NEW YORK (CNNMoney.com) -- President Obama called on the financial industry Thursday to support his efforts to enact new regulatory reforms or risk repeating the "failure of responsibility" that nearly brought down the nation's economy.
"I believe in the power of the free market," Obama said in a speech at Cooper Union, not far from the New York Stock Exchange. "But a free market was never meant to be a free license to take whatever you can get, however you can get it."
Obama said the lesson of the recent financial crash, which sparked a deep recession that claimed over 8 million jobs, is that reform is needed to prevent repeating the mistakes of the past.
Without reform, Obama said, "our house will continue to sit on shifting sands, leaving our families, businesses and the global economy vulnerable to future crises."
The highly anticipated speech came as Obama and Democrats in Congress are pushing to get a reform package approved this year, with talk that there may be support from at least some Republicans. The House passed a regulatory reform bill in December, and the Senate version is currently being debated.
Obama said the proposed reforms represent a "significant improvement on the flawed rules we have in place today." But the push get those reforms enacted has had to contend with "the furious efforts of industry lobbyists to shape them to their special interests."
While he's sure many of the lobbyists working to defeat the measure are acting on behalf of the Wall Street firms represented by members of the audience, Obama sought to convince the them that regulatory reform will benefit the industry, as well as the nation.
"I am here today because I want to urge you to join us, instead of fighting us in this effort," he said. "I am here because I believe that these reforms are, in the end, not only in the best interest of our country, but in the best interest of our financial sector."
The speech had prompted some hand-wringing on Wall Street. Senior administration officials told CNN that many top bankers had called the White House this week to see "how bad" the speech would be for Wall Street.
But the tone of the speech was not as fiery as some had feared. Indeed, stocks recovered from session lows as investors appeared to take the speech in stride.
In response to criticism that his proposals will result in future taxpayer bailouts of financial firms, Obama argued that the current system is to blame for the troubles of large, interconnected institutions such as American International Group (AIG, Fortune 500), which ultimately required massive amounts of government aid.
"Only with reform can we avoid a similar outcome in the future," he said. "A vote for reform is a vote to put a stop to taxpayer-funded bailouts."
To limit the threat posed by large financial institutions that fail, Obama said the government needs a system to shut them down with as little "collateral damage" to taxpayers as possible.
He said banks should pay a fee to help repay the federal aid that companies such as AIG and Citibank received during the height of the financial crisis in 2008.
The president's argument did not fly with Rep. Darrell Issa, R-Calif., who said in an interview on CNN that the proposed reforms won't end the too big to fail problem and would create "government step children" on Wall Street.
Issa also criticized the bill being debated in the Senate for not addressing some critical issues, including what to do with state-sponsored mortgage lenders Fannie Mae (FNM, Fortune 500) and Freddie Mac (FRE, Fortune 500).
Obama reiterated his support for the so-called Volcker rule, named for former Federal Reserve chairman Paul Volcker, which would limit the proprietary trading activities of banks that take deposits, among other things.
Tim Ryan, president of Securities Industry and Financial Markets Association, said he shared Obama's urgency to enact reforms, though he acknowledged that some sticking points remain.
"While we disagree on some of the details - specifically on the Volcker rule and aspects of the derivatives portion of the legislation - it should not distract us from our overall shared goal of passing responsible reform," Ryan said in a statement.
While Obama derided the use of complex investment derivatives as "financial weapons of mass destruction" - a phrase coined by Warren Buffett - he acknowledged that such instruments have a "legitimate role" in the economy. For example, he said, airlines may use standardized derivatives to hedge against rising fuel prices.
Obama said reform would make derivatives trading more transparent and increase accountability for those who don't use them in an above board way.
"The only people who ought to fear this kind of oversight and transparency are those whose conduct will fail its scrutiny," he said.
The issue of regulating derivatives has been in the spotlight since the Securities and Exchange Commission charged Goldman Sachs last week with fraud related to the 2007 sale of a collateralized debt obligation (CDO).
Goldman's chief executive, Lloyd Blankfein, was among the roughly 700 Wall Street leaders in attendance at Thursday's speech.
Obama also said his proposed reforms would help protect consumers from being "duped" by deceptive financial practices.
While many consumers took financial obligations that they could not afford in the years leading up to the crisis, Obama said the government should create a "dedicated agency" to establish rules that would prevent banks from taking advantage of average Americans.
Richard Hunt, president of the Consumer Bankers Association, said that he agreed with the president on the need for regulatory reform, but opposed Obama's plan to create a consumer protection agency, a cause championed by Senate Banking Committee chairman Christopher Dodd, D-Conn.
"What the President and Chairman Dodd are proposing would have an immediate negative impact on the American banking system and ultimately the American consumer," Hunt said in a statement.
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