Monday, September 29, 2008

Buying the Bad Stuff: Implementation Considerations for the Paulson Plan

(NERA) In the midst of the ongoing US financial crisis, NERA experts Dr. Chantale LaCasse, Dr. Marcia Kramer Mayer, Dr. Arun Sen, and Dr. Elaine Buckberg have written a paper examining implementation considerations for the Paulson Plan. The paper focuses specifically on the reverse auction process and the key economic issues to consider when designing auctions to purchase troubled assets. (http://www.nera.com/image/PUB_Buying_the_Bad_Stuff_FINAL.pdf)

Treasury intends to rely on auctions to price the mortgage-related assets for which it will be a purchaser. Treasury is and has long been a frequent and massive seller of US government securities at auction. It obviously has extensive experience in implementing auctions in which it stands alone on one side of the market. Is the only difference between the usual Treasury auctions and reverse auctions for mortgage-related assets the side of the market where Treasury stands?

Hardly.

The authors argue that multiple factors distinguish the nature of the auctions that we can expect in this new realm from those routinely used to market new issues of Treasury securities. This paper highlights some of these key factors.

For further discussion, please refer to our brief,
The Paulson Proposal: Economists' Views, which presents a summary of current thinking by academic economists and reviews the proposed Paulson Plan as well as alternative plans intended to stabilize the financial system.

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