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]

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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. 

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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.

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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
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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

Alan B. Krueger
Assistant Secretary for Economic Policy & Chief Economist
Statement for the Treasury Borrowing Advisory Committee
of the Securities Industry and Financial Markets Association

Economic conditions improved in the third quarter of 2009.  GDP growth resumed following a year of steady contraction.  The third-quarter rise reflected a jump in consumer spending but activity also picked up in a number of other sectors, including housing.  While many third-quarter measures improved, the labor market remained weak, even as the pace of job losses slowed.  Conditions in financial and credit markets continued to improve.  The economy's recent improvement is partly due to the broad array of measures taken by the Administration and Congress to encourage growth and restore stability in credit and financial markets; at the same time, there are encouraging signs that the private sector is starting to expand again on its own. 

Real GDP rose 3.5 percent at an annual rate in the third quarter.  Growth in the summer was the strongest in two years and followed a record four quarters of steep decline, during which real GDP fell by nearly 4 percent.  Federal outlays provided crucial support to the economy during the June-to-September period, but private expenditures rose for the first time since the spring of 2008.    

Consumer spending, which accounts for 70 percent of GDP, posted a solid 3.4 percent gain (annual rate) in the third quarter.  A surge in motor vehicle purchases spurred by the Cash for Clunkers program accounted for a substantial portion of the jump in consumption, but even excluding the pickup in autos, consumer demand strengthened notably in the third quarter.  For example, spending on services and non-durable goods posted their largest quarterly gain since the third quarter of 2007.

Residential investment, which had been a drag on growth since the housing downturn began more than 3 years ago, turned up for the first time since late 2005, contributing about 1/2 percentage point to real GDP growth during the third quarter.  Housing starts, building permits, home sales, and housing prices have generally turned higher since the spring.  The inventory of homes on the market has come down, and homebuilder sentiment has improved slightly.  Despite these recent welcome improvements, the housing sector remains weak, with the real value of homebuilding activity in the third quarter less than half of the level in 2005.

Overall business investment fell in the third quarter but the pace of decline slowed sharply.  Business spending on equipment and software edged up, growing for the first time in nearly two years.  Outlays for structures continued to fall but the rate of decline eased considerably.  Although businesses continued to liquidate inventories, the inventory drawdown in the third quarter slowed.  As a result, inventory investment made a sizable contribution to real GDP growth in the third quarter after providing a substantial drag on the economy in each of the previous three quarters. 

Exports grew in the third quarter, providing some evidence that the international economy also began to recover.  At the same time, the improvement in the U.S. economy boosted imports, and the net export deficit widened, producing a small drag on real GDP growth.  Net exports had been providing support to the economy in the previous three quarters, when imports--reflecting the steep declines in the U.S. economy--were falling faster than exports. 

Administration policies, including fiscal stimulus and efforts to stabilize the financial sector, have played a key role in the third quarter economic improvement.  The Car Allowance Rebate System--the "Cash for Clunkers" program--provided a much needed boost to motor vehicle sales this summer, helping consumers who turned in their gas guzzlers purchase nearly 700,000 new, more fuel-efficient vehicles.  These purchases were an important driver of consumer spending in the third quarter.  The first-time homebuyer tax credit may have contributed to a pickup in home sales, helping to stabilize the housing sector following a prolonged slump.  As of September, combined sales of new and existing homes had risen more than 20 percent from the 14-year low recorded in January.

The American Recovery and Reinvestment Act (ARRA) has also stimulated private demand, with an array of tax cuts, one-time payments, and infrastructure outlays amounting to nearly $800 billion.  Through October 30, tax cuts associated with the Recovery Act pumped nearly $85 billion into the economy, while contracts and entitlement payments contributed roughly another $120 billion.  Administration estimates along with analysis by a wide range of private-sector forecasters suggest that the ARRA contributed between 3 and 4 percentage points to real GDP growth in the third quarter.  New data released last week by the Recovery Board show that recipients of Recovery Act contracts, grants, and loans have reported that nearly 650,000 jobs were either created or saved as a direct result of the ARRA.  This jobs figure excludes the effects of tax cuts, and does not include any jobs created or saved indirectly--like jobs created in businesses that provide goods and services to those directly receiving government contracts.  Taking account of those effects, estimates are that more than 1 million jobs were created or saved.   

Although there has been noticeable improvement in many sectors of the economy, the labor market remains very weak.  In September, the unemployment rate reached a 26-year high of 9.8 percent, and payrolls declined for the 21^st straight month.  Altogether, 7.2 million jobs have been lost since the recession started in December 2007.  Although businesses continue to trim their payrolls, the pace of job loss has slowed considerably.  In the third quarter, the average monthly decrease in nonfarm payroll employment was 256,000, well below the second-quarter average of 428,000.  More recently, weekly data on new claims for Unemployment Insurance have trended down, and, though at levels consistent with further large job losses, also point to slowing declines. 

