The U.S. Treasury Department's Community Development CapitalInitiative drew a charge of political tampering last week from aneconomist who has often been critical of programs related to theTroubled Asset Relief Program.

The Treasury Department used money from the TARP program to fundalmost $70 million in long-term loans at low interest rates to atotal of 48 credit unions before the TARP program came to anend.

But the use of TARP money to fund the loans has always causedsome degree of misgivings among some credit unions. They areworried about the possible stigma of using funds from thecontroversial bank-oriented program might bring and a criticalpaper last week seemed to incarnate some of those concerns.

Linus Wilson, an academic who has specialized in studying TARP,has alleged that political influence played a role in decidingwhich credit unions received CDCI money. Wilson, an associateprofessor of finance at the University of Louisiana at Lafayette,has authored 14 papers on different aspect of TARP and testifiedbefore Congress on TARP oversight.

His paper, “Political Influence and TARP Investments in CreditUnions,” charged that credit unions eligible for TARP funds underTreasury's Community Development Capital Initiative program werethree times more likely to receive funds if they were located in adistrict represented by a member of the House Committee onFinancial Services.

The statistical analysis also showed, Wilson said, that “creditunions that received bailout money had significantly lower ratiosof loans to deposits,” adding, “this means that TARP recipientslent less to their communities as a percent of deposits, relativeto eligible credit unions that did not receive TARPinvestments.”

Wilson called this “startling” because credit unions had beenpicked, in part, on their ability and willingness to lend moneyinto their communities.

“Forty-eight credit unions received capital injections as partof the financial sector bailout. The predicted probability ofreceiving bailout funds jumps from 23% to 76% for the typicalcredit union, if the institution's headquarters was in the districtof a member of the U.S. House Financial Services Committee,” Wilsonwrote.

Wilson's work drew upon a similar study from two University ofMichigan economists who made a similar allegation about the waysthe U.S. Treasury distributed TARP money to banks.

Ron Duchin and Denis Sosyura, both assistant professors offinance at the University of Michigan's Ross School of Businessauthored “TARP Investments: Financials and Politics” in June 2009and updated it in October 2010. The two analyzed the banks that gotmoney under the Capital Purchase Program, the largest vehicleTreasury used to channel money to support potentially troubledbanks in the wake of the credit crisis.

“Our findings suggest that political ties, at least in somecases, affected federal investment decisions under TARP, resultingin a deviation from the declared focus on healthy institutions andshifting at least some of the federal capital toward ailing banks,”the authors wrote. “This interpretation justifies the additionalrequirements for accountability, disclosure and transparency inTARP investment decisions that are advocated by the GAO and otheroversight bodies of the program.”

Wilson's paper drew its own criticism from the NationalFederation of Community Development Credit Unions, a tradeassociation that helped many of the credit unions prepareapplications for the CDCI money and shepherd the applicationsthrough a multistage and multireview application process.

The federation's analysis of Wilson's paper, according tofederation CEO Clifford Rosenthal, showed Wilson lacked criticaldata about who applied for CDCI funds that was not made public.Further, when such data was used, an analysis of which creditunions received CDCI funds shows a greater percentage of creditunions located in House Financial Services districts were rejectedfor CDCI money than were approved.

“Wilson states that 'forty-eight of the eligible credit unionswere selected to receive TARP funds,'” Rosenthal wrote in adetailed critique of Wilson's paper. “In fact, we know that atleast 72 credit unions received final approval for CDCI secondarycapital loans and at least 24 of these credit unions declined toaccept the investment.”

Rosenthal pointed out that Wilson's thesis that credit unionsthat received CDCI money failed if he did not have a real list ofcredit unions that received the money. The Treasury Departmentclearly meant for more than 48 credit unions to have access to CDCIsupport, Rosenthal noted. The fact that only 48 credit unionsactually received the money is a failure in the program, not itsintent.

Rosenthal also observed that Wilson's number for how many creditunions were eligible for CDCI money was flawed.

As a foundation of his calculations, Wilson used 189 creditunions listed as community development financial institutions onthe a website maintained by the U.S. Treasury's CommunityDevelopment Financial Institution fund. But participation in theCDCI had been opened only to CUs that were both recognized as CDFIsand designated as low- income credit unions by the NCUA. Inaddition, Rosenthal pointed out that some credit unions had hadbeen merged or closed and had not yet been purged from the CDFIlist and that the NCUA has said that only 111 credit union appliedfor CDCI loans.

“These two points alone destroy the foundation of Wilson'sargument,” Rosenthal wrote. “Instead of political influence having'driven the selection' of 48 credit unions out of 189 eligibleinstitutions, we see that at least 72 credit unions qualified andwere approved for loans out of 111 eligible applicants.”

Rosenthal also pointed out that Wilson lacked the identities ofcredit unions that had applied for CDCI funds since neitherTreasury nor the NCUA had ever made the list public. The lack ofsuch a list meant that Wilson lacked a control group against whichhe could test his thesis, Rosenthal observed.

Since the federation had served as an adviser to more than 100credit unions that applied for CDCI funds, Rosenthal said that ithad such a control group. Its analysis of that list showed thatwhile 7.1% of credit union CDCI applicants were located indistricts represented by members of the House Financial ServicesCommittee, only 6.9% of CU applicants in those districts wereapproved for CDCI money and 7.7% of CU CDFI applicants in thosedistricts were rejected for CDCI loans.

For his part, Wilson said he is willing to modify his researchto reflect the new data but said that when he contacted thefederation for their list, it declined to share it. Rosenthalconfirmed this and said the federation had acted to protect thecredit union involved.

“Our conclusions came from painstaking one-on-one contacts withevery credit union we knew or thought was applying,” Rosenthalwrote in an e-mail. “The credit unions that withdrew or wererejected do not want that information disclosed because it wasconfidential and they do not want to suffer reputation risk. Thebaseless political attacks of Wilson only heighten those concerns.”he added.