Here's a fun compromise way I enjoyed trying:
Figure out how much treasure each PC needs to start his new character.
Divide this treasure into nice chunks - 1000 gp, 2000 gp (a lot of these), 3000 gp, 300 gp, etc.
For each size chunk, use a different color of index card. Write a magic item of roughly that value on each card.
- - To make this step easier on the PCs, I would usually write something like "+1 weapon of your choice".
- - But to make it more interesting for me, it was also often something like "+1 simple weapon" or "+1 light armor".
Make up a few more cards than you need. It helps.
Have a few cards contain gold, so that a few PCs can buy specific things they need or want.
Then, have the players draw a number of cards equalling their starting gold. Allow them to trade amongst themselves. Encourage them to "bid" for popular items - if everyone really wants that +2 weapon, why should they only pay book cost for it?
I found that this method played into the gamer's love of props - anything you can pass around the table is cooler than what's written on a sheet of paper.