The headline Consumer Price Index fell 1.3 percent over the year ending in September, in stark contrast to the 4.9 percent jump recorded in the same period a year ago.  Steep declines in energy prices in late 2008 are largely responsible for the drop in headline inflation.  Over the year ending in September, consumer energy prices plunged 22 percent, a sharp reversal from the 23 percent surge recorded in the year-earlier period.  Energy prices started to rise again recently, however, and so far this year are up 17 percent at an annual rate.  Still, headline inflation through the first nine months of 2009 was a moderate 2.7 percent.  In addition, the high unemployment rate and low business capacity utilization rate are helping to keep inflation pressures contained.  Core consumer inflation (a measure that excludes energy and food prices) was 1.5 percent over the year ending in September, down from 2.5 percent a year ago.  So far this year, core inflation is around 2 percent.

Credit market conditions improved further in the third quarter.  The 3-month U.S. dollar LIBOR-OIS spread – a measure of what banks perceive as the credit risk in lending to one another – has narrowed to around 13 basis points, roughly back to its pre-crisis norm and down from an all-time high of 365 basis points in early October 2008.  Corporate bond spreads have also narrowed, pointing to a rising tolerance for risk.  The spread between Baa-rated corporate bonds and the 10-year Treasury note is currently around 280 basis points.  Though still elevated, this measure is far below its December 2008 peak of 616 basis points.  Mortgage rates remain at historically low levels.  The average interest rate on a 30-year conventional fixed-rate mortgage is currently around 5.0 percent. 

Financial markets have stabilized.  The S&P stock market volatility index (VIX), often used as a measure of financial market uncertainty, has retreated from the all-time high of almost 81 percent posted on November 20, 2008 and at roughly 25 percent is approaching readings near the 20 percent recorded in late August 2008.  Equity markets have turned sharply higher.  The S&P500 has risen almost 60 percent from its March 9, 12½-year low and is up nearly 20 percent for the year. 

Many private forecasters believe the economy has turned a corner.  Most expect to see another solid increase in real GDP in the fourth quarter, and are currently looking for real GDP to grow about 2½ percent in 2010.  Recovery in the labor market is expected to lag behind GDP growth.  The consensus forecast expects the unemployment rate to climb to 10 percent by the end of this year and remain near that level through at least the first half of 2010.

In sum, the economy is starting to recover from what has been the most severe recession of the post-war period.  It will take time for the pickup in economic activity to translate into renewed hiring but labor market conditions should improve with sustained and solid economic growth.  Administration policies have played an important role in jumpstarting economic activity and restoring stability to markets and will continue to provide support in the months ahead.  Recoveries do not proceed along straight lines, and while we can expect some volatility on the road to recovery, the overall trend is expected to be upward.

Treasury Secretary Timothy F. Geithner
Press Conference Remarks on New Markets Tax Credits Announcement
Chicago, Illinois
As Prepared for Delivery

Thank you, Rep. Davis. As you've said, "all the issues associated with poverty are pronounced" in your 7^th District of Chicago.  And all of them are harder to deal with because of the recent economic and financial crisis.

It is good to see you [again], Mayor Daley.  I'm pleased to be here with Treasury's Donna Gambrell, Director of the Community Development Financial Institutions Fund.

 I want to offer a special thanks to Bill Leavy.  Bill is Executive Director of the Greater West Town Community Development Project, our host today.  Bill is helping Chicago's disadvantaged get the training they need to find jobs. 

Yesterday's 3.5 percent GDP figure was the first positive performance the U.S. economy has posted in more than a year, following the steepest drop in growth in more than 50 years, and the longest in more than 60 years.  

This means that our Recovery Act is helping to move us in the right direction--with tax cuts that put money in the pockets of middle-class families and small businesses; extended unemployment and health benefits to tide people across tough times; aid to state and local governments to sustain critical services like teachers in the classroom, and investments in infrastructure to create private sector jobs.

It means that our financial programs are working to repair the financial system so that it can make the loans to households and businesses essential to reviving prosperity.

But a single quarter's growth is only a first step.

It is enough to stanch the hemorrhaging of nearly three-quarters of a million jobs a month that greeted us last January.  But it is not enough to bring down the jobless rate from its unacceptably high level of nearly 10%.

It is enough to get some people back to work.  But it is not enough to ensure that every American who wants a good job--and the security and self-worth that comes with work--can find one and keep it.

The American people expect us to reach for these broader goals, and President Obama is doing everything in his power to deliver for them. 

To deliver, we must rebuild our economy on a firmer foundation--to equip our workers with the skills and education they need to compete; to invest in renewable energy and the jobs of the future; and to make health care affordable for families and businesses everywhere.

