President Obama outlined the administration's financial industry reform proposals yesterday. It's a complicated package because the problems are complicated. Some say it doesn't go far enough, but there are some much needed reforms.

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First, it imposes stricter capital and liquidity requirements for banks and investment firms, which aims to avoid some of the credit problems that got us in the current mess.

It also requires issuers of asset-backed securities (i.e. mortgage derivatives) to retain at least 5% of the risk so that, if I understand it correctly, they maintain a financial interest in their product's performance. That might not sound like much, but these things make money on the thinnest of margins and are leveraged to the hilt, so maybe it's enough to dial down some of the wild and crazy.

It creates broad new powers for the Fed or FDIC or somebody to take over failing investment firms whose failure would pose a "systemic risk." Although it's similar to the FDIC taking over a failed bank, I seriously doubt the FDIC is equipped to wade through and unwind the incredibly complex finances of an investment firm as compared to the (relatively) simpler business of highly regulated and (supposedly) more conservative banks.

It would impose SEC (or Commodity Futures Trading?) regulation and possibly exchange trading of all OTC derivative transactions, which include credit swaps, currency hedges, derivatives, and other exotic investment products which are currently unregulated.

It also calls for simplified consumer financial products and creates a new Consumer Financial Protection Agency to oversee consumer credit.

What it doesn't do is end the ability for the bundler of toxic assets to pay a rating agency for a favorable rating. There are only suggestions and guidelines for cleaning up this conflict of interest, improving the rating process, and making it more transparent.

Presumably there's something in there for every special interest to hate, so expect a lot of heated debate in Congress.

More reading:

• U.S. financial regulation reforms outlined

• New consumer agency would have broad powers

• Lawmakers welcome Obama plan on OTC regulation

• Rating agencies largely spared in Obama overhaul

• The White House: New Foundation, New Stability

• U.S. Treasury Dept. White Paper (pdf)