Remarks from Octpber 3 Economic Briefing
“Recent data reflect the impact of the housing correction and financial market strains. The troubled assets relief program will help to stabilize markets and thereby lend support to broader economic activity.” - Assistant Secretary Phillip Swagel, October 3, 2008
The U.S. economy is fundamentally strong, but the housing correction, credit turmoil, and high oil prices are weighing on growth this year and short-term risks are to the downside. The Economic Stimulus Act of 2008, signed into law on February 13, will help protect the strength of our economy as we weather the housing downturn and other challenges. This agreement includes short-term incentives to bolster business investment and consumer spending to keep our economy growing and creating jobs this year.
U.S. Economic Strength
Employment Fell in September: Job Growth: Payroll employment fell by 159,000 in September, following a decrease of 73,000 in August. The United States has added about 7.5 million jobs since August 2003. Employment increased in 27 states and the District of Columbia over the year ending in August. (Last updated: October 3, 2008)
Unemployment: The unemployment rate was 6.1 percent in September, unchanged from August but 1.4 percentage point higher than a year ago. (Last updated: October 3, 2008)
Growth Was Solid in Q2:Real GDP: Real GDP growth in Q2 was 2.8 percent at an annual rate, up from 0.9 percent growth in Q1. Consumer spending added 0.9 percentage points to growth in the first quarter and net exports added 2.9 percentage points. These positives were partly offset by the continued drag from housing and a large inventory reduction. (Last updated: September 26, 2008)
Signs of Economic Strength Include Exports and Low Core Inflation:Exports: Strong global growth is boosting U.S. exports, which grew 11 percent over the past 4 quarters. (Last updated: September 26, 2008)Inflation: Core inflation remains contained. The consumer price index excluding food and energy rose 2.5 percent over the 12 months ending in August. (Last updated: September 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.
October 3, 2008HP-1175
Paulson Statement on Emergency Economic Stabilization Act
Washington- By acting this week, Congress has proven that our Nation's leaders are capable of coming together at a time of crisis, even at a critical stage of the political calendar, to do what is necessary to stabilize our financial system and protect the economic security of all Americans.
The American people will appreciate the leadership of their elected representatives and senators who took bold action to help stem a severe credit crunch that threatens to cost many jobs and undermine access to credit for working Americans.
This bill contains a broad set of tools that can be deployed to strengthen financial institutions, large and small, that serve businesses and families. Our financial institutions are varied – from large banks headquartered in New York, to regional banks that serve multi-state areas, to community banks and credit unions that are vital to the lives of our citizens and their towns and communities. Each institution has its own unique benefits, and their collective strength makes our financial system more resilient, and more innovative. The challenges our institutions face are just as varied – from holding illiquid mortgage backed securities, to illiquid whole loans, to raising needed capital, to simply facing a crisis of confidence. This diversity of institutions and challenges requires that we deploy the tools in this rescue package, in combination with the tools the Fed, the Treasury, the FDIC and other bank regulators already have, in a variety of ways that addresses each of these needs and restores the ability of our financial system to fuel our broader economy.
There is no one-size-fits-all solution to alleviating the stress in our financial system. Each situation will be different and we must implement these new programs with a strategy that allows us to adapt to changing circumstances and conditions, and attract private capital. The broad authorities in this legislation, when combined with existing regulatory authorities and resources, gives us the ability to protect and recapitalize our financial system as we work through the stresses in our credit markets.
We will move rapidly to implement the new authorities, but we will also move methodically. In the coming days we will work with the Federal Reserve and the FDIC to develop strategies that deploy these tools in an expedited and methodical way to maximize effectiveness in strengthening the financial system, so it can continue to play its necessary and vital role supporting the U.S. economy and American jobs. Transparency throughout this process will be important, and I look forward to providing regular updates as we move ahead to implement this strategy.
October 3, 2008HP-1173
Under Secretary David H. McCormick Remarks atWharton’s Eleventh Annual Investment Management ConferenceResponding to Today’s Market Turmoil
Philadelphia - These are incredibly challenging and unprecedented times for the United States. Over the last twelve months, we have witnessed one of the most significant periods of economic turmoil that has ever faced our country, and I have had the opportunity to see first hand how our country's leaders have responded. Today I'd like to share my views on how we arrived at this place, what we have done about it up to this point, and what else we must do to stabilize our markets and ensure America's long term prosperity.
The seeds of the challenges we face today were sown many years ago, beginning with a gradual weakening of lending practices by banks and financial institutions and by greater willingness by borrowers to take out mortgages they couldn't afford. These factors, combined with growing complexity and opaqueness in our capital markets, are at the heart of the current crisis.
We are now paying the price. We've seen the results for homeowners in higher foreclosure rates affecting individuals and neighborhoods. We are now seeing the impact on struggling financial institutions. These weak loans started a chain reaction, and in recent weeks, our credit markets have tightened dramatically with even some non-financial companies around the country having difficulties financing their day-to-day business operations. These effects are already beginning to trickle down and affect all parts of the U.S. economy.
In response to this worsening situation, the U.S. government has taken bold and decisive actions in recent months to stabilize the markets, mitigate the impact on our financial system and the U.S. economy, and address the underlying sources of market uncertainty.
Root Causes of the Market Turmoil
How did we get to this point? The story begins with a decade of benign economic conditions marked by low interest rates, low inflation, and less volatile asset markets, which led many to ignore the "risk" half of the risk-reward equation at the heart of financial markets. Investors around the world, who in preceding years had enjoyed above-historical returns on most assets, continued reaching for ever-higher gains. The financial-services industry created a variety of complicated new products to meet this demand. Regulators and investors alike showed a growing complacency toward risk. These factors blended into a dangerous cocktail of underlying conditions ripe for instability.
