Obama to detail broad financial reform

WASHINGTON (CNNMoney.com) -- President Obama on Wednesday will finally announce his long-anticipated plan to restructure how banks and other firms are regulated in the hope of preventing another financial collapse.

The far-reaching effort would reorder the roles of some key agencies to try to tighten government supervision of the financial sector.

Obama's plan will include a proposal to get rid of the embattled Office of Thrift Supervision and merge it with the Office of the Comptroller of the Currency, a senior administration official said Tuesday evening.

The OTS has been on the hot seat for months for its role as the overseer of American International Group (AIG, Fortune 500) and failed lenders IndyMac and Washington Mutual. The comptroller's office is a Treasury Department bureau that regulates national banks.

The plan would also expand the roles of the Federal Reserve and the Treasury Department.

Obama will call for the creation of a council of regulators chaired by the Treasury secretary to work alongside the Fed to monitor system-wide risk, the administration official said.

The Treasury would also officially keep powers it has already been wielding to approve government action aimed at saving a company that's teetering on the verge of collapse.

In addition, Obama will propose the establishment of a new watchdog agency aimed at protecting consumers from deceptive or dangerous mortgages, credit cards and other financial products.

The new consumer agency would take on some powers that currently reside with other regulators like the Fed. It will also have the power to make rules and enact them, as well as the ability to inspect "banking and nonbanking" firms, the official said.

"It's critical we act now. We can't afford to wait," the official said. "We can't afford to let our financial system continue to operate under a system that is inadequate."

Obama is expected to spell out the full plan around 1 p.m. ET. An outline of the proposal had emerged by late Tuesday night in administration briefings and an 85-page paper obtained by CNNMoney.com.

Most of the proposals will have to be approved by Congress, which has its own ideas about reforming the financial regulatory structure.

Lawmakers have begun hearings on the issue of regulatory reform, but final legislative passage could be a lengthy process, veteran Hill watchers say.The Federal Reserve would get new powers to force big financial firms, including those that aren't even banks, to keep a certain amount of money aside in reserves, widening the firm's financial safety net.

Some in the banking industry say the new capital requirements appear tougher than they had originally thought.

Jaret Seiberg, a policy analyst with Concept Capital's Washington Research Group, called the proposal "worse for the financial sector than was expected." He points out that regulators can require banks to shore up their capital levels even if Congress balks at that piece.

A lot of banks and trade associations oppose the new consumer protection agency -- especially the idea of giving it power to curb financial products if they're found to be deceptive or unfair.

"We have a concern creating another regulatory burden, and wonder how they plan on paying for the agency," said Dan Berger, head lobbyist for the National Association of Federal Credit Unions.

But most of the banking industry expected and some even called for giving the Federal Reserve more powers to monitor systemic risk and setting up a new way to unwind big financial firms.

Scott Talbott of the Financial Services Roundtable said banks "won, tied and lost," in the proposal, pointing out aspects they supported, opposed and could put up with.

And the Financial Services Forum, which represents 17 chief executives, said overall, the proposal appears "comprehensive" and "reasonable," said president Rob Nichols.

"I think this is a great start of the dialogue for what's going to take place on the Hill over the next six months," Nichols said.

The White House also aims to tighten up supervision of the securitization markets, requiring firms that originate a security to keep 5% of the "securitized exposure." That means whoever created the financial product would still hold a piece of it, even as it got resold, and would have some interest in its ultimate performance.

The proposal will call for the regulation of all over-the-counter derivatives, including the kind of credit default swaps that led to the collapse of AIG. In addition, officials want to make sure that such products aren't marketed to "unsophisticated" investors.

The Obama plan would address the conflicts of interest that occur when financial firms work with rating agencies to get a golden seal of approval on a financial product.

Rating agencies have been blamed for exacerbating the financial crisis for giving top ratings to bad financial products. The official speaking Tuesday did not offer details as to how rating agency oversight might be toughened.

The Federal Deposit Insurance Corp. could get more power to take over and unwind financial companies, beyond banks, that are in deep trouble. The White House will propose to arm "government with tools to manage the financial crisis," the official said.