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REVERSE AUCTION TIME?

September 22, 2008

A Wall Street Journal article suggested that the Treasury might use "reverse auctions" to spend its $700 billion bailout fund. My smart world of finance acquaintance says that's the obvious way to go. He explains that in a reverse auction, the Treasury would announce that it was going to buy, say, $50 billion of a certain type of bad mortgages. The holders of the paper would then bid to sell it at declining prices. Bank A would offer to sell its junk at 50 cents on the dollar, Bank B would offer at 47 cents, and so on, and the $50 billion would go to those willing to sell the cheapest.

One of the big concerns about the bailout is the risk of the Treasury overpaying for the junk assets. If you have any thoughts about whether a reverse auction is the answer to this concern, the comments are open.

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