And we must make sure that the advantages of this new, stronger economy are broadly shared, including by communities, such as those in the 7^th District and those served by Greater West Town Project.

These communities suffer the most in recessions. Job-expanding projects fail for lack of investment.  These failures set back the communities in which they occur, making those communities less appealing to future potential investors, thereby making them prone to still more setbacks.

The New Markets Tax Credit program helps break this vicious cycle and extends the benefits of growth to all corners of the country.

The program works by attracting private business and development.  It does so by offering tax credits worth 39 percent of the value of the investment claimable over seven years.  This credit offsets some of the risks involved in investing in these communities and, in the process, creates a partnership between the private and public sectors to help create jobs and opportunity where they are most needed.

New Markets Tax Credits have proven to be remarkably effective job creators [engines of economic development].  To date over $14 billion of private sector capital has been invested in an estimated two thousand businesses, supporting roughly 200,000 jobs.

That's why the Administration has worked to expand the program. And that's why today I am announcing tax credit allocations to support $5 billion in new investments.

Those on the receiving end of recent investments under the New Markets program are proven winners. One of these is the Greater West Town Community Development Project.  

Leavy and his team are using $9.3 million of NMTC-supported funds to build a new career training and economic development center on North Sacramento Boulevard.  When they move in next September, they will be able to more than double their program to help students who did not complete high school, from 100 students to 250.

Since its inception in 2003, the program has managed to graduate 70 percent of incoming classes sending hundreds of graduates out with full high school degrees and college transition training.

The center will also provide new quarters for Greater West Town's shipping, receiving and warehousing program. This program has traditionally graduated and placed more than 80 percent of participants.

One of those who has landed a new job is Francisco Chavez.

Chavez is an Army veteran and 41-year-old father of three.  He worked days and went to community college at night until the economy's troubles caught up with his most recent employer, a gas tank manufacturer.  He was laid off in June of last year.

He enrolled in Greater West Town's shipping and receiving program this summer. Despite having just worked as a shipping coordinator, he found the transition tough because of all the new technology.

"The thought of quitting passed my mind,'' he told one of my staff.  "But there was no way I could; I have my children."

Francisco graduated two weeks ago. He landed a shipping job with Bearse Manufacturing, a military pack and duffel bag maker, three days ago.  He starts Monday.

Francisco, will you say a few words about how Greater West Town has improved your life?

[Francisco Chavez speaks.]

Francisco's story will have to be repeated millions of times over before a real recovery is underway.  

And we are going to keep at it so that their jobs will come with access to affordable health care and our children will have access to better education.  And with programs like the New Markets Tax Credits and help from groups like Greater West Town, we are working to restore confidence in America by giving Americans the opportunity and economic security that they deserve.

Thank you.

###

Treasury Awards $5 Billion to Encourage Private
Sector Investments in Local Communities

New Markets Tax Credit Program Includes $1.5 Billion
Awarded Under the Recovery Act

CHICAGO-- As part of the Obama Administration's efforts to revive local economies, Treasury Secretary Tim Geithner today visited a job training center in Chicago benefiting from private sector investments made through the New Markets Tax Credit (NMTC) program. As part of his visit, Geithner announced $5 billion in NMTC awards, including $1.5 billion made possible through the American Recovery and Reinvestment Act (Recovery Act), for more than 90 organizations in communities around the country.

"We must rebuild our economy on a firmer foundation, one that equips our workers with the skills and education they need to compete," said Secretary Geithner.  "We must make sure that the advantages of this new, stronger economy are broadly shared. Too often, communities are left behind by economic growth.  The Recovery Act and the New Markets Tax Credit program help break this vicious cycle to ensure the benefits of growth reaches all corners of the country."

In May 2009, Secretary Geithner announced an initial $1.5 billion for NMTC awards under the Recovery Act, making today's announcement the second round of Recovery Act funding for the program.  The NMTC program, established by Congress in December 2000, permits individual and corporate taxpayers to receive a credit against federal income taxes for making equity investments in investment vehicles known as Community Development Entities (CDEs). The investor receives a credit totaling 39 percent of the cost of the investment. CDEs must apply to the Treasury's Community Development Financial Institutions (CDFI) Fund, which administers the NMTC program, to compete for this allocation authority.  The organizations receiving awards have identified principal service areas that will cover nearly every state in the country, as well the District of Columbia and Puerto Rico and plan to invest in renewable energy projects, charter schools, health care facilities, manufacturing companies, and retail centers.

Secretary Geithner's announcement was made today at the Greater West Town Community Development Project (GWTP) which provides job training and placement services to local residents, and educational and career development services targeted to former Chicago public high school drop-outs.  Through financing provided by the Chicago Development Fund, a New Markets Tax Credit award recipient in Chicago, the GWTP will convert a vacant industrial building into a new job training and education facility. The GWTP projects the development will create 30 construction jobs and 35 permanent jobs for employees. Secretary Geithner was joined at the site by Donna J. Gambrell, Director of Treasury's CDFI Fund; Mayor Richard Daley; Congressman Danny Davis (IL-7); and Bill Leavy, Director of the GWTP.

