August 8, 2008
HP-1111

U.S., Malta Sign Income Tax Treaty

Washington, DC--The Treasury Department today announced that U.S. Ambassador to Malta, Molly Bordonaro, and Malta Finance Minister Tonio Fenech have signed a new income tax treaty between the two countries in the Maltese capital of Valletta.

The agreement provides for reduced withholding rates on cross-border dividend payments generally with the elimination of withholding on cross-border dividend payments to pension funds.  It also generally provides for withholding at a 10-percent rate on interest, royalties, and other income.

The treaty also contains a comprehensive limitation of benefits provision and provides for the exchange of information between the competent authorities to facilitate the administration of each country's tax laws. 

The final version of the treaty is attached.

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REPORTS

• U.S.-Malta Income Tax Treaty

August 6, 2008
HP-1110

Treasury, IRS Issue Ruling Preventing Certain Pension Transfers

Agencies Offer Framework for Possible Legislative Change

Washington, DC--The Treasury Department and the Internal Revenue Service today issued Revenue Ruling 2008-45, which states that a transfer of a tax-qualified pension plan from an employer to an unrelated taxpayer when the transfer is not connected with a transfer of significant business assets, operations, or employees, is not permissible under current law. A copy of the ruling is attached.

Accompanying today's ruling, the Administration put forth a framework of principles, as described below, that should guide the development of legislation that could permit such transactions, in circumstances where the transaction is in the best interest of plan participants, their beneficiaries, employers, and the pension insurance system. The legislative framework was developed by the Treasury Department, the Labor Department, the Commerce Department, and the Pension Benefit Guaranty Corporation.

Under the legislative framework, a pension plan (or a portion of a plan) under which benefits are no longer accruing (i.e., a frozen plan) could be transferred to an entity unrelated to the employer (or former employer) of the participants in the plan, provided that certain conditions are met. The conditions would reflect the following fundamental requirements:

• Plan participants, their representatives, and ERISA regulators would be required to receive advance notice of a plan transfer, and the parties to the transaction would be required to provide regulators information necessary to review and approve the proposed transaction.
• Only financially strong entities in well-regulated sectors would be permitted to acquire a pension plan in a plan transfer transaction.
• The parties to the transaction would be required to demonstrate that participants' benefits and the pension insurance system would be exposed to less risk as a result of the transfer, and that the transfer would be in the best interests of the participants and beneficiaries.
• Limitations on transfers would be imposed to limit undue concentration of risk.
• Transferees and members of their controlled groups would assume full responsibility for the liabilities of transferred plans and would comply with post-transaction reporting and fiduciary requirements.
• Subsequent transfer transactions would be subject to the rules applicable to original transfer transactions.

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REPORTS

• Revenue Ruling 2008-45

August 5, 2008
HP-1109

Treasury Designates the Financial Network of Major Sinaloa
Cartel Operator Rigoberto Gaxiola Medina

Washington, DC--The U.S. Department of the Treasury's Office of Foreign Assets Control (OFAC) today named 14 companies and 17 individuals tied to drug trafficking kingpin Rigoberto Gaxiola Medina as specially designated narcotics traffickers (SDNTs).  The designees, all based in Mexico, are now subject to economic sanctions pursuant to the Foreign Narcotics Kingpin Designation Act.

Rigoberto Gaxiola Medina, currently imprisoned in Mexico, is the leader of a major drug trafficking organization responsible for transporting thousands of tons of marijuana from Mexico into the Southwestern United States.  His organization built and employed a network of underground tunnels to move drugs and cash between Mexico and the United States.  As a gate-keeper for marijuana shipments entering the United States, Gaxiola's organization functions as a vital component of the Joaquin "Chapo" Guzman Loera drug trafficking organization and the Sinaloa Cartel.

"We are sanctioning Rigoberto Gaxiola Medina's network of companies and associates to support and advance the Mexican authorities' important efforts against this criminal organization," said OFAC Director Adam J. Szubin.

The designation includes key Gaxiola associates Roque Duarte Munoz, Armando Aguirre Cardona, Juan Luis Guzman Enriquez and Juan Francisco Quintero Arce, all of whom were arrested in 2003 along with Rigoberto Gaxiola Medina by Mexican federal authorities. Another associate designated today, Sandra Lucero de Martinez, was arrested by U.S. law enforcement in 2005 and subsequently extradited to Mexico to face organized crime charges. All six individuals are currently imprisoned on a combination of convictions for organized crime and unlawful use of military-grade weapons.

Despite the 2003 arrests, Rigoberto Gaxiola Medina's financial network for laundering drug proceeds has continued to function under the leadership of his family and close business associates, including his wife, Maria Del Rosario Garcia Duran, his sons Rigoberto Gaxiola Garcia and Carlos Alberto Gaxiola Garcia, and his daughter, Maria Elena Gaxiola Garcia, all of whom are also being designated today by OFAC.  Other key associates designated by this action are Eleazar Fontes Moreno, Rafael Angel Valencia Jaime, and Ana Cristina Arce Borboa.

The financial network designated by today's action is comprised of companies in the Mexican states of Sonora, Sinaloa, and Jalisco, including: 4 mining firms, Minera Rio Presidio, S.A. De C.V., Minera La Castellana y Anexas, S.A. De C.V., Copa de Plata, S.A. De C.V. and Compania Minera Del Rio Cianury, S.A. De C.V.; a car dealership, Distribuidora Gran Auto, S.A. De C.V.; and a private gym, Bioesport, S.A. De C.V.

This action is part of ongoing efforts under the Foreign Narcotics Kingpin Designation Act to apply financial measures against significant foreign narcotics traffickers worldwide. More than 300 businesses and individuals associated with 75 drug kingpins have been designated pursuant to the Kingpin Act since June 2000.

Today's designation would not have been possible without key support from the Drug Enforcement Administration (DEA) Resident Office in Hermosillo, Sonora, Mexico; DEA's Financial Operations Division; the Department of Homeland Security's Immigration and Customs Enforcement field office in San Diego; and the U.S. Attorney's Office, District of Arizona.

