a path of fiscal responsibility, emerging markets and economies with large and sustained surpluses will need to shift their growth towards domestic demand and reduce their reliance on exports.  Governments around the world will need to accept this basic reality or we will all face slower growth.

Indeed, countries are already redirecting policies along these lines.  In the United States, private saving has risen and the U.S. current account deficit has fallen from over 6-1/2 percent of GDP in late 2005 to about 3 percent of GDP at this time.  We are seeing domestic demand play a stronger role in recoveries abroad and corresponding reductions in global imbalances elsewhere.

At the Pittsburgh Summit, President Obama secured a commitment by G-20 leaders to adopt a Framework for Strong, Sustainable, and Balanced Growth.  In St. Andrews, G-20 Finance Ministers and Central Bank Governors set out a detailed process and timeframe for achieving this goal.  We asked the International Monetary Fund (IMF) to assist us in a mutual assessment process by evaluating whether policies pursued by individual G-20 countries are consistent with a more sustainable and balanced trajectory for the global economy and, if needed, recommending how policies could be adjusted to improve the global outlook. 

Why is this important?  In the final analysis, it is up to each of our countries to deliver the policies needed to achieve strong, sustainable, and balanced growth throughout the world. The Administration will do its part and looks forward to working with Congress to put our fiscal policy on a sustainable footing when recovery is in place. But the fact that all of the G-20 countries signed up to this detailed process, recognizing that policy formulation in their countries will need to take broader global interests into account to avoid the booms and busts of the past, demonstrates the strong collective resolve to tackle global challenges with the same force that we brought to overcoming the crisis.

Let me assure you, however, that we are not laying the foundation for global rebalancing only in the context of the G-20.  Even before the Pittsburgh Summit, we were working hard to achieve this goal through the Strategic and Economic Dialogue (S&ED) with China and in our ongoing bilateral discussions.  I have had lengthy conversations with my European colleagues about this subject, and I was just in Tokyo for bilateral discussions with the new government ahead of attending the Asia Pacific Economic Cooperation (APEC) Ministerial in Singapore, where there was broad agreement on the need to balance growth.

Open trade and investment policies will be equally important to ensuring future U.S. economic growth, prosperity, and sustainability.  Trade will be critical to creating U.S. jobs and ensuring economic dynamism and vibrancy.  Importantly, G-20 countries have played an active role by pledging to keep markets open, not to erect protectionist barriers, and not to retreat into financial protectionism.

Together, Congress and the Administration have a critical role to play in showing the world that we are serious about critical financial reforms, strong trade and investment, and fiscal consolidation. These policy steps are essential to continuing the strong U.S. role in the global economic system, ensuring strong international confidence in U.S. economic fundamentals, and promoting our nation's interests. By taking action at home, we must communicate our resolve to ensure that the U.S. economy remains the strongest and most innovative in the world.

Together with the other measures we are taking, these steps will help foster a sustainable global growth path and a strong U.S. economy.

Promoting Global Financial Stability

Next, alongside the growth agenda, we must build a stronger global financial system to prevent and mitigate financial instability wherever it emanates in the international system.

In the wake of the crisis, policy makers and regulators from the United States and across the globe have mounted strenuous efforts to repair financial systems.  A strong and welcome consensus exists among G-20 countries on a framework and objectives for building a more stable global financial system.  We have agreed on a strategy to put in place stronger constraints on risk taking across the financial system, to bring appropriate oversight to key institutions, products and markets, such as the over-the-counter derivative markets, to reform the securities markets, and to provide the tools necessary to wind down firms that fail.  All of this will make the financial system stronger and better able to withstand future pressures.

But as we saw during the financial crisis, in a world of global capital markets, even the strongest regulatory standards can be circumvented by lax oversight in other financial centers, triggering regulatory arbitrage and a race to the bottom in which everyone loses.  Thus, the Obama Administration believes it is in the United States' interest to work with our G-20 partners and other countries to seek the adoption of high standards by all major economies.

That is why we expanded the Financial Stability Board (FSB) to include all of the G-20 countries.

That is why we are pursuing a vigorous agenda of regulatory reform internationally in parallel with our agenda at home. We are working with the G-20 to subject non-bank financial institutions, credit rating agencies, and hedge funds to greater scrutiny and advancing adherence to international standards across a number of other areas. We agreed at the Pittsburgh Summit along with the G-20 countries to build high-quality capital, mitigate pro-cyclicality in financial regulations, strengthen adherence to sound compensation practices in order to foster greater financial stability, improve the functioning of over-the-counter derivatives markets, and address cross-border resolutions and systemically important financial institutions. 

The challenge each G-20 nation faces is now to implement this agenda.  Here at home, we are working to enact sweeping reforms designed to protect consumers and investors and create a more stable, more resilient financial system. Working with Congress to pass legislation on comprehensive reform of our nation's financial system is one of my highest priorities.

Forging Multilateral Solutions to Global Threats

Let me now shift to the third priority: working with the G-20 to forge multilateral solutions to today's global threats. From Afghanistan and Pakistan to food security and climate change, the Obama Administration is committed to revitalizing the multilateral financial institutions to help tackle our toughest global challenges.

The G-20 has strongly supported the central role of the multilateral development banks (MDBs) in the fight against global poverty and as essential partners during this time of financial stress. They serve as the first responders for the global poor and provide a high return on U.S. development dollars.  We estimate that for every dollar that the United States invests in the World Bank as paid in capital, $26 of aid are delivered.

As evidenced in Afghanistan, Pakistan and Iraq--environments that are as critical as they are challenging--the multilateral development institutions play critical roles in addressing some of our most pressing problems, often working side by side with our bilateral efforts, including Treasury's Office of Technical Assistance.

Recognizing that bilateral and multilateral aid work best when they work together, it is critical to focus more attention and resources in order to achieve greater results in the following areas:

Advancing Energy and Climate Security

The President has outlined comprehensive changes in how we use energy, focusing on policies to advance energy and climate security while promoting economic recovery efforts job creation, and driving clean energy manufacturing.

U.S. domestic action, however, can only be part of the solution to our energy security and climate change challenges.  We must seek a global agreement with significant action by all major economies.  As part of that agreement, developing countries will need financial support to reduce their emissions and create new markets for clean energy technologies, as well as to adapt to the unavoidable effects of climate change.

Climate finance therefore will need to be scaled up significantly but we must do so in a way that is efficient and leverages U.S. investments in the arena of climate.

Because of their central role in financing and assisting countries, we have argued within the G-20 that the MDBs are uniquely positioned to play an important role in helping to transition to a green global economy.

The World Bank will specifically have a central role in contributing to financing the transition to a green economy by assisting countries in integrating climate change concerns into their core strategies.  In the context of a new climate agreement, we have argued that a new climate fund should be established at an existing international financial institution to deploy financial resources effectively.  We expect such a fund to build on the experience of the Climate Investment Funds (CIF) at the World Bank, which this Administration has strongly supported.

While the G-20's work on climate is in its early phases, this fund can provide additional momentum to the U.N. negotiations in Copenhagen in December, as well as ensure that any agreement is implemented effectively.

At Pittsburgh, the G-20 Leaders committed to phase out inefficient fossil fuel subsidies over the medium term.  This groundbreaking effort will encourage the conservation of energy, improve our energy security, and provide a down-payment on our commitment to reduce greenhouse gas emissions.  We believe this step will encourage investment in clean energy sources, promote green growth, and free up resources to use for pressing social needs such as health, food security, and environmental protection. We will follow through on the commitment while also preventing an adverse effect on the poorest by providing them with targeted cash transfers and other appropriate forms of support. 

Enhancing Food Security 

Over the past year, the global financial crisis put millions more people at risk of chronic hunger and poverty. At the G-20 Summit in London, President Obama called for a new approach to food security that includes strategic coordination of assistance, investment in country-owned plans, a comprehensive approach to enhancing agricultural development, and the effective use of bilateral and multilateral institutions and facilities.  In Pittsburgh, the President furthered this effort by securing agreement among G-20 Leaders to establish a multilateral food security trust fund at the World Bank to scale up agricultural assistance to low-income countries.  To advance these efforts, I have been working with Secretary Clinton, Secretary Vilsack, my colleagues in the

G-20, the World Bank, and others to advance new strategies for agricultural investments that leverage the resources and expertise of the multilateral organizations, and support accountable, country-led strategies.

Generating Growth in the Most Challenging Environments

As the United States works to stabilize the economies of vital countries, such as Iraq, Pakistan, and Afghanistan, the MDBs have a critical role to play in offering support. From assessing needs to mobilizing donor resources and providing substantial technical and financial support, the MDBs are important partners in places of strategic interest to the United States.

For example, Pakistan--one of the largest borrowers from the Asian Development Bank--will receive nearly $1.6 billion this year and another $1.4 billion next year to finance projects in the energy, transportation and agricultural sectors.  Afghanistan, the largest recipient of grants from the Asian Development Bank, will receive half a billion dollars over 2009 and 2010.  In Iraq, the World Bank is implementing programs worth $1 billion in education, roads, electricity, and water.  These types of investments help governments meet fundamental human needs which, in turn, give citizens a stake in maintaining a stable political and economic environment.‪ ‪

Supporting Private Sector-led Growth, Infrastructure, and Financial Access

Additional means of strengthening the potential of the global economy include supporting private sector-led growth strategies and improving access to financial services for the poor.  Through the G-20, we are seeking a renewed focus from the MDBs on promoting the business and market environments, including appropriate legal reforms needed for private enterprises of all sizes to thrive. These efforts will in turn strengthen the ability of the private sector in developing countries to foster opportunities for growth.

Improving access to financial services for the poor is also a critical component of this effort. Together with our G-20 partners, the United States has agreed to support the safe and sound spread of new modes for the delivery of financial services to the poor.  Also, building on the example of micro finance, the United States and its G-20 partners have asked the MDBs to scale up the successful models of small- and medium-size enterprise financing.

Furthering the Reform Agenda

We are committed to working across the Obama Administration and particularly with the State Department and USAID to ensure coherence of this critical development agenda.

Achieving these objectives will require reform from the MDBs. To ensure the effectiveness of U.S. investments in development, we continue to press for institution-wide reforms. Our desired reform agenda includes greater progress on combating corruption; strengthening financial management; improving transparency, accountability, and governance; increasing the capacity to innovate and demonstrate results; dedicating a greater share of resources to the poorest; and seeking better coordination and division of labor among institutions.

Achieving these objectives may also require new resources.  As this Committee is aware, all of the MDBs are undergoing, or have just concluded, capital reviews as part of a broader strategic repositioning.  At a time when resources are at a premium here at home, the United States is carefully reviewing all options.  Additionally, to underscore our commitment to poverty reduction, the U.S. will want to show leadership in MDB discussions on concessional financing for the poorest.  We are conducting a thorough review of how best to equip these institutions for today's and tomorrow's challenges, and look forward to working with this Committee, as well as with our partners in the G-20, to reach agreement on a set of core priorities, reforms, and resources.

However, to be credible in these negotiations, we must fully honor our previous commitments, which currently surpass $1 billion. I hope this Committee will support our requests to pay down our arrears.

Reforming the International Financial Architecture

Reforming the international financial architecture will be critical for advancing these priorities and the cause of multilateralism.  An essential element will be to strengthen international institutions and enhance cooperation, while continuing to preserve the strong leadership role of the United States in international forums.

As we continue to shape the G-20 to serve as the premier forum for global economic cooperation, we will also deepen and not diminish engagement though bilateral means such as the S&ED and through regional groupings such as APEC and the Summit of the Americas process.

As this Committee knows, the financial crisis clearly demonstrated the central role that the IMF plays in the global system as a crisis responder.  Over the past year, the IMF has taken critical steps to strengthen its crisis response by improving the ways it provides needed resources to members – both emerging market and low-income countries – by streamlining conditionality in programs to focus on the most critical actions a country needs to take, and by increasing its capacity to provide precautionary support to help forestall crises, importantly through a new Flexible Credit Line.

I want to thank the Chairman, Ranking Member, and Members of this Committee for your critical support for the U.S. $100 billion investment in the IMF's NAB.  Rapid Congressional passage of this legislation at a critical moment in the crisis enabled the United States to play a leadership role in expanding the IMF's supplemental resources through the NAB by $500 billion and restoring financial market confidence at a dark time.  The commitment of G-20 members to contribute to the NAB has resulted in contributions from leading emerging economies for the first time.

Looking ahead, the IMF will have a critical role in supporting balanced growth and financial stability.  I have already touched on the important assistance the IMF can provide in helping the G-20 countries with the mutual assessment of their economic policies.  What we ask of the IMF, and frankly what is needed, is candid, transparent, and independent surveillance to support this process.

In order for the IMF to effectively carry out its post-crisis mandate and to continue to fulfill its role as a crisis responder, the IMF's governance structure needs to evolve to reflect the relative weights and changing dynamics of the world economy.  This means giving greater representation to dynamic emerging market and developing countries that are now playing a greater role in the global economy and it also means preserving our strong leadership role in the Fund.  Progress was made on this front earlier this decade and, earlier this year, Congress passed legislation to implement those necessary reforms.  The G-20 took a critical step in Pittsburgh, committing to a shift in quota share of at least five percent to dynamic emerging market and developing countries.  G-20 Leaders also reaffirmed their commitment to complete the process of reviewing quotas by January 2011.

Similarly, we secured agreement among the G-20 to support a shift of at least 3 percent of the World Bank's voting power to developing and transitioning countries. We expect an international agreement to be reached on this issue in the spring of 2010 at the annual meetings of the World Bank and the IMF.  We look forward to working with this Committee as those reforms proceed.

Conclusion

Ten years ago, the Treasury Department took the lead in creating the G-20 Finance Ministers' and Central Bank Governors' process.  We did so in recognition of the changing face of the global economic and financial system and the need to give dynamic emerging market economies a greater role in the system, especially in the wake of the Asia crisis. The G-20 finance process continued, on the whole successfully, during this period.  It showed that our countries, despite representing a wide range of cultures, history, and developmental levels, could work together and had common interests in promoting the improved functionality of our economies.  A decade later, based on this shared experience, the G-20 countries were well positioned to tackle the challenges of the crisis.   

From rebalancing the global economy to preventing financial instability and addressing global threats, we must seek the engagement of partners to achieve our economic goals and objectives and serve our nation's interests.  First and foremost, we are responsible for our own destiny and our job begins at home.  But in today's interdependent world, no country is isolated from global events.

The turmoil of the past two years has been the worst the global economy has witnessed since the 1930s, and has put the international economic system to the most severe test it has faced since then.  By shifting the forum in which we addressed the crisis from a small circle of advanced nations to a broader and more representative table of the world's major economies, we strengthened the foundation for success in taking cooperative action to pull the global financial sector back from the brink.

But the job of building an effective international economic system for the 21^st century is far from finished. If the United States is to succeed in building a strong economy for future generations at home and abroad, we must continue to seek the support of our global partners in the G-20 and other forums. Just as the United States led in developing the institutions of today, so must we lead in developing the future foundation for a strong, resilient, and innovative global economy.

Thank you and I look forward to your questions.

###

President Obama establishes Interagency Financial
Fraud Enforcement Task Force

To view Secretary Geithner's remarks, as prepared for delivery, click here.

         WASHINGTON – Attorney General Eric Holder, Treasury Secretary Tim Geithner, Housing and Urban Development (HUD) Secretary Shaun Donovan, and Securities and Exchange Commission (SEC) Chairwoman Mary Schapiro today announced that President Barack Obama has established by Executive Order an interagency Financial Fraud Enforcement Task Force to strengthen efforts to combat financial crime.  The Department of Justice will lead the task force and the Department of Treasury, HUD and the SEC will serve on the steering committee.  The task force's leadership, along with representatives from a broad range of federal agencies, regulatory authorities and inspectors general, will work with state and local partners to investigate and prosecute significant financial crimes, ensure just and effective punishment for those who perpetrate financial crimes, address discrimination in the lending and financial markets and recover proceeds for victims.

The task force, which replaces the Corporate Fraud Task Force established in 2002, will build upon efforts already underway to combat mortgage, securities and corporate fraud by increasing coordination and fully utilizing the resources and expertise of the government's law enforcement and regulatory apparatus.  The attorney general will convene the first meeting of the Task Force in the next 30 days.

"This task force's mission is not just to hold accountable those who helped bring about the last financial meltdown, but to prevent another meltdown from happening," Attorney General Eric Holder said.  "We will be relentless in our investigation of corporate and financial wrongdoing, and will not hesitate to bring charges, where appropriate, for criminal misconduct on the part of businesses and business executives."

"Through the Financial Fraud Task Force, we are making clear that the Obama Administration is going to act aggressively and proactively in a coordinated effort to combat financial fraud," said Treasury Secretary Geithner.  "It's not enough to prosecute fraud only after it's become widespread.  We can't wait for problems to peak before we respond. We're seeking comprehensive financial reform to create a more stable, safer financial system and stepping up our enforcement strategy.  Doing so will help to stop emerging trends in financial fraud before they're able to cause extensive, system-wide damage to our economy."

