November 7, 2009
tg-358

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

This will require a delicate balance.

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

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

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

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

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

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

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

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

Thank you.

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REPORTS

• Communiqué

Treasury Designates Bank Mellat Subsidiary and
Chairman Under Proliferation Authority

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

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

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

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

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

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

Identifying Information

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

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

###

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

I.                    Introduction

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

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

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

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

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

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

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

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

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

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

My testimony will focus on the following three areas:

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

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

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

II.            Challenges Posed by the Misuse of Legal Entities

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

V.            Conclusion

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

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

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

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

U.S. International Reserve Position

U.S. International Reserve Position

Assistant Secretary for Financial Stability Herbert M. Allison, Jr.
Written Testimony
Congressional Oversight Panel

Chair Warren, Members of the Panel, thank you for the opportunity to testify today regarding Treasury's efforts under the Emergency Economic Stabilization Act of 2008 (EESA) and the Troubled Asset Relief Program (TARP).  You have asked me in particular to describe the progress of our efforts and to assess the effectiveness of our strategy in stabilizing the financial sector.  You have also asked me to discuss the findings and recommendations of your recent report on our foreclosure mitigation efforts.  I am happy to address these subjects and look forward to engaging in a dialogue with you after my testimony. 

TARP – Progress to Date and Effectiveness

One year ago, we were in the midst of one of the worst periods in our financial history. Immediate, strong action was needed to avoid a complete meltdown of the financial system.

On October 3, 2008, Congress passed the Emergency Economic Stabilization Act of 2008, recognizing the need to take difficult but necessary action and giving the Treasury Department unprecedented authority to stabilize the U.S. economy by creating TARP.

The actions of the Treasury Department under TARP last fall must be viewed together with many other actions taken by the government to address the crisis, including Treasury's Money Market Mutual Fund Guarantee Program, the Federal Reserve's liquidity programs that support both financial institutions and the commercial paper market, and the FDIC's Temporary Liquidity Guarantee Program.  These efforts collectively succeeded in preventing a catastrophic collapse of our financial system. However, when President Obama took office, the financial system remained extremely fragile and the Administration faced a rapidly evolving set of grave challenges.

In January 2009, what America faced was no longer just a financial crisis; it was a full-blown economic crisis. In January alone, we lost 741,000 jobs, the largest single month decline in 60 years.  Home foreclosures were increasing at a rapid rate.  Businesses and families were struggling to find credit.  It was feared that those banks that remained standing had too little capital and too much exposure to risky assets.  Secondary markets for credit had essentially come to a halt; and liquidity in a broader range of securities markets had fallen sharply.  Overall, American families had lost $10 trillion in household wealth. 

In short, the economy was in a free fall and there was increasing concern we were headed towards a second Great Depression. Christina Romer, the Chair of the President's Council on Economic Advisors, recently gave a speech outlining just how close we came to a second Great Depression. She noted that the decline in household wealth from December 2007 to December 2008 was 17% - five times the decline that occurred in 1929.  

The Administration confronted this situation by taking forceful action on several fronts.  A comprehensive strategy was put in place to stabilize the financial system and the housing market, to stimulate economic activity, and to provide help to those in most need.  We still have a way to go before complete recovery takes hold, but we have stepped back from the brink. 

The work we have done under our Financial Stability Plan helped avert a collapse of our financial system.  As such, the Treasury is now in a position to begin winding down TARP programs that helped put large banks and the auto companies on a sounder footing.  It is time to set a new direction for the TARP, to account for the recent improvements in capital markets and to address lingering weaknesses in housing markets and small business lending. 

While the next steps for TARP will focus on the twin challenges of helping responsible families keep their homes and small businesses get better access to credit, it is still appropriate here to provide an update on the progress and impact of the range of existing programs.  

Capital Purchase Program

As you know, a key program under TARP has been the Capital Purchase Program (CPP), which has provided a total of $205 billion to 679 financial institutions, including over 300 small and community banks.  This capital has been essential in stabilizing the financial system, enabling banks to absorb losses from bad assets while continuing to lend to consumers and businesses. 

Treasury also worked with the federal banking regulators to develop a plan for "stress tests".  This was a comprehensive, forward looking assessment of the capital held by the largest 19 US banks.  The design of the tests and their results were made public, a highly unusual step taken because of the unprecedented need to reduce uncertainty and restore confidence. 

Since the stress test results were released in early May, banks of all sizes have raised over $80 billion in common equity and $40 billion in non-guaranteed debt.  Importantly, that capital raising has enabled more than 30 banks to repay the TARP investments made by Treasury. We have received over $70 billion in principal repayments, and over $6.5 billion in dividends, interest and fees from CPP participants.  In addition, we expect banks to repay another $50 billion over the next 12 to 18 months.

Other metrics further support our conclusion that TARP capital has had a positive effect.  First, the TED spread, which measures the difference between interbank lending rates and T-bills and is a measure of the risk in the banking system, had grown to 338 basis points (bps) in December 2008.  As a point of reference, the TED spread rose to 219 points in December of 1930.  At the end of last week, the TED spread was approximately 23 bps.  Second, conditions in interbank markets have continued to improve. The spreads of LIBOR rates to overnight index swap ("OIS") rates, a useful measure of banks' short-term borrowing costs, declined in the third quarter (see Figure B below).  The spreads of the one-month and 3-month LIBOR over OIS have narrowed to levels about equal to those prevailing before the financial crisis after having spiked to previously unforeseen levels.  In line with these improvements in bank funding markets, the use of the Federal Reserve liquidity facilities directed at depository institutions has declined.  

Figure B

When the Obama Administration took office, the Treasury had outstanding commitments to banks under the CPP and other programs of $238 billion.  Since mid-January, we have invested $11 billion in nearly 400 institutions, while receiving the repayments noted above of $70 billion.  Thus, since January, we have reduced the size of the Treasury's investments in the banking system by $59 billion to $180 billion, shifting the mix of remaining CPP investments significantly toward small and community banks. 

