Auction design for bailout by treasury

Peter Cramton and Larry Ausubul weigh in, in "Auction Design Critical for Rescue Plan" in The Economists' Voice

"An auction that determines a
real price for a given security needs to require
multiple holders of the security to compete
with one another. This can be achieved if the
Treasury purchases only some, not all, of any
given security."

"Thus, a better approach would be for the
Treasury to instead conduct a separate auction
for each security and limit itself to buying
perhaps 50% of the aggregate face value. Again,
the auction starts at a high price and works its
way down. If the security clears at 30 cents on
the dollar, this means that the holders value
it at 30 cents on the dollar. (If the value were
only 15 cents, then most holders would supply
100% of their securities to be purchased at 30
cents, and the price would be pushed lower.)
The auction then works as intended. The price
is reasonably close to value. The “winners” are
the bidders who value the asset the least and
value liquidity the most.
This auction has an important additional
benefit. The “losers” are not left high and dry.
By determining the market clearing price, the
auction increases liquidity for the remaining
50% of face value, as well as for related securities.
The auction has effectively aggregated market
information about the security’s value. This
price information is the essential ingredient
needed to restore the secondary market for
mortgage backed securities."