It should have read decoupling from the dollar....

Ceiling limits on the banksters pay is cheap, toothless populism. So
the salary of the head of Fannie Mae goes down from two million to one
million. So what? A million really is a lot less than 700 billion.
Chump change at that level.

Paulson Cannot be Allowed to Have a Blank Check

By George Soros

Hank Paulson's $700bn rescue package has run into difficulty on
Capitol Hill. Rightly
so: it was ill-conceived. Congress would be abdicating its
responsibility if it
gave the Treasury secretary a blank cheque. The bill submitted to
Congress even
had language in it that would exempt the secretary's decisions from
review by any
court or administrative agency - the ultimate fulfillment of the Bush
administration's
dream of a unitary executive. (Z: George, can't you just say
"Dictator"?)

Mr Paulson's record does not inspire the confidence necessary to give
him discretion
over $700bn. His actions last week brought on the crisis that makes
rescue necessary.
On Monday he allowed Lehman Brothers to fail and refused to make
government funds
available to save AIG. By Tuesday he had to reverse himself and
provide an $85bn
loan to AIG on punitive terms.

The demise of Lehman disrupted the commercial paper market. A large
money market
fund "broke the buck" and investment banks that relied on the
commercial paper
market had difficulty financing their operations. By Thursday a run on
money market
funds was in full swing and we came as close to a meltdown as at any
time since
the 1930s. Mr Paulson reversed again and proposed a systemic rescue.

Mr Paulson had got a blank cheque from Congress once before. That was
to deal with
Fannie Mae and Freddie Mac. His solution landed the housing market in
the worst
of all worlds: their managements knew that if the blank cheques were
filled out
they would lose their jobs, so they retrenched and made mortgages more
expensive
and less available. Within a few weeks the market forced Mr Paulson's
hand and
he had to take them over.

Mr Paulson's proposal to purchase distressed mortgage-related
securities poses a
classic problem of asymmetric information. The securities are hard to
value but
the sellers know more about them than the buyer: in any auction
process the Treasury
would end up with the dregs. The proposal is also rife with latent
conflict of interest issues. Unless the Treasury overpays for the
securities, the scheme would not bring relief. But if the scheme is
used to bail out insolvent banks, what will the taxpayers
get in return?

Barack Obama has outlined four conditions that ought to be imposed: an
upside for
the taxpayers as well as a downside; a bipartisan board to oversee the
process;
help for the homeowners as well as the holders of the mortgages; and
some limits
on the compensation of those who benefit from taxpayers' money. These
are the right
principles. They could be applied more effectively by capitalising the
institutions
that are burdened by distressed securities directly rather than by
relieving them
of the distressed securities.

The injection of government funds would be much less problematic if it
were applied
to the equity rather than the balance sheet. $700bn in preferred stock
with warrants
may be sufficient to make up the hole created by the bursting of the
housing bubble.
By contrast, the addition of $700bn on the demand side of an $11,000
market may
not be sufficient to arrest the decline of housing prices.

Something also needs to be done on the supply side. To prevent housing
prices from
overshooting on the downside, the number of foreclosures has to be
kept to a minimum.
(Z: George and I think alike.)
The terms of mortgages need to be adjusted to the homeowners' ability
to pay.
The rescue package leaves this task undone. Making the necessary
modifications is
a delicate task rendered more difficult by the fact that many
mortgages have been
sliced up and repackaged in the form of collateralised debt
obligations. The holders
of the various slices have conflicting interests. It would take too
long to work
out the conflicts to include a mortgage modification scheme in the
rescue package.
The package can, however, prepare the ground by modifying bankruptcy
law as it relates
to principal residences.

Now that the crisis has been unleashed a large-scale rescue package is
probably
indispensable to bring it under control. Rebuilding the depleted
balance sheets
of the banking system is the right way to go. Not every bank deserves
to be saved,
but the experts at the Federal Reserve, with proper supervision, can
be counted
on to make the right judgments. Managements that are reluctant to
accept the consequences of past mistakes could be penalised by
depriving them of the Fed's credit facilities.

Making government funds available should also encourage the private
sector to participate
in recapitalising the banking sector and bringing the financial crisis
to a close.

The writer is chairman of Soros Fund Management