Treasury Under Secretary for International Affairs David McCormick
Remarks on Global Financial Turmoil and its Implications for China

Prepared Remarks of Treasurer Anna Escobedo Cabral on the Economic Stimulus Package

Secretary Henry M. Paulson, Jr. Remarks on the Economic Stimulus

Kansas City, Mo.--Thank you; it is great to be back in Kansas City.  I have just come from one of Treasury's bureaus here, the Financial Management Service Regional Financial Center, where they are printing the economic stimulus checks that will put money in the hands of American families and boost our economy this year.  It's fitting that I see this economic stimulus become a reality in Kansas City, because my visit here last December was among the events that convinced me that we needed to boost the U.S. economy, and do it early so it could make a difference in 2008.

In December, I was at the Bruce Watkins Cultural Heritage Center and Museum for a town hall meeting.  I met with and heard from many homeowners about mortgage and other housing difficulties.  They also talked of their concerns about the broader economy in Kansas City and Missouri.  During that week, I also spent time in Florida and California, where I heard similar concerns.  And when I got back to Washington, I talked to people in a variety of industries; I asked them what their business was telling them about where the economy was headed.  My travels, my discussions with industry leaders and a review of the economic data with the rest of the President's economic team convinced me in mid-December that the economy had taken a sharp turn for the worse and the risks were to the downside going forward.

The President recognized the downturn early, and took decisive action.  At the beginning of January, President Bush told the nation we were considering an economic stimulus package.  Congressional leaders also saw the weakening economy and the need for action.  The President directed me to work with Congress to craft legislation that would put cash in the hands of American consumers and help American businesses invest and create jobs.   And the President directed me to get this job done quickly, because we needed to bolster both consumer spending and business investment to protect the health of our economy. 

And today, we are seeing that our action couldn't have been more timely.  We didn't wait for the twenty-twenty hindsight of economic data to confirm a slow economy, we knew it was happening.  And because we didn't wait, the bipartisan stimulus package the President and the Congress enacted is injecting dollars into the economy now, when it can make a real difference. 

It was a pleasure to work in a bipartisan spirit with House and Senate leaders.  Together, we crafted a stimulus package that is big enough to have an impact, easy to implement, provides targeted payments and is temporary.  We acted quickly to support our economy and help create jobs this year.

The package includes stimulus payments to households, and tax incentives for businesses to invest and create jobs.  For households, single filers generally will receive a minimum of $300 and as much as $600, and joint filers will generally receive at least $600 and up to $1,200.  There is also an additional $300 payment for each qualifying child.  Total cash to households will be over $100 billion. 

In 2001 and 2003, tax relief payments to individuals and families stimulated the broader economy by increasing consumer spending.  Evidence suggests that households spent one-third to two-thirds of their 2001 and 2003 payments, and the current stimulus package is almost three times as large as what was enacted in 2001 --- $38 billion then, versus $100 billion now.

For businesses, there is a temporary change to the tax code that will allow them to buy new equipment this year and deduct an additional 50 percent of that investment cost in 2008.  In addition, the package expanded the current expensing limits for small businesses, allowing up to $250,000 of qualifying purchases to be deducted for tax years beginning in 2008.  Businesses will save approximately $50 billion in near-term taxes and lower taxes will help create new jobs this year.

At $150 billion – or around 1 percent of GDP --- these business and household measures are large enough to make a real difference as we weather the current economic slowdown and, by the end of this year, will lead to the creation of over 500,000 new jobs that would not have been created otherwise.  And just as important, these initiatives are temporary – so as not to impact our long-term fiscal position.   The cooperation between the Administration and the Congress demonstrated to the nation and to the world that we can come together to address the needs of the American people.

On February 13th the President signed the Economic Stimulus Act of 2008, the bipartisan bill that set this stimulus process in motion.   Just 75 days later, on April 28th, the first electronic direct deposits were sent into Americans' bank accounts.  Last week, the first week of payments, 7.7 million individual direct deposits averaging $920 were sent, amounting to more than $7 billion.  And we are continuing this process every week, until about 44 million stimulus payments have been made through direct deposits. 

This morning at the FMS center I saw employees printing checks non-stop on high speed printers.  There are machines manufacturing envelopes and wrapping the envelopes around the checks. Checks are being sorted by zip code and loaded onto trays for pickup by the U.S. Postal Service. Today is the first day that economic stimulus checks are being mass produced --- more than two million checks are being printed at FMS centers across the country, and this is just the first big batch.   During the rest of May, Kansas City will print 2.5 million checks a week.  In June and July, once the regular tax filing season is finished, we expect Kansas City will send 3.75 million stimulus checks per week.  FMS centers in Philadelphia, Austin and San Francisco are also preparing checks that will be, without a doubt, in the mail soon.  In total, we will send an estimated 88 million stimulus payments as paper checks through the mail.        

By the end of May, we will have pumped almost $50 billion into the economy and another $50 billion will follow --- by early July, about 130 million households will have almost $100 billion of payments in-hand.  

We expect that these payments will help right away --- help individuals, families and our economy.  Giving people cash means they can decide how best to use it.  Seniors, veterans, moms, dads and grandparents can each put their payments toward what is important to them --- whether it's gas for a summer vacation, clothes for back to school, or a trip to see the grandkids.

And these payments will provide a boost to the U.S. economy as we go through a difficult patch.  Our economy had been growing for more than six straight years when growth started to slow last winter.  And it has remained slow in the first part of 2008.  Wages have risen, but so have the costs of food, gasoline, and health care.

In addition, after years of unsustainable home price appreciation, we are experiencing an inevitable and necessary housing correction.  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 the correction is completed, 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. 

The ongoing housing correction and volatility in the financial markets are causing many Americans to feel uncertain. That is understandable and reasonable, and it's also true that the long-term economic prospects of the United States remain solid.  I never tire of repeating that we have the most resilient economy in the world --- because it is true --- and that we will emerge from this period as we have emerged from past periods of difficulty and move on to new heights. 

These stimulus payments will reduce the impact of the downturn on households across the nation.  I am pleased to be here and have seen the evidence that when we say the check will be in the mail, we mean it.  Thank you.

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May 5, 2008
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Secretary Paulson Names Leadership for President’s Advisory Council
on Financial Literacy

Washington- Secretary Henry M. Paulson, Jr., and Charles Schwab, Chairman of the President's Advisory Council on Financial Literacy, announced the appointment of several key Council officers today as the group conducted its second public meeting.

Secretary Paulson designated Deputy Assistant Secretary for Financial Education Dan Iannicola, Jr., as Executive Director of the President's Advisory Council on Financial Literacy. On behalf of Secretary Paulson, Mr. Iannicola will manage the council's activities and support Chairman Schwab's agenda to raise the nation's level of financial literacy.

"Dan Iannicola has been a true leader in financial literacy for many years, and he will make an excellent Executive Director," said Chairman Schwab. "With Dan's appointment and our committee chairs in place, the Council is well positioned to carry out its work of making financial literacy a national priority, and ensuring that people of all ages and backgrounds have the skills to understand and manage their finances."

President Bush established the advisory council to focus on expanding Americans' access to financial services and increasing financial education for youth in school and for adults in the workplace.

In addition, Chairman Schwab selected the leaders for the committees that will set the Council's goals for the upcoming months, including:

• Ted Beck, Committee on Outreach;
• Tahira Hira, Committee on Financial Education Research;
• John Bryant, Committee on Underserved Populations;
• Janet Parker, Committee on Financial Education in the Workplace
• Laura Levine, Committee on Financial Education for Youth.

Chairman Schwab named Council member Cutler Dawson to serve as a liaison to the Financial Literacy and Education Commission, and Council member Ted Daniels to serve as alternate liaison. Established by the Fair and Accurate Credit Transactions Act of 2003, the Commission is comprised of 20 federal agencies and led by the Treasury Department.

