[Senate Hearing 110-]
[From the U.S. Government Publishing Office]



 
  FINANCIAL SERVICES AND GENERAL GOVERNMENT APPROPRIATIONS FOR FISCAL 
                               YEAR 2009

                              ----------                              


                        WEDNESDAY, MARCH 5, 2008

                                       U.S. Senate,
           Subcommittee of the Committee on Appropriations,
                                                    Washington, DC.
    The subcommittee met at 3 p.m., in room SD-138, Dirksen 
Senate Office Building, Hon. Richard J. Durbin (chairman) 
presiding.
    Present: Senators Durbin, Brownback, and Allard.

                       DEPARTMENT OF THE TREASURY

STATEMENT OF HON. HENRY M. PAULSON, JR., SECRETARY OF 
            THE TREASURY


             opening statement of senator richard j. durbin


    Senator Durbin. Good afternoon, and I'm pleased to convene 
a series of hearings to examine fiscal year 2009 funding 
requests. Today we launch our lineup with the Department of the 
Treasury.
    Welcome, Secretary Henry Paulson, to the hearing room, 
along with any associates who would like to join in your 
testimony.
    I welcome my colleagues who will join me shortly, and 
others who may arrive. Although, this is a budget hearing for 
the Treasury, we've scheduled a separate hearing next month to 
devote particular attention to the Internal Revenue Service 
(IRS), the Treasury's largest bureau. We'll defer the bulk of 
our questions relating to the IRS until that hearing.
    The non-IRS portion of the Department's budget constitutes 
over $1.1 billion, supporting many critical activities in the 
central programs we'll concentrate on today.
    The Department plays a pivotal role in the global economy, 
and as an ambassador for the Nation's economic and financial 
institutions. In fulfilling the mission, Treasury promotes 
economic prosperity, and ensures the financial security of our 
Nation.
    Treasury also administers the world's largest collection 
system, over $2 trillion a year. In addition, Treasury supports 
financial institutions in generating community development, and 
leads Government efforts in the area of financial intelligence.
    I'm pleased that for fiscal year 2008, we were able to 
provide additional funds for the Department to address several 
important needs. The funds will further support the 
Department's efforts to combat terrorism, through implementing 
economic sanctions, and gathering and analyzing financial 
intelligence.
    For fiscal year 2009, the budget request for Treasury is 
$12.47 billion, an increase of $461.6 million, or 3.8 percent. 
Excluding IRS, the request for the remainder is $1.11 billion. 
This represents a net decrease of $7.5 million over fiscal year 
2008, overall reduction of less than 1 percent. This would 
appear to be a very restrained budget for the non-IRS portion 
of the Department, however, the top line includes a 70 percent 
decrease from fiscal year 2008 funding level for the Community 
Development Financial Institutions Fund (CDFI), commonly known 
as CDFI.
    Holding CDFI funding at the fiscal year 2008 level, the 
fiscal year 2009 President's budget reflect a $57.9 million, or 
5.2 percent increase for the non-IRS portion of the Treasury 
Department. I'm concerned about this proposed cut in CDFI, 
which we will discuss later, because I believe that the 
infusion of capital to these institutions can help many 
distressed communities, and low-income individuals, who are 
facing the economic downturn, with more severity than most.
    I think it's clear that adequate funding for CDFI is 
critically important.
    For the Office of Terrorism and Financial Intelligence 
(TFI), including Financial Crimes Enforcement Network, known as 
FinCEN, the budget requests $153 million for fiscal year 2009, 
compared to $142.6 million last year, an increase of over $10 
million. I'm pleased to see Treasury continues to emphasize 
strategies to counterterrorist financing and money laundering.
    Beyond the Treasury Department, I also want to talk for a 
few minutes with the Secretary about broader economic issues. I 
know you've faced that already once today, so you've 
undoubtedly been prepared for this by my colleagues in the 
House.
    I appreciate your insights on the current housing crisis 
and the state of the economy, and we'll have a few questions 
along those lines. I look forward to discussing them with you.
    At this point, since Senator Brownback has not arrived, I 
would like to turn the floor over to the Secretary, and Mr. 
Secretary, you may proceed with your remarks.
    Secretary Paulson. Thank you, Senator Durbin--there we go.
    Senator Durbin. Thank you.
    Secretary Paulson. That's always the most difficult part of 
the hearings, turning on the microphone.
    But, thank you very much for your remarks, and for your 
support of the Treasury. I very much appreciate the opportunity 
to discuss the Treasury Department's proposed fiscal year 2009 
budget.
    Our budget request reflects the Department's continued 
commitment to promoting a healthy U.S. economy, fiscal 
discipline, and national security. The Department has broad 
responsibility in Federal cash management, tax administration, 
and plays an integral role in combating terrorism, terrorist 
financing, and advocating the integrity of the U.S. and global 
financial systems.
    Our spending priorities for the 2009 fiscal year fall into 
six main categories. I'll briefly describe their priorities and 
then take your questions.
    Treasury has an important role to play as a steward of the 
U.S. economy, and provides--and our offices provide technical 
analysis, economic forecasting and policy guidance on issues 
ranging from Federal financing, to domestic and global 
financial systems.
    Those functions are especially critical now, as the U.S. 
economy--through a combination of a significant housing 
correction, high energy prices, and capital market turmoil--has 
slowed appreciably.
    Our long-term economic fundamentals are solid, and I 
believe our economy will continue to grow this year, although 
not nearly as rapidly as in recent years.
    In response to economic signals early this year, the 
administration and Congress worked together to quickly pass, on 
a bipartisan basis, the Economic Stimulus Act of 2008, and I 
would like to thank this subcommittee for approving funds for 
the IRS and the Financial Management Service (FMS), to 
administer the stimulus check rebate program under the act, so 
thank you for that.
    As you know, the stimulus payments to households, and the 
incentives to businesses in the act, together are estimated to 
lead to the creation of 500,000 jobs by year-end. This will 
provide timely and effective support for families in our 
economy, and it wouldn't be possible without your leadership.
    Treasury's Office of Terrorism and Financial Intelligence 
(TFI) uses financial intelligence, sanctions, and regulatory 
authorities, to track and combat threats to our security, and 
safeguard the U.S. financial system from abuse by terrorists, 
proliferators of weapons of mass destruction, and other illicit 
actors.
    To continue to build on our efforts to combat these 
threats, we are requesting an $11 million increase for TFI, 
including $5.5 million for the Financial Crimes Enforcement 
Network, to ensure effective management of the Bank Secrecy 
Act.
    The budget request emphasizes infrastructure and technology 
investments to modernize business processes and improve 
efficiency throughout the Treasury Department. We will continue 
to make information technology management a priority, and have 
taken several significant steps to strengthen our systems and 
oversight.
    Treasury is committed to managing the Nation's finances 
effectively, ensuring the most efficient use of taxpayer 
dollars in collecting the revenue due to the Federal 
Government. The IRS, of course, plays an integral role in all 
of this, the budget requests a 4.3 percent increase in IRS 
funding to expand IRS enforcement activities, improve 
compliance, reduce the tax gap, and continue improvements in 
taxpayer service.
    In addition, we are asking your colleagues on the State, 
Foreign Operations Subcommittee to support funding both in 
multilateral development banks--noticeably, new replenishments 
for the World Bank's International Development Association 
(IDA), and the African Development Fund, and have forwarded a 
$400 million request for the first installment of a $2 billion 
clean technology fund that--with additional funding from other 
donors around the world, will help finance clean energy 
projects in the developing world, and make strides toward 
addressing global climate change.
    Overall, the budget request reflects a prudent and forward-
leaning approach to fulfilling the Treasury Department's core 
responsibilities to support our economy, managing the 
Government's finances, and ensuring financial system security.


                           PREPARED STATEMENT


    I thank you for your past support and consideration of our 
work, and I look forward to working with you during your 
deliberations.
    Thank you, and I welcome your questions.
    [The statement follows:]

              Prepared Statement of Henry M. Paulson, Jr.

    Chairman Durbin, Senator Brownback, Members of the Committee: Thank 
you for the opportunity to discuss the Treasury Department's proposed 
fiscal year 2009 budget. Our budget request reflects the Department's 
continued commitment to promoting a healthy U.S. economy, fiscal 
discipline and national security. The Department has broad 
responsibility in federal cash management, tax administration and plays 
an integral role in combating terrorist financing and advocating the 
integrity of the U.S. and global financial systems.
    Our spending priorities for the 2009 fiscal year fall into six main 
categories. I will briefly describe the priorities and then take your 
questions.

                         U.S. ECONOMIC STEWARD

    Treasury has an important role to play as steward of the U.S. 
economy, and our offices provide technical analysis, economic 
forecasting and policy guidance on issues ranging from federal 
financing to domestic and global financial systems.
    Those functions are especially critical now as the U.S. economy, 
through a combination of a significant housing correction, high energy 
prices and capital market turmoil has slowed appreciably. Our long term 
economic fundamentals are solid, and I believe our economy will 
continue to grow this year, although not as rapidly as in recent years.
    In response to economic signals, early this year the Administration 
and the Congress worked together to quickly pass, on a bipartisan 
basis, the Economic Stimulus Act of 2008. And I would like to thank 
this subcommittee for approving funds for the IRS and the FMS to 
administer the stimulus check rebate program under that Act.
    As you know, the stimulus payments to households and the incentives 
to businesses in the Act, together, are estimated to lead to the 
creation of half a million jobs by year-end. This will provide timely 
and effective support for families and our economy, and it wouldn't be 
possible without your leadership.

                    STRENGTHENING NATIONAL SECURITY

    Treasury's Office of Terrorism and Financial Intelligence (TFI) 
uses financial intelligence, sanctions, and regulatory authorities to 
track and combat threats to our security and safeguard the U.S. 
financial system from abuse by terrorists, proliferators of weapons of 
mass destruction and other illicit actors.
    To continue and build on our efforts to combat these threats, we 
are requesting an $11 million increase for TFI, including $5.5 million 
for the Financial Crimes Enforcement Network to ensure effective 
management of the Bank Secrecy Act.
Efficient Management of the Treasury Department
    The budget request emphasizes infrastructure and technology 
investments to modernize business processes and improve efficiency 
throughout the Treasury Department. We will continue to make 
information technology management a priority, and have taken several 
significant steps to strengthen our systems and oversight.

                           FISCAL DISCIPLINE

    Treasury is committed to managing the nation's finances 
effectively, ensuring the most efficient use of taxpayer dollars and 
collecting the revenue due to the federal government.
Enforcing the Nation's Tax Laws Fairly and Efficiently
    The Internal Revenue Service, of course, plays an integral role in 
this. The budget requests a 4.3 percent increase in IRS funding.
    As in the past three budget requests, we are proposing to increase 
IRS enforcement funding as a Budget Enforcement Act program integrity 
cap adjustment. IRS enforcement efforts have yielded record revenue 
collections. With the requested funding, the IRS will collect an 
estimated $55 billion in direct enforcement revenue in 2009.
    The budget also includes a number of legislative proposals intended 
to target the tax gap and improve tax compliance, with an appropriate 
balance between enforcement and taxpayer service. These proposals are 
estimated to generate $36 billion over the next ten years.

                         INTERNATIONAL PROGRAMS

    We will continue to focus efforts on supporting a stable and 
growing global economy, through on-going dialogue and initiatives with 
developing economies throughout Asia, Latin America and Africa.
    In addition we are asking your colleagues on the Foreign Operations 
Subcommittee to support key objectives of the President's international 
assistance agenda. This includes funding for the multilateral 
development banks_notably new replenishments for the World Bank's 
International Development Association (IDA) and the African Development 
Fund.
    Also included as a Foreign Operations priority is $400 million 
request for the first installment of a $2 billion clean technology fund 
that, with additional funding from the United Kingdom, Japan and other 
donors, will help finance clean energy projects in the developing world 
and make strides towards addressing global climate change.

                               CONCLUSION

    Overall, the budget request reflects a prudent and forward-leaning 
approach to fulfilling the Treasury Department's core responsibilities 
to support our economy, managing the government's finances and ensuring 
financial system security. I thank you for your past support and 
consideration of our work, and look forward to working with you during 
your deliberations.
    Thank you and I welcome your questions.

    Senator Durbin. Thanks, Mr. Secretary, and I welcome my 
ranking member, Senator Brownback, of Kansas.
    If you have an opening statement, I'll defer to you at this 
point.
    Senator Brownback. I'll just make some of those comments 
during my questions, I think that would probably be the best, 
prudent way.
    If I could, Mr. Chairman, I'd ask if I could put my full 
statement in the record, right now.
    Senator Durbin. Without objection.
    [The statement follows:]

              Prepared Statement of Senator Sam Brownback

    Good afternoon. At this first hearing of our subcommittee, I want 
to thank you, Chairman Durbin, for your leadership. I look forward to 
working together with you during this coming year as we make funding 
decisions and provide oversight to the various agencies within this 
subcommittee's jurisdiction.
    Secretary Paulson, thank you for appearing before our subcommittee 
today. I look forward to hearing the details of your fiscal year 2009 
budget request and the key efforts that your department will be 
undertaking this year. You have a crucial role in overseeing our 
financial systems and in promoting our participation in the 
international economy so I am interested in hearing your thoughts on 
the domestic and global economic situation.
    Looking at the President's budget, I am pleased that it assumes the 
continuation of the President's tax cuts, which are key to preventing 
recession and allowing our economy to rebound from the sub-prime 
mortgage crisis. I am encouraged that the President's budget projects a 
balanced budget by 2012.
    Mr. Secretary, regarding the economic stimulus package, I support 
the tax rebates to families and the expensing and depreciation changes 
to assist businesses. But I believe that we must look down the road at 
other ways to stave off recession, such as enacting incentives for U.S. 
companies to bring money back to this country from abroad. This would 
allow multi-national corporations to bring funds into the United States 
at a reduced tax rate for a period of time. I believe that we must 
continue to be proactive to keep our economy healthy. The most 
effective way to do this is to lower taxes so that consumers and 
businesses have more of their own money to spend and invest.
    Mr. Secretary, the lion's share of your budget--approximately 90 
percent--is for the Internal Revenue Service. I understand that you are 
seeking additional resources to close the so-called ``tax gap.'' 
Certainly, we must ensure that taxes which are owed are collected. 
However, I remain concerned that our tax system is overly complex, 
complicated, and burdensome. Americans spend roughly $157 billion each 
year in tax preparation to ensure they do not run afoul of the IRS. The 
system is desperately in need of reform. One reason we have a ``tax 
gap'' may be that our tax system is so complex that taxpayers cannot 
figure out what they owe.
    Mr. Secretary, I want to commend your Department for its efforts to 
combat terrorism. Your ``Office of Terrorism and Financial 
Intelligence'' is working hard to safeguard the financial system 
against illicit activities and combating rogue nations, terrorist 
facilitators, money launderers, drug kingpins, and other national 
security threats. This is important work and I am supportive of your 
efforts in this area.
    I know that the Treasury Department is aggressively blocking U.S. 
commercial bank transactions connected to the government of Sudan, 
including those involving oil revenues. I am pleased that you are 
taking these actions. Last year, we passed legislation and the 
President signed into law the authority for your Department to levy 
greater criminal and civil penalties for those who violate these 
sanctions. I hope this new authority has acted as a strong deterrent 
for bad behavior.
    Mr. Secretary, I am deeply concerned that American consumers are 
unwittingly purchasing products that have been manufactured with 
natural resources extracted by enslaved and abused children in 
countries where the profits are then used to support murdering and 
raping rebels. For example, I believe that our demand for coltan--which 
is an essential mineral needed for the manufacture of cell phones, TVs, 
and computers--has helped to fuel the conflict in the Congo. We need to 
be vigilant to ensure that American manufacturers are not supporting 
the conflict in the Congo by purchasing coltan. I would like you to 
work with us and perhaps the SEC to prevent American companies from 
purchasing coltan that has been mined by children and whose profits are 
supporting killings in the Congo. Congo's ``conflict coltan'' has 
created a vast and grave humanitarian crisis where 5.4 million people 
have died since 1998 directly and indirectly from the conflict and 
where 1,500 people continue to die each and every day.
    We cannot sit idly by while others suffer. We need to be 
responsible as a nation and as consumers. We must hold our suppliers 
accountable. I plan to introduce legislation to stop the exploitation 
of coltan, particularly in eastern Congo. I am working with leaders of 
non-governmental organizations who understand the situation as I write 
this bill.
    Mr. Secretary, I would like to hear what your Department is doing 
to support a stable and growing global economy through initiatives with 
developing economies throughout the rest of Africa and Latin America. I 
would like to hear how you can help ensure that we are not complicit in 
illegal activities in Congo and the rest of the world.
    So Mr. Secretary, I look forward to hearing your testimony this 
afternoon.
    Thank you, Mr. Chairman.

