In Letter to Financial Oversight Council, Hatch Questions Default Deadline, Requests Specific Data

Utah Senator Writes, “Many Americans and members of Congress are, unfortunately, relying on estimates and projections from either large Wall Street financial institutions or non-governmental organizations often labeled ‘think tanks.’ The lack of information is unsatisfactory.”

WASHINGTON – U.S. Senator Orrin Hatch (R-Utah), Ranking Member of the Senate Finance Committee, today wrote to the group charged with monitoring the financial stability of the nation, the Financial Stability Oversight Council (FSOC), asking for detailed information about how much money the Treasury Department has to avoid default and a detailed contingency plan if the debt ceiling is not raised by August 2. Hatch requested the information by close-of-business on Thursday. The Senate Finance Committee has jurisdiction over Treasury’s cash management practices and sovereign debt.

Hatch wrote to eight members of the FSOC today, “Treasury officials have warned that based on actual and projected revenues and expenditures, along with potential exhaustion of available ‘extraordinary measures’ to avoid breach of the statutory debt limit, the United States will exhaust its borrowing authority under the limit and possibly run out of available cash to pay obligations of the federal government that are due. 

“Unfortunately, Congress and the American people do not have sufficient information about Treasury’s actual and projected revenues, expenditures, and cash flows to make informed judgments.   Many Americans and members of Congress are, unfortunately, relying on estimates and projections from either large Wall Street financial institutions or non-governmental organizations often labeled ‘think tanks.’  The lack of information is unsatisfactory.”

The FSOC was established under the Dodd-Frank Act to oversee the financial health of the United States and identify potential risks and threats to its stability. Voting members of the Council are: Treasury Secretary Geithner; Federal Reserve Chairman Ben Bernanke;  Commodity Futures Trading Commission Chairman Gary Gensler; U.S. Securities and Exchange Commission Chairman Mary Schapiro; Federal Deposit Insurance Corporation Acting Chairperson Martin J. Gruenberg; Federal Housing Finance Agency Acting Director Edward DeMarco; National Credit Union Administration Chairman Debbie Matz; and Office of the Comptroller of the Currency Acting Comptroller John Walsh.

The text of the letter to the FSOC is below.

July 27, 2011

The Honorable Timothy Geithner                        Martin J. Gruenberg
Secretary                                                         Acting Chairperson
Department of the Treasury                               Federal Deposit Insurance Corporation
1500 Pennsylvania Ave. NW                               550 17th Street NW
Washington, DC 20220                                     Washington, DC 20429

The Honorable Ben Bernanke                            Edward DeMarco
Chairman, Board of Governors                           Acting Director
The Federal Reserve System                             Federal Housing Finance Agency
20th Street and Constitution Ave. NW                 1700 G Street NW, 4th Floor
Washington, DC 20551                                     Washington, DC 20552

The Honorable Gary Gensler                              The Honorable Debbie Matz
Chairman                                                        Chairman
Commodity Futures Trading Commission            National Credit Union Administration
Three Lafayette Center                                    1775 Duke Street
1155 21st Street NW                                        Alexandria, VA 22314
Washington, DC 20581

The Honorable Mary Schapiro                           John Walsh
Chairman                                                      Acting Comptroller
U.S. Securities and Exchange Commission         Office of the Comptroller of the Currency
100 F Street NE                                              250 E Street SW, Room 9048
Washington, DC 20549                                   Washington, DC 20219

Dear Secretary Geithner, Chairmen Bernanke, Gensler, Matz, Shapiro, Acting Chairperson Gruenberg, Acting Director DeMarco, and Acting Comptroller Walsh:

The President, on July 25, spoke to the American public about risks associated with failure to raise the statutory debt limit, saying that: “We would risk sparking a deep economic crisis…”  The President warns of a deep crisis and risks to financial stability. 

You, the voting members of the Financial Stability Oversight Council (FSOC), are charged by the Dodd-Frank Wall Street Reform and Consumer Protection Act with the responsibility to identify risks and potential emerging threats to the financial stability of the United States. 

• Does the Council agree with the President’s assessment that possible failure to raise the statutory debt limit by sometime in early August represents an emerging threat to the financial stability of the United States?
•  Does any voting Council member dissent from whatever is the majority view of the Council?  If so, please explain precisely why.

Neither the Minutes of the FSOC July 13, 2011 meeting nor the Annual Report of the FSOC, which was approved on July 22, 2011, identify possible failure to raise the statutory debt limit by August 2 as an imminent risk to the financial stability of the United States worthy of a warning to the American people, and do not come close to recent statements by Treasury officials warning of “catastrophe.”