"The 20 agencies on the Commission make a critically important contribution to the effort to raise the nation's financial literacy level," said Chairman Schwab. "The Council's new liaison to the Commission will help maintain open lines of communication between the private sector and the federal government, and ensure that the two panels are working together toward a common goal."

The President and the Secretary of the Treasury have tasked the Council with advising them on how to raise the level of financial literacy for all Americans. The Council has turned to the American public for help with that task and is soliciting public comments at

<http://www.treasury.gov/offices/domestic-finance/financial-institution/fin-education/council/032008_SolicitationofPublicComments.pdf>.

It will meet next in person on June 18 in Washington, D.C. Council meetings are open to the public. 

Assistant secretary of the U.S. Treasury Anthony Ryan
Remarks at SIFMA “Wall Street to Washington” Conference

Washington - Good afternoon. Thank you for inviting me to join you today. It's a pleasure to be here.

The title of this conference is Wall Street to Washington. It sounds like a one way trip, but I imagine that most of you are only visiting our nation's capital, and plan on returning to New York later this evening. Your trip reflects that it is a two way street, and recognizes that the relationship must be as well. The reality is, not only does Wall Street go to Washington, but as we have also witnessed in recent weeks, Washington goes to Wall Street.

This two-way relationship goes back to the founding of our Republic. In fact, our first Secretary of the Treasury, Alexander Hamilton brought Wall Street ideas to Washington. These ideas continue to affect how we finance the Federal government's operations to this day.

The relationship between Wall Street and Washington is critically important because it influences what ultimately is experienced on Main Street. Our policies and regulations, coupled with how efficiently and effectively capital is created and transmitted, affects every American. This is true for citizens who seek to borrow money to purchase a car, parents looking to finance their children's education, married couples looking to buy their first home, and entrepreneurs hoping to secure a small business loan. It is equally true for providers of capital, whether they are individuals investing their savings, or a pension official overseeing a retirement plan.

How should we define this relationship? What forces affect it? What are the mechanisms for change? Fortunately, nature provides alternative models.

One is competition. We embrace competition and the efficiency it brings to our markets. Competition is a force that is critically important in our capital markets. Competition spurs innovation. As market participants seek better ways to meet consumer and investor demands, more choices are created, and the cost of capital is reduced.

A second model is predation. While predation is the law of the jungle in nature, as civilized society, we need to have laws in place to protect investors and consumers. Market integrity is critical for a sound and robust market. Market participants must know the playing field is level and the rules are fair. There is a real benefit to the existence and enforcement of broad anti-fraud and anti-manipulation authorities. Predatory lenders, rumor mongers, market manipulators, insider traders and others who seek to gain an unfair advantage must be identified and prosecuted. It is important that regulators have broad authority to investigate and prosecute these actions. These measures instill confidence in market participants that the market is operating in a fair and transparent fashion where rules matter.

Other types of relationships also come to mind. For example, commensalism is one relationship in which one entity gains some benefit while the other is neither helped nor harmed. Another relationship that we all know is parasitism, whereby one entity gains some benefit at the expense of another.

Each of these types of relationships exists and play a role as the natural world continually evolves. The capital markets are no different. Well before the days of Hamilton, financial systems had been evolving. They will continue to evolve, and remain influenced by various types of relationships.

Successful capital markets and effective regulatory policy do not happen independently; quite the contrary. The fact is, success is inter-dependent; hence the need for the relationship to be two way. How it evolves is up to both the private and public sectors.

Evolution is not only driven simply by competition, but also by cooperation, interaction, and some level of mutual dependence. As we look forward, we must recognize how much we have to gain or lose, individually and collectively, if the relationship is not more symbiotic.

We need to ensure that our capital markets remain the most efficient in the world. I have great confidence in our markets, but private sector calls for more voluntary industry efforts will ring hollow if they are not followed with proactive and tangible actions that result in changed behavior. The objective is not to study issues, write reports, or propose protocols that sit on a shelf. We need to see constructive ideas not just developed, but implemented. We need to see changes in market practices. It is that simple.

Meaningful change often requires leadership. It is not surprising that it is difficult to ensure unanimous support for strengthening practices or that suggesting change attracts antagonism.

Make no mistake about it, change will occur, one way or the other, and there is a great deal to be said when it originates within the private sector. Policy makers will welcome such constructive developments by the private sector, but regulatory practices will have to change as well. The question, which time will ultimately answer, is what is the appropriate balance? If private sector market practices do not change, and market discipline is not significantly strengthened, legislators and regulators will certainly move to address the weaknesses in the private sector's contribution to market discipline.

So, let me highlight four areas where Washington is looking to partner with you, and where we need to work together to strengthen our capital markets.

Market Turmoil

Our first priority must be to confront the current challenges in our capital markets, and to seek to minimize the spillover effects on our real economy. A great deal of de-leveraging is occurring, which has created liquidity challenges and compromised our credit markets' ability to facilitate economic activities.

Working closely through the President's Working Group on Financial Markets (PWG), we recently completed a rigorous review of the underlying causes of the turmoil, and released a policy statement that included specific recommendations to address the underlying weaknesses that caused, facilitated, and exacerbated the challenges in our capital markets.

The PWG recommendations cover the practices of a broad array of market participants, as well as supervisors. The participants include originators of credit such as mortgage brokers, financial firms that securitize credit, rating agencies, and investors.

At the Treasury Department, we look forward to seeing the recommendations implemented. Everybody has a role to play, and efforts must be made to strengthen practices in:

Transparency and disclosure. The effect of 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.

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 improve, 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. Risk management is everyone's business.

4. Capital management. Well-capitalized institutions are better prepared to deal with challenges, foster economic growth and enhance market confidence.

As Chairman Bernanke recently remarked, "We do not have the luxury of waiting for markets to stabilize before we think about the future. Indeed, many of the necessary changes that have been identified, including increasing transparency, improving risk management, and attaining better coordination among regulators, could provide important support to the process of normalizing our financial markets."

Hedge Funds

Another area in which the private sector must continue to move forward is hedge funds. Over a year ago, the PWG released principles and guidelines regarding private pools of capital. While private pools of capital bring many advantages to our capital markets, they also pose challenges, including systemic risk and investor protection. We must rely on a combination of strong market discipline and regulatory policies to address these risks.

In September 2007, the PWG tasked two private-sector committees, comprised of well-known and well-respected asset managers and investors, to develop best practices for their respective groups. Their reports were released for public comment two weeks ago, and after a period of public comment, the groups will release final reports this summer.

The "Best Practices for Asset Managers" calls on hedge funds to adopt comprehensive best practices in all aspects of their business, including the critical areas of disclosure, valuation of assets, risk management, business operations, compliance and conflicts of interest. They recommend innovative and far-reaching practices that exceed existing industry standards, and called for increased accountability for hedge fund managers.

The "Best Practices for Investors" includes both a Fiduciary's Guide and an Investor's Guide. The Fiduciary's Guide provides recommendations to individuals charged with evaluating the appropriateness of hedge funds as a component of an investment portfolio. The Investor's Guide provides recommendations to those charged with executing and administering a hedge fund program once a hedge fund has been added to an investment portfolio. Their best practices offer a guide for responsible investment in hedge funds. In the months ahead, we believe that it is critical to see these implemented.

There is also need to move forward on a longer term, strategic basis. Treasury recently released a Blueprint for Financial Regulatory Reform. Our current regulatory structure is not optimally positioned to address the modern financial system with its diversity of market participants, innovation, complexity of financial instruments, convergence of financial intermediaries and trading platforms, and global integration and interconnectedness.

We suggested in the Blueprint a new framework, one that includes 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, investment banks, 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.

Our ambition is to frame the debate and put forth a model that can guide all stakeholders as we seek to modernize our financial regulatory structure.

