price discovery through reverse dutch auctions

since everyone from all sides has been hammering treasury sec. tim geithner for such a bad roll out of the housing plan last week, i figured id take a look at the speech for myself. it wasnt a great speech. but it gave me an idea and i ran that idea past a friend of mine who is a wall street type and he said i should blog about it so here goes...

what really troubled me was geithner saying how it was very hard to determine a price for the toxic assets. not because he's wrong, but because he's right. its impossible for any group of people to sit in a room and figure out the right price. especially when they are all economists. just a joke. sort of.

but still a price needs to be found. thats why we have the TARP program, and i think its probably the most important early step which needs to happen before we can get a serious recovery started

so here's my approach: let the market decide the price they are willing to take to sell toxic assets to the government. there is no market now, so we have to create a temporary quasi-market.

in a dutch auction the price of the item for sale starts high and continually drops. if buyers are looking for a low price they run the risk that the inventory will run out before they get to make a purchase. as near as i can recall it started with tulip sales, and from what i understand it has been used for IPOs in modified form.

for this purpose it would have to be modified again. the treasury (or the fed) would say that on a given day it was going to spend half a billion (or a billion, or some finite number) on buying back toxic assets. the bidding would start at a very low price on the dollar, say 10 cents on the dollar. if there were no takers, it would move to 11 cents on the dollar and so on until the entire half billion dollars was gone. i think the banks would find it in their self interest to take a pretty good guess at what the risk on these assets would be to take advantage of this opportunity. and the banks that are in better shape (relatively speaking of course) would have the advantage of being able to jump in earlier.

the whole thing could probably be done on line and at least cnbc viewers would watch

another thing: the government shouldnt commit to a firm schedule of whether there will be subsequent auctions.

this does raise the question that the government might pay too much for the assets and not be able to get its money back out. to me, that should be a secondary consideration and maybe ill write about that in the next post if anyone reads this one

oh yeah, back to geithner's speech. it wasnt that good i agree. but its kind of hard to imagine that this guy is going to be able to think creatively about these problems since he's been knee deep in them for a couple years and the whole country is on his back. and maybe public speaking isnt really his bag, i know its not mine. i think everyone has beat on him enough for the time being, he's in the job now so hopefully he gets a couple months to show what he can do. and if anyone sees his boss ask if the guy can get a couple days off sometime soon, it might help