Grassley Warns of Bailed-out Banks’ Repaying Bail-outs With Government Funds

WASHINGTON – Sen. Chuck Grassley is asking the Treasury secretary for assurances that banks bailed out with government funds will not be allowed to use another government program to pay back their bailouts.

“The reports that banks from New York to Nashville are using federal dollars from the so-called Small Business Lending Fund to increase profits and ‘pay back’ TARP make this look like another TARP-style money shuffle,” Grassley said. “Replacing one form of government subsidy with another wasn’t a repayment when GM did it and it still isn’t. The Treasury Department has an obligation to put the brakes on any tricky bookkeeping that misleads the American taxpayer and subverts what this program was supposed to do.”

Grassley wrote to Treasury Secretary Timothy Geithner, citing media reports and a bank earnings statement to investors that banks in Pennsylvania, Nashville and New York that received money through the $700 billion Troubled Asset Relief Program (TARP) are considering paying back that bailout with money received through the federal Small Business Lending Fund. One bank touted increased “profitability” in converting TARP funds to Small Business Lending Funds in its quarterly earnings report.

Grassley asked Geithner for assurances that a repayment shuffle will not take place. He asked for a description of Treasury’s oversight plans to prevent such a shuffle and for information including a list of banks that have applied for loans under the small business program.

Last year, Grassley exposed the misleading nature of claims from the Treasury Department and General Motors that the company repaid a TARP loan through a business turn-around. In fact, its repayment was via federal money held by the government.

""Dear Secretary Geithner:

During the consideration of the Small Business Jobs Act in the 111th Congress I said that the so-called “Small Business Lending Fund” (SBLF) proposed under this legislation would become a “mini-TARP” because it allowed banks to access federal government funds at reduced costs. The White House has pushed back strongly against this claim and denied that there is any link between the SBLF and TARP. In fact, the administration even took it upon itself to “fact check” an Associated Press story on the SBLF, boldly labeling the claim that “The administration’s haziness about whom the program benefits has fueled comparisons to the $700 billion bailout known as the Troubled Asset Relief Program, or TARP” as “FICTION.”

Given these facts, I was surprised to read an article in the Pittsburgh Post-Gazette that seems to contradict the White House’s position on this issue and renews my fear that the White House is using the SBLF as a bailout for banks and a pass-through to falsely show profits in the TARP program. The Pittsburgh Post-Gazette article, published on March 17, states:

""Executives at most …local banks said they were considering paying off the TARP funds with money borrowed from a new $30 billion federal program set up to spur community banks to lend more to small businesses and boost the economy. The program, called the Small Business Lending Fund, is open to banks with less than $10 billion in assets. Banks have until the end of the month to apply. Bankers are expecting that in order to participate, they will be required to repay TARP with the proceeds. “We are considering participating in that fund,” said Jeffrey Stopko, chief financial officer at Ameriserve Financial, based in Johnstown. “If we would do that, we would utilize those funds to repay TARP.” Parkvale Financial’s chief financial officer, Gil Riazzi, said the Monroeville-based institution had already applied for a piece of the new lending fund. “We fully expect to refinance TARP with the proceeds,” he said this week.""

This is not the only example of the SBLF being used as a backdoor repayment mechanism for TARP. On March 8th, Nashville Public Radio reported that, “Nashville-based Pinnacle Financial is considering paying back one loan from the federal government by taking out another…. Pinnacle received $95 million from the Troubled Asset Relief Program, or TARP, during the financial meltdown. Now it’s considering repaying that money by taking out up to $110 million from Small Business Lending Fund.”6 Further, New York City based Medallion Financial Corporation even went so far as to tout increased “profitability” in converting their TARP funds to SBLF funds in their quarterly earnings report.7 These public statements fly in the face of the White House’s claims that there is no link between the SBLF and TARP and are a great cause of concern.

First, I ask your assurance that any TARP funds repaid by SBLF-recipient banks will not be counted as funds “repaid” to the federal government. To claim that TARP funds are being “repaid” by government-lent SBLF funds would be an egregious example of budget gimmickry and also further demonstrate that the SBLF is simply another extension of TARP at lower interest rates and without executive compensation controls. In addition, in order to fully investigate the links between the TARP program and the SBLF, please provide a written reply to each of the following:

1. What the Treasury Department’s oversight plans are for the SBLF?

2. Please provide a list of all banks which have applied for SBLF funds.

3. How much each bank has requested?

4. Which of those banks are TARP recipients?

5. How much they still owe in TARP funds?

6. For each TARP recipient bank applying for SBLF funds, what interest payments would each bank have to make on its TARP funds for the next four-and-a-half years and, if accepted into the SBLF program, what interest payments would each bank have to make over the next four-and-a-half years if it complies with the SBLF’s increased lending requirements?

Thank you for your cooperation and attention in this matter. I would appreciate all the documents in response to this request by April 5, 2011. If you have any questions, please do not hesitate to contact Chris Lucas for the Committee on the Judiciary at (202) 224-5225.

Additionally, on October 6, 2010 Senator Coburn and I sent a letter to you regarding the Office of the Comptroller of the Currency denying the Office of the Inspector General access to information on fraud at failed financial institutions. This letter specifically requested a written response by October 20, 2010. It has been five months, and yet I have received nothing.

Please provide a response to that letter as well as a written explanation as to why your reply is so long overdue.

Sincerely,

Charles E. Grassley Ranking Member Committee on the Judiciary""

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