Treasury Secretary Henry Paulson proposed the most sweeping overhaul of the financial regulatory system since the Great Depression.
The plan would change how the government regulates thousands of businesses from the nation's biggest banks and investment houses down to the local insurance agent and mortgage broker.
Paulson unveiled the 218-page plan in a speech in Treasury's ornate Cash Room. He declared that a strong financial system was important not just for Wall Street but also for working Americans.
The administration's plan was already drawing criticism from Democrats that it does not go far enough to deal with abuses in mortgage lending and securities trading that were exposed by the current credit crisis.
The plan, which would require congressional approval for its biggest changes, seeks to trim a hodge-podge collection of overlapping jurisdictions that date back to the Civil War.
It would give the Federal Reserve more power to protect the stability of the entire financial system while merging day-to-day bank supervision into one agency, down from five at present.
It also would create one super agency in charge of business conduct and consumer protection, performing many of the functions of the current Securities and Exchange Commission.
It would, in addition, ask Congress to establish a federal Mortgage Origination Commission to set recommended minimum licensing standards for mortgage brokers, many of whom now operate outside of federal regulation, and it would also take a first step toward federal regulation of the insurance industry by asking Congress to establish an Office of Insurance Oversight inside the Treasury Department.
Paulson acknowledged in his remarks that most of the changes will not occur until after a lengthy debate in Congress, leaving it to the next administration to deal with the biggest changes proposed by the report. He also said the Bush administration's focus would remain on getting through the current severe credit crisis, which has roiled financial markets since last August.
Paulson rejected Democratic charges that it was lax regulation of mortgage brokers and the financial industry that had led to the current problems.
"I do not believe it is fair or accurate to blame our regulatory structure for the current market turmoil," he said. "I am not suggesting that more regulation is the answer or even that more effective regulation can prevent the periods of financial market stress that seem to occur every five to 10 years."
The proposed overhaul would be the most extensive since the current regulatory system was created in response to the 1929 stock market crash and the Great Depression. (See Paulson's Monday CNBC interview at left.)
It comes at a time when the financial system faces its most severe credit crisis in two decades, one that has resulted in billions of dollars of losses for big banks and investment houses and the near-collapse of the country's fifth-largest investment bank.
The rising tide of bad debt has made it harder for consumers and businesses to get credit, further weighing on an economy struggling with a prolonged housing slump and soaring energy prices. Many economists believe the country is already in a recession.
The market turmoil has presented an opening for critics to make the case for stronger federal rules to prevent abuses. Treasury Secretary Paulson rejects making that link.
"I do not believe it is fair or accurate to blame our regulatory structure for the current turmoil," Paulson said in a draft of remarks he delivered Monday. (See speech at left.)
Democrats said the plan wouldn't do enough to crack down on problems in mortgage lending and the sale of complex financial products that have been exposed by the current market turmoil.
Senate Banking Committee Chairman Christopher Dodd said that the administration blueprint "would do little if anything to alleviate the current crisis."
House Financial Services Committee Chairman Barney Frank, D-Mass., who is working on his own regulatory revamp, called Paulson's plan a "constructive step forward" but said it wouldn't give the Federal Reserve the regulatory authority needed for its broader market stability role.
Frank and others said that given the complexity of the issues, they expect the debate on the Paulson proposal and Democratic alternatives will continue in Congress as the next president takes office.
Business groups are split on the Paulson approach. The U.S. Chamber of Commerce and the securities industry support the broad outlines, but banking lobbyists are critical of some of the details affecting their industry.
"Dismantling the thrift charter and crippling state banking charters will weaken banking in America," said Edward Yingling, president of the American Bankers Association.