Obama Administration to Keep TARP Inspector General from New Small Business Program Top Republican says move is "chilling," calls it revenge for past criticism.

Feb 22, 2010 -- The Obama administration is trying to prevent a bailout watchdog from overseeing an upcoming program to boost lending to small businesses, according to a letter sent to a top Treasury Department official.

The expected decision already has Republicans crying foul, with the GOP lawmaker on a key Congressional oversight panel saying Monday that the plan sent a "disturbing" and "chilling" message that the administration will take revenge on watchdogs who criticize their efforts.

The dispute emerged in a letter sent last Friday by Neil Barofsky, the special inspector general for the $700 billion Wall Street bailout (SIGTARP), to Herb Allison, the assistant treasury secretary for financial stability.

In the letter, Barofsky warned that to exclude his office from oversight of the program would be "terribly wasteful" and "could lead to significant exposure to waste, fraud and abuse."

While the administration has not yet finalized its legislative proposal for the $30 billion program, Allison indicated to Barofsky last week that his office would not have any oversight of the program.

"I was surprised to learn from you Wednesday that Treasury is contemplating excluding SIGTARP from the oversight provisions of its legislative proposal concerning the Small Business Lending Fund, contrary to what you previously told us," Barofsky wrote in his letter to Allison.

Only two weeks ago Allison had indicated to Barofsky that the watchdog would "expressly have jurisdiction over" the small business effort, but that all changed last week. The about-face, Barofsky said, was "a curious change".

To exclude Barofsky's office from oversight, he warned, would be "contrary to the best interests of the taxpayer."

As Barofsky noted, the new small business effort bears numerous similarities to one of the programs that his office has been overseeing for more than a year: the Capital Purchase Program [CPP], part of the larger $700 billion Troubled Asset Relief Program (TARP).

"The funds being utilized, the core mechanics, the economic terms of the program, and even many of the participants all stem from TARP's CPP," Barofsky said.

"Disregarding that expertise when developing a program that has the same goals, a very similar basic structure, that is being run by the same people, and that involves many of the same participants…would, at best, be terribly wasteful and lead to duplicative efforts and, at worst, could lead to significant exposure to waste, fraud, and abuse as another oversight body gets up to speed," he wrote.

Barofsky emphasized that the small business program's structure "leaves it vulnerable to potential fraud and will require vigorous and experienced oversight from the onset of the program."

"For all of these reasons," he said, "I strongly urge Treasury to reconsider its positions with respect to the oversight provisions" of the small business effort.

Rep. Darrell Issa, R-Calif, the top Republican on the House Oversight & Government Reform Committee, called Treasury's expected move "disturbing" and "chilling" and urged the agency to reverse course.

"SIGTARP has been an aggressive watchdog for American taxpayers and this attempt to circumvent their oversight must not go forward," said Issa. "It is disturbing, but not altogether out of character, that this Treasury Department would attempt to deny SIGTARP the ability to conduct oversight of this proposed program."

Issa said Treasury's decision was an attempt to take revenge on the watchdog for a series of scathing reports in recent months.

"Denying SIGTARP the ability to defend taxpayers sends a chilling message that IGs who conduct real oversight will be punished for holding this administration accountable," said the Republican lawmaker.

Barofsky and Treasury have been at odds on various occasions over the course of the past year.

Last summer the agency asked the Justice Department to issue a ruling on the watchdog's independence after Barofsky's office sought to obtain AIG documents for an investigation.

While the Treasury department ultimately withdrew the request in September, the dispute highlighted an ongoing tension between the two sides.

Barofsky, at times, has been an outspoken critic of certain Treasury actions during the government's response to the worst economic downturn since World War II.

In a report released in late January, Barofsky argued that "many of TARP's stated goals…have simply not been met."

Last October he concluded that Treasury Secretary Tim Geithner was "ultimately responsible" for AIG, the recipient of a record $182 billion in taxpayer bailout aid, paying out $165 million in retention bonuses in the spring of 2009.

Barofsky also charged that Treasury and the Federal Reserve had misled the American public and Congress in the days leading up to the bailout's enactment in the fall of 2008.

In light of Allison's comments to Barofsky, Issa called on Congress to stand up for the watchdog's oversight powers and reject any measures that to limit them.

"Both proponents and opponents in Congress of this administration's spending policies should reject outright any effort to weaken oversight of bailout funds," Issa said.

Later this week Allison will testify before another House panel on small business lending in local markets. The Treasury official will appear before the House Financial Services Committee on Friday at 10 a.m.