Said Gambrell: "The New Markets Tax Credit Program is promoting private-sector investment in our nation's communities and is helping to stimulate economic growth, create jobs and bringing new opportunities to Americans most in need.  This innovative federal program is helping to finance numerous businesses and real estate projects across the country--projects that may not have been financed if not for New Markets Tax Credits."

Said Leavy: "The major reason we are able to build this new job training facility is because we received a New Markets Tax Credit award.  This innovative federal program is supporting the expansion of employment and educational opportunities so desperately needed in communities like ours."

To date, over $14 billion of private-sector capital has been invested through the NMTC Program into urban and rural communities throughout the country. Data reported through 2008 shows that $12.7 billion dollars of NMTC capital has been invested into approximately 2,000 businesses and real estate developments. A complete list of the organizations selected and additional information on the NMTC Program can be found on the CDFI Fund's web site at: www.cdfifund.gov.

###

Administration Calls on Congress to Approve Key Housing Measures

Secretary Timothy F. Geithner
Written Testimony
House Financial Services Committee

Chairman Frank, Ranking Member Bachus, members of the House Financial Services Committee, it is a pleasure to appear before you today as we continue working towards comprehensive reform of our financial system.

The Chairman and the Committee have made important progress over the past several weeks.

Against strong opposition, you have acted swiftly to lay the foundation for far-reaching reform that would better protect consumers from unfair and fraudulent lending practices, regulate the derivatives market, improve investor protection, reform credit rating agencies, and extend basic oversight to hedge funds and other unregulated financial entities.

Today, the Committee carries that momentum forward, tackling an extremely difficult and important issue: how to prevent excessive risk-taking by large financial firms and make sure that when those firms fail during a future crisis, the government can contain damage to the economy without imposing costs on taxpayers.   

Over the past few decades, we have seen the significant growth of large, highly leveraged financial firms. These firms benefited from the perception that the government could not afford to let them fail, creating a classic moral hazard problem.

During the recent financial crisis, in order to preserve the stability of the financial system, protect the savings of Americans and prevent greater economic fallout, the government was forced to step in and stand behind almost all of these firms. That cannot happen again.

No financial system can operate efficiently if financial institutions and investors assume that the government will protect them from the consequences of failure. We cannot put taxpayers in the position of paying for the losses of large private financial institutions. We must build a system in which individual firms, no matter how large or important, can fail without risking catastrophic damage to the economy.

In June, the Administration outlined a comprehensive set of proposals to achieve this goal. Since then, after extensive work, the Chairman has drafted new legislation.

We believe that the test for any effective set of reforms is whether it has five key elements. And we believe that the Chairman's bill meets that test.

Orderly Resolution of Failing Financial Institutions

First, the federal government must have the ability to resolve failing major financial institutions in an orderly manner, with losses absorbed not by taxpayers but by equity holders, unsecured creditors and, if necessary, other large financial institutions.

In all but the rarest of cases, bankruptcy will remain the dominant tool for handling the failure of non-bank financial firms. But as the collapse of Lehman Brothers showed, the Bankruptcy Code is not an effective tool for resolving the failure of a global financial services firm in times of severe economic stress.

The Bankruptcy Code focuses almost exclusively on maximizing the interests of a firm's creditors, with little or no concern for spill-over effects on the financial system or the economy. It often moves too slowly. And it contains too few mechanisms for the stabilization of critical operations of a failed firm.

Recognizing this, Congress established a separate resolution regime for banks and thrifts, allowing the Federal Deposit Insurance Corporation (FDIC) to accomplish orderly failures of depository institutions. We need to adapt this effective and proven mechanism to address the significant risks associated with the failure of large financial institutions.

Under the proposed special resolution authority, a failing firm would be placed into an FDIC-managed receivership. The purpose of the receivership would be to unwind, dismantle, sell, or liquidate the firm in an orderly way that protects the financial system at lowest cost to taxpayers. Shareholders and other providers of regulatory capital of the failing firm would be forced to absorb losses, and managers responsible for the failure would be replaced.

Such an approach allows the government to reduce the risk that failure would result in panic by creditors and shareholders of other firms and helps maximize recovery of the value of the firm's assets.

Use of the proposed resolution authority would only be permissible if a financial firm is in default or in danger of imminent default; if the failure of the firm would have serious adverse effects on financial stability; and if use of the proposed regime would avoid or mitigate those adverse effects. We need strong checks and balances and any action would require agreement by the FDIC, the Federal Reserve, and the Treasury, in consultation with the President. 

