Taxpayers may soon be taking a page from Warren Buffett, as the bailout plan contains provisions giving the government a shot at an upside in exchange for putting its money on the line.
The law requires Treasury to receive warrants or rights to own a stake in publicly traded institutions that sell $100 million or more in assets to the government. It’s not unlike how Buffett’s Berkshire Hathaway struck a deal for warrants after injecting money into General Electric and Goldman Sachs.
Owning a piece of companies makes the plan more equitable, says Donn Vickrey, co-founder of market research firm Gradient Analytics. “Taxpayers are taking a lot of risk,” he says.
If the government’s plan restores credit markets and health of financial firms, those firms could be more valuable. In that case, the plan gives Treasury the right to sell the warrants and use the money to reduce the taxpayers’ tab. If a bailed-out financial firm’s shares no longer trade, the warrants convert to debt, giving the Treasury greater claims against the firm’s assets.
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