Barney Frank: TARP Recycling Okay If Money Goes To Small Banks

06/17/2010 04:52 pm ET | Updated May 25, 2011

Now that some bailout recipients have begun sending checks back to the Treasury Department, the question has become: Whose money is that?

Deficit hawks, during the initial bailout negotiations, pushed for language that would return the funds to the Treasury to be used for debt reduction. And Treasury officials assured that this would happen. Neel Kashkari, former assistant to Treasury Secretary Henry Paulson, said that the department "has no plans to recycle funds from the $700 billion Wall Street rescue package to make more capital injections into financial institutions," as the Wall Street Journal reported in November.

Current Treasury Secretary Timothy Geithner has other ideas. Geithner announced recently he'd be recycling the money back into the financial industry by pumping it into community banks and other smaller lending institutions.

House Financial Services Committee Chairman Barney Frank (D-Mass.) told the Huffington Post that while the ideal scenario would see Troubled Asset Relief Program funds repaid, he's open to recycling funds, if it would benefit small banks.

"I'd like to get it back into Treasury and into debt reduction," Frank said. "On the other hand, there was a delay in getting some of the money to community banks, and that's where it could do us the most good."

But some lawmakers and economists say it's illegal to recycle TARP funds. The law governing the bailout says that revenue from the sale of troubled assets "shall be paid into the general fund of the Treasury for reduction of the public debt."

For the past few weeks Rep. Brad Sherman (D-Calif.) has been railing against Geithner's recycling plans, saying the administration seems to be following an "it's not illegal if Wall Street wants it" philosophy. Last week Attorney General Eric Holder told Sherman he'd look into the matter. A spokesman for the bailout's Congressional Oversight Panel told the Huffington Post that the panel is looking into it as well.

Asked if it's legal for Geithner to recycle funds, Frank said, "I don't know. I'm looking at that. I thought they had to send it back, but apparently there's a difference between the dividends which has to go to Treasury, and the TARP money. But the smaller bank piece is very important, because they're the ones who lend it."

A Treasury spokeswoman told the Huffington Post on May 7 that principal repaid by firms participating in the $250 billion Capital Purchase Program under the TARP is eligible for reuse, whereas dividends and warrant income from CPP investments in preferred equity goes to the general fund.

"As long as you don't read the statute, you'd come to that conclusion," Sherman told the Huffington Post on Monday. "Just go through the statute and work your way through it."

The law defines a troubled asset as a mortgage or instrument based on a mortgage, or any "financial instrument that the Secretary... determines the purchase of which is necessary to promote financial market stability."

"If this preferred stock isn't a troubled asset," said Sherman, "then the whole $250 billion purchases of stock are illegal."

The Treasury has not answered requests from the Huffington Post to respond to Sherman's interpretation.

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