JPMORGAN CHASE & Co.

Matthew E. Zames
Chief Operating Officer

May 2, 2016

The Honorable Jacob Lew
Secretary

Department of the Treasury
1500 Pennsylvania Avenue, NW
Washington, D.C. 20220

Dear Mr. Secretary:

Our May 3rd gathering will mark the conclusion of my eight year term of service as a member of the
Treasury Borrowing Advisory Committee (TBAC) — including more than four as Chairman. It has been an
honor and privilege to have served as an advisor on Treasury debt issuance, helping Treasury to innovate and
meet the challenges of funding the government in the lowest cost manner possible. While proud of our
accomplishments, I know that we're all in agreement in regretting that no major changes have been adopted
to address the most glaring flaw of the government's financing system—the current debt ceiling framework.

Treasury’s meeting with this advisory committee dates back to World War II. Treasury meets with TBAC
quarterly at the request of the Secretary. TBAC consists of up to 20 Treasury-appointed individuals who are
senior leaders employed by primary dealers, institutional investors, and other major financial market
participants. The Committee is typically asked to consider the current quarterly refunding operation and to
provide expert advice on financing options for the current quarter and on longer term debt management
policies.

Although these may sound like mundane, technical policy considerations, the U.S. Treasury market is the
most important market in the world. Its orderly operation is critical for financial markets to operate and
investors rely on U.S. government securities as a safe haven during uncertain times. Even small changes in
rates can result in significant direct costs or savings to taxpayers, and changes in Treasury yields can also
influence rates on other financial instruments, impacting investors and consumers around the world.

Of TBAC’s many accomplishments, three stand out as being particularly notable during my time on the
Committee. First — early in my tenure — the government faced a surge in financing requirements as part of
the policy response to the financial crisis. Initially this surge was met in the usual fashion through increased
Treasury bill issuance. This rapidly lowered the weighted average maturity (WAM) of the Treasury portfolio
to a 20 year low of 49 months. Given tremendous uncertainty around the magnitude and duration of the
crisis, prudent risk management regarding the distribution of Treasury’s borrowing led to a Committee
recommendation to gradually lengthen the portfolio WAM by introducing more long-term issuance.
Treasury has been successful in this strategy — the portfolio WAM now stands at 69 months, well above the
historical average and close to a 35 year high.

Second, in order to diversify the investor base and satisfy the market’s demand for short-dated high quality
liquid assets, TRAC recommended the introduction of the Floating Rate Note (FRN), the first new type of
Treasury debt security in over 17 years. The first successful auction of the 2-year FRN was held in January
2014 and FRNs have been issued in every subsequent month since. Today there are over $328 billion of
FRNs outstanding held by a highly diverse group of investors, demonstrating the success of the product.
Broadening the investor base should help to lower borrowing costs and lead to savings for taxpayers.

270 Park Ave., 48th Fl., » New York, New York 10017
Telephone 212-834-4000 + Facsimile 212-834-6070 + matthew e.zames@ipmorgan.com

JPMorGaAN CHASE & Co.


Third, in 2014, TBAC advised a change in the debt management framework to hold higher cash balances to
mitigate market disruption risks. As such, after studying the issue, Treasury changed its operating
framework to hold a prudent minimum level of cash generally sufficient to cover one week of outflows,
subject to a minimum balance of ~$150 billion. This was a material change from previous periods when
cash balances were targeted to be as close as possible to a $5 billion minimum. This change is common
sense when you contrast the U.S. government position with the four largest money-center banks, which each
hold on average over $460 billion in high quality liquid assets, much of which is cash at central banks.

While I believe these steps are case studies in good government that result in sound management of the
country’s finances, they pale in comparison to the potential adverse consequences on Treasury borrowing
costs and the health of the broader economy if the government failed to make an interest or principal
payment on its debt.

Though both recent debt limit episodes ended with last-minute resolutions that avoided catastrophic technical
default, the debt limit framework, which separates passage of legislation that creates the need to borrow from
the limit on Treasury’s ability to borrow to pay bills already incurred, still remains in place today.
Accordingly, the possibility that future debt limit showdowns could introduce market uncertainty and trigger
another catastrophic financial crisis still exists and remains the unresolved “elephant in the room.” Since
1941 when the Public Debt Act was passed setting a single limit on the amount of Treasury debt obligations
that could be outstanding at any one time, Congress has passed and the President has signed more than 80
debt limit increases. It is time to introduce an alternative method of raising the debt limit.

Under current law, the budget decisions that create Treasury’s need to borrow are made separately from —
and generally earlier than — decisions about the debt limit, thus creating the conditions for disruptive
impasses. Though there are many viable policy alternatives to the current dysfunctional debt limit
framework, as noted in a July 9, 2015 debt limit report by the General Accounting Office, I think we can all
agree with the following principle — it is much more responsible and makes much more sense for Congress to
closely link decisions about the debt limit with decisions about spending and revenue at the time that the
budget decisions are made and voted upon.

The debt limit should not be seen as a budget tool. It is simply a limit on Treasury’s ability to borrow to pay
obligations that have already been incurred by Congress during the budget process.

Sincerely,