Interim Assistant Secretary for Financial Stability Neel Kashkari Remarks before the Institute of International Bankers

Washington- Good morning and thank you for that kind welcome.

I am here today to provide a comprehensive update on the Treasury Department's progress in implementing the Troubled Asset Relief Program (TARP).

As you know, our credit markets are frozen and lending has become extremely impaired. In recent months our government has taken strong and decisive actions, but a more systemic approach was needed. Secretary Paulson and Chairman Bernanke asked Congress for extraordinary authorities to address the extraordinary challenges in our financial markets. Every American depends on the flow of money through our financial system. They depend on it for car loans, home loans, student loans and their individual family needs. Congress recognized the threat frozen credit markets posed to Americans and to our economy as a whole. On Friday October 3, Congress passed and President Bush signed into law the bipartisan Emergency Economic Stabilization Act of 2008.

The law gives the Treasury Secretary broad and flexible authority to purchase and insure mortgage assets, and to purchase any other financial instrument that the Secretary, in consultation with the Federal Reserve Chairman, deems necessary to stabilize our financial markets -- including equity securities. Treasury worked hard with Congress to build in this flexibility because the one constant throughout the credit crisis has been its unpredictability.

The law empowers Treasury to design and deploy numerous tools to attack the root cause of the current turmoil: the capital hole created by illiquid troubled assets. Addressing this problem should enable our banks to begin lending again. Our nation has successfully worked through every economic challenge we have faced and we are confident this new program will help us overcome these challenges as well.

Today, I will brief you about three areas. First, I will discuss Treasury's strategy to develop multiple tools under the Troubled Asset Relief Program. Second, I will give you a detailed update on the many steps we have already taken to begin to implement the program. And finally, I will briefly discuss our next steps.

Strategy

Let me begin with our strategy, which is clear and focused.

Treasury is implementing its new authorities with one simple goal - to restore capital flows to the consumers and businesses that form the core of our economy. Achieving this goal will require multiple tools to help financial institutions remove illiquid assets from their balance sheets, and attract both private and public capital. Our toolkit is being designed to help financial institutions of all sizes so they can grow stronger and provide crucial funding to our economy.

Implementation

Next, let me turn to implementation. Congress passed the new law just 10 days ago, but in that time, we have accomplished a great deal on many fronts. We are moving quickly - but methodically - and I am confident we are building the foundation for a strong, decisive and effective program.

First, Treasury is working very closely with both domestic and international regulators to understand how best to design tools that will be most effective in dealing with the challenges in our financial system. For example, regulators are helping us to identify the quickest and most efficient method to purchase equity in financial institutions so they can resume lending. Throughout this process, we have kept in mind one clear priority: to protect the taxpayers by making the best use of their money.

Second, we are using the full resources of the Treasury Department to ensure this program's success. As soon as the legislation was signed, we immediately created seven policy teams to develop several tools and other important elements that are required under the TARP. In each case, we designated team leaders to drive the work-streams and take responsibility for their success. We've broken the teams down as follows:

1) Mortgage-backed securities purchase program: This team is identifying which troubled assets to purchase, from whom to buy them and which purchase mechanism will best meet our policy objectives. Here, we are designing the detailed auction protocols and will work with vendors to implement the program.

2) Whole loan purchase program: Regional banks are particularly clogged with whole residential mortgage loans. This team is working with bank regulators to identify which types of loans to purchase first, how to value them, and which purchase mechanism will best meet our policy objectives.

3) Insurance program: We are establishing a program to insure troubled assets. We have several innovative ideas on how to structure this program, including how to insure mortgage-backed securities as well as whole loans. At the same time, we recognize that there are likely other good ideas out there that we could benefit from. Accordingly, on Friday we submitted to the Federal Register a public Request for Comment to solicit the best ideas on structuring options. We are requiring responses within fourteen days so we can consider them quickly, and begin designing the program.

4) Equity purchase program: We are designing a standardized program to purchase equity in a broad array of financial institutions. As with the other programs, the equity purchase program will be voluntary and designed with attractive terms to encourage participation from healthy institutions. It will also encourage firms to raise new private capital to complement public capital.

5) Homeownership preservation: When we purchase mortgages and mortgage-backed securities, we will look for every opportunity possible to help homeowners. This goal is consistent with other programs - such as HOPE NOW - aimed at working with borrowers, counselors and servicers to keep people in their homes. In this case, we are working with the Department of Housing and Urban Development to maximize these opportunities to help as many homeowners as possible, while also protecting taxpayers.

6) Executive compensation: The law sets out important requirements regarding executive compensation for firms that participate in the TARP. This team is working hard to define the requirements for financial institutions to participate in three possible scenarios: One, an auction purchase of troubled assets; two, a broad equity or direct purchase program; and three, a case of an intervention to prevent the impending failure of a systemically significant institution.

7) Compliance: The law establishes important oversight and compliance structures, including establishing an Oversight Board, on-site participation of the General Accounting Office and the creation of a Special Inspector General, with thorough reporting requirements. We welcome this oversight and have a team focused on making sure we get it right.

Recruitment

Recruiting the right people is essential to the success of this program and we are moving quickly on several fronts.

It will obviously take time to bring on board permanent members of the team that will manage this program over the long term and provide stability during the transition. While the permanent team is being identified for tomorrow, we are tapping the very best, seasoned, financial veterans from across the government to help launch the program today. We have been successful in recruiting outstanding interim leaders for key positions in the Office of Financial Stability. In each case, the interim official is charged with: One, setting up the office; two, hiring permanent staff; three, operationalizing our programs; and, four, identifying their permanent successor.

The team continues to grow daily and the team members are too numerous to name individually. However, I want to highlight a few of our key interim leaders. In the 10 days since the President signed the law, we have already recruited:

1) Tom Bloom, CFO of the Office of the Comptroller of the Currency and former CFO of the Commerce Department to serve as the interim Chief Financial Officer. Tom brings 30 years of financial management and reporting experience in both the public and private sectors.

2) Jonathan Fiechter, Deputy Director of the IMF Monetary and Capital Markets Department in charge of financial supervision and crisis management, formerly Board member of the Resolution Trust Corporation and the FDIC, to serve as interim Chief Risk Officer. Jonathan has more than 30 years experience that spans Treasury, the OCC, OTS and the World Bank.

3) Donna Gambrell, Director of the Community Development Financial Institutions Fund and former Deputy Director of Consumer Protection and Community Affairs of the FDIC to serve as interim Chief of Homeownership Preservation. Donna brings 17 years of experience at the FDIC, preceded by invaluable experience at the Resolution Trust Corporation.

4) Don Hammond, Deputy Director of the Division of Federal Reserve Bank Operations and Payment Systems and former Treasury Fiscal Assistant Secretary to serve as interim Chief Compliance Officer. Don brings 23 years of experience at the Treasury in fiscal operations, including developing policy for and overseeing operations for the Federal government's financial infrastructure.

5) Reuben Jeffrey, Under Secretary of State for Economic Affairs and former Chairman of the Commodity Futures Trading Commission (CFTC) to serve as interim Chief Investment Officer. His public sector experience includes serving on the President's Working Group on Financial Markets and as a Special Advisor to the President for Lower Manhattan Development. He brings 18 years of private sector experience in financial services.

Our ability to quickly attract outstanding talent illustrates the importance of this program and this is only the beginning. These leaders are actively building out their operations and contributing to all phases of the TARP.

Procurement

Now, let me turn to procurement.

Our approach to procurement is based on the following strategy. First, in order to protect the taxpayers, we will seek the very best in private sector expertise to help execute this program. Second, we believe, to the extent possible, everyone should have a right to compete for these contracts, especially small businesses, veteran-owned businesses, and minority and women-owned businesses. Third, we are taking appropriate steps to mitigate potential conflicts of interest.

To begin, last Monday, we published three procurement documents:

Procurement authorities and procedures.

Conflict of interest mitigation procedures.

Asset manager selection procedures.

