Credit Rating Agencies and Their Regulation

Gary Shorter
Specialist in Financial Economics

Michael V. Seitzinger
Legislative Attorney

Credit rating agencies (CRAs) are expected to provide investors with an informed and unbiased view on securities' debt risk (also referred to as credit risk), the risk that issuers will fail to make promised interest or principal payments when they are due. The agencies provide judgments ("opinions") on the creditworthiness of bonds issued by a wide spectrum of entities, including corporations, nonprofit firms, special purpose entities, sovereign nations, and state and municipal governments. They take the form of ratings that are usually displayed in a letter hierarchical format: AAA being the highest and safest, with lower grades representing an increasing scale of risk to the investor. The three dominant CRAs are Moody's, Standard & Poor's, and Fitch. 

CRAs have been a fixture of securities markets since the 19th century; they predate federal regulation of the markets. The Securities and Exchange Commission (SEC) issues a designation of Nationally Recognized Statistical Rating Organization (NRSRO), which is important because a variety of laws and regulations reference their use. (For example, the amount of risk-based capital that banks must hold against a portfolio of securities is linked to ratings; and thrift institutions are not allowed to own bonds rated below investment grade.) 

In recent years, many assert that the performance of the dominant rating agencies has been marked by a number of spectacular failures. Companies like Enron and WorldCom retained their high credit ratings until a few days before they filed for bankruptcy. More recently, many mortgage-backed securities initially rated AAA have defaulted or have been sharply downgraded. In both situations, investors who relied on the ratings suffered heavy losses. The SEC and other observers have criticized the failings of the three dominant CRAs in their ratings of mortgage backed securities. Subsequently, Moody's, Standard & Poor's, and Fitch have adopted a number of voluntary reforms intended to address their perceived shortcomings. 

Between December 2008 and September 2009, the SEC adopted several reforms aimed at enhancing NRSRO disclosures, and mitigating NRSRO conflicts of interest, including a prohibition on NRSRO personnel involved in rating determination participating in fee discussions, negotiations, or arrangements; a requirement that each NRSRO and NRSRO applicant provide rating change statistics for each asset class of credit ratings for which it is registered or is seeking registration; an authorization for competing NRSROs to offer unsolicited ratings for structured finance products by granting them access to the necessary underlying data for structured products; and an elimination from federal securities regulations and laws certain references to credit ratings by NRSROs. On December 11, 2009, the House passed H.R. 4173. In November 2009, the Senate Banking, Housing, and Urban Affairs Committee released a legislative draft that also contains rating agency reform provisions. Both would require NRSROs to have established internal controls over the processes used to determine credit ratings, enhance the rights of entities to bring private actions against rating agencies for certain knowing or reckless failures in research with respect to rating determinations, and disclose the primary assumptions used in constructing the procedures and methodologies for arriving at credit ratings. Separately, H.R. 4173 would strike references to "not investment grade" or to "ratings" or similar language in a number of federal statutes, including the Federal Deposit Insurance Act; replace the term ''nationally recognized statistical rating'' with ''nationally registered statistical rating'' in the Securities Act of 1933 and the Securities Exchange Act of 1934; and require the removal of references by federal financial regulators and in certain federal laws. Other bills that would also provide for rating agency reforms include S. 927 (Pryor), S. 1073 (Reed), H.R. 1181 (Ackerman), H.R. 1445 (McHenry), and H.R. 2253 (Delahunt).  .


Date of Report: February 18, 2010
Number of Pages: 29
Order Number: R40613
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The Financial Crisis: Impact on and Response by The European Union

James K. Jackson
Specialist in International Trade and Finance

The EU and the United States have taken unusual and extraordinary steps to resolve the financial crisis while stimulating domestic demand to stem the economic downturn. These efforts appear to have been successful, although the economic recovery remains tepid. The economic recession and the financial crisis became reinforcing events, causing EU governments to forge policy responses to both crises. In addition, both the United States and the EU have confronted the prospect of growing economic and political instability in Eastern Europe and elsewhere over the impact of the economic recession on restive populations. In the long run, the United States and the EU likely will search for a financial regulatory scheme that provides for greater stability while not inadvertently offering advantages to any one country or group. Throughout the crisis, the European Central Bank and other central banks assumed a critical role as the primary institutions with the necessary political and economic clout to respond effectively. Within Europe, national governments, private firms, and international organizations varied their responses to the financial crisis, reflecting differing views over the proper policy course to pursue and the unequal effects of the financial crisis and the economic downturn. Initially, some EU members preferred to address the crisis on a case-by-case basis. As the crisis has persisted, however, leaders have begun looking for a systemic approach that ultimately may affect the drive within Europe toward greater economic integration. 

Within the United States, Congress appropriated funds to help recapitalize financial institutions, and adopted several economic stimulus measures. In addition, Congress has been involved in efforts to reshape institutions and frameworks for international cooperation and coordination in financial markets. European governments also adopted fiscal measures to stimulate their economies and wrestled with failing banks. The financial crisis has demonstrated that financial markets are highly interdependent and that extensive networks link financial markets across national borders, which has pressed EU governments to work together to find a mutually reinforcing solution. Unlike the United States, however, where the federal government can legislate policies that are consistent across all 50 States, the EU process gives each EU member a great deal of discretion to decide how they will regulate and supervise financial markets within their borders. The limits of this system have been tested as the EU and others have searched for a regulatory framework that spans a broad number of national markets. Governments that have expended considerable resources utilizing fiscal and monetary policy tools to stabilize the financial system and to provided a boost to their economies may be required to be increasingly more inventive in providing yet more stimulus to their economies and face political unrest in domestic populations. Attention likely will also focus on those governments that are viewed as not expending economic resources commensurate with the size of their economies to stimulate economic growth.


Date of Report: February 8, 2010
Number of Pages: 39
Order Number: R40415
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The Berne Union: An Overview

James K. Jackson
Specialist in International Trade and Finance

The Berne Union, or the International Union of Credit and Investment Insurers, is an international organization comprised of more than 70 public and private sector members that represent both public and private segments of the export credit and investment insurance industry. Members range from highly developed economies to emerging markets, from diverse geographical locations, and from a spectrum of viewpoints about approaches to export credit financing and investment insurance. Within the Berne Union, the United States is represented by the U.S. Export-Import Bank (Eximbank) and the Overseas Private Investment Corporation (OPIC) and four private-sector firms and by one observer. The main role of the Berne Union and its affiliated group, the Prague Club, is to: work to facilitate cross-border trade by helping exporters mitigate risks through promoting internationally acceptable principles of export credit financing, strengthen the global financial structure, and facilitate foreign investments. Over the past decade, the growth and increased importance of global trade and financing have altered the agenda of the Berne Union from focusing primarily on concerns over country-specific political risk to concerns about global trade, international finance, global and regional security, and questions of business organization, civil society, transparency, and corporate responsibility. Congress, through its oversight of Eximbank and OPIC, as well as international trade and finance, has interests in the functioning of the Berne Union. .


Date of Report: February 8, 2010
Number of Pages: 8
Order Number: RS22319
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The Work Opportunity Tax Credit (WOTC)

Linda Levine
Specialist in Labor Economics

The Work Opportunity Tax Credit (WOTC) is meant to induce employers to hire members of families receiving benefits under the Temporary Assistance to Needy Families (TANF) program and other groups thought to experience employment problems regardless of general economic conditions (e.g., food stamp recipients and ex-felons). One year later, in 1997, Congress passed the Welfare-to-Work (WtW) tax credit to focus specifically on more disadvantaged TANF recipients. The 109th Congress folded the WtW credit into a revised WOTC as part of the Tax Relief and Health Care Act of 2006. 

Provisions to increase the minimum wage and to provide tax relief to small businesses were included in emergency supplemental appropriations during the 110th Congress. The U.S. Troop Readiness, Veterans' Care, Katrina Recovery, and Iraq Accountability Act of 2007 (P.L. 110-28) extends the WOTC for three-and-one-half years through August 31, 2011. It also expands the definition of WOTC-eligible veterans to persons entitled to compensation for service-connected disabilities (1) with a hiring date not more than one year after having been discharged or released from active duty in the Armed Forces or (2) having been unemployed for at least six months during the one-year period ending on the hiring date, and doubled (to $12,000) the maximum wage against which the subsidy rate could be applied for this component of the veterans group. Additionally, the law expands the age range of high-risk youth to cover 18 to 39 year olds and renamed the WOTC-eligible group "designated community residents." The act also clarifies the definition of vocational rehabilitation referrals, adds "rural renewal county" to the places of residence for designated community residents, and allows the WOTC and tip credit against the Alternative Minimum Tax. 

