Searching for the Missing Pieces

By George Church

Why would a lawyer ask the Justice Department to subpoena some of the papers of his own clients -- especially if those clients are the President of the U.S. and his wife? White House senior adviser Bruce Lindsey has a simple . answer: "Privacy." Indeed, subpoenaed papers become part of the record of a criminal investigation, unavailable for release under the Freedom of Information Act and thus shielded more effectively than otherwise from Congress and the press.

Accordingly, on the day last week that the Justice Department received a request under the Freedom of Information Act to make public files on Whitewater Development Corp. -- an Arkansas land venture in which Bill and Hillary Rodham Clinton were partners -- the White House announced that those files were under subpoena. David Kendall, the Clintons' personal lawyer, had asked for that subpoena almost two weeks earlier, on Dec. 23 -- the day Clinton announced he would turn over all the files to Justice "voluntarily." As it happened, Justice lawyers were already drafting a subpoena; Kendall persuaded them to broaden it and demand more documents than they originally wanted to see. Kendall handed over about half the papers last week, after a couple of days of confusion and contradiction: the White House had first announced that all the papers had been turned over, and then that none would be for a couple of weeks because they had to be "cataloged."

Had the President wanted to amplify whispers of "cover-up" into roars, he could hardly have devised a better strategy. And the Administration promptly compounded the damage. Besieged by demands that she appoint a special counsel to look into the case, Attorney General Janet Reno steadfastly refused to do so at this time. That "might be a possibility," she said, if Congress passes a new law authorizing her to ask a court to choose a special counsel (the old law expired in 1992). But if she were to name one on her own now, said Reno, no one would believe the counsel would be "truly independent." To critics the reasoning seemed lame, and even inside the White House some aides were offering to bet that a special counsel will be named soon. But it might be too late to save Clinton from suspicion that he resisted as long as he could.

Altogether, it seems as if the President, the First Lady and their aides have forgotten everything they learned about damage control during the bitter campaign of 1992. Old Washington hands point out that suspicions of hiding a scandal usually hurt a President far more than the scandal itself. That seems especially true in this case. The affairs of Whitewater and its partners -- the Clintons, James McDougal, the owner of a failed Arkansas savings and loan, and his wife Susan -- were so convoluted that they defy quick summary. Even the questions that the dealings raise are too complex to fit on a bumper sticker. The press and television paid almost no attention until recently, and then largely because it developed that a file relating to Whitewater had been removed from the office of White House counsel Vincent Foster after he committed suicide last July (that file is one of the papers Justice subpoenaed and Kendall handed over last week).

But there is a strong reason for White House efforts to soft-pedal the whole affair, and it can be put in a single word: Hillary. Compared with the President, the First Lady was a central player. Among other things, she sought power of attorney for Whitewater and represented McDougal's S&L before a state regulator appointed by her husband, then Arkansas Governor. "This is hers," says a White House official. "If the troopers ((who accused Bill Clinton of extramarital affairs)) were about him, this one is about her."

But within the White House no one is allowed to voice anything that sounds like criticism of Hillary. The last person who tried -- staff secretary John Podesta, who suggested that Mrs. Clinton might have had something to do with the dismissal of the White House travel-office staff -- was banished from the inner circle for months. It would take considerable bravery for a Clinton aide to face the President with advice to agree to a special counsel and let the chips fall where they may, since some of those chips might fall on his wife's head. Late last week, nonetheless, some senior White House officials did discuss the special counsel idea with Clinton, but even the Commander in Chief deferred to Hillary's fierce opposition -- at least for now. The problem for the White House, of course, is that stonewalling, or the suspicion of it, only intensifies the questions.

The essential background is simple enough: the Clintons and McDougals formed Whitewater, a company that tried unsuccessfully to sell land in northern Arkansas for vacation homes, in 1979, Clinton's first year as Governor; it lingered in existence until late last year. In 1989, McDougal's S&L, Madison Guaranty, went broke, costing federal taxpayers $47 million. Madison was regulated by Clinton's state government, while its deposits were insured by the Federal Government.

