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Banks begin rush for US bailout funds

Early reluctance is giving way as hundreds prepare to apply before the deadline.

By Staff writer of The Christian Science Monitor / November 5, 2008

At the White House: Press secretary Dana Perino said Nov. 3 that the Bush administration is 'taking some time' to figure out which struggling homeowners would qualify for US government help.

Ron Edmonds/AP

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Badge of shame – or sign of solvency?

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That's the question for thousands of banks across the US as they decide whether to apply for government investments from the Treasury's $700 billion rescue fund.

When Treasury Secretary Henry Paulson first announced that Washington would inject capital into private banks directly via equity purchases, some analysts thought that participation might mark regional institutions as somehow impaired.

But dozens of banks have already signed up, and hundreds more now are expected to follow by the mid-November deadline. That rush – plus the fact that the money represents reasonably priced capital – appears to have changed the equity program's image.

"There's some feeling this is a club you have to be a member of," says Robert Brusca, chief economist at Fact and Opinion Economics.

The Treasury's rescue effort already has changed and grown into something more complicated than officials envisioned when the bill authorizing it was signed into law by President Bush on Oct. 3.

Originally, the $700 billion was intended for government purchase of the toxic mortgage-based assets held by financial institutions. But as markets continued to deteriorate throughout October, the Treasury Department announced that $250 billion of the money would be used for direct injections of capital into banks, as a means of getting credit moving through the economy more quickly.

Since then, administration officials have announced that they may also draw on bailout bill authority to try to help prevent home foreclosures, perhaps by partially guaranteeing some refinanced mortgages.

That effort appears to have slowed, however, as officials discuss how to figure out which homeowners are deserving of government aid.

A homeowner who is struggling yet still making payments on time might feel slighted if a neighbor in similar circumstances gets a US subsidy, pointed out White House spokeswoman Dana Perino on Nov. 3.

"How do you deal with all of that? And we're mindful of it, and that's why we're taking some time," Ms. Perino said.

The Treasury also reportedly is considering direct investment in a range of firms that are involved in financial business, not just banks and insurance firms.

But the direct injection of funds for banks is the only part of the Treasury's effort so far. Officials have not detailed the methods used to evaluate applicants, lest those who don't meet the criteria be tainted. As of Tuesday, 35 institutions had said they would participate, accounting for some $163 billion of the Treasury's announced investment capital.