Early in the 111th Congress, the WOTC was amended in the American Recovery and Reinvestment Act of 2009 (P.L. 111-5). The credit's targeted groups were extended to cover unemployed veterans and disconnected youth who begin working for an employer during 2009 or 2010. Unemployed veterans are persons discharged or released from active duty in the Armed Forces within five years of their hiring date and having received unemployment compensation for not less than four weeks during the one-year period ending on the hiring date. Disconnected youth are 16 to 24 year olds who are not regularly attending school during the six-month period preceding the hiring date, not regularly employed within the same time frame, and not readily employable because they lack a sufficient number of skills. 

Bills have since been introduced to amend the WOTC to improve the employment prospects of workers unemployed during the latest recession (e.g., H.R. 3953). Although it would not amend the WOTC, S. 2983 has a similar purpose. It is meant to spur firms to hire the unemployed by exempting for-profit and non-profit employers from their share of social security taxes for hiring in 2010 persons who had not worked for 60 days. Unlike other recent job tax proposals, neither WOTC-related bills nor S. 2983 are incremental in nature. See CRS Report R41034, Business Investment and Employment Tax Incentives to Stimulate the Economy for more information.


Date of Report: February 16, 2010
Number of Pages: 20
Order Number: RL30089
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Fee Disclosure in Defined Contribution Retirement Plans: Background and Legislation

John J. Topoleski
Analyst in Income Security

As households become more reliant on 401(k) plans and other defined contribution pension plans for future retirement income, policymakers have become more concerned that participants could be unaware of the fees charged in their plans. Small differences in fees charged can have large impacts on account balances upon retirement. This report provides information on the kinds of fees that are charged in 401(k) and other defined contribution plans and details the provisions of bills introduced in the 111th Congress that address fee disclosure in retirement plans. In the 111th Congress, these bills are H.R. 2779, the Defined Contribution Plan Fee Transparency Act of 2009, introduced by Representative Neal on June 9, 2009; H.R. 2989, the 401(k) Fair Disclosure and Pension Security Act of 2009, introduced by Representative Miller on June 23, 2009; S. 401, the Defined Contribution Fee Disclosure Act of 2009, introduced by Senator Harkin on February 10, 2009; and H.R. 4146, the Sensible Transparency for Retirement Plans Act of 2009, introduced by Representative Kline on November 19, 2009. H.R. 2989 was reported out of committee on June 24, 2009. 

This report will be updated as legislative action warrants. .


Date of Report: January 29, 2010
Number of Pages: 20
Order Number: RL34678
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The Consumer Price Index: A Brief Overview

Brian W. Cashell
Specialist in Macroeconomic Policy

The Consumer Price Index (CPI) is perhaps the most widely reported measure of inflation. A number of federal government programs are regularly adjusted to account for changes in the CPI, such as Social Security benefits and the personal income tax rate schedule. Thus, the behavior of the CPI has important consequences for a large number of people. Many, however, may be unfamiliar with how the CPI is estimated. 

For Congress, the CPI is of particular interest because of its significant effect on the federal budget. Changes in the CPI can have substantial effects on both revenues and outlays, and those changes may either reflect underlying economic conditions or result from methodological changes in the way the CPI is calculated. 

The CPI is based on a number of sample surveys. One of these surveys estimates the purchasing patterns of the "typical" household to determine how that household spends its money. Another survey determines where those households shop, and a third survey collects prices on the goods and services purchased by those households. 

The CPI measures the price level relative to a particular period. Currently, the CPI number for each month is a measure of the price level relative to what it was between 1982 and 1984. The CPI is available for a number of metropolitan areas but it does not allow comparisons of the cost of living in different cities.


Date of Report: February 17, 2010
Number of Pages: 18
Order Number: RL30074
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Traditional and Roth Individual Retirement Accounts (IRAs): A Primer

John J. Topoleski
Analyst in Income Security

In response to concerns over the adequacy of retirement savings, Congress has created incentives to encourage individuals to save more for retirement through a variety of retirement plans. Some retirement plans are employer-sponsored (such as 401(k) plans), and others are established by individual employees (such as Individual Retirement Accounts (IRAs)). 

This report describes the primary features of two common retirement savings accounts that are available to individuals. Both traditional and Roth IRAs offer tax incentives to encourage individuals to save for retirement. Although the accounts have many features in common, they differ in some very important aspects. This report explains the eligibility requirements, contribution limits, tax deductibility of contributions, and rules for withdrawing funds from the accounts. This report will be updated as legislative activity warrants.


Date of Report: January 28, 2010
Number of Pages: 17
Order Number: RL34397
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Auction-Rate Securities

D. Andrew Austin
Analyst in Economic Policy

Many municipalities, student loan providers, and other debt issuers borrowed funds using auction-rate securities (ARSs), whose interest rates are set periodically by auctions. ARSs combine features of short- and long-term securities; ARSs couple longer maturities with interest rates linked to short-term money markets. Most ARSs are bonds, although some are preferred equities. ARS issuance volumes grew rapidly since they were introduced in the mid-1980s. By 2007, ARSs comprised a $330 billion market. The credit crunch of 2007-2008, however, exposed major vulnerabilities in the design of ARSs. 

Turmoil in global financial markets that erupted in August 2007, combined with vulnerabilities in the structure of ARSs, put mounting pressure on the ARS market. In addition, downgrades of some bond insurers increased stress on segments of the ARS market. In early February 2008, major ARS dealers withdrew their support for ARS auctions, most of which then failed. Widespread auction failures in the ARS market left many investors with illiquid holdings and sharply increased interest costs for many issuers, such as student lending agencies, cities, and public authorities. In particular, ARS failures, according to some, have made it more difficult for student lenders that had used ARSs to raise funds. CRS Report RL34578, Economics of Guaranteed Student Loans, by D. Andrew Austin, discusses these issues. 

Many major investment banks, in the wake of lawsuits filed by state attorneys general as well as pressure from state and federal regulators, have announced plans to repurchase outstanding ARSs for certain relatively smaller investors and to make efforts to liquidate ARS holdings of larger and institutional investors. The U.S. Securities and Exchange Commission (SEC) reached several settlements with broker-dealers in late 2008 and early 2009. Lawsuits alleged that some investment banks sold ARS products as cash equivalents, but failed to disclose liquidity risks and the extent of bank support for auctions—the main liquidity channel for ARSs. Many major investment banks involved in the ARS market have announced settlements and agreements to buy back ARSs from some investors, typically certain individual investors, non-profit organizations, and small businesses. Some large firms and high-wealth individuals, however, have not been covered by these settlements. 

Some segments of the ARS market, such as municipal issues and closed-end mutual funds, have restructured much of their debt, as issuers have redeemed ARS securities and switched to other financing strategies. Only a small portion of existing student-loan-backed ARS (SLARS) debt issues have been refinanced. 

In the past, Congress has expressed concern about policy areas that the ARS market's collapse has affected. For example, the House Financial Services Committee held a March 2008 hearing to examine how financial market developments may have increased interest and other financing costs of state and local governments, followed by another hearing in September 2008 on ARSs. In April 2008, Congress passed the Ensuring Continued Access to Student Loans Act of 2008 (H.R. 5715, P.L. 110-227) to allow the Secretary of Education to provide capital to student lenders, whose ability to borrow in some cases had been constricted by ARS failures. Some large firms have called for federal help to sell their ARS holdings, whose market valuations have dropped sharply. More generally, many Members of Congress have stepped up oversight of financial markets and are reconsidering the structure of federal financial regulation. 

This report will be updated as events warrant. .


Date of Report: January 29, 2010
Number of Pages: 33
Order Number: RL34672
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The Exon-Florio National Security Test for Foreign Investment

James K. Jackson
Specialist in International Trade and Finance

The Exon-Florio provision grants the President the authority to block proposed or pending foreign acquisitions of "persons engaged in interstate commerce in the United States" that threaten to impair the national security. This provision came under intense scrutiny with the proposed acquisitions in 2006 of major operations in six major U.S. ports by Dubai Ports World and of Unocal by the China National Offshore Oil Corporation (CNOOC). The debate that followed reignited long-standing differences among Members of Congress and between the Congress and the administration over the role foreign acquisitions play in U.S. national security. The public debate underscored the differences between U.S. policy, which is to actively promote internationally the national treatment of foreign firms, and the concerns of some over the way this policy applies to companies that are owned by foreign governments that have unlimited access to the Nation's industrial base. Much of this debate focused on the activities of a relatively obscure committee, the Committee on Foreign Investment in the United States (CFIUS) and the Exon- Florio provision, which gives the President broad powers to block certain types of foreign investment. 

In the first session of the 110th Congress, Congresswoman Maloney introduced H.R. 556, the National Security Foreign Investment Reform and Strengthened Transparency Act of 2007, on January 18, 2007. The measure was approved by the House Financial Services Committee on February 13, 2007, with amendments, and was approved with amendments by the full House on February 28, 2007, by a vote of 423 to 0. On June 13, 2007, Senator Dodd introduced S. 1610, the Foreign Investment and National Security Act of 2007. On June 29, 2007, the Senate adopted S. 1610 in lieu of H.R. 556 by unanimous consent. On July 11, 2007, the House accepted the Senate's version of H.R. 556 by a vote of 370-45 and sent the measure to the President, who signed it on July 26, 2007. It is designated as P.L. 110-49. 

