Chrysler asked government officials today for an additional $5 billion in loans to ride out the deepening economic slump.

Many small community banks are growing frustrated about their inability to access the government's $700 billion financial rescue fund, nearly two months after large banks began tapping the fund for much-needed capital.

Trade groups representing the banks complain that the delay is putting smaller institutions at a competitive disadvantage to publicly traded banks, more than 50 of which have received capital injections.

"They took care of Wall Street first, and it seems like Main Street got left behind," said Cynthia Blankenship, vice chairwoman of Bank of the West in Irving, Texas, which has $250 million in assets. Blankenship is also chairwoman of the Independent Community Bankers of America.

Some small banks, especially in areas such as California and Florida where the housing slump hit hardest, carry troubled real estate loans and likely would benefit from the government cash, Blankenship said.

Publicly traded banks have been eligible since the Treasury Department began the $250 billion capital injection program Oct. 14. The department opened it on Nov. 17 to about 3,800 small, privately held banks. A few publicly traded community banks already have received government money.

But the department has yet to issue the necessary guidelines for about 3,000 additional private banks. Most of them are set up as partnerships, with no more than 100 shareholders. They aren't able to issue preferred shares to the government in exchange for capital injections, as other banks can.

The Treasury Department has come under fire from members of Congress for not ensuring that the capital injections lead to more lending. The ICBA also argues that healthy smaller banks are more likely to use government money to make loans than are big banks that need to shore up their capital after writing down billions in mortgage-related losses.

Hundreds of the banks have applied for government money, the ICBA said in a letter Tuesday, as a precautionary step. But they can't access the money.

As a result, the government needs to figure out what it can receive in exchange for capital. Treasury officials say they are working on it but that the task is technically difficult.

"I have not seen a good answer yet," Neel Kashkari, director of Treasury's Office of Financial Stability, said Monday at a housing conference.

The vast majority of small banks are financially healthy, the ICBA says. Most did not get caught up in the housing meltdown that has so damaged Wall Street banks. But groups such as the ICBA say the rescue fund is supposed to be available to all healthy banks.

Banks that aren't eligible may lose out to other lenders that have received government money, the American Bankers Association added in a letter Dec. 5 to Treasury Secretary Henry Paulson.

"They can only watch while many of their competitors, strengthened by capital injections from the government, seize opportunities to meet credit needs of their communities," the ABA letter said.

Rep. Paul Kanjorski, a Pennsylvania Democrat, urged Treasury Secretary Henry Paulson in a letter Dec. 5 to open the program to the remaining small banks by the end of December.

Bert Ely, a banking consultant, said one possible solution would be for the government to receive some type of debt instrument rather than equity.

The Treasury Department is still struggling to hire enough staff to operate the capital-injection program, the Government Accountability Office, an auditing agency, said in a report earlier this month.

The department has handed out more than $155 billion to 77 banks. Of that sum, $115 billion has gone to the eight largest, including Bank of America Corp., Citigroup Inc. and JPMorgan Chase & Co.

Some smaller banks that haven't yet been able to access the federal money are particularly irked by the efforts of nonbank financial institutions, such as life insurers and credit card companies, to get a slice of the money. At least four life insurers, including Hartford Financial Services Group Inc. and Genworth Financial Inc., are seeking to buy small thrifts to become eligible for the capital injections.

"The law was passed to help banks, and now companies are trying to get in front by becoming a bank," said Paul Merski, chief economist for the ICBA, which has about 5,000 members. "It's a little bit frustrating."

The banks that aren't eligible control just a small slice of the nation's banking assets. They make up about one-third of community banks, which the Federal Deposit Insurance Corp. defines as banks with less than $1 billion in assets.

Overall, community banks hold 11 percent of the industry's total assets, according to Sheila Bair, chairwoman of the Federal Deposit Insurance Corp. Still, they play a vital role in small business and agriculture lending.