"To give American families the protection and peace-of-mind they need, it's clear the federal response must be as interconnected and multi-dimensional as the challenges we face," said HUD Secretary Shaun Donovan.  "No one agency is going to be able to stop financial fraud. This Task force will build upon many of the inter-agency collaborations already underway to protect consumers and restore confidence."

"Many financial frauds are complicated puzzles that require painstaking efforts to piece together.  By formally coordinating our efforts, we will be better able to identify the pieces, assemble the puzzle and put an end to the fraud," said SEC Chairman Mary Schapiro.

The task force is composed of senior-level officials from the following departments, agencies and offices:

a.     the Department of Justice;
b.     the Department of the Treasury;
c.     the Department of Commerce;
d.     the Department of Labor;
e.     the Department of Housing and Urban Development;
f.      the Department of Education;
g.     the Department of Homeland Security;
h.     the Securities and Exchange Commission;
i.      the Commodity Futures Trading Commission;
j.      the Federal Trade Commission;
k.     the Federal Deposit Insurance Corporation;
l.      the Board of Governors of the Federal Reserve System;
m.    the Federal Housing Finance Agency;
n.     the Office of Thrift Supervision;
o.     the Office of the Comptroller of the Currency;
p.     the Small Business Administration;
q.     the Federal Bureau of Investigation;
r.      the Social Security Administration;
s.     the Internal Revenue Service, Criminal Investigations;
t.      the Financial Crimes Enforcement Network;
u.     the United States Postal Inspection Service;
v.     the United States Secret Service;
w.    the United States Immigration and Customs Enforcement;
x.     relevant Offices of Inspectors General and related Federal entities, including without limitation the Office of the Inspector General for the Department of Housing and Urban Development, the Recovery Accountability and Transparency Board and the Office of the Special Inspector General for the Troubled Asset Relief Program; and
y.     such other executive branch departments, agencies, or offices as the President may, from time to time, designate or that the Attorney General may invite.

In addition, the attorney general will invite representatives of the National Association of Attorneys General, the National District Attorneys Association and other state, local, tribal and territorial representatives to participate in the task force through its Enforcement Committee.

# # #

Secretary Timothy Geithner
Remarks at the Financial Fraud Enforcement Task Force Event
As Prepared for Delivery

Thank you, Rob.  And thanks to Secretary Donovan and Attorney General Holder for your excellent leadership.

Let me close by putting this new Financial Fraud Enforcement Task Force into a broader context.

We are emerging from a severe financial crisis and a deep recession caused, in part, by failures of financial regulation and consumer and investor protection.                                                   

Basic regulations in our financial system that were designed to provide those protections instead allowed many financial institutions to operate completely outside of them with little supervision and oversight.

Institutions were able to shop for the weakest regulator and the weakest form of regulation.

This helped make it possible for millions of Americans to be sold subprime mortgages they could not afford.

This helped give rise to teaser rates on credit cards that lured consumers in and then hit them with big increases.

And this helped financial criminals defraud huge numbers of investors of their savings.

To address these failures we first need to enact comprehensive financial reform that establishes stronger standards, enforces those standards evenly, and creates a more stable, safer financial system.

The bills being drafted in both chambers of Congress would do that by creating stronger system-wide protections and a much stronger regime for protecting consumers and investors. 

But for these reforms to work we need more than new rules. We need more than a new system with fewer gaps and greater oversight. We also need a much more aggressive strategy of enforcement.

It's not enough to prosecute fraud only after it's become widespread. We can't wait for problems to peak before we respond.

Too often in the past, even with dedicated people at the federal and state level trying to provide strong protections, resources around enforcement were not mobilized until extensive damage had already been done.

Remember, it took federal banking agencies until June 2007 to reach a consensus on supervisory guidance that imposed even general standards on subprime mortgages. By then it was too late.

President Obama is committed to changing that and bringing a more aggressive, preemptive and proactive approach, across federal agencies and alongside state governments, to stop trends in financial fraud as early as possible.

This task force is designed to help do that.

Now, we've already taken some important steps in this direction.

In April we announced an inter-agency approach to combat loan modification fraud by moving early and preemptively in a coordinated manner.

Since then, Treasury's Financial Crimes Enforcement Network has pursued more than 100 cases, partnering with 31 state attorneys general who are aggressively cracking down on mortgage fraud and are shutting down suspect companies.

State Attorney Generals are shutting down the operations, in part because of our efforts to increase coordination among federal and state agencies.

Treasury will play a key role on this new task force.

As part of this, we will work to increase transparency in our financial system, making it more difficult for criminals to access, manipulate or hide illegal assets.

And we will enhance coordination to better analyze and investigate the intelligence we get from financial institutions regarding suspicious activity.

Two years ago, the conventional wisdom was that our financial system was burdened by too many rules and too much enforcement.

Clearly that consensus was wrong.

We need to do everything we can to restore trust and confidence in our financial system and central to that effort is enacting stronger and smarter rules with stronger, more proactive enforcement.

Thank you.

###

November 17, 2009
tg407

Treasury International Capital Data For September

WASHINGTON – The U.S. Department of the Treasury today released Treasury International Capital (TIC) data for September 2009. The next release, which will report on data for October 2009, is scheduled for December 15, 2009.

Net foreign purchases of long-term securities were $40.7 billion.

• Net foreign purchases of long-term U.S. securities were $55.7 billion. Of this, net purchases by private foreign investors were $44.8 billion, and net purchases by foreign official institutions were $10.9 billion.
• U.S. residents purchased a net $15.0 billion of long-term foreign securities.

Net foreign acquisition of long-term securities, taking into account adjustments, is estimated to have been $31.7 billion.

Foreign holdings of dollar-denominated short-term U.S. securities, including Treasury bills, and other custody liabilities decreased $11.8 billion. Foreign holdings of Treasury bills decreased $0.3 billion.

Banks' own net dollar-denominated liabilities to foreign residents increased $113.7 billion.

Monthly net TIC flows were $133.5 billion. Of this, net foreign private flows were $148.1 billion, and net foreign official flows were negative $14.6 billion.

Complete data are available on the Treasury website at www.treas.gov/tic.

Note: Beginning with the press release of September 16, 2009, the data for lines 22-32, and especially line 29, include data from a number of institutions previously reporting only quarterly as nonbanks, but which are now reporting monthly as banking entities. This change in reporter classification affects data going back to October 2008.

REPORTS

• Treasury International Capital Data For September

Treasury, SBA to Host Small Business Financing Forum Wednesday, November 18, 2009

WASHINGTON – On Wednesday, Treasury Secretary Tim Geithner and Small Business Administrator Karen G. Mills will convene a forum on small business financing issues for a range of key stakeholders including policymakers, lenders, and small business owners to explore new ideas and strategies for expanding access to financing for small businesses. The event, which the President called for last month, is part of a larger effort to help small businesses grow, create new jobs, and contribute to our economic recovery and to challenge the private sector to increase lending to small businesses.

WHO:            Treasury Secretary Tim Geithner 
Small Business Administrator Karen G. Mills
Obama Administration officials
Members of Congress
Representatives from small businesses across the country, Community Development Financial Institutions (CDFIs), small lenders and large financial institutions as well as industry associations
Preliminary list of participants listed below

WHAT:          Small Business Financing Forum

WHEN:          Wednesday, November 18, 2009 
9:00 a.m. – 3:00 p.m.

WHERE:       Cash Room
U.S. Treasury Department
1500 Pennsylvania Ave., NW
Washington, D.C. 20220

The event will also be streamed on www.whitehouse.gov/blog.

PRESS DETAILS:

9:00 AM

OPENING REMARKS

Secretary Geithner, Small Business Administrator Mills, FDIC Chairwoman Sheila Bair and Chair of the Senate Committee on Small Business and Entrepreneurship Senator Mary Landrieu (D-LA)

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Coverage: Open Press

Press Entrance: Moat entrance on the south side of the Treasury Department, adjacent to the Hamilton entrance. No vehicles will be permitted onto Treasury grounds; equipment must be carried in. NOTE: Press with equipment must arrive no later than 7:30 a.m.

Press Arrival: 7:30 AM (with equipment), 8:00 AM (without equipment)

Final Access to Cash Room: 8:45 AM

9:30 AM

VOICES OF SMALL BUSINESS

Obama Administration officials and small business owners from across the country

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U.S. Treasury Department

1500 Pennsylvania Avenue, NW

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Coverage: Open Press

10:30 AM

THE LENDERS' PERSPECTIVE

Obama Administration officials, Senator Mark Warner (D-VA), Kevin Watters of JP Morgan, David J. Rader of Wells Fargo and Steve Steinour of Huntington Bank

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U.S. Treasury Department

1500 Pennsylvania Avenue, NW

Washington, D.C.

Coverage: Open Press

11:45 AM

CHALLENGES FOR UNDERSERVED MARKETS AND INDUSTRIES         

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U.S. Treasury Department

1500 Pennsylvania Avenue, NW

Washington, D.C.

Coverage: Open Press

12:45 PM

BREAKOUT SESSIONS

Room locations to follow

U.S. Treasury Department

1500 Pennsylvania Avenue, NW

Washington, D.C.

Coverage: Pool reporters will be assigned to each breakout session. Pool reports will be distributed following the event.

2:00 PM

LOOKING AHEAD: IDEAS FOR THE FORUM ON JOBS AND ECONOMIC GROWTH AND BEYOND

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U.S. Treasury Department

1500 Pennsylvania Avenue, NW

Washington, D.C.

Coverage: Open Press

MEDIA NOTES:

All panel discussions are open press but space is limited and is first come, first serve. There will be an overflow media hold in Room 1464, where the event will be broadcast on closed circuit TV. The event will also be streamed on www.whitehouse.gov/blog. There will be several breakout sessions at the lunch hour, and each session will be covered by one print pool reporter.

Media without Treasury press credentials planning to attend must contact Frances Anderson in Treasury's Office of Public Affairs at (202) 622-2960 or (202) 528-9056 with the following information: name, Social Security number and date of birth.  This information may also be emailed to frances.anderson@do.treas.gov.  Congressional and White House press passes will not grant you access to Treasury. Please note if you have camera equipment. The deadline to RSVP is Tuesday at 2:00 PM ET.

Press with camera equipment should arrive at the Moat Entrance (south side of the Treasury building, adjacent to the Hamilton entrance) no later than 7:30 a.m. to allow time for equipment sweeps and escorts to the Cash Room. No vehicles will be permitted onto Treasury grounds; equipment must be carried in. All other media can enter the Treasury building through the Pennsylvania Ave. entrance and should allow 45 minutes to clear through security. Final access to the Cash Room will be 8:45 a.m.

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U.S. International Reserve Position

Deputy Secretary Neal S. Wolin Remarks to the American Bar Association’s Banking Law Committee

Thank you Laurie, for that kind introduction and thank you all for the chance to speak with you today. 

Before I start, let me just say: I think many of you know Laurie, but for those of you who don't – Laurie is an incredible asset for the Treasury Department. We are very, very lucky to have her.  She and her team are a constant source of invaluable expertise and judgment, and they've been right at the center of the reform effort that I'd like to talk about this morning.

As you know, last summer President Obama put forward a comprehensive set of proposals to modernize our approach to financial regulation and to deal with the fundamental gaps and weaknesses that became so apparent in the financial crisis. 

In designing those proposals, and in the months since, the Administration has worked very closely with the House and the Senate – in particular, with Chairman Frank, Chairman Dodd, and the members of their respective committees. 

In the House, Chairman Frank has now passed through his committee substantial portions of a comprehensive package.  The committee plans to complete its work in short order.  In the Senate, Chairman Dodd just a few days ago released draft legislation for consideration by the Senate Banking Committee in the next few weeks. 

The legislation that has passed or that is under consideration in these committees reflects the core principles of the President's proposals.  Both Committees are moving swiftly towards comprehensive reform.

There is, of course, still much work to be done.  And so I'd like to take this opportunity this morning to step back and look first at why these reforms are so essential – and then to focus, more specifically, on a question that has lately been at the center of the debate: the question of how to supervise the largest, most interconnected financial institutions – and how to limit the moral hazard associated with those institutions. 

Just over a year ago, the collapse of Washington Mutual, Wachovia, and Lehman Brothers, and the near-failure of AIG produced a financial panic of a scale not seen since the Great Depression.  After a year of reflecting on the crisis and its causes, we must not forget how close we came to a complete financial collapse.

At times last year, the fear was so intense that firms were unable to get short-term financing even by pledging US Treasury securities as collateral.  The strongest, most stable U.S. commercial companies could not borrow to meet working capital needs.  Money-market funds, among the safest of investment vehicles, saw massive investor flight. 

It did not take long for the financial contagion to infect the real economy.  When President Obama took office, America's growth rate had hit negative 6.3 percent, and monthly job losses had reached 741,000 - the worst in decades.

Measured in jobs lost, measured in retirement savings lost, measured in homes foreclosed upon, measured in shuttered plants and struggling small businesses, the cost of the financial crisis for everyday Americans has been enormous. 

Unprecedented actions by Congress, the Fed, the FDIC and Treasury helped to prevent a truly catastrophic collapse.  There are signs that we are now headed toward economic recovery.  As the President has said, our work won't be done until every American who wants work can find work.  But we have reported solid growth of 3.5 percent on an annual basis in the third quarter – with more growth projected for the fourth quarter and for 2010.

The progress of recovery must not distract us, however, from the need for reform.  Because while responsibility lies in many places, it is clear that the financial crisis and the economic destruction that followed were due, in large measure, to the failure of financial regulation. 

Our approach to regulation was – and is – outdated and ineffective.  Protections for consumers were woefully inadequate.  Key parts of the system went entirely or almost entirely un-regulated.  Supervision of financial institutions was lax and inconsistent and capital requirements were too low.  We did not have the tools to deal with the failure of large, interconnected firms that threatened the stability of the system as a whole.

These weaknesses cannot be fixed piecemeal.  As the crisis demonstrated all too clearly, what happens in one market – indeed, in one institution – can affect the stability of the system as a whole.  That's why we have pushed for comprehensive reform. 

Take, for example, the weakness in our approach to consumer protection.

In the years leading up to the crisis, millions of Americans were sold products they didn't understand and couldn't afford.  No doubt, many households made irresponsible choices.  But there's also no doubt that millions of people were misled by unclear disclosures, overly complicated contracts, or loan originators incented to close the deal without regard to the borrower's ultimate ability to pay. 

The result was tragic for the families who have lost their homes or who still struggle to carry crushing debts.  And the result was also devastating for the economy as a whole.  Through the market for asset backed securities, irresponsible mortgage lending destabilized the entire system – shaking the foundations of some of our nation's largest, oldest, most sophisticated financial institutions.  

To deal with the inadequacy of consumer protection, we've proposed the creation of a single agency – the Consumer Financial Protection Agency – that will write and enforce clear, straightforward, responsible rules of the road. 

The CFPA will help ensure that consumers have the information they need to make the responsible choices that are right for them.  And it will help make the financial system as a whole more stable. 

Of course, the CFPA is just one part of the reform package.  I'd like to talk now about how we have proposed to deal with moral hazard associated with our largest, most interconnected institutions – or, put another way, how we have proposed to end what some have called the problem of "Too Big to Fail."

In recent decades, we've seen the significant growth of large, highly leveraged, and substantially interconnected financial firms.  These firms benefited from the perception that the government could not afford to let them fail.  Creditors and investors believed that large firms could grow larger, take on more leverage, engage in riskier activity – and avoid paying the consequences should those risks turn bad.  It is a classic moral hazard problem. 

During the financial crisis, the federal government did stand behind almost all of these firms.  That action was necessary, but there is no question that, unless we enact meaningful reforms, the fact that the federal government intervened this past year will have made the problem much worse.  We take this moral hazard challenge very seriously.  And our proposals address this problem, head on, in a number of ways.

The biggest, most interconnected financial firms must be subject to serious, accountable, comprehensive oversight and supervision.  The idea that investment banks like Bear or Lehman or other large firms like AIG could escape meaningful consolidated federal supervision should be considered unthinkable from now on. 

For the largest, most interconnected financial firms – for any firm whose failure might threaten the stability of the financial system – there must be clear, inescapable, single-point regulatory accountability.  The scope of that accountability must include both the parent company and all subsidiaries.

No regulator had a perfect record leading up to the crisis.  But in our view, the Federal Reserve is the agency best equipped for the task of supervising the largest, most complex firms.  The Fed already supervises all major U.S. commercial banking organizations on a firm-wide basis.  After the changes in corporate structure over the past year, the Fed now supervises all major investment banks as well.  It is the only agency with broad and deep knowledge of financial institutions and the capital markets necessary to do the job effectively.

In addition, the Fed's role as lender of last resort depends importantly on its supervision of the largest, most interconnected firms.  Supervision gives it deep understanding and timely access to information about the banking sector, payments systems, and capital markets.  Stripped of its supervisory role, the Fed would not have timely and complete information in a crisis. 

In addition to being subject to strong, consolidated supervision, the largest, most interconnected firms must be subject to tougher standards.  Prudential requirements should be set with a view to offsetting any perception that size alone carries implicit benefits or subsidies.  Capital and liquidity requirements must be higher for major firms, and they should be set at levels that compel firms to internalize the cost of the risks they impose on the financial system.  

