November 20, 2008
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Treasury Enters into Agreement
to Assist the Reserve Fund’s US Government Money Market Fund

Washington- The U.S. Treasury Department announced today that it agreed to assist with the liquidation of The Reserve Fund's U.S. Government Fund, due to unique and extraordinary circumstances.

The fund, which Treasury accepted into its temporary guarantee program for money market funds, has not made a claim to Treasury under the program. In a separate agreement with the fund, the Treasury has agreed to serve as a buyer of last resort for the fund's securities, which consist of short-term U.S. government and government sponsored enterprise securities.

This action is being taken to ensure that the fund is liquidated in an orderly and timely fashion.

The agreement grants the fund a 45-day period where it will continue to sell assets at or above their amortized cost. At the conclusion of this period, Treasury's Exchange Stabilization Fund will purchase any remaining securities at amortized cost, up to an amount required to ensure that each shareholder receives $1 for every share they own.

This extraordinary action is in response to the unique situation of the money market fund. This fund was permitted to suspend share redemptions as of September 17, in accordance with an order issued by the Securities and Exchange Commission.

No other funds participating in Treasury's temporary guarantee program received a similar order from the SEC. Because of this, Treasury does not foresee a need to take similar actions with regard to any other funds participating in Treasury's temporary guarantee program.

Treasury's agreement with the fund requires the fund's adviser and its trustees to waive their fees accrued after November 19 to the extent that fund shareholders do not receive distributions of $1 per share.

REPORTS

• Letter Agreement

Treasury Designates al-Qaida in Iraq Facilitator

Washington, DC--The U.S. Department of the Treasury today designated Redouane El Habhab, a Germany-based terrorist financier and facilitator who has provided financial support and other services to al-Qaida in Iraq (AQI).

"We must remain vigilant in our efforts to shut every funding stream terrorists and their supporters exploit to carry out attacks in Iraq and around the world," said Adam Szubin, director of Treasury's Office of Foreign Assets Control. "The power and reach of the UN's counterterrorism authorities continue to be critically important tools to shut down financing conduits wherever they may develop."

Redouane El Habhab has supported AQI financially, through payments to the group, and logistically, by facilitating the smuggling of "violence prone activists" into Iraq.

On January 24, 2008, the Schleswig-Holstein Higher Regional Court in Germany convicted Habhab of having provided support to a foreign terrorist organization and sentenced him to a five year, nine month prison term. Habhab initially appealed his sentence; however, he subsequently withdrew this appeal, and he remains in prison in Lübeck, Germany. On November 12, 2008, Habhab's name was added to the Consolidated List of the U.N. 1267 Committee, which obligates all U.N. member states to freeze his assets and prevent his travel.

Redouane El Habhab was designated today under Executive Order 13224, which targets terrorists and those providing support to terrorists or acts of terrorism.  Any assets Redouane El Habhab holds under U.S. jurisdiction are frozen and U.S. persons are prohibited from engaging in any transactions with him. 

Identifying Information

REDOUANE EL HABHAB
Nationality:                                        
German
DOB:                                                 
December 20, 1969
POB:                                                  
Casablanca, Morocco
German Passport:                               
1005552350
German Federal Identity Card:            
1007850441
Address:                                             
Iltisstraße 58, 24143 Kiel, Germany

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Treasury Targets Somali Terrorists

Washington, DC--The U.S. Department of the Treasury today designated three members of al-Shabaab, a violent and brutal extremist group in Somalia.

"Today's action targets three leaders of al-Shabaab, an al Qaida-linked terrorist group that uses lethal tactics to undermine peace and civil society in Somalia," said Adam Szubin, director of Treasury Office of Foreign Assets Control.  "These terrorist commanders have had direct involvement in the kidnappings and cold-blooded murders of numerous Somali officials and civilians and they should be cut off from the world's financial system."

Al-Shabaab has used intimidation and violence to undermine the Somali government and threaten civil society activists working to bring about peace through political dialogue and reconciliation. It has claimed responsibility for shooting Deputy District Administrators in Somalia and for several bombings and shootings in Mogadishu targeting Ethiopian troops and Somali government officials.

In addition to attacks that have killed or wounded various Somali government officials, al­-Shabaab claimed responsibility for the February 6, 2008 bombings in Boosaaso, Puntland, which killed 22 Ethiopian civilians and wounded 66.

Further, a number of al-Shabaab members are affiliated with al Qaida, and many of al-Shabaab's senior leaders are believed to have trained and fought with al Qaida in Afghanistan.

The U.S. Department of State named al-Shabaab as a Foreign Terrorist Organization and a Specially Designated Global Terrorist on February 26, 2008.

Today's action was taken pursuant to Executive Order 13224, which targets terrorists and those providing support to terrorists or acts of terrorism.  Any assets these individuals hold under U.S. jurisdiction are frozen and U.S. persons are prohibited from engaging in any transactions with the designees.

Identifying Information

AHMED ABDI AW-MOHAMED
AKAs:                        
Ahmed Abdi Aw Mohammed
Muktar Abdulrahim Abuzubair
Shaykh Mukhtar
Abu Zubeyr
Godani
Godane
DOB:                   
10 July 1977
POB:                                    
Hargeysa, Somalia
Nationality:                
Somali

Ahmed Abdi aw-Mohamed is the founder and a current leader of al-Shabaab. He claimed his group was responsible for the May 2007 assassination of a judge in Beledweyne, Somalia, and in March 2007 he coordinated attacks on Ethiopian troops in Somalia. Aw-Mohamed has also served as a conduit for financing to al-Shabaab.

ISSA OSMAN ISSA
AKA:                   
Musse
Abdullah Bur
Abdullah Atto
Abdala Sudani
Afadey            
DOB:                   
1973
POB:                                    
Malindi, Kenya
Nationality:                          
Kenyan

Issa Osman Issa has a leadership role in al-Shabaab and has served as a commander of al­-Shabaab forces in Somalia.

In late April 2007, Issa led a militia assault against Mogadishu's Basil Hotel, which was often frequented by Ugandan peacekeepers. He also was reportedly involved in recruiting an individual to carry out a successful April 2007 suicide attack against the Ethiopian military presence in Afgooye, Somalia.

Before al-Shabaab's creation, Issa was one of the operatives who fired the surface-to-air missiles used in the failed 2002 attempt to shoot down an Israeli airliner in Mombasa, Kenya. Issa was also involved in the planning of the near-simultaneous attack in 2002 against the Paradise Hotel in Kikambala, Kenya, in which a vehicle-borne explosive device struck the hotel, killing 12 and injuring 40.

MUKHTAR ROBOW
AKAs:                                 
Mukhtar Ali Rubu
Mukhtar Abdullahi Ali
Mujahid Mukhtar Robow Ali
Shaykh Mukhtar Robo Ali
Abu Mansur
Abu Mansour
DOB:                   
1969
ALT. DOB:                
10 October 1969*
POB:                                    
Xudur, Somalia
ALT. POB:                
Keren, Eritrea*
Nationality:                          
Eritrean*
National ID No.:        
1372584, Kenya*
Passport No.:              
0310857, Eritrea, issued 21 August 2006, expires 20 August 2008*

*This identifying information is derived from an Eritrean passport issued under the alias name of Mukhtar Abdullahi Ali.

Mukhtar Robow serves as al-Shabaab's spokesperson, communicating to the press and public on its behalf. He has also served as al-Shabaab's spiritual leader and as its military commander in Southern Somalia.

As an al-Shabaab military commander, Robow has targeted Somali Transitional Federal Government (TFG), Ethiopian and African Union troops in Somalia. In December 2007, Robow's al-Shabaab forces attacked military bases of the Somali government forces, Ethiopian forces and African Union peacekeepers in Mogadishu. In addition, Robow and former al­-Shabaab leader Aden Hashi Ayrow (deceased) were responsible for the November 2006 suicide attack against a TFG checkpoint in Baidoa, Somalia. The attack killed at least eight and wounded four.

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In Case You Missed It:
“Fighting the Financial Crisis, One Challenge at a Time”

By Secretary Henry M. Paulson, Jr.
The New York Times
November 18, 2008

We are going through a financial crisis more severe and unpredictable than any in our lifetimes. We have seen the failures, or the equivalent of failures, of Bear Stearns, IndyMac, Lehman Brothers, Washington Mutual, Wachovia, Fannie Mae, Freddie Mac and the American International Group. Each of these failures would be tremendously consequential in its own right. But we faced them in succession, as our financial system seized up and severely damaged the economy.

