There are five key parts to the proposed overhaul, which the administration hopes Congress will pass this year.
First, the administration is calling for the creation of a new Financial Services Oversight Council. Headed by Treasury Secretary Tim Geithner, it would help fill gaps in supervision and identify emerging risks, and also implement stricter capital requirements across the board.
As part of this, the already-powerful Federal Reserve would gain additional authority to serve as the consolidated supervisor at the holding company level of all large, inter-connected financial firms that could pose a systemic risk to the overall system, institutions that would be subject to stricter capital requirements. A new national bank supervisor would conduct prudential supervision and regulation of all federally chartered depository institutions, and the Office of Thrift Supervision would be shuttered to "close loopholes that have allowed important institutions to cherry pick among banking rules."
Second, the government would have expanded powers that would allow it to take over financial firms before they collapse. The administration wants regulation of over-the-counter derivatives such as credit-default swaps, the registration of hedge funds and other private pools of capital, as well as improvements in the regulation of money-market mutual funds.
The administration would impose stricter reporting requirements on issuers' mortgage securities, insist that the originators maintain a long-term financial interest in them and demand new rules for credit-rating agencies evaluating the securities. The Securities and Exchange Commission would take on a larger role in requiring disclosures.
Third, a brand new regulatory commission called the Consumer Financial Protection Agency would be created to help protect consumers dealing with home mortgages, credit cards, student loans and home loans. It would also have the power to crack down on securities markets.
"Consumers will be provided information that is simple, transparent and accurate. You'll be able to compare products and see what's best for you," the president told Americans. "The most unfair practices will be banned. Those ridiculous contracts with pages of fine print that no one can figure out, those things will be a thing of the past. And -- and enforcement will be the rule, not the exception."
Fourth, the Obama administration wants more power and tools to effectively manage financial crises in the future, a la AIG. The key part of this is giving the government the resolution authority -- similar to the Federal Deposit Insurance Corp.'s handling of failing banks -- to wind down large, failing companies so that they never again are faced with the "bad choices" of either providing emergency bailout money or allowing a potentially devastating financial collapse.
Lastly, the administration will seek similar regulations globally. "We need to level up the playing field globally so there is fair competition based on high standards, not a race to the bottom," a government official said.
"The key thing to say is the status quo is not an option," Christina Romer, chairwoman of Obama's Council of Economic Advisers, said on "Good Morning America" today. "One of the things we've seen from the crisis ... is that there were gaps, there were failures in our regulatory system, and we need to make it better."