A new Democratic Senate bill to tame the financial markets would give the government new powers to break up firms that threaten the economy, force the industry to pay for its failures and create a consumer watchdog within the Federal Reserve.
Legislation unveiled Monday by Senate Banking Committee Chairman Chris Dodd falls shy of the ambitious restructuring of federal financial regulations envisioned by President Barack Obama or contained in legislation already passed in the House.
But the bill, which includes provisions negotiated with Republicans, would still be the biggest overhaul of regulations since the New Deal. It comes 18 months after Wall Street's failures helped plunge the nation into a deep recession.
"We will have financial reform adopted this year in the Congress of the United States," Dodd said.
The bill would give the government power to seize and dismantle failing financial companies and require banks to contribute to a reserve fund to pay for it, reports CBS News correspondent Anthony Mason. It would also create a "Consumer Financial Protection Bureau." The agency would have an independent director, but would be made part of the Federal Reserve.
"There's no two ways about it that the Fed's reputation in protecting consumers is not very good," University of Maryland law professor Michael Greenberger told Mason.
In its sweep, the bill would touch all corners of the financial sector, from storefront payday lenders to the highest penthouse office suites on Wall Street.
"Americans are frustrated and angry, as we all know," Dodd said. "They've lost faith in our markets, and they wonder if anyone is looking out for them."
In announcing his bill at a news conference, Dodd stood alone, a sign of the difficult task ahead of him in forging a bill that can pass the Senate. None of the 10 Republicans on his committee endorsed his plan. Several Democrats have voiced dismay at Dodd's decision to reject a plan for a freestanding consumer agency, an Obama regulatory centerpiece.
The bill also does not fully embrace Obama's most recent demand to reduce the size of the largest financial institutions and to ban commercial banks from conducting risky trades on their own accounts.
Critics say the reforms do little to police derivatives and credit default swaps, the complex financial contracts which helped set off the financial crisis.
Even Jamie Cawley wants more reform. His company, IDX Capital trades $200 million in derivatives a day. The crisis occurred, he said, because the market is unregulated and interconnected.
And "That risk is still there." Cawley told Mason. "We don't think the current legislation in its form today goes far enough."
"The key question of whether we really will be able to fight future recessions, near depressions, is our ability to get a handle on these toxic instruments," Greenberger said. "And we have not even heard the opening shot on that today."
Obama called Dodd's bill "a strong foundation," but he signaled that it fell short of his requirements.
"I will take every opportunity to work with Chairman Dodd and his colleagues to strengthen the bill and will fight against efforts to weaken it," he said.
The bill envisions a leaner Federal Reserve that would gain new powers to regulate the size and the activities of the nation's largest financial firms. The Fed's independent consumer bureau would write regulations governing all lending transactions. Bank regulators, however, could appeal those regulations if they believe they would affect the health of the banking system.
The bill creates a powerful nine-member Financial Stability Oversight Council that could:
--Place large, interconnected financial institutions such as insurance conglomerate American International Group under the supervision of the Federal Reserve.
--Approve the breakup of large complex companies if they pose a "grave threat" to the to the nation's financial system.
--Veto regulations written by the new consumer protections bureau at the Fed.
All those actions would require a two-thirds vote of the council.
The bill also would give shareholders of publicly held financial institutions a voice on executive pay by letting them cast a nonbinding vote on compensation packages. Though advisory only, that step has drawn fire from Wall Street as an intrusion into corporate governance.
Recognizing New York as the capital of the financial sector, Dodd would upend the selection of the leadership of the Federal Reserve Bank of New York Fed, which counts five of the nation's seven largest banks under its supervision. The president of the New York Fed would be appointed by the president and confirmed by the Senate for a five-year term.
Moreover, Dodd would prohibit past officers, directors or employees of institutions supervised by the Fed from serving on the boards of the regional Fed banks. Under current, law, three of the nine directors in each of the 12 Fed regions are bankers.
The American Bankers' Association panned Dodd's regulatory effort.
"We oppose this bill because it will subject traditional banks, which did not cause this crisis, to heavy new regulation, while non-banks will have even further competitive advantage," said Edward Yingling, the ABA's president and chief executive officer.
John Taylor, head of the National Community Reinvestment Coalition, a consumer advocacy group, said Dodd was "capitulating to the industry's interests."
"He's offering a faux consumer protection agency that holds little promise to be effective in the long run," Taylor said.
Author Michael Lewis explained on "60 Minutes" Sunday how some of Wall Street's finest minds managed to destroy $1.75 trillion of wealth in the subprime mortgage markets.
Wall Street: Inside the Collapse
Full Segment, Part 1: Inside The Collapse
Full Segment, Part 2: Inside The Collapse
Web Extra: Is Wall Street Overpaid?
Web Extra: Bailout Blues
Web Extra: The $8.4 Billion Bet
Web Extra: Wall Street Misfit
Web Extra: "The Blind Side"
"This was an episode where capitalism was almost destroyed, just by the capitalists. And, in the most sensational way, they were sort of destroyed by their own folly," Lewis told correspondent Steve Kroft.