We have established a formal procurement process, to ensure that selections are fair and in the best interest of the taxpayers. We have established expert review committees, made up of Treasury employees and outside experts who review submissions and make recommendations regarding the quality of the proposals. The review committees make recommendations for a final decision to a senior career officer in the Treasury.

Taking aggressive steps to manage potential conflicts of interest is essential because firms with the relevant financial expertise may also hold assets that become eligible for sale into the TARP. We have asked firms that wish to compete for contracts to disclose their potential conflicts of interest and recommend specific steps to manage those conflicts. Firms are evaluated in part on the extent of those conflicts and their ability to design processes and procedures to manage them that are satisfactory to Treasury. Treasury then conducts its own independent examination to determine the firms' potential conflicts of interest, and to help ensure that the firms have fully disclosed any potential concerns. Treasury will only hire firms when we are confident in our and their ability to manage any conflicts.

Secretary Paulson and I believe that it is essential that the TARP be structured in a manner that encourages participation of small businesses, veteran-owned businesses, and minority and women-owned businesses. Our initial procurements set high capability standards; for example, securities asset managers had to have at least $100 billion of dollar denominated fixed income assets under management.

This is critical given the magnitude of the program - up to $700 billion. Treasury believes that it would not be fiscally prudent to ask a firm that only had experience managing only a few billion to manage $100 billion. It could put the taxpayers at unnecessary risk.

However - and this is very important - we asked vendors to demonstrate their ability and commitment to working with small, veteran, minority and women-owned businesses as sub-contractors. And we are evaluating their submissions in part on their capability to do this. In addition, we plan to go out with subsequent solicitations with specific opportunities for these businesses.

Last Monday, we put out four notices and requests for proposals, each requiring responses within 48 hours. We solicited proposals for:

1) Investment management consultant – This is an expert firm to help us review asset manager proposals. Our request went out to six firms, we received three proposals and selected Ennis Knupp as the winning vendor on Saturday. They began working immediately.

2) Master custodian firm – This is the firm which will hold and track the assets we purchase as well as run and report on the auctions we use to buy the assets. Think of this as the prime contractor of the purchase program. We received seventy submissions of which 10 met the eligibility requirements and minimum qualifications. We invited three firms in for presentations and, in the next twenty-four hours, we will announce the winner, which will begin working immediately.

3) Securities asset manager – This is a firm which will hold, manage and ultimately sell the mortgage-backed securities we purchase. We received over 100 submissions and are working with the investment management consultant to review them. We expect to make a selection in the next few days.

4) Whole loan asset manager – This is a firm which holds, manages and ultimately sells the whole mortgage loans we purchase, including working with servicers. We received over 100 submissions and are working with the consultant to review them. We expect to make a selection in the next few days.

In addition, on Thursday we reached out to six specialist law firms to advise us on the equity program structuring. We received two proposals, and selected Simpson Thatcher on Friday. They began working immediately.

These solicitations were just the first wave as Treasury establishes the foundations of the program. In the coming weeks we expect to select two accounting firms to provide auditing servicers and to help us design and implement our internal control systems.

Operations

On the operational front, Treasury's management and operations team is working around the clock to establish the institutional and logistical framework. The team is led by Treasury Assistant Secretary for Management and Chief Financial Officer Pete McCarthy, a seasoned official who served 27 years in the banking industry. Not only is his team integral to the procurement process, but they have identified temporary space in the Treasury building to house the TARP staff. As the TARP staff grows and the program is established, we'll move to more permanent space.

Compliance

Let me now turn to compliance. Consistent with Congress' intent, we are committed to transparency and oversight in all aspects of the program and have already taken several important steps in this area:

First, we moved quickly to establish the Financial Stability Oversight Board, which, by law, includes:

The Secretary of the Treasury

The Chairman of the Federal Reserve Board

The Chairman of the Securities and Exchange Commission

The Secretary of Housing and Urban Development, and

The Director of the Federal Housing Finance Agency

The law required the first board meeting to take place within fourteen days. Again, we moved very quickly, and the new oversight board met within four days. At that initial meeting, the members of the board selected Chairman Bernanke to be Chairman of the Oversight Board. In addition, the Board adopted its bylaws and reviewed the work-streams I described earlier.

The new law also requires appointment of a Senate-confirmed Special Inspector General to oversee the program. We are working with the White House to identify candidates for possible nomination and confirmation in November. In the interim, we are coordinating closely with Treasury's Inspector General and we had our first meeting on Monday, October 6, where we walked him through our work-streams, procurement and operational plans.

Additionally, the law calls for the General Accounting Office to establish a physical presence at Treasury to monitor the program. Secretary Paulson had his first call with the Acting Comptroller General, Gene Dodaro, on Monday, October 6. The Acting Comptroller General and his team met with our team on Thursday, October 9. And yesterday, the GAO staff came to Treasury to review the contracts we signed over the weekend.

Treasury is committed to an open and transparent program with appropriate oversight. We look forward to continuing to work with the Oversight Board, the Inspector General, the Comptroller General, and the Congress as we set up and execute this program. Transparency will not only give the American people comfort in our execution, it will give the markets confidence in what form our action will take.

Next steps

As you can see, we have accomplished a great deal in just 10 days. But our work is only beginning. A program as large and complex as this would normally take months - or even years - to establish. We don't have months or years. Hence, we are moving to implement the TARP as quickly as possible while working to ensure high quality execution.

Our goal is to use the multiple tools enabled by the TARP to attack the capital and troubled asset problem from multiple directions, so American families and businesses can get the credit they need. We will complete the design of these tools and deploy them as soon as they are ready. This is Secretary Paulson's highest priority and we are working around the clock to make it happen. We are committed to helping homeowners and to using the taxpayers' money efficiently.

We will provide you with regular updates on our progress. Thank you.

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Acting Under Secretary for Domestic Finance Anthony Ryan
Remarks at the Investment Company Institute’s Equity,
Fixed Income and Derivatives Market Conference
in New York

New York - Good afternoon. I appreciate the opportunity to be with you today. At the Treasury Department we appreciate the efforts that the Investment Company Institute has taken recently and encourage this important work to continue.

Our economy has been facing a prolonged period of uncertainty and our financial markets are experiencing unprecedented and extraordinary challenges. In the past few months, the federal government has taken many steps to protect our economy and our citizens from the financial market turmoil. However, as participants in and beneficiaries of open, robust global capital markets -- you too have an important role to play.

Let me begin by discussing the current state of play in Washington. The last few months have been a whirlwind of activity and the Treasury, along with the Fed and other government regulators, have been working to resolve challenges.

When I joined Secretary Paulson for his transition to the Treasury Department in July of 2006, we expected to face challenges, but few predicted the magnitude, breadth and severity of what we have been confronting over the past year.

While these are challenging times, I am confident we will emerge from this current period with stronger capital markets, stronger financial institutions and an even more robust economy.

That being said, make no mistake, there is a great deal of work ahead of us. It will take our collective best efforts and a good deal more time.

Last week, Congress passed and the President signed into law the Emergency Economic Stabilization Act of 2008, paving the way for the Treasury to begin standing up a new program.

While we have been taking proactive steps over the last few weeks to prepare and begin to design a program, much of the hard work is yet to come. With its enactment into law, Treasury has moved into implementation mode.

When we emerge from the turmoil, we should expect the financial landscape to be quite different. Certain financial instruments, structures and institutions will not survive. The practices defining the new environment will reflect changed conditions brought about by many of the lessons learned. Market participants and regulators will have re-defined the practices and rules by which we operate.

The challenge for all of us is executing this transition – from the excesses of past --- through the turmoil of the present ---- to the model of the future.

Today, I would like to discuss two key topics. First, I would like to discuss a policy framework for how we can work together to execute this transition, and second, a practical effort to expedite the process while mitigating the negative economic consequences.

Let me begin with the policy framework. Science often provides us with models that can serve as useful analogies. To help illustrate my point, I'll borrow from the work of Alfred Wegener, the geologist who first proposed the scientific theory of plate tectonics. The ground underneath our feet is shifting. Like an earthquake, the pressure had built up for years, there were warning signs and tremors, and now the rift has been exposed.