Other Programs

Let me turn now to some of the other EESA programs and their impact on the overall economy.  The Public-Private Investment Partnership (PPIP) was designed to help cleanse the balance sheets of major financial institutions and re-liquefy key markets for financial assets.  Recently, the first closings with asset managers selected to run the PPIP funds have taken place, and to date Treasury has closed on approximately $9.2 billion of capital commitments, representing $12.3 billion of purchasing ability when combined with private capital. Although purchases of assets under the program are just beginning, the announcement of the program itself helped reassure investors. Since the announcement, non-agency mortgage-backed securities have gone up substantially in price.  Prime fixed rate securities issued in 2006 that traded as low as $60 in March have increased in value by over 40 percent as additional liquidity has come back to the markets. That improvement in financial market conditions has created the positive backdrop to enable us to proceed with the program at a scale smaller than initially envisioned.  Treasury expects to provide approximately $30 billion in equity and debt financing to special purpose entities (SPEs) formed by the PPIP fund managers. 

Another problem area of the economy one year ago was the asset-backed securities markets, through which credit is extended to consumers, small businesses and students.  The Term Asset-Backed Securities Loan Facility (TALF) has been a successful effort to help restart those markets. Opened in March 2009, TALF is a lending facility operated by the Federal Reserve Bank of New York (FRBNY) under which FRBNY provides term non-recourse loans collateralized by certain types of AAA-rated asset-backed securities (ABS).  Treasury has consulted in the design of the program and will provide up to $20 billion for the purchase of ABS in the event of a default.

I am pleased to report that, since March, a total of $79.6 billion of new TALF-eligible ABS has been brought to market, of which $46.5 billion was funded using TALF loans.  This aid to the securitization market has had a decidedly positive impact on liquidity, spreads, and the availability of consumer and small business credit.  The figure below details the entire market impact (TALF and non-TALF) on the for AAA-rated interest rate spreads for credit card receivable and automobile loan-backed securities.

This decline in spreads leads Treasury to believe that there will be less reliance on TALF funding in the future as TALF "money" becomes more expensive in comparison to financing now available in the private markets – an original design of the program.

As you know, Treasury has also implemented a number of programs designed to stabilize specific institutions or sectors of the economy.  For example, Treasury has implemented the Automotive Industry Financing Program (AIFP) for General Motors (GM), Chrysler, GMAC, Chrysler Financial and automotive parts suppliers, the Targeted Investment Program (TIP) for Bank of America and Citigroup, the Asset Guarantee Program (AGP) and has provided support, in conjunction with the Federal Reserve, to American International Group (AIG).  In each case, Treasury responded quickly to help stave off further deterioration in the financial condition of the institutions involved and the overall economy.  In the case of the automotive industry, Treasury's leadership and forceful action helped GM and Chrysler effect large-scale asset sales through bankruptcy court proceedings that resulted in leaner and more efficient companies. 

The effects of EESA and TARP cannot be evaluated in a vacuum – they must be considered in conjunction with the many other measures the government has taken to combat this crisis.  Nevertheless, in many ways, as noted above, we believe the programs have been successful.  As the utilization of the extraordinary policies put in place to combat the financial crisis declines, Treasury looks ahead to a prudent exit and the sustainable supply of credit for consumers and families.  The financial system still has significant issues which must be addressed – key parts of the financial system remain impaired and the system as a whole is still somewhat fragile. Unemployment is too high and the equity markets remain volatile.  We must continue to be ready to provide support if needed, and we must unwind these programs carefully, so that the nascent recovery is not disrupted. 

Housing – Updates and a Response to the October 9^th Recommendations

You have asked that I address the findings and recommendations of the Congressional Oversight Panel in their recent October 9th report.  We welcome the thoughts of the Congressional Oversight Panel on the nation's housing crisis, and we thank you for your suggestions on how to improve the Making Home Affordable Program. 

The Congressional Oversight Panel report correctly recognizes that the Home Affordable Modification Program (HAMP), is achieving its intended goal of providing struggling borrowers with more affordable modified monthly payments – it reports that HAMP is saving families an average of $500 a month on permanent modifications.  I am pleased that on October 8, almost one month ahead of the November 1 benchmark set earlier this year, we reached a new milestone of more than 500,000 trial loan modifications underway.

As of September 30th, we have signed contracts with 63 servicers, including the five largest.  Between loans covered by these servicers and loans owned or guaranteed by the GSEs, more than 85 percent of all residential mortgage debt in the country is now covered by the program.  As of September 30th, more than 757,955 trial modifications have been offered under HAMP, and as of October 8th, more than 500,000 trial modifications are underway.

Today, I want to outline some of the recent steps that Treasury and the Administration have taken or will shortly be taking to improve the effectiveness of HAMP with the goal of strengthening the housing sector, helping millions of homeowners and laying the foundation for economic recovery and financial stability. 

First, we are committed to helping eligible homeowners obtain a final modification if they are qualified for HAMP.  We do not want eligible borrowers to fail the trial period because the document requirements are unnecessarily burdensome.  We recently released guidance – Streamlined Borrower Documentation – that reduces the volume of paperwork needed to obtain a trial modification or final modification, and standardizes documentation across servicers.  We worked with the Internal Revenue Service, for example, to to simplify the process of obtaining income tax return transcripts directly from the IRS, eliminating the need for borrowers to mail or fax bulky returns.  The new standardized forms provide borrowers with more information about the modification process but in a format that is easy to understand. We hope and expect that the streamlined document revisions to HAMP will enable more borrowers to successfully complete the requirements of the trial period and enable them to obtain a permanent modification.

