Payback provision in US bail-out plan

FT is reporting that a tentative deal has been reached authorizing the government to buy up to $700bn of troubled assets from financial institutions. The deal envisages historic restrictions on executive pay for banks involved in the programme and it opens the door for the government to take equity warrants in those institutions. The equity warrants idea is interesting since it is a good way of protecting taxpayers.

Here is what Patrick Honohan said in a comment to a post on “The price of salvation” :
Let the banks sell the assets for their current book value (they will hardly accept much less), but provide a warrant to purchase shares in the bank which can be exercised by the Government in several years time at a price – and here’s the key – which depends inversely on the value of the toxic debt at that future date. The future date needs to be set far enough into the future for the market in these kinds of assets to have settled down and their price less imponderable
If the banks prove to be right about the valuation, the warrant will end up too costly to exercise. If the banks are wrong and the assets end up worth far less than they are now recorded in the banks’ books, then the Government will hold an equity stake compensating it in the end for the losses it has taken on the assets.
Bank shareholders will not like the prospect of dilution if the assets really are more toxic than they have acknowledged. But they can limit their dilution exposure by accepting a lower price for the toxic assets.
There’s scope for many refinements of this scheme, including variations in the pricing and maturity of the warrants, and whether they should be for common or preferred shares. This flexibility should facilitate arriving at a deal which is both politically viable and sufficiently attractive to the bank shareholders.