The design of any reverse auction to be used by Treasury is not at all clear. One big issue is how to define the range of mortgage-backed securities (MBS) to be included in any auction (I am assuming that they will be buying MBS). The complexity of the MBS market is rather overwhelming: In a typical $1 billion mortgage pool, there would be upwards of 15 different tranches of MBS created, from the top A level securities through mezzanine to even lower priority class securities. Suppose there was $2 trillion of subprime and alt-A mortgages securitized in this way. That would mean 2,000 different pools/trusts created and about 30,000 different classes of MBS securities!!
So obviously you cannot just run an auction where you say, submit offers to sell any MBS. You have to define the class of MBS you will buy more narrowly. Of course, if you go too narrow -- for example, just the M-2 class from the GSAMP Trust 2006-NC2 pool -- you may end up with too few holders and therefore too few potential sellers.
I suspect the Treasury will have to define acceptable securities for any auction by things like original offer date, original degree of credit subordination, current and/or original rating, plus all kinds of characteristics on the underlying mortgage pool. I think one can define classes narrowly enough so that the MBS are similar enough to think that one price can be efficiently put on all of them, while defining the class broadly enough so that the auction has effective competition.
Once the Treasury buys the MBS, what do they do with them? Like a used car dealer, I suspect they will want to "fix them up" so they can be sold at a higher price. What might that mean? Lots of things, including possibly re-pooling the MBS, creating what were called collateralized mortgage obligations. Put all the MBS from an auction into a new pool, and define new securities with claims to that pool of cash flows. I would love to see some simplification there: don't define many new classes, keep it simple and just create one or a couple different CDO tranches.
Then they have to structure an auction to re-sell the new securities. That will be the easy part.