Second, we are developing a foreclosure alternatives program for HAMP, which will provide incentives for short sales and deeds-in lieu of foreclosure where borrowers are unable or unwilling to complete the HAMP modification process.  We are aware that there are many borrowers whose modifications under HAMP will not be sufficient to keep them out of foreclosure; for example, borrowers who do not have sufficient income to support a modified payment. The Foreclosure Alternatives Program can help prevent costly foreclosures and minimizes the damage that foreclosures impose on borrowers, financial institutions and communities.

Third, we have established denial codes that require servicers to report the reason for modification denials in writing to Treasury.  We will shortly require servicers to use those denial codes as a uniform basis for sending letters to borrowers who were evaluated for HAMP but denied a modification.  In those letters, borrowers will be provided with a phone number to contact their servicer as well as the HOPE hotline, which has counselors who are trained to work with borrowers to help them understand reasons they may have been denied a modification and explain other modification or foreclosure prevention options that may be available to them.

Fourth, we have expanded the efforts of the federal government to combat mortgage rescue fraud and put scammers on notice that we will not stand by while they prey on homeowners seeking help under our program.  On September 17, Secretary Geithner hosted Attorney General Eric Holder, Housing and Urban Development (HUD) Secretary Shaun Donovan, Federal Trade Commission (FTC) Chairman Jon Leibowitz, Financial Crimes Enforcement Network (FinCEN) Director Jim Freis and attorneys general from 12 states to discuss emerging trends and proactive strategies to combat fraud against consumers in the housing markets as well as best practices to bolster coordination across state and federal agencies. 

In its October 9th report, the Congressional Oversight Panel recommended that Making Home Affordable address option ARM loans and negative equity, as well as unemployed borrowers.   Let me briefly describe these issues. 

Option ARMS

Some types of mortgage loans, like pay option ARMs, present unique challenges.  The goal of HAMP is to reduce monthly payments to manageable levels, and place troubled borrowers into amortizing, fixed rate mortgages.  Where borrowers on an option ARM are already having trouble paying the introductory low teaser rates – the relatively short initial fixed-rate periods when the option ARM bears an interest rate that is substantially below the "fully indexed" rate – it may be difficult to reduce the monthly payment and modify into an amortizing fixed rate loan.  Despite these challenges, our current program permits borrowers with pay-option ARMs to use HAMP when they meet other eligibility criteria.  In fact, the COP report showed that some borrowers with adjustable rate mortgages are getting modifications under HAMP.

Negative Equity

The Administration's plan focuses on affordability because achieving an affordable payment is essential to keep at-risk homeowners in their homes.   Data from past cycles suggest negative equity alone is unlikely to be sufficient to cause default, and though this cycle could be different, there is little evidence suggesting a dramatic change in behavior.   However, (Making Home Affordable) MHA recognizes and addresses the problem of negative equity as well.  HAMP can help homeowners with negative equity reduce their mortgage payments to affordable levels.   Servicers will be required to evaluate borrowers for a Hope for Homeowners refinance at the same time they are evaluated for a Home Affordable Modification, and to offer the Hope for Homeowners refinance if the borrower qualifies.  The Department of Housing and Urban Development recently issued a mortgagee letter and other materials to assist implementation of Hope for Homeowners.  Greater use of an improved Hope for Homeowners program will help to reach borrowers with negative equity and allow them to regain a positive equity position.

HAMP also uses incentives to servicers and investors to reduce borrowers' interest rates – or write down their principal, if the servicer chooses – to bring down the monthly payment to a level the borrower can afford.  Additional incentives are available to borrowers to help them pay down principal more quickly. The Administration's goal is to maximize program participation in order to provide an affordable and sustainable solution for as many struggling borrowers as possible.

Unemployment

We recognize unemployment is a significant problem contributing to the ongoing foreclosure crisis.  Rising unemployment and other recessionary pressures have impaired the ability of many otherwise responsible families to stay current on their mortgage payments.  Unemployed borrowers that will receive at least nine months of unemployment benefits are eligible for a modification under HAMP.   The COP report showed that this is working – the report showed that unemployed borrowers are receiving modifications through HAMP. We continue to study ways to help unemployed homeowners and we remain committed to meeting the challenges of reducing foreclosures and helping people maintain their homes.

Improving Transparency

The Panel recommended in its October 9^th report that Treasury should increase transparency of MHA – in eligibility, reasons for denial and other issues touching homeowners, and in disclosure of performance data.  We agree that borrowers should be provided with clear explanations for loan modification denials.  For that reason, we established the denial codes described above that require servicers to report the reason for modification denials to Treasury, and we intend to require servicers to use those denial codes as a basis for sending written letters to borrowers who were evaluated for HAMP but were denied a modification. 

We also agree that transparency of the Net Present Value (NPV) model – a key component of the eligibility test – is important.  We are increasing public access to the NPV white paper, which explains the methodology used in the NPV model.  We are also working to increase transparency of the NPV model, so that there can be a wider understanding of how the model works among housing counselors and borrowers.

We are working with participating servicers to establish operational metrics to measure the performance of servicers in responding to borrowers, such as average borrower wait time for inbound borrower inquiries, and response time for completed applications.  We plan to publish these metrics on a servicer-by-servicer basis in our monthly public reports. 

Streamlining HAMP Processes

The Panel also recommended that Treasury should implement greater uniformity and streamline processes in MHA.  As described above, we have recently released the streamlined documentation program, which standardizes and simplifies the documentation required for modifications.

In addition, within the next few weeks, the Treasury expects to implement internet capabilities that will allow borrowers to fill-in, download, and print these standardized documents to send to their servicer.  As we continue to enhance the Making Home Affordable website, we look forward to providing borrowers with a centralized location through which they can access borrower documents, apply directly for a modification, and ultimately communicate with their servicer to track the status of their modification.

