20 September 2001
Text: Treasury's O'Neill on Prospects for U.S. Economy
(He warns against panic after terrorist attack) (2010)
U.S. Treasury Secretary Paul O'Neill says that the long-term prospects
for the U.S. economy remain sound but adds that he cannot predict
short-term effects on the economy from terrorist attacks on the World
Trade Center and Pentagon.
In September 20 testimony before the Senate Banking Committee, O'Neill
urged caution in assessing short-term economic reports.
"Americans should not react with fear that the stock market has
declined but rather marvel in that it is open, that for every seller
there is a buyer," O'Neill said. "Financial firms that suffered
devastating losses are operating, serving customers, clearing
transactions, and ensuring that the financial lifeblood of our economy
continues to flow."
While the financial sector has suffered damage, he said, the U.S.
production capacity remains intact and "ready for whatever trials lie
ahead."
O'Neill's testimony also reviewed the actions Treasury, the Federal
Reserve, the Securities and Exchange Commission and other agencies
have taken to assist U.S. financial markets.
Following is the text of O'Neill's testimony as submitted for the
committee's records:
(Note: In the text "billion" equals 1,000 million.)
(begin text)
THE U.S. FINANCIAL SYSTEM IN THE WAKE
OF THE ATTACK ON THE WORLD TRADE CENTER
TESTIMONY OF PAUL O'NEILL
SECRETARY OF THE TREASURY
BEFORE THE
COMMITTEE ON BANKING, HOUSING, AND URBAN AFFAIRS
UNITED STATES SENATE
Mr. Chairman, Senator Gramm, and Members of the Committee, I am
grateful for this opportunity to appear before you today to discuss
the effects of the recent terrorist attacks on our nation's financial
system and our economy.
I traveled to New York City on Monday, for the opening of the New York
Stock Exchange. What I saw was a testament to America's determination
and ingenuity.
The people who live and work in lower Manhattan took a horrible blow
last week. And yet, amid the rubble of broken buildings and the sorrow
of lost friends and colleagues, the New York Stock Exchange not only
opened and ran smoothly, but handled a record number of transactions
on Monday. I can think of no better testament to the resiliency of
America and her economy. Among the countless heroes of the past week
are the workers in New York's financial district -- from the brokers
and traders to the police and firemen to the phone and water utility
workers. In the face of enormous personal and human losses, these
professionals worked around the clock to put our nation's financial
center back into operation. I am grateful for their efforts and for
the cooperation with which they have worked with the Treasury
Department and the federal financial regulatory agencies.
As noted by observers from Alexis de Tocqueville forward, the United
States is a nation of commerce. While horrifying it is perhaps not
surprising that unseen enemies seeking to strike at America's very
heart would choose to attack her most visible financial center. It was
surely their hope and intention that the economic engine of the world
would be paralyzed as a result. We denied the terrorists any such
victory. Our economy -- our prosperity -- will not be destroyed.
The economy of the United States remains strong and resilient. And the
nation's financial markets, in spite of having sustained a terrible
blow, continue to function. Shares are being bought and sold on the
stock markets; firms are able to borrow funds for continued operation
in the nation's debt markets. Of course this is not to say that the
events of September 11th have had no impact on our financial
community. But thanks to careful planning and preparation for
potential disaster, and swift action by both the private and public
sectors, the United States' financial system is operating with only
temporary disruption.
Private Sector Response
Private financial institutions and firms have long planned for the
possibility of disruption to the flow of information and damage to
their operational facilities by implementing programs of redundancy.
Records, as required by both prudent business practice and by law, are
routinely duplicated and stored off site. Contingency plans enabled
firms to restart their operations quickly from alternate locations. We
know from conversations with company representatives and press reports
that firms whose facilities were totally destroyed and who tragically
lost many key staff in the destruction of the World Trade Center were
back in operation within days making certain that the country's
financial markets continued to function.
Federal Regulatory Response
Federal regulatory agencies have also been swift to act. They have
taken a number of steps to ensure the continued functioning of the
nation's financial markets, including measures to assist customers of
financial institutions, ensure market liquidity, and stabilize
securities and futures markets.
Customer Relief. The Federal Reserve Board (FRB), the Office of the
Comptroller of the Currency (OCC), the Office of Thrift Supervision
(OTS), the Federal Deposit Insurance Corporation (FDIC) and the
National Credit Union Administration (NCUA) have issued guidance to
their regulated institutions requesting that they undertake prudent
efforts to work with customers affected by Tuesday's attacks, or by
resulting delays in mail delivery. These efforts include waiving late
payment fees, extending loan terms, restructuring debt obligations,
and easing credit terms where a customer has a demonstrable need
resulting from the events of September 11.
Market Liquidity. To preserve market liquidity, the banking industry
has provided hundreds of billions of dollars in liquidity to their
customers, including credit extended under standby letters of credit
and credit commitments. As a result, banks' balance sheets have grown
as these new loans have been made. In turn, financial regulators have
facilitated market liquidity in two important ways. First, the Federal
Reserve has met the demand for liquidity by banks through
unprecedented credit extension involving the discount window, the
repurchase market, and other tools available to it. Second, the
federal banking agencies issued a joint statement to all banks that
recognizes the potential for these actions to inflate banks' balance
sheets and hence erode banks' capital ratios. The statement announces
the agencies' desire to work with those banks for which such credit
extension may lead to a temporary decline in capital ratios.
