U.S. Banks Asks Paulson to Clarify Case for Rescue

By Rebecca Christie

Oct. 17 (Bloomberg) -- U.S. Treasury Secretary Henry Paulson needs to better explain why his $700 billion rescue program will benefit the economy, not just the banking industry, the American Bankers Association told him in a letter.

Paulson has made $250 billion available for purchasing preferred shares in banks so they can increase lending to businesses and consumers. Nine of the biggest institutions agreed to take $125 billion; the remainder will be available to ``thousands'' of others, federal regulators say.

Banks that sign up for capital injections shouldn't automatically be branded as troubled, Edward Yingling, the ABA's president, wrote in the letter today. Conflicting messages from officials, coupled with calls from some policy makers for more restrictions on participants, may be discouraging community bankers from signing up, Yingling said.

Lenders would be interested ``but not if they are going to run the risk of being labeled -- falsely -- as needing government support, or of appearing to be asking for a handout, or of being subjected to additional unknown government requirements or restrictions in the future,'' Yingling said.

Yingling said many banks aren't undercapitalized, even though current conditions make it tough to raise new funds. These banks could lend more if they take part in the Treasury's program, he wrote.

``There is simply no reason for these banks to run these risks to their reputations or their economic futures,'' Yingling said.

`Clarify' Details

``ABA requests that the Treasury and regulators clarify for the banking industry, the media, other policymakers, and most importantly, the American public the purpose of these programs and what they mean for and about the banks that participate,'' he said.

Treasury spokeswoman Brookly McLaughlin didn't respond immediately to a request for comment.

Big banks already have agreed to participate in the capital injection program. Citigroup, JPMorgan, Bank of America, Goldman Sachs Group Inc., Wells Fargo & Co., Merrill Lynch & Co., Morgan Stanley, State Street Corp. and Bank of New York Mellon Corp. will get the initial $125 billion, said John Dugan, head of the Office of the Comptroller of the Currency.

The $250 billion will alleviate credit losses and build confidence in the banking system, while the guarantee removes uncertainty that has eroded a willingness to fund balance sheets, said Dugan, who oversees more than 1,500 banks including Citigroup, Bank of America and JPMorgan Chase.

``What the government just did, particularly with the guarantee but also with the capital, is relieve that intense funding pressure, that intense run risk that can lead suddenly to a bank failing that's otherwise solvent,'' Dugan said today in an interview in his Washington office.

To contact the reporters on this story: Rebecca Christie in Washington at Rchristie4@bloomberg.net.