In addition to inquiring about the Council’s views on possible risks to financial stability, I write to ask the Council and its voting members about their current knowledge of recent Treasury cash inflows and outflows and projections of those cash flows, daily, through the month of August.

Treasury officials have warned that based on actual and projected revenues and expenditures, along with potential exhaustion of available “extraordinary measures” to avoid breach of the statutory debt limit, the United States will exhaust its borrowing authority under the limit and possibly run out of available cash to pay obligations of the federal government that are due. 

Unfortunately, Congress and the American people do not have sufficient information about Treasury’s actual and projected revenues, expenditures, and cash flows to make informed judgments.   Many Americans and members of Congress are, unfortunately, relying on estimates and projections from either large Wall Street financial institutions or non-governmental organizations often labeled “think tanks.”  The lack of information is unsatisfactory.

In a May 2, 2011 letter to Congress, Treasury Secretary Geithner stated the as a result of stronger than anticipated tax receipts, Treasury then estimated that extraordinary measures  to provide headroom under the statutory debt limit would be exhausted on August 2, 2011.  Since that time, more data have become available.  Some reports since that time have indicated that receipts may have been turning out higher than previously expected.  Further, the Federal Reserve’s July 2011 Monetary Policy Report to the Congress identifies that “Federal receipts have risen rapidly lately—they are up about 10 percent in the first eight months of fiscal 2011 compared with the same period in fiscal 2010.”

I recognize that receipts and Treasury’s cash inflows and outflows can be lumpy and are stochastic.  However, the date at which extraordinary measures available to Treasury become exhausted, and cash inflows may prove insufficient to meet incoming obligations that are due, has almost surely changed from the August 2 date estimated by Treasury on May 2.  Given incoming data since May 2, does August 2 remain the date with the highest statistical likelihood of being the point in time at which Treasury will run out of extraordinary measures to provide additional headroom under the debt limit and will face insufficient cash inflows relative to obligations that are coming due?

Please provide, by 5:00 p.m., Eastern Standard Time on Thursday, July 28, detailed information known by the Council and by any voting member on:

• Actual revenues and expenditures through July 27;
• Projected or actual daily Treasury cash inflows and outflows for each day between July 28 and August 31, along with methods used to make projections;
• Whether, given current projections of cash inflows and obligations coming due, Treasury would run out of cash and not have sufficient cash available to meet all obligations that become due on any date between August 2 and August 31 (projections here mean point estimates, with the acknowledgement that projections are inherently uncertain);
• Any cash or liquid accounts available (presently or any time during August) to Treasury, such as Treasury’s $5 billion liquid balance sitting idle in its Supplementary Financing Program Account at the Federal Reserve, established to allegedly assist the Federal Reserve with management of its balance sheet during the financial crisis (the Daily Statement of cash and debt operations of the United States Treasury for Monday, July 25, 2011 indicates that the $5 billion was available to Treasury on that date) ;
• Current values of securities and other marketable assets available (presently or any time during August) to Treasury, including mortgage-backed-securities and other financial claims amassed by Treasury during the recent financial crisis, which could be liquidated and converted to cash (my request is for total values, not an assessment of the advisability of asset sales);
• Contingency plans for generation of cash within Treasury in the event that the statutory debt limit is not raised by August 2, 2011;
• Contingency plans of regulators of financial institutions, including any plans for regulatory forebearance, in the event of a ratings downgrade of United States Treasury debt securities;
• Contingency plans of the Federal Reserve System and the Federal Reserve Bank of New York in the event of a ratings downgrade of United States Treasury debt securities, including plans related to “breaking of the buck” by a money market mutual fund, disruptions in the tri-party repo market, disruptions in payment systems or systemically important financial utilities, or creation of programs or facilities with broad-based eligibility under authorities provided by Section 1101 of the Dodd-Frank Wall Street Reform and Consumer Protection Act;
• Any private assurances by any government officials to any financial institution or significant financial market participant that the United States Treasury will not fail to pay principal and interest on Treasury securities even if the statutory debt limit is not raised.

As Ranking Member of the Senate Finance Committee, with a responsibility for oversight of our sovereign debt and Treasury’s cash management practices, I am deeply concerned about the lack of information about upcoming cash flows and reliance of Congress and the American people on non-governmental projections of those flows in decision making.  Time is of the essence, and I require, as I stated, the information that I have requested by 5:00 p.m. Eastern Standard Time on Thursday, July 28.

Sincerely,

ORRIN G. HATCH

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