Making Program Enhancements to HAMP

The October 9^th report recommended that Treasury should consider program enhancements to HAMP, such as localizing NPV models, and lowering the debt-to-income (DTI) eligibility test.  Servicers are permitted to enter in their own variables for several elements of the NPV calculations.  For this process, servicers rely on standardized home price valuation products and service providers that can accommodate housing data as granular as street-by-street pricing information. 

Foremost among Treasury's efforts to localize the NPV models has been the Home Price Decline Protection (HPDP) incentive payment.  The HPDP payments provide lenders additional incentives for modifications where home price declines have been most severe and lenders fear these declines may persist. These incentives will encourage servicers to undertake more modifications in areas hard hit by home price declines.

Improving Servicer Accountability

The Panel also recommended that Treasury should ensure rigorous compliance and accountability with strong sanctions for non-compliant servicers.  Freddie Mac, Treasury's compliance agent for HAMP, began servicer reviews in July.  Recognizing that many of the servicer's processes are newly developed and most modifications are still in their trial periods, these reviews have focused on the servicer's implementation activities, looking to identify process improvements at this early stage.  As loans move into the official modification status and as servicers' processes mature, Freddie Mac's reviews will focus more on risk-based activities and compliance trend issues.

Freddie Mac also began a "second look" review process, where Freddie Mac will audit servicers to review a sample of HAMP modification applications that have been declined by the related servicers.  This "second look" process began in August, and is designed to minimize the likelihood that borrower applications are overlooked or that applicants are inadvertently denied a modification.  In addition, the second look program is examining servicer non-performing loan (NPL) portfolios to identify eligible borrowers that should have been solicited for a modification, but were not.

Following these reviews, Treasury will receive performance assessments of each servicer's program compliance as prepared by Freddie Mac, and we plan to institute substantial penalties for non-compliance.  These penalties may include withholding or reducing payments to servicers, requiring repayments of prior payments made to servicers with respect to affected loans, or requiring additional servicer oversight.

Furthermore, Treasury has recently developed a compliance committee for HAMP to review and understand servicers' compliance results and determine appropriate remedies.  The compliance committee's actions range from requiring improperly rejected loans to be modified, to operational enhancements to monetary actions.

We recognize that any modification program seeking to avoid preventable foreclosures has limits, HAMP included.  HAMP does not, nor was it ever intended to address every delinquent loan.  For those who fail the NPV test, but fall within HAMP's eligible population, Treasury is finalizing guidelines that would provide incentives for borrowers and servicers to pursue alternatives to foreclosure through a deed in lieu or short sale transaction.

We remain committed to helping American families during this crisis and will aggressively continue to build on our progress to date.  Sustained recovery of our housing market, and the mitigation of foreclosures, is critical to lasting financial stability and promoting a broad economic recovery.  Consequently, we appreciate your suggestions for improvement to HAMP and we look forward to working with you to help keep Americans in their homes, restore stability to the US housing market and ensure a sustained economic recovery.

Conclusions

It has been over a year since the most devastating financial crisis since the Great Depression.  In the panic that followed, our financial system nearly ground to a halt.  Congress' swift response in enacting EESA and approving the TARP funds prevented a truly catastrophic collapse.  Fortunately, we have moved back from the financial brink and are headed toward economic recovery, thanks in part to the programs we have enacted under EESA.  Nevertheless, risks remain.  We must make sure the financial recovery continues to take hold.  In particular, sustained recovery of our housing market and of small businesses is critical to lasting financial stability and promoting a broad economic recovery.  We look forward to working with you to help keep Americans in their homes, restore stability to the US housing market and to the financial system, help ensure small businesses have access to credit, and ensure a sustained economic recovery.

###

U.S. International Reserve Position

Gene Sperling, Counselor to the Secretary of the Treasury
Written Testimony
U.S. Senate Committee on Small Business and Entrepreneurship
Health Insurance Reform and Small Businesses

October 16, 2009
TG-322

Joint Statement of
Tim Geithner,
Secretary of the Treasury,
and
Peter Orszag,
Director of the Office of Management and Budget,
on
Budget Results for Fiscal Year 2009

"This year's deficit is lower than we had projected earlier this year, in part because we are managing to repair the financial system at a lower cost to taxpayers.  But future deficits are too high, and the President is committed to working with Congress to bring them down to a sustainable level as the economy recovers," Secretary Geithner explained.

"It was critical that we acted to bring the economy back from the brink earlier this year. As we move from rescue to recovery, the President recognizes that we need to put the nation back on a fiscally sustainable path.  As part of the FY 2011 budget policy process, we are considering proposals to put our country back on firm fiscal footing," Director Orszag stated. 

A summary of the FY2009 data, released as part of the September 2009 Monthly Treasury Statement of Receipts and Outlays of the United States Government, shows that the federal deficit dropped by $162 billion from a projected $1,580 billion in the August Mid-Session Review (MSR) to the final figure of $1,417 billion.  

Receipts for the fiscal year totaled $2,105 billion, while outlays totaled $3,522 billion. 

The decline in the deficit from the August MSR estimate reflected outlays that were $132 billion lower than expected in August, in large measure because of lower-than-anticipated outlays by the government's Troubled Assets Relief Program (TARP). The decline was also the result of receipts that were $31 billion higher than estimated in the MSR.

The FY2009 deficit was largely the product of the spending and tax policies inherited from the previous Administration, exacerbated by a severe recession and financial crisis that were underway as the current Administration took office.  The new Administration's chief economic stabilization and recovery efforts implemented through TARP and the American Recovery and Reinvestment Act (Recovery Act) accounted for 24 percent of the deficit total.