                           HOPE NOW ALLIANCE

    Senator Durbin. Mr. Secretary, the Treasury Department 
reported Monday that loan modifications under Hope Now helped 
45,000 borrowers in January. But that number, as I understand 
it, includes all modifications of any sort, including those 
that only temporarily delayed foreclosure, rather than only 
counting mortgage changes that would allow families to stay in 
their homes for a longer period of time.
    Isn't it true that Hope Now numbers you're citing include 
all mortgage changes of any sort?
    Secretary Paulson. Yes sir, very much.
    And let me say that with Hope Now, the objective is--and 
the numbers you were citing have to do with subprime mortgage 
holders who were facing resets. And a major objective there is 
to help those homeowners who were facing resets they couldn't 
afford, and help them stay in their homes, and modifications to 
change the terms and to change, you know, the terms on a 
mortgage that lets someone stay in their home, is what we're 
about doing.
    The other thing I would point out is that we're very 
fortunate in the--to the extent that the rate cuts that the 
Federal Reserve had made, made the impact of the some of the 
resets much less severe. And prior to the rate cuts, some of 
the initial resets were going to take the rates from 8.5 
percent to 10.8 percent. After the rate cuts, they, you know, 
the impact was more like 8.5 to 9 percent. So, again, we 
received help there. And I certainly don't discount 
modifications that mortgage servicers made to let people remain 
in their homes.
    Senator Durbin. Are you satisfied that the financial 
institutions across America have responded voluntarily to the 
administration's request, in an adequate way, to deal with the 
current mortgage foreclosure crisis?
    Secretary Paulson. The way I would answer that question is 
I'm gratified by the progress that's been made, to date. And 
again, there's been some criticism, but in terms of an 
initiative that's up and going, I happen to believe it stacks 
up well, relative to anything else I see out there.
    So, I would start off by saying that there's been 1 million 
people helped, to date, and I don't discount that at all, I 
think it's significant.
    Now, the objective here--and I want to put this in 
perspective--that what we have is an industrywide effort in 
looking at subprime mortgages, where we have servicers covering 
90 percent of the market. There are varying degrees of 
aggressiveness and sophistication in that group. And there are 
some firms in that group that didn't even need Hope Now to be 
doing the right things. And they've been out and they've been 
leading, and I thank them.
    There are other servicers in that group that has less 
sophistication, were less prepared, we had significant 
obstacles--legal obstacles, accounting obstacles--we had the 
Securities and Exchange Commission (SEC) sign off on some 
accounting guidance on January 8, and technological issues.
    So, the way I look at it right now is, we have some 
leaders, we have some followers, we have now--the followers 
fully implementing the protocol, and we have them doing that 
ahead of the biggest period of recess----
    Senator Durbin. Let me try to narrow it down, because I 
want to get to the point of understanding this. When you talked 
about 1 million borrowers being helped----
    Secretary Paulson. Yes.
    Senator Durbin. And that you're satisfied with some 
responses--I'm trying to put the response level, or the 
response so far, I should say, in the context of the challenge 
that we face.
    Secretary Paulson. Right.
    Senator Durbin. And I have heard that some 2.2 million--at 
least that's a common figure--mortgage holders in America--
subprime mortgage holders--face the probability, possibility of 
foreclosure.
    Secretary Paulson. Right.

                           SUBPRIME BORROWERS

    Senator Durbin. I don't know if that's an accepted figure 
or an accepted estimate, but I've heard it repeatedly.
    So, what do you think, what would--how would you describe, 
in percentage terms----
    Secretary Paulson. Right.
    Senator Durbin. The number of those vulnerable homeowners 
who have been helped, to date----
    Secretary Paulson. Right.
    Senator Durbin. By the administration's programs?
    Secretary Paulson. Well, let me say--first of all, let me 
deal with numbers. And if you give me a minute or two on this, 
we'll go through it.
    That in a average, good year, you know, if we looked at 
2002 through 2005, there are 650,000 foreclosures. Last year, 
estimates are there will be about 1.5 million. Some people are 
projecting 2 million foreclosures this year.
    Now, I think, you sir, Mr. Chairman, are right to focus on 
subprime because if we look at the third quarter of last year, 
we had roughly 13 percent of these 55 million mortgages are 
subprime mortgage--they were----
    Senator Durbin. The 55 million mortgages?
    Secretary Paulson [continuing]. 55 million mortgages, 13 
percent were subprime.
    Senator Durbin. That's of all the mortgages, you said, 
universal mortgages, 55 million?
    Secretary Paulson. All the mortgages, yes. And of that 
subprime universe, of that 13 percent, 50 percent of those were 
where we had foreclosures. And if you even look at a smaller 
sample, 6.5 percent were adjustable rate subprime mortgages, 
and they had 50 percent of the foreclosures.
    And we had a--and on top of that--the 18 percent, if you 
take a look at sort of the--the period when there were the 
worst underwriting practices, which was 2006, and these so-
called ``2-28'' mortgages, you know, teaser rate for the first 
2 years, and then resets--that 18 percent of that pool 
foreclosed 6 months ahead of even the first reset.
    So, again, as I look as the objective--and so, I think 
what's important, that we talk about what's a reasonable 
objective, and to me the reasonable objective is that every 
homeowner who is in a subprime mortgage and is able to afford 
the initial rates--because if they can't even afford the 
initial rates, I think there's a different problem we need to 
deal with--every homeowner that's in a subprime mortgage and is 
able to afford the initial rates, and can't afford the step-up 
rate, there should be a solution that keeps them out of 
foreclosure, if they are willing to talk to someone about it, 
and engage to talk about solutions.
    So, a major issue we continue to have--and we're making 
progress--is that before Hope Now, that roughly 2 to 3 percent 
of those getting letters from servicers responded. Half of 
those going into foreclosure ever talked to anyone. Now the 
response rate is close to 20 percent--that still means 80 
percent aren't having conversations.
    Now, it's very hard for the Government or anyone, to help 
someone who won't try to help themselves, won't respond, won't 
engage in a conversation. There's also some people out there, 
where there's a different issue.
    Just to step back, and the other issue that's out there, 
and you hear a lot of conversation about, is the put-out 
numbers, the 8.8 million homeowners that have mortgages that--
where they have zero equity or negative equity in their home. 
Now, as you look at that universe, as I look at it, if you're a 
mortgage holder, even if you have negative equity in your home, 
if you can afford to make your mortgage payment, then I believe 
you've got an obligation to make the mortgage payment and you 
don't walk away--you're a speculator if you walk away because 
you happen to think your home is under water and the--your 
mortgage is under water. And I think most homeowners look at it 
this way--I think most homeowners, 93 percent of the homeowners 
are making their payment every month, you know, even if it's 
difficult for them to do so--only 2 percent are in foreclosure.

                              SPECULATORS

    So, I do believe--but there are some, some of these, and 
they're doing terrible practices. Last year, even last year 
after all of this, 30 percent of the mortgages that remain in 
this country, there was almost no down payment or no down 
payment on a mortgage. And so, there are certain people that--
sometimes they are second homes, they're speculators, they took 
out a mortgage, if the home value doesn't go up, they're 
walking away from that.
    That's not the focus. The focus of our program is you've 
got to want to stay in your home, and respond to someone, and 
have the capability to do that. And I think on that--and just 
to finish up, Mr. Chairman--on that, we're continuing to make a 
very big effort, and I think the industry is, and we're going 
to monitor that very carefully.
    Senator Durbin. I've gone way over my time, and I want to 
give Senator Brownback his. But I do--I do want to go back to 
my question.
    Secretary Paulson. Right.

                             LOAN WORK OUTS

    Senator Durbin. You've really described the battleground, 
and the universe, but I want to zero in--how many of these have 
we helped? If, in fact, there are 13 percent of the 55 million 
that are subprime, that calculates out to about 7 million--if 
half of them are facing foreclosure, that's 3.5 million--how 
many have been reached by Hope Now, and this administration's 
efforts?
    Secretary Paulson. I would say, to date, okay, Hope Now, 
since the beginning there have been 1 million homeowners that 
have engaged in some form of modification or work out, okay? 
So, there have been 1 million people that have been helped.
    But what we're not picking up in our numbers are the 
refinancings. So, even when you--the number you cited, I looked 
very carefully at that number, and there were 45,000 
modifications, there were 167,000 work outs, both work outs and 
modifications went up faster than foreclosure starts--which was 
a positive. But we don't know the number of refinancings. And 
it's been hard, and there are a lot of refinancings. And so we 
will do everything we can to measure the numbers that have been 
helped.
    The other thing I'm really focused on is, you can't help 
people that aren't going to help themselves, or reach out. The 
standard I really want to set is that if there's a homeowner, 
and has been able to make the reset, be able to make the 
initial payment, and they said, ``I reached out and I talked to 
my servicer, and I'm still put into foreclosure,'' I want to 
know about that, because again, I want to follow-up. I mean, 
that's, to me, another--and we're going to work to get the 
numbers to help answer more and more of your question.
    Senator Durbin. I have some more questions, but I want to 
defer to my colleague, here.
    Senator Brownback.
    Senator Brownback. Thanks, Mr. Chairman.
    Secretary, thanks for being here. And also, just at the 
outset, I wanted to thank you for your years of expertise that 
you bring into the Government. I think particularly at this 
time with the economic problems we're facing, it's great to 
have somebody with your background and expertise, and I 
appreciate it.
    Now, I'm going to yell at you, but I first want to tell you 
how appreciative I am, of you being in Government with this, 
because I think it does bring a stature that's needed, and it's 
very helpful to have.
    I want to talk about two things--the economy, and terrorist 
financing. And I appreciate your describing the universe of the 
home situation, I wanted to describe a philosophy and then ask 
you questions on how to implement that.
    I've been through a similar crisis in the past, my guess is 
you've also seen a couple of things like this, and so you bring 
a philosophy that's based on your experience, as well.
    I went through the farm crisis of the 1980s, I was a lawyer 
in an undistinguished practice in the Midwest, and then went on 
to be agriculture secretary in the State. One of the things I 
saw in that early 1980s farm crisis--this would have been a 
Dick statement, Bigway, as well--is we took a crisis and we 
made it a huge--we took a problem and we made it a crisis. And 
we did that through trying to get too much done too fast.
    There was land that went on the market at a cheap rate, and 
then--I was representing some farmers and some banks. The 
regulators came out and told the banks, ``Clean up your 
loans,'' the banks went out and started suing a bunch of 
farmers to get their land, so we dropped a whole bunch of land 
on the market, a whole bunch of equipment, everybody's prices 
fell a huge amount, and it just exacerbated the problem--we 
tried to do too much, too fast, and we made it really bad. It 
was bad.
    So, I take that experience and I say that the thing we need 
to do now, because we've got a real problem here, is we've got 
to string this out, over a period of time, and not try to see 
too much housing stock get on the market too fast. Because if 
you get too much out there, you further plummet, and you get a 
whole bunch more people that are in trouble.
    So, if that's the correct philosophy, we need to meter this 
out over a period of time. We've got a problem, we had excess 
capital, or problems coming in, and bad loans taking place, and 
sharks out there, and we've got to work our way through this.
    Is the way to do that not just what the administration is 
proposing, but also tax credits for purchasing housing or even 
distressed housing? Or, some people are proposing changes in 
the bankruptcy code, to provide for a cram-down feature on 
housing? If you agree with the philosophy, I would like for you 
to say which actions by Congress you think would be the 
appropriate ones to prevent this problem from making an even 
worse impact on the overall economy.

                            CAPITAL MARKETS

    Secretary Paulson. Right, Senator, I assume since there's 
just the two of you, I can take a little bit longer time, since 
I took a lot of time on the chairman's question.
    Senator Brownback. Fine.
    Secretary Paulson. Because it's a very good question and I 
think it deserves a thoughtful answer, and I've thought a lot 
about it.
    The, first of all, I've said for some time, that as we look 
at this crisis, there's two focuses. First and foremost is 
getting through this period with as little impact--negative 
impact--as possible on the real economy, and so second, is 
what's the policy response to reduce the likelihood of going 
through this period again, something like this? And so we don't 
want to do something up front that's going to compound the 
problem in the short term, or to make it worse in the longer 
term.
    Now, there are a number of--even before you get to the 
housing, that is why I have been, when we look at what's going 
on with the capital markets turmoil right now, that I have been 
so focused on having all of our financial institutions, 
including the GSEs, raise capital that they need, so that they 
can be active in, you know, in the market--lending, keeping up 
their normal economic activities, as opposed to shrinking their 
balance sheet.
    Now, in looking at housing as I've looked at this, and I've 
looked at a whole lot of things, first I focused on efforts 
that would avoid what I would call a market failure. And the 
level of adjustable rate mortgage resets that were coming is 
such a wave that it wouldn't allow the private sector to react 
the way they normally would react, which would be to have the 
investor have time to strike a deal with each individual 
mortgage holder, and work something out that was in both of 
their best interest, because foreclosures are costly. And so 
that's why this ASF protocol, and working the fast-track 
modifications, to avoid avoidable foreclosures.
    The other big effort we still have--we have a number of 
things that have been done, are when you look at Fannie Mae and 
Freddie Mac, that we have them today to go back far enough in 
our history, we didn't, and they can play a constructive, 
counter-cyclical role. And they have been, but to continue to 
do so, they're going to have to raise more capital, and be very 
active there.
    Senator Brownback. What about tax credits and bankruptcy 
reform?

                               BANKRUPTCY

    Secretary Paulson. Oh, yeah, I would say this now, let me 
get at both of those. In terms of bankruptcy reform, I've had 
some very good conversations with your chairman, and he and I 
have a very similar objective. We approach this differently, 
and there's two reasons why I don't like the bankruptcy reform. 
First, as a matter of property rights and contract, I don't 
like the idea of retroactively changing contracts, and I'm 
concerned with what it might do to financing availability going 
forward.
    But even more importantly in working through this, I am 
emphasizing a program which says, if you're a homeowner, and 
you want to stay in your home, and you can afford to stay in 
your home--raise your hand. Call, reach out to someone. And 
it's a lot quicker than slowing it down, and bogging down our 
courts.
    Senator Brownback. What about the tax credit ground?