Today's designation action freezes any assets the 31 designees may have under U.S. jurisdiction and prohibits U.S. persons from conducting transactions or dealings in property interests of the designated individuals and entities.  Penalties for violations of the Kingpin Act range from civil penalties of up to $1,075,000 per violation to more severe criminal penalties. Criminal penalties for corporate officers may include up to 30 years in prison and fines up to $5,000,000. Criminal fines for corporations may reach $10,000,000. Other individuals face up to 10 years in prison for criminal violations of the Kingpin Act and fines pursuant to Title 18 of the United States Code.

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REPORTS

• Designation Chart

Treasury Economic Update 8.1.08

"Today's jobs data reflect the headwinds affecting the U.S. economy--the housing correction, credit market strains, and higher energy prices. Yesterday's GDP data reflect the positive impact and timeliness of the stimulus payments, which will continue to support spending as we work through these headwinds."
Assistant Secretary Phillip Swagel, August 1, 2008

Employment Fell in July:

Job Growth: Payroll employment fell by 51,000 in July, following a decrease of 51,000 in June. The United States has added about 7.8 million jobs since August 2003. Employment increased in 33 states and the District of Columbia over the year ending in June. (Last updated: August 1, 2008)

Unemployment: The unemployment rate was 5.7 percent in July, up from 5.5 percent in June. (Last updated: August 1, 2008)

Growth Was Moderate in Q2:

Real GDP: Real GDP growth in Q2 was 1.9 percent at an annual rate, up from 0.9 percent growth in Q1. Consumer spending added 1.1 percentage points to growth in the first quarter and net exports added 2.4 percentage points. These positives were partly offset by the continued drag from housing and a large inventory reduction. (Last updated: July 31, 2008)

Signs of Economic Strength Include Exports and Low Inflation:

Exports: Strong global growth is boosting U.S. exports, which grew 10.2 percent over the past 4 quarters. (Last updated: July 31, 2008)

Inflation: Core inflation remains contained. The consumer price index excluding food and energy rose 2.4 percent over the 12 months ending in June.
(Last updated: July 16, 2008)

The Economic Stimulus Package Will Provide a Temporary Boost to Our Economy:

The package will help our economy weather the housing correction and other challenges. The Economic Stimulus Act of 2008, signed into law by President Bush has two main elements--stimulus payments so that working Americans have more money to spend and temporary tax incentives for businesses to invest and grow. Together, the legislation will provide about $150 billion of stimulus for the economy in 2008, providing a meaningful boost to the U.S. economy in 2008.
(Last updated: February 29, 2008)

Pro-Growth Policies Will Enhance Long-Term U.S. Economic Strength:

We made significant progress on the deficit. The FY07 budget deficit was down to 1.2 percent of GDP, from 1.9 percent in FY06. Much of the improvement in the deficit reflects strong revenue growth, which in turn reflects strong economic growth. The economic stimulus package and the slowing economy contribute to the near-term budget deficit. The Mid-Session Review of the Budget projects that the deficit will be 2.7 percent of GDP in FY08 and 3.3 percent of GDP in FY09. Looking ahead, higher spending on entitlement programs dominates the future fiscal situation; we must squarely face up to the challenge of reforming these programs.

http://www.treas.gov/economic-plan/

July 31, 2008
HP-1096

Treasury Targets FARC Financiers and Drug-Traffickers

Washington, DC--The U.S. Department of the Treasury's Office of Foreign Assets Control (OFAC) today designated six companies and 13 individuals that act on behalf of and materially assist the narcotics trafficking activities of the Revolutionary Armed Forces of Colombia (FARC), a designated narco-terrorist organization. Today's designation, made pursuant to the Foreign Narcotics Kingpin Designation Act (Kingpin Act), is OFAC's fifth action against the FARC in the past eight months.

"Today's action is the latest in a series of blows to the FARC and builds on the Colombian government's recent successes against this corrupt narco-terrorist group," said OFAC Director Adam J. Szubin. "Our designation targets the logistical and financial support network of the FARC's 1^st Front, the arm of this terrorist group responsible for holding the hostages recently rescued by the Colombian authorities."

One of the FARC individuals sanctioned today, Alexander Farfan Suarez (a.k.a. "Enrique Gafas"), was captured by Colombian authorities during the July 2, 2008 hostage rescue mission that freed three U.S. citizens--Marc Gonsalves, Thomas Howes, and Keith Stansell--who were held captive roughly five years, as well as 12 other hostages held by the FARC. Also captured was the FARC's 1^st Front commander, Gerardo Antonio Aguilar Ramirez (a.k.a. "Cesar"), who was designated by OFAC on September 28, 2006.

This OFAC sanctions investigation targets a logistical and financial support network of the FARC's 1^st Front, run by Nancy Conde Rubio (a.k.a. "Doris Adriana"). Conde Rubio, arrested by Colombian authorities in February 2008, oversaw individuals and entities that used money derived from FARC narcotics sales to procure weapons, ammunition, communications gear, medical equipment, uniforms, and airplane fuel. Conde Rubio communicated with various persons in the FARC network targeted by this action using Communicaciones Unidas de Colombia Ltda., a call center located in Villavicencio, Colombia, operated by FARC associate Ana Isabel Pena Arevalo. This FARC network laundered its drug trafficking monies through two money exchange businesses or cambistas - Cambios Euro Ltda. and La Monedita De Oro Ltda. - both located in Bogota, Colombia. Two other Bogota-based FARC front companies, Dizriver Y Cia S. En C. and Colchones Sunmoons Ltda., were also designated.

Conde Rubio and eight other individuals sanctioned by OFAC today were named in a February 2008 U.S. federal indictment in the U.S. District Court for the District of Columbia for materially assisting the FARC.