Suspecting check kiting and other abuses, the Resolution Trust Corp., the federal body formed to clean up the affairs of failed S&Ls, referred the matter to the Justice Department in 1992 for investigation and possible prosecution. The referral, which has never been made public, mentioned the Clintons, but in what capacity is uncertain. People who have seen the referral say it definitely did not identify the Clintons as suspected wrongdoers. Some say they were named as potential witnesses, or as people who might have benefited from improper activities, though perhaps unwittingly. As investigators delve more deeply into the tangled affair, they will be seeking answers to these questions:

WAS MONEY FROM MADISON GUARANTY AND/OR WHITEWATER DIVERTED INTO CLINTON'S CAMPAIGNS FOR GOVERNOR? The RTC is known to have raised this question. The grounds for its suspicions are somewhat less clear. But there is no question that James McDougal was one of Clinton's money raisers. In particular, it is known that he held a fund raiser in 1985 and came up with $35,000 to help repay Clinton for a $50,000 loan that the Governor had made to his own campaign fund the previous year (making personal loans to their campaigns is a common practice among politicians). There is some suspicion that at least part of the money may have come from Madison's depositors rather than from bona fide individual contributors.

Iowa Republican Jim Leach, ranking minority member of the House Banking Committee, makes this charge explicitly. Says he: "The effect is that the money that flowed into the Clinton campaign to pay back a personal loan of the Clintons' ends up being deferred public financing of a campaign, and not by choice. That is, the money in effect came from an insolvent thrift ((institution)), paid back later by the federal taxpayer" in the form of reimbursements to money-losing depositors. Nothing has been proved, however, and Clinton has denied any knowledge of money improperly diverted into his campaigns.

DID THE CLINTONS GET SWEETHEART DEALS IN WHITEWATER AND OTHER VENTURES? Quite the opposite, say the President and First Lady; they put $69,000 into Whitewater and lost virtually all that money. But Bill Clinton once put the loss at "at least $25,000," and the Clintons never wrote off any loss at all on their tax returns. A Clinton aide contends that the documentation is too poor to enable them to do so.

Other aspects of the Whitewater venture are somewhat odd. To begin with, the Clintons got a half share, although they invested much less than the McDougals (who put in $92,000). The Clintons have claimed to be only "passive" investors who let the McDougals run the show, but that hardly squares with Hillary's known activities. In her 1988 letter requesting power of attorney, she mentions having been actively involved in selling lots. Also, she built, sold and then bought back a model home. It now turns out that Hillary built the house in 1981 with a $30,000 loan from the tiny Bank of Kingston, which was controlled by McDougal and Steve Smith, a former top aide to Governor Clinton. (Another shareholder was Jim Guy Tucker, who has succeeded Clinton as Arkansas Governor.) Marlin Jackson, who was then Arkansas banking commissioner, has told TIME that the loan violated state regulations because the home and borrower's residence were outside the area in which the bank was permitted to lend.

Then there was an incident in which McDougal in effect swapped 20 Whitewater building lots, almost half the project's total, for little more than a twin- engine Piper Seminole airplane that was later sold for a loss of $13,000. That loss was absorbed by Madison Guaranty's depositors, but federal taxpayers eventually had to pick up the tab through the RTC. Another intriguing factor is that the plane was at one point owned by Seth Ward, the father-in-law of Webster Hubbell, then a law partner of Hillary's and now Reno's top deputy at the Justice Department. McDougal sold Ward the plane, and his S&L loaned him the money for the purchase, Ward told TIME, in order to keep the aircraft off Madison's books, where it might have aroused suspicion among regulators. Hubbell acted as counsel to his father-in-law in the deal, one of several connections with the thrift that have had the effect of forcing Hubbell to dissociate himself from any investigations involving Whitewater or Madison. All in all, Whitewater's finances were tangled enough to make the traditional can of worms look simple.

