[Senate Hearing 110-]
[From the U.S. Government Publishing Office]
FINANCIAL SERVICES AND GENERAL GOVERNMENT APPROPRIATIONS FOR FISCAL
YEAR 2009
----------
WEDNESDAY, MARCH 5, 2008
U.S. Senate,
Subcommittee of the Committee on Appropriations,
Washington, DC.
The subcommittee met at 3 p.m., in room SD-138, Dirksen
Senate Office Building, Hon. Richard J. Durbin (chairman)
presiding.
Present: Senators Durbin, Brownback, and Allard.
DEPARTMENT OF THE TREASURY
STATEMENT OF HON. HENRY M. PAULSON, JR., SECRETARY OF
THE TREASURY
opening statement of senator richard j. durbin
Senator Durbin. Good afternoon, and I'm pleased to convene
a series of hearings to examine fiscal year 2009 funding
requests. Today we launch our lineup with the Department of the
Treasury.
Welcome, Secretary Henry Paulson, to the hearing room,
along with any associates who would like to join in your
testimony.
I welcome my colleagues who will join me shortly, and
others who may arrive. Although, this is a budget hearing for
the Treasury, we've scheduled a separate hearing next month to
devote particular attention to the Internal Revenue Service
(IRS), the Treasury's largest bureau. We'll defer the bulk of
our questions relating to the IRS until that hearing.
The non-IRS portion of the Department's budget constitutes
over $1.1 billion, supporting many critical activities in the
central programs we'll concentrate on today.
The Department plays a pivotal role in the global economy,
and as an ambassador for the Nation's economic and financial
institutions. In fulfilling the mission, Treasury promotes
economic prosperity, and ensures the financial security of our
Nation.
Treasury also administers the world's largest collection
system, over $2 trillion a year. In addition, Treasury supports
financial institutions in generating community development, and
leads Government efforts in the area of financial intelligence.
I'm pleased that for fiscal year 2008, we were able to
provide additional funds for the Department to address several
important needs. The funds will further support the
Department's efforts to combat terrorism, through implementing
economic sanctions, and gathering and analyzing financial
intelligence.
For fiscal year 2009, the budget request for Treasury is
$12.47 billion, an increase of $461.6 million, or 3.8 percent.
Excluding IRS, the request for the remainder is $1.11 billion.
This represents a net decrease of $7.5 million over fiscal year
2008, overall reduction of less than 1 percent. This would
appear to be a very restrained budget for the non-IRS portion
of the Department, however, the top line includes a 70 percent
decrease from fiscal year 2008 funding level for the Community
Development Financial Institutions Fund (CDFI), commonly known
as CDFI.
Holding CDFI funding at the fiscal year 2008 level, the
fiscal year 2009 President's budget reflect a $57.9 million, or
5.2 percent increase for the non-IRS portion of the Treasury
Department. I'm concerned about this proposed cut in CDFI,
which we will discuss later, because I believe that the
infusion of capital to these institutions can help many
distressed communities, and low-income individuals, who are
facing the economic downturn, with more severity than most.
I think it's clear that adequate funding for CDFI is
critically important.
For the Office of Terrorism and Financial Intelligence
(TFI), including Financial Crimes Enforcement Network, known as
FinCEN, the budget requests $153 million for fiscal year 2009,
compared to $142.6 million last year, an increase of over $10
million. I'm pleased to see Treasury continues to emphasize
strategies to counterterrorist financing and money laundering.
Beyond the Treasury Department, I also want to talk for a
few minutes with the Secretary about broader economic issues. I
know you've faced that already once today, so you've
undoubtedly been prepared for this by my colleagues in the
House.
I appreciate your insights on the current housing crisis
and the state of the economy, and we'll have a few questions
along those lines. I look forward to discussing them with you.
At this point, since Senator Brownback has not arrived, I
would like to turn the floor over to the Secretary, and Mr.
Secretary, you may proceed with your remarks.
Secretary Paulson. Thank you, Senator Durbin--there we go.
Senator Durbin. Thank you.
Secretary Paulson. That's always the most difficult part of
the hearings, turning on the microphone.
But, thank you very much for your remarks, and for your
support of the Treasury. I very much appreciate the opportunity
to discuss the Treasury Department's proposed fiscal year 2009
budget.
Our budget request reflects the Department's continued
commitment to promoting a healthy U.S. economy, fiscal
discipline, and national security. The Department has broad
responsibility in Federal cash management, tax administration,
and plays an integral role in combating terrorism, terrorist
financing, and advocating the integrity of the U.S. and global
financial systems.
Our spending priorities for the 2009 fiscal year fall into
six main categories. I'll briefly describe their priorities and
then take your questions.
Treasury has an important role to play as a steward of the
U.S. economy, and provides--and our offices provide technical
analysis, economic forecasting and policy guidance on issues
ranging from Federal financing, to domestic and global
financial systems.
Those functions are especially critical now, as the U.S.
economy--through a combination of a significant housing
correction, high energy prices, and capital market turmoil--has
slowed appreciably.
Our long-term economic fundamentals are solid, and I
believe our economy will continue to grow this year, although
not nearly as rapidly as in recent years.
In response to economic signals early this year, the
administration and Congress worked together to quickly pass, on
a bipartisan basis, the Economic Stimulus Act of 2008, and I
would like to thank this subcommittee for approving funds for
the IRS and the Financial Management Service (FMS), to
administer the stimulus check rebate program under the act, so
thank you for that.
As you know, the stimulus payments to households, and the
incentives to businesses in the act, together are estimated to
lead to the creation of 500,000 jobs by year-end. This will
provide timely and effective support for families in our
economy, and it wouldn't be possible without your leadership.
Treasury's Office of Terrorism and Financial Intelligence
(TFI) uses financial intelligence, sanctions, and regulatory
authorities, to track and combat threats to our security, and
safeguard the U.S. financial system from abuse by terrorists,
proliferators of weapons of mass destruction, and other illicit
actors.
To continue to build on our efforts to combat these
threats, we are requesting an $11 million increase for TFI,
including $5.5 million for the Financial Crimes Enforcement
Network, to ensure effective management of the Bank Secrecy
Act.
The budget request emphasizes infrastructure and technology
investments to modernize business processes and improve
efficiency throughout the Treasury Department. We will continue
to make information technology management a priority, and have
taken several significant steps to strengthen our systems and
oversight.
Treasury is committed to managing the Nation's finances
effectively, ensuring the most efficient use of taxpayer
dollars in collecting the revenue due to the Federal
Government. The IRS, of course, plays an integral role in all
of this, the budget requests a 4.3 percent increase in IRS
funding to expand IRS enforcement activities, improve
compliance, reduce the tax gap, and continue improvements in
taxpayer service.
In addition, we are asking your colleagues on the State,
Foreign Operations Subcommittee to support funding both in
multilateral development banks--noticeably, new replenishments
for the World Bank's International Development Association
(IDA), and the African Development Fund, and have forwarded a
$400 million request for the first installment of a $2 billion
clean technology fund that--with additional funding from other
donors around the world, will help finance clean energy
projects in the developing world, and make strides toward
addressing global climate change.
Overall, the budget request reflects a prudent and forward-
leaning approach to fulfilling the Treasury Department's core
responsibilities to support our economy, managing the
Government's finances, and ensuring financial system security.
PREPARED STATEMENT
I thank you for your past support and consideration of our
work, and I look forward to working with you during your
deliberations.
Thank you, and I welcome your questions.
[The statement follows:]
Prepared Statement of Henry M. Paulson, Jr.
Chairman Durbin, Senator Brownback, Members of the Committee: Thank
you for the opportunity to discuss the Treasury Department's proposed
fiscal year 2009 budget. Our budget request reflects the Department's
continued commitment to promoting a healthy U.S. economy, fiscal
discipline and national security. The Department has broad
responsibility in federal cash management, tax administration and plays
an integral role in combating terrorist financing and advocating the
integrity of the U.S. and global financial systems.
Our spending priorities for the 2009 fiscal year fall into six main
categories. I will briefly describe the priorities and then take your
questions.
U.S. ECONOMIC STEWARD
Treasury has an important role to play as steward of the U.S.
economy, and our offices provide technical analysis, economic
forecasting and policy guidance on issues ranging from federal
financing to domestic and global financial systems.
Those functions are especially critical now as the U.S. economy,
through a combination of a significant housing correction, high energy
prices and capital market turmoil has slowed appreciably. Our long term
economic fundamentals are solid, and I believe our economy will
continue to grow this year, although not as rapidly as in recent years.
In response to economic signals, early this year the Administration
and the Congress worked together to quickly pass, on a bipartisan
basis, the Economic Stimulus Act of 2008. And I would like to thank
this subcommittee for approving funds for the IRS and the FMS to
administer the stimulus check rebate program under that Act.
As you know, the stimulus payments to households and the incentives
to businesses in the Act, together, are estimated to lead to the
creation of half a million jobs by year-end. This will provide timely
and effective support for families and our economy, and it wouldn't be
possible without your leadership.
STRENGTHENING NATIONAL SECURITY
Treasury's Office of Terrorism and Financial Intelligence (TFI)
uses financial intelligence, sanctions, and regulatory authorities to
track and combat threats to our security and safeguard the U.S.
financial system from abuse by terrorists, proliferators of weapons of
mass destruction and other illicit actors.
To continue and build on our efforts to combat these threats, we
are requesting an $11 million increase for TFI, including $5.5 million
for the Financial Crimes Enforcement Network to ensure effective
management of the Bank Secrecy Act.
Efficient Management of the Treasury Department
The budget request emphasizes infrastructure and technology
investments to modernize business processes and improve efficiency
throughout the Treasury Department. We will continue to make
information technology management a priority, and have taken several
significant steps to strengthen our systems and oversight.
FISCAL DISCIPLINE
Treasury is committed to managing the nation's finances
effectively, ensuring the most efficient use of taxpayer dollars and
collecting the revenue due to the federal government.
Enforcing the Nation's Tax Laws Fairly and Efficiently
The Internal Revenue Service, of course, plays an integral role in
this. The budget requests a 4.3 percent increase in IRS funding.
As in the past three budget requests, we are proposing to increase
IRS enforcement funding as a Budget Enforcement Act program integrity
cap adjustment. IRS enforcement efforts have yielded record revenue
collections. With the requested funding, the IRS will collect an
estimated $55 billion in direct enforcement revenue in 2009.
The budget also includes a number of legislative proposals intended
to target the tax gap and improve tax compliance, with an appropriate
balance between enforcement and taxpayer service. These proposals are
estimated to generate $36 billion over the next ten years.
INTERNATIONAL PROGRAMS
We will continue to focus efforts on supporting a stable and
growing global economy, through on-going dialogue and initiatives with
developing economies throughout Asia, Latin America and Africa.
In addition we are asking your colleagues on the Foreign Operations
Subcommittee to support key objectives of the President's international
assistance agenda. This includes funding for the multilateral
development banks_notably new replenishments for the World Bank's
International Development Association (IDA) and the African Development
Fund.
Also included as a Foreign Operations priority is $400 million
request for the first installment of a $2 billion clean technology fund
that, with additional funding from the United Kingdom, Japan and other
donors, will help finance clean energy projects in the developing world
and make strides towards addressing global climate change.
CONCLUSION
Overall, the budget request reflects a prudent and forward-leaning
approach to fulfilling the Treasury Department's core responsibilities
to support our economy, managing the government's finances and ensuring
financial system security. I thank you for your past support and
consideration of our work, and look forward to working with you during
your deliberations.
Thank you and I welcome your questions.
Senator Durbin. Thanks, Mr. Secretary, and I welcome my
ranking member, Senator Brownback, of Kansas.
If you have an opening statement, I'll defer to you at this
point.
Senator Brownback. I'll just make some of those comments
during my questions, I think that would probably be the best,
prudent way.
If I could, Mr. Chairman, I'd ask if I could put my full
statement in the record, right now.
Senator Durbin. Without objection.
[The statement follows:]
Prepared Statement of Senator Sam Brownback
Good afternoon. At this first hearing of our subcommittee, I want
to thank you, Chairman Durbin, for your leadership. I look forward to
working together with you during this coming year as we make funding
decisions and provide oversight to the various agencies within this
subcommittee's jurisdiction.
Secretary Paulson, thank you for appearing before our subcommittee
today. I look forward to hearing the details of your fiscal year 2009
budget request and the key efforts that your department will be
undertaking this year. You have a crucial role in overseeing our
financial systems and in promoting our participation in the
international economy so I am interested in hearing your thoughts on
the domestic and global economic situation.
Looking at the President's budget, I am pleased that it assumes the
continuation of the President's tax cuts, which are key to preventing
recession and allowing our economy to rebound from the sub-prime
mortgage crisis. I am encouraged that the President's budget projects a
balanced budget by 2012.
Mr. Secretary, regarding the economic stimulus package, I support
the tax rebates to families and the expensing and depreciation changes
to assist businesses. But I believe that we must look down the road at
other ways to stave off recession, such as enacting incentives for U.S.
companies to bring money back to this country from abroad. This would
allow multi-national corporations to bring funds into the United States
at a reduced tax rate for a period of time. I believe that we must
continue to be proactive to keep our economy healthy. The most
effective way to do this is to lower taxes so that consumers and
businesses have more of their own money to spend and invest.
Mr. Secretary, the lion's share of your budget--approximately 90
percent--is for the Internal Revenue Service. I understand that you are
seeking additional resources to close the so-called ``tax gap.''
Certainly, we must ensure that taxes which are owed are collected.
However, I remain concerned that our tax system is overly complex,
complicated, and burdensome. Americans spend roughly $157 billion each
year in tax preparation to ensure they do not run afoul of the IRS. The
system is desperately in need of reform. One reason we have a ``tax
gap'' may be that our tax system is so complex that taxpayers cannot
figure out what they owe.
Mr. Secretary, I want to commend your Department for its efforts to
combat terrorism. Your ``Office of Terrorism and Financial
Intelligence'' is working hard to safeguard the financial system
against illicit activities and combating rogue nations, terrorist
facilitators, money launderers, drug kingpins, and other national
security threats. This is important work and I am supportive of your
efforts in this area.
I know that the Treasury Department is aggressively blocking U.S.
commercial bank transactions connected to the government of Sudan,
including those involving oil revenues. I am pleased that you are
taking these actions. Last year, we passed legislation and the
President signed into law the authority for your Department to levy
greater criminal and civil penalties for those who violate these
sanctions. I hope this new authority has acted as a strong deterrent
for bad behavior.
