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TARP Money May Help Fund Financial Reform Legislation

Lawmakers are now considering ending the $700 billion TARP program early and using some of that money to help fund the new financial overhaul bill, CNBC has learned.

The proposal is being weighed as Democrats scramble to save the bill, whose final approval is in jeopardy because of objections to roughly $19 billion in new bank fees and taxesthat was inserted at the last minute to pay for other measures in the legislation.

Sen. Christopher Dodd, one of the main architects of the bill, confirmed that such a move is being considered.

As reported earlier by CNBC, Democrats have been forced to consider changing the bank tax in order to save the legislation.

The bank tax—which would apply to large financial institutions and hedge funds with over $10 billion in assets under management—threw the passage of the financial overhaul bill into doubt when Senator Scott Brown (R-Mass) said he would vote against the bill if it amounted to a new tax. He said he feared the fee would be passed on to bank customers.

House-Senate conferees, who hammered out the legislation late last week, are now expected to meet later today to address Brown’s concerns.

The conferees will propose ending the Treasury Department's authority to require banks to accept additional TARP funds. While this authority would sunset over time rather than end immediately, budget rules say that this would result in a savings of something like $10 billion to $11 billion.

Additional FDIC premiums also are being considered to bring in $3.5 billion, bringing the total closer to the $19 billion the lawmakers sought to raise with the bank tax. The Republicans are expected to accept this deal.

The biggest banks would be subject to the higher FDIC fees, but not hedge funds, since they are not part of the FDIC system. On the other hand, smaller banks—exempted from the fee under the current bill—that operate under the FDIC system would likely find themselves footing the bill.

The assessment was put in place in order to comply with the Pay-As-You-Go Act, which requires that new laws include funding for their costs. The bill seeks to raise the lesser of $19 billion and one and one-third of the amount necessary to fully offset its net deficit effects over the next decade.

Sources on Capitol Hill say the situation is moving fast. If a change is agreed to, it may be announced very quickly in hopes of allowing the House and Senate to pass the bill before the July 4th holiday.

—CNBC's Eamon Javers contributed to this report.

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