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U.S. banks line up for another bailout

Bailout: Follow the Money

Bob Moon: The government's about to start handing over billions of dollars in cheap money to smaller community banks -- a way Uncle Sam says to jump start lending to small businesses. Critics are calling it "Son of TARP," and as Marketplace's Bob Moon reports, some experts want to know why bailed-out banks are lining up for another bailout.


Bob Moon: Small businesses keep complaining that stubborn banks are holding back the recovery, making it hard to borrow start-up funding, or money for inventory or payroll. So lawmakers came up with a plan that sounded straightforward.

Sam Graves: Bolster the capital available to community banks, so that they can then lend to small businesses.

That seemingly simple plan outlined by Republican Sam Graves -- who chairs the House Small Business Committee -- has gotten complicated. Treasury Secretary Timothy Geithner was on Capitol Hill last week, trying to explain why only a third of the $30 billion available has been requested by banks.

Timothy Geithner: We do not have the capacity, and the program does not give us the ability, to force banks to lend.

Critics say the program is flawed. They say the way it's set up is most beneficial to hundreds of small banks that are already on the hook for money from the big Troubled Asset Relief Program -- TARP. They can quietly use this money to get out from under the stigma and tough restrictions of the first bailout.

Neil Barofsky: It looks like almost every single one of those TARP banks that could possibly qualify for the program have applied.

NYU professor Neil Barofsky is the former special inspector general for the Troubled Asset Relief Program. He says if the banks repay their TARP debt now through this more favorable government program, taxpayers get the short end of the deal.

The banks contend their borrowing costs only go down if they boost their small business lending by at least 10 percent. But Barofsky points out the supposed "incentive" is actually retroactive to last year.

Barofsky: For the TARP bank that just naturally increased lending as a result of the economic recovery, for having done nothing other than enjoying the benefits of TARP money and their normal course of business, they're going to get a huge windfall reduction in what they have to pay the government -- which is just not good from a taxpayer perspective.

Professor Linus Wilson has studied this issue at the University of Louisiana at Lafayette. He says government leaders have special motivation to move banks out of the controversial TARP bailout.

Linus Wilson: It'll make the numbers of the TARP look a lot better than it really is.

Wilson says they can claim a lot more banks emerged successfully from TARP -- even if those troubled banks really just switched to another kind of government aid.

I'm Bob Moon for Marketplace.

About the author

Bob Moon is Marketplace’s senior business correspondent, based in Los Angeles.

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