Also designated today is Jose Maria Corredor Ibague (a.k.a. "Boyaco"), considered one of the FARC's most prolific arms-for-drugs traffickers of the past few years. Josue Cuesta Leon (a.k.a. "El Viejo") and Edilma Morales Loaiza, both key arms traffickers involved in the FARC's drug trafficking activities, were also named.

OFAC's sanctions investigation of the FARC's 1^st Front would not have been possible without the support of the Federal Bureau of Investigation and the U.S. Attorney's Office for the District of Columbia.

In addition, Exchange Center Ltda., a Colombian cambista linked to the FARC's 27^th Front is being designated by OFAC today. Previously, on May 7, 2008, OFAC designated Mercurio International S.A., a Colombian money exchange house ("casa de cambio") for providing support to the FARC.

On May 29, 2003, President George W. Bush identified the FARC as a significant foreign narcotics trafficker pursuant to the Kingpin Act. Previously, in 2001, OFAC designated the FARC as a Specially Designated Global Terrorist pursuant to Executive Order 13224, and in 1997 the FARC was designated as a Foreign Terrorist Organization by the Secretary of State.

Today's action freezes any assets the designated entities and individuals may have under U.S. jurisdiction and prohibits U.S. persons from conducting financial or commercial transactions involving those assets. Penalties for violations of the Kingpin Act range from civil penalties of up to $1,075,000 per violation to more severe criminal penalties. Criminal penalties for corporate officers may include up to 30 years in prison and fines of up to $5,000,000. Criminal fines for corporations may reach $10,000,000. Other individuals face up to 10 years in prison for criminal violations of the Kingpin Act and fines pursuant to Title 18 of the United States Code.

For a complete list of the individuals and entities designated today, please visit:
http://www.treasury.gov/offices/enforcement/ofac/actions/

To view previous OFAC actions directed against the FARC, please visit:

• Treasury Action against the FARC on May 7, 2008.

• Treasury Action against the FARC on April 22, 2008.

• Treasury Action against the FARC on January 15, 2008.

• Treasury Action against the FARC on November 1, 2007.

• Treasury Action against the FARC on September 28, 2006.

• Treasury Action against the FARC on February 19, 2004.

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REPORTS

• Chart

Minutes of the Meeting of the
Treasury Borrowing Advisory Committee
Of the Securities Industry and Financial Markets Association
July 29, 2008

 The Committee convened in closed session at the Hay-Adams Hotel at 10:30 a.m.  All Committee members were present.  Acting Undersecretary for Domestic Finance Anthony Ryan and Office of Debt Management Director Karthik Ramanathan welcomed the Committee and gave them the charge.
 
The first item on the charge related to Treasury's financing needs in the coming years as well as current and medium-term trends in the economic outlook. In particular, Treasury sought the Committee's advice on whether the recent adjustments to the financing schedule provided Treasury with sufficient debt management tools to handle a wide range of budgetary and financing outcomes, or if additional adjustments should be considered.

To provide background, Director Ramanathan delivered a presentation to the Committee which highlighted current credit market conditions and potential factors to consider in addressing this issue. In particular, current credit market conditions remained volatile, and potential pressures on corporate tax receipts and individual withheld taxes could increase Treasury's borrowing needs in FY 2008 and FY 2009.

Director Ramanathan noted that marketable borrowing – i.e. borrowing from the public – is projected to total $555 billion in FY 2008 versus just $134 billion for FY 2007, and that this large increase warranted the Committee's focus.

The potential weakness in receipts as a result of the challenges facing the economy as well as reduced non-marketable debt issuance, large redemptions by the Federal Reserve in conjunction with its various liquidity initiatives, and expedited payments related to the fiscal stimulus package – all within a compressed time period - necessitated the increased issuance of Treasury bills, cash management bills, and shorter dated nominal coupons. Redemptions and outright sales by the Federal Reserve since the beginning of the fiscal year for liquidity purposes have resulted in the Treasury's need to issue over $150 billion in additional bills and coupons. Moreover, state and local government issuance for which net issuance was $58 billion in fiscal year 2007 versus total a net redemption of $10 billion in 2008 fiscal year to date.

Director Ramanathan also noted that total cash management bills in FY 2008 year to date total over $300 billion versus about $250 billion for all of FY 2007. At the same time, 2-year note issue sizes have increased $13 billion year to date and 5-year note issue sizes have increased $8 billion. In addition to increasing bills by over $200 billion this fiscal year, Treasury introduced a monthly 52-week bill in July 2008. Nonetheless, debt rollover and average portfolio metrics have changed modestly and remain within historical ranges.

Based on deficit projections from the recently released Mid Session Review, as well as estimates provided by primary dealers of $413 billion for FY 2008 and $422 billion for FY 2009, Director Ramanathan noted that Treasury's additional funding needs may need to be focused on other nominal coupon issuances beyond the short end of the curve. While the 2-year note to 5-year note sector raises cash in FY09, Treasury needs to be flexible beyond that time horizon as a result of the uncertainty regarding financing needs and due to the debt maturity profile of the portfolio. Treasury will continue to adjust issuance sizes in the front of the curve, but also look to adjustments in the medium to longer dated sector of the existing curve to meet borrowing needs.

 With these highlights, Director Ramanathan asked the Committee its views on debt issuance options and the optimal financing strategy given current projections and constraints.

 A Committee member began by asking about the average maturity of the debt, noting that Treasury had over the last year issued a significant amount of debt in bills and short to intermediate coupons. Director Ramanathan explained that the current average maturity was 56 months, well within the historical norms of the last 30 years. Treasury does not target an average maturity at this time, but feels comfortable with this measure being within historical norms as long as overall flexibility is maintained. 

Another Committee member asked if the volatility in the cash balance was typical of prior years. Director Ramanathan replied that while cash balances maintain a seasonal pattern, the current fiscal year has seen more volatility due to many factors including liquidity intitatives, stimulus payments, unexpected outlays, and a decline in the growth of receipts.

