A former government official in charge of overseeing 2008 bailout funds said Treasury Secretary Steven Mnuchin is defying the law in locking away excess funds from the Federal Reserve’s emergency loan programs.

Neil Barofsky, a former special inspector general of the $700 billion Troubled Asset Relief Program (TARP), said that parking $455 billion in leftover money in the Treasury’s General Fund violates the Coronavirus Aid, Relief, and Economic Security (CARES) Act.

“[Mnuchin’s] making it up, this can’t be any more clear,” Barofsky told Yahoo Finance Live in an interview Wednesday.

Mnuchin last week ordered the Fed to close down nine of its 13 backstops to various financial markets and return about $429 billion in unused money appropriated by the CARES Act. The Treasury will also return about $26 billion in funds for it to directly loan to companies, for a total of $455 billion.

On Tuesday, Bloomberg reported that the Treasury was going to move the money into the General Fund as opposed to the Exchange Stabilization Fund (ESF), which means the money could not be redeployed under a Biden administration without Congressional action.

Mnuchin has argued that he is the interpreter of the CARES Act. But Barofsky counters that if that were the case, he would have no reason not to place the money in the ESF, where the Treasury would at least have the option to reuse the money for emergency purposes.

“The only justification for taking what is a legally questionable act of moving these funds out of the reach of the Biden administration is to salt the Earth, to limit their options, and leave the country in a more dangerous place for political purposes,” said Barofsky, now a partner at the law firm of Jenner & Block. “Full stop. There is no legal justification for this.”

Flashbacks to TARP

Barofsky was appointed by President George W. Bush in 2008 to oversee TARP funds used to save banks, insurance companies, and automakers during the Great Financial Crisis.

He told Yahoo Finance that there is precedent to reallocating emergency funds, pointing to the Obama administration’s efforts to redirect $225 billion in TARP into the Treasury’s General Fund. Barofsky said an act of Congress was needed to move that money.

For the CARES Act money, Barofsky points to Sec. 4027 of the bill, which notes that on January 1, 2026, any remaining funds are to be transferred into the Treasury’s General Fund for deficit reduction.

“The statute doesn’t allow him to do this until 2026,” said Barofsky.

Ultimately, Barofsky said the Biden administration could choose to ignore Mnuchin’s move and shift the funds back into the ESF once the White House changes hands. But he said he does not expect the Biden administration to take such aggressive action, adding that he also would not bet on the Fed launching a legal challenge.

As Mnuchin has clarified, the ESF still has under $80 billion for the Treasury and the Fed to restart its liquidity facilities if needed. But the scale of those facilities would be far smaller than under the $455 billion originally committed.

Brian Cheung is a reporter covering the Fed, economics, and banking for Yahoo Finance. You can follow him on Twitter @bcheungz.

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