No Open-Bank Assistance to Failing Financial Institutions

The second element of effective reform is making sure that any individual firm that puts itself in a position where it cannot survive without special assistance from the government must face the consequences of failure.

The proposed resolution authority would not authorize the government to provide open-bank assistance to any failing firm. In other words, it would not permit the government to put money into a failing firm unless that firm is in government receivership and on the path to being unwound, sold or liquidated.

The authority would facilitate the orderly demise of a failing firm, not ensure its survival, and would strengthen market discipline and reduce moral hazard risks.

Protecting Taxpayers from Losses

The third element of effective reform is making sure that taxpayers are not on the hook for any losses that might result from the failure and subsequent resolution of a large financial firm.

The government should have the authority to recoup any such losses by assessing a fee on large financial firms.  These assessments should be stretched out over time, as necessary, to avoid adding to the pressure induced by the crisis.

Such an ex-post funding mechanism has several advantages over an ex-ante fund. Most notably, it would generate less moral hazard because a standing fund would create expectations that the government would step in to protect shareholders and creditors from losses. In essence, a standing fund would be viewed as a form of insurance for those stakeholders. 

Limiting the Federal Reserve's and the FDIC's Emergency Authorities

The fourth element of effective reform is limiting the emergency authorities of the FDIC and the Federal Reserve so that they are subject to appropriate checks and balances and can be used only to protect the financial system as a whole.

These authorities should only allow for temporary support, with an appropriate fee, that is designed to enable healthy institutions to continue operating and to prevent the disruption of credit flows during a severe economic downturn.

Specifically, the Federal Reserve's ability to extend credit to failing non-bank firms under section 13(3) of the Federal Reserve Act should be eliminated.  Going forward, the Federal Reserve should be able to use 13(3) only to provide liquidity to solvent firms during periods of severe stress in the financial markets or US economy. 

Use of the Federal Reserve's 13(3) authority should require prior written consent of the Treasury.  With these reforms, the Federal Reserve would preserve its valuable central bank authority to act as the lender of last resort for a financial system in crisis, but would no longer be able to come to the rescue of failing firms such as Bear Stearns or AIG.

The FDIC should only be able to provide liquidity or guarantees to solvent non-bank financial firms with strong checks and balances. Any such use must be authorized by the Treasury and two-thirds of the boards of the Fed and the FDIC. In addition, any use must be recouped with assessments on the largest non-bank firms.

Stronger Constraints on Size and Leverage

The fifth element of effective reform is giving the federal government stronger supervisory and regulatory authority over major financial firms, and making sure that key financial markets and market infrastructure have buffers strong enough to absorb losses associated with periods of financial stress.

Regulators must be empowered with explicit authority to force major financial firms to reduce their size or restrict the scope of their activities when necessary to limit risk to the system. This is an important tool to deal with the risks posed by the largest, most interconnected financial firms.

Regulators must be able to impose tougher requirements – most crucially, stronger capital rules and more stringent liquidity standards – which would reduce the probability that major financial firms experience financial distress, either through capital depletion or a run by creditors. This would provide strong incentive for these firms to shrink, simplify, and reduce their leverage. 

In addition, major firms must be subject to a prompt corrective action (PCA) regime and be required to prepare and regularly update what some have called "living wills," which are plans for their rapid resolution in the event of distress. These plans would leave us better prepared to deal with a firm's failure, and provide another incentive for firms to simplify their organizational structures and improve their risk management.

To build-up shock absorbers system-wide, all firms must face higher prudential requirements. And we are negotiating a new international accord to establish a level playing field for capital requirements. This accord will raise capital requirements, improve the quality of capital, establish strong liquidity requirements that reduce reliance on unstable short-term funding, raise capital charges on more risky activities and help make regulation less pro-cyclical, so that they will more likely dampen rather that amplify future instability.

We must also improve supervision and regulation of derivatives markets and critical payment, clearing, and settlement systems; increase transparency throughout the financial system; and align incentives to improve securitization markets.  This should be done at home and abroad.

Finally, we must close loopholes and reduce possibilities for gaming the system.

Monitoring threats to financial stability will fall to the proposed Financial Services Oversight Council. The Council would have the duty and authority to identify any financial firms whose size, leverage, complexity, and interconnectedness pose a systemic threat and require those firms to submit to a system of heightened supervision and regulation. 

The Federal Reserve would oversee individual major financial firms so that there is clear, inescapable, single-point accountability.  The Fed already supervises all major U.S. commercial banking organizations on a firm-wide basis and all major investment banks as well. 

Conclusion

The current rules in place for our financial system are inadequate and outdated.

We have all experienced what happens when, during a crisis, the government is left with limited tools and limited choices. That is the searing lesson of last fall.

