The president was to detail the administration's overhaul plan on Wednesday, recommending new powers for the Federal Reserve; a new consumer protection agency to govern lending and credit; and new rules that would reach into currently unregulated regions of the financial markets.
An 85-page draft of the administration's plan details an effort to change a regulatory regime that Mr. Obama's economic team maintained had become too porous for the innovations and intricacies of the today's financial markets.
The plan the president is proposing, if enacted, would be the biggest changes since the 1930s - changes the president says might have prevented the current financial crisis, reports CBS News senior White House correspondent Bill Plante. Mr. Obama says he knows passing this will be - as he put it - "a heavy lift."
With Congress already embroiled in health care legislation, Mr. Obama has set an ambitious schedule, pushing lawmakers to adopt a new regulatory regime by year's end.
"We are not bulldozing the whole system. We're very much starting with the regulatory structure we have and improving it," Christine Romer, the chair of the White House Counsel of Economic Advisers, said on CBS' The Early Show.
Mr. Obama said Tuesday his administration was going to put forward "a very strong set of regulatory measures that we think can prevent this kind of crisis from happening again."
The financial sector and lawmakers from both parties concede the need for significant changes in the rules that govern the intricate and interconnected world of banking and investment. But the details of Mr. Obama's proposal already are facing resistance, signaling a tough sell for a president who is spending major political capital on his health care overhaul.
Under Mr. Obama's plan, the Fed would gain power to supervise holding companies and large financial institutions considered so big that their failure could undermine the nation's financial system. But even as it gains new powers, the Fed also would lose some banking authority to a new Consumer Financial Protection Agency.
Mr. Obama's proposal would require the Fed, which now can independently use emergency powers to bail out failing banks, to first obtain Treasury approval before extending credit to institutions in "unusual and exigent circumstances."
The expanded Fed role and the new consumer regulator are likely to be the two main political flash points in the administration's proposal. Many bankers oppose a new consumer protection regulator and many lawmakers worry the Fed could become too powerful. Friction over those points could slow any major overhaul.
Besides having the Federal Reserve supervise "systemically significant" institutions, Mr. Obama will recommend a council of regulators, which would include the Fed, to monitor risk throughout the broader financial system. The arrangement is designed to prevent crashes like those that felled AIG and Lehman Brothers.
In conjunction with the Fed's authority over large financial institutions and the new consumer agency, Mr. Obama also will propose:
Mr. Obama's plan does not attempt major consolidation of turf-conscious regulatory agencies and does not inject itself into an ongoing debate over whether to bring some insurance companies under federal oversight.
"We don't want to tilt at windmills," Mr. Obama said on CNBC.
Mr. Obama's decision to create a consumer agency comes amid criticism that mortgage lenders and credit card companies have taken advantage of unwitting customers and saddled them with debt.
The new regulator would have the power to demand that customers have the option of simple financial products, to impose fines and to allow states to pass laws that are stricter than the federal standards. Consumer protections are now spread among various state and federal authorities, including the Fed, the Securities and Exchange Commission, the Federal Trade Commission and banking regulators.
Financial lobbyists rallied against the new agency, saying it's impossible to separate bank regulation from oversight of the products they offer.
"We're supposed to be trying to plug holes and connect dots" with the regulatory overhaul, said Scott Talbott, top lobbyist with the Financial Services Roundtable. "The consumer regulator idea moves in the opposite direction."
Sen. Chuck Schumer, D-N.Y., called the new consumer products agency "the cornerstone of regulatory reform." The Fed and other banking regulators, he said, were too focused on the "safety and soundness" of the institutions they oversee, and "did not do a very good job of protecting consumers."
Rep. Bill Delahunt, a Massachusetts Democrat who has helped write a consumer protection bill in the House, said: "Here we are just beginning to extract ourselves from this mess that was on the cusp of total collapse, and the banks don't want further regulations. Give me a break."
The administration will also have to use its political skills to strengthen the Fed. While Democrats generally agree with a need for regulatory changes, many oppose a Fed with expanded powers.
Sen. Christopher Dodd, chairman of the Senate Banking Committee, has advocated an alternative plan to strip the Fed of its regulatory role entirely and create a new consolidated bank regulator that would assume the roles that the Fed and Federal Deposit Insurance Corp. now play in helping regulate state-chartered banks.
Dodd, however, is a strong proponent of a consumer protection agency and is likely to champion that component of Mr. Obama's plan.