The US government may have little choice but to use an auction process to price up to $700 billion of toxic mortgage debt it is buying from financial institutions, even if the formula has its snags.

The Bush administration sent a proposal for the unprecedented bailout to US lawmakers this weekend to tackle the nation's worst financial disaster since the Great Depression.

The government has a tightrope to walk. It wants to buy assets cheaply enough to make sure taxpayers don't lose too much money, and perhaps even make money when markets stabilize, but at a high enough price to avoid hurting banks any more than necessary.

An auction process would make sense, because it would allow the banks with the best information about the securities to determine the price, said Peter Cramton, a professor of economics at University of Maryland who has set up auctions for governments globally. But competition among sellers would prevent banks from setting too high a price.

Cramton believes a "reverse descending clock auction" is ideal in this situation. Through that process, the government would announce a target for how much of a particular security it is seeking to buy in dollar terms, and an initial buying price.

Sellers would indicate how much they would sell at that initial price, and if there were too many sellers, the government would lower its price until the amount of securities that banks are willing to sell equals the government's target.

"I've conducted dozens of these auctions for assets valued at billions of dollars, and they are extremely effective in determining a competitive market price," Cramton said.

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