AND WALTER HAMILTON, WASHINGTON AND NEW YORK — The Obama administration is proposing the farthest-reaching set of new rules for the financial industry since the Great Depression -- including measures that would for the first time regulate hedge funds and give government the power to seize and dismantle companies deemed a threat to the economy.
There is strong support for reform in the wake of last fall's near-meltdown of the global banking system, but several of the measures could trigger fierce resistance from the financial industry.
That sets up a potential battle in Congress -- with one side armed with public outrage, and the other with Wall Street money.
"Time after time in history, we've heard the promise that if only we had more regulations, we wouldn't find ourselves in the situation that we're in today," said Rep. Scott Garrett (R-N.J.), who labeled himself a skeptic. "But the Federal Reserve [was] created to ensure that asset bubbles and panics -- sort of like we have right now -- don't happen. But they do."
Congress must approve the measures, which were outlined by Treasury Secretary Timothy F. Geithner on Thursday as follows:
* Give the Federal Reserve or another agency broad authority to oversee the entire economy for signs of "systemic risk."
* Establish a government mechanism to seize and dismantle large institutions whose failure threatens the nation's financial stability.
* Pass tougher requirements for the amount of money and assets that financial institutions need to have on hand so they can withstand economic troubles.
* Require hedge funds, private equity firms and other private investment funds to register with the Securities and Exchange Commission.
* Set up a new, comprehensive framework of regulation of the complex financial instruments known as derivatives, including a central clearinghouse for trades in that market.
"Our system is wrapped today in extraordinary complexity, but beneath all that, financial systems serve an essential and basic function," Geithner told the House Financial Services Committee. "Financial institutions and markets transform the earnings and savings of American workers into the loans that finance a home, a new car or a college education."
Geithner and other administration officials contend that greater regulation is needed to prevent the kinds of financial emergencies that have strained the nation's treasury, including the $182.5-billion bailout of insurer American International Group Inc.
"To address this will require comprehensive reform -- not modest repairs at the margin, but new rules of the game," Geithner told the committee. "And the new rules must be simpler and more effectively enforced."
The measures also would give the government greater oversight of financial firms that now operate largely outside of federal scrutiny.
For example, failed mortgage lender Ameriquest Mortgage Co. of Orange, once the nation's biggest subprime lender, did not fall under the jurisdiction of federal banking regulators because it did not take insured deposits. It took a coalition of 49 state attorneys general to sue Ameriquest over predatory lending practices and win a $325-million settlement.
In some ways, Ameriquest was the tip of the iceberg. By imposing tighter regulation on the Wall Street firms that funded lenders like Ameriquest and bundled their loans into now-toxic securities, the Obama administration's plan would aim to reach into such companies and force changes before things get worse.
"It's acknowledging that banks are no longer the only game in town," said Randall S. Kroszner, a University of Chicago economics professor and a former Federal Reserve governor.
"A lot of our regulatory framework was based on the view that the traditional commercial banks are the main source of systemwide risk," Kroszner said. "I think taking a broader perspective and acknowledging that there are many other types of institutions is important."
Among the most controversial provisions could be one that would require hedge funds, private equity firms and other funds that cater to wealthy and institutional investors to register with the SEC.
The agency passed such a rule in 2004, but it was struck down by a federal appeals court two years later. Opponents said it imposed high compliance costs on the funds while doing little to protect investors.
Behind the scenes, some hedge fund managers groused about the plan for broad regulation of their industry. Several trade organizations said there is a need to modernize regulation and limit so-called systemic risk but questioned the need for more rules.
"We believe that private equity investments do not create systemic risk," said the Private Equity Council, which represents leading firms such as Blackstone Group and Carlyle Group.
"Private equity firms invest in companies, not exotic securities, and their investors are long-term investors, eliminating the 'run on the bank' type of risk that helped create the current financial crisis."