United States Government Accountability Office

GAO Report to the Chairman, Committee on 

Ways and Means, House of 

Representatives 

DEBT 

MANAGEMENT 

Backup Funding 

Options Would 

Enhance Treasury’s 

Resilience to a 

Financial Market 

Disruption 

September 2006 

 

GAO-06-1007 
What GAO Found

United States Government Accountability Office

Why GAO Did This Study

Highlights

Accountability Integrity Reliability

September 2006

DEBT MANAGEMENT

Backup Funding Options Would Enhance 

Treasury’s Resilience to a Financial 

Market Disruption 

Highlights of GAO-06-1007, a report to the 

Chairman, Committee on Ways and 

Means, House of Representatives 

The September 11, 2001, attacks 

significantly affected the financial 

markets that the U.S. Treasury 

(Treasury) relies on. To 

understand how Treasury could

obtain funds during a future

potential wide-scale financial 

market disruption GAO examined

(1) steps Treasury and others took 

during the September 11 attacks

and after to assure required debt

obligations and payments were

made on time and ensure liquidity 

in the markets, (2) major actions 

Treasury and others have taken 

since the attacks to increase the

resiliency of the auction process, 

and (3) the opinions of relevant

parties on the main design features 

of any backup funding options. We 

conducted interviews with

Treasury officials and others and 

reviewed appropriate documents. 

What GAO Recommends

We recommend that the Secretary 

of the Treasury examine the 

requirements for establishing a line

of credit and a private placement of

a CM bill and select the most 

appropriate option(s) as a first tier. 

As a second tier, Congress should 

consider allowing the Federal 

Reserve to lend directly to the 

Treasury during a wide-scale 

disruption using a carefully crafted 

last resort funding option. Both 

Treasury and the Federal Reserve

agreed that Treasury should 

examine the first-tier options. 

Neither took a position on the 

second tier, but both emphasized

the importance of maintaining the

independence of the central bank. 

In response to the effects of the September 11 attacks on the financial 

markets, Treasury canceled a scheduled 4-week bill auction after 

communicating with the Federal Reserve Bank of New York (FRBNY). 

Treasury then used compensating balances from banks across the country to 

help meet its obligations on time. Compensating balances were replaced by

direct payments in 2004. Also, in response to the attacks’ financial effects, 

the Federal Reserve lent billions of dollars to both domestic and foreign 

financial institutions through a combination of methods to help markets 

recover. Federal Reserve actions and market behavior in the aftermath of 

the September 11 attacks are informative when considering potential 

alternative funding sources for Treasury during a future wide-scale financial 

market disruption. 

Treasury, the Federal Reserve, and primary dealers have added contingency

sites and systems intended to increase the resilience of the auction process. 

Regardless of resiliency efforts, the nature and impact of a potential future 

wide-scale disruption are unknown. In addition, Treasury has at least one 

less source of cash since the compensating balances Treasury relied upon 

during the September 11 attacks are no longer used. Finally, Treasury’s cash 

management policy of minimal cash balances to lower borrowing costs 

further limits Treasury’s access to cash during a wide-scale disruption. All 

these factors make it prudent for Treasury to explore other funding 

alternatives to use during a wide-scale disruption. Relevant parties with 

whom we spoke, including primary dealers, agreed. They also generally 

agreed on a list of main design features including source of funds, situations 

for use, approvals, and costs, among others, that should be considered when 

weighing alternative funding options. 

Discussions with Treasury, the Federal Reserve, and other relevant parties 

have led GAO to conclude that a two-tiered approach is promising. The first 

tier consists of two funding options involving a range of appropriate 

financial institutions, namely a credit line and a private placement of a 

flexible security known as a cash management (CM) bill. The second tier 

involves a direct draw from the Federal Reserve that would provide Treasury 

a last resort source of funds when other options are not viable. A credit line 

with several financial institutions would involve a prior transparent 

commitment or understanding by certain financial institutions to provide 

funds to Treasury. A private placement of a CM bill would involve a prior 

arrangement to issue a CM bill after communicating with certain senior 

executives at financial institutions who would have the ability and authority 

to meet Treasury’s immediate funding needs. Finally, a direct draw from the 

Federal Reserve would require a change in the law to allow the Federal

Reserve to directly lend to Treasury. Appropriate limitations, adequate 

flexibility, and accountability would have to be included in the design. 

www.gao.gov/cgi-bin/getrpt?GAO-06-1007.

To view the full product, including the scope 

and methodology, click on the link above. 

For more information, contact Susan J. Irving 

at (202) 512-9142 or irvings@gao.gov. 
Contents 

Letter 1

Results in Brief 2 

Background 5

Objectives, Scope, and Methodology 8 

Treasury Canceled an Auction and Used Certain Cash Balances to 

Help Meet Its Obligations during the Week of September 11, 

2001 10

Compensating Balances Are No Longer Used 13 

The Federal Reserve Used a Number of Methods to Provide 

Liquidity to Domestic and Foreign Financial Institutions 14 

Since the Attacks, Treasury and the Federal Reserve Have Added 

Staffed Locations and Data System Capability Intended to 

Increase Auction Resilience 18 

Primary Dealers Have Taken Actions Intended to Increase Their 

Resilience and Treasury Has Suggested Additional 

Improvements 23

Despite Actions Intended to Increase Auction Resilience, Exploring 

Funding Alternatives Outside of the Auction Process Is 

Appropriate 25

Relevant Parties Validated Design Features and a Potential Tiered 

Approach to Treasury Funding Options Has Emerged from 

Discussions 25

Conclusion 31

Recommendations for Executive Action 32 

Matters for Congressional Consideration 33 

Agency Comments 33 

Appendix I Cost and Complexity Rule Out Other Options 

That Were Discussed 35 

Appendix II Background on Previous Treasury Draw 

Authorities 37 

Appendix III Comments from the Department of the Treasury 47 

Page i GAO-06-1007 Debt Management
Appendix IV Comments from the Board of Governors of the 

Federal Reserve System 49 

Appendix V GAO Contact and Staff Acknowledgments 51 

Tables 

Table 1: Matrix Treasury Presented to Dealers on Potential 

Responses to Contingencies 22 

Table 2: Design Features of 1979 Cash and Securities Draw 

Authorities 38

Figures 

Figure 1: Treasury Acted to Ensure Funding after the September 11 

Attacks 10

Figure 2: Four Major Processes Must Be Performed for Treasury to 

Receive Its Cash After Announcement 19 

Figure 3: Current Operations of the Auction and Issuance of 

Marketable Treasury Securities 20 

Figure 4: Concentrated Use of Cash Draw Authority 1942-1981 

(Days Federal Reserve Held Special Short-Term Treasury 

Certificates) 40

Figure 5: Borrowing Concentrated Around Tax Payment Months 

1942-1981 (Days Federal Reserve Held Special ShortTerm Treasury Certificates) 41 

Figure 6: Cash and Securities Draw Authority Transactions 43 

This is a work of the U.S. government and is not subject to copyright protection in the 

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other material, permission from the copyright holder may be necessary if you wish to 

reproduce this material separately. 

Page ii GAO-06-1007 Debt Management
United States Government Accountability Office

Washington, DC 20548 

September 26, 2006 

The Honorable William M. Thomas 

Chairman 

Committee on Ways and Means 

House of Representatives 

Dear Mr. Chairman: 

The massive destruction caused by the September 11, 2001, attacks on the 

World Trade Center and the resulting loss of life, facilities, 

telecommunications, and power significantly affected U.S. financial 

markets, including the markets for U.S. Treasury (Treasury) securities. 

The attacks exposed the vulnerability to a serious wide-scale disruption1

 of 

the markets that Treasury relies on as a regular source for financing 

government operations and large, regularly occurring payments such as 

Social Security benefits. In response to the attacks, Treasury canceled a 

scheduled auction of 4-week bills on September 11 and used compensating 

balances—noninterest-bearing cash balances used to compensate banks 

for various services—to help meet its obligations on time. 

However, compensating balances are no longer used. In addition, 

Treasury’s cash management policy is to maintain minimal cash balances

in order to lower borrowing costs. We reported earlier this year that the

combination of a minimal cash balance policy and the unavailability of 

previous methods for accessing cash warrant closer attention to 

Treasury’s ability to raise cash—and ultimately meet federal payment 

obligations—should normal auctions be unavailable in the event of 

another wide-scale disruption to financial markets.2

In your continuing interest in how Treasury borrows the money required

to finance the federal government and in recognition of the risks of a wide-

 1

 We broadly refer to a wide-scale disruption as an event that causes a severe disruption or 

destruction of critical infrastructure components across a geographic area or that results in

a wide-scale evacuation or inaccessibility of certain areas. 

2

 GAO, Debt Management: Treasury Has Refined Its Use of Cash Management Bills but 

Should Explore Options That May Reduce Cost Further, GAO-06-269 (Washington, D.C.: 

Mar. 30, 2006). 

Page 1 GAO-06-1007 Debt Management
scale financial market disruption, you asked us how Treasury might obtain 

funds should normal financial market operations be significantly degraded 

or closed due to a catastrophic emergency. Specifically, we examined 

(1) steps Treasury and the Federal Reserve took during the week of the 

September 11, 2001, attacks and during the weeks following the attacks to 

assure required debt obligations and payments were made on time and 

ensure liquidity in the financial markets, (2) major actions Treasury, the 

Federal Reserve, and primary dealers have taken since the September 11 

attacks to increase the resiliency of Treasury’s auction process and 

participation, and (3) the opinions of relevant parties3

 on the main design 

features of any cash draw authority and how the features would affect 

accountability and congressional oversight, enhance Treasury’s 

operations, affect Federal Reserve operations, and influence the views of

capital market participants. 

Treasury canceled a 4-week bill auction and used certain cash balances to 

help meet its obligations during the week of the September 11, 2001, 

attacks. Also in response to the attacks’ financial effects, the Federal 

Reserve provided large amounts of liquidity4

 to financial institutions. Since 

the attacks, Treasury and the Federal Reserve have added staffed 

locations and data systems capability for critical auction functions. 

Primary dealers—who are awarded a large proportion of Treasury 

securities at auction—have also taken actions intended to increase their 

resiliency. Regardless of actions taken to increase resiliency, exploring 

other funding options is appropriate and a promising two-tiered approach

that would provide Treasury additional access to cash during a wide-scale

disruption has emerged.

Results in Brief 

To make up for the cash shortfall associated with the cancellation of the 

4-week bill auction in 2001, Treasury used compensating balances, which 

were subsequently eliminated in 2004,5

 to help meet its obligations on time. 

 3

 Relevant parties include Treasury and Federal Reserve officials and staff, and capital 

market participants such as traders, senior executives of financial institutions, and trade 

association executives. We also had discussions with congressional staff regarding 

oversight. 

4

 The term liquidity is used broadly here to encompass cash and credit in hand and

promises of credit to meet needs for cash. 

5

 Although Treasury’s authority to use compensating balances has not been eliminated, it 

no longer uses compensating balances to pay for financial agent services. It now directly

pays for services, which it says improves cash management. 

Page 2 GAO-06-1007 Debt Management
It resumed auctions within a week and replaced compensating balances 

within 10 business days of the attacks. 

In the days following the attacks, the Federal Reserve expanded liquidity, 

providing billions of dollars to domestic and foreign financial institutions 

through open market operations, securities lending transactions, discount 

window lending, and other actions.6

 As Treasury considers an alternative 

source of cash during a possible future wide-scale disruption, it should be

cognizant that the Federal Reserve was, is, and potentially will be a 

significant source of liquidity for many financial institutions in a crisis. 

Since the September 11 attacks, Treasury and the Federal Reserve, acting

as Treasury’s fiscal agent, have staffed additional operational locations7

and added data systems capability intended to increase auction resilience. 

Treasury and the Federal Reserve have added locations in different 

geographic regions from their primary locations for all four critical auction 

functions. Treasury periodically tests sites during live auctions, conducts

mock auctions, and stipulates that if it cannot conduct any disrupted 

auction within an hour of the originally scheduled time it will 

communicate information to market participants as it becomes available. 

Primary dealers have also taken actions to increase resiliency. All primary 

dealers have contingency sites and most have systems that link directly to

Treasury’s auction systems at their contingency sites. Because of the 

nature of financial markets, almost all primary dealer contingency 

locations are well within the same geographic regions as their primary 

sites and most dealers plan on staff relocating to their contingency sites. 

