Banks Must Use Bailout Funds for Lending: Rep. Frank

Companies receiving public money under a U.S. government financial rescue program must use it for lending or they will be violating the law, the chairman of the House Financial Services Committee said Friday.

AP

"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," Rep. Barney Frank, a Massachusetts Democrat, said in a statement.

"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," he added.

Frank said Treasury Secretary Henry Paulson must make it absolutely clear to a participating entity that the federal government will insist on compliance.

Treasury is heading up a $250 billion capital injection program into U.S. banks as part of the larger $700 billion market bailout legislation passed earlier this month.

The first $125 billion went to nine large U.S. banks, and the Treasury is actively distributing the other $125 billion to community and regional banks around the nation.

As part of the program, banks get capital injections and must give the government senior preferred shares.

The program also includes restrictions on executive compensation and a prohibition on increasing dividends and stock repurchases.

In recent days, lawmakers have tried to attach more conditions to the program, including a prohibition on any dividends and restrictions on the type of lending allowed.

The conditions would likely come as guidelines, not requirements, but bank supervisors could enforce the guidelines by essentially restricting the banks' activities if they don't agree to them.

A Bush administration official said on Thursday that putting excessive restrictions on banks' activities could result in weaker—not stronger—financial institutions.

When describing the plan on Oct. 20, Paulson said the program was designed to attract private capital and to encourage lending.

"Our purpose is to increase confidence in our banks ... so that they will deploy, not hoard, their capital. And we expect them to do so, as increased confidence will lead to increased lending," Paulson said.

Participating banks also are expected "to help struggling home owners who can afford their homes avoid foreclosure," he added.

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