Soros : Paulson's Financial-Rescue Plan Is `Ill-Conceived'

By Katherine Burton and Matthew Benjamin
Bloomberg

Oct. 1 (Bloomberg) -- Billionaire investor George Soros said the U.S. should inject equity into banks rather than buy their bad debts as proposed by Treasury Secretary Henry Paulson in his financial-rescue package.

``The plan is ill-conceived or not conceived at all,'' Soros said today in a telephone interview, calling the current credit meltdown ``the crisis of a lifetime.''

Paulson would allocate as much as $700 billion to purchase distressed securities from banks, freeing up capital for lending that would help stabilize financial markets. The House of Representatives rejected the package on Sept. 29. The Senate is set to vote today on legislation that links the plan to an increase in bank-deposit-insurance limits and tax breaks. The House will likely take action in two days.

``The Treasury should rely on the Federal Reserve and the bank examiners to establish what equity each bank needs,'' said Soros, chairman of Soros Fund Management LLC, a New York-based hedge-fund firm with $20 billion in assets. The examiners would end up declaring some banks insolvent.

Soros, 78, proposed that banks first try to raise capital from private investors. As needed, the government would inject additional cash into the banks in exchange for preferred stock with warrants or convertible bonds. Existing shareholders would also be given the right to subscribe to the new securities, and could sell their rights to others.

``If administered properly, this recapitalization would be enough to let the banks lend again,'' he said.

Paulson's plan is flawed because the banks' bad debt is hard to value, and to make the plan work the Treasury would have to overpay for the securities, Soros said.

Paulson ``has been reactive and not proactive, and he's made a number of U-turns, but he's the best we have right now,'' said Soros when asked about the job Paulson has done in handling the crisis.


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