Regulators should have the authority to break up or constrain the growth and activity of these firms, when their size or activities would pose a risk to the financial system.  Firewalls between insured depository institutions and their affiliates should be strengthened.  Risky activities – including in particular proprietary trading and sponsorship of off-balance sheet vehicles – should be subject to higher capital requirements.

Through tougher prudential regulation, we aim to give these firms a positive incentive to shrink, to reduce their leverage, their complexity, and their interconnectedness.  And we aim to ensure that they have a far greater capacity to absorb losses when they make mistakes.   

Beyond the heightened prudential requirements and enhanced regulatory authorities we've proposed, it is critical to emphasize that being among the largest, most interconnected firms does not come with any guarantee of support in times of stress.  Indeed, the presumption must be the opposite: shareholders and creditors should expect to bear the costs of failure. 

And that presumption needs to have real weight.  That means the financial system must be able to handle the failure of any firm. 

Leading up to the recent crisis, the shock absorbers that are critical to preserving the stability of the financial system – capital, margin, and liquidity cushions in particular – were inadequate to withstand the force of the global recession. 

While the largest firms should face higher prudential requirements than other firms, standards need to be increased system-wide.  We've proposed to raise capital and liquidity requirements for all banking firms and to raise capital charges on exposures between financial firms. 

We've also laid out principles that we believe should guide regulators in setting capital requirements in the future.   The core principle is that capital and other regulatory requirements must be designed to ensure the stability of the financial system as a whole, not just the solvency of individual institutions. 

Beyond that, we've called for a greater focus on the quality of capital.  We've called for capital requirements that are more forward-looking and reduce pro-cyclicality.  We've called for explicit liquidity requirements.  And we've called for better rules to measure risk in banks' portfolios.  

We've also called for measures to strengthen financial markets and the financial market infrastructure.  For example, we've proposed to strengthen supervision and regulation of critical payment, clearing, and settlement systems and to regulate comprehensively the derivatives markets. 

Our plan would require standardized derivatives to be centrally cleared and traded on an exchange or trade execution facility – substantially reducing the build-up of bilateral counterparty credit risk between our major financial firms. 

We would require all customized OTC derivatives to be reported to a trade repository, making the market far more transparent.   We would provide for strong and consistent prudential regulation of all OTC dealers and all other major players in the OTC markets, including robust capital and initial margin requirements for derivative transactions that are not centrally cleared. 

We should never again face a situation – so devastating in the case of AIG – where the potential failure of a virtually unregulated major player in the derivatives market can impose risks on the entire system. 

Taken together, the significance of these reforms should be clear: by building up capital and liquidity buffers throughout the system, and by increasing transparency in key markets, our plan will make it easier for the system to absorb the failure of any given financial institution.  The stronger the system, therefore, the clearer it will be that there is no such thing as an implicit government guarantee.

In most circumstances, these precautions will be enough. More comprehensive oversight, combined with stronger capital and liquidity standards and the other measures we've proposed, will minimize the risk that the largest financial institutions will face failure.  Moreover, in the event that they do fail, we believe that these actions will minimize the risk that any individual firm's failure will pose a danger to broad financial stability, which is why bankruptcy proceedings will remain the dominant option for handling the failure of non-bank financial institutions. 

The last two years, however, have shown that the U.S. government simply does not have the tools to respond effectively when failure could threaten financial stability.  That is why our plan permits the government, in very limited circumstances, to resolve the largest and most interconnected financial companies outside of the traditional bankruptcy regime and consistent with the approach long taken for bank failures. 

This is the final step in addressing the problem of moral hazard.  To make sure that we have the capacity – as we do now for banks and thrifts – to break apart or unwind major non-bank financial firms in an orderly fashion that limits collateral damage to the system. 

The purpose of the special resolution regime would be to unwind, dismantle, restructure, or liquidate the firm in an orderly way to minimize costs to taxpayers and the financial system. All holders of tier 1 and tier 2 regulatory capital would be forced to absorb losses, and management responsible for the failure would be fired.  If there are any losses to the government in connection with the resolution regime, these will be recouped from large financial institutions in proportion to their size.

Our proposals represent a comprehensive, coordinated answer to the moral hazard challenge posed by our largest, most interconnected financial institutions:  strong, accountable supervision; the imposition of costs, both to deter excessive risk and to force firms to better protect themselves against failure; a strong, resilient, well-regulated financial system that can better absorb failure, and a flexible resolution regime to enable the government to unwind major financial firms in a financial crisis in an orderly manner that protects financial stability, protects taxpayers – and makes shareholders and creditors shoulder the losses.

Together, these proposals give us a clear and credible argument that, as the President said two months ago in New York, "Those on Wall Street cannot resume taking risks without regard for consequences, and expect that next time, American taxpayers will be there to break their fall." 

Let me close by saying this: This is one of those rare moments when we have the chance to define the rules of the road for the next generation.  The stakes are high.  There is, of course, plenty of room for honest differences on the details of various plans.  But there should be no disagreement about the urgency of reform.

November 10, 2009
TG-401

Treasury Designates Financial Network
Tied to the Rodriguez Orejuela Family as
Specially Designated Narcotics Traffickers

WASHINGTON – The U.S. Department of the Treasury's Office of Foreign Assets Control (OFAC) today designated a network of 14 individuals and 25 companies in Colombia, Spain and the Netherlands as Specially Designated Narcotics Traffickers (SDNTs) for supporting the network of Gilberto Rodriguez Orejuela, leader of the Cali Cartel.  Hernando Mejia Uribe, a Colombian national, is the lynchpin of this network of Colombians and Spaniards who collaborated to hide assets belonging to the previously designated family members of Cali Cartel leaders Miguel and Gilberto Rodriguez Orejuela. Today's action is being taken pursuant to Executive Order 12978, which freezes any assets the designated entities may have that are subject to U.S. jurisdiction and prohibits all financial and commercial transactions by any U.S. person with those entities.

Hernando Mejia Uribe is a long-time associate of Miguel and Gilberto Rodriguez Orejuela and controlled a number of Colombian properties belonging to previously designated Rodriguez Orejuela family members.  In February 2009, Mejia Uribe was arrested by Colombian authorities, along with Gilberto Rodriguez Orejuela's children, Humberto, Jaime, and Maria Alexandra Rodriguez Mondragon, on charges of money laundering and acting as a front person for the Rodriguez Orejuela family.

"Today's designation of a previously hidden, multi-national network demonstrates the great lengths that the Rodriquez Orejuela family has gone to hide their assets from authorities – and OFAC's commitment for almost fifteen years to expose and block assets from their drug trafficking and money laundering activities in support the Government of Columbia's counter-narcotics efforts," said OFAC Director Adam J. Szubin.

Hernando Mejia Uribe owns or controls a number of Colombian companies, principally located in Cartagena, Colombia, including:  Inversiones El Progreso S.A., Euromar Caribe S.A., and Inversiones Lamarc S.A.  Mejia Uribe's network also includes his wife, Maria Emma Botero Aristizabal; lawyers Luis Carlos Gamboa Morales and Luis Gonzalo Baena Cardenas; and accountants Inmaculada Diaz Chacon and Sixto Parra Millares.  Through the companies Inversiones El Progreso S.A. and Under Par Real Estate S.L., the Mejia Uribe network is involved in real estate projects in Cartagena, Colombia with the two Spanish developers Laureano Ramos Rodriguez and Marco Jose Fernandez Montero   Additionally, the Spanish developers control a number of companies including: Under Par Real Estate S.L., Auriga Interlexus S.L., and Servicios De Control Integral De Obras S.L. in Spain and Colombia Real Estate Development B.V. and Arawak Holding B.V. in the Netherlands.  The individuals and entities are all targeted in today's action.

In 2006, Miguel and Gilberto Rodriguez Orejuela pleaded guilty to drug trafficking charges in the U.S. District Court for the Southern District of Florida and money laundering charges in the U.S. District Court for the Southern District of New York.  In connection with Miguel and Gilberto Rodriguez Orejuelas' guilty pleas, 28 of their family members who were previously designated as SDNTs entered into an agreement with the U.S. Department of Justice and the U.S. Department of the Treasury in September 2006. 

As part of this agreement, the 28 family members were obligated to identify all "forfeitable property" financed in whole or in part with narcotics proceeds and to identify all other assets of any nature whatsoever that are owned or controlled by any family member who is a party to the agreement.  The Hernando Mejia Uribe financial network identified today worked to conceal assets that were not previously identified by several Rodriguez Orejuela family members who are designated as SDNTs by OFAC.

Today's designation is part of the ongoing interagency effort by the Departments of the Treasury, Justice, State and Homeland Security to implement Executive Order 12978 which applies financial sanctions to Colombia's drug cartels.

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REPORTS

• Rodriguez Orejuela Financial Network

November 10, 2009
TG-400

Obama Administration Releases New Date
On Making Home Affordable Program,
Includes State-Specific Modifications to Date

WASHINGTON – Today, the Obama Administration released the next monthly report for the Making Home Affordable (MHA) loan modification program. As part of an ongoing commitment to transparency, the report includes for the first time state-specific trial modification numbers. With more than 650,000 modifications under way across the country, the program is on track to meet its goals over the next several years.

"As this report demonstrates, struggling homeowners in every state now benefit from reduced monthly mortgage payments and have an opportunity to stay in their homes," said Treasury Assistant Secretary Michael S. Barr.  "The program is having a pronounced impact in areas particularly hard hit by the housing crisis. We're reaching borrowers at a larger scale than any other modification program to date, but there is still much more work to be done."

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REPORTS

• Monthly MHA Report

Treasury Announcement Regarding the Capital Assistance Program

Only one institution, GMAC, has indicated a need for capital from Treasury and their capital need is expected to be lower than anticipated at the time the SCAP results were announced.  This institution is expected to access the Troubled Asset Relief Program (TARP) Automotive Industry Financing Program to meet its capital need, and is in discussions with the Treasury on the structure of its investment.

"In January of this year, there was very little confidence in the financial system. Financial institutions could not borrow without guarantees provided by the government, and we faced the real prospect of having to use taxpayer resources to recapitalize the banks," said Treasury Secretary Tim Geithner.  "Today, banks are repaying the taxpayers with interest and credit is coming back, but we need to reinforce that improvement and ensure that small and medium sized businesses can borrow to create jobs on Main Street."

The results of the stress tests -- the most comprehensive, forward looking review of our nation's largest banks ever undertaken -- were released publicly by the Federal banking supervisors on May 7, 2009. These tests were intended to ensure that banks maintained a sufficient capital cushion to continue lending even in a more adverse economic scenario than was expected at the time. 

In January, there was risk that the taxpayer would be called upon to provide up to the $75 billion of capital augmentation required by the SCAP. The President's Budget for 2010 included a placeholder for an additional $750 billion of funding to supplement the existing authority under the TARP. In the subsequent six months, banks successfully raised $80 billion in common equity, the highest quality capital, from private sources and $73 billion of TARP investments have been repaid. The President has also subsequently removed the placeholder for additional support for the financial system from the budget for 2010. On top of the repayments, Treasury has received $6.8 billion in dividend income and $2.9 billion in warrant related income. It anticipates another $50 billion in repayments over the next 12-18 months.  On the whole, Treasury is borrowing less and taxpayer support for the financial sector has declined materially, because banks are meeting their needs in the private markets and repaying the government.

Despite this important progress, Treasury remains focused on fostering a sustainable recovery and ensuring that remaining resources in the TARP program are devoted making credit available to businesses and households. Progress in these areas has been slower than the in the financial markets more broadly, and there is more work to be done.

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U.S. International Reserve Position

November 7, 2009
tg-358

Statement by Secretary Geithner at the G-20 Meeting of Finance Ministers and Central Bank Governors

I want to start with the state of the global economic recovery.

Yesterday's jobs numbers in the United States reinforced that this is still a very tough economic environment. The pace of job losses has slowed sharply, but unemployment is very high and still rising.  Millions of Americans are out of work, or working less than they would like.  The crisis caused enormous damage, and that damage has left consumers and businesses still cautious and tentative about the future.

We need a period of sustained economic growth to bring the unemployment rate down.

And that process of growth is now beginning.  The U.S. economy and the global economy are growing again.  Businesses are starting to invest.  And consumers are spending.  Business and consumer confidence has improved.  Global trade is expanding at an encouraging pace.

As the crisis has receded, the value of savings around the world has risen. The cost of credit has fallen. Confidence in the stability of the financial system has been reestablished. These improvements have been more rapid and more broad-based than many anticipated.

At the start of this year, the world was confronting the very real risk of a great depression, global deflation, and financial collapse.  Now, the forceful policy response of governments and central banks around the world has put out most of the financial fire and restarted growth in private activity.

Banks in the United States are repaying the government's investments with interest.  We have wound down the broad-based guarantees and large scale capital programs for banks that were essential to break the financial panic of last fall.

The consensus of private forecasts now anticipates global growth in the range of three percent next year.

With growth now underway and the financial fires winding down, the policy challenge is changing.
The first stage was the emergency rescue, providing tax cuts to boost personal and business income and public investments to help offset the fall in private demand.

The next stage is about catalyzing private demand and business investment.  This will require continued policy support.

This is why the recovery programs put in place in the United States and around the world were designed to provide support for growth over a two year period, and this is why governments around the world are committed to continue to reinforce the recovery now underway, before we shift to restraint.

That is why President Obama signed legislation on Friday expanding and extending tax cuts for businesses and supporting workers who are struggling to find jobs.

That is why we are continuing to provide targeted support for small businesses and small banks to make sure we repair and open up the financial pipes that provide credit.

That is why we will continue to support the stabilization of the housing market.

That is why we are working to build consensus with our major trading partners on ways to open global markets.

That is why we are providing very substantial incentives for basic science, research and development, for job training and education, for new energy technologies.

And that is why we are trying to reduce the costs and burdens our existing health care system imposes on American families and businesses.

Government policy has to provide a bridge to growth led by the private sector.  We're now in the middle span of that bridge.

As growth strengthens and financial headwinds diminish, we will be able to begin the essential process of restoring balance to public finances and fully removing the broad backstop still in place for credit markets.

This will require a delicate balance.

If we put the brakes on too quickly, we will weaken the economy and the financial system, unemployment will rise, more businesses will fail, budget deficits will rise, and the ultimate cost of the crisis will be greater.

Our citizens and businesses and investors around the world must be confident that we will find the political will to restore fiscal responsibility and balance when recovery is in place.  If that confidence ebbs,  the recovery will be weaker, and we will have less flexibility to provide the reinforcement that the economy and the financial system may still require in the near term.

We need to reinforce growth to create jobs and get businesses investing again to underpin the recovery in the housing market and to repair the credit markets.  It is too early to start to lean against recovery.  The classic mistake in past crises was to put on the brakes too quickly.  But we all recognize that confidence in our ability to reduce future deficits and to exit from the extraordinary monetary policy and financial emergency measures is very important to confidence in the sustainability of recovery.

Today's G-20 statement reflects a very broad consensus that growth remains the dominant policy imperative across our economies.  And we are bringing the same commitment to cooperation and coordination we demonstrated in the crisis to the agenda of reforms we outlined in London and Pittsburgh.

These reforms are directed at the critical priorities of laying the foundation for stronger, more balanced and more sustainable growth, at financial reforms that will create a more stable system with stronger rules to constrain risk-taking and at building stronger international financial institutions.

These are all global challenges.  They are important to our national economic interest, but they cannot be addressed by the United States alone.

We made important progress on all these fronts today and look forward to advancing these reforms in the months ahead.

Let me conclude by thanking Prime Minister Brown, Chancellor Darling and his colleagues for bringing us to this beautiful country and for their leadership of the G-20 this year.  That role now moves to Canada and Korea.

Thank you.

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REPORTS

• Communiquι

Treasury Department Announces Additional initial closing of
Legacy Securities Public Private Investment Fund

WASHINGTON -- The U.S. Department of the Treasury today announced that RLJ Western Asset Management, LP, has completed an initial closing of a Public-Private Investment Fund (PPIF) established under the Legacy Securities Public-Private Investment Program (PPIP).  RLJ Western Asset Management, LP, is a minority-owned partnership between The RLJ Companies, LLC and Western Asset Management.

To date, seven PPIFs have completed initial closings on approximately $4.09 billion of private sector equity capital which has been matched 100 percent by Treasury, representing $8.18 billion of total equity capital.  Treasury has also provided $8.18 billion of debt capital, representing $16.36 billion of total purchasing power for all PPIFs.

Treasury expects initial closings for the remaining two PPIFs to be announced soon.  Following an initial closing, each PPIF has the opportunity to conduct additional closings over the following six months to receive matching Treasury equity and debt financing, with a total Treasury equity and debt investment in all PPIFs equal to $30 billion ($40 billion including private investor capital).  Treasury will continue to provide updates as subsequent PPIF closings occur.

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Assistant Secretary Michael S. Barr
Remarks to ALI-ABA Conference on Life Insurance
November 5, 2009

Thank you Steve, for that kind introduction. I appreciate the opportunity to talk to you today.