This imbalance between risk and reward was most evident in the U.S. housing market, where lenders significantly loosened credit standards, particularly for a new generation of adjustable-rate mortgages. Yet aggressive financial innovation went well beyond mortgages. Banks and brokers created an alphabet soup of products with simple names like CDOs, CLOs, and SIVs, which were in fact complex and opaque investment products and structures. Credit-rating agencies responsible for assessing and rating these assets, as well as investors who purchased them, failed to question the chances of these underlying investments going bad.
Last summer these vulnerabilities in our financial system became clear. Looser credit standards in the housing market combined with an end to rapid home-price appreciation led to a significant rise in delinquent mortgages. This in turn contributed to immediate and unexpected losses for investors and a reconsideration of the risk-reward relationship--first in housing, and soon after, across all asset classes. The shaken investor confidence in housing assets had a domino effect throughout world markets, ratcheting up demand for cash and liquidity, and curtailing the pace of the new lending and investment necessary for strong growth to continue.
Actions to Mitigate Risk and Stabilize Markets
Recognizing the risk to the U.S. economy of the housing downturn, the Administration and Congress acted quickly earlier this year to pass a $150 billion stimulus bill. At Treasury, we brought together mortgage providers through the HOPE NOW alliance to help families avoid foreclosure on their homes. Yet, as we seek to minimize the impact of the housing correction on the economy, we must avoid impeding its progress. The sooner we turn the corner on housing, the sooner we will see home values stabilize, the sooner we will see more people buying homes, and the sooner housing will once again contribute to economic growth.
In the financial markets, progress has not moved in a straight line, and additional challenges clearly lie ahead. There have been some positive developments. In the past year, for example, U.S. financial institutions (often under new management) have recorded losses of over $300 billion and raised over $200 billion in new capital. Yet, the events of the last few weeks – where we have acted on a case-by-case basis to address destabilizing financial conditions in a number of institutions – demonstrate continued weakness across the financial services sector.
In March, the Federal Reserve took unprecedented action to ensure an orderly resolution for Bear Stearns, and in September, authorities around the world took steps to mitigate the impact of the bankruptcy of Lehman Brothers, America's fourth largest investment bank. That same week, the Federal Reserve provided funding to American International Group (AIG) to address the systemic risk that would have resulted from a sudden collapse of the firm. And last week, the FDIC brokered a deal and supported the sale of Wachovia's banking operations to Citigroup in order to prevent its failure following the earlier collapse of Washington Mutual. In each of these cases, policymakers attempted to strike a careful balance of mitigating systemic risk while promoting market discipline, holding investors and management teams responsible, while protecting blameless consumers from collateral damage.
And we are not alone. Europe and Asia are also suffering through their own financial turmoil. In recent days, the United Kingdom, Iceland, Belgium, the Netherlands, Luxemburg, France and Germany have all intervened to support troubled institutions. And last week, we also saw how rumors precipitated a run on Hong Kong's Bank of East Asia. We see from these examples that our financial markets are more global and more interdependent than at any time in history.
The cases of the Government Sponsored Enterprises (GSEs), Fannie Mae and Freddie Mac, deserve special mention, particularly given their significance to investors around the world. The GSEs have become the largest sources of mortgage finance in the United States, touching roughly 70 percent of mortgages originated. Not surprisingly, the prolonged housing correction weakened their financial condition, and both institutions faced a loss of investor confidence. Fannie Mae and Freddie Mac are so large and so interwoven in our financial system that if either of them were to fail, it would have far reaching effects on the U.S. and global economies. Business finance would be more difficult to obtain, constraining job creation and making it harder for Americans to get home loans, auto loans, and consumer credit.
This past summer, investors began to express growing concerns over the stability of Fannie and Freddie and the ambiguity over the scope and certainty of government support for these institutions. In response, Secretary Paulson asked Congress for authorities regarding Fannie Mae and Freddie Mac in order to help stabilize our financial markets and support our housing market. Congressional leaders acted promptly and decisively with the needed legislation, and in the days and weeks that followed, Jim Lockhart, the director of the GSE's regulator, the Federal Housing Finance Agency (FHFA), Federal Reserve Chairman Bernanke, and Secretary Paulson concluded they needed to act decisively to avert instability in our markets. As a first critical step, the FHFA put Fannie and Freddie into conservatorship, allowing for the government to take temporary control and make needed changes at both institutions.
In a complementary step, Treasury established contractual Preferred Stock Purchase Agreements with both institutions under which it committed up to $100 billion per institution to ensure that each GSE maintains a positive net worth. These Preferred Stock Purchase Agreements are intended to explicitly address the underlying ambiguities in the GSE Congressional charters and to give the holders of Fannie Mae and Freddie Mac debt confidence in the promise of government support for their investments. Because the U.S. Government created these ambiguities and the resulting uncertainty, Secretary Paulson felt strongly that we had a responsibility to address the systemic risk posed by the scale and breadth of the agency debt.
The terms of these purchase agreements provide taxpayers significant protection. The existing common and preferred shareholders of the GSEs will lose 100 percent of their investment before the American taxpayers lose a penny. Moreover, as part of the terms of the agreement, Treasury has received from each company $1 billion in senior preferred stock and warrants providing options to purchase up to 79 percent of the companies' outstanding shares.