DID STATE REGULATORS GO EASY ON MADISON GUARANTY IN RETURN FOR FAVORS TO THE CLINTONS? This is another charge leveled by Leach, who cannot conveniently be accused of blind partisanship. He is, in fact, perhaps the least partisan Republican in the House. One reason for the contention: at the start of 1985, Clinton appointed Beverly Bassett Schaffer as head of the state department that regulates S&Ls. Later, Schaffer approved a proposal for an unusual stock sale to shore up McDougal's already troubled S&L. The proposal was presented by none other than Hillary Clinton, acting as attorney for Madison Guaranty. The stock sale, however, never went into effect, and records in the Arkansas state security division show that Schaffer was quite tough on Madison. In the middle of 1986, state and federal regulators joined in removing McDougal as its chief.

WERE THE EVENTUAL INVESTIGATIONS LESS VIGOROUS THAN THEY SHOULD HAVE BEEN? In 1992, when Whitewater's name was starting to crop up in stories about Bill Clinton's campaign, Denver lawyer James Lyons did an audit, at Clinton's request, that to critics seemed highly inadequate. The RTC's referral of the case to Justice landed in Washington in the fall of 1992 -- just as Clinton was forging decisively ahead of George Bush in the presidential race. Justice officials were afraid they would be accused of a partisan effort to smear Clinton if they had Washington take over the investigation, so they left it with the U.S. Attorney in Little Rock. At the time that was Republican Charles Banks, but after Clinton's victory he was replaced by Democrat Paula Casey.

Enter David Hale, an Arkansas judge and head of a lending company that was backed by federal money. Hale claims that in 1986, Clinton, who had appointed him to the bench, and McDougal pressured him to arrange a $300,000 loan to clean up some dubious Madison Guaranty loans. Hale did approve a loan of that amount to McDougal's wife, but $110,000 went into Whitewater. Clinton denied exerting any pressure and said he had been unaware of such money winding up in Whitewater. Hale proposed to Casey that he have himself wired up to record incriminating conversations, perhaps with Clinton and aides.

Casey refused, suspecting the offer was not serious. Hale, who had been indicted for fraud in a separate case, wanted Casey to give him a plea bargain; Casey offered instead a reduction in sentence if he pleaded guilty and cooperated with the government on other matters. But Hale refused the deal and will stand trial next month. Casey eventually recused herself from both the Hale and Madison cases, but most belatedly, last November. She would have trouble claiming impartiality; she had been a law student of Bill Clinton's and a volunteer in all his campaigns. Her husband works for Arkansas Governor Tucker, who had many dealings with McDougal. After Casey's recusal, the Justice Department in Washington took over the investigation; pending possible appointment of a special counsel, it is being run by Donald Mackay, a senior trial attorney -- and a Republican.

/ It is important to note that no one has offered proof of any criminal activity. Even if anyone did, it would be very difficult to prove the Clintons knew of it and approved. Who would be a credible witness against them? James McDougal insists they did nothing wrong, appearing last week on the tabloid TV A Current Affair to make the point. Even if he were to decide otherwise, he has suffered a mental breakdown. Susan McDougal is separated from him; last week she pleaded not guilty to a California indictment charging her with embezzling $200,000 from symphony conductor Zubin Mehta, whom she served as a financial adviser. Even Leach concedes the whole affair has no potential to be another Watergate; it is entirely possible the Clintons will never face any penalties at all or be asked only to repay some money to Madison Guaranty depositors and be accused of a conflict of interest. Still, even by the standards of Arkansas, where members of a tiny financial-political elite constantly deal with one another, Hillary's representation of a business partner before a banking regulator appointed by her husband the Governor seems to be going rather far.

At the very least, the Clintons' choices of James and Susan McDougal and David Hale as associates call into question their ability to judge character. And the other questions raised by the affair could come back to haunt Clinton in his probable 1996 re-election run. It may be that the President and his wife are guilty of nothing wrong. All the more reason to agree to have a special counsel conduct a vigorous investigation that is free of any suspicion of bias. Unless that is done, no one will ever really know.

With reporting by Laurence I. Barrett and Michael Duffy/Washington, Richard Behar and Adam Zagorin/Little Rock