Regardless of the progress of resiliency efforts, the nature and impact of a 

potential future wide-scale disruption remain unknown. In addition, since 

compensating balances were eliminated in 2004, Treasury has at least one 

less source of funds on which to rely. Finally, Treasury’s cash management 

policy of minimal cash balances to lower borrowing costs further limits 

Treasury’s access to cash during a wide-scale disruption. The combination 

of these factors makes it prudent for Treasury to explore other funding 

 6

 The discount window is the lending mechanism used by Federal Reserve banks to lend

funds to depository institutions on a short-term basis to cover temporary liquidity needs or

reserve deficiencies. 

7

 An operational location is a site that is staffed and has systems operating during the 

routine performance of the function. 

Page 3 GAO-06-1007 Debt Management
alternatives to use during a wide-scale disruption. Relevant parties with 

whom we spoke, including primary dealers, agreed. 

These parties also generally agreed that the main design features that 

should be considered when weighing alternative funding options include 

situations for use, type of collateral, transaction type, approvals, costs, 

amount limit, time limit, inclusion under the debt ceiling, disclosure, and 

length of authority (if required). However, the specifics would depend on 

the proposed options. 

Discussions with Treasury and Federal Reserve officials and other 

relevant parties have led us to conclude that a two-tiered approach could 

enhance Treasury’s ability to obtain funds during a wide-scale disruption. 

The first tier consists of two funding options involving a range of 

appropriate financial institutions, namely a credit line and a private 

placement of a cash management (CM) bill. The second tier involves a 

direct draw from the Federal Reserve that would provide Treasury a last 

resort source of funds when other options are not viable. 

We recommend that the Secretary of the Treasury determine the main 

design features and examine any implementation requirements for 

establishing a line of credit and a private placement of a CM bill with a 

range of appropriate private sector financial institutions for use during a 

wide-scale disruption, and select the most appropriate option(s). In 

addition, Congress should consider establishing an explicit, carefully 

crafted, last resort draw authority to permit the Federal Reserve to lend 

directly to the Treasury. This authority should be limited to situations in 

which all other funding options are not viable during a wide-scale 

disruption. 

In written comments on a draft of this report, both Treasury and the 

Federal Reserve agreed that Treasury should examine the first-tier funding 

options described in this report. Although neither took a position on our 

suggestion that Congress should consider permitting the Federal Reserve 

to lend directly to the Treasury, both emphasized the importance of 

maintaining the independence of the central bank. For example, Treasury 

stated that it, “is generally opposed to arrangements in which 

governments, at their discretion, can borrow directly from their central 

bank as such arrangements compromise the independence of the central

bank.” As our report notes, we also recognize the importance of 

maintaining the independence of the central bank and suggest an 

approach that we believe provides both flexibility and reduces the 

vulnerability to abuse. Both Treasury and Federal Reserve Board staff also 

Page 4 GAO-06-1007 Debt Management
provided technical comments which we incorporated as appropriate. Their 

letters are reprinted in appendix III and appendix IV respectively. 

The September 2001 terrorist attacks and the subsequent collapse of the 

twin World Trade Center towers damaged more than 400 structures across 

a 16-acre area, and claimed almost 2,800 lives. Financial services industry 

employees accounted for about 74 percent of the victims. Dust and debris

blanketed the area, creating difficult and hazardous conditions that 

complicated recovery efforts. Many financial organizations lost 

telecommunications service when the 7 World Trade Center building 

collapsed and debris struck a major Verizon central switching office that 

served approximately 34,000 businesses and residences.8

 Over 13,000 

customers also lost power. To accommodate the rescue and recovery 

efforts and maintain order, pedestrian and vehicle access to the area 

encompassing the financial district was restricted through September 13, 

2001.

9

Background 

The attacks severely disrupted the secondary markets for government 

securities and money market instruments primarily because of the impact 

on the brokers that facilitate trading among dealers (broker-dealers) and 

on one of the clearing banks for those trades. Two banks—the Bank of 

New York (BONY) and JPMorganChase—provided clearing and settlement 

services (and still do) for many major broker-dealers in the government 

securities market. Clearing banks transferred funds and securities for their 

customers that purchased or sold government securities based on 

instructions received by the Government Securities Clearing Corporation 

(GSCC).10 As a result of the attacks, BONY had difficulty reestablishing its 

connections with GSCC and its own account at the Federal Reserve, and

its customers had difficulties connecting with BONY. These problems 

contributed to the disruption of the secondary government securities 

 8

 When this Verizon facility was damaged, about 182,000 voice circuits, more than 1.6

million data circuits, and more than 11,000 lines serving Internet service providers were 

lost.

9

 GAO, Potential Terrorist Attacks: Additional Actions Needed to Better Prepare Critical 

Financial Market Participants, GAO-03-414 (Washington, D.C.: Feb. 12, 2003). 

10 Broker-dealers submitted trade information to GSCC, which compared and netted this 

information and sent settlement information to clearing banks, such as BONY and 

JPMorganChase. In 2003, GSCC merged into the Fixed Income Clearing Corporation, 

which now handles the clearing and settlement of U.S. government securities for its 

member firms. 

Page 5 GAO-06-1007 Debt Management
market. BONY had to evacuate four facilities, including its primary 

telecommunications data center and over 8,300 staff, because they were 

located near the World Trade Center. By September 14 BONY 

reestablished connectivity with GSCC and began receiving and 

transmitting instructions for securities transfers.11

Both the Federal Reserve’s Fedwire Securities Service, which provides 

safekeeping, transfer, and settlement services for securities issued by 

Treasury and other federal agencies, and its Fedwire Funds Service, which 

provides payments services associated with securities sales and other 

large-value transactions, continued processing transactions without 

interruption. Although the Federal Reserve Bank of New York (FRBNY), 

which manages the Fedwire services, sustained damage to some 

communication lines, the Fedwire services were not interrupted because 

the facilities that process transactions were not located in lower 

Manhattan. Over 30 banks initially lost connectivity to Fedwire services, 

but most were able to reestablish connections through backup systems, 

and most payment system operations continued with minimal disruption. 

The Federal Reserve, Treasury, and primary dealers all play important 

roles in Treasury auctions. The Federal Reserve and its associated Federal

Reserve banks function as the United States government’s fiscal agent and 

perform a variety of services for the Treasury including handling Treasury 

auctions, accepting bids, communicating bids to Treasury, issuing 

Treasury securities to winning bidders, and collecting payment for 

securities. 

Treasury borrows the money needed to operate the federal government 

and manages the government’s outstanding debt subject to a statutory 

limit.12 Treasury’s primary debt management goal is to finance the 

government’s borrowing needs at the lowest cost over time. To meet this 

objective, Treasury issues debt through auctions in a “regular and 

predictable” pattern across a wide range of securities. Treasury publishes 

a schedule with tentative announcement,13 auction, and settlement (issue) 

dates up to 6 months in advance of regular security auctions. Depending 

 11 GAO-03-414. 

12 Treasury’s authorities are codified in chapter 31 of title 31 of the United States Code. 

13 The tentative auction schedule provides the date but not the actual amount of an auction, 

which Treasury provides in an announcement generally a few days prior to auction. 

Page 6 GAO-06-1007 Debt Management
on the type of security, Treasury typically auctions and then issues a 

security within a week or less. Treasury generally issues short-term 

regular bills with 4-, 13-, and 26-week maturities every Thursday and issues 

2- and 5-year notes at the end of each month. Three- and 10- year notes are 

issued in the middle of each quarter. Treasury reopens 10-year notes—or 

increases the amount outstanding for these notes—1 month after their 

initial issuance. In addition, Treasury issues Treasury Inflation-Protected 

Securities (TIPS) in 5-, 10-, and 20-year maturities in certain months 

according to the TIPS’ maturity. 14 Finally, Treasury issues 30-year bonds in

February and August and reopens these issues in May and November, 

respectively.

Treasury supplements its regular and predictable schedule with flexible 

securities called cash management (CM) bills. Unlike for other securities, 

Treasury does not publish information on CM bills on its auction schedule. 

Instead, Treasury generally announces CM bill auctions anywhere from 1 

to 4 days ahead of the auction. The term to maturity—the length of time 

the bill is outstanding—varies according to Treasury’s cash needs. CM bills 

allow Treasury to finance very short-term cash needs—for as little as 

1 day—while providing short notice to market participants.15

As of the end of fiscal year 2005, about 46 percent of marketable Treasury

securities held by the public will mature during the next 24 months. As 

these securities mature and are replaced by new debt, the cost to finance

the federal government’s debt will vary with changing interest rates. 

The bidders in Treasury auctions include depository institutions, 

individuals, dealers and brokers, pension and retirement funds, insurance 

companies, investment funds, foreign and international entities, the 

Federal Reserve, and others. In recent years the percentage of U.S. 

Treasury securities held internationally has increased. Although the 

categories of bidders are diverse, primary dealers, other commercial bank

dealer departments, and other nonbank dealers and brokers received 

almost 60 percent of auction awards of marketable securities between 

August 2001 and May 2006. Federal Reserve banks received almost 

21 percent during that same time period for their own accounts. Primary 

dealers are banks and securities brokers that trade in U.S. government 

securities with the Federal Reserve. Primary dealers have functioned for

 14 GAO-06-269. 

15 For more information on CM bills see GAO-06-269. 

Page 7 GAO-06-1007 Debt Management
over 40 years as the distribution and support system for Treasury debt and

play a “vital” role16 in the price discovery process.17 The FRBNY designates 

primary dealers based on certain capital requirements, and requires 

primary dealers to participate meaningfully in both Federal Reserve open 

market operations and Treasury auctions to maintain their designation. 

However, the Federal Reserve does not have regulatory authority over 

dealers acting in the primary dealer role. 

In the past, outside of the auction process, Treasury had access to a cash 

draw authority intended for emergencies. Intermittently between 1942 and 

1981, Treasury was able to directly sell (and purchase) certain short-term 

obligations to (and from) the Federal Reserve in exchange for cash. 

Treasury used the cash draw authority infrequently and mostly in times of 

war or armed conflict. Congress last granted the authority in 1979 and 

limited the amount Treasury could draw to $5 billion. Congress allowed 

this authority to expire in 1981 (see app. II for more background 

information). Although the existence of a previous draw authority is 

relevant, we are not suggesting restoration of this authority in its previous 

form due to certain limitations. 

To understand the steps that Treasury and the Federal Reserve took 

during the week of the September 11 attacks and during the following 

weeks to assure required debt obligations and payments were made on 

time and ensure liquidity in the financial market, we conducted interviews

with knowledgeable Treasury and Federal Reserve officials and staff. We 

also reviewed prior audit reports and other documentation from GAO, the 

Federal Reserve, and Treasury. We analyzed and examined these sources 

to develop a time line with key actions and to determine actions and 

financial market behavior that are informative when considering 

alternative funding sources for Treasury. 

Objectives, Scope, 

and Methodology 

To understand major actions Treasury, the Federal Reserve, and primary 

dealers have taken since the September 11 attacks to increase the 

resiliency of Treasury’s auction process and participation, we interviewed 

Treasury and Federal Reserve officials and staff involved in conducting 

 16 See Remarks of the Under Secretary Brian C. Roseboro before The Bond Market 

Association’s Annual Meeting, April 22, 2004, js-1454. 

17 Price discovery is the process that primary dealers undertake that determines an 

appropriate clearing price at auction. 

Page 8 GAO-06-1007 Debt Management
primary dealer visits, the auction process, and systems. We reviewed 

Treasury contingency and continuity of operations (COOP) plans and 

other documents that described contingency sites, staff training topics, 

contingency exercise results, and other Treasury summaries. We also 

interviewed executives and staff involved and familiar with resiliency 

efforts at 14 primary dealers and executives involved with emergency 

planning at The Bond Market Association, the industry association 

representing participants in the government securities and other debt 

markets. In addition, some of our work was based on internal knowledge 

derived from Treasury audits we have conducted in the past. 

To describe the opinions of relevant parties on the main design features of

any cash draw authority and how the features affect accountability and 

congressional oversight, enhance Treasury’s operations, affect Federal 

Reserve operations, and influence the views of capital market participants, 

we interviewed Treasury officials involved with debt management, policy, 

operations, fiscal management, auctions, and legal matters. Further, we 

interviewed Federal Reserve officials involved with monetary affairs, open 

market and discount window operations, and Treasury auction staff and 

researchers. In addition, we communicated with foreign debt management 

officials, and conducted interviews with executives and staff involved with 

Treasury auctions at 14 primary dealers and senior executives at two 

major commercial banks. We also spoke with other capital market 

participants, and had discussions with senior congressional staff 

concerned with oversight. We analyzed relevant Treasury, Federal 

Reserve, and capital market documentation to obtain government and 

capital market perspectives. We validated, with relevant parties, main 

design features for consideration when structuring an alternative cash 

draw arrangement and looked for emerging funding options based on 

discussion with relevant parties. 

