On housing, Donilon at center of regulatory fight

[October 09, 2010]  WASHINGTON (AP) -- Before President Barack Obama picked him to be his next national security adviser, Tom Donilon was a lobbyist for mortgage giant Fannie Mae and fought off congressional attempts to impose new regulations.

As Fannie Mae's legal counsel and top strategic thinker in the late 1990s to the middle of this decade, Donilon left his sizable imprint on the company long before its takeover by the government amid the wreckage of the housing market. By that time, Donilon had moved on, well before what critics said was a day of reckoning after years of inadequate regulation and lax oversight.

In early 2008, seven months before disaster struck, Fannie Mae and its smaller cousin, Freddie Mac, held in their portfolios or guaranteed $4.9 trillion in home-mortgage debt. The government took over Freddie Mac the same day. Their rescue has cost taxpayers more than $148 billion so far.

Obama announced Friday that Donilon, would replace Gen. James Jones as national security adviser after having served as Jones' deputy since January, 2009.

A longtime Democratic operative, Donilon for six years beginning in 1999 was a registered lobbyist and top executive at Fannie Mae, leaving in 2005. His tenure coincided with efforts in Congress to rein in the mortgage giant with tougher regulations and greater oversight.

David Jeffers, Donilon's former chief spokesman, says Donilon believed in strong regulation and oversight of the company, but maintains that many of the approaches that were circulating in Congress were not the right ones.

The main one was that Congress wanted to downsize its own creation, a government-sponsored corporation that had become a housing industry behemoth -- one that some on Capitol Hill felt should be forced to sell off part of its portfolio.

"There were a variety of proposals during that time that had the intention of better oversight but undermined the basic strength of the structure of Fannie Mae," said Jeffers, who now is president of Collingwood Communications, a strategic communications firm in banking and housing.

"The company felt strongly that the portfolio was an important component in keeping the company strong financially," he added.

Others have a different view of Donilon's agenda, suggesting that Donilon wanted to preserve the mortgage giant's empire and head off any attempt by Congress to lessen Fannie Mae's huge footprint on the mortgage market.

"Mr. Donilon's actions at Fannie Mae to undercut meaningful reform precipitated the largest taxpayer-funded bailout in American history," Sen. Richard Shelby said Friday night. "Now President Obama is entrusting him with America's security."

Shelby, from Alabama, is the ranking Republican on the Senate Banking Committee.

At Fannie Mae, Donilon was the key player whose job it was to battle any regulatory initiatives from Capitol Hill, said two people familiar with Donilon's tenure at the housing mortgage giant.

Donilon designed and implemented Fannie Mae's public affairs strategy, which included Capitol Hill and anything that might affect opinion there, said one of the two people, a former Democratic Party official who spoke on condition of anonymity in order to be able to speak candidly.

The second person, a former housing industry executive intimately familiar with of Fannie Mae's operations, agreed that Donilon was at the head of an unceasing anti-regulatory campaign that the company waged throughout his tenure.

The former housing executive said that on political issues, especially regulatory oversight, Donilon was the right-hand man to Fannie Mae chairman and CEO Franklin Raines. The former housing executive also spoke on condition of anonymity to provide a clear picture of Donilon's role.

Fannie Mae and Freddie Mac got so big because the public perception was that they were too big to fail -- that the government would bail them out in any financial disaster. That picture enabled Fannie Mae to borrow cheaply on world markets by issuing hundreds of billions in top-rated securities linked to mortgages.

[Associated Press; By PETE YOST]

AP Business Writer Marcy Gordon in Washington contributed to this report.

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