Obama delivers his plan to overhaul financial regulation

— -- President Obama on Wednesday proposed the most sweeping overhaul of financial market regulation since the 1930s in response to a Wall Street crisis that sent the economy into an epic tailspin.

His plan would give broad new powers to the Federal Reserve, abolish the Office of Thrift Supervision, establish a new watchdog agency to protect consumers, and more tightly regulate hedge funds and derivatives, according to a senior Treasury Department official. The official requested anonymity because Obama has not announced details of the overhaul.

Aggressive marketing of subprime mortgages and their packaging into securities helped undercut financial systems and trigger a deep recession.

Obama wants Congress to make the plan law by the end of the year, an ambitious goal given that he also is pushing lawmakers to overhaul the nation's health care system by October.

Both measures face a blizzard of opposition from special interest groups, who fear the changes envisioned will cut into profits or impose undue complexities on their industries.

In his remarks, the president offered his version of the source of the financial crisis, tracing the troubles to complex financial instruments such as asset-backed securities that ended up concentrating risk. "It was easy money," he said. "But these schemes were built on a pile of sand."

The regulatory system either had gaps or overlaps with little accountability, he said.

"Millions of Americans who have worked hard and behaved responsibly have seen their life dreams eroded by the irresponsibility of others and the failure of their government to provide adequate oversight," Obama said.

The 88-page white paper delivered Wednesday by the administration will spark intense debate in Congress with opponents already claiming that it imposes too many restrictions that will harm the ability of U.S. financial companies to compete in the global economy. The proposals are designed to:

•Strengthen oversight of the financial system. A "financial services oversight council" headed by Treasury would make the Fed supervisor of all big financial holding companies.

"We have to have somebody who is responsible for seeing the risks of the system as a whole and not just individual institutions," Obama told Bloomberg News Tuesday. "And we think that the Fed is best positioned to do that."

Regulators would ensure major financial institutions have sufficient capital and that high levels of executive compensation don't prompt company officers to take undue risks.

The Office of Thrift Supervision, which has been criticized for lax enforcement of savings and loans, would be replaced by a "national bank supervisor" to keep institutions from shopping for the most lenient regulator.

The new system would also force hedge funds to register and regulate money market mutual funds. A crisis of confidence in money market funds last year threatened to topple the financial system.

•Regulate complex financial instruments. Over-the-counter derivatives and credit default swaps would be regulated and sold on exchanges. Companies that bundle loans into securities would have to retain 5% of the credit risk.

•Create a financial watchdog agency. The entity would oversee a wide range of consumer products, including mortgages. The agency would ensure financial firms clearly disclose risks to consumers in plain language and don't use unfair practices.

"Mortgage brokers will be held to higher standards. Exotic mortgages that hide exploding costs will no longer be the norm, home mortgage disclosures will be reasonable, clearly written, and concise," Obama said.

"We've got to make sure that we have somebody who is focused and responsible for protecting consumers, whether it's on subprime loans for their mortgages, for their credit cards, that investors have additional protections," Obama said.

•Reduce risk of failing companies. The Fed would have authority to safely shut down failing financial firms so they don't threaten the entire system. Today, the government can dismantle failing banks but has no such power over non-banks. Last year, the Fed had to use its emergency powers to prop up insurance giant American International Group.