The balanced tension within our financial market system was weakened by deficiencies on both sides, and the resulting chasm has emerged. How will this be filled? Who will fill it? When will stability be restored? These are important questions. Just as in nature, there is no predetermined solution.

As it relates to the capital markets from a public policy perspective, we must restore equilibrium. We must strike the optimal balance between private-sector market discipline and regulatory oversight. Aligning the interests of the private sector and the public sector is critical to the long term success of our economy. When market discipline and regulatory oversight is balanced, market participants better manage risks, financial institutions operate in a safer and sounder manner and our economy is served by more competitive, innovative and efficient capital markets.

Equilibrium in this context translates to market stability. Market discipline failed us. It is not the time to point fingers at any one group of market participants. There's enough blame to go around. We need to focus on moving forward and each party must contribute to the effort.

Regulatory efforts were also compromised. Rules, guidance and oversight did not mitigate failures of market discipline. So here too, regulators need to be part of the solution. Both market practices and regulatory practices must be reviewed with a critical eye towards improvement and materially strengthened.

The U.S. Treasury plays an important role in the formation of financial policy and regulatory structure. We need to ensure this leadership is maintained and enhanced. At Treasury, we are addressing both tactical and strategic challenges. Moreover, we have been confronting these challenges in collaboration with the regulatory community – both at home and abroad, as well as the private sector. The public and private sector must share the responsibility to address the challenges, define and design the best collective prudent practices, and most importantly, implement these new policies. In doing so, we will enhance investor confidence, market stability and improve liquidity.

One of my roles at the Treasury is to coordinate the efforts of the President's Working Group on Financial Markets (PWG). In March, the PWG issued its "Policy Statement on Financial Market Developments," which contained an analysis of underlying factors that contributed to the market turmoil. We identified weaknesses in global markets, financial institutions, and regulatory policies, and made a set of comprehensive recommendations to address those weaknesses. Since that time, the PWG has worked to ensure the implementation of its recommendations.

Later this week, the PWG will release an update on the progress that has been made since we originally issued our statement and recommendations. The PWG recommendations focused on six areas: mortgage origination, improving investors' contributions to market discipline, reforming the ratings process and practices regarding structured credit, strengthening risk management practices, enhancing prudential regulatory policies, and enhancing the infrastructure in the OTC derivative market.

The PWG recommendations cover the practices of a broad array of market participants, as well as supervisors, addressing all links in the securitization chain: mortgage brokers, mortgage originators, mortgage underwriters, securitizers, issuers, credit rating agencies, investors, and regulators.

While progress has been made, more must follow. Let me highlight four areas:

1. Transparency and disclosure. Many of the weaknesses in the market and the resulting challenges in addressing them were exacerbated by complexity and opacity. The best antidote to opacity is transparency and better and more useful disclosure. Issuers and underwriters must provide such disclosure, and investors and asset managers must demand, use, and independently evaluate information more effectively.

2. Risk awareness. Regulators and all market participants must be more aware of, and better able to respond to, risks. Credit rating agency practices must revaluate their methodologies and practices, and the users of their services must rely less on, and appreciate more the limitations of ratings products.

3. Risk management. We need improved risk management practices by investors and financial institutions, and continued review and guidance from regulators, including the areas of exposure aggregation, concentration risk, and stress testing. Risk management is everyone's business.

4. Capital and liquidity management. Well-capitalized and liquid institutions are better prepared to deal with challenges and enhance market confidence. We need improved practices in capital and liquidity management to ensure that cushions are sufficiently robust to absorb extreme system-wide shocks.

Recent market events have also highlighted that our existing financial regulatory structure is sub optimal and that comprehensive regulatory reform is required to restore confidence in financial markets and institutions. Our 21st century global capital markets and financial services industry remains regulated largely by outdated 20th century laws and structures. 

Earlier this year, the Treasury published a blueprint that would modernize our financial regulatory structure.  Our current regulatory framework is not optimally positioned to address the dynamism of the modern financial system. Given the diversity of market participants, the constant innovation undertaken by market practitioners, the growing complexity of financial instruments, and the convergence of financial intermediaries and trading platforms – all within a global context – establishing a more robust, nimble regulatory structure is critical.

One of the recommendations in the Financial Regulatory Blueprint was the creation of a market stability regulator with broad powers focusing on the overall financial system. The market stability regulator would have the ability to evaluate the capital, liquidity, and margin practices across the entire financial system and their potential impact on overall financial stability.

To do this effectively, the market stability regulator would collect information from commercial banks, broker dealers, insurance companies, hedge funds, and commodity pool operators. Rather than focus on the health of a particular organization, the market stability regulator would focus on whether a firm's or industry's practices threaten overall financial stability. It would have broad powers and the necessary corrective authorities to deal with deficiencies that pose threats to our financial stability.

While the Treasury Department commenced our work on the Regulatory Blueprint before the financial market turmoil began, the current turmoil has proven the necessity for this kind of regulatory oversight and monitoring. Credit and liquidity conditions, as well as capital requirements are at the heart of the challenges our financial system still faces.

We all realize that as a result of the many excesses, significant deleveraging, and the corresponding actions taken by market participants, our credit and cash markets have effectively been locked up. Just as anxious neighbors lock their doors, anxious market participants have locked down our markets. An unwillingness to extend credit to counterparties and extreme risk aversion has closed the financial community --- compromising its ability to function and choking economic growth. While a key can unlock a door, there is no single key to unlock our financial markets. The lock is too complex. A host of complementary actions will be required to open credit markets and restore the flow of capital.

The second topic I want to discuss is our effort to expedite the transition while mitigating the negative economic consequences.

As we've worked through this period of market turmoil, we have acted on a case-by-case basis --- addressing problems at Fannie Mae and Freddie Mac, working with market participants to prepare for the failure of Lehman Brothers, and lending to AIG so it could sell some of its assets in an orderly manner. We have also taken a number of proactive, tactical steps to increase confidence in the system, including the establishment of a temporary guaranty program for the U.S. money market mutual fund industry.

Despite these steps, more efforts are needed. We saw market dislocations reach a new level last month, and we must now take further, decisive action to fundamentally and comprehensively address the root cause of this turmoil.

And that root cause is the illiquid mortgage-related assets that are choking off the flow of credit. This flow of credit is vitally important to our economy. We must address this underlying problem, and restore confidence in our financial markets and financial institutions so they can perform their mission of supporting future prosperity and growth for all Americans.

We proposed and recently received legislation to establish a troubled asset relief program, one that is sufficiently large to have an impact, and one that includes features to protect the taxpayer to the maximum extent possible.

The current situation is already posing great risk to the taxpayer.  When the financial system doesn't work as it should, the ability of consumers and businesses to finance spending, investment and job creation – as well as the personal savings of Americans - are threatened.

The ultimate protection to the taxpayer will be enhanced market stability. A continuing series of financial institution failures and frozen credit markets is certainly not in our nation's interest.

Congress and the Administration have now come together quickly and effectively to enact this new legislation. We now need to complete our preparations, and begin to implement the multi-dimensional program.

There is no one-size-fits-all solution to alleviating the stress in our financial system. Each situation will be different and we must implement this new program with a strategy that allows us to adapt to changing circumstances and conditions, and attract private capital. The broad authorities in this legislation, when combined with existing regulatory authorities and resources, gives us the ability to protect and recapitalize our financial system as we work through the stresses in our credit markets.

In the coming days we will hire the expertise to help us optimally design and implement our new authorities. Transparency throughout this process will be important, and I look forward to providing regular updates as we move ahead to implement this strategy.

Summary

Never more than today has it been more evident that what happens in our financial markets affects not only Americans in all 50 states, but people and markets around the world.

Only through stable markets and sound financial institutions can capital be available for small and large companies to borrow and grow, for the entrepreneur to start a new business, for families to buy homes and cars and pay for their children's educations. When people and companies save, borrow, and invest, they place their trust in our markets and our financial institutions.

