Some big banks, including JPMorgan Chase & Co, are wrangling with officials over the warrants they want to buy back from Treasury, which the government owns in addition to the banks' preferred stock. The banks argue they should get a discount on the warrants because they did not want the money in the first place.
The issue puts Treasury in the tough position of wanting to give the banks a fair deal while not shortchanging taxpayers, who financed the industry rescue plan at a time when the sector was extremely shaky.
The standoff means the warrants may remain in government hands for a while longer -- leaving the banks ensnared within a Treasury Department tentacle.
"There would be a huge political issue with pricing the warrants below what the market would pay," said Douglas Elliott, a former JPMorgan investment banker now with the Brookings Institution, a Washington think tank.
Jamie Dimon, chief executive of JPMorgan -- which has taken $25 billion in federal funds and has chafed under the government's influence -- said earlier this week that the United States should cancel 50 percent of the warrants "out of fairness." Dimon has said the largest banks were strong-armed into taking bailout funds last October and should not continue to be punished.
The Federal Reserve will name next week the first batch of big banks given the green light to repay funds from the $700 billion Troubled Asset Relief Program. Repayment involves buying back the preferred stock the banks issued to the government, as well as the warrants.
The warrants come with a total price tag of almost $4 billion for eight of the largest U.S. banks seen as contenders to soon repay the TARP funds, some estimates show, with JPMorgan's warrants making up $1.5 billion of that total.
Once the banks bought back their preferred stock they would be free of many of the restrictions attached to TARP money, including limits on executive pay, according to legislative language recently approved by Congress.
But until the banks bought back the warrants, the government would still have an interest in them.
It would be "a very realistic scenario" that some banks could repay TARP for the preferred stock while still negotiating warrant buybacks, said Scott Talbott, an executive with the Financial Services Roundtable.
"Until the warrants are repurchased, the government still has an ownership stake in the banks," Talbott said, raising concerns that the rules of the rescue program could be changed again.
A FAIR DEAL
Valuing the government-held warrants is an inexact science because there is no directly comparable market price.
Fed Chairman Ben Bernanke on Wednesday highlighted the challenge, telling lawmakers that banks would have the option of buying back their own warrants before Treasury could publicly auction them. That means banks could negotiate with Treasury on the price because a market price is not clear, resulting in low-ball offers from banks.
But Bernanke said the government has a responsibility to honor its obligation to taxpayers.
"The point of the warrants was that as things turned around and got better, that the public would share in some of that gain, and I would say that TARP has been pretty successful in terms of stabilizing the banks," Bernanke said.
Herb Allison, the nominee to head the financial bailout program, told lawmakers on Thursday that Treasury is looking at valuation and will announce its policy "before too long."
The issue of fair valuation has already resulted in one dust-up.
Old National Bancorp, a small bank based in Evansville, Indiana, recently bought back its warrants for $1.2 million, when other estimates had indicated the warrants were worth as much as five times that amount.
Since then, lawmakers have urged Treasury to make deals that get taxpayers maximum value for their investments.
Linus Wilson, a finance professor at the University of Louisiana at Lafayette, said the banks got a "massive subsidy" through the capital infusions, which were good deals at the time, whether they asked for the money or not.
The private negotiation process tends to reward banks that low-ball the value of their warrants, Wilson said, but public scrutiny for fair prices could balance that concern.
"Treasury should be taking a very hard line in these negotiations," Wilson said.