Community banks provide 29 percent of small commercial and industrial loans, 40 percent of small commercial real estate loans and 77 percent of small agricultural production loans, Bair said in congressional testimony last month. The FDIC doesn't have more precise data for the type of banks that aren't eligible for capital injections.

The delay in accessing the rescue money is just one aspect of the program that has frustrated small community banks and their directors.

The government has said the $250 billion it set aside for capital injections is intended for healthy banks. Yet the money has been widely referred to in press reports as a "bailout." As a result, many well-capitalized banks worry that if they take money from Treasury, their customers might see them as weak, Blankenship said.

Conversely, if they don't receive any funds, customers might wonder if they were turned down, she said. Treasury lists banks that have received money. But it won't say which banks have applied.

Finally, the ICBA has raised concerns about a measure governing the capital injections that would let the Treasury Department "unilaterally amend" the program. For example, Congress could require banks that have received government money to do more lending, Merski said.

"That's a bit concerning," said Dan Blanton, chief executive of Georgia Bank & Trust, based in Augusta, Ga. "If they decide they want to change the rules after you've taken the money ... you have to live with it."

Still, Blanton said his bank has applied for federal funds, though he hasn't decided yet whether to take the money if his bank is approved.

Federal agencies and trade groups have encouraged banks of all kinds -- including those not yet technically eligible -- to apply for the capital, to preserve the option. More than 1,000 community financial institutions have applied, Bair said in her testimony last month.

But some small banks that are eligible are saying no. Financial services firm Keefe, Bruyette & Woods said in a recent report that at least 82 banks have publicly said they won't seek funds.

Evergreen Federal Bank, based in Grants Pass, Ore., for example, has a link on its home page that reads, "We Don't Need a Bailout."

(Adds opening stock prices)

OTTAWA (Reuters) - BCE Inc (nyse: BCE - news - people ), Canada's biggest telecom company, said Friday it has not received an offer from private equity funds to take a minority stake in the company now that their C$34.8 billion ($26.9 billion) leveraged buyout deal for all of BCE is in jeopardy.

There were reports Thursday that the buyers, led by the Ontario Teachers' Pension Plan, were floating an alternative deal. One source told Reuters that it involved an C$8 billion to C$10 billion investment for a minority stake in the company, which would remain publicly listed.

"While it is BCE's policy not to comment on rumors or speculation, in the interest of its shareholders, BCE is today confirming that no such offer has been made," the company said in a statement Friday.

The buyout of BCE is on the brink of collapse after accountants ruled a week ago that the company that would emerge from the deal would fail a solvency test because of its huge debt load.

A positive solvency opinion from KPMG, BCE's accountants, is a condition for the deal to close on Dec. 11 as planned. Without it, the buyout is unlikely to proceed, BCE has said.

BCE said Friday that it continued to work with KPMG and the purchasers to satisfy closing conditions of the agreement. The buyers group also includes Providence Equity Partners, Madison Dearborn Partners and Merrill Lynch (nyse: MER - news - people ) Global Private Equity.

Shares in BCE fell 0.8 percent, of 18 Canadian cents, to C$22.77 on the Toronto Stock Exchange Friday morning and 2 percent to $17.57 on New York in opening trade. ($1=$1.29 Canadian) (Reporting by Susan Taylor; Editing by Peter Galloway)

Copyright 2008 Reuters, Click for Restriction

Top Story

Massive fiscal stimulus could wind up creating jobs offshore as funds are spent on imports

• Plus: Obama Names Volcker to Economic

President-elect Barack Obama has made a promise: to save or create 2.5 million jobs over the next two years. Estimates of the cost of his high-powered spending program to rescue the U.S. economy start at $500 billion and go way up from there.

But a giant issue lurks: How much of Obama's mammoth fiscal stimulus will "leak" abroad, creating jobs in China, Germany, or Mexico rather than the U.S? This is a question with big economic and political implications—and no easy answers.

