Paulson to propose financial market overhaul

Treasury Secretary Paulson will unveil a plan on Monday to overhaul the government's regulation of the banking and securities industry.

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WASHINGTON (CNN) -- The Federal Reserve would have the power to regulate virtually the entire banking and securities industry under proposals to be unveiled Monday by Treasury Secretary Henry Paulson, according to a summary of the proposals provided to CNN late Friday.

Paulson will introduce the proposals, designed to modernize the financial oversight structure, in a speech Monday, said Treasury Department spokeswoman Michele Davis.

While Davis said that the proposals have been in the works since June -- two months before the current sub-prime mortgage crisis began affecting financial markets -- it is a long-term restructuring project that is at least in part a response to criticism that the federal government has not been ahead of the current problems.

Some of the proposals -- broadening the focus of a presidential working group on financial markets and tightening oversight on mortgage originators -- are classified as short-term recommendations, while the department expects the rest to take some time to finalize.

Davis said the department does not expect to finish those longer term proposals before President Bush leaves office next year. Instead, she said, Paulson is trying to start the process of creating "a better regulatory framework so we're in better shape next time" there's a rough patch in economy.

The banking and financial industry regulation structure has been developed over decades, from the establishment of the national bank charter in 1863 to the creation of the Federal Reserve system in 1913 to recent changes made in response to other crises. Now, however the ever-expanding complexities of global markets have largely outgrown some of the structure's component parts, creating weaknesses and redundancies.

Paulson will propose the Federal Reserve have authority to look at the financial status of any institution that could affect market stability; the Securities and Exchange Commission merge with the Commodity Futures Trading Commission; stock exchanges have more room for self-regulation; and bank supervision be consolidated into one regulator, according to Brookly McLaughlin, another department spokeswoman.

One of the most dramatic changes would extend the powers of the Federal Reserve -- designed to regulate the commercial banking industry -- to oversight of virtually the entire financial industry.

That change would make the Fed the first responder to a potential financial crisis. Currently, several agencies and commissions have oversight over various parts of the industry, but none has the broad authority.

The proposed change would help the oversight and regulatory system catch up with the events of the last two weeks, when the Federal Reserve intervened to facilitate the sale of failing brokerage Bear Stearns (BSC, Fortune 500) to JP Morgan Chase (JPM, Fortune 500).

Nearly all of the proposals will require the approval of Congress, where Democrats are already at work on their own proposals. Sen. Charles Schumer, D-New York, said that Democrats "agree with large parts" of Paulson's plan but think the proposals should go further.

"Very complex financial instruments have evolved in recent years, like (collateral debt obligations) and credit default swaps, which pose potential problems in terms of systemic risk," he said. "The Treasury Department should address these issues as well."

Initial response from the financial industry was positive. Tim Ryan, president and CEO of the Securities Industry and Financial Markets Association called Paulson's proposals "a thoughtful and sweeping plan."

"Our present regulatory framework was born of Depression-era events and is not well suited for today's environment where billions of dollars race across the globe with the click of a mouse," he said. "That fact, teamed with the current market conditions, result in an universal agreement that it is time to modernize and revitalize the current system."

- CNN's Alan Chernoff, Ali Velshi, Ed Henry and Gene Bloch contributed to this report.