Our country must continue our strong record of confronting challenges, developing solutions, and being innovative and competitive. By doing so, we will work through the current challenges and facilitate sustainable economic growth. We must redouble our efforts to ensure that our financial markets are the strongest in the world and inspire confidence by market participants.

Progress will not come in a straight line, and we need to remain focused as we work through these challenges. Policymakers and regulators must remain vigilant, use all available tools and as necessary seek new ones, not merely to address immediate concerns but also to close the rift that was created by the breakdown of robust market and regulatory practices. We must realize that our nation's economy is dependent on healthy, well functioning financial markets where credit flows from providers to users of capital in an orderly manner.

I believe that the United States is on the right path to resolving market disruptions and building a stronger financial system. Increasingly, our capital markets will reflect the underlying economy, and here we are fortunate that our long-term fundamentals are strong. Thank you.

Procurement Authorities and Procedures

Washington, DC-- In implementing the Emergency Economic Stabilization Act of 2008, Treasury has available two mechanisms for engaging private-sector firms. These mechanisms are financial agent authority, and procurement under the Federal Acquisition Regulation. Treasury will make a determination on which of these authorities best applies on a case by case basis.

Treasury has long had the statutory authority to retain financial agents to provide services on its behalf. The Act broadens that authority to encompass all reasonable duties related to the Act that may be required and permits the retention of a broader class of financial institutions as agents. In general, financial agent authority will be used when a firm is needed to conduct transactions on Treasury's behalf, for example where Treasury needs the services of an asset manager.

Selection of financial agents will occur through processes which will be posted on the Treasury website. Although the process may be tailored to a specific situation, typically Treasury prepares a notice to interested and qualified financial institutions, evaluates the response to that notice, and negotiates one or more financial agency arrangements.

Treasury also may obtain supplies or services using a procurement contract under the Federal Acquisition Regulation (FAR). In general, the FAR requires the solicitation of offers from all interested sources. However, competition for procurements may be limited for various reasons, including in circumstances of unusual or compelling urgency. Certain procurements may be set aside for certain small businesses. Due to the paramount need for expeditious implementation of the Secretary's authorities under the Act, Treasury anticipates that a number of contracts will be awarded through other than full and open competition, using the previously established FAR provisions applicable under conditions of unusual and compelling urgency. Information on contracts awarded by Treasury will be posted at www.fedbizopps.gov (Federal Business Opportunities website) and/or at https://www.fpds.gov (Federal Procurement Data System).

Additionally, the Act grants to the Secretary of the Treasury the authority, under certain specified conditions, to waive specific provisions of the FAR.

Where applicable, procurement opportunities will be posted at www.fedbizopps.gov. Businesses may submit capability statements to the Department's Office of the Procurement Executive at ootpe@do.treas.gov.

For information on how small businesses can participate in Treasury contracting, contact Treasury's Office of Small and Disadvantaged Business Utilization at TreasuryOSDBU@do.treas.gov.

Under Secretary David H. McCormick Remarks at
Wharton’s Eleventh Annual Investment Management Conference

Responding to Today’s Market Turmoil

Philadelphia - These are incredibly challenging and unprecedented times for the United States. Over the last twelve months, we have witnessed one of the most significant periods of economic turmoil that has ever faced our country, and I have had the opportunity to see first hand how our country's leaders have responded. Today I'd like to share my views on how we arrived at this place, what we have done about it up to this point, and what else we must do to stabilize our markets and ensure America's long term prosperity.

The seeds of the challenges we face today were sown many years ago, beginning with a gradual weakening of lending practices by banks and financial institutions and by greater willingness by borrowers to take out mortgages they couldn't afford. These factors, combined with growing complexity and opaqueness in our capital markets, are at the heart of the current crisis.

We are now paying the price. We've seen the results for homeowners in higher foreclosure rates affecting individuals and neighborhoods. We are now seeing the impact on struggling financial institutions. These weak loans started a chain reaction, and in recent weeks, our credit markets have tightened dramatically with even some non-financial companies around the country having difficulties financing their day-to-day business operations. These effects are already beginning to trickle down and affect all parts of the U.S. economy.

In response to this worsening situation, the U.S. government has taken bold and decisive actions in recent months to stabilize the markets, mitigate the impact on our financial system and the U.S. economy, and address the underlying sources of market uncertainty.

How did we get to this point? The story begins with a decade of benign economic conditions marked by low interest rates, low inflation, and less volatile asset markets, which led many to ignore the "risk" half of the risk-reward equation at the heart of financial markets. Investors around the world, who in preceding years had enjoyed above-historical returns on most assets, continued reaching for ever-higher gains. The financial-services industry created a variety of complicated new products to meet this demand. Regulators and investors alike showed a growing complacency toward risk. These factors blended into a dangerous cocktail of underlying conditions ripe for instability.

This imbalance between risk and reward was most evident in the U.S. housing market, where lenders significantly loosened credit standards, particularly for a new generation of adjustable-rate mortgages. Yet aggressive financial innovation went well beyond mortgages. Banks and brokers created an alphabet soup of products with simple names like CDOs, CLOs, and SIVs, which were in fact complex and opaque investment products and structures. Credit-rating agencies responsible for assessing and rating these assets, as well as investors who purchased them, failed to question the chances of these underlying investments going bad.

Last summer these vulnerabilities in our financial system became clear. Looser credit standards in the housing market combined with an end to rapid home-price appreciation led to a significant rise in delinquent mortgages. This in turn contributed to immediate and unexpected losses for investors and a reconsideration of the risk-reward relationship--first in housing, and soon after, across all asset classes. The shaken investor confidence in housing assets had a domino effect throughout world markets, ratcheting up demand for cash and liquidity, and curtailing the pace of the new lending and investment necessary for strong growth to continue.

Recognizing the risk to the U.S. economy of the housing downturn, the Administration and Congress acted quickly earlier this year to pass a $150 billion stimulus bill. At Treasury, we brought together mortgage providers through the HOPE NOW alliance to help families avoid foreclosure on their homes. Yet, as we seek to minimize the impact of the housing correction on the economy, we must avoid impeding its progress. The sooner we turn the corner on housing, the sooner we will see home values stabilize, the sooner we will see more people buying homes, and the sooner housing will once again contribute to economic growth.

In the financial markets, progress has not moved in a straight line, and additional challenges clearly lie ahead. There have been some positive developments. In the past year, for example, U.S. financial institutions (often under new management) have recorded losses of over $300 billion and raised over $200 billion in new capital. Yet, the events of the last few weeks – where we have acted on a case-by-case basis to address destabilizing financial conditions in a number of institutions – demonstrate continued weakness across the financial services sector.

In March, the Federal Reserve took unprecedented action to ensure an orderly resolution for Bear Stearns, and in September, authorities around the world took steps to mitigate the impact of the bankruptcy of Lehman Brothers, America's fourth largest investment bank. That same week, the Federal Reserve provided funding to American International Group (AIG) to address the systemic risk that would have resulted from a sudden collapse of the firm. And last week, the FDIC brokered a deal and supported the sale of Wachovia's banking operations to Citigroup in order to prevent its failure following the earlier collapse of Washington Mutual. In each of these cases, policymakers attempted to strike a careful balance of mitigating systemic risk while promoting market discipline, holding investors and management teams responsible, while protecting blameless consumers from collateral damage.

And we are not alone. Europe and Asia are also suffering through their own financial turmoil. In recent days, the United Kingdom, Iceland, Belgium, the Netherlands, Luxemburg, France and Germany have all intervened to support troubled institutions. And last week, we also saw how rumors precipitated a run on Hong Kong's Bank of East Asia. We see from these examples that our financial markets are more global and more interdependent than at any time in history.

The cases of the Government Sponsored Enterprises (GSEs), Fannie Mae and Freddie Mac, deserve special mention, particularly given their significance to investors around the world. The GSEs have become the largest sources of mortgage finance in the United States, touching roughly 70 percent of mortgages originated. Not surprisingly, the prolonged housing correction weakened their financial condition, and both institutions faced a loss of investor confidence. Fannie Mae and Freddie Mac are so large and so interwoven in our financial system that if either of them were to fail, it would have far reaching effects on the U.S. and global economies. Business finance would be more difficult to obtain, constraining job creation and making it harder for Americans to get home loans, auto loans, and consumer credit.