Federal borrowing from the public net of financial assets increased by $1,417 billion during FY2009, to $6,711 billion or 47.2 percent of GDP. [1]

Summary of Fiscal Year 2009 Final Data

Overall, government receipts in FY2009 were $419 billion lower than in FY2008 -- a reduction of 16.6 percent.  This was largely a result of the effects of the economic slowdown on incomes and corporate profits and the tax provisions in the Recovery Act, enacted in February 2009.  Receipts fell from 17.5 percent of GDP in FY2008 to 14.8 percent of GDP in FY2009.

Primarily because of the government's economic recovery efforts, outlays for FY2009 grew by $543 billion, or 18.2 percent, from FY2008.  The full implementation of these temporary measures -- notably TARP initiatives to aid financial institutions and stabilize credit markets, the Treasury's Preferred Stock Purchase Agreement with Fannie Mae and Freddie Mac, which helped to stabilize credit availability in the mortgage market, and the Recovery Act -- contributed to growth in outlays.  Increased outlays through automatic stabilizers such as Medicaid and the Supplemental Nutrition Assistance Program also contributed to the change.  As a percentage of GDP, outlays grew from 20.6 percent in FY2008 to 24.8 percent in FY2009.

The final $1,417 billion FY2009 deficit figure was $424 billion lower than projected in the FY2010 Budget, released in May, with receipts coming in $52 billion lower and outlays $476 billion lower than projected.  Relative to the FY2008 data, the FY2009 deficit ended $962 billion higher.  The FY2009 deficit amounts to an estimated 10.0 percent of GDP. 

More complete explanations of the FY2009 receipts, outlays, and deficit follow.

Fiscal Year 2009 Receipts

Total receipts for FY2009 were $2,105 billion, $31 billion higher than the MSR estimate of $2,074 billion.  Higher-than-expected collections of individual income taxes and corporation income taxes accounted for most of the net increase in receipts relative to the MSR.  Table 2 displays actual receipts and estimates from the Budget and MSR by source.

• Individual income taxes were $915 billion, $12 billion higher than the MSR estimate.  Higher-than-estimated non-withheld payments accounted for $5 billion of the increase in individual income taxes relative to the MSR.  Higher-than-anticipated growth in non-wage sources of income such as capital gains and dividends, relative to what was assumed in the MSR, contributed to the increase in non-withheld payments.  Lower-than-estimated refunds increased collections of individual income taxes an additional $7 billion relative to the MSR estimate.  A reclassification of recovery payments provided under the Economic Stimulus Act of 2008 and claimed on individual income tax returns for 2008 as outlays rather than as tax refunds accounted for approximately half of the reduction in refunds relative to the MSR estimate. This reclassification had no effect on the deficit.  An accounting adjustment based on more recent data reallocated $2 billion less than had been expected in withheld tax payments from the Social Security and Medicare Trust Funds to individual income taxes. This reduction in withheld individual income tax payments was offset by higher-than-estimated withholding attributable to other factors, resulting in no net change in withheld individual income tax payments relative to the MSR estimate.
• Corporation income taxes were $138 billion, $17 billion higher than the MSR estimate. Inaction on the Administration's proposal to expand net operating loss carrybacks increased corporation income tax payments $28 billion relative to the MSR. This increase was partially offset by reduced corporation income tax payments and increased refunds, attributable to lower corporate profits than assumed in the MSR.
  

Social insurance and retirement receipts were $891 billion, the same as the MSR estimate, although there were offsetting differences among the sources of this category of receipts. A $2 billion increase in employment and general retirement receipts relative to the MSR was attributable to the lower-than-expected reallocation of withheld tax payments from the Social Security and Medicare Trust Funds to individual income taxes, as described above. Lower-than-expected deposits by States of unemployment payroll taxes, relative to what was assumed in the MSR, contributed to an offsetting $2 billion shortfall in unemployment insurance receipts.

• Excise taxes were $62 billion, $3 billion lower than the MSR estimate. This decline was attributable to lower-than-expected demand for taxed goods.
  
• Estate and gift taxes were $23 billion, $3 billion lower than the MSR estimate. This decline was in large part attributable to a decline in the value of taxable estates relative to the MSR estimate.
  
  
• Customs duties were $22 billion, within $100 million of the MSR estimate.
  
  
• Miscellaneous receipts were $52 billion, $8 billion higher than the MSR estimate. Higher-than-expected deposits of earnings by the Federal Reserve System, attributable to higher-than-expected returns on its investment portfolio and its foreign currency holdings, accounted for $7 billion of the increase in miscellaneous receipts relative to the MSR estimate.
  

Fiscal Year 2009 Outlays

Total outlays were $3,522 billion for FY2009, which was $132 billion below the MSR estimate. Outlays for a number of agencies were below MSR estimates, including differences of $4 billion or more in the Departments of Agriculture, Defense, Health and Human Services, Transportation, and Treasury as well as the Corps of Engineers and the Postal Service. These lower-than-expected outlays were partially offset by significantly higher-than-expected outlays in the Other Defense Civil programs, the Office of Personnel Management, and the Federal Deposit Insurance Corporation.

Total Recovery Act outlays in FY2009 were $113 billion, with the largest components in the Department of Health and Human Services (HHS) to cover increased Medicaid payments, the Department of Labor to provide higher unemployment benefits, and the Department of Education for payments to states from the State Fiscal Stabilization Fund and for increases in Pell grants.  Additionally, Department of the Treasury outlays grew due to new assistance to government-sponsored enterprises (GSEs).  HHS outlays also expanded due to significant growth for Medicare. 