By September, the government faced a systemwide crisis. After months of making the most of the authority we already had, we asked Congress for a comprehensive rescue package so we could stabilize our financial system and minimize further damage to our economy.

By the time the legislation had passed on Oct. 3, the global market crisis was so broad and so severe that we needed to move quickly and take powerful steps to stabilize our financial system and to get credit flowing again. Our initial intent was to strengthen the banking system by purchasing illiquid mortgages and mortgage-related securities. But the severity and magnitude of the situation had worsened to such an extent that an asset purchase program would not be effective enough, quickly enough. Therefore, exercising the authority granted by Congress in this legislation, we quickly deployed a $250 billion capital injection program, fully anticipating we would follow that with a program for buying troubled assets.

There is no playbook for responding to turmoil we have never faced. We adjusted our strategy to reflect the facts of a severe market crisis, always keeping focused on our goal: to stabilize a financial system that is integral to the everyday lives of all Americans. By mid-October, our actions, in combination with the Federal Deposit Insurance Corporation's guarantee of certain debt issued by financial institutions, helped us to accomplish the first major priority, which was to immediately stabilize the financial system.

As we assessed how best to use the remaining money for the Troubled Asset Relief Program, we carefully considered the uncertainties around the deteriorating economic situation in the United States and globally. The latest economic reports underscore the challenges we are facing. The gross domestic product for the third quarter (which ended Sept. 30, three days before the bill passed) shrank by 0.3 percent. The unemployment rate rose in October to a level not seen since the mid-1990s. Home prices in 10 major cities have fallen 18 percent over the previous year. Auto sales numbers plummeted in October and were more than a third lower than one year ago. The slowing of European economies has been even more drastic.

I have always said that the decline in the housing market is at the root of the economic downturn and our financial market stress. And the economy, as it slows further, threatens to prolong this decline, as well as the stress on our financial institutions and financial markets.

A troubled-asset purchase program, to be effective, would require a huge commitment of money. In mid-September, before economic conditions worsened, $700 billion in troubled asset purchases would have had a significant impact. But half of that sum, in a worse economy, simply isn't enough firepower.

If we have learned anything throughout this year, we have learned that this financial crisis is unpredictable and difficult to counteract. We decided it was prudent to reserve our TARP money, maintaining not only our flexibility, but also that of the next administration.

The current $250 billion capital purchase program is strong medicine for our financial institutions. More capital enables banks to take losses as they write down or sell troubled assets. And stronger capitalization is essential to increasing lending, which is vital to economic recovery.

Recently I've been asked two questions. First, Congress gave you the authority you requested, and the economy has only become worse. What went wrong? Second, if housing and mortgages are at the root of our economic difficulties, why aren't you addressing those problems?

The answer to the first question is that the purpose of the financial rescue legislation was to stabilize our financial system and to strengthen it. It is not a panacea for all our economic difficulties. The crisis in our financial system had already spilled over into the overall economy. But recovery will happen much, much faster than it would have had we not used TARP to stabilize our system. If Congress had not given us the authority for TARP and the capital purchase program and our financial system had continued to shut down, our economic situation would be far worse today.

The answer to the second question is that more access to lower-cost mortgage lending is the No. 1 thing we can do to slow the decline in the housing market and reduce the number of foreclosures. Together with our bank capital program, the moves we have made to stabilize and strengthen Fannie Mae and Freddie Mac, and through them to increase the flow of mortgage credit, will promote mortgage lending. We are also working with the Department of Housing and Urban Development, the F.D.I.C. and others to reduce preventable foreclosures.

I am very proud of the decisive actions by the Treasury Department, the Federal Reserve and the F.D.I.C. to stabilize our financial system. We have done what was necessary as facts and conditions in the market and economy have changed, adjusting our strategy to most effectively address the crisis. We have preserved the flexibility of President-elect Barack Obama and the new secretary of the Treasury to address the challenges in the economy and capital markets they will face.

As policymakers face the difficult challenges ahead, they will begin with two considerable advantages: a significantly more stable banking system, one where the failure of a major bank is no longer a pressing concern; and the resources, authority and potential programs available to deal with the future capital and liquidity needs of credit providers.

Deploying these new tools and programs to restore our financial institutions, financial markets and the flow of lending and credit will determine, to a large extent, the speed and trajectory of our economic recovery. I am confident of success, because our economy is flexible and resilient, rooted in the entrepreneurial spirit and productivity of the American people.

Treasury Issues Debt Management Guidance on the Temporary Supplementary Financing Program

Washington - The balance in the Treasury's Supplementary Financing Account will decrease in the coming weeks as outstanding supplementary financing program bills mature. This action is being taken to preserve flexibility in the conduct of debt management policy in meeting the government's financing needs.

November 14, 2008
HP-1272

PWG Announces Initiatives to Strengthen
OTC Derivatives Oversight and Infrastructure

Washington- The President's Working Group on Financial Markets today announced a series of initiatives to strengthen oversight and the infrastructure of the over-the-counter derivatives market.

Initiatives announced today include the development of credit default swap central counterparties, some of which will commence operations before the end of 2008, and the establishment of a Memorandum of Understanding regarding CDS central counterparties among the Federal Reserve Board of Governors, the Securities and Exchange Commission and the Commodity Futures Trading Commission. The PWG also announced a broad set of policy objectives to guide efforts to address the full range of challenges associated with OTC derivatives and issued a progress summary to provide an overview of the results of ongoing efforts to strengthen the infrastructure of OTC derivatives markets.

The Treasury Secretary serves as chair of the group, which includes the Chairs of the Federal Reserve Board, the Securities and Exchange Commission, and the Commodity Futures Trading Commission. The PWG, working with the Office of the Comptroller of the Currency and the Federal Reserve Bank of New York, has been actively overseeing improvements underway in OTC derivatives markets and the reports issued today identify the progress already made and specific objectives for the relevant supervisors going forward.

Over-the-counter derivatives are integral to the smooth functioning of today's complex financial markets and, with appropriate regulatory oversight and prudent management can enhance the ability of market participants to manage risk. The rapid growth of OTC derivatives markets over the past several years reflects their increasing importance to market participants.

The PWG's top near-term OTC derivatives priority is to oversee the successful implementation of central counterparty services for credit default swaps. A well-regulated and prudently managed CDS central counterparty can provide immediate benefits to the market by reducing the systemic risk associated with counterparty credit exposures. It also can help facilitate greater market transparency and be a catalyst for a more competitive trading environment that includes exchange trading of CDS.

At the prompting of the PWG, several potential central counterparty providers have accelerated the development of their efforts. The relevant regulatory authorities are assessing these central counterparty proposals by conducting detailed on-site reviews of risk management and other key design elements. After completing the on-site reviews, regulators expect to proceed toward regulatory approvals and/or exemptions expeditiously and anticipate that one or more CDS central counterparties will commence operations before the end of 2008.

To facilitate the regulatory approval process and to promote more consistent regulatory oversight, the Board of Governors of the Federal Reserve System, the Securities and Exchange Commission and the Commodity Futures Trading Commission today signed a Memorandum of Understanding. The Memorandum of Understanding establishes a framework for consultation and information sharing on issues related to CDS central counterparties.

The PWG is announcing a set of additional policy objectives to guide efforts to address challenges associated with OTC derivatives, consistent with the recommendations of the Financial Stability Forum.

U.S. and foreign supervisors embarked on an effort in 2005 to improve how market participants manage their OTC derivatives operations, which had not matured sufficiently to support increased trading volumes. These efforts sought to enhance other elements of the market infrastructure, reduce systemic risk and address operational risks that have accompanied the growth of OTC derivatives.

In light of recent developments, the PWG is issuing broader objectives than those that motivated the PWG's previous OTC derivatives recommendations in the March 13 PWG Policy Statement on Financial Market Developments.

The PWG has established the following policy objectives:

1) improve the transparency and integrity of the credit default swaps market;

2) enhance risk management of OTC derivatives;

3) further strengthen the OTC derivatives market infrastructure;

4) strengthen cooperation among regulatory authorities.

The agencies in the PWG will work with other regulators and market participants to achieve these goals over the next several months. Where necessary, they will support legislative change.