Mr. Secretary, I am deeply concerned that American consumers are
unwittingly purchasing products that have been manufactured with
natural resources extracted by enslaved and abused children in
countries where the profits are then used to support murdering and
raping rebels. For example, I believe that our demand for coltan--which
is an essential mineral needed for the manufacture of cell phones, TVs,
and computers--has helped to fuel the conflict in the Congo. We need to
be vigilant to ensure that American manufacturers are not supporting
the conflict in the Congo by purchasing coltan. I would like you to
work with us and perhaps the SEC to prevent American companies from
purchasing coltan that has been mined by children and whose profits are
supporting killings in the Congo. Congo's ``conflict coltan'' has
created a vast and grave humanitarian crisis where 5.4 million people
have died since 1998 directly and indirectly from the conflict and
where 1,500 people continue to die each and every day.
We cannot sit idly by while others suffer. We need to be
responsible as a nation and as consumers. We must hold our suppliers
accountable. I plan to introduce legislation to stop the exploitation
of coltan, particularly in eastern Congo. I am working with leaders of
non-governmental organizations who understand the situation as I write
this bill.
Mr. Secretary, I would like to hear what your Department is doing
to support a stable and growing global economy through initiatives with
developing economies throughout the rest of Africa and Latin America. I
would like to hear how you can help ensure that we are not complicit in
illegal activities in Congo and the rest of the world.
So Mr. Secretary, I look forward to hearing your testimony this
afternoon.
Thank you, Mr. Chairman.
HOPE NOW ALLIANCE
Senator Durbin. Mr. Secretary, the Treasury Department
reported Monday that loan modifications under Hope Now helped
45,000 borrowers in January. But that number, as I understand
it, includes all modifications of any sort, including those
that only temporarily delayed foreclosure, rather than only
counting mortgage changes that would allow families to stay in
their homes for a longer period of time.
Isn't it true that Hope Now numbers you're citing include
all mortgage changes of any sort?
Secretary Paulson. Yes sir, very much.
And let me say that with Hope Now, the objective is--and
the numbers you were citing have to do with subprime mortgage
holders who were facing resets. And a major objective there is
to help those homeowners who were facing resets they couldn't
afford, and help them stay in their homes, and modifications to
change the terms and to change, you know, the terms on a
mortgage that lets someone stay in their home, is what we're
about doing.
The other thing I would point out is that we're very
fortunate in the--to the extent that the rate cuts that the
Federal Reserve had made, made the impact of the some of the
resets much less severe. And prior to the rate cuts, some of
the initial resets were going to take the rates from 8.5
percent to 10.8 percent. After the rate cuts, they, you know,
the impact was more like 8.5 to 9 percent. So, again, we
received help there. And I certainly don't discount
modifications that mortgage servicers made to let people remain
in their homes.
Senator Durbin. Are you satisfied that the financial
institutions across America have responded voluntarily to the
administration's request, in an adequate way, to deal with the
current mortgage foreclosure crisis?
Secretary Paulson. The way I would answer that question is
I'm gratified by the progress that's been made, to date. And
again, there's been some criticism, but in terms of an
initiative that's up and going, I happen to believe it stacks
up well, relative to anything else I see out there.
So, I would start off by saying that there's been 1 million
people helped, to date, and I don't discount that at all, I
think it's significant.
Now, the objective here--and I want to put this in
perspective--that what we have is an industrywide effort in
looking at subprime mortgages, where we have servicers covering
90 percent of the market. There are varying degrees of
aggressiveness and sophistication in that group. And there are
some firms in that group that didn't even need Hope Now to be
doing the right things. And they've been out and they've been
leading, and I thank them.
There are other servicers in that group that has less
sophistication, were less prepared, we had significant
obstacles--legal obstacles, accounting obstacles--we had the
Securities and Exchange Commission (SEC) sign off on some
accounting guidance on January 8, and technological issues.
So, the way I look at it right now is, we have some
leaders, we have some followers, we have now--the followers
fully implementing the protocol, and we have them doing that
ahead of the biggest period of recess----
Senator Durbin. Let me try to narrow it down, because I
want to get to the point of understanding this. When you talked
about 1 million borrowers being helped----
Secretary Paulson. Yes.
Senator Durbin. And that you're satisfied with some
responses--I'm trying to put the response level, or the
response so far, I should say, in the context of the challenge
that we face.
Secretary Paulson. Right.
Senator Durbin. And I have heard that some 2.2 million--at
least that's a common figure--mortgage holders in America--
subprime mortgage holders--face the probability, possibility of
foreclosure.
Secretary Paulson. Right.
SUBPRIME BORROWERS
Senator Durbin. I don't know if that's an accepted figure
or an accepted estimate, but I've heard it repeatedly.
So, what do you think, what would--how would you describe,
in percentage terms----
Secretary Paulson. Right.
Senator Durbin. The number of those vulnerable homeowners
who have been helped, to date----
Secretary Paulson. Right.
Senator Durbin. By the administration's programs?
Secretary Paulson. Well, let me say--first of all, let me
deal with numbers. And if you give me a minute or two on this,
we'll go through it.
That in a average, good year, you know, if we looked at
2002 through 2005, there are 650,000 foreclosures. Last year,
estimates are there will be about 1.5 million. Some people are
projecting 2 million foreclosures this year.
Now, I think, you sir, Mr. Chairman, are right to focus on
subprime because if we look at the third quarter of last year,
we had roughly 13 percent of these 55 million mortgages are
subprime mortgage--they were----
Senator Durbin. The 55 million mortgages?
Secretary Paulson [continuing]. 55 million mortgages, 13
percent were subprime.
Senator Durbin. That's of all the mortgages, you said,
universal mortgages, 55 million?
Secretary Paulson. All the mortgages, yes. And of that
subprime universe, of that 13 percent, 50 percent of those were
where we had foreclosures. And if you even look at a smaller
sample, 6.5 percent were adjustable rate subprime mortgages,
and they had 50 percent of the foreclosures.
And we had a--and on top of that--the 18 percent, if you
take a look at sort of the--the period when there were the
worst underwriting practices, which was 2006, and these so-
called ``2-28'' mortgages, you know, teaser rate for the first
2 years, and then resets--that 18 percent of that pool
foreclosed 6 months ahead of even the first reset.
So, again, as I look as the objective--and so, I think
what's important, that we talk about what's a reasonable
objective, and to me the reasonable objective is that every
homeowner who is in a subprime mortgage and is able to afford
the initial rates--because if they can't even afford the
initial rates, I think there's a different problem we need to
deal with--every homeowner that's in a subprime mortgage and is
able to afford the initial rates, and can't afford the step-up
rate, there should be a solution that keeps them out of
foreclosure, if they are willing to talk to someone about it,
and engage to talk about solutions.
So, a major issue we continue to have--and we're making
progress--is that before Hope Now, that roughly 2 to 3 percent
of those getting letters from servicers responded. Half of
those going into foreclosure ever talked to anyone. Now the
response rate is close to 20 percent--that still means 80
percent aren't having conversations.
Now, it's very hard for the Government or anyone, to help
someone who won't try to help themselves, won't respond, won't
engage in a conversation. There's also some people out there,
where there's a different issue.
Just to step back, and the other issue that's out there,
and you hear a lot of conversation about, is the put-out
numbers, the 8.8 million homeowners that have mortgages that--
where they have zero equity or negative equity in their home.
Now, as you look at that universe, as I look at it, if you're a
mortgage holder, even if you have negative equity in your home,
if you can afford to make your mortgage payment, then I believe
you've got an obligation to make the mortgage payment and you
don't walk away--you're a speculator if you walk away because
you happen to think your home is under water and the--your
mortgage is under water. And I think most homeowners look at it
this way--I think most homeowners, 93 percent of the homeowners
are making their payment every month, you know, even if it's
difficult for them to do so--only 2 percent are in foreclosure.
SPECULATORS
So, I do believe--but there are some, some of these, and
they're doing terrible practices. Last year, even last year
after all of this, 30 percent of the mortgages that remain in
this country, there was almost no down payment or no down
payment on a mortgage. And so, there are certain people that--
sometimes they are second homes, they're speculators, they took
out a mortgage, if the home value doesn't go up, they're
walking away from that.
That's not the focus. The focus of our program is you've
got to want to stay in your home, and respond to someone, and
have the capability to do that. And I think on that--and just
to finish up, Mr. Chairman--on that, we're continuing to make a
very big effort, and I think the industry is, and we're going
to monitor that very carefully.
Senator Durbin. I've gone way over my time, and I want to
give Senator Brownback his. But I do--I do want to go back to
my question.
Secretary Paulson. Right.
LOAN WORK OUTS
Senator Durbin. You've really described the battleground,
and the universe, but I want to zero in--how many of these have
we helped? If, in fact, there are 13 percent of the 55 million
that are subprime, that calculates out to about 7 million--if
half of them are facing foreclosure, that's 3.5 million--how
many have been reached by Hope Now, and this administration's
efforts?
Secretary Paulson. I would say, to date, okay, Hope Now,
since the beginning there have been 1 million homeowners that
have engaged in some form of modification or work out, okay?
So, there have been 1 million people that have been helped.
But what we're not picking up in our numbers are the
refinancings. So, even when you--the number you cited, I looked
very carefully at that number, and there were 45,000
modifications, there were 167,000 work outs, both work outs and
modifications went up faster than foreclosure starts--which was
a positive. But we don't know the number of refinancings. And
it's been hard, and there are a lot of refinancings. And so we
will do everything we can to measure the numbers that have been
helped.
The other thing I'm really focused on is, you can't help
people that aren't going to help themselves, or reach out. The
standard I really want to set is that if there's a homeowner,
and has been able to make the reset, be able to make the
initial payment, and they said, ``I reached out and I talked to
my servicer, and I'm still put into foreclosure,'' I want to
know about that, because again, I want to follow-up. I mean,
that's, to me, another--and we're going to work to get the
numbers to help answer more and more of your question.
Senator Durbin. I have some more questions, but I want to
defer to my colleague, here.
Senator Brownback.
Senator Brownback. Thanks, Mr. Chairman.
Secretary, thanks for being here. And also, just at the
outset, I wanted to thank you for your years of expertise that
you bring into the Government. I think particularly at this
time with the economic problems we're facing, it's great to
have somebody with your background and expertise, and I
appreciate it.
Now, I'm going to yell at you, but I first want to tell you
how appreciative I am, of you being in Government with this,
because I think it does bring a stature that's needed, and it's
very helpful to have.
I want to talk about two things--the economy, and terrorist
financing. And I appreciate your describing the universe of the
home situation, I wanted to describe a philosophy and then ask
you questions on how to implement that.
I've been through a similar crisis in the past, my guess is
you've also seen a couple of things like this, and so you bring
a philosophy that's based on your experience, as well.
I went through the farm crisis of the 1980s, I was a lawyer
in an undistinguished practice in the Midwest, and then went on
to be agriculture secretary in the State. One of the things I
saw in that early 1980s farm crisis--this would have been a
Dick statement, Bigway, as well--is we took a crisis and we
made it a huge--we took a problem and we made it a crisis. And
we did that through trying to get too much done too fast.
There was land that went on the market at a cheap rate, and
then--I was representing some farmers and some banks. The
regulators came out and told the banks, ``Clean up your
loans,'' the banks went out and started suing a bunch of
farmers to get their land, so we dropped a whole bunch of land
on the market, a whole bunch of equipment, everybody's prices
fell a huge amount, and it just exacerbated the problem--we
tried to do too much, too fast, and we made it really bad. It
was bad.
So, I take that experience and I say that the thing we need
to do now, because we've got a real problem here, is we've got
to string this out, over a period of time, and not try to see
too much housing stock get on the market too fast. Because if
you get too much out there, you further plummet, and you get a
whole bunch more people that are in trouble.
So, if that's the correct philosophy, we need to meter this
out over a period of time. We've got a problem, we had excess
capital, or problems coming in, and bad loans taking place, and
sharks out there, and we've got to work our way through this.
Is the way to do that not just what the administration is
proposing, but also tax credits for purchasing housing or even
distressed housing? Or, some people are proposing changes in
the bankruptcy code, to provide for a cram-down feature on
housing? If you agree with the philosophy, I would like for you
to say which actions by Congress you think would be the
appropriate ones to prevent this problem from making an even
worse impact on the overall economy.
CAPITAL MARKETS
Secretary Paulson. Right, Senator, I assume since there's
just the two of you, I can take a little bit longer time, since
I took a lot of time on the chairman's question.
Senator Brownback. Fine.
Secretary Paulson. Because it's a very good question and I
think it deserves a thoughtful answer, and I've thought a lot
about it.
The, first of all, I've said for some time, that as we look
at this crisis, there's two focuses. First and foremost is
getting through this period with as little impact--negative
impact--as possible on the real economy, and so second, is
what's the policy response to reduce the likelihood of going
through this period again, something like this? And so we don't
want to do something up front that's going to compound the
problem in the short term, or to make it worse in the longer
term.
Now, there are a number of--even before you get to the
housing, that is why I have been, when we look at what's going
on with the capital markets turmoil right now, that I have been
so focused on having all of our financial institutions,
including the GSEs, raise capital that they need, so that they
can be active in, you know, in the market--lending, keeping up
their normal economic activities, as opposed to shrinking their
balance sheet.
Now, in looking at housing as I've looked at this, and I've
looked at a whole lot of things, first I focused on efforts
that would avoid what I would call a market failure. And the
level of adjustable rate mortgage resets that were coming is
such a wave that it wouldn't allow the private sector to react
the way they normally would react, which would be to have the
investor have time to strike a deal with each individual
mortgage holder, and work something out that was in both of
their best interest, because foreclosures are costly. And so
that's why this ASF protocol, and working the fast-track
modifications, to avoid avoidable foreclosures.
The other big effort we still have--we have a number of
things that have been done, are when you look at Fannie Mae and
Freddie Mac, that we have them today to go back far enough in
our history, we didn't, and they can play a constructive,
counter-cyclical role. And they have been, but to continue to
do so, they're going to have to raise more capital, and be very
active there.
Senator Brownback. What about tax credits and bankruptcy
reform?
BANKRUPTCY
Secretary Paulson. Oh, yeah, I would say this now, let me
get at both of those. In terms of bankruptcy reform, I've had
some very good conversations with your chairman, and he and I
have a very similar objective. We approach this differently,
and there's two reasons why I don't like the bankruptcy reform.
First, as a matter of property rights and contract, I don't
like the idea of retroactively changing contracts, and I'm
concerned with what it might do to financing availability going
forward.
But even more importantly in working through this, I am
emphasizing a program which says, if you're a homeowner, and
you want to stay in your home, and you can afford to stay in
your home--raise your hand. Call, reach out to someone. And
it's a lot quicker than slowing it down, and bogging down our
courts.
Senator Brownback. What about the tax credit ground?
TAX CREDITS
Secretary Paulson. Yeah, I think the, you know, the tax
credit, I understand the concept very well, because we're
looking at it--the overhang, and the inventory of unsold homes.