On January 23, 2008, President Bush issued Executive Order 13456 implementing the law. The Executive Order also establishes some caveats that may affect the way in which the law is implemented. These caveats stipulate that the President will provide information that is required under the law as long as it is "consistent" with the President's authority 1) to conduct the foreign affairs of the United States; 2) withhold information that would impair the foreign relations, the national security, the deliberative processes of the Executive, or the performance of the Executive's constitutional duties; or the President's ability to supervise the unitary executive branch. Despite the recent changes to the Exon-Florio process, some Members are questioning the way in which the changes in the law are being interpreted by the administration and the way in which the law is being used to address cases involving foreign governments, particularly with the emergence of direct investments through sovereign wealth funds (SWFs).


Date of Report: February 4, 2010
Number of Pages: 23
Order Number: RL33312
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The Committee on Foreign Investment in the United States (CFIUS)

James K. Jackson
Specialist in International Trade and Finance

The Committee on Foreign Investment in the United States (CFIUS) is comprised of 9 members, two ex officio members, and other members as appointed by the President representing major departments and agencies within the federal Executive Branch. While the group generally has operated in relative obscurity, the proposed acquisition of commercial operations at six U.S. ports by Dubai Ports World in 2006 placed the group's operations under intense scrutiny by Members of Congress and the public. Prompted by this case, some Members of the 109th and 110th Congresses questioned the ability of Congress to exercise its oversight responsibilities given the general view that CFIUS's operations lack transparency. Other Members revisited concerns about the linkage between national security and the role of foreign investment in the U.S. economy. Some Members of Congress and others argued that the nation's security and economic concerns have changed since the September 11, 2001, terrorist attacks and that these concerns were not being reflected sufficiently in the Committee's deliberations. In addition, anecdotal evidence seemed to indicate that the CFIUS process was not market neutral. Instead, a CFIUS investigation of an investment transaction may have been perceived by some firms and by some in the financial markets as a negative factor that added to uncertainty and may have spurred firms to engage in behavior that may not have been optimal for the economy as a whole. 

In the first session of the 110th Congress, the House and Senate adopted S. 1610, the Foreign Investment and National Security Act of 2007. On July 11, 2007, the measure was sent to President Bush, who signed it on July 26, 2007. It is designated as P.L. 110-49. On January 23, 2008, President Bush issued Executive Order 13456 implementing the law. The Executive Order also established some caveats that may affect the way in which the law is implemented. These caveats stipulate that the President will provide information that is required under the law as long as it is "consistent" with the President's authority "to (i) conduct the foreign affairs of the United States; (ii) withhold information the disclosure of which could impair the foreign relations, the national security, the deliberative processes of the Executive, or the performance of the Executive's constitutional duties; (iii) recommend for congressional consideration such measures as the President may judge necessary and expedient; and (iv) supervise the unitary executive branch." Despite the relatively recent passage of the amendments, Members of Congress and others have questioned the performance of CFIUS and the way the Committee reviews cases involving foreign governments, particularly with the emergence of direct investments through sovereign wealth funds (SWFs). There have been few policy statements by the Obama Administration to assess its approach to foreign direct investment, but the Administration seems to supportive of a free flow of direct investment.


Date of Report: February 4, 2010
Number of Pages: 24
Order Number: RL33388
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Unemployment Insurance: Available Unemployment Benefits and Legislative Activity

Julie M. Whittaker
Specialist in Income Security

Alison M. Shelton
Analyst in Income Security

Various benefits may be available to unemployed workers to provide income support. When eligible workers lose their jobs, the Unemployment Compensation (UC) program may provide up to 26 weeks of income support through the payment of regular UC benefits. UC benefits may be extended for up to 13 or 20 additional weeks at the state level by the Extended Benefit (EB) program if certain economic situations exist within the state. In July 2008, a new temporary unemployment benefit, the Emergency Unemployment Compensation (EUC08) program, began. EUC08 now provides up to an additional 34 weeks of unemployment benefits and, if certain economic conditions exist within the state, EUC08 may provide up to an additional 19 weeks of EUC08 benefits (totaling four tiers and 53 weeks of EUC08 benefits). The EUC08 program expires at the end of February, 2010. 

Certain groups of workers who lose their jobs because of international competition may qualify for income support through Trade Adjustment Act (TAA) programs. Unemployed workers may be eligible to receive Disaster Unemployment Assistance (DUA) benefits if they are not eligible for regular UC and if their unemployment may be directly attributed to a declared major disaster. 

The American Recovery and Reinvestment Act (ARRA) of 2009, P.L. 111-5 (the 2009 stimulus package), contained several provisions affecting unemployment benefits. ARRA increased unemployment benefits by $25 per week through December 2009. The stimulus package also extended the temporary EUC08 program through the end of 2009. ARRA provided for 100% federal financing of the EB program through January 1, 2010, and allows states the option of temporarily easing EB eligibility requirements. ARRA suspended income taxation on the first $2,400 of unemployment benefits received in 2009. In addition, states would not owe or accrue interest, through December 2010, on federal loans to states for the payment of unemployment benefits. ARRA also provided for a special transfer of up to $7 billion in federal monies to state unemployment programs as "incentive payments" for changing certain state UC laws. In addition, ARRA transfers $500 million to the states for administering unemployment programs. (For more information on unemployment provisions in ARRA, please see CRS Report R40368, Unemployment Insurance Provisions in the American Recovery and Reinvestment Act of 2009.) 

The Worker, Homeownership, and Business Assistance Act of 2009, P.L. 111-92, expanded the number of weeks available in the EUC08 program. Tier I benefits continue to be up to 20 weeks in duration and tier II benefits are now 14 weeks in duration (compared with 13 previously) and no longer are dependent on a state's unemployment rate. The new tier III benefit provides up to 13 weeks of EUC08 benefits to those workers in states with an average unemployment rate of 6% or higher. The new tier IV benefit may provide up to an additional 6 weeks of benefits if the state unemployment rate is at least 8.5%. 

On December 19, 2009, the President signed P.L. 111-118, the Department of Defense Appropriations Act of 2010, into law. P.L. 111-118 extends the EUC08 program through the end of February 2010. The law also amends ARRA by extending the 100% federal financing of the EB program as well as the $25 supplemental weekly benefit through February 2010. On December 16, 2009, the House passed H.R. 2847, the Commerce, Justice, Science and Related Agencies Appropriations Act of 2010, which would extend the EUC08 program through the end of June 2010 in Title III—Unemployment and Other Emergency Needs. The President's 2010 budget emphasizes the need for legislation to make the UC system more responsive to changing economic conditions, with a focus on the EB program.


Date of Report: February 2, 2010
Number of Pages: 32
Order Number: RL33362
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CRS Issue Statement on Unemployment Insurance

Julie M. Whittaker, Coordinator
Specialist in Income Security

Abigail B. Rudman
Information Research Specialist

Alison M. Shelton
Analyst in Social Security

Jon O. Shimabukuro
Legislative Attorney

Alison M. Smith
Legislative Attorney

John J. Topoleski
Analyst in Income Security

The current recession that began in December 2007 will likely be the longest since the Great Depression. The national unemployment rate reached 10.1% in October 2009 and has since remained at 10.0%. An estimated 15.3 million workers were unemployed in December 2009, compared with 7.7 million in December 2007. Approximately 11 million of these unemployed workers were receiving Unemployment Compensation, Emergency Unemployment Compensation, or Extended Benefits. 

Providing additional unemployment insurance benefits has been a key component of Congress' response to the current recession, because these benefits not only help relieve unemployed workers' financial distress but also help dampen the effect of the recession when beneficiaries spend their unemployment benefits. When workers lose their jobs, many are eligible for income support through a variety of unemployment insurance (UI) benefits including Unemployment Compensation (UC), Emergency Unemployment Compensation (EUC08), Extended Benefits (EB), and Trade Adjustment Assistance Act (TAA) benefits. The UC program may provide benefits to eligible workers for up to 26 weeks. Those who exhaust UC benefits may be eligible for the temporary EUC08 benefit program. If certain economic conditions exist in a state, those workers may be additional weeks of EUC08 benefits. A separate program, the permanent EB program, may also provide additional weeks of unemployment benefits in states where certain unemployment conditions exist. Certain groups of workers who lose their jobs on account of international competition may qualify for additional or supplemental income support including the Trade Readjustment Allowance (TRA) through the TAA program. Older TAA-eligible workers, age 50 or over, may be able to opt for Reemployment Trade Adjustment Assistance (RTAA), which provides a wage supplement in lieu of TRA benefit. 