REPORTS

• MOU
• Progress Summary
• Policy Objectives

Setting the Record Straight

• Treasury worked with Congress to put strong oversight and transparency provisions in the bill and every reporting requirement in the statute has been fully met on time. All reports have been published on the Treasury's website.
• The law created a new Special Inspector General for the program, and that position has to be confirmed by the Senate. The Administration has been working to identify a qualified candidate and will work closely with the Senate when a nominee is chosen.
• GAO has been on site from the beginning as Treasury has implemented the Emergency Economic Stabilization Act. Within days of the bill being signed, the Acting Comptroller General spoke with Secretary Paulson and with Interim Assistant Secretary Kashkari. GAO has had a team of over a dozen specialists and senior executives working on all aspects of the program. GAO staff typically meets with Treasury staff several times a week. They have access to contract files as soon as each contract is completed, and they often begin their review of those files within 24 hours of a contract signing. Every contract is posted on the Treasury website.
• The Financial Stability Oversight Board was organized and met within days of the bill's enactment, well before the statutory deadline. EESA required the board to meet within 14 days of enactment, and monthly thereafter. In fact, the board met within 4 days of enactment, and has met 4 times in the 5 weeks since EESA was enacted. Meetings have been held both to review overall implementation of EESA as well as to consider establishment of the Capital Purchase Program and TARP's investment in American International Group. It has published bylaws and meeting minutes, elected a chair, and appointed a secretary, counsel, and staff-level executive director.
• Treasury has provided regular briefings to staff from the Congressional oversight committees and leadership offices on its implementation of the legislation.
• Treasury is prepared to work closely with the Congressional Oversight Panel once it is established.

November 13, 2008
HP-1268

Treasury Action Targets Burmese Drug Cartel

Washington, DC--The U.S. Department of the Treasury's Office of Foreign Assets Control (OFAC) today named 26 individuals and 17 companies tied to Burma's Wei Hsueh Kang and the United Wa State Army (UWSA) as Specially Designated Narcotics Traffickers pursuant to the Foreign Narcotics Kingpin Designation Act (Kingpin Act). 

"The United Wa State Army is the largest and most powerful drug trafficking organization in Southeast Asia and is a major producer and exporter of synthetic drugs, including methamphetamine," said OFAC Deputy Director Barbara C. Hammerle.  "Today OFAC is targeting the Wa's lieutenants and the financial holdings of this massive drug trafficking organization.  We call on other nations to do the same." 

On June 1, 2000, the President identified Wei Hsueh Kang as a significant foreign narcotics trafficker under the Kingpin Act.  Wei is a senior commander of the UWSA, which the President subsequently identified as a significant foreign narcotics trafficker on May 29, 2003.  In January 2005, federal prosecutors in the Eastern District of New York unsealed a criminal indictment charging Wei, along with his brothers Wei Hsueh Lung and Wei Hsueh Ying, who are designated today, for narcotics trafficking.  The U.S. Department of State is offering a reward of up to $2,000,000 for information leading to Wei Hsueh Kang's capture.

Other key individuals designated by OFAC today are Pao Yu Hsiang, Ho Chun Ting and Shih Kuo Neng.  Pao Yu Hsiang, indicted in 2005 with Wei Hsueh Kang, is the Commander-in-Chief of the UWSA.  In May 2005, prosecutors in the Eastern District of New York charged Ho Chun Ting and Shih Kuo Neng, among others, with money laundering and narcotics trafficking.  In October 2007, Hong Kong authorities arrested Ho Chun Ting, a partner of Wei Hsueh Kang, but Hong Kong later released him for unknown reasons. Shih Kuo Neng is the manager of the Hong Pang conglomerate of companies, many of which are also designated today. 

Today's designation would not have been possible without key support from the Drug Enforcement Administration's offices in Thailand and the U.S. Attorney's Office in the Eastern District of New York.

This action is part of ongoing efforts under the Kingpin Act to apply financial measures against significant foreign narcotics traffickers worldwide.  Internationally, 419 businesses and individuals associated with 75 drug kingpins have been designated by OFAC pursuant to the Kingpin Act since June 2000.

The designation action freezes any assets the 43 designees may have under U.S. jurisdiction and prohibits U.S. persons from conducting transactions or dealings in the property interests of the designated individuals and entities. Penalties for violations of the Kingpin Act range from civil penalties of up to $1,075,000 per violation to more severe criminal penalties. Criminal penalties for corporate officers may include up to 30 years in prison and fines up to $5,000,000. Criminal fines for corporations may reach $10,000,000. Other individuals face up to 10 years in prison, and fines pursuant to Title 18 of the United States Code, for criminal violations of the Kingpin Act.

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REPORTS

• Designation Chart.

November 12, 2008
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Agencies Issue Final Rule to Implement Unlawful
Internet Gambling Enforcement Act

Washington - The Department of the Treasury and the Federal Reserve Board today announced the release of a joint final rule to implement the Unlawful Internet Gambling Enforcement Act of 2006. The Act prohibits gambling businesses from knowingly accepting payments in connection with unlawful Internet gambling, including payments made through credit cards, electronic funds transfers, and checks.

The Board and the Treasury are required by the Act to develop a joint rule in consultation with the Department of Justice. The final rule requires U.S. financial firms that participate in designated payment systems to establish and implement policies and procedures that are reasonably designed to prevent payments to gambling businesses in connection with unlawful Internet gambling. The rule provides non-exclusive examples of such policies and procedures and sets out the regulatory enforcement framework. For purposes of the rule, unlawful Internet gambling generally would cover the making of a bet or wager that involves use of the Internet and that is unlawful under any applicable federal or state law in the jurisdiction where the bet or wager is initiated, received, or otherwise made.

Compliance with the rule is required by December 1, 2009.

The Federal Register notice is attached.

REPORTS

• Final Rule

Treasury to Join FHFA, GSEs, HOPE NOW to Announce Streamlined Modification Program

Treasury Assistant Secretary Neel Kashkari will join officials from the Federal Housing Finance Agency (FHFA), the Department of Housing and Urban Development and HOPE NOW today to announce a new streamlined modification program. A background briefing with FHFA, GSE and HOPE NOW representatives will follow the press conference.

The following event is open to the media:

Neel Kashkari, Interim Assistant Treasury Secretary for Financial Stability

James B. Lockhart, FHFA Director & Oversight Board Chairman

Brian Montgomery, FHA Commissioner

Faith Schwartz, HOPE NOW

Michael Heid, Wells Fargo

Remarks on Streamlined Modification Program

Pen-and-Pad Background Briefing

Tuesday, November 11, 2008 2 p.m. (EST)

OTS Amphitheatre

1700 G Street, NW

TV crews should bring their own lights and microphones. No stage lights or mult-box will be available. No cameras will be permitted to the background briefing.

November 10, 2008
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Treasury to Invest in AIG Restructuring Under the Emergency Economic Stabilization Act

Washington, DC-- The Treasury Department today announced that it will purchase $40 billion in senior preferred stock from the American International Group (AIG) as part of a comprehensive plan to restructure federal assistance to the systemically important company. Together with steps taken by the Federal Reserve, this restructuring will improve the ability of the firm to execute its asset disposition plan in an orderly manner. AIG will use the equity to pay down $40 billion of the Federal Reserve's secured lending facility.

Under the agreement AIG must be in compliance with the executive compensation and corporate governance requirements of Section 111 of the Emergency Economic Stabilization Act. AIG must comply with the most stringent limitations on executive compensation for its top five senior executive officers as required under the Emergency Economic Stabilization Act. Treasury is also requiring golden parachute limitations and a freeze on the size of the annual bonus pool for the top 70 company executives. Additionally, AIG must continue to maintain and enforce newly adopted restrictions put in place by the new management on corporate expenses and lobbying as well as corporate governance requirements, including formation of a risk management committee under the board of directors.

Treasury exercised its authority to purchase troubled assets under the Emergency Economic Stabilization Act.

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REPORTS

• AIG Term Sheet

November 7, 2008
HP-1260

Treasury Announces Solicitation for Financial Agents
under the Emergency Economic Stabilization Act

Washington, DC--The Treasury Department posted today a solicitation for financial agents to provide services that are needed for the effective implementation of the Capital Purchase Program being administered under the Emergency Economic Stabilization Act. The services being sought are:

• Equity, Debt, Warrants Asset Management Services

All interested and eligible parties that meet the requirements and guidelines required of the service should submit requests by the 5 p.m. (EST) on Nov 13, 2008.

These services are being obtained through the Treasury's authority to retain financial agents to provide services on its behalf as provided for under the Emergency Economic Stabilization Act. These are not contracts governed by the provisions of the Federal Acquisition Regulation. More information on Treasury's procurement authorities under this Act can be found at: http://www.treasury.gov/initiatives/eesa/authorities.shtml.