I want to start by giving you an overview of the President's comprehensive plan for regulatory reform and focus in particular on the problem that has come to be known as "too big to fail."  

Just over a year ago, the collapses of Washington Mutual, Wachovia, and Lehman Brothers, and the extraordinary interventions in AIG, severely tested our collective ability to respond to a financial crisis.  In the panic that followed, our financial system nearly ground to a halt.

A swift response prevented a truly catastrophic collapse.  But last September's events revealed deep weaknesses in our financial system. 

It did not take long for the financial contagion to infect the real economy.  When President Obama took office, America's growth rate had hit negative 6.3 percent, and monthly job losses had reached 741,000 - the worst in decades.

There are indications that we have moved back from the financial brink and are headed toward economic recovery.  Important parts of the financial system are back to functioning on their own.  Some of the damage to people's savings has been repaired.  We have taken the first steps towards both reducing the government's direct involvement in the financial system and reducing the risks that taxpayers are bearing.

But we cannot ignore the urgent need for action: our regulatory system is outdated and ineffective, and the weaknesses that contributed to the financial crisis persist.  Our citizens are paying the price everyday for the failures in our financial system.  The progress of recovery must not distract us from the project of reform.

The Administration has put forward comprehensive reforms and we are working closely with Congress to enact legislation by the end of this year.  I'll spend most of our time today taking questions from you, but first let me briefly outline the Obama Administration's approach to financial regulatory reform, and in particular to explain the way that our plan addresses the challenge of those firms whose failure could threaten the stability of the financial system

Our goals are simple: to give responsible consumers and investors the basic protections they deserve; to lay the foundation for a safer, more stable financial system, less prone to panic and crisis; and to safeguard American taxpayers from bearing risks that ought to be borne by shareholders and creditors.

Right now we are working closely with the House and Senate to establish a federal insurance office within Treasury to gather information, develop expertise, monitor for systemic risks to and from the sector, negotiate international prudential agreements, and coordinate federal policy in the insurance sector.  Insurance is a major component of the financial system.  In 2008, the insurance industry had $5.7 trillion in assets, compared with $15.8 trillion in the banking sector.  This office will be a significant step forward for the development of expertise at the Federal level and to give insurance appropriate focus within the development of federal policy for financial institutions and financial markets. [Such an office would have played a critical role in the events of last year, and not just with AIG but also with the issues the crises brought to bear on some life insurers].

For the immediate term, and critically in the international arena, creating a federal office within Treasury will enable the U.S. to speak with one voice in the International Association of Insurance Supervisors (IAIS) and to better represent American interests in negotiations with other countries, and enter into prudential agreements that will promote the ability of American insurers to operate effectively abroad.  

Although many of the problems at AIG were created outside of its traditional insurance businesses, the example illustrates how large, leveraged and interconnected firms can develop in any business model – and that our regulatory approach must be flexible enough and tough enough to address risks wherever they may arise. 

In recent decades, we've seen the significant growth of large, highly leveraged, and substantially interconnected financial firms.  These firms benefited from the perception that the government could not afford to let them fail.  This perception was an advantage in the market place.  Creditors and investors believed that large firms could grow larger, take on more leverage, engage in riskier activity – and avoid paying the consequences should those risks turn bad.  It is a classic moral hazard problem. 

Of course, during the financial crisis, the federal government did stand behind almost all of these firms.  That action was necessary, but there is no question that, unless we enact meaningful reforms, the fact that the federal government intervened this past year will have made the problem worse.  We take this moral hazard challenge very seriously.  Our proposals for reform address it head on.   We must end the perception that any firm is too big to fail.

First, the biggest, most interconnected financial firms must be subject to serious, accountable, comprehensive oversight and supervision.  The idea that investment banks like Bear or Lehman or other large firms like AIG could escape meaningful consolidated federal supervision should be considered unthinkable from now on. 

For the largest, most interconnected financial firms – for any firm whose failure might threaten the stability of the financial system – there must be clear, inescapable, single-point regulatory accountability.  The scope of that accountability must include both the parent company and all subsidiaries.

In our view, the Federal Reserve is the agency best equipped for the task of supervising the largest, most complex firms.  The Fed already supervises all major U.S. commercial banking organizations on a firm-wide basis.  After the changes in corporate structure over the past year, the Fed now supervises all major investment banks as well.  It is the only agency with broad and deep knowledge of financial institutions and the capital markets necessary to do the job effectively.

So the first part of our approach to the moral hazard problem is clear, accountable, comprehensive oversight and supervision. 

The second part is tougher standards. The regulatory and supervisory costs for firms that could pose a risk to the financial system must be increased.  The firms must not feel like there is a benefit to being so large and interconnected that their failure could pose a risk to the system. 

Those prudential requirements should be set with a view to offsetting any perception that size alone carries implicit benefits or subsidies.  Capital and liquidity requirements must be higher for major firms, and they should be set at levels that compel firms to internalize the cost of the risks they impose on the financial system.   

We will explicitly empower the Federal Reserve to require systemic firms to sell assets or terminate activities if necessary to ensure the safety and soundness of the firm or to protect financial stability.

We will impose higher capital requirements on riskier activities, including in particular proprietary trading and sponsorship of off-balance sheet vehicles.

Our proposal requires the Federal Reserve to review large acquisitions by systemic firms to ensure that the acquisition does not impair financial stability.

We will strengthen the firewalls between insured depository institutions and their affiliates (including affiliated investment funds and trading firms).

We have required bank holding companies that have elected to be financial holding companies and engage in a broad range of financial activities (such as merchant banking or underwriting and dealing in securities) to meet substantially higher capital requirements.

Through tougher prudential regulation, we aim to give these firms a positive incentive to shrink, to reduce their leverage, their complexity, and their interconnectedness.  And we aim to ensure that they have a far greater capacity to absorb losses when they make mistakes.    

As part of our proposal, we've called for the major financial firms to prepare what some have called "living wills."  We would require these firms to prepare and regularly update a credible plan for their rapid resolution in the event of distress.  Supervisors will make this a key component of regulatory oversight, both domestically and internationally as has been agreed in the G20.  This requirement will leave us better prepared to deal with a firm's failure – and will provide another incentive for firms to simplify their organizational structures and improve risk management.

The third key element of our response to the moral hazard problem is to emphasize that being among the largest, most interconnected firms does not come with any guarantee of support in times of stress.  Indeed, the presumption should be the opposite: shareholders and creditors should expect to bear the costs of failure. 

That presumption needs to have real weight.  That means the financial system must be able to handle the failure of any firm.  In this last crisis, it clearly was not. 

Leading up to the recent crisis, the shock absorbers that are critical to preserving the stability of the financial system – capital, margin, and liquidity cushions in particular – were inadequate to withstand the force of the global recession. 

While the largest firms should face higher prudential requirements than other firms, standards need to be increased system-wide.  We've proposed to raise capital and liquidity requirements for all banking firms and to raise capital charges on exposures between financial firms. 

We've also laid out principles that we believe should guide regulators in setting capital requirements in the future.   The core principle is that capital and other regulatory requirements must be designed to ensure the stability of the financial system as a whole, not just the solvency of individual institutions. 

Beyond that, we've called for a greater focus on the quality of capital.  We've called for capital requirements that are more forward-looking and reduce pro-cyclicality.  We've called for explicit liquidity requirements.  And we've called for better rules to measure risk in banks' portfolios.  

We've also called for measures to strengthen financial markets and the financial market infrastructure.  For example, we've proposed to strengthen supervision and regulation of critical payment, clearing, and settlement systems and to regulate comprehensively the derivatives markets. 

Our plan would require standardized derivatives to be centrally cleared and traded on an exchange or trade execution facility – substantially reducing the build-up of bilateral counterparty credit risk between our major financial firms.  We would require all customized OTC derivatives to be reported to a trade repository, making the market far more transparent.   We would provide for strong and consistent prudential regulation of all OTC dealers and all other major players in the OTC markets, including robust capital and initial margin requirements for derivative transactions that are not centrally cleared. 

We should never again face a situation – so devastating in the case of AIG – where the potential failure of a virtually unregulated major player in the derivatives market can impose risks on the entire system. 

Taken together, the significance of these reforms should be clear: by building up capital and liquidity buffers throughout the system, and by increasing transparency in key markets, our plan will make it easier for the system to absorb the failure of any given financial institution.  The stronger the system, therefore, the clearer it will be that there is no such thing as an implicit government guarantee.

In most circumstances, these precautions will be enough. More comprehensive oversight, combined with stronger capital and liquidity standards and the other measures we've proposed, will minimize the risk that the largest financial institutions will face failure.  Moreover, in the event that they do fail, we believe that these actions will minimize the risk that any individual firm's failure will pose a danger to broad financial stability, which is why bankruptcy proceedings will remain the dominant option for handling the failure of non-bank financial institutions. 

The last two years, however, have shown that the U.S. government simply does not have the tools to respond effectively when failure could threaten financial stability.  That is why our plan permits the government, in very limited circumstances, to resolve the largest and most interconnected financial companies outside of the traditional bankruptcy regime and consistent with the approach long taken for bank failures. 

This is the final step in addressing the problem of moral hazard.  To make sure that we have the capacity – as we do now for banks and thrifts – to break apart or unwind major non-bank financial firms in an orderly fashion that limits collateral damage to the system. 

The purpose of the special resolution regime would be to unwind, dismantle, restructure, or liquidate the firm in an orderly way at the least cost to taxpayers and the financial system. All holders of tier 1 and tier 2 regulatory capital would be forced to absorb losses, and management responsible for the failure would be fired.  If there are any losses to the government in connection with the resolution regime, these will be recouped by the financial industry in proportion to firms size.

Our proposals represent a comprehensive, coordinated answer to the moral hazard challenge posed by our largest, most interconnected financial institutions:  strong, accountable supervision; the imposition of costs, both to deter excessive risk and to force firms to better protect themselves against failure; a strong, resilient, well-regulated financial system that can better absorb failure, and a flexible resolution regime to enable the government to unwind major financial firms in a financial crisis in an orderly manner that protects financial stability.  The plan protects taxpayers and enables shareholders and creditors to take losses. 

Together, these proposals give us a clear and credible argument that, as the President said two weeks ago in New York, "Those on Wall Street cannot resume taking risks without regard for consequences, and expect that next time, American taxpayers will be there to break their fall." 

Thank you.

Treasury Designates Bank Mellat Subsidiary and
Chairman Under Proliferation Authority

WASHINGTON – The U.S. Department of the Treasury today designated First East Export Bank (FEEB), a Bank Mellat subsidiary located in Malaysia, under Executive Order (E.O.) 13382 for being owned or controlled by Bank Mellat. Treasury also designated the Chairman of Bank Mellat, Ali Divandari, for acting on behalf of Bank Mellat. E.O. 13382 freezes the assets of designated proliferators of weapons of mass destruction and their supporters and prohibits U.S. persons from engaging in any transactions with them.

Iran's state-owned Bank Mellat has facilitated the movement of millions of dollars for Iran's nuclear program and was designated under E.O. 13382 in October 2007 for its role in providing financial services to the Atomic Energy Organization of Iran (AEOI) and Novin Energy Company (Novin).  Specifically, Bank Mellat has serviced and maintained AEOI bank accounts, mainly through Novin, which acted as AEOI's financial conduit.  On October 12, 2009, the United Kingdom also took financial action against Bank Mellat for its role in Iran's nuclear program. As Chairman of Bank Mellat, Ali Divandari plays a significant role in Bank Mellat's activities and decision-making processes.

"Today's action will help to protect the integrity of the U.S. financial system and ensure that banks and regulators around the world are aware that First East Export Bank is in fact an arm of Bank Mellat, an institution that has supported Iran's nuclear program in violation of UN Security Council resolutions," said Under Secretary for Terrorism and Financial Intelligence Stuart Levey.

AEOI and Novin were previously sanctioned by the U.S. government under E.O. 13382 and by the UN Security Council under Resolutions 1737 and 1747, respectively.  AEOI, which reports directly to the Iranian president, is the main Iranian government organization for research and development activities in the field of nuclear technology. Novin, an AEOI front company, has transferred millions of dollars on behalf of AEOI to entities associated with Iran's nuclear program.

Bank Mellat received a license from Malaysian financial authorities to establish FEEB in Labuan, Malaysia in late 2008, and the Malaysian government publicly listed FEEB as an official offshore bank in April 2009.  FEEB is the first overseas subsidiary of an Iranian bank to open for business since the Financial Action Task Force (FATF), the world's premier standard-setting body for combating money laundering and terrorist financing, called in February 2009 for all jurisdictions to impose countermeasures to protect against the risks posed by Iran to the international financial system.  FATF also advised jurisdictions at that time to take these risks into account when considering requests by Iranian financial institutions to open branches and subsidiaries.

Today's actions are consistent with United Nations Security Council Resolutions on Iran, including UNSCR 1803, which calls on Member States to exercise vigilance over activities between their financial institutions and all banks domiciled in Iran, and their branches and subsidiaries abroad, in order to avoid such activities contributing to the proliferation of sensitive nuclear activities, or to the development of nuclear weapon delivery systems.

Identifying Information

Entity:             First East Export Bank, P.L.C. Unit Level 10 (B1), Main Office Tower, Financial Park Labuan, Jalan Merdeka, 87000 WP Labuan, Malaysia; Business Registration Number LL06889 [NPWMD]

Individual:      Ali Divandari, c/o Bank Mellat, Tehran, Iran; DOB: 1 July 1967; POB Ghoochan, Khorasan, Iran; Nationality: Iranian [NPWMD]

###

Written Testimony of Assistant Secretary for
Terrorist Financing David S. Cohen
Senate Committee on Homeland Security and Governmental Affairs
“Business Formation and Financial Crime:
Finding a Legislative Solution”

I.                    Introduction

Chairman Lieberman, Ranking Member Collins, distinguished members of the Committee, thank you for inviting me to testify today.   I am pleased to have the opportunity to present the Department of the Treasury's views on the global challenge of enhancing access to beneficial ownership information in order to combat the abuse of legal entities by those engaging in financial crime. 

I would like to begin by thanking Senator Levin for his leadership on this important and pressing topic, and for raising awareness in the U.S. and globally of an issue that is of paramount importance in our efforts to combat financial crime.  I would also like to extend my appreciation to colleagues across the government and private sector, here at home and internationally, who have worked with the Department of the Treasury and invested a tremendous amount of time and energy in attempting to address the challenges of making beneficial ownership information more readily available. 

My colleagues across the Department of the Treasury, including from the Office of Terrorism and Financial Intelligence, Domestic Finance, International Affairs and Tax Policy, have all contributed to Treasury's thinking on how best to require the disclosure of beneficial ownership information in a way that effectively combats the criminal misuse of legal entities while, at the same time, ensuring that we do not unduly complicate the company formation process, which plays such an important role in our nation's economic prosperity.  I look forward today to outlining Treasury's approach to this critically important and difficult challenge, explaining the basis for our current thinking, and offering the Administration's views on S. 569, the "Incorporation Transparency and Law Enforcement Assistance Act". 

At the outset, it is important to recognize a number of key considerations that have informed our thinking:

First, the ability of criminal and other illicit actors to form corporations in the United States without disclosing their true identity presents a serious vulnerability.  It creates a pathway for criminal actors to gain access to the international financial system, and creates significant obstacles in our ability to investigate financial crime.  As I will explain, there is ample evidence that criminal organizations and others who threaten our national security exploit this vulnerability. 

Second, information on the true beneficial ownership of a legal entity – at the time a business is formed, as ownership changes during its lifespan, and when it seeks to open accounts at financial institutions – is critical to stopping the exploitation of legal entities by criminal actors.

Third, the challenge of enhancing access to the beneficial ownership information of legal entities is complex and requires a global solution.  While we work within the Administration and with Congress to address this issue domestically, Treasury is also working with our foreign counterparts to improve global understanding and capability to address this challenge worldwide.

Fourth, in seeking to make beneficial ownership information available in ways that effectively address the misuse of legal entities, we are keenly aware of the need to preserve an efficient and straightforward entity formation process in the United States, and not to create unnecessary impediments to accessing the financial system for the vast majority of new and existing businesses that pose no threat whatsoever.

Finally, because we are starting from a situation in which beneficial ownership information is not required at the time of company formation, we believe that even incremental progress in this area is likely to yield substantial positive results. 

These considerations inform and shape our views on S. 569.  This bill addresses a key issue – namely, helping ensure that information on the beneficial ownership of legal entities created in the United States is readily available to law enforcement for investigative purposes.  As I will explain in detail, the Administration believes that S. 569 is an important step in the right direction on this issue, and provides a useful platform on which to construct an effective legislative solution, provided that it is amended and modified in the manner that I describe below.  We are fully committed to working with the Congress and our interagency partners to craft legislative text to amend the Bill in order to address our concerns. 

My testimony will focus on the following three areas:

(i)                  The ways in which lax company formation laws are abused by criminals to perpetrate crime while hiding behind the corporate form;

(ii)                Treasury's comprehensive approach to enhance access to information on the beneficial ownership of legal entities; and

(iii)               Our views on S. 569, in particular the amendments and modifications that we think are necessary to craft legislation that will effectively and efficiently enhance the availability of beneficial ownership information of legal entities created in the United States.