We conducted our review in Washington, D.C., and New York, N.Y., from 

March 2006 through September 2006 in accordance with generally 

accepted government auditing standards. 

Page 9 GAO-06-1007 Debt Management
Treasury took a number of steps in reaction to the September 11 attacks to

ensure it met its obligations during a time of disrupted financial markets, 

as summarized in figure 1. It canceled an auction scheduled for September 

11, withdrew compensating balances held in depository institutions across 

the country, communicated with the FRBNY about the status of markets, 

and resumed its normal auction schedule within 1 week of the attacks. 

Treasury Canceled an 

Auction and Used 

Certain Cash 

Balances to Help Meet 

Its Obligations during 

the Week of 

September 11, 2001 

Figure 1: Treasury Acted to Ensure Funding after the September 11 Attacks 

10 13 14 15 11 12

17 21 22

24

Treasury announced 

4-week bill auction 

for September 11.

Treasury conducted 

normal 13- and 

26-week bill auctions.

Treasury replaced 

remaining compensating balances.

Treasury replaced 

most compensating 

balances.

Treasury canceled 

scheduled 4-week 

bill auction. 

Treasury called 

banks to inform 

them of compensating balance 

withdrawals on 

Sept 13.

Treasury paid 

maturing 4-week bill 

and announced 13- 

and 26-week bill 

auctions for Sept. 17.

Treasury received 

compensating 

balances.

Sunday Tue Monday sday Wednesday Thursday Friday Saturday

Source: GAO (data), PhotoDisc (upper left photo), and FEMA/Andrea Booher (lower right photos).

23

18 19 20

9

16

Page 10 GAO-06-1007 Debt Management
Treasury decided to postpone and then cancel a planned auction of 

$10 billion worth of 4-week bills because of financial market degradation 

due to the September 11 attacks. In addition, various infrastructure 

concerns at the FRBNY made it unclear whether it could have conducted

an auction.

18 Following its normal borrowing schedule, on September 10 

Treasury announced its intention to auction $10 billion worth of 4-week 

bills on September 11 to help pay off $11 billion worth of 4-week bills that 

were about to mature on September 13. 

According to a senior Treasury debt management official, after the 

September 11 attacks, Treasury initially wanted to postpone but not cancel 

the auction. Treasury officials consulted with the FRBNY about market 

conditions and learned that some primary dealers had evacuated their 

office buildings that morning. 

As the magnitude of the attacks became clearer Treasury decided to 

cancel the auction. A markets officer in charge of Treasury auction staff 

located at the FRBNY told us that it was unclear if they could have 

executed the auction because of evacuations, structural integrity, and 

other concerns at the time. Treasury issued a press release on September 

12 confirming the cancellation of the 4-week bill auction and that Treasury 

had no plans for rescheduling the auction. Treasury officials determined 

that canceling the auction would not damage Treasury’s reputation for 

“regular and predictable” auctions, given the nature of the attacks. 

Treasury decided on September 11 to initiate procedures to withdraw 

almost $13 billion of compensating balances—noninterest-bearing cash 

balances that Treasury used to compensate banks for various services—to 

make up for the cash shortfall associated with the cancellation of the 

$10 billion 4-week bill.19 Treasury officials told us that they wanted to pull 

back as much cash as possible and as quickly as possible without harming 

the financial position of the banks. Treasury’s ending operating cash 

balance on September 11 was just a little over $11 billion, which would 

Treasury Canceled a 

4-week Bill Auction in 

Response to the Attacks’ 

Effects 

Treasury Relied on 

Compensating Balances to 

Help Meet Its Debt 

Obligations 

 18 According to Treasury, the Bureau of Public Debt—a bureau of the Treasury—-could 

have conducted the auction since its systems were available and operational. 

19 The total impact on Treasury’s cash balance resulting from the cancellation of the 

auction was a shortfall of $11.5 billion, including $1.5 billion of Federal Reserve holdings 

scheduled to be rolled into the 4-week bill. So, other things being equal, Treasury would 

have had to pull $11.5 billion in compensating balances to make up for the cancellation of

the 4-week bill.

Page 11 GAO-06-1007 Debt Management
have been insufficient to pay off maturing 4-week bills on September 13, 

meet Treasury’s other obligations, and maintain the $5 billion target in its 

Federal Reserve account. 

Treasury contacted banks across the country holding compensating 

balances on September 11 and asked them to confer with other bank 

executives and consider whether withdrawing a total of $12.6 billion on 

September 13 would cause any harm to the banks’ operations. The banks 

responded that the withdrawals would not, and according to senior 

Treasury officials, also offered to help Treasury in any way during the 

crisis. Treasury transmitted formal letters on September 12 specifying 

amounts to be withdrawn on September 13. On that date Treasury 

received the $12.6 billion from compensating balances and returned 

posted collateral to applicable banks. Treasury did not pay any penalties 

because compensating balances could be withdrawn by Treasury at any

time, and no telecommunications problems were encountered in 

completing the transfers. 

Treasury Met Its Debt 

Obligations on Time, 

Resumed Auctions within 

a Week, and Replaced 

Compensating Balances 

within 10 Business Days of 

the Attacks 

Treasury paid almost $43 billion in maturing bills (including about 

$11 billion of maturing 4-week bills) and received about $35 billion from 

issuing bills on September 13. Additionally, on September 13 Treasury 

announced its intention to auction 13- and 26- week bills and executed the 

auction on September 17, 2001, awarding almost $35 billion, resuming its 

normal auction schedule. In deciding to resume auctions, Treasury held 

conversations with market participants and the FRBNY who conveyed that 

the market was ready to bid on auctions. The September 17 auction 

proceeded normally according to one senior debt management official and 

bid-to-cover ratios20—a commonly cited measure of auction performance 

and market demand for securities—were similar to the 13- and 26-week 

bill auctions held just before September 11. 

 20 The bid-to-cover ratio is the ratio of the amount of bids received in a Treasury security 

auction compared with the amount of awarded bids. The 13-week bill auction on 

September 10, 2001, resulted in a bid-to-cover ratio of 2.06, and the September 17, 2001, 

auction resulted in a ratio of 2.31. The 26-week bill auction on September 10, 2001, resulted 

in a bid-to-cover ratio of 2.29, and the September 17, 2001, auction resulted in a ratio of 

2.19. 

Page 12 GAO-06-1007 Debt Management
Finally, Treasury replaced $11.2 billion of compensating balances on 

September 21 and another $2 billion on September 24.21 Banks were 

required to pledge certain types of collateral to secure compensating 

balances and one bank could not pledge enough collateral until September 

24. 

Treasury replaced compensating balances with direct payments to banks 

for certain services in 2004.22 This effectively eliminated the alternative 

source of funds Treasury had drawn on during the September 11 attacks.

Compensating balances were—as the name implies—noninterest-bearing 

balances deposited in banks to compensate them for collecting tax and 

nontax receipts. Banks could make loans or buy investments with the 

compensating balances, which were fully collateralized. 

Compensating 

Balances Are No 

Longer Used 

The amount of any compensating balance was determined by Treasury 

based on specified interest rates.23 Current Treasury officials told us that 

they did not view compensating balances as a substitute cash backup 

source except in extraordinary circumstances. Further, a combination of 

circumstances starting in 2002 made compensating balances “inefficient 

and disruptive” for Treasury.24 Declining interest rates required increases 

in balances while the need to stay under the debt-limit25 required decreases 

in balances, which later had to be reversed and increased to unusually 

high levels. For example, September end-of-month compensating balances 

 21 Treasury replaced $12.6 billion in compensating balances and deposited an additional 

$0.6 billion in compensating balances based on certain requirements that determined the 

amount. 

22 Section 218 of the Transportation, Treasury, and Independent Agencies Appropriations 

Act, 2004, Pub. L. No. 108-199, Div. F, 118 Stat. 279, 321 (Jan. 23, 2004), established a 

permanent, indefinite, appropriation for Treasury to reimburse financial institutions for 

depository and financial services previously reimbursed by means of compensating 

balances. 

23 The banks’ compensation for performing these services was based on the imputed

earnings from the compensating balances calculated at the 91-day Treasury bill rate.

Treasury determined the amount to deposit by comparing the value of services provided

with the imputed earnings on the compensating balances. 

24 U.S. Office of Management and Budget, Budget of the U.S. Government, Analytical

Perspectives, Fiscal Year 2006 (Washington, D.C.: 2005), p. 249. 

25 The debt limit is a legal ceiling on the amount of gross federal debt (excluding some 

minor adjustments), which must be raised periodically by Congress to accommodate

additional federal borrowing.

Page 13 GAO-06-1007 Debt Management
increased from about $6 billion, to $13 billion, and then to $27 billion in 

fiscal years 2000, 2001, and 2002, respectively. Treasury began to phase out 

compensating balances in 2003 and drew down the compensating balances 

to zero in 2004. 

Consistent with its goal of maintaining the stability of the financial system 

and containing systemic risks, the Federal Reserve took action in response 

to the attacks’ financial effects. The Federal Reserve communicated that it 

was available as a source of liquidity and provided billions of dollars 

through various means to banks and financial market participants 

experiencing liquidity problems as a result of the September 11 attacks. 

The Federal Reserve announced its willingness to provide liquidity on 

September 11 several times via systems and official statements. For 

example, soon after the attacks the Federal Reserve broadcast that it was 

fully operational on the Fedwire system—the Federal Reserve’s largevalue electronic payment system. In a second broadcast message it 

announced that it was available to meet liquidity needs. Around noon, the 

Federal Reserve Board of Governors issued a press release stating that 

“The Federal Reserve System is open and operating. The discount window 

is available to meet liquidity needs.” These statements along with others by 

a Federal Reserve governor and a Federal Reserve bank president on that 

day26 were intended to reassure financial markets that the Federal Reserve 

System was functioning normally and to encourage banks to view the 

discount window as a source of liquidity. According to a then Director of 

Research at the Federal Reserve Bank of Richmond who has since become

that bank’s President, the statements also signaled to banks a “distinct” 

shift in how the Federal Reserve would view discount window 

borrowing.27

The Federal Reserve 

Used a Number of 

Methods to Provide 

Liquidity to Domestic 

and Foreign Financial 

Institutions 

The Federal Reserve provided liquidity through discount window and open 

market operations. We previously reported that banking regulatory staff 

told us that the attacks largely resulted in a funding liquidity problem 

 26 See statements by Federal Reserve Governor Edward Gramlich and Federal Reserve 

Bank of New York President William McDonough in Jeffrey M. Lacker, “Payment System 

Disruptions and the Federal Reserve Following September 11, 2001,” Journal of Monetary

Economics, vol. 51, issue 5 (July 2004), 935-965. 

27 See Jeffrey M. Lacker, “Payment System Disruptions and the Federal Reserve Following 

September 11, 2001,” Journal of Monetary Economics, vol. 51, issue 5 (July 2004), 935-965. 

Page 14 GAO-06-1007 Debt Management
rather than a solvency crisis for banks.28 Thus, the challenge the Federal 

Reserve faced was ensuring that banks had adequate funds to meet their 

financial obligations. Settlement problems also prevented broker-dealers

and others from using the repo markets29 to fund their daily operations. In 

4 days after the attacks, the Federal Reserve provided billions of dollars to 

banks through various means to overcome the problems resulting from 

unsettled government securities trades and financial market dislocations. 

For example, the Federal Reserve provided $37 billion in overnight credit 

through its discount window on September 11, $46 billion on September 

12, and $8 billion on September 13. In contrast, no overnight discount 

window credit was provided on September 10 and September 14. It also 

conducted securities purchase transactions and other open market 

operations to provide needed funds to illiquid institutions. For example, 

the Federal Reserve held a zero end-of-day balance in overnight repos on

September 10 and September 11, but end-of-day balances increased to $38 

billion on September 12 and peaked at $81 billion on September 14 during 

the 4 days following the attacks. In addition, the Federal Reserve waived

daylight overdraft fees for all account holders and eliminated the penalty 

on overnight overdrafts for depository institutions from September 11 

through September 21. Had these actions not been taken, some firms 

unable to receive payments may not have had sufficient liquidity to meet 

their other financial obligations, which could have produced other defaults 

and magnified the effects of September 11 into a systemic solvency crisis. 