Government Securities/Fixed Income Markets. The Treasury has
successfully adjusted its financing needs in the face of the recent
market disruptions. The Treasury and other regulatory agencies worked
closely with the Bond Market Association (BMA) to re-establish an
active and orderly fixed income market. Following a recommendation by
the BMA to close the market on Wednesday, September 12th, trading
resumed in all fixed income markets on Thursday, September 13th.
Further, Treasury was able to execute a successful auction of 3- and
6-month Treasury bills on Monday, September 17th, with 24 of the 25
primary dealers participating.
Equity Markets. The Securities and Exchange Commission (SEC) undertook
a number of regulatory relief measures in preparation for Monday's
re-opening of the stock markets. These included providing relief under
Rule 10b-18, which provides a safe harbor from liability for
manipulation in connection with purchases by an issuer of its own
stock. The relief gives issuers greater latitude to provide buy side
liquidity this week. The SEC also announced limited relief under
Section16(b) to facilitate purchases this week by persons subject to
that statute.
Futures Markets. The Commodity Futures Trading Commission (CFTC)
worked closely with the SEC and bank regulators to address intermarket
coordination issues and facilitate an orderly re-opening of equity
futures markets when the primary stock markets re-opened. The CFTC
continues to be in close communication with the New York futures
exchanges to support their efforts toward safe, orderly resumption of
trading in contracts based on energy products, metals, agricultural,
and other commodities.
Treasury Response
In addition to the steps taken through Treasury's financial regulatory
Bureaus, the Department has also responded to the events of September
11th on the tax and law enforcement fronts.
IRS Tax Guidance. The IRS and Treasury are providing relief to all
taxpayers directly affected by the terrorist attacks. This relief
includes extending the time for filing tax returns and extending the
time for making estimated tax payments. The victims of the airplane
crashes (on the ground and in the air), taxpayers whose workplace or
whose records are in a disaster area, relief workers, and taxpayers in
all 5 boroughs of New York City and in Arlington County, Virginia (the
location of the Pentagon) are among those who qualify for this relief.
In addition, the IRS and Treasury are providing relief to taxpayers
unable to meet tax deposit obligations because of damage or injury
inflicted by the terrorist attack.
Furthermore, for all taxpayers, the IRS has postponed until September
24 the due date for all federal tax obligations (other than deposits
of federal taxes) that otherwise would be due between September 10 and
September 24. This postponement includes, for example, the filing of
returns and the payment of estimated taxes.
Enforcement. Treasury has established an inter-agency team dedicated
to the disruption of terrorist fundraising. The team is designed to
increase our ability to identify foreign terrorist groups, assess
their sources and methods of fundraising, and provide information that
will make clear to law enforcement officials how terrorist funds are
moved. This team will ultimately be transformed into a permanent
Foreign Terrorist Asset Tracking Center in the Treasury Department's
Office of Foreign Asset Control (OFAC). This is an extraordinary
effort that illustrates the Treasury Department's creativity in
developing new ways to combat terrorists.
Economic Impact
The destruction of much of the nation's financial center in Manhattan
may cause short-term problems and uncertainty. And the personal toll
has been staggering for the companies and people in New York's
financial district.
We cannot say at this very preliminary stage exactly how these events
will affect the economy. We do not have sound estimates of the dollar
amount of damage that occurred in New York. Yet I would call on the
Committee, and indeed all Americans, to be cautious in assessing
forthcoming short-term economic reports. This past week Americans have
been making charitable donations, giving blood, gathering in prayer,
and otherwise demonstrating our national unity and our determination
to overcome the threats facing our country. While these activities may
not appear in any economic report, they are a reminder of our humanity
and our strength as a country.
Consider our financial system. The markets will inevitably have ups
and downs. Americans should not react with fear that the stock market
has declined but rather marvel in that it is open, that for every
seller there is a buyer. Financial firms that suffered devastating
losses are operating, serving customers, clearing transactions, and
ensuring that the financial lifeblood of our economy continues to
flow.
On Sunday, the President called us back to work. While the country is
back to work, it still grieves. But in the long term the economy
remains sound. Although the financial sector has been damaged, it
continues to function. Moreover, the economy's productive capacity is
fully intact, ready for whatever trials lie ahead.
Indeed, America's dynamic economy is not located in any one place.
Innovation and productivity are found in every factory and farm, every
laboratory, every financial institution, every small business and
every home office across America. That spirit cannot be destroyed.
We at Treasury have been inundated with phone calls from people
wanting to know what they can do to help. Every American can make a
contribution by helping to keep our economy strong -- by getting back
to work and going forward with the spending plans they made before
September 11. Each and every American should know that by continuing
to work and spend, they are doing their part to restore our nation and
our economy in the wake of last week's attack.
We have every reason to maintain our confidence in the U.S. economy.
No evil, no matter how unspeakable, can destroy America's productive
spirit. If anything, this evil act strengthens our resolve to be the
most free, most vibrant economy in the world.
(end text)
(Distributed by the Office of International Information Programs, U.S.
Department of State. Web site: http://usinfo.state.gov)
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