I think that what you're apt to get with that is something
that's going to prolong the issue. And so, net-net--although I
look at it as a creative idea, there have been some creative
ideas--we are much more focused right now, and let's get the
GSE reform, get the Federal Housing Administration (FHA)
modernization done, get the tax-exempt financing done, and so
we're not there on the tax credit. But, again, I understand
what people are seeking to get at with that proposal.
CONFLICT MINERALS
Senator Brownback. If I could just ask one more question in
the length of time we have. I've handed you a proposal, this is
on financing--terrorist financing, and also conflict
commodities financing, I think it's a topic you--the
administration has done a pretty good job of trying to get at--
terrorist financing.
I want to put another issue in your portfolio, and it's
conflict commodities in Africa, particularly from the Sudan and
Congo.
Secretary Paulson. Yes.
Senator Brownback. And that we really start targeting these
commodities coming out of conflicts so as to prevent further
exacerbation of the conflict.
Secretary Paulson. Yes.
Senator Brownback. Senator Durbin and I went to Congo
together, I've even got a picture of one of the coltan coming
out of Congo, financing it, now tin is being used--these are
kind of Mom and Pop mining operations.
Secretary Paulson. Yes.
Senator Brownback. This is kind of how they mine coltan
that's in your cell phone, or even tin out of Congo, this
picture is taken out of Congo. No other group--they've got a
proposal out of a draft piece of legislation saying that we
won't purchase commodities from conflict zones, where that
money is used to finance rebel groups.
I would urge you to look at it, because I think this going
to be one of the keys for us to try to stabilize Africa.
Secretary Paulson. Yes.
Senator Brownback. We need to keep the money from going to
these rebel groups, particularly like in the eastern Congo,
it's a classic place. I think it's also what we need to look at
in the Sudan.
Secretary Paulson. Yes.
Senator Brownback. There you've got a government that's
being primarily financed by oil and I think we need to be very
aggressive on this in looking at it.
And I would draw to your attention to one other thing, that
we have done, Senator Durbin and a number of others worked on
the Sudan Divestment Act that passed. I'd like to see us do a
similar one on Iran, as a way to divest and get money out of
the financing of the conflicts.
I draw that one more to your attention than for a response,
unless you give me a positive response, you don't need to
respond at all.
Secretary Paulson. How could I not be positive? Because
this is a real problem, and your leadership and the chairman's
leadership are very much appreciated on this. And I will pass
on the comments to Secretary Rice and others at the State
Department, because I think this is something that I know is an
important issue.
Senator Brownback. Thank you.
Senator Durbin. Senator Allard.
Senator Allard. Thank you, Mr. Chairman, thank you for
holding the hearing to examine the budget request for the
Treasury Department.
And it's a pleasure to be here, to be able to welcome you,
Secretary Paulson. We have an opportunity to see one another
quite frequently----
Secretary Paulson. Yes.
COSTS OF COINS
Senator Allard. And so I do appreciate the job that you're
doing and I apologize for being--not being able to be here to
hear your testimony this afternoon, we started markup on the
budget--we started debating the budget, and so, I'm on the
Budget Committee, so it's important that I at least be there
for the opening part of the Budget Committee debate.
I did want to stop by briefly to raise one issue which has
important appropriations implications, and I appreciate my
colleagues accommodating my schedule on this.
Last week on a radio program, you'd advocated for the
elimination of the penny, but added that you didn't think it
was politically doable.
Secretary Paulson. I didn't----
Senator Allard. If my information is correct.
Secretary Paulson. No, I did not advocate it. I've got no
intent, no plans to advocate it. What we're advocating, though,
very strongly, for is we have legislation that would change the
content of the----
Senator Allard. Well, that's what I'm getting at.
Secretary Paulson. The penny and the nickel.
Senator Allard. Yeah.
Secretary Paulson. Which would save the American taxpayer a
good bit of money.
Senator Allard. Okay. This was an Associated Press story.
They must have got that wrong in the story.
Secretary Paulson. Yeah, I said--what I had--we have no
intent or plans to----
Senator Allard. Well, we can still move forward with my
question.
Secretary Paulson. Right.
Senator Allard. Because I've introduced legislation, I
believe we've got bipartisan support on this, S. 1968, which
gives the flexibility to the Treasury Department to manage the
content of the coin.
Secretary Paulson. Right.
Senator Allard. Metal content. So, my question is, is--how
much do you think this could save, as far as the Treasury
Department is concerned, and how urgent do you think it is that
we get this changed, to give you the flexibility with the
changing metal market. You know, gold right now is at a
historic high, I think, and a lot of our metals are falling
right in behind that.
Secretary Paulson. Yeah, it is, you know, we're losing
money for every penny we mint and----
Senator Allard. Even a nickel, too, right?
Secretary Paulson. I don't have the number offhand--oh, the
nickel's even more. It's--I think the nickel--directionally
right, if it's, it costs 7.7 cents or something, to make a
nickel or 1.4 cents to make a penny, and I'll get you the
numbers.
[The information follows:]
Cost of Pennies and Nickels
Using current metal prices (February 2008), production costs this
year for the Mint will be more than 1.3 cents per penny and 7.7 cents
per nickel.
Secretary Paulson. But, when I looked at it over the period
of time, we're talking about hundreds of millions of dollars.
But, whatever the number is, there's no reason to be losing
money in a needless way. And so we just need to change the
metal content of those coins.
METAL CONTENT OF COINS
Senator Allard. Well, you know, and I sympathize with--
given you and the various agencies that you work with, the
flexibility to change that metal content. Because, you know,
all of these metals--they change in value from year to year,
and I don't think the action of the Congress can keep up with
it, and if we can do this in a way that saves taxpayer
dollars----
Secretary Paulson. Right.
Senator Allard [continuing]. I think we ought to do it. And
the sooner the better. And so anything you can do on that to
help us get the message out, we'd appreciate it. I do think
it's a very commonsense kind of piece of legislation, and
something that I think we need to do.
Secretary Paulson. It is. It is, very much.
Senator Allard. So, anything you can do on that, we'd
appreciate it.
And you know, I--I guess the question is, are there metals
that we would use that--we potentially could use--that we're
not using now?
Secretary Paulson. Yes.
Senator Allard. Yes.
Secretary Paulson. They are--they're composites, and
there's been a lot of work done on this.
Senator Allard. Is that right?
Secretary Paulson. And I'd be very happy to send some
people up to give you all the details on it, because there's
been a lot of good work done on this by the Mint.
Senator Allard. I would appreciate us being briefed on
that, if you would, please. And maybe other members of the
subcommittee would be interested in that.
Secretary Paulson. Go through the whole economic analysis.
Senator Allard. Okay, well, very good, well I'd like to
follow-up on that a little bit, and maybe we can all get that
information, get briefed together, or something. I don't know
if we need to have a formal hearing on it, Mr. Chairman, but if
you wanted to include it or something for the members of the
subcommittee, we could do that. But, I'm particularly
interested in it, and would like to have that information.
Thank you.
Senator Durbin. I thank the Senator from Colorado, and just
for the record the Lincoln penny was initiated 100 years ago,
on the 100th anniversary of Lincoln's birth. And the
bicentennial of that birth, next year, will result in four new
backs for the penny to show different aspects of Lincoln's
life. And the metal content is secondary to the people of
Illinois, as long as Lincoln's on the penny.
Secretary Paulson. But, we can do them both, right?
Senator Durbin. Right, no objection.
Secretary Paulson. We can do them both, and we celebrate
it.
Senator Durbin. Yes.
BANKRUPTCY
Mr. Secretary, Federal Reserve Chairman Bernanke recently
said, relative to the foreclosure crisis, ``Principal
reductions that restore some equity for the homeowner may be a
relatively more effective means of avoiding delinquencies and
foreclosure.'' And he continued, ``When the mortgage is under
water, a reduction in principal may increase the expected
payoff to the bank by reducing the risk of default and
foreclosure.''
I want to say a word about the bankruptcy provision which
you've alluded to, because Senator Brownback will get a chance
to consider that measure in a day or two in our Senate
Judiciary Committee.
Over the months since we've first initiated the concept, we
have changed it dramatically. Originally, we said that there
was no equity or justice in allowing a bankruptcy court to
modify the terms of a mortgage on a vacation condo, a farm or a
ranch, but to prohibit, by law, any modification of the terms
of a mortgage on a principal residence or a home. And so,
initially, we began with the premise, let's treat them all the
same, allow the bankruptcy court that option.
But, some have observed that that may have a negative
impact, so we have dramatically restricted the bankruptcy
reform that I am proposing. First, it's harder to get into
bankruptcy court today than it was 5 years ago. You have
chapter 13, which requires certain requirements, income
requirements and the like, before you can end up in the
bankruptcy court.
Second, we restricted this provision, this change, only to
homeowners, so no speculators need apply. You have to actually
live in the home we're talking about.
Third, we said only subprime mortgages for those homes.
Fourth, we said that any modification of the terms of the
mortgage could not reduce the principal any lower than fair
market value to protect--as best we can--the lender who, if
they're facing a distress sale, are lucky to see fair market
value.
Then we said the interest rate has to be based on the prime
rate plus a reasonable premium for risk. And, we added another
provision which, I think, is an effort to go an extra mile to
win back some support from the banking community, and it did
win the support of credit unions. If there is a modification of
the principal on a mortgage in a bankruptcy facing foreclosure,
and say a house is re-valued from $500,000 to $450,000, and
then in subsequent years, increases in value, back up over
$450,000--that delta, that change, that improvement--will go to
the lender. So, we're trying to protect the lender on the
downside fair market value and the upside, in terms of
appreciation.
What I'm troubled with is this reference by yourself and
bankers to the ``sanctity of the contract.'' I've seen some of
these contracts in our home State. There's nothing holy about
how these contracts were entered into. Many of them were
deception at its worst. People were taken advantage of. Poor
people, uneducated people, senior citizens.
And to hold these as ``holy instruments'' which now must be
respected, overlooks the obvious--when we changed the
bankruptcy code 5 years ago, we changed the impact of all of
the contracts that come in under bankruptcy. The sanctity of
the contract was never raised by the banks who wanted to change
the bankruptcy code for their advantage.
Now, when they may end up negotiating a contract of
mortgage which they've resisted negotiating, they're arguing
the sanctity, the ``holiness'' of the integrity of this
contract. And I will tell you, I can give you chapter and verse
of some that were as unholy as you can imagine.
Secretary Paulson. Can I respond to that?
Senator Durbin. Of course.
Secretary Paulson. Because there is no way you're ever
going to get me defending some of those loans. And I am
cheering on our law enforcement agencies, everyone that is
going after the fraud.
What I was talking about was taking a bankruptcy statute,
that was designed the way it was for a reason. The presumption
is the judge is going to--you're not going to be altering the
terms of a vacation home or a sailboat, or whatever. You're in
bankruptcy, the presumption is, you lose it.
Senator Durbin. Not in chapter 13.
Secretary Paulson. It's----
Senator Durbin. Not in chapter 13.
Secretary Paulson. But, I'll tell you, it's a much
different presumption when you're talking about your home. But
again, rather than--I just make two points, okay? And I'll just
make them again, and make them quickly. That, to me when you
change a bankruptcy statute and do it retroactively--I
recognize you've narrowed it, okay?--to change it
retroactively, it's something that gives me pause. And then
second, again, that when you look at bogging down the system
and dumping this in the courts when I think a simpler, more
effective way to deal with it is to have homeowners when
there's a problem, go deal with it.
And a large number of foreclosures we're seeing, from
everything I can learn, is homeowners not responding.
Senator Durbin. But, Mr. Secretary, let me tell you, you
said that earlier. ``If you can make the original payment and
can't make the reset, hold up your hand,'' you said. Well,
you've got hundreds of thousands of borrowers across America
who are in this predicament, and to say to them, ``You should
go take care of your problem.''
What I'm saying to you is, the response so far, the
voluntary response of your administration programs has reached
some, but not nearly enough to turn this crisis. The Fed--the
Chairman of the Federal Reserve, Mr. Bernanke, is basically
said what I am saying. That there comes a moment in time, that
if you want to turn this crisis, you have to deal with the
reality.
I don't want these people to go to bankruptcy court--if I
could just finish--I don't want these people to end up in
bankruptcy court. But if the lender understands that there is a
possibility of bankruptcy and modification, they are much more
likely to renegotiate the terms of the mortgage before
bankruptcy. Currently, there is no incentive.
Secretary Paulson. Listen, I very much appreciate what
you're trying to do and your motives, you appreciate mine. As
far as I know, Ben Bernanke is not advocating changing the
bankruptcy law retroactively. And again, there's a fact, and
the fact is that we're making a huge effort. There still are a
fair number of people that--a large number of people, a
disappointing number of people--aren't responding when they get
numerous letters and phone calls and they hear--and all I'm
saying is, wouldn't it be easier to--and how do you help
someone if they're not going to raise their hand and----
COUNSELING FUNDING
Senator Durbin. Then let me ask you this question, why did
the administration issue a statement saying that they would
veto the housing stimulus bill before the Senate last week, and
one of the reasons because it would have substantially
increased the number of counselors available for those facing
foreclosure. If your argument is that enough people aren't
seeking help, why did the administration say that that was one
of the specific reasons they would veto the housing stimulus
bill?
Secretary Paulson. Well, I missed that part of it, because
I will tell you that counseling is vital. And one of the things
that the administration has been advocating has been funding
for counseling, and funding a counseling partially by the
servicers at Hope Now, and the whole effort. And the 888-995-
HOPE number is to get people to call and get to counseling.
So, you know, I didn't read that part that you're referring
to, but I sure know that the--we've got a similar objective and
I appreciate the fact that you've narrowed it appreciably, and
again, I'm just giving you my----
Senator Durbin. Senator Brownback.
LOAN WORK OUTS
Senator Brownback. Thank you, and this is a good
discussion, because I remember the same discussion during the
farm crisis time period. And, a lot of these loans need to be
restructured.
Is it your belief that a number of the loans that people
want to restructure are being restructured by financial
institutions?
Secretary Paulson. I sure believe that.
Senator Brownback. Do you have any hard numbers that you've
been able to track or to look at?
Secretary Paulson. What we've got--here's some hard numbers
I've got. Some are encouraging and some are discouraging.
That, before this effort, 2 to 3 percent of the people were
responding to servicers, when they went to homeowners that were
facing resets or delinquent. Now, 20 percent are responding,
okay? So, that's a positive.
We have a hard number that since the beginning of putting
this together, that there have been 1 million homeowners who
have been helped--either, you know, through a, through a work
out of some sort.
We have hard numbers that this last--the last month, that I
was encouraged to see modifications and work outs growing
faster than foreclosure starts. But, I don't have numbers on
refinancings.