In today's markets, capital moves at speeds unimaginable when our current regulatory framework was created. And today's economy requires that Congress bring that framework into the 21^st century, granting the government carefully constrained power to contain damage to the economy while managing the failure of large, complex financial institutions.

The bill before the Committee does that.

It represents a comprehensive, coordinated answer to the moral hazard problem posed by our largest, most interconnected financial institutions. It produces strong, accountable supervision of all our major financial firms and imposes costs not on the taxpayer but with the risk-takers, where they belong.  It deters excessive risk taking and forces firms to better protect themselves against failure. It creates a strong, resilient, well-regulated financial system that can better absorb failure when it happens. And it establishes a resolution regime allowing the government, when the financial system is at risk, to unwind and break up a failing financial firm without imposing costs on taxpayers.  

What this bill does not do is provide a government guarantee for troubled financial firms. It does not create a fixed list of systemically important financial firms. It does not create a permanent TARP-like authority. It does not give the government broad discretion to step in and rescue insolvent firms. And it does not give comfort to investors, creditors, counterparties, or management that the government will be there to absorb losses from risky business strategies.

With this bill we are looking forward, not backwards. We are looking to provide future Administrations with better options than existed last year. This is still an extremely sensitive moment for the financial system. Investors across the country and around the world are closely watching each step we take. And it is important for them to understand that the bill we are debating today is about giving the government better tools to deal with future crises, while we work to repair the damage caused by this crisis.

Mr. Chairman, the American people are counting on us to get this right and to get this done. You have made enormous progress already and we look forward to working with you so that we can put in place comprehensive reforms that will restore confidence in our financial system at home and abroad.

Thank you.

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Special Master for TARP Executive Compensation Kenneth R. Feinberg
Testimony before the House Committee on Oversight and Government Reform

Mr. Chairman:

I thank you and the Committee for the opportunity to testify today.  The subject of executive compensation continues to be a top priority of the American people and the international business community, so I welcome your invitation and look forward to participating in this hearing. 

As you know, in June of this year, I was asked to serve as Special Master for TARP Executive Compensation by the Secretary of the Treasury.  In that capacity, I have a number of responsibilities under the relevant statutory^[1] and regulatory^[2] authority. These responsibilities include interpreting the regulations, and evaluating and making determinations regarding compensation payments to, and compensation structures for, certain employees of TARP recipients receiving exceptional financial assistance.

In these capacities, I have spent the past five months carefully considering the terms and conditions of the 2009 executive compensation for senior executives at those seven corporations that received exceptional financial assistance from the federal government:   AIG, Bank of America, Citigroup, Chrysler, Chrysler Financial, General Motors and GMAC.  These executives include five "senior executive officers" and the twenty "most highly compensated employees."  My mandatory jurisdiction under the regulations is limited to the senior executives at these seven companies and only these seven companies.  Although I do have interpretive authority under the Standards, and advisory authority under the law to make recommendations and nonbinding determinations as to officials of other companies who received TARP financial assistance,  I have no legal authority to make final determinations pertaining to executive compensation for any companies other than these seven.

Mr. Chairman, I refer you and the Members of the Committee to the Report of the Special Master for TARP Executive Compensation: 2009 Executive Compensation Determinations for the TARP Exceptional Assistance Recipients, dated October 22, 2009, a copy of which is included with my prepared testimony.  This Report includes my compensation determinations concerning senior executives at each of the seven companies referenced above, and provides a comprehensive explanation and analysis of the reasoning which underlies such determinations.  I welcome any inquiries you may have concerning my Report.

In your letter of October 15, 2009, inviting me to testify, you raised three questions for me to focus on during my appearance here today.  I treat these questions in the order you presented them in your letter.

I.          What standards and considerations are you using to evaluate employee       compensation at the seven companies that submitted such plans for review?

I was guided by the rules and principles in the statute and the Treasury regulations in evaluating employee compensation at the seven companies.  For example, the Treasury regulations expressly make clear that I must consider competitive market forces in determining compensation levels that will permit the seven companies to remain in business, to thrive financially, and to eventually repay the taxpayers for TARP financial assistance.  These companies must be able to attract sufficient talent to prosper.  At the same time, however, the law requires me to take into account whether the terms and conditions of compensation are performance-based and tie compensation to the companies' prospective performance and financial success.  In addition, the regulations make clear that my compensation determinations should be made in such a way that considers whether senior executives are provided incentives to avoid taking excessive risks to receive greater amounts of compensation.  The law also anticipates that a portion of compensation be tied to the repayment of TARP financial assistance, and requires companies to "claw back" incentive compensation that is based upon inaccurate financial statements or performance metrics. 

