The Wall Street Journal has an interesting piece of reporting today on a Treasury program ostensibly meant to boost small businesses, but which instead has become a backdoor way for banks to get out of TARP.

Here’s the gist: The Treasury Department’s Small Business Lending Fund was set up to give loans to small banks so they would lend to small businesses. But there hasn’t been much direct lending going on. Instead, the banks have taken most of the $4 billion dispersed this year and given it right back to the government—to pay off their TARP loans. In other words, the government, under the all-American cover of helping small businesses, is giving banks low-interest loans so they can get out of TARP.

Even the U.S. Chamber of Commerce (or at least its small-business guy) goes on the record attacking it as a bailout for banks:

“It was basically a bailout for 100-plus banks,” said Giovanni Coratolo, vice president of small-business policy at the U.S. Chamber of Commerce. “From a point of view of a small business owner, it was very ineffective in getting funds out to small business.”

Money is fungible, of course, so it would be hard to prevent this kind of thing. But the banks didn’t even bother to launder it through other functions. They’re quite open about what happened:

“It’s a bit of a shell game,” acknowledged John Schmidt, chief operating officer of Heartland Financial USA Inc., a Dubuque, Iowa, lender. Heartland received $81.7 million from the fund, and it used the full amount to retire TARP obligations.

(UPDATE: Heartland contacted me to say the Journal misquoted Schmidt. It says he said, ““While it may look like a bit of a shell game to you, …” That clearly changes the meaning of what he said. I’ve asked the Journal for comment and will update this with any response.)

It’s easy to suspect that this was the real purpose of the program, as designed by Tim Geithner & Co. Indeed, check out this Reuters report from December 2009:

The official said the administration was looking at setting up a special purpose vehicle to be a conduit for money from the Troubled Asset Relief Fund, or TARP, that would get around restrictions on executive bank pay.

Alas, the “intentional or incompetent?” question isn’t quite so easy to answer. In its three months of existence, the program lent out just $4 billion of the $30 billion allotted.

But the Journal misses here by not telling us exactly why banks are so eager to git rid of their TARP debt, only noting vaguely that comes with conditions that chafe bankers who are used to imposing them. The closest we get to that is part of this quote from a banker who used 100 percent of his SBLF loans to pay off TARP:

“It gets you out of tough restrictions under TARP.

Which tough restrictions? We’re not told. The WSJ gives more weight to the bad PR banks get from TARP

But the restrictions are certainly far more likely to have been at the root of this than that. If you have TARP money, you have to step up your internal controls and compliance, which banks don’t like to do. They also don’t like disclosing their policies on perks and expenses, something TARP also required. Most important, TARP imposed restrictions on executive compensation, limiting salary to $500,000 a year.

The Journal also reports that TARP loans are higher-interest than the loans from the small-business fund, and that will indirectly free up capital for lending, which is good.

That doesn’t change the fact that, at base, the bailed-out banks are getting bailed out of their bailout.

If you'd like to get email from CJR writers and editors, add your email address to our newsletter roll and we'll be in touch.

Ryan Chittum is a former Wall Street Journal reporter, and deputy editor of The Audit, CJR's business section. If you see notable business journalism, give him a heads-up at rc2538@columbia.edu. Follow him on Twitter at @ryanchittum.