Politics

Geithner Plans To Give Recycled TARP Money To Small Banks

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Treasury Secretary Timothy Geithner announced Wednesday morning that the Treasury Department plans to give small banks access to bailout funds returned by big banks to the Troubled Asset Relief Program.

"Using the proceeds of the repayments we expect to receive from some of the largest banks, we plan to re-open the application window for banks with total assets under $500 million under the Capital Purchase Program," Geithner said in his remarks to the Independent Community Bankers of America during its summit in Washington.

At least two lawmakers have questioned the legality of recycling TARP money after Geithner announced in April that the TARP would benefit from $25 billion in repaid funds, a number that climbed to $35 billion in a Washington Post story on Saturday. The law 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."

On Tuesday, Rep. Brad Sherman (D-Calif.) delivered a tirade on the House floor, saying the administration's plans to recycle bailout funds suggests an "it's not illegal if Wall Street wants it" governing philosophy.

"The statute is very clear," Sherman said. "Whatever is returned to the Treasury goes into the general fund."

A Treasury spokeswoman told the Huffington Post last week that the law says principal repaid under the Capital Purchase Program "is put back into the TARP pool of funds." The CPP, a $250 billion sub-program of the TARP, injects capital into firms in the form of investments in preferred shares.

The distinction between revenue from the sale of troubled assets and repaid principal was the impetus for an amendment by Sen. John Thune (R-S.D.) last week that would have specifically banned the Treasury from recycling repaid principal. The amendment failed, 47-48, but a Thune spokesman told the Huffington Post that "no one should be taking a one-vote margin as authorization to act counter to the intent of Congress."

Brad Sherman doesn't buy the capital-revenue distinction in the first place. In his remarks Tuesday, the California Democrat (who voted against the bailout) said the law is clear that the preferred stock purchased under the CPP counts as a troubled asset.

"Troubled asset is defined as any financial instrument that the Secretary... determines the purchase of which is necessary to promote financial stability," Sherman said. "The preferred stock that we are about to sell or that the companies are about to repurchase from us is exactly this defined troubled asset."

Economist James Galbraith is skeptical of the Treasury's recycling plans as well.

"It would be very interesting to know what other revenues the government has, that Treasury might assume unilateral control over under similar principles," wrote Galbraith in an email to the Huffington Post. "For example, why not consider that income taxes of government employees are just a return of income previously paid to civil servants? Then Treasury would not need to consult Congress on the use of that money either."

The Treasury did not immediately respond to an inquiry from the Huffington Post on Wednesday.

Sherman's interpretation seems to square with the language in the bailout bill. Here's how the Emergency Economic Recovery and Stability Act defines a troubled asset:

(9) Troubled assets.--The term "troubled assets'' means--

(A) residential or commercial mortgages and any securities, obligations, or other instruments that are based on or related to such mortgages, that in each case was originated or issued on or before March 14, 2008, the purchase of which the Secretary determines promotes financial market stability; and

(B) any other financial instrument that the Secretary, after consultation with the Chairman of the Board of Governors of the Federal Reserve System, determines the purchase of which is necessary to promote financial market stability, but only upon transmittal of such determination, in writing, to the appropriate committees of Congress.

Here's what the law says about where revenue from the sale of troubled assets should go:

Transfer to Treasury.--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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