The Federal Reserve provided additional liquidity by continuing its normal 

check crediting schedule despite delays in transportation. The grounding 

of air transportation complicated and delayed some check clearing, since 

both the Federal Reserve and private providers relied on overnight air 

delivery to transport checks between banks in which they are deposited 

and banks on which they are drawn. The Federal Reserve continued to 

credit the value of deposits to banks even when it could not present 

checks and debit the accounts of paying banks. The Federal Reserve 

decided to not offset this float through open market operations to 

continue providing liquidity. Crediting banks for deposited checks before

receiving the corresponding credit from banks on which the checks were 

 28 GAO, Potential Terrorist Attacks: Additional Actions Needed to Better Prepare Critical 

Financial Market Participants, GAO-03-414 (Washington, D.C.: Feb. 12, 2003). 

29 Repo or a repurchase agreement is a form of short-term collateralized borrowing used by 

dealers in government securities. See GAO-06-269 for more information on repurchase

agreements. 

Page 15 GAO-06-1007 Debt Management
drawn causes float. This additional liquidity—normally less than $1 billion 

outstanding at any one time—peaked at over $47 billion on September 13, 

2001. 

To provide dollars needed by foreign institutions, the Federal Reserve also

arranged new or expanded swap lines with the Bank of Canada, the 

European Central Bank, and the Bank of England. The swap lines involved

exchanging dollars for the foreign currencies of these jurisdictions,30 with 

agreements to re-exchange amounts later. These temporary arrangements 

provided funds to settle dollar-denominated obligations of foreign banks 

whose operations were affected by the attacks. 

According to a Federal Reserve official, the large injections of liquidity 

were also necessary in part to offset large reserve drains from other 

autonomous factors—factors that affect the supply of balances but are 

generally outside the control of the Federal Reserve. For example, as 

previously noted, the level of check float peaked at $47 billion on 

September 13 and a foreign currency swap added $20 billion of balances 

on that same day, but another autonomous factor reduced balances by 

over $30 billion on that day, which was between $15 billion and $20 billion 

more than prior levels. 

To further increase liquidity, the Federal Open Market Committee 

(FOMC)31 announced on September 17 that it would lower its federal funds

target rate by 50 basis points32 to 3 percent and the Federal Reserve Board 

of Governors approved a 50 basis point reduction in the discount rate to 

2-1/2 percent.33 In its announcement the Federal Reserve stated that it 

would “continue to supply unusually large volumes of liquidity to the 

financial markets, as needed, until normal market functioning is restored.” 

The FOMC acknowledged that the actual federal funds rate might fall 

below its target in this situation. According to a then Director of Research 

 30 Although swap lines permitted up to a total of $90 billion to be exchanged, the maximum

foreign currency swap during this period was about $20 billion on September 13, 2001. 

31 As part of the Federal Reserve, the Federal Open Market Committee oversees open 

market operations, which are used to implement monetary policy on a day-to-day basis. 

32 One basis point is equal to 1/100th of a percent. Thus, 50 basis points are .50 percentage 

points.

33 The Federal Reserve Board of Governors exercises general supervision over the

operations of the Federal Reserve banks. The Federal Reserve banks establish the discount 

rates subject to review and determination of the Federal Reserve Board of Governors. 

Page 16 GAO-06-1007 Debt Management
at the Federal Reserve Bank of Richmond, who has since become that 

bank’s President, market participants expected a decline in the federal 

funds rate driven perhaps by the large amount of liquidity injected by the 

Federal Reserve, creating excess reserve balances.

34

Market participants typically use government securities as collateral for 

financing or to meet settlement obligations. When some broker and bank

facilities were destroyed or lost connectivity, the results of trading 

information, such as amounts of securities or funds to transfer and the 

ability to transfer funds, were lost or degraded for days. If trade 

information is not correct and funds and securities are not properly 

transferred, the trade will be considered a “fail.” To help alleviate failed 

trades resulting from the attacks, the Federal Reserve and Treasury loaned

and auctioned securities respectively. From September 11 through 

September 13, the Federal Reserve loaned $22 billion of securities from its 

portfolio to broker-dealers that needed securities to complete settlements 

of failed trades. The Federal Reserve also reduced restrictions on its 

securities lending, leading to a sharp increase in borrowing at the end of 

September 2001.35

Treasury also conducted an unplanned, special issuance of 10-year notes 

in order to prevent a possible financial crisis.36 According to current and 

former Treasury officials involved with this decision, on September 17 it 

became evident that the stopped and incomplete trading on September 11 

resulted in increasing fails in the secondary market. Treasury officials 

described how a rapid rise in fails at the end of September and beginning

of October was based on demand for the 5- and 10-year notes. After 

conferring with capital market participants who recommended a 

reopening, or increasing the amount outstanding, of the 5- or 10-year 

notes, Treasury officials decided to reopen the 10-year note. They 

reasoned that since the note was already scheduled to reopen in 

November, investors—-who were anticipating the November reopening—-

would be better prepared for the issuance than for a 5-year note. Treasury 

officials concluded that the additional supply of the 10-year note produced 

 34 See Jeffrey M. Lacker, “Payment System Disruptions and the Federal Reserve Following 

September 11, 2001,” Journal of Monetary Economics, vol. 51, issue 5 (July 2004), 935-965. 

35 The Federal Reserve loans out securities from its System Open Market Account (SOMA) 

subject to certain limits. The Federal Reserve suspended per dealer limits on SOMA

holdings on September 11 and further loosened terms on September 13. 

36 GAO-03-414. 

Page 17 GAO-06-1007 Debt Management
a positive “psychological” effect on markets by providing increased 

confidence about the certainty of supply helping to decrease fails in the 5- 

and 10-year notes trades. 

Immediately after the September 11 attacks, many financial institutions, 

including some foreign central banks, looked to the Federal Reserve to 

provide liquidity through various methods. As Treasury considers potential

financial institutions for funding sources during a wide-scale disruption, it 

will need to remain cognizant of the fact that the Federal Reserve was, is, 

and potentially will be, the provider of liquidity for many financial 

institutions in a crisis. Further, the amount and terms of the liquidity 

provided by the Federal Reserve to financial institutions will likely affect 

the characteristics of any funding alternatives available to Treasury. As 

discussed previously, the Federal Reserve eased restrictions and lowered 

interest rate targets to provide expanded liquidity to financial institutions. 

Finally, the market fails and other collateral issues in the secondary 

market may affect the type of security Treasury will want to issue in a 

crisis. Treasury officials recognize that during a crisis, investors tend to 

exhibit a “flight-to-quality” behavior, moving their capital away from 

riskier investments to safer investment vehicles, such as U.S. Treasury 

securities. These considerations are discussed later in this report. 

After an auction is announced, the critical functions that must occur 

without interruption for Treasury to raise the required funds from the 

issuance of Treasury securities are (1) auction, (2) prepare issue file, 

(3) issue securities, and (4) cash transfer (see fig. 2). If any of these 

functions are disrupted, Treasury would not be able to obtain the cash 

needed from an auction. During the September 11 attacks, Treasury and 

the Federal Reserve, acting as Treasury’s fiscal agent, had two operational 

locations to conduct auctions, one operational location to prepare files 

with important issuance information, one operational location to issue 

securities, and one operational location with a secondary location—which 

could be activated if necessary—to transfer cash. Since then, Treasury and 

the Federal Reserve have added locations for all of Treasury’s critical 

auction process functions. 

Some Federal Reserve 

Actions and Financial 

Market Behavior Are 

Informative When 

Considering Alternative 

Funding Sources for 

Treasury 

Since the Attacks, 

Treasury and the 

Federal Reserve Have 

Added Staffed 

Locations and Data 

System Capability 

Intended to Increase 

Auction Resilience 

Treasury depends on certain systems to auction and issue its securities. 

The critical systems that must be operational for an auction to occur and

for Treasury to receive the funds from that auction are (1) the auction

system which receives and processes bids for securities, (2) the funds and 

securities transfer system, (3) the book-entry accounting system, and 

Page 18 GAO-06-1007 Debt Management
(4) the cash reporting system. In addition, since the September 11 attacks

the Federal Reserve has strengthened its out-of-region data system 

capability. Figure 2 describes each of these processes and associated 

systems. 

Figure 2: Four Major Processes Must Be Performed for Treasury to Receive Its Cash After Announcement 

Auction Prepare issue file Issue securities Cash transfer

Source: GAO.

Bids are electronically 

submitted to the securities

auction system. In the event 

that a bidder cannot access

the auction system, bids can 

be accepted by phone. The 

auction system automatically 

calculates the auction results

and determines the award 

price and winners based on 

the bid information submitted. 

If the auction system is not 

available, bids can be 

calculated and awarded 

manually.

Auction staff transfers the 

data, including the awarded 

bidders, award price, and 

delivery instructions for the 

securities, to an issuance file. 

After verifying that the file is

correct, auction staff at either 

Treasury or the Federal 

Reserve provide the file to 

Federal Reserve staff 

responsible for issuing the 

securities.

On issuance day, usually a

few days after auction day, the 

Federal Reserve staff 

releases the securities into the 

book-entry accounting system. 

At this time, the funds and 

securities transfer system 

generates acknowledgments

indicating that the securities

were released. Simultaneously, the book-entry accounting system issues securities

versus payment by debiting 

the awarded bidder’s account 

for the payment amount of 

the security.

Entries are made into the cash 

reporting system for cash 

received by the Federal 

Reserve for issued securities. 

After these entries are made, 

the Federal Reserve, through 

its New York bank, transfers

the cash to the Treasury 

General Account for the 

securities sold.

Treasury and the Federal 

Reserve Have Added Sites 

for All Four Critical 

Functions Since the 

September 11 Attacks 

Treasury and the Federal Reserve have added sites that are geographically 

separated from each other for all four of Treasury’s critical auction 

functions, as seen in figure 3. Contingency sites are located in different 

geographic regions and do not require staff to relocate from the primary 

site, while backup facilities are generally located in the same region as the 

sites they are intended to backup. For example, staff would relocate from 

a primary site, like site A in figure 3, to the cold backup facility listed 

under site A in a contingency. 

Page 19 GAO-06-1007 Debt Management
Figure 3: Current Operations of the Auction and Issuance of Marketable Treasury 

Securities 

Site H–cold

Site F–hot 

Site B–hot Site G–cold Site C–cold

(with cold backup facility)

Site E–warm

Site A–hot Site D–warm

(with cold backup facility)

Site B–hot

(with cold backup facility)

Site A–hot Site D–hot

(with cold backup facility)

Locations

Cash transfer

Issue securities

Prepare

issue file 

Auction

Function Locations Locations Locations

Source: GAO.

Notes: Gray sites have been added since the September 11 attacks. 

A hot site is generally staffed and has systems operating during the routine performance of the 

function. Hot sites simultaneously perform the function. 

A warm site is generally staffed and has systems operating on a periodic basis (i.e., bi-weekly) or is 

aware and ready to take over when necessary during the operations of the function.

A cold site is generally not staffed to perform its associated function on a routine or nonroutine basis 

until the organization deems it necessary due to some contingency.

Auctions can now be performed at three operational locations with one 

backup facility. All three locations are fully operational for every auction.

Issuance files can now be prepared at one operational location with a 

backup facility and one semi-operational location. Site D is geographically

separated from site A, periodically performs the functions for specific 

auctions, and can be immediately activated to perform the tasks of this 

function. Further, site A has trained staff at its backup facility that can 

perform the tasks of this function after being notified of a contingency 

situation or event. 

Securities can now be issued at one operational location with a backup 

facility and one semi-operational location. Site E periodically performs the 

function of issuing securities for specific auctions approximately once 

every 2 weeks. This site is also geographically located in another region. 

The cash transfer function has added two cold contingency locations since 

September 11, 2001. Site B is the primary location and sites G and H are 

the secondary locations, which are geographically separated from site B 

and can be activated in the case of a contingency event. Site C is now a 

Page 20 GAO-06-1007 Debt Management
third contingency location that was a secondary location at the time of the 

September 11 attacks. 

Treasury periodically switches auction processing between sites during 

live auctions to test their readiness and conducts mock auctions. For 

example, in one exercise, Treasury directed one site to take over the 

auction processing from another site during a live auction. Treasury 

reported the test a success since staff demonstrated their ability to 

“seamlessly” take over and perform auction closing procedures, release 

auction results, and complete other normal post-auction activities. In 

another exercise, Treasury conducted a manual mock auction to expose 

staff to an atypical situation and reported achieving its objective of 

calculating auction results within 2 hours.37

In April 2003, Treasury began discussing options for postponing a 

scheduled auction “when the market is operating in a contingency or 

extraordinary environment” with dealers. In July of that year, Treasury 

presented dealers with a matrix of contingencies and Treasury responses, 

shown in table 1. 