As in past economic recessions, the federal response to this current recession includes the augmentation of regular UC benefits with both permanent (EB) and temporary (EUC08) benefits. In addition—unique to this recession—is the temporary Federal Additional Compensation (FAC) benefit which adds $25 to each UC, EB, EUC08, and TRA benefit. The federal response also included offering a total of $7 million in incentive monies to states for changes in state laws that would generally make UC more widely available, providing a tax exemption on the first $2,400 of unemployment benefits received in 2009; providing relief to states for the accrual of interest on federal loans to states for the payment of UC and EB; and by appropriating general revenues to support the federal-state unemployment system. These collective interventions provided essential support to the federal-state unemployment system in 2009. 

The debate about whether and in what way to extend most of these interventions and programs continues in 2010. This debate includes examining the efficacy of using a variety of unemployment statistics as triggers for extending unemployment benefits. It also has examined whether the intervention should be at a national or state level. The rise in unemployment has increased interest in short-time compensation (STC), a special program within the unemployment insurance system often called "work sharing." STC is provided in conjunction with a work sharing program, under which an employer faced with a temporary need to downsize reduces the hours of all employees instead of laying off a smaller number of employees. If the firm meets state and federal requirements, partial unemployment benefits known as "short-time compensation" may be available to compensate workers for reduced hours of work 

Sustained unemployment and the subsequent increased use of the unemployment insurance program has strained the solvency of the federal and state programs. This strain has resulted in the federal accounts borrowing funds from the general Treasury revenue. In addition, increasing numbers of states are being required to borrow funds from the federal unemployment trust fund (UTF). As a result, there is renewed Congressional interest in the federal unemployment tax (FUTA) as well as the state unemployment tax (SUTA) structure.


Date of Report: January 19, 2010
Number of Pages: 4
Order Number: IS41061
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CRS Issue Statement on Financial Regulatory Reform

Baird Webel, Coordinator
Specialist in Financial Economics

The financial regulatory system in the United States consists of a variety of regulators created at various historical times in response to different events. The resulting system is somewhat of a patchwork, with issues arising in the past involving coordination between regulators, and the possibility of "regulatory arbitrage" as regulated entities can choose regulators in some instances. Even before the recent financial crisis reached its height toward the end of 2008, some observers were calling for substantial reform of U.S. financial regulation, largely to improve the efficiency of the regulatory system. The financial crisis brought renewed focus to financial regulatory reform and substantially shifted the focus of reform to address the perceived causes of the crisis.

The financial crisis began with unexpectedly high mortgage defaults, particularly in subprime mortgages, which then resulted in falling values for securities backed by these mortgages. Credit rating agencies had previously rated such securities highly and they were generally perceived as unlikely to fall in value. Distrust of securities backed by assets spread beyond mortgage-backed securities and many large financial institutions that held or insured asset-backed securities found their survival threatened. Eventually the securitization market, which had grown over previous decades as the source of much of the credit available in the United States, largely ceased to operate. Financial derivatives, such as credit default swaps, acted essentially as an accelerant to the crisis. Derivatives both amplified the actual financial risk undertaken by some financial firms and spread uncertainty in the market due to a lack of information about what derivative positions were outstanding. Government entities, including the Federal Reserve, the Federal Deposit Insurance Corporation (FDIC), and the Treasury, have taken a number of extraordinary steps to contain the crisis and rebuild financial markets in its aftermath.

In response the crisis, various proposals have been put forward to broadly reform the financial regulatory system, including legislation by House Financial Services Committee Chairman Barney Frank (H.R. 4173), House Financial Services Committee Ranking Member Spencer Bachus (H.Amdt. 539), and Senate Banking, Housing, and Urban Affairs Committee Chairman Christopher Dodd (an unnumbered committee print). As Congress moves forward considering policy proposals to reform financial regulation several different policy questions may be addressed. 

Specific Policy Questions 

How should Congress approach consumer protection in the financial sector? What role should regulators overseeing firm solvency play in protecting consumers? What should consumer protection entail? Should it focus on disclosure of financial product features and risks or on specific regulation of those features and risks?

How should Congress approach regulation for depository institutions (banks and thrifts)? Does the current system with multiple regulators need to be streamlined, or do multiple regulators provide important checks and balances?

Should Congress increase derivative oversight? Should derivatives be cleared through a central clearinghouse? Should they be traded on an exchange? Should there continue to be separation of the regulation of financial and commodity derivatives?

Should Congress increase the federal role in insurance regulation?

How should the failure of large, non-depository financial institutions be handled in the future? Should the FDIC or similar agency resolve such failures? Should they be handled through bankruptcy? If funding is need to resolve such failures, what would the source of funds be?

Should Congress increase regulation of large firms that might "too big to fail" prior to their failure? What entity should undertake this oversight? Should Congress attempt to prevent firms from becoming "too big to fail?" Could this be done through reinstituting some separation of financial functions (similar to the repealed Glass-Steagall Act) or through limits on financial firm size regardless of function, or through some other mechanism?

Does Congress need to increase investor protections? What rights should shareholders have to oversee managers, particularly with regard to executive compensation?

Does Congress need to regulate either the amount or method of executive compensation to decrease risk-taking by financial firms?

Does Congress need to change the oversight of credit rating agencies or their role in government policy?

Does financial regulation need to be harmonized between countries? If so, what steps could Congress take to promote international cooperation?


Date of Report: January 25, 2010
Number of Pages: 4
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The Global Financial Crisis: Increasing IMF Resources and the Role of Congress

Jonathan E. Sanford
Specialist in International Trade and Finance

Martin A. Weiss
Specialist in International Trade and Finance

At their meeting in London on April 2, 2009, the leaders of the 20 systemically important industrialized and developing countries (G-20) agreed on several initiatives to bolster the International Monetary Fund's (IMF) resources, improving its ability to provide financial assistance to countries impacted by the ongoing financial crisis. These included increasing the resources of the IMF and international development banks by $1.1 trillion including $750 billion more for the IMF, $250 billion to boost global trade, and $100 billion for multilateral development banks. For the additional IMF resources, $250 billion was to be made available immediately through bilateral arrangements between the IMF and individual countries, while an additional $250 billion would become available as additional countries pledged their participation. 

In June 2009, Congress enacted legislation authorizing U.S. participation in this new increase in IMF resources. The White House formally requested on May 12 that Congress consider increasing the U.S. contribution to the IMF based on commitments made by the Bush Administration in 2008 and by the Obama Administration at the London meeting of the G-20 countries in April 2009. At the meeting, G-20 leaders agreed that the IMF's New Arrangements to Borrow (NAB), a supplemental fund to bolster IMF resources, should be increased by up to $500 billion from its present level of $50 billion. The Obama Administration proposed that the United States contribute up to $100 billion. The G-20 also agreed that the IMF should create $250 billion in new Special Drawing Rights (SDR) and allocate them to its members through its SDR Department. 

Already pending at the time of the G-20 meeting was a proposal for a new increase in IMF quota resources. Negotiations on a package of reforms and a new quota increase were completed in April 2008, and the proposals were submitted to the House and Senate by the Bush Administration in November 2008. The U.S. share is about $8 billion. The package includes reform of IMF governance, finances, and procedures. It also includes a proposal that the IMF sell 403 metric tons of gold to create a facility that would cover the costs of its country and global surveillance, technical assistance, research, and other non-lending operations. 

U.S. participation in the new IMF quota increase and a U.S. subscription of $100 billion for the NAB required congressional approval. Likewise, amendments to the IMF Articles—including the prospective Fourth Amendment for a new SDR allocation—required congressional approval. On the other hand, the proposed $250 billion allocation of SDRs (which is being made under a different provision of the IMF Articles) was too small to trigger the legal requirement that Congress give its assent. Any contributions to the IMF, to fund increases in the U.S. quota or to subscribe new resources to the NAB, must be authorized by Congress. 

Despite concerns about the process of authorizing and appropriating contributions to the IMF, and the impact on the global economy of creating a large of amount of SDRs, U.S. participation in the funding agreement, and the requisite authorizations for IMF reform efforts, were included in the FY2009 Spring Supplemental Appropriations for Overseas Contingency Operations (P.L. 111-32). .


Date of Report: January 29, 2010
Number of Pages: 23
Order Number: R40578
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CRS Issue Statement on the Trade Deficit and the Dollar

Craig K. Elwell, Coordinator
Specialist in Macroeconomic Policy

Marc Labonte
Specialist in Macroeconomic Policy

James K. Jackson
Specialist in International Trade and Finance

Carolyn C. Smith
Information Research Specialist

J. Michael Donnelly
Information Research Specialist

Jennifer Teefy
Information Research Specialist

Congress has a continuing interest in the trade deficit and its potential consequences for the national economy because of its constitutional role, through the general welfare and interstate commerce clauses, to promote strong and steady economic growth. In 2009, the trade deficit was near $400 billion, down from $705 billion in 2008, and from a high of $804 billion in 2006. A large portion of the decrease is the result of the strong dampening effect of the recent recession on U.S. import purchases and could be quickly reversed with economic recovery. 

