Obama to offer broad market overhaul

Geithner says the proposal will give the financial system 'clear accountability and responsibility.'

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By Catherine Clifford, CNNMoney.com staff writer

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NEW YORK (CNNMoney.com) -- President Obama will release details on Wednesday of his proposed overhaul of how the government oversees banks and financial companies.

The aim is to patch holes in the country's complex system of financial regulation.

The system "was fundamentally too fragile and unstable and it did a bad job of protecting consumers and investors," said Treasury Secretary Tim Geithner, who spoke at a Time Warner (TWX, Fortune 500) summit on the economy. Time Warner is the parent of CNNMoney.com.

Geithner addressed the main objectives of the new regulatory system, although he was not willing to discuss specific details of the proposal prior to the official unveiling by Obama on Wednesday.

The U.S. financial system is far less centralized than other mature economies, according to Geithner, pointing to the between 8,000 and 9,000 banks throughout the country. To hold a vast system accountable, he said that there has to be a more centralized regulation system.

"At the core of making the system stronger is to give one place clear accountability and responsibility," he said.

Focus on reform: In a commentary published in Monday's Washington Post, Geithner and the director of the National Economic Council, Lawrence Summers, said the proposal would grant the Federal Reserve increased power in the oversight and management of the largest financial companies in the market.

It would also create an agency like the Federal Deposit Insurance Corp., to oversee consumer-oriented financial products.

The two men wrote that the plan would point to the need for deeper cash reserves at major financial institutions. Those firms -- whose operations affect other, smaller institutions -- will be moderated by a consortium of Federal Reserve leaders.

In addition, the proposal intends to impose stricter reporting standards for asset-backed securities in an attempt to prevent a housing boom and subsequent bust like the one that catalyzed the current downturn, the two men wrote.

The housing collapse, fueled by the popularization of subprime mortgages, was evidence of weak consumer protection, Geithner and Summers wrote, adding that the proposal Obama will unveil Wednesday works to continue to protect consumers.

Another component of the plan, which "will be available only in extraordinary circumstances," according to Geithner and Summers, creates an option to dissolve financial companies that are too big to fail.

"It will help ensure that the government is no longer forced to choose between bailouts and financial collapse," they wrote.

The proposal will also pledge to lead a global overhaul in regulation.

One financial industry representative said he was on board with the reform agenda.

The five areas touched on "are widely recognized by the industry and other experts as issues that must be addressed," said Tim Ryan, president and CEO of the Securities Industry and Financial Markets Association, in a written statement.

"From a systemic supervisor to resolution of non-banks and other areas, we in the industry understand the urgent need for reform and are working to provide substantive and constructive solutions as the political process moves forward," added Ryan.

Proposal still has to face Congress: Obama's proposal would require congressional approval. Geithner is set to testify about the plan before Congress on Thursday.

The plan will meet with opposition from those opposed to giving the government a heavier hand in the financial marketplace.

While Geithner acknowledged the importance of competition to create innovation in a market economy, he was also unwavering in the defense of increased regulation.

"We are not going to go back to where it was -- we can't," he said Monday. "The damage of the crisis was just too acute."

Geithner said it is crucial to reform the regulatory system even before the economy is completely out of the current recession. "We are trying to move very, very quickly while the memory of the crisis is still in the forefront of people's memory," he said. To top of page

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