Part of the problem we have, Senator, is that--as I said
earlier, there are really--and the chairman made that point--
there were just egregious, some of the lending contracts and
some of the way people were put in these loans, and there--but
there were 18 percent of the 2006 adjustable rate subprime
mortgage holders defaulted 6 months before the first reset.
They couldn't afford the initial payment.
And so, there are, regrettably, going to be some people
that are going to return to becoming renters. But, again, I'm
going to work hard to make the Hope Now Alliance work, and work
better, we're going to work as hard as we know how to get the
data out there and to track it, and I've got to tell you, if
something isn't working the way it needs to work, then we're
open--and I'm sure open--to making modifications in the way we
approach things. We just have a----
Senator Brownback. Secretary, if I could, and I just wanted
to interject, and I appreciate you going through this--my raw
point on this would be that I really hope that the financial
institutions and the administration can make the work outs
work.
Secretary Paulson. Yes.
Senator Brownback. Because if it looks like things aren't
working or that the financial industry says, ``Look, we're just
going to dig in and start fighting on these,'' then I think the
issue comes back in front of the Congress at that point in
time.
So, I think there is a period where people can look at
this, and say, ``You know, the bank doesn't want the home
back,'' the financial institution doesn't want the home--they
want the person to stay in it.
But, a lot of times, people have gotten into something they
shouldn't have, or were talked into something that they
shouldn't have been. We are where we are today, and we all know
we've got a problem here, and I just think if we can make the
work outs work in substantial numbers across the country, then
great. I would presume, really, Senator Durbin would be very
happy with that.
If they don't, then it becomes a more difficult matter if
these numbers start jumping up. And that would be the point I
would like to make to you, on a raw basis.
Secretary Paulson. Senator, can I respond to that in one
way? Because no matter how well we make this program work,
given the excesses that were entered into, the foreclosures
will jump up. And there are a number of homeowners who were
speculators. There were a number of homeowners in hot markets
that put very little down, the first time there's some negative
equity from their home, they're going to walk away from their
obligation.
And I think the very interesting question there--to me,
it's not a difficult question, for some it's a more difficult
question, to me it isn't--that if someone is going to walk away
unless someone else pays for their losses, I don't want it to
be the Government or other taxpayers to pay for their losses.
To me, those are speculators, and that shouldn't be the focus
of our efforts.
Senator Brownback. Fair enough.
Secretary Paulson. And so, when you look at these
foreclosures, I'm focused on the same ones that Chairman Durbin
is focused on--in other words, homeowners that want to stay in
their home and are having trouble with----
REPATRIATION OF FUNDS
Senator Brownback. I want to build off of that point with
the little bit of time that I have here. It certainly strikes
me that one of the biggest things we all want to avoid is this
soft economy going on into a recession. The economy's soft,
credit's tight, and we don't want it to slide on into a
recession. I think the administration is trying to do
everything they can to stave off a recession.
One of the issues that I want to draw to your attention--
I'm sure you've looked at this--is repatriation of funds from
large corporations bringing back to the U.S. economy. Last time
we did that, that brought in $284 billion in earnings from
overseas back into the U.S. economy in a 1-year time period,
where normally we'd have about $70 billion in the same 1-year
time period. So, nearly a $200 billion infusion into the U.S.
economy. I hope the administration would look at something like
that as an infusion of cash into the economy, which we need to
have at this point in time.
Secretary Paulson. Senator, I thank you for pointing that
out. It's something we've looked at, it's something that I had
calls from a number of people I knew in the private sector
advocating very hard for that at the time we did the stimulus
package. And since we were very rigorous on the stimulus, in
terms of saying, ``Everything that went in had to be
stimulus,'' there are some things that are very good economic
policies, and, you know, I knew from a lot of experience, just
because a company brings cash back, doesn't mean they're going
to spend it, okay? And so, we focused much more on things that
were going to increase the likelihood that it'll be a real
stimulus.
But, I understand the incentives and motivations you're
talking about, and the wisdom of something like that, and I
thank you for bringing it.
Senator Brownback. Well, it strikes me that we may be
getting to a point where we want to put everything out there we
possibly can to keep the economy from going into recession. And
even if the corporations don't spend it, if it's sitting
overseas, they're for sure not going to spend it here.
Secretary Paulson. Right.
Senator Brownback. You've assured that one of taking place.
So, I think we ought to be looking at the next step on
this, just to----
Secretary Paulson. Right.
Senator Brownback [continuing]. Because things are tough
out there, and it looks like, it's going to be difficult for
the consumer to come back in the marketplace, to the degree or
level that we want. So that's going to depend upon a lot of
corporations and individuals investing, us being very
competitive with our exports--which have grown substantially.
Secretary Paulson. Yes.
Senator Brownback. Us expanding the energy industry
domestically, I just think now we're looking at some bit of
restructuring of our economy, probably a little away from the
consumer, and more towards exports, energy--and these are great
opportunities for us. I see you put some things on the energy
market, here, I hope we can do that.
ALTERNATIVE METALS FOR COINS
And just a final comment--I just hope you don't make the
penny out of plastic, or nickel out of plastic. Make it out of
some metal.
Secretary Paulson. Yeah, we're talking about composite
metals, right, we're just changing the metal content a bit.
Senator Brownback. All right, thank you. Unless it's wheat-
based plastics or something like that.
You know, maybe corn, being from Illinois, but just--don't
make it out of plastic.
COUNSELING FUNDING
Senator Durbin. We have a bipartisan position on that.
Mr. Secretary, when you get back, take a look at the
statement of administration policy issued February 26, this
year, relative to the housing stimulus bill on the floor, and
you'll see that the administration said that it would veto this
bill over the suggestion of tripling the funding for the
Neighborhood Reinvestment Corporation, which was expressly for
more counselors.
Secretary Paulson. Yeah, I just put in front of me, yeah.
You said it's because--I think the view is we've got plenty of
funding right now.
Senator Durbin. Well, I think that--I've been out, locally
in Chicago and all around our State, and I think that's
arguable. Because if we are reaching 20 percent, and still have
80 percent, some of that is because of lack of volition on the
part of the borrower, but it appears to me that there's a lot
more that needs to be done if there's truly going to be an
aggressive approach to this.
I would just like to close, and I'm going to give you a
chance to respond, because it's--what I'm about to say is
critical, and I want to hear your response to it.
When one of your senior counselors was asked yesterday
about the Treasury Department report on loan modifications
under Hope Now, 45,000 borrowers in January, the senior
mortgage banker who runs the Hope Now program said, and I
quote, ``A mortgage servicers obligation is to get the maximum
value to the investor over the life of loan. If you're going to
modify the loan and keep the borrower in the house, the bias is
to do that for a shorter, rather than a longer, period of time.
There's a reluctance to do long-term modifications.''
So, I think the 45,000 figure may be misleading. If it's
only temporarily suspending the foreclosure, it's not going to
help in terms of really trying to right this ship.
My concern from the beginning, is that I know the
administration's philosophy, that you have carried out, calls
for voluntary involvement by lending institutions. When we
suggest bringing in a bankruptcy court to try to force the hand
of some of these banks to finally renegotiate, the
administration opposes it, and says they'll veto a bill.
I have said, repeatedly, and I won't go into the graphic
detail, I don't think that the response to this housing crisis
is adequate. I think it is going to continue to get worse. And
as long as it worsens, and as long as the housing industry is
in such terrible shape across America, it's going to be hard to
see a sound economic recovery.
It isn't just the builders, and the speculators, and the
land developers, it's all the material men and skilled
craftsmen and everyone else who are, frankly, not doing much
work in my State of Illinois and around this country, waiting
for the housing market to come back. And those of us who own
homes are watching the values go down because of foreclosures.
And we're watching units of local government that will face
serious problems as assessed valuation goes down, and as
property tax revenue goes down that's used to sustain local
units of government.
If there was ever a time for someone to push away a Herbert
Hoover view of this, and say, ``We need a New Deal view of
this, that says there has to be something that's decisive, and
meaningful, and reaches the most number of people as quickly as
possible to turn this ship around,'' I think it's now. And the
longer we wait, the worse, I think, it's going to get.
And, I invite your response.
Secretary Paulson. Well, let me respond to that, and the
counseling.
I would say on counseling, I get out a fair amount, and
spend time with counselors, I'll be spending some time when I'm
out in California later this week, when I was in Chicago, I
spent time with NeighborWorks. And at least to date, when I've
talked with counseling firms, they're not impeded by a lack of
funds, okay? There's not--and so we're, because I just don't
want there to be a difference between us on that. Because this
is essential and it is, it's major.
LOAN MODIFICATIONS
Now, in terms of modifications, various firms take various
approaches to the modification. But to me, the focus I have is
having mortgage servicers make modifications that help people
stay in their home, and avoid foreclosure. And that is the
objective, it is--I think these are costly things to go
through, I don't think it's in the interest of either the
borrower or the lender, to have something not be sustainable.
All I can say to you is that on that effort, I'm going to drive
that as hard as I know how.
Now, in terms of your overall comment, where you talked
about Herbert Hoover--there's been a lot that's changed since
we went through the Depression and when the foreclosures were
50 percent and unemployment was 25 percent. We have GSEs, we
have the FHA, we have the Federal Home Loan Banks, that we're
going through a period now where 93 percent of the people in
this country, every single month, no matter how hard it is,
make their mortgage payment. Two percent--not 50 percent--are
in foreclosure.
Now, I believe when you say you think it's going to get
worse, I'm not arguing with you. I've said that I think that
those forecasters who say that this is an adjustment, a period
of adjustment, it's going to take longer to run its course--I
agree with them.
You know, when I look at the mortgages that were made in
2006, that are going to be reset over the next couple of years,
and when I look at some of the mortgages, the negative
amortization mortgages, which will be coming, now, even further
out--I recognize that this is going to take longer. And again,
I've told you where the focus is, and we're focusing very hard
on avoiding preventable foreclosures to those who want to stay
in their home, and have the capability to do that.
I appreciate you and I want to do the same thing. I'm going
to keep watching this very closely, we're going to be all over
it, and I, you know, as again, I know you've got the same
objective I do. We've got some--and you're supportive of Hope
Now, you're saying you think there should be some other things
done----
Senator Durbin. There should be more.
Secretary Paulson. And we're just----
Senator Durbin. Well, let me thank you for coming today and
testifying--we didn't talk much about your budget. But you will
get plenty of written questions on that, which we will submit
to you.
Secretary Paulson. Thank you.
ADDITIONAL COMMITTEE QUESTIONS
Senator Durbin. And we will provide those for you. And any
members who wish to make statements and allow them part of the
record, they will be included, and any questions in writing, I
ask that you try--I know you're a very busy man, but if you'd
try to respond to them in a timely fashion, we would appreciate
that very much.
[The following questions were not asked at the hearing, but
were submitted to the Department for response subsequent to the
hearing:]
Questions Submitted by Senator Richard J. Durbin
TRADE
Question. In Illinois, we continue to see losses in manufacturing
jobs that can at least in part be attributed to the forces of
globalization. The Trade and Globalization Adjustment Assistance Act of
2007 extends Trade Adjustment Assistance (TAA) to services sector
workers and workers affected by offshoring, creates a new TAA program
for rural and distressed communities, and makes training, healthcare,
and wage insurance benefits more accessible and flexible. Does the
Administration support strengthening Trade Adjustment Assistance along
these lines?
Answer. The Administration strongly supports TAA reauthorization
that includes needed reforms to help workers adversely impacted by
trade access the training and reemployment services they need to return
to work quickly.
Reauthorization provides an opportunity to redesign the TAA program
to make it more effective in enabling workers to gain the skills needed
to successfully compete in the 21st century global economy.
The Administration believes there are several flaws in the TAA
program as it is currently designed. These flaws include:
--TAA is an ``all or nothing'' program, where participants lose
access to benefits by choosing to return to work.
--Training options are limited and the process of applying for
training is lengthy and bureaucratic.
--Services cannot be provided until after the worker is laid off--
even when the layoff is announced well in advance.
--There is no requirement that One-Stop Career Centers provide
``wrap-around'' services such as career counseling, assessment
and job placement assistance to all TAA participants through
the Workforce Investment Act (WIA).
The Administration believes any reauthorization of the TAA program
should reflect the following priorities:
--Workers must have increased choice to combine employment with
training and ``earn while they learn.''
--Training options should be flexible and easy to access.
--Services should be available prior to layoff, in order to reduce
the length of time workers are unemployed.
--Integration with the Workforce Investment System should be improved
by requiring states to ensure workers have access to the full
range of services available through the One-Stop Career Centers
under WIA.
Question. It is difficult for workers to complete some courses
under the current TAA restrictions because it simply takes longer to
finish the programs than TAA allows. For example, Illinois has an acute
shortage of nurses, and yet the state is unable to find enough people
either to teach the training courses or to complete the programs. This
is a high-growth area for workers that cannot be readily outsourced.
However, our TAA rules make it nearly impossible for displaced workers
to enter the nursing profession because the program takes longer to
complete that TAA allows for training. Do you support common sense
updates to Trade Adjustment Assistance rules that would address
difficulties like this?
Answer. The Administration believes that a high priority for TAA
reauthorization is that trade-affected workers must have increased
individual choice to ``earn and learn'' by having access to
transitional benefits, such as education and training post-employment
and transitional income support (in certain cases). Benefits under the
program should include a menu of ``New Economy Worker Services'' that
allows the worker to choose the option that best fits his or her
individual needs. For example, training-related options should allow a
worker to combine either full or part-time work with education and
training. Similarly, the reauthorization would ensure greater access to
education and training by providing ``New Economy Scholarships'' to
workers that could be used over four years. Additional monies would
also be available to workers who need pre-requisites for training in a
high demand occupation. The New Economy Scholarship should be portable,
enabling certified workers to have access to tuition assistance whether
they are unemployed or return to employment. Workers should be able to
choose to attend training full or part-time and use the funds for
tuition, books, fees and required tools.
INTERNATIONAL SANCTIONS: SUDAN
Question. Does the Bush Administration intend to enforce the Sudan
Accountability and Divestment Act, which I worked very hard to pass in
conjunction with Chairman Dodd and Chairman Frank over in the House,
along with the Ranking Member of this committee, Senator Brownback?
The Treasury Department will provide to Congress the reports called
for in Section 10 of the Act. Section 6 of the Act governs the
Executive Branch concerning government contracts with companies that
conduct certain business operations in Sudan. The Treasury Department
intends to comply with that provision once the Federal Acquisition
Regulation is updated by the Federal Acquisition Regulatory Council, as
provided for in the Act.
If so, why did the Administration issue a signing statement that
left in doubt whether that would be the case? If not, why did President
Bush sign the bill?
Answer. The Department respectfully recommends that these questions
be directed to the White House.
