September 11, 2001 : Attack on America
Testimony of Paul O'Neill Secretary of the Treasury before the Committee on Banking, Housing, and Urban Affairs United States Senate; September 20, 2001

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.

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