Taxpayers follow Buffett's lead: Get rights to own stakes in companies

ByMatt Krantz, USA TODAY
October 05, 2008, 8:46 PM

— -- Taxpayers may soon be taking a page from Warren Buffett, as the bailout bill contains provisions giving the government a shot at an upside in exchange for putting its money on the line.

The bill 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.

Getting a shot at 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.

By owning warrants, taxpayers would own pieces of the companies. If the government's plan restores the credit markets and health of financial firms, those firms could be more valuable.

In that case, the bill gives Treasury the right to sell the warrants and use the money to reduce the tab to the taxpayer. And if a bailed-out financial firm's shares no longer trade on a stock market exchange, the warrants convert to debt, which gives the Treasury greater claims against the firm's assets.

But the bill leaves important details vague and up to the judgment of Treasury officials. It doesn't set how much Treasury would pay for the warrants or how high a financial firm's stock must rise before it has value, says John Barrie, partner at law firm Bryan Cave.

Barrie expects the terms to vary for each institution.

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