The member pointed out that Treasury has benefited from the flight to quality, but needs to consider the situation in which credit market conditions improve. Several members stated that Treasury's issuance of bills was clear and transparent given its needs, and that at some point, the Federal Reserve would look to reconstitute its portfolio. As a result, Treasury's marketable borrowing needs would decline. Another member commented that the short to intermediate coupon sector has seen significant increases in issue sizes and that moving further out the curve was prudent.

Another  member pointed out that there was a significant uncertainty in the fiscal situation posed by dislocations in the credit markets, the slowdown in the economy, supplemental expenditures, and the imminent need for large entitlement spending (Social Security, Medicare,  and Medicaid, etc.). Given the recent increases in shorter term funding and the sizable projected borrowing needs going forward, the member believed that this may be the time to recognize that the borrowing needs were becoming more structural. This member continued by stating that Treasury should consider increasing its maturity profile using existing securities to meet these financing needs.

A discussion followed regarding the best method for Treasury to raise cash and reduce rollover risk.  One member, noting the chart with the maturity profile indicated that there was room to add issuance that matures in the 2011 to 2013 region and also to add maturities in the 2019 to 2028 region. This member suggested adding 3-year notes or 10-year notes to more evenly distribute the debt profile..

Another member suggested that Treasury first consider issuing 10-year notes monthly, either through a double reopening or through new initial offerings of 10-year notes each month.  This same member also suggested that Treasury offer new initial quarterly 30-year bonds, as opposed to the current practice of offering a combination of new and reopened 30-year bonds. Another member stated that there would be substantial demand for securities greater than 5-year in length from investors seeking to add duration. Several members stated that there may also be substantial demand for longer-term products, specifically 10-year notes, from accounts seeking to hedge mortgage duration.

A few members noted that the current 30-year auction cycle with an initial offering and reopening with accrued interest was unduly, and that Treasury should switch to original issue 30-year bonds.  Director Ramanathan noted that Treasury moved to the current cycle of 30-year bond issuance to enhance liquidity in the STRIPS market by adding May/November maturity points, but that Treasury understood that such an adjustment may improve the debt maturity profile.

Alternative maturity points were discussed briefly by the committee. One member commented that previous issues of 4-year notes, 7-year notes, and 20-year bonds always traded at a discount.  This member thought it would be costly to issue at those points or any "new" points outside of current points at this time. Another member stated that if Treasury were to increase 10-year and 30-year issuance, it could then reintroduce a 3-year to meet even greater than expected borrowing needs as well as to prevent average maturity from extending too far.   Another member stated given the projected secular borrowing needs, Treasury should consider new liquidity points, including 50-year bonds or callable issues, but that such issuances we unnecessary at this point and prior to all of the other adjustments Treasury could make in their place.   

A general consensus developed that Treasury should consider issuing 10-year notes with two reopenings instead of one reopening, and also move to new issue quarterly 30-year bonds. In addition, the Committee generally agreed that there was additional room in the front end of the curve to make modest increases in 2-year and 5-year notes, and that further deterioration in the fiscal outlook could be met by reintroducing the 3-year note or other such securities.

After finishing this discussion relate dto the fiscal outlook, the Committee moved on to the second item on the charge dealing with credit market conditions. The presenting member began by reviewing the history of the funding strains that were characteristic of recent credit market conditions.  The member noted that LIBOR/OIS spreads were significantly more volatile and were trading at elevated levels relative to the historical trends. Similarly, credit default swaps for banks were trading higher. High volatility in LIBOR/OIS reduced investor confidence by creating strains in the repo markets, resulting in wider bid-ask spreads and less liquidity.

The Committee member then discussed the various Federal Reserve initiatives designed to enhance liquidity.  The presenter began with the a discussion of the Term Auction Facility (TAF) noting that it had grown in size from $40 billion from its inception in December of 2007 to its current size of $150 billion. At the current size, bid-to-cover ratios were around 1, suggesting that some level of equilibrium had been reached. The presenting member suggested that while the TAF has been effective in reducing 1 month LIBOR/OIS spreads lower by over 60bps, 3 month LIBOR/OIS spreads remained elevated at 80 bps. The presenting member suggested extending the TAF to 90-days to complement the current 1-month TAF.  The presenting member then provided background on the Treasury Securities Lending Facility (TSLF) and the Primary Dealer Credit Facility (PDCF) as well as their impact on Treasury issuance. The presenting member noted that Treasury Bills and Treasury repo have cheapened due to increased Treasury issuance and as a result of the initiatives of the Federal Reserve.

The presenting member then moved on to investor activity and sentiment. The presenting member noted the increase of assets flowing into money market funds. The member noted that a reconstitution of the SOMA portfolio could mitigate any significant improvement in market conditions, but that Treasury would be prudent in extending its portfolio. The presenting member also noted that GSE discount note issuance has doubled and that the Federal Home Loan Bank had provided $380 billion of funding in return for mortgage collateral.

After the presentation was completed, Committee members commented on the various issues related to credit markets. One member commented that tri-party best practices would be extremely helpful especially if it included a discussion on clearing agent responsibilities. One member suggested regulation in the repo market might prevent some of the fails. Another member remarked that if issues like rollover risk in tri-party repo were addressed, investor confidence would further benefit. Finally one member suggested that concerns in the repo market should be resolved before PDCF is eliminated.

The Committee then moved on to the second presentation to Treasury which focused on TIPS and trends in inflation. The presenting member begun by noting that while headline CPI should remain well above 5% for the rest of the year, it is expected to collapse to core next year even if oil were to increase an additional $10 from current levels. The Committee member then noted that most surveys related to inflation lacked any significant predictive power and tended to be reactive to current inflation.

The presenting member noted that even with $497 outstanding in the TIPS market, daily trading volume is estimated to be $8 billion, representing a daily turnover of total outstanding of about 2%. By comparison, average daily turnover in the $4 trillion nominal Treasury market is estimated to be nearly 14%.  The member pointed out that TIPS seem to have reached a plateau in terms of trading volume despite Treasury's continued efforts to grow the market. The member also stated that the TIPS market appealed to "buy-and-hold" investors while the nominal market attracted many more traders. 