In sum, the standards and considerations I used in evaluating employee compensation at the seven companies can be found in the statute and the accompanying Treasury regulations:  in these laws, Congress and the Treasury provided me the guidance needed to make my final determinations.  Based on this guidance, I determined that a new compensation regimen should be implemented at these seven companies:  guaranteed compensation is to be replaced by performance-based compensation designed to tie individual executives' financial opportunities to the long term overall financial success of each Company.  Short-term profits must give way to longer-term financial stability and success.   

II.        What specific proposals have been received from the seven companies and what    specific actions have you taken with respect to those proposals?

Mr. Chairman, I refer you and the Members of the Committee to my Report (attached) which details the individual submissions made by each of the seven companies, and also describes in comprehensive fashion my response to each of these submissions.  The general conclusions I reached after careful evaluation and analysis of the submissions were the same for six of the seven companies--I concluded, pursuant to the statute and the Treasury regulations, that each submission would result in payments contrary to the "Public Interest Standard," and should, therefore, be rejected.  The "Public Interest Standard" is the term I used in my Report to describe the regulatory standards that I am required to apply in making determinations.  Instead, as my Report spells out, I made important revisions to the submissions as a precondition to approving compensation structures and payments for each individual covered executive at these six TARP recipients.  (Chrysler Financial has unique circumstances, and I determined that its proposal was appropriate in light of them.

I can summarize the flaws in the six individual company submissions as follows:

1.      The companies requested excessive guaranteed cash – salaries and bonuses – for company executives;
2.      The companies requested that stock issued to these executives be either immediately redeemable or redeemable without a sufficient waiting period;
3.      Many of the companies did not sufficiently tie compensation to performance-based benchmarks and metrics;
4.      Many of the companies did not sufficiently limit or restrict financial "perks," such as private airplane transportation, country club dues, golf outings, etc., and in some cases provided excessive levels of severance and executive retirement benefits;
5.      The companies did not make sufficient effort to fold guaranteed compensation contracts – entered into prior to the enactment of the current compensation regulations – into 2009 performance-based compensation.

In modifying these six submissions in order to satisfy the "Public Interest Standard," I made important changes designed to tie compensation to prospective company performance:

1.      I greatly reduced the amount of 2009 guaranteed cash compensation made available to senior executives.  On the whole, cash (which, in the past, included cash base salaries and cash bonuses) was reduced by approximately 90%.  Overall total compensation was reduced by approximately 50%.

2.      In place of cash, I substituted "stock salary" which, in accordance with Treasury regulations, vests immediately upon issuance but may only be redeemed in three equal, annual installments beginning in 2011, with each installment redeemable one year early if TARP obligations are repaid.   The objectives are clear – to tie individual compensation to longer-term performance metrics, and to encourage senior executives to remain at the company for a period of years to maximize their personal benefit from the overall profitability of the company itself.  The value of "stock salary" will depend on the companies' financial success in coming years.  At the same time, I also permitted incentive payments of "long-term restricted stock."  This long-term incentive stock vests only if executives remain employed for three years after grant, and it can be cashed in only in 25% increments for each 25% of TARP obligations repaid by their employer.    Again, the goal is to tie individual compensation to the overall financial success of the company. 

3.      By implementing the ideas of "stock salary" and "long-term restricted stock," only redeemable after multiple years of company performance,  I tied individual compensation to long-term company success.

4.      I reined in  "perks" by expressly requiring that any such perks beyond $25,000 per individual must first receive the approval of the Office of the Special Master.  No longer will senior executives be entitled to excessive use of private planes and other compensation-related financial benefits.
I also prohibited additional company contributions to executive retirement programs..

5.      I succeeded in almost all cases in getting the companies to agree to restructure guaranteed contracts and other forms of guaranteed compensation into prospective, performance-based compensation packages.  These companies agreed, in almost all cases, to transfer guaranteed forms of compensation – entered into with company officials before the enactment of current legal requirements – into "stock salary." 
I am very reluctant to even attempt to invalidate the sanctity of contracts entered into well before enactment of the current law; however, I did work closely with the companies in an attempt, cooperatively, to restructure these "grandfathered" financial guarantees by making them part of my 2009 final compensation determinations. 

Mr. Chairman, I refer you and the Members of the Committee, to my Report which spells out in further detail how we modify company submissions to comply with the "Public Interest Standard." 

III.       What recommendations do you have for oversight of TARP recipient employee     compensation schemes in the future?

The Treasury regulations speak quite clearly to this question. 

First, the Standards require that the Office of the Special Master now turn its attention to reviewing compensation structures for the remaining executive officers, and 75 next most highly compensated employees, in each of the seven companies.  The regulations do not require the Special Master to make individual compensation determinations for these individuals; instead, the regulations require that the Special Master approve the compensation structure for these individuals.  The law affords me 60 days to do this from the time that I deem the company submissions with respect to these individuals "substantially complete."  I have received all of these pertinent submissions from each of the seven companies but have not yet concluded that they are "substantially complete," thereby triggering the 60-day limitation. 