The U.S. dollar fell about 23% from 2002 through 2009 as foreign investors gradually shifted away from dollar assets. This depreciation of the dollar was a principal reason for the trade deficits decrease in 2007 and 2008. If foreign investors continue to move out of dollar assets, the dollar would likely continue to depreciate, providing more downward impulse on the trade 

A falling trade deficit would help sustain economic recovery, but the associated reduction of the inflow of foreign capital could raise the borrowing cost faced by households, businesses , and government. Continued uncertainty in financial markets and economic weakness in the United States and abroad make the prospect for trade deficit and the dollar in 2010 difficult to judge.


Date of Report: January 11, 2010
Number of Pages: 4
Order Number: IS40400
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CRS Issue Statement on Bilateral and Regional Trade Agreements

J. F. Hornbeck, Coordinator
Specialist in International Trade and Finance

Congress has constitutional authority over the formation and oversight of U.S. trade policy, and one of its most important responsibilities is consideration of legislation related to reciprocal bilateral and regional free trade agreements (FTAs). The congressional role is comprehensive, with broad legislative and oversight responsibilities. Congress provides authority to the President to negotiate and enter into FTAs, approves and implements them, authorizes trade adjustment assistance, trade capacity building, and other programs to facilitate the administration of FTAs, and monitors the success of trade agreements in meeting congressional objectives. Evaluating the trade agreements process in its entirety is an ongoing priority for Congress. 

A holdover issue from the first session is the possible consideration of three reciprocal bilateral FTAs with Panama, Colombia, and South Korea. Despite expressing support for these FTAs, the Obama Administration has yet to arrange with Congress for the introduction of implementing bills. Each FTA contains labor and environment chapters consistent with a formal bipartisan agreement reached on May 10, 2007, but congressional movement on them continues to languish. The proposed FTA with Colombia has been the most contentious because of recurring internal violence, including attacks against labor union representatives. The proposed U.S.-Panama FTA has been delayed over Panama's labor and tax laws. Congressional concern over trade in automobiles and beef has hampered consideration of the U.S.-Korean FTA. Resolving these issues to the satisfaction of a majority in Congress has proven difficult and the outcome on these FTAs may point to the direction trade policy may be headed in the future.


Date of Report: January 15, 2010
Number of Pages: 4
Order Number: IS40399
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Government Interventions in Response to Financial Turmoil

Baird Webel
Specialist in Financial Economics

Marc Labonte
Specialist in Macroeconomic Policy

In August 2007, asset-backed securities, particularly those backed by subprime mortgages, suddenly became illiquid and fell sharply in value as an unprecedented housing boom turned to a housing bust. Financial firms eventually wrote down these losses, depleting their capital. Uncertainty about future losses on illiquid and complex assets led to some firms having reduced access to private liquidity, with the loss in liquidity being fatal in some cases. In September 2008, the financial crisis reached panic proportions, with some large financial firms failing or having the government step in to prevent their failure. 

Initially, the government approach was largely an ad hoc one, attempting to address the problems at individual institutions on a case-by-case basis. The panic in September 2008 convinced policy makers that a more system-wide approach was needed, and Congress created the Troubled Asset Relief Program (TARP) in October 2008. In addition to TARP, the Federal Reserve (Fed) and Federal Deposit Insurance Corporation (FDIC) implemented broad lending and guarantee programs. Because the crisis had so many causes and symptoms, the response tackled a number of disparate problems, and can be broadly categorized into programs that (1) increased financial institutions' liquidity; (2) provided capital directly to financial institutions for them to recover from asset write-offs; (3) purchased illiquid assets from financial institutions in order to restore confidence in their balance sheets; (4) intervened in specific financial markets that had ceased to function smoothly; and (5) used public funds to prevent the failure of troubled institutions that were deemed "too big to fail" because of their systemic importance. 

The primary goal of the various interventions was to end the financial panic and restore normalcy to financial markets. By this measure, the programs were arguably a success—financial markets are largely functioning again, although access to credit is still limited for many borrowers over a year later. The goal of intervening at zero cost to the taxpayers was never realistic, at least initially, or meaningful, since non-intervention would likely have led to a much more costly loss of economic output that indirectly would have worsened the government's finances. Nevertheless, an important part of evaluating the government's performance is whether financial normalcy was restored at a minimum cost to the taxpayers. 

Initial government outlays are a poor indicator of taxpayer exposure since outlays were used to acquire or guarantee income-earning debt or equity that can eventually be repaid or sold. For broadly available facilities accessed by financially sound institutions, the risk of default became relatively minor once financial normalcy was restored. At this point, many of the programs that were introduced have either expired or are already shrinking. For these programs, one can estimate with relative confidence approximately how much the programs will ultimately cost (or generate income for) the taxpayers. For a few programs that are still growing in size, and for assistance to firms that are still relying on government support to function, estimates of ultimate gains or losses are more uncertain. The Congressional Budget Office and Office of Management and Budget estimate that most of the government's expected losses are concentrated in a few "too big to fail" firms, such as American International Group (AIG), Fannie Mae, Freddie Mac, and the domestic automakers. Other programs show small expected losses or gains. 

This report reviews new programs introduced and other actions taken by the Treasury, Federal Reserve, and Federal Deposit Insurance Corporation. It does not cover longstanding programs such as the Fed's discount window and FDIC receivership of failed banks.


Date of Report: February 1, 2010
Number of Pages: 44
Order Number: R41073
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Business Investment and Employment Tax Incentives to Stimulate the Economy

Thomas L. Hungerford
Section Research Manager

Jane G. Gravelle
Senior Specialist in Economic Policy

According to the Business Cycle Dating Committee of the National Bureau of Economic Research (NBER), the U.S. economy has been in recession since December 2007. Congress passed and the President signed an economic stimulus package, the American Recovery and Reinvestment Act of 2009 (P.L. 111-5), in February 2009. The $787 billion package included $286 billion in tax cuts to help stimulate the economy. Among the tax reductions, many were tax incentives directed to business. The preliminary estimate of fourth quarter real gross domestic product (GDP) growth is 5.7%; the unemployment rate, a lagging indicator, averaged 9.6% in the third quarter and 10.0% in the fourth quarter of 2009. Federal Reserve Chairman Ben Bernanke expects the economy to continue growing at a modest pace, but predicts that bank lending will remain constrained and the job market will remain weak into at least 2010. To further assist unemployed workers, help business, and stimulate housing markets, Congress passed the Worker, Homeownership, and Business Assistance Act of 2009 (P.L. 111-92). The Obama Administration has advocated further business tax incentives to spur investment and employment, especially for small business. 

The two most common measures to provide business tax incentives for new investment are investment tax credits and accelerated deductions for depreciation. The evidence, however, suggests that a business tax subsidy may not necessarily be the best choice for fiscal stimulus, largely because of the uncertainty of its success in stimulating aggregate demand. If such subsidies are used, however, the most effective short-run policy is probably a temporary investment subsidy. Permanent investment subsidies may distort the allocation of investment in the long run. 

Employment and wage subsidies are designed to increase employment directly by reducing a firm's wage bill. The tax system is a frequently used means for providing employment subsidies. Most of the business tax incentives for hiring currently under discussion are modeled partially on the New Jobs Tax Credit (NJTC) from 1977 and 1978. Evidence provided in various studies suggests that incremental tax credits have the potential of increasing employment, but in practice may not be as effective in increasing employment as desired. There are several reasons why this may be the case. First, jobs tax credits are often complex and many employers, especially small businesses, may not want to incur the necessary record-keeping costs. Second, since eligibility for the tax credit is determined when the firm files the annual tax return, firms do not know if they are eligible for the credit at the time hiring decisions are made. Third, many firms may not even be aware of the availability of the tax credit until it is time to file a tax return. Lastly, product demand appears to be the primary determinant of hiring.


Date of Report: February 1, 2010
Number of Pages: 18
Order Number: R41034
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CRS Issue Statement on Securities and Derivatives Regulation

Rena S. Miller, Coordinator
Analyst in Financial Economics

Mark Jickling
Specialist in Financial Economics

Gary Shorter
Specialist in Financial Economics

Michael V. Seitzinger
Legislative Attorney

Kathleen Ann Ruane
Legislative Attorney

The financial crisis revealed a number of regulatory failures in the securities and derivatives markets and sparked calls for dramatic change. In particular, the unregulated nature of the over-the-counter derivatives market and the rapid rise and collapse of the private securitization market exacerbated the financial crisis. The increasing importance in capital-raising from the "shadow banking sector," or non-bank financial intermediation between investors and borrowers, and its prominence in the financial crisis also highlighted gaps in securities and derivatives oversight. The propensity for price volatility in stocks, oil, and farm products, has further sparked concern about the adequacy of supervision of the commodities and derivatives markets. The international nature of the derivatives market in particular has raised concerns about a "race to the bottom" if tightened regulation is not effectively coordinated with other governments. 

