The government said it was giving banks more money so they could make more loans. Dollars paid to shareholders don't serve that purpose, but Treasury officials say that suspending quarterly dividend payments would have deterred banks from participating in the voluntary program.

Critics, including economists and members of Congress, question why banks should get government money if they already have enough money to pay dividends -- or conversely, why banks that need government money are still spending so much on dividends.

"The whole purpose of the program is to increase lending and inject capital into Main Street. If the money is used for dividends, it defeats the purpose of the program," said Sen. Charles E. Schumer (D-N.Y.), who has called for the government to require a suspension of dividend payments.

The Treasury plans to invest up to $250 billion in a wide swath of U.S. banks in return for ownership stakes, which the government will relinquish when it is repaid.

Among other restrictions, participating institutions cannot increase dividend payments without government permission. They also are barred from repurchasing stock, which increases the value of outstanding shares.

The 33 banks signed up so far plan to pay shareholders about $7 billion this quarter. Companies generally try to pay consistent dividends and, at the present pace, those dividends will consume 52 percent of the Treasury's investment over the initial three-year term.

"The terms of our capital purchase program were set to encourage participation by a broad array of financial institutions so they strengthen their financial positions," Treasury spokeswoman Michele Davis said.

The Treasury's approach contrasts with decisions by foreign governments, including Britain and Germany, to require banks that accept public investments to suspend dividend payments until the government is repaid. The U.S. government similarly required Chrysler to suspend its dividend payments as a condition of the government's 1979 bailout.

The legislation passed by Congress authorizing the Treasury's current bailout program is silent on the issue.

The first nine participants were major banks, some running short on capital, that were told by Treasury officials earlier this month to sign on to the program for the good of the country. Their major shareholders are primarily institutional investors, such as pension funds and mutual funds, although a few wealthy individuals hold large stakes, such as Warren Buffett in Wells Fargo and Prince Alwaleed bin Talal in Citigroup.

Several banks are on pace to pay more in dividends than they get from the government. The Bank of New York Mellon got $3 billion from the government on Tuesday. It will pay out $275 million to shareholders this quarter, and a projected $3.3 billion over the next three years. A spokesman declined to comment.

'It's payback time,' banks warned in threat letters

Letters containing white powder that were sent to more than 50 financial institutions warned that "it's payback time," the FBI said Thursday.

Officials said most of the powder-laced letters were sent to branches of JPMorgan Chase.

"Steal tens of thousands of people's money and not expect repercussions. It's payback time. What you just breathed in will kill you within 10 days. Thank [word redacted] and the FDIC for your demise," said one letter released by the FBI on Thursday.

Most of the letters contained a powder that the FBI said is harmless.

But sending the letters is "a serious crime," even if they are a hoax, FBI spokesman Richard Kolko said in a statement.

More than 50 letters were received this week at financial institutions in 11 states and the District of Columbia, the FBI said.

The letters were all sent from Amarillo, Texas, to branches of Chase Bank; the Federal Deposit Insurance Corp., which insures bank deposits; and the U.S. Office of Thrift Supervision, a regulatory agency. Not all the letters contained exactly the same wording, the FBI said.

The U.S. Postal Inspection Service is offering a reward of up to $100,000 "for any information

The FBI, U.S. postal inspectors and state and local authorities are investigating, resulting in "a drain on resources" for those agencies, Kolko said.

"Law enforcement will continue to work to identify and arrest those responsible," Kolko said .

As of Thursday, financial institutions in New York, New Jersey, the District of Columbia, Ohio, Illinois, Colorado, Oklahoma, Georgia, Texas, Virginia, California and Arizona have received the letters, the FBI reported.

Kolko said that field tests on the powder included in the letters have found no sign of a hazardous material but that additional tests were being conducted.

Most of the letters have been sent to branches of JPMorgan Chase, one law enforcement official said on condition of anonymity because the investigation is ongoing.

More European banks may fail as government cash injections dry up and the region's economy grinds to a near-halt next year, the International Monetary Fund warned Tuesday.

The IMF said in its economic outlook for Europe that banks are still under severe pressure to reduce their high leverage -- the amount of debt they carry in proportion to their assets.

It said recapitalization was "now likely to slow" because cash-rich investors ---- such as sovereign wealth funds and institutional investors such as pension funds -- are now less interested in buying into banks. Instead, governments have decided to take equity stakes and become the provider of new capital.

The IMF said stock markets are watching leverage closely and that European banks tended to score less favorably than U.S. rivals.