INTERNATIONAL SANCTIONS: CUBA
Question. Do you think that the United States should view the
transfer of power from Fidel Castro to his brother Raul as an
opportunity to strengthen ties to Cuba? Or do you think our policies of
sanctions and non-communication should continue? What benefits are
derived from a stay-the-course, status-quo approach to Cuba that would
maintain the policy of isolating the Cuban government with economic
sanctions? Is any consideration being given to an approach aimed at
influencing the Cuban government through an easing of sanctions and
increased contact and engagement? If not, why not?
Answer. The United States foreign policy positions are defined by
the State Department. The Office of Foreign Assets Control (OFAC)
administers and enforces the country sanctions against Cuba, which
restrict the flow of funds to Cuba that would otherwise be used to prop
up the regime rather than benefit the Cuban people. The
Administration's policy has been designed to prevent resources from
reaching the regime, which uses its resources to control and oppress
the Cuban people. We will continue to monitor developments closely and
stand ready, if asked, to assist a genuine Cuban transition government
committed to democracy.
REDUCTION IN REQUESTED CDFI FUNDING
Question. Compared to fiscal year 2008, proposed reductions could
jeopardize $700 million in private capital for CDFIs that could
otherwise be made available to communities and individuals currently
facing credit shortages. Why are you recommending such a drastic
reduction to a program that demonstrates such a tremendous return on
the taxpayer's dollars?
Answer. The fiscal year 2009 President's budget includes over $28
million for the CDFI Fund, which will be used to expand the capacity of
financial institutions to provide credit, capital and financial
services to underserved populations and communities. Specifically, the
CDFI Fund will continue to provide grants, loans and equity investments
through the CDFI Program, allocate tax credits through the New Markets
Tax Credit Program, and support the CDFI Fund's existing grantees.
The fiscal year 2009 President's budget does not propose funding
for the Bank Enterprise Award (BEA) Program. The BEA Program provides
funds to for-profit banks based on their past activity, and has not
demonstrated that its awards increase lending and financial services in
economically distressed communities. The BEA program is in the process
of modifying the program's regulations. With these revisions in place,
any future BEA funding will encourage future community development
activities, rather than reward past activity. This change aligns BEA
Program activities with the CDFI Fund's goals and objectives.
In fiscal year 2009 the CDFI Fund will continue to serve Native
communities through the CDFI Program; however, the fiscal year 2009
President's budget does not include a separate request for Native
Initiatives.
Question. How do you reconcile this proposed reduction with the
Administration's concern with the shrinking availability of credit?
Answer. The Department of the Treasury encourages the availability
of capital and credit to all communities, including low-income, through
a broader system of financial institutions. While the CDFI Fund
provides capital and credit to financial institutions serving low-
income communities it is not the only source of funding available to
these institutions. These intuitions may also receive funds from
various federal, state, and local entities, such as the U.S. Department
of Health and Human Services, U.S. Department of Agriculture, state
economic development agencies, and local municipalities. Non-government
funding sources for these financial institutions include banks,
thrifts, credit unions, and non-regulated institutions such as loan
funds and community development venture funds.
ECONOMIC STIMULUS REBATES
Question. I understand that you anticipate that IRS will begin
sending rebate checks starting in May. When do you project that the
payments will have a noticeable positive impact on the economy?
Answer. The first economic stimulus payments will be issued by
direct deposit beginning May 2, 2008. The first paper checks will go
out beginning May 16, following the schedule outlined below.
STIMULUS PAYMENT SCHEDULE FOR TAX RETURNS RECEIVED AND PROCESSED BY
APRIL 15
------------------------------------------------------------------------
------------------------------------------------------------------------
Direct Deposit Payments
If the last two digits of your Social Your economic stimulus
Security number are: payment deposit should be
sent to your bank account
by:
00-20................................. May 2
21-75................................. May 9
76-99................................. May 16
Paper Check
If the last two digits of your Social Your check should be in the
Security number are: mail by:
00--09................................ May 16
10--18................................ May 23
19--25................................ May 30
26--38................................ June 6
39--51................................ June 13
52--63................................ June 20
64--75................................ June 27
76--87................................ July 4
88--99................................ July 11
------------------------------------------------------------------------
Based on the payment schedule, the Department projects that the
stimulus will begin to provide a meaningful boost to spending almost
immediately and that its effect on economic growth will be felt through
the rest of the year. The Department also anticipates that the
individual and business tax relief components of the package together
could lead to the creation of over half a million jobs by the end of
the year.
NEW 24/7 OPERATIONS CENTER
Question. The President's 2009 budget for the department requests
$6.2 million for a new Operations Center, which would provide 24/7
capability to monitor the global market. How will the enhanced
capabilities of the new Operations Center support Treasury's mission?
Answer. The Department of the Treasury serves the American people
and strengthens national security by managing the U.S. Government's
finances effectively, promoting economic growth and stability, and
ensuring the safety, soundness, and security of the United States and
international financial systems.
The global scope of the Department's operations requires a 24/7
response capability. The Treasury Operations Center will act as a
fusion center for the receipt, analysis, and dissemination of
information critical to the economic well being of the country. It will
have enhanced analysis capabilities necessary to monitor international
and domestic financial markets, coordinate actions with other Federal
agencies, foreign governments, and global financial markets, and manage
the Treasury's global operations on a round the clock basis. It will
have a capability to integrate open source and classified information
that currently does not exist in the Treasury organizational structure.
The speed with which financial information is processed and the fact
that decisions facing the United States are not limited to weekdays
from 9-5, dictate the creation of a 24/7 facility that will protect and
enhance the fiscal power and reach of the United States Government.
Additionally, the Treasury Operations Center will act as a
communications hub for information directly related to the financial
markets as well as to national and world events that affect the
markets. This communications hub will tie together the Treasury program
offices with their private sector counterparts, foreign financial
ministries, and other federal government entities. The Treasury
Operations Center will engage directly with international financial
market participants, foreign governments, international financial
institutions, and in multinational fora in an immediate time-sensitive
manner. Open and secure communications capabilities will be available,
as will a 24/7 executive switchboard.
Lastly, the Treasury Operations Center will function as a crisis
management center. It will be the hub for activities bringing senior
Treasury Department officials together to manage rapidly developing
issues affecting the financial community (for example, managing the
recent sub-prime mortgage situation and bolstering confidence in the
investment banking community). Current financial crises require the
Secretary to manage operations on a daily if not hourly basis, as well
as implementing policies that affect the future course of the nation's
economic health. Open and secure conference rooms will be available,
along with fully equipped private office space.
CROSS-BORDER WIRE TRANSFERS
Question. In October of 2006, Treasury's Financial Crimes
Enforcement Network released a study that found that it is technically
feasible to require financial institutions to report data on wire
transfers that cross borders. What is the status of Treasury's efforts
to implement reporting of Cross-Border Wire Transfers?
Answer. The Financial Crimes Enforcement Network (FinCEN) continues
to study regulatory proposals for the collection of Cross-Border
Electronic Transmittals of Funds. FinCEN is currently analyzing the
costs and benefits of a proposed regulation that will affect law
enforcement and regulatory agencies, and the financial industry. Upon
completion of the study, a report will be provided to the Secretary for
review and consideration.
Question. Have you conducted any analyses in order to weigh the
additional costs that data reporting on cross border wire transfers
might impose on the financial sector against the benefits of gathering
this data?
Answer. As mentioned above, FinCEN is actively engaged in a review
of the costs and benefits of a proposed regulation to collect Cross-
Border Electronic Transmittals of Funds. Data collection efforts that
contribute to the evaluation of costs and benefits include surveys, in-
person interviews, and ``use case scenarios.'' Specifically, FinCEN has
reached out to affected parties of the Bank Secrecy Act Advisory Group
(BSAAG), a statutorily created forum for discussing Bank Secrecy Act
(BSA) administration, to assess the impact on industry. FinCEN has also
coordinated with the Federal Reserve Board to survey financial
institutions that transmit funds internationally. This voluntary survey
asked institutions to identify the impact of a reporting requirement,
including the cost of reporting such information. Finally, FinCEN
conducted in-person interviews with law enforcement and regulatory
agency officials and collected ``use case scenarios,'' which are
specific examples of exactly how the agencies would use the cross
border data and its resulting benefits.
BUDGETARY IMPLICATIONS OF CUBA SANCTIONS
Question. How many fiscal year 2008 budget and staff resources
(stated in dollars and actual staff, either part-time or full-time, and
work location) are presently designated for administering the Cuba
sanctions? What proportion of total Treasury/OFAC resources do those
levels represent?
Answer. Most of OFAC's Cuba-related work is centered in its
Licensing Division and includes processing applications for travel to
Cuba to market and sell agricultural products to Cuba as provided for
by the Trade Sanctions Reform and Export Enhancement Act of 2000, as
well as applications to engage in family and religious travel and other
Cuba-related transactions. Of the 155 OFAC FTE, six FTE (approximately
$1.1 million) in Washington, DC and five FTE (approximately $.9
million) in Miami, FL are devoted full-time to the Cuba program. These
eleven FTE represent approximately seven percent of OFAC's budget. In
addition, some other individuals, including supervisors, who dedicate
time to one or more of the other 20-plus sanctions programs
administered by OFAC, work on aspects of the Cuba program as necessary.
Question. How do those levels compare to the resources that are
devoted to the other sanctions programs that OFAC implements, including
sanctions related to terrorism, weapons proliferation, and narcotics
trafficking?
Answer. The balance of OFAC's budget (approximately ninety-two
percent) is devoted to the other 20-plus sanctions programs that OFAC
implements, including those related to Iran, Sudan, terrorism, weapons
proliferation, and narcotics trafficking. However, as noted in the
response to the question above, some individuals, including
supervisors, who dedicate time to one or more of the other sanctions
programs administered by OFAC, work on certain aspects of the Cuba
program as necessary.
Within OFAC's Designations Investigations Division, there are
currently six FTE (two of which are currently vacant) devoted full-time
to administering counter-terrorism sanctions programs; eight FTE
devoted full-time to administering counter-proliferation sanctions
programs; eleven FTE devoted full-time to administering counter-
narcotics sanctions programs; and eight FTE (two of which are currently
vacant) devoted full-time to administering country/regime sanctions
programs. These figures are fluid and the resources assigned to
administer these programs can change at any time to accommodate foreign
policy interests and national security priorities. The FTE within the
other operating divisions (Licensing, Policy, Compliance, Civil
Penalties and Enforcement) are not assigned to administer and implement
specific sanctions programs; rather, these divisions assign employees
on a cross-program basis.
It should be further noted that in 2005, as part of the creation of
the Office of Terrorism and Financial Intelligence, twenty-three
analysts assigned to OFAC's terrorism sanctions program in the Foreign
Terrorist Division of OFAC were transferred to Treasury's Office of
Intelligence and Analysis (OIA) to form the nucleus of OIA's analytic
team. These analysts have continued to support OFAC's counter-terrorism
sanctions program through in-depth targeting, research, analysis, and
drafting of evidentiaries. Over time, the number of analysts assigned
to counter-terrorism work in OIA has grown to thirty-five,
strengthening and deepening Treasury's counter-terrorism sanctions
program and also allowing OIA to provide expanded analytical support to
the Treasury Department and interagency community on terrorist
financing matters.
Question. How do the fiscal year 2008 levels (resources and
staffing) compare to funds and personnel devoted to Cuba efforts in the
previous four fiscal years (fiscal years 2004 through 2007)?
Answer. In fiscal year 2008, OFAC employed new strategies on Cuba
matters in the Enforcement and Civil Penalty divisions that have
reduced and are expected to continue to reduce resources committed to
Cuba; specifically, OFAC increased its targeting of enforcement efforts
by concentrating on those facilitating illegal travel to Cuba. It is
expected that the percentage of staff time expended by the Enforcement
and Civil Penalties divisions on Cuba matters will decrease as a result
of the new strategies being deployed. Resources and staffing devoted to
Cuba will otherwise remain consistent with the previous four fiscal
years (fiscal years 2004 through 2007).
Question. Please provide the Subcommittee with a data table
detailing the resources (dollars and personnel) allocated for fiscal
year 2008 for investigating and penalizing violations of the Cuba
embargo, describing the types of activities involved, and specifying,
for comparison purposes, the amounts dedicated to each of the other 20-
plus sanctions programs that OFAC administers.
Answer. As noted above, OFAC has adopted new strategies with
respect to sanctions violations in recent years. These strategies have
resulted in a significant reduction in Cuba penalty cases. Enforcement
resources committed to Cuba are also being reduced and enforcement
efforts are being targeted in a more effective way by concentrating on
those facilitating illegal travel to Cuba. The data table below
identifies the FTE within OFAC that are devoted to administering and
implementing the Cuba program for fiscal year 2008.
As previously noted, some individuals, including supervisors, who
dedicate time to one or more of the other 20-plus sanctions programs
administered by OFAC, work on aspects of the Cuba program as necessary.
Because of the significance and demands related to the other programs
to which these individuals are assigned, OFAC does not track their time
spent on the Cuba program. For comparison purposes approximately
ninety-two percent of OFAC's budget is devoted to other sanctions
programs that OFAC implements, including sanctions related to Iran,
Sudan, terrorism, weapons proliferation, and narcotics trafficking.
FISCAL EYAR 2008
[Dollars in thousands]
----------------------------------------------------------------------------------------------------------------
Cuba All other programs Total
Divisions with FTE dedicated to a specific -----------------------------------------------------------------
program \1\ FTE Dollars FTE Dollars FTE Dollars
----------------------------------------------------------------------------------------------------------------
Licensing..................................... 11 $1,969 ......... ......... 11 $1,969
Designations Investigations:
Counterterrorism.......................... ......... ......... 6 $1,041 6 1,041
Counterproliferation...................... ......... ......... 8 1,388 8 1,388
Counternarcotics.......................... ......... ......... 11 1,909 11 1,909
Country/regime............................ ......... ......... 8 1,388 8 1,388
-----------------------------------------------------------------
Total................................... 11 1,969 33 5,726 44 7,695
----------------------------------------------------------------------------------------------------------------
\1\ As noted above, OFAC's other operating programs assign FTE on a cross-program basis rather than to a
particular sanctions program.
MANAGEMENT OF TREASURY'S IT SYSTEMS
Question. The Inspector General's 2008 Annual Plan repeats a
continuing concern with the Department's management of large capital
investments--particularly information technology (IT) investments.
While this is a challenge for any organization, the Department has had
particular problems in this area. How are you addressing these
deficiencies from a department-wide perspective? What measures and
procedures are in place to ensure the success of new systems?
Answer. Over the past year, the Department has taken a number of
significant steps to address the IT management challenges. The
Department's strategy has focused on three key elements: (1) regular
engagement of the Treasury Department and Bureau executives in the
management of IT; (2) more rigorous planning and management of IT
projects; and (3) improved IT investment review and evaluation tools,
processes and practices.