The presenting member then stated that TIPS have been a good value to investors, helping them to diversify inflation risks in fixed income portfolios and to express views on realized and expected inflation. The key downside for investors is the illiquidity of the product. Moreover, liquidity does not seem likely to improve given the private sector's reluctance to issue inflation indexed securities. This reluctance on the part of private issuers to issue such debt reflects very high costs (and uncertainty) associated with such issuance, very little fundamental depth of demand, and FAS-133 hedge accounting related issues.

On the other hand, from Treasury's perspective, while TIPS have modestly diversified the investor base, there have been substantial associated costs.  The presenting member developed a cost model comparing TIPS issuance versus potential nominal coupon issuance, and concluded that the aggregate cost of the TIPS program was over $30 billion. This cost reflects the fact that realized inflation has been higher than expectations.

The member noted that excess expense of the TIPS program compared to the equivalent amount of nominal issuance is 30% of the overall program expense this year. The cost for the lack of liquidity in TIPS makes up 22% of the excess cost, or approximately $1 billion a year. The presenting member viewed this cost as non-transient. The other 78% of the excess cost was related to the difference between realized inflation and expectations. The presenting member measured liquidity differentials by comparing TIPS and nominal asset swap spreads.

Finally, the presenting member stated that TIPS did not gain the same flight to quality bid that nominal securities did in the recent credit market tightening which in turn caused an increase in the cost of 5-year TIPS relative to the 10-year TIPS and 20-year TIPS. The Committee member concluded the presentation by stating that extending the average maturity of the TIPS portfolio was not so obvious given variable demand at the 20-year point.

The Committee generally agreed that an increase of average maturity in the TIPS program would be best accomplished by reducing or eliminating 5-year TIPS issuance. There was general agreement that given the excess cost to date and the non-transient liquidity premium of TIPS, inflation indexed secruties over the past 10 years have proven to be a less efficient funding mechanism given Treasury's objective of the lowest cost of borrowing over time. The Committee also reiterated its previous suggestion of moderating the growth of the program and eliminating 5-year TIPS issuance.

Director Ramanathan responded by stating that Treasury remained committed to the TIPS, but that a moderation in the growth of the program has occurred given the pace of issuance ver the past ten years relative to nominal issuance.

One member remarked that the lack of a swaps market for TIPS or any sort of liquid CPI-U NSA inflation derivatives market made the TIPS market unattractive to private issuers. This factor helped to explain why TIPS were currently a more costly financing vehicle for Treasury relative to comparable nominal issuance. Another member stated that many investors were not interested in hedging CPI-U NSA.  The lack of an inflation derivatives market also prevented short sales of TIPS, which reduced trading volumes and helped explain why there was no flight-to-quality buying in stressed markets.

Another member stated that TIPS should not be considered a growth product in the Treasury debt issuance portfolio. The product was complicated to price, the return profiles were difficult to explain, and the tax treatment made it unattractive to many accounts.  

Another member noted, however, that globally there was growing interest in inflation-indexed products, and that if inflation were to continue to rise, there could be additional demand for TIPS. One member suggested that much of that interest was driven by regulatory induced demand that required investors to hold assets that are inflation indexed.
 
To conclude the discussion, a member asked if another distribution mechanism should be considered for selling TIPS such as by subscription with a price determined by Treasury.  Members recommended that Treasury maintain its auction disctibutin method, but study the alternative strategy further.

 The meeting adjourned at 11:56 a.m.

 The Committee reconvened at the Hay-Adams Hotel at 6:00 p.m. All of the Committee members were present.  The Chairman presented the Committee report to Acting Under Secretary Ryan.

The Committee then reviewed the financing for the remainder of the July through September quarter and the October through December quarter (see attached).  

A brief discussion followed the Chairman's presentation but did not raise significant questions regarding the report's content.

The meeting adjourned at 6:20 p.m.

_________________________________
Karthik Ramanathan, Director
Office of Debt Management, United States Department of the Treasury
July 29, 2008

Certified by:

___________________________________
Keith T. Anderson, Chairman
Treasury Borrowing Advisory Committee
Of The Securities Industry and Financial Markets Association
July 29, 2008

Treasury Borrowing Advisory Committee Quarterly Meeting
Committee Charge – July 29, 2008

Fiscal Outlook

Given Treasury's financing needs in the coming years as well as current and medium-term trends in the economic outlook, what are the Committee's thoughts on Treasury's debt issuance?  In particular, we would like the Committee's advice on whether the recent adjustments to the financing schedule provide Treasury with sufficient debt management tools to handle a wide range of budgetary and financing outcomes, or if additional adjustments should be considered.

Credit Market Conditions

Treasury seeks the Committee's perspectives on the current conditions of credit markets.  What are investors' perceptions of risk in light of previous actions by the Federal Reserve, including its introduction of various temporary facilities such as the Term Securities Lending Facility and the Primary Dealer Credit Facility, and additional recent initiatives by the Treasury and Federal Reserve?  What are the implications for financial market investors, regulatory oversight, and market infrastructure, as well as their potential impact on Treasury market dynamics? 

TIPS and Inflation Trends 

In light of recent trends, Treasury would like the Committee's views on TIPS, particularly in regard to issuance of shorter-dated versus longer-dated inflation-indexed securities.

Financing this Quarter

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

• The composition of Treasury notes and bonds to refund approximately $43.5 billion of privately held notes maturing on August 15, 2008.
• The composition of Treasury marketable financing for the remainder of the July-September quarter, including cash management bills.
• The composition of Treasury marketable financing for the October-December quarter, including cash management bills.

