Bailed-Out Banks Used Small Business Funds to Repay TARP

Money sent to banks to boost lending to small businesses in the wake of the economic crises was used instead by banks to repay TARP (Troubled Asset Relief Program) loans from the government, according to a new report from a government watchdog group.

The report issued Tuesday by the special inspector general for the Troubled Asset Relief Program says that banks that were bailed out did not distribute their loans to small business as much as banks that were not bailed out. Some banks that used the small business lending fund did not increase lending at all.

The Treasury Department was authorized to spend up to $30 billion on loans to small banks under the program, yet only $4 billion of that was spent, according to the report by Special Inspector General Christy Romero. Of that, a total $2.7 billion went to the 137 bailed-out banks, which used $2.1 billion of it to repay the higher-interest rescue aid they had received from the government.

By repaying TARP funds using money set aside for small businesses, banks were able to escape limits on executive compensation and other restrictions.

The Treasury Department disputed the report’s findings. In a letter to the Special Inspector, they stated that banks that were bailed out and used their special lending funds “significantly increased” their small business lending. The banks that received TARP funds increased their small business lending by $3.6 billion compared with levels before the special fund was established. They also added that banks that were bailed out should not be compared with banks that did not receive bailout.