Market Infrastructure

A third area where we need to see further progress by the private sector is market infrastructure. It includes market-making capacity and systems for processing, settling, and clearing financial transactions. Comprehensive and dependable market infrastructure inspires investor confidence and plays an important role in the integrity of our marketplace. Market infrastructure is critical as it ultimately affects the ability to transfer risk and facilitate liquidity. For this reason, the financial industry must continue its efforts to enhance its strong system of clearance and settlement, including secure custodial arrangements.

Over the past ten months, despite dislocations in our financial markets, our market infrastructure has proven quite resilient. Payments were made, transaction processing continued, and exchanges handled massive surges in volume across the globe.

While these signs are encouraging, we constantly must seek to improve our position and ensure business continuity. Over the past decade there has been a tremendous expansion in the scale, diversity, and impact of over-the-counter (OTC) derivatives, which have become important vehicles for hedging and transferring risk. But as with most financial products, infrastructure development has lagged innovation. Market volume and instrument complexity call for a clear, functional, well-designed infrastructure that can meet the needs of the OTC derivatives markets in the years ahead.

Asset managers, investors, counterparties, and creditors must promptly set ambitious standards for trade data submission and resolution; promptly amend standard credit derivative trade documentation to incorporate the cash settlement protocol; and develop a longer-term plan for an integrated operational infrastructure supporting OTC derivatives. The industry needs to take further steps to limit the domino effect of lagging and uncertain post-trade processes in the event of a counterparty default or failure.

We need to remain focused and complete the work already underway. The Federal Reserve Bank of New York (FRBNY) and an industry group (the "Operations Management Group" or OMG) have been working collaboratively to address the OTC processing and infrastructure issues. ISDA has developed a cash settlement protocol and is exploring incorporating the auction mechanism into its documentation. The private-sector committee on risk management recommended by the PWG statement will look at strengthening the operational infrastructure of financial markets, including settlement protocols, close-outs in defaults, and processing of OTC derivatives. On all of these issues, the industry has an opportunity to improve market practices, and must do so.

U.S. Treasury Market

The final area that I will highlight this afternoon concerns an issue that is core to the mission of my Department – the U.S. Treasury marketplace. We value the symbiotic relationship that we have with the participants in the Treasury market. Because our operating principles of transparency and predictability are well established, buyers of Treasury securities come to us in greater numbers and bid with more confidence and in larger amounts. Our predictability, coupled with our unitary financing approach, increases the depth and liquidity of the Treasury marketplace and results in lower cost borrowing for the government.

We appreciate the principles-based framework outlined by the Treasury Markets Practices Group (TMPG). The principles and guidelines they put forth provide a strong foundation for how all stakeholders should enhance their current practices, fulfill their responsibilities, and support actions that facilitate liquidity in the U.S. Treasury market. As debt managers, we constantly encourage the implementation and evolution of these principles in our discussions with major institutional investors, reserve managers, and central banks.

When these principles were laid out almost a year ago, I remarked that success will be determined by how market participants interpret and implement these practices, and how market practices evolve from this point forward. I also pointed out that SIFMA is engaging its membership on negative repo rate trading, improved buy-in procedures, and the margining of fails.

At the February 2008 Quarterly Refunding, we discussed settlement failures in the Treasury market with our Treasury Borrowing Advisory Committee (TBAC), a committee sponsored by SIFMA and comprised of some of the finest, most experienced professionals in the financial market place. As you know, settlement failures, or fails, occur when a party selling a security fails to deliver the security to the buyer on the agreed upon settlement date. Settlement failures, occur for a variety of reasons including errors in the back office and miscommunications, and are generally small and resolved quickly.

Larger, more chronic fails can occur due to wide-scale operational disruptions or financial market conditions, such as when interest rates reach low levels.

Treasury and the TBAC discussed the potential risk of chronic fails in a lower interest rate environment, a risk that we believe impairs liquidity and threatens to raise our cost of borrowing. In addition, we asked market participants to pursue market-oriented solutions, adapt and implement practices for such a situation, and report back to us regarding their progress.

Over the past twelve weeks, we have seen rates drop quickly, the demand for Treasury securities skyrocket, and a rapid increase in fails to deliver in the Treasury market. In a short time period, we entered an interest rate regime in which the cost associated with fails declined significantly – and, perversely, weakened the financial incentive to rectify a fail. While the cost of failing to deliver may be low for a single market participant, the aggregate cost can be high when it potentially impairs the overall system, and such behavior is certainly not consistent with professional best practices.

This week, at the May 2008 Quarterly Refunding, we asked the TBAC for their view on actions taken by market participants to date. Committee members were encouraged by the collaborative efforts undertaken by the private sector industry groups to formulate viable solutions to address chronic fails, and members broadly accepted that the initiatives outlined by SIFMA and TMPG would improve market practices for fails monitoring and remediation in the near-term.

Implementation of the potential steps outlined and recommended by SIFMA and the TMPG, such as encouraging cash settlement of fails before the 30th day after the fail had occurred, "Fails Best Practices" which define such parameters as margining of fails, cash settlement procedures, and initiatives related to pair-offs and security-delivery, and the enactment of a Fails Monitoring Committee, were broadly agreed upon. The TBAC emphasized the need for industry groups to quickly execute recommended practice guidance and urged both groups to employ measures that would collectively help prevent chronic fails situations.

Treasury agrees that now is the time to act. We believe that private sector action now regarding the implementation of these mitigating initiatives is optimal, and we will continue to monitor progress closely.

Conclusion

As financial industry professionals and policy leaders, you know first hand the benefits of dynamic economic growth, and thus have a vested interest in capital markets that enhance investor confidence and market liquidity - both of which have been challenged significantly in recent months.

These are important issues, and we need to see material steps taken towards our goals. Both market and regulatory practices will evolve from here. All stakeholders, including regulators, must remain on top of these issues. We must not just define solutions, but implement them, and continually seek to strengthen both our market and regulatory practices.

By positively changing market practices, you will help strengthen market discipline, mitigate systemic risk, restore investor confidence, and facilitate stable economic growth.

The health of our capital markets reflects the collective efforts of both the public and private sectors. To reap the benefits, both sectors must share responsibility and be actively engaged. So, as you return to Wall Street, know that there is much work to do, and that each of you has an important responsibility to strengthen the vitality, stability, and integrity of our capital markets.

Thank you very much.

Paulson Meets with French Delegation

Washington - Treasury Secretary Henry M. Paulson, Jr. will welcome French Prime Minister Francois Fillon, Minister of Economy, Industry and Employment Christine Lagarde, and Minister of Agriculture Michel Barnier to the U.S. Treasury Department on Friday, May 2, 2008.  This meeting continues Treasury's regular engagement with France on a range of issues, including global and regional economic and financial developments and efforts to combat money laundering and terrorist finance.

Deputy Assistant Secretary Mark Sobel
Remarks at Conference on U.S. – EU Regulatory Cooperation
U.S. Chamber of Commerce

Washington - Thank you for the invitation to join this panel and discuss U.S.-EU financial market issues ahead of the TEC.

Obviously, the current global financial turmoil and US/EU cooperation is uppermost in people's minds. As noted in the recent G7 statement, the world's major central banks have coordinated their actions to address liquidity pressures in funding markets and disruptions in global financial markets. The Financial Stability Forum (FSF) -- which consists of the G7 countries, Switzerland, the Netherlands, Australia, Hong Kong and Singapore, and also brings together the key standard setting bodies -- put forward a strong consensus-based report with proposals on prudential oversight, transparency and valuation, the role of credit rating agencies, supervisory authorities' responsiveness to risk and robust arrangements for dealing with stress in the financial system.

Several EU members are active participants in the FSF and the European Commission works closely with many standard setting bodies and has itself pursued work in the European context aimed at addressing the turmoil. The substance of this work is closely aligned with that of the FSF as well as U.S. work in the President's Working Group on Financial Markets. These activities underscore that US-EU cooperation in addressing global financial market turmoil is excellent and that this work needs to be anchored not just in transatlantic cooperation but also in the global system.