Second, Treasury established a new, temporary credit facility for Fannie Mae, Freddie Mac, and the Federal Home Loan Bank to fund, if necessary, their regular business activities. Finally, to further support the availability of mortgage financing for millions of Americans, Treasury is initiating a temporary program to purchase mortgage-backed securities issued by the GSEs, thereby providing additional capital to the mortgage marketplace.
These steps are the best means of protecting taxpayers and stabilizing our markets, but they leave for future policymakers fundamental decisions about the role and structure of these enterprises. Our recent actions have afforded a "time out" – providing the stability, time, and flexibility for Congress and the next Administration to address the inherent conflict in the GSE charters that require them to serve the interests of private investors and the broader public.
A Comprehensive Policy Response
Despite the hardening of the government's support and involvement in Fannie Mae and Freddie Mac, and the decisive resolutions of Bear Stearns, Lehman Brothers, AIG, Washington Mutual, and Wachovia, investors have become increasingly concerned over the possibility of other failing financial institutions. And, this has made them increasingly reluctant to extend credit.
This has led to sharp increases in the cost of credit for financial and non-financial companies, increasing the risk that corporate America would be unable to roll over maturing corporate debt. Given this environment, it was necessary for U.S. authorities to act decisively and comprehensively to provide capital, liquidity, and smooth market operations with the goals of stabilizing the markets and addressing the underlying sources of uncertainty. The three components of the plan rolled out two weeks ago by Secretary Paulson and Chairman Bernanke seek to achieve these goals.
First, central banks from around the world have acted together to provide additional liquidity for financial institutions. The Federal Reserve has established swap lines with nine central banks to reduce pressures in global short-term U.S. dollar markets. Additionally, Treasury implemented a temporary guaranty program for the U.S. money market mutual fund industry, which has experienced funding problems in recent weeks. This temporary $50 billion guaranty program offers government insurance that was previously unavailable in order to address concerns about whether these investments are safe and accessible.
Second, we have put forward a plan to provide much needed capital to address the root causes of the current stress in our financial system – the ongoing housing correction and the consequent buildup of illiquid mortgage-related assets. These troubled assets remain frozen on the balance sheets of banks and other financial institutions, constraining the flow of credit that is so vitally important to our economic growth. The failure to address this root cause would mean that every aspect of our financial and funding markets, ranging from consumer credit to money market funds, would continue to be impaired.
The Administration has worked with Congress to develop a $700 billion comprehensive program for addressing the problem of these illiquid assets on the balance sheets of institutions within the financial system. This will help reduce an enormous source of uncertainty in the markets and stimulate the raising of capital within the financial services sector. In addition, the bill will help ensure the availability of credit so American families can meet their daily needs and American businesses can make purchases, ship goods, and meet their payrolls. A failure to act comprehensively and decisively could have dire consequences for the U.S. economy and all Americans. This plan also sends a strong signal to markets around the world that the United States is serious about restoring confidence and stability to our financial system.
Third, we have taken steps to improve market operations and market integrity. As an example, the Securities and Exchange Commission took temporary emergency action to prohibit short selling in financial companies to protect the integrity and quality of the securities market and strengthen investor confidence. The SEC's exceptional actions were joined by regulators in the UK, France, Germany, and other countries who also imposed restrictions on short selling.
A Possible Turn Inward
In addition to the things we must do, there are also things we must avoid. Our recent downturn has contributed to a climate of increased distrust and anxiety among Americans that is fueling support for protectionist policies. The benefits of trade and open investment are being openly questioned across the political spectrum, and this rhetoric is particularly pronounced on Capitol Hill. There is reluctance, for example, to pass the pending trade agreements with Colombia, Panama, and Korea, and there are concerns over foreign investment in U.S. companies, despite the clear and unequivocal benefits of both to the United States. These trends, dangerous at any time, could be devastating in this period of heightened market uncertainty and fragility.
This trend is all the more concerning because trade and investment play such an important role in the competitiveness and success of the U.S. economy. Overseas sales by U.S. companies account for about 50 percent of all U.S. exports, and the profit growth of U.S. companies comes chiefly from the global sales. Remarkably, exports now account for 13% of the U.S. GDP – the highest level in history. Moreover, foreign-owned firms in the US employ more than 5 million workers directly and another 5 million indirectly, and these jobs pay on average a quarter more than jobs created by U.S.-owned companies.
However, these facts are understandably lost on many Americans who have been negatively affected by the dynamism and speed of global markets. With this in mind, we must work to build public support for openness in this era of globalization, even as we acknowledge and take steps to mitigate some of its negative consequences of dynamic global competition. This too must be a priority as we work through the economic challenges that lie ahead.
Conclusion
Ladies and Gentleman, now is the time to act quickly, decisively, and collaboratively with regulators and market participants around the world to restore stability and confidence to our markets. It will no doubt take time to work through the excesses that were built up over a number of years. U.S. policymakers are decisively implementing policies that address our short-term economic challenges and rebuild faith in the market. When we emerge from this difficult period – and we will emerge both wiser and stronger – our next task will be to strengthen our financial regulatory structure to guard against such excesses in the future.
The interdependence of our global economy makes this challenge more complex, and it also makes our work with international counterparts to promote growth and financial stability all the more important. I'm confident that our leaders and our great country are up to this pressing challenge.
Thank you.
October 3, 2008 HP-1172
Treasury Distributes 1.147 Million Additional Stimulus Checks in September
Washington, DC--The Treasury Department announced today that it distributed 1.147 million stimulus payments, totaling $672 million in the month of September. As of the end of September, a total of 115.957 million payments have been distributed totaling $94.061 billion since disbursements started April 28.
