Plans for a massive shake-up of U.S. financial market regulation prompted by the collapse of the subprime mortgage market will not satisfy critics and are likely to face stiff opposition from powerful vested interests, officials and analysts said yesterday, reports Reuters.

U.S. Treasury Secretary Henry Paulson unveils proposals for broad reform, in a telling acknowledgment from the pro- business administration of U.S. President George W. Bush that its hands-off approach to freewheeling financial markets is not sustainable.

“The Bush administration is realizing that the private marketplace isn’t going to handle this on its own,” Senator Bill Nelson, a Florida Democrat, said on Sunday on CNN’s “Late Edition” program. Congressional backing is required for any major changes in the law and time is short.

There are only a few months left in the life of this Congress, with one third of the Senate and all seats in the House of Representatives up for grabs when the nation votes for a new president in November. With the housing slump being blamed for possibly tipping the United States into a recession—and Democrats in control of Congress and focused on the election—the groundswell for tighter market controls has built up a head of steam. “Paulson is calling for greater regulation.

And if some of those regulatory agencies hadn’t been asleep at the switch, we might not be in as bad a shape as we are now,” said Nelson. The campaign of Republican presidential nominee John McCain said he was studying the plans and said he was looking forward to a “healthy debate over the best path forward,” in a nod to the fact that the process will be prolonged.

A Federal Reserve spokeswoman said on Saturday the Paulson initiative was a welcome “first step.” But she pointedly stressed that the U.S. central bank was looking forward to working with Congress to develop the policy framework. The financial services industry offered a guarded welcome to Paulson’s initiative, but stressed that any new rules needed to be carefully crafted.

“The last thing you want to do is do something super quickly that could have unintended consequences .... It is so complex you just can’t rush into it,” said Robert Nichols, president of the Financial Services Forum in Washington. Paulson’s plan envisages a much larger role for the Fed, merging the Securities and Exchange Commission with the Commodity Futures Trading Commission (CFTC) and closing the Office of Thrift Supervision (OTS).

This tramples on some jealously guarded turf in Washington, both for the officials whose jobs might be forced to change, and U.S. lawmakers to whom they report—who might resent having to share their regulatory authority. For instance, the CFTC falls under the writ of the House and Senate agriculture committees, while the SEC belongs to their colleagues on the finance committees. Committee officials were not immediately available for comment on Sunday.

“That comes up constantly,” said Kenneth Scott, professor of law and business at Stanford University, referring to a SEC/CFTC merger. “I don’t see any likelihood of that.” OTS Director John Reich also made plain he would fight for the survival of his institution and said Paulson’s plan was just the latest in a dozen efforts at restructuring over the last 60 years—and would meet the same fate.

“Although none of these proposals became reality, many of you might be wondering whether financial services restructuring is an idea whose time has finally come. I don’t think so,” he told staff in a weekend note made available to the media. The American Bankers Association said it looked forward to working with the current and next U.S. presidential administration on the reorganization, but voiced its concern that the OTS might be eliminated.

“We are disappointed that in several important respects the proposed blueprint comes up short,” ABA president and chief executive officer Edward Yingling said in a statement. “In particular, dismantling the thrift charter and crippling state banking charters will weaken banking in America,” he said.

Arguing that the mortgage market woes were not a failure of his agency, Reich tricked off a long list of reasons why Paulson’s proposals would run into the sand, including the lack of time and bank industry support for the institution.