REPORTS

• Notice for Equity Securities, Debt Obligations and Warrants

November 7, 2008
HP-1259

Treasury Calls for Large Position Report

The Treasury is calling for Large Position Reports from those entities whose reportable positions in either the 2% Treasury Notes of September 2010 or the 3-1/8% Treasury Notes of September 2013 equaled or exceeded $2 billion as of close of business Thursday, November 6, 2008.  Entities with reportable positions in either of these notes equal to or exceeding the $2 billion threshold must submit a separate report for that security to the Federal Reserve Bank of New York.  Entities with positions in these notes below $2 billion are not required to file Large Position Reports. Reports must be received by the Government Securities Dealer Statistical Unit of the Federal Reserve Bank of New York before noon Eastern Time (ET) on Friday, November 14, 2008, and must include the required positions and administrative information. Large Position Reports may be faxed to (212) 720-5030 or delivered to the Bank at 33 Liberty Street, 4th floor.

This call for large position information is made under Treasury's large position reporting rules (17 CFR Part 420).  The notice calling for Large Position Reports is also being published in the Federal Register.  This press release and a copy of a sample Large Position Report, which appears in Appendix B of the rules at 17 CFR Part 420, are available at the Bureau of the Public Debt's website at: www.treasurydirect.gov/instit/statreg/gsareg/gsareg.htm

Questions about Treasury's large position reporting rules should be directed to Treasury's Government Securities Regulations Staff at Public Debt on (202) 504-3632.  Questions regarding the method of submission of Large Position Reports should be directed to the Government Securities Dealer Statistical Unit of the Federal Reserve Bank of New York at (212) 720-7993.

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REPORTS

• Details on Calls for Large Position Reports

Fact Sheet: Treasury Strengthens Preventive Measures Against Iran

On October 16, the Financial Action Task Force (FATF), which has members representing 32 jurisdictions and is the world's premier standard-setting body for anti-money laundering and counter-terrorist financing (AML/CFT), warned for the fourth time about the risks posed to the international financial system by continuing deficiencies in Iran's AML/CFT regime.  The FATF called for all countries to strengthen preventive measures to protect their financial systems from this risk.  Additionally, the UN Security Council called upon all states in March 2008 to exercise vigilance over the activities of financial institutions in their territories with all Iranian banks.

Consistent with these multilateral calls for action, the Treasury Department is revoking the "U-turn" general license today to protect U.S. financial institutions individually, and the U.S. financial system as a whole, from the significant terrorist financing and proliferation risks posed by Iran.  This regulatory action will close the last general entry point for Iran to the U.S. financial system.

Iran's access to the international financial system enables the Iranian regime to facilitate its support for terrorism and proliferation. The Iranian regime disguises its involvement in these illicit activities through the use of a wide array of deceptive techniques, specifically designed to avoid suspicion and evade detection by responsible financial institutions and companies.  Iran also is finding ways to adapt to existing sanctions, including by turning to non-designated Iranian banks to handle illicit transactions. 

The Treasury Department is taking a range of measures, including today's action, to counter these deceptive activities.  The Treasury Department encourages all jurisdictions to adopt robust preventive measures consistent with the FATF warnings and relevant UN Security Council Resolutions (UNSCRs). 

Iran Misuses the International Financial System to Support Terrorism

Iran is the world's most active state sponsor of terror.  The support provided by the regime to terrorist groups includes financing that is routed through the international financial system, especially through Iranian state-owned banks.          

•           Iran's Support to Terror.  The Department of State designated Iran as a state sponsor of international terrorism in 1984, and Iran remains the most active of the listed state sponsors of terrorism, routinely providing substantial resources and guidance to multiple terrorist organizations.  For example, Hamas, Hizballah, and the Palestinian Islamic Jihad (PIJ) maintain representative offices in Tehran to help coordinate Iranian financing and training of these groups.

•           Iran's IRGC and IRGC-Qods Force Support Terrorist Groups.  Elements of Iran's Islamic Revolutionary Guard Corps (IRGC) have been directly involved in the planning and support of terrorist acts throughout the world, including in the Middle East, Europe and Central Asia, and Latin America.  The IRGC-Qods Force, which has been designated under Executive Order 13224 for providing material support to the Taliban and other terrorist groups, is the Iranian regime's primary mechanism for cultivating and supporting terrorist and militant groups abroad.  Qods Force-supported groups include: Lebanese Hizballah; Palestinian terrorists; certain Iraqi Shi'a militant groups; and Islamic militants in Afghanistan and elsewhere.  The Qods Force is especially active in the Levant, providing Lebanese Hizballah with funding, weapons and training.  It has a long history of supporting Hizballah's military, paramilitary and terrorist activities, and provides Hizballah with more than $100 to $200 million in funding each year.  The Qods Force continues to provide the Taliban in Afghanistan with limited weapons, funding, logistics and training in support of anti-U.S. and anti-coalition activities.

•           Iran Uses its Banks to Finance Terrorism.  In a number of cases, Iran has used its state-owned banks to channel funds to terrorist organizations.  Between 2001 and 2006, Bank Saderat transferred $50 million from the Central Bank of Iran through Bank Saderat's subsidiary in London to its branch in Beirut for the benefit of Hizballah fronts that support acts of violence.  Hizballah also used Bank Saderat to send funds to other terrorist organizations, including Hamas, which itself had substantial assets deposited in Bank Saderat as of early 2005.  The Treasury Department designated Bank Saderat under E.O. 13224 for providing financial services to Hizballah, Hamas and PIJ.  Australia has also designated Bank Saderat.  Iran's Bank Melli, which has been designated by the United States under E.O. 13382 for proliferation-related activities, was used to transfer at least $100 million to the IRGC-Qods Force between 2002 and 2006.       

•           Iran Lacks a Counter-Terrorist Financing Legal Regime.  In addition to its regime-directed support to terrorist organizations, Iran continues to lack a legal framework to counter the risk of terrorist financing and has not indicated a willingness to address this deficiency.  The FATF's October statement on Iran notes that, while Iran has taken some steps towards implementing an anti-money laundering regime, there is a lack of even such a minimal "corresponding effort" by Iran in the area of counter-terrorist financing.            

Iran Misuses the International Financial System to Facilitate Proliferation

•           Iran Continues to Pursue Nuclear Capabilities and Develop Ballistic Missiles.  In addition to its active support to terrorist and militant activities, Iran continues to defy the international community by pursuing nuclear capabilities and developing ballistic missiles in violation of five UNSCRs.  Iran's failure to comply with these various resolutions has resulted in the UN Security Council's imposing sanctions against Iran.  These have included specific provisions aimed at preventing Iran from abusing banks and the international financial system to pursue nuclear capabilities and develop ballistic missiles. 

•           Iran Uses its Banks to Finance its Nuclear and Missile Programs. Multiple Iranian financial institutions have been implicated in facilitating Iran's nuclear and ballistic missile programs. 

➢ Bank Sepah.  Iran's state-owned Bank Sepah has been designated in the United States under E.O. 13382 and by the UN Security Council under UNSCR 1747.  Bank Sepah has provided direct and extensive financial services, such as arranging financing and processing dozens of multi-million dollar transactions, for the Shahid Hemmat Industries Group (SHIG) and the Shahid Bakeri Industries Group (SBIG), two Iranian missile firms designated by the UN Security Council in UNSCR 1737 and identified by President Bush in the Annex to E.O. 13382 for their direct roles in advancing Iran's ballistic missile programs.  Bank Sepah also has provided financial services to SHIG's and SBIG's parent entity, Iran's Aerospace Industries Organization (AIO), which also was identified by President Bush in the Annex to E.O. 13382 for its role in overseeing all of Iran's missile industries.

➢ Bank Melli.  Iran's largest state-owned bank, Bank Melli, has facilitated numerous purchases of sensitive materials for Iran's nuclear and missile programs on behalf of UN-designated entities.  In doing so, Bank Melli has provided a range of financial services to known proliferators, including letters of credit and the maintenance of accounts. The United States, the European Union, and Australia have designated Bank Melli.  

➢ Bank Mellat.  Iran's state-owned Bank Mellat has provided banking services in support of Iran's nuclear entities, namely the Atomic Energy Organization of Iran (AEOI) and Novin Energy Company.  Bank Mellat, which was designated pursuant to E.O. 13382 in October 2007, has serviced and maintained AEOI accounts, mainly through AEOI's financial conduit, Novin Energy.  Bank Mellat has facilitated the movement of millions of dollars for Iran's nuclear program since at least 2003.