Table 3 displays actual outlays by agency and major program as well as estimates from the Budget and the MSR.  The largest changes in outlays from the MSR were in the following areas:

• Department of Agriculture -- Outlays for the Department of Agriculture were $114 billion, $6.4 billion below the MSR estimate. Commodity Credit Corporation (CCC) actual outlays were about $2 billion less than MSR estimates. This occurred because fewer producers than anticipated took out commodity loans and more paid them back before the end of the fiscal year; dairy prices increased late in the fiscal year, which resulted in lower Milk Income Loss Contract payments than anticipated in the MSR; the prices of certain agricultural commodities did not fall as much as assumed in the MSR so counter-cyclical payments were lower than expected; and non-insured assistance payments (crop loss payments for commodities not eligible for crop insurance) were lower than anticipated. Recovery Act outlays for the Forest Service and the Rural Development program area were approximately $1 billion less than MSR estimates. Project approval and obligation occurred at a slower pace than originally projected. In addition, the delay in project obligations resulted in a delay in the disbursement of Rural Development salaries and expenses since these funds support project approval and monitoring. Outlays for the Supplemental Nutrition Assistance Program were $1.2 billion, or 2 percent, lower than projected in the MSR. There were roughly 200,000 fewer participants than anticipated, and the average benefit per person was lower as well.
• Department of Commerce -- Department of Commerce outlays were $11 billion in FY2009, $1.1 billion below the MSR estimate. Over half of this difference ($558 million) related to the National Telecommunications and Information Administration, which administers the digital-to-analog converter box coupon program and public safety interoperable communications grants; both programs spent less in FY2009 than anticipated. Actual outlays for the Bureau of the Census were $375 million below MSR estimates, and outlays by the National Institute of Standards and Technology were $350 million below estimates.
• Department of Defense -- Outlays for the Department of Defense (DOD) were $637 billion, $4.4 billion, or 0.7 percent, less than estimated in the MSR. There is no single explanation for the differences between projected and actual outlays, but several examples illustrate the types of variance seen in accounts. For example, DOD spent $1.5 billion less than projected for the Air Force to purchase aircraft, in part because prior year supplemental appropriations provided more money than could be used to buy C-130 Hercules transport aircraft, exceeding production capacity. Other examples of lower-than-projected outlays include the contracts to purchase heavy- and medium-wheeled vehicles, where contracts were delayed or protested, slowing outlays by more than $1 billion. In some instances supplemental funds caused higher-than-expected outlays for the purchase of major defense systems, such as for the Navy's purchase of aircraft.  In this instance, the purchase of planes had an outlay surge in the second year after appropriations (resulting in an outlay rate $1.3 billion higher than projected).
• Department of Education -- Outlays for the Department of Education were $53 billion, $3.9 billion higher than the MSR estimate. Spending for the new State Fiscal Stabilization Fund, created by the Recovery Act, was $7.1 billion higher than expected, due to accelerated State drawdowns of this funding. This increase was partially offset by higher-than-expected negative subsidy receipts in the Federal Family Education Loan Program and Federal Direct Loan Programs primarily due to changes in the amounts and composition of student loan volumes, which reduced net outlays by $2.7 billion relative to the MSR.
• Department of Energy -- Outlays for the Department of Energy were $24 billion, $3.5 billion lower than the MSR estimate. Outlays for the Energy Efficiency and Renewable Energy account were $1.34 billion below MSR estimates due to slower-than-expected disbursement of Recovery Act funds, particularly for the Weatherization Assistance Program. Lower outlays for Fossil Energy ($310 million less than MSR) and Science ($632 million less than MSR) were due primarily to delays in awarding funds and slower progress on cleanup actions. Outlays for the Environmental Management program were $380 million less than MSR, due to slower-than-expected progress in implementing cleanup actions at DOE sites.
• Department of Health and Human Services -- Outlays for the Department of Health and Human Services were $796 billion, $17.6 billion below the MSR estimate.  A little less than half of the total difference was in outlays for Medicaid, which were $7.6 billion (2.9 percent) lower than MSR estimates, due to slower-than-expected growth in State Medicaid spending. While year-end financial and enrollment data are still being finalized, the difference between the estimated and actual Medicaid spending growth was likely due to a combination of slower-than-expected enrollment growth and stronger efforts by States to control program spending, such as by freezing or cutting provider reimbursement rates or by reducing benefits. Outlays for the Administration for Children and Families (ACF) were $3.4 billion below the MSR estimate. Outlays for the Children and Families Services account, which includes Head Start and Early Head Start, were lower than expected because ACF was not able to make grant awards from Recovery Act expansion funds before the end of FY2009. Grants are being awarded through October, and outlays will be made in FY2010. Outlays from the Temporary Assistance for Needy Families (TANF) contingency fund account were also lower than expected, because the MSR overestimated State applications for Recovery Act emergency funds.  In addition, slower-than-expected outlays for research grants at the National Institutes of Health and for emergency preparedness and response activities across HHS resulted in decreases of approximately $1.7 billion and $2.8 billion in outlays, respectively, relative to MSR projections.  It is likely that some of these outlays will shift from late FY2009 to early FY2010.
  
• Department of Homeland Security -- Outlays for the Department of Homeland Security (DHS) were $52 billion in FY2009, $1.8 billion more than the MSR estimate. The difference was attributable primarily to a decrease in fee collections and higher-than-expected outlays from a number of agencies within the Department. DHS fees were below the MSR estimate by approximately $700 million. Additionally, Customs and Border Patrol outlays exceeded the MSR estimate in both the Salaries and Expenses account and the Border Security, Fencing, and Tactical Infrastructure account.
  
  
• Department of Housing and Urban Development -- The Department of Housing and Urban Development's total FY2009 outlays were $61 billion, $1.8 billion below the MSR estimate. Most of this difference ($0.9 billion) was due to receipts generated by Federal Housing Administration (FHA) single-family and Government National Mortgage Association (GNMA) loan guarantee programs with negative subsidy rates. The loan volume of these programs surged as private mortgage insurance largely vacated the housing finance market. Two new housing programs experienced lower-than-anticipated FY2009 activity after their introduction -- the Hope for Homeowners and Tax Credit Assistance programs had outlays of $0.5 billion less than their MSR estimates. Outlays are likely to increase in FY2010 as these programs reach their projected scales. Outlays for the FHA General and Special Risk liquidating account were $0.4 billion less than the MSR estimate due to a substantial decline in mark-to-market activity (multi-family housing loan restructuring) and higher-than-anticipated collections on defaulted loans.
  