The crisis also highlighted enforcement failures in the securities market, as the Madoff investment scandal, and additional frauds and insider-trading schemes, sparked a more aggressive enforcement approach at the Securities and Exchange Commission (SEC). The Commodity Futures Trading Commission (CFTC) was widely seen as ineffective during severe oil price volatility in 2008. In addition to possible reforms at these two agencies, and possible efforts to harmonize their overlapping regulation of derivatives, Congress is examining ways to change the financial regulatory structure, perhaps by merging some of the existing regulators into one or more "super-agencies."


Date of Report: January 19, 2010
Number of Pages: 3
Order Number: IS40384
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CRS Issue Statement on the Recession: Restoration of Financial and Credit Markets

Baird Webel, Coordinator
Specialist in Financial Economics

The current financial instability became widely apparent in the credit markets in August 2007. Although initially thought to be limited to subprime mortgages, increasing defaults on prime mortgages caused losses that rippled through the financial system. To a large degree, the system of financial intermediation has broken down, with the basic trust between institutions eroded to the point that previously routine trades were occurring only with high risk premiums, if they occurred at all. The effects have been particularly severe because U.S. mortgage-backed securities had previously been viewed as very low risk investments and were very widely held around the world. Thus, what was initially a slowdown in the U.S. housing markets has taken on global dimensions. 

Beginning in early 2008, multiple failures in large financial institutions prompted case-by-case government interventions to address these failures. Dissatisfaction with these ad hoc responses was cited by the Treasury in proposing a broader response focusing on government purchase of troubled mortgage-related assets, hoping to stem uncertainty and fear by removing these assets from the financial system. In early October 2008, Congress passed, and the President signed, the Emergency Economic Stabilization Act of 2008 (EESA, Division A of H.R. 1424/P.L. 110-343), creating the Troubled Assets Relief Program (TARP).


Date of Report: March 5, 2009
Number of Pages: 3
Order Number: IS40380
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CRS Issue Statement on Economic Recovery and Jobs

Jane G. Gravelle, Coordinator
Senior Specialist in Economic Policy

Although the economy appears to be recovering from the recession and some economic indicators suggest that growth has resumed, unemployment remains high and is projected to remain so for some time. Employers may be slow to rehire separated workers or hire new ones. Labor force participation has also declined, suggesting that some potential workers have become discouraged from seeking a job. 

Turmoil in the financial markets, which can be partially traced to a downturn in the housing market that led to difficulties in the subprime mortgage market, has significantly restricted credit. The effects of restricted credit have spread to the wider economy, leading to declines in output and increases in unemployment, and continues currently


Date of Report: January 25, 2010
Number of Pages: 3
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Foreign Direct Investment in the United States: An Economic Analysis

James K. Jackson
Specialist in International Trade and Finance

Foreign direct investment in the United States declined sharply after 2000, when a record $300 billion was invested in U.S. businesses and real estate. [Note: The United States defines foreign direct investment as the ownership or control, directly or indirectly, by one foreign person (individual, branch, partnership, association, government, etc.) of 10% or more of the voting securities of an incorporated U.S. business enterprise or an equivalent interest in an unincorporated U.S. business enterprise. 15 CFR § 806.15 (a)(1).] In 2008, according to Department of Commerce data, foreigners invested $325 billion. Foreign direct investments are highly sought after by many state and local governments that are struggling to create additional jobs in their localities. While some in Congress encourage such investment to offset the perceived negative economic effects of U.S. firms investing abroad, others are concerned about foreign acquisitions of U.S. firms that are considered essential to U.S. national and economic security. 

Foreigners invested $325 billion in U.S. businesses and real estate in 2008, according to data published by the Department of Commerce.1 As Figure 1 shows, this represents a sharp increase over the $237 billion invested in 2007. Investments abroad by U.S. parent firms fell slightly in 2008 to $318 billion, down from the $333 billion they invested abroad in 2007. The increase in foreign direct investment flows mirrors a turnaround in global flows. According to the United Nations' World Investment Report, global foreign direct investment inflows increased by 30% in 2007 and 38% in 2006. The data indicate that global foreign direct investment flows increased slightly in 2004 after three years of declining flows that arose from competitive international price pressures leading to greater internationalization of production, rising commodity prices, and increased international merger and acquisition activity in some areas.


Date of Report: February 4, 2010
Number of Pages: 9
Order Number: RS21857
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Foreign Investment in U.S. Securities

James K. Jackson
Specialist in International Trade and Finance

Foreign capital inflows are playing an important role in the U.S. economy by bridging the gap between domestic supplies of and demand for capital. In 2008, as the financial crisis and global economic downturn unfolded, foreign investors looked to U.S. Treasury securities as a "safe haven" investment, while they sharply reduced their net purchases of corporate stocks and bonds. In the first two quarters of 2009, foreign capital inflows dropped sharply, reflecting an increase in savings by households and businesses and a continued decrease in U.S. liabilities to foreigners reported by U.S. banks and securities firms. Foreign investors now hold more than 50% of the publicly held and traded U.S. Treasury securities. The large foreign accumulation of U.S. securities has spurred some observers to argue that this large foreign presence in U.S. financial markets increases the risk of a financial crisis, whether as a result of the uncoordinated actions of market participants or by a coordinated withdrawal from U.S. financial markets by foreign investors for economic or political reasons. 

Congress likely would find itself embroiled in any such financial crisis through its direct role in conducting fiscal policy and in its indirect role in the conduct of monetary policy through its supervisory responsibility over the Federal Reserve. Such a coordinated withdrawal seems highly unlikely, particularly since the vast majority of the investors are private entities that presumably would find it difficult to coordinate a withdrawal. The financial crisis and economic downturn, however, have sharply reduced the value of the assets foreign investors acquired, which may make them more hesitant in the future to invest in certain types of securities. As a result of the financial crisis of 2008, foreign investors curtailed their purchases of corporate securities, a phenomenon that was not unique to the United States. In a sense, the slowdown in the U.S. economy and rise in personal savings have eased somewhat the need for foreign investment. The importance of capital inflows may well change as the federal government's budget deficits rise over the course of the economic downturn.. This report analyzes the extent of foreign portfolio investment in the U.S. economy and assesses the economic conditions that are attracting such investment and the impact such investments are having on the economy. 

Economists generally attribute this rise in foreign investment to a number of factors, including "safe haven" investment during times of uncertainty; comparatively favorable returns on investments, a surplus of saving in other areas of the world, the well-developed U.S. financial system, and the overall stability and rate of growth of the U.S. economy. Capital inflows also allow the United States to finance its trade deficit because foreigners are willing to lend to the United States in the form of exchanging the sale of goods, represented by U.S. imports, for such U.S. assets as U.S. businesses and real estate, stocks, bonds, and U.S. Treasury securities. Despite improvements in capital mobility, foreign capital inflows do not fully replace or compensate for a lack of domestic sources of capital. Economic analysis shows that a nation's rate of capital formation, or domestic investment, seems to have been linked primarily to its domestic rate of saving. 

This report relies on a comprehensive set of data on capital flows, represented by purchases and sales of U.S. government securities and U.S. and foreign corporate stocks, bonds, into and out of the United States, that is reported by the Treasury Department on a monthly basis.


Date of Report: February 4, 2010
Number of Pages: 27
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Foreign Investment, CFIUS, and Homeland Security: An Overview

James K. Jackson
Specialist in International Trade and Finance

The President is generally seen as exercising broad discretionary authority over developing and implementing U.S. direct investment policy, including the authority to suspend or block investments that "threaten to impair the national security." Congress is also directly involved in formulating the scope and direction of U.S. foreign investment policy, and some Members are urging the President to be more aggressive in blocking certain types of foreign investments. Such confrontations reflect vastly different philosophical and political views between members of Congress and between Congress and the Administration over the role foreign investment plays in the economy and the role that economic activities should play in the context of U.S. national security policy. In July 2007, Congress asserted its own role in making and conducting foreign investment policy when it adopted and the President signed P.L. 110-49, the Foreign Investment and National Security Act of 2007. This law broadens Congress's oversight role, and it explicitly includes the areas of homeland security and critical infrastructure as separately identifiable components of national security that the President must consider when evaluating the national security implications of a foreign investment transaction. The act may well draw Congress into a greater dialogue, and possibly greater conflict, with the Administration over efforts to define the limits of the broad rubric of national economic security. 

