The Obama administration is promising to "rewrite the rules of the game" for the finance industry, with a clampdown on unfettered trading, new oversight of hedge funds and additional powers to shut down large firms that threaten to destabilise the global economy.
Tim Geithner, the US Treasury Secretary, yesterday published the outline of a plan to reform financial regulation, tightening the government's grip on an industry whose excesses are blamed for the credit crisis.
But Wall Street lobbyists and Republican leaders immediately began massing their forces for a battle over the proposals, promising at least to slow down the push for more federal involvement.
The plan, Mr Geithner said, was a once-in-a-lifetime shot at rebuilding a system which, under current rules, "has proved too unstable and fragile, subject to significant crises every few years, periodic booms in real estate markets and in credit, followed by busts and contraction".
Testifying before the House financial services committee, he said: "This will require comprehensive reform – not modest repairs at the margin, but new rules of the game."
Republican leaders signalled that they would not allow President Barack Obama and his team to bulldoze new legislation through Congress, and instead called for time for reflection. Spencer Bachus, the senior Republican on the House financial services committee, said law-makers must "not rush" into imposing new regulation, and said there was a lack of detail in the plan outlined by Mr Geithner.
The New Jersey Congressman Scott Garrett said: "Before we get too far down the road of 'fixing' problems in our regulatory structure, I would argue that more consensus needs to be reached on exactly what the problems are that we are fixing."
Banking shares reversed early gains on fears that the new regime might be more costly that previously expected. The Treasury is proposing a levy to pay for the work of new regulators who could oversee the liquidation of systemically important firms that get into trouble. Moves to force derivatives trading on to recognised exchanges could crimp innovation, and therefore curtail profitable trading opportunities, analysts also said.
Individual lobby groups immediately threw up objections to parts of the plan. The American Bankers Association urged caution in expanding the power of the Federal Deposit Insurance Corporation (FDIC), saying that power to seize non-bank firms would be better housed elsewhere. "It is dangerous to risk confusing the mission of the FDIC," the trade group said.
The FDIC would be given authority to take control of institutions which, like AIG and Lehman Brothers last year, could do enormous damage to the financial system were they to fail. At the same time, there will be new compulsions on all types of firms to declare their trading positions, so that a systemic regulator could assess the dangers any one poses. Any hedge fund of more than moderate size would be drawn into this net.
The Geithner plan additionally calls for curbs on the ability of investors to pull their money out of money market funds, to reduce the chances of runs. Another set of provisions covers the over-the-counter derivatives market, where contracts such as credit default swaps are traded. These will now have to be traded on exchanges and through regulated clearing houses, not directly between banks without oversight.
Making her pitch for a greater role for the Securities and Exchange Commission in the new era of tighter regulation, the agency's chairman, Mary Schapiro, told a Senate hearing that it would strengthen rules for money market funds and investment advisers and reiterated plans to give shareholders more rights.