Billionaire George Soros says giving a "blank check" to U.S. Treasury Secretary Henry Paulson would be a huge mistake.

The $700 billion package as originally proposed is rife with new risks, including the shocking deferral of power directly to Paulson, Soros writes in the Financial Times.

"Mr. Paulson's record does not inspire the confidence necessary to give him discretion over $700 billion," Soros writes.

Soros charges that Paulson so far has brought chaos, not resolution, to the markets.

For instance, Paulson let Lehman fail and then had to be forced to provide $85 billion to AIG, Soros argues. Lehman's end then disrupted the commercial paper market to the point that money market funds were forced to shut down. Commercial banks couldn't get financing.

It's that kind of near-miss with systemic failure that has forced the Secretary to come up with the new, bigger bailout plan.

Yet the blank check idea is a proven failure, Soros writes. Just look at the Fannie and Freddie bailout, which started as a massive increase in funding, not an outright government takeover.

"His solution landed the housing market in the worst of all worlds: Their managements knew that if the blank checks were filled out they would lose their jobs, so they retrenched and made mortgages more expensive and less available," Soros writes.

"Within a few weeks, the market forced Mr. Paulson's hand, and he had to take them over."

If the same happens now with the much larger, system wide debts, the same result will follow, but on a huge scale.

In effect, the U.S. public would be buying a pig in a poke. "Mr. Paulson's proposal to purchase distressed mortgage-related securities poses a classic problem of asymmetric information," Soros writes.

"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."

Government will almost certainly overpay, reducing any potential upside in the future, Soros maintains. Instead, Soros, who supports of presidential candidate Sen. Barack Obama, endorses the candidate's proposed conditions to any deal.

They are: 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.

In the end, too, it's a problem of oversupply — too many houses for sale at once. To keep house prices from "overshooting" to the downside, foreclosures must be headed off, Soros says.

Soros suggests resetting the terms, which would break private contracts but likely keep more people in houses long enough to sell them in an orderly fashion.

He admits that the combining of all these problem mortgages into collateralized debt obligations has made this last task much more complex, perhaps even unworkable. Yet changes in bankruptcy law in regard to principal residences might be enough to achieve the beginnings of a solution.

"Rebuilding the depleted balance sheets of the banking system is the right way to go," Soros writes.

"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."

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