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.
Imagine today's financial transactions as an athletic contest where the referees have lost their vantage point. Plays occur out of their sight and fouls go undetected. Some referees halt play while others let it go on.
Even the players have had enough.
"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.
—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.
At one point, 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 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. At a dinner two weeks ago, Geithner told key lawmakers he would not propose the merger.
"The Obama administration -- because they're working in a more realistic environment -- are into the art of the possible," Ryan said.
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 both the manager of monetary policy and the overseer of the enterprises with the biggest financial footprint in the country, if not the world.
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 provided such intervention is triggered by Fed or Treasury regulators.
Republicans prefer that companies be restructured or liquidated in bankruptcy court.
Alabama Rep. Spencer Bachus, the top Republican on the House Financial Services Committee, urged lawmakers to reject a regulatory system "that depends on the infallibility of the government regulators, who have so far shown themselves unable to anticipate crisis, let alone prevent them."
In a speech Friday to the Council on Foreign Relations, Summers offered the administration's counterpoint: "Any financial institution that is big enough, interconnected enough or risky enough that its distress necessitates government writing substantial checks, is big enough, risky enough or interconnected enough that it should be some part of the government's responsibility to supervise it on a comprehensive basis."