Timothy Geithner's Bailout Dollar Recycling May Be Illegal

06/07/2009 05:12 am ET | Updated May 25, 2011

In his testimony before the Congressional Oversight Panel on April 21, Treasury Secretary Tim Geithner said that the government's bank bailout program has $134 billion left. Geithner said the figure was boosted by $25 billion that he expects to be paid back by bailed-out firms over the next year.

Rep. Brad Sherman says that's a no-no.

"If you look at the law, it's pretty clear any money returned from these banks goes into the general fund of the United States and not a revolving bank bailout fund," said the California Democrat in an interview with the Huffington Post.

Sherman points to language in the Emergency Economic Stability Act -- the bailout bill that created the Troubled Asset Relief Program -- that specifically states that revenues and proceeds from sales of troubled assets "shall be paid into the general fund of the Treasury for reduction of the public debt."

In other words, the taxpayer is supposed to get his money back.

Sherman, who voted against the bailout, said he brought up the recycling issue with the Treasury Department a few weeks ago. "They said they'll get back to me," he said. The Department has not yet responded to requests for comment from the Huffington Post, either.

It's not clear that Sherman's got an airtight case. Geithner specifically said that the $25 billion would be coming from firms participating in the Capital Purchase Program, which injects capital directly into financial firms by investing in preferred equity securities. It doesn't buy and sell troubled assets.

On Tuesday, the Senate defeated a measure by John Thune (R-S.D.) that would have definitively banned Geithner's recycling. A Thune staffer says the current law doesn't.

"Thune's amendment deals with return of principal, not revenue or proceeds," Thune spokesman Kyle Downey told the Huffington Post. "[The current law] is concerned with sale of troubled assets but it's silent on direct capital."

Sherman doesn't think it makes a difference from which part of the bailout the money's coming back. The CPP, after all, is part of the Troubled Asset Relief Program. He added that it was his understanding during negotiations with Geithner's predecessor, Henry Paulson, that recycling wouldn't happen.

"Paulson, in response to my questions, publicly stated he wasn't intending to recycle," Sherman said.

"My guess is that Geithner will get away with it," emailed Dean Baker, an economist with the Center for Economic and Policy Research, in response to a query from the Huffington Post. "That may not have been the intention of Congress, but no one is going to stop it."

Here's what the law says: "Revenues of, and proceeds from the sale of troubled assets purchased under this Act, or from the sale, exercise, or surrender of warrants or senior debt instruments acquired under section 113 shall be paid into the general fund of the Treasury for reduction of the public debt."

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