POGO Letter to Congress Calling for Oversight of Small Business Bailout Program

House Committee on Financial Services

House Committee on Small Business

Dear Chairman and Ranking Member:

Even as the administration begins to wind down many of its programs to stabilize the financial system and stimulate the economy, it is imperative that the remaining programs—which continue to place billions, if not trillions, of taxpayer dollars at risk—be subject to extraordinary oversight and scrutiny. The Project On Government Oversight (POGO) is writing to raise concerns about the administration's recent proposal to transfer $30 billion from the Troubled Asset Relief Program (TARP) into a new Small Business Lending Fund (SBLF) that will be used to support lending among community and smaller banks. [1] Although POGO takes no position on the strategic merits of the SBLF, we urge Congress to exercise caution before agreeing to establish the SBLF outside of the usual TARP oversight mechanisms.

POGO is an independent nonprofit that investigates and exposes corruption and other misconduct in order to achieve a more effective, accountable, open, and ethical federal government. In keeping with its mission, POGO believes that programs such as the SBLF are most effective when they are governed by strong oversight rules to ensure that taxpayer dollars are reaching their intended target without waste or abuse.

At a recent joint hearing before the House Financial Services Committee and the House Small Business Committee, Treasury Assistant Secretary for Financial Stability Herbert Allison explained why the administration prefers to establish the SBLF outside of TARP. He testified that "various restrictions under TARP have had unanticipated consequences for small and mid-sized banks," and that even if these restrictions were removed, many small banks would still be hesitant to participate because they "believe there is a stigma attached to accepting TARP capital." [2]

While it is important for Congress to consider how the "TARP stigma" might limit the participation of small banks, POGO would also caution against removing many of the oversight mechanisms associated with TARP. Many of the TARP rules—such as those that protect investments from the undue influence of lobbyists and outside parties—were put in place not to make life difficult for the recipients, but rather to safeguard the interests of the taxpayers who are funding these programs.

And in some cases, it appears even the TARP rules did not go far enough. For instance, because Treasury initially did not require banks to report on how they actually used the capital acquired through the TARP's Capital Purchase Program (CPP), the Special Inspector General for the Troubled Asset Relief Program (SIGTARP) had to conduct its own audit, which revealed that banks were using these funds for a wide array of activities, including lending, maintaining capital cushions, purchasing agency-mortgage backed securities, repaying outstanding loans, and even acquiring other banks. [3] If Congress further reduces oversight for the SBLF, POGO is concerned that it will be difficult to assess whether the small banks are actually using the funds to make loans to small businesses as intended.

And there are other reasons POGO is troubled by the administration's proposal to establish the SBLF outside of TARP. Last month, Special IG Neil Barofsky wrote to Assistant Secretary Allison expressing his surprise that Treasury is considering excluding SIGTARP from the oversight provisions of its proposal. In response, Representative Darrell Issa, Ranking Member of the House Committee on Oversight and Government Reform, issued a statement affirming that the "SIGTARP has been an aggressive watchdog for American taxpayers," and warning that "this attempt to circumvent their oversight must not go forward." [4]

The SIGTARP points out that there are striking similarities between the newly proposed program and the TARP's CPP, including the "funds being utilized, the core mechanics, the economic terms of the program and even many of the participants." For instance, both programs provide capital in the form of preferred equity, and in both cases, the amount of capital provided is determined by the bank's risk-weighted assets. Furthermore, according to the SIGTARP, Treasury has said that $11 billion in CPP investments would be eligible for conversion to the SBLF, and the SIGTARP has estimated that up to 95 percent of the current CPP participants would be eligible to convert. [5] Again, we encourage you to question the wisdom of establishing a program that is remarkably similar to other TARP programs outside of the normal TARP oversight rules. Even if the SBLF is created outside of TARP, the program should still be governed by comparable oversight mechanisms: for instance, recipients should be required to report on their actual use of funds, and Treasury should be required to document communications with outside parties seeking to influence the SBLF investments. In addition, it is imperative that you grant explicit oversight authority to the appropriate watchdog, be it the SIGTARP or the Treasury Department Inspector General, and that you give it all the tools and resources it needs to root out waste, fraud, and abuse in the program.

Thank you in advance for your leadership on this important matter. If you have any questions or need further information, please contact me or POGO Investigator Michael Smallberg at (202) 347-1122.

Sincerely,

Danielle Brian

Executive Director

1 The White House. "President Obama Outlines New Small Business Lending Fund." February 2, 2010. (Downloaded March 17, 2010)

2 House Committee on Financial Services and House Committee on Small Business Joint Hearing. "Condition of Small Business and Commercial Real Estate Lending in Local Markets." February 26, 2010. (Downloaded March 17, 2010)

3 Office of the Special Inspector General for the Troubled Asset Relief Program. SIGTARP Survey Demonstrates that Banks Can Provide Meaningful Information on Their Use of Tarp Funds. July 20, 2009. (Downloaded March 17, 2010)

4 House Committee on Oversight and Government Reform, Minority. "Issa Criticizes Treasury for Attempt to Exclude Oversight by SIGTARP of Proposed Small Business Lending Fund." February 22, 2010. (Downloaded March 17, 2010)

5 Letter from Neil Barofsky, Special Inspector General for the Troubled Asset Relief Program, to Herbert Allison, Assistant Secretary for Financial Stability. February 19, 2010. (Downloaded March 17, 2010)