Federal audit rips ‘backdoor bailout’ for banks, The Treasury Department opened the vault for banks to pay off their federal bailouts and boost executive salaries with funds that had been targeted for small-business loans, a new report charges.

Banks used $2.1 billion from a Small Business Lending Fund to reimburse the government’s Troubled Asset Relief Program, said Christy Romero, special inspector general for TARP.

“These TARP banks used SBLF funds as a vehicle to exit TARP, escape TARP’s restrictions on executive compensation and luxury expenditures,” Romero testified before the House Committee on Oversight and Government Reform.

Romero laid the blame squarely on the Treasury Department, which disbursed $4 billion in funds.

Treasury officials, who declined Committee Chairman Darryl Issa’s request to appear at Wednesday’s hearing, say banking regulators should have been watching more closely.

But Romero countered: “It was Treasury’s program.”

Romero said Treasury officials rejected her office’s recommendations to disqualify banks that sought only enough money to pay off their TARP debts.

What’s worse, Romero reported that “24 TARP banks actually decreased their small-business lending by $741 million” while receiving $501 million in SBLF funds.

She said 14 of the 24 banks paid dividends to shareholders during that period.

The inspector general’s audit criticized Treasury’s application process, which consisted of a single-page form.

“Overall, Treasury’s application review process was almost entirely focused on the banks’ ability to repay funds to Treasury, overshadowing any consideration of the applicants’ preparedness to lend SBLF money,” the report stated.

In a rare display of bipartisanship, both Issa, R-Calif., and ranking committee member, Elijiah Cummings, D-Md., criticized the handling of the loan program.

Cummings decried “a culture of mediocrity” by bureaucrats who failed to follow through with congressional intent to loosen the credit logjam for small businesses.

Issa mocked “absurd” predictions by Tim Geithner, then secretary of the Treasury, that SBLF would yield $10 in small-business loans for every federal dollar expended.

Committee members characterized the TARP-SBLF shuffle as a “backdoor bank bailout.”

Among all TARP banks participating in the program, SBLF lending increased by just $1.13 for each dollar received.

Non-TARP banks that received SBLF funding increased small-business loans by more than three times that amount — $3.45 for each dollar.

The two biggest SBLF recipients of — First Busey Corp. of Illinois and First Merchants Corp. of Indiana – received $72 million and $90 million, respectively.

The Inspector General’s Office told Talk Radio News Service that First Busey had its reduced qualified small-business lending by $92 million and First Merchants had cut its small-business lending by $270 million. Both figures were as of the third quarter.

“In other words, the SBLF – Bank Bailout 2.0 – was a sweetheart deal to further assist banks that were aided in TARP – Bank Bailout 1.0,” said Bill Cheney, president and CEO of the Credit Union National Association, which represents state and federally chartered credit unions.

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