Treasury Alternates Sites 

to Process Auctions and 

Conducts Mock Auction 

Tests 

Treasury Has Adopted a 

Flexible Contingency 

Policy for Auction 

Disruptions 

 37 Calculating results within 2 hours assumes all bids have been received and processed. 

Page 21 GAO-06-1007 Debt Management
Table 1: Matrix Treasury Presented to Dealers on Potential Responses to 

Contingencies

Contingency Treasury response

Treasury/Fed 

operational/technical problems

Delay auction.a 

Notify market of specific length of delay (e.g., 1 hour). 

Treasury/Fed systems failure Reschedule auction.

Notify market of rescheduling with specific date and 

time if possible. If not immediately possible, provide 

follow-up with specific date and time as soon as 

feasible. 

Bidder connectivity disrupted

(some participants affected, 

auction still covered) 

Response will depend on strength of auction coverage. 

If delay is necessary, then notify market of specific 

length of delay (e.g., 1 hour). 

Bidder connectivity disrupted

(many participants affected, 

auction not covered) 

Delay auction.a

Notify market of specific length of delay (e.g., 1 hour). 

Independent of connectivity 

auction not covered 

Delay auction.a

Notify market of specific length of delay (e.g., 1 hour). 

Source: U.S. Treasury.

a

If an auction is delayed for any reason, Treasury will notify the market of the delay and the new 

closing time. In all cases, a delay will cause Treasury to reject all competitive bids already tendered 

and participants will need to resubmit competitive bids when the auction resumes.

Treasury gathered feedback from participants and concluded a more 

flexible contingency approach would be appropriate. Treasury told us that 

some dealers suggested that writing rules for various contingencies may 

be too burdensome and that it may be to Treasury’s advantage to remain 

discreet on how certain auction fails will be handled. For example, in the 

case where one or two dealers have missed the auction, and if the auction

was covered sufficiently, then Treasury may want to complete the auction 

without the missing parties. Treasury told us that it needs a flexible 

approach because there are an “infinite number of possible situations” to 

which it might have to respond, so the best it can do is provide general 

guidelines about how it will respond. According to Treasury, the matrix of 

Treasury responses to a number of possible contingencies was generally 

considered comprehensive and reasonable by the dealers they 

interviewed. 

Page 22 GAO-06-1007 Debt Management
The Bond Market Association (TBMA)38 commended Treasury for 

developing the matrix of possible circumstances, but encouraged Treasury 

to expand its list of contingencies to include actions Treasury would take

in the face of extraordinary circumstances such as natural disasters, 

terrorist attacks, suspension of trading, or a disruption to the clearance

and settlement system. TBMA proposed that Treasury delay and 

reschedule an auction in these circumstances, while notifying the market

with a specific date and time if possible or provide this information as 

soon as feasible. The association predicted that market participants would 

likely support the decision to delay the auction, assuming the securities 

were still auctioned and settled by the originally announced issuance date. 

TBMA stated that it was unclear what the impact of these circumstances 

would be on future auctions. 

This discussion process resulted in the following Treasury statement in 

February 2004: “Treasury will conduct any announced auction that is 

disrupted within an hour of the originally scheduled time and in the event

that circumstances and conditions are such that a one hour postponement 

cannot be met, Treasury will communicate information to market 

participants as it becomes available.”

All primary dealers have contingency sites. According to Treasury, most 

primary dealers have systems that link directly to Treasury’s auction 

systems at their contingency sites and have conducted connectivity tests 

to ensure they could participate in an auction from their contingency sites 

if required. Because of the nature of the financial markets, almost all 

primary dealer contingency locations are within the same geographic 

region as their primary sites. Treasury periodically visits dealers, and has 

suggested improvements in systems and testing for many dealers. 

According to 14 dealers with whom we spoke, dealer personnel are crosstrained to bid on and complete auctions for all types of Treasury 

securities. 

Primary Dealers Have 

Taken Actions 

Intended to Increase 

Their Resilience and 

Treasury Has 

Suggested Additional 

Improvements

A Treasury official with whom we spoke noted that the nature of financial 

markets encourages the close proximity of staff. A professor of economics 

has stated, “high density levels are particularly conducive to chance 

meetings, regular exchanges of new ideas, and the general flow of 

 38 TBMA is an industry association representing participants in the government securities

and other debt markets. 

Page 23 GAO-06-1007 Debt Management
information” 39 that aid in the rapid access to information that is crucial to 

financial markets. This likely helps to explain why almost all primary 

dealers’ primary sites are within the same geographic region. All 23 

primary dealers also have at least one contingency site for their 

operations, generally in the same geographic region as their primary sites, 

since most primary dealers plan on relocating their staff from their 

primary sites to their contingency sites during a wide-scale disruption. 

Treasury expects this migration might take several hours. Treasury also 

expects it might have to postpone an auction for a day, depending on the 

severity of the disruption, so dealers have enough time to report to their 

contingency sites. 

According to Treasury officials, 17 primary dealers40 have added systems at

their contingency sites that directly link with Treasury auction systems 

and have successfully tested the connectivity of these systems. Treasury 

encouraged dealers to add these systems and offered cost information on 

these systems so dealers could more easily consider the systems 

implementation. All of the dealers have the ability to submit auction bids

via the Internet or phone at their contingency sites. 

Eight dealers41 have told Treasury that they have participated in live 

auctions from their contingency sites, but Treasury told us that its auction 

systems do not automatically track whether or not dealers are 

participating in auctions from contingency sites. Treasury has encouraged 

dealers to conduct live auction tests from their contingency sites and plans 

to continue to work with primary dealers to increase their resiliency by 

developing test plans for primary dealers to participate in mock auctions. 

One dealer expressed reservations about participating in an auction from a 

contingency site because it would not want to take bids from traders over 

the phone, while another dealer stated that it planned to conduct a mock 

auction before participating in a live auction from the contingency site. 

Primary dealers we spoke with said they have cross-trained their staff to 

participate in auctions of different Treasury securities and told us that 

they have sufficient staff trained to participate and provide backup 

 39 Edward L. Glaeser, “Urban Colossus: Why is New York America’s Largest City?” FRBNY 

Economic Policy Review (December 2005), p. 22. 

40 As of August 2006, 3 additional primary dealers have installed systems that directly link 

with Treasury auction systems and are in the process of conducting user tests.

41As of August 2006. 

Page 24 GAO-06-1007 Debt Management
support. These same dealers estimated about 15 to 20 people per dealer 

are involved in the Treasury auction process, including support personnel. 

While some dealers indicated that their overseas staff are able to 

participate in auctions, other dealers expressed reservations about the 

readiness of their overseas staff to bid on auctions. In addition, while some

dealers report having backup personnel for traders and multiple sites, one 

reports that backup personnel are in the same location as traders, and 

most plan on relocating their staff from primary locations to their 

contingency sites during a wide-scale disruption. 

Regardless of the progress of resiliency efforts, the nature, duration, and 

effects of any potential future wide-scale disruption are unknown. In 

addition, since compensating balances are no longer used, Treasury has at 

least one less source of funds to rely upon. Current Treasury officials 

stated they had not viewed compensating balances as a cash source 

except in extraordinary circumstances such as the September 11 attacks, 

and a former Treasury official acknowledged that compensating balances

provided extra flexibility for Treasury. Finally, Treasury’s cash 

management policy of maintaining minimal cash balances to lower 

borrowing costs further limits Treasury’s access to cash during a widescale disruption. The combination of these factors makes it prudent for 

Treasury to explore alternative backup funding options to use during a 

wide-scale disruption. The relevant parties with whom we spoke, including 

primary dealers, agreed.

These parties also generally agreed that the main design features to be 

considered when weighing alternatives for backup funding options are the 

situations for use, source of funds, type of collateral, transaction type, 

approvals, determination of cost, amount limit, time limit, inclusion under 

debt ceiling, disclosure, and length of authority (if required). However, the 

specifics would depend on proposed options. For example, some parties 

thought that borrowing from the Federal Reserve should require higher 

level approval than borrowing from financial institutions. 

Discussions with Treasury and Federal Reserve officials and other 

relevant parties have led us to conclude that a two-tiered approach could 

enhance Treasury’s ability to obtain funds during a wide-scale disruption. 

We discussed design features and broad options with relevant parties and

progressively adjusted options based on comments and our own analysis. 

The two-tiered approach is suggested as a strategy to be used only when 

auctions are not viable based on some sort of wide-scale disruption to the 

Despite Actions 

Intended to Increase 

Auction Resilience, 

Exploring Funding 

Alternatives Outside 

of the Auction 

Process Is 

Appropriate 

Relevant Parties 

Validated Design 

Features and a 

Potential Tiered 

Approach to Treasury 

Funding Options Has 

Emerged from 

Discussions 

Page 25 GAO-06-1007 Debt Management
financial markets that Treasury relies upon, and not as a substitute or 

complement to Treasury’s normal auction process when market prices 

become expensive, or cash balances are lower than expected. The first tier 

consists of two funding options involving a range of appropriate financial

institutions, namely (1) a credit line and (2) a private placement of a CM 

bill. The second tier involves a direct draw from the Federal Reserve that 

would provide Treasury a last resort source of funds when other options 

are not viable. Under this system, Treasury would first seek to use the 

credit line and/or the private placement of a CM bill. Then, if and only if 

those options are not available or insufficient, would it turn to the Federal

Reserve. 

Any system for obtaining cash from financial institutions—whether 

through a line of credit or private placement of a CM bill—may, in a crisis, 

ultimately depend on the Federal Reserve to provide liquidity to those 

institutions.42 One party suggested the viability of a credit line or a private 

placement of a CM bill would likely be enhanced if these options involved 

depository institutions that could borrow from the discount window. Most 

market participants with whom we spoke preferred a direct draw 

authority for the Treasury. Although that might be the most direct route, 

we recognize the importance of maintaining the independence of the

central bank. For example, some economists believe that if a central bank

regularly lends money to the government (Treasury), it would lead to an 

expansion of the monetary base and inflation and the expectation that the 

central bank would lend to the government whenever the government 

wants. 

The Committee on Banking and Currency also recognized the importance 

of central bank independence in the establishment of the Federal Reserve 

in 1913. In its report the committee stated, “It can not be too emphatically 

stated that the committee regards the Federal reserve board as a distinctly

nonpartisan organization whose functions are to be wholly divorced from 

politics. In order, however, to guard absolutely against any suspicion of 

political bias or one-sidedness, it has been deemed expedient to provide in

the law against a preponderance of members of one party.”43

 42 The Federal Reserve’s regular lending authority generally extends only to depository

institutions.

43 H.R. Rep. No. 63-69, at 43 (1913). 

Page 26 GAO-06-1007 Debt Management
A tiered approach would recognize independence concerns, offering both 

flexibility and protection against the potential for abuse because of its 

two-stage structure. The availability of the first tier would provide 

Treasury an extra option(s) outside of its normal auction process to obtain 

funds making it less likely that Treasury would have to go to the second 

tier, the Federal Reserve, as a last resort funding option. 

Some relevant parties with whom we spoke noted that consideration of 

how any funding option would interact with the debt ceiling is important 

to consider given the number of times in recent years Treasury has 

operated in an environment under debt ceiling constraints, including debt

issuance suspension periods (DISP).44 A wide-scale disruption such as 

occurred on September 11 could also result in a delay in congressional 

action to raise the debt limit. This in turn could worsen any problems in 

the government’s ability to finance operations. Given this, some relevant 

parties suggested that if a wide-scale disruption occurred when Treasury 

was at or near the debt limit, use of any alternative funding option during 

such a disruption should be excluded from the debt ceiling. Others argued 

that any funding options should be included in the debt ceiling to prevent 

having the options become a tool to evade the debt ceiling. 

Primary dealers we spoke with stated that if Treasury did postpone an 

auction and use any of these funding options, they preferred that Treasury 

resume auctions as soon as possible. They also expressed a strong desire 

to maintain the originally scheduled settlement date, even if an auction 

had to be performed on the settlement date. 

In addition, the impact on the Federal Reserve of replacing an auction with

one of these options would have to be considered since the Federal 

Reserve places bids to replace its existing securities inventories at many 

Treasury auctions. Other options we discussed but were less viable are 

summarized in appendix I. 

