Now, a special prosecutor will examine the Clintons' puzzling Arkansas investments
by Stephen J. Hedges, Susan Headden, Matthew Cooper, Warren Cohen, Greg Ferguson, Gordon Witkin, David Bowermaster, Paul Glastris, Kenneth T. Walsh
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"This was just another little deal ... I was a guy who had a reputation for always making profitable investments."
James McDougal, explaining his partnership with Bill and Hillary Clinton in Whitewater Development
It's probably a fine thing, going through life with the handle "Diamond Jim," and maybe everyone just once ought to have a friend so large, so outlandish, so generous. Surely that's the way the Clintons, Bill and Hillary, once felt about Diamond Jim McDougal, as he was known back when times were good, when the deals stacked up fat and happy like flapjacks, when the sky was the limit.
That was in the early 1980s, of course. The Clintons had become partners in Whitewater Development Co. Inc. with McDougal and his wife in 1978. The way McDougal remembers it, he ran into the Clintons at a restaurant, and he broached the idea of buying and developing some land in the Ozarks. "It was just a casual, social thing." In the years to come, there would be personal and campaign loans to the Clintons from friendly banks and a fund- raiser to retire a campaign debt for which the Clintons were personally liable.
Now, however, investigators must determine whether McDougal's failed Madison Guaranty Savings & Loan improperly diverted depositor funds to Clinton's gubernatorial campaign and whether Clinton, by appointing friendly regulators, kept a failing institution in business when it should have been declared insolvent. Hillary Rodham Clinton, who has long functioned as the family's chief financial officer and who was a partner in the state's most influential law firm, is facing conflict-of-interest questions as well. During one 15-month period while she was living in the governor's mansion in Little Rock, the Rose Law Firm received $2,000 a month from Madison to assist it in dealings with Arkansas regulators.
Although the president was on the road last week, in Prague on the way to Kiev and then to Moscow, the White House had cranked the elaborate machinery of damage control into overdrive. But with bipartisan calls for investigation growing louder, Clinton's top aides knew the effort had already failed. At midweek, in a late-night conference call to the president in Prague's Atrium Hotel, senior advisers "laid out the situation" on the Whitewater mess. On his end of the phone line, Clinton decided to sleep on the decision. Early the next day, White House operators put his call through to aides in the West Wing. Let's do it, Clinton said over the phone -- meaning he would accept the appointment of a special counsel. He told aides traveling with him: "I need to get on with the business of my presidency."
Both Clintons find the unceasing interest in the Whitewater affair "bewildering," "vexing" and "infuriating." As Clinton complained to aides: "I lost money, and I didn't take a tax deduction, and people think I'm a crook." Adds White House adviser Bruce Lindsey: "It's sort of Alice in Wonderland. There are no charges -- now prove your innocence."
Clubby network. And that is true: There are no charges. Moreover, experienced financial and legal experts who have examined the available evidence say they see no basis for criminal charges. What there is, in spades, is suspicion. In part, it is fueled by the window Whitewater has opened on financial and political life in Arkansas and on the clubby network of high-priced lawyers, friendly bankers and businessmen who rotated in and out of Bill Clinton's political life as governor over 12 years. But it has been exacerbated by the Clintons' own behavior -- a seeming refusal to come clean on the affair and to answer the many questions that surround it.
The most puzzling of these is why the couple failed to claim a capital loss for much of the $68,900 they say they lost on the Whitewater investment. A U.S. News review documented nearly $40,000 the Clintons could have invested in Whitewater; the couple may have been prevented from claiming the rest of their claimed investment because of tax laws that limit capital losses offset by capital gains. What has struck many observers, however, is that the Clintons seldom failed to claim a legitimate deduction. The couple deducted the price of a box of Pampers and assorted cookies given to a rescue mission and knocked off $2 and $15 apiece, respectively, for charitable donations of Bill Clinton's used undershorts and long johns.Here is what is known so far: In 1978, records show, the Clintons and the McDougals borrowed $20,000 from Little Rock's Union Bank in order to make a down payment in Whitewater, a venture to develop 230 acres along the picturesque White River in the Ozark Mountains in northern Arkansas. Four years later, the Clintons and the McDougals refinanced that loan at the Bank of Cherry Valley, which was owned by a Clinton supporter, W. Maurice Smith. The banker would eventually become an appointee of Governor Clinton. A year after refinancing the Clintons' Whitewater loan at Cherry Valley, Smith gave Bill Clinton a $50,000 loan to cover expenses stemming from his re-election campaign. Those records were subpoenaed last week by a federal grand jury sitting in Little Rock.
Those sorts of close banking and political ties were the rule, not the exception. In 1990, for instance, Perry County Bank in Perryville, Ark., lent Clinton $180,000. Herby Branscum, half owner of Perry County Bankshares Inc., also contributed $5,600 to Clinton gubernatorial campaigns since 1984. His wife, Billie Jo Branscum, gave an additional $2,600. Last week, Herby Branscum would say only, "I'm not in the position to discuss the president's banking business." Marlin Jackson, who served as Clinton's state banking chairman, has contributed $4,010 to Clinton campaigns since 1984. In 1983, Jackson's Security Bank in Paragould, Ark., refinanced the $20,000 left on a $30,000 loan taken out by Hillary Clinton two years earlier. That money, which was used to build a model home at Whitewater, was originally borrowed from the Bank of Kingston, then owned by Jim McDougal and Clinton aides Steve Smith and Jim Guy Tucker, now governor of Arkansas. In a lengthy interview with a U.S. News reporter last week, Jim McDougal said that he arranged the Kingston loan for Hillary Clinton on terms that were competitive.
So why did the loan move to Jackson's bank two years later? McDougal says Jackson urged Clinton to move it. In fact, it may have been because Jackson, as banking commissioner, was bringing pressure on McDougal's banking operations. In any case, McDougal says that the Bank of Kingston -- which the group renamed Madison Bank -- gave the Clintons an additional $20,000 personal loan for campaign expenses. That loan, he says, was repaid with a cashier's check from Jackson's Security Bank.
The Clintons' claim to have lost nearly $69,000 on Whitewater is a source of seemingly endless puzzlement. That number was arrived at by James Lyons, the Colorado lawyer picked by Bill Clinton during the campaign to examine the Whitewater files. Today, Lyons says the numbers still stand (story, Page 29).
The U.S. News review of the Clintons' tax returns shows that they invested approximately $40,000 in Whitewater. The investment shows up on the Clintons' tax returns as investment interest deductions. White House official Bruce Lindsey confirmed that investment as having gone to Whitewater. The Clintons decided not to claim a long-term capital loss on the remaining $20,000 to $30,000, Lindsey says. Of the Clintons' loss, McDougal said, "I'm in no position to substantiate it." Asked what the Clintons' actual investment in Whitewater was, McDougal said he could not be sure. "My memory -- and you've got to remember that I've been through a hell of a bunch of stuff, including a stroke and some very serious depression -- th