II.            Challenges Posed by the Misuse of Legal Entities

In order to develop an effective way forward in combating the criminal abuse of legal entities through enhanced access to beneficial ownership information, it is essential at the outset to recognize and balance the substantial threat presented by the abuse of legal entities to facilitate financial crime, and the countervailing importance of maintaining efficient processes in creating legal entities and in promoting access to financial services.

The substantial threat presented by abuse of legal entities to facilitate financial crime

Criminal organizations abuse legal entities to obscure the beneficial ownership and control of businesses they operate.  This allows criminal actors to gain access to the international financial system – because the true risk associated with providing accounts to these entities is masked – and thus facilitates financial crime.  Years of research and law enforcement investigations have conclusively demonstrated the link between the abuse of legal entities, on the one hand, and, on the other hand, WMD proliferation, terrorist financing, sanctions evasion, tax evasion, corruption and money laundering for virtually all forms of serious criminal activity.^[1] 

As these reports and investigations indicate, this abuse is particularly prevalent with respect to legal entities created in the United States.  We know how easy it is for illicit actors around the world to create a legal entity in the United States.  And we know that these actors then use the presumed legitimacy of a US-based entity to gain access to the international financial system and disguise the source of their funds or the purpose of their financial transactions.  We also know that some disreputable company formation agents in the United States have facilitated this activity by promoting the ease of setting up a legal entity – in some cases it can be done in a matter of minutes – together with techniques that legally enable individuals behind the legal entity to maintain anonymity even when the legal entity becomes the subject of a criminal investigation. 

These practices have been highlighted in a number of public reports, such as the 2006 GAO Report on Company Formation, the 2006 Financial Crimes Enforcement Network (FinCEN) Guidance on Potential Money Laundering Risk Related to Shell Companies, and the 2007 National Money Laundering Strategy.  The two prior hearings on beneficial ownership held by this Committee and the Permanent Subcommittee on Investigations also provided detailed testimony from the Department of the Treasury, the Department of Justice, the Department of Homeland Security, the New York District Attorney and others on the extent of this problem. 

These reports, and the testimony previously presented to this Committee and its subcommittee, are replete with examples of how criminals and other illicit actors abuse the lax company formation processes in the United States to facilitate their endeavors.  These reports and prior testimony from the Treasury Department and other agencies describe in great detail how our existing company formation laws undermine efforts to promote transparency across the international financial system and impede investigations of significant cases of money laundering, terrorist financing, and other financial crime. 

It is important to note, however, that the United States is not alone in grappling with this question.  Jurisdictions all over the world continue to struggle to find ways of making meaningful beneficial ownership information about legal entities available to relevant authorities.  The Financial Action Task Force (FATF), the international policy and standard-setting body for combating financial crime, has issued an international standard stating that "[c]ountries should ensure that there is adequate, accurate, and timely information on the beneficial ownership and control of legal persons that can be obtained or accessed in a timely fashion by competent authorities."  Out of over 125 jurisdictions assessed against this standard by the FATF, FATF-Style Regional Bodies, the International Monetary Fund or the World Bank, the overwhelming majority have failed to substantially comply.  In the case of legal entities created in the United States, the FATF has stated that "there are no measures in place to ensure that there is adequate, accurate and timely information on the beneficial ownership and control of legal persons that can be obtained or accessed in a timely fashion by competent authorities."  Bringing our company formation laws in line with FATF's standards is an important objective, especially when, as here, it reinforces a clearly articulated law enforcement priority.

The importance of maintaining efficient processes in creating legal entities and in promoting access to financial services

In working to enhance access to beneficial ownership information, Treasury is also mindful of the very significant interests in preserving efficient processes in creating legal entities and in promoting access to financial services, both of which are essential to a well-functioning economy and the efficient operation of the domestic and international financial system.  Foreign and domestic persons with legitimate economic interests rely upon the ability to create legal entities quickly and easily for a variety of entirely beneficial and lawful reasons.  In addition, ensuring the ability of legal entities to open bank accounts and otherwise access financial services facilitates entrepreneurship, economic growth and development.  In considering ways to enhance the availability of beneficial ownership information of legal entities, we must be careful not to infringe on these entirely legitimate, and fundamentally important, interests. 

III.           Treasury's Comprehensive Approach to Enhance Access to Beneficial Ownership Information of Legal Entities

The Department of the Treasury has been focused for several years on the question of how best to enhance access to beneficial ownership information to combat the abuse of legal entities, and we are currently pursuing a three-pronged approach to advance these interests.  Our approach generally balances the need to enhance access to beneficial ownership information of legal entities with the need to maintain efficient processes in creating legal entities and in promoting access to financial services.  Our comprehensive approach includes the following elements:

• Enhance the availability of beneficial ownership information of legal entities created in the United States:  Promote legislation that requires (a) the submission of beneficial ownership information at the time of company formation; (b) the obligation to keep that information updated throughout the entity's existence; and (c) the availability of that information upon proper request by law enforcement.  To ensure compliance, the legislation must impose significant penalties for failure to abide by these requirements.  We are focusing our current efforts on working with our interagency partners and the Congress to amend S. 569 so that it more effectively and efficiently accomplishes these goals.
• Clarify and strengthen customer due diligence requirements for U.S. financial institutions with respect to the beneficial ownership of legal entity accountholders:  Treasury is currently working with the federal financial regulatory agencies to consider guidance for U.S. financial institutions that will clarify when and how financial institutions should identify and verify beneficial ownership as a component of conducting customer due diligence of accountholders that are legal entities.  We are also working with the regulatory and law enforcement communities, and consulting with the private sector, to determine whether and, if so, how such due diligence requirements should be strengthened through rulemaking or otherwise.
• Clarify and facilitate global implementation of international standards regarding beneficial ownership:  In 2003 the FATF reviewed and updated its 40 Recommendations for jurisdictions to implement appropriate countermeasures against money laundering.  Three of those Recommendations – Recommendations 5, 33 and 34 – specifically address obtaining beneficial ownership information.  These Recommendations, however, have created implementation challenges for the overwhelming majority of jurisdictions around the world.  As we move forward in addressing the issue of beneficial ownership in the United States, we are also working with our counterparts in the FATF to ensure that its standards evolve in a way in which compliance is both achievable and effective.  Even if we make progress domestically, failure to achieve consistency internationally will merely shift the locus of the problem to another jurisdiction and fail to address the problems that flow from lack of beneficial ownership transparency.

IV.          Amending S. 569 to Enhance the Availability of Beneficial Ownership Information of Legal Entities Created in the United States

The Treasury Department clearly recognizes the need for federal legislation to enhance the availability of beneficial ownership information of legal entities created in the United States.  The gravity and complexity of the ongoing abuse of legal entities by a broad spectrum of criminals and others who threaten our national security demand nothing less.  And we view S. 569 as a productive step in the direction of requiring the availability of meaningful beneficial ownership information about legal entities created in the United States.  We believe that with modifications, S. 569 could serve as the appropriate legislative vehicle to address this issue.

I also want to be clear that Treasury recognizes that there is no perfect solution to this complex problem.  Whatever action we take will not prevent all criminals from misusing legal entities to perpetrate financial crime.  And whatever action we take will entail some cost and burden in the company formation process.  Our goal is meaningful progress, capitalizing on what we have learned over the past few years in studying this problem, and laying the groundwork for future action if it proves necessary.

While Treasury fully supports the objective of enhancing law enforcement access to beneficial ownership information of legal entities created in the United States, in order for us to support S. 569, we believe it must be amended to address the following key issues:

• Clarify and limit the beneficial ownership definition and corresponding information disclosure requirements:  Under S. 569 as currently drafted, the ambiguity and breadth of the definition of beneficial ownership, coupled with burdensome disclosure requirements, makes compliance uncertain, time-consuming and costly.  The definition and application of beneficial ownership information requirements should be sufficiently straightforward and simple in application to work for the full range of covered legal entities – from small, start-up businesses to large, complex legal entities – and regardless of whether the applicant is a foreign or U.S. person. 
• Eliminate expansion of anti-money laundering obligations to company formation agents in favor of broader civil and criminal federal liability for noncompliance:  As currently drafted, S. 569 would effectively require Treasury to subject attorneys who provide company formation services for their clients to anti-money laundering regulation, thereby raising substantial legal, policy and practical challenges.  Subjecting company formation agents in general to such regulation would also present tremendous administrative challenges for Treasury, largely due to the lack of an existing functional regulator for this industry.  We believe S. 569 should not attempt to regulate company formation agents under the Bank Secrecy Act, but instead should establish clear and significant federal criminal and civil liability for persons who fail to provide accurate beneficial ownership information as required by law.      
• Establish documentation requirements: As currently drafted, S. 569 does not establish any documentation requirements for beneficial owners who are U.S. persons, although it does require foreign persons to provide a copy of a passport page on which the beneficial owner's photograph appears.  In our view, S. 569 should require robust documentation for all beneficial owners, foreign and domestic, to be held within the State and made available upon proper demand by law enforcement.  Generally, that documentation would be a credible and legible copy of government-issued photographic identification, such as driver's license or a passport. 
• Require further study of illicit finance vulnerabilities associated with the transfer of legal entities and potential solutions for updating beneficial ownership information:  S. 569 allows for company formation applicants to update their beneficial ownership information in an annual filing with the State.  This time gap introduces a significant vulnerability for abuse upon the transfer of a legal entity and requires further study.
• Preserve State Homeland Security Grant funds:  As currently drafted, S. 569 authorizes States to use State Homeland Security Grant funds to carry out the obligations imposed by the Bill.  These funds, however, are already relied upon by States to finance first responders in preparing for and responding to emergency situations.  In our view, S. 569 should not authorize States to draw from the State Homeland Security Grant program to defray the costs of implementation.

Based on recent discussions with our interagency partners and the Congress, we firmly believe that S. 569 can be amended to address these key issues.  We are fully committed to working with our interagency partners and the Congress to make this happen, and we have already begun to draft proposed legislative text to address the five concerns I have described above. 

V.            Conclusion

Looking ahead, Treasury intends to make progress on each of the elements of our comprehensive beneficial ownership strategy to address the abuse of legal entities in facilitating all forms of financial crime: 

• Treasury will work in earnest with the Congress and our interagency partners to have S. 569 amended along the lines described above in order to enhance the availability of beneficial ownership information of entities created in the United States in an effective and workable manner.
• In consultation with the federal financial regulators, Treasury will be considering guidance to the financial community, and will consider engaging in rulemaking, to clarify and enhance customer due diligence obligations for financial institutions regarding the identification and verification of beneficial ownership information of legal entity accountholders under a risk-based approach.
• Treasury will continue to work with the Financial Action Task Force to clarify and facilitate implementation of international standards addressing beneficial ownership, building from our domestic experience.

Although we know that there is still much to do, we have seen tremendous progress over the last several years.  We have developed and are moving forward with a comprehensive approach to address the challenges of beneficial ownership.  With respect to the particular challenge of enhancing the availability of beneficial ownership information of legal entities created in the United States, we have moved from discussions about the problem to discussions about solutions.  This is no simple accomplishment, especially considering that the issue involves the highly sensitive issue of modifying the process by which corporate entities are created.

On behalf of the Department of the Treasury, I would like to thank the Committee for inviting me to testify today, and I look forward to answering your questions.     

Marisa Lago, Assistant Secretary-designate
for International Markets and Development
Opening Statement – As Prepared for Delivery
United States Senate Committee on
Banking, Housing and Urban Affairs

Deputy Secretary of the Treasury Neal S. Wolin
University of the Witswatersrand, Johannesburg, South Africa
Remarks as Prepared for Delivery

Good morning.  Thank you so much, Boris, for that kind introduction. 

It is a pleasure to be here.  And to those of you studying here at Wits – the future leaders of Africa – it's a particular privilege to be with you.   

When I was studying development economics as a post-graduate at Oxford in the mid-1980s, I spent a lot of time with a group of Wits graduates who had been very active in National Union of South African Students. 

We spent countless hours talking about the future of South Africa, and to be in South Africa now is to marvel at how far this nation has traveled over the past few decades.  South Africa today is taking its place as an important regional and, indeed, a global leader.

I must say that I wish this trip coincided with the World Cup.  But perhaps I'll just have to come back again next year.  I have no doubt that South Africa will host a great tournament, and I am looking forward to the U.S. side doing as well as – or perhaps better than – it did in the Confederation Cup that South Africa hosted so well earlier this year.  Let's hope for U.S. versus Bafana Bafana in the final.

Johannesburg is the final stop of a three-country visit that took me first to Rwanda and Tanzania.  In both of those countries, and here in South Africa, I've had the opportunity to talk with senior government officials and also to talk extensively both with people in the private sector and in the development community.

Taken altogether, it's been a visit that has made me hopeful for the future of Africa – and for the future of U.S.-Africa partnership. 

I will talk a bit this morning about my trip and particularly about the important development efforts with respect to agriculture, infrastructure, and financial inclusion that were a large part of my focus here in Africa.   But first, I'd like to take a step back and look more broadly at the global events of the past year.

One year ago, the world's financial system faced the most severe financial crisis in generations.  Global credit markets had frozen.  Global trade was collapsing.  We were truly standing on the edge of the abyss. 

Proving – if anyone still doubted it – that the nations of the world are inextricably intertwined, the fallout from that crisis hit Africa hard.  In South Africa, your economy slipped into a recession for the first time since 1992 as exports plummeted.  And across the continent, trade, investment and growth slowed substantially.

There were few who would have predicted with confidence that, one year later, we would begin to see signs of recovery and growth as we do today.

One of the key reasons that we have succeeded in stepping back from the brink is that together, we approached the crisis with tremendous international cooperation and coordination.  Indeed, that is one of the most significant and positive outcomes of the past year.  There is now a broad recognition of the importance – and also the power – of coordinated international action. 

When the G-20 leaders gathered in London last April, they agreed to a coordinated recovery program – to spur growth, to stabilize the financial system, to restore the flow of credit, to mobilize financial resources for emerging market economies, and to keep our markets open for trade and investment.

In the United States, the Administration and Congress had already enacted a sweeping economic recovery package.  And we established a Financial Stability Plan designed to recapitalize our financial system; to get credit flowing again to American families and businesses; and to stabilize the spiraling housing crisis.

In South Africa, the primary budget surpluses you have run in recent years allowed your government to put forward a powerful fiscal response.   

Within months of the London meeting, global economic growth turned positive; industrial production began increasing; international trade recovered by ten percent; financial markets improved as interest rate spreads narrowed. 

By the time G-20 leaders gathered in Pittsburgh two months ago, it was clear that recovery was in our sights.  This past week, the United States announced third quarter GDP growth of 3.5 percent on an annual basis.  Finance Minister Gordhan, in his medium-term budget policy statement last week, projected positive growth for the South African economy in 2010.

For sub-Saharan Africa overall, the IMF is now projecting a healthy 4.1 percent real GDP growth rate in 2010.  Private capital inflows to Africa are forecasted to expand again next year.  The value of exports from sub-Saharan Africa, which shrank by 38 percent this year after six years of double-digit growth, is expected to grow by 13 percent in 2010. 

No doubt, tremendous challenges still remain.  This crisis was years in the making, and full recovery cannot happen overnight.  But the improvements we are seeing would not have been possible without swift international action. 

From the perspective of the U.S.-South African partnership, what is just as important as the fact of the international coordination is the forum in which that coordination took place.  The primary forum for international crisis response was not the G-7 or the G-8 – but the G-20. 

The shift towards the G-20 reflects the critical importance of emerging economies like South Africa, India, Brazil and others.  To be credible – and to be effective – global economic coordination in the 21st century must take place in a broad and inclusive forum.

The growing importance of emerging economies must also be reflected in the governance of international financial institutions like the IMF and the World Bank.  In Pittsburgh, the G-20 committed to a shift in IMF quotas of at least 5 percent to dynamic emerging market and developing countries and to an increase of voting power at the World Bank of at least 3 percent for developing and transition countries, on top of earlier shifts.

We are hopeful that these reforms will be made in the near future.   

The close partnership between the leading nations of the world – developed and emerging, north and south – will not and cannot end with the passing of the financial crisis. 

While much has been done to stabilize the global economy, we now face the tougher and longer-term challenge of laying the foundation for more stable, balanced, and sustainable growth going forward.  We can only succeed if we approach this endeavor with a deep sense of common purpose.

I'd like to focus today on three areas where I think continued partnership and cooperation between the United States and South Africa is particularly important:

First, financial regulatory reform; second, the rebalancing of the global economy; and third, economic development here in Africa. 

The financial crisis of the past year had many causes.  Not least is the fact that many of the world's economies have an outdated approach to regulation, incapable of managing the risks inherent in the 21st century global financial system.  

We cannot let this moment pass to achieve comprehensive reforms on a global level.

South Africa has a significant role in this process, and much to contribute.  You come to the table with a great deal of credibility.  Your banks are solvent and have been well managed, with little exposure to toxic assets.  South Africa's financial regulation is strong. 

