Savings and Loan Probe Extends From Arkansas to White House

What is learned about president's connection to Arkansas firm may have important implications for his proposed overhaul of banking regulators

By , Staff writer of The Christian Science Monitor

THE long tentacles of the savings and loan crisis, after snaring the ``Keating Five'' senators and former President Bush's son, Neil, may be reaching into the White House.

Federal investigators are probing connections between Bill and Hillary Rodham Clinton and Madison Guaranty Savings & Loan, a bankrupt Arkansas institution run in the 1980s by Clinton friend James McDougal. The inquiries are part of a broader probe into alleged fraud at Madison - whose 1989 bankruptcy cost the government $47.7 million - and related businesses.

The burgeoning investigations may have important implications for President Clinton's political future and the administration's proposed overhaul of banking regulators.

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The Clintons have firmly denied any wrongdoing. ``We did nothing improper, and I have nothing to say about it,'' Mr. Clinton told reporters after the story broke last month.

But prosecutors are still probing the case. As the tale has unfolded, mainly in press reports, the central player was Mr. McDougal. From small-town Arkansas, his rise to prominence in the early 1980s sounds straight out of Horatio Alger; his fall from grace at decade's end reads more like a Stephen King novel. Quickly became player

Madison S&L opened a Little Rock, Ark., branch in 1983 and quickly became a major player in state politics and finance. McDougal did business with many of the state's leaders, including then-Governor Clinton and current Gov. Jim Guy Tucker (D). He became partners with the Clintons in Whitewater Development Company, an unsuccessful real estate venture.

By the late 1980s, McDougal had gone broke, and the S&L was insolvent. The federal Resolution Trust Corporation seized control in 1989. When RTC investigators looked over the books, they found many dubious practices that sank a raft of other S&Ls in the 1980s, including ``sweetheart'' loans to insiders and heavy compensation for executives. Although McDougal was acquitted on one fraud charge in 1990, the RTC has forwarded several other concerns to the United States Attorney's office for possible prosecution.

One big question confronting prosecutors is: How did Madison stay in business for so long despite warnings from federal and state banking regulators about its reckless ways?

``It would appear that Madison S&L was a rogue thrift perpetrating a fraud on the taxpayers of the US,'' Rep. Jim Leach (R) of Iowa, the ranking Republican on the House Banking Committee, said in a statement last month. ``As a state-chartered enterprise, its creation and prolonged existence in an insolvent condition depended on the acquiescence of state officials.''

Some leads from Madison point to the Clintons, according to interviews and published accounts.

McDougal has told reporters, for instance, that, at Clinton's request, he hired the Rose Law Firm in 1984 to represent Madison for a $2,000-a-month retainer. Rose, whose partners included Mrs. Clinton, successfully fought Clinton-appointed state banking regulators to keep the firm open. Later, the firm represented the Federal Deposit Insurance Corporation in a suit against Madison's accountants.

McDougal also actively supported Clinton's campaigns. Federal investigators reportedly have found evidence that part of McDougal's contributions to help retire Clinton's 1984 campaign debt - which reportedly included a $50,000 personal loan from the candidate - came from overdrawn Madison checks and loans that were approved for other people. Clinton has admitted accepting contributions from McDougal, but says he didn't know the source of the funds.

The most controversial part of allegations against Clinton concerns the 1986 $300,000 loan to Susan McDougal by Capital Management Services Inc., a federal Small Business Investment Company in Little Rock run by municipal Judge David Hale. The loan, which hasn't been repaid, is questionable because SBIC funds are intended to help ``socially or economically disadvantaged'' people; the McDougals then had assets of $3 million-plus.

Mr. Hale, no longer a judge, was indicted in September on unrelated fraud charges. Just before indictment, he sought a plea bargain by telling prosecutors he made the loan to Mrs. McDougal at the request of Clinton, who told him the money was needed to tide over Madison and Whitewater. Prosecutors did not make a deal with Hale.

White House spokeswoman Dee Dee Myers said last month Clinton never met with Hale. He ``tried to make a deal on the eve of his indictment.... I think you have to question the motives of some people.''

Federal investigators are still trying to get to the bottom of the story. ``We're trying to trace and collect the money from Mrs. McDougal,'' says Martin Teckler, a senior official at the Small Business Administration.

GOP congressmen are also pressing for a fuller accounting. But they have been stymied by the Democratic majority. Probe suddenly called off

Rep. Henry Gonzalez (D) of Texas, Banking Committee chairman, agreed in November to launch a probe of Madison S&L, but on Dec. 10 he abruptly ended it without requesting any relevant documents from banking regulators.

``I will not undertake a political fishing expedition not warranted by the facts,'' Mr. Gonzalez said in a statement.

``I think it's wrong to prejudge a probe without seeking out the facts,'' Mr. Leach replies in an interview. He adds that the GOP staff will continue digging because ``it's the responsibility of the minority party to hold the other party accountable when there are ethical lapses.''

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