                              TAX CREDITS

    Secretary Paulson. Yeah, I think the, you know, the tax 
credit, I understand the concept very well, because we're 
looking at it--the overhang, and the inventory of unsold homes. 
I think that what you're apt to get with that is something 
that's going to prolong the issue. And so, net-net--although I 
look at it as a creative idea, there have been some creative 
ideas--we are much more focused right now, and let's get the 
GSE reform, get the Federal Housing Administration (FHA) 
modernization done, get the tax-exempt financing done, and so 
we're not there on the tax credit. But, again, I understand 
what people are seeking to get at with that proposal.

                           CONFLICT MINERALS

    Senator Brownback. If I could just ask one more question in 
the length of time we have. I've handed you a proposal, this is 
on financing--terrorist financing, and also conflict 
commodities financing, I think it's a topic you--the 
administration has done a pretty good job of trying to get at--
terrorist financing.
    I want to put another issue in your portfolio, and it's 
conflict commodities in Africa, particularly from the Sudan and 
Congo.
    Secretary Paulson. Yes.
    Senator Brownback. And that we really start targeting these 
commodities coming out of conflicts so as to prevent further 
exacerbation of the conflict.
    Secretary Paulson. Yes.
    Senator Brownback. Senator Durbin and I went to Congo 
together, I've even got a picture of one of the coltan coming 
out of Congo, financing it, now tin is being used--these are 
kind of Mom and Pop mining operations.
    Secretary Paulson. Yes.
    Senator Brownback. This is kind of how they mine coltan 
that's in your cell phone, or even tin out of Congo, this 
picture is taken out of Congo. No other group--they've got a 
proposal out of a draft piece of legislation saying that we 
won't purchase commodities from conflict zones, where that 
money is used to finance rebel groups.
    I would urge you to look at it, because I think this going 
to be one of the keys for us to try to stabilize Africa.
    Secretary Paulson. Yes.
    Senator Brownback. We need to keep the money from going to 
these rebel groups, particularly like in the eastern Congo, 
it's a classic place. I think it's also what we need to look at 
in the Sudan.
    Secretary Paulson. Yes.
    Senator Brownback. There you've got a government that's 
being primarily financed by oil and I think we need to be very 
aggressive on this in looking at it.
    And I would draw to your attention to one other thing, that 
we have done, Senator Durbin and a number of others worked on 
the Sudan Divestment Act that passed. I'd like to see us do a 
similar one on Iran, as a way to divest and get money out of 
the financing of the conflicts.
    I draw that one more to your attention than for a response, 
unless you give me a positive response, you don't need to 
respond at all.
    Secretary Paulson. How could I not be positive? Because 
this is a real problem, and your leadership and the chairman's 
leadership are very much appreciated on this. And I will pass 
on the comments to Secretary Rice and others at the State 
Department, because I think this is something that I know is an 
important issue.
    Senator Brownback. Thank you.
    Senator Durbin. Senator Allard.
    Senator Allard. Thank you, Mr. Chairman, thank you for 
holding the hearing to examine the budget request for the 
Treasury Department.
    And it's a pleasure to be here, to be able to welcome you, 
Secretary Paulson. We have an opportunity to see one another 
quite frequently----
    Secretary Paulson. Yes.

                             COSTS OF COINS

    Senator Allard. And so I do appreciate the job that you're 
doing and I apologize for being--not being able to be here to 
hear your testimony this afternoon, we started markup on the 
budget--we started debating the budget, and so, I'm on the 
Budget Committee, so it's important that I at least be there 
for the opening part of the Budget Committee debate.
    I did want to stop by briefly to raise one issue which has 
important appropriations implications, and I appreciate my 
colleagues accommodating my schedule on this.
    Last week on a radio program, you'd advocated for the 
elimination of the penny, but added that you didn't think it 
was politically doable.
    Secretary Paulson. I didn't----
    Senator Allard. If my information is correct.
    Secretary Paulson. No, I did not advocate it. I've got no 
intent, no plans to advocate it. What we're advocating, though, 
very strongly, for is we have legislation that would change the 
content of the----
    Senator Allard. Well, that's what I'm getting at.
    Secretary Paulson. The penny and the nickel.
    Senator Allard. Yeah.
    Secretary Paulson. Which would save the American taxpayer a 
good bit of money.
    Senator Allard. Okay. This was an Associated Press story. 
They must have got that wrong in the story.
    Secretary Paulson. Yeah, I said--what I had--we have no 
intent or plans to----
    Senator Allard. Well, we can still move forward with my 
question.
    Secretary Paulson. Right.
    Senator Allard. Because I've introduced legislation, I 
believe we've got bipartisan support on this, S. 1968, which 
gives the flexibility to the Treasury Department to manage the 
content of the coin.
    Secretary Paulson. Right.
    Senator Allard. Metal content. So, my question is, is--how 
much do you think this could save, as far as the Treasury 
Department is concerned, and how urgent do you think it is that 
we get this changed, to give you the flexibility with the 
changing metal market. You know, gold right now is at a 
historic high, I think, and a lot of our metals are falling 
right in behind that.
    Secretary Paulson. Yeah, it is, you know, we're losing 
money for every penny we mint and----
    Senator Allard. Even a nickel, too, right?
    Secretary Paulson. I don't have the number offhand--oh, the 
nickel's even more. It's--I think the nickel--directionally 
right, if it's, it costs 7.7 cents or something, to make a 
nickel or 1.4 cents to make a penny, and I'll get you the 
numbers.
    [The information follows:]

                      Cost of Pennies and Nickels

    Using current metal prices (February 2008), production costs this 
year for the Mint will be more than 1.3 cents per penny and 7.7 cents 
per nickel.

    Secretary Paulson. But, when I looked at it over the period 
of time, we're talking about hundreds of millions of dollars.
    But, whatever the number is, there's no reason to be losing 
money in a needless way. And so we just need to change the 
metal content of those coins.

                         METAL CONTENT OF COINS

    Senator Allard. Well, you know, and I sympathize with--
given you and the various agencies that you work with, the 
flexibility to change that metal content. Because, you know, 
all of these metals--they change in value from year to year, 
and I don't think the action of the Congress can keep up with 
it, and if we can do this in a way that saves taxpayer 
dollars----
    Secretary Paulson. Right.
    Senator Allard [continuing]. I think we ought to do it. And 
the sooner the better. And so anything you can do on that to 
help us get the message out, we'd appreciate it. I do think 
it's a very commonsense kind of piece of legislation, and 
something that I think we need to do.
    Secretary Paulson. It is. It is, very much.
    Senator Allard. So, anything you can do on that, we'd 
appreciate it.
    And you know, I--I guess the question is, are there metals 
that we would use that--we potentially could use--that we're 
not using now?
    Secretary Paulson. Yes.
    Senator Allard. Yes.
    Secretary Paulson. They are--they're composites, and 
there's been a lot of work done on this.
    Senator Allard. Is that right?
    Secretary Paulson. And I'd be very happy to send some 
people up to give you all the details on it, because there's 
been a lot of good work done on this by the Mint.
    Senator Allard. I would appreciate us being briefed on 
that, if you would, please. And maybe other members of the 
subcommittee would be interested in that.
    Secretary Paulson. Go through the whole economic analysis.
    Senator Allard. Okay, well, very good, well I'd like to 
follow-up on that a little bit, and maybe we can all get that 
information, get briefed together, or something. I don't know 
if we need to have a formal hearing on it, Mr. Chairman, but if 
you wanted to include it or something for the members of the 
subcommittee, we could do that. But, I'm particularly 
interested in it, and would like to have that information.
    Thank you.
    Senator Durbin. I thank the Senator from Colorado, and just 
for the record the Lincoln penny was initiated 100 years ago, 
on the 100th anniversary of Lincoln's birth. And the 
bicentennial of that birth, next year, will result in four new 
backs for the penny to show different aspects of Lincoln's 
life. And the metal content is secondary to the people of 
Illinois, as long as Lincoln's on the penny.
    Secretary Paulson. But, we can do them both, right?
    Senator Durbin. Right, no objection.
    Secretary Paulson. We can do them both, and we celebrate 
it.
    Senator Durbin. Yes.

                               BANKRUPTCY

    Mr. Secretary, Federal Reserve Chairman Bernanke recently 
said, relative to the foreclosure crisis, ``Principal 
reductions that restore some equity for the homeowner may be a 
relatively more effective means of avoiding delinquencies and 
foreclosure.'' And he continued, ``When the mortgage is under 
water, a reduction in principal may increase the expected 
payoff to the bank by reducing the risk of default and 
foreclosure.''
    I want to say a word about the bankruptcy provision which 
you've alluded to, because Senator Brownback will get a chance 
to consider that measure in a day or two in our Senate 
Judiciary Committee.
    Over the months since we've first initiated the concept, we 
have changed it dramatically. Originally, we said that there 
was no equity or justice in allowing a bankruptcy court to 
modify the terms of a mortgage on a vacation condo, a farm or a 
ranch, but to prohibit, by law, any modification of the terms 
of a mortgage on a principal residence or a home. And so, 
initially, we began with the premise, let's treat them all the 
same, allow the bankruptcy court that option.
    But, some have observed that that may have a negative 
impact, so we have dramatically restricted the bankruptcy 
reform that I am proposing. First, it's harder to get into 
bankruptcy court today than it was 5 years ago. You have 
chapter 13, which requires certain requirements, income 
requirements and the like, before you can end up in the 
bankruptcy court.
    Second, we restricted this provision, this change, only to 
homeowners, so no speculators need apply. You have to actually 
live in the home we're talking about.
    Third, we said only subprime mortgages for those homes.
    Fourth, we said that any modification of the terms of the 
mortgage could not reduce the principal any lower than fair 
market value to protect--as best we can--the lender who, if 
they're facing a distress sale, are lucky to see fair market 
value.
    Then we said the interest rate has to be based on the prime 
rate plus a reasonable premium for risk. And, we added another 
provision which, I think, is an effort to go an extra mile to 
win back some support from the banking community, and it did 
win the support of credit unions. If there is a modification of 
the principal on a mortgage in a bankruptcy facing foreclosure, 
and say a house is re-valued from $500,000 to $450,000, and 
then in subsequent years, increases in value, back up over 
$450,000--that delta, that change, that improvement--will go to 
the lender. So, we're trying to protect the lender on the 
downside fair market value and the upside, in terms of 
appreciation.
    What I'm troubled with is this reference by yourself and 
bankers to the ``sanctity of the contract.'' I've seen some of 
these contracts in our home State. There's nothing holy about 
how these contracts were entered into. Many of them were 
deception at its worst. People were taken advantage of. Poor 
people, uneducated people, senior citizens.
    And to hold these as ``holy instruments'' which now must be 
respected, overlooks the obvious--when we changed the 
bankruptcy code 5 years ago, we changed the impact of all of 
the contracts that come in under bankruptcy. The sanctity of 
the contract was never raised by the banks who wanted to change 
the bankruptcy code for their advantage.
    Now, when they may end up negotiating a contract of 
mortgage which they've resisted negotiating, they're arguing 
the sanctity, the ``holiness'' of the integrity of this 
contract. And I will tell you, I can give you chapter and verse 
of some that were as unholy as you can imagine.
    Secretary Paulson. Can I respond to that?
    Senator Durbin. Of course.
    Secretary Paulson. Because there is no way you're ever 
going to get me defending some of those loans. And I am 
cheering on our law enforcement agencies, everyone that is 
going after the fraud.
    What I was talking about was taking a bankruptcy statute, 
that was designed the way it was for a reason. The presumption 
is the judge is going to--you're not going to be altering the 
terms of a vacation home or a sailboat, or whatever. You're in 
bankruptcy, the presumption is, you lose it.
    Senator Durbin. Not in chapter 13.
    Secretary Paulson. It's----
    Senator Durbin. Not in chapter 13.
    Secretary Paulson. But, I'll tell you, it's a much 
different presumption when you're talking about your home. But 
again, rather than--I just make two points, okay? And I'll just 
make them again, and make them quickly. That, to me when you 
change a bankruptcy statute and do it retroactively--I 
recognize you've narrowed it, okay?--to change it 
retroactively, it's something that gives me pause. And then 
second, again, that when you look at bogging down the system 
and dumping this in the courts when I think a simpler, more 
effective way to deal with it is to have homeowners when 
there's a problem, go deal with it.
    And a large number of foreclosures we're seeing, from 
everything I can learn, is homeowners not responding.
    Senator Durbin. But, Mr. Secretary, let me tell you, you 
said that earlier. ``If you can make the original payment and 
can't make the reset, hold up your hand,'' you said. Well, 
you've got hundreds of thousands of borrowers across America 
who are in this predicament, and to say to them, ``You should 
go take care of your problem.''
    What I'm saying to you is, the response so far, the 
voluntary response of your administration programs has reached 
some, but not nearly enough to turn this crisis. The Fed--the 
Chairman of the Federal Reserve, Mr. Bernanke, is basically 
said what I am saying. That there comes a moment in time, that 
if you want to turn this crisis, you have to deal with the 
reality.
    I don't want these people to go to bankruptcy court--if I 
could just finish--I don't want these people to end up in 
bankruptcy court. But if the lender understands that there is a 
possibility of bankruptcy and modification, they are much more 
likely to renegotiate the terms of the mortgage before 
bankruptcy. Currently, there is no incentive.
    Secretary Paulson. Listen, I very much appreciate what 
you're trying to do and your motives, you appreciate mine. As 
far as I know, Ben Bernanke is not advocating changing the 
bankruptcy law retroactively. And again, there's a fact, and 
the fact is that we're making a huge effort. There still are a 
fair number of people that--a large number of people, a 
disappointing number of people--aren't responding when they get 
numerous letters and phone calls and they hear--and all I'm 
saying is, wouldn't it be easier to--and how do you help 
someone if they're not going to raise their hand and----

                           COUNSELING FUNDING

    Senator Durbin. Then let me ask you this question, why did 
the administration issue a statement saying that they would 
veto the housing stimulus bill before the Senate last week, and 
one of the reasons because it would have substantially 
increased the number of counselors available for those facing 
foreclosure. If your argument is that enough people aren't 
seeking help, why did the administration say that that was one 
of the specific reasons they would veto the housing stimulus 
bill?
    Secretary Paulson. Well, I missed that part of it, because 
I will tell you that counseling is vital. And one of the things 
that the administration has been advocating has been funding 
for counseling, and funding a counseling partially by the 
servicers at Hope Now, and the whole effort. And the 888-995-
HOPE number is to get people to call and get to counseling.
    So, you know, I didn't read that part that you're referring 
to, but I sure know that the--we've got a similar objective and 
I appreciate the fact that you've narrowed it appreciably, and 
again, I'm just giving you my----
    Senator Durbin. Senator Brownback.

