WASHINGTON - President Obama is ready to roll out an overhaul of the intricate rules and systems that govern America's troubled financial institutions, proposing the most ambitious revision since the Great Depression.
Unlike the government's temporary ownership stake in automakers and major financial companies, the regulatory changes to be announced Wednesday are designed to be permanent. They could result in a major realignment of power and authority among government agencies that set the rules for banking, lending, and investing and touch American lives through daily transactions, including credit cards, mortgages, and mutual funds.
Members of Congress are already debating whether Obama's proposals will prove too timid or place too heavy a hand on the levers of capitalism. Some will require Congress' approval, others only executive action.
At issue is the 21st-century system of high-stakes swaps and trades, bets and losses, where trillions of dollars of investment products have grown too intricate for a 20th-century regulatory structure.
Imagine today's financial transactions as an athletic contest in which the referees have lost their vantage point. Plays occur out of their sight, and fouls go undetected. Some referees halt play; others let it go on.
Even the players have had enough.
"On a macro basis, we're very supportive of reform," said Tim Ryan, president and chief executive officer of the Securities Industry and Financial Markets Association.
In devising new regulations and oversight, the administration is looking to address four perceived weaknesses:
The lack of an all-seeing federal entity to detect institutional stresses that threaten the financial system, and the government's inability to step in and unwind large institutions before they choke the system. The Federal Deposit Insurance Corp. can do this with banks, but the government lacked the power to do the same with a behemoth such as the insurer American International Group Inc.
The undercapitalization of large financial institutions. Heading into the financial crisis, too many banks were leveraged with significantly more debt than equity. "If you give people enough leverage, they can lose an unbelievably large amount of their own money and that of their clients," Obama's chief economic adviser, Lawrence Summers, said last week.
The emergence of large, lightly regulated markets, such as hedge funds, and big insurers, such as AIG, without a federal overseer. The administration wants large private-investment funds to register with the Securities and Exchange Commission and is weighing the creation of a federal charter for insurance firms.
Consumers and lenders whose unwitting or reckless borrowing placed families under staggering debts and contributed to the instability of the financial system. Obama is likely to recommend creating a consumer-protection body with oversight powers over mortgages and credit cards and other financial products.
One way or another, the Federal Reserve could be a winner in the administration's plan.
The administration and Fed Chairman Ben S. Bernanke would like the central bank to be the overarching "systemic risk" regulator, lording over the financial system in search of flaws and weak points. Such a role would give the Fed exceptional authority as both the manager of monetary policy and the overseer of the enterprises with the biggest financial footprint in the country, if not the world.