While mass disbursement of stimulus checks ended July 11, small batches of payments continue to be sent out to American households. The Treasury Department will announce updates monthly until the end of the year. The Treasury Department also reminds Americans, especially those seniors and veterans who do not normally file a tax return, to file a return by the October 15th filing deadline to receive a stimulus payment this year.
October 2, 2008HP-1174
Assistant Secretary Clay Lowery Remarks on Sovereign Investingat the Third Columbia Investment Conference
New York - It's a pleasure to join you today and to participate in this conference on sovereign investing. The schedule that you have put together over the last couple of days appears intense and focuses on many of the issues that we have been trying to address within the U.S. Government for the last couple of years – how do we view sovereign investing in the United States.
Recent Developments
Before discussing the primary motivation of your conference, however, let me first take a moment to acknowledge the context in which today's discussion on sovereign investment takes place. As you all know, we are in the midst of an historic reassessment of risk by the world's financial markets, triggered by the bursting of the U.S. housing bubble and the subsequent steep decline in U.S. housing prices. The U.S. government has taken a number of bold steps to stabilize markets, mitigate the impact of a number of failing or troubled institutions, and address the underlying sources of market uncertainty. We are working to resolve the current crisis and re-establish stability. No doubt there will be much analysis of the current crisis in the months and years ahead. But one fact is already clear: opaqueness in our capital markets and inadequate supervision and risk management on the part of financial sector participants contributed to the crisis. When we emerge from this difficult period, our next task will be to strengthen the financial regulatory structure to forestall such excesses in the future. The interdependence of our global economy makes this challenge more complex, and it also makes our work with international counterparts to promote openness and financial stability all the more important.
The current crisis also serves as a reminder that the enemy of financial policymakers is complacency and the friend is to worry about vulnerabilities. It puts a premium on constantly thinking about "what is around the corner?" and how should we address the issues that such analysis reveals. Otherwise, those vulnerabilities can manifest themselves in front of your eyes as an outright crisis.
One of those vulnerabilities that we see in the United States has been the rise of protectionist sentiment, in many respects, epitomized in the rhetoric surrounding international investment. While I'd like to think that in times of economic difficulties, it would be enough to remind people that international investment fuels our own economic prosperity by bringing new technology and business methods and by providing healthy competition that fosters innovation, productivity gains, lower prices, and greater variety for consumers. Or I'd like to think that it would be enough to recall that over 5 million Americans are employed by foreign-owned companies, and foreign-owned companies pay on average 25 percent more than U.S. companies. I, unfortunately, realize that I would be wrong – it is not enough.
Therefore, let me try to explain how we are attempting to "see around corners" when it comes to sovereign wealth funds and CFIUS.
Sovereign Wealth Funds (SWFs)
Sovereign wealth funds have garnered much attention in the past year, both for their growing relevance as global financial market participants and for their recent investments in major financial institutions. For instance, according to Monitor Group, in the first half of 2008 alone, sovereign wealth funds invested $24 billion in 23 deals in the financial sector. These investments come on top of a flurry of deals involving financial institutions at the end of 2007.
SWFs are not a new phenomenon, but their rapid growth both in number and size is relatively new, and a trend that is expected to continue. From the current estimated level of roughly $3 trillion, the IMF and private sector analysts project SWF assets could reach $7 to $11 trillion or more in the next five years. Even though many sovereign investors have been around for decades, the expected growth of sovereign wealth fund assets, the number of new sovereign wealth funds and recent "headline" deals involving SWFs have all contributed to an intensified interest in sovereign wealth fund activities among public and private actors, alike. This interest often manifests itself in the form of questions about the "true" motivations for sovereign wealth fund investments; the degree of control a sovereign could exercise over the investment target; as well as the processes by which recipient countries – the United States, in particular – review sovereign investments for national security concerns.
So what do we know about sovereign wealth funds and their investments?
The IMF recently published a Survey of SWF Institutional and Operational Practices that provides a good baseline of information – in aggregate – on 20 different sovereign wealth funds. While the data set is limited, the results provide additional information about SWF objectives and roles in policy making; data availability; and asset allocation. For instance, two-thirds of responding SWFs have long term savings/stabilization as their operating mandate and do not generally engage directly in macroeconomic policies. Most of the respondents make data available to national compilers of macroeconomic statistics, but not necessarily to the public. The majority of respondents use external asset managers to some degree, while SWFs that are established as separate legal entities typically are permitted higher allocations to alternative asset classes.
In addition to this survey, it is pretty clear that SWFs are in principle long-term investors that historically have maintained their strategic asset allocation in the face of short-term losses. They typically are not highly leveraged. SWF managers generally have a higher tolerance for risk than reserve managers and seek higher returns by investing in a wider range of asset classes. They have access to, and frequently make use of, well-regarded private fund managers, consultants, administrators and custodians. SWFs as a group, but particularly the more longstanding funds, generally have a track record of making investment decisions on economic and financial grounds.
US Treasury Response
It is this last area that has probably raised the most concerns – do SWFs invest for some sort of political and strategic purpose or do they invest to maximize returns. In the U.S. Government, our view was that we needed to address this concern head on and do it in a way that would not resort to protectionist measures.