                             LOAN WORK OUTS

    Senator Brownback. Thank you, and this is a good 
discussion, because I remember the same discussion during the 
farm crisis time period. And, a lot of these loans need to be 
restructured.
    Is it your belief that a number of the loans that people 
want to restructure are being restructured by financial 
institutions?
    Secretary Paulson. I sure believe that.
    Senator Brownback. Do you have any hard numbers that you've 
been able to track or to look at?
    Secretary Paulson. What we've got--here's some hard numbers 
I've got. Some are encouraging and some are discouraging.
    That, before this effort, 2 to 3 percent of the people were 
responding to servicers, when they went to homeowners that were 
facing resets or delinquent. Now, 20 percent are responding, 
okay? So, that's a positive.
    We have a hard number that since the beginning of putting 
this together, that there have been 1 million homeowners who 
have been helped--either, you know, through a, through a work 
out of some sort.
    We have hard numbers that this last--the last month, that I 
was encouraged to see modifications and work outs growing 
faster than foreclosure starts. But, I don't have numbers on 
refinancings.
    Part of the problem we have, Senator, is that--as I said 
earlier, there are really--and the chairman made that point--
there were just egregious, some of the lending contracts and 
some of the way people were put in these loans, and there--but 
there were 18 percent of the 2006 adjustable rate subprime 
mortgage holders defaulted 6 months before the first reset. 
They couldn't afford the initial payment.
    And so, there are, regrettably, going to be some people 
that are going to return to becoming renters. But, again, I'm 
going to work hard to make the Hope Now Alliance work, and work 
better, we're going to work as hard as we know how to get the 
data out there and to track it, and I've got to tell you, if 
something isn't working the way it needs to work, then we're 
open--and I'm sure open--to making modifications in the way we 
approach things. We just have a----
    Senator Brownback. Secretary, if I could, and I just wanted 
to interject, and I appreciate you going through this--my raw 
point on this would be that I really hope that the financial 
institutions and the administration can make the work outs 
work.
    Secretary Paulson. Yes.
    Senator Brownback. Because if it looks like things aren't 
working or that the financial industry says, ``Look, we're just 
going to dig in and start fighting on these,'' then I think the 
issue comes back in front of the Congress at that point in 
time.
    So, I think there is a period where people can look at 
this, and say, ``You know, the bank doesn't want the home 
back,'' the financial institution doesn't want the home--they 
want the person to stay in it.
    But, a lot of times, people have gotten into something they 
shouldn't have, or were talked into something that they 
shouldn't have been. We are where we are today, and we all know 
we've got a problem here, and I just think if we can make the 
work outs work in substantial numbers across the country, then 
great. I would presume, really, Senator Durbin would be very 
happy with that.
    If they don't, then it becomes a more difficult matter if 
these numbers start jumping up. And that would be the point I 
would like to make to you, on a raw basis.
    Secretary Paulson. Senator, can I respond to that in one 
way? Because no matter how well we make this program work, 
given the excesses that were entered into, the foreclosures 
will jump up. And there are a number of homeowners who were 
speculators. There were a number of homeowners in hot markets 
that put very little down, the first time there's some negative 
equity from their home, they're going to walk away from their 
obligation.
    And I think the very interesting question there--to me, 
it's not a difficult question, for some it's a more difficult 
question, to me it isn't--that if someone is going to walk away 
unless someone else pays for their losses, I don't want it to 
be the Government or other taxpayers to pay for their losses. 
To me, those are speculators, and that shouldn't be the focus 
of our efforts.
    Senator Brownback. Fair enough.
    Secretary Paulson. And so, when you look at these 
foreclosures, I'm focused on the same ones that Chairman Durbin 
is focused on--in other words, homeowners that want to stay in 
their home and are having trouble with----

                         REPATRIATION OF FUNDS

    Senator Brownback. I want to build off of that point with 
the little bit of time that I have here. It certainly strikes 
me that one of the biggest things we all want to avoid is this 
soft economy going on into a recession. The economy's soft, 
credit's tight, and we don't want it to slide on into a 
recession. I think the administration is trying to do 
everything they can to stave off a recession.
    One of the issues that I want to draw to your attention--
I'm sure you've looked at this--is repatriation of funds from 
large corporations bringing back to the U.S. economy. Last time 
we did that, that brought in $284 billion in earnings from 
overseas back into the U.S. economy in a 1-year time period, 
where normally we'd have about $70 billion in the same 1-year 
time period. So, nearly a $200 billion infusion into the U.S. 
economy. I hope the administration would look at something like 
that as an infusion of cash into the economy, which we need to 
have at this point in time.
    Secretary Paulson. Senator, I thank you for pointing that 
out. It's something we've looked at, it's something that I had 
calls from a number of people I knew in the private sector 
advocating very hard for that at the time we did the stimulus 
package. And since we were very rigorous on the stimulus, in 
terms of saying, ``Everything that went in had to be 
stimulus,'' there are some things that are very good economic 
policies, and, you know, I knew from a lot of experience, just 
because a company brings cash back, doesn't mean they're going 
to spend it, okay? And so, we focused much more on things that 
were going to increase the likelihood that it'll be a real 
stimulus.
    But, I understand the incentives and motivations you're 
talking about, and the wisdom of something like that, and I 
thank you for bringing it.
    Senator Brownback. Well, it strikes me that we may be 
getting to a point where we want to put everything out there we 
possibly can to keep the economy from going into recession. And 
even if the corporations don't spend it, if it's sitting 
overseas, they're for sure not going to spend it here.
    Secretary Paulson. Right.
    Senator Brownback. You've assured that one of taking place.
    So, I think we ought to be looking at the next step on 
this, just to----
    Secretary Paulson. Right.
    Senator Brownback [continuing]. Because things are tough 
out there, and it looks like, it's going to be difficult for 
the consumer to come back in the marketplace, to the degree or 
level that we want. So that's going to depend upon a lot of 
corporations and individuals investing, us being very 
competitive with our exports--which have grown substantially.
    Secretary Paulson. Yes.
    Senator Brownback. Us expanding the energy industry 
domestically, I just think now we're looking at some bit of 
restructuring of our economy, probably a little away from the 
consumer, and more towards exports, energy--and these are great 
opportunities for us. I see you put some things on the energy 
market, here, I hope we can do that.

                      ALTERNATIVE METALS FOR COINS

    And just a final comment--I just hope you don't make the 
penny out of plastic, or nickel out of plastic. Make it out of 
some metal.
    Secretary Paulson. Yeah, we're talking about composite 
metals, right, we're just changing the metal content a bit.
    Senator Brownback. All right, thank you. Unless it's wheat-
based plastics or something like that.
    You know, maybe corn, being from Illinois, but just--don't 
make it out of plastic.

                           COUNSELING FUNDING

    Senator Durbin. We have a bipartisan position on that.
    Mr. Secretary, when you get back, take a look at the 
statement of administration policy issued February 26, this 
year, relative to the housing stimulus bill on the floor, and 
you'll see that the administration said that it would veto this 
bill over the suggestion of tripling the funding for the 
Neighborhood Reinvestment Corporation, which was expressly for 
more counselors.
    Secretary Paulson. Yeah, I just put in front of me, yeah. 
You said it's because--I think the view is we've got plenty of 
funding right now.
    Senator Durbin. Well, I think that--I've been out, locally 
in Chicago and all around our State, and I think that's 
arguable. Because if we are reaching 20 percent, and still have 
80 percent, some of that is because of lack of volition on the 
part of the borrower, but it appears to me that there's a lot 
more that needs to be done if there's truly going to be an 
aggressive approach to this.
    I would just like to close, and I'm going to give you a 
chance to respond, because it's--what I'm about to say is 
critical, and I want to hear your response to it.
    When one of your senior counselors was asked yesterday 
about the Treasury Department report on loan modifications 
under Hope Now, 45,000 borrowers in January, the senior 
mortgage banker who runs the Hope Now program said, and I 
quote, ``A mortgage servicers obligation is to get the maximum 
value to the investor over the life of loan. If you're going to 
modify the loan and keep the borrower in the house, the bias is 
to do that for a shorter, rather than a longer, period of time. 
There's a reluctance to do long-term modifications.''
    So, I think the 45,000 figure may be misleading. If it's 
only temporarily suspending the foreclosure, it's not going to 
help in terms of really trying to right this ship.
    My concern from the beginning, is that I know the 
administration's philosophy, that you have carried out, calls 
for voluntary involvement by lending institutions. When we 
suggest bringing in a bankruptcy court to try to force the hand 
of some of these banks to finally renegotiate, the 
administration opposes it, and says they'll veto a bill.
    I have said, repeatedly, and I won't go into the graphic 
detail, I don't think that the response to this housing crisis 
is adequate. I think it is going to continue to get worse. And 
as long as it worsens, and as long as the housing industry is 
in such terrible shape across America, it's going to be hard to 
see a sound economic recovery.
    It isn't just the builders, and the speculators, and the 
land developers, it's all the material men and skilled 
craftsmen and everyone else who are, frankly, not doing much 
work in my State of Illinois and around this country, waiting 
for the housing market to come back. And those of us who own 
homes are watching the values go down because of foreclosures. 
And we're watching units of local government that will face 
serious problems as assessed valuation goes down, and as 
property tax revenue goes down that's used to sustain local 
units of government.
    If there was ever a time for someone to push away a Herbert 
Hoover view of this, and say, ``We need a New Deal view of 
this, that says there has to be something that's decisive, and 
meaningful, and reaches the most number of people as quickly as 
possible to turn this ship around,'' I think it's now. And the 
longer we wait, the worse, I think, it's going to get.
    And, I invite your response.
    Secretary Paulson. Well, let me respond to that, and the 
counseling.
    I would say on counseling, I get out a fair amount, and 
spend time with counselors, I'll be spending some time when I'm 
out in California later this week, when I was in Chicago, I 
spent time with NeighborWorks. And at least to date, when I've 
talked with counseling firms, they're not impeded by a lack of 
funds, okay? There's not--and so we're, because I just don't 
want there to be a difference between us on that. Because this 
is essential and it is, it's major.

                           LOAN MODIFICATIONS

    Now, in terms of modifications, various firms take various 
approaches to the modification. But to me, the focus I have is 
having mortgage servicers make modifications that help people 
stay in their home, and avoid foreclosure. And that is the 
objective, it is--I think these are costly things to go 
through, I don't think it's in the interest of either the 
borrower or the lender, to have something not be sustainable. 
All I can say to you is that on that effort, I'm going to drive 
that as hard as I know how.
    Now, in terms of your overall comment, where you talked 
about Herbert Hoover--there's been a lot that's changed since 
we went through the Depression and when the foreclosures were 
50 percent and unemployment was 25 percent. We have GSEs, we 
have the FHA, we have the Federal Home Loan Banks, that we're 
going through a period now where 93 percent of the people in 
this country, every single month, no matter how hard it is, 
make their mortgage payment. Two percent--not 50 percent--are 
in foreclosure.
    Now, I believe when you say you think it's going to get 
worse, I'm not arguing with you. I've said that I think that 
those forecasters who say that this is an adjustment, a period 
of adjustment, it's going to take longer to run its course--I 
agree with them.
    You know, when I look at the mortgages that were made in 
2006, that are going to be reset over the next couple of years, 
and when I look at some of the mortgages, the negative 
amortization mortgages, which will be coming, now, even further 
out--I recognize that this is going to take longer. And again, 
I've told you where the focus is, and we're focusing very hard 
on avoiding preventable foreclosures to those who want to stay 
in their home, and have the capability to do that.
    I appreciate you and I want to do the same thing. I'm going 
to keep watching this very closely, we're going to be all over 
it, and I, you know, as again, I know you've got the same 
objective I do. We've got some--and you're supportive of Hope 
Now, you're saying you think there should be some other things 
done----
    Senator Durbin. There should be more.
    Secretary Paulson. And we're just----
    Senator Durbin. Well, let me thank you for coming today and 
testifying--we didn't talk much about your budget. But you will 
get plenty of written questions on that, which we will submit 
to you.
    Secretary Paulson. Thank you.

                     ADDITIONAL COMMITTEE QUESTIONS

    Senator Durbin. And we will provide those for you. And any 
members who wish to make statements and allow them part of the 
record, they will be included, and any questions in writing, I 
ask that you try--I know you're a very busy man, but if you'd 
try to respond to them in a timely fashion, we would appreciate 
that very much.
    [The following questions were not asked at the hearing, but 
were submitted to the Department for response subsequent to the 
hearing:]

            Questions Submitted by Senator Richard J. Durbin

                                 TRADE

    Question. In Illinois, we continue to see losses in manufacturing 
jobs that can at least in part be attributed to the forces of 
globalization. The Trade and Globalization Adjustment Assistance Act of 
2007 extends Trade Adjustment Assistance (TAA) to services sector 
workers and workers affected by offshoring, creates a new TAA program 
for rural and distressed communities, and makes training, healthcare, 
and wage insurance benefits more accessible and flexible. Does the 
Administration support strengthening Trade Adjustment Assistance along 
these lines?
    Answer. The Administration strongly supports TAA reauthorization 
that includes needed reforms to help workers adversely impacted by 
trade access the training and reemployment services they need to return 
to work quickly.
    Reauthorization provides an opportunity to redesign the TAA program 
to make it more effective in enabling workers to gain the skills needed 
to successfully compete in the 21st century global economy.
    The Administration believes there are several flaws in the TAA 
program as it is currently designed. These flaws include:
  --TAA is an ``all or nothing'' program, where participants lose 
        access to benefits by choosing to return to work.
  --Training options are limited and the process of applying for 
        training is lengthy and bureaucratic.
  --Services cannot be provided until after the worker is laid off--
        even when the layoff is announced well in advance.
  --There is no requirement that One-Stop Career Centers provide 
        ``wrap-around'' services such as career counseling, assessment 
        and job placement assistance to all TAA participants through 
        the Workforce Investment Act (WIA).
    The Administration believes any reauthorization of the TAA program 
should reflect the following priorities:
  --Workers must have increased choice to combine employment with 
        training and ``earn while they learn.''
  --Training options should be flexible and easy to access.
  --Services should be available prior to layoff, in order to reduce 
        the length of time workers are unemployed.
  --Integration with the Workforce Investment System should be improved 
        by requiring states to ensure workers have access to the full 
        range of services available through the One-Stop Career Centers 
        under WIA.
    Question. It is difficult for workers to complete some courses 
under the current TAA restrictions because it simply takes longer to 
finish the programs than TAA allows. For example, Illinois has an acute 
shortage of nurses, and yet the state is unable to find enough people 
either to teach the training courses or to complete the programs. This 
is a high-growth area for workers that cannot be readily outsourced. 
However, our TAA rules make it nearly impossible for displaced workers 
to enter the nursing profession because the program takes longer to 
complete that TAA allows for training. Do you support common sense 
updates to Trade Adjustment Assistance rules that would address 
difficulties like this?
    Answer. The Administration believes that a high priority for TAA 
reauthorization is that trade-affected workers must have increased 
individual choice to ``earn and learn'' by having access to 
transitional benefits, such as education and training post-employment 
and transitional income support (in certain cases). Benefits under the 
program should include a menu of ``New Economy Worker Services'' that 
allows the worker to choose the option that best fits his or her 
individual needs. For example, training-related options should allow a 
worker to combine either full or part-time work with education and 
training. Similarly, the reauthorization would ensure greater access to 
education and training by providing ``New Economy Scholarships'' to 
workers that could be used over four years. Additional monies would 
also be available to workers who need pre-requisites for training in a 
high demand occupation. The New Economy Scholarship should be portable, 
enabling certified workers to have access to tuition assistance whether 
they are unemployed or return to employment. Workers should be able to 
choose to attend training full or part-time and use the funds for 
tuition, books, fees and required tools.

                     INTERNATIONAL SANCTIONS: SUDAN

    Question. Does the Bush Administration intend to enforce the Sudan 
Accountability and Divestment Act, which I worked very hard to pass in 
conjunction with Chairman Dodd and Chairman Frank over in the House, 
along with the Ranking Member of this committee, Senator Brownback?
    The Treasury Department will provide to Congress the reports called 
for in Section 10 of the Act. Section 6 of the Act governs the 
Executive Branch concerning government contracts with companies that 
conduct certain business operations in Sudan. The Treasury Department 
intends to comply with that provision once the Federal Acquisition 
Regulation is updated by the Federal Acquisition Regulatory Council, as 
provided for in the Act.
    If so, why did the Administration issue a signing statement that 
left in doubt whether that would be the case? If not, why did President 
Bush sign the bill?
    Answer. The Department respectfully recommends that these questions 
be directed to the White House.