In order to better engage executives across Treasury and its
Bureaus, the Department has revitalized the Executive Investment Review
Board (E-Board), which was a key recommendation by the Government
Accountability Office's July 2007 report (GAO-07-865). The E-Board was
re-chartered in December 2007 and held its first meeting in February
2008. The E-Board is chaired by the Deputy Secretary and is comprised
of the heads of each of the Department's Bureaus. The Assistant
Secretaries for Management and Legislative Affairs, the General Counsel
and the Chief Information Officer (CIO) also participate on the E-
Board. The E-Board is tasked with ensuring the Department's IT
portfolio decisions are driven by Treasury's business requirements and
that each Bureau and the Department have in place appropriate planning,
monitoring and evaluation mechanisms. The E-Board will also identify
strategic priorities for IT use and address Department-wide IT policy
issues as they arise.
To improve the effectiveness of planning and management of IT
projects, the Treasury CIO has issued new policy and guidance regarding
requirements for project planning in order to receive CIO endorsement
for funding. The CIO, in collaboration with the Treasury Chief
Procurement Executive, has drafted a new IT acquisition policy to
strengthen the Department's IT contract management. The Department is
working with the bureaus to implement the new OMB required, Federal
Acquisition Council Project and Program Management qualifications to
ensure that the Treasury federal staff that oversee our IT projects
have the appropriate knowledge and skills required to successfully
deploy and manage Treasury IT systems. Finally, the Department
continues to strengthen its ability to defend against cyber attacks and
protect the sensitive information entrusted to the Treasury by the
public.
Another element of the Department's overall IT management strategy
is to improve the review and evaluation of Treasury IT investments.
Rigorous review at both the bureau and Department level is a
prerequisite for successful deployment and management of IT systems. In
addition, the Treasury CIO has taken action to improve the Department's
visibility into and influence on IT projects. In the fall of 2007, the
Treasury CIO made the decision to require non-major investments to
participate in a process similar to the Department's formal selection
and review processes for major investments. As a result, all IT
investments (both major and non-major) are considered during the
portfolio selection process that is integrated with the Department's
budget request. Likewise, bureaus must report quarterly for all IT
investments (both major and non-major) on cost, schedule, and
performance goals. Finally, the Treasury CIO is expanding its IT
investment evaluation process to assess not only ``completed'' projects
against planned objectives, but also those portions of IT developmental
projects that have implemented discrete operational components.
Question. The President's fiscal year 2009 budget requests $2.9
million to fund an upgrade to the IT system used for financial
reporting under the Bank Secrecy Act. In July 2006, FinCEN halted work
on BSADirect, the previous attempt to upgrade its IT systems. Treasury
spent two years of planning and $14.4 million on that failed system.
What improvements have you made to the planning and implementation
process that will avoid problems that plagued the previous failed
upgrade?
Answer. During fiscal year 2007, FinCEN made significant progress
on the full range of organizational, program management, and technical
architecture-related efforts needed to modernize the bureau's IT
systems. FinCEN identified the specific action items in its October
2006 Information Technology Plan, created in response to the BSA Direct
project termination. In fiscal year 2007, FinCEN launched an effort to
establish the organization's first enterprise business transformation
and IT modernization strategy, which serves as the roadmap for aligning
FinCEN's IT portfolio with business objectives and processes. FinCEN
also expanded its capacity for executing complex IT projects by (1)
hiring new project managers; (2) introducing management tools and
techniques through the creation of a Project Management Office; (3)
establishing a Data Management Framework to improve the management and
visibility of BSA data issues; (4) awarding a performance-based
contract for acquiring IT services; (5) and strengthening collaboration
with internal and external stakeholders. FinCEN is also fully engaged
in Treasury's revised processes in the question above.
Question. The President's fiscal year 2009 budget requests $3
million for a new debt management system. Treasury reports that the new
system will enhance the efficiency of federal borrowing, which will
save taxpayers money. How much do you estimate that the current system
is costing taxpayers? What kind of return will the taxpayers get on
this investment?
Answer. Currently, Treasury's Office of Debt Management (ODM)
spends approximately $600,000 annually to manage its $9+ trillion
liability portfolio. Given the size of the portfolio, ODM believes
there is significant opportunity cost foregone due to its current
outdated IT infrastructure and modeling capabilities which limit
sophisticated portfolio analysis.
Treasury issues $4.3 trillion of debt per year using basic Excel
spreadsheets and manual operations. The current size of Treasury's
marketable debt portfolio is $4 trillion, with an annual interest cost
of $244 billion in 2007. The additional funds to improve ODM's systems
will make a huge difference in costs. For example, if the Department
can issue just $1 billion less over a one month period due to better
portfolio analytics and sound modeling capabilities, Treasury would
save $3 million at current interest rates. Over the long term, the
Department could potentially save one one-hundredth of a percent
(.0001) on the $4 trillion marketable debt portfolio, resulting in
potential interest costs savings of over $400 million annually. We
believe this cost saving is conservative, and that additional savings
are eminently possible given better risk management systems and
operations.
More importantly, for global financial markets, a disruption in the
ability to make debt issuance decisions or the inability to function in
the event of a contingency event would precipitate severe financial
distress and cost. Since every fixed income market in the world is tied
to the Treasury market, such disruption would be significantly costly
from a financial perspective.
The proposed systems would provide: (1) a robust infrastructure on
top of the new Treasury auction system (providing 24/7 reliability,
back office servicing, and applications development), (2) a secure
contingency site with numerous business continuity options, (3) the
ability to remotely access and make debt issuance recommendations, (4)
the ability to make informed debt issuance decisions using advanced
portfolio analytics, (5) the ability to provide key interest rate data
to Congress as mandated and to financial markets as necessary without
interruption, and (6) major infrastructure upgrades (including servers
which are severely antiquated). The immediate implementation of these
systems is necessary for the national and financial security of the
United States.
COMMITTEE ON FOREIGN INVESTMENT IN THE UNITED STATES (CFIUS)--CASELOAD
MANAGEMENT
Question. The Foreign Investment and National Security Act of 2007
became law in July of 2007, increasing Congressional oversight of the
CFIUS review process. How is the Department preparing to meet the
increase in requirements under the new law?
Answer. CFIUS and Treasury have been in compliance with the
requirements of the Foreign Investment and National Security Act
(FINSA) since FINSA became effective in October 2007. To ensure that
Treasury and all CFIUS agencies comply fully with FINSA and meet the
increased Congressional oversight requirements that it presents, the
Department has made multiple changes and taken multiple steps, which
include: increases in staffing levels, increases in accountability, and
higher level cooperation between CFIUS agencies and agencies outside of
the CFIUS process.
Regarding staffing, Treasury and other CFIUS agencies have
substantially increased staffing for CFIUS-related issues. In Treasury,
we established a new Deputy Assistant Secretary position focused on
CFIUS issues and reporting to the Assistant Secretary and the Under
Secretary for International Affairs. Treasury has also hired additional
staff to handle the increased requirements, including reporting
requirements under FINSA and the increased case load. The total number
of full-time staff assigned to work on investment security issues in
Treasury has nearly tripled, rising from 5 full-time positions to 14.
On accountability, CFIUS has implemented formal processes to ensure
that CFIUS matters are fully considered at the highest levels. This
includes strong internal procedures to ensure that every case is
certified at the Assistant Secretary or Deputy Secretary level, as
appropriate, that the required post-review or post-investigation
certifications are submitted to Congress in a timely manner, and that
requested briefings are provided to Congress as required.
On coordination, Treasury (in consultation with other CFIUS
agencies) has issued internal CFIUS guidelines to ensure that the
reporting requirements under FINSA are fully satisfied in a timely
manner. CFIUS agencies meet each week to discuss and deliberate on all
cases before CFIUS, and where appropriate, outside agencies and
departments (such as the Departments of Transportation and Health and
Human Services, and NASA) are called on to bring their expertise into
the CFIUS process. Improvements have also been made in intelligence
analysis, which is now being coordinated by the Director of National
Intelligence, who is consulting with each of the key intelligence
agencies in the U.S. government. Further, the Executive Order issued by
the President on January 23, 2008, establishes executive branch rules
to ensure that CFIUS is able to meet the reporting requirements under
FINSA in an efficient and orderly manner. Treasury is coordinating with
other CFIUS agencies to submit the required annual report to Congress
by July 31, 2008.
Question. I understand that the CFIUS caseload has increased over
the last few years. Why are we seeing such a dramatic increase, and how
is Treasury adapting to respond to this increase while ensuring that
the CFIUS cases are completed in a reasonable time frame?
Answer. There are numerous reasons for the recent increase in the
CFIUS caseload, including the rate of foreign direct investment into
the United States, heightened public awareness of the CFIUS review
process following several high-profile cases in recent years, and
increased recognition among businesses that certain transactions could
raise national security considerations in the current security
environment. In addition, there have been a number of ``defensive''
filings where there is a cross-border acquisition that has little
relevance to national security.
In the last few years, Treasury has made numerous organizational
and procedural improvements to ensure that all cases continue to be
processed efficiently, with all national security considerations fully
analyzed. As noted above, Treasury established a new Deputy Assistant
Secretary position in 2006 focused on CFIUS issues. Treasury has also
hired additional staff to focus on CFIUS issues. Meanwhile, the
increased caseload requires additional resources to be dedicated to
CFIUS matters. The regulations and guidance that Treasury will be
publishing this spring will also help ensure an efficient process.
Further, CFIUS agencies have made it clear to companies and their
advisors that, where appropriate, advance pre-filing briefings and
consultations ensure that CFIUS has adequate time for reviews.
INTEGRATION OF TREASURY INTO U.S. INTELLIGENCE COMMUNITY
Question. How well is the Office of Terrorism and Financial
Intelligence being integrated in the intelligence community?
Answer. Since its creation in 2004, the Office of Intelligence and
Analysis (OIA)--Treasury's Intelligence Community (IC) component--has
become a fully-integrated member of the IC. OIA is recognized as a key
player in IC efforts to address the financial underpinnings of national
security threats and threats to international financial stability. The
Assistant Secretary for Intelligence and Analysis is a member of the
Director of National Intelligence's (DNI) Executive Committee (the IC's
``Board of Directors'') and OIA is an active participant in the various
working groups and committees guiding IC efforts against key threats,
including the National Intelligence Analysis Production Board, the
Counterterrorism Advisory Group, the IC Leadership Council, the WMD-T
Steering Group, and the Interagency Intelligence Committee on
Terrorism. The Office of the Director of National Intelligence recently
acknowledged OIA's status as a key IC figure by asking it to serve as
the National Intelligence Priorities Framework Topic Expert for
Economic Stability and Financial Networks.
OIA routinely coordinates on (and provides input to) articles
drafted for the National Terrorism Bulletin (NTB) and the President's
Daily Brief. In addition, OIA provides regular support to the Federal
Bureau of Investigations (FBI) counterterrorism investigations, and
frequently offers input to counterterrorism and counter-proliferation
analytic products drafted by the FBI, the Central Intelligence Agency
(CIA), and other IC agencies. On numerous occasions, OIA analysts have
drafted intelligence reports jointly with their counterparts at the FBI
and CIA. In order to strengthen cooperation with these agencies, OIA
has detailed officers to the FBI's Terrorist Finance Operations Section
and to the CIA. OIA also has officers forward-deployed to U.S. Central
Command, U.S. Pacific Command, U.S. European Command, and the joint
Treasury-DOD Iraq Threat Finance Cell in Baghdad. OIA is in the process
of identifying an officer to serve as Treasury's representative to the
DNI's National Intelligence Coordination Center (NIC-C). The Defense
Intelligence Agency, and the National Security Agency have assigned
officers to OIA to facilitate cooperation and information sharing.
Question. What improvements are needed to maximize the ability of
Treasury and other components of the intelligence community to exchange
critical information?
Answer. OIA's fiscal year 2009 Global Finance Initiative (GFI)
would give Treasury the resources it needs to successfully leverage its
status as a fully-integrated member of the IC. GFI would provide $2
million, including a realignment of $1 million in Department base
resources, and 10 positions to establish a capability in OIA to advance
global finance intelligence issues within the IC. Resources would be
targeted to: (a) aligning IC collection requirements on finance-related
issues more closely with policymaker needs, (b) developing and taking
advantage of new sources of information, (c) enhancing analysis on
finance-related issues in coordination with the IC, and (d) expanding
OIA's role and relationships within the IC. This initiative is aligned
with key tasks and objectives of the National Security Strategy, the
National Intelligence Strategy, the National Implementation Plan for
the War on Terror, and the Treasury Strategic Plan.
GFI would enhance the effectiveness of IC collection and analysis
on global financial networks. Addressing global financial networks
involves assessing the financial underpinnings of national security
threats, identifying our adversaries' financial vulnerabilities,
measuring the impact of targeted financial measures, and uncovering
threats to the stability of the international financial system. By
assuming a greater role in guiding financial intelligence collection
and analysis, OIA would address a growing need in the IC, and take a
large step toward meeting the expectations of Congress and Treasury
leadership when they created OIA.
Question. What organizational, technical, or other types of
barriers hamper the ability of the office to fit successfully into the
overall intelligence community, and how are those impediments being
addressed?
Answer. Since its creation in 2004, the Office of Intelligence and
Analysis (OIA)--Treasury's Intelligence Community (IC) component--has
made great strides in its efforts to integrate itself into the IC. OIA
is recognized as a key player in IC efforts to address the financial
underpinnings of national security threats and threats to international
financial stability. OIA's fiscal year 2009 Global Finance Initiative
(GFI) would give Treasury additional resources for aligning collection
requirements on finance-related issues more closely with policymaker
needs; developing and taking advantage of new sources of information;
enhancing analysis on finance-related issues in coordination with the
IC; and expanding OIA's role and relationships within the IC.
Despite these advancements, OIA faces significant challenges in
hiring highly qualified analysts. The conventional hiring process is
cumbersome and lengthy, and competition within the Intelligence
Community for qualified candidates is fierce. The Treasury Department
strongly supports section 121 of the fiscal year 2009 Intelligence
Authorization Bill, which establishes the authority to convert
positions within the intelligence component of the Treasury Department,
DHS, and other departmental intelligence components to excepted service
status, which would go a long way towards leveling the playing field.
______
Questions Submitted by Senator Sam Brownback
Question. Could you give us an update on how your ``HOPE NOW
alliance'' is working to prevent further foreclosures in the nation's
housing market?
Answer. Treasury is pleased with progress of the HOPE NOW Alliance,
a private group of lenders, servicers, non-profit counselors and trade
organizations that was initially facilitated by Treasury and HUD.
