Most sweeping overhaul of financial regulation since Great Depression being proposed

WASHINGTON -- The Bush administration is trying to confront the credit crisis that has rattled nerves from Wall Street to Main Street by proposing wholesale changes in how Washington oversees the financial system.

A plan set for release Monday would give new powers to the Federal Reserve so that the central bank serves as the system's overarching protector of stability.

The proposal would abolish agencies such as the Office of Thrift Supervision and the Commodity Futures Trading Commission, shifting their responsibilities to other federal institutions.

When Treasury Secretary Henry Paulson outlines the ideas in a speech, the changes will represent the most sweeping overhaul of financial regulation since the Great Depression of the 1930s.

The Associated Press obtained a 22-page executive summary of the proposal. It seeks to make sense of the mishmash of overlapping oversight in which an alphabet-soup roster of agencies regulates banks, thrifts and credit unions.

Under the current hodgepodge, institutions that take deposits and are federally insured face multiple regulatory bodies. By contrast, hedge funds, private equity firms and investment banks endure substantially less regulation.

The credit crisis that has rocked Wall Street and made credit hard to get on Main Street has highlighted that discrepancy in regulation.

Many financial institutions have declared billions of dollars in losses stemming from soaring mortgage defaults caused by prolonged housing troubles.

In an unprecedented move designed to get credit flowing again, the Fed is allowing investment banks to borrow directly from the Fed, something only commercial banks had the power to do before.

That decision came as part of a rescue effort for Bear Stearns Cos., the nation's fifth largest investment bank. It nearly failed earlier this month before the Fed rushed in with a $30 billion line of credit to facilitate the sale of Bear Stearns to JP Morgan Chase & Co.

The Fed's moves have put public money potentially at risk and increased calls for greater regulation of investment banks and other institutions.

The Paulson plan is expected to generate intense debate in Congress, which would have to approve the changes.

Some top Democrats, including Rep. Barney Frank, the chairman of the House Financial Services Committee, are pushing competing ideas that would streamline oversight but also impose new controls beyond those in Paulson's plan.

On Saturday, Frank called Paulson's plan "a very constructive step forward."

"By rejecting the argument for the status quo; by making it clear that new regulation done properly enhances the function of the market rather than detracts from it; and by explicitly including consumer protection among the core functions of the system he proposes, he has narrowed, albeit by no means removed, the differences between his position and that of many Democrats," Frank said in a statement.

Sen. Charles Schumer, a leading voice in the debate, said he did not think Paulson had gone far enough in dealing with some of the new complex types of investments heavily featured in the current financial crisis.

"Very complex financial instruments have evolved in recent years," said Schumer, D-N.Y. "The Treasury Department should address these issues as well."

David Nason, Treasury's assistant secretary for domestic finance, said the administration's primary goal is to get through the current credit crisis with officials understanding that the debate over an overhaul plan this far-reaching could last for years.

"These are very complex issues that require a serious amount of debate," he said in an AP interview Saturday. "It is going to take time to play out."

Business groups on Saturday generally voiced support for Paulson's approach and said there would be significant debate over the details.

"The current crisis just shows in a very stark way that ... you need a regulatory structure that is simple, nimble and modern and ours does not meet that test," said David Hirschmann, president of the U.S. Chamber of Commerce's Center for Capital Markets Competitiveness.

Tim Ryan, president of the Securities Industry and Financial Markets Association, a big lobbying group for Wall Street, said there was "universal agreement that it is time to modernize and revitalize the current system."

The Paulson plan would:

• designate the Fed as the primary regulator for market stability, greatly expanding its ability to examine any financial institution deemed to pose a risk to the stability of the system.
• shift the functions of the Office of Thrift Supervision to the Office of the Comptroller of the Currency, although ultimately the plan envisions just one banking regulator.
• merge the Securities and Exchange Commission with the Commodity Futures Trading Commission.
• create a national regulator for insurance companies, which now are largely regulated by the states.
• establish a commission to address the abuses exposed in the current tidal wave of mortgage defaults.