President Bush at a meeting on the economy in the Roosevelt Room of the White House on March 17, 2008. Bush is flanked on his right by Treasury Secretary Paulson and on his left by Federal Reserve Chairman Bernanke

The Bush Administration on Monday will propose the biggest overhaul of the US financial regulatory system since the Great Depression.

The 200-page plan will be announced at a time when the US financial system is in the midst of a crisis but it had its genesis in early 2007, at a time when the best and the brightest from the Federal Reserve Chairman to Wall Street insiders, boldly proclaimed that the then nascent subprime home loans problem, would be "contained." US Treasury Secretary Hank Paulson had ordered a review of the regulatory system in response to calls that the overregulation, particularly rules known as Sarbanes-Oxley introduced in the aftermath of the collapse of Texas energy trade Enron, were resulting in the loss of business to overseas financial centres, in particular London's.

However, calls for tougher regulation has been prompted by the credit crisis and Secretary Paulson, was head of Wall Street's most successful investment bank Goldman Sachs when it like rivals, repackaged junk

 mortgages for sale as trusted security products, around the world. How Goldman Sachs made money from US subprime mortgages on the way up and down 

“I do not believe it is fair or accurate to blame our regulatory structure for the current turmoil,” Paulson is expected to say according to a draft of a speech, when he outlines the Administration’s proposals.

“Despite the fact that there will be a temptation to view this through a lens of what is happening now in credit markets, this has been a process that has been going on for a year,” David Nason, Treasury’s Assistant Secretary for Domestic Finance, said in an interview. “These are very complex issues that require a serious amount of debate.”

In the plan, the Federal Reserve will gain new powers to serve as the protector of stability for the entire financial system. Some institutions such as the Office of Thrift Supervision and the Commodity Futures Trading Commission; their responsibilities would shift to other agencies.

The Paulson plan proposes a three-stage process that would lead to establishing three main regulatory agencies.

The Fed would be at the peak of the regulatory pyramid as the “market stability regulator.” But it would lose its current powers over bank holding companies.

The proposal would combine the five agencies now responsible for regulating banks, thrifts and credit unions into a single regulatory agency.

The plan proposes a federal commission, the Mortgage Origination Commission, to develop uniform, minimum licensing standards for mortgage market participants.

The powers of the Securities and Exchange Commission would be transferred into a super agency responsible for business conduct and consumer protection.

The chairman of the Senate Banking, Housing and Urban Affairs Committee, Senator Christopher Dodd, said in a statement the recommendations deserved careful consideration. But he said he believed they “would do little if anything to alleviate the current crisis.”

House Financial Services Committee Chairman Barney Frank said Paulson’s plan was a “very constructive step forward.”

“By rejecting the argument for the status quo ... he has narrowed, albeit by no means removed, the differences between his position and that of many Democrats,” Frank said.

Paulson said in relation to the Fed's role: "They would have broad powers so they could go anywhere in the system they needed to go."

The Wall Street Journal says today that a roving oversight role could ultimately leave the Fed as sole supervisor of nothing while being potentially liable for everything. Fed officials are in a delicate position over the plan. They do not want to explicitly endorse a report with which they have some important misgivings. They have argued they needed the authority, if they found a firm or firms acting in a way that endangered the system, to take firm measures to correct it, such as imposing a capital surcharge. The report does not explicitly give the Fed that power, but it does give it the power to take "corrective actions" in consultation with the other regulators.

June 16, 1933-Washington, DC- President Franklin D. Roosevelt affixes his signature to the Glass-Steagall bank reform--deposit insurance measure, which provided for the separation of commercial and retail banking and established the Federal Deposit Insurance Corporation. Behind the President (L-R) are: Sen. Allen Barkley; Sen. Thomas Gore; Sen. Carter Glass; Comptroller of Currency J.F.T. Connors; Sen. William G. McAdoo; Rep. Henry S. Steagall; Senator Duncan U. Fletcher; Rep. Alan Goldsborough; and Rep. Robert Luce. Photo: Corbis

The Journal says that  the Fed didn't want to break ranks with Treasury. The united front the two have maintained in the recent crisis-such as the bailout of Bear Stearns Cos.-has been important to restoring confidence in financial markets, officials feel. Like other agencies, the Fed also sees little point in getting into a fight over a blueprint that is unlikely to be implemented any time soon, if at all.

Lawrence Summers, President Clinton's last Treasury Secretary, says the Fed in any case might not be up to the task. "It's not realistic to think that career civil servants are going to foresee bubbles that are about to burst in ways that are better than those who have their large fortunes on the line," he said