"I believe that under the Treasury program, auctions and other mechanisms could be designed that will give the market good information on what the hold-to-maturity price is for a large class of mortgage-related assets. If the Treasury bids for and then buys assets at a price close to the hold to maturity price, there will be substantial benefits," said Bernanke.
Under a reverse auction, Treasury wouldn’t bid at all. It would circulate a list of assets, and then buy them from whichever bank was willing to sell them for the lowest price.
The way Bernanke sees the auction working, however, it’s the other way around: the banks would tender their assets for sale, and then Treasury would put in a bid at what it considers "close to the hold to maturity price".
As Henry Blodget says,
this is a huge boon to banks and will likely hose taxpayers. Why? Because the government will not have time to figure out what the true "hold to maturity" value of these assets is. Instead, it will have to take the word of banks who have every incentive to dump their crap on taxpayers.
Certainly under this system no outside investor would ever want to get involved. This is a bailout pure and simple, with the government paying too much money for banks’ assets. And I don’t like it at all.
I do understand that if the government paid a market-clearing price for the assets, the banks would have to take enormous charges against their capital base, and then be recapitalized. Well, so be it — that’s basically what the Dodd plan has in mind.
Transparency is a good thing. If the aim is to use government money to strengthen banks, then do that directly, by injecting it directly into the capital structure. Don’t do it indirectly, by overpaying for toxic assets.