With reporting by Sam Stein
The Treasury Department is insisting the law governing the bailout bill gives it a green light to recycle taxpayer bailout dollars after at least one lawmaker questioned the legality of the practice.
In a statement to the Huffington Post, Treasury spokeswoman Stephanie Cutter said the law allows the Treasury to refill the Troubled Asset Relief Program with capital paid back by firms under the Capital Purchase Program, the part of the TARP that injected capital into companies in the form of investments in preferred equity securities.
Treasury Secretary Tim Geithner raised a few eyebrows in April when he said the financial bailout program would benefit from $25 billion in funds returned by bailed-out firms. Rep. Brad Sherman (D-Calif.) called the practice bogus, citing language in the Emergency Economic Stability Act (the bailout bill that created the TARP) that says money earned from sales of troubled assets "shall be paid into the general fund of the Treasury for reduction of the public debt."
Sherman told the Huffington Post that Geithner's predecessor, Henry Paulson, specifically told him that the Treasury would not recycle TARP funds. But since the money is coming from repaid principal and not troubled assets, Treasury says it's kosher.
The Senate provided additional backdoor justification for the practice on Tuesday when it voted down an amendment that would have specifically banned re-using principal. Senate Majority Leader Harry Reid (Nev.) told reporters on Thursday that in light of the Senate's vote, he thinks Geithner's recycling is probably acceptable.
Cutter's statement:
Here's what the law says:
Repaid CPP (which is the money that all the banks have) is put back into the TARP pool of funds.
Dividends (which is paid on the CPP funds) and warrant purchase income is income to Treasury.
Dean Baker, an economist with the Center for Economic and Policy Research, thinks the Treasury's stance is a bit of a stretch -- the intent of lawmakers in crafting the bill was clear.
"The wording of the original bill is quite explicit in saying that Congress did not intend for recycling of money used to buy troubled assets, which was the original purpose of the bill," said Baker in an email to the Huffington Post. "It would be a bit of a stretch to say that Congress did not want to see the recycling of money used to buy troubled assets, but it is fine with the recycling of money lent to banks to buy preferred shares. While the original bill did not explicitly rule out the recycling of money used to buy preferred shares, the position attributed to Congress by Treasury makes no sense."