November 17, 2008 -- One of Obama's top transition team members, Thomas Donilon, oversaw an aggressive, backdoor lobbying campaign by mortgage giant Fannie Mae to undermine the credibility of a probe into the firm's accounting irregularities, according to a 2006 government report on the company.

The effort -- which reportedly included attacks on the funding for the oversight agency, the Office of Federal Housing Enterprise Oversight, and an attempt to launch a separate investigation into OFHEO itself -- was ultimately unsuccessful, and regulators eventually discovered top Fannie Mae executives had been manipulating the company's financial reporting to maximize their bonuses.

Facing accusations of misstating its earnings from 1998 to 2004, Fannie Mae settled with the Securities and Exchange Commission for $400 million in 2006, although it did not admit any wrongdoing.

Obama transition advisor and ex-Fannie Mae executive Donilon has not been accused of participating in the accounting irregularities. But he did oversee its lobbying, and helped paint a rosy picture of Fannie's financial health to the company's board, OFHEO investigators concluded, a picture that was ultimately proven false.

Donilon declined to comment for this article.

President-elect Obama has pledged to change the culture of coziness between officials, lobbyists and lawmakers in Washington. But the role of Donilon in the Fannie Mae scandal raises questions about just how much of a break the Obama administration will be from business as usual inside the Beltway.

When asked about Donilon's place in the Obama transition team, Obama spokesperson Tommy Vietor said in a statement that "Mr. Donilon is volunteering his time and more than 30 years of accomplishment to help prepare the State Department for an efficient transition to the President-elect, who is taking office at a time of war and when we are confronting a complex and challenging international environment. Mr. Donilon's experience in foreign affairs as Assistant Secretary of State and Chief of Staff at the State Department is critical to this review process."

Donilon's Rise at Fannie

A former top aide to Secretary of State Warren Christopher, Donilon joined Fannie as general counsel in 2000. A year later he was promoted to executive vice president for law and policy and corporate secretary, where he oversaw the company's sizeable legal and government affairs divisions.

Fannie's coziness with lawmakers was well established before Donilon joined the company's ranks. As former Chief Operating Officer Daniel Mudd told CEO Franklin Raines in a November 2004 memo, "[t]he old political reality was that we always won, we took no prisoners, and we faced little organized political opposition," according to the 2006 report by the Office of Federal Housing Enterprise Oversight.

Donilon was no rookie to politics either. A veteran of the Carter administration, he was a top strategist for both Walter Mondale and Joseph Biden's failed presidential bids. And under Donilon's watch, these efforts continued. "The goal of senior management was straightforward: to force OFHEO to rely on the Enterprise for information and expertise to such a degree that Fannie Mae would essentially regulate itself," the report stated.

Fannie Mae's accounting came under scrutiny in late 2003, after its sister organization, Freddie Mac, disclosed it had misstated its accounting.

Seeing the problems, OFHEO stepped up its monitoring of Fannie Mae and in a preliminary report in 2004 alleged the company had improperly used reserves to smooth its earnings.

Fannie Mae executives began pushing back hard against the increasing oversight. Its lobbyists -- overseen by Donilon -- pushed U.S. lawmakers to limit OFHEO's budget, and make it subject to annual approval. "[W] ith the knowledge and support of senior management, " Fannie Mae's lobbyists "used their longstanding relationships with Congressional staff to attempt to interfere with OFHEO's special examination," according to the report.

They also tried to get OFHEO investigated. Email trails show that Fannie Mae lobbyists drafted legislation which required a probe into how the agency spent its money.

And Fannie Mae's head lobbyist at the time, Duane Duncan, told OFHEO investigators that Fannie Mae lobbyists had "generated the request" from a congressman for the probe into OFHEO that looked into allegations that the agency had improperly leaked information about Fannie during its probe of the mortgage giant.

While that effort was "conceived and executed" by the government relations team, it was "well known by many members of senior management" including Donilon," the report stated.

Duncan reported directly to Donilon, and OFHEO concluded Donilon was aware of his team's efforts. According to the report, the two met at the end of each day for "Donilon to manage the implementation of the decisions." During weekly strategy meetings, the report said, Raines and Donilon were "deciding what positions Fannie Mae would take on any given issue."

Donilon isn't the only member of the Obama team who has worked for one of the government-backed housing enterprises. Wendy Sherman, who is working with Donilon the State Department agency review team, served on the board of Fannie's charity. And Rahm Emmanuel, who will be Obama's chief of staff, served on the board of Freddie Mac, which also restated its earnings.

Click Here for the Blotter Homepage.