The Obama administration’s overhaul of financial-industry rules faces a lobbying assault on Capitol Hill, as lawmakers question the Federal Reserve’s role and bankers say the plan may hinder economic growth.

President Barack Obama announced his proposals yesterday in the White House, and banks, hedge funds and commodities traders quickly pointed to provisions they didn’t like. The American Securitization Forum, whose members include Goldman Sachs Group Inc. and JPMorgan Chase & Co., said Obama’s plan to fix the mortgage market “may not be the most effective way.”

Financial firms, some of them blamed for causing the credit crisis, say they want to make sure the industry isn’t further damaged by ill-conceived or burdensome regulations. They want to limit costs that may eat into profits and eliminate rules that give competitors an advantage, said Ernest Patrikis, a partner in New York law firm White & Case LLP.

“Anytime you have a new regulatory regime that’s this sweeping, there will be a lot of lobbyists engaged on all sides,” said Peter Peyser, principal at the Washington lobbying firm Blank Rome Government Relations LLC. “The momentum is clearly in the direction of more regulation.”

House Financial Services Committee Chairman Barney Frank said in an interview yesterday that Obama’s plan “is overwhelmingly likely to be passed substantially” in its original form. Even so, he and other top Democrats in Congress, who will guide the legislation, disagree with cornerstones of the proposal.

Fed’s Role

Treasury Secretary Timothy Geithner is scheduled to testify today to the Senate Banking Committee about the financial regulatory system.

Obama would give the Federal Reserve the power to regulate all firms that pose a threat to financial stability. Senate Banking Committee Chairman Christopher Dodd said yesterday in an interview that the matter is “still an open question.” Frank said he also had concerns about the Fed’s ability to do the job. “We’ll see what alternatives people have to this,” he said.

Financial-industry executives were working to shape Obama’s plan well before it was announced, Peyser said. Some demands from lobbyists were already incorporated.

The financial, insurance and real estate industries contributed $39.7 million to Obama’s 2008 campaign, compared with $28.9 million for Republican rival John McCain, according to the Center for Responsive Politics. Four years earlier, those industries gave $34.3 million to President George W. Bush and $14.6 million to Democrat John Kerry.

Bankers Unhappy

On Dec. 16, Obama’s staff met with some of the industry’s biggest trade groups, including the Securities Industry and Financial Markets Association, the American Bankers Association, the Financial Services Forum, the Mortgage Bankers Association and the Financial Services Roundtable.

The American Bankers Association still isn’t happy with Obama’s plans for a new agency to monitor bank-lending practices whose mandate may “go well beyond consumer protection,” the group said yesterday in a statement. The group vowed to fight for changes, he said.

“The administration’s proposal is so vast and controversial that it will be extremely difficult to enact and will produce great uncertainty in the financial markets,” the association’s CEO, Edward Yingling, said in the statement. “It needlessly rips apart all the existing regulatory agencies.”

Other Obama measures likely to encounter pushback include higher capital requirements for banks deemed “too big to fail” and a rule that brokers act in their clients’ best interests when doling out investment advice.

How Much Capital?

“Stronger capital standards is really going to be an issue,” said Patrikis, a former general counsel for the New York Federal Reserve. “It all becomes a cost factor.” Patrikis was the general counsel of American International Group Inc. from 1999 to 2006.

The Washington-based Hedge Fund Association said in a statement that Obama’s registration requirements would be “unduly burdensome” on firms with less than $250 million under management and “could have a significant negative impact on the hedge fund industry and U.S. economy.”

Peyser said he expects “significant lobbying” on regulation of the insurers, hedge funds and private equity. “There’s a lot of detail that’s not here, and those industries will be working very hard to try to limit the scope of the regulation,” he said.

David Hirschmann, president and chief executive of the U.S. Chamber of Commerce’s Center for Capital Markets, said “we can’t simply insert new regulatory agencies and hope that we’ve covered our bases.”

Battle Brewing

The brewing legislative battle recalls the industry’s reluctance to accept reforms after the 1929 stock-market crash, said Charles Geisst, a finance professor at Manhattan College in New York and author of a history of Wall Street.

“I don’t think anyone can buy the argument that by regulating too tightly, we’ll choke off capitalism,” Geisst said. “That argument is as shallow now as it was then.”

Banks may benefit from Obama’s decision not to merge Washington’s biggest financial regulators into a single agency, Patrikis said. Only the Office of Thrift Supervision and Office of the Comptroller of the Currency would be combined into a single National Bank Supervisor, with the Federal Reserve and Federal Deposit Insurance Corp. remaining apart.

“It doesn’t eliminate this lack of accountability and supervision for a major banking organization,” Patrikis said. “Who’s responsible, the Fed or the Comptroller of the Currency? Those issues are still there. The industry probably loves being able to play between the two.”

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