Lawmakers to Geithner: pay debt with TARP refunds

WASHINGTON (Reuters) - As banks prepare to pay back billions of dollars in federal bailout funds, lawmakers are questioning whether the U.S. Treasury has legal authority to recycle the cash toward new rescue efforts.

Treasury Secretary Timothy Geithner told the Senate Banking Committee on Wednesday that he has the power to count repaid money as part of available resources in the $700 billion Troubled Asset Relief Program.

"The way it works is that a dollar comes back, goes in the general fund. That leaves us with the ability to make an additional (dollar) commitment going forward," Geithner said, adding that this was determined by Treasury lawyers after careful consideration.

The Treasury has made a "conservative" estimate that banks will return $25 billion in taxpayer capital over the next year -- a figure that could easily double if four big banks reportedly seeking to repay capital are allowed to do so.

But a number of Republican senators who want to reclaim taxpayer money to pay down debt questioned the Treasury's interpretation of the law that created the $700 billion Troubled Asset Relief Program last October.

"I think both your predecessor and you have been reading enormous flexibility into this statute that hasn't been there," said Sen. David Vitter of Louisiana, addressing Geithner and referring to Henry Paulson, the former Treasury secretary who pushed the bailout plan through last year.

In September, Paulson persuaded lawmakers to create a rescue kitty that officials could use to stabilize roiling financial markets. Ever since, some members of Congress have asked that the money be returned with haste.

The Senate nearly endorsed a measure early this month that would have forced the Treasury to return TARP funds as they are repaid by banks. That plan was defeated by a one-vote margin in a sign that lawmakers have deep misgivings about how the rescue money is being spent.

Some Democrats also want returns to pay down debt. Rep. Brad Sherman of California, a frequent Treasury critic, said he believed the original bill made clear that the TARP funds were for one-time use. "I thought $700 billion was enough, more than enough," Sherman said.

On Wednesday, Vitter accused the Treasury of wrongly hoarding the funds so that it did not have to ask Congress for more taxpayer bailout cash.

"I think the political rationale behind it is to avoid coming back to us for anything," said Vitter, a Republican.

Geithner during his testimony reiterated that the Treasury doesn't intend to come back to Congress for more bailout money in the near term. Including the $25 billion in repayments, he said the Treasury estimates that it has $123.7 billion in unused TARP capacity, enough to fund currently contemplated support programs.

But Geithner said it was important to have flexibility to recycle TARP funds because the economy was still shrinking and the financial system was "still quite damaged."

Vitter warned Geithner that "if you have to come back (for more funds) you've built up with a lot of members a complete distrust of the next step because of these interpretations."

In a recent letter, Vitter points to language in the rescue legislation that states that TARP funds should return to the Treasury's general fund.

But Geithner's recycling plans agree with an interpretation from Paulson's legal staff, which also ruled that the funds could be recirculated for at least a year, according to former Treasury officials.

(Reporting by David Lawder and Patrick Rucker)