Barney Frank to Banks: TARP Cash Isn’t for Acquisitions

As the question of how financial institutions should deploy their TARP funds grows increasingly contentious, House Financial Services Committee Chairman Barney Frank on Friday said he was “deeply disappointed” with the way some banks were using their bailout cash.

From Frank's statement:

I am deeply disappointed that a number of financial institutions are distorting the legislation that Congress passed at the President's request to respond to the credit crisis by making funds available for increased lending. Any use of the these funds for any purpose other than lending—for bonuses, for severance pay, for dividends, for acquisitions of other institutions, etc.-- is a violation of the terms of the Act.

The use of bailout funds to finance acquisitions has come under increased scrutiny in the wake of PNC's recent deal to acquire the struggling National City Corp. (GOP presidential hopeful John McCain has called for an investigation into the deal.)

For its part, Treasury appears to be supportive of the use of bailout cash to help pay for acquisitions as a way to cleanse the industry of weaker players--and there are plenty of them out there. The bankers that I've spoken with--who have already been approved for TARP cash--say they'll be using the capital for loans as well as acquisitions.

Look for this issue to become increasingly prominent on Capitol Hill. Connecticut Sen. Chris Dodd, chairman of the Senate Banking Committee, recently said "there will be hell to pay" if it turns out that banks are hoarding their capital rather than lending it out. And Frank, a Massachusetts Democrat, has announced oversight hearings on the matter in coming weeks. “It is very important if Congressional and public support for this program is to continue that we receive assurances at those hearings that the money being advanced will be used only for relending and for no other purpose,” Frank said in a statement.

Concrete limits on the use of TARP funds are already being prepared. Sen. Dianne Feinstein, a California Democrat, has announced plans to introduce legislation that would ban financial institutions receiving TARP funds from lobbying with that cash. And if Tuesday's election strengthens the Democrats' majority in Congress and puts Obama in the White House--as many now expect--don't be shocked to see bills introduced that are aimed at preventing banks from using TARP funds for acquisitions.