  
• Department of Justice -- FY2009 outlays for the Department of Justice (DOJ) were $28 billion, $1.4 billion below the MSR estimate. DOJ's actual outlays for State and local law enforcement assistance in the Office of Justice Programs were $1.0 billion lower due to slower-than-expected outlays of the Recovery Act grantee funds. The Recovery Act funds have been fully obligated to state and local law enforcement programs, but the grantees are not spending the funds as quickly as had been projected.
  
  
• Department of Transportation -- Outlays for the Department of Transportation were $73 billion, $7.5 billion lower than projected in the MSR. Actual outlays for DOT Recovery Act programs were $4.5 billion less than estimated, with the difference primarily in highway, transit, and rail programs. This was largely because of the time and steps required by project sponsors to start work on a new set of previously unplanned projects. Actual outlays for the Consumer Assistance to Recycle and Save (CARS or "cash for clunkers") program exceeded MSR estimates by $2.2 billion because the original estimate did not include outlays from an additional $2 billion in transfer authority enacted in Public Law 111-47.  In addition, rates of participation in the program far surpassed initial agency predictions, which resulted in a shift to FY2009 of outlays anticipated for FY2010. Also, spending out of the Federal Aid Highway account was $1.9 billion less than projected.
  
  
• Department of the Treasury -- Outlays for the Department of Treasury totaled $703 billion, $98.4 billion lower than the MSR estimate. Major differences from the MSR estimate include the following:
  
  
  • TARP had net outlays of $153.9 billion for debt, equity, guarantee, and housing programs, $82.3 billion lower than the MSR estimate, most of which was due to the timing of disbursements that were expected to occur in FY2009 but are now assumed to shift to FY2010.
    
    
  • Under the Government Sponsored Enterprise (GSE) Preferred Stock Purchase Agreements program, the Department of the Treasury's capital payments to Fannie Mae and Freddie Mac totaled $95.6 billion in FY2009, $10.3 billion less than estimated in the MSR, due to better-than-expected financial results at the GSEs. In addition, actual credit subsidy receipts for the GSE mortgage-backed securities (MBS) purchase program were $1.4 billion lower than in the MSR due to lower-than-projected purchase volumes, which increased net outlays relative to the MSR estimate by that amount.
    
    
  • Net outlays for two Treasury accounts related to exchange stabilization were $2.6 billion below the MSR estimate – the Exchange Stabilization Fund, which Treasury uses at times to maintain a stable international financial system, and its child account, the Exchange Stabilization Fund Money Market Mutual Fund Guaranty Facility. The Facility was established for the Money Market Fund Guaranty Program, which began on September 29, 2008, and ended on September 18, 2009. In the MSR, OMB estimated a likely claim pay-out under the program of $2.5 billion based on total fund assets guaranteed of approximately $3 trillion. However, the participating funds had no covered losses while the program was in effect, so the program provided insurance to the markets at no ultimate cost to the public.
    
    
  • Outlays for refundable tax credits and related programs that are part of the Internal Revenue Code and administered by Treasury and the Internal Revenue Service, such as the child tax credit, were $6.6 billion lower than estimated in the MSR. The largest difference was for a new Recovery Act program of cash assistance to States in lieu of low-income housing credits, which outlayed $3.1 billion less than estimated in the MSR. While these funds were obligated in FY2009, they are now expected to be drawn down and outlayed in FYs 2010 and 2011. Outlays for refundable credits for the new Recovery Act program to provide post-employment ("COBRA") health insurance coverage were $1.6 billion less than estimated in the MSR because claims by employers were smaller than expected, and also apparently later than expected.  In addition, economic stimulus payments in FY2009 to certain individuals not eligible for the original recovery rebates paid in FY2008 were $1.2 billion below the MSR estimate due to lower-than-expected claims. Actual outlays for other programs in this category were $0.7 billion lower than the MSR estimate.
    
    
  • Interest on the public debt, which includes interest paid to government accounts as well as interest paid to the public, was $383.4 billion, $11.1 billion lower than the MSR estimate. Interest paid to government accounts was $14.0 billion lower than projected, due primarily to lower interest rates, including $4.9 billion in lower interest paid to trust funds and $8.0 billion in lower interest paid to the DOD Medicare-Eligible Retiree Health Care Fund. This was partially offset by $3.0 billion in higher-than-expected interest paid to the public, due almost entirely to higher interest on inflation-indexed securities because of faster-than-expected inflation in the Consumer Price Index.
    
    
  • An additional $14.4 billion of the difference in Treasury outlays was due to intragovernmental interest transactions with credit financing accounts, including $30.1 billion lower-than-projected interest paid to credit financing accounts and $44.6 billion lower-than-anticipated offsetting receipts of interest from credit financing accounts. (Interest received from credit financing accounts is reported in Treasury's aggregate offsetting receipts.) Transactions with the TARP financing accounts comprised $9.5 billion of the total $14.4 billion difference, including $8.4 billion in lower-than-expected interest paid to TARP financing accounts and $18.0 billion in lower-than-expected interest received from TARP financing accounts.  These differences resulted from lower-than-anticipated TARP program volumes as well as actual interest rates that were lower than the MSR estimates.
    
    
• Corps of Engineers -- Outlays for the Army Corps of Engineers civil works program were $7 billion, $5.8 billion lower than the MSR estimate. Much of the difference was due to changes in construction project schedules made after the MSR and increases in offsetting collections for work that the Corps performed on behalf of other Federal agencies under its reimbursable program.
  
