AP reports the government is now planning to redirect TARP money that is repaid by the big banks to community banks:

“The administration first indicated that the repaid funds would be used for further injections earlier this month when regulators announced the results of the “stress tests” conducted on the nation’s 19 largest banks. Those tests found that 10 of the banks, including Bank of America Corp. and Citigroup Inc., needed to raise additional capital to survive a worsening recession.

Several members of Congress, including Rep. Brad Sherman, a Democrat, contend that the law creating the TARP does not allow the money to be invested a second time. Instead, repayments should be used to reduce the national debt, they say.”

Swamp Report sees this as the Administration’s attempt to maintain a permanent fund to reward cooperation by industry… and, since it can be used for auto companies, as well as banks, there is virtually no limit on what the government can use this revolving “evergreen” fund to do.  Option ARMageddon doesn’t like the idea either:

“The Obama administration will use bailout money repaid by large U.S. banks to provide additional capital infusions to community banks, Treasury Secretary Timothy Geithner said Wednesday.” The article notes criticism from Congressman Brad Sherman, who says the TARP Act doesn’t permit TARP money to be reinvested.  This is a dangerous precedent when you think about it.  In accounting parlance, the TARP could become a kind of permanent “cookie jar,”  i.e. a pool of capital premanently available to the administration to rescue favored financials.  It will hard to organize opposition to such a plan: who could be against helping “community” banks.  It’s only fair they get their piece after the big guys got rescued, right?  Ugh.

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Read more on Troubled Assets Relief Program (TARP) at Wikinvest

Monsters Inc. by James Surowiecki at the The New Yorker – How the banks got so big and why they need to be smaller…

GM Bankruptcy Probable as Obama Favors UAW Against Bondholders by Jeff Green and Caroline Salas at Bloomberg – lowering the importance of the rule of law to favor the unions

New York Fed Chairman’s ties to Goldman raises questions by  Kate Kelly and Jon Hilsenrath at WSJ – New York Fed Chair appears to be just like the old one, Tim Geithner… owned by GS.

Wall St confidence grows over stress tests by Kiran Stacey at FT – We’ve been saying the government is managing the release of stress tests results to produce an anticlimax…