I'll take a stab at it: Instead of writing off all bad assets from a company's balance sheet, which would create an insolvency risk for highly leveraged firms, the asset purchases at this time are intended to only to prevent deflationary money destruction resulting from the collapse of these institutions. (Illustration here: http://tinyurl.com/4j3933 )
The price discovery function occurs later as the distressed assets purchases by the Treasury are structured similarly to a stock market index fund or perhaps more appropriately, a real estate investment trust. Initially, the Fed/Treasury would own the vast majority of "shares," with the number of shares floated increasing over time as the market valuation of the assets increases (ideally). Shareholders would be paid dividends from income generated by rents collected from component income-producing assets.
It's not a great example, especially as stock values are now at 1994 levels, but this post (http://tinyurl.com/3ve7pp )showing a chart of the S&P 500 vs its trailing year dividends per share from December 1991 to July 2008 illustrates how that price discovery/recovery process might look in practice following the effects of an asset bubble's inflation and collapse.
One other thing - to the best of my knowledge, the $700 billion figure was pretty arbitrarily selected. It may well represent a Treasury official's idea of a number big enough to scare politicians into acting but small enough to still get passed through Congress.
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