The United States is the largest foreign direct investor in the world and also the largest recipient of foreign direct investment. By year-end 2008, foreign direct investment in the United States had reached $2.3 trillion and U.S. direct investment abroad had reached $3.2 trillion. This dual role means that globalization, or the spread of economic activity by firms across national borders, has become a prominent feature of the U.S. economy and that through direct investment the U.S. economy has become highly enmeshed with the broader global economy. 

The globalization of the economy also means that the United States has important economic, political, and social interests at stake in the development of international policies regarding direct investment. With some exceptions for national security,1 the United States has established domestic policies that treat foreign investors no less favorably than U.S. firms. In addition, the United States has led efforts over the past 50 years to negotiate internationally for reduced restrictions on foreign direct investment, for greater controls over incentives offered to foreign investors, and for equal treatment under law of foreign and domestic investors. In light of the terrorist attacks on the United States on September 11, 2001, however, some Members have questioned this open-door policy and have argued for greater consideration of the long-term impact of foreign direct investment on the structure and the industrial capacity of the economy, and on the ability of the economy to meet the needs of U.S. defense and security interests.


Date of Report: February 4, 2010
Number of Pages: 9
Order Number: RS22863
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Codes of Conduct for Multinational Corporations: An Overview

James K. Jackson
Specialist in International Trade and Finance

The U.S. economy has grown increasingly interconnected with other economies around the world, a phenomenon often referred to as globalization. As U.S. businesses expand globally, however, various groups across the social and economic spectrum have expressed their concerns over the economic, social, and political impact of this activity. Over the past 15 years, multinational corporations and nations have adopted voluntary, legally enforceable, and industry specific codes of conduct to address many of these concerns. Congress will continue to play a pivotal role in addressing the large number of issues regarding internationally applied corporate codes of conduct that remain to be negotiated.

Over the last decade, international flows of capital have skyrocketed. International flows in dollars, for instance, now total over $3.2 trillion per day, or more than the total annual amount of U.S. exports and imports of goods and services. These flows are the prime mover behind exchange rates and global flows of goods and services. One part of these flows is foreign direct investment, or investment in businesses and real estate. On a cumulative basis, direct investment now totals over $10 trillion world-wide, about 20% of which is associated with the overseas investment of U.S. firms, the largest share held by the firms of any nation. This type of investment spans all countries, industrial sectors, industries, and economic activities and has become a major conduit for goods, capital, and technology between the developed and the developing economies. Foreign direct investment has become a much needed source of funds for capital formation in developing countries and foreign investment accounts for important shares of employment, sales, income, and R&D spending in developing countries.


Date of Report: February 4, 2010
Number of Pages: 9
Order Number: RS20803
Price: $29.95

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CRS Issue Statement on Mortgage Markets and Regulation

Edward V. Murphy, Coordinator
Specialist in Financial Economics

Mortgage markets raise a number of issues of congressional concern, including consumer protection, bank safety and soundness, market liquidity, and systemic risk. Mortgage markets are the central mechanism for facilitating home ownership and for providing collateral for the loans of many thrifts and commercial banks. The financial regulators, including the Federal Reserve, the Office of Thrift Supervision, the Office of the Comptroller of the Currency, the Federal Deposit Insurance Corporation, and the National Credit Union Administration, are of continuing interest to Congress because of Congress's oversight role and the large amount of constituent mail devoted to the subject. Mortgage market practices such as underwriting standards, appraisal guidelines, and other issues can be influenced by the willingness of other institutions to fund mortgage lenders, including government-sponsored enterprises, investors in mortgage-related securities, and covered bonds. The ability of mortgage originators to shift risk to secondary institutions might indirectly influence the protection of consumers in mortgage markets, whether due to reduced safeguards against predatory lending or due to negligent underwriting.


Date of Report: January 21, 2010
Number of Pages: 3
Order Number: IS40352
Price: $7.95

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CRS Issue Statement on Investment Income Taxation

Thomas L. Hungerford, Coordinator
Specialist in Public Finance

Jane G. Gravelle
Senior Specialist in Economic Policy

Donald J. Marples
Specialist in Public Finance

Carol A. Pettit
Legislative Attorney

Patrick Purcell
Specialist in Income Security

Jennifer Teefy
Information Research Specialist

The U.S. economy's productive capacity depends on the quality and quantity of the capital stock, the quality and size of the labor force, and improvements in production techniques. The accumulation of capital goods occurs through investment; consequently, investment is an important determinant of long-term economic growth and economic well-being. Investment is also important to the process of how growth in the labor force is accommodated and how new technologies are introduced. Investment depends, to a great extent, on national saving. Many firms' investment in capital goods is financed, in part, by the sale of bonds or by new public stock issues. These financial assets (that is, the stocks and bonds) are purchased by households, mutual funds, and pension plans. Overall, the growth of financial assets corresponds closely to changes in the stock of capital goods.


Date of Report: January 19, 2010
Number of Pages: 3
Order Number: IS40337
Price: $7.95

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CRS Issue Statement on Insurance Regulatory Reform

Rawle O. King, Coordinator
Analyst in Financial Economics and Risk Assessment

The 111th Congress has shown interest in strengthening insurance supervision. Faced with rapidly changing economic conditions, U.S. insurance regulators and policymakers face a number of critical issues regarding the practices of all financial institutions—not just insurance. Congressional concerns stem partly from a perceived lack of adequate disclosure and inability of financial sector regulators to identify, in timely fashion, mounting risk in specific market sectors. Increased transparency could strengthen confidence in the integrity of financial transactions, thereby generating large and reliable transaction volumes resulting in more consistent overall liquidity.

Congress is considering post-crisis financial regulatory reforms that include the establishment of a new office within the Treasury Department to develop better information on insurance at the federal level and improve oversight of systemic risk. Congress is also considering ways to identify weaknesses in consumer financial protection and to streamline and modernize the statebased regulation of insurers, reinsurers, and surplus lines carriers.


Date of Report: January 22, 2010
Number of Pages: 3
Order Number: IS40332
Price: $7.95

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CRS Issue Statement on Indexation and COLAs

Brian W. Cashell, Coordinator
Specialist in Macroeconomic Policy

Gerald Mayer
Analyst in Labor Policy

Gary Sidor
Information Research Specialist

Even though inflation, for now, is subdued, in the long run it has been persistent. To insulate some aspects of the economy from the effects of rising prices, policymakers have established certain automatic adjustments that occur on a regular schedule. Among those amounts subject to automatic adjustments are federal payments such as social security benefits. In addition, some aspects of the tax code are adjusted annually to insulate taxpayers from inflation induced increases in effective tax rates.


Date of Report: January 19, 2010
Number of Pages: 2
Order Number: IS40329
Price: $7.95

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The Debt Limit: History and Recent Increases

D. Andrew Austin
Analyst in Economic Policy

Mindy R. Levit
Analyst in Public Finance

Total debt of the federal government can increase in two ways. First, debt increases when the government sells debt to the public to finance budget deficits and acquire the financial resources needed to meet its obligations. This increases debt held by the public. Second, debt increases when the federal government issues debt to certain government accounts, such as the Social Security, Medicare, and Transportation trust funds, in exchange for their reported surpluses. This increases debt held by government accounts. The sum of debt held by the public and debt held by government accounts is the total federal debt. Surpluses generally reduce debt held by the public, while deficits raise it. 

A statutory limit has restricted total federal debt since 1917 when Congress passed the Second Liberty Bond Act. Congress has voted to raise the debt limit ten times since 2001. Deficits each year since 2001 and the persistent increases in debt held by government accounts repeatedly raised the debt to or near the limit in place at the time. Congress raised the limit in June 2002, and by December 2002 the U.S. Department of the Treasury asked Congress for another increase, which was passed in May 2003. In June 2004, the Treasury asked for another debt limit increase. After Congress recessed in mid-October 2004 without acting, the Secretary of the Treasury told Congress that the actions he was taking to avoid exceeding the debt limit would suffice only through mid-November. Congress approved a debt limit increase in a post-election session, which the President signed on November 19, 2004. 

In 2005, reconciliation instructions in the FY2006 budget resolution (H.Con.Res. 95) included a debt limit increase. With no action having been taken by December 2005, the Secretary of the Treasury sent several letters warning Congress that the Treasury would exhaust its options to avoid default by mid-March 2006. Congress passed an increase in mid-March, which the President signed on March 20. The House's adoption of the conference report on the FY2008 budget resolution in the spring of 2007 automatically created and deemed passed legislation (H.J.Res. 43) raising the debt limit by $850 billion to $9,815 billion. The Senate approved the resolution on September 27, 2007, and it was signed by the President two days later. 

