Updated 7-4-97


Arkansas Roots

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A Starr-Crossed Investigation The three-year, $30 million probe of a small-time Arkansas land deal has taken some troubling turns. (6/30/97)


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Clinton's Testimony From The First Whitewater Trial

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Arkansas Roots

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In 1978, Bill Clinton, then attorney general, was engaged in his first gubernatorial election. By year's end, he and his wife, Hillary, would become the youngest First Couple in the history of Arkansas. They were rising stars in Little Rock, but their salaries were relatively modest: Bill made just $35,000 and Hillary just $25,000 as a young associate at the influential Rose Law Firm.

78 inauguration

Weeks before election day, Mrs. Clinton invested about $1,000 in the commodities market. In the next 10 months, she would clear $100,000, an unheard-of return. James Blair, the chief outside counsel for powerful Tyson Foods, oversaw the trades for her.

The Clintons soon made another investment. With developer Jim McDougal and his wife Susan, both longtime friends, they formed the Whitewater Development Corporation to build on lots near the town of Flippin. Questions would later be raised as to how much risk the Clintons really bore in the deal.


When Bill Clinton lost his first bid for re-election in 1980, Jim McDougal lost his job. The developer, who had been Clinton's economic aide for two years, tried a new profession: banking.

McDougal bought a small bank in Kingston and renamed it the Madison Bank and Trust Company. Three years later, he and Susan McDougal bought a savings and loan and renamed it Madison Guaranty. By the end of 1983, McDougal's bank was involved in ambitious real estate projects from Arkansas to the coast of Maine.

Already, red flags were appearing. That same year, the S&L started to run into trouble with federal regulators for making too many loans outside its service area. And in 1984, the McDougals borrowed $100,000 from Madison Guaranty to pay down the original Whitewater mortgage.


The Clintons and Jim and Susan McDougal were members of what was known as "the Arkansas political family," but neither couple had much money. In 1980, they hatched a moneymaking idea to develop forested lots along the White River in Arkansas. Their pitch: "One weekend here and you'll never want to live anywhere else."

The Clintons and McDougals borrowed about $200,000 from Citizens' Bank to buy Whitewater and without telling Citizens' they borrowed $10,000 from another bank to make the down payment. The Clintons got a half share, although they invested much less.

From there, the loans began to spiral as Whitewater faltered. Just after Clinton lost the governorship in 1980, Hillary Clinton called McDougal asking for money. He believed that Whitewater needed a model home to attract buyers, and he loaned her $30,000 from his small bank to build, own and ultimately sell a three-bedroom, ranch-style unit.

By 1982, the lots still weren't selling, and the two couples had to borrow another $20,000 just to pay interest on their original loan. McDougal began an effort to unload the properties and at one point, he in effect sold the remaining 20 lots to his real estate agent, Chris Wade, for a Piper Seminole airplane. The deal later cost taxpayers $13,000.

At the same time, the McDougals were loaning themselves thousands of dollars from Madison to cover the mortgage. They say they tried to persuade the Clintons to abandon the investment. Hillary Clinton angrily refused. Then, and for several years after, the Clintons were taking tax deductions for interest payments on Whitewater. The deductions were later challenged because the interest payments came from the Whitewater Corporation itself.

In 1988, Mrs. Clinton wrote McDougal, who was having a mental breakdown brought on by the probing into his Madison activities, to ask for power of attorney to sell off the remaining Whitewater lots herself.


By the mid-1980s, Jim McDougal was rapidly expanding the reach of Madison Guaranty. He did it by making imprudent loans with such frequency that the Arkansas banking commissioner warned the Clintons of shoddy practices.

Madison's losses were piling up, but the books never showed it. David Hale, an Arkansas judge appointed by Bill Clinton, alleges that the governor and McDougal pressured him to arrange a $300,000 loan to help cover up the problems. Hale did approve a loan of that amount to Susan McDougal, and $110,000 went to Whitewater. Clinton says he was unaware of this.

About the same time, Hillary Clinton, acting as a lawyer for Madison, won state approval of an unusual stock offering to help keep the thrift afloat (the plans were scuttled). By mid-1986, federal regulators removed McDougal as Madison Guaranty's president. By 1989, they closed the failed S&L at a cost to taxpayers of more than $60 million.


Hillary Clinton has denied doing any substantial work for the failed Madison Guaranty, as well as charges that any such work was a conflict of interest because her husband was governor. In 1985 and 1986, Mrs. Clinton represented Madison before state regulators appointed by Bill Clinton. One of them, Beverly Bassett Schaffer, approved her unusual stock sale to shore up the troubled S&L.