Treasury Designates Burmese State-Owned Enterprises

Washington, DC--The U.S. Department of the Treasury's Office of Foreign Assets Control (OFAC) today announced financial sanctions against ten companies owned or controlled by the Government of Burma or its officials, including companies involved in the gem-mining industry.  The action coincides with the President's signing of the Tom Lantos Block Burmese JADE (Junta's Anti-Democratic Efforts) Act of 2008, legislation aimed at extending sanctions against leaders of the Burmese military regime, those providing such leaders with economic and political support, their immediate family members, and the Burmese gem industry, an important source of revenue for the Burmese military regime. 

"We are tightening financial sanctions against Burma's repressive junta and the companies that finance it," said OFAC Director Adam J. Szubin.  "The regime's refusal to protect and allow relief to reach the Burmese people as Cyclone Nargis devastated their country is but another example of the regime's heartless neglect of its people." 

Today's action by Treasury targets two conglomerates, the Union of Myanmar Economic Holdings Limited (UMEH) and the Myanmar Economic Corporation, both of which have extensive interests in a variety of sectors critical to the Government of Burma, including the gem, banking, and construction industries.  Four of UMEH's subsidiary companies--Myanmar Ruby Enterprise, Myanmar Imperial Jade Company Ltd., Myawaddy Trading Ltd., and Myawaddy Bank Ltd.--have been added to OFAC's Specially Designated Nationals and Blocked Persons list as a result of today's action.       

Today's action also targets the "No. 1 Mining Enterprise," "No. 2 Mining Enterprise," and "No. 3 Mining Enterprise," all of which are owned by the Burmese Ministry of Mines.  The Cooperative Import Export Enterprise, a trading company under the Burmese Ministry of Cooperatives, has been sanctioned today as well.

This action was taken pursuant to Executive Order 13464, which authorizes the Secretary of the Treasury to block the property and interests in property of, among others, entities owned or controlled by, directly or indirectly, the Government of Burma or an official or officials of the Government of Burma.  On April 30, 2008, President Bush blocked the property and interests in property of three Burmese state-owned enterprises, Myanmar Gem Enterprise, Myanmar Timber Enterprise, and Myanmar Pearl Enterprise, named in the Annex to Executive Order 13464.   

Today's designation freezes all assets of the designated persons subject to U.S. jurisdiction and prohibits all financial and commercial transactions by any U.S. person with the designated persons.    The designations also make available to the global community information about companies that provide vital support to the Burmese military and to a regime that is systematically oppressing the Burmese people.

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July 28, 2008
HP-1104

Treasury Announces Marketable Borrowing Estimates

 Washington- Treasury announced its current estimates of marketable borrowing today for the July – September 2008 and October – December 2008 quarters:

• Over the July – September 2008 quarter, the Treasury expects to borrow $171 billion of marketable debt, assuming an end-of-September cash balance of $45 billion.  This borrowing estimate is $59 billion higher than announced in April 2008.  The increase in borrowing is primarily due to higher outlays and lower net issuances of State and Local Government Series securities.
• Over the October – December 2008 quarter, the Treasury expects to borrow $142 billion of marketable debt, assuming an end-of-December cash balance of $40 billion.

During the April – June 2008 quarter, Treasury borrowed $13 billion of marketable debt, finishing with a cash balance of $53 billion at the end of June.  In April 2008, Treasury estimated a pay down in marketable borrowing of $35 billion, assuming an end-of-June cash balance of $45 billion.  The increase in borrowing was primarily the result of lower receipts, higher outlays, redemptions of portfolio holdings by the Federal Reserve System and adjustments to cash balances.

Treasury estimates total marketable borrowing of $555 billion in FY 2008.  Note that beginning in April 2008, in order to more accurately reflect borrowing from private market participants, redemptions from the Federal Reserve's System Open Market Account (SOMA) were excluded from Treasury's marketable borrowing estimates.  To date this fiscal year, the Federal Reserve System redeemed $151 billion in SOMA holdings.  The table below details the impact of excluding SOMA redemptions in the actual results for the three previous quarters.

Additional financing details relating to Treasury's Quarterly Refunding will be released at 9:00 a.m. on Wednesday, July 30.

REPORTS

• Sources and Uses Table
• Table

July 28, 2008
HP-1102

Treasury Releases Best Practices to Encourage
Additional Form of Mortgage Finance

Washington- The U.S. Treasury Department took steps today to encourage additional sources of mortgage finance and strengthen financial institutions by issuing Best Practices for Residential Covered Bonds.

"As we are all aware, the availability of affordable mortgage financing is essential to turning the corner on the current housing correction. And so we have been looking broadly for ways to increase the availability and lower the cost of mortgage financing to accelerate the return of normal home buying and refinancing activity," said Treasury Secretary Henry M. Paulson, Jr. "We are at the early stages of what should be a promising path, where the nascent U.S. covered bond market can grow and provide a new source of mortgage financing."

A covered bond is secured debt instrument that provides funding to a depository institution, collateralized by high-quality mortgage loans that remain on the issuer's balance sheet. Covered bonds have the potential to increase funding for mortgages and to strengthen our financial institutions by offering them a new funding source that will diversify their overall funding portfolio.

While a large European covered bond market already exists, valued at $3.3 trillion in 2007, only two U.S. institutions to date have issued covered bonds. Market participants sought structural clarity to develop the U.S. covered bond market.

This document is intended to provide clarity and homogeneity to the new market. It is meant to define a starting point for the U.S. covered bond market and serve as a complement to the Federal Deposit Insurance Corporation final policy statement.

Treasury worked with the FDIC, the Federal Reserve, the Office of the Comptroller of the Currency, the Office of Thrift Supervision and the Securities and Exchange Commission when developing the guide. The Department also consulted with market participants, including potential issuers, investors, underwriters, ratings agencies as well as international regulators.

Treasury believes the $11 trillion mortgage market can benefit from all forms of mortgage finance. Covered bonds can serve as a complement to the housing government sponsored enterprises, helping to provide additional funding to homeowners.