Let me step back now and put US/EU financial discussions in a broader context. This decade, the EU intensified its efforts to forge an integrated financial market under its Financial Services Action Plan (FSAP). Transformation is already visible, especially at the wholesale level. The EU Markets in Financial Instruments Directive has made for more seamless trading across European platforms. Stock exchanges are being consolidated in Europe and across the Atlantic. Several EU cross-border bank mergers have taken place. All listed European firms use International Financial Reporting Standards (IFRS). Efforts are underway to create more efficient clearance, settlements and payments systems.

In the United States, change is also afoot. Financial markets have evolved significantly reflecting the increased globalization of finance and commerce. Technological change has increased trading efficiency. Cross-border capital flows have picked up and corporate governance has been strengthened.

While financial market regulation is undertaken at the national level, one nation's actions clearly don't stop at the water's edge. This is a reality that the U.S. and EU have confronted. Against that background, in 2002, the informal U.S.-EU Financial Market Regulatory Dialogue (FMRD) began. This dialogue complemented many other critical international processes, for example, in the G-7, Financial Stability Forum, Basel Committee, IOSCO and the like.

Since then, the Dialogue has addressed many topics, including the impact of the FSAP on U.S interests; the effect of U.S. regulatory actions on the EU; how to manage these spillovers; and our common interests in working with emerging markets on financial sector issues. Let me underscore -- this is an "informal dialogue", not a negotiation. Both sides respect the independence of regulatory authorities, recognize that our structures are different and focus on promoting the common objective of facilitating global financial stability and finding practical solutions, if possible.

Much has been achieved. The relationships among the players are extremely cordial and virtual. The nitty-gritty depth of our discussions at times can be mind-numbing. Since many items I will discuss in the rest of my remarks fall in the domain of our regulators, let me be clear that they are independent, I would not presume to speak on their behalf, and my points are solely intended to be factual. To list a few things done since 2002:

• Asset pledge requirements for foreign branches in the U.S. were reduced.
• U.S. firms continued their European operations in the presence of the EU's Financial Conglomerates Directive.
• Accommodations were reached on the impact of Sarbanes-Oxley on Europe.
• European financial rule-making became more transparent and consultation with market participants improved.
• Europe allowed for internalization of stock trading.
• Good discussions were held on the timeline for implementing Basel II, helping to facilitate the smooth management of this issue. Trading book capital charges were included in European legislation.
• Rules were put in place making it easier for foreign companies to terminate SEC registration and reporting requirements when there is little US market interest in their securities.
• In 2005, the SEC and EU began work on a landmark "roadmap" for the United States to accept IFRS statements as a basis for U.S. public listings no later than 2009, and the EU to find US GAAP statements "equivalent" in order to ensure their continued use on European markets without a reverse reconciliation requirement.
• And in early 2007, an active debate emerged on establishing a system of "substituted compliance" for recognition of foreign broker-dealer regimes, or what the G7 Finance Ministers have labeled "mutual recognition of comparable regimes," aimed at facilitating cross-border access by securities exchanges, other trading systems and investment firms, while ensuring high quality investor protection.

With the launch of the Transatlantic Economic Council, the U.S. and EU highlighted the benefits to our economies from promoting greater transatlantic economic integration and seeking to reduce regulatory burdens. Given that some two-thirds of global capital flows take place in the transatlantic space, it was natural that the TEC highlighted financial market issues. Three issues, long in the financial realm, will be in focus.

The US is open to foreign reinsurers, who account for 85% of the US reinsurance market. On reinsurance collateral, certain European reinsurers operating without licenses in given states take the view that the requirement to hold 100% collateral against gross liabilities is excessively costly and inconsistent with a risk-based regime. High-level discussions have occurred for years on reinsurance collateral, including through the NAIC/EU insurance dialogue, a NAIC dialogue with the European committee of insurance supervisors and the FMRD. Unfortunately, a solution which could be implemented has not been found, though many good ideas have been advanced and work undertaken in good faith to address the matter. Those efforts continue among state insurance commissioners.

On Solvency II, Europe is moving to adopt a new regime, perhaps in 2012, which would provide for consolidated supervision of insurance firms at the financial holding company level and a risk-based approach to capital requirements. Solvency II also provides that foreign firms operating in the EU must be supervised on an "equivalent" basis by their home supervisor or face unspecified measures. Large U.S. insurance firms operating in Europe fear the EU will find the U.S. insurance supervisory regime not equivalent and that they in turn will face uncertainties and higher costs in continuing their European operations. This is a matter requiring intensive discussion.

The Chair specifically asked me to address Treasury's "Blueprint for a Modernized Financial Regulatory Structure" in this context. As Secretary Paulson has said, a state-based regulatory system is burdensome, and it can hinder development of national products and directly impact the competitiveness of U.S. insurers. Also, he has said insurance presents a clear need for regulatory modernization. Certainly in my talks with regulators across the globe, a familiar refrain has been that foreign firms find interacting with many state regulators cumbersome.

Against this background, the Blueprint made two proposals. First, Treasury recommended the establishment of a federal insurance regulatory structure to provide for the creation of an Optional Federal Charter. Second, as an intermediate step, Treasury recommended that Congress create a federal Office of Insurance Oversight within Treasury to establish a federal presence in insurance for international and regulatory issues. These reforms would provide in Treasury's view for more effective, efficient and consistent regulation for national insurers.

Two weeks ago, Congresspersons Kanjorski and Pryce of the House Financial Services Committee introduced legislation to create a federal insurance adviser within Treasury, similar to the intermediate step proposal in the Blueprint. As Assistant Secretary David Nason stated, Treasury welcomes this proposal and it would help the U.S. address international regulatory issues affecting our markets' competitiveness.

Needless to say, these proposals are not yet law and until such time that they are implemented, the current U.S. insurance regulatory structure will remain in place. It is in this context for the period ahead that U.S.-EU international insurance discussions will continue to take place in the various dialogues previously outlined. It is Treasury's strong hope and expectation that all parties will work constructively together in search of practical solutions.

Thank you.

Assistant Secretary for Financial Institutions David G. Nason
Remarks on Treasury’s Blueprint for a Modernized Regulatory Structure

London - Chairman Julius, thank you for that kind introduction. It is a pleasure to be here for the New Financial Frontiers conference. The Chatham House, as home to the Royal Institute of International Affairs, has served its mission well to foster debate and ideas on important international policy matters for over 80 years. I am honored to be here with this distinguished group of conference speakers and participants and to have the opportunity to contribute to this discussion on financial markets.

I would like to spend my time today in two ways. First, I would like to give an update as to how we see things progressing in the U.S. financial markets. Limiting the impact of the capital market turmoil and housing downturn on the rest of the economy has been and will continue to be our primary focus. Secretary Paulson often says that stable and orderly financial markets are critical to the health of our economy – businesses rely on access to credit in order to invest and create jobs, and families draw on credit markets to finance their homes and daily lives.

Second, I would like to discuss Treasury's recently-released Blueprint for a Modernized Financial Regulatory Structure, its approach to addressing long-term challenges with the U.S. regulatory structure and how they connect with current market regulation.

As we all know, the financial markets stress began last summer. The root causes of the stress are well documented. The turmoil in financial markets was born from a dramatic weakening of underwriting standards for U.S. mortgages, especially subprime mortgages, beginning in late 2004 and extending into early 2007.

The loosening of credit terms in the subprime market was symptomatic of a much broader erosion of market discipline on the standards and terms of loans to households and businesses. Following many years of benign economic conditions and plentiful market liquidity, global investors had become complacent about risks, even in the case of new and increasingly complex financial instruments.

The confluence of many events led to a significant credit contraction and repricing of risk. Sentiment swung hard to risk aversion with perhaps one of the most dramatic series being the events that led to JPMorgan Chase acquiring Bear Stearns.

