"It's analogous to saying, 'We need $700 billion to fight a war. We'll tell you later how we're going to fight it,' " Douglas W. Elmendorf, a former Fed economist now at the Brookings Institution, said of the proposal.
The most complicated step in Treasury's effort -- and one about which the plan sent to Congress gives no specifics -- is how Treasury will go about buying the troubled assets at the center of the crisis.
That turns out to be more complicated than it might first appear, because the very reason these assets are causing so much trouble is that nobody wants to buy them, so no one knows how much they are worth or what their prices should be.
Lawmakers who have discussed the matter with Paulson said he intended to tackle this problem by conducting a series of so-called reverse auctions.
In a reverse auction, the government would announce that it would buy, say, $50 billion of a certain type of troubled asset. Firms with that asset would make bids by offering to sell the securities for a certain price. The government would start buying from those making the lowest bids and work its way up the list until it had spent the $50 billion. Owners of the securities would have an incentive to price them relatively low to increase the chances that Treasury would buy them.
Analysts said this technique could help end the current crisis in two ways: By getting troubled assets off the books of some firms, it would allow them to go back to doing business as usual. Additionally, it would help firms that didn't sell know where they stand financially by in effect setting a price for assets for which it is now impossible to determine a value.
But Treasury officials are almost certain to find themselves on the horns of a dilemma, and how they resolve it may decide whether the government, and taxpayers, recoup their money or take a financial bath.
The problem is this: The quality of mortgage assets varies all over the map even within very narrowly defined classes of the financial instruments that Washington will need to buy to end the crisis
"That means that if the classes are defined broadly, the Treasury will end up with the lowest-quality assets, driving up its fiscal cost," Jan Hatzius, chief U.S. economist for Goldman Sachs, wrote in a note to clients.
On the other hand, Hatzius said, "if the classes are defined narrowly, only a few institutions will own the asset in question and there may not be enough bidders for an auction."
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Times staff writers Richard Simon and Nicole Gaouette contributed to this report.