                     INTERNATIONAL SANCTIONS: CUBA

    Question. Do you think that the United States should view the 
transfer of power from Fidel Castro to his brother Raul as an 
opportunity to strengthen ties to Cuba? Or do you think our policies of 
sanctions and non-communication should continue? What benefits are 
derived from a stay-the-course, status-quo approach to Cuba that would 
maintain the policy of isolating the Cuban government with economic 
sanctions? Is any consideration being given to an approach aimed at 
influencing the Cuban government through an easing of sanctions and 
increased contact and engagement? If not, why not?
    Answer. The United States foreign policy positions are defined by 
the State Department. The Office of Foreign Assets Control (OFAC) 
administers and enforces the country sanctions against Cuba, which 
restrict the flow of funds to Cuba that would otherwise be used to prop 
up the regime rather than benefit the Cuban people. The 
Administration's policy has been designed to prevent resources from 
reaching the regime, which uses its resources to control and oppress 
the Cuban people. We will continue to monitor developments closely and 
stand ready, if asked, to assist a genuine Cuban transition government 
committed to democracy.

                  REDUCTION IN REQUESTED CDFI FUNDING

    Question. Compared to fiscal year 2008, proposed reductions could 
jeopardize $700 million in private capital for CDFIs that could 
otherwise be made available to communities and individuals currently 
facing credit shortages. Why are you recommending such a drastic 
reduction to a program that demonstrates such a tremendous return on 
the taxpayer's dollars?
    Answer. The fiscal year 2009 President's budget includes over $28 
million for the CDFI Fund, which will be used to expand the capacity of 
financial institutions to provide credit, capital and financial 
services to underserved populations and communities. Specifically, the 
CDFI Fund will continue to provide grants, loans and equity investments 
through the CDFI Program, allocate tax credits through the New Markets 
Tax Credit Program, and support the CDFI Fund's existing grantees.
    The fiscal year 2009 President's budget does not propose funding 
for the Bank Enterprise Award (BEA) Program. The BEA Program provides 
funds to for-profit banks based on their past activity, and has not 
demonstrated that its awards increase lending and financial services in 
economically distressed communities. The BEA program is in the process 
of modifying the program's regulations. With these revisions in place, 
any future BEA funding will encourage future community development 
activities, rather than reward past activity. This change aligns BEA 
Program activities with the CDFI Fund's goals and objectives.
    In fiscal year 2009 the CDFI Fund will continue to serve Native 
communities through the CDFI Program; however, the fiscal year 2009 
President's budget does not include a separate request for Native 
Initiatives.
    Question. How do you reconcile this proposed reduction with the 
Administration's concern with the shrinking availability of credit?
    Answer. The Department of the Treasury encourages the availability 
of capital and credit to all communities, including low-income, through 
a broader system of financial institutions. While the CDFI Fund 
provides capital and credit to financial institutions serving low-
income communities it is not the only source of funding available to 
these institutions. These intuitions may also receive funds from 
various federal, state, and local entities, such as the U.S. Department 
of Health and Human Services, U.S. Department of Agriculture, state 
economic development agencies, and local municipalities. Non-government 
funding sources for these financial institutions include banks, 
thrifts, credit unions, and non-regulated institutions such as loan 
funds and community development venture funds.

                       ECONOMIC STIMULUS REBATES

    Question. I understand that you anticipate that IRS will begin 
sending rebate checks starting in May. When do you project that the 
payments will have a noticeable positive impact on the economy?
    Answer. The first economic stimulus payments will be issued by 
direct deposit beginning May 2, 2008. The first paper checks will go 
out beginning May 16, following the schedule outlined below.

   STIMULUS PAYMENT SCHEDULE FOR TAX RETURNS RECEIVED AND PROCESSED BY
                                APRIL 15
------------------------------------------------------------------------

------------------------------------------------------------------------
          Direct Deposit Payments

If the last two digits of your Social       Your economic stimulus
 Security number are:                        payment deposit should be
                                             sent to your bank account
                                             by:
    00-20.................................      May 2
    21-75.................................      May 9
    76-99.................................      May 16

                Paper Check

If the last two digits of your Social       Your check should be in the
 Security number are:                        mail by:
    00--09................................      May 16
    10--18................................      May 23
    19--25................................      May 30
    26--38................................      June 6
    39--51................................      June 13
    52--63................................      June 20
    64--75................................      June 27
    76--87................................      July 4
    88--99................................      July 11
------------------------------------------------------------------------

    Based on the payment schedule, the Department projects that the 
stimulus will begin to provide a meaningful boost to spending almost 
immediately and that its effect on economic growth will be felt through 
the rest of the year. The Department also anticipates that the 
individual and business tax relief components of the package together 
could lead to the creation of over half a million jobs by the end of 
the year.

                       NEW 24/7 OPERATIONS CENTER

    Question. The President's 2009 budget for the department requests 
$6.2 million for a new Operations Center, which would provide 24/7 
capability to monitor the global market. How will the enhanced 
capabilities of the new Operations Center support Treasury's mission?
    Answer. The Department of the Treasury serves the American people 
and strengthens national security by managing the U.S. Government's 
finances effectively, promoting economic growth and stability, and 
ensuring the safety, soundness, and security of the United States and 
international financial systems.
    The global scope of the Department's operations requires a 24/7 
response capability. The Treasury Operations Center will act as a 
fusion center for the receipt, analysis, and dissemination of 
information critical to the economic well being of the country. It will 
have enhanced analysis capabilities necessary to monitor international 
and domestic financial markets, coordinate actions with other Federal 
agencies, foreign governments, and global financial markets, and manage 
the Treasury's global operations on a round the clock basis. It will 
have a capability to integrate open source and classified information 
that currently does not exist in the Treasury organizational structure. 
The speed with which financial information is processed and the fact 
that decisions facing the United States are not limited to weekdays 
from 9-5, dictate the creation of a 24/7 facility that will protect and 
enhance the fiscal power and reach of the United States Government.
    Additionally, the Treasury Operations Center will act as a 
communications hub for information directly related to the financial 
markets as well as to national and world events that affect the 
markets. This communications hub will tie together the Treasury program 
offices with their private sector counterparts, foreign financial 
ministries, and other federal government entities. The Treasury 
Operations Center will engage directly with international financial 
market participants, foreign governments, international financial 
institutions, and in multinational fora in an immediate time-sensitive 
manner. Open and secure communications capabilities will be available, 
as will a 24/7 executive switchboard.
    Lastly, the Treasury Operations Center will function as a crisis 
management center. It will be the hub for activities bringing senior 
Treasury Department officials together to manage rapidly developing 
issues affecting the financial community (for example, managing the 
recent sub-prime mortgage situation and bolstering confidence in the 
investment banking community). Current financial crises require the 
Secretary to manage operations on a daily if not hourly basis, as well 
as implementing policies that affect the future course of the nation's 
economic health. Open and secure conference rooms will be available, 
along with fully equipped private office space.

                      CROSS-BORDER WIRE TRANSFERS

    Question. In October of 2006, Treasury's Financial Crimes 
Enforcement Network released a study that found that it is technically 
feasible to require financial institutions to report data on wire 
transfers that cross borders. What is the status of Treasury's efforts 
to implement reporting of Cross-Border Wire Transfers?
    Answer. The Financial Crimes Enforcement Network (FinCEN) continues 
to study regulatory proposals for the collection of Cross-Border 
Electronic Transmittals of Funds. FinCEN is currently analyzing the 
costs and benefits of a proposed regulation that will affect law 
enforcement and regulatory agencies, and the financial industry. Upon 
completion of the study, a report will be provided to the Secretary for 
review and consideration.
    Question. Have you conducted any analyses in order to weigh the 
additional costs that data reporting on cross border wire transfers 
might impose on the financial sector against the benefits of gathering 
this data?
    Answer. As mentioned above, FinCEN is actively engaged in a review 
of the costs and benefits of a proposed regulation to collect Cross-
Border Electronic Transmittals of Funds. Data collection efforts that 
contribute to the evaluation of costs and benefits include surveys, in-
person interviews, and ``use case scenarios.'' Specifically, FinCEN has 
reached out to affected parties of the Bank Secrecy Act Advisory Group 
(BSAAG), a statutorily created forum for discussing Bank Secrecy Act 
(BSA) administration, to assess the impact on industry. FinCEN has also 
coordinated with the Federal Reserve Board to survey financial 
institutions that transmit funds internationally. This voluntary survey 
asked institutions to identify the impact of a reporting requirement, 
including the cost of reporting such information. Finally, FinCEN 
conducted in-person interviews with law enforcement and regulatory 
agency officials and collected ``use case scenarios,'' which are 
specific examples of exactly how the agencies would use the cross 
border data and its resulting benefits.

                BUDGETARY IMPLICATIONS OF CUBA SANCTIONS

    Question. How many fiscal year 2008 budget and staff resources 
(stated in dollars and actual staff, either part-time or full-time, and 
work location) are presently designated for administering the Cuba 
sanctions? What proportion of total Treasury/OFAC resources do those 
levels represent?
    Answer. Most of OFAC's Cuba-related work is centered in its 
Licensing Division and includes processing applications for travel to 
Cuba to market and sell agricultural products to Cuba as provided for 
by the Trade Sanctions Reform and Export Enhancement Act of 2000, as 
well as applications to engage in family and religious travel and other 
Cuba-related transactions. Of the 155 OFAC FTE, six FTE (approximately 
$1.1 million) in Washington, DC and five FTE (approximately $.9 
million) in Miami, FL are devoted full-time to the Cuba program. These 
eleven FTE represent approximately seven percent of OFAC's budget. In 
addition, some other individuals, including supervisors, who dedicate 
time to one or more of the other 20-plus sanctions programs 
administered by OFAC, work on aspects of the Cuba program as necessary.
    Question. How do those levels compare to the resources that are 
devoted to the other sanctions programs that OFAC implements, including 
sanctions related to terrorism, weapons proliferation, and narcotics 
trafficking?
    Answer. The balance of OFAC's budget (approximately ninety-two 
percent) is devoted to the other 20-plus sanctions programs that OFAC 
implements, including those related to Iran, Sudan, terrorism, weapons 
proliferation, and narcotics trafficking. However, as noted in the 
response to the question above, some individuals, including 
supervisors, who dedicate time to one or more of the other sanctions 
programs administered by OFAC, work on certain aspects of the Cuba 
program as necessary.
    Within OFAC's Designations Investigations Division, there are 
currently six FTE (two of which are currently vacant) devoted full-time 
to administering counter-terrorism sanctions programs; eight FTE 
devoted full-time to administering counter-proliferation sanctions 
programs; eleven FTE devoted full-time to administering counter-
narcotics sanctions programs; and eight FTE (two of which are currently 
vacant) devoted full-time to administering country/regime sanctions 
programs. These figures are fluid and the resources assigned to 
administer these programs can change at any time to accommodate foreign 
policy interests and national security priorities. The FTE within the 
other operating divisions (Licensing, Policy, Compliance, Civil 
Penalties and Enforcement) are not assigned to administer and implement 
specific sanctions programs; rather, these divisions assign employees 
on a cross-program basis.
    It should be further noted that in 2005, as part of the creation of 
the Office of Terrorism and Financial Intelligence, twenty-three 
analysts assigned to OFAC's terrorism sanctions program in the Foreign 
Terrorist Division of OFAC were transferred to Treasury's Office of 
Intelligence and Analysis (OIA) to form the nucleus of OIA's analytic 
team. These analysts have continued to support OFAC's counter-terrorism 
sanctions program through in-depth targeting, research, analysis, and 
drafting of evidentiaries. Over time, the number of analysts assigned 
to counter-terrorism work in OIA has grown to thirty-five, 
strengthening and deepening Treasury's counter-terrorism sanctions 
program and also allowing OIA to provide expanded analytical support to 
the Treasury Department and interagency community on terrorist 
financing matters.
    Question. How do the fiscal year 2008 levels (resources and 
staffing) compare to funds and personnel devoted to Cuba efforts in the 
previous four fiscal years (fiscal years 2004 through 2007)?
    Answer. In fiscal year 2008, OFAC employed new strategies on Cuba 
matters in the Enforcement and Civil Penalty divisions that have 
reduced and are expected to continue to reduce resources committed to 
Cuba; specifically, OFAC increased its targeting of enforcement efforts 
by concentrating on those facilitating illegal travel to Cuba. It is 
expected that the percentage of staff time expended by the Enforcement 
and Civil Penalties divisions on Cuba matters will decrease as a result 
of the new strategies being deployed. Resources and staffing devoted to 
Cuba will otherwise remain consistent with the previous four fiscal 
years (fiscal years 2004 through 2007).
    Question. Please provide the Subcommittee with a data table 
detailing the resources (dollars and personnel) allocated for fiscal 
year 2008 for investigating and penalizing violations of the Cuba 
embargo, describing the types of activities involved, and specifying, 
for comparison purposes, the amounts dedicated to each of the other 20-
plus sanctions programs that OFAC administers.
    Answer. As noted above, OFAC has adopted new strategies with 
respect to sanctions violations in recent years. These strategies have 
resulted in a significant reduction in Cuba penalty cases. Enforcement 
resources committed to Cuba are also being reduced and enforcement 
efforts are being targeted in a more effective way by concentrating on 
those facilitating illegal travel to Cuba. The data table below 
identifies the FTE within OFAC that are devoted to administering and 
implementing the Cuba program for fiscal year 2008.
    As previously noted, some individuals, including supervisors, who 
dedicate time to one or more of the other 20-plus sanctions programs 
administered by OFAC, work on aspects of the Cuba program as necessary. 
Because of the significance and demands related to the other programs 
to which these individuals are assigned, OFAC does not track their time 
spent on the Cuba program. For comparison purposes approximately 
ninety-two percent of OFAC's budget is devoted to other sanctions 
programs that OFAC implements, including sanctions related to Iran, 
Sudan, terrorism, weapons proliferation, and narcotics trafficking.

                                                FISCAL EYAR 2008
                                             [Dollars in thousands]
----------------------------------------------------------------------------------------------------------------
                                                        Cuba           All other programs           Total
  Divisions with FTE dedicated to a specific   -----------------------------------------------------------------
                  program \1\                      FTE      Dollars      FTE      Dollars      FTE      Dollars
----------------------------------------------------------------------------------------------------------------
Licensing.....................................         11     $1,969  .........  .........         11     $1,969
Designations Investigations:
    Counterterrorism..........................  .........  .........          6     $1,041          6      1,041
    Counterproliferation......................  .........  .........          8      1,388          8      1,388
    Counternarcotics..........................  .........  .........         11      1,909         11      1,909
    Country/regime............................  .........  .........          8      1,388          8      1,388
                                               -----------------------------------------------------------------
      Total...................................         11      1,969         33      5,726         44      7,695
----------------------------------------------------------------------------------------------------------------
\1\ As noted above, OFAC's other operating programs assign FTE on a cross-program basis rather than to a
  particular sanctions program.

