Some Banks May Tell U.S. to Keep Bailout Cash

Talk about biting the hand that feeds you.

The American Bankers Association complained on Thursday that bankers around the country were “extremely upset” about how the Treasury Department was trying to offer them billions of dollars in fresh capital.

“These bankers believe they are being asked—in some cases pressured—to participate in a program they did not want and do not need,” wrote Edward L. Yingling, president of the American Bankers Association, in a blistering letter to the Treasury secretary, Henry M. Paulson Jr.

Saying he had “deep concerns with the lack of clarity about the program,” Mr. Yingling said the confusion had grown sharply this week over what the government’s purpose was.

The bank lobbying group said the main confusion was over whether the purpose of the program was to shore up healthy banks, as Mr. Paulson has insisted, or to rescue failing ones.

Mr. Yingling said he was alarmed that lawmakers in Congress were criticizing the Bush administration for its reluctance to impose tougher restrictions on banks that accept government money. Some Democratic lawmakers have complained that banks are taking taxpayer money with one hand while paying out dividends to shareholders with the other. Some policy makers have also complained that banks are not lending enough and might be paying their executives too much.

Since the Treasury Department introduced its plan, officials have stressed that their goal was to strengthen healthy banks and get them to revive their lending. Officials are also encouraging the takeovers of sick banks by healthy ones, as they did last week when the Treasury approved the bailout program’s purchase of $7.7 billion of preferred shares in PNC Financial Services and rejected an application from National City Bank , based in Cleveland. National City quickly agreed to a takeover by PNC .

But the focus on healthy banks has created baffling contradictions. Healthy banks have been reluctant to take the government money, in part because they feared being stigmatized as needy or vulnerable.

Mr. Paulson essentially strong-armed several of the country’s biggest banks into participating when he announced the program earlier this month.

To attract healthy banks into the program, Treasury officials also imposed as few restrictions as possible for those that received money. Banks could still keep paying dividends. They had only limited restrictions on executive bonuses and compensation. And the government would not force the banks to make loans they did not want to make.

But that only raised the question: why was the government trying to give those banks money in the first place?

Andrew M. Cuomo, the New York attorney general, sent letters to the nine biggest financial institutions on Wednesday, demanding a “detailed accounting” of the next round of bonuses they planned to pay.

Mr. Yingling said many healthy banks might want to take advantage of the Treasury’s offer, but not if they had to suspend dividends or accept restrictions on executive pay.

“It would make no sense for a well-capitalized bank with solid earnings to agree to a program which would greatly lower the value of its stock,” Mr. Yingling wrote.