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Obama unveils US financial regulatory overhaul

President Barack Obama proposed massive changes on Wednesday to how the US regulates its financial industry, hoping to win new government powers that could prevent the next economic crisis from taking place.

world Updated: Jun 17, 2009 22:39 IST

President Barack Obama proposed massive changes on Wednesday to how the US regulates its financial industry, hoping to win new government powers that could prevent the next economic crisis from taking place.

In what has been billed the most significant overhaul since the Great Depression of the 1930s, Obama hopes to vastly expand the authority of the Federal Reserve and create a new "oversight council" of regulators to watch over financial firms.

The administration is seeking oversight over virtually all corners of Wall Street, including hedge funds and complex financial products like mortgage-backed securities, which have been blamed for the financial crisis but have faced little or no regulation in the past.

Obama, who was to lay out his proposals in a speech on Wednesday afternoon, said all sides deserved some blame for the country's worst financial crisis in 70 years.

"A culture of irresponsibility took root from Wall Street to Washington to Main Street," Obama said in prepared remarks released by the White House.

"And a regulatory regime basically crafted in the wake of a 20th century economic crisis the Great Depression? was overwhelmed by the speed, scope and sophistication of a 21st century global economy," Obama said.

Obama's proposals put the US central bank in charge of monitoring the country's biggest financial firms - those considered critical to

the health of the system as a whole. Those firms will also face new, stiffer requirements on how much capital and liquidity they keep in reserve.

The Obama administration also wants unprecedented powers to step into financial institutions that are facing imminent collapse, in order to force an orderly bankruptcy that would protect the wider economy.

The government has already plugged nearly $600 billion into banks that were on the brink of collapse last October, after investment banking giant Lehman Brothers declared bankruptcy.

A senior administration official said the new powers to manage failing firms would help do away with the current "false choice of bail-outs or financial collapse."

Obama's plans also envisage creating a new consumer protection agency that could clamp down on unfair practices by banks in everything from mortgages to credit cards.

The plan will now move to Congress, which is already engaged in a heated debate and will hold its first hearing on the proposals with Treasury Secretary Timothy Geithner on Thursday.

Republicans, who are in the minority in both chambers of Congress, have already launched their own plan, rejecting the idea that the government should be involved in managing the country's largest financial institutions.

Wall Street firms, which are mostly blamed for creating the crisis, have cautiously welcomed most of the administration's proposals.

It is important to strengthen the system to protect the consumer, the industry and the economy," said Steve Bartlett, president of the Financial Services Roundtable, Wall Street's main lobby group.

"The past two years have clearly demonstrated what happens when risk is not properly assessed in our industry," read the statement.

Wall Street is strongly resisting the proposal to create a consumer protection agency, but the idea is likely to prove popular in Congress.