                  MANAGEMENT OF TREASURY'S IT SYSTEMS

    Question. The Inspector General's 2008 Annual Plan repeats a 
continuing concern with the Department's management of large capital 
investments--particularly information technology (IT) investments. 
While this is a challenge for any organization, the Department has had 
particular problems in this area. How are you addressing these 
deficiencies from a department-wide perspective? What measures and 
procedures are in place to ensure the success of new systems?
    Answer. Over the past year, the Department has taken a number of 
significant steps to address the IT management challenges. The 
Department's strategy has focused on three key elements: (1) regular 
engagement of the Treasury Department and Bureau executives in the 
management of IT; (2) more rigorous planning and management of IT 
projects; and (3) improved IT investment review and evaluation tools, 
processes and practices.
    In order to better engage executives across Treasury and its 
Bureaus, the Department has revitalized the Executive Investment Review 
Board (E-Board), which was a key recommendation by the Government 
Accountability Office's July 2007 report (GAO-07-865). The E-Board was 
re-chartered in December 2007 and held its first meeting in February 
2008. The E-Board is chaired by the Deputy Secretary and is comprised 
of the heads of each of the Department's Bureaus. The Assistant 
Secretaries for Management and Legislative Affairs, the General Counsel 
and the Chief Information Officer (CIO) also participate on the E-
Board. The E-Board is tasked with ensuring the Department's IT 
portfolio decisions are driven by Treasury's business requirements and 
that each Bureau and the Department have in place appropriate planning, 
monitoring and evaluation mechanisms. The E-Board will also identify 
strategic priorities for IT use and address Department-wide IT policy 
issues as they arise.
    To improve the effectiveness of planning and management of IT 
projects, the Treasury CIO has issued new policy and guidance regarding 
requirements for project planning in order to receive CIO endorsement 
for funding. The CIO, in collaboration with the Treasury Chief 
Procurement Executive, has drafted a new IT acquisition policy to 
strengthen the Department's IT contract management. The Department is 
working with the bureaus to implement the new OMB required, Federal 
Acquisition Council Project and Program Management qualifications to 
ensure that the Treasury federal staff that oversee our IT projects 
have the appropriate knowledge and skills required to successfully 
deploy and manage Treasury IT systems. Finally, the Department 
continues to strengthen its ability to defend against cyber attacks and 
protect the sensitive information entrusted to the Treasury by the 
public.
    Another element of the Department's overall IT management strategy 
is to improve the review and evaluation of Treasury IT investments. 
Rigorous review at both the bureau and Department level is a 
prerequisite for successful deployment and management of IT systems. In 
addition, the Treasury CIO has taken action to improve the Department's 
visibility into and influence on IT projects. In the fall of 2007, the 
Treasury CIO made the decision to require non-major investments to 
participate in a process similar to the Department's formal selection 
and review processes for major investments. As a result, all IT 
investments (both major and non-major) are considered during the 
portfolio selection process that is integrated with the Department's 
budget request. Likewise, bureaus must report quarterly for all IT 
investments (both major and non-major) on cost, schedule, and 
performance goals. Finally, the Treasury CIO is expanding its IT 
investment evaluation process to assess not only ``completed'' projects 
against planned objectives, but also those portions of IT developmental 
projects that have implemented discrete operational components.
    Question. The President's fiscal year 2009 budget requests $2.9 
million to fund an upgrade to the IT system used for financial 
reporting under the Bank Secrecy Act. In July 2006, FinCEN halted work 
on BSADirect, the previous attempt to upgrade its IT systems. Treasury 
spent two years of planning and $14.4 million on that failed system. 
What improvements have you made to the planning and implementation 
process that will avoid problems that plagued the previous failed 
upgrade?
    Answer. During fiscal year 2007, FinCEN made significant progress 
on the full range of organizational, program management, and technical 
architecture-related efforts needed to modernize the bureau's IT 
systems. FinCEN identified the specific action items in its October 
2006 Information Technology Plan, created in response to the BSA Direct 
project termination. In fiscal year 2007, FinCEN launched an effort to 
establish the organization's first enterprise business transformation 
and IT modernization strategy, which serves as the roadmap for aligning 
FinCEN's IT portfolio with business objectives and processes. FinCEN 
also expanded its capacity for executing complex IT projects by (1) 
hiring new project managers; (2) introducing management tools and 
techniques through the creation of a Project Management Office; (3) 
establishing a Data Management Framework to improve the management and 
visibility of BSA data issues; (4) awarding a performance-based 
contract for acquiring IT services; (5) and strengthening collaboration 
with internal and external stakeholders. FinCEN is also fully engaged 
in Treasury's revised processes in the question above.
    Question. The President's fiscal year 2009 budget requests $3 
million for a new debt management system. Treasury reports that the new 
system will enhance the efficiency of federal borrowing, which will 
save taxpayers money. How much do you estimate that the current system 
is costing taxpayers? What kind of return will the taxpayers get on 
this investment?
    Answer. Currently, Treasury's Office of Debt Management (ODM) 
spends approximately $600,000 annually to manage its $9+ trillion 
liability portfolio. Given the size of the portfolio, ODM believes 
there is significant opportunity cost foregone due to its current 
outdated IT infrastructure and modeling capabilities which limit 
sophisticated portfolio analysis.
    Treasury issues $4.3 trillion of debt per year using basic Excel 
spreadsheets and manual operations. The current size of Treasury's 
marketable debt portfolio is $4 trillion, with an annual interest cost 
of $244 billion in 2007. The additional funds to improve ODM's systems 
will make a huge difference in costs. For example, if the Department 
can issue just $1 billion less over a one month period due to better 
portfolio analytics and sound modeling capabilities, Treasury would 
save $3 million at current interest rates. Over the long term, the 
Department could potentially save one one-hundredth of a percent 
(.0001) on the $4 trillion marketable debt portfolio, resulting in 
potential interest costs savings of over $400 million annually. We 
believe this cost saving is conservative, and that additional savings 
are eminently possible given better risk management systems and 
operations.
    More importantly, for global financial markets, a disruption in the 
ability to make debt issuance decisions or the inability to function in 
the event of a contingency event would precipitate severe financial 
distress and cost. Since every fixed income market in the world is tied 
to the Treasury market, such disruption would be significantly costly 
from a financial perspective.
    The proposed systems would provide: (1) a robust infrastructure on 
top of the new Treasury auction system (providing 24/7 reliability, 
back office servicing, and applications development), (2) a secure 
contingency site with numerous business continuity options, (3) the 
ability to remotely access and make debt issuance recommendations, (4) 
the ability to make informed debt issuance decisions using advanced 
portfolio analytics, (5) the ability to provide key interest rate data 
to Congress as mandated and to financial markets as necessary without 
interruption, and (6) major infrastructure upgrades (including servers 
which are severely antiquated). The immediate implementation of these 
systems is necessary for the national and financial security of the 
United States.

COMMITTEE ON FOREIGN INVESTMENT IN THE UNITED STATES (CFIUS)--CASELOAD 
                               MANAGEMENT

    Question. The Foreign Investment and National Security Act of 2007 
became law in July of 2007, increasing Congressional oversight of the 
CFIUS review process. How is the Department preparing to meet the 
increase in requirements under the new law?
    Answer. CFIUS and Treasury have been in compliance with the 
requirements of the Foreign Investment and National Security Act 
(FINSA) since FINSA became effective in October 2007. To ensure that 
Treasury and all CFIUS agencies comply fully with FINSA and meet the 
increased Congressional oversight requirements that it presents, the 
Department has made multiple changes and taken multiple steps, which 
include: increases in staffing levels, increases in accountability, and 
higher level cooperation between CFIUS agencies and agencies outside of 
the CFIUS process.
    Regarding staffing, Treasury and other CFIUS agencies have 
substantially increased staffing for CFIUS-related issues. In Treasury, 
we established a new Deputy Assistant Secretary position focused on 
CFIUS issues and reporting to the Assistant Secretary and the Under 
Secretary for International Affairs. Treasury has also hired additional 
staff to handle the increased requirements, including reporting 
requirements under FINSA and the increased case load. The total number 
of full-time staff assigned to work on investment security issues in 
Treasury has nearly tripled, rising from 5 full-time positions to 14.
    On accountability, CFIUS has implemented formal processes to ensure 
that CFIUS matters are fully considered at the highest levels. This 
includes strong internal procedures to ensure that every case is 
certified at the Assistant Secretary or Deputy Secretary level, as 
appropriate, that the required post-review or post-investigation 
certifications are submitted to Congress in a timely manner, and that 
requested briefings are provided to Congress as required.
    On coordination, Treasury (in consultation with other CFIUS 
agencies) has issued internal CFIUS guidelines to ensure that the 
reporting requirements under FINSA are fully satisfied in a timely 
manner. CFIUS agencies meet each week to discuss and deliberate on all 
cases before CFIUS, and where appropriate, outside agencies and 
departments (such as the Departments of Transportation and Health and 
Human Services, and NASA) are called on to bring their expertise into 
the CFIUS process. Improvements have also been made in intelligence 
analysis, which is now being coordinated by the Director of National 
Intelligence, who is consulting with each of the key intelligence 
agencies in the U.S. government. Further, the Executive Order issued by 
the President on January 23, 2008, establishes executive branch rules 
to ensure that CFIUS is able to meet the reporting requirements under 
FINSA in an efficient and orderly manner. Treasury is coordinating with 
other CFIUS agencies to submit the required annual report to Congress 
by July 31, 2008.
    Question. I understand that the CFIUS caseload has increased over 
the last few years. Why are we seeing such a dramatic increase, and how 
is Treasury adapting to respond to this increase while ensuring that 
the CFIUS cases are completed in a reasonable time frame?
    Answer. There are numerous reasons for the recent increase in the 
CFIUS caseload, including the rate of foreign direct investment into 
the United States, heightened public awareness of the CFIUS review 
process following several high-profile cases in recent years, and 
increased recognition among businesses that certain transactions could 
raise national security considerations in the current security 
environment. In addition, there have been a number of ``defensive'' 
filings where there is a cross-border acquisition that has little 
relevance to national security.
    In the last few years, Treasury has made numerous organizational 
and procedural improvements to ensure that all cases continue to be 
processed efficiently, with all national security considerations fully 
analyzed. As noted above, Treasury established a new Deputy Assistant 
Secretary position in 2006 focused on CFIUS issues. Treasury has also 
hired additional staff to focus on CFIUS issues. Meanwhile, the 
increased caseload requires additional resources to be dedicated to 
CFIUS matters. The regulations and guidance that Treasury will be 
publishing this spring will also help ensure an efficient process.
    Further, CFIUS agencies have made it clear to companies and their 
advisors that, where appropriate, advance pre-filing briefings and 
consultations ensure that CFIUS has adequate time for reviews.

        INTEGRATION OF TREASURY INTO U.S. INTELLIGENCE COMMUNITY

    Question. How well is the Office of Terrorism and Financial 
Intelligence being integrated in the intelligence community?
    Answer. Since its creation in 2004, the Office of Intelligence and 
Analysis (OIA)--Treasury's Intelligence Community (IC) component--has 
become a fully-integrated member of the IC. OIA is recognized as a key 
player in IC efforts to address the financial underpinnings of national 
security threats and threats to international financial stability. The 
Assistant Secretary for Intelligence and Analysis is a member of the 
Director of National Intelligence's (DNI) Executive Committee (the IC's 
``Board of Directors'') and OIA is an active participant in the various 
working groups and committees guiding IC efforts against key threats, 
including the National Intelligence Analysis Production Board, the 
Counterterrorism Advisory Group, the IC Leadership Council, the WMD-T 
Steering Group, and the Interagency Intelligence Committee on 
Terrorism. The Office of the Director of National Intelligence recently 
acknowledged OIA's status as a key IC figure by asking it to serve as 
the National Intelligence Priorities Framework Topic Expert for 
Economic Stability and Financial Networks.
    OIA routinely coordinates on (and provides input to) articles 
drafted for the National Terrorism Bulletin (NTB) and the President's 
Daily Brief. In addition, OIA provides regular support to the Federal 
Bureau of Investigations (FBI) counterterrorism investigations, and 
frequently offers input to counterterrorism and counter-proliferation 
analytic products drafted by the FBI, the Central Intelligence Agency 
(CIA), and other IC agencies. On numerous occasions, OIA analysts have 
drafted intelligence reports jointly with their counterparts at the FBI 
and CIA. In order to strengthen cooperation with these agencies, OIA 
has detailed officers to the FBI's Terrorist Finance Operations Section 
and to the CIA. OIA also has officers forward-deployed to U.S. Central 
Command, U.S. Pacific Command, U.S. European Command, and the joint 
Treasury-DOD Iraq Threat Finance Cell in Baghdad. OIA is in the process 
of identifying an officer to serve as Treasury's representative to the 
DNI's National Intelligence Coordination Center (NIC-C). The Defense 
Intelligence Agency, and the National Security Agency have assigned 
officers to OIA to facilitate cooperation and information sharing.
    Question. What improvements are needed to maximize the ability of 
Treasury and other components of the intelligence community to exchange 
critical information?
    Answer. OIA's fiscal year 2009 Global Finance Initiative (GFI) 
would give Treasury the resources it needs to successfully leverage its 
status as a fully-integrated member of the IC. GFI would provide $2 
million, including a realignment of $1 million in Department base 
resources, and 10 positions to establish a capability in OIA to advance 
global finance intelligence issues within the IC. Resources would be 
targeted to: (a) aligning IC collection requirements on finance-related 
issues more closely with policymaker needs, (b) developing and taking 
advantage of new sources of information, (c) enhancing analysis on 
finance-related issues in coordination with the IC, and (d) expanding 
OIA's role and relationships within the IC. This initiative is aligned 
with key tasks and objectives of the National Security Strategy, the 
National Intelligence Strategy, the National Implementation Plan for 
the War on Terror, and the Treasury Strategic Plan.
    GFI would enhance the effectiveness of IC collection and analysis 
on global financial networks. Addressing global financial networks 
involves assessing the financial underpinnings of national security 
threats, identifying our adversaries' financial vulnerabilities, 
measuring the impact of targeted financial measures, and uncovering 
threats to the stability of the international financial system. By 
assuming a greater role in guiding financial intelligence collection 
and analysis, OIA would address a growing need in the IC, and take a 
large step toward meeting the expectations of Congress and Treasury 
leadership when they created OIA.
    Question. What organizational, technical, or other types of 
barriers hamper the ability of the office to fit successfully into the 
overall intelligence community, and how are those impediments being 
addressed?
    Answer. Since its creation in 2004, the Office of Intelligence and 
Analysis (OIA)--Treasury's Intelligence Community (IC) component--has 
made great strides in its efforts to integrate itself into the IC. OIA 
is recognized as a key player in IC efforts to address the financial 
underpinnings of national security threats and threats to international 
financial stability. OIA's fiscal year 2009 Global Finance Initiative 
(GFI) would give Treasury additional resources for aligning collection 
requirements on finance-related issues more closely with policymaker 
needs; developing and taking advantage of new sources of information; 
enhancing analysis on finance-related issues in coordination with the 
IC; and expanding OIA's role and relationships within the IC.
    Despite these advancements, OIA faces significant challenges in 
hiring highly qualified analysts. The conventional hiring process is 
cumbersome and lengthy, and competition within the Intelligence 
Community for qualified candidates is fierce. The Treasury Department 
strongly supports section 121 of the fiscal year 2009 Intelligence 
Authorization Bill, which establishes the authority to convert 
positions within the intelligence component of the Treasury Department, 
DHS, and other departmental intelligence components to excepted service 
status, which would go a long way towards leveling the playing field.
                                 ______
                                 
