CAMPAIGN FINANCE

Loans Could Paint McCain Into Corner

By Matthew Mosk
Washington Post Staff Writer
Wednesday, February 27, 2008

Sen. John McCain's campaign and a Bethesda bank strongly defended $4 million in loans yesterday, as Democrats questioned their legality and said that the way they were secured requires the Arizona Republican to abide by federal spending restrictions.

Trevor Potter, a former Federal Election Commission chairman who is McCain's lawyer, wrote in a letter to the nation's top election official yesterday that the loans were proper and that they should not prevent McCain from withdrawing from the presidential public financing system.

On Monday, the Democratic National Committee filed a complaint with the FEC arguing that the way the loans were structured -- by using the promise of federal matching funds as collateral -- requires McCain to remain in the system. McCain "secured a $4 million line of credit to keep his campaign afloat by using public financing as collateral. He should follow the law," said Howard Dean, the DNC chairman.

The dispute centers on some of the most esoteric aspects of campaign finance law, but the implications for McCain's presidential bid are potentially serious. McCain applied for public financing last year, when his campaign was faltering. In February, when his campaign had turned around, he wrote the FEC seeking to exit the system. But to do so, McCain needed to show he had not yet received any federal funds and had not used the promise of those funds as collateral to borrow money.

Should the FEC or a federal court force him to remain within the system, he would have to abide by a $54 million spending cap until September, when the primary season ends. His campaign had spent $49 million as of Jan. 31, reports show.

Potter gave the FEC a letter from the lawyers for Bethesda-based Fidelity & Trust Bank that said both parties were careful to avoid using the federal matching money as collateral. Barry C. Watkins, the bank's president, said in an interview yesterday that the loan was secured instead with McCain's promise to raise more money in the future.

"McCain has been raising money for a long period of time," Watkins said. "It was that long history that meant there was little risk."

Still, questions about the legality of the deal have turned the fine print of McCain's borrowing into a source of intense scrutiny among leading campaign lawyers. Several suggested McCain has landed in a legal bind: If McCain used the promise of public financing to secure the loan -- as Democrats suggest -- he faces strict spending limits. If public funds were not involved -- as Potter argues -- that poses other problems.

Potter said the campaign offered as collateral its assets, including McCain's massive fundraising lists and his willingness to keep raising from them. But that may not satisfy the FEC, which requires that politicians borrow using only terms that assure repayment.

"If the bank is saying they lent him money on the basis of future receipts, well, in presidential campaigns, their future receipts can be zero or millions," said Marc Elias, an election lawyer who arranged a loan in 2003 for the presidential bid of Sen. John F. Kerry (D-Mass.). "The idea that this would be a dependable source of collateral is preposterous."

Another question, Elias said, is whether McCain received special treatment in obtaining the loan. Watkins said McCain did not. But he noted that Fidelity's bankers had prior relationships with several top McCain advisers, including lobbyist Charles R. Black Jr. and campaign manager Rick Davis. Davis's consulting firm borrowed money from Fidelity bankers in the mid-1990s when they worked at Franklin National Bank, according to Watkins and public records. (Franklin National later merged with BB&T.)

Lawrence M. Noble, a former FEC general counsel, said he believes the commission, which currently lacks a quorum to consider the matter, would want to study the loans when they are at full strength.

"This is a very unusual loan, and at the very least it does look like they were trying to use loopholes to make it work," Noble said.

Research editor Alice Crites contributed to this report.


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