  
• General Services Administration -- GSA's total outlays were $0.3 billion, $1.1 billion less than what was projected in the MSR. $890 million was associated with the Federal Buildings Fund (FBF) and the Acquisition Services Fund. For the Acquisition Services Fund, actual revenue was $251 million higher than anticipated. For the FBF, actual revenue was more than $200 million higher than anticipated. The FBF Recovery Act projects initially had outlay projections based on the standard outlay calculators associated with construction and repairs and alterations projects. The standard outlay calculators are often used prior to work beginning on a construction project and are updated as the project is underway. Although GSA was able to obligate almost $1.4 billion of FBF Recovery Act funding in FY2009, the outlays were $326 million less than projected in the MSR.
  
  
• Office of Personnel Management -- Outlays for the Office of Personnel Management were $72 billion, $4.1 billion higher than the MSR estimate. OPM outlays were higher due to legislative relief provided to the US Postal Service in the 2010 Continuing Resolution, which allowed that agency to make only $1.4 billion of the expected $5.4 billion end-of-year payment for USPS retiree health.
  
  
• Other Defense Civil Programs -- Outlays for Other Defense Civil programs were $57 billion, $8.8 billion more than the MSR estimate. Most of this difference was due to lower-than-projected earnings on investments of the Medicare-Eligible Retiree Health Care Fund (MERHCF), which are offset against gross outlays to calculate net outlays. These lower-than-projected earnings were largely due to a less-than-expected return on the Treasury Inflation-Protected Securities (TIPS) investments in the MERHCF portfolio.
  
  
• Federal Deposit Insurance Corporation -- The Federal Deposit Insurance Corporation (FDIC) had net actual outlays of $6.7 billion, $5.3 billion above the MSR estimate. The difference was almost entirely due to greater-than-expected payments related to the resolution of failed banks.
  
  
• National Credit Union Administration -- Outlays for the National Credit Union Administration (NCUA) were $16 billion, $1.5 billion lower than the MSR estimate, predominantly due to one unanticipated transaction. The Credit Liquidity Facility transferred $1.75 billion from the U.S. Central Federal Credit Union to the U.S. Treasury, resulting in an unexpected net in-flow of cash in August 2009.
  
  
• United States Postal Service -- The United States Postal Service (USPS) had net actual outlays of $0.4 billion, $3.5 billion lower than the MSR estimate. This difference was almost entirely due to the recent legislated change in the statutorily mandated USPS payment to the Office of Personnel Management for retiree health benefits liabilities. The Continuing Appropriations Resolution, 2010, reduced the required end-of-year payment from $5.4 billion to $1.4 billion, reducing USPS outlays by $4.0 billion.  These reduced outlays are offset by lower receipts for OPM and have no effect on the unified budget deficit.
  
  
• Undistributed Offsetting Receipts -- Undistributed offsetting receipts were $274 billion in FY2009, $3.7 billion lower than the MSR estimate.  Interest received by trust funds was $181.6 billion, $4.9 billion lower than the MSR estimate, due primarily to lower-than-estimated interest earnings for the Civil Service Retirement and Disability Fund. Partially offsetting these lower-than-expected receipts were $1.4 billion more in receipts for the Federal employer share of employee retirement than were expected in the MSR estimate.

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REPORTS

• Tables

Treasury International Capital Data for August

The U.S. Department of the Treasury today released Treasury International Capital (TIC) data for August 2009. The next release, which will report on data for September 2009, is scheduled for November 17, 2009.

Net foreign purchases of long-term securities were $28.6 billion.

• Net foreign purchases of long-term U.S. securities were $32.9 billion. Of this, net purchases by private foreign investors were $21.3 billion, and net purchases by foreign official institutions were $11.6 billion.
• U.S. residents purchased a net $4.3 billion of long-term foreign securities.

Net foreign acquisition of long-term securities, taking into account adjustments, is estimated to have been $13.0 billion.

Foreign holdings of dollar-denominated short-term U.S. securities, including Treasury bills, and other custody liabilities decreased $18.5 billion. Foreign holdings of Treasury bills decreased $2.5 billion.

Banks' own net dollar-denominated liabilities to foreign residents increased $15.7 billion.

Monthly net TIC flows were $10.2 billion. Of this, net foreign private flows were $14.9 billion, and net foreign official flows were negative $4.7 billion.

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

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

Treasury Releases Semi-Annual Report to Congress
on International Economic and Exchange Rate Policies

WASHINGTON –The U.S. Department of the Treasury today released the Semi-Annual Report to Congress on International Economic and Exchange Rate Policies, as required under Sections 3004 and 3005 of the Omnibus Trade and Competitiveness Act of 1988.  The report covers the period from January 2009 through June 2009, but where available and appropriate, information through early October 2009 is included.  The report, along with past reports, can be found at http://www.treasury.gov/offices/international-affairs/economic-exchange-rates/.

The report describes U.S. economic developments as well as international economic, financial, and exchange rate developments during the first half of 2009.  In particular, it focuses on the policy actions that major U.S. trading partners – representing more than 80 percent of U.S. international trade – have taken to lay the foundation for economic recovery.

During the period under consideration, virtually every country and economic area described in the report put in place additional monetary and fiscal measures to bolster demand.  These forceful actions worked, and the report shows that financial conditions in the United States and around the world have improved dramatically and signs of an economic recovery have begun to emerge. Global current account imbalances have fallen sharply during the crisis from a peak of 5.9 percent of world GDP to an IMF-estimated 3.6 percent in 2009. The U.S. current account deficit has fallen from a peak of 6.5 percent of GDP in the fourth quarter of 2005 to 2.9 percent of GDP in the second quarter of 2009. 

As noted in the report, Treasury has concluded that no major trading partner of the United States met the standards identified in Section 3004 of the Act during the most recent reporting period. 

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U.S. International Reserve Position