➢ Export Development Bank of Iran.  On October 22, 2008, the Treasury Department designated the Export Development Bank of Iran (EDBI) under E.O. 13382 for providing or attempting to provide financial services to Iran's Ministry of Defense and Armed Forces Logistics (MODAFL), which had been designated by both the European Union and the United States for its involvement in Iranian proliferation activities.  Some MODAFL scientists and officials have also been designated by the UN.  The EDBI provides financial services to multiple MODAFL-subordinate entities that permit these entities to advance Iran's WMD programs.  Furthermore, the EDBI has facilitated the ongoing procurement activities of various front companies associated with MODAFL-subordinate entities.  In addition, since Bank Sepah's designation by the United States and the UN Security Council, the EDBI has served as one of the leading intermediaries handling Bank Sepah's financing, including WMD-related payments.  The EDBI has also facilitated financing for other proliferation-related entities sanctioned under U.S. and UN authorities.

•           International Focus on Proliferation Risks Associated with Iranian Financial Institutions.  The role that Iranian financial institutions play in Iranian proliferation activities is underscored by UNSCR 1803, which was adopted in March 2008 and calls upon states to exercise vigilance over the activities of their financial institutions with all Iranian banks.  The FATF issued guidance in October 2008 to assist countries in implementing this provision.  That guidance recommends that jurisdictions encourage their financial institutions to take strong preventive measures for the mitigation of risks posed by Iranian banks, including refusing to process transactions involving Iranian banks when full information regarding the parties to the transaction is unavailable.  The FATF guidance also recommends that jurisdictions encourage their financial institutions to reassess, and if necessary, terminate correspondent relationships with Iranian banks, and take steps to satisfy themselves that their correspondent relationships with non-Iranian financial institutions are not used to circumvent the risk-mitigation practices in place for Iranian banks.

Iran Uses Deceptive Financial Practices to Evade Sanctions

•           Iranian Commercial Banks.  It has been a standard practice for Iranian financial institutions to conceal their identity to evade detection when conducting transactions.  For example, Bank Sepah has requested that its name be removed from transactions in order to make it more difficult for intermediary financial institutions to determine the true parties to a transaction.  Following the designation of Bank Sepah under UNSCR 1747, Bank Melli took precautions not to identify Bank Sepah in transactions.  Bank Melli also has employed similar deceptive practices to obscure its involvement from the international banking system when handling financial transactions on behalf of the IRGC.  In addition, when Iranian assets were targeted in Europe, branches of Iranian state-owned banks in Europe took steps to disguise ownership of assets on their books in order to protect assets from future actions.        

•           Central Bank of Iran.  The Central Bank of Iran (CBI), the sole Iranian entity that regulates all Iranian banks, has not only engaged in deceptive practices itself – such as asking for its name to be removed from transactions – but has also encouraged such practices among Iran's state-owned banks.  For example, prior to EU and UN sanctions, the CBI attempted to help Banks Sepah and Melli protect their assets from being frozen.  Later, the CBI instructed non-sanctioned Iranian state-owned banks to issue payment instructions on behalf of Sepah in order to circumvent sanctions. In the case of Bank Melli, the CBI provided substantive assistance to minimize the impact of sanctions.  In fact, between January and March 2008, the CBI handled tens of millions of dollars in transactions to and from the accounts of U.S.- and UN-designated banks held at the CBI.

•           Use of Front Companies and Misuse of Bank Accounts.  Iran hides behind front companies and intermediaries to engage in ostensibly legitimate financial and commercial transactions that are actually related to its nuclear or missile programs.  Iranian entities form front companies outside of Iran for the sole purpose of exporting dual-use items to Iran that can be used in these programs.  These front companies enable the regime to obtain materials that the country of origin would typically prohibit from being exported to Iran.  Iran also has a history of using accounts set up for one purpose to facilitate activities with designated entities.  

•           Use of Money Service Business Accounts.  Iran also has exploited its relationship with certain foreign money service businesses, capitalizing on a business model where the absence of an ongoing account relationship may mean that less information is collected on certain transactions. 

Effect of the Revocation of U-Turn License

OFAC has revoked the authorization of "U-turn" transfers for the direct or indirect benefit of Iran, through an amendment of the Iranian Transactions Regulations, 31 CFR part 560, to narrow the scope of existing § 560.516.  This action affects the "U-turn" class of funds transfers, which are so named because, while they are conducted on behalf of Iranian account holders and banks or in connection with Iran-related transactions, they only pass through the U.S. financial system on their way from one offshore non-Iranian financial institution to another.

As a result of today's action, U.S. depository institutions are no longer allowed to process "U-turn" transfers to or from Iran, or for the direct or indirect benefit of persons in Iran or the Government of Iran.  The prohibition on U-turns applies not only to state-owned Iranian banks and the Central Bank of Iran, but also to privately-owned Iranian banks, Iranian companies, and the settlement of third-country trade transactions that involve Iran. 

Allowable Transactions

Today's action will not affect funds transfers by U.S. depository institutions, through intermediary third-country banks, to or from Iran or for the direct or indirect benefit of the Government of Iran or a person in Iran arising from several types of underlying transactions including:

• A non-commercial remittance to or from Iran (e.g., a family remittance not related to a family-owned enterprise);
• The exportation to Iran or importation from Iran of information and informational materials;
• A travel-related remittance;
• Payment for the shipment of a donation of articles to relieve human suffering; or
• An underlying transaction authorized by OFAC through a specific or general license. Allowable funds transfers would include, for example, payments arising from over-flights of Iranian airspace, legal services, intellectual property protection, and authorized sales of agricultural products, medicine, and medical devices to Iran pursuant to the Trade Sanctions Reform and Export Enhancement Act. 

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Treasury Revokes Iran’s U-Turn License

Washington, DC--The U.S. Department of the Treasury today announced that it is revoking the "U-turn" license for Iran, further restricting Iran's access to the U.S. financial system.

Treasury's move today follows a series of U.S. government actions to expose Iranian banks' involvement in the Iranian regime's support to terrorist groups and nuclear and missile proliferation.

Prior to today's action, U.S. financial institutions were authorized to process certain funds transfers for the direct or indirect benefit of Iranian banks, other persons in Iran or the Government of Iran, provided such payments were initiated offshore by a non-Iranian, non-U.S. financial institution and only passed through the U.S. financial system en route to another offshore, non-Iranian, non-U.S. financial institution.  As a result of today's action, U.S. financial institutions are no longer allowed to process these U-turn transfers.

The Treasury Department previously designated Iranian state-owned banks Melli, Mellat, Sepah, Future Bank and the Export Development Bank of Iran for their roles in Iran's weapons proliferation activities, as well as Bank Saderat for providing support to terrorism.  While these banks are already prohibited from taking advantage of the U-turn authorization, today's action ends this exception for all remaining Iranian banks, both state-owned and private, including the Central Bank of Iran. 

As a member of the Financial Action Task Force (FATF), the United States today fulfilled its obligation to strengthen measures to protect the financial sector from the risks posed to the international financial system by Iran.  In October 2008, FATF issued its fourth statement declaring that Iran continues to "pose a serious threat to the integrity of the international financial system" and called for countries worldwide to strengthen measures to protect their financial sectors from this threat.

To ensure that transactions relating to humanitarian aid for the Iranian people and other legitimate activities continue to flow, today's action will not affect funds transfers by U.S. financial institutions arising from several types of underlying transactions, including:

• Payment for the shipment of a donation of articles to relieve human suffering;
• A non-commercial remittance to or from Iran (e.g., a family remittance not related to a family-owned enterprise);
• The exportation to Iran or importation from Iran of information and informational materials;
• Travel-related remittances; and
• An underlying transaction authorized by Treasury's Office of Foreign Assets Control (OFAC) through a specific or general license.

Allowable funds transfers under specific or general OFAC licenses would include: payments arising from over-flights of Iranian airspace; legal services; intellectual property protection; and authorized sales of agricultural products, medicine, and medical devices to Iran. 

This action will take effect when the amendment to the regulations is published in the Federal Register on November 10, 2008.

Minutes of the Meeting of the Treasury Borrowing Advisory Committee Of the Securities Industry and Financial Markets Association

November 4, 2008

The Committee convened in closed session at the Hay-Adams Hotel at 10:40 a.m. All Committee members were present. Acting Undersecretary for Domestic Finance Anthony Ryan, Acting Assistant Secretary for Financial Markets Karthik Ramanathan, and Acting Directors of the Office of Debt Management Fred Pietrangeli and Steve Vajs welcomed the Committee and gave them the charge.

The first item on the charge related to Treasury's financing needs in the coming years as well as current and medium-term trends in the economic outlook. In particular, Treasury sought recommendations from the Committee on changes to the auction calendar. Treasury delivered a presentation to the Committee which highlighted current market conditions and potential factors to consider in addressing this issue.