Exactly what else Mrs. Clinton did for Madison is in dispute. Rose lawyers also became involved in a 1,050-acre land development called Castle Grande. McDougal and Seth Ward, father-in-law of Rose partner Webb Hubbell, were principals in the deal. Federal regulators would call it a "sham transaction" that cost the public $4 million. Hillary Clinton has claimed that a young associate, Rick Massey, effectively handled the case, although records discovered later indicate that she personally billed Madison for 60 hours of work.


Since the early 1970s, when he refused money from big business in a failed run for Congress, Bill Clinton had matured into a master political fund-raiser. Throughout the 1980s, the governor had done what many politicians do: take personal loans, use them for campaigning and then raise money to repay the loans later. Clinton raised several hundred thousand dollars this way from influential supporters like Don Tyson, the head of Arkansas's powerful Tyson foods.


But in 1985, the governor's biggest campaign contributor was himself, with help from Jim McDougal of Madison Guaranty. In 1985, Clinton asked McDougal to host a fund-raiser to pay off $50,000 that he had lent his own campaign the year before, as some politicians do. The event raised $35,000. Federal investigators are still looking into charges that much of it came from Madison, in the names of depositors, without their knowledge.

Clinton's eventual successor as governor, Jim Guy Tucker, also received large loans from Madison, and would later go on trial with the McDougals for bank fraud. All three were convicted.

White House

By November 1992, the Clintons were in a position to reward Arkansas friends who had helped them gain the White House and safeguard them from questions about Whitewater along the way. Webb Hubbell, Mrs. Clinton's partner at the Rose Law Firm, was installed as Number Three at the Justice Department, where he would play a role in federal investigations related to Whitewater. Vincent Foster, her other close Rose associate, handled documents related to Madison as deputy White House counsel.


The Clintons also rewarded Harry and Linda Bloodworth Thomason, Arkansas friends who had become successful TV producers, when they hired Thomason acquaintances to run the White House Travel Office.


In March 1992, just as Bill Clinton was making a political comeback in his campaign for president, the news media began to zero in on the Whitewater investment. It began with a New York Times story that suggested the McDougals heavily subsidized the Clintons in the Whitewater investment, and that the Clintons took improper tax deductions from it. The Clinton campaign fired back with a report showing that the couple had made substantial investments in Whitewater and lost about $68,000. This amount would later fall as new documents emerged. But the story stuck, and Whitewater was dead as a campaign issue.

Even so, attorney David Kendall and other close aides to the Clintons begin pulling together records of the Clintons' involvement with McDougal, Whitewater and Madison Guaranty.

Foster's Death

Vincent Foster, the closest partner to Hillary Clinton at the Rose Law Firm, had handled paperwork for the Clintons' most intimate finances. When they sold their Whitewater stake back to Jim McDougal in 1992, Foster represented them.

In 1993, the Clinton Administration's growing troubles weighed heavily on Foster. As deputy White House counsel, he filed three years of tax returns for the Whitewater investment on their behalf. At the same time, he was apparently distraught over the White House Travel Office scandal, in which Mrs. Clinton stood accused of cronyism.

On July 20, Foster was found shot to death in a suburban Washington, D.C., park. His death has been ruled a suicide by three investigations, including, reportedly, the ongoing probe led by Kenneth Starr. Federal and Senate investigators question whether records pertaining to Whitewater, including those detailing Hillary Clinton's controversial legal work, were removed from Foster's office by Clinton aides that night.

Meet the Press

Under increasing pressure from the media on Whitewater, Hillary Clinton called a dramatic press conference in the East Wing of the White House in April 1994. She answered the questions with calm authority, momentarily silencing her critics.

She sought to put two nagging issues to rest:

First, reporters had discovered that Mrs. Clinton had realized a $100,000 return on a $1,000 investment in commodities futures back in 1979. Jim Blair, a friend and chief attorney for Arkansas food giant Tyson, had advised her. Now, the first lady said she had made the trades by herself. Later, she would admit that Blair and others had taken the lead.

Mrs. Clinton also denied having worked on a Madison-related project called Castle Grande, a fraudulent deal that cost the public $4 million. She repeated her written statement to regulators that a young Rose associate, Rick Massey, did most of the work. That assertion was called into question when her billing records were found in early 1996.


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