In an effort to decrease the costs of leaving the Troubled Asset Relief Program (TARP), the banking industry is aggressively lobbying the Treasury Department to expunge the warrants the government received when it bought preferred stock in roughly 500 banks over the past six months, according to The Wall Street Journal.
The warrants allow the government to buy common stock in the banks at a later date at a fixed price, so that when the banking industry recovers taxpayers can receive a larger return on their investment. They can be bought back by the banks if they provide an assessment of their worth by a third party, and the bank and the Treasury will enter into negotiations if they do not agree. The Treasury must try to sell the warrants to private investors if an equitable solution cannot be reached.
Bank representatives are trying to escape their contractual obligation to buy back the warrants because they believe the cost would be burdensome, and “could be equivalent to paying 60% annual interest on short-term loans.” They are also holding that they should be released from the contract since TARP rules, including added compensation rules, have changed since they signed on.
A reaction from Congress or the Treasury has not appeared as of yet.