The chairman of the House Committee on Financial Services, Barney Frank (D-MA), issued a strongly worded statement today addressing what he considers to be the proper use of proceeds that financial institutions are receiving from the sale of their preferred stock and warrants to the U.S. Treasury under the Treasury’s Capital Purchase Program. In Chairman Frank’s view, “[a]ny 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.” House Minority Leader, John Boehner (R-OH), expressed similar views in a recent letter to Secretary Paulson in which he stated that “funds made available under the economic recovery rescue package should not be used to pay for bank acquisitions, raises, and executive compensation.”

Notwithstanding the Congressmen’s assertions, EESA does not impose, or require Treasury to impose, restrictions on financial institutions’ use of proceeds from Treasury asset purchases. Section 2 of EESA sets forth certain purposes of the legislation, including providing authority and facilities for Treasury to “restore liquidity and stability to the financial system” with a mandate to use that authority and facilities to “protect[] home values, college funds, retirement accounts, and life savings,” “preserve[] homeownership and promote[] jobs and economic growth,” and “maximize overall returns to taxpayers.” Treasury is expressly authorized to establish its asset purchase program “on such terms and conditions as are determined by the Secretary.” Section 113 of EESA requires the Treasury Secretary to use his authority in a manner that will “minimize the long-term impact on the taxpayer, taking into account” such factors as “the overall economic benefits of the program, including economic benefits due to improvements in economic activity and the availability of credit….” The Treasury Secretary is also required to establish program guidelines covering a range of topics and to implement the program in a way that avoids “unjust enrichment” of participating financial institutions. Finally, Section 103 of EESA requires the Treasury Secretary to take a number of considerations into account in exercising the authority granted to him. However, nothing in these or any other provisions of EESA imposes any restrictions on financial institutions’ use of proceeds from Treasury’s asset purchases or requires the Treasury Secretary to adopt or impose any such restrictions.

The Treasury Secretary’s exercise of his discretion under EESA is subject to oversight both by congressional committees and by the Financial Stability Oversight Board and the special joint congressional Oversight Panel established by EESA. Both the Secretary and the Oversight Panel must provide reports to Congress as Treasury begins to purchase “troubled assets,” and implementation of the Capital Purchase Program triggers these requirements. Chairman Frank’s statement noted that the House Financial Services Committee will be holding oversight hearings on November 12th and 18th “on legislation Congress has passed to cope with the financial crisis,” including EESA.