Treasury may seek to remove watchdog from small business lending program

By David Cho
Washington Post Staff Writer
Tuesday, February 23, 2010; A13

Senior Treasury officials have told the financial bailout program's inspector general that they are considering excluding a new $30 billion small-business lending initiative from the watchdog office's oversight.

The message, delivered at a meeting last week, sparked outrage from Republicans, who accused the Treasury of taking revenge on the watchdog for writing a series of scathing reports. Neil M. Barofsky, the special inspector general for the bailout, urged the Treasury to reconsider, arguing in a letter that the department was acting "contrary to the best interests of the taxpayer."

A Treasury official said that no final decision has been made. "We believe that this small business initiative needs strong oversight and will be working with Congress to ensure that happens," Treasury spokesman Andrew Williams said in a statement. "Until Congress decides how to structure the financing for small business lending, we aren't going to prejudge what that oversight will look like."

Developing the small-business lending initiative with money from the Troubled Assets Relief Program has been a struggle for the Obama administration. The program has a stigma within the financial community, and many banks say that taking federal aid would make them look unhealthy. They also do not like the conditions that are attached to TARP funds, such as executive pay limits and the oversight from Barofsky's office.

The government hopes healthy banks that are in the best position to increase lending will agree to take federal aid, but many of those firms have refused the money. Weaker banks want access to the funds, but Treasury officials are concerned that helping them may not spur new small-business lending.

To address those issues, Treasury officials have been trying to distance the new initiative from the original TARP by creating a new small-business fund with few restrictions. They are preparing to ask Congress to drop the executive pay limits for banks that lend to small businesses.

Small banks that participate would be offered up to $300 million at a 5 percent interest rate, and if the firms increase lending by at least 10 percent over two years, the interest rate could fall to 1 percent. In essence, the loan would become cheaper as lending to small businesses increases.

The proposal, however, requires congressional approval, and the Obama administration could struggle to win Republican support if its proposal does not give Barofsky's office oversight over the new initiative, said Rep. Darrell Issa (R-Calif.), the ranking member of the House Oversight and Government Reform Committee.

Issa called Treasury's decision to exclude Barofsky's office, commonly called by its acronym, SIGTARP, "disturbing" and "chilling."

"SIGTARP has been an aggressive watchdog for American taxpayers and this attempt to circumvent their oversight must not go forward," Issa said. "It is disturbing, but not altogether out of character, that this Treasury Department would attempt to deny SIGTARP the ability to conduct oversight of this proposed program."

Earlier in the year, Treasury officials told Barofsky that his office would have oversight over the new small-business initiative. Last week, they changed course, according to Barofsky.

Two days later, Barofsky wrote a letter to Herbert Allison, the senior Treasury official who oversees the bailout program, contending that the SIGTARP is best suited to oversee financial rescue programs and that a decision to exclude the watchdog would leave the new small business initiative "vulnerable to potential fraud."

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