Assistant Secretary Ramanathan stated that the exceptional marketable borrowing needs in FY09, which according to market estimates could approach $1.4 trillion and potentially vary by $500 billion, presented a unique set of challenges for Treasury. Nonetheless, even with the large financing need and the significant uncertainty around these estimates, Ramanathan noted that Treasury debt managers were positioned to address these needs within its current framework of adjustments to issuance sizes and the auction calendar.

Current credit market conditions remained volatile, and potential pressures on corporate and individual withheld tax receipts could increase Treasury's borrowing needs in FY08 and FY09, according to Ramanathan. He also noted that volatility across all markets remained elevated despite recent improvement, and that there was currently little risk appetite or available balance sheet among investors. In addition, economic fundamentals appeared challenging as measured by employment, home sales, and consumer confidence. At the same time, while flight-to-quality purchases of government debt was benefiting Treasury in the short-term, debt managers realize that they needed to be vigilant of a rapid improvement in broader financial market sentiment or conditions.

A recently provided market-based estimate of the deficit of $988 billion for FY09 is more than double the estimate released in July 2008 in the Mid-Session Review. Similarly, marketable borrowing needs are estimated to be double those of FY08. Lower corporate taxes and weaker withheld receipts in FY08 led to a decline in revenues for the first time since FY03. Meanwhile, outlays accelerated to their highest level since FY06, reflecting many of the measures that the government is undertaking to stabilize financial markets.

A number of initiatives undertaken by the Treasury, the Federal Reserve and the FDIC, to help stabilize financial markets, have pushed net marketable borrowing higher. In addition, reduced non-marketable debt issuance, large redemptions by the Federal Reserve related to the implementation of liquidity initiatives, the introduction of the Supplementary Financing Program (SFP), and expedited fiscal stimulus payments – all within a compressed time period - have necessitated the increased issuance of Treasury bills, cash management bills, and shorter dated nominal coupons.

In FY08, SFP bill issuance and redemptions by the Federal Reserve for liquidity purposes resulted in the Treasury's need to issue over $450 billion in additional bills and coupons. Moreover, state and local government issuance, for which net issuance was $58 billion in FY07, totaled a net redemption of $35 billion in FY08, and has continued this trend in FY09 with net redemptions to date of $10 billion.

Ramanathan noted that total cash management bills in FY09 year to date have totaled $475 billion including $330 billion for SFPs. This amount compares to $725 billion of CMB issuance for all of FY2008, including $300 billion for SFPs. At the same time, since the beginning of FY08, 2-year note and 5-year note issue sizes have increased $14 billion and $11 billion, respectively. Finally, in addition to increasing regular bills in FY08, Treasury introduced a monthly 52-week bill in July 2008. Bill and short-dated coupon issuance sizes stand at record levels. Despite borrowing across the curve, the average maturity has declined by three months in the last quarter.

Meanwhile, TIPS as a percentage of the overall portfolio has stabilized at 10 percent. Despite Treasury being the largest global issuer in the inflation-indexed sector, the sponsorship for shorter dated TIPS among investors is less enthusiastic than the sponsorship for longer dated TIPS and other Treasury products as evidenced by auction tails, cover ratios, and participation. Recent cost studies as well as investor participation statistics suggest that TIPS issuance, particularly for shorter-dated TIPS, has not reduced borrowing costs nor diversified the investor base, both of which were objectives at the start of the program.

Ramanathan noted that the breakeven rate on the most recent 5-year TIPS auction was negative 75 basis points implying higher costs versus nominal securities for Treasury as an issuer. Such a series of results in upcoming auctions would create additional costs for Treasury. Focusing on longer dated TIPS may be an approach to reducing effective costs, capturing a higher inflation premium, and increasing liquidity among benchmark TIPS instruments while at the same extending the duration of the portfolio.

Treasury's additional funding needs may need to be focused on other nominal coupon issuances beyond the short end of the curve. While the 2-year note to 5-year note sector raises cash in FY09, Treasury needs to be flexible beyond that time horizon as a result of the uncertainty regarding financing needs and due to the debt maturity profile of the portfolio. Treasury will continue to adjust issuance sizes in the front of the curve, but also look to adjustments in the medium to longer dated sector of the existing curve to meet additional borrowing needs.

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

A discussion followed with one member stating that Treasury was at a point where cyclical changes in borrowing needs were intersecting with secular changes in borrowing needs. Members noted that using bill financing to fund both the cyclical and secular changes was contributing to a shortening of the average length. A few members stated that net marketable borrowing could be as high as to $2 trillion in FY09, and Treasury needed to consider changes in auction sizes, auction frequencies, and also the offering menu.

Another member suggested that Treasury needed to be more transparent with some of the extraordinary measures being undertaken to assist financial markets, including insight into the asset structure of troubled assets being purchased by Troubled Assets Relief Program (TARP) This member stated that that it may be prudent to lengthen the average maturity in a manner consistent with the duration of the TARP assets.

A majority of the members however stated that extending average length at this point, given current cyclical and future secular shifts, may actually be desirable.

This spurred a discussion about whether Treasury should fund TARP purchases with special issuances. A member of the committee pointed out that Treasury had not matched liabilities with other past extraordinary expenditures such as wars or disaster relief. While members generally agreed that transparency around TARP was important, most members thought that issuing special liabilities, different from benchmark issues, was a more costly way to fund the extraordinary liabilities.

The Committee then turned to a discussion of how to fund the substantial borrowing needs facing Treasury. All members felt that Treasury should reintroduce 3-year notes, either on a on a monthly or quarterly basis, and that markets would not be surprised by the return of the 3-year note. Members debated whether the issue should be sold at mid-month or at month end as well as potential sizes of an initial offering.

A consensus developed that the issue should be a mid-month offering, with an initial offering size somewhere between the current offering sizes of the 2 year and the 5-year note. One member suggested that FDIC guarantees of bank debt for the next 3 years had the potential for creating a lot of congestion in the 3-year maturity sector. Other members pointed out that the FDIC guarantee would be rolling down the curve so that it should have minimal impact on Treasury 3-year issuance.

The Committee then suggested that Treasury add a second reopening of the 10-year note in the month following the first reopening, essentially creating monthly issuance of 10s. One member stated that this change in the calendar would create large liquid 10-year issues and would assist in mitigating fails in the 10-year sector. Several members thought if Treasury introduced a second reopening that it should offer a large initial size, with scaled down first and second reopenings. Other members thought that, depending on borrowing needs, Treasury could auction a large initial size and more uniform second and third reopenings.

All members also felt that Treasury should expand the 30-year offerings, with varying opinions on implementation of this expansion. Most members felt it was sufficient to just offer four new initial bonds a year, one at each quarterly refunding. Other members suggested that Treasury should offer four new bonds with four reopenings in the month that followed the initial offering. One member thought that there was tightness in the current 30-year and the extra supply would benefit secondary market liquidity.

It was suggested that a reopening strategy would also reduce the duration and DV01 risk to the underwriting community by spreading supply across two auctions instead of one. One member suggested that Treasury consider monthly 30-year offerings via an initial offering once a quarter and 2 subsequent reopenings. This member stated that pension funds would potentially be willing buyers. In the end, it was the general view that Treasury offer four new initial 30 year bonds each year, and if the need arises, consider reopenings if financing needs warranted such a move. The Committee concluded that the 30-year bond frequency and size should be increased.

The Committee moved on to the second item in the charge concerning steps that Treasury could take to ensure efficient market functioning. Treasury outlined the existing cash and debt management tools available, including modifications to the Treasury Tax and Loan collateral provisions, the Term Investment option provisions, and the recently enacted authority to conduct Repurchase Agreement to a broad set of counterparties. These three programs provide means for Treasury to invest its cash balances in exchange for collateral in the form of securities. In addition, Treasury has other debt management tools including making adjustments to specific issues or to the auction calendar, as well as the ability to repurchase debt.

Ramanathan then raised the issue of the recent high level of settlement fails, and showed a chart that demonstrated that such episodes manifest themselves in periods of low interest rates. In particular, fails as of last week had decreased by nearly 70% since the reopenings which took place in early October, and Treasury's actions were well warranted.

While recent concerns by major securities lenders regarding counterparty risk have exacerbated the fails to deliver situation, addressing the core issue in light of existing market conventions is necessary. Changing market-trading conventions to eliminate the artificial price floor embodied in the master repo agreement and cash trading practices may provide economic incentives on both the demand and supply sides in a manner that will mitigate the prevalence of systemic fails.

