President Barack Obama laid out his vision for recrafting U.S. financial regulation on Wednesday, vowing to halt a cascade of mistakes ... over the course of decades that eroded bank and market oversight.
The Obama plan, under development for six months, next goes to the U.S. Congress for debate, where more than a dozen committee hearings are scheduled between now and mid-July.
The plan takes on some tough jobs, such as forcing large financial firms to boost their capital cushions and regulating over-the-counter derivatives and securitized instruments.
But it only partially tackles a task once seen as vital -- a top-to-bottom revamp of financial regulatory agencies.
No merger of the Securities and Exchange Commission (SEC) and the Commodity Futures Trading Commission (CFTC) is being proposed, for instance, due largely to political obstacles.
A centerpiece of the plan is vesting the Federal Reserve with new powers over systemic risk in the economy with the aim of preventing future disasters like September's collapse of former Wall Street giant Lehman Brothers and the taxpayer bailout of mega-insurer American International Group.
My administration is proposing a sweeping overhaul of the financial regulatory system, a transformation on a scale not seen since the reforms that followed the Great Depression, the president said in a speech at the White House.
Obama is walking a tightrope. He must avoid clamping down too hard on financial interests, stifling their role in driving growth in an economy that is trying to dig out of a recession.
But he and his top economic advisers see the current financial troubles as the latest in a series of crises, going back many years, that can only be addressed by basic changes.
We are called upon to recognize that the free market is the most powerful generative force for our prosperity -- but it is not a free license to ignore the consequences of our actions, he said, echoing language from his campaign.
STOCK MARKET LITTLE CHANGED
Powerful lobbying groups for corporate America were quick to pounce on the president's plan after it was released. Obama wants to sign legislation into law before the end of the year. Conservative House Republicans are offering a rival plan.
The administration's proposal is so vast and controversial that it will be extremely difficult to enact and will produce great uncertainty in the financial markets, said Edward Yingling, president of the American Bankers Association
The basic shape of the plan has been known for weeks and the stock market registered little reaction to its unveiling. The Dow Jones industrial average of 30 major companies closed down less than 1.0 percent at 8,497.19.
Under the plan, a council of regulators chaired by the U.S. Treasury secretary would work on systemic risk with the Fed, but the entire approach looks like a flashpoint in Congress.
Senate Banking Committee Chairman Christopher Dodd said making the Fed responsible for overseeing the largest U.S. financial firms is still open to debate.
There's not a lot of confidence in the Fed at this point, said Dodd, who wants to look closely at alternatives to putting the central bank in charge of systemic risk.
Treasury Secretary Timothy Geithner told reporters the administration had examined options, but had found no plausible alternative to having the Fed watch over system-wide risks.
Obama also called for closing the Office of Thrift Supervision and ending the federal charter under which savings and loans operate as a way to streamline bank supervision.
The government would be empowered, under the plan, to seize and unwind large, troubled companies that are not banks, modeling the process on the Federal Deposit Insurance Corp's existing power to unwind failing banks.
Obama also wants to rein in over-the-counter derivatives markets and securitized debt, and beef up regulation of money market mutual funds, credit rating agencies and hedge funds, which would be required to register with the SEC.
Geithner said the administration would not ask the SEC to require hedge funds to disclose their positions. But officials did not rule out the possibility that certain large hedge funds could come under the scrutiny of the Fed as large and complex enough to pose a systemic risk.
(Additional reporting by Corbett Daly, Karey Wutkowski, Patrick Rucker, Thomas Ferraro, Rachelle Younglai and Emily Kaiser; Editing by Neil Stempleman)