Second, the Office of the Special Master must soon turn its attention to the process for determining the 2010 compensation for the senior executives at each of the seven TARP exceptional assistance companies.  I believe we have made important progress in this regard as a result of completed efforts at 2009 compensation.  Nevertheless, there will undoubtedly be new compensation issues which will confront us in 2010.  (For example, we anticipate dealing once again with claims of "grandfathered"  retention contracts and other guaranteed forms of compensation which will have to be considered by the Special Master as part of 2010 submissions for the senior executives; in addition, it is anticipated that the list of senior executives for each Company will undergo some modification, requiring a new evaluation of certain individual compensation packages submitted by each company.) 

Finally, I do not recommend that my responsibilities related to compensation determinations for senior executives, as currently defined by Treasury regulations, be expanded beyond the current seven companies receiving exceptional TARP financial assistance.  I believe Congress and the Treasury have already spoken with respect to the compensation restrictions that apply beyond this group of firms.  My limited mandatory jurisdiction involving just these seven companies is justified by the fact that the American taxpayers have a vested interest as particularly significant stakeholders in these seven companies.  But, the federal government should not enter the business of micromanaging compensation practices beyond these seven companies by expanding my jurisdiction or broadening my discretionary authority.  Hopefully, the individual final compensation determinations I make may yet be used, in whole or in part, by other companies in modifying their individual compensation practices.  I believe the final compensation determinations I make and discuss in my Report are a useful model to guide others in the private marketplace.  But that is where my authority should end.  I do not believe it necessary or wise to broaden my jurisdiction or make my legal authority more pervasive. 

Mr. Chairman, this concludes my formal written statement, and I welcome any questions from you and the Members of this distinguished Committee.

Thank you.

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Treasury Allocates $2.2 Billion in Bonds for Renewable Energy Development

Clean Renewable Energy Bonds Awarded to More Than 800 Recipients Nationally

WASHINGTON--As part of the Obama Administration's efforts to spur renewable energy production, the U.S. Department of Treasury today announced the allocation of $2.2 billion in Clean Renewable Energy Bonds (CREBs) for 805 recipients across the country.  Funded by the Energy Improvement and Extension Act of 2008 and the American Recovery and Reinvestment Act of 2009 (Recovery Act), these energy bonds help government agencies, public power providers, and cooperative electric companies obtain lower cost financing for clean energy development projects.

"The Recovery Act's innovative bond programs provide communities around the country with financing to jump start important development projects," said Treasury Deputy Secretary Neal Wolin. "Because of the Clean Renewable Energy Bonds awards announced today, energy developers will be able to access lower cost credit to help make the shift to clean renewable energy production, benefitting both our economy and our environment."

The Treasury Department allocates bond authority to governmental agencies, public power providers, and cooperative electric companies involved in clean renewable energy development and production. The application deadline for the new CREBs allocations was August 4, 2009, with recipients being announced today.  These bonds function as tax credit bonds which allow investors to receive federal tax credits in lieu of the payment of a portion of the interest on the bond.  For CREBs, the federal tax credits will cover 70 percent of the interest on the bonds.

A complete list of recipients receiving awards of bond authority to issue CREBs can be found here.

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U.S. International Reserve Position

October 23, 2009
TG-331

Treasury Surpasses $3 Billion in Recovery Act Funds for States to Provide Affordable Housing

California to Receive $284 Million in Payments in Lieu of Tax Credits;
To Date, 45 State Housing Agencies Receive Funds

WASHINGTON – As part of the Obama Administration's efforts to strengthen communities and ease pressures on the housing market, the U.S. Department of the Treasury today announced $284 million in American Recovery and Reinvestment Act (Recovery Act) funding to spur the development of affordable housing in California. To date, 45 state housing authorities have been awarded a total of $3.1 billion in payments in lieu of tax credits for affordable housing projects.

"This innovative Recovery Act program allows the federal government to partner with states to support local developers and helps ensure that housing developers can access the financing necessary to build affordable housing," said Treasury Deputy Secretary Neal Wolin. "We have worked quickly to make available more than $3 billion to state housing agencies, and we expect to see continued efforts at the state level, so that these funds can be delivered to the communities that need it most."

In May 2009, the Treasury Department launched an innovative program to provide payments in lieu of tax credits to state housing agencies to jump start the development or renovation of qualified affordable housing for families across the country.  Upon receiving notice of these allocations, state housing agencies manage a competitive process to disburse funds to qualified developers. This is an ongoing program open to additional state applications through 2010.

The following is a complete list of funds awarded to states under the program to date. For more information on the award to California, please contact Alice Scott, Public Affairs Director of the California Tax Credit Allocation Committee, ascott@treasurer.ca.gov, (916) 651-9411.

REPORTS

• Designated State Housing Credit Agency