U.S. Treasury loan plan may exclude TARP watchdog

WASHINGTON (Reuters) - A Treasury bailout watchdog has warned that excluding his office from oversight of a proposed $30 billion small business lending fund would be "terribly wasteful" and could put taxpayers at risk.

Neil Barofsky, special inspector general for the Treasury's $700 billion Troubled Asset Relief Program (SIGTARP), said in a letter to a senior Treasury official that he was "surprised" to learn last week that Treasury is proposing the new program operate outside his purview. The letter, dated Friday, was made public on Monday.

Barofsky wrote that initially, Treasury officials had indicated the new program, although technically created outside of TARP, would have the same oversight coverage as TARP. That was because it uses $30 billion of repaid TARP funds and many current TARP bank recipients could convert to the new program. But he said this was reversed in a "curious change in course."

The inspector general urged Herbert Allison, the Treasury's assistant secretary for financial stability, to reconsider this oversight decision. He said his special inspector general's office had built up considerable expertise and relationships needed to protect taxpayers' interests.

"Disregarding that expertise when developing a program that has the same goals, a very similar basic structure, that is being run by the same people, and that involves many of the same participants...would at best be terribly wasteful and lead to duplicative efforts and at worst, could lead to significant exposure to waste, fraud and abuse, as another oversight body gets up to speed," Barofsky wrote.

The Obama administration proposed the new lending fund as a means to funnel capital through small banks into small business loans. It structured the fund outside of TARP to make it more palatable to small institutions by eliminating certain restrictions and the "stigma" that has become associated with the financial bailout program.

Many smaller banks had avoided previous TARP bank capital programs designed primarily to save larger institutions from collapse. The new plan needs congressional approval.

U.S. Rep. Darrell Issa, the top Republican on the U.S. House of Representatives Oversight and Government Reform Committee, said it was "disturbing but not altogether out of character" that the Treasury would try to deny TARP watchdog oversight of the new program.

"Denying SIGTARP the ability to defend taxpayers sends a chilling message that IGs (inspector generals) who conduct real oversight will be punished for holding this administration accountable," Issa said in a statement.

The Treasury said, however, that it wasn't trying to avoid oversight of the new program.

"We believe that this small business initiative needs strong oversight and will be working with Congress to ensure that happens," a Treasury spokeswoman said. "Until Congress decides how to structure the financing for small business lending, we aren't going to pre-judge what that oversight will look like."

(Reporting by David Lawder; Editing by Andrew Hay)