This past summer, investors began to express growing concerns over the stability of Fannie and Freddie and the ambiguity over the scope and certainty of government support for these institutions. In response, Secretary Paulson asked Congress for authorities regarding Fannie Mae and Freddie Mac in order to help stabilize our financial markets and support our housing market. Congressional leaders acted promptly and decisively with the needed legislation, and in the days and weeks that followed, Jim Lockhart, the director of the GSE's regulator, the Federal Housing Finance Agency (FHFA), Federal Reserve Chairman Bernanke, and Secretary Paulson concluded they needed to act decisively to avert instability in our markets. As a first critical step, the FHFA put Fannie and Freddie into conservatorship, allowing for the government to take temporary control and make needed changes at both institutions.

In a complementary step, Treasury established contractual Preferred Stock Purchase Agreements with both institutions under which it committed up to $100 billion per institution to ensure that each GSE maintains a positive net worth. These Preferred Stock Purchase Agreements are intended to explicitly address the underlying ambiguities in the GSE Congressional charters and to give the holders of Fannie Mae and Freddie Mac debt confidence in the promise of government support for their investments. Because the U.S. Government created these ambiguities and the resulting uncertainty, Secretary Paulson felt strongly that we had a responsibility to address the systemic risk posed by the scale and breadth of the agency debt.

The terms of these purchase agreements provide taxpayers significant protection. The existing common and preferred shareholders of the GSEs will lose 100 percent of their investment before the American taxpayers lose a penny. Moreover, as part of the terms of the agreement, Treasury has received from each company $1 billion in senior preferred stock and warrants providing options to purchase up to 79 percent of the companies' outstanding shares.

Second, Treasury established a new, temporary credit facility for Fannie Mae, Freddie Mac, and the Federal Home Loan Bank to fund, if necessary, their regular business activities. Finally, to further support the availability of mortgage financing for millions of Americans, Treasury is initiating a temporary program to purchase mortgage-backed securities issued by the GSEs, thereby providing additional capital to the mortgage marketplace.

These steps are the best means of protecting taxpayers and stabilizing our markets, but they leave for future policymakers fundamental decisions about the role and structure of these enterprises. Our recent actions have afforded a "time out" – providing the stability, time, and flexibility for Congress and the next Administration to address the inherent conflict in the GSE charters that require them to serve the interests of private investors and the broader public.

Despite the hardening of the government's support and involvement in Fannie Mae and Freddie Mac, and the decisive resolutions of Bear Stearns, Lehman Brothers, AIG, Washington Mutual, and Wachovia, investors have become increasingly concerned over the possibility of other failing financial institutions. And, this has made them increasingly reluctant to extend credit.

This has led to sharp increases in the cost of credit for financial and non-financial companies, increasing the risk that corporate America would be unable to roll over maturing corporate debt. Given this environment, it was necessary for U.S. authorities to act decisively and comprehensively to provide capital, liquidity, and smooth market operations with the goals of stabilizing the markets and addressing the underlying sources of uncertainty. The three components of the plan rolled out two weeks ago by Secretary Paulson and Chairman Bernanke seek to achieve these goals.

First, central banks from around the world have acted together to provide additional liquidity for financial institutions. The Federal Reserve has established swap lines with nine central banks to reduce pressures in global short-term U.S. dollar markets. Additionally, Treasury implemented a temporary guaranty program for the U.S. money market mutual fund industry, which has experienced funding problems in recent weeks. This temporary $50 billion guaranty program offers government insurance that was previously unavailable in order to address concerns about whether these investments are safe and accessible.

Second, we have put forward a plan to provide much needed capital to address the root causes of the current stress in our financial system – the ongoing housing correction and the consequent buildup of illiquid mortgage-related assets. These troubled assets remain frozen on the balance sheets of banks and other financial institutions, constraining the flow of credit that is so vitally important to our economic growth. The failure to address this root cause would mean that every aspect of our financial and funding markets, ranging from consumer credit to money market funds, would continue to be impaired.

The Administration has worked with Congress to develop a $700 billion comprehensive program for addressing the problem of these illiquid assets on the balance sheets of institutions within the financial system. This will help reduce an enormous source of uncertainty in the markets and stimulate the raising of capital within the financial services sector. In addition, the bill will help ensure the availability of credit so American families can meet their daily needs and American businesses can make purchases, ship goods, and meet their payrolls. A failure to act comprehensively and decisively could have dire consequences for the U.S. economy and all Americans. This plan also sends a strong signal to markets around the world that the United States is serious about restoring confidence and stability to our financial system.

Third, we have taken steps to improve market operations and market integrity. As an example, the Securities and Exchange Commission took temporary emergency action to prohibit short selling in financial companies to protect the integrity and quality of the securities market and strengthen investor confidence. The SEC's exceptional actions were joined by regulators in the UK, France, Germany, and other countries who also imposed restrictions on short selling.

In addition to the things we must do, there are also things we must avoid. Our recent downturn has contributed to a climate of increased distrust and anxiety among Americans that is fueling support for protectionist policies. The benefits of trade and open investment are being openly questioned across the political spectrum, and this rhetoric is particularly pronounced on Capitol Hill. There is reluctance, for example, to pass the pending trade agreements with Colombia, Panama, and Korea, and there are concerns over foreign investment in U.S. companies, despite the clear and unequivocal benefits of both to the United States. These trends, dangerous at any time, could be devastating in this period of heightened market uncertainty and fragility.

This trend is all the more concerning because trade and investment play such an important role in the competitiveness and success of the U.S. economy. Overseas sales by U.S. companies account for about 50 percent of all U.S. exports, and the profit growth of U.S. companies comes chiefly from the global sales. Remarkably, exports now account for 13% of the U.S. GDP – the highest level in history. Moreover, foreign-owned firms in the US employ more than 5 million workers directly and another 5 million indirectly, and these jobs pay on average a quarter more than jobs created by U.S.-owned companies.

However, these facts are understandably lost on many Americans who have been negatively affected by the dynamism and speed of global markets. With this in mind, we must work to build public support for openness in this era of globalization, even as we acknowledge and take steps to mitigate some of its negative consequences of dynamic global competition. This too must be a priority as we work through the economic challenges that lie ahead.

Ladies and Gentleman, now is the time to act quickly, decisively, and collaboratively with regulators and market participants around the world to restore stability and confidence to our markets. It will no doubt take time to work through the excesses that were built up over a number of years. U.S. policymakers are decisively implementing policies that address our short-term economic challenges and rebuild faith in the market. When we emerge from this difficult period – and we will emerge both wiser and stronger – our next task will be to strengthen our financial regulatory structure to guard against such excesses in the future.

The interdependence of our global economy makes this challenge more complex, and it also makes our work with international counterparts to promote growth and financial stability all the more important. I'm confident that our leaders and our great country are up to this pressing challenge.

Thank you.

Remarks by Treasury Under Secretary for International Affairs
David H. McCormick
at
CLSA Hong Kong Investors’ Forum

Remarks by Treasury Under Secretary for International Affairs
David H. McCormick
at Future
of Consumer Payments Conference

Washington – Good afternoon. Thank you for that kind introduction, Martin. And thanks to you, to Bob and to Ken Chenault for the invitation to be here today. I am pleased to join with you for this conference on "the quiet revolution in money," the implications for our citizens, our economy, and financial system of the dramatic change in consumer payments.

I'd like to begin by passing along the regrets of Secretary Paulson who is focused today on market developments and has asked me to speak on his behalf.

Financial Markets

I will begin my remarks on a broader issue. As you know, we are going through a difficult period in our financial markets right now as we work through past excesses. After years of unsustainable home price appreciation, we are undergoing a necessary, difficult, and prolonged housing correction. In addition, benign U.S. and global economic conditions, significant global imbalances, large international capital flows, lax lending standards and investors' aggressive appetite for yield extended beyond the U.S. housing market and have impacted our capital markets more broadly.

