A TARP Program by Any Other Name Still Needs Oversight

POGO just sent a letter to the House Committees on Financial Services and Small Business raising concerns about a recent proposal to create a bailout program for small businesses outside of the oversight rules established under the Troubled Asset Relief Program (TARP).

According to the administration’s legislative proposal, the Treasury Department would transfer $30 billion from TARP into a new Small Business Lending Fund (SBLF) that will be used to encourage community banks to lend more to small businesses. Treasury Assistant Secretary for Financial Stability Herbert Allison recently testified to Congress that the administration prefers to establish the SBLF outside of TARP because “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.”

Although it’s important to structure the program in a way that encourages maximum participation, POGO urged Congress to think twice before exempting the SBLF from TARP oversight rules designed to safeguard the interests of taxpayers and to ensure that the funds reach their intended recipients. Neil Barofsky, the Special Inspector General for the Troubled Asset Relief Program (SIGTARP), has also raised red flags about the program, stating that the administration’s proposal to circumvent TARP is all the more surprising given the striking similarities between the SBLF and the TARP’s Capital Purchase Program (CPP). 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, 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.

The SIGTARP wrote to Assistant Secretary Allison last month raising concerns about reports that the administration was considering excluding the TARP watchdogs from the oversight provisions of its proposal. In response, Rep. Darrell Issa (R-CA), 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.”

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 how they actually use the funds, and Treasury should be required to document any communications with outside parties seeking to influence the SBLF investments. POGO also called on Congress to grant explicit oversight authority to the appropriate watchdog, be it the SIGTARP or the Treasury Department Inspector General, and to give it all the tools and resources it needs to root out waste, fraud, and abuse in the program.

Or as POGO put in its press statement: “A bailout program for small businesses still needs big oversight.”