Our thinking led us to proposing approaches that are measured, multilateral, and maintain openness. This is in the best interest of participants on both sides of the investment equation -- countries that have these funds and countries in which these funds invest. Recognizing that better understanding and communication is necessary on both sides of the investment relationship, Treasury has undertaken substantial outreach to strengthen communication with SWFs and build support for multilateral initiatives. These efforts included agreement in March with Singapore and the United Arab Emirates on a set of principles that would create a strong incentive among SWFs and recipient countries to hold themselves to high standards.
Generally Accepted Principles and Practices
More robustly, Treasury proposed a large multilateral effort to develop voluntary best practices for SWFs. Roughly one year later, officials from 23 countries are prepared to unveil an historic agreement among the world's major sovereign wealth funds. This agreement represents a milestone in enhancing the openness and transparency of the global financial system and in promoting open investment worldwide.
The IMF facilitated the establishment of a group of 23 countries with SWFs, the International Working Group of Sovereign Wealth Funds or "IWG." The IWG drafted and agreed on the Generally Accepted Principles and Practices or "Santiago Principles" in less than half a year – an impressive achievement given the number of participants, the complexity of the issues and the unchartered territory that the agreement represents for a number of sovereign wealth funds. The group welcomed input from recipient countries as the group deliberated, demonstrating a collaborative spirit and a common interest in a credible product.
The Principles will be released publicly during the IMF's annual meeting next weekend. Broadly speaking, it is a voluntary framework that consists of principles and supporting commentary, which will guide SWFs in establishing sound practices in three key areas:
Legal framework and coordination with macro policies;
Institutional and governance framework; and
Investment framework, including risk management.
Adoption of the Principles by SWFs will address many of the key issues that have been dealt with only at the discretion of each individual fund up until now: for instance, what is the policy purpose of an SWF? What guides specific investment decisions? What stance does an SWF take with regard to voting shares? And how does an SWF manage risk? In the process, the Principles will also directly address financial stability and investment issues raised by the rapid growth in the size and number of SWFs.
Even though the Principles are not yet public, the process and substance behind it are already bearing fruit. In June, the Abu Dhabi Investment Authority (ADIA) – one of the world's largest sovereign wealth fund and also co-chair of the IWG – expanded the amount of information available through its website to include information on its Investment Strategy, Governance and Organizational Structure. Just last week, the Government of Singapore Investment Corporation (GIC), also one of the largest SWFs, disclosed for the first time its asset composition and historical returns.
The Principles demonstrate a significant positive shift in SWF practices relative to current practices--but useful work remains to be done. Their effectiveness in helping to reduce protectionist pressures and contribute to global financial stability ultimately will depend on their widespread adoption by SWFs. We expect SWF ownership of the Principles – a key goal of our original proposal – will lead to a high rate of implementation among participating SWFs. Early adherents will serve as an example to other SWFs, and result in a rise to the top in institutional and operational practices among the vast majority of funds. We expect the successor to the Working Group will continue to meet to consider implementation issues and proposals for further work.
When Treasury first started looking at the issue of sovereign wealth funds in great detail, some observers worried that an "overemphasis on transparency of SWFs alone may lead to unnecessary conflicts with allies." A leading economic thinker noted that it was the unwillingness of sovereign wealth funds to agree to standards openly that raises concerns about sovereign wealth fund motivations. Still others concluded that "a global solution to SWF concerns is unlikely to emerge," given a lack of international consensus regarding foreign investment rules.
They were right to be cautious – even pessimistic – with regard to the chances of reaching agreement on a wide-ranging set of principles, among a diverse group of countries, each with unique institutional arrangements, objectives and disclosure requirements. Such long odds makes the Working Group's achievement that much more impressive. We commend the IMF's efforts in convening and supporting the group's work, and IWG members for reaching consensus on a wide-ranging and groundbreaking agreement. Their efforts demonstrate a collaborative spirit and common interest in a credible product. Now it is up to SWFs to implement the Principles in support of maintaining an open and stable global financial system.
Recipient Country Policies
Committee on Foreign Investment in the United States (CFIUS) and Regulations
When I think of our work on SWFs, I like to think of it as the U.S. Government being proactive, "seeing vulnerabilities around the corner", and designing policy responses that are prudent, and hopefully coherent.
When I think of the other major area of foreign investment in the United States – CFIUS – I also think about the word "proactive," but as a lesson. As folks are probably pretty aware, Dubai Ports World became a major issue in 2006. The reasons it became an issue is a study in itself, but the important part of that "experience" are the lessons learned. And the key lesson is to be proactive.
As we have done for SWFs, policy makers need to see around the corners and think proactively about the vulnerabilities that can arise from an issue and the consequences. While Dubai Ports World was a painful episode (almost like being hit by a truck), it also lead to strong proactive work that has ensured the continuation of our long-standing open investment policy.
Instead of taking Thomas Friedman's thoughts of a few days ago and curling up into the fetal position…we figured that we had to address the two important challenges before us: restore confidence that the United States remains open to foreign investment and restore confidence that our national security process is thorough, accountable, and targeted.
While there were many concerns raised about the Dubai Ports World transaction, the most significant were the apparent lack of accountability, the lack of communication with Congress, and the lack of clarity in terms of the law. To reform those problems, we focused on two key actions: getting our house in order and revising the legal context within which CFIUS operates.
Getting our house in order: In over two years, we have made it our mission at Treasury to fix the problems that I just identified. We reorganized the Department and our procedures so that accountability is now at the highest levels within Treasury; we changed our practices and now keep Congress informed of every transaction after we have concluded the examination; and we remade the inter-agency process so that key responsibilities of agencies are clear so as to improve coordination and make decision making more efficient.