Obtain a Line of Credit 

with Financial Institutions 

A credit line would provide Treasury a prior transparent commitment or 

understanding with several financial institutions to provide funds to 

Treasury during a wide-scale disruption. The financial institutions would 

 44 When debt is nearing the statutory limit, Treasury has to take a number of extraordinary

steps to meet the government’s obligation to pay its bills while keeping under the debt

ceiling. DISPs have been declared for certain periods in fiscal years 2002, 2003, 2005, and 

2006. For more information on DISPs see GAO-06-269 and GAO-04-526. 

Page 27 GAO-06-1007 Debt Management
have to have the willingness and capability to lend money to Treasury in 

the appropriate amount and time required by Treasury. Treasury could 

select the financial institutions through a bidding process or other 

procedure on a periodic basis that could help determine and perhaps 

lower any required fees or costs that this arrangement would entail. 

Canada and France have similar borrowing arrangements with financial

institutions. For example, Canada has a $6 billion (U.S.) standby line of 

credit with a syndicate of international banks. Also, according to a French

debt management official, France has credit lines with some primary 

dealers on which it could draw during a wide-scale disruption. 

Some primary dealers suggested that Treasury seek such a line of credit 

with a broad range of financial institutions that could include not only 

commercial banks but also institutional mutual funds and others who 

could meet Treasury requirements. Another party suggested that 

institutional mutual funds may not be practical because these funds 

typically obtain cash by selling short-term assets, which might not be 

possible in a crisis. 

Some parties, including commercial bankers with whom we spoke, stated 

providing liquidity to Treasury based on a formal line of credit might 

require regular maintenance fees to offset costs associated with the 

treatment of regulatory capital for the line of credit under U.S. and 

international capital standards. However, since funds would be lent to the 

U.S. Treasury, it is unclear if this arrangement would be subject to the 

same requirements as guaranteeing credit to other borrowers.

45

Some commercial banks raised the possibility of a prearranged 

understanding with Treasury instead of a formal commitment. Since an

understanding is not a formal commitment, it would not impose costs on 

banks, and so might not require any maintenance fees. These commercial 

bankers told us that they would very likely lend funds to Treasury because

it is in their financial interest to ensure that Treasury can make its 

payments, but that such an understanding would be subject to fulfilling 

their own liquidity needs in a time of crisis. As discussed previously, and 

 45 Some commercial bankers we spoke with said that certain international banking capital 

accords would require them to incur costs if a credit line is guaranteed. Another party 

thought that banks would not necessarily incur costs because guaranteeing credit to the

U.S. Treasury may be viewed differently under those accords. U.S. banking regulators are 

currently determining the application of a new approach to calculate regulatory credit risk

capital requirements based on a new international capital accord. 

Page 28 GAO-06-1007 Debt Management
given the actions taken during the September 11 attacks, it seems likely 

that the Federal Reserve would be available to provide commensurate 

liquidity to depository institutions. Federal Reserve officials we spoke 

with said that an obligation from Treasury would likely be accepted as 

sufficient collateral by a depository institution at the discount window. 

Although an understanding could avoid fees, it does not offer the certainty

of a committed line of credit for Treasury’s use. 

Private Placement of a 

Cash Management Bill 

A private placement of a CM bill would involve a prior arrangement to 

issue a CM bill after communicating with certain senior executives at 

financial institutions who would have the ability and authority to purchase 

a CM bill that meets Treasury’s immediate funding needs. The specific 

terms of the CM bill, such as amount, yield, settlement date, and maturity, 

would be determined at the time of CM bill placement. Similar to the 

credit line option, some market participants suggested that Treasury seek 

a broad range of financial institutions that could include not only 

commercial banks but also institutional mutual funds that could meet 

Treasury requirements. The Federal Reserve would again likely provide 

liquidity to depository institutions. Since this option involves delivering a 

security, clearing and settlement systems would have to be functioning 

adequately to complete transactions. 

Some parties told us that the market would react positively to accepting a

tradable security like a CM bill because it fits well with their normal 

operations and implied that Treasury may benefit from flight-to-quality 

behavior in a crisis. Some parties also commented that this option was 

appropriately aligned with Treasury’s current operations, since Treasury is

used to issuing CM bills and has auctioned and issued CM bills in 1 day 

under normal conditions. 

Among a number of policy and operational issues that must be considered 

before Treasury could place a cash management bill, Treasury would have 

to decide how to set an appropriate price when it executes this

arrangement. During a wide-scale disruption to financial markets, pricediscovery—the process that determines an appropriate clearing price at 

auction—would likely prove challenging to financial institutions because

of degradation in the financial market. 

Page 29 GAO-06-1007 Debt Management
In the event that the first tier options involving financial institutions 

proved insufficient, turning to the Federal Reserve as a last resort funding 

source would require a change in law to allow the Federal Reserve to 

directly lend to Treasury. Appropriate limitations, adequate flexibility, and 

accountability would have to be included in the design. 

Explicitly Authorize a 

Treasury Draw Authority 

with the Federal Reserve 

As we previously discussed, primary dealers and commercial bankers 

generally agreed that this was the most resilient and direct way for 

Treasury to ensure it met its obligations. Some Treasury and Federal 

Reserve officials we spoke with also confirmed that this method would 

likely be technically and operationally easy to implement. In addition, 

despite central bank independence concerns discussed previously, 

primary dealers and commercial bankers we spoke with stated that they 

did not think this arrangement would damage Treasury’s or the Federal

Reserve’s reputation if it is used in a limited way during a wide-scale 

disruption. 

Although direct lending by a central bank is not without precedent, it is 

viewed as a last resort. For example, although the Canadian federal 

government has legal authority to borrow directly from the Bank of 

Canada—its central bank—this legal authority was last used in the early

1960s and is not expected to be used in the future. 

Some parties, including Federal Reserve officials, expressed concerns 

about any direct lending arrangement and the potential for abuse of such 

authority in the future. They thought a high hurdle would be appropriate 

for using this authority. For example, one Federal Reserve official 

emphasized that this option should only be considered during a situation

where it was “physically impossible” for Treasury to conduct auctions and 

after judgment is reached at suitably high levels in the executive branch

and at the Federal Reserve that other options would not work. Another 

Federal Reserve official stated that it is important to clarify that this 

option should only be used in a national emergency. Another party 

concerned with Treasury oversight commented to us that legislation 

should be written “very tightly” to limit this authority to when it is 

absolutely required. Some Federal Reserve officials suggested that the

approval for a direct draw should be at a very high level—perhaps the 

President of the United States, Secretary of the Treasury, and the 

Chairman of the Federal Reserve, and wanted to maintain some veto 

power on the draw to preserve the Federal Reserve’s independence. 

Federal Reserve officials concerned with central bank independence and 

the risks of direct lending stated that any draw from the Federal Reserve 

Page 30 GAO-06-1007 Debt Management
should be at a market price, perhaps even higher to discourage use, even 

though they acknowledged that proceeds from a higher price would 

eventually be delivered back to Treasury. Some officials suggested that the 

Federal Reserve should be able to review the draw arrangement daily to 

ensure it did not last longer than necessary. There was broad agreement 

among Federal Reserve officials with whom we spoke that the draw 

should be reversed as soon as Treasury could hold an auction again and 

that any arrangement should be fully transparent and disclosed by 

Treasury and the Federal Reserve. 

Other parties emphasized the need to maintain some flexibility for 

Treasury while protecting central bank independence. An approach that 

appears promising would be to require joint approval from the Chairman 

of the Federal Reserve and the Secretary of the Treasury. Since a Federal

Reserve Chairman is unlikely to agree to a direct draw unless convinced 

that other options are not viable, this would provide sufficient protection 

against abuse of this authority. Since the authority is predicated on a widescale emergency and disruption, adding presidential approval might 

unnecessarily delay necessary actions without adding any additional 

protection beyond that provided by requiring agreement of the Chairman 

of the Federal Reserve. Both the duration of the draw and the amount 

might be established at the time the Secretary and Chairman agree to the 

direct draw. 

If the authority is to be provided, a decision on how to facilitate 

congressional oversight would be necessary. One party concerned with 

congressional oversight referred to a “delicate balance” between 

Treasury’s need to obtain funding during a wide-scale disruption and 

Congress’s need to conduct oversight of debt management. One possibility 

would be to require notification of the majority and minority leadership in

both houses of Congress at the time of a draw and report after the use of 

this authority in addition to regular reporting requirements. Finally, 

legislation developing an authority for a direct draw might require periodic 

review and renewal by Congress. 

The combination of minimal cash balances and the elimination of 

compensating balances have effectively increased Treasury reliance on the 

auction process as a funding source. Treasury, the Federal Reserve, and 

primary dealers have taken actions intended to increase the resilience of

the auction process. Regardless of resiliency efforts, the duration and the 

effects of a potential future wide-scale disruption are unknown. All these 

Conclusion 

Page 31 GAO-06-1007 Debt Management
factors make it prudent to explore other funding options for Treasury to 

use during a wide-scale disruption. 

Although Treasury, the Federal Reserve, primary dealers, and other 

financial institutions might be able to develop some funding mechanism at 

the time of a wide-scale disruption, prearranged funding alternatives offer

the advantage of explicit legal approaches with adequate built-in oversight 

and disclosure requirements. One approach discussed earlier requires 

changes in law. Without having prearranged access to additional funding 

sources and methods outside of the normal auction process, Treasury is 

missing an opportunity to strengthen its ability to obtain funds—and 

ultimately meet payment obligations—during a wide-scale disruption to 

the financial markets it relies upon. A tiered system that involves a range 

of private sector financial institutions as a first tier and the Federal 

Reserve as a second tier would expand Treasury’s access to cash and 

would enhance its ability to obtain necessary funds during a major, widescale disruption while limiting the potential for abuse. 

We recommend that the Secretary of the Treasury examine in detail the 

implementation requirements for establishing a line of credit and a private 

placement of a CM bill with a range of appropriate private sector financial 

institutions, select the most appropriate option(s), and take steps to put 

required frameworks into place for use during a wide-scale disruption. 

Implementation details to be considered for both options include 

determining the design features discussed earlier, including situations or 

criteria for use, how to determine the appropriate financial institutions to 

rely upon, and the amount needed. For the private placement of a CM bill, 

the cost or price determination method would have to be analyzed since 

price discovery may not be possible in a significantly degraded financial

market. For a credit line, ways to reduce the cost of an understanding or a 

guarantee of credit would have to be explored, such as a prearranged 

proposal process that determines the fees (if any) and terms of the 

transaction. As Treasury explores these options, it should consider how 

other countries have implemented alternative funding options to obtain 

any useful insights on its design, recognizing that the U.S. Treasury market 

has a unique role as the largest and most active debt market in the world. 

Recommendations for 

Executive Action 

Page 32 GAO-06-1007 Debt Management
Congress should consider providing the Federal Reserve the explicit 

authority to lend directly to Treasury as a last resort when other options 

are not viable during a wide-scale disruption. Developing a direct draw 

authority would require careful consideration and determination of design 

features and any other requirements to support Treasury’s need for an 

effective funding source, the Federal Reserve’s independence, and 

congressional oversight and accountability concerns. An approach that 

appears promising would be to require that both the Secretary of the 

Treasury and Chairman of the Federal Reserve approve any draw and 

agree on specific amounts and duration at the time of any draw. This might 

balance independence and accountability concerns with the need for 

sufficiently prompt action and flexibility. 

We requested comments on a draft of this report from the Secretary of the

Treasury and the Chairman of the Board of Governors of the Federal

Reserve System. The agencies’ letters are reprinted in appendix III and 

appendix IV, respectively. Both Treasury and the Federal Reserve noted

that they had taken steps to increase their resiliency in recent years but 

agreed that Treasury should examine the first-tier funding options 

described in this report. Although neither took a position on our 

suggestion that Congress should consider permitting the Federal Reserve 

to lend directly to the Treasury, both emphasized the importance of 

maintaining the independence of the central bank. For example, Treasury 

stated that it, “is generally opposed to arrangements in which 

governments, at their discretion, can borrow directly from their central 

bank as such arrangements compromise the independence of the central

bank.” Treasury and the Federal Reserve suggested that any legislation 

that would provide the Federal Reserve the authority to lend directly to 

the Treasury should be very carefully and tightly drawn to preserve the 

independence of the central bank. As our report notes, we also recognize 

the importance of maintaining the independence of the central bank and

suggest an explicit, carefully crafted, last resort authority and approach 

that we believe provides both flexibility and reduces the vulnerability to 

abuse. Indeed, part of the rationale for a two-tiered approach is to reduce 

the chances that the Treasury would ever need to turn to the Federal 

Reserve. Both Treasury and Federal Reserve Board staff also provided 

technical comments, which we incorporated as appropriate. 