Since November 2003, Treasury has repeatedly asked the private sector to address this issue proactively. On several occasions, market participants have emphatically stated that they would resolve the situation without government intervention, but such steps have not been implemented. Treasury outlined several private sector steps which should be taken to resolve settlement fails including identifying pair-offs, bilateral processes between counterparties, cash settlement, and the initiation of negative rate repo trading.

The discussion turned to the recent unscheduled reopenings of four off-the-run securities in early October. The reopenings were taken to address borrowing needs. At the same time, the reopenings provided some ancillary benefit for improving liquidity in the Treasury market which was experiencing an unprecedented level of settlement fails.

A member acknowledged the successful steps which Treasury undertook in the midst of very large market dislocations, and commended the efforts of debt managers to address these issues quickly. The impact of these actions, according to this member, helped markets, and assisted in the resolution of certain dislocations.

One member pointed out that the reopening was not executed well but that it did help to fix fails, and that Treasury should consider being more opportunistic to take advantage of rich issues. Being opportunistic in this manner may help Treasury fund at low costs while also addressing the fails situation. Other members stated that certainty of supply was a hallmark of Treasury policy. A few members stated that such reopenings however would create a premium on Treasuries due to uncertainty of supply.

Another member asked the group if reopening issues was preferable to exchanging cheap off-the-runs for rich on-the-run issues via some sort of exchange offering facilitated by Treasury. Several members seemed to prefer the idea of targeting the demand side.

One member outlined a method of reopening issues where Treasury would offer certain dislocated securities on a routine basis on which the market could bid on. Treasury would reopen securities within the basket based on the best bids received. Over time, this could reduce the level of fails while providing low cost funding for the Treasury.

Another member cautioned that such a facility would encourage speculators to short issues in an attempt to guess which securities would be reopened. Other members questioned Treasury operational ability to implement such a program. Ramanathan concurred with both points and stated that such a program was operationally challenging.

Another member suggested that the behavior of holders of securities was adversely affecting the repo market and causing settlement fails. While this was a factor, several other members noted that dependence on a specific group of lenders without implementing potential solutions was not productive These members pointed out that there was little economic incentive to lend securities when general collateral rates stood at 20 basis points and the penalty for failing was zero basis points.

A member suggested that a negative rate of 200 or 300 basis points and margining of fails would create the correct economic incentives to cause holders of securities in low interest rate environments to lend securities again. This member suggested that market practices needed to change. Other members stated that attempting to force holders to lend was not feasible, and that industry efforts to prevent such problems need to be undertaken, particularly related to netting "daisy chain" fails and other issues.

Ramanathan stated unscheduled reopenings to fund the government would continue to be the exception, and that such actions were contrary to Treasury's policy of transparency, regularity, and predictability. Moreover, such actions had other less positive consequences. This reluctance to use unscheduled reopenings is consistent with a long-standing policy.

Ramanathan concluded the discussion by stating that the Treasury market must remain deep and liquid under all types of market conditions. The failure by the private sector to address the issues could result in the potential imposition of rules which would limit the overall efficiency of the Treasury market.

The Committee moved on to the third item on the charge dealing with credit market conditions and the impact of recent actions undertaken by the Treasury, the Federal Reserve and the FDIC. A Committee member was asked to deliver the presentation.

The presenting member began by noting that some financial market indicators suggest that financial markets have seen the worst and that credit market deterioration has at least stabilized, and may even be improving. The presenting member noted that swap spreads have narrowed from recent highs, both domestically and in Europe. In addition, commercial paper outstanding has started to increase, and the Federal Reserve has been very accommodating, expanding the monetary base by nearly 39 percent in recent months.

The presenting member also cautioned that while there are some positive improvements, markets are still showing signs of aversion to risk. Corporate and agency credit spreads are still high, default risk was elevated as measured by credit default swaps, and market volatility is still near record levels, reflecting a high degree of economic uncertainty.

The presenting member also highlighted some challenges including the high level of fails to deliver in the Treasury market which adversely impacts liquidity, the weakening balance sheet of the consumer, lending attitudes by banks as reflected by their hoarding cash, and asset allocations by investors away from risky assets. The presenting member concluded that it will take time for risk appetite to return to more historically normal levels.

After the presentation was completed, one committee member commented that this year was the first year that the Pension Protection Act was effective and that the recent substantial underfunding of pensions, related to the decline in equity prices, might create more financial market headwinds to the degree that companies will need to fund their pensions with cash.

The meeting adjourned at 12:00 PM.

The Committee reconvened at the Department of the Treasury at 6:00 p.m. All of the Committee members were present. The Chairman presented the Committee report to Acting Under Secretary for Domestic Finance Tony Ryan.

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

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

The meeting adjourned at 6:15 p.m.

_________________________________

Karthik Ramanathan
Acting Assistant Secretary for Financial Markets
Director, Office of Debt Management
United States Department of the Treasury
November 4, 2008
Certified by:

___________________________________

Keith T. Anderson, Chairman
Treasury Borrowing Advisory Committee
Of The Securities Industry and Financial Markets Association
November 4, 2008

Treasury Borrowing Advisory Committee Quarterly Meeting

Committee Charge – November 4, 2008

Fiscal Outlook

Given Treasury's financing needs in the coming years as well as current and medium-term trends in the fiscal and economic outlooks, what are the Committee's thoughts on Treasury's debt issuance? What changes to the auction calendar do you recommend Treasury make at this time?

Treasury Cash and Debt Management Tools

Given the benefits of a liquid Treasury market and broad investor participation, what steps should be pursued to ensure continued efficient market functioning? Are there any other approaches to auctions, cash and debt management tools, and/or instruments that Treasury should consider?

Credit Market Conditions

The Treasury, Federal Reserve, and FDIC have undertaken a series of actions to strengthen public confidence in U.S. financial institutions and to foster the robust functioning of credit markets. Please discuss how these actions have impacted credit markets, what additional steps may be considered, and the implications of any current or additional steps on the Treasury market.

Financing this Quarter

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

• The composition of Treasury notes and bonds to refund approximately $54.9 billion of privately held notes maturing on November 15, 2008.

• The composition of Treasury marketable financing for the remainder of the October - December quarter, including cash management bills.

• The composition of Treasury marketable financing for the January - March quarter, including cash management bills.

November 3, 2008
HP-1251

Treasury Hires Legal Firms Under the Emergency Economic Stabilization Act

Washington- The U.S. Treasury Department today announced that Hughes Hubbard & Reed, LLP and Squire Sanders & Dempsey, LLP will assist the Department in the implementation of the Capital Purchase Program authorized under the Emergency Economic Stabilization Act. Treasury procured the services of the law firms on Wednesday.

The firms will help the Department with executing transactions under the program, which includes reviewing executed investment agreements, working directly with accepted financial institutions to identify and resolve any legal issues before closing, and conducting the closing of transactions.

The agreements with the firms are effective until April 28, 2009. Treasury issued a request for quotes from five firms on the General Services Administration's Federal Supply Schedules on October 24. The Department received four quotes in response. Based on the estimated transactions under the program, total costs for each firm is not expected to exceed approximately $5.5 million. More information on these contracts will be posted at https://www.fpds.gov (Federal Procurement Data System).

REPORTS

• Hughes Hubbard & Reed Contract
• Squire Sanders & Dempsey Contract

November 3, 2008
hp-1236

Treasury Announces Marketable Borrowing Estimates

Washington- Treasury announced its current estimates of marketable borrowing today for the October – December 2008 and January – March 2009 quarters:

Over the October – December 2008 quarter, the Treasury expects to borrow $550 billion of marketable debt, assuming an end-of-December cash balance of $300 billion, which includes $260 billion for the Supplementary Financing Program (SFP). Without the SFP, the end-of-December cash balance is expected to be $40 billion. This borrowing estimate is $408 billion higher than announced in July 2008. The increase in borrowing is primarily due to higher outlays related to economic assistance programs, lower receipts, and lower net issuances of State and Local Government Series securities.

Over the January – March 2009 quarter, the Treasury expects to borrow $368 billion of marketable debt, assuming an end-of-March cash balance of $75 billion.

During the July – September 2008 quarter, Treasury borrowed $530 billion of marketable debt, including $300 billion for the SFP, and finished with a cash balance of $372 billion at the end of September. Without the SFP, the end of September cash balance was $72 billion. In July 2008, Treasury estimated $171 billion in marketable borrowing, assuming an end-of-September cash balance of $45 billion. The increase in borrowing was related to the SFP, lower receipts, higher outlays, and lower net issuances of State and Local Government Series securities.

Additional financing details relating to Treasury's Quarterly Refunding will be released at 9:00 a.m. on Wednesday, November 5.

