WASHINGTON — President Barack Obama this week rolls 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.
The proposals are the source of a spirited debate in Congress over whether they will prove too timid or place too heavy a hand on the levers of capitalism.
Some market players are calling for change. "On a macro-basis, we're very supportive of reform," said Tim Ryan, president and chief executive of the Securities Industry and Financial Markets Association.
In devising new regulations and oversight, the administration is looking to address four perceived weaknesses in the current system:
• 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 of 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 credit and borrowing decisions placed families under staggering debts and contributed to the instability of the financial system. Obama is likely to recommend creating a financial services consumer protection body with oversight powers over mortgages and credit cards and other consumer financial products.
Internally, the administration has vacillated over whether to streamline the vast array of regulatory agencies.
Treasury and White House officials floated the idea of a single financial services regulator to oversee banks and certain insurers. But it didn't get a warm reception from the chairman of the Senate Banking, Housing and Urban Affairs Committee or the chairman of the House Financial Services Committee.
The administration then backed away from the idea.
But last week, Sen. Chuck Schumer, D-N.Y., a key player in financial issues, called on Treasury Secretary Timothy Geithner to include a single banking regulator in the administration's overhaul plan. House Republicans want streamlining, too, but would take power away from the Federal Reserve and the FDIC.
The administration considered merging the Securities and Exchange Commission, the powerful stock market regulator, and the Commodities Futures Trading Commission, which oversees commodity futures and some options markets. But the move would have meant congressional and regulatory turf battles.
One way or another, the Fed could be a winner in the administration's plan.
The administration and Fed Chairman Ben Bernanke would like the central bank to be the overarching "systemic risk" regulator, lording over the financial system in search of flaws and weak stress points. Such a role would give the Fed exceptional authority as the manager of monetary policy and the overseer of big financial institutions.
Industry officials now expect Obama and Geithner to propose a system that makes the Fed a supervisor of systemic risk assisted by a council of regulators that would advise the central bank about potential dangers.
Also in the debate is how to handle failing institutions that pose a threat to the entire financial system. The administration wants a beefed up FDIC to carry out that function. Republicans prefer that companies be restructured or liquidated in bankruptcy court.