Gregg claims that TARP money must be used to pay down the deficit

President Barack Obama has proposed a boost for small businesses, but Sen. Judd Gregg isn't hot on the idea.

In a hearing about the administration's latest budget, Gregg, a New Hampshire Republican, criticized the White House for proposing to use funds from the Troubled Asset Relief Program, an initiative originally intended to keep the banking system from collapsing, to help community banks lend to small businesses. Gregg said it violates TARP rules.

"The whole concept of the TARP was that as we recoup the money ... and as we recoup that money, we would use it to pay down the debt," Gregg said, responding to Obama's Feb. 2, 2010, proposal to transfer $30 billion from TARP to a new program that will support small business lending. "Now that's not going to happen. ... It's become a piggy bank. ... The law is very clear! 'The monies recouped from the TARP shall be paid into the general fund of the Treasury for the reduction of the public debt.'"

Peter Orszag, Obama's budget chief, defended the proposal.

"The degree to which shifting funds would add to our debt or deficits depends on what the net subsidy rate would be on that new activity," he told Gregg. "And remember, the purpose of TARP was to address problems in our financial markets ... and it has been remarkably successful in bringing credit spreads back down to normal levels. One of the lingering problems in our financial markets, however, is access to credit for small businesses."

Late in 2009, Obama ran into similar criticism from Republican lawmakers after he announced that he wanted to use unspent TARP money for tax breaks for small businesses and investments in infrastructure projects, among other things. Then, U.S. Rep. Mike Pence of Indiana, chairman of the House Republican Conference, said, "To use money from the TARP fund in the manner that is being discussed by the White House and congressional Democrats would be a violation of the law, and it would betray the trust of the American people."

We found Pence's claim to be Half True.

On one hand, the TARP legislation is quite clear: Section 106, Part D of the TARP legislation: "Revenues of, and proceeds from the sale of troubled assets purchased under this Act, or from the sale, exercise, or surrender of warrants or senior debt instruments acquired under section 113 shall be paid into the general fund of the Treasury for reduction of the public debt."

But we also talked with budget experts who said that Congress could get around those rules in a number of ways. For example, Congress could rescind the TARP money and then, in a separate action, use it to pay other expenses, said Brian Riedl, lead budget analyst for the conservative Heritage Foundation.

"Congress can of course vote to spend new money on anything it wants," Dean Baker, an economist and co-director of the left-leaning Center for Economic and Policy Research in Washington, told us in December.

In Gregg's case, though, he's strictly talking about what the law says, that TARP money cannot be used for anything other than deficit reduction. He's right and we find his claim True.

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