Nov. 5 (Bloomberg) -- Now that Barack Obama has won the White House, his campaign to overhaul a financial industry imperiled by its worst crisis in seven decades begins.

The president-elect has vowed a top-to-bottom examination, focusing on everything from the retail mortgage system to the capital requirements for the biggest lenders.

Obama wants a moratorium on home foreclosures and backs a congressional plan to encourage lenders to refinance troubled loans. He has proposed changing bankruptcy laws to allow judges to write down mortgage values, and to reduce the number of overlapping regulatory agencies. He would boost oversight of credit-rating companies and says he wants any company borrowing from the federal government to be subject to regulation.

``The last thing we can afford is four more years where no one in Washington is watching anyone on Wall Street because politicians and lobbyists killed common-sense regulations,'' Obama, 47, said in a Nov. 3 speech. ``It's time for change.''

The most immediate issue facing Obama is how to handle the $700 billion bailout Congress passed last month. It gives Treasury Secretary Henry Paulson broad authority for ``providing stability to and preventing disruption in the economy and financial system.''

Obama's economic team will cooperate rather than collaborate with Paulson's staff in the transition before his Jan. 20 inauguration, and he will have leeway to shift the program in a direction more consistent with his own policies.

`Tremendous' Latitude

``The law is there, and it's not only for Paulson,'' said Peter Wallison, a former general counsel at the Treasury who is now a fellow at the American Enterprise Institute in Washington. ``It was written to provide a tremendous amount of latitude depending on what the circumstances are.''

While Obama will have allies in the Democratic-controlled Congress, some of the broader financial proposals he and top party lawmakers are seeking likely will spark clashes with Wall Street, lenders and Republicans wary of sweeping changes.

House Financial Services Committee Chairman Barney Frank, a Massachusetts Democrat, said last month that Congress will enact legislation next year ``comparable to what Franklin Roosevelt and Congress did in the New Deal'' to eliminate lapses that allowed the U.S. credit markets to deteriorate.

Frank has said Congress should consider either creating a separate agency or empowering the Federal Reserve to assess risk across the financial markets and intervene if necessary.

`Lobby Hard'

Steve Verdier, a lobbyist at the Washington-based Independent Community Bankers of America, representing about 5,000 smaller lenders, said his members ``would lobby hard'' against a single financial-services regulator.

``Over time, the leadership of a single unified agency would tend to focus on the largest institutions,'' he said. ``Community banks would be relegated to the backwaters of the agency and not be listened to.''

``We want them to focus on regulating the unregulated and dealing with the institutions that are too big to fail and knocking them down to size,'' Verdier said.

Floyd Stoner, the top lobbyist at the American Bankers Association, a Washington-based industry group, said changes should affect institutions that aren't subject to the same rules as commercial banks.

``Let's be sure that we focus on the little-regulated or unregulated sectors and not simply pile additional burdens onto those who are already regulated and examined,'' Stoner said.

Mortgage Brokers

Those unregulated areas include mortgage brokers, whom bank regulators and the banking industry blame for the faulty subprime loans at the heart of the crisis; hedge funds; private equity companies, and financial instruments such as credit default swaps and mortgage-backed securities.

They are likely to get their wish. Obama's call for the regulation of any financial institution that can borrow from the government would encompass many of the nation's largest firms. During the last year, the Federal Reserve has opened its vaults to financial companies, such as investment banks, that previously had escaped Fed oversight.

So far, Paulson has committed $250 billion of the $700 billion in rescue funds for buying stakes in potentially a couple thousand banks in a bid to shore up their capital and allow them to lend to businesses and consumers. He has another $100 billion that hasn't been set aside for anything specific yet.

The law allows the president to request the remaining $350 billion at any time. The Congress then has 15 days to vote against giving him the money.

Wholesale Changes

With much of the Treasury's plans for the program in place, former government officials and lawyers said that the next administration needs to be careful making any wholesale changes.

Obama's Treasury secretary is likely to be ``extremely sensitive'' about any revisions, said Kevin Petrasic, a banking attorney with the Paul, Hastings, Janofsky & Walker law firm in Washington. ``If the market starts to view this as driven by politics and that things are going to change, all the work that has been done so far is going to unravel.''

Petrasic, a former official at the Office of Thrift Supervision, said the new Treasury secretary probably will emphasize new priorities rather than add programs.

Helping Homeowners

For example, the new administration could speed efforts to help homeowners rather than banks. Or, it could look to spread some of the remaining funds across other industries, such as insurers or automakers. With at least $350 billion yet to be deployed, there will be plenty of requests, Petrasic said.

Still, Wallison, Petrasic and others say the Bush administration won't hand over major policy decisions until Obama takes office. His advisers will use the time before then to get up to speed on the Treasury plan.

The new president is also looking to strengthen capital requirements on mortgage securities and derivatives, tighten controls over credit-rating companies and require financial institutions to better disclose to investors and companies with whom they do business the kinds of assets they hold.

Steve O'Connor, senior vice president of government affairs at the Washington-based Mortgage Bankers Association, said he wants to begin talks with the new administration immediately about the future of the secondary-mortgage market. At the top of his list: the fate of mortgage-finance companies Fannie Mae and Freddie Mac, which were placed into government conservatorship in September.

Fannie, Freddie

Obama has pledged to replace Fannie Mae and Freddie Mac ``with a structure that is engaged in helping people buy homes, not engaging in market speculation.''

``Fannie and Freddie have proven very effective over the years,'' O'Connor said. ``The important thing is to think through the implications of any alternatives.''

O'Connor also will find himself at odds with the new administration over mortgage writedowns in bankruptcy, after the industry and the Bush administration defeated efforts in Congress to enact the provision this year.

The proposal would make it difficult for investors to assess risk and would prompt lenders to require higher down payments and rates, and shorter loan terms, O'Connor said.

During the debate over the bailout bill, Obama promised to make the bankruptcy law change an early priority of his administration if lawmakers supported the measure.

``Obama is dedicated to a wholesale reform of the financial regulatory system, said Greg Zerzan, head of global public policy at the International Swaps and Derivatives Association. ``Our hope is that we will have a regulatory structure in place that better accommodates 21st century markets.''

To contact the reporter on this story: Alison Fitzgerald in Washington at afitzgerald2@bloomberg.netAlison Vekshin in Washington at avekshin@bloomberg.net

Last Updated: November 5, 2008 00:13 EST