We are working to minimize the impact of the housing correction on the rest of the economy, but we do not want to impede its progress --- because the sooner we turn the corner on housing, the sooner we will see home values stabilize, the sooner we will see more people buying homes, and the sooner housing will again contribute to economic growth. Still, it will take time to work through these stresses. Progress will not come in a straight line, and there will be bumps in the road as we make progress. The events of the last few weeks are evidence of this and are important and necessary steps to work through the uncertainty and turmoil in our markets and minimize their impact on the rest of the economy.

This past weekend, Secretary Paulson and the Treasury team worked with the Federal Reserve and the Securities and Exchange Commission (SEC) to convene financial institution leaders from around the world to discuss particular areas of market weakness and how to work through managing the broader impact of those issues on financial market stability. The weekend culminated with a series of significant events. To mitigate disruption surrounding the bankruptcy of Lehman Brothers, the SEC, the Federal Reserve, and major global financial institutions each took a series of extraordinary steps.

The Federal Reserve has broadened the eligible collateral of certain lending facilities, and the SEC has taken steps to protect customer accounts at Lehman Brothers. Moreover, in an important show of leadership, major market participants have stepped up to their responsibility to support stable and orderly markets as well. The extraordinary commitments will be critical to facilitating liquid, smooth functioning markets and addressing potential credit concerns.

This past weekend, regulators and market participants mitigated the systemic risk that might have otherwise occurred due to the bankruptcy of the fourth largest U.S. investment bank. And as Secretary Paulson said yesterday, while what's happening is not easy -- and significant challenges remain -- the American people can remain confident in the soundness and resilience of our banking and financial system.

Healthy capital markets are the backbone of a vibrant U.S. economy, and they are critical to the well-being of our families. Capital market stress continues to weigh on our economy, but the housing correction is at the root of the challenges facing our financial institutions and our markets. These factors, along with high energy prices, present ongoing challenges. But we are also confident in the resilience and diversity of the U.S. economy and that we will move through these difficulties, just as we have moved through difficult periods in the past. We expect our economy to continue growing this year, although at a moderate pace as these challenges persist.

U.S. Economy and Housing Market

The current soft labor market reflects our slow rate of growth. The unemployment rate increased to 6.1 percent in August, and although Americans' average wages have increased, higher food and energy prices are absorbing those gains.

Energy prices, while still much higher than a year ago, have declined recently. A gallon of regular gas costs about 30 cents less now than in early summer, even in the face of hurricane-related disruptions, which should help relieve some pressure on family finances and business costs.

Clearly, the economic slowdown is hurting American families. The stimulus package proposed by President Bush and passed by Congress earlier this year has provided some relief --- $93 billion in payments have been sent to American households. We saw the impact of this in the second quarter, when the U.S economy expanded at a solid 3.3 percent, supported by increases in trade and consumer spending. And we expect that the stimulus package will continue to boost growth above where it would have been otherwise through the end of the year.

As Secretary Hank Paulson, Chairman Ben Bernanke, and others have said from the outset of these challenges over a year ago, housing poses the biggest downside risk to our economy and continues to be a drag on growth. Yet, there are signs of progress. Fewer new homes are being built, and this means the total number of new single-family homes on the market is down 27 percent from a July 2006 peak. And though it is early, new and existing home sales show tentative signs of stabilizing.

Treasury has worked closely with lenders and key industry participants on an aggressive strategy to do everything possible to help avoid preventable foreclosures. We supported the creation of the HOPE NOW Alliance last October, which to date has helped over 2 million homeowners avoid foreclosure through loan workouts.

But we have much further to go. Turning the corner on the housing correction requires that prices stabilize and affordable mortgage financing be available so buyers can return to the market. And so while we are working to stabilize capital markets, it is also vital that the Government Sponsored Enterprises (GSEs) Fannie Mae and Freddie Mac continue to play their role in supporting the housing market.

Actions to Stabilize Housing and Financial Markets

The GSEs have become the largest sources of mortgage finance, touching 70 percent of mortgages originated in the first quarter. Their continued activity is critical to turning the corner on the housing situation and removing the underlying uncertainty in our financial markets and financial institutions.

Not surprisingly, the prolonged housing correction weakened the financial condition of both of these enterprises, and they faced a significant loss of confidence among investors. Fannie Mae and Freddie Mac are so large and so interwoven in our financial system that if either of them were to fail, it would be harder for Americans to get home loans, auto loans and other consumer credit. Business finance would be even harder to obtain, constraining job creation and our overall economic growth.

And so in July, Secretary Paulson asked the Congress for extraordinary authorities with regard to Fannie Mae and Freddie Mac in order to support our housing markets and the stability of our financial markets more broadly. Congress acted promptly and decisively. In the days and weeks that followed, the Federal Housing Finance Agency (FHFA) Director Lockhart, Fed Chairman Bernanke, and Secretary Paulson conducted a rigorous analysis of the situation, which led to the unpleasant but necessary decision to utilize these authorities. We had no choice but to act. Waiting for a precipitating event would have been too late.

We acted decisively to avert instability in our markets that would have harmed the overall financial well-being of Americans, and we acted to support the availability of mortgage credit and protect taxpayers to the maximum extent possible.

First, Treasury and the GSEs, under the control of the conservator FHFA, have established contractual Preferred Stock Purchase Agreements. Under these agreements, Treasury has committed up to $100 billion per institution to ensure that each GSE maintains a positive net worth. In return, to protect the taxpayers to the maximum extent, Treasury has received from the companies $1 billion in senior preferred stock and warrants providing an option to purchase up to 79 percent of the companies' outstanding shares at a nominal price.

These Preferred Stock Purchase Agreements were made necessary by the ambiguities in the GSE Congressional charters, which have been perceived to indicate government support for agency debt. Our nation has tolerated these ambiguities for too long, and as a result, central banks and investors throughout the United States and around the world who hold GSE debt and MBS believe them to be virtually risk-free. Because the U.S. Government created these ambiguities, we have a responsibility to both avert and ultimately address the systemic risk now posed by the scale and breadth of the holdings of GSE debt and agency MBS.

The terms of these purchase agreements provide significant taxpayer protection. The existing shareholders of the GSEs will lose 100 percent of their investment before the American taxpayers lose a penny.

Second, Treasury has established a new, secured credit facility for Fannie Mae, Freddie Mac, and the Federal Home Loan Bank to fund, if necessary, their regular business activities in the capital markets. This facility is intended to serve purely as an ultimate liquidity backstop, and will be available until the temporary authority expires in December 2009.

And third, to further support the availability of mortgage financing for millions of Americans, Treasury is initiating a temporary program to purchase mortgage-backed securities issued by the GSEs. This will provide additional capital to the mortgage marketplace. There is no reason to expect taxpayer losses from this program, which will also expire in December 2009.

Together, Treasury and FHFA steps are the best means of protecting taxpayers and our markets from the systemic risk posed by the current financial condition of the GSEs and to provide support for these enterprises' current, important role in the housing market.

At the same time, we face fundamental policy decisions about the role and structure of these enterprises. Policymakers must resolve the inherent conflict in their charter that requires they serve both the interests of private investors and a public mission. Our recent actions have afforded a "time out" – providing the stability, time, and flexibility for Congress and the current and the next Administration to address both the need for affordable mortgage finance and the systemic risk presented by the scale and breadth of the existing GSE holdings. We will make a grave error if we don't use this time to permanently address these structural issues.

Electronic Payments

As we work through these financial and housing market issues, let me speak for a moment on one of the most constant aspects of our economic life -- change ---- and how this is evidenced in the topic of today's conference – consumer payments. This is evident in how we pay for our groceries, our bills, our clothes, and our taxes. Between 2003 and 2006, Americans wrote 7 billion fewer checks and made 19 billion more electronic payments.