Our policy makers and central banks have been working diligently to respond. The U.S. Federal Reserve has provided additional liquidity by amending some of its existing policy tools and creating new facilities when needed. The Federal Open Market Committee has lowered the federal funds target rate by 300 basis points since August 2007, to help soften the negative impact of the recent financial market disturbance has on the real economy.

Additionally, the Federal Reserve in coordination with the European Central Bank and Swiss National Bank has provided additional liquidity through a dollar swap facility to help address dollar funding pressures outside of the United States. Other liquidity enhancing measures by the ECB as well as the Bank of England through its recently announced long term debt swap facility have and will continue to help address the acute funding pressures that continue to persist.

As the Federal Reserve helped to resolve the Bear Stearns situation, it subsequently took a very important and consequential action of instituting a temporary program for providing liquidity to primary dealers. Taking this step in a period of stress recognizes the changed nature of our financial system and the role played by investment banks. Such direct lending from the central bank to non-depository institutions has not occurred in the United States since the 1930s. The Federal Reserve's creativity in the face of new challenges deserves praise, but the circumstances that led the Federal Reserve to modify its lending facilities raises significant policy considerations that we must address.

If we pause and examine where our markets stand today, the story is mixed.

There are certainly some encouraging trends such as the narrowing of both commercial and investment bank credit default swap spreads. Also, financial institution equity prices have stabilized largely as a result of institutions recognizing their losses and raising additional capital. This improves market confidence and allows banks to continue to extend the lending necessary for economic growth.

Our largest institutions have gone to market to raise additional capital. Since December of last year, financial institutions have raised more than $175 billion in capital. Importantly, this investment is helping to facilitate price discovery in markets that are suffering from significant illiquidity. We would like to see smaller institutions raise capital as well.

Of course, some trends are not as encouraging. The interbank financing market is still strained and many securitization markets have not revived in a material fashion.

The Treasury Department has worked to decrease the chances that the current challenges will happen again. Treasury, in conjunction with other regulatory bodies, has developed policy responses to begin to address the ongoing crisis of confidence in our markets.

The President's Working Group on Financial Markets (PWG), led by Secretary Paulson, is composed of the Chairmen of the Federal Reserve, Securities and Exchange Commission (SEC), and the Commodity Futures Trading Commission. The PWG is working closely with the Financial Stability Forum (FSF), composed of regulators, finance ministries, and central banks from the world's largest and most significant economies. The PWG and FSF have proposed sets of separate but consistent ways to address the root causes of current market instability. These are specific ideas to deal with some of these challenges within our current regulatory regimes.

In the United States, we are at the beginning of a journey to more fundamental change regarding financial services regulation. Since the focus of the conference is on managing risk and the new financial frontiers, I would like to spend the rest of my time talking about a structure that is better suited to deal with the 21^st century financial services markets. Just a few weeks ago Treasury released a Blueprint for a Modernized Financial Regulatory Structure, addressing these topics with a series of short, intermediate and long-term recommendations. While this project started more than a year ago, not in response to current market events, there is no question that recent events have transformed these issues from the theoretical to the practical.

For the optimal regulatory structure in our long-term recommendation we started with a blank slate. We thought about the best approach to U.S. financial services regulation. We studied closely regulatory structures in other jurisdictions; we spoke to and reviewed hundreds of comment letters from market participants and regulators worldwide, including our counterparts in the United Kingdom.

After this process, Treasury decided that the optimal regulatory structure would be an objectives-based approach, an approach with individual regulators focused on three key objectives: market stability regulation; prudential regulation, focused on institutions with reliable access to a government backstop or subsidy; and business conduct regulation, focused on consumer protection and disclosure issues.

Our recommendation for a market stability regulator garnered significant interest in both in the United States and abroad. In Treasury's model, a market stability regulator would address overall conditions of financial market stability that could impact the real economy. This regulator would have authorities to focus market stability regulation in areas where financial markets may not function properly, to provide information to enhance the functioning of financial markets, and to provide authority to take actions should the need arise.

Typically, a market stability role is associated with the central bank. Most central banks have a general responsibility to achieve macroeconomic stability through the formation of monetary policy. In the United States, the Federal Reserve plays this role with the goal of promoting overall macroeconomic stability in terms of output and prices. In normal economic conditions, market stability and macroeconomic stability should go hand in hand. But, as the current conditions in credit markets and other past episodes of financial instability illustrate, the traditional toolbox of monetary policy and the regulatory framework associated with financial institutions might not be well-suited to deal with transmission of financial shocks to the real economy in today's financial markets.

We recommended recasting the role of the Federal Reserve as our market stability regulator to expand its assessment and authority over potential risks in the overall financial system, including correlations and common exposures across financial institutions. This contrasts with its existing regulatory authority that focuses primarily on the health of individual financial institutions. This new responsibility can be referred to as "macro-prudential regulation" and the latter as "micro-prudential regulation".

Undoubtedly, the tasks of the market stability regulator would be difficult. Some have likened it to an impossible task of piercing asset bubbles or having an omnipresent view of risk in the financial system. To be clear, we do not view it in that manner. We do not believe that we can eliminate all future bouts of financial instability.

In a dynamic market economy it is impossible to eliminate instability through regulation. At a fundamental level, the root causes of market instability are difficult to predict, and past history may be a poor predictor of future episodes of instability. Nonetheless, we should not stop trying to understand better and mitigate instability. Yes, the task is difficult, but the task remains.

So exactly what would this new Federal Reserve do? It is interesting to note that this current period in financial market stress has created an important change in vocabulary. For years, public policy makers have struggled with the notion that certain institutions could be deemed "too big to fail". Now, we should consider whether certain firms are "too interconnected to fail".

Interconnectedness occurs in formal markets or in more informal networks of trading in financial instruments. These networks or trading mechanisms are essential to the free movement of capital and efficient disbursement of risk. The network structure is much like an airline hub such as Heathrow Airport, where if everything works as planned, airline passengers and their luggage are efficiently moved from one destination to another. But if a breakdown occurs at just one or two departure gates, the entire interconnected airport can turn into complete disarray.

This is one of the key functions of the market stability regulator – carefully monitoring the interconnectivity embedded in our networks of financial institutions. It is a monitoring of the entire system, making sure that passengers and luggage get to where they are supposed to go, having contingency plans for bad weather, and keeping the air transportation system running even if one airline goes out of business.

Obvious focus points here are counterparty risk exposures – whether they occur through standard credit instruments, credit default swaps, credit insurance, or other means; the operation of market structures – whether established on a formal or informal basis; and general practices that could cause problems for the overall financial network – such as concentrations of asset exposures and overall risk management practices.

At the outset, a goal of this regulator is to attempt to harness market forces. The market stability regulator must have access to detailed information from all types of financial institutions, including data submissions and the ability to join in or initiate examinations. Second, the market stability regulator should have the authority to require additional disclosure by financial institutions so that market participants can better evaluate their risk profiles. Third, the market stability regulator should also be involved in financial institution regulatory requirements to include a focus on broader market stability perspectives. Finally, the market stability regulator should have the ability to require financial firms to undertake corrective actions to address financial stability problems.

As the market stability regulator collects and analyzes this type of information, it could publish aggregate information to highlight issues and trends associated with potential risk exposure. Such actions, combined with enforcement authority as necessary, would provide a clear signal to market participants and other regulators that the market stability regulator has identified some potential problems that should be addressed. We would expect that this action alone could have an impact on overall behavior.

This process is what some have referred to as "leaning against the wind" in an attempt to prevent broad economic dislocations caused by potential excesses. I would agree, so long as the lean can be calibrated based on the conditions of the storm and the effectiveness of the regulators initial actions.

This would not be an easy task. In addition to the difficulty of determining just where and when to lean against the wind, there could be a tendency of a regulator to lean too heavily simply to avoid blame for any ensuing financial instability. Moreover, regulated entities could push back, alleging regulatory over-reach. But if we clearly understand that this process will not prevent all financial instability and that the dynamic and innovative aspects of financial markets must be preserved, then it is a process worth trying.

