The U.S. Treasury Department should not have let large insurers qualify for the Troubled Asset Relief Program by acquiring small thrifts, Sen. Charles Grassley says.

Grassley, R-Iowa, the highest-ranking Republican on the Senate Finance Committee, cites the $4.3 billion in aid that Hartford Financial Services Group Inc., Hartford, (NYSE:HIG) and Lincoln National Corp., Radnor, Pa., (NYSE:LNC) received from the TARP Capital Purchase Program as examples of problems with TARP management.

The ability of insurers to get into a program meant to support banks and bank lending by buying small thrifts, and the Treasury Department’s previous reluctance to provide detailed reports on use of TARP funds by TARP recipients, validate grassroots skepticism about the program, Grassley says.

“There shouldn’t even be a question about whether the Treasury Department would report on how the $700 billion taxpayer-sponsored bailout was being used by those who got the money,” Grassley says in a statement.

Grassley was responding to an audit report issued Thursday by officials in the Official of the Special Inspector General for the Troubled Asset Relief Program.

In the report, SIGTARP officials provide some details, long sought by members of Congress and others, about how selected TARP recipients have used TARP funds.

SIGTARP officials assert in the report that Lincoln and Hartford probably received far more TARP aid than the thrifts would have been able to get on their own, then went on to use most or all of the TARP aid to support operations unrelated to lending to individuals and small businesses.

Treasury officials told SIGTARP that the insurers’ participation in TARP was consistent with program rules.

That response “misses the point,” SIGTARP officials write.

If the insurers’ participation in TARP had violated the law, “SIGTARP would have taken prompt action to address such non-compliance,” SIGTARP officials write.

The problem is that insurers’ participation in TARP “was incongruous with the spirit and intent of the CPP program,” officials write.

Instead of letting insurers into a program aimed at banks, Treasury could have designed a program to help insurers, but, “instead, Treasury chose to allow the insurance companies access to the CPP program,” officials write. “Simply put, Treasury fit the enormous investments in these insurance companies, huge proverbial pegs, into the small round holes represented by the technical CPP eligibility brought about through these targeted acquisitions.”

SIGTARP officials say Hartford allocated about $2.7 billion in TARP aid to the parent company and $500 million to the Hartford Life Insurance Company subsidiary.

When Lincoln sought aid, “Treasury considered Lincoln’s financial position strong and the company viable without TARP funds,” SIGTARP officials report. “However, Lincoln deemed that TARP funds could provide additional protection for the company to prudently pursue its business plans.”

Lincoln told regulators in its CPP application that it would use most of the TARP money to increase life subsidiary capital levels.

Lincoln is using TARP funds to invest in securities such as residential mortgage-backed securities and credit card-backed securities, officials say.

Representatives for Lincoln were not immediately available to comment on the SIGTARP report and Grassley’s statement. Representatives for Hartford declined to comment.