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UPDATE 2-Obama admin cool to bank swap-trade spin-off plan

* Lincoln provision not among top Obama goals-official

* White House opposes auto dealer exemption-Farrell (Recasts with analyst, Barr comments, adds background)

WASHINGTON, May 26 (Reuters) - The outlook for a plan to force banks to spin off their swap-trading desks dimmed on Wednesday when an Obama administration official made clear it is not a core Wall Street reform goal for the White House.

The plan -- proposed by Democratic Senator Blanche Lincoln, who faces a reelection challenge -- is one of the most controversial components of a Senate bill approved last week.

Major banks, whose profits and business structures could be hit by the Lincoln plan, are lobbying in Congress to kill it.

For the Obama administration, overhauling financial regulation is a top priority and involves certain key goals, but the Lincoln plan is not one of them, Assistant Treasury Secretary Michael Barr told reporters at a briefing.

“There are other provisions, like the Lincoln provision, that are not part of that core set of questions, and I think those are going to get worked through,” Barr told reporters.

When asked if the administration opposes the Lincoln plan, Barr said: “I think I’ve laid out pretty clearly what the president’s core objectives are.”

His comments could influence the debate set to get under way next month in a House-Senate conference committee that must combine the Senate bill with one approved in December by the House of Representatives, which excludes the Lincoln plan.

Analysts have said the Lincoln proposal will likely fade away as lawmakers combine the two bills.

“Lincoln has little choice but at some point to back off of her demands” to include her plan in the final bill, policy analysts Teddy Downey and Chris Krueger said in a report on Wednesday from investment research firm Concept Capital.

Democratic Representative Barney Frank, who will chair the House-Senate conference, said on Tuesday he disagreed with Lincoln’s proposal. She has vowed to put up a fight, however.

LINCOLN CHALLENGED AT HOME

Lincoln, a moderate, faces a run-off election on June 8 in Arkansas against Democratic Lieutenant Governor Bill Halter.

The House-Senate conference, of which Lincoln is a key member, is scheduled to get down to work that same week.

President Barack Obama and congressional Democrats want to tighten bank and capital market regulation to prevent a recurrence of the 2007-2009 financial crisis that slammed economies worldwide, triggered massive taxpayers bailouts of Wall Street giants and unleashed a wave of reform proposals.

A central element of proposed reforms is imposing new regulations on the unpoliced $615 trillion over-the-counter derivatives market that includes swaps, such as the credit default swaps at the core of problems at firms like AIG.

The administration’s core goals include redirecting much of the swaps market through more accountable channels such as exchanges, electronic trading platforms and clearinghouses, with more oversight of dealers and participants.

The OTC derivatives market is dominated by a handful of major companies, including Goldman Sachs GS.N, JPMorgan Chase JPM.N, Citigroup C.N and Bank of America BAC.N.

Wall Street can be expected to push hard for loopholes in the reform bill as the conference hammers it out, Barr said.

“The lobbying community is not done ... We will be fighting any attempt to weaken the bill,” he said.

Diana Farrell, deputy director of the National Economic Council, said the administration opposes a Republican proposal to exempt car dealers from the oversight of a proposed financial consumer watchdog included in the bill.

“We don’t like carve-outs. We don’t want any carve-outs ... We’re pleased to see it’s not in the Senate bill,” she said.

The House bill contains a car dealer carve-out; the Senate bill does not. Before sending its bill to conference, the Senate approved a non-binding motion from Republican Senator Sam Brownback asking that conferees include the exemption. (Reporting by Kevin Drawbaugh; Editing by Jan Paschal)

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