Monday, Oct. 06, 2008

Reverse Auction

Definition: One of the foundations of the government's bailout proposal plan. The Treasury Department would hold an auction under which financial institutions would try to sell their bad assets. Whichever bank offered the lowest bid would get to sell their junk for cash. In effect, banks (the sellers) are placing bids, not Treasury (the buyer). Hence, reverse auction.

Usage: Once the bill is signed into law, Paulson will have many options open to him on how to unclog the credit markets, which Senator Judd Gregg, the top negotiator on the bill for Senate Republicans, described as a massive car accident in the middle of the highway. The government must clear the accident away by buying the toxic debt so that normal traffic can flow freely. One avenue will be to do a reverse auction, where banks compete to sell the Treasury their bad paper, with the Treasury choosing the lowest offers. (, Sept. 29, 2008)