To take a typical example, consider a $1.7-billion mortgage security marketed by Countrywide Financial Corp. in March 2004.
The portfolio encompasses 7,554 mortgages. About one-fifth are for California homes, most carry adjustable rates and fully one-third are "stated income" loans -- that is, the borrowers were not required to document their incomes.
Evaluating the portfolio requires diving into a 200-page prospectus brimming with tables showing the range of the borrowers' credit scores (more than half with low scores between 600 and 500), the range of applicable interest rates on the loans, the loan-to-value ratios on the underlying properties and 16 other variables, all disclosed to help buyers calculate the likelihood of delinquencies and foreclosures.
A buyer would also want to subject the portfolio to a "stress test" -- model how the delinquency rate might change given movement in housing prices and overall economic conditions.
These factors are likely to enter into Treasury's calculation of the price it wants to pay for the securities. But they're not the only complications.
Another is the need to act quickly. "The difficulty of the task argues for proceeding slowly and building up expertise," Setser said. "But the need to unfreeze the market may demand speed in getting money out the door."
Some provisions Congress added to Paulson's original bailout plan, many of which were ostensibly designed to protect taxpayers' interests, will further complicate the process. The final bill allows government officials to take equity stakes in institutions that sell their troubled assets to the Treasury and impose limitations on executive compensation. Both represent costs that the selling institutions will tend to consider in setting their sale prices on the assets.
Then there's the oversight mechanism Congress imposed. Among other things, it requires Treasury to make the details of every transaction public. That's an admirable effort to create transparency for the bailout program, but it won't make the buying and selling of the securities any easier.
"The financial and political conflicts, together with the prospect of second-guessing, will make this a Sisyphean task," said George L. Ball, chairman of the brokerage Sanders Morris Harris Group.
One important consideration will be guarding against conflicts of interest among the government-appointed money managers.
