With the U.S. economy in turmoil, some members of Utah's industrial banking community are finding the allure of federal bailout money, even with all its strings attached, tough to resist.

Just the thought of possibly tapping into the federal funds that may be available to beef up their operations compelled six of Utah's 30 industrial banks in recent weeks to either convert their operations to commercial banking enterprises or take the first steps in that direction.

Among the six are some of the state's big names in industrial banking, Goldman Sachs, Morgan Stanley and GMAC.

"Those that are in the process of converting to commercial banks all seem to be interested in securing federal funding, if they decide it is to their advantage," said Ed Leary, commissioner of the Utah Department of Financial Institutions.

Faced with what it believed was a looming meltdown of the nation's financial sector, Congress in early October authorized $700 billion for the U.S. Department of the Treasury to establish the Troubled Assets Relief Program, or TARP, to provide assistance to the nation's financial institutions and get the economy moving again.

Funds from the TARP program, though, generally will not be available to industrial banks, which have long been considered by many members of Congress as the unwanted and slightly odd stepchildren of the nation's financial services industry.

Industrial banks, also known as industrial loan corporations, or ILCs, are state-chartered but federally insured financial institutions that historically have operated in narrow niches, such as issuing credit cards or offering automobile loans. Utah is home to about half of the nation's ILCs but they account for about 80 percent of the industry's assets.

"The question everyone is facing is, 'Do we apply or don't we apply for TARP funding?' " said Frank Pignanelli, executive director of the Utah Association of Financial Services, which represents the state's industrial banks. "Generally, I don't think anyone really wants to change (and become a commercial bank), but some feel they need to move in that direction and at least apply while they wait and see what develops."

Utah's Republic Bank, an industrial loan corporation that specializes in equipment lease financing, started moving toward converting about a month ago as it began to explore the possibility of tapping into the federal TARP funding, said Boyd Lindquist, Republic's chief executive.

"We've been contemplating applying (for TARP money), even though we don't really need it," Lindquist said. "The big concern everyone is facing is whether they can take money from the government, redeploy it and still turn a profit."

TARP money isn't going to come cheaply, he said.

"Everyone is calling it 'bailout money' but that is really a misnomer. The government wants a five percent premium annually for the first five years and 9 percent after that. They also want 15 percent in warrants" that could allow them eventually to acquire an ownership interest in any financial institution accepting the money.

For some, though, that doesn't appear to be a concern.

GMAC Financial Services, which operates an ILC under the GMAC Bank moniker, announced two weeks ago it applied to federal regulators to become a bank holding company regulated by the Federal Reserve. If its application is accepted, GMAC Bank will become a Utah-chartered commercial bank.

"This will give us expanded opportunities for funding and access to capital," GMAC spokeswoman Gina Proia said. She indicated that the company also has filed with the U.S. Treasury to participate in TARP's capital repurchase program, which will help GMAC's business of providing automotive and mortgage financing to consumers.

Along with the possibility of federal money, Republic Bank's Lindquist said there remains a lingering concern that Congress may renew its offensive against industrial banks that was launched two years ago after Wal-Mart Stores and Home Depot applied to open Utah industrial banks.

Fearful that Wal-Mart could come to dominate banking the way it dominates the nation's retail arena, Congress began considering legislation that would have prevented retailers and other commercial firms from owning an ILC. If the legislation had succeeded it could have seriously impacted the growth of Utah's financial services community by reducing the number of companies eligible to own an industrial loan corporation.

Such banks were authorized under an exemption in federal banking laws in 1987. With the adoption, Utah jumped in to take advantage of what some critics disparagingly described as a loophole that gave retailers and other commercial companies a way to own a federally insured bank -- something they had been prevented from doing since the Great Depression.

Industrial banks can operate much like commercial banks. They can issue credit cards, take deposits and make loans. However, they cannot offer individual standard checking accounts if the bank's assets exceed $100 million. They also are regulated by the Federal Deposit Insurance Corp. instead of the Federal Reserve, which oversees the operations of bank holding companies.

Bob Majka, president of the Salt Lake City-based Marlin Bank, said that ILC's board of directors made the decision to switch to a commercial bank so the company could access federal bailout money and pursue additional opportunities in commercial leasing.

"Under the business plan we filed with the FDIC (in order to gain federal deposit insurance) we were fairly restricted in what we could do. As a commercial bank we will have a little more latitude to expand our operations," he said.

Although the flight by the six Utah industrial banks to the commercial side represents the biggest switch away from ILC charters in the state's history, Pignanelli of the Utah Association of Financial Services said he doesn't believe it is a sign interest in the industry is fading.

"I had a large company that was interested in opening a couple of weeks ago," he said. "There is still a lot of value for some companies in operating an ILC."

steve@sltrib.com