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Market Commentary for December 4, 2007

The Bears were in control of the market direction today with the major indices holding in negative territory throughout the trading session. Trading volume was moderate, trading ranges were generally tight. With no or limited economic data, day traders and investors have little to go on to make for an interesting trading session. Tomorrow’s session could provide more activity with upcoming economic data.

At the closing bell, here is how the major indices ended the session: the DOW (Dow Jones Industrial Average) posted a loss of 65.84 points on the day to end the session at 13,248.73; the NYSE (New York Stock Exchange) posted a loss of 63.48 points to end the session at 9,748.38; the NASDAQ posted a loss of 17.30 points for a close at 2,619.83; the S&P 500 moved lower by 9.63 points to end at 1,462.79 and the RUSSELL 2000 moved lower by 7.91 points to close at 752.06. The FTSE All-World Index ex-US (top Large/Mid Cap aggregate from over 2,700 stocks from the FTSE Global Equity Index Series (GEIS) which covers 90% of the world’s investable market capitalization) posted a loss of 1.20 points to close at 264.60 and the FTSE RAFI 1000 posted a loss of 36.17 points to close at 5,982.95.

Assistant Secretary for Financial Markets Anthony W. Ryan Remarks at the Euromoney Euro Fixed Income Forum
Paris - Bonjour. Thank you for inviting me to join you here in Paris at the Euromoney Euro Fixed Income Forum. The citizens of this great city have long been renowned for their intellectual curiosity, their diverse discourse, and their resilience in the face of adversity. These same characteristics are again in demand as market participants face uncertainty and dislocations in the financial markets. While challenges are no longer necessarily constrained to a single city or even country, given how interconnected financial markets and economies are in the world today, the qualities inherent to citizens of this nation are equally important to stakeholders globally as we move forward. At the U.S. Department of the Treasury, we know this firsthand. Our views range far beyond the Treasury market in the United States and impact a global audience. This morning, I'd like to begin by discussing the current state of the financial markets and the economy. I'll then share a few thoughts about the demand for U.S. Treasury securities and regulation of the government securities market. Following that, I'd be happy to answer some questions.

Current State of the Markets
A comprehensive reassessment of risk is occurring by participants in capital markets, resulting in the repricing of securities across asset classes and sectors. This process, while ultimately constructive, will be long and slow. Some of the repricing has occurred with significant volatility, with very few asset classes being immune, even U.S. Treasuries. Leading into the summer, it was clear that risk was priced very cheaply. Developments in the U.S. subprime mortgage market may well have provided the initial spark for the repricing of risk, but there was plenty of kindling available in other sectors of the markets. Consequently, challenges have been widespread and global in nature. As market participants seek to gain a better understanding of the root causes of recent volatility, they will find some of the traditional causes and conditions such as an abundant supply of easy credit and a decline in lending standards. Other contributory factors are more unique to this episode given the profusion of financial innovation and its accompanying characteristics such as the complexity and opacity of many financial instruments and the heavy reliance by investors on rating agency assessments. Earlier this year, uncertainty regarding the probability of defaults of subprime mortgage-backed securities caused investor concerns. This concern led to broader uncertainty as market participants sought to reassess the credit risk of many asset-backed securities. In itself, such discrimination serves a purpose; it is in fact "market discipline" in action. However, this credit worthiness evaluation spread further and faster than most investors anticipated. This created liquidity challenges as investors shunned certain securities. This illiquidity spread to short term money markets creating stress and volatility in markets normally noted for their stability including Fed funds, LIBOR, and commercial paper. These short-term credit markets play an important role in facilitating financing activity and enhancing the liquidity in the broader capital markets - all of which is important to economic vitality and for growth going forward. While there has been some improvement in certain sectors of the credit markets since this past summer, risks still exist as participants work through market-based solutions to the current challenges and stresses. As we head into year end, we are witnessing a resurgence of risk aversion and continued impaired liquidity across the credit spectrum. It will take additional time for markets to regain confidence, and we will likely witness more unforeseen challenges leading to more headlines and volatility as additional disclosures are made in the weeks and months ahead. But we should acknowledge that we are fortunate to confront these challenges with the backdrop of a growing global economy.