But make no mistake: the fact that South Africa's financial system has fared well relative to others should not diminish the vigor with which South Africa approaches the international regulatory reform effort.

You have suffered greatly from the economic fallout of the financial crisis.  And as South Africa's financial sector continues to grow and to develop and to become more globally integrated, you will have an even greater stake in ensuring financial stability.   

Recognizing the inadequacy of our own regulatory approach, the Obama Administration has proposed to Congress the most sweeping set of regulatory reforms since the 1930s.  We are working aggressively with Congress to enact those reforms. 

But even as we push for reform at home, it is critical that our efforts here are matched by corresponding efforts around the world.  If the United States acts alone – indeed, if any G-20 nation acts on its own – little will be achieved.  Financial firms and activities will simply migrate towards the places of regulatory weakness.  

That's why we must all work towards consensus on setting higher capital standards; a simple leverage ratio to constrain excess risk-taking; and appropriate standards for executive compensation.  And we must establish deadlines for implementation of these new standards. 

We look forward to working with South Africa – in the G-20, in the Basel Committee, and on the Financial Stability Board – as this process moves forward.  As the events of the past year have shown, the stability of the financial system doesn't just matter for New York, London, and Tokyo – but for Johannesburg, for Lagos, and for Nairobi, too.

Another challenge we share as members of the G-20 is the challenge of building a more sustainable and balanced model for global economic growth.  

In the lead-up to the crisis, some of the world's largest economies relied upon the American consumer as the primary engine of growth. Americans made it easy. For far too long, we bought too much and saved too little – running up large external deficits and international debt.

Meanwhile, other nations relied too heavy on exports, running large external surpluses, building up large foreign exchange reserves, and leaving themselves vulnerable to the collapse in demand that followed the financial crisis.

The imbalanced growth model of recent years is not just undesirable, it's unsustainable.

Americans today are spending less and saving more.   The U.S. deficit will decline as our stimulus spending winds down over the next year.  The combination of increased saving and a falling deficit means that the United States and U.S. consumers can no longer be the driving force of global expansion. 

There is a consensus on the need for change.  In Pittsburgh, the G-20 adopted a Framework for Strong, Sustainable, and Balanced Growth that avoids the pitfalls of the past. 

Achieving balanced growth will not be easy.  To have meaning, the words of the Framework must be matched by actions – actions at least as bold as the actions taken in response to the immediate pressures of the financial crisis.

As a key member of the G-20 and as a nation with important trade relationships with China and other large economies, South Africa has an opportunity to step up to the plate – here in South Africa, that should have been a cricket metaphor instead of a baseball metaphor! – to step up to the plate and be a leader in pushing for a more balanced, sustainable model for global economic growth.

Reforming financial regulation and restoring balance to the global economy will benefit every nation, not just the richest and not just those in the G-20.  But at the same time as we partner to meet those common aims, we cannot ignore the more direct and immediate needs of the developing world – and, in particular, the needs of sub-Saharan Africa.

As the United States approaches development assistance to Africa, we are especially focused on those areas that we believe will do the most to promote strong, country-led, sustainable and inclusive growth.  Three areas are vitally important: infrastructure, agriculture and food security, and financial access.  

Poor infrastructure, particularly in the power and transport sectors, remains a key growth constraint in most if not all sub-Saharan African countries.  It keeps farmers from getting their goods to market; limits the growth of small enterprise; and leaves millions of children without access to clean, safe drinking water. 

Agriculture, too, is an area desperately in need of smart investment.  With three quarters of sub-Saharan Africa's poor population living in rural areas, achieving higher rates of agricultural productivity is a key to economic growth and durable poverty reduction and food security.

And finally, as African nations seek to promote the growth of small businesses – including in the agriculture sector – expanding access to credit and other financial services will be essential. 

The United States is focused on these priorities – and, at least with respect to the first two, has committed substantial resources. 

At the L'Aquila Summit in July, President Obama and other leaders pledged $20 billion over three years to increase agricultural investments globally, with the United States contributing at least $3.5 billion.  We will work to support country-led agricultural development plans in countries that show a corresponding commitment.

At the G-20 meeting in Pittsburgh, G-20 leaders called on the World Bank to establish a new multi-donor trust fund to support innovative bilateral and multilateral efforts to improve global nutrition and build sustainable agricultural systems –including programs like those developed through the Comprehensive African Agriculture Development Program.

And bilaterally, through the Millennium Challenge Corporation, the Overseas Private Investment Corporation, the Export-Import Bank and the U.S. Agency for International Development, the U.S. is investing heavily in infrastructure – from Cape Verde, to Togo, to Tanzania.

So we are committed to assist African nations in their development.  But as President Obama emphasized so eloquently in Accra: where we provide assistance to African nations, we will do so not as a patron, but as a partner.    

Two countries where our partnership is strong – and where I've just spent time this week – are Rwanda and Tanzania.   

The last time I was in Rwanda was in the late summer of 1994, only months after the genocide that shocked – and stained – the conscience of the world. 

Last week, I laid a wreath at the Kigali Genocide Memorial Center. I was struck not just by the overwhelming sense of tragedy but also by a deep wonder at Rwanda's ability to rise from such darkness and build a brighter future. 

Today, Rwanda is a leader not only in reconciliation, but also in economic reform.  Indeed, those two projects go hand in hand.  Economic growth is central to President Kagame's vision for taking Rwanda forward, in unity, with a sense of common purpose.

One of the keys to that growth is the promotion of partnerships – between governments, multilateral institutions, and the private sector. 

In Gisenyi, on Lake Kivu, an American company has joined in a public-private partnership with the Rwandan government to develop a $325 million power generation facility to extract methane from the lake – scaling up a pilot project supported by the International Finance Corporation and the African Development Bank. 

The project will more than double the power generation capacity in a country where today only 6 percent of the population has access to electricity.  And it will do so with minimal impact on the environment.

The government of Rwanda is also pursuing partnerships to strengthen its agricultural sector – a key driver of the economy.  For instance, working with the U.S. Agency for International Development (USAID), American dairy processor Land O' Lakes, and the African Development Bank, the government is providing livestock, training, and technical assistance to small dairy farmers and agro-processing firms to increase dairy production, improve quality, and expand the value chain.

Innovative projects and partnerships like these represent development partnership at its best: focused not on short term aid, but on building lasting local capacity; developing infrastructure and markets; investing rather than just assisting.

But what's even more significant is that these projects don't just stand alone.  In Rwanda, development partnerships like those I visited complement a much broader strategy of liberalization, reform and openness to investment.

Tanzania, too, has recognized the need for economic reform – having largely abandoned its statist past and made great progress in transforming itself into a market-oriented economy. 

Tanzania continues to score well relative to its peers in the U.S. Millennium Challenge Corporation's (MMC) ratings.  Recognizing the progress made in Tanzania, the U.S. is supporting the country's efforts to improve its infrastructure with a $698 million MCC grant, the largest in the world.  These funds support Tanzania's investments in roads, energy, and water.  Deficiencies in those areas today present significant barriers to growth. 

Through its Kilimo Kwanza – agriculture first – program, the Government of Tanzania has committed to make significant investment in its agriculture sector.  The U.S. and international organizations are working to complement Tanzania's own investments.   

For example, in Bagamoyo, just outside Dar es Salaam, I visited a project run by the International Institute for Tropical Agriculture, with support from USAID and the World Bank.  The project focuses on the local staple crop, Cassava, and helps give farmers the tools and the knowledge they need to dramatically improve yields and move up the value chain. 

So again, where the United States sees that African nations are working to strengthen governance and accountability, making it easier for their citizens to do business, and investing their own resources in development and growth, the United States stands eager to partner.   

But we look to African nations to lead the way.

As the largest economy on the continent, the largest investor in African nations, and an example to African nations of the potential for growth and development, South Africa has a unique ability to promote the kind of reforms and commitments that are so essential.   

And with respect to financial access and inclusion, South Africa has an especially vital role to play. 

The G-20 leaders recently directed the establishment of a Financial Inclusion Experts Group to support new modes of financial service delivery capable of reaching the poor and to scale up successful models of small and medium enterprise financing. 

This group will be particularly important for Africa, where less than 20 percent of people have access to financial services.  South Africa has substantial expertise in this area, having had great success in establishing basic bank accounts for the poor, as well as promoting mobile banking – efforts which have dramatically increased financial inclusion.

We encourage South Africa to play a leading role in the Financial Inclusion Experts Group, and we look to South Africa as a global leader in the promotion of financial access and inclusion.      

The agenda before us is a daunting one: sustaining economic recovery, reforming our financial systems, achieving balanced and sustainable growth, and supporting the efforts of developing nations to overcome the many obstacles that stand in the way of their security and prosperity.  None of these efforts will be easy.  But all are essential. 

One year ago today, Barack Obama was elected the forty-fourth President of the United States. Americans of every age, race and faith stood together and declared that it was time to renew our nation's promise. A year ago, a moment of possibility echoed around the world, including, I suspect, right here to Johannesburg.

At the time, President-elect Obama said that "this victory alone is not the change we seek. It is only the chance for us to make that change."

I think that one of the changes that we've already begun to make – in the United States and in the world at large – is that we are approaching global challenges in a new spirit of partnership.  And we have a chance to do a great deal more, together – particularly here in Africa.

Thank you. 

###

Opening Statement of Michael F. Mundaca
Nominee for Assistant Secretary of the Treasury for Tax Policy
U. S. Senate Committee on Finance
As Prepared for Delivery

Thank you, Chairman Baucus, Senator Grassley, and members of the Senate Finance Committee, for the opportunity to appear before you today.  I am honored to have been nominated by President Obama to serve as Treasury Assistant Secretary for Tax Policy, and I am grateful to Secretary Geithner for recommending me to the President.  And I want to thank you and your staffs for meeting with me over the last weeks to discuss tax policy issues and my qualifications for the position to which I have been nominated.

I know the time is brief.  If you permit me, Mr. Chairman, I would like to introduce the members of my family who are here today and who have supported me through the years.  My wife, Gina, who has been with me since our time together at university, and my daughter, Ana, who is a fourth-grader at the Oyster-Adams Bilingual Public School, here in Washington, D.C.  My son, Alexander, who is 4 years old and also a student at Oyster, could not be with us here today.  All three have been a steadfast source of support and I thank them for their consent to my continuing public service.  If approved by this Committee and confirmed by the Senate, I will need their further support and guidance.

If confirmed, I would be honored to begin my third phase of federal public service.  I first worked at the Treasury Department from 1997-2002, starting as an Attorney-Advisor in the Office of the International Tax Counsel in Tax Policy and leaving after over 5 years' service as Deputy International Tax Counsel, returning to the private sector, as a partner at the accounting firm, Ernst & Young.  I was honored to be asked to the return to the Treasury Department in 2007, as Deputy Assistant Secretary for International Tax Affairs, and have served at the Treasury Department since that time.

My commitment to public service was instilled in me by my parents.  My father, Fred Mundaca, was born in Chile and came to this country as a teenager with his parents.  He met my mother, Irene, in Staten Island, NY, where his family settled and where my mother lived.  When I was born, my parents and my sister, Marie and I, lived in the West Brighton housing projects on Staten Island.  My father went to Staten Island Community College during the day and worked at night for the U.S. Postal Service.  After getting his degree, he was hired by IBM, where he worked for the next 25 years, until retiring.  Through saving and borrowing, my mother and father raised enough money to move us out of the projects and into the house my parents still live in to this day.  They also helped put my sister and me through college and graduate school, with the additional help of student loans and scholarships.  My parents' experience taught me to work hard, play by the rules, and help others whenever you can. 

I hope that my children can learn those lessons from me. 

And I also hope that my children will have all the opportunities that I have had.  I do not need to tell this Committee that both the United States and the world economy have faced unprecedented turmoil.  However, I am convinced that we can meet the serious challenges we continue to face with the right mix of economic and tax policies that address near-term conditions in a manner that promotes long-term growth.

Tax policy will play an important role as we move ahead.  We need a tax system that is simple, fair, and promotes growth, while providing necessary revenue.  Our current system falls short.

If confirmed, I look forward to working with this Committee and Congress to address the necessary changes to our tax system. 

In addition to changing our current system, however, we must also work together to improve compliance with our current rules.  Non-compliance undermines confidence in the fairness of our tax system and fosters further non-compliance.  It also results in a de facto tax increase on compliant taxpayers, who must pay more because others fail to pay what they owe.

It is incumbent upon the Treasury Department to issue guidance necessary to provide taxpayers the information they need to meet their obligations.  Taxpayer service is also an important element.

But we must do more.  The Obama Administration has also already proposed and already taken a number of additional significant steps to increase compliance.

We are currently moving to implement the recent important changes that Congress passed to increase reporting with respect to credit card and securities transactions.

In addition, the Administration's Budget includes a number of proposals to increase both domestic and cross-border compliance.  We welcome the recent introduction by the Chairman and others of a significant offshore evasion bill that incorporates the approach of the Administration's proposals, and appreciate the leadership this Committee as a whole has shown on the important issue of improving compliance.  If confirmed, I look forward to working with this Committee and Congress to enact those proposals.

Treasury has also sought to improve compliance by increasing our access to the information held by our trading partners which is necessary to enforce our laws.  We have recently entered into a number of important agreements to exchange tax information, including agreements with Switzerland, Luxembourg, Monaco, and Gibraltar.

In addition, through greater cooperation within the G-20 and the OECD, we have been able to increase the number of countries that have committed to full tax information exchange and to establish a process to assess implementation of those commitments.

In closing I would like to thank the lawyers, economists, accountants and other professional within the Office of Tax Policy.  I have never worked with such a talented group of individuals, and it has been an honor to head the office during this challenging period. 

I am humbled and honored to have the possibility of serving the nation in this new capacity during these extraordinary times.  If you and your colleagues in the Senate give me the opportunity to serve as Assistant Secretary for Tax Policy, I pledge to you diligent and dedicated service, and I promise to apply myself fully to the best of my ability to justify your trust and confidence.

Again, thank you for allowing me to appear before you today.  I would be pleased to answer any questions.

###

Report to the Secretary of the Treasury from the Treasury Borrowing Advisory Committee of the Securities Industry and Financial Markets Association

November 4, 2009

Dear Mr. Secretary:

Since the Committee met in early August, the contraction in economic activity appears to have drawn to a close and financial conditions have continued to improve. Aggressive fiscal and monetary policies have played a critical role in helping to begin the process of normalization in key financial markets and the real economy. That normalization is highlighted in part by a return to pre-crisis spread levels in money and credit markets and the recently reported 3½% annualized gain in third-quarter GDP.

Despite the increase in third-quarter economic activity and the prospect of additional modest growth ahead, it remains unclear to what extent the economy can expand without the aid of aggressive policy support. Monetary and fiscal policy remains full throttle and contributed importantly to the latest quarter's growth spurt. For instance, "cash for clunkers" lifted consumer purchases of motor vehicles, the first-time homebuyers' tax credit is boosting home sales and traditional public sector automatic stabilizers are supporting household income, while on the monetary side, near zero interest rates and asset purchase and liquidity programs are shifting investor risk preference, improving the cost of capital.

With the federal funds rate at its lower nominal bound, the Federal Reserve is continuing its asset purchase program in an effort to further improve financial conditions. The Treasury purchase program begun in March has been completed but the purchase of mortgage backed securities is ongoing and will persist into the first quarter of 2010. These purchases will be a continued source of monetary stimulus.

Against this economic backdrop, the Committee's first charge was to examine what adjustments to debt issuance, if any, should Treasury make in consideration of its financing needs.  The Committee felt that no meaningful change in the nominal coupon issuance schedule was necessary.  Members felt that there was capacity to reasonably grow auction sizes as needed. 

With regard to TIPS, the Committee recommends increasing TIPS issuance from $58 billion in 2009 to $70-$80 billion in 2010.  The auction schedules for both 5 and 10-year TIPS would be maintained, although sizes would increase.  However, 20-year TIPS issuance would be replaced with 30-year TIPS, on the same auction schedule, with larger sizes.  The Committee felt that this would both lengthen the average maturity of Treasury's debt, while attracting investors interested in longer duration inflation protection.  In the medium term, the Committee felt that the market could support increases in both auction sizes and frequency, growing gross TIPS issuance to $100-$130 billion per annum.  These actions maintain, if not increase, the proportion of TIPS to total marketable debt outstanding.

There was lively debate among the Committee members regarding the GAO Report published September 2009 entitled "Treasury Inflation Protected Securities Should Play a Heightened Role in Addressing Debt Management Challenges."  Committee members could not come to broad agreement on the findings of the report.  While Committee members acknowledged the benefits of TIPS as a debt management tool, some members reiterated their higher cost to date versus nominal Treasury securities.      

The second charge was to examine the implications of Federal Reserve exit strategies on the Treasury market.  The Committee member's presentation (see attached) attributed investor demand across a variety of asset classes including Treasuries, largely in part to the Fed's zero interest rate policy, asset purchase program, and credit easing facilities.  In particular, the member highlighted that after accounting for Fed purchases, net fixed income supply in 2009 was actually negative.  Thus, exit strategies, whether it's a wind down of asset purchases, reverse repos, or raising the Fed Funds rate, must be carried out with extreme caution.  Several members of the Committee debated the merits of the Fed engaging in reverse repos while continuing its asset purchase program. 

