More controls planned for banks, Wall Street

President Barack 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.

The goal is to prevent a recurrence of the economic crisis that erupted in the United States and exploded last fall with devastating consequences still reverberating around the world.

Unlike the government’s temporary ownership stake in automakers and major financial companies, the regulatory changes set 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, from credit cards to mortgages and mutual funds.

The proposals already are the source of a spirited debate in Congress over whether Obama’s measures will prove too timid or place too heavy a hand on the levers of capitalism.

At issue is a 21st century system of high-stakes swaps and trades, bets and losses where trillions of dollars worth of investment products have grown too intricate for a 20th century regulatory structure.

In devising new regulations and oversight, the administration is looking to address four perceived weaknesses in the current system:

  • The need for an all-seeing government entity to detect institutional stresses that threaten the entire financial system. Think of the mortgage-backed securities that are still weighing down bank balance sheets.
  • The inability to step in and unwind large and complex institutions before they fail and become the thread that unravels the fabric of the system.
  • The undercapitalization of large financial institutions. Heading into the financial crisis, too many banks were leveraged with significantly more debt than equity.
  • Consumers and lenders whose unwitting or reckless credit and borrowing decisions placed families under staggering debts and contributed to the instability of the financial system. Obama is likely to recommend creation a financial services consumer protection body with oversight powers over mortgages and credit cards and other consumer financial products.