Global Economy
From a global perspective, economic growth has been quite strong. The International Monetary Fund projects that by the end of this year, the world will have experienced five consecutive years in which real growth exceeded 4 percent. In fact, the average of those five years is almost 5 percent. This is the best five year growth period in over three decades. Not only is this growth widespread, but at the same time, world consumer price inflation is at its lowest level in three decades, averaging 3.6 percent during the past five years, according to the IMF. The U.S. economy was also in good shape going into the current period of market dislocations and economic fundamentals remain sound. For instance, job creation remains strong with over 1.7 million new jobs being created in the past year, and the U.S. economy has now added jobs for 50 straight months. The unemployment rate is at 4.7 percent, close to its lowest reading in 6 years. In the U.S., real GDP growth was 4.9 percent in the third quarter, supported by strong gains in consumer spending, business investment and exports. Corporate profits are solid, and global growth is boosting U.S. exports, helping to improve the current account balance. The fiscal deficit has been substantially reduced, and importantly, core inflation remains contained. While the U.S. economy does face serious headwinds from a weak housing market and high energy prices in addition to current credit market conditions, solid economic fundamentals should support continued growth.

Capital Markets
However, despite many solid economic fundamentals, capital market conditions remain a formidable challenge. At the U.S. Department of the Treasury we are confronting both the immediate and longer term challenges in the capital markets. As part of our effort to be vigilant when we monitor markets, we are in daily contact with market participants, be it global investors, reserve managers, financial institutions, and policy makers - to discuss market conditions. Throughout these discussions, we encourage the private sector to continue to focus on responding to market challenges in a proactive manner.

Broader Policy Implications of Recent Market Dislocations
Market challenges have also sparked legitimate discussion and debate on a broad range of policy issues impacting our capital markets. It is important for policy makers and market participants to assess the implications of financial innovation – and we are doing just that. The President's Working Group on Financial Markets, or PWG, which Secretary Paulson chairs and includes the Chairmen of the Federal Reserve, the Securities and Exchange Commission, and the Commodity Futures Trading Commission, is conducting a comprehensive review of such issues. Given the global nature of our financial markets, we are also working with the G7, and through the Financial Stability Forum to address several of these issues. One area where the PWG was already ahead of the recent credit and mortgage market challenges is hedge funds. Back in February, the PWG produced forward-leaning guidance for the industry and its participants. The PWG's Principles and Guidelines Regarding Private Pools of Capital serve as a foundation to enhance vigilance and market discipline, strengthen investor protection and guard against systemic risk. While a small number of hedge funds were forced to wind down in recent months, there have been no systemic events associated with their closure. Ironically, many regulated institutions both in the U.S. and Europe appear to have underestimated all of the risks associated with the securitized assets on their balance sheets or the risks associated with commitments to provide liquidity to off-balance sheet vehicles, such as conduits and structured investment vehicles (SIVs). Many of the policy issues we are currently reviewing are directly tied to the credit and mortgage markets; others affect the capital markets more broadly. One area that clearly warrants examination is the role of credit rating agencies. In addition, we are also addressing financial institution risk management and related regulatory issues. These complementary reviews are focused on efforts that range from enhancing the management of counterparty credit risk, to market infrastructure issues, to issues surrounding reporting and risk disclosure and how the existing regulatory structure and tools respond to a financial system that is constantly evolving.

Another area that deserves attention is the role played by professional investors. Strong market discipline relies on investors to assess risk in a comprehensive and diligent manner. Many investors are purchasing, either directly or indirectly, increasingly complex securities. While risk evaluation can be difficult and complexity may be a very legitimate reason a potential investor decides not to invest, it can be no excuse for an existing investor or buyer of such a security to justify a loss. Investors and fiduciaries must understand the risks associated with a potential investment. This is true of any investment whether it is an asset, such as equity, or a derivative product, such as a CDO. Insufficient understanding or failure to perform independent and adequate due diligence prior to making an investment decision is simply unacceptable. Investors must also monitor their holdings and exposures, including reassessing their risks and validating their assumptions given changing economic and market conditions. Our capital markets need more risk analysis, not risk paralysis.