The third charge was to examine Treasury debt portfolio characteristics.  The Committee member (see attached presentation) was asked to contemplate the average maturity of Treasury's debt given structural financing needs coupled with the economic outlook in the medium and long term.  In addition, the member examined financing and risk management by other sovereign nations and how it might apply to US Treasury debt management.  The conclusions were that the potential for inflation, higher interest rates, and roll over risk should be of material concern.  In most economic scenarios, lengthening the average maturity of debt from 53 months to 74-90 months was recommended.  Committee members commented that while real progress has been made in terms of lengthening the average maturity of US Treasury debt to 53 months, [net issuance in coupons growing from $188.5 billion in 2008 to $1.246 trillion in 2009], more needs to be done in this regard.   

In the final charge, the Committee considered the composition of marketable financing for the upcoming two quarters.  The Committee's recommendations are attached.

Respectfully Submitted,

Matthew E. Zames, Chairman

__________________________________________________

Ashok Varadhan, Vice Chairman

___________________________________________________

November 2009 Quarterly Refunding Statement

U.S. Treasury Department
Office of Public Affairs

Embargoed Until 9:00 a.m. (EST), November 4, 2009
Contact: Office of Public Affairs, (202) 622-2960

NOVEMBER 2009 QUARTERLY REFUNDING STATEMENT

Washington, DC – Treasury is announcing the following changes to the issuance calendar:

-          Reintroduction of 30-year Treasury Inflation-Protected Securities (TIPS), with the first auction to occur in February 2010.

-          Discontinuation of 20-year TIPS auctions, effective immediately.

Details of the November Refunding

We are offering $81.0 billion of Treasury securities to refund approximately $38.5 billion of privately held securities maturing or called on November 15, 2009.  This will raise approximately $42.5 billion.  The securities are:

-          A 3-year note in the amount of $40.0 billion, maturing November 15, 2012;

-          A 10-year note in the amount of $25.0 billion, maturing November 15, 2019; and

-          A 30-year bond in the amount of $16.0 billion, maturing November 15, 2039.

The 3-year note will be auctioned on a yield basis at 1:00 p.m. EST on Monday, November 9, 2009. The 10-year note will be auctioned on a yield basis at 1:00 p.m. EST on Tuesday, November 10, 2009, and the 30-year bond will be auctioned on a yield basis at 1:00 p.m. EST on Thursday, November 12, 2009.  All of these auctions will settle on Monday, November 16, 2009. 

The balance of our financing requirements will be met with weekly bills; monthly 52-week bills; monthly 2-year, 3-year, 5-year, and 7-year notes; the December and January 10-year note and 30-year bond reopenings; and the January 10-year TIPS offering.

Treasury will also issue cash management bills, some longer dated, during the quarter.

Changes to the TIPS Auction Calendar

To potentially improve liquidity in the TIPS program, extend the average maturity of the portfolio, and better capture the premium associated with inflation protection, Treasury will replace its 20-year TIPS offering with 30-year TIPS. 

The 30-year TIPS will be issued on a semi-annual basis, with an initial offering in February, followed by a reopening of the original issue in August 2010.  Similar to the 5-year TIPS offering, the security will mature mid-month, but will settle at the end of the month.  The first 30-year TIPS auction will be on Monday, February 22, 2010, for settlement on Friday, February 26, 2010.

Additionally, market participants have communicated to Treasury that more frequent auctions would help improve liquidity in the TIPS market.  Given Treasury's commitment to this program, and our plan to gradually increase TIPS issuance, we are considering making further changes to the TIPS auction calendar.  Any changes will be made in close consultation with market participants and will be done in a transparent manner, consistent with our operating framework of being regular and predictable.

Regular Bill Auctions 

Over the past year, Treasury has frequently rescheduled the timing of regular bill auctions from 1:00 p.m. to 11:30 a.m to accommodate additional auctions of coupon securities.

In light of this experience and after consulting with market participants, Treasury has decided to move all regularly scheduled Treasury bill auctions to 11:30 a.m., beginning with the 13-week and 26-week bill auctions scheduled for Monday, November 9, 2009.  Treasury expects this change to increase transparency and make bill auctions more regular and predictable. 

The standardization of bill auction closing times applies to regular Treasury auctions of 4-week, 13-week, 26-week, and 52-week bills only.  The closing times of cash management bill (CMB) auctions will be included in the details of each CMB auction announcement.

Debt Subject to the Limit

Based on current projections, Treasury expects to reach the debt ceiling in mid- to late- December. However, the government's cash flows are volatile, and forecasting a precise date is difficult.

Treasury is working closely with Congress to pass legislation to increase the debt ceiling.  We will keep financial market participants apprised of developments as the debt outstanding approaches the statutory limit.

Supplementary Financing Program

Treasury announced on September 16, 2009, that the balance in the Treasury Supplemental Financing Program (SFP) Account would decrease from $200 billion to $15 billion. The action was taken to preserve flexibility in the conduct of debt management policy.  Despite the recent decision to reduce the size of the program, Treasury retains the flexibility to increase the SFP in the future.  Such a decision will be made in coordination with the Federal Reserve.

Please send comments and suggestions on these subjects or others related to Treasury debt management to debt.management@do.treas.gov.

The next quarterly refunding announcement will take place on Wednesday, February 3, 2010. 

###

November 4, 2009
tg347

Minutes of the Meeting of the Treasury Borrowing Advisory Committee Of the Securities Industry and Financial Markets Association

The Committee convened in closed session at the Hay-Adams Hotel at 10:32 a.m. All Committee members were present.  Deputy Assistant Secretary (DAS) for Federal Finance Matthew Rutherford and Office of Debt Management Director Karthik Ramanathan welcomed the Committee, introduced the new Chairman Matthew Zames and the new Vice Chairman Ashok Varadhan, and then gave them the charge.

The first item on the charge asked the Committee what adjustments to debt issuance Treasury should make in consideration of its financing needs and uncertainty regarding the fiscal outlook.   

Given the cumulative deficit over the next three fiscal years of nearly $3.5 trillion according to OMB, Director Ramanathan stated that Treasury will need to remain extremely agile through its debt management approach and actions to confront challenges related to the fiscal and economic outlook. 

Director Ramanathan said that market participants should expect between $1.5 trillion and $2 trillion in nominal and inflation linked issuance again this year; at the same time, bill issuance may marginally decline while shorter dated coupons stabilize at current levels. Treasury debt managers will continue to remain aggressive in managing financing needs while minimizing potential market implications.

As an example, Director Ramanathan outlined Treasury's successful strategy in addressing the $1.4 trillion deficit in fiscal year 2009. Noting the $1.9 trillion in nominal coupon issuance this past fiscal year, Director Ramanathan stated that Treasury was able to raise $1.25 trillion in new cash in tenor beyond two years, nearly six times the amount raised in fiscal year 2008, while at the same time meeting unexpected borrowing needs through bills.

Director Ramanathan pointed out that outlays in FY 2009 were nearly $550 billion higher (an 18% increase) versus fiscal year 2008 while receipts fell by over $400 billion (or 17%), versus the prior year – just short of a $950 billion financing swing in just one year.

Outlays related to fiscal stimulus and financial stability measures were the drivers of expenditures, including TARP related spending of over $300 billion as well as additional spending related to unemployment benefits which are up approximately 150% year over year.  Outlays increased across the board, including Medicaid (25% higher), Medicare (10% higher), Social Security benefits (9% higher), and Defense spending (7% higher). Net interest on public debt was lower though by 10%.

At the same time, all receipt categories fell significantly including withheld taxes (7% lower year over year), non-withheld receipts (28% lower), and corporate taxes (55% lower).  

Ramanathan noted that as of today, the gross cost basis of Treasury's marketable financing was less than 1.0 % given the large amount of bills issued. Even with nearly $8 trillion in gross issuance across the portfolio, bills averaged 0.16%, notes averaged 1.9% while bonds averaged 4.2% in fiscal year 2009.

Director Ramanathan then turned to OMB's midsession review, which included a table illustrating the effect of budget proposals on projected deficits.  The updated 2010 projections' baseline estimates placed the deficit to GDP just above 4% for 2010-2014.  Ramanathan noted that any significant variation in debt to GDP or decline in GDP growth in the coming years could increase Treasury's funding cost. 

Despite these significant headwinds as well as issuance for Federal Reserve liquidity initiatives, the multi-tiered approach implemented by Treasury to meet these large financing needs ultimately served to stabilize Treasury's average maturity and actually shifted its direction higher. The reintroduction of the 3-year note and 7-year note as well as aggressively moving to two reopening in the 10-year note and 30-year note took place in an extremely compressed period of time, but led to minimal market disruption.  

Moreover, if non-marketable debt such as state and local government issuance reverses course or the economy strongly recovers, these increases in coupon sizes could potentially end sooner. Director Ramanathan then explicitly stated that all of these estimates are subject to change given the uncertainty in policy and fiscal expectations, and any shifts would be gradual.

DAS Rutherford continued the presentation to the Committee, outlining cumulative net financing flows since FY 2007 and noting the transition from bill issuance to coupon issuance in greater detail. The large financing needs and lumpy nature of cash flows has led to large cash balances which remain elevated and volatile. DAS Rutherford noted that Supplementary Financing Program (SFP) bills would gradually decline to $15 billion as previously announced from $200 billion to in anticipation of the constraints surrounding the debt ceiling legislation.

DAS Rutherford reviewed the composition of the portfolio, noting that bills as a portion of the debt outstanding fell to about 27%, while bills excluding the SFP program fell to close to historical averages of 23%. DAS Rutherford noted that Treasury will work in close consultation with the Federal Reserve in considering the future path of the program.

Furthermore nominal coupons have risen to 65% from 57% of the portfolio, with particular reliance on the 5-year coupon, while TIPS have fallen to about 8% of the portfolio. Given recent dealer estimates of $1.4 trillion for the fiscal year 2010 deficit and marketable borrowing needs estimates between $1.2 trillion and $1.75 trillion, DAS Rutherford expected the current trends in issuance to continue but cautioned that the outlook remained uncertain as demonstrated by the $550 billion range in marketable borrowing expectations.

DAS Rutherford noted that deficit projections remain unacceptably high and that he expects the FY2011 budget to outline ways to address this. He did inform the Committee, however, that given the number of TIPS coming due early next year and Treasury's sizable borrowing need, TIPS as a proportion of the overall portfolio may continue to decline. 

To better understand the reason for the shifts in the composition and profile of the portfolio, DAS Rutherford reviewed the circumstances of last year that sparked the decline in average maturity, noting that the bulk of bill issuance occurring last fall.  DAS Rutherford discussed Treasury's maturity profile, noting that over the next 5 years, 73 days will have maturities greater than $20 billion and 46 days will have maturities greater than $30 billion DAS Rutherford noted that approaches to addressing these sizable maturities will be a topic for TBAC discussion in the future.

Looking at the a number of forecasts for the next three years, DAS Rutherford pointed to continued reliance on nominal coupon issuance as well as additional issuance of inflation indexed securities to meet the large borrowing needs while shorter dated issuance eased. By gradually increasing coupons incrementally over the next three years, DAS Rutherford expected the average maturity of the debt to increase back to the historical average of 60 months by fiscal year-end 2010.  Eventually, though it could take five to six years, Treasury's marketable debt portfolio will stabilize at a new level between six to seven years.     

DAS Rutherford then discussed a change in policy relating to Treasury bill issuance.  After repeated rescheduling of the 4- and 52-week auctions this year, Treasury proposed moving all bill auctions to 11:30 a.m. from 1:00 p.m. to minimize conflicts with coupon auctions.  DAS Rutherford presented a chart depicting improved coverage ratios in the 4-week bill auctions that occurred at the 11:30 a.m. close.

DAS Rutherford then addressed Treasury's intention to eliminate the 20-year TIPS and reintroduce the 30-year TIPS.  Citing an internal ODM report, DAS Rutherford noted zero-coupon inflation swaps data depicts inflation to be upwardly sloping.  Assuming that 10-year forward and 20-year forward inflation expectations are not much different, Treasury would be capturing more inflation risk premium by extending issuance from 20-year to 30-year, making 30-year TIPS more cost effective for debt management.

With the presentation complete, DAS Rutherford asked the Committee for its thoughts on debt issuance and the policy changes being considered.

The Committee turned its attention to what changes to the current auction calendar, if any, were needed in order address Treasury's future borrowing needs. Members agreed that at this time, no additional securities to the nominal calendar were necessary, and that gradual increases in coupon sizes would be sufficient to address the large borrowing needs. Any coupon issuance to increase the average maturity should also take place in a gradual manner, and market participants should not be surprised with slow shift.

The Committee opened with a discussion on TIPS and the idea of eliminating the 20-year TIPS in favor of 30-year TIPS. One member began by discussing the September 2009 GAO Study "Treasury Inflation Protected Securities Should Play and Heightened Role in Addressing Debt Management Challenges" (http://www.gao.gov/new.items/d09932.pdf) . One member stated that the study was generally balanced and that the study highlighted reasons why there were market perceptions that the Treasury was not committed to the program.

Another member stated that the GAO study pointed out that there are two potential valid ways of considering the cost of TIPS – an ex-post analysis and ex-ante analysis. Ex-post analysis, over the last 13 years, had shown that TIPS were an expensive form of financing for the government; by other metrics, including asset swaps and auction tails, Treasury was paying a premium to issue TIPS.  Another member stated that on an ex-ante basis, TIPS appeared to be less expensive than on an ex-post basis.  Another member stated that it would take years to determine if ex-ante analysis is the correct way of measuring TIPS costs. 

A member stated that the measure of TIPS cost should perhaps be broadened so as to consider any positive externalities associated with the government accepting the risk to sell inflation. The member stated that investors may perceive the government's willingness to short inflation as a sign that policy makers are confident that inflation is contained.  Also, issuing TIPS may be pro-cyclical and serve as a hedge to the government's balance sheet.  Another member pointed out, however, that the government currently issues significant amounts of short-dated Treasury bills which are less expensive to the taxpayer and could be considered to be "pro-cyclical issuance".   The member noted that the "pro-cyclical benefits" argument for issuing TIPS also breaks down in stagflation environments. 

A majority of TBAC members generally believed that despite legitimate concerns surrounding TIPS costs and liquidity, given its funding requirements Treasury would need to increase the size of the TIPS program.  In addition, TIPS could help Treasury in its stated goal of extending the average length.   

In terms of TIPS issuance, there was general consensus by committee members to eliminate the 20-year TIPS and replace it with 30-year TIPS issuance. This change might allow Treasury to capture a greater inflation-risk premium and would also create a TIPS issue that could be better compared to a comparable on-the-run nominal issuance point.  The additional duration associated with a 30 year TIPS would also be consistent with Treasury's desire to increase average maturity. 

The committee generally recommended that the overall issuance of TIPS be increased over the next couple of years.  For FY2010, TIPS issuance should be increased from the current run rate of $58 billion per year to an overall issuance amount of between $70 and $80 billion per year across securities. In FY2011, overall TIPS issuance should be further increased to between $100 and $125 billion.

In addition, given that TIPS auctions are liquidity events in the TIPS market, Treasury should consider increasing the frequency of TIPS auctions so that there is either a 5-, 10- or 30-year TIPS auction once a month.  One member suggested that Treasury could issue a new 5-year TIPS in April with August and November reopenings; a new 30-year TIPS in February with June and October reopenings and new 10-year TIPS in January and July, with March/May and September/November reopenings, respectively.  Some members, however objected to increasing the size of the TIPS program so dramatically, citing concerns about costs.

Members recommended that it was important to continue to extend average maturity but there was no need to change the nominal auction calendar to achieve such an increase. One member stated that there was some confusion in the markets regarding how fast Treasury was intending to increase the average maturity and that Treasury should provide some clarity around that issue. 

Director Ramanathan reiterated that market participants should expect between $1.5 trillion and $2 trillion in nominal and inflation linked issuance again this year; at the same time, bill issuance may marginally decline while shorter dated coupons stabilize at current levels.

The Committee then turned to a presentation by one of its members on the likely form of the Federal Reserve's exit strategy and the implications for the Treasury's borrowing program resulting from that strategy. 

The presenting member began by noting the importance of the exit strategy for financial markets and fiscal authorities.  It was noted that the near-zero interest rates driven by current Federal Reserve policy was pushing many financial entities such as pension funds, insurance companies, and endowments further out on the yield curve into longer-dated, riskier asset classes to earn incremental yield. Treasury securities have benefitted from the resultant increase in demand, but riskier assets have benefitted even more.  According to the member, the greater decline in the indices for investment grade and high-yield corporate debt relative to 10-year Treasuries and current coupon mortgages displays this reach for yield.  A critical issue will be the impact on the riskier asset classes as market interest rates move away from zero.

The presenting member then looked at the likely sequence of the Federal Reserve's exit strategy.  The member acknowledged that the central bank must address the uncertainty and fragility of the economic recovery and the dependence of the housing market on low rates.  It was suggested that the most likely sequence would be the draining of excess reserves from the banking system, the cessation of the mortgage-backed securities purchase program, and only then raising the Fed funds target rate. 