Revising the legal context within which CFIUS operates: Given that this is a law school and I'm not a lawyer, I thought about skipping this part -- but instead -- I'll summarize the legal context in two areas.
First, we worked hard with Congress to re-write the CFIUS statute, and that law passed with wide bipartisan support last year. The law:
Maintains a very selective focus on only the cases that raise genuine national security concerns.
Formalizes the current practice of seeking to resolve any concerns, rather than prohibiting transactions.
Maintains strict deadlines: First-stage security reviews must be completed within 30 days. Second-stage investigations must be completed within 45 days, and any action by the President must be taken within 15 days following the conclusion of an investigation.
Provides Congress with an extensive annual report detailing CFIUS activities and the cases it reviews.
Second, in April of this year, we proposed a rewrite of the 1992 regulations. Our aim was to provide as much clarity as possible while still providing the government with the flexibility it needs to protect national security. We have received a number of comments on the regulations from a broad array of public and private entities, both domestic and international. We are carefully reviewing those comments, and will issue final regulations soon, as well as separate guidance on the types of transactions that CFIUS has reviewed and that have raised national security considerations. The guidance will help investors and their counsel decide whether or not to file a voluntary notice requesting CFIUS review of their transactions.
At Treasury, we believe that these reforms have built confidence in our ability to carry out the important role that Congress and the President have entrusted to the CFIUS process. In addition, we now have an important message – backed up by statistics – that we have been delivering to both domestic and international audiences, demonstrating that the new and improved CFIUS operates fully within the context of the U.S. commitment to open investment.
Let me assert that CFIUS is an efficient, disciplined process that reviews only a small number of transactions. CFIUS is narrowly focused on national security risks posed by the specific transaction under review, not broader considerations such as economic security, industrial policy or "national interest."
To provide some statistical proof of this assertion, Thomson Financial reports that in 2007, there were over 11,000 mergers and acquisitions in the United States, of which about 2,000 involved foreign acquirers. CFIUS reviewed only 138 transactions covered by the statute, or fewer than 7% of these foreign acquisitions. Six cases went to investigation, and none of the six required a Presidential decision. Over 80 percent of the cases were closed out within the 30 days of the beginning of the CFIUS examination. In other words, barely more than 1% of all cross border mergers and acquisitions in our country had a national security review that lasted longer than 30 days and 0% of all cases were blocked by the Federal Government.
In 2007, less than one-fifth of the covered transactions that CFIUS reviewed involved a foreign government-controlled acquirer, and even fewer cases involved sovereign wealth funds. Foreign government control is a factor that CFIUS considers in its review of covered transactions, and under FINSA, acquisitions by foreign-government controlled entities are subject to clearance by higher level officials. Nevertheless, CFIUS reviews have not prevented acquisitions by foreign government-controlled companies from proceeding, including within 30 days in numerous cases in which that is appropriate.
In sum, the nature and practice of CFIUS demonstrates that the United States continues to welcome foreign investment. President Bush reaffirmed our commitment to open investment in a statement in May 2007 in which he said we welcome foreign investment in this country and will work to ensure fair treatment and equitable opportunity for our investors abroad.
Conclusion
I'd like to close by summarizing just how far we've come in dealing with the consequences of higher levels of foreign investment, including sovereign investment. As noted, there was great skepticism with regard to the willingness of sovereign wealth funds to voluntarily participate in a process premised on greater transparency. Likewise, the firestorm surrounding the 2006 Dubai Ports World transaction severely damaged confidence in the CFIUS process and increased the risk of a protectionist response. Yet on both counts, we are in a substantially better place then most observers would have guessed two years ago.
Sovereign wealth funds have sought to address the underlying concerns about their investment intentions by voluntarily adopting a framework of sound principles and practices, and increasing the amount of information available about their operations. Likewise, the United States has comprehensively reformed our own processes for reviewing foreign investment, in a manner which reassures foreign investors that the United States remains open to foreign investment, while clearly prioritizing national security. No doubt, the issues surrounding sovereign foreign investment will continue to evolve. But I am confident that the structures and processes currently in place are capable of adjusting to these changes, and sufficiently robust to respond in a manner consistent with our open investment policy objectives.
Progress toward greater transparency and accountability on the part of sovereign wealth funds and recipient countries alike place these actors at the forefront of a move toward greater transparency among financial market participants more broadly. These efforts will build confidence on both sides of the investment relationship and support the future stability of the global financial system.
I would be happy to take any questions from the audience.
October 1, 2008 2008-10-2-11-44-54-4819
Statement by Secretary Henry M. Paulson, Jr.on Emergency Economic Stabilization Act Vote
Washington, DC-- Secretary Henry M. Paulson, Jr. made the following statement on the Senate vote on the Emergency Economic Stabilization Act of 2008:
I commend the Senate for tonight's strong, bipartisan vote. This sends a positive signal that we stand ready to protect the U.S. economy by making sure that Americans have access to the credit that is needed to create jobs and keep businesses going. I urge the House to act promptly to pass this bill.
October 1, 2008
U.S. International Reserve Position
The Treasury Department today released U.S. reserve assets data for the latest week. As indicated in this table, U.S.reserve assets totaled $72,988 million as of the end of that week, compared to $72,087 million as of the end of the prior week.
September 30, 2008 HP-1170
Assistant Secretary Swagel to Hold Monthly Economic Briefing
Assistant Secretary for Economic Policy Phillip Swagel will hold a media briefing to review economic indicators from the last month and discuss the state of the U.S. economy. The event is open to the media:
Who Assistant Secretary for Economic Policy Phillip Swagel
What Economic Media Briefing
When Friday, October 3, 10:00 a.m. EDT
Where Treasury DepartmentMedia Room (4121)1500 Pennsylvania Avenue, NWWashington, D.C.