As investors continuously discover, risks are often positively correlated. Another risk to economic growth that we face in the U.S. is a decline in housing. This sector has been a drag on U.S. economic growth since early 2006, and the correction in both homebuilding and housing prices is still unfolding. The longer housing prices remain stagnant or fall, the greater the penalty to near-term economic growth and the bigger the effect on American families. With respect to the housing sector in the short term, our first ambition is to limit the number of avoidable foreclosures. Following a series of meetings this summer and fall, Treasury encouraged mortgage servicers, counselors and lenders to work together in a coordinated, efficient and expedited fashion. This group launched a large non-partisan, private-sector alliance, named HOPE NOW, which is coordinating efforts to reach more homeowners to help them find affordable solutions. There is an immediate need to identify struggling borrowers who will be able to refinance or modify their mortgages into something more sustainable in order to stem the rising number of defaults and foreclosures nationwide. The President has also been calling on the U.S. Congress to modernize the Federal Housing Administration, to make affordable loans more widely available. In order to facilitate mortgage workouts, the President has called on Congress to eliminate taxes temporarily on mortgage debt forgiven on a primary residence. Our longer-term ambition with respect to housing is to identify public policy changes to reduce the likelihood of repeating the excesses of recent years while maintaining access to credit for able homeowners. The patchwork combination of overlapping federal and state regulation of the mortgage industry needs to be streamlined and modernized. This fragmented system has complicated an already difficult situation. Currently, the Treasury is working on a blueprint for reforming the U.S. financial regulatory system. Additionally, homebuyer education and effective disclosure are critical to helping borrowers understand the risks of innovative mortgage products, as financial choices become more and more complex. In order to continue to derive the associated benefits of economic growth and to foster sustainability, stakeholders in the capital markets and economy must address challenges, and we are doing just that. Some challenges are national, others are global.

Importance of Open Capital Markets
One global challenge is the growing risk of protectionism. We live in, compete in, and benefit from, a global economy. Open economies create greater opportunity for citizens including the opportunity to expand markets by facilitating trade and welcoming foreign investment. In fact, one reason the U.S. economy has been resilient during this housing correction has been the strength of our export sector. Open investment and the free flow of capital are essential to healthy capital markets. Let me take this opportunity to assure international investors that they are welcome in our markets. President Bush reaffirmed the U.S.'s commitment to an open investment policy earlier this year stating that "The United States unequivocally supports international investment in this country and is equally committed to securing fair, equitable, and nondiscriminatory treatment for U.S. investors abroad." Last year, there was a net increase of $1.9 trillion in foreign-owned assets in the United States: over 5 million U.S. workers are directly employed by foreign-based firms and about an equivalent number of additional jobs are indirectly supported by foreign direct investment into the United States. We understand that when America embraces international investment, its businesses, workers and consumers ultimately benefit. The same is true for all markets. Ultimately, open capital markets improve the efficiency of markets, improving liquidity and reducing the costs of investing. As stakeholders we need to ensure that our regulatory and business practices encourage openness, as well as, fair and honest competition.

U.S. Treasury Marketplace
We have certainly embraced the philosophy of open investment as it relates to the U.S. Treasury marketplace. We encourage broad participation in the U.S. Treasury market. This broad participation enhances trading volumes, market depth and liquidity, which in turn enables the U.S. government to borrow at a lower cost over time. These savings are passed on to the U.S. taxpayer in terms of lower interest costs. Currently, 52 percent of the privately held public debt outstanding is held by individuals, pension plans and the central banks of other countries. This level of international investment as a percent of debt outstanding is comparable to other vibrant, open sovereign debt markets that we see amongst the G7. Given the massive flows that need to be invested as a result of international transactions globally, the U.S. Treasury market remains the preeminent marketplace for commerce. No other marketplace in the world has the depth and liquidity of the U.S. Treasury market, and we are not taking our competitive position for granted. We are always looking for new ways to improve the U.S. Treasury marketplace. Earlier this year, several private sector firms gathered and established the Treasury Market Practices Group. This group, comprised of representatives from the dealer community, buy-side firms and custodians, was formed to foster dialogue and offer recommendations for the Treasury cash, repo and related markets. This group developed and released "Treasury Market Best Practices" to promote trading integrity and market efficiency. Their principles based approach -- a self regulating mechanism essentially for a lightly regulated market -- and the subsequent market reaction has been very encouraging. The introduction of these practices represents another step in the continual process of enhancing our Treasury market. We encourage other private sector market participants, such as the Securities Industry and Financial Markets Association, to continue their efforts to ensure the preeminence of the U.S. Treasury market. It is very encouraging to see the private sector take a leading role in promoting market integrity and orderliness.

