I left the Treasury Department yesterday with lots of questions about how the proposed public-private fund to buy up toxic assets would actually work.
One potential problem: What if the bank has a toxic asset it thinks (hopes) is worth 40 cents on the dollar. But the investors running the fund think there's no way it's worth more than 20 cents. Then no trade, right? The banks are still stuck with it. We haven't fixed the problem.
Economists and auction experts Peter Cramton and Larry Ausubel just posted something laying out how you might set up one of these public-private funds. It's basically a kind of investment bank which is co-owned by private investors and the government. It would purchase the toxic assets through a reverse auction. (Reverse auction stories here and here)
I could also imagine a solution where the government sets up a few of these banks which would compete to buy the assets. I'm not sure either of these gets around the problem outlined above though.