Treasury is interested in this transformation on a macroeconomic level --- one study estimates that growth in electronic payments added 0.5 percent to real GDP per year in each of the last 20 years, or the equivalent of 1.3 million new jobs. The same study estimated that the increase in efficiency and velocity of electronic over paper-based payments saved at least 1 percent of GDP, or about $60 billion, annually.

We have a long-standing strategic vision, which is becoming a reality thanks to years of hard work by our many professionals, to become an all-electronic Treasury. To put the scale of this in perspective, Treasury manages a daily cash flow of nearly $60 billion.

Every year, we collect more than $3.1 trillion and disburse nearly one billion payments worth nearly $1.6 trillion. In 1996, 56 percent of federal benefit payments were made by electronic payment; today it's 82 percent.

Electronic payments provide real savings to the U.S. taxpayer. It costs Treasury approximately 10 cents to issue an electronic payment, versus 98 cents to issue a check --- when you consider the millions of annual federal payments made, the savings are substantial. There are savings on the collection side as well --- processing a taxpayer's check costs $1.30 versus 73 cents for an electronic payment.

We are encouraging more individuals to opt for direct deposit for their social security payments, because nine times out of ten when there's a problem with a payment, it's with a paper check.

Treasury also works closely with financial regulatory authorities on issues of infrastructure and data integrity so that consumers can trust that their information will be protected. Through a public-private partnership, we work with the intelligence community, law enforcement, and financial institutions to provide the latest information regarding cyber vulnerabilities and risk mitigation tactics.

Conclusion

Just as you are looking forward, so are we. It will take time to work through the excesses that were built up over a number of years, and the Administration and financial regulators remain vigilant. We are focused on measures and policies that address our short-term economic challenges and build a stronger long-term foundation. And the American economy has a record of innovation and adjustment --- to challenges, to risks, to changing demands --- second to none. That is the underlying spirit that has made the United States the economic envy of the world – even as we manage through our current problems --- and it will keep us so in the years ahead. Thank you.

-30-

September 15, 2008
hp-1135

Treasury Office of Debt Management Director Karthik Ramanathan
Remarks at Real Return USA:
The Euromoney Inflation Linked Products Conference

New York City - Good Morning. Thank you for giving me this opportunity to share my thoughts on Treasury debt management. I'm going to start off by explaining the role that our office and Treasury securities play in the capital markets, then describe some of the challenges posed by recent market conditions, and finally, address Treasury Inflation Protected Securities.

In my role as the Director of the Office of Debt Management, I provide recommendations on matters related to the Treasury's debt management policy, the issuance of Treasury securities, and the state of financial markets. By actively engaging with reserve managers, institutional investors, and market participants like you, we remain well informed regarding financial market conditions, liquidity in the fixed income markets, and Treasury-market-specific issues.

Our mission is to issue debt in a manner that provides the U.S. government – and ultimately the taxpayer – with the lowest cost of financing over time. With over $4 trillion of annual marketable Treasury issuance, more than 200 Treasury auctions each year, and nearly $9.5 trillion in total federal debt, the numbers are large, so discussing these issues is quite relevant.

U.S. Treasuries play an important role in the global capital markets. They are actively used by portfolio managers, investors, and traders to hedge existing positions, to serve as the risk-free pricing benchmark, and to provide the ultimate source of liquidity. In addition, the Federal Reserve uses Treasury securities to affect the supply of reserves in the banking system, and Treasuries provide foreign central banks with a highly liquid investment vehicle. The central roles that Treasuries play contribute to a lower overall cost of capital.

However, despite this prominent role, we do not take our position in the debt markets for granted. We constantly strive to enhance Treasury's status as the preeminent sovereign debt market by adhering to our clear mission. This gives us confidence that Treasury will remain the borrower of choice in global capital markets.

Now, before I delve into more detail on TIPS, I'd like to first talk about Treasury's debt management objectives, then financial market challenges over the past year, and finally, how we as debt managers responded.

The Treasury Department's primary goal in debt management is to finance the government's borrowing needs at the lowest cost over time. In meeting this objective, we face numerous constraints and risks.

Perhaps the most prevalent of these constraints is uncertainty. Uncertainty arises from many different sources including changes in economic conditions, unexpected legislative initiatives, and fluctuations in non-marketable debt issuance. In a given year, these factors could easily shift borrowing by a significant amount with little advance warning.

Another major source of uncertainty stems from deficit forecast errors with various estimates off by more than $100 billion on average. Collectively, the private sector as well as policy makers have difficulty in consistently projecting deficits in the coming twelve months – let alone further into the future.

Given the extensive uncertainty Treasury faces, debt management requires considerable flexibility. The recent fiscal stimulus package, in which rebates were literally place into the hands of Americans just 20 weeks after enactment, shows such a need for adapting to rapidly changing conditions. At the same time, our large size makes behaving opportunistically impractical. Moreover, it would not necessarily lower borrowing costs. Financial market participants would likely model our interest rate objectives and anticipate our debt issuance behavior, limiting any potential gains we might hope to achieve.

In addition, opportunistic behavior would increase investor uncertainty and could limit demand for our securities. Therefore, in order to ensure ready market access, we issue debt regularly and in predictable amounts. Our set of instruments consists of 8 nominal issues and 3 inflation indexed issues – a very simple, liquid set of benchmarks which investors can tailor to their needs.

Under these conditions, we must not create additional constraints based on externalities that result from a particular debt management strategy. For example, the U.S. Treasury often receives requests for debt tailored to particular interests such as GDP-linked debt, annuitizing debt instruments, and callable debt. However, it is the Treasury's policy not to issue debt targeted to any particular constituency. As taxpayers, we are better off with the Treasury market being deep and liquid. We consider the market's appetite for certain securities or debt management practices; however, debt management policy decisions cannot be held captive solely to the market's preferences.

For example, when Treasury discontinued the 52-week bill in 2001, we did so despite positive externalities associated with the security including its wide use as a benchmark point for pricing derivatives (such as adjustable rate mortgages and interest rate swaps), and its use for setting rates for statutorily required credit programs (which required Congress and Treasury to make legislative changes). We simply did not need it at the time, and acted in the best interest of the taxpayer. Similarly, the 30-year bond and 30-year TIPS were also discontinued in 2001 due to reduced borrowing needs.

Decisions to adopt or suspend particular debt management practices are similarly made by always keeping in mind our goal of the lowest borrowing cost over time. For instance, despite the benefits of multiple-price auctions to certain more sophisticated segments of the financial markets, Treasury moved to uniform-price auctions. Internal studies and empirical analysis indicated that such auctions broaden the distribution of auction awards, promote efficiency in the markets, and lead to more aggressive bidding – all factors which collectively reduce the cost of financing the federal debt.

As another example, we continue to have the authority to conduct buybacks of Treasury securities. However, Treasury suspended this practice when they were no longer practical despite the benefits to some investors of having a regular buyer for relatively illiquid securities.

While not limiting potential responses to ever changing financial market conditions, we make any changes to Treasury debt issuance and debt management practices in a transparent manner, in consultation with market participants, and based on analyses of how to best meet our goals.

The financial markets have faced challenging conditions over the past year, many of which have impacted the broader economy. Tighter credit standards and pressure on interest rate spreads have made it more difficult to obtain credit in many sectors. In the face of these challenges, Treasury has responded aggressively.

To provide confidence and stability to financial markets, Treasury financed an economic stimulus package and moved to support the housing government sponsored enterprises Fannie Mae and Freddie Mac. A cyclical correction is underway, particularly in the housing sector, and this process of re-pricing of risk and deleveraging across asset classes has created additional challenges for market participants.

Borrowing requirements have risen swiftly in response to the economic stimulus legislation as well as actions take by the Federal Reserve related to its liquidity initiatives. To sterilize the monetary effects of these initiatives, the Federal Reserve redeemed Treasury securities held in its portfolio and also sold securities outright which resulted in nearly $300 billion in additional Treasury issuance. We responded successfully to these challenges by increasing bill auction sizes, reintroducing the 52-week bill, and issuing longer dated cash management bills.

Looking ahead, a wide variety of factors could potentially impact Treasury's marketable borrowing including a less robust economy, the possibility of additional legislative initiatives enacted by Congress, and further pressures on the financial sector.