              Questions Submitted by Senator Sam Brownback

    Question. Could you give us an update on how your ``HOPE NOW 
alliance'' is working to prevent further foreclosures in the nation's 
housing market?
    Answer. Treasury is pleased with progress of the HOPE NOW Alliance, 
a private group of lenders, servicers, non-profit counselors and trade 
organizations that was initially facilitated by Treasury and HUD. 
However, we recognize more work remains. As of February 29, 2008, the 
industry had helped almost 1.2 million homeowners find alternatives to 
foreclosure through either a loan modification or repayment plan since 
July of 2007. These data do not include refinancing statistics. Of 
particular significance is the fact that modifications are continuing 
to rise as a proportion of work-outs. In February alone, 39,000 
subprime borrowers received loan modifications. Modifications accounted 
for more than 38 percent of borrower work-out plans in February, up 
from just under 19 percent in July 2007. In total, the three-month rate 
of change in modifications was up approximately 40 percent in February, 
while the rate of change in foreclosure starts was up only 16 percent.
    FHA has also aided HOPE NOW's efforts and played a vital role in 
helping more current and delinquent homeowners find affordable 
solutions. The recent announcement to expand FHA Secure to more 
delinquent borrowers will enable FHA to refinance an additional 100,000 
homeowners this year. In total, FHA Secure is estimated to refinance up 
to 500,000 homeowners by the end of 2008.
    Through a variety of outreach tools and operational best practices 
established by HOPE NOW, Treasury believes the Alliance has laid the 
groundwork for increased success in the coming months.
    It is imperative that HOPE NOW continue to improve on its progress 
to date, and Treasury will be sure to consistently convey that message 
to the Alliance.
    Question. What are your thoughts on the Durbin Bankruptcy bill that 
would allow judges to re-write loan provisions? What would be the 
effects on the banking system of the provisions of this bill?
    Answer. While Treasury respects the efforts of Senator Durbin to 
explore potential solutions for the current mortgage market downturn, 
Treasury is concerned about the unintended consequences such 
legislation may have on the mortgage market in going forward.
    Amending the bankruptcy code in this manner would undermine 
existing contracts, leading to a contraction in available and 
affordable mortgage credit. This bankruptcy provision would rewrite 
certain tenets of bankruptcy law in ways that would fundamentally alter 
the expectations of parties to thousands of home purchases after the 
fact. These provisions would also likely prolong the time it will take 
the market to recover from the current downturn.
    Question. I understand that the World Bank is sending U.S. taxpayer 
funds to Iran through banks that we have already sanctioned as WMD 
proliferators. What is the Treasury Department doing to try to stop 
this from happening, since it is contrary to everything we are trying 
to accomplish with our Iran policy?
    Answer. The Administration shares Congressional concern with the 
deceptive practices of Iranian financial institutions and the 
involvement of these institutions in proliferation activities. The 
Treasury Department has been a leader in singling out Iranian banks for 
sanctions as a result of their illicit activities.
    The Department has worked closely and diligently with the World 
Bank to ensure that it is fully abreast of the evolving sanctions being 
put in place by the United Nations Security Council, the inter-
governmental Financial Action Task Force (FATF), and the most recent 
Treasury Department designation of Future Bank as being controlled by 
Iran's Bank Melli.
    The Administration has taken and will continue to take an active 
role in opposing World Bank lending to Iran. The United States has 
opposed every proposal for Iran since the early 1980s. However, despite 
these efforts, projects have been approved by the 24-member Board and 
continue to disburse funds. The Department has been assured that 
disbursement of loan proceeds under these World Bank-financed projects 
and the project accounts have been transferred to commercial banks 
which are neither on the list of entities sanctioned pursuant to the 
U.N. Security Council resolutions nor on the list of entities 
sanctioned for nuclear proliferation activities by the U.S. Treasury. 
When making such disbursements, the World Bank screens the list of 
beneficiary entities as well as financial intermediaries against the 
U.N. list maintained pursuant to the aforementioned U.N. Security 
Council decisions, and the list maintained by the Treasury Department's 
Office of Foreign Assets Control (OFAC).
    The Treasury Department will continue to strongly oppose and vote 
against any World Bank Group loan or other type of assistance to Iran 
and will also ensure that the Bank continues to comply with the full 
range of sanctions regimes to avoid any activity that could facilitate 
Iran's nuclear or missiles programs.
    Question. We have enacted legislation to allow States to divest 
from Sudan. What are your thoughts on allowing States to divest from 
Iran?
    Answer. The Administration shares Congressional concern with the 
conduct of the Iranian regime, and the Treasury Department has played a 
leading role in seeking to isolate Iran financially. Such efforts 
targeting Iran are most likely to succeed if they are multilateral in 
nature, and much of our effort has been targeted at persuading our 
allies and private sector institutions to cut back or terminate their 
financial dealings with Iran. The multilateral efforts that resulted in 
the recent United Nations Security Council Resolution with respect to 
Iran (U.N. Security Council Resolution 1803, passed March 3, 2008) are 
but one example of the cooperation we are receiving from our allies 
abroad. Legislation authorizing divestment from companies that do 
business in Iran risks alienating the very allies whose assistance we 
need. It also limits the President's ability to conduct U.S. foreign 
policy with one voice.
    Question. You've asked for some increases in your budget for the 
Office of Terrorism and Financial Intelligence. Can you update us on 
the progress you have made in cutting off funds to terrorist 
organizations and rogue nations?
    Answer. The Office of Terrorism and Financial Intelligence (TFI) 
has made significant progress in this area by using a combination of 
financial measures, fueled by financial intelligence, in a way that 
engenders the support of other governments and the private sector. TFI 
has successfully drawn on a range of tools for this effort, including 
executive orders issued by the President pursuant to the International 
Emergency Economic Powers Act, Section 311 of the USA PATRIOT Act, and 
FinCEN advisories. Combining these authorities with targeted 
intelligence about illicit financing networks, TFI has used conduct-
based, intelligence-grounded, targeted financial measures to address 
the threat of terrorist organizations and rogue nations in a way that 
encourages support from both the private sector and larger 
international community.
    Executive Order (E.O.)13224 has proven to be a powerful and 
flexible tool for targeting terrorist organizations, allowing the 
Department to block the assets of individuals and entities controlled 
by or acting on behalf of named terrorist organizations, freezing any 
of the target's assets that are held by U.S. persons and preventing 
U.S. persons from having any future dealings with them. To date, the 
United States has designated 486 individuals and entities pursuant to 
E.O. 13224, of which nearly 400 were named by Treasury. In addition, 19 
individuals and entities have been designated pursuant to E.O. 12947, 
which prohibits transactions with terrorists who threaten the Middle 
East peace process.
    Treasury has also drawn on this range of tools to influence the 
conduct of rogue nations like North Korea, using targeted financial 
measures and systemic controls like those previously described. In the 
case of North Korea, the Department took two important actions to 
address conduct ranging from WMD proliferation-related activities to 
counterfeiting of U.S. currency and other illicit behavior. First, a 
number of North Korean proliferation firms were targeted under E.O. 
13382. That Order authorizes the Treasury and State Departments to 
target key nodes of WMD and missile proliferation networks, including 
their suppliers and financiers, in the same way as is done with 
terrorists. A designation under this order cuts the target off from 
access to the U.S. financial and commercial systems and puts the 
international community on notice about a particular threat. Second, 
regulatory action was taken to protect the financial system against 
Banco Delta Asia (BDA). In September 2005, Treasury designated BDA as a 
primary money laundering concern. At that time, Treasury issued a 
proposed rule, which was subsequently finalized in March 2007, 
prohibiting U.S. financial institutions from opening or maintaining 
correspondent accounts for or on behalf of BDA. Treasury took this step 
to protect the U.S. financial system from BDA, which exhibited systemic 
failures in its application of appropriate standards and due diligence, 
as well as its facilitation of unusual or deceptive financial practices 
by North Korean-related clients. In addition to protecting the U.S. 
financial system from the significant vulnerability that BDA 
represents, the Section 311 action has spurred improvements in Macau's 
regulatory environment. Following the BDA action, the Macanese 
authorities took substantial steps to strengthen Macau's anti-money 
laundering and counter-terrorist financing regime, notably by passing a 
new law to strengthen these controls and starting the jurisdiction's 
first-ever Financial Intelligence Unit (FIU). Perhaps most importantly, 
the action against BDA has had a profound effect, not only in 
protecting the U.S. financial system from abuse, but also in notifying 
financial institutions and jurisdictions globally of an illicit finance 
risk. Following these actions, responsible foreign jurisdictions and 
institutions have taken steps to ensure that North Korean entities 
engaged in illicit conduct are not receiving financial services.
    Question. You have identified the targeting of state sponsors of 
terrorism such as Iran and Syria as an immediate challenge for the 
Office of Terrorism and Financial Intelligence (TFI). What can you tell 
us about those activities and the progress you have made so far?
    Answer. TFI has taken important steps with both Iran and Syria by 
using a combination of financial measures, fueled by financial 
intelligence, to target their conduct in a way that engenders the 
support of other governments and the private sector.
    Syria.--Targeted financial measures have proved effective in 
addressing the threat Syria's problematic behavior poses to the United 
States. To respond and take additional measures to address this threat 
to our national security, foreign policy, and economy, President George 
W. Bush issued E.O. 13460 on February 13, 2008. This measure targets 
individuals and entities determined to be responsible for or who have 
benefited from the public corruption of senior officials of the Syrian 
regime. On February 21, 2008, the Treasury used this authority to 
designate Rami Makhluf, a powerful Syrian businessman and regime 
insider whom improperly benefits from and aides the public corruption 
of Syrian regime officials. In addition to this use of targeted 
economic sanctions against Syrian entities involved in WMD 
proliferation, Treasury has taken action under Section 311 to protect 
the U.S. financial system against the Commercial Bank of Syria (CBS), 
which has been used by criminals and terrorists to facilitate or 
promote money laundering and terrorist financing, including the 
laundering of proceeds from the illicit sale of Iraqi oil and the 
channeling of funds to terrorists and terrorist financiers. In March 
2006, Treasury issued a final rule, pursuant to Section 311, 
designating CBS as a ``primary money laundering concern'' and requiring 
U.S. financial institutions to close correspondent relationships with 
CBS. Consequently, prominent international financial institutions have 
begun to reassess their relationships with Syria and a number of Syrian 
entities.
    Iran.--Due to U.S. concern about Iran's well-documented illicit 
behavior, the Treasury Department maintains broad sanctions against 
Iran (measures that build upon our overall and long-standing Iran 
policy). U.S. commercial and financial sanctions against Iran, as 
administered by OFAC, prohibit U.S. persons from engaging in a wide 
variety of trade and financial transactions with Iran or the Government 
of Iran, and prohibit most trade in goods and services between the 
United States and Iran, and any investments by U.S. persons in Iran. 
U.S. persons are also prohibited from facilitating transactions via 
third-country persons that they could not engage in themselves. Against 
this backdrop of long-standing sanctions against Iran, Treasury has 
taken a number of actions to address the threat of Iranian 
proliferation activity in recent years.
    First, while under our general Iran country sanctions program, 
Iranian financial institutions are prohibited from directly accessing 
the U.S. financial system, they are permitted to do so indirectly 
through a third-country bank for payment to another third-country bank 
in transactions not involving the United States or U.S. persons. In 
September 2006, OFAC cut off one of the largest Iranian state-owned 
banks, Bank Saderat, from any access, including this indirect, or ``u-
turn,'' access to the U.S. financial system. This bank, which has 
approximately 3,400 branch offices, is used by the Government of Iran 
to transfer money to terrorist organizations. As noted below, OFAC 
later designated Bank Saderat for its support for terrorist groups.
    Second, OFAC is relying increasingly on the targeted financial 
measures to combat Iran's pursuit of nuclear capability, development of 
ballistic missiles, and its support for terrorism. With respect to 
Iran, OFAC has been able to apply these measures in the context of U.N. 
Security Council Resolution (UNSCR) 1737 and 1747, enabling the 
Department to secure greater multilateral implementation by governments 
and the private sector and use targeted financial measures against 
Iranian individuals and entities in both our counterterrorism and 
counterproliferation sanctions programs. Treasury took several major 
actions under these programs in October 2007, building on previous 
successes with designations of Iranian entities supporting 
proliferation using U.S. unilateral authorities and at the United 
Nations. On October 25, 2007, Treasury and State (acting in tandem) 
were able to expose Iranian banks, companies, and individuals that had 
been involved in proliferation and terrorism-related activities and cut 
them off from the U.S. financial system. These actions included making:
  --Treasury designations of two of Iran's state-owned banks (Banks 
        Melli and Mellat) and three individuals affiliated with Iran's 
        Aerospace Industries Organization (AIO) for proliferation 
        activities under E.O. 13382;
  --Treasury designations of nine Islamic Revolutionary Guard Corps 
        (IRGC)-affiliated entities and five IRGC-affiliated individuals 
        as derivatives of the IRGC under E.O. 13382;
  --The designation of the IRGC-Qods Force (IRGC-QF) under E.O. 13224 
        for providing material support to the Taliban and other 
        terrorist organizations; and
  --The designation of Iran's state-owned Bank Saderat as a terrorist 
        financier.
    Many of the U.S. designations against Iranian entities and 
individuals under E.O. 13382 have been similarly designated under UNSCR 
1737 and UNSCR 1747. Most recently, UNSCR 1803 added additional names 
to the growing list of Iranian individuals and entities that are 
subject to multilateral targeted financial sanctions. UNSCR 1803 also 
includes a warning regarding Iranian financial institutions more 
generally, establishing obligations for U.N. member states to exercise 
vigilance over their own financial institutions activities with 
financial institutions domiciled in Iran, and their branches and 
subsidiaries abroad. The Resolution further names two Iranian financial 
institutions that Treasury previously designated, Bank Melli and Bank 
Saderat, as institutions of particular concern.
    Third, in addition to these ``formal'' actions, the Treasury has 
engaged in unprecedented, high-level outreach to the international 
private sector, meeting with more than forty banks worldwide to discuss 
the threat Iran poses to the international financial system and to 
their institutions. Through this outreach, OFAC has shared information 
about Iran's deceptive financial behavior and raised awareness about 
the high financial and reputational risk associated with doing business 
with Iran. The use of targeted measures has aided this effort by 
highlighting specific threats, helping isolate these bad actors, and 
preventing them from abusing the financial system. By thus partnering 
with the private sector, there is an increasingly less desire to work 
around sanctions. Even those institutions not formally bound to follow 
U.S. law pay close attention to the targeted actions and often adjust 
their business activities accordingly. Many leading financial 
institutions have scaled back dramatically, refused to issue new 
letters of credit to Iranian businesses, or even terminated their Iran-
related business entirely. They have done so of their own accord, many 
concluding that they did not wish to be the banker for a regime that 
deliberately conceals the nature of its dangerous and illicit business.
    TFI has also communicated with the U.S. financial sector regarding 
Iran through the issuance of advisories. In October 2007, following a 
statement by the FATF on the threat posed by deficiencies in Iran's 
anti-money laundering/combating the financing of terrorism regime, the 
FinCEN followed suit by issuing an advisory to alert U.S. financial 
institutions of similar concerns regarding Iran. In this advisory, 
FinCEN advised that financial institutions should be particularly aware 
that there may be an increased effort by Iranian entities to circumvent 
sanctions and related financial community scrutiny through the use of 
deceptive practices involving shell companies and other intermediaries 
or requests that identifying information be removed from transactions. 
The advisory went on to explain that such efforts may originate in Iran 
or Iranian free trade zones subject to separate regulatory and 
supervisory controls, including Kish Island. Such efforts may also 
originate wholly outside of Iran at the request of Iranian-controlled 
entities.
    Question. Treasury's Office of Intelligence Analysis was 
established in fiscal year 2005. Since that time, how has it 
contributed to overall intelligence collection?
    Answer. OIA has limited authority to collect foreign financial and 
monetary information, and general foreign economic information. OIA's 
primary mission is to analyze intelligence collected by other agencies 
in order to support the formulation of Treasury policy and the 
execution of its authorities. To support its mission, OIA leadership 
firmly believes that the organization should drive intelligence 
collection by providing timely and insightful analytic support to IC 
members engaged in clandestine and open-source intelligence activities. 
OIA analysts routinely provide their intelligence requirements to 
collectors at the Central Intelligence Agency, the National Security 
Agency, the Federal Bureau of Investigation, the Defense Intelligence 
Agency, and other IC elements in order to help those organizations more 
effectively direct their resources. OIA also provides feedback to IC 
Collectors as to the timeliness, relevance, and accuracy of the 
information provided by their sources. All in all, this support helps 
ensure that scarce IC collection resources are focused on the hardest 
targets and finance-related collection requirements are closely aligned 
with policymaker needs.
    In fiscal year 2008, OIA is expanding its ability to drive 
collection by increasing its cadre of dedicated Requirements Officers. 
OIA's fiscal year 2009 Global Finance Initiative (GFI) would provide 
additional resources to ensure that each of OIA's core mission areas 
receives dedicated collection requirements support.
    Question. Question from the Republican Staff Director of the JEC:
    Recent turmoil in financial markets is continuing, particularly the 
markets for asset backed debt instruments. It's clear that in many 
instances debt that received a AAA-rating was in fact not AAA grade at 
all. Up until now, the credit rating agencies have relied solely on 
traditional risk indicators, all of which are either borrower-focused 
or collateral-focused.
    It seems that both home owners and mortgage lenders alike could 
benefit from an independent, objective and standardized third-party 
verification step that verifies the quality and risk associated with 
these loans before they are sold on the secondary market or before they 
are finalized by a broker. Consumers and investors could also benefit 
by having the ability to review the record of particular lenders.
    Do you believe that assigning such a pre-securitization rating 
based upon borrower information, adequacy of collateral and loan 
quality would help to prevent future crises in the mortgage market?
    Answer. On March 13th, the President's Working Group on Financial 
Markets (PWG), which is chaired by the Secretary, released the 
comprehensive ``Policy Statement on Market Developments.'' The PWG's 
statement was intended to help to restore market liquidity, market 
discipline, and investor confidence through recommendations to enhance 
disclosure/transparency, due diligence/independent analysis, valuation 
techniques, risk management practices, regulatory policies, and market 
infrastructure. There are recommendations for all stakeholders (all 
market participants and regulators) and for all links in the chain of 
the securitization process (mortgage brokers, originators, 
securitizers, financial institutions, credit rating agencies, 
investors, and state and federal regulators).
    The PWG made several recommendations to improve the quality and 
disclosure of information about and analysis of mortgage loans 
underlying securitized products, including:
  --All states should implement strong nationwide licensing standards 
        for mortgage brokers;
  --Federal and state regulators should strengthen and make consistent 
        government oversight of entities that originate and fund 
        mortgages and otherwise interface with customers in the 
        mortgage origination process;
  --The Federal Reserve should issue stronger consumer protection and 
        disclosure rules;
  --Overseers of institutional investors should require investors to 
        obtain from sponsors and underwriters of securitized credits 
        better information about the risk characteristics of such 
        credits, including information about the underlying asset 
        pools;
  --Overseers should ensure that these investors develop an independent 
        view of the risk characteristics of the instruments in their 
        portfolios, rather than rely solely on credit ratings;
  --The PWG will form a committee to develop best practices regarding 
        disclosure to investors in securitized credits;
  --Credit rating agencies (CRAs) should disclose the reviews they 
        perform on originators of assets and should require 
        underwriters to represent the level and scope of due diligence 
        performed on the underlying assets;
  --CRAs should publish sufficient information about the assumptions 
        underlying their credit rating methodologies, so that users of 
        credit ratings can understand how a particular credit rating 
        was determined;
  --CRAs should provide the information investors need to make informed 
        decisions about risk, including measures of the uncertainty 
        associated with ratings and of potential ratings volatility; 
        and
  --The PWG will form a group to develop recommendations for further 
        steps that issuers, underwriters, CRAs, and policymakers could 
        take to ensure the integrity and transparency of ratings, and 
        to foster appropriate use of ratings in risk assessment.
    Question. What key ways is your Department proposing to employ to 
close the ``tax gap?'' You once stated in a Finance Committee hearing 
that this is not a pot of gold. How big is the gap and what will it 
cost to close it?
    Answer. The estimated size of the tax gap is as follows. In 2001, 
the overall compliance rate was estimated at over 86 percent, after 
late payments and recoveries from IRS enforcement activities. The tax 
gap results from noncompliance, specifically the amount of tax that 
should be paid but is not paid. After enforcement efforts and late 
payments, this amount was approximately $290 billion.
    The key ways in which the Treasury Department is proposing to 
reduce the tax gap were set forth in a comprehensive strategy to 
improve tax compliance released in September 2006. The strategy builds 
upon the demonstrated experience and current efforts of the Treasury 
Department and IRS to improve compliance. Four key principles guided 
the development of this strategy: both unintentional taxpayer errors 
and intentional taxpayer evasion should be addressed; sources of non-
compliance should be targeted with specificity; enforcement activities 
should be combined with a commitment to taxpayer service; and tax 
policy and compliance proposals should be sensitive to taxpayer rights 
and maintain an appropriate balance between enforcement activity and 
imposition of taxpayer burden. These principles underscore the Treasury 
Department's and IRS' comprehensive, integrated, multi-year strategy to 
improve tax compliance. Components of this strategy include: (1) 
legislative proposals to reduce opportunities for evasion; (2) a multi-
year commitment to compliance research; (3) continued improvements in 
information technology; (4) improvements in IRS compliance activities; 
(5) enhancements of taxpayer service; (6) simplification of the tax 
law; and (7) coordination between the government and its partners and 
stakeholders.
    More specifically, the Treasury Department's fiscal year 2009 
Revenue Proposals include a number of legislative proposals intended to 
improve tax compliance with minimum taxpayer burden. The fiscal year 
2009 President's budget does include a number of legislative proposals 
intended to improve tax compliance with minimum taxpayer imposition. 
These proposals could generate $36 billion over the next ten years. The 
Administration proposes to expand information reporting, improve 
compliance by businesses, strengthen tax administration, and expand 
penalties.
  --Expand information reporting.--Compliance with the tax laws is 
        highest when payments are subject to information reporting to 
        the IRS. Specific information reporting proposals would: 
        require information reporting on payments to corporations; 
        require basis reporting on security sales; require information 
        reporting on merchant payment card reimbursements; require a 
        certified Taxpayer Identification Number (TIN) from 
        contractors; require increased information reporting on certain 
        government payments; increase information return penalties; and 
        improve the foreign trust reporting penalty.
  --Improve compliance by businesses.--Improving compliance by 
        businesses of all sizes is important. Specific proposals to 
        improve compliance by businesses would: require electronic 
        filing by certain large organizations; and implement standards 
        clarifying when employee leasing companies can be held liable 
        for their clients' Federal employment taxes.
  --Strengthen tax administration.--The IRS has taken a number of steps 
        under existing law to improve compliance. These efforts would 
        be enhanced by specific tax administration proposals that 
        would: expand IRS access to information in the National 
        Directory of New Hires for tax administration purposes; permit 
        disclosure of prison tax scams; make repeated willful failure 
        to file a tax return a felony; facilitate tax compliance with 
        local jurisdictions; extend statutes of limitations where state 
        tax adjustments affect federal tax liability; and improve the 
        investigative disclosure statute.
  --Expand penalties.--Penalties play an important role in discouraging 
        intentional non-compliance. A specific proposal to expand 
        penalties would impose a penalty on failure to comply with 
        electronic filing requirements.
    In the fiscal year 2009 President's budget, the IRS has budgeted 
over $23 million to implement these proposals. The budget also includes 
other items relating to the tax gap: over $286 million to reduce the 
tax gap for large business, small business, and the self-employed 
sector, to increase compliance of domestic taxpayers with offshore 
activity, and to minimize revenue loss by increasing document matching 
efforts; and over $51 million to increase support for research to 
understand better the reasons for taxpayer non-compliance.
    Question. If we simplified our tax code with, for example, a flat 
income tax, what effect would there be on revenue receipts and revenue 
collection?
    Answer. Replacing the existing income tax with a flat income tax 
could raise, lower, or leave unchanged tax revenue, depending on such 
design features as the tax rate imposed by the flat tax. A standard 
objective of tax reform efforts is to broaden the tax base and reduce 
tax rates. Generally speaking, the broader the base, the lower tax 
rates can be and still raise the same revenue as the current tax 
system. So, for example, eliminating or minimizing special exclusions, 
exemptions, deductions, and credits allows setting lower tax rates 
without reducing revenue. Both a broad tax base and lower tax rates are 
desirable from a policy perspective because they reduce economic 
distortions caused by the tax system.
    Question. Will you commit to working with us and with SEC in 
preventing U.S. manufacturing companies from purchasing ``blood 
minerals'' like coltan from exporters who are abusing and murdering 
innocent people?
    Answer. The Administration shares Congressional concern regarding 
the conflict in the Democratic Republic of Congo, which has been marked 
by serious violations of human rights and international law. To address 
this threat to the foreign policy of the United States, the President 
declared a national emergency and issued E.O. 13413 (October 27, 2006) 
implementing sanctions directed at persons contributing to the 
widespread violence and atrocities in the Democratic Republic of the 
Congo, as called for by U.N. Security Council Resolutions 1596 of April 
18, 2005, and 1649 of December 21, 2005. The E.O. blocks the assets of, 
and prohibits U.S. persons from engaging in transactions and dealings 
with, persons listed in the Annex to, or designated pursuant to, the 
E.O. The Annex to the E.O. listed seven persons, including the 
notorious international arms dealer Viktor Bout, and OFAC designated an 
additional seven companies and three individuals pursuant to the E.O. 
in March 2007. A number of the March 2007 designations specifically 
related to exploitation of the gold sector in support of armed militia 
activity. OFAC continues to investigate aggressively the operations and 
holdings of rogue actors operating in the Democratic Republic of Congo.
    Question. Last year, Congress passed and the President signed 
legislation to give your Office of Foreign Assets Control the ability 
to levy larger civil and criminal penalties for those who violate 
sanctions against rogue nations. Have the stronger tools helped provide 
a greater deterrent for those who would be inclined to deal with 
countries on whom we have imposed sanctions?
    Answer. We appreciate Congressional efforts in increasing the 
maximum civil penalties available to the Office of Foreign Assets 
Control and believe that the availability of such meaningful penalties 
will serve as a meaningful deterrent for those who might otherwise 
treat civil penalties as merely ``the cost of doing business.'' Indeed, 
OFAC has conducted several outreach events specifically on this topic. 
While it is still too soon to assess the full impact of the legislation 
that was passed last year, we note that there has been significant 
interest from the media and the general public related to these 
enhanced penalties.