One problem is that over the past 25 years the U.S. has become the "consumer of last resort" for the world economy. Imports have risen from the equivalent of 9% of gross domestic product to almost 19%. Even more astonishing, the value of imported goods now is equal to almost 40% of the output of U.S. manufacturing. For some types of consumer goods, such as clothing and consumer electronics, it's increasingly difficult to find items that were not made abroad. As a result, fiscal stimulus that boosts consumer spending in the U.S. may be diffused through the global economy, reducing its impact on jobs here.

At the same time, Obama will face intense political pressure to make sure his intended spending on infrastructure, health-care modernization, and green technology creates manufacturing and service jobs in the U.S. Federal procurement is already governed by a complicated welter of laws mandating minimum "domestic content" for many types of federal purchases, including the Depression-era Buy American Act. That's why, for example, steel for federally funded transit projects typically has to be made in the U.S.

No Sideshow

The scale of the fiscal stimulus will likely ensure a frenzy of lobbying to tweak the existing domestic content rules and add new ones. But the more rules and earmarks that are built into the package to ensure domestic jobs, the more expensive it will get and the more the U.S. will look as if it's retreating from free-trade policies. "Job leakage will continue," says Susan Houseman, a senior economist at the W.E. Upjohn Institute. "For better or worse, Obama and Congress will be under tremendous pressure to plug that leak."

The coming debate over "Buy American" restrictions in the fiscal stimulus is no sideshow. The financial crisis was caused, in large part, by U.S. consumers borrowing trillions of dollars from the rest of the world to buy imported cars, clothes, and gasoline, even as jobs slipped overseas. As long as the U.S. is running a big trade deficit and borrowing from abroad, a fundamental cause of the crisis remains.

Now, whether Obama's stimulus package creates 2.5 million jobs or not, economists believe it is a good idea, given the ferociousness of the downturn. "Without it, you could get a protracted period of negative or weak growth," says Nariman Behravesh, chief economist of IHS Global Insight in Lexington, Mass. "With it, you could get the economy coming out of recession in the third quarter" of 2009.

Vanishing Factories

Yet given the U.S. appetite for imports, hitting the Obama jobs target will be tough. When President Ronald Reagan cut taxes during the deep recession year of 1982, the U.S. was still a relatively closed economy. That meant when consumers started spending, the jobs showed up in this country.

Over the past 10 years, however, the number of manufacturing jobs in the U.S. has plummeted, going from 17 million in 1997 to 13 million today. The part of the Obama plan that props up consumer spending will not bring back those lost factory jobs.

In fact, Obama does aim to get money into the hands of consumers, through extended unemployment benefits and aid to state and local governments that might otherwise lay off workers or raise taxes. J. Fred Giertz, a state budget expert at the University of Illinois at Urbana-Champaign, notes that in 2003, $20 billion of federal assistance was allocated to states, with about half earmarked for Medicaid. How much this time? "Something in the range of 5% to 10% of the stimulus package would be a good guess," says Giertz.

The advantage of these types of spending is that they are fast-acting. The disadvantage: They support the same "U.S. as consumer" mentality that got us into trouble in the first place, along with purchases of imports.

What about spending on infrastructure, health-care modernization, and green technology? All these tend to produce less leakage overseas than consumer spending. But even jobs in these areas have a tendency to slip over the border unless carefully constrained. Spending on infrastructure such as rail transit is more likely to create domestic jobs, in part because it is already covered by federal legislation that mandates a certain level of purchases of U.S.-made goods.

For example, new public transit vehicles generally must have 60% domestic content and be assembled in the U.S. Electric streetcars—a mass transit option to cut pollution that's favored by cities such as Denver and Salt Lake City—would likely be imported from other countries if it weren't for the "Buy American" requirements attached to federal funding.

The Federal Reserve has requested that the Treasury Department deposit $40 billion with the central bank in an effort to help the Fed continue to stabilize the financial markets and address concerns about whether it is overstretched.