The U.S. House of Representatives will debate on Thursday the most sweeping changes to financial regulation proposed since the Great Depression, including broad new government powers over large banks and tighter regulation of capital markets.

President Barack Obama and congressional Democrats see the reforms they are backing as crucial to preventing a repeat of last year's financial crisis that led to taxpayer bailouts of companies such as AIG and Citigroup.

Legislation before the House would set up an inter-agency council to police systemic risks in the economy and create new protocols for dealing with large, troubled financial firms to prevent such debacles as last year's Lehman Brothers collapse.

For the first time, the $450-trillion over-the-counter derivatives market -- dominated by firms such as Goldman Sachs and JPMorgan Chase -- would be regulated, including credit default swaps at the root of AIG's problems.

Curbs would be imposed on executive pay that encourages unwise risk-taking, while lenders would have to retain risk in loans they securitize for sale on the secondary debt market.

The insurance industry would for the first time be monitored by a federal office, while a new agency would be formed to protect financial consumers, and hedge funds would be forced to register with federal regulators.

Wall Street melted down and Main Street paid the price. This cannot happen again, said Democratic Representative Scott Murphy in debate that began late on Wednesday evening.

Republicans have attacked the bill as a measure that would codify bailouts in law and destroy jobs, while setting up new government bureaucracies and piling costs on businesses.

Call it what you want to, but it's socialism, said Representative Spencer Bachus, top Republican on the House Financial Services Committee, during floor debate.

LOBBYISTS PUSH BACK

An army of lobbyists from banks and Wall Street have worked for months to block, water down and delay the bill, which would threaten the profits of many financial services firms.

Reformers have reduced their goals since earlier this year, abandoning a wholesale reorganization of existing regulatory agencies as too politically difficult, for instance.

But the 1,279-page House bill proposes steps that would have been seen as radical not long ago, such as exposing Federal Reserve monetary policy to unprecedented congressional scrutiny, and empowering regulators to break up even solvent financial firms if they threaten economic stability.

Democratic Representative David Scott said charges of socialism were unfair. Republicans made the same accusations decades ago, he said, when the Roosevelt administration set up the Securities and Exchange Commission and other reforms during the Great Depression. This isn't socialism, Scott said.

In a 235-177 vote late on Wednesday, Democrats pushed through a procedural rule for the bill, hammered out over months of discussion and compromise. All Republicans voting on Wednesday opposed the procedural rule.

As many as 30 amendments were expected to be debated on Thursday, said House aides, with leaders hoping to bring the measure to a final vote by Friday. House approval, which analysts widely expect, would move the reform agenda to the Senate, where debate will probably go well into 2010.

(Editing by Tomasz Janowski)

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