                              CONGO/COLTAN

    Question. The Office of Foreign Assets Control (OFAC) administers 
and enforces economic and trade sanctions, based on U.S. foreign policy 
and national security goals against foreign countries, terrorists, 
international narcotics traffickers, and those engaged in activities 
related to the proliferation of weapons of mass destruction.
    While the issue of exploited natural resources in the Democratic 
Republic of Congo, or specifically the issue of coltan may not be an 
engagement of proliferation of weapons of mass destruction, these 
activities are some of the most brutal human rights abuses we see in 
our world today (human-trafficking, child labor, sexual abuse and 
rape). The product of many of these actions leads to the refined 
component of a mineral which then ends up in much of our high 
technology industry here--cell phones, DVD players, flat screen 
televisions, etc. What are the limitations of OFAC's capabilities to 
target these rogue actors in eastern Congo?
    Answer. Within the framework of E.O. 13413 (October 27, 2006) and 
related U.N. Security Council Resolutions, the Treasury Department has 
the authority to designate rogue actors engaging in activities 
contributing to the violence and atrocities taking place in the 
Democratic Republic of the Congo. OFAC continues to aggressively 
investigate the operations and holdings of such rogue actors (including 
militia leaders and their financial enablers) operating in the 
Democratic Republic of Congo. Improved access to credible and reliable 
on-the-ground information pertaining to the business activities of 
these rogue actors is always vital to OFAC's ability to designate 
potential targets.
    Question. Has OFAC looked into targeting these rogue actors before?
    Answer. The Annex to the E.O. 13413 listed seven persons, including 
the notorious international arms dealer Viktor Bout, and OFAC 
designated an additional seven companies and three individuals pursuant 
to the E.O. in March 2007. A number of the March 2007 designations 
specifically related to exploitation of the gold sector in support of 
armed militia activity. OFAC continues to investigate aggressively the 
operations and holdings of rogue actors operating in the Democratic 
Republic of Congo.
    Question. What assistance might OFAC need in this procedure?
    Answer. As stated above, access to on-the-ground information 
pertaining to the business activities of these rogue actors is vital to 
OFAC's ability to designate potential targets. OFAC is working to 
enhance its access to this type of information. OFAC as a matter of 
policy does not comment publicly on its techniques and sources for 
gathering this type of information.
    Question. In regards to the budget, what accountability measures 
are in place, specifically regarding Congo, to ensure material 
resources are not siphoned off by these rogue actors? If any, what is 
Department of Treasury doing to implement these measures?
    Answer. Pursuant to E.O.13413 (October 27, 2006), OFAC continues to 
investigate aggressively the operations and holdings of rogue actors 
operating in the Democratic Republic of Congo; designated individuals 
and entities are deprived of access to the U.S. financial system and 
any transactions involving U.S. persons.
    Question. As a former board member of the Nature Conservancy, I 
know that you have a great interest in natural resource conservation. 
Would you support protecting parts of the Congo so that its natural 
resources are not further exploited?
    Answer. The Department of the Treasury strongly supporting ongoing 
efforts to strengthen natural resource management in the Democratic 
Republic of Congo (DRC), particularly the efforts of the World Bank to 
encourage reform of the forestry and mining sectors. Some important 
steps taken to date by the Congolese authorities include establishing a 
moratorium on new logging titles and the promulgation of new Mining and 
Forest Codes. Treasury sees these as strong building blocks for longer-
term reform and important steps toward filling the legal vacuum with 
respect to the governance of the Congolese forest and mining sectors. 
However, the situation in the DRC is extremely challenging and much 
work remains, including developing appropriate regulatory frameworks 
and strong institutions to manage these sectors. Treasury will continue 
to urge the World Bank to work with the Congolese authorities on the 
issue of natural resource management.
    Further, the United States is a founding member and financial 
supporter of the Congo Basin Forest Partnership (CBFP) which brings 
together governments, the private sector, civil society and development 
organizations to conserve the unique natural resources of the Congo 
Basin, fight illegal logging and poaching, and improve the livelihoods 
of the Basin's 100 million inhabitants. The Department of Treasury 
respectfully refers you to the State Department and USAID for 
additional information, as they are the lead U.S. government agencies 
with regard to our involvement in the CBFP.

                          SUBCOMMITTEE RECESS

    Secretary Paulson. We will, and I thank you very much for 
the way you have supported Treasury's budget. And thank you 
very much.
    Senator Durbin. Thanks, Mr. Secretary. This meeting of the 
Subcommittee on Financial Services and General Government will 
stand recessed.
    [Whereupon, at 4 p.m., Wednesday, March 5, the subcommittee 
was recessed, to reconvene subject to the call of the Chair.]
