Treasury to Propose Overhaul of Financial Oversight

The Treasury Department will unveil a sweeping plan on Monday to change the way the government oversees the nation's financial industry. The proposed overhaul comes amid the worst financial crisis in decades.

One thing the Bush administration would like is to have the Federal Reserve take on a more investigative role — to be able to look at the books of firms that are threatening financial stability throughout the system, investment banks such as Bear Stearns and private equity firms. If the Fed doesn't like what it sees, it could make the company take action to limit its financial risk.

The administration also wants to consolidate the agencies overseeing the industry. No one agency possesses all the information and authority to monitor systemic risk and make sure the system doesn't go haywire.

The proposal also calls for setting up a mortgage origination commission that would evaluate mortgages by state. But the plan doesn't include regulation to prevent the sort of abuse that started the crisis, that is, mortgage lenders giving loans to people who couldn't afford them.

Democratic Sen. Charles Schumer of New York said there's a need to regulate mortgage brokers the way the government regulate banks.

"For instance," he said, "it should be illegal for them to issue a mortgage to someone who cannot repay. In other words, in some cases someone's income was $25,000 a year and their mortgage was $35,000 a year — a bank couldn't do that."

The proposal first needs the blessing of Congress, and it will take a while. Investment banks stand to lose a lot. They also make a lot of campaign contributions, so they have a lot of influence in Washington.