It isn't known whether Treasury will try to give the asset managers specific guidelines on pricing, although both Paulson and Federal Reserve Chairman Ben S. Bernanke have argued that the troubled mortgage loans owned by banks would be worth more if they could be held to maturity than if they were forced onto the market now in a fire sale.
That gives the Treasury a rationale for paying banks more than current valuations, on the assumption that it will make a profit down the line. But such prices might expose the Treasury to charges that it is unfairly subsidizing the banking industry with overpayments.
Economists, bond traders and securities brokers say the process is certain to be vastly more complicated than a simple auction. The reason is that the assets to be purchased are a far cry from the objects customarily sold on EBay or, for that matter, the complex financial instruments traded on futures exchanges.
As a result, USC's Harris points out, questionable deals could easily slip under the radar. "If a security's worth $10 million and you pay $30 million for it, who'd ever find out?"
On the selling block will be at least 100,000 individual mortgage-backed bonds and other troubled securities along with a larger number of individual mortgage loans, according to a recent report by NERA Economic Consulting.
Before making their purchases, trading experts say, Treasury officials or their agents will have to develop a working model of the exotic mortgage securities' true value -- what they're worth given their probable cash flow to maturity.
"They're extremely complex," said Campbell R. Harvey, a finance professor at Duke University. "To get this operational is not going to be quick, and there are many layers of execution risk."
--
Unbundling unknowns
The so-called mortgage-backed securities that have pushed some of the nation's biggest financial institutions to collapse consists of home loans that were bundled together and sold to investors. Each security is a unique package of loans from different parts of the country, with different borrower characteristics. The potential for unpleasant surprises is ever-present.
"You're always worried that the person selling it knows more than you do, that they've seen something in the cash flows and they know a problem's brewing," said Brad W. Setser, a former Treasury official who is now a fellow at the Council on Foreign Relations.
