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Fundranker Blog—Reverse Auction

Reverse Auction

To give maximum flexibility to the U.S. Treasury and the Federal Reserve, the newly legislated financial rescue plan is short on specifics on how the troubled assets will be priced and purchased by the government. A clever reverse auction process is one of the key ideas and deserves serious consideration. In this process, financial firms would offer to sell their troubled assets to the government at prices of their own choosing, and the government would buy the troubled assets in ascending order.

Presumably, the more anxious a financial firm is for help, the more they would lower the price they ask for their troubled assets. To make a reverse auction work most efficiently from the taxpayer viewpoint, the government would need to set up separate reverse auctions for various homogenous groups of assets, specify the total amount of money for each reverse auction, and set a maximum price it would pay for individual assets.

Posted 10/8/08 9:31am ET in Economy