Government Pricing in its Purchase of MBSs

Under Paulsen's Plan we will bail out foreign banks with taxpayer money -- but wait, this is a minor issue, the major issue is how the government will price what it will buy.  The government will buy mortgages and MBSs, securities backed by mortgages.  At what price?  There are several options, all bad.  1) The government will declare a class of MBSs it will buy and then hold a reverse auction, buying those that are priced the cheapest.  Problems:  a) How to "Class" MBSs; b) We will buy the worst stuff ("toxic" in the words of Wall Street) that is included in the class, rewarding those that hold the toxis stuff: and c) Those with courage will price even toxic stuff high and wait -- for the next in a sequence of auction that they know will come. 2) The government will buy investor by investor in negotiated sales. Problems a) Favoritism b) Uniformity accross multiple sales and c) Lack of time to do due diligence on individual sales (government as "sucker")   3) The government will put money into package deals (block purchases) that include private buyers [See Bearn Stearns Buyout].  Problems: Strategic behavior by both a) private buyers and b) sellers and c) it takes too long, the government wants to buy now (which is why strategic behavior by others, who know your deadline, is possible -- ask any negotiator).  Again, I repeat, buy commercial paper -- it is liquid and uniform, easy to price, and will grease the markets until they find a bottom.