As a follow up to my blog posting on September 27th titled "What Happened, The Market Implosion?", our Congress has now passed and the President has signed the bailout legislation providing $700 billion to purchased distressed mortgage backed securities. From all I have read on the subject, The US Department of the Treasury has been given great latitude in how it sets up the process to actually purchase these securities from the private sector and has been working on developing this process for some time, with support from the Federal Reserve, SEC, etc...
The key question is how to value these securities, since there is no market for them. There is a single buyer, the US taxpayer through the Treasury. There are valuation models including the Monte Carlo method and/or the Binomial Tree solution but these appear to be flawed in this particular situation.
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