The optimal structure in Treasury's Blueprint was an ambitious attempt to recast the debate on regulatory structure for financial institutions and the entire financial system in the United States. As we have acknowledged, change of this magnitude would require considerable debate and time.

The recent challenges in credit markets illustrates that the world has changed and we need to think continually about what steps can be considered now while broader changes regarding regulatory structure are debated. Fortunately, the Blueprint's analysis is instructive in this regard.

For example, one obvious question is the proper regulatory oversight of investment banks, especially the largest firms- the SEC's consolidated supervisory entities. Right now, the Federal Reserve and the SEC are working constructively together while the primary dealers have access to the Federal Reserve's liquidity facilities. This is appropriate, as the Federal Reserve needs to have information about institutions to which it is lending.

What happens next after that facility eventually closes is a more difficult policy question. We are in the first act of what is a multi-act play. Some decisions seem clear. If firms have permanent access to a government backstop, then these firms need to be regulated in the same way as all other institutions that have access to this backstop. Similarly, as our markets have gotten more inter-connected, it is necessary to have some type of oversight to ensure that broader issues of market stability are considered adequately.

Many other issues still need to be resolved. Some market participants question whether the primary dealers' access to the Federal Reserve's liquidity facilities is truly temporary, which has an impact on behavior. Uncertainty leads some to conclude that these non-banking financial institutions should have the same type of regulation as institutions that have a significant percentage of their liabilities insured by the government.

Others believe the increasing complexity of financial transactions and structure of financial institutions is a logical reason for extending bank-like regulation to additional firms. Greater complexity has not developed in a vacuum. While new financial products and complex risk-hedging strategies provide the benefit of wider risk dispersion, if market participants cannot evaluate fully the risk profiles of the financial institutions using these products, then it remains unclear that innovation has reduced risk.

If we expand bank-like regulation to a wider range of firms it seems that two outcomes are possible. One outcome could be that innovation and risk-taking decline to levels below what the market would normally allow. This could inhibit overall economic growth and could push market-permitted risk-taking to those firms not swept into broader regulatory reach. Another outcome would be to provide a false sense of security to market participants, potentially leading to less market discipline and even greater complexity and opacity in the future that could lead to even greater financial instability. Both of these outcomes are unattractive. But so is the status quo. Change, in one form or another, is likely to come.

For this reason, the Blueprint advocated for a separation of responsibilities between a regulator looking at the system as a whole and another regulator focused on the health of individual institutions. A bifurcation of regulatory responsibility properly aligns regulatory incentives. A macro-stability regulator should generally not be concerned with the failure of an individual institution. In contrast, especially where the government safety net is at risk, the tendency of a micro-prudential regulator would be to be very concerned with individual institution failures.

If these two functions continue to be combined and the distinction is further blurred, the result could be more overall government support for troubled financial institutions, whether explicit or implicit. This further distorts financial markets and can make the financial system more fragile rather than more stable.

We look forward to further considering the appropriate role of regulation in pursuit of market stability in the coming months. Market stability regulation should reflect a fine balance of addressing areas where the market may not function, allowing for innovation, and harnessing market discipline. It will be difficult to balance these roles, but if we go into this process understanding that we will never fully eliminate market instability, we have a much better chance of establishing a more stable financial system for the future.

Thank you.

Statement for the Treasury Borrowing Advisory Committee
of the Securities Industry and Financial Markets Association

Washington, DC--Economic growth slowed considerably in the first part of 2008, with consumer and business spending affected by the housing downturn, credit market disruption, and the impact of high energy prices.  These headwinds are expected to be offset in part by the stimulus payments and investment incentives enacted in February as part of the Economic Stimulus Act of 2008.  Even so, the U.S. economy is likely to grow at a rate below trend and the labor market to remain soft throughout the year.

Real GDP grew at an annual rate of just 0.6 percent in the fourth quarter of 2007, and data released so far indicate that growth remained quite sluggish in the first quarter of 2008.  The advance estimate of first quarter GDP will be released on April 30.

Household spending has been affected by a weaker job market, declining wealth from housing and equity markets, and rising energy costs.  Real personal consumption expenditures were flat in February after having risen only slightly in January.  Together with lackluster retail sales in March, it appears likely that consumer spending slowed considerably in the first quarter from the 2.3 percent annual rate posted in the fourth quarter. 

Labor market conditions deteriorated in the first quarter after the job market had broadly slowed in the second half of 2007.  The unemployment rate reached a 2-1/2-year high of 5.1 percent in March, after averaging 4.6 percent over 2007.  Nonfarm payrolls fell by about 77,000 per month on average in the first quarter – the first quarterly decline in payrolls since August 2003. 

Housing market indicators point to another large decline in real residential investment in the first quarter, following a drop of 25 percent at an annual rate in the fourth quarter of 2007.  Housing starts fell to a 17-year low in March, with starts of single-family homes down by 63 percent from the January 2006 peak.  Sales of new single-family homes also fell to a 17-year low in March and existing single-family home sales in March were near the lowest point in the past 10 years.  Prices for purchased homes edged up slightly in February according to figures from the Office of Federal Housing Enterprise Oversight (OFHEO), but remained 2.4 percent lower than a year earlier.  Other measures such as the Case-Shiller indices indicate as well that home prices are declining in most major U.S. cities.  Widespread weakness in the housing data reflects the fact that the U.S. is undergoing a necessary housing correction following years of what were, in retrospect, unsustainable house price increases. 

Housing appears likely to subtract a full percentage point or more from growth in 2008 after taking off nearly as much in 2006 and 2007.  Inventories of unsold homes are at historically high levels, building permits remain well below starts, and homebuilder optimism is close to an all-time low.  Mortgage delinquencies and foreclosures are projected to rise further in 2008; the additional foreclosures will slow the process of working through the inventory overhang and in turn put additional downward pressure on home prices. 

Business investment growth appears to have slowed in the first quarter of 2008 from the 6 percent pace in the fourth quarter of last year.  Shipments of nondefense capital goods excluding aircraft--a key input into equipment and software spending in the national income and product accounts--rose 1.2 percent in March, partly retracing February's 1.6 percent decline.  Private nonresidential construction declined for three consecutive months through February.  Tighter credit conditions are likely to affect business spending going forward.

Export growth remains a bright spot in the outlook.  Real exports were up 8.4 percent during the four quarters of 2007, the second straight year of more than 8 percent growth.  Data for early 2008 suggest that export growth remains strong.  Real imports rose by 1 percent over the four quarters of 2007.  Nominal data through February suggest that import growth accelerated in the first part of 2008, with much of the increase reflecting the rising value of petroleum imports.  The wider trade deficit through February means that net exports are likely to add less to first-quarter real GDP growth than was the case in the second half of 2007, when trade contributed more than 1 percentage point to real GDP growth.

Headline inflation has picked up with energy and food prices, but measures of core inflation remain contained.  Overall consumer price inflation reached 4 percent in the twelve months ending in March, up from 2.8 percent a year earlier.  Energy prices started to climb rapidly last fall, with the front-month futures price of light sweet crude oil topping the $100 per barrel mark for the first time in February and averaging above $117 per barrel in late April.  Food prices are up 4.5 percent over the year ending in March, up from food price inflation of 3.3 percent a year ago.  Despite the pickup in headline inflation, core inflation remains within the narrow range that has prevailed over the past four years.  The core consumer price index, which excludes food and energy prices, rose 2.4 percent over the year ended in March, compared to 2.5 percent a year ago.  Rising inflation eroded the 3.6 percent increase in nominal average hourly earnings and meant that real wage growth turned negative in late 2007, with real wages down by 0.6 percent through the 12 months ending in March.

