Nov. 13 (Bloomberg) -- JPMorgan Chase & Co., Bank of America Corp. and Goldman Sachs Group Inc. are among banks that told the government its program to back their bonds is flawed because it doesn't have a strong enough guarantee.

The Federal Deposit Insurance Corp. guarantee for repayments in default needs to be clearer, fees are too high and banks need more freedom on whether to opt in, according to a letter from law firm Sullivan & Cromwell LLP posted on the agency's Web site on behalf of nine banks. The comment period on the interim rules for the FDIC's Temporary Liquidity Guarantee Program ends today.

The comments shed light on why almost a month after the government placed its guarantee behind new bank bonds, no U.S. company has yet tested the market. By contrast, under a similar program in the U.K., banks have issued the equivalent of 13.9 billion pounds ($20.6 billion) of government-guaranteed bonds.

``A guarantee obligation that is anything less than an obligation to pay all amounts due could severely curtail the demand for these securities and might impair a bank's access to guaranteed funding,'' New York-based Sullivan & Cromwell said in the Oct. 31 letter.

The letter cited the U.K. program as a model because it offers ``an unconditional guarantee'' of principal and interest when due. Without a similar guarantee, U.S. banks will be ``at a significant disadvantage'' to their U.K. and European counterparts because their government-backed debt will be more expensive for borrowers and less attractive to investors, the letter said.

FDIC spokesman Andrew Gray said ``the nature of the comment period is to get feedback from industry and other stakeholders.''

Pre-Paid Fee

Banks asked the FDIC to reduce the fee they must pay to preserve the option to issue both guaranteed and non-guaranteed debt. The FDIC wants to charge a pre-paid fee of 37.5 basis points on outstanding debt as of Sept. 30, scheduled to mature on or before June 30, 2009, in exchange for the freedom to issue both while participating in the program. The group of banks wants to reduce that to a 75 basis-point fee on 25 percent of the outstanding debt. A basis point is 0.01 percentage point.

The other six banks represented in the Sullivan & Cromwell letter were Bank of New York Mellon Corp., Citigroup Inc., Merrill Lynch & Co., Morgan Stanley, State Street Corp. and Wells Fargo & Co.

Credit Suisse Group AG sent a separate letter to the FDIC on Nov. 4.

Without rules that ``fully and irrevocably'' guarantee repayment, the size of the program and the number of banks that participate will be ``significantly below the expectations of the FDIC, the industry, and all interested parties in the health of the U.S. banking system,'' wrote Fred Sherrill, managing director at Credit Suisse Securities USA LLC in New York.

Timing of Payments

Interim rules for the government program fall short of traditional bond guarantees because they leave the timing of principal and interest payments in the event of a bank default open to changes by bankruptcy courts, Sherrill wrote.

``We are optimistic that, with appropriate modifications, the program will be successful in helping to mitigate systemic fear in the interbank and capital markets,'' he wrote.

Standard & Poor's issued a report Nov. 10 supporting the banks' position on the guarantee.

``We do not view the issue of timeliness as a mere technicality,'' according to the report from the New York-based unit of McGraw-Hill Cos.

Treasury Plan

The FDIC said Oct. 14 it would guarantee three-year senior unsecured bank debt issued through June 30, 2009, as part of a sweeping plan by the U.S. Treasury that included expanded deposit insurance and $250 billion of direct capital injections for U.S. banks.

Last week, the agency extended the deadline for banks to choose whether to participate to Dec. 5, so they could ``fully consider'' the final rules before making a decision, according to a statement.

Banks dominated U.S. corporate bond sales last year, accounting for 71 percent of $1.02 trillion of investment-grade new issuance, according to data compiled by Bloomberg. As the credit seizure deepened and yields over benchmark rates soared, banks were forced out of the debt market. No major U.S. bank has sold debt since Sept. 3.

To contact the reporter on this story: Gabrielle Coppola in New York at gcoppola@bloomberg.net

Last Updated: November 13, 2008 16:32 EST