We are sending copies of this report to the Ranking Minority Member of 

the House Committee on Ways and Means, the Chairs and Ranking 

Minority Members of the House Committee on Financial Services, the 

Matters for 

Congressional 

Consideration 

Agency Comments 

Page 33 GAO-06-1007 Debt Management
Senate Committee on Finance, the Senate Committee on Banking, Housing 

and Urban Affairs, the Secretary of the Treasury, the Chairman of the 

Board of Governors of the Federal Reserve System, and other interested 

parties. We will also make copies available to others upon request. In 

addition, the report will be available at no charge on GAO’s Web site at 

http://www.gao.gov. 

If you or your staff have any questions about this report please contact 

Susan J. Irving at (202) 512-9142 or irvings@gao.gov. Contact points for 

our Offices of Congressional Relations and Public Affairs may be found on

the last page of this report. GAO staff making key contributions to this 

report are listed in appendix V. 

Sincerely yours, 

Susan J. Irving 

Director, Federal Budget Analysis 

Page 34 GAO-06-1007 Debt Management
A

Other Opt

ppendix I: Cost and Complexity Rule Out 

ions That Were Discussed 

Page 35 GAO-06-1007

Appendix I: Cost and Complexity Rule Out 

Other Options That Were Discussed 

Although holding excess cash balances would supply the Department of 

the Treasury with an extra source of funds to draw from in an emergency,

it is generally more cost-efficient to repay debt than run higher cash 

balances because the interest earned on excess cash balances is generally

insufficient to cover borrowing costs. As we previously reported, because 

of this negative funding spread, Treasury has placed increased emphasis 

on minimizing cash balances to reduce overall borrowing cost.1

 Treasury’s 

current cash balance target is $5 billion, which represents the amount to 

be held at the Federal Reserve. Treasury invests excess cash above the $5 

billion target in Treasury Tax and Loan (TT&L) accounts,2

 the Term 

Investment Option (TIO) program, and Repurchase Agreement (Repo) 

pilot program. TT&L accounts are held at financial institutions and earn 

interest rates equal to the federal funds rate less 25 basis points, a rate set 

in 1978 originally intended to reflect the rate paid on overnight repurchase

(repo) agreements—a short-term collateralized loan used by dealers in 

government securities.3

 The rate earned on TT&L accounts is generally

less than the average rate Treasury pays on CM and other regular shortterm bills. The TIO program was introduced in 2002 to add investment 

capacity to the TT&L program and to increase the rate that Treasury earns 

on invested funds. The Repo program is a pilot program that allows 

Treasury to place a portion of its excess operating funds with TT&L 

depositories through a repo transaction for a set period of time at an 

agreed upon rate of interest. Treasury told us that it now places over 70

percent of its cash balances through the TIO and Repo program. Treasury 

officials with whom we spoke acknowledged that holding additional cash 

balances would not be a viable option because of the negative funding 

spread. 

Holding Additional Cash 

Balances Would Not Be 

Cost Efficient 

 1

 GAO, Debt Management: Treasury Has Refined Its Use of Cash Management Bills but 

Should Explore Options That May Reduce Cost Further, GAO-06-269 (Washington, D.C.: 

Mar. 30, 2006). 

2

 The TT&L program helps stabilize the supply of reserves in the banking system. If 

Treasury held all its cash in its Federal Reserve account, increases in its cash position

would drain reserves from the banking system, and decreases would add reserves. Thus,

the Federal Reserve would have to conduct frequent and perhaps large open market 

operations to mitigate undesired fluctuations in bank reserves and the federal funds rate.

The TT&L program also helps Treasury manage federal tax receipts and earn interest on 

public funds. 

3 GAO-06-269. 

Debt Management
Appendix I: Cost and Complexity Rule Out 

Other Options That Were Discussed 

Treasury and Federal Reserve officials we spoke with agreed that 

borrowing from foreign central banks may require some sort of currency 

conversion, unless the banks had adequate funds in dollars. The currency 

conversion would presumably have to occur on a very short-term and 

possibly same day basis. If the foreign central banks did not have adequate 

dollar-based liquidity, they may have to rely on the Federal Reserve to 

provide them with liquidity. As discussed previously, the Federal Reserve 

conducted currency swaps with some foreign central banks to help them 

fulfill their dollar-denominated obligations. Treasury officials we spoke 

with acknowledged that although this type of arrangement is possible, it is 

less promising because of the transactions and currency conversions that 

would likely be required. In addition, Treasury told us that although most 

large foreign banks operating in the U.S. have access to the discount 

window, Treasury would not advocate relying upon these banks for 

emergency funding. 

Foreign Central Banks Add 

Complexity to Obtaining 

Funds 

Page 36 GAO-06-1007 Debt Management
Appendix II: Background on Previous Appendix II: Background on Previous Treasury Draw Authorities 

Treasury Draw Authorities 

In the past, Treasury had access to both a cash and securities draw 

authority. Intermittently between 1942 and 1981, Treasury was able to 

directly sell (and purchase) certain short-term obligations to (and from) 

the Federal Reserve in exchange for cash. Congress first granted this cash 

draw authority temporarily in 1942,1

 allowed it to lapse several times, and 

extended it 22 times until 1979, when it modified some of the terms and 

added controls.2

 In 1979, Congress also authorized a securities draw 

authority, which permitted Treasury to borrow securities from the Federal 

Reserve, sell them, and then repurchase the securities in the open market 

and return the securities to the Federal Reserve within a specified period.

3

The securities draw authority was never used. 

After Congress authorized Treasury to earn interest on its Treasury Tax & 

Loan (TT&L) account balances in 1977,4

, 5 Congress allowed both draw 

authorities to expire in 1981. In a 1979 proceeding, one Member of 

Congress said that after World War II, the cash draw authority allowed 

Treasury to carry lower cash balances.6

 According to another Member, 

since TT&L accounts earned interest, there was no reason for Treasury not 

to “keep plenty of cash on hand” thereby reducing the need for a draw 

authority,7

 although the interest that Treasury earned on these accounts 

was .25 percentage points below the federal funds rate.8

 Current Treasury 

officials to whom we spoke said that they did not know if the passage of 

legislation allowing Treasury to earn interest on its TT&L accounts led 

Congress to allow both draw authorities to expire. Table 2 summarizes the 

 1

The cash draw authority lapsed in certain months in 1973, 1974, 1976, and 1977. See H.R.

Rep. No. 96-111, 7 (1979). 

2

Treasury Draw Policy, as amended, Pub. L. No. 96-18, sec. 1 (c), 93 Stat. 35 (Jun. 8, 1979). 

3

Pub. L. No. 96-18, sec. 2. 

4

Treasury Tax and Loan Accounts are funds held in accounts at financial institutions in the

name of the U.S. Treasury. Their purpose is to dampen fluctuations in bank reserves, 

process federal tax payments, and provide an interest-earning location for cash. 

5

Public Moneys Investment Act, Pub. L. No. 95-147, 91 Stat. 1227 (Oct. 28, 1977). 

6

125 Cong. Rec. 10081 (1979) (Statement of Congressman Hansen). 

7

125 Cong. Rec. 10080 (1979) (Statement of Congressman Wylie). 

8

The federal funds rate is the interest rate at which financial institutions exchange balances 

in their accounts at the Federal Reserve with each other on an overnight and unsecured

basis.

Page 37 GAO-06-1007 Debt Management
Appendix II: Background on Previous 

Treasury Draw Authorities 

key design features of Treasury’s draw authorities in 1979. A somewhat 

fuller discussion of each feature follows. 

Table 2: Design Features of 1979 Cash and Securities Draw Authorities 

Design features Cash draw authority Securities draw authority 

Situations specified 

for use 

Emergencies, markets closed More routine for cash 

management purposes 

Source of funds Federal Reserve Bank 

System 

Financial market (through sale of 

borrowed securities from Federal 

Reserve) 

Type of collateral None None 

Transaction type Direct sale of special shortterm certificates to Federal 

Reserve 

Borrow security from Federal 

Reserve and sell to financial 

market, repurchase security and 

return to Federal Reserve 

Approvals Five Governors of Federal 

Reserve System Board 

Federal Open Market Committee 

Cost determination Interest rate of .25 percent 

below discount rate of 

Federal Reserve Bank of New 

York 

Market value of securities when 

Treasury repurchases 

Amount limit $5 billion No limit 

Time limit No later than 30 days Repurchase of securities no later 

than 6 months

Inclusion in debt 

ceiling 

Included in debt subject to 

limit 

Included in debt subject to limit

Disclosure Annual Federal Reserve 

report to Congress 

None specified

Length of authority 2 years 2 years 

Source: GAO.

Situations When Treasury 

Used Previous Draw 

Authorities 

The Treasury Draw Policy, as amended in 1979 (hereafter, amended 

Treasury Draw Policy) stated that Treasury could use the cash draw 

authority in only “unusual and exigent circumstances.”9

 In 1979, both 

Federal Reserve and Treasury officials supported the extension of the cash 

draw authority for emergencies. A Treasury Assistant Secretary said that

Treasury might not have sufficient time to raise funds through the 

securities draw authority and that the cash draw authority provided 

Treasury with immediate funds to meet unforeseen developments, 

 9

Pub. L. No. 96-18. 

Page 38 GAO-06-1007 Debt Management
Appendix II: Background on Previous 

Treasury Draw Authorities 

especially if these developments transpired late in the trading day.10 A 

Federal Reserve Board Governor testified that the cash draw authority 

functioned well in the past and that Treasury needed this authority to 

obtain immediate funds when securities markets might be in “general 

disarray” based on a national emergency.11 Members of Congress said a 

number of times that they intended Treasury to use the cash draw 

authority only in certain situations, such as when military attacks disrupt 

or close markets.12 One Member cited examples beyond wartime when the 

use of the cash draw authority might be appropriate, such as grave health

and well-being emergencies or nuclear accidents.13

Treasury used previous cash draw authorities infrequently. Between 1942 

and 1981, the Federal Reserve held special short-term certificates 

purchased directly from the Treasury on 228 days. In the years Treasury 

used this authority, it borrowed on average about 11 days per year. Use of 

this authority was concentrated mostly in times of war or armed conflict,

as seen in figure 4. The most Treasury borrowed on a single day 

throughout the period was $2.6 billion in 1979. 

 10Federal Reserve-Treasury Draw Authority: Hearing on H.R. 2281 and H.R. 421 before 

the Subcommittee on Domestic Monetary Policy of the House Committee on Banking, 

Finance and Urban Affairs, 96th Cong. 18-20 (1979) (letter from the Honorable Roger 

Altman, Assistant Secretary of the Treasury, to the Honorable Parren J. Mitchell, Chairman

of the Subcommittee on Domestic Monetary Policy, House Committee on Banking, Finance 

and Urban Affairs, March 16, 1979). 

11Federal Reserve-Treasury Draw Authority: Hearing on H.R. 2281 and H.R. 421 before 

the Subcommittee on Domestic Monetary Policy of the House Committee on Banking, 

Finance and Urban Affairs, 96th Cong. 7-8 (1979) (statement of the Honorable J. Charles 

Partee, member, Board of Governors of the Federal Reserve System). 

12125 Cong. Rec. 10081 (1979) (Statement of Congressman Hansen) and 125 Cong. Rec. 

10083 (1979) (Statement of Congressman Mitchell). 

13125 Cong. Rec. 10083 (1979) (Statement of Congressman Mitchell). 

Page 39 GAO-06-1007 Debt Management
Appendix II: Background on Previous 

Treasury Draw Authorities 

Figure 4: Concentrated Use of Cash Draw Authority 1942-1981 

(Days Federal Reserve Held Special Short-Term Treasury Certificates)

0

5

10

15

20

25

30

35

40

1940

1941

1942

19431944

1946

1947

1948

1949

1951

1952

1953

1954

1956

1957

19581959

1961

1962

1963

1964

1966

1967

1968

19691971

1972

1973

1974

1976

1977

1978

1979

1980

1981

1945

1950

1955

1960

1965

1970

1975

Days World War II

1940–1945 Korean War

1950–1953

Vietnam War

1964–1975

Year

Source: GAO analysis of Federal Reserve annual reports.