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REPORTS

• Sources and Uses Table

October 31, 2008
HP-1247

Treasury Issues Additional Information on Capital Purchase Program

Washington- The Treasury Department today issued additional documents for publicly traded financial institutions applying for the capital purchase program authorized by the Emergency Economic Stabilization Act. Documents include:

• Securities Purchase Agreement: This document describes the terms of the financial institution's agreement to issue shares and fulfill other requirements in exchange for Treasury's investment.
• Form of Letter Agreement: This contractual agreement describes the firm-specific information necessary to implement the securities purchase agreement and represents the financial institution's commitment to the terms of the Securities Purchase Agreement.
• Certificate of Designations: This document creates the preferred shares.
• Form of Warrant – Stockholder Approval Not Required: This document describes the terms of the warrants Treasury receives when stockholder approval is not required.
• Form of Warrant – Stockholder Approval Required: This document describes the terms of the warrants Treasury receives when stockholder approval is required.
• Term Sheet
• SEC, FASB Letter on Warrant Accounting

This program is designed to attract broad participation by healthy institutions, to stabilize the financial system and increase lending for the benefit of the U.S. economy and the American people.

After a financial institution is granted preliminary approval, the institution must complete and submit the securities purchase agreement, letter agreement, certificate of designations and warrant. Financial institutions that are granted preliminary approval will receive a letter from the Treasury Department with instructions regarding filing the documents and completing the process.

Once the investment agreements are complete and the investment is authorized, within two business days Treasury will publicly disclose the name and capital purchase amount for the financial institution. The information will be posted at http://www.treasury.gov/initiatives/eesa/ and updated daily at 4:30 p.m. (EDT) as needed.

All publicly traded eligible institutions wishing to participate should submit their applications no later than 5:00 p.m. (EDT), November 14, 2008.

Treasury will post an application form and term sheet for privately held eligible institutions at a later date and establish a reasonable deadline for private institutions to apply.

REPORTS

• Securities Purchase Agreement
• Form of Letter Agreement
• Certificate of Designations
• Form of Warrant
• Form of Warrant – Stockholder Approval Required
• Term Sheet
• SEC, FASB Letter on Warrant Accounting

Treasury Distributes 1.416 Million Additional Stimulus Checks in October

Washington, DC--The Treasury Department announced today that it has distributed 1.416 million stimulus payments, totaling $976.561 million in the month of October.  As of the end of October, a total of 117.372 million payments have been distributed totaling $95.038 billion since disbursements started April 28.

While mass disbursement of stimulus checks ended July 11, small batches of payments continue to be sent out to American households.  The Treasury Department will announce updates monthly until the end of the year. 

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Three LIFG Members Designation for Terrorism

Washington, DC--The U.S. Department of the Treasury today designated three members of the Libyan Islamic Fighting Group (LIFG) under Executive Order 13224, which targets terrorists and the financial, technological, or material support networks of terrorists.

"LIFG, along with other al Qaida affiliates, seeks to exploit our globalized world, raising funds in Europe for transfer to terror cells operating in North Africa," said Adam Szubin, director of Treasury's Office of Foreign Assets Control.  "To combat such transnational threats, the power and reach of the U.N.'s counterterrorism authorities are needed more than ever to shut down financiers of bloodshed wherever they may be."

LIFG officially announced its formation in 1995 among Libyans who had fought Soviet forces in Afghanistan and the Qadhafi regime in Libya. The LIFG is believed to have participated in the planning of the May 2003 Casablanca suicide bombings, and LIFG has been linked to the 2004 Madrid attacks.

Since the late 1990s, many LIFG members have fled Libya for various countries, particularly the United Kingdom. In early November 2007, Ayman al-Zawahiri announced the LIFG had become an official affiliate of al Qaida. The LIFG was named a Specially Designated Global Terrorist (SDGT) in the annex to E.O. 13224 on September 23, 2001 and was added to the UN 1267 Committee Consolidated List of individuals and entities associated with al Qaida or the Taliban on October 6, 2001.

These three individuals were also recently added to the UN 1267 Sanctions Committee's Consolidated List of individuals and entities associated with Usama bin Laden, al Qaida and the Taliban. All UN member states are obligated to freeze the funds and other assets of listed individuals and entities included on the List and to apply other sanctions, including a travel ban and an arms embargo. The United States implements this asset freeze through E.O. 13224.

Identifying Information

MAFTAH MOHAMED ELMABRUK

AKAs:                        
Muftah Al Mabrook
Mustah ElMabruk
Maftah El Mobruk
Muftah El Mabruk
Elmobruk Maftah
Al-Mabruk Muftah Muhammad Al-Fathali
Al-Mabruk Al-Fathali
Al-Hajj 'Abd Al-Haqq
Al Hajj Abd Al Haqq
Al Haj Abd Al Hak
Haj 'Abd Al-Haq

DOB:                          01 May 1950
POB:                           Libya  
Nationality:                 Libyan

As of January 2007, Elmabruk was a U.K.-based LIFG member and active in LIFG financial matters in the U.K. Elmabruk has been involved in fundraising activities on behalf of the LIFG for several years. Elmabruk attended various training camps in Afghanistan in the mid-1980s to early 1990s.

ABDELRAZAG ELSHARIF ELOSTA

AKAs:                        
Abdelrazag Elsharif Al Usta
'Abd al-Razzaq Sharif
'Abd Al-Razzaq Al-Sharif Al-Usta
Abu Mu'awiya
'Abd Al-Mulay

DOB:  20 June 1963
POB: Soguma, Libya
Nationality:                 British

As of January 2007, Elosta was a U.K.-based LIFG member and LIFG leadership figure. In January 2005, Elosta maintained funds for the LIFG in the U.K, for various LIFG-related purposes.

ABDULBASIT ABDULRAHIM

AKAs:                        
Abdul Basit Fadil Abdul Rahim
Abdelbasit Abdelrahim
Abdullah Mansour
Abdallah Mansour
Abdulbasit Fadil Adbulrahim Mahoud
'Abdallah Mansur
Abdel Bassit Fadil Al Zawy
'Abd Al-Basit Fadil Al-Zway
'Abd Al-Basit Fadhil Al-Zawi
Abu Basir
Abou Bassir

DOB: 02 July 1968
POB: Gdabia, Libya
POB: Ajdabiyah, Libya
Nationality:  British

As of January 2007, Abdulrahim was a U.K.-based LIFG member. In January 2005, Abdulrahim was one of the most important LIFG members working on LIFG finances in the U.K., where the greatest amount of funding for the LIFG originated.

Abdulrahim joined the LIFG in 1993 while living in Saudi Arabia and was responsible there for the LIFG Islamic Jurisprudence Committee. During this time, Abdulrahim received material assistance for the LIFG from Saudi supporters, and tasked individuals to obtain material assistance for the LIFG.

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October 29, 2008
HP-1242

Treasury, IRS Issue Guidance on Indirect Ownership of Fannie and Freddie Preferred Stock

Washington, DC--The Treasury Department and the Internal Revenue Service today issued Revenue Procedure 2008-64 (Rev. Proc. 2008-64), which provides that certain gains and losses from indirect ownership of Fannie Mae and Freddie Mac preferred stock can be treated as ordinary income and loss.

The Emergency Economic Stabilization Act of 2008 (EESA) provided banks and certain financial institutions ordinary treatment for gains and losses on direct investments in preferred stock of Fannie Mae and Freddie Mac.  It also directed the Treasury Department to issue guidance with respect to the treatment of these gains or losses when realized indirectly through certain investment vehicles. 

Rev. Proc. 2008-64 provides banks and certain other financial institutions the benefit of ordinary treatment on gains and losses that they are experiencing on certain indirect investments in this preferred stock.

Many financial institutions have invested in Fannie Mae and Freddie Mac preferred stock indirectly through certain adjustable rate preferred programs and other vehicles.  Pursuant to the authority granted in EESA, the revenue procedure includes guidance describing when these financial institutions receive ordinary treatment on:

·      gains and losses on this stock recognized by a trust or other entity taxed as a partnership in which the financial institution is a partner;

·      gains and losses on the sale of an interest in a partnership that owns this stock;

·      gains and losses on the sale of this stock that the financial institution received in a distribution from a partnership;

·      gains and losses on this stock recognized by certain subsidiaries of financial institutions; and

·      gains and losses on the sale of this stock that the financial institution received in certain "transferred basis" transactions.

Rev. Proc. 2008-64 is effective immediately and includes rules for application to transactions that occurred prior to issuance of the revenue procedure. The revenue procedure also requests comments from taxpayers regarding the guidance.

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REPORTS

• Rev. Proc. 2008-64