This means that banks are now more reliant on government help, selling off assets and combining with rivals to shore up their capital, the IMF said.

A full-blown banking crisis in Europe is "improbable," the fund said, but it warned that trouble was far from over as borrowing costs and credit default spreads increase and credit becomes harder to get.

"Additional banks may fail, as implied by their very high risk spreads and market doubts about the viability of their business models," it said.

It called on European leaders to make "a decisive commitment to concerted and coordinated action to alleviate financial stresses" and avoid the serious risk of European banks retrenching to national markets, undoing efforts to join European economies more closely.

European Union governments have put up some 2 euros trillion ($2.6 trillion) in recent weeks in a bid to restore confidence in the troubled financial sector after banks froze lending to each other. The money includes guarantees that might not be spent, but also new capital injections in some countries such as Britain, France and Germany.

The countries have taken action individually on the basis of broad principles agreed to at an economic summit earlier this month.

The IMF predicts that the 15 nations that share the euro will barely grow next year, expanding just 0.2 percent. The largest economy in the region, Germany, will stagnate, it said.

Countries where a housing bubble is bursting will see sharper downturns, particularly Denmark, Ireland, Spain and Britain.

Business activity will be "very weak" in the second half of 2008 and the first half of next year, but should rebound in 2010, the IMF said.

Companies that are dependent on bank lending will be hit hard by the credit crunch, the report said, with default rates "expected to rise from their recent historically low levels." Highly leveraged firms and real-estate related businesses are particularly vulnerable, it said.

The IMF also warned that high oil prices -- at an average of $89 a barrel -- could slow growth over the longer term.

Protesters in Philadelphia call for more action on the subprime crisis Adam Nadel/Polaris

The financial system, perhaps, has been saved. Now, what about homeowners?

So far, attempts to slow the foreclosure epidemic at the center of the crisis have had little impact. Despite "voluntary" industrywide efforts to rework troubled mortgages—efforts that Treasury Secretary Henry Paulson jawboned banks and mortgage servicers into undertaking last fall—the numbers continue to soar. In 2008 some 1.69 million homeowners will lose their houses—double the rate of two years ago, says Rod Dubitsky, managing director for asset-backed securities at Credit Suisse (CS). He thinks 3.6 million more foreclosures could pile up through 2012.

Both Presidential candidates now want the federal government to take a more active role in buying up troubled mortgages and helping homeowners refinance with more affordable loans. Congress has also insisted the Treasury do more. But many of the proposals, which are based on the Depression-era Home Owners' Loan Corp., are likely to run into the same legal woes that have stymied mortgage workouts so far. The government may have to find a more extreme legal solution to get mass workouts going.

The reason: No one has figured out how to untie the Gordian knot created by the mass securitization of mortgage loans. Hundreds of investors may own an interest in the trust that holds any given mortgage. If a loan is reworked, some of those investors would lose more than others. In many cases, mortgage servicers are prohibited from modifying a pool of loans without the consent of two-thirds of the investors; often, the servicers also earn more in foreclosure than in reworking a loan. "The servicer or the lender needs more flexibility to reach a rational economic decision," says John L. Douglas, chair of the banking and financial institutions group at law firm Paul, Hastings, Janofsky & Walker.

What might that mean? Douglas thinks servicers need protection from investor lawsuits. But others say the government may have to nullify or supersede some of their obligations or investors' rights. To give securities holders more incentive to loosen the trust rules that govern them, Georgetown University Law Center associate professor Adam Levitin argues that Congress could reduce the favorable tax status for trusts that don't go along. Or, he says, what's known as the Gold Clause could be invoked. Under this New Deal-era legal precedent, the government, citing the need to preserve gold because of the economic emergency, abrogated private contracts that required payment in bullion. Washington could use the Gold Clause to give trusts leeway to modify mortgages.

Those tactics could spark enormous litigation, however. Uncle Sam might also have to reimburse investors for lost value. That's why many argue it would be better for Congress to change the bankruptcy laws. Currently, homeowners who go belly-up cannot renegotiate their mortgages in court. Democrats have tried to alter the law so bankruptcy judges can trim interest or principal. "It gets around the biggest impediment to workouts without costing taxpayers a penny," says Jaret Seiberg, an analyst for the Stanford Group brokerage.

Republicans have blocked the effort, arguing that if courts were granted these new powers, lenders would see their losses soar and pass the cost on through pricier mortgages. But should foreclosures continue to skyrocket—and should Barack Obama, who backs the bankruptcy measure, be elected President—mortgage holders could find themselves on the losing end of the battle.