WASHINGTON — The Bush administration is proposing a sweeping overhaul of the nation's financial regulatory system, combining what is now an alphabet soup of government agencies into three streamlined regulators.
The proposal is the result of a year of study by Treasury Secretary Henry M. Paulson Jr. and has the support of the president, according to Treasury officials who spoke on condition of anonymity Friday.
Under the administration's plan, which will be released in detail Monday, the Federal Reserve would get expanded power to promote stability in financial markets.
The Securities and Exchange Commission and a handful of other federal agencies -- all formed in the Great Depression or earlier -- would be restructured and have their responsibilities redefined.
Oversight of the mortgage industry would be stepped up, and states could lose some of their authority to regulate banks.
The aim of the realignment is to better oversee the financial markets and the banking system as they have evolved since the 1930s -- and avoid the kind of upheaval seen in recent months.
An outline of the proposal, first reported by the New York Times late Friday and confirmed by Treasury officials, includes short-, intermediate- and long-term changes in the country's regulatory structure.
Paulson's review began before the sub-prime mortgage crisis and subsequent financial market turmoil, but it was given new import by the near-collapse of investment house Bear Stearns Cos. and the Federal Reserve's decision two weeks ago to temporarily extend its lending to include investment firms as well as banks.
Many if not most of the changes would need congressional approval, which is far from certain. Both houses of Congress are controlled by Democrats, and this is a presidential election year, so any changes could take years.
Still, at least one Democratic leader expressed support for the administration's goals, if not necessarily its specific proposals.
"In broad outlines, we agree with large parts of Secretary Paulson's plan," said Sen. Charles E. Schumer (D-N.Y.), a member of the Senate leadership who is also chairman of Congress' Joint Economic Committee. "He is on the money when he calls for a more unified regulatory structure, although we would prefer a single regulator to the three he proposes."
Schumer also complained that the administration proposal did not appear to address the full spectrum of complex new financial securities, including so-called collateralized debt obligations, or CDOs, which repackage assets such as mortgages for sale to investors.
Losses on such securities have cost Wall Street firms billions of dollars and made them and other institutions reluctant to lend money. That in turn has fueled the credit crunch that is squeezing the economy.
"Very complex financial instruments have evolved in recent years, like CDOs and credit-default swaps, which pose potential problems in terms of systemic risk," Schumer said. "The Treasury Department should address these issues as well."
In the short term, Paulson's plan proposes:
Creating a Mortgage Originations Commission that would oversee the home-loan industry, making sure that state-level licensing conformed with a set of new federal minimum standards.
Consideration of what kind of regulation should be put in place for investment banks that wish to borrow directly from the Federal Reserve.
Paulson has said previously that, although the Fed this month agreed to make loans to securities firms on a temporary, emergency basis, those institutions would have to be more heavily regulated if they wanted permanent access to Fed lending.
In the medium term, Paulson proposes:
Eliminating the distinction between thrifts and banks under federal law.
Bringing all state-chartered banks under federal supervision, either through the Federal Reserve or the Federal Deposit Insurance Corp.
Federal oversight of insurance companies.
Integrating oversight of the futures and securities markets by combining the Securities and Exchange Commission with the Commodity Futures Trading Commission.
Ultimately, the administration's proposal envisions paring down financial market oversight to just three regulators: a "market stability" regulator based on the Federal Reserve; a "business conduct regulator" based on the current SEC and CFTC; and a "prudential oversight" regulator focused on depository banks, encompassing the current Office of the Comptroller of the Currency and the Office of Thrift Supervision.
A major Wall Street trade group, the Securities Industry and Financial Markets Assn., said in reaction to Paulson's blueprint that there was "universal agreement that it is time to modernize and revitalize the current system" of regulation.
"The 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," the group said.
Staff writer Tom Petruno in Los Angeles contributed to this report.