In the years Treasury used the cash draw authority, it most often used it 

surrounding tax payment dates in March, June, and September and to a 

lesser extent in January, April, October, and December, as seen in figure 

5.14 In other months, Treasury used this authority for less than 10 days total

per month. According to a 1979 testimony by a Federal Reserve Governor, 

Treasury had used the authority in earlier years to offset cash drains just 

before funds became available from quarterly income tax payments. He 

went on to explain that Treasury used the cash draw authority less in 

recent years since it relied more often on cash management bills to “cover 

low points in its cash balance” prior to tax payment dates.15 In that same 

proceeding, an Assistant Secretary of the Treasury credited the access to 

 14Both corporate and individual estimated tax payment dates occur in April, June, and 

September. In addition, corporate tax payment dates occur in March, October, and

December. An individual estimated tax payment date also occurs in January.

15Federal Reserve-Treasury Draw Authority: Hearing on H.R. 2281 and H.R. 421 before 

the Subcommittee on Domestic Monetary Policy of the House Committee on Banking, 

Finance and Urban Affairs, 96th Cong. 7-8 (1979) (statement of the Honorable J. Charles 

Partee, member, Board of Governors of the Federal Reserve System). 

Page 40 GAO-06-1007 Debt Management
Appendix II: Background on Previous 

Treasury Draw Authorities 

short-term funds, specifically weekly bills and cash management bills, with 

reduced use of the cash draw authority after 1975.

16

Figure 5: Borrowing Concentrated Around Tax Payment Months 1942-1981 

(Days Federal Reserve Held Special Short-Term Treasury Certificates)

After 1979, the cash draw authority was only to be used in emergencies, 

while the securities draw authority could be used “in more routine 

circumstances.”17 However, we did not find any evidence that Treasury 

used the securities draw authority between 1979 and its expiration in 1981. 

One Member of Congress described how the securities draw authority 

could be used when Treasury did not have the time to “prepare and 

market” a new security issue quickly enough to meet short-term cash 

needs. He reasoned that since Treasury would borrow “seasoned 

securities” from the Federal Reserve —existing securities in the Federal

Reserve’s portfolio—that Treasury would be able to sell them quickly 

 16Federal Reserve-Treasury Draw Authority: Hearing on H.R. 2281 and H.R. 421 before 

the Subcommittee on Domestic Monetary Policy of the House Committee on Banking, 

Finance and Urban Affairs, 96th Cong. 9-10 (1979) (Statement of Paul H. Taylor, Fiscal 

Assistant Secretary of the Treasury). 

17H.R. Rep. No. 96-111, at 2 (1979). 

Page 41 GAO-06-1007 Debt Management
Appendix II: Background on Previous 

Treasury Draw Authorities 

enough to meet cash needs.18 A committee report also stated that the 

requirement for Treasury to repurchase securities in the open market 

would subject Treasury to market discipline.19

The source of funds for the cash draw authority was the Federal Reserve, 

while the source of funds for the securities draw authority was the 

financial market. As shown in figure 6, when using the cash draw 

authority, Treasury sold special short-term certificates directly to the 

Federal Reserve in exchange for cash from the Federal Reserve. The

amended Treasury Draw Policy also specified that Treasury could borrow 

obligations (securities) from the Federal Reserve and sell them in the open 

market (in exchange for cash) to meet short-term cash needs, as shown in 

figure 6.20

The cash draw authority did not require any specific collateral beyond the 

special short-term Treasury certificates that the Federal Reserve 

purchased from Treasury. The securities draw authority also did not 

require any collateral. 

The cash draw authority and securities draw authority represented 

different transactions. As shown in figure 6, the cash draw authority 

directly involved only the Federal Reserve and Treasury, while the 

securities draw authority involved the Federal Reserve, Treasury, and the

financial market. 

Source of Funding 

Collateral Used 

Type of Financial 

Transaction 

 18125 Cong. Rec. 12514 (1979) (Statement of Congressman Mitchell). 

19H.R. Rep. No. 96-111, at 2 (1979). 

20Pub. L. No. 96-18. 

Page 42 GAO-06-1007 Debt Management
Appendix II: Background on Previous 

Treasury Draw Authorities 

Figure 6: Cash and Securities Draw Authority Transactions

Original transaction

No later than 30 days after transaction

Special short-term Treasury certificates

Special short-term Treasury certificates

Original transaction

No later than 6 months after transaction

Federal

Reserve 

bank

Federal 

Reserve

bank

Federal

Reserve 

bank

Federal 

Reserve

bank

U.S. 

Treasury

U.S.

Treasury

U.S. 

Treasury

U.S.

Treasury

Financial

market

Financial

market

Cash

Security

Security

Security

Cash

(market value of security)

Cash

(market value of security)

Security

Original cash plus interest

1

2

1

2

Cash draw authority transaction

Source: GAO analysis, PhotoDisc (images).

Securities draw authority transaction

In 1979, members of Congress and Treasury officials discussed how these 

transactions might affect monetary policy. For example, a number of 

members saw the cash draw authority as a way to monetize the debt and 

in effect print new money, thereby complicating monetary policy.21 In a 

letter to Congress, Treasury wrote that the cash draw authority did not 

create problems for monetary policy since the Federal Reserve could 

offset Treasury borrowings through its open market operations, thus 

 21125 Cong. Rec. 10080, (1979) (Statement of Congressman Wylie) and 125 Cong. Rec. 

10081, (1979) (Statement of Congressman Hansen). 

Page 43 GAO-06-1007 Debt Management
Appendix II: Background on Previous 

Treasury Draw Authorities 

having the same net effect as if Treasury borrowed from the market 

instead of the Federal Reserve.22

According to the amended Treasury Draw Policy, at least five members of 

the Board of Governors of the Federal Reserve System had to approve 

purchases and sales of bonds, notes, or other obligations to the United 

States (Treasury) by the Federal Reserve.23 The act also specified that the

securities draw authority was subject to the approval, rules, and 

regulations of the Federal Open Market Committee.24

The cost that Treasury paid to use the draw authorities was implied in the 

interest rate that the Federal Reserve charged or the market value of the 

securities that Treasury repurchased. The interest rate Treasury paid to 

use the cash draw authority changed between 1942 and 1981. The Federal

Reserve reported that Treasury paid a fixed .25 percent interest rate on the 

amount borrowed when it used this authority through December 3, 1957;

after December 3, 1957, and through the expiration of this authority it paid

a rate set at .25 percent below the prevailing discount rate of the Federal

Reserve Bank of New York.25 Although a memorandum of understanding 

between the Federal Reserve and Treasury was not readily available and 

may not have existed, according to one Member of Congress the interest 

rate for the cash draw authority was “arbitrarily” set by negotiations 

between Treasury and the Federal Reserve.26

Approvals on Use of Draw 

Authority 

The Cost of the Draw 

Authorities 

In contrast, legislative history shows some members intended to subject 

Treasury to “market discipline” when it used the securities draw authority. 

 22Federal Reserve-Treasury Draw Authority: Hearing on H.R. 2281 and H.R. 421 before 

the Subcommittee on Domestic Monetary Policy of the House Committee on Banking, 

Finance and Urban Affairs, 96th Cong. 18-20 (1979) (letter from the Honorable Roger 

Altman, Assistant Secretary of the Treasury, to the Honorable Parren J. Mitchell, Chairman

of the Subcommittee on Domestic Monetary Policy, House Committee on Banking, Finance 

and Urban Affairs, Mar. 16, 1979). 

23Pub. L. No. 96-18. 

24The Federal Open Market Committee is part of the Federal Reserve and oversees open 

market operations to promote monetary policy. 

25The discount rate is the rate that commercial banks pay to borrow funds from the Federal

Reserve. The Federal Reserve Board of Governors sets this rate. 

26125 Cong. Rec. 12515 (1979) (Statement of Congressman Stanton). 

Page 44 GAO-06-1007 Debt Management
Appendix II: Background on Previous 

Treasury Draw Authorities 

During discussions in 1979, to describe market discipline, one member 

offered a scenario in which Treasury would repurchase securities at a 

slightly higher price than it paid for them—since the securities would be 

closer to maturity—and that this price differential reflected a fair market 

interest rate on Treasury’s borrowing.27 A Federal Reserve Governor noted 

that Treasury could pay a substantial premium for selling securities it 

borrowed from the Federal Reserve late in the day because the action 

would probably take market participants by surprise. He went on to say 

that if markets were unsettled Treasury may not be able to sell all of the

securities it needed.28

Congress limited the amount and time that Treasury could use the cash 

draw authority. The amended Treasury Draw Policy stated that the 

aggregate amount of obligations acquired (at any one time by the 12 

Federal Reserve banks) directly from the United States (Treasury) could 

not exceed $5 billion.29 In addition, the act specified that Treasury could 

use the cash draw authority for renewable periods not to exceed 30 days. 

Congress limited the amount of time that Treasury could use the securities 

draw authority but did not limit the amount of securities Treasury could 

borrow. The amended Treasury Draw Policy required Treasury to 

repurchase obligations (securities) no later than 6 months after the date of 

sale and return these securities to the Federal Reserve.30

The use of the cash and securities draw authorities was not expressly 

excluded from the debt subject to limit. 

Amount and Time Limits 

for Use of Draw 

Authorities 

The Inclusion of Draw 

Authorities in the Debt 

Ceiling 

 27125 Cong. Rec. 10081 (1979) (Statement of Congressman Hansen). 

28Federal Reserve-Treasury Draw Authority: Hearing on H.R. 2281 and H.R. 421 before 

the Subcommittee on Domestic Monetary Policy of the House Committee on Banking, 

Finance and Urban Affairs, 96th Cong. 7-8 (1979) (statement of the Honorable J. Charles 

Partee, member, Board of Governors of the Federal Reserve System). 

29Pub. L. No. 96-18. 

30Pub. L. No. 96-18. 

Page 45 GAO-06-1007 Debt Management
Appendix II: Background on Previous 

Treasury Draw Authorities 

Congress specified reporting requirements for the cash draw authority but 

not for the securities draw authority. The amended Treasury Draw Policy 

required the Board of Governors of the Federal Reserve System to include

detailed information about use of the cash draw authority in its annual 

report to Congress.31 In addition, a Treasury Assistant Secretary testified in

1979 that any previous use of the cash draw authority was reported in the 

daily Treasury statement of cash and debt operations and in the weekly 

Federal Reserve statement.32

The amended Treasury Draw Policy established the cash and securities 

draw authority for 2 years.33 In 1979, members of Congress deliberated 

over how long to extend the authorities, some advocating 1 year, while 

others advocated 2 or 5 years. Those who advocated shorter periods 

wanted to give Congress a chance to evaluate the authorities’ use and 

make modifications, if necessary, prior to a 5-year period.34 After the 

expiration of the authorities, the Federal Reserve was and still is limited to 

purchasing and selling obligations of the United States only in the open 

market. 

Disclosure of the Use of 

the Draw Authorities 

Expiration of Draw 

Authorities 

 31Pub. L. No. 96-18. 

32Federal Reserve-Treasury Draw Authority: Hearing on H.R. 2281 and H.R. 421 before 

the Subcommittee on Domestic Monetary Policy of the House Committee on Banking, 

Finance and Urban Affairs, 96th Cong. 9-10 (1979) (Statement of Paul H. Taylor, Fiscal 

Assistant Secretary of the Treasury). 

33Pub. L. No. 96-18. 

34125 Cong. Rec. 10082 (1979) (Statement of Congressman Rousselot). 

Page 46 GAO-06-1007 Debt Management
Appendix III: Comments from the Appendix III: Comments from the Department of the Treasury 

Department of the Treasury 

Page 47 GAO-06-1007 Debt Management
Appendix III: Comments from the 

Department of the Treasury 

Page 48 GAO-06-1007 Debt Management
Appendix IV: Comments from the Board of Appendix IV Governors of the Federal Reserve System : Comments from the Board of 

Governors of the Federal Reserve System 

Page 49 GAO-06-1007 Debt Management
Appendix IV: Comments from the Board of 

Governors of the Federal Reserve System 

Page 50 GAO-06-1007 Debt Management
Appendix V: 

A

GAO Contact and Staff 

cknowledgments 

Page 51 GAO-06-1007

Appendix V: GAO Contact and Staff 

Acknowledgments 

Susan J. Irving, (202) 512-9142 

In addition to the contact named above, Jose Oyola (Assistant Director), 

Julie Atkins, Richard Cambosos, Dean Carpenter, Abe Dymond, Cody 

Goebel, Thomas McCabe, James McDermott, Naved Qureshi, Keith Slade, 

and Dawn Simpson made significant contributions to this report. 

Debt Management

GAO Contact 

Acknowledgments 

(450480) 
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