I have been wondering how come few peopled raised the questions about RTC entity. How should distressed assets be purchased and more importantly, will the discount sale lead financial instituions to write down loss and further hist in their balance sheet? the following excepts answered my questions...
People familiar with the matter say Mr. Paulson would like the new RTC like entity, which would buy and hold the distressed assets, established within the Treasury Department. The government would hire asset managers to oversee the entity, which would buy residential mortgages, commercial mortgages and mortgage-backed securities and other securities.
The new entity is expected to purchase assets through a type of reverse auction, in which the government would favor the institution that sells its assets for the lowest bid. However, the government may find itself in a quandary: Does it pay more than fair-market value for hard-to-assess distressed assets, putting taxpayers on the hook for any losses? Or does it drive a hard bargain, buying for pennies on the dollar? The latter approach would further hurt financial institutions, since they would have to write down the losses and take additional hits to their balance sheets. The Treasury department is expected to propose issuing debt in $50 billion tranches to fund the purchases.
There's vast uncertainty about how exactly how the new government entity would function. Among the many questions unanswered about the bailout is whether the government will get anything in return for buying the assets off the banks' books, such as warrants to purchase stock in the future, the sort of deal it structured when it agreed to lend $85 billion to American International Group Inc. earlier this week. More fundamentally, it isn't clear how the government will decide which assets to buy.