Several members at this point asked why draining reserves before ending the MBS program made sense. The presenting member noted that the program was already set to expire, and other measures, such as a revival of the Supplementary Financing Program, could be utilized by the Federal Reserve at the same time.

The presenting member then addressed the options for draining reserves from the banking system.  The problem of excess reserves could persist through the end of 2011 with up to one trillion in excess reserves remaining after liquidity facilities and on balance sheet securities have rolled off.  One approach, raising the Fed funds rate to increase the opportunity costs of banks using their reserves, carries the attendant problems of increasing interest rates too soon in the economic recovery.  A second option, taking in term deposits, lacks a clear mechanism for rate setting and bank use.  Selling assets may run into difficulties if the public appetite for debt at that time is sated, especially considering the impact on the housing market and the major role the Federal Reserve currently plays in the market.  

According to the presenting member, these less than optimal solutions leaves the Federal Reserve the option of reverse repurchase agreements (reverse repos) as the most likely option although the potential of the mechanism for draining reserves is unclear.  If it is to undertake these reverse repos, the selection of counterparty is important.  Depending on how the program is designed, whether it is made to work with dealers or money market funds or to pursue a TALF model with banks as agents, there will be different impacts on the scope of the program, the ease with which it can be set up, and the term of the contracts.  In all cases, the program will compete with other short-term investments and put upward pressure on Treasury bill rates according to the presenting member.  Moreover, draining excess reserves may dampen the demand for Treasury securities by banks given that banks are investing in securities – particularly Treasuries - in the absence of loan demand. 

Several members noted the graph discussing net fixed income supply in 2009 and 2010, and how issuance will ramp up dramatically in 2010. Federal Reserve purchases have taken an enormous amount of supply out of the market this past year across fixed income markets, but next year, financial markets should expect even greater issuance with no support. Such an outcome could pressure rates. 

The presenting member then addressed the Treasury market implications of this likely strategy by the Federal Reserve. Using information from the Flow of Funds data and internal projections, the presenting member suggested that the program of Federal Reserve purchases of securities has artificially reduced the supply of fixed income securities coming into the market.  According to the member, by contrasting 5-year/5-year forward TIPS expectations with skew data for the 1-year/10-year high and low strikes, the real concern in the market is higher real interest rates rather than inflation.

The presenting member then offered several recommendations to possible market outcomes given the outlined scenario.  According to the member, the Treasury should increase TIPS issuance to diversify and broaden its base in light of future competition for market demand.  Further, Treasury should extend the average maturity of the Treasury portfolio. These actions must be balanced with the risk that further disinflation or deflation could impact the concentrated TIPS buyer base when it is most needed.  The presentation then concluded.

Members generally agreed with the recommendations offered in the presentation as well the potential outcomes from pursuing specific exit strategies in relation to Treasury demand. One member noted that the end of the mortgage purchase program could impact overall rates by 50 to 100 basis points depending on the economic outlook and housing situation. Another member noted that Treasury rates could simply remain stable as other rates fell as the exit strategy took place or if less of an inflationary scenario took place.

The Committee then turned its attention to the third item on the Charge regarding characteristics of Treasury's debt portfolio. Specifically, given recent trends in the economy and the government's fiscal position, the charge asked members to discuss Treasury's plan to lengthen the average maturity of the portfolio in the medium to long term. In addition, Treasury sought the Committee's opinion on the optimal range for average maturity given structural financing needs in the medium and long term. Another Committee member gave the presentation.

The presenting member began by stating the four conclusions of the analysis.  Namely:

1.      Inflation, higher interest rate and roll over risk should be the primary concerns in Treasury's debt management strategies.

2.      In most scenarios, it is prudent to lengthen maturities significantly in a gradual manner from the current average maturity of 50 months.  The base case recommends an extension to 74 months, while more pessimistic scenarios suggest an extension to 96 months.

3.      The objective of lowest borrowing cost could lead to higher yields that conflict with monetary policy objectives.

4.      Clever debt management strategy could potentially reduce debt service cost meaningfully, but still can't completely substitute for prudent fiscal policy.

The presenting member then went on to provide background material before discussing a model developed to help in determining optimal average maturity.

The Committee member noted that in doing a review of G7 countries' debt management strategies, several facts were notable.  One point was that the United States had the lowest average maturity. Another point was that the U.S. had the largest percentage of foreign ownership of its debt. The member also noted that while the UK economy appeared to be in similar straits as the United States, it had the highest average maturity of all the G7 countries.  Finally, the member noted the general lack of use of an asset-liability management framework for debt management.

The Committee member went on to review charts depicting various characteristics of Treasury's debt portfolio.  The member presented charts showing that the current average maturity is lower than it has been in nearly 25 years, that the federal debt to GDP ratio was only higher than it is presently during World War II, and that this ratio is poised to increase significantly according to current Administration and CBO forecasts. 

The member stated that much of the increase in the government's expenditures was structural in nature rather than temporary and presented charts indicating that mandatory spending was growing five times faster than discretionary spending. The rapid growth in entitlement spending as a percent of GDP beginning between 2010 and 2020 also remained a major challenge. The member then presented a chart showing an alternative possible budget outlook that indicated that the debt to GDP ratio could grow to as high as 98 percent by 2019.

The member continued by noting that the budget deficit has benefited from low rates but cautioned that this could change in the future since approximately 40 percent of the debt will need to be refinanced in less than one year.

Director Ramanathan noted that a significant portion of the shortening of the average debt was related to over $1 trillion in Treasury bill issuance as a result of Federal Reserve liquidity initiatives, fiscal stimulus, and financial stability measures. Director Ramanathan noted that the transition from bill financing to coupon financing was in process, but would not take place in an abrupt manner.

The member ended the background discussion with a chart that warned that historically, large fiscal expansions that were coupled with debt monetization could lead to inflation.

The presenting member went on to discuss a model developed to help in determining the optimal average maturity of debt issuance and began by issuing a disclaimer that the model was a stylized model meant to aid in how to think about the problem rather than to determine the actual optimal average maturity.  The member also indicated that the model was developed over a very short period of time and therefore some simplifications were necessary, including using only 3-month and 10-year securities to finance the debt and excluding factors that would likely affect the output of the model.

The model projects funding needs across 15 economic and credit scenarios over the next ten years and attempts to find the optimal average maturity of debt issuance given different risk scenarios over the next three years in order to minimize the total debt cost of debt service over the ten-year period.  The model employs assumptions for the determinants of the 3-month and 10-year rates.  The presentation focused on four scenarios a base case, a low growth, a low inflation case similar to Japan, a moderate growth, high inflation case and, finally, a high credit loss case.

The results from the model indicate that in the low growth, low inflation scenario average maturity of issuance should be as low as possible, while in the high inflation scenario, average maturity should be extended to lock in low rates. 

The member said that the model indicated that the macroeconomic environment had the most impact on average maturity. The model indicates that real growth of 2% combined with inflation of 2% results in an optimal average maturity of issuance of 55 months, while 2% real growth combined with 5% inflation increased the optimal average maturity to 116 months.  In contrast, given a 0% real growth and 0% inflation environment, credit losses of $575 billion lead to a debt maturity of 26 months and losses of $1.4 trillion only increase the optimal debt maturity of issuance to 34 months.  Interestingly, optimal average maturity of debt issuance is not significantly reduced by an increase in tax receipts of 30%.

The model results are highly dependent on the impact of duration supply on yields and, all else equal, if issuing more long-dated debt has a larger impact on rates, the optimal average maturity of issuance will be shorter.

The member noted that the lowest cost strategy for optimizing average maturity may lead to yields that conflict with monetary policy goals, and that constraining near-term yields would lead to shorter average maturity. 

The member noted that the model indicated that clever debt management could reduce costs by a surprisingly high 13% of government revenues in a high credit loss, high inflation scenario by issuing long-dated debt from 2009 through 2011.  However, the member also noted that even with optimal debt maturity, debt service cost would be unbearable and that prudent fiscal policy was needed to bring debt service costs under control.

The presentation ended with the member noting that there were many areas that could me more fully explored.   The model did not fully consider entitlements and state and local government as potential contingent liabilities. And, therefore, the risk to the model is to the upside. The model can be enhanced on duration supply going forward.  The member noted that current literature is focused on historical regression. 

The Committee members all agreed that the Treasury should extend the average maturity of the debt an indicated that the presentation just solidified that view. Members however noted that this process would not take place in a very short period, but may take time to occur over several years.

_________________________________

Karthik Ramanathan

Director, Office of Debt Management

United States Department of the Treasury

November 3, 2009

Certified by:

___________________________________

Matthew E. Zames, Chairman

Treasury Borrowing Advisory Committee

Of The Securities Industry and Financial Markets Association

November 3, 2009

___________________________________

Ashok Varadhan, Vice Chairman

Treasury Borrowing Advisory Committee

Of The Securities Industry and Financial Markets Association

November 3, 2009

Treasury Borrowing Advisory Committee Quarterly Meeting

Committee Charge – November 3, 2009

Fiscal Outlook

What adjustments to debt issuance, if any, should Treasury make in consideration of its financing needs in the short, medium, and long term?

Implications of a Federal Reserve Exit Strategy on the Treasury Market

Treasury would like the Committee's thoughts on potential Federal Reserve exit strategies, particularly as they relate to Treasury debt management. What actions does the Committee feel the Federal Reserve is likely to take to reduce the supply of excess reserves? What are the likely effects of these actions on the Treasury market and other related markets?

Treasury Debt Portfolio Characteristics

Given recent trends in the economy and the government's fiscal position, please discuss Treasury's plan to lengthen the average maturity of the portfolio in the medium to long term. Is there an optimal average maturity range, given structural financing needs in the medium and long term? Does it make sense to apply asset-liability management to Treasury's marketable debt portfolio?  Can you discuss approaches to financing and risk management and how these may be applicable to U.S. Treasury debt management?

Financing this Quarter

We would like the Committee's advice on the following:

• The composition of Treasury notes and bonds to refund approximately $38.5 billion of privately held notes called or maturing on November 15, 2009.
• The composition of Treasury marketable financing for the remainder of the October – December quarter, including cash management bills.
• The composition of Treasury marketable financing for the January – March quarter, including cash management bills.

 TBAC Recommended Financing Tables: Q1

 TBAC Recommended Financing Tables: Q4

November 2009 Quarterly Refunding Statement

U.S. Treasury Department
Office of Public Affairs

Embargoed Until 9:00 a.m. (EST), November 4, 2009
Contact: Office of Public Affairs, (202) 622-2960

NOVEMBER 2009 QUARTERLY REFUNDING STATEMENT

Washington, DC – Treasury is announcing the following changes to the issuance calendar:

-          Reintroduction of 30-year Treasury Inflation-Protected Securities (TIPS), with the first auction to occur in February 2010.

-          Discontinuation of 20-year TIPS auctions, effective immediately.

Details of the November Refunding

We are offering $81.0 billion of Treasury securities to refund approximately $38.5 billion of privately held securities maturing or called on November 15, 2009.  This will raise approximately $42.5 billion.  The securities are:

-          A 3-year note in the amount of $40.0 billion, maturing November 15, 2012;

-          A 10-year note in the amount of $25.0 billion, maturing November 15, 2019; and

-          A 30-year bond in the amount of $16.0 billion, maturing November 15, 2039.

The 3-year note will be auctioned on a yield basis at 1:00 p.m. EST on Monday, November 9, 2009. The 10-year note will be auctioned on a yield basis at 1:00 p.m. EST on Tuesday, November 10, 2009, and the 30-year bond will be auctioned on a yield basis at 1:00 p.m. EST on Thursday, November 12, 2009.  All of these auctions will settle on Monday, November 16, 2009. 

The balance of our financing requirements will be met with weekly bills; monthly 52-week bills; monthly 2-year, 3-year, 5-year, and 7-year notes; the December and January 10-year note and 30-year bond reopenings; and the January 10-year TIPS offering.

Treasury will also issue cash management bills, some longer dated, during the quarter.

Changes to the TIPS Auction Calendar

To potentially improve liquidity in the TIPS program, extend the average maturity of the portfolio, and better capture the premium associated with inflation protection, Treasury will replace its 20-year TIPS offering with 30-year TIPS. 

The 30-year TIPS will be issued on a semi-annual basis, with an initial offering in February, followed by a reopening of the original issue in August 2010.  Similar to the 5-year TIPS offering, the security will mature mid-month, but will settle at the end of the month.  The first 30-year TIPS auction will be on Monday, February 22, 2010, for settlement on Friday, February 26, 2010.

Additionally, market participants have communicated to Treasury that more frequent auctions would help improve liquidity in the TIPS market.  Given Treasury's commitment to this program, and our plan to gradually increase TIPS issuance, we are considering making further changes to the TIPS auction calendar.  Any changes will be made in close consultation with market participants and will be done in a transparent manner, consistent with our operating framework of being regular and predictable.

Regular Bill Auctions 

Over the past year, Treasury has frequently rescheduled the timing of regular bill auctions from 1:00 p.m. to 11:30 a.m to accommodate additional auctions of coupon securities.

In light of this experience and after consulting with market participants, Treasury has decided to move all regularly scheduled Treasury bill auctions to 11:30 a.m., beginning with the 13-week and 26-week bill auctions scheduled for Monday, November 9, 2009.  Treasury expects this change to increase transparency and make bill auctions more regular and predictable. 

The standardization of bill auction closing times applies to regular Treasury auctions of 4-week, 13-week, 26-week, and 52-week bills only.  The closing times of cash management bill (CMB) auctions will be included in the details of each CMB auction announcement.

Debt Subject to the Limit

Based on current projections, Treasury expects to reach the debt ceiling in mid- to late- December. However, the government's cash flows are volatile, and forecasting a precise date is difficult.

Treasury is working closely with Congress to pass legislation to increase the debt ceiling.  We will keep financial market participants apprised of developments as the debt outstanding approaches the statutory limit.

Supplementary Financing Program

Treasury announced on September 16, 2009, that the balance in the Treasury Supplemental Financing Program (SFP) Account would decrease from $200 billion to $15 billion. The action was taken to preserve flexibility in the conduct of debt management policy.  Despite the recent decision to reduce the size of the program, Treasury retains the flexibility to increase the SFP in the future.  Such a decision will be made in coordination with the Federal Reserve.

Please send comments and suggestions on these subjects or others related to Treasury debt management to debt.management@do.treas.gov.

The next quarterly refunding announcement will take place on Wednesday, February 3, 2010. 

###

U.S. International Reserve Position

Treasury Removes Three Former Terrorist
Supporters from Specially Designated Nationals List

WASHINGTON – The U.S. Department of the Treasury's Office of Foreign Assets Control (OFAC) today removed Patricia Rosa Vinck, Barakaat International, and Barakaat International Foundation from its Specially Designated Nationals List, having found that Vinck and the two entities no longer present a significant threat of supporting terrorism.  Today's action was taken in conjunction with a removal of the three names from the United Nations' 1267 Sanctions Committee (U.N. 1267 Committee) Consolidated List of individuals and entities subject to U.N. sanctions measures. 

"The U.S. Government is actively supporting the comprehensive review underway at the U.N. 1267 Committee to ensure the efficacy, accuracy, and fairness of this vital sanctions regime," said OFAC Director Adam J. Szubin. "We are reviewing the evidentiary records for hundreds of listings – advocating for continued preventative sanctions against those who pose a significant threat of supporting terrorism and removal of those who do not." 

Vinck, Barakaat International, and Barakaat International Foundation were all designated by the Treasury Department under Executive Order 13224 and by the U.N. 1267 Committee.   The Treasury Department and the United Nations designated Vinck in January 2003 and the two Barakaat entities in November 2001.

Vinck is the wife of Nabil Abdul Salam Sayadi, who headed the Belgium office of the Global Relief Foundation (GRF), an organization designated in October 2002 by the United States and the United Nations for its support to al Qaida.  Vinck served as the secretary of GRF's Belgium office and facilitated GRF's activities.  Following U.S. and U.N. sanctions against her, Vinck ceased her activities on behalf of GRF.

The Barakaat organizations were part of a financial conglomerate operating in 40 countries around the world that facilitated the financing and operations of al Qaida and other terrorist organizations.  The U.S. and U.N. sanctions against these entities assisted the global effort to prevent them from routing funds to al Qaida and other terrorist groups, and the two organizations are no longer operating.  Other designated entities and individuals related to the Barakaat conglomerate remain on the U.S. and U.N. sanctions lists.

The U.N. 1267 Committee is currently implementing a number of procedural and other measures called for by U.N. Security Council Resolution 1822, adopted in June 2008, to improve the effectiveness and fairness of U.N. sanctions.  These measures include a comprehensive review of the approximately 500 names on the U.N. 1267 Committee's Consolidated List to be completed by June 2010.  The resolution also mandates the establishment and posting on the U.N. 1267 Committee's website of narrative summaries of reasons for the listing of all individuals and entities on the Consolidated List, and updates to the U.N. 1267 Committee's listing and delisting procedures.  The United States strongly supports and is participating vigorously in these efforts.