Secretary Paulson first discussed Treasury's interest in helping to develop covered bond guidance in March 2008. The initiative is one of many options Secretary Paulson has pursued to help stabilize the mortgage finance market, including regulatory reform of the government sponsored enterprises, FHA modernization and the creation of HOPE NOW, a coalition of mortgage servicers, lenders and counselors that aims to reach more troubled borrowers.

In conjunction with the release of the Best Practices Guide, Treasury will update its own collateral acceptability policy to include covered bonds as an approved asset category for securing the Treasury's investments and deposits of public money with commercial counterparties.

REPORTS

• Fact Sheet
• US Covered Bond Best Practices
• More Information

Treasury Designates Zimbabwean Parastatals and Companies Supporting the Mugabe Regime

Washington, DC--The U.S. Department of the Treasury's Office of Foreign Assets Control (OFAC) today designated seventeen entities, including several Zimbabwean parastatals, and one individual whose support for Robert Mugabe's regime contributes to the undermining of democratic processes and institutions in Zimbabwe.

"In light of the continued intransigence of the brutal Mugabe regime, the U.S. is imposing further sanctions against this regime and its supporters," said OFAC Director Adam J. Szubin. "These actions send a clear warning to those who would protect Mugabe and his assets at the expense of the Zimbabwean people."

Today's designations include a number of Zimbabwean parastatals and entities that are owned or controlled by the Government of Zimbabwe. Robert Mugabe, his senior officials, and regime cronies have used these entities to illegally siphon revenue and foreign exchange from the Zimbabwean people. Treasury's designations today include the Minerals Marketing Corporation of Zimbabwe (a.k.a MMCZ), the sole marketing and export agent for all minerals, except gold and silver, mined in Zimbabwe; the Zimbabwe Mining Development Corporation (a.k.a. ZMDC), involved in investment in the mining industry in Zimbabwe, and in planning, coordinating and implementing mining projects on behalf of the Government of Zimbabwe; the Zimbabwe Iron and Steel Company (a.k.a. ZISCO), Zimbabwe's largest steel works; the Agricultural Development Bank of Zimbabwe (a.k.a Agribank), a commercial bank owned by the Government of Zimbabwe; the Industrial Development Corporation of Zimbabwe Ltd, a state-owned enterprise that owns a large number of companies operating in the industrial sector, including the chemical, clothing and textiles, mineral processing, and motor and transport sectors; the Infrastructure Development Bank of Zimbabwe, a financing entity; Zimre Holdings Limited, an investment and reinsurance entity; ZB Financial Holdings Limited, a holding company for a group of companies involved in commercial and merchant banking; and 4 major subsidiaries of ZB Financial Holdings Limited: ZB Bank Limited (a.k.a Zimbank), ZB Holdings Limited, Intermarket Holdings Limited, and Scotfin Limited.

Also designated today are Thamer Bin Saeed Ahmed Al-Shanfari, an Omani national with close ties to Mugabe and his top officials, as well as his company, Oryx Natural Resources, which Al-Shanfari uses to enable Mugabe and his senior officials to maintain access to, and derive personal benefit from, various mining ventures in the Democratic Republic of the Congo (the "DRC"). OFAC has also designated OSLEG (a.k.a. Operation Sovereign Legitimacy), an enterprise that is a commercial arm of the Zimbabwean army representing its interests in the DRC and elsewhere, and which is controlled by various senior officials in Zimbabwe. The activities of OSLEG and Al-Shanfari's Oryx Natural Resources, benefiting Robert Mugabe and his regime's senior officials, have been widely documented by various non-governmental and human rights organizations.

Finally, OFAC is designating the following companies that are owned or controlled by a number of Specially Designated Nationals ("SDNs"): Divine Homes, a property company whose Chairman is SDN David Chapfika, Zimbabwe's Deputy Minister of Agriculture; COMOIL (Pvt) Ltd., a petroleum importing company, owned by SDN Saviour Kasukuwere, Zimbabwe's Deputy Minister of Youth Development and Employment Creation; and Famba Safaris, a registered Zimbabwean safari operator, whose Director and major shareholder is SDN Webster Shamu, Mugabe's Minister of State for Policy Implementation.

As a result of Treasury's action, any assets of the individual and entities designated today that are within U.S. jurisdiction must be frozen. Additionally, U.S. persons are prohibited from conducting financial or commercial transactions with the individual or entities.

-30-

REPORTS

• Statement by the President
• Executive Order

Treasury Targets Al Qaida-Affiliated Terror Group in Algeria

Washington, DC--The U.S. Department of the Treasury today designated four leaders of al Qaida in the Lands of the Islamic Maghreb (AQIM), a terrorist organization that has carried out numerous attacks in Algeria. On July 3, 2008, these four individuals were added to the United Nations Consolidated List of individuals and entities associated with Usama Bin Laden, al Qaida, and the Taliban.

"Algeria has shown remarkable courage in the face of horrifying terrorist attacks against its people," said Adam J. Szubin, Director of the Office of Foreign Assets Control (OFAC). "The four terrorists that we have targeted today are among the most culpable for this violence, as leaders of al Qaida in the Lands of the Islamic Maghreb. We are proud to support the efforts of Algeria and the world community to combat this deadly threat and we will continue to do so."

AQIM carried out three attacks east of Algiers in early June 2008, including a bombing near a train station that killed a French national. In February 2008, AQIM kidnapped two Austrian tourists in Tunisia and has issued demands to the Austrian government for their release. In April 2007, AQIM bombed both the Algerian prime minister's office and police facilities in Algiers. AQIM conducted dual bombings in December 2007 of two United Nations offices and the headquarters of Algeria's Constitutional Council.

AQIM, which was formerly known as the Salafist Group for Preaching and Combat (GSPC), merged with al Qaida in September 2006. GSPC was one of the sixteen entities originally named a Specially Designated Global Terrorist (SDGT) pursuant to E.O. 13224 on September 24, 2001. GSPC was added to the U.N. list on October 6, 2001. AQIM was designated pursuant to E.O. 13224 on February 21, 2008 and was added to the U.N. list on April 26, 2007.

