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."

The White House and congressional Democrats yesterday reached an "agreement in concept" on a measure that would throw a government lifeline to the faltering Detroit auto industry but require the auto giants, their workers and creditors to quickly negotiate a plan to achieve profitability or face the prospect of bankruptcy.

The agreement calls for the government to speed $15 billion in emergency loans to the car companies as soon as next week, and for President Bush to immediately name a car czar to oversee the bailout. Under the agreement, the car czar would be required to revoke the loans unless the companies proved by March 31 that they were implementing a plan to achieve "a positive net present value," according to a senior administration official who spoke on condition of anonymity because final language was still under discussion.

Under the measure, if the firms fail to make progress, the car czar would be required to submit to Congress a new plan to restore them to financial viability, the official said, including the option of Chapter 11 bankruptcy protection. If no plan for the long-term survival of the companies were to emerge, the firms would be ineligible for any additional federal assistance.

The official said the agreement would create "three very serious sticks to ensure that this is truly what it was intended to be: bridge financing for firms that have a plan and a path to become competitive," rather than becoming "the first in a number of interminable loans that these guys can get to avoid making the hard choices."

The agreement cedes to the Bush administration its central demand that the auto giants move immediately to make changes in their operations or lose government funding. It would also ensure that the car companies would be held to a tough standard after President-elect Barack Obama takes office.

Last night, the agreement was still being drafted into legislation, which would be subject to review by both sides. But the official said "there's an agreement on the concept and the way forward" between the Bush administration and Democratic lawmakers.

House leaders said they would hold the first vote as soon as today. Still unclear was whether the plan would be accepted by congressional Republicans, whose support is crucial to pushing it through the closely divided Senate. Yesterday, a growing list of Republicans voiced opposition to the compromise.

Some Republicans said they were annoyed that they had been excluded from the negotiations. Others raised more fundamental objections, saying the plan didn't go far enough to compel the auto giants to make painful changes in their operations and to ensure that taxpayers are repaid. As the White House began working to shore up GOP support, Sen. John Ensign (R-Nev.) said he plans to use Senate rules to block the measure, which could delay a vote in the Senate until early next week.

"Unless major changes are made that I can be convinced of, it would take a lot for me to move off where I am," said Ensign, who expressed skepticism toward the idea of investing vast powers in an auto czar.

Senate Majority Leader Harry M. Reid (D-Nev.) acknowledged the brewing battle in remarks on the Senate floor, but vowed to press ahead, even if it means keeping senators in Washington through the weekend. "We're going to have a vote on this sometime. We can either have it sooner or we can have it later," Reid said. "We cannot let a few people stop us from doing the people's business."

Until new members take office in January, Democrats have at best a 50-to-49 edge in the Senate, because of President-elect Barack Obama's resignation. It was unclear yesterday whether Obama's vice president, Sen. Joseph R. Biden Jr. (D-Del.), would cast a vote on the auto bill, meaning Democrats may need as many as 11 GOP votes to prevail over filibuster threats. A spokesman for Obama's pick for secretary of state, Sen. Hillary Rodham Clinton (D-N.Y.), said she would be available for the vote.

The legislative maneuvering came as Democratic negotiators and White House officials were signing off on the final details of an agreement to speed $15 billion in emergency loans to the car companies as soon as next week -- less than half the $38 billion General Motors, Chrysler and Ford had been seeking. The money is intended to keep GM and Chrysler afloat through the end of March. Ford has said it does not expect to need the money immediately.

Under the proposal, the government would get warrants for equity equal to at least 20 percent of the loan it provides to each firm. Bush would immediately name a car czar or trustee to manage the bailout and set broad goals for the industry in January. By March 31, the companies would be required to submit detailed proposals for cutting costs, restructuring debt and producing fuel-efficient vehicles that can succeed in the marketplace. Otherwise, the car czar could demand immediate repayment of the loans, a move that would effectively force the firms into bankruptcy.

In talks yesterday, Democrats bowed to the White House on a series of key demands, including that the car czar be allowed less discretion over whether to extend long-term government assistance to the car companies. A senior Democratic aide said the measure was being redrafted to make clear that the car czar would be required to recall any federal loans or to deny additional government support to the companies if they fail to meet certain benchmarks on the road to financial solvency.

Democrats also agreed to increase the size of the investments, asset sales or other transactions that must be reported to the car czar from $25 million to $100 million. The provision is intended to prevent the firms from using taxpayer dollars to make investments abroad, but the Bush administration argued that the lower figure would amount to "micromanaging," according to Rep. Barney Frank (D-Mass.), chairman of the House Financial Services Committee, whose staff was leading the talks for House Democrats.

Democrats kept a provision, opposed by the White House, that bars car companies that accept federal cash from pursuing lawsuits against California and other states trying to implement tailpipe emissions standards that are tougher than the federal guidelines.

Republicans say the move would undercut the automakers' profits, but Sens. Dianne Feinstein (D-Calif.) and Bill Nelson (D-Fla.) said yesterday in a letter to Reid that GM and Ford have laid out business plans indicating that they already intend to exceed the California fuel economy standards within the next few years.

The administration official warned that if the provision stays in the measure, "it will not succeed."

Democrats also were pressing to include a provision stating that if the loans fail to save Chrysler from bankruptcy, the government could recover its money from Cerberus Capital Management, the private-equity firm that owns 80 percent of Chrysler's stock.

The White House was balking at that idea, congressional aides said. But even some Republicans are troubled by the possibility that public dollars could wind up in Cerberus's well-capitalized hands.

Yesterday, Sen. Charles E. Grassley (R-Iowa) said taxpayers should not pour cash into Chrysler if Cerberus was unwilling to do so. Grassley also objected to an unrelated provision in the developing measure that would enable transit agencies, such as the Washington area Metro, to continue benefiting from a financial arrangement that amounts to a tax shelter for foreign institutions.

"Taken together, these issues are a one-two punch. They insult the taxpayer by propping up tax evasion, and they insult every American feeling the brunt of the economic crisis by putting tax dollars on the line where private equity investors refuse to put any of their own money at risk," Grassley said in a statement.

In a statement, Cerberus said that it had "worked tirelessly to assist Chrysler" and would "continue to provide Congress with full transparency as to its financials."

Sneakergate

Taylor Buley, 12.02.08, 06:00 PM EST

The U.S. government gets jittery about malware.

Here's a great start for a newspaper story: the LA Times reported that President Bush and Defense Secretary Robert Gates were recently briefed on a pressing security threat. The U.S. Strategic Command in turn raised its network operations security level.

Too bad the threat probably wasn't really aimed at the government.

The threat was a tiny piece of software, called "malware," embedded in removable media devices, namely USB sticks. And although the Bush administration might feel under attack from many sides, this attack probably wasn't a carefully planned campaign.

"I think it's just coincidental," says Paul Ferguson, a researcher at Trend Micro, the world's third-largest Internet security company behind McAfee (nyse: MFE - news - people ) and Symantec (nasdaq: SYMC - news - people ).

Instead of being a targeted cyberwarfare attack, this malware is simply a run-of-the-mill trojan virus that travels by "sneakernet," the tongue-in-cheek name for the transmission of viruses across unconnected computers by hand (or foot) in the days before widespread Internet connectivity. "Most of this malware is just seeded by criminals that cast a very wide net," Ferguson says.

The malicious software "agent.btz," though aptly-named for a narrative about international espionage, is likely one of many flavors of a particular category of malware that automatically (and silently) executes when removable media is inserted into a Windows machine.

Trend Micro aggregates information about the threats it finds and publishes the data on its Web site.