However, we recognize more work remains. As of February 29, 2008, the
industry had helped almost 1.2 million homeowners find alternatives to
foreclosure through either a loan modification or repayment plan since
July of 2007. These data do not include refinancing statistics. Of
particular significance is the fact that modifications are continuing
to rise as a proportion of work-outs. In February alone, 39,000
subprime borrowers received loan modifications. Modifications accounted
for more than 38 percent of borrower work-out plans in February, up
from just under 19 percent in July 2007. In total, the three-month rate
of change in modifications was up approximately 40 percent in February,
while the rate of change in foreclosure starts was up only 16 percent.
FHA has also aided HOPE NOW's efforts and played a vital role in
helping more current and delinquent homeowners find affordable
solutions. The recent announcement to expand FHA Secure to more
delinquent borrowers will enable FHA to refinance an additional 100,000
homeowners this year. In total, FHA Secure is estimated to refinance up
to 500,000 homeowners by the end of 2008.
Through a variety of outreach tools and operational best practices
established by HOPE NOW, Treasury believes the Alliance has laid the
groundwork for increased success in the coming months.
It is imperative that HOPE NOW continue to improve on its progress
to date, and Treasury will be sure to consistently convey that message
to the Alliance.
Question. What are your thoughts on the Durbin Bankruptcy bill that
would allow judges to re-write loan provisions? What would be the
effects on the banking system of the provisions of this bill?
Answer. While Treasury respects the efforts of Senator Durbin to
explore potential solutions for the current mortgage market downturn,
Treasury is concerned about the unintended consequences such
legislation may have on the mortgage market in going forward.
Amending the bankruptcy code in this manner would undermine
existing contracts, leading to a contraction in available and
affordable mortgage credit. This bankruptcy provision would rewrite
certain tenets of bankruptcy law in ways that would fundamentally alter
the expectations of parties to thousands of home purchases after the
fact. These provisions would also likely prolong the time it will take
the market to recover from the current downturn.
Question. I understand that the World Bank is sending U.S. taxpayer
funds to Iran through banks that we have already sanctioned as WMD
proliferators. What is the Treasury Department doing to try to stop
this from happening, since it is contrary to everything we are trying
to accomplish with our Iran policy?
Answer. The Administration shares Congressional concern with the
deceptive practices of Iranian financial institutions and the
involvement of these institutions in proliferation activities. The
Treasury Department has been a leader in singling out Iranian banks for
sanctions as a result of their illicit activities.
The Department has worked closely and diligently with the World
Bank to ensure that it is fully abreast of the evolving sanctions being
put in place by the United Nations Security Council, the inter-
governmental Financial Action Task Force (FATF), and the most recent
Treasury Department designation of Future Bank as being controlled by
Iran's Bank Melli.
The Administration has taken and will continue to take an active
role in opposing World Bank lending to Iran. The United States has
opposed every proposal for Iran since the early 1980s. However, despite
these efforts, projects have been approved by the 24-member Board and
continue to disburse funds. The Department has been assured that
disbursement of loan proceeds under these World Bank-financed projects
and the project accounts have been transferred to commercial banks
which are neither on the list of entities sanctioned pursuant to the
U.N. Security Council resolutions nor on the list of entities
sanctioned for nuclear proliferation activities by the U.S. Treasury.
When making such disbursements, the World Bank screens the list of
beneficiary entities as well as financial intermediaries against the
U.N. list maintained pursuant to the aforementioned U.N. Security
Council decisions, and the list maintained by the Treasury Department's
Office of Foreign Assets Control (OFAC).
The Treasury Department will continue to strongly oppose and vote
against any World Bank Group loan or other type of assistance to Iran
and will also ensure that the Bank continues to comply with the full
range of sanctions regimes to avoid any activity that could facilitate
Iran's nuclear or missiles programs.
Question. We have enacted legislation to allow States to divest
from Sudan. What are your thoughts on allowing States to divest from
Iran?
Answer. The Administration shares Congressional concern with the
conduct of the Iranian regime, and the Treasury Department has played a
leading role in seeking to isolate Iran financially. Such efforts
targeting Iran are most likely to succeed if they are multilateral in
nature, and much of our effort has been targeted at persuading our
allies and private sector institutions to cut back or terminate their
financial dealings with Iran. The multilateral efforts that resulted in
the recent United Nations Security Council Resolution with respect to
Iran (U.N. Security Council Resolution 1803, passed March 3, 2008) are
but one example of the cooperation we are receiving from our allies
abroad. Legislation authorizing divestment from companies that do
business in Iran risks alienating the very allies whose assistance we
need. It also limits the President's ability to conduct U.S. foreign
policy with one voice.
Question. You've asked for some increases in your budget for the
Office of Terrorism and Financial Intelligence. Can you update us on
the progress you have made in cutting off funds to terrorist
organizations and rogue nations?
Answer. The Office of Terrorism and Financial Intelligence (TFI)
has made significant progress in this area by using a combination of
financial measures, fueled by financial intelligence, in a way that
engenders the support of other governments and the private sector. TFI
has successfully drawn on a range of tools for this effort, including
executive orders issued by the President pursuant to the International
Emergency Economic Powers Act, Section 311 of the USA PATRIOT Act, and
FinCEN advisories. Combining these authorities with targeted
intelligence about illicit financing networks, TFI has used conduct-
based, intelligence-grounded, targeted financial measures to address
the threat of terrorist organizations and rogue nations in a way that
encourages support from both the private sector and larger
international community.
Executive Order (E.O.)13224 has proven to be a powerful and
flexible tool for targeting terrorist organizations, allowing the
Department to block the assets of individuals and entities controlled
by or acting on behalf of named terrorist organizations, freezing any
of the target's assets that are held by U.S. persons and preventing
U.S. persons from having any future dealings with them. To date, the
United States has designated 486 individuals and entities pursuant to
E.O. 13224, of which nearly 400 were named by Treasury. In addition, 19
individuals and entities have been designated pursuant to E.O. 12947,
which prohibits transactions with terrorists who threaten the Middle
East peace process.
Treasury has also drawn on this range of tools to influence the
conduct of rogue nations like North Korea, using targeted financial
measures and systemic controls like those previously described. In the
case of North Korea, the Department took two important actions to
address conduct ranging from WMD proliferation-related activities to
counterfeiting of U.S. currency and other illicit behavior. First, a
number of North Korean proliferation firms were targeted under E.O.
13382. That Order authorizes the Treasury and State Departments to
target key nodes of WMD and missile proliferation networks, including
their suppliers and financiers, in the same way as is done with
terrorists. A designation under this order cuts the target off from
access to the U.S. financial and commercial systems and puts the
international community on notice about a particular threat. Second,
regulatory action was taken to protect the financial system against
Banco Delta Asia (BDA). In September 2005, Treasury designated BDA as a
primary money laundering concern. At that time, Treasury issued a
proposed rule, which was subsequently finalized in March 2007,
prohibiting U.S. financial institutions from opening or maintaining
correspondent accounts for or on behalf of BDA. Treasury took this step
to protect the U.S. financial system from BDA, which exhibited systemic
failures in its application of appropriate standards and due diligence,
as well as its facilitation of unusual or deceptive financial practices
by North Korean-related clients. In addition to protecting the U.S.
financial system from the significant vulnerability that BDA
represents, the Section 311 action has spurred improvements in Macau's
regulatory environment. Following the BDA action, the Macanese
authorities took substantial steps to strengthen Macau's anti-money
laundering and counter-terrorist financing regime, notably by passing a
new law to strengthen these controls and starting the jurisdiction's
first-ever Financial Intelligence Unit (FIU). Perhaps most importantly,
the action against BDA has had a profound effect, not only in
protecting the U.S. financial system from abuse, but also in notifying
financial institutions and jurisdictions globally of an illicit finance
risk. Following these actions, responsible foreign jurisdictions and
institutions have taken steps to ensure that North Korean entities
engaged in illicit conduct are not receiving financial services.
Question. You have identified the targeting of state sponsors of
terrorism such as Iran and Syria as an immediate challenge for the
Office of Terrorism and Financial Intelligence (TFI). What can you tell
us about those activities and the progress you have made so far?
Answer. TFI has taken important steps with both Iran and Syria by
using a combination of financial measures, fueled by financial
intelligence, to target their conduct in a way that engenders the
support of other governments and the private sector.
Syria.--Targeted financial measures have proved effective in
addressing the threat Syria's problematic behavior poses to the United
States. To respond and take additional measures to address this threat
to our national security, foreign policy, and economy, President George
W. Bush issued E.O. 13460 on February 13, 2008. This measure targets
individuals and entities determined to be responsible for or who have
benefited from the public corruption of senior officials of the Syrian
regime. On February 21, 2008, the Treasury used this authority to
designate Rami Makhluf, a powerful Syrian businessman and regime
insider whom improperly benefits from and aides the public corruption
of Syrian regime officials. In addition to this use of targeted
economic sanctions against Syrian entities involved in WMD
proliferation, Treasury has taken action under Section 311 to protect
the U.S. financial system against the Commercial Bank of Syria (CBS),
which has been used by criminals and terrorists to facilitate or
promote money laundering and terrorist financing, including the
laundering of proceeds from the illicit sale of Iraqi oil and the
channeling of funds to terrorists and terrorist financiers. In March
2006, Treasury issued a final rule, pursuant to Section 311,
designating CBS as a ``primary money laundering concern'' and requiring
U.S. financial institutions to close correspondent relationships with
CBS. Consequently, prominent international financial institutions have
begun to reassess their relationships with Syria and a number of Syrian
entities.
Iran.--Due to U.S. concern about Iran's well-documented illicit
behavior, the Treasury Department maintains broad sanctions against
Iran (measures that build upon our overall and long-standing Iran
policy). U.S. commercial and financial sanctions against Iran, as
administered by OFAC, prohibit U.S. persons from engaging in a wide
variety of trade and financial transactions with Iran or the Government
of Iran, and prohibit most trade in goods and services between the
United States and Iran, and any investments by U.S. persons in Iran.
U.S. persons are also prohibited from facilitating transactions via
third-country persons that they could not engage in themselves. Against
this backdrop of long-standing sanctions against Iran, Treasury has
taken a number of actions to address the threat of Iranian
proliferation activity in recent years.
First, while under our general Iran country sanctions program,
Iranian financial institutions are prohibited from directly accessing
the U.S. financial system, they are permitted to do so indirectly
through a third-country bank for payment to another third-country bank
in transactions not involving the United States or U.S. persons. In
September 2006, OFAC cut off one of the largest Iranian state-owned
banks, Bank Saderat, from any access, including this indirect, or ``u-
turn,'' access to the U.S. financial system. This bank, which has
approximately 3,400 branch offices, is used by the Government of Iran
to transfer money to terrorist organizations. As noted below, OFAC
later designated Bank Saderat for its support for terrorist groups.
Second, OFAC is relying increasingly on the targeted financial
measures to combat Iran's pursuit of nuclear capability, development of
ballistic missiles, and its support for terrorism. With respect to
Iran, OFAC has been able to apply these measures in the context of U.N.
Security Council Resolution (UNSCR) 1737 and 1747, enabling the
Department to secure greater multilateral implementation by governments
and the private sector and use targeted financial measures against
Iranian individuals and entities in both our counterterrorism and
counterproliferation sanctions programs. Treasury took several major
actions under these programs in October 2007, building on previous
successes with designations of Iranian entities supporting
proliferation using U.S. unilateral authorities and at the United
Nations. On October 25, 2007, Treasury and State (acting in tandem)
were able to expose Iranian banks, companies, and individuals that had
been involved in proliferation and terrorism-related activities and cut
them off from the U.S. financial system. These actions included making:
--Treasury designations of two of Iran's state-owned banks (Banks
Melli and Mellat) and three individuals affiliated with Iran's
Aerospace Industries Organization (AIO) for proliferation
activities under E.O. 13382;
--Treasury designations of nine Islamic Revolutionary Guard Corps
(IRGC)-affiliated entities and five IRGC-affiliated individuals
as derivatives of the IRGC under E.O. 13382;
--The designation of the IRGC-Qods Force (IRGC-QF) under E.O. 13224
for providing material support to the Taliban and other
terrorist organizations; and
--The designation of Iran's state-owned Bank Saderat as a terrorist
financier.
Many of the U.S. designations against Iranian entities and
individuals under E.O. 13382 have been similarly designated under UNSCR
1737 and UNSCR 1747. Most recently, UNSCR 1803 added additional names
to the growing list of Iranian individuals and entities that are
subject to multilateral targeted financial sanctions. UNSCR 1803 also
includes a warning regarding Iranian financial institutions more
generally, establishing obligations for U.N. member states to exercise
vigilance over their own financial institutions activities with
financial institutions domiciled in Iran, and their branches and
subsidiaries abroad. The Resolution further names two Iranian financial
institutions that Treasury previously designated, Bank Melli and Bank
Saderat, as institutions of particular concern.
Third, in addition to these ``formal'' actions, the Treasury has
engaged in unprecedented, high-level outreach to the international
private sector, meeting with more than forty banks worldwide to discuss
the threat Iran poses to the international financial system and to
their institutions. Through this outreach, OFAC has shared information
about Iran's deceptive financial behavior and raised awareness about
the high financial and reputational risk associated with doing business
with Iran. The use of targeted measures has aided this effort by
highlighting specific threats, helping isolate these bad actors, and
preventing them from abusing the financial system. By thus partnering
with the private sector, there is an increasingly less desire to work
around sanctions. Even those institutions not formally bound to follow
U.S. law pay close attention to the targeted actions and often adjust
their business activities accordingly. Many leading financial
institutions have scaled back dramatically, refused to issue new
letters of credit to Iranian businesses, or even terminated their Iran-
related business entirely. They have done so of their own accord, many
concluding that they did not wish to be the banker for a regime that
deliberately conceals the nature of its dangerous and illicit business.
TFI has also communicated with the U.S. financial sector regarding
Iran through the issuance of advisories. In October 2007, following a
statement by the FATF on the threat posed by deficiencies in Iran's
anti-money laundering/combating the financing of terrorism regime, the
FinCEN followed suit by issuing an advisory to alert U.S. financial
institutions of similar concerns regarding Iran. In this advisory,
FinCEN advised that financial institutions should be particularly aware
that there may be an increased effort by Iranian entities to circumvent
sanctions and related financial community scrutiny through the use of
deceptive practices involving shell companies and other intermediaries
or requests that identifying information be removed from transactions.
The advisory went on to explain that such efforts may originate in Iran
or Iranian free trade zones subject to separate regulatory and
supervisory controls, including Kish Island. Such efforts may also
originate wholly outside of Iran at the request of Iranian-controlled
entities.
Question. Treasury's Office of Intelligence Analysis was
established in fiscal year 2005. Since that time, how has it
contributed to overall intelligence collection?