In this rapidly evolving economic and financial market environment, Treasury has responded to changes in marketable borrowing needs in its traditional manner by first reviewing the size of our existing securities, then addressing the frequency of issuance, and finally, making adjustments to the auction calendar as necessary.

In addition, through our meetings with major investors domestically and abroad, many ideas have been suggested to better position Treasury to meet these challenges. Some recommendations include increasing the frequency of the 10-year note and 30-year bond, reintroducing other securities including the 3-year note and 7-year note, and reintroducing a Treasury buyback program to better manage our debt maturity profile.

Other ideas included issuing additional longer dated inflation linked securities versus shorter dated securities to potentially better capture any inflation premium. We appreciate all of these suggestions, and take them all under consideration in achieving the lowest cost of financing over time.

Now, turning to inflation linked securities, Treasury has been issuing TIPS for over 10 years and is the largest issuer of inflation linked bonds globally. We have held 60 TIPS auctions since the inception of the program and have over half a trillion dollars of such debt outstanding. Average daily trading volume of $9 billion also makes the TIPS market the most liquid of any sovereign inflation-linked debt market. With 27 issues outstanding, the TIPS curve is well established out to 10 years, and well on its way to being complete out to 20 year.

Let me give you some other figures about the size and liquidity if the TIPS market. In fiscal year 2007, TIPS issuance totaled $57 billion, or 10 percent of total Treasury coupon issuance, and represented about 30 percent of total global inflation linked debt issuance. In comparison, such issuance was $29 billion in the United Kingdom, $27 billion in Japan, and $26 billion in France. Although the growth rate of TIPS has slowed, it still outpaces nominal coupons.

In terms of secondary market liquidity, which often receives much attention, the TIPS market is much more liquid than any other sovereign inflation linked market. Prior to this most recent period of stress in credit markets, the typical bid-ask spread on the benchmark 10-year TIPS on a trading size of $50 million was about 1 basis point. In contrast, for similar benchmark issues in the United Kingdom, France and Japan, the bid–ask spreads ranged between 2.5 and 5 basis points.

So, while TIPS will likely remain less liquid than nominal coupons due to their unique qualities, from an investor perspective, the depth of the TIPS market is unrivaled. Calls to increase liquidity through much larger issuance need to be carefully evaluated.

Taken together, these market statistics illustrate our preeminent stance in the inflation-indexed market in terms of size, depth, and liquidity, even in an environment without regulatory mandates and in the absence of a high rate of indexation to inflation compared to other sovereigns.

While the TIPS auction calendar has seen several changes since the inception of the program, we have repeatedly communicated to market participants our commitment to the program. Let me again reassure you that inflation linked securities are an important part of our portfolio.

As I mentioned earlier, determining the proper mix of our portfolio in pursuit of the lowest cost of borrowing is an ongoing effort. From our perspective, TIPS offer potential benefits including a more diversified portfolio, a potentially broader investor base, and a liability that theoretically tracks tax receipts.

However, you may be aware that recently the Treasury's Borrowing Advisory Committee of the Securities Industry and Financial Markets Association, or TBAC, prepared a presentation on TIPS. The presenting Committee member concluded that the cost of the program, compared to nominal debt issued at a similar time, was estimated at close to $30 billion. This cost was attributed to two factors: the low level of breakeven inflation and the reduced level of liquidity of TIPS compared to nominal securities.

It was also noted that private issuers have been less willing to issue inflation linked securities because they view them as costly and because of unfavorable accounting treatment. In fact, over the past ten years, there have been only a handful of corporate issuers of inflation indexed debt, thereby limiting the growth of the inflation derivatives markets. The large majority of corporate issuance is immediately hedged with TIPS, so it does not really create new inflation-linked supply. Instead, the Treasury continues to be the only significant payer of inflation in the United States.

This situation naturally raises many questions. Why are corporations not issuing such debt more generally? Are we selling insurance on inflation protection for too little? Should unknown future liabilities resulting from inflation accretion concern debt issuers? Certainly in a corporation or financial institution, these issues would be taken into consideration. Are we as sovereign debt issuers doing the same?

Not surprisingly, the financial press has been discussing the deliberations of the TBAC's presentation. Some have agreed with its findings, while others have disputed them. As debt managers, we greatly appreciate all viewpoints and encourage further constructive dialogue. The growth in the significance of the inflation linked debt market over the past decade by sovereign issuers has made having an accurate understanding of the costs involved in their issuance more important than ever.

Sovereign debt issuers have issued inflation indexed debt with the belief that such issuance would diversify their portfolios and better track receipts. In addition, there was a belief that borrowing costs would be lower due to the willingness of some investors to pay a premium in return for inflation compensation. Other nations have recently joined this trend, issuing inflation linked debt with the same intentions and with little empirical or analytical studies of costs versus benefits. Unfortunately, though, there have been only a few published studies of the costs of issuing TIPS, and these have offered conflicting conclusions.

In May of 2004 then Federal Reserve economists Brian Sack and Robert Elsasser estimated that TIPS issuance since the inception of the program had been expensive relative to comparable nominal securities, primarily due to the difficulties in launching a new asset class and the flight to quality earlier in the decade. Sack and Elsasser used realized costs - an "ex post" approach - in their estimates. They estimated that the cost of the program as of June 2003 was $2.8 billion, and estimated a projected total cost of $12.3 billion.

An update to this analysis in 2007 by Sack showed that the 10-year TIPS that matured in January 2007 saved the Treasury $1.1 billion.

In October 2007, also using ex-post calculations, Federal Reserve Board economist Jennifer Roush concluded that TIPS issuance was relatively costly due to illiquidity in the early years of the program. She estimated the cost of the program through early 2007 at around $5 billion to $8 billion.

Roush's analysis, however, also suggested that beginning with issuance in 2004, TIPS have actually saved Treasury a small amount of money, and will save Treasury from $1 billion to $4 billion over the entire life of these securities. Moreover, she finds that if the illiquidity effects of the early years of the TIPS program are excluded, the TIPS program would have saved the Treasury a substantial amount – from $14 billion to $17 billion through early 2007. The "liquidity premium" effectively cost Treasury between $10 billion and $15 billion.

On the other hand, some economists have suggested that ex-post analyses are too simplistic and that the relevant question is whether the Treasury obtained the financing it needed at a lower "ex-ante cost;" that is, using expected inflation at the time of issuance in determining the cost. However, one of the difficulties of an ex-ante approach is obtaining an accurate estimate of investors' inflation expectations. Studies using an ex-ante approach have shown neither a benefit nor a cost from issuing TIPS relative to nominal securities.

As can be seen from these studies, the results to date have been conflicting and, at times, inconclusive. Assumptions which are used greatly vary. Perhaps most disturbing, few rigorous, analytical approaches have been undertaken to fully understand the efficiency of the program.

Treasury has a duty to ensure that taxpayers attain the lowest cost of borrowing over time. In that vein, we must continuously study our models, develop alternative perspectives, and institute changes if warranted. We need to focus on our mission and less on positive externalities. From our perspective as debt issuers, we have a wealth of information to examine. We know the details of every competitive bid made at each auction. We know the concentration of bids by particular investors at given auctions. And we know our alternative funding choices. Moreover, we have a large set of observations. While the growth of inflation-indexed securities remains robust, and the importance investors place on them continues to grow, taking a step back, evaluating our practices, and examining the costs and benefits of any program in a deliberative manner is only prudent. .

Treasury, like other major sovereign issuers of debt, needs to attract capital from the market, but we need to do so in a thoughtful manner. So I want to make the earnest request to all sovereign debt issuers and members of the financial market community actively develop an appropriate framework for assessing the cost of issuing inflation linked debt versus nominal debt.

Such an undertaking will benefit all who participate in this market, most importantly the taxpayer. As we undertake these deliberations in concert with financial market participants, Treasury will continue to issue TIPS in a regular and predictable manner and continue to maintain these securities as a significant portion of our overall debt portfolio.

Thank you.