Identifier Information

SALAH GASMI

AKAs:            
Salah Abu Muhamad
Salah Abu Mohamed
Bounouadher

DOB:             
l3 April l97l
POB:              
Zeribet El Oued, Biskra, Algeria

Gasmi is the head of AQIM's information committee and is responsible for developing statements, circulating claims of responsibility for terrorist activities, and creating videos for AQIM.

As AQIM's representative to the media, Gasmi issued AQIM's claim of responsibility for its kidnapping of the Austrian hostages. Gasmi is one of the principal figures negotiating with the Austrian government for the release of the hostages. He represents AQIM leader Abdelmalek Droukdel's interests in the negotiations. Droukdel was added to the U.N. list on August 27, 2007 and was named an SDGT by the Treasury Department on December 4, 2007.

Gasmi also directs AQIM's internet communications with al Qaida senior leadership.

YAHIA DJOUADI

AKAs:            
Yahia Abu Amar
Abu Ala
Abou Alam

DOB:             
1 January 1967
POB:              
M'Hamid, Sidi Bel Abbas, Algeria

Djouadi is based in northern Mali and serves as the leader of AQIM in Africa's Sahara-Sahel region (also known as the AQIM South Zone). He is responsible for managing AQIM members in the South Zone and was actively recruiting Mauritanians as of early 2008.

Djouadi provided financial and operational support to a Moroccan AQIM-affiliated extremist who planned to establish an AQIM support base in North Africa.

Djouadi headed the AQIM military committee prior to his appointment as AQIM South Zone Emir.

AHMED DEGHDEGH

AKAs:            
Abd Al Illah
Abu Abdallah

DOB:             
17 January 1967
POB:              
Anser, Jijel, Algeria

Deghdegh is AQIM's finance chief.

Deghdegh has relayed AQIM messages in ongoing hostage negotiations; as AQIM's designated negotiator, Deghdegh communicated stipulations for the release of the hostages and issued ransom demands.

Deghdegh has acknowledged that AQIM has worked to undermine the interests of countries that support U.S. counterterrorism efforts.

ABID HAMMADOU

AKAs:            
Abid Hamadu
Abdelhamid Abu Zeid
Abdelhamid Abou Zeid
Youcef Adel
Abu Abdellah

DOB:             
12 December 1965
POB:              
Touggourt, Ouargla, Algeria

Hammadou is the deputy leader of AQIM's Tarek Ibn Zaid battalion and is based in northern Mali.

Hammadou was involved in kidnapping the Austrian tourists for AQIM in February 2008.

In 2003, Hammadou participated in the kidnapping of 32 foreign tourists in Algeria by the GSPC, AQIM's predecessor organization. Hammadou was appointed by regional AQIM leader al-Para to lead the Tarek Ibn Zaid battalion, which carried out the kidnapping (El Para, AKA Saifi Ammari, was named an SDGT on December 5, 2003). Hammadou and other members of the battalion received part of the ransom paid to liberate the tourists and allegedly used the funds to purchase weapons.

In June 2005, Hammadou led a unit of AQIM operatives in an attack on a Mauritanian military outpost that killed fifteen soldiers and wounded at least another fifteen.

Hammadou established a camp for AQIM recruits in northern Mali that included training in combat techniques, making and defusing bombs, and guerilla tactics.

-30-

July 11, 2008
HP-1077

WEEK 11 WRAP-UP:
TREASURY SENT 7.530 MILLION STIMULUS PAYMENTS THIS WEEK

This week the Treasury Department sent out 7.530 million economic stimulus payments to American households totaling $5.755 billion.  In total, Treasury has sent out 112.405 million total economic stimulus payments totaling $91.834 billion.

This week marks the final week of mass disbursements of stimulus payments.  Payments will continue to be sent to households in small batches throughout the end of the year as returns are filed by the October 15 extension deadline.  Those Americans who do not file by October 15 and still qualify for a payment can obtain their stimulus payment by filing a 2008 tax return next year.     

Cumulative Total

Total Number of Payments: 112.405 million
Total Amount of Payments: $91.834 billion

Week Eleven (July 7-11)

Total Number of Payments: 7.530 million
Total Amount of Payments: $5.755 billion

Week Ten (June 30-July 4)

Total Number of Payments: 10.025 million
Total Amount of Payments: $7.775 billion

Week Nine (June 23-27)

Total Number of Payments: 9.674 million
Total Amount of Payments: $7.522 billion

Week Eight (June 16-20)

Total Number of Payments: 9.071 million
Total Amount of Payments: $6.919 billion

Week Seven (June 9-13)

Total Number of Payments: 9.526 million
Total Amount of Payments: $7.032 billion

Week Six (June 2-6) 

Total Number of Payments: 9.143 million
Total Amount of Payments: $6.789 billion

Week Five (May 26-30)

Total Number of Payments: 5.757 million
Total Amount of Payments: $4.320 billion

Week Four (May 19-23)

Total Number of Payments: 6.211 million
Total Amount of Payments: $4.927 billion

Week Three (May 12-16)

Total Number of Payments: 15.575 million
Total Amount of Payments: $13.562 billion

Week Two (May 5-9)

Total Number of Payments: 22.180 million
Total Amount of Payments: $20.138 billion

Week One (April 28-May 2)

Total Number of Payments: 7.708 million
Total Amount of Payments: $7.091 billion

Payments began April 28 and will continue via direct deposit or paper check through mid-July.  For a single filer, the minimum payment is generally $300 and the maximum payment is $600.  For joint filers, the minimum is generally $600 and the maximum $1,200.  There is also an additional $300 payment for each qualifying child.   

For tax returns processed by the Internal Revenue Service by April 15 households will receive their payments according to the last two digits of the Social Security number on the tax form.  On a joint return, the first number listed will determine when a stimulus payment will be sent. 

REPORTS

• Direct Deposit Payments