Economic growth appears to have remained sluggish in the second quarter to date, with the labor market deteriorating further.  Initial claims for unemployment insurance have continued to rise, with the four-week average of new claims up to around 370,000 in mid April from an average of 351,000 in the first quarter.  Consumer sentiment fell to a 26-year low in April, and homebuilder confidence remained near a record low.  Regional measures of manufacturing activity point to broadly flat factory activity in April.

The Economic Stimulus Act of 2008 will provide an important boost to GDP in the second half of the year: more than $150 billion in payments to individuals and business tax relief this year, with the first payments going to consumers this week.  These stimulus payments are expected to provide significant support to household and business spending in the middle of the year. 

Other policy actions of the Administration have been aimed at helping individual homeowners affected by the housing market downturn.  These include measures to help increased numbers of families to refinance their mortgages into fixed-rate products guaranteed by the Federal Housing Administration (FHA); since August, FHA has helped more than 170,000 homeowners refinance.  The Administration has also worked with the HOPE NOW Alliance on measures being taken by private lenders to prevent avoidable foreclosures in cases where borrowers have the desire and financial wherewithal to afford their home in a more suitable mortgage product.  These efforts have produced meaningful results: HOPE NOW announced in April that about 1.2 million struggling homeowners have received either a loan modification or repayment plan since July 2007 to help them stay in their homes.  Preventing avoidable foreclosures limits further increases in the inventory of unsold homes, which would otherwise extend the housing correction.  Legislative action on FHA modernization and GSE reform would assist additional homeowners and strengthen the financial sector and thus the overall U.S. economy.

In sum, the economy faces strong headwinds, as the housing correction, high energy prices, and strains in financial markets will continue to weigh on growth through 2008.  Tax rebates and investment incentives in the Economic Stimulus Act of 2008 will support consumer and business spending in the middle of the year.  A resumption of strong and sustainable growth, however, requires that the U.S. economy work through the corrections in housing and credit markets.

-30-

Remarks by Under Secretary David H. McCormick
to the CFA Society of Chicago

Chicago − Thank you for your invitation to be here today. I'm delighted to meet this distinguished group.

Today, I've been asked to speak about the public policy response to financial market turmoil. Unfortunately, the rhetoric surrounding this subject has sometimes drifted towards sweeping regulation or unbounded injections of public money. Such suggestions seem motivated by hope for a simple and easily implemented solution.

But in fact, there are no quick fixes, no simple solutions. The reality of market developments since August 2007 is much more complicated and requires multi-dimensional responses. Recent events highlight some age-old truths and the ever-present need to cultivate strong market discipline, greater transparency and disclosure, prudent regulatory policies and robust risk management.

Today, I'd like to discuss with you the forces that led to current market conditions and I plan to explain an ambitious combination of domestic and international actions which are being undertaken to address these challenges. While there will inevitably be more bumps in the road ahead, U.S. long-run economic fundamentals remain sound, and the flexibility, resilience and strength of our capital markets and our economy will prevail.

The current turmoil finds its original roots in a long period of benign macroeconomic and financial conditions that encouraged widespread complacency about risk. Investors in search of higher yields created significant demand for structured credit products but, in many cases, did not conduct adequate due diligence.

Meanwhile, demand for housing began to slow in 2004, and credit standards loosened significantly, particularly for subprime mortgages. Hybrid-adjustable-rate mortgages (ARMs) with low teaser rates, interest-only features, low or no down payments, and even negative amortization, became popular. In 2005 and 2006, non-traditional ARMs comprised about one-quarter of mortgage originations, exposing mortgage holders to far greater risk than traditional fixed rate mortgages.

At the same time, the pace of financial innovation gathered momentum and the trend toward securitization of assets accelerated. Financial innovation clearly brought enormous benefits to investors and consumers, and contributed to domestic and global economic growth. We also see, however, that the resulting dramatic increase in leverage and complexity of financial instruments brought new risks to financial markets – not only to the United States but to other interconnected markets in Europe and around the world.

The looser credit standards, combined with the aforementioned complacency, inevitably contributed to an unexpected rise in mortgage delinquencies. This, in turn, triggered a global reassessment of risk beginning in August 2007, followed by significant de-leveraging. The dramatic swing in sentiment, subsequent market volatility and heightened uncertainty ratcheted up demand for cash and liquidity. Many structured finance markets seized up, causing markets for asset-backed commercial paper to contract substantially.

These developments revealed serious weaknesses in risk management practices at many large U.S. and European financial institutions, particularly in the area of liquidity risk management. Some institutions experienced significant losses and significant balance sheet pressures, contributing to a tightening of lending standards and potential impact on economic growth.

The Administration has responded vigorously, both on the domestic and the international fronts. Here at home, the Administration's response addresses near-term as well as longer-term measures. The goals are straightforward: minimize the impact on the real economy; maintain efficient and liquid markets; ensure continued availability of credit; and enhance risk management. Our domestic approach includes three sets of actions to help accomplish these goals.

First, the Administration has acted aggressively to support the economy as it weathers the housing correction and financial market challenges. The housing correction will undoubtedly take time to run its course. The fiscal stimulus package, signed into law by President Bush on February 13, provides temporary tax relief to over 130 million American households and temporary tax incentives for businesses. This year's $150 billion infusion will support the creation of over half a million additional jobs by year end.

Our housing market initiatives also seek to increase the availability of affordable mortgage financing, prevent avoidable foreclosures, and minimize the economic disruption of the housing correction. They include temporary actions to raise the conforming loan limit, which will allow Fannie Mae and Freddie Mac to inject more capital into the mortgage market. Two other key initiatives include FHA Secure, launched in September, and the HOPE NOW Alliance, launched in October at the encouragement of the Treasury. To date, the Federal Housing Administration has refinanced more than 155,000 borrowers into affordable loans, while the HOPE NOW Alliance recently announced that nearly 1.2 million homeowners have been helped through workout plans since the middle of last year. As this effort progresses, the Administration will continue to look for new ways to assist more struggling homeowners, as was evident with the recent expansion of FHA Secure to help additional borrowers qualify for government-insured mortgage loans.

Second, U.S. policymakers have also initiated a number of medium-term efforts to strengthen market discipline and address regulatory gaps. Secretary Paulson chairs the President's Working Group on Financial Markets – the PWG – an interagency policy coordination group that includes the Fed, the SEC, and the CFTC. On March 13, the members of the PWG issued a comprehensive review of policy issues related to recent financial market turmoil. That review identified several areas of underlying weaknesses, including:

• lax underwriting standards for mortgages, particularly for subprime mortgages;
• an erosion of market discipline in the securitization process;
• flaws in credit rating agencies' assessments of some complex structured credit products;
• risk management weaknesses at global financial institutions; and
• regulatory policies that failed to mitigate risk management weaknesses.

The President's Working Group recommended measures to reform mortgage origination, strengthen risk management, enhance disclosure and market discipline in the securitization process, and reform the use of credit ratings. Secretary Paulson also has proposed establishing a new federal Mortgage Origination Commission to fill an important gap in the current regulatory structure.

Finally, the Administration also is working on longer-term efforts to maintain competitive capital markets. Long before our current challenges, Secretary Paulson had launched a broad Capital Markets Competitiveness Initiative to improve financial regulation effectiveness. Since then, work has proceeded in a variety of areas such as accounting and auditing, disclosure, and financial education. These long-term efforts remain central to the resilience of our financial markets, and their ability to support sustainable economic growth.

Of particular note, there is a pressing need to modernize our regulatory framework, which resembles a patchwork of overlapping agencies and responsibilities conceived over the last 75 years. After extensive consultations, Treasury concluded in its Blueprint for modernized financial regulation that the optimal financial regulatory model mirrors the reasons we regulate: market stability, safety and soundness associated with federal guarantees, and consumer and investor protection. This proposal includes a market stability regulator, prudential financial regulator and business conduct regulator. This approach would foster innovation, mitigate risk, and enhance competitiveness.