Answer. OIA has limited authority to collect foreign financial and
monetary information, and general foreign economic information. OIA's
primary mission is to analyze intelligence collected by other agencies
in order to support the formulation of Treasury policy and the
execution of its authorities. To support its mission, OIA leadership
firmly believes that the organization should drive intelligence
collection by providing timely and insightful analytic support to IC
members engaged in clandestine and open-source intelligence activities.
OIA analysts routinely provide their intelligence requirements to
collectors at the Central Intelligence Agency, the National Security
Agency, the Federal Bureau of Investigation, the Defense Intelligence
Agency, and other IC elements in order to help those organizations more
effectively direct their resources. OIA also provides feedback to IC
Collectors as to the timeliness, relevance, and accuracy of the
information provided by their sources. All in all, this support helps
ensure that scarce IC collection resources are focused on the hardest
targets and finance-related collection requirements are closely aligned
with policymaker needs.
In fiscal year 2008, OIA is expanding its ability to drive
collection by increasing its cadre of dedicated Requirements Officers.
OIA's fiscal year 2009 Global Finance Initiative (GFI) would provide
additional resources to ensure that each of OIA's core mission areas
receives dedicated collection requirements support.
Question. Question from the Republican Staff Director of the JEC:
Recent turmoil in financial markets is continuing, particularly the
markets for asset backed debt instruments. It's clear that in many
instances debt that received a AAA-rating was in fact not AAA grade at
all. Up until now, the credit rating agencies have relied solely on
traditional risk indicators, all of which are either borrower-focused
or collateral-focused.
It seems that both home owners and mortgage lenders alike could
benefit from an independent, objective and standardized third-party
verification step that verifies the quality and risk associated with
these loans before they are sold on the secondary market or before they
are finalized by a broker. Consumers and investors could also benefit
by having the ability to review the record of particular lenders.
Do you believe that assigning such a pre-securitization rating
based upon borrower information, adequacy of collateral and loan
quality would help to prevent future crises in the mortgage market?
Answer. On March 13th, the President's Working Group on Financial
Markets (PWG), which is chaired by the Secretary, released the
comprehensive ``Policy Statement on Market Developments.'' The PWG's
statement was intended to help to restore market liquidity, market
discipline, and investor confidence through recommendations to enhance
disclosure/transparency, due diligence/independent analysis, valuation
techniques, risk management practices, regulatory policies, and market
infrastructure. There are recommendations for all stakeholders (all
market participants and regulators) and for all links in the chain of
the securitization process (mortgage brokers, originators,
securitizers, financial institutions, credit rating agencies,
investors, and state and federal regulators).
The PWG made several recommendations to improve the quality and
disclosure of information about and analysis of mortgage loans
underlying securitized products, including:
--All states should implement strong nationwide licensing standards
for mortgage brokers;
--Federal and state regulators should strengthen and make consistent
government oversight of entities that originate and fund
mortgages and otherwise interface with customers in the
mortgage origination process;
--The Federal Reserve should issue stronger consumer protection and
disclosure rules;
--Overseers of institutional investors should require investors to
obtain from sponsors and underwriters of securitized credits
better information about the risk characteristics of such
credits, including information about the underlying asset
pools;
--Overseers should ensure that these investors develop an independent
view of the risk characteristics of the instruments in their
portfolios, rather than rely solely on credit ratings;
--The PWG will form a committee to develop best practices regarding
disclosure to investors in securitized credits;
--Credit rating agencies (CRAs) should disclose the reviews they
perform on originators of assets and should require
underwriters to represent the level and scope of due diligence
performed on the underlying assets;
--CRAs should publish sufficient information about the assumptions
underlying their credit rating methodologies, so that users of
credit ratings can understand how a particular credit rating
was determined;
--CRAs should provide the information investors need to make informed
decisions about risk, including measures of the uncertainty
associated with ratings and of potential ratings volatility;
and
--The PWG will form a group to develop recommendations for further
steps that issuers, underwriters, CRAs, and policymakers could
take to ensure the integrity and transparency of ratings, and
to foster appropriate use of ratings in risk assessment.
Question. What key ways is your Department proposing to employ to
close the ``tax gap?'' You once stated in a Finance Committee hearing
that this is not a pot of gold. How big is the gap and what will it
cost to close it?
Answer. The estimated size of the tax gap is as follows. In 2001,
the overall compliance rate was estimated at over 86 percent, after
late payments and recoveries from IRS enforcement activities. The tax
gap results from noncompliance, specifically the amount of tax that
should be paid but is not paid. After enforcement efforts and late
payments, this amount was approximately $290 billion.
The key ways in which the Treasury Department is proposing to
reduce the tax gap were set forth in a comprehensive strategy to
improve tax compliance released in September 2006. The strategy builds
upon the demonstrated experience and current efforts of the Treasury
Department and IRS to improve compliance. Four key principles guided
the development of this strategy: both unintentional taxpayer errors
and intentional taxpayer evasion should be addressed; sources of non-
compliance should be targeted with specificity; enforcement activities
should be combined with a commitment to taxpayer service; and tax
policy and compliance proposals should be sensitive to taxpayer rights
and maintain an appropriate balance between enforcement activity and
imposition of taxpayer burden. These principles underscore the Treasury
Department's and IRS' comprehensive, integrated, multi-year strategy to
improve tax compliance. Components of this strategy include: (1)
legislative proposals to reduce opportunities for evasion; (2) a multi-
year commitment to compliance research; (3) continued improvements in
information technology; (4) improvements in IRS compliance activities;
(5) enhancements of taxpayer service; (6) simplification of the tax
law; and (7) coordination between the government and its partners and
stakeholders.
More specifically, the Treasury Department's fiscal year 2009
Revenue Proposals include a number of legislative proposals intended to
improve tax compliance with minimum taxpayer burden. The fiscal year
2009 President's budget does include a number of legislative proposals
intended to improve tax compliance with minimum taxpayer imposition.
These proposals could generate $36 billion over the next ten years. The
Administration proposes to expand information reporting, improve
compliance by businesses, strengthen tax administration, and expand
penalties.
--Expand information reporting.--Compliance with the tax laws is
highest when payments are subject to information reporting to
the IRS. Specific information reporting proposals would:
require information reporting on payments to corporations;
require basis reporting on security sales; require information
reporting on merchant payment card reimbursements; require a
certified Taxpayer Identification Number (TIN) from
contractors; require increased information reporting on certain
government payments; increase information return penalties; and
improve the foreign trust reporting penalty.
--Improve compliance by businesses.--Improving compliance by
businesses of all sizes is important. Specific proposals to
improve compliance by businesses would: require electronic
filing by certain large organizations; and implement standards
clarifying when employee leasing companies can be held liable
for their clients' Federal employment taxes.
--Strengthen tax administration.--The IRS has taken a number of steps
under existing law to improve compliance. These efforts would
be enhanced by specific tax administration proposals that
would: expand IRS access to information in the National
Directory of New Hires for tax administration purposes; permit
disclosure of prison tax scams; make repeated willful failure
to file a tax return a felony; facilitate tax compliance with
local jurisdictions; extend statutes of limitations where state
tax adjustments affect federal tax liability; and improve the
investigative disclosure statute.
--Expand penalties.--Penalties play an important role in discouraging
intentional non-compliance. A specific proposal to expand
penalties would impose a penalty on failure to comply with
electronic filing requirements.
In the fiscal year 2009 President's budget, the IRS has budgeted
over $23 million to implement these proposals. The budget also includes
other items relating to the tax gap: over $286 million to reduce the
tax gap for large business, small business, and the self-employed
sector, to increase compliance of domestic taxpayers with offshore
activity, and to minimize revenue loss by increasing document matching
efforts; and over $51 million to increase support for research to
understand better the reasons for taxpayer non-compliance.
Question. If we simplified our tax code with, for example, a flat
income tax, what effect would there be on revenue receipts and revenue
collection?
Answer. Replacing the existing income tax with a flat income tax
could raise, lower, or leave unchanged tax revenue, depending on such
design features as the tax rate imposed by the flat tax. A standard
objective of tax reform efforts is to broaden the tax base and reduce
tax rates. Generally speaking, the broader the base, the lower tax
rates can be and still raise the same revenue as the current tax
system. So, for example, eliminating or minimizing special exclusions,
exemptions, deductions, and credits allows setting lower tax rates
without reducing revenue. Both a broad tax base and lower tax rates are
desirable from a policy perspective because they reduce economic
distortions caused by the tax system.
Question. Will you commit to working with us and with SEC in
preventing U.S. manufacturing companies from purchasing ``blood
minerals'' like coltan from exporters who are abusing and murdering
innocent people?
Answer. The Administration shares Congressional concern regarding
the conflict in the Democratic Republic of Congo, which has been marked
by serious violations of human rights and international law. To address
this threat to the foreign policy of the United States, the President
declared a national emergency and issued E.O. 13413 (October 27, 2006)
implementing sanctions directed at persons contributing to the
widespread violence and atrocities in the Democratic Republic of the
Congo, as called for by U.N. Security Council Resolutions 1596 of April
18, 2005, and 1649 of December 21, 2005. The E.O. blocks the assets of,
and prohibits U.S. persons from engaging in transactions and dealings
with, persons listed in the Annex to, or designated pursuant to, the
E.O. The Annex to the E.O. listed seven persons, including the
notorious international arms dealer Viktor Bout, and OFAC designated an
additional seven companies and three individuals pursuant to the E.O.
in March 2007. A number of the March 2007 designations specifically
related to exploitation of the gold sector in support of armed militia
activity. OFAC continues to investigate aggressively the operations and
holdings of rogue actors operating in the Democratic Republic of Congo.
Question. Last year, Congress passed and the President signed
legislation to give your Office of Foreign Assets Control the ability
to levy larger civil and criminal penalties for those who violate
sanctions against rogue nations. Have the stronger tools helped provide
a greater deterrent for those who would be inclined to deal with
countries on whom we have imposed sanctions?
Answer. We appreciate Congressional efforts in increasing the
maximum civil penalties available to the Office of Foreign Assets
Control and believe that the availability of such meaningful penalties
will serve as a meaningful deterrent for those who might otherwise
treat civil penalties as merely ``the cost of doing business.'' Indeed,
OFAC has conducted several outreach events specifically on this topic.
While it is still too soon to assess the full impact of the legislation
that was passed last year, we note that there has been significant
interest from the media and the general public related to these
enhanced penalties.
CONGO/COLTAN
Question. The Office of Foreign Assets Control (OFAC) administers
and enforces economic and trade sanctions, based on U.S. foreign policy
and national security goals against foreign countries, terrorists,
international narcotics traffickers, and those engaged in activities
related to the proliferation of weapons of mass destruction.
While the issue of exploited natural resources in the Democratic
Republic of Congo, or specifically the issue of coltan may not be an
engagement of proliferation of weapons of mass destruction, these
activities are some of the most brutal human rights abuses we see in
our world today (human-trafficking, child labor, sexual abuse and
rape). The product of many of these actions leads to the refined
component of a mineral which then ends up in much of our high
technology industry here--cell phones, DVD players, flat screen
televisions, etc. What are the limitations of OFAC's capabilities to
target these rogue actors in eastern Congo?
Answer. Within the framework of E.O. 13413 (October 27, 2006) and
related U.N. Security Council Resolutions, the Treasury Department has
the authority to designate rogue actors engaging in activities
contributing to the violence and atrocities taking place in the
Democratic Republic of the Congo. OFAC continues to aggressively
investigate the operations and holdings of such rogue actors (including
militia leaders and their financial enablers) operating in the
Democratic Republic of Congo. Improved access to credible and reliable
on-the-ground information pertaining to the business activities of
these rogue actors is always vital to OFAC's ability to designate
potential targets.
Question. Has OFAC looked into targeting these rogue actors before?
Answer. The Annex to the E.O. 13413 listed seven persons, including
the notorious international arms dealer Viktor Bout, and OFAC
designated an additional seven companies and three individuals pursuant
to the E.O. in March 2007. A number of the March 2007 designations
specifically related to exploitation of the gold sector in support of
armed militia activity. OFAC continues to investigate aggressively the
operations and holdings of rogue actors operating in the Democratic
Republic of Congo.
Question. What assistance might OFAC need in this procedure?
Answer. As stated above, access to on-the-ground information
pertaining to the business activities of these rogue actors is vital to
OFAC's ability to designate potential targets. OFAC is working to
enhance its access to this type of information. OFAC as a matter of
policy does not comment publicly on its techniques and sources for
gathering this type of information.
Question. In regards to the budget, what accountability measures
are in place, specifically regarding Congo, to ensure material
resources are not siphoned off by these rogue actors? If any, what is
Department of Treasury doing to implement these measures?
Answer. Pursuant to E.O.13413 (October 27, 2006), OFAC continues to
investigate aggressively the operations and holdings of rogue actors
operating in the Democratic Republic of Congo; designated individuals
and entities are deprived of access to the U.S. financial system and
any transactions involving U.S. persons.
Question. As a former board member of the Nature Conservancy, I
know that you have a great interest in natural resource conservation.
Would you support protecting parts of the Congo so that its natural
resources are not further exploited?
Answer. The Department of the Treasury strongly supporting ongoing
efforts to strengthen natural resource management in the Democratic
Republic of Congo (DRC), particularly the efforts of the World Bank to
encourage reform of the forestry and mining sectors. Some important
steps taken to date by the Congolese authorities include establishing a
moratorium on new logging titles and the promulgation of new Mining and
Forest Codes. Treasury sees these as strong building blocks for longer-
term reform and important steps toward filling the legal vacuum with
respect to the governance of the Congolese forest and mining sectors.
However, the situation in the DRC is extremely challenging and much
work remains, including developing appropriate regulatory frameworks
and strong institutions to manage these sectors. Treasury will continue
to urge the World Bank to work with the Congolese authorities on the
issue of natural resource management.
Further, the United States is a founding member and financial
supporter of the Congo Basin Forest Partnership (CBFP) which brings
together governments, the private sector, civil society and development
organizations to conserve the unique natural resources of the Congo
Basin, fight illegal logging and poaching, and improve the livelihoods
of the Basin's 100 million inhabitants. The Department of Treasury
respectfully refers you to the State Department and USAID for
additional information, as they are the lead U.S. government agencies
with regard to our involvement in the CBFP.
SUBCOMMITTEE RECESS
Secretary Paulson. We will, and I thank you very much for
the way you have supported Treasury's budget. And thank you
very much.
Senator Durbin. Thanks, Mr. Secretary. This meeting of the
Subcommittee on Financial Services and General Government will
stand recessed.
[Whereupon, at 4 p.m., Wednesday, March 5, the subcommittee
was recessed, to reconvene subject to the call of the Chair.]