The global economy derives much of its strength from robust and diverse capital markets. As participants in the global economy, each of us must contribute to ensure the integrity, openness and competitiveness of our markets. It is a privilege to do such work. With such privilege comes responsibility. To attain our goals, we must recognize that the responsibility is borne by both the public and private sectors. Welcoming investment from abroad, addressing both the near term and strategic challenges, and doing all we can to ensure high quality, competitive capital markets remain our goals. Using sound principles as a guide, we can strengthen the vitality, stability and integrity of our capital markets, and in turn our economies. Merci beaucoup.

Commodities Markets
The trend was mixed across the board today for the Energy Sector: Light crude moved lower today by $0.99 to close at $88.32 a barrel; Heating Oil closed at $2.51 a gallon; Natural Gas moved lower today by $0.06 to close at $7.16 per million BTU and Unleaded Gas closed with no change at $2.25 a gallon.

Metals Market ended the session mostly higher across the board today: Gold moved sharply higher today by $12.90 to close at $807.60 a Troy ounce; Silver moved higher by $0.26 today to close at $14.47 per Troy ounce; Platinum moved nicely higher today by $10.90 to close at $1,472.30 per Troy ounce and Copper moved lower by $0.06 to close at $3.02 per pound.

On the Livestock and Meat Markets, the trend was lower across the board today: Lean Hogs ended the day lower by $0.90 to close at $60.33; Pork Bellies ended the day lower by $1.18 at $89.55; Live Cattle ended the day lower by $0.08 at $96.30 and Feeder Cattle ended the day lower by $1.05 at $107.00.

Other Commodities: Corn moved nicely higher today by $7.75 to close at $411.25 and Soybeans moved nicely higher today by $12.75 to end the session at $1,091.50.

Bonds were mixed across the board today: 2 year bond closed with no change at 100 16/32; 5 year bond closed with no change at 100 18/32 today; 10 year bond moved lower by 3/32 at 103 5/32 and the 30 year bond closed at 111 5/32 for the day.

The e-mini Dow ended the session today at 13,265 with a loss of 84 points on the trading session. The total Dow Exchange Volume for the day came in at 139,007 which are comprised of Electronic, Open Auction and Cash Exchange. Traders should review workshops available at the CBOT (Chicago Board of Trade) Educational in-person seminars schedules available on CBOT (Chicago Board of Trade) website.

The end of day results for the CBOT (Chicago Board of Trade) which is comprised of the total Exchange Volume for Futures and Options (EVFO) including Electronic, Open Auction and Cash Exchange ended the day at 9,985,705; Open Interest for Futures moved lower by 58,350 points to close at 9,985,705; the Open Interest for Options moved lower by 285,080 points to close at 5,932,623 and the Cleared Only closed moved lower by 259 points to close at 16,101 for a total Open Interest on the day of 15,934,429 for a total Change on the day with a loss of 343,689 points.

On the NYSE today, advancers came in at 1,157; decliners totaled 2,127; unchanged came in at 82; new highs came in at 48 and new lows came in at 155. Active trading stocks on the Big Board today:

Advancers: CME Group Incorporated (CME) higher by 9.45 points, high on the session $687.00, low on the session $660.15, closing price $670.25; Rio Tinto plc (RTP) higher by 9.27 points, high on the session $462.64, low on the session $448.25, closing price $458.66. Decliners: Goldman Sachs Group Incorporated (GS) lower by 11.67 points, high on the session $223.46, low on the session $215/22, closing price $215.22; Suntech Power Holdings Corporation Limited (STP) lower by 4.06 points, high on the session $81.45, low on the session $75.82, closing price $77.24; Phillips-Van Heusen Corporation (PVH) down by 5.65 points, high on the session $40.46, low on the session $36.65, closing price $37.64; Transocean Incorporated (RIG) lower by 7.49 points, high on the session $132.41, low on the session $129.33, closing price $130.06.

On the NASDAQ today, advanced totaled 1.012; decliners totaled 1,972; unchanged came in at 121; new highs came in at 30 and new lows came in at 246. Active trading stocks for the day consisted of: Advancers: CMGI Incorporation (CMGI) higher by 3 points, high on the session $13.88, low on the session $10.30, closing price $13.33. Decliners: First Solar Incorporated (FSLR) lower by 14.68 points, high on the session $231.46, low on the session $213.91, closing price $213.00.

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