These concerted domestic efforts notwithstanding, financial turmoil witnessed on a global scale also has required an international response. Internationally, as market turmoil began to spread, Treasury quickly engaged with our counterparts in the Group of Seven (G-7) countries and the Financial Stability Forum.

Across global markets, and with the support of their national regulators, many financial institutions took aggressive action to write down assets, disclose losses and raise new capital. Write downs and losses in the past six months total well over $200 billion with U.S. financial institutions accounting for about half, Europeans over a third, and Asians, Canadians and others the remainder. Global financial institutions have raised over $150 billion in capital, with sovereign wealth funds making significant contributions. It remains vital that financial institutions act promptly to recognize the losses, secure adequate capital, and ensure credit availability for consumers and businesses.

In September, the G-7 asked the Financial Stability Forum to examine underlying weaknesses and develop appropriate international responses. The Financial Stability Forum (FSF), formed by the G-7 in 1999 following the Asian financial crisis, occupies a unique place in the international landscape. The FSF brings together supervisors, central banks, finance ministries, the International Monetary Fund and the World Bank, and other international regulators. Together, the members of the FSF assess international financial system vulnerabilities and identify needed actions among responsible authorities. This provides critical coordination between globally integrated capital markets and national regulatory agencies.

The FSF presented its findings to the G-7 last week. The report's conclusions and recommendations are consistent to those of the President's Working Group, but on a global scale. The recommendations include:

• Strengthening prudential oversight of capital, liquidity and risk management.
• Enhancing transparency and valuation.
• Changing and clarifying the role and use of credit ratings.
• Strengthening the authorities' responsiveness to risks.
• Creating robust arrangements for dealing with stress in the financial system.

Let me expand briefly on each of these areas.

Prudential oversight: Firms need to strengthen their risk management practices, liquidity buffers and capital. The Basel Committee should raise capital requirements for complex securities and off-balance sheet vehicles. Supervisors need to issue revised liquidity risk management guidelines by July 2008, enhance monitoring, and require more stress testing.

Transparency and valuation: Well-functioning markets rely on timely disclosure and robust valuations. Firms need to fully disclose their risk exposures and fair value estimates for complex securities. Supervisors need to require improved transparency for off-balance sheet entities. The International Accounting Standards Board should urgently act to improve standards for off-balance sheet entities and improve guidance for fair value accounting.

Credit ratings: Investors should improve their due diligence efforts, reducing their reliance on credit ratings. Credit rating agencies need to clearly differentiate the ratings for structured products, improve their disclosures, and reassess the quality of the information they use to determine ratings for structured products.

Authorities' responsiveness to risks: Supervisors and central banks need to increase their cooperation and information exchanges, including assessments of financial stability risks.

Dealing with stress in the financial system: Central banks need to effectively provide liquidity when the financial system is under stress. In addition, authorities should strengthen arrangements for dealing with weak and failing banks, domestically and across borders.

These recommendations, while primarily aimed at filling regulatory gaps, also include suggestions that could enhance market conditions. These include, for example, encouraging stronger mid-2008 financial reporting, enhanced transparency for off-balance sheet entities, and fair value estimates for complex securities. These are important and immediate steps for boosting market confidence.

Work is already underway in many areas. Last week, the G-7 committed to the timely implementation of the FSF recommendations by the end of 2008. The Financial Stability Forum will report on progress on this ambitious agenda to the G-7 Finance Ministers next October. This important work – and this important body – will continue efforts to strengthen market discipline and encourage efficient and competitive markets.

Over the past 8 months, we have learned that our efforts must evolve quickly and creatively as events unfold and new information becomes available. And, we must maintain our perspective. Secretary Paulson, drawing on years of experience, has observed that: "every period of prolonged turbulence seems to be the worst until it is resolved. And it always is resolved."

Recent events highlight the ever present need to cultivate strong market discipline, greater transparency and disclosure, prudent regulatory policies and robust risk management. The actions being taken are doing just that.

I believe we will work through this period as we have those in the past, and will return to robust growth. The long-term prospects of the U.S. economy remain solid. Inevitably, more challenges lie ahead, but we will learn from this experience. We will adapt and we will emerge stronger. The flexibility, resilience and strength of U.S. capital markets and the U.S. economy will prevail.

April 15, 2008
HP-927

PWG Private-Sector Committees Release Best Practices for Hedge Fund Participants

Washington- Two blue-ribbon private-sector committees established by the President's Working Group released separate yet complementary sets of best practices for hedge fund investors and asset managers today, in the most comprehensive public-private effort to increase accountability for participants in this industry.

"As we said when announcing these committees --- we want the world's highest investor protection standards; we want to guard against systemic risk and keep the United States the most competitive financial marketplace in the world. As these committees were formed, their Chairmen and the PWG believed that markets benefit when experienced and respected participants develop best practices and new accountability standards," said Treasury Secretary Henry M. Paulson, Jr., who chairs the PWG. "These are important issues, and these recommendations represent tangible steps towards our goals."

The PWG tasked the committees, selected in September 2007 and comprised of well-respected asset managers and investors, with collaborating on industry issues and developing a set of best practices for their respective groups of stakeholders. Their work was based on the PWG's Principles and Guidelines Regarding Private Pools of Capital issued in February 2007, which sought to enhance investor protections and systemic risk safeguards. The best practices may be viewed at the committees' websites, www.amaicmte.org.

The PWG includes the heads of the U.S. Treasury Department, the Federal Reserve, the Securities and Exchange Commission and the Commodity Futures Trading Commission.

The best practices for the asset managers call on hedge funds to adopt comprehensive best practices in all aspects of their business, including the critical areas of disclosure, valuation of assets, risk management, business operations, compliance and conflicts of interest. Eric Mindich, CEO of Eton Park Capital Management, chairs the Asset Managers' Committee.

The best practices for investors include a Fiduciary's Guide and an Investor's Guide. The Fiduciary's Guide provides recommendations to individuals charged with evaluating the appropriateness of hedge funds as a component of an investment portfolio. The Investor's Guide provides recommendations to those charged with executing and administering a hedge fund program once a hedge fund has been added to the investment portfolio. Russell Read, Chief Investment Officer of the California Public Employees' Retirement System, leads the Investors' Committee.

Both best practices documents recommend innovative and far-reaching practices that exceed existing industry standards. The recommendations complement each other by encouraging both types of market participants to hold the other more accountable. Given the global nature of financial markets, the best practices were designed to be consistent with the work that was done in the United Kingdom to improve hedge fund oversight.

The PWG Principles and Guidelines Regarding Private Pools of Capital issued in early 2007 provided a clear but flexible approach to address issues presented by the growth and dynamism of these investment vehicles. The PWG designed the principles to endure as financial markets evolved and identified four stakeholders who contribute to hedge fund vigilance: asset managers, creditors, investors and regulators.

Regulators moved to implement these principles and worked to encourage the industry to adopt the principles. Secretary Paulson in June 2007 announced that the PWG would call upon experienced industry participants who could lead the charge to raise standards for improving transparency and accountability. The group selected chairmen to lead two private-sector committees to develop the best practices.

The PWG and the committee chairmen sought a range of experience and leadership when considering committee members. The Investors' Committee included representatives from labor organizations, endowments, foundations, corporate and public pension funds, investment consultants, and non-U.S. investors. The Asset Managers' Committee includes representatives from a diverse group of hedge fund managers representing many different investment strategies.

The recommendations will be open for public comment for 60 days. The committees then will review and, as necessary, revise these best practices and standards. Comments may be submitted at the Committees' website. The committees will continue to meet to discuss raising the standards for industry participants after the best practices are complete.

REPORTS

• Fact Sheet: Asset Managers’ Committee Best Practices Summary
• Asset Managers’ Committee Best Practices
• Fact Sheet: Investors’ Committee Best Practices Summary
• Investors’ Committee Best Practices