Note Media without Treasury press credentials should contact Frances Anderson at (202) 622-2960, or Frances.Anderson@do.treas.gov with the following information: full name, Social Security number, and date of birth.
September 29, 2008 hp1168
Statement by Secretary Henry M. Paulson, Jr. on Emergency Economic Stabilization Act Vote
Washington, DC-- Secretary Henry M. Paulson, Jr. made the following statement on the Emergency Economic Stabilization Act of 2008 vote in the House:
I'm disappointed in today's vote, but leaders on both sides of the aisle worked hard. I've spoken to them and I know they share my great disappointment.
We have experienced significant turmoil in our financial markets in the last few days, including the collapse of Washington Mutual and Wachovia here and the failure of two major financial institutions in Europe. Markets around the world are under stress, and that reduces the availability of credit that businesses across America depend on to meet payroll and to purchase inventories.
Families, too, feel the credit crunch as it becomes more difficult to get car loans or a student loan.
I and my colleagues at the Fed and the SEC continue to address the market challenges we are facing on a daily basis. I am committed to continuing to work with my fellow regulators to use all the tools available to protect our financial system and our economy.
Our tool kit is substantial but insufficient. Therefore, I will continue to work with Congressional leaders to find a way forward to pass a comprehensive plan to stabilize our financial system and protect the American people by limiting the prospects of further deterioration in our economy.
We've got much work to do. This is much too important to simply let fail.
September 29, 2008 HP-1167
Statement by Assistant Secretary Michele Davis onEmergency Economic Stabilization Act Vote
Washington, DC-- Treasury Assistant Secretary for Public Affairs and Director of Policy Planning Michele Davis issued the following statement on the Emergency Economic Stabilization Act of 2008 vote:
"The Secretary will be consulting with the President, the Chairman of the Federal Reserve, and Congressional leaders on next steps. In the meantime, we stand ready to work with fellow regulators and use all the tools at our disposal, as we have over the last several months, to protect our financial markets and our economy."
September 29, 2008 hp-1163
Frequently Asked Questions About Treasury’s Temporary Guarantee Program for Money Market Funds
How does an investor sign up to participate in the Treasury's Temporary Guarantee Program for Money Market Funds?
While the program protects the shares of all money market fund investors as of September 19, 2008, each money market fund makes the decision to sign up for the program. Investors cannot sign up for the program individually.
How will investors know if their money market fund participates in the program?
Investors should contact their money market fund directly to determine if it is participating in the program.
What type of funds does the program cover?
All money market mutual funds that are regulated under Rule 2a-7 of the Investment Company Act of 1940, are publicly offered, are registered with the Securities and Exchange Commission and maintain a stable share price of $1 will be eligible to participate in the program. This includes both taxable and non-taxable funds.
Is an investor in a fund that is managed like a money market fund but that is not registered with the SEC covered?
No, the program only covers money market funds that are regulated under Rule 2a-7 of the Investment Company Act of 1940, are publicly offered, are registered with the Securities and Exchange Commission and maintain a stable share price of $1 will be eligible to participate in the program. This includes both taxable and non-taxable funds.
When will my fund be covered by the program?
Each fund must decide to participate in the program. If your fund participates in the program, your investment as of September 19, 2008 will be covered.
How much of an investor's money market fund is insured? What happens if the number of shares held in an investor's account increase above the level at the close of business on September 19, 2008? What happens if the number of shares held in an investor's account decreases below the level at the close of business on September 19, 2008?
The program provides a guarantee based on the number of shares held at the close of business on September 19, 2008. Any increase in the number of shares held in an account after the close of business on September 19, 2008 will not be guaranteed. If the number of shares held in an account fluctuates over the period, investors will be covered for either the number of shares held as of the close of business on September 19, 2008 or the current amount, whichever is less.
Examples include:
If an investor owned 100 shares in a money market fund as of close of business September 19, 2008, but owns 50 shares on the day the guarantee payment is made, after the fund breaks the buck, then that investor will be guaranteed for 50 shares.
If an investor owned 100 shares in a money market fund as of close of business September 19, 2008, but owns 150 shares on the day the guarantee payment is made, after the fund breaks the buck, then that investor will be guaranteed for 100 shares. The fund, upon liquidation, will distribute proceeds to the shareholder for the additional 50 shares, at net asset value.
If an investor owned 100 shares in a fund as of close of business September 19, 2008, subsequently sold 50 shares and later bought 25 shares, the investor owns 75 shares on the day the guarantee payment is made and will be guaranteed for 75 shares.
If an investor owned no shares in a fund as of close of business September 19, 2008, but owns 100 shares on the day the guarantee payment is made, none of the investor's shares are guaranteed by the program and the investor will receive the net asset value directly from the fund.
What if another fund in an investor's fund family breaks the buck before this program starts? Is the investor covered?
The program provides a guarantee on a fund-by-fund basis up to the amount of shares held as of the close of business on September 19, 2008. The performance of a different fund, even one in the same fund family of the investor's fund, doesn't affect the investor's fund's eligibility. Investors should contact their fund to determine if their fund participates in the program.
When does the program terminate?
The program is designed to address temporary dislocations in credit markets. The program will be in effect for an initial three month term, after which the Secretary of the Treasury will review the need and terms for the program and the costs to provide the coverage. The Secretary has the option to extend the program up to the close of business on September 18, 2009. In order to maintain coverage, funds would have to renew their participation in the program after each extension. If the Secretary chooses not to extend the program at the end of the initial three month period, the program will terminate.
Who provides this guarantee? Are investors able to get all of their money back whenever they want?
The U.S. Treasury Department, through the Exchange Stabilization Fund, is providing this guarantee. In the event that a participating fund breaks the buck and liquidates, a guarantee payment should be made to investors through their fund within approximately 30 days, subject to possible extensions at the discretion of the Treasury.
Is shareholder in a fund that broke the buck before September 19, 2008 covered?
No. This does not meet the program's eligibility criteria noted above.
What should shareholders in a participating fund that breaks the buck do? Who should they call?
If your fund enrolled in the program you will be covered and do not need to take any action. Shareholders should contact their fund directly.
Who should a fund contact if it has further questions about this program?
Please e-mail the Treasury Department atmoneymarketfundsguaranteeprogram@do.treas.gov.
September 29, 2008 hp-1161
Treasury Announces Temporary Guarantee Program for Money Market Funds
Washington- The U.S. Treasury Department today opened its Temporary Guarantee Program for Money Market Funds. The U.S. Treasury will guarantee the share price of any publicly offered eligible money market mutual fund – both retail and institutional – that applies for and pays a fee to participate in the program.
All money market mutual funds that are regulated under Rule 2a-7 of the Investment Company Act of 1940, maintain a stable share price of $1, and are publicly offered and registered with the Securities and Exchange Commission will be eligible to participate in the program. Treasury first announced this program on Friday, September 19.
The temporary guarantee program provides coverage to shareholders for amounts that they held in participating money market funds as of the close of business on September 19, 2008. The guarantee will be triggered if a participating fund's net asset value falls below $0.995, commonly referred to as breaking the buck.
The program is designed to address temporary dislocations in credit markets. The program will exist for an initial three month term, after which the Secretary of the Treasury will review the need and terms for extending the program. Following the initial three month term, the Secretary has the option to renew the program up to the close of business on September 18, 2009. The program will not automatically extend for the full year without the Secretary's approval, and funds would have to renew their participation at the extension point to maintain coverage. If the Secretary chooses not to renew the program at the end of the initial three month period, the program will terminate.
To participate in the program, the Treasury Department will require money market funds with a net asset value per share greater than or equal to $0.9975 as of the close of business on September 19, 2008, to pay an upfront fee of 0.01 percent, 1 basis point, based on the number of shares outstanding on that date. Funds with net asset value per share of greater than or equal to $0.995 and below $0.9975 as of the close of business on September 19, 2008, will be required to pay an upfront fee of 0.015 percent, 1.5 basis points, based on the number of shares outstanding on that date. These fees will only cover the first three months of participation in the program.
Funds with a net asset value below $0.995 as of the close of business on September 19, 2008, may not participate in the program.
While the program protects the accounts of investors, each money market fund makes the decision to sign-up for the program. Investors cannot sign-up for the program individually. Funds should apply by October 8, 2008 for the program using the forms on the program webpage: http://www.blogger.com/cgi-bin/redirect.cgi?http://www.treas.gov/offices/domestic-finance/key-initiatives/money-market-fund.shtml.
Eligible funds include both taxable and tax-exempt money market funds. The Treasury and the IRS issued guidance that confirmed that participation in the temporary guarantee program will not be treated as a federal guarantee that jeopardizes the tax-exempt treatment of payments by tax-exempt money market funds.
President George W. Bush approved the use of existing authorities by Secretary Henry M. Paulson, Jr. to make available as necessary the assets of the Exchange Stabilization Fund to guarantee the payment
The Exchange Stabilization Fund was established by the Gold Reserve Act of 1934, as amended, and has approximately $50 billion in assets. This Act authorizes the Secretary of the Treasury, with the approval of the President, "to deal in gold, foreign exchange, and other instruments of credit and securities" consistent with the obligations of the U.S. government in the International Monetary Fund to promote international financial stability. More information on the Exchange Stabilization Fund can be found athttp://www.blogger.com/cgi-bin/redirect.cgi?http://www.treas.gov/offices/international-affairs/esf/
September 28, 2008 HP-1162
Statement by Secretary Henry M. Paulson, Jr. on Emergency Economic Stabilization Act
Washington, DC -- Treasury issued the following statement by Secretary Henry M. Paulson, Jr. on the Emergency Economic Stabilization Act of 2008:
I thank my colleagues on both sides of the aisle for their hard work over a very short time period to craft strong legislation that will enable us to strengthen our financial markets and promote the flow of credit to businesses and consumers that is so vital to our economic growth and prosperity. This bill provides the necessary tools to deploy up to $700 billion to address the urgent needs in our financial system, whether that be by purchasing troubled assets broadly, insuring troubled assets, or averting the potential systemic risk from the disorderly failure of a large financial institution. I am confident this legislation gives us the flexibility to unclog our financial markets and increase the ability of our financial institutions to deliver the credit that will help create jobs. We are taking the steps needed to be ready to begin implementing this legislation as soon as it is signed.
Members on both sides were focused on the right things – creating an effective program that can be implemented quickly and effectively, and doing everything possible to protect the taxpayers.
Quick, effective and bipartisan action sends a signal to investors large and small, here and abroad, that we are committed to taking the necessary actions to protect our financial system and our economy. The American people will recognize the leadership you have all shown to protect them – to preserve their access to credit, and preserve jobs.
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