The current economic slowdown led to sharply higher estimates of the FY2008 and FY2009 deficits, which led to a series of debt limit increases. A debt limit increase was included in the Housing and Economic Recovery Act of 2008 (H.R. 3221) and signed into law (P.L. 110-289) on July 30. The Emergency Economic Stabilization Act of 2008 (H.R. 1424), signed into law on October 3 (P.L. 110-343), raised the debt limit again. The debt limit was increased for the third time in less than a year with the passage of American Recovery and Reinvestment Act of 2009 on February 13, 2009 (ARRA; H.R. 1), which was signed into law on February 17, 2009 (P.L. 111- 5), which raised the debt limit to $12,104 billion. 

The House's adoption of the conference report on the FY2010 budget resolution (S.Con.Res. 13) on April 29, 2009, triggered the automatic passage of a measure (H.J.Res. 45) to raise the debt limit to $13.029 trillion. In August 2009, according to media reports, Treasury said that the debt limit would be reached in mid-October, although the Treasury later stated that the limit would not be reached until mid or late December 2009. H.R. 4314, passed by the House on December 16, 2009, and by the Senate on December 24, raised the debt limit to $12.394 trillion when the President signed the measure (P.L. 111-123) on December 28. On January 28, the Senate passed an amended version of H.J.Res. 45, which the House passed on February 4. This report, written with the assistance of Joseph McCormack, will be updated as events warrant.


Date of Report: February 4, 2010
Number of Pages: 25
Order Number: RL31967
Price: $29.95

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Trade Agreements: Impact on the U.S. Economy

James K. Jackson
Specialist in International Trade and Finance

The United States is in the process of considering a number of trade agreements. In addition, the 111th Congress may address the issue of trade promotion authority (TPA), which expired on July 1, 2007. These agreements range from bilateral trade agreements with countries that account for meager shares of U.S. trade to multilateral negotiations that could affect large numbers of U.S. workers and businesses. During this process, Congress likely will be presented with an array of data estimating the impact of trade agreements on the economy, or on a particular segment of the economy.

An important policy tool that can assist Congress in assessing the value and the impact of trade agreements is represented by sophisticated models of the economy that are capable of simulating changes in economic conditions. These models are particularly helpful in estimating the effects of trade liberalization in such sectors as agriculture and manufacturing where the barriers to trade are identifiable and subject to some quantifiable estimation. Barriers to trade in services, however, are proving to be more difficult to identify and, therefore, to quantify in an economic model. In addition, the models are highly sensitive to the assumptions that are used to establish the parameters of the model and they are hampered by a serious lack of comprehensive data in the services sector. Nevertheless, the models do provide insight into the magnitude of the economic effects that may occur across economic sectors as a result of trade liberalization. These insights are especially helpful in identifying sectors expected to experience the greatest adjustment costs and, therefore, where opposition to trade agreements is likely to occur.

This report examines the major features of economic models being used to estimate the effects of trade agreements. It assesses the strengths and weaknesses of the models as an aid in helping Congress evaluate the economic impact of trade agreements on the U.S. economy. In addition, this report identifies and assesses some of the assumptions used in the economic models and how these assumptions affect the data generated by the models. Finally, this report evaluates the implications for Congress of various options it may consider as it assesses trade agreements.


Date of Report: February 4, 2010
Number of Pages: 24
Order Number: RL31932
Price: $29.95

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U.S. Trade and Investment Relationship with Sub-Saharan Africa: The African Growth and Opportunity Act

Vivian C. Jones
Specialist in International Trade and Finance

Following the end of the apartheid era in South Africa in the early 1990s, the United States sought to increase economic relations with Sub-Saharan Africa. President Clinton instituted several measures that dealt with investment, debt relief, and trade. Congress required the President to develop a trade and development policy for Africa. 

The economic challenges facing Africa today are serious. Unlike the period from 1960 to 1973, when economic growth in Sub-Saharan Africa was relatively strong, since 1973 the countries of Sub-Saharan Africa have grown at rates well below other developing countries. There are some signs of improvement, but problems such as HIV/AIDS and the debt burden are constraining African economic growth. The global economic crisis and its aftermath have also profoundly affected the region. 

In May 2000, Congress approved a new U.S. trade and investment policy for Sub-Saharan Africa in the African Growth and Opportunity Act (AGOA; Title I, P.L. 106-200). U.S. trade with and investment in Sub-Saharan Africa have comprised only 1%-2% of U.S. totals for the world. AGOA extends preferential treatment to imports from eligible countries that are pursuing market reform measures. Data show that U.S. imports under AGOA are mostly energy products, but imports to date of other products have grown. AGOA mandated that U.S. officials meet regularly with their counterparts in Sub-Saharan Africa, and six of these meetings have been held. 

AGOA also directed the President to provide U.S. government technical assistance and trade capacity support to AGOA beneficiary countries. Government agencies that have roles in this effort include the U.S. Agency for International Development, the Assistant U.S. Trade Representative for Africa (established by statute under AGOA), the Overseas Private Investment Corporation, the Export-Import Bank, the U.S. and Foreign Commercial Service, and the Trade and Development Agency. In addition to bilateral programs, the United States is a member of several multilateral institutions that provide trade capacity building. 

In AGOA, Congress declared that free-trade agreements should be negotiated, where feasible, with interested Sub-Saharan African countries. Related to this provision, negotiations on a freetrade agreement with the Southern African Customs Union, which includes South Africa and four other countries, began in June 2003, but were suspended in April 2006. 

Several topics may be important to the 111th Congress in the oversight of AGOA and in potential legislation amending the act. First, S. 1141 (Feinstein, introduced May 21, 2009, the TRADE Act of 2009) seeks to establish a trade preference program for least-developed countries such as Afghanistan, Bangladesh, and Yemen. Second, an emerging area of concern for Sub-Saharan African countries is growing interest in Congress over reforming trade preference programs by combining existing programs, some of which are due to expire at the end of 2010, into a unified package. H.R. 4101 (McDermott, introduced November 18, 2009) proposes such an approach. Some African leaders have expressed concern that a preference program giving trade benefits similar to those enjoyed by AGOA countries, or creating one trade preference program for all developing countries, would lead to erosion of the preferences granted to African countries under AGOA, and place them in direct competition for U.S. market share and investment with other developing and least-developed countries such as Bangladesh and Cambodia. 


Date of Report: February 4, 2010
Number of Pages: 35
Order Number: RL31772
Price: $29.95

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Social Security Benefits for Noncitizens

Dawn Nuschler
Specialist in Income Security

Alison Siskin
Specialist in Immigration Policy

Concerns about the number of unauthorized (illegal) aliens residing in the United States and the totalization agreement with Mexico have fostered considerable interest in the eligibility of noncitizens for U.S. Social Security benefits. The Social Security program provides monthly cash benefits to qualified retired and disabled workers, their dependents, and survivors. Generally, a worker must have 10 years of Social Security-covered employment to be eligible for retirement benefits (less time is required for disability and survivor benefits). Most U.S. jobs are covered under Social Security, and as a result, noncitizens who are authorized to work in the United States are eligible for a Social Security number (SSN). Noncitizens who work in Social Securitycovered employment must pay Social Security payroll taxes, including those who are in the United States working temporarily or without authorization. There are some exceptions. Generally, the work of aliens who are citizens of a country with which the United States has a "totalization agreement," coordinating the payment of Social Security taxes and benefits for workers who divide their careers between two countries, is not covered if they work in the United States for less than five years. Also, by statute, the work of aliens under certain visa categories is not covered by Social Security. 

The Social Security Protection Act of 2004 (P.L. 108-203) requires an alien whose application for benefits is based on an SSN assigned January 1, 2004, or later to have work authorization at the time an SSN is assigned, or at some later time, to gain insured status under the Social Security program. Aliens whose applications are based on SSNs assigned before January 1, 2004, may count all covered earnings toward insured status, regardless of work authorization. The Social Security Act also prohibits the payment of benefits to aliens in the United States who are not "lawfully present"; however, under certain circumstances, alien workers as well as their dependents and survivors may receive benefits while residing outside the United States (including benefits based on unauthorized work). 

In June 2004, the United States and Mexico signed a totalization agreement. In early 2007, a copy of the agreement was made publicly available. The agreement has not been transmitted to Congress for review and has not been finalized. Currently, because Mexico meets the "social insurance country" definition, a Mexican worker may receive U.S. Social Security benefits outside the United States. Family members of the Mexican worker must have lived in the United States for at least five years to receive benefits in Mexico. The agreement does not waive the requirements that aliens in the United States must be lawfully present to receive benefits in the United States, and that aliens must have work authorization at some time to gain insured status, but would allow payment of benefits to alien dependents and survivors who have never lived in the United States. The Social Security Administration reports that the projected cost of the agreement would average $105 million annually over the first five years. The Government Accountability Office reports that "the cost of [the] totalization agreement ... is highly uncertain" due to the large number of unauthorized aliens from Mexico estimated to be living in the United States. 

This report will be updated as legislative activity occurs or